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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 30, 2009
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-16541
REMEC, INC.
(Exact name of registrant as specified in its charter)
| CALIFORNIA | 95-3814301 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
3790 VIA DE LA VALLE, SUITE 211 DEL MAR, CALIFORNIA | 92014 | |
| (Address of principal executive offices) | (Zip Code) |
(858) 259-4302
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ¨ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding as of: December 4, 2009 | |
| Common Stock, $.01 par value | 30,031,000 |
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Form 10-Q
For The Quarterly Period Ended October 30, 2009
Index | Page No. | |||
PART I | FINANCIAL INFORMATION | |||
Item 1. | 1 | |||
| 1 | ||||
Condensed Statements of Changes in Net Assets in Liquidation | 2 | |||
| 3 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||
Item 3. | 11 | |||
Item 4T. | 11 | |||
PART II | ||||
Item 1. | 12 | |||
Item 1A. | 12 | |||
Item 6. | 12 | |||
| 13 | ||||
CERTIFICATIONS
EXHIBITS
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As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company” and “REMEC” refer to REMEC, Inc., a California corporation.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our current expectations, assumptions, estimates and projections about REMEC and include, but are not limited to, the following:
| • | any statements regarding the execution, timing and expenses associated with the complete dissolution of REMEC; |
| • | any statements regarding the disposition of our existing assets; |
| • | any statements regarding the resolution of outstanding creditor claims and the ongoing litigation against us; |
| • | any statements regarding the amount of future liquidating distributions, if any, and the timing thereof, to our shareholders. |
Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described elsewhere in this report. Readers are urged to carefully review and consider the various disclosures we make, which attempt to advise them of the factors that affect our business, including without limitation, the disclosures made under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein and throughout this Quarterly Report on Form 10-Q for the period ended October 30, 2009. Risk factors are more fully described in our annual report on Form 10-K for the fiscal year ended January 31, 2009. The important factors listed in these disclosures, which could cause our actual results to differ materially from the forward-looking statements contained herein, include but are not limited to, the following:
| • | our ability to accurately estimate the expenses associated with executing our plan of complete liquidation and dissolution; and |
| • | our ability to successfully resolve all our outstanding or unknown future creditor claims and litigation. |
In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. We do not intend to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, except as otherwise required pursuant to our on-going reporting obligations under the Securities Exchange Act of 1934, as amended.
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The accompanying October 30, 2009 and October 31, 2008 interim condensed financial statements of REMEC, Inc. required to be filed with this Form 10-Q Quarterly Report were prepared by management without audit and commence on the following page, together with the related notes. These interim condensed financial statements should be read in conjunction with the audited financial statements for the fiscal year ended January 31, 2009 included in our fiscal year end January 31, 2009 Annual Report on Form 10-K, previously filed with the Securities and Exchange Commission.
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| Item 1. | Financial Statements. |
CONDENSED STATEMENTS OF NET ASSETS IN LIQUIDATION
(in thousands)
| October 30, 2009 (Unaudited) | January 31, 2009 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 30,856 | $ | 16,449 | ||
Restricted cash | 2,850 | 20,806 | ||||
Receivables and other assets | 615 | 800 | ||||
Total assets | 34,321 | 38,055 | ||||
LIABILITIES | ||||||
Estimated taxes payable | 1,225 | 7,465 | ||||
Estimated costs to be incurred during liquidation | 3,970 | 5,644 | ||||
Total liabilities | 5,195 | 13,109 | ||||
Net assets in liquidation | $ | 29,126 | $ | 24,946 | ||
The accompanying notes are an integral part of these interim condensed financial statements.
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CONDENSED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(Unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 30, 2009 | October 31, 2008 | October 30, 2009 | October 31, 2008 | |||||||||||||
Net assets in liquidation, beginning of period | $ | 24,462 | $ | 23,808 | $ | 24,946 | $ | 38,495 | ||||||||
Changes in net assets in liquidation: | ||||||||||||||||
Litigation costs | — | (307 | ) | (98 | ) | 321 | ||||||||||
Taxes payable | 6,675 | 425 | 6,240 | (50 | ) | |||||||||||
Net realizable value of assets and settlement amounts of other liabilities | (398 | ) | (175 | ) | (964 | ) | (233 | ) | ||||||||
Costs to be incurred during liquidation | (1,613 | ) | (314 | ) | (998 | ) | (81 | ) | ||||||||
Net change in net assets in liquidation | 4,664 | (371 | ) | 4,180 | (43 | ) | ||||||||||
Distributions to shareholders | — | — | — | (15,015 | ) | |||||||||||
Net increase (decrease) in net assets in liquidation | 4,664 | (371 | ) | 4,180 | (15,058 | ) | ||||||||||
Net assets in liquidation, end of period | $ | 29,126 | $ | 23,437 | $ | 29,126 | $ | 23,437 | ||||||||
The accompanying notes are an integral part of these interim condensed financial statements.
