1
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 NOVEMBER 3, 1996
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Commission File Number 0-27414
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REMEC, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3814301
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(State of other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
9404 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA 92123
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(Address of principal executive offices) (Zip Code)
(619) 560-1301
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(Registrant's telephone number, including area code)
Indicate by check 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 12 month (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------------ ------------
Indicate number of shares outstanding of each of the issuer's classes of common
stock, at the latest practicable date:
Class Outstanding as of: NOVEMBER 3, 1996
----------- ---------------------------------------
Common shares,
$.01c. par value 9,014,342
2
Index Page No.
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets...........................................3
Condensed Consolidated Statements of Income.....................................4
Condensed Consolidated Statement of Changes in Shareholder's Equity.............5
Condensed Consolidated Statements of Cash Flows.................................6
Notes to Condensed Consolidated Financial Statements............................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................20
SIGNATURES.....................................................................................21
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
November 3, January 31,
------------- -------------
1996 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $6,513,399 $1,326,292
Short term investments - 1,482,548
Accounts receivable, net 11,953,527 5,385,500
Inventories, net 16,473,955 12,223,871
Prepaid expenses and other current assets 2,281,038 1,888,225
------------ ------------
Total current assets 37,221,919 22,306,436
Property, plant and equipment, net 11,887,806 9,026,482
Deferred offering costs -- 1,108,424
Intangible and other assets 4,906,071 1,298,029
------------ ------------
$54,015,796 $33,739,371
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,457,635 $3,301,216
Accrued expenses 6,800,577 7,093,543
------------ ------------
Total current liabilities 11,258,212 10,394,759
Bank revolving term loan and line-of-credit -- 1,900,000
Other long-term liabilities 1,238,105 1,350,628
Shareholders' equity 41,519,479 20,093,984
------------ ------------
$54,015,796 $33,739,371
============ ============
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Nine months ended
November 3, October 22, November 3, October 22,
----------- ------------ ----------- ------------
1996 1995 1996 1995
---- ---- ---- ----
Net sales $22,465,672 $15,128,881 $62,461,159 $45,565,484
Cost of sales 16,729,535 10,959,424 46,805,491 34,256,020
------------ ------------ ------------ ------------
Gross profit 5,736,137 4,169,457 15,655,668 11,309,464
Operating expenses:
Selling, general and administrative 3,005,575 2,475,411 8,233,536 7,135,158
Research and development 478,879 805,078 2,287,914 1,444,807
------------ ------------ ------------ ------------
3,484,454 3,280,489 10,521,450 8,579,965
------------ ------------ ------------ ------------
Income from operations 2,251,683 888,968 5,134,218 2,729,499
Interest (income) expense (46,208) 29,060 (247,983) 47,699
------------ ------------ ------------ ------------
Income before provision for income taxes 2,297,891 859,908 5,382,201 2,681,800
Provision for income taxes 922,099 366,223 2,166,816 1,135,848
------------ ------------ ------------ ------------
Net income $1,375,792 $493,685 $3,215,385 $1,545,952
============ ============ ============ ============
Net income per share $ 0.15 $ 0.07 $ 0.36 $ 0.23
============ ============ ============ ============
Shares used in per share calculations 9,041,908 6,684,857 8,982,908 6,663,652
============ ============ ============ ============
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Convertible
preferred shares Common shares
------------------ ------------------- Paid-in Retained
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ ------- -------- -----
Balance at January 31, 1996 718,607 $ 7,186 5,361,956 $53,620 $11,876,824 $ 8,156,354 $20,093,984
Issuance of Common stock in ---- ---- 2,264,893 22,649 15,626,560 ---- 15,649,209
initial public offering
Issuance of Common stock under ---- ---- 161,672 1,616 1,149,682 ---- 1,151,298
employee stock purchase plan
Issuance of Common stock upon ---- ---- 16,075 161 64,139 ---- 64,300
exercise of stock options
Other issuances of Common stock ---- ---- 131,837 1,318 1,479,257 ---- 1,480,575
Conversion of preferred stock (718,607) (7,186) 1,077,909 10,779 (3,593) ---- ----
Net income ---- ---- ---- ---- ---- 3,215,385 3,215,385
Elimination of Magnum activity for
the duplicated two months
ended March 31, 1996 ---- ---- ---- ---- ---- (135,272) (135,272)
---------- ------- ---------- ------- ----------- ----------- ---------
Balance at November 3, 1996 $ ---- $ ---- 9,014,342 $90,143 $30,192,869 $11,236,467 $41,519,479
========== ======= ========== ======= ============ =========== ===========
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
November 3, October 22,
---------- -----------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $3,215,385 $1,545,952
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 2,060,213 1,488,301
Changes in operating assets and liabilities:
Accounts receivable (5,916,505) (2,917,742)
Inventories (3,303,104) 1,041,495
Prepaid expenses and other current assets (402,878) 12,810
Accounts payable 598,802 609,316
Accrued expenses and other long-term
liabilities 1,961 403,159
---------- ----------