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NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Plan of Dissolution
On July 21, 2005, our Board of Directors approved the liquidation and dissolution of REMEC, Inc. (“REMEC” or the “Company”) pursuant to a Plan of Complete Liquidation and Dissolution (the “Plan of Dissolution”), intended to allow for the orderly disposition of the Company’s remaining assets and liabilities. The holders of a majority of our outstanding shares approved the Plan of Dissolution effective September 3, 2005, at our August 31, 2005 special shareholder meeting. The key features of the Plan of Dissolution include: (1) filing a certificate of dissolution for REMEC and the remaining REMEC businesses with their respective jurisdictions of formation or incorporation; (2) ceasing conducting normal business operations, except as may be required to wind up our business affairs; (3) attempting to convert all of our remaining assets into cash or cash equivalents in an orderly fashion; (4) paying or adequately providing for payment of all our known obligations and liabilities; and (5) distributing pro rata, in one or more liquidating distributions, all of our remaining assets to our shareholders as of the applicable record date.
REMEC will continue in existence until its final dissolution, which is subject to settlement of outstanding litigation and the payment of liabilities. Based on current estimates, the Company anticipates that final dissolution will not occur prior to the end of the fourth quarter of our 2010 fiscal year. During this period, we will not operate our business as a going concern. Our Plan of Dissolution provides us with authority to sell any and all of our assets without further approval by our shareholders and provides that liquidating distributions be made to our shareholders as determined by our Board of Directors. The Company is currently evaluating potential trustee options as we prepare to transfer the net assets to a trust.
Based on our projections of operating expenses and liquidation costs as of October 30, 2009, we estimate that the remaining amount of additional future liquidating distributions will range from $0.85 to $0.97 per common share. The actual amount available for distribution, if any, could be less than $0.85 if we discover additional liabilities or claims or incur unexpected or greater than expected expenses, or more than $0.97 if we are able to resolve our remaining liabilities for less than our reserves, and we do not incur additional or unexpected liabilities or expenses. We are subject to litigation, the outcome of which is not presently known and which may increase our expenses and reduce cash available for distribution to our shareholders. In addition, we may be subject to final examination by taxing authorities; thus amounts presently estimated for tax liabilities may vary from ultimate amounts determined to be owed, which may cause our final distributions to change, perhaps significantly. Although our Board of Directors has not established a firm timetable for authorizing future liquidating distributions, it intends, subject to contingencies inherent in winding up our business, to make such distributions periodically and as promptly as practicable as we pay or resolve our remaining liabilities and obligations.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Interim Financial Data
The interim condensed financial statements included herein have been prepared by REMEC without audit, in accordance with (a) accounting principles generally accepted in the United States of America (“GAAP”) and (b) the instructions to Form 10-Q and Article 8-03 of Regulation S-X for smaller reporting companies of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to such SEC rules and regulations. These interim condensed financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended January 31, 2009, included in REMEC’s Annual Report on Form 10-K. In the opinion of management, the condensed financial statements included herein reflect all adjustments necessary in order to make the financial statements not misleading. Changes in net assets in liquidation for the interim period may not be indicative of the changes which may be reported for any other interim period or for the entire fiscal year.
The January 31, 2009 statements of net assets in liquidation and amounts related to disclosure of January 31, 2009 balances within these interim condensed financial statements were derived from the audited fiscal 2009 financial statements.
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Subsequent Events Evaluation
The Company evaluated all events or transactions that occurred after October 30, 2009 up through December 14, 2009, the date these financial statements were issued.
Recent Accounting Pronouncements
As of October 30, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) which was established as a single authoritative source of GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of GAAP for SEC registrants. Under the Codification, existing GAAP references are referred to by ASC topic numbers, and in circumstances where revisions or updates to existing standards are required, the FASB will issue an Accounting Standards Update (“ASU”) on the related ASC topic. Based on its adoption of the Codification in the current quarter, the Company has revised references to legacy U.S. GAAP to be consistent with the Codification in its financial statements, starting with the accompanying interim condensed financial statements and disclosures for the period ended October 30, 2009. The Codification had no effect on the Company’s interim condensed financial statements.
Liquidation Basis of Accounting
As a result of the shareholders’ approval of the Plan of Dissolution and the imminent nature of liquidation, the Company adopted the liquidation basis of accounting for all periods subsequent to September 2, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable values of assets and settlement value of liabilities are reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.
The valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts necessarily requires many estimates and assumptions. In addition, there are substantial risks and uncertainties associated with carrying out the liquidation of the Company’s existing operations. The valuations presented in the accompanying Statement of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and costs associated with carrying out the Plan of Dissolution based on the assumptions set forth below. The actual realizable values of assets and settlement amounts of liabilities are expected to differ from the amounts shown herein and could be greater or lesser than the amounts recorded. Accordingly, it is not possible to predict the aggregate amount that will ultimately be distributable to shareholders and no assurance can be given that the amount to be received in liquidation will equal or exceed the net assets in liquidation per share in the accompanying Statement of Net assets in Liquidation or the price or prices at which the Common Stock has generally traded or may trade in the future. The cautionary statements regarding estimates of net assets in liquidation set forth in the Forward-Looking Statements portion of this report are incorporated herein by reference.
Reclassifications
Certain reclassifications have been made to estimated costs to be incurred during liquidation liabilities in prior period amounts included in the statement of changes in net assets in liquidation in order to conform to the current period presentation.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The liquidation basis of accounting requires us to make assumptions, judgments and estimates that can have a significant impact on our reported net assets in liquidation. We base our assumptions, judgments and estimates on the most recent information available and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for the estimated costs to be incurred during liquidation and taxes payable, have the greatest potential impact on our financial statements, so we consider estimates associated with these obligations to be critical to our financial statements.
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Estimated Costs to be Incurred During Liquidation and Taxes Payable
Under the liquidation basis of accounting, we accrue for the estimated remaining costs to be incurred during liquidation, including employee expense, insurance expense, third party services including estimated third party trust fees, facility lease expense partially offset by facility sub-lease income (see Note 3, Commitments and Contingencies under“Leases”)and miscellaneous other expected future costs. As of October 30, 2009, such costs were estimated at approximately $4.0 million. Our estimates are based on assumptions regarding costs to be incurred in executing the Plan of Dissolution, as described above, through January 31, 2010, the end of the Company’s fourth quarter of fiscal 2010. If there are delays in executing the Plan of Dissolution, actual costs incurred during liquidation may increase, reducing net assets available in liquidation.
As of October 30, 2009 taxes payable were estimated at approximately $1.2 million, including approximately $0.5 million in interest and penalties payable (see Note 4, Income Tax Contingencies). Our estimate of taxes payable may be subject to final examination by taxing authorities. Because many transactions are subject to varying interpretations of the applicable federal, state or foreign tax laws, our reported tax liabilities and taxes may be subject to change at a later date upon final determination by taxing authorities. The impact of this final determination on our estimated tax obligations could increase or decrease amounts of cash available for distribution to our shareholders, perhaps significantly.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Cash and cash equivalents included investments held in a money market fund of $30.9 million as of October 30, 2009. Changes in market interest rates would not be expected to have a material impact on the fair value of $30.9 million of our cash equivalents as of October 30, 2009, as these consisted of securities with maturities of less than three months. As a result of the Company’s Plan of Dissolution, the Company no longer purchases new investments.
Restricted Cash
As of October 30, 2009, restricted cash was approximately $2.9 million representing certificates of deposit that secure certain letters of credit issued to third parties for foreign Value Added Tax (“VAT”), workers’ compensation and leasehold security interest obligations. The terms of the letters of credit expire upon the extinguishment of each underlying obligation. At that time, the certificates of deposit will be liquidated, also see Note 3 below, Commitments and Contingencies under“Indemnifications and Guarantees”.