Net cash provided (used) by operating activities (3,746,126) 2,183,291
INVESTING ACTIVITIES
Additions to property, plant and equipment (4,954,220) (2,051,635)
Payment for acquisition, net of cash acquired (4,011,735) --
Other assets (136,225) 20,964
Purchase of held to maturity securities -- (981,607)
Maturity of held to maturity securities 1,482,565 953,657
---------- ----------
Net cash used by investing activities (7,619,615) (2,058,621)
FINANCING ACTIVITIES
Proceeds from bank revolving term loan, line-of-credit
and long-term debt -- 10,150,000
Repayments on bank revolving term loan, line-of-credit and
long-term debt (2,867,399) (9,454,353)
Proceeds from sale of common stock and deferred
offering costs 19,453,806 63,340
Cash dividends -- (54,800)
---------- ----------
Net cash provided by financing activities 16,586,407 704,187
---------- ----------
Increase in cash and cash equivalents 5,220,666 828,857
Cash and cash equivalents at beginning of period 1,326,292 1,754,929
Elimination of Magnum's net cash activity for the duplicated two
months ended March 31, 1996 (33,559)
---------- ----------
Cash and cash equivalents at end of period $6,513,399 $2,583,786
========== ==========
SEE ACCOMPANYING NOTES.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. QUARTERLY FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included
herein have been prepared by REMEC, Inc. (the "Company") without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in annual financial statements, have
been condensed or omitted pursuant to such SEC rules and regulations;
nevertheless, management of the Company believes that the disclosures
herein are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto for the year ended January 31, 1996 included in the Company's
Form 10-K and with the Company's Current Report on Form 8-K dated
August 26, 1996. In the opinion of management, the condensed
consolidated financial statements included herein reflect all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position of the
Company as of November 3, 1996 and the results of its operations for
the three-month and nine-month periods ended November 3, 1996 and
October 22, 1995. The results of operations for the interim periods
are not necessarily indicative of the results which may be reported
for any other interim period or for the entire fiscal year.
2. ACQUISITION OF MAGNUM MICROWAVE CORPORATION ("MAGNUM")
On August 26, 1996, the Company issued 1,081,486 shares of its common
stock in exchange for all of the outstanding shares of common stock of
Magnum, a manufacturer of microwave components and subsystems. The
acquisition of Magnum was accounted for as a pooling of interests.
Therefore, the Company's consolidated financial statements for the
periods prior to the acquisition of Magnum have been restated to
include the financial position, results of operations, and cash flows
of Magnum.
Prior to the combination, Magnum's fiscal year ended on the Friday
closest to March 31. In recording the business combination, Magnum's
financial statements for the interim periods ended November 3, 1996
were combined with REMEC's for the same periods. Magnum's statements
of operations, cash flows and changes in shareholders' equity for the
three and nine months ended December 29, 1995 were combined with
REMEC's for the three and nine months ended October 22, 1995.
Magnum's balance sheet as of March 31, 1996 was combined with REMEC's
as of January 31, 1996.
Consolidated operating results and the net change in consolidated cash
and cash equivalents for the interim period ended November 3, 1996
include Magnum's results of operations and change in cash flows for
the two months ended March 31, 1996. Magnum net sales and net income
for the two month period ended March 31, 1996 were $1,743,000 and
$135,000 respectively.
Included in the consolidated statements of operations for the interim
periods ended November 3, 1996 were costs of $424,000 related to the
combination and integration of Magnum into REMEC. These costs are
comprised primarily of professional fees and other costs associated
with the registration of shares in connection with the merger.
Unless the context indicates otherwise, references herein to the
Company are deemed to include the operations of Magnum.
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3. INVENTORIES
Inventories consist of the following:
November 3, January 31,
1996 1996
---- ----
Raw materials $ 7,163,105 $ 7,953,813
Work in progress 10,540,709 8,375,730
----------- -----------
17,703,814 16,329,543
Less unliquidated progress payments (1,229,859) (4,105,672)
----------- -----------
$16,473,955 $12,223,871
=========== ===========
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$1,820,000 and $1,924,000 at November 3, 1996 and January 31, 1996,
respectively.
4. NET INCOME PER SHARE
Net income per share is computed based on the weighted average number
of common and common equivalent shares outstanding during each period
using the treasury stock method. Pursuant to the requirements of the
Securities and Exchange Commission, common and common equivalent
shares issued during the twelve-month period prior to the company's
initial public offering (see Note 5) have been included in the
calculations as if they were outstanding for all periods presented
using the treasury stock method. In addition, the calculation of the
number of shares used in computing net income per share also includes
convertible preferred stock, which converted into 1,077,909 common
shares upon the closing of the initial public offering, as if they
were converted into common shares as of their original dates of
issuance. The calculation of earnings per share reflects the
historical information for both REMEC and Magnum after adjusting the
Magnum information to reflect the conversion of Magnum common shares
into REMEC shares as stipulated in the acquisition agreement between
REMEC and Magnum (see note 2).