Concentration of Credit Risk—Financial Instruments
Financial instruments that subject the Company to a concentration of credit risk consist of cash and cash equivalents balances maintained in financial institutions in the United States that are either uninsured or are in excess of Federal Deposit Insurance Corporation (“FDIC”) limits. As of October 30, 2009, cash equivalents consisted primarily of money market funds of approximately $30.6 million which invest exclusively in short-term U.S. Treasury bills, notes and other obligations issued or guaranteed by the U.S. Treasury, and repurchase agreements collateralized by such obligations. Our money market funds are not insured by the FDIC or guaranteed by the U.S. Treasury. However, these funds are backed by 102% collateral in U.S. Treasury securities.
As of October 30, 2009 and January 31, 2009, the total uninsured balances of our cash and cash equivalents were $30.9 million and $16.5 million, respectively. The Company evaluates the financial strength of institutions at which significant investments are made. The Company has not experienced any losses in such accounts and believes that based on the financial strength of institutions at which significant investments are made and the collateral backing the uninsured money market funds, credit risk relating to its cash and cash equivalents is limited.
Note 3. Commitments and Contingencies
Letter of Credit Facility
The Company maintains certificates of deposit placed to cover certain letters of credit for foreign Value Added Tax (“VAT”) obligations, workers’ compensation and leasehold security interest obligations, which are secured by cash (See description of “Restricted Cash” in Note 2 above). During the first quarter of fiscal 2010, one letter of credit, issued to secure workers’ compensation obligations in the amount of $1.04 million, was terminated and as a result, the cash used to secure this letter of credit was reclassified from restricted cash to cash and cash equivalents. As of October 30, 2009 the remaining letters of credit totaled approximately $2.9 million.
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Leases
Our contractual obligations and commitments as of October 30, 2009 are reported in the statements of net assets in liquidation as accrued expenses to be incurred during liquidation. Included in estimated costs to be incurred during liquidation are our remaining facility leases, all of which, except for the principal executive offices, are fully subleased. As of October 30, 2009 the accrual for the estimated net lease settlements on the remaining facility obligations was approximately $0.1 million net of contractual sublease income totaling approximately $1.1 million.
Indemnifications and Guarantees
We have entered into separate indemnification agreements with our officers and with each of our directors. These agreements require us, among other things, to indemnify such officers and directors against expenses (including attorneys’ fees), judgments, fines and settlements paid by such individual in connection with any action, suit or proceeding arising out of such individual’s status or service as our director or officer (provided that the individual acted in good faith and in a manner the individual reasonably believed to be in the best interests of the Company) and to advance expenses incurred by such individual in connection with any proceeding against such individual with respect to which such individual may be entitled to indemnification by us. Other than the pending Securities Class Action litigation described below, there are no pending legal proceedings that involve the indemnification of any of the Company’s officers or directors.
Performance-Based Incentive Bonuses
Richard A. Sackett, our President, is entitled, in accordance with our Plan of Dissolution and the Amended and Restated Performance and Retention Agreement (“Performance & Retention Agreement”) entered into between Mr. Sackett and the Company, to receive an incentive bonus in consideration for his work in implementing the Plan of Dissolution, if specified performance goals are met in our liquidation and dissolution. Any such incentive bonus paid to Mr. Sackett will be in addition to his regular salary and the retention bonus called for under the Performance & Retention Agreement. During fiscal year ended January 31, 2009 and during the nine months ended October 30, 2009, no incentive bonus was paid to Mr. Sackett.
David F. Wilkinson, our Chief Financial Officer, is entitled, in accordance with our Plan of Dissolution and the Amended and Restated Performance and Retention Agreement (“Performance & Retention Agreement”) entered into between Mr. Wilkinson and the Company, to receive an incentive bonus in consideration for his work in implementing the Plan of Dissolution, if specified performance goals are met in our liquidation and dissolution. Any such incentive bonus paid to Mr. Wilkinson will be in addition to his regular salary and the retention bonus called for under the Performance & Retention Agreement. During the fiscal year ended January 31, 2009 and during the nine months ended October 30, 2009, no incentive bonus was paid to Mr. Wilkinson.
Claims and Litigation
The Company’s commitments and contingencies include the following claims and litigation. The Company continues to vigorously defend against current claims and litigation. The cost to conduct litigation is affected by a number of factors, many of which cannot be predicted with certainty. Accordingly, our continued litigation activities and ultimate settlement may result in the Company incurring lesser or greater costs than our current accruals, affecting net assets available in liquidation. This risk has been considered in our estimated range of additional future liquidating distributions.
Securities Class Action
On September 29, 2004, three class action lawsuits were filed against the Company and certain former officers (the “Defendants”) in the United States District Court for the Southern District of California alleging that between September 8, 2003 and September 8, 2004 (the “Class Period”) the Defendants made false and misleading statements and failed to disclose material information regarding the Company’s financial condition, operations and future business prospects in violation of federal securities laws. On January 18, 2005, the law firm of Milberg Weiss Bershad & Schulman LLP (“Milberg Weiss”) was appointed Lead Counsel and its client was appointed Lead Plaintiff.
After several consolidated and amended complaints were filed, challenged by the Defendants and dismissed by the Court with leave to amend, the Court denied the Company’s Motion to Dismiss the Fourth Amended Complaint on September 26, 2006. REMEC filed its Answer to the Fourth Amended Complaint on November 6, 2006, denying all liability and asserting certain affirmative defenses. On November 21, 2007 the Court granted Plaintiff’s motion for class certification.
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The parties engaged in discovery, including production of documents, between May 2007 and March 2009. All discovery, including expert discovery, is now closed. There are currently four motions seeking summary judgment or partial summary judgment pending before the Court, three made by the Defendants and one made by the Plaintiffs. The time period for filing dispositive motions has closed. The Pretrial Conference has been set for January 25, 2010, and Trial has been set for February 23, 2010. REMEC maintains directors’ and officers’ liability insurance, and has tendered the defense of this lawsuit to its insurance carriers. The primary insurance carrier has agreed to pay defense costs and provide coverage of this action, subject to a reservation of rights. The Company believes the case is without merit and has been vigorously defending against the asserted claims. Because the Company has not determined that a loss in this case is probable, the Company has not included any amounts related to this litigation in either its estimate of cost to be incurred during liquidation (See Note 2) or in the estimated range of future liquidating distributions (See Note 1), as of October 30, 2009.
Other
Other than the claims and lawsuits described above, REMEC is not presently subject to any material claims or litigation, nor to the Company’s knowledge, are such claims or litigation threatened against REMEC.
Environmental Matters
We follow the policy of monitoring our properties under lease for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to our leased properties that would have a material effect on our financial condition. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Note 4. Income Tax Contingencies
During the third quarter of fiscal 2010, management determined that previously recorded unrecognized tax contingencies and related accrued interest and penalties should be reduced by approximately $4.3 million and $2.4 million, respectively, as a result of a lapse of the applicable federal statue of limitations. The remaining tax contingency as of October 30, 2009 for estimated taxes payable, relating to state statue of limitations is approximately $1.2 million, which includes approximately $0.5 million in estimated interest and penalties payable.
Our estimate of taxes payable may be subject to final examination by taxing authorities. Because many transactions are subject to varying interpretations of the applicable federal, state or foreign tax laws, our reported tax liabilities and taxes may be subject to change at a later date upon final determination by the taxing authorities. The impact of this final determination on our estimated tax obligations could increase or decrease amounts of cash available for distribution to our shareholders, perhaps significantly.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our condensed financial statements and notes appearing elsewhere in this Form 10-Q. Such financial statements and information have been prepared to reflect our net assets in liquidation as of October 30, 2009 and January 31, 2009, together with changes in net assets for the three and nine months ended October 30, 2009 and October 31, 2008, respectively.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our current expectations, assumptions, estimates and projections about REMEC. These forward-looking statements include estimates of the net assets of the Company in liquidation, statements about the amount and timing of the payment of additional liquidating distributions and statements about the Company’s operating costs through final dissolution, including the additional wind up costs, which will vary with the length of time it operates. The forward-looking statements in this report are subject to a number of other significant risks and uncertainties, and there can be no assurance that the expectations reflected in those statements will be realized or achieved. Such risks and uncertainties include, without limitation, possible contingent liabilities and post-closing indemnification and other obligations arising from the sale of the Company’s remaining assets; the risk that federal, state or local taxing authorities will audit the tax returns filed by the Company resulting in additional taxes being assessed against the Company; the risk that income, sales, use and other tax returns filed by the Company prior to the divestiture of its business units might be audited by federal, state or local taxing authorities resulting in additional taxes being assessed against the Company; the risk that the Company may not be able to realize its current estimate of the net value of its assets; the risk that the Company may have underestimated the settlement expense of its obligations and liabilities, including without limitation, accrued compensation and tax liabilities; risks associated with the liquidation and dissolution of the Company, including without limitation, settlement of the Company’s litigation, liabilities and obligations, costs including professional fees, incurred in connection with carrying out the Plan of Dissolution, discharge of any outstanding creditor claims, and the winding up and dissolution of the Company. These risks and others are more fully described in our annual report on Form10-K for the fiscal year ended January 31, 2009. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this report to reflect future events or circumstances.
Overview
During fiscal year 2005, we engaged the services of financial advisors to evaluate strategic alternatives to enhance shareholder value, which included exploring the disposition of some or all of our business units. It was determined that in the best interest of shareholder value that the Company divest all remaining product line business units. During fiscal 2006, with shareholder approval, the Company divested all its remaining business units and adopted the Plan of Dissolution, effective September 3, 2005. On May 20, 2005, the Company completed the sale of the Defense & Space group to Chelton Microwave. On July 1, 2005, the Company completed the sale of certain assets and liabilities constituting a substantial portion of the Electronic Manufacturing Services business to Veritek Manufacturing Services, LLC and Samjor Family Limited Partnership. On August 26, 2005, the Company completed the sale of the Outdoor Unit/Transceiver business to Wireless Holdings International, Inc. On September 2, 2005, the Company sold the Wireless Systems business unit to Powerwave Technologies, Inc. The Wireless Systems business was the last remaining REMEC product line business unit.
The Company is in the process of finalizing the disposition of its remaining business assets, including the completion of outstanding litigation and the payment of liabilities. During this period, we will not continue our business as a going concern.
Our Plan of Dissolution provides us with authority to retain a third party liquidator or trust without further approval by our shareholders at the discretion of our Board of Directors. We may determine that the continued liquidation of REMEC may be more efficiently handled by retaining a third party liquidator or trust to manage the liquidation process. In particular, we may determine to do so at such time as our outstanding litigation and other significant creditor claims have been resolved. We cannot predict when or if these matters will be resolved, or when or if we will engage a third party liquidator or trust. We have accrued estimated costs of a trust as of October 30, 2009 in our estimated costs to be incurred during liquidation. We are currently evaluating potential trustee options as we prepare to transfer the net assets to a trust.
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Since the Company is in liquidation without continuing operations, the need to present quarterly Statements of Operations and Comprehensive Income Statements as well as a Statements of Cash Flows is eliminated.
Liquidation Basis of Accounting and Plan of Dissolution
The accompanying interim condensed financial statements have been prepared on the liquidation basis of accounting. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted. Uncertainties as to the precise net value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value that may ultimately be distributable to shareholders. Claims, liabilities and future expenses for operations, although currently declining in the aggregate, will continue to be incurred with execution of the plan. These costs will reduce the amount of net assets available for ultimate distribution to shareholders. Although we do not believe that a precise estimate of those expenses can currently be made, we believe that available cash and amounts received from sales of non-cash assets will be adequate to provide for our obligations, liabilities, operating costs and claims, and to make cash distributions to shareholders. If amounts received from the settlement of non-cash assets are less than the estimated net realizable value or if actual settlement of our obligations, liabilities, operating costs and claims exceeds currently estimated amounts, future distributions of cash to our shareholders will be reduced.
Net Assets in Liquidation
Net assets in liquidation increased approximately $4.2 million, or $0.14 per share, to $29.13 million for the nine months ended October 30, 2009 from $24.95 million as of January 31, 2009. (In thousands, except per share data):
| October 30, 2009 | January 31, 2009 | |||||
Net assets in liquidation | $ | 29,126 | $ | 24,946 | ||
Number of common shares outstanding at each respective date | 30,031 | 30,031 | ||||
Net asset value per outstanding share | $ | 0.969 | $ | 0.831 | ||
The following paragraphs summarize certain material actions and events which have occurred regarding the Company’s liquidation process during the nine months ended October 30, 2009.
Net assets in liquidation increased approximately $4.2 million for the nine months ended October 30, 2009. The increase in net assets in liquidation was primarily due to the reverse of the accrual for estimated taxes payable of approximately $4.3 million and approximately $2.4 million in associated estimated penalties and interest. The reduction to income taxes payable was the result of a lapse of the applicable statue of limitations for federal taxes.
Increases in net assets in liquidation were offset by approximately $2.0 million due to increases in costs to be incurred during liquidation related to, operating costs, net, associated with winding up operations; insurance amortization (primarily D&O coverage), insurance expense (primarily workers’ compensation), compensation costs for our two executive officers, and legal fees.
Results of Operations
In connection with the adoption of the Plan of Dissolution, and the adoption of the liquidation basis of accounting for all periods subsequent to September 2, 2005, we do not generate revenue and have no supply of product available for sale, and, therefore, we do not incur cost of revenues.
Liquidity and Capital Resources
As of October 30, 2009, net assets in liquidation totaled $29.1 million. Total assets of $34.3 million include approximately $30.8 million in cash and cash equivalents and approximately $2.9 million of restricted cash held as security on letters of credit. Receivables and other assets consist of approximately $0.6 million, which includes notes receivables and prepaid insurance, consisting primarily of D&O insurance premiums to be amortized. Total assets are offset by approximately $5.2 million of estimated total liabilities expected to be incurred during liquidation, consisting of approximately $1.2 million in taxes payable and approximately $4.0 million of estimated operating costs and estimated costs to be incurred during liquidation.
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We expect to use our capital resources to execute and complete our Plan of Dissolution, settle existing claims against the Company, including existing litigation and other current liabilities and accrued expenses, and to make liquidating distributions to our shareholders. Capital resources available for liquidating distributions to shareholders may vary if we incur greater than estimated operating expenses associated with executing the Plan of Dissolution, actual settlement costs for existing claims against the Company may vary from estimates, or if there are existing, but unknown claims made against us in the future. We intend to distribute net assets in liquidation to shareholders as liquidating distributions as promptly as practicable as we convert our remaining assets to cash. At October 30, 2009, our cash and cash equivalents were held primarily in money market funds and other bank deposit accounts. We expect to continue to hold our cash and cash equivalents primarily in money market funds while we execute the Plan of Dissolution.
Distributions
On August 2, 2005, we filed additional proxy material with the SEC that provided shareholders with an estimate of the cash and the number of shares of Powerwave common stock that would be distributed to REMEC shareholders following the sale of REMEC’s Wireless Systems business unit to Powerwave. That filing indicated shareholders were ultimately expected to receive between $2.45 to $2.95 in total cash distributions and 0.333 shares of Powerwave stock for every share of REMEC stock held at the time the transaction closed. In September 2005, 10 million shares of Powerwave stock were issued to the shareholders of record on September 13, 2005 of REMEC stock at a ratio of 0.3443 shares of Powerwave stock for every share of REMEC stock held. On October 4, 2005, an initial cash liquidating distribution was made to shareholders of record of REMEC stock on September 13, 2005 at a rate of $1.35 per share totaling approximately $39.2 million.
On October 19, 2006, the Board of Directors approved a cash liquidating distribution of approximately $22.5 million, or $0.75 per share to shareholders of record as of November 1, 2006 pursuant to our Plan of Dissolution. On November 8, 2006, a cash liquidating distribution was made to all shareholders of record as of November 1, 2006 at a rate of $0.75 per share, totaling approximately $22.5 million.
On December 14, 2007, the Board of Directors approved a cash liquidating distribution of approximately $22.5 million, or $0.75 per share to shareholders of record as of the close of business on December 14, 2007 pursuant to our Plan of Dissolution. On December 21, 2007, a cash liquidating distribution was made to all shareholders of record as of December 14, 2007 at a rate of $0.75 per share, totaling approximately $22.5 million.
On June 17, 2008, the Board of Directors approved a cash liquidating distribution of approximately $15.0 million, or $0.50 per share to shareholders of record as of the close of business on June 27, 2008 pursuant to our Plan of Dissolution. On July 7, 2008, a cash liquidating distribution was made to all shareholders of record as of June 27, 2008 at a rate of $0.50 per share, totaling approximately $15.0 million.
The sources for payment of these distributions were funds made available from the settlement of liabilities and the liquidation of assets.
Subsequent cash distributions are pending, subject to review by REMEC’s Board of Directors of the Company’s remaining obligations. However, the significant number of liabilities and obligations that REMEC must satisfy along with the uncertainty surrounding these obligations makes the actual amount and timing of distributions uncertain and may result in the actual cash distribution being lower or higher than the expected range from $0.85 to $0.97 per common share.
Off-Balance Sheet Arrangements
As of October 30, 2009, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Obligations and Commitments
Our contractual obligations and commitments as of October 30, 2009 are reported in the statements of net assets in liquidation as estimated costs to be incurred during liquidation or estimated taxes payable. Obligations and commitments of the Company include facility operating leases, all of which, except for the principal executive office, are fully subleased. As of October 30, 2009 the accrual for the estimated net lease settlements on the remaining facility obligations is approximately $0.1 million net of sublease payments totaling approximately $1.1 million.
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| Item 3. | Qualitative and Quantitative Disclosures About Market Risk. |
“As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item. “
| Item 4T. | Controls and Procedures. |
(1) Management’s Evaluation of Disclosure Controls
Our management evaluated, with the participation of our President and Chief Financial Officer, the effectiveness of our design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(2) Changes in Internal Control over Financial Reporting
During the quarter ended October 30, 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings. |
Claims and Litigation
The Company’s commitments and contingencies include the following claims and litigation. The Company continues to vigorously defend against current claims and litigation. The cost to conduct litigation is affected by a number of factors, many of which cannot be predicted with certainty. Accordingly, our continued litigation activities and ultimate settlement may result in the Company incurring lesser or greater costs than our current accruals, affecting net assets available in liquidation. This risk has been considered in our estimated range of additional future liquidating distributions.
Securities Class Action
On September 29, 2004, three class action lawsuits were filed against the Company and certain former officers (the “Defendants”) in the United States District Court for the Southern District of California alleging that between September 8, 2003 and September 8, 2004 (the “Class Period”) the Defendants made false and misleading statements and failed to disclose material information regarding the Company’s financial condition, operations and future business prospects in violation of federal securities laws. On January 18, 2005, the law firm of Milberg Weiss Bershad & Schulman LLP (“Milberg Weiss”) was appointed Lead Counsel and its client was appointed Lead Plaintiff.
After several consolidated and amended complaints were filed, challenged by the Defendants and dismissed by the Court with leave to amend, the Court denied the Company’s Motion to Dismiss the Fourth Amended Complaint on September 26, 2006. REMEC filed its Answer to the Fourth Amended Complaint on November 6, 2006, denying all liability and asserting certain affirmative defenses. On November 21, 2007 the Court granted Plaintiff’s motion for class certification.
The parties engaged in discovery, including production of documents, between May 2007 and March 2009. All discovery, including expert discovery, is now closed. There are currently four motions seeking summary judgment or partial summary judgment pending before the Court, three made by the Defendants and one made by the Plaintiffs. The time period for filing dispositive motions has closed. The Pretrial Conference has been set for January 25, 2010, and Trial has been set for February 23, 2010. REMEC maintains directors’ and officers’ liability insurance, and has tendered the defense of this lawsuit to its insurance carriers. The primary insurance carrier has agreed to pay defense costs and provide coverage of this action, subject to a reservation of rights. The Company believes the case is without merit and has been vigorously defending against the asserted claims. Because the Company has not determined that a loss in this case is probable, the Company has not included any amounts related to this litigation in either its estimate of cost to be incurred during liquidation (See Note 2) or in the estimated range of future liquidating distributions (See Note 1), as of October 30, 2009.
Other
Other than the claims and lawsuits described above, REMEC is not presently subject to any material claims or litigation, nor to the Company’s knowledge, are such claims or litigation threatened against REMEC.
| Item 1A. | Risk Factors. |
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide the information under this Item. There have been no material changes from risk factors as previously disclosed in our annual report on Form10-K for the fiscal year ended January 31, 2009.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
| Item 6. | Exhibits |
Exhibit Number | Description | |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| REMEC, Inc. | ||
| By: | /s/ Richard A. Sackett | |
| Richard A. Sackett | ||
| President | ||
| /s/ David F. Wilkinson | ||
| David F. Wilkinson | ||
| Chief Financial and Accounting Officer | ||
Date: December 14, 2009
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