5. INITIAL PUBLIC OFFERING
In February, 1996, the Company completed an initial public offering
(the "IPO") of its common stock in which the Company sold a total of
2,264,893 shares of common stock at $8.00 per share. Concurrent with
the closing of the IPO, the 461,538 outstanding shares of Series A
preferred stock and 257,069 outstanding shares of Series B preferred
stock were converted into 1,077,909 shares of common stock. The
Company's proceeds from the offering after deducting underwriting
commissions of $1,268,340 and expenses of $1,201,675 were $15,649,209.
In connection with the Company's IPO, certain shareholders also sold
1,185,107 shares as part of the offering.
6. ACQUISITION OF RF MICROSYSTEMS, INC. ("RFM")
Effective April 30, 1996, the Company acquired all of the outstanding
common stock of RFM and various VSAT (very small aperture terminals)
microwave design and manufacturing resources from STM Wireless,
Inc.("STM") in exchange for cash consideration of approximately
$4,066,000. The acquisition has been accounted for as a purchase, and
accordingly, the total purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values
in accordance with the
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provisions of Accounting Principles Board Opinion No. 16. The
estimated excess of the purchase price over the net assets acquired of
$3,559,000 is being carried as intangible assets and will be amortized
over its estimated life of 15 years.
In connection with the acquisition, the Company also received purchase
orders from STM totaling approximately $20.0 million for the design
and manufacture of commercial wireless C-Band VSAT equipment.
A summary of the RFM acquisition costs and a preliminary allocation of
the purchase price to the assets acquired and liabilities assumed is
as follows:
Total acquisition cost:
Cash paid $ 3,933,000
Payment of acquisition related expenses 133,000
-----------
$ 4,066,000
===========
Allocated as follows:
Current assets $ 1,622,000
Machinery and equipment 320,000
Acquired intangibles 3,559,000
Liabilities assumed (1,435,000)
-----------
$ 4,066,000
===========
Final purchase price adjustments, if any, will be determined at a
later date and may differ from the estimates presented above.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
REMEC, Inc. (The "Company") commenced operations in 1983 and has become a
leader in the design and manufacture of microwave multi function modules
("MFMs") for the defense industry. The Company's consolidated results of
operations include the operations of REMEC Microwave (Microwave), REMEC
Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems, Inc.
("RFM"), from the date of acquisition on April 30, 1996, and Magnum Microwave
Corporation ("Magnum"), which was acquired on August 26, 1996. The acquisition
of Magnum has been accounted for as a pooling of interests. Therefore, the
Company's consolidated financial statements for the periods prior to the
acquisition have been restated to include the results of operations, the
financial position and the cash flows of Magnum.
The Company's microwave defense business is conducted at Microwave, its
commercial telecommunications business is conducted through Wireless, its
precision instrument business is conducted as Humphrey, RFM provides the
Department of Defense with research and analysis, systems engineering and test
evaluation services, and Magnum manufactures microwave components and
subsystems.
Historically, substantially all of the Company's sales have been to prime
contractors to various agencies of the U.S. Department of Defense and foreign
defense contracts and governments. Beginning in 1995, the Company entered the
commercial wireless telecommunications market via the establishment of
Wireless. During 1996, the Company increased its capability in this market by
purchasing certain VSAT microwave design and manufacturing resources from STM
Wireless and through its acquisition of Magnum. Accordingly, the Company
expects sales to the commercial telecommunications market to represent an
increasing percentage of revenues in the future.
The Company's research and development efforts in the defense industry are
conducted in direct response to the unique requirements of a customer's order
and, accordingly, expenditures related to such efforts are included in cost of
sales and the related funding is included in net sales. As a result,
historical research and development expenses have been minimal. The Company
expects that, as its commercial business expands, research and development
expenses will increase in amount and as a percentage of sales.
The Company historically has experienced some fluctuations in operating results
attributable to various factors including the contractual demands of major
customers and defense spending budgetary constraints. In addition, with the
decline in available defense industry production programs, the Company has
placed more reliance on development contracts as a source of defense revenues,
resulting in an increased susceptibility to fluctuations due to an increase in
revenues from fixed price development contracts as a percentage of total
revenues. Development contracts carry reduced gross margins and are typically
for minimal hardware deliveries and sporadic non-hardware revenue items which
results in fluctuating revenues and gross margins. Furthermore, a large
portion of the Company's expenses are fixed and difficult to reduce. If net
sales do not meet the Company's expectations, the fixed nature of the Company's
expenses would exacerbate the effect on profitability of any net sales
shortfall.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total net sales, certain
consolidated statement of income data for the periods indicated.
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Three months ended Nine months ended
Nov. 3, Oct.22, Nov. 3, Oct. 22,
1996 1995 1996 1995
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.5 72.4 74.9 75.2
----- ----- ----- -----
Gross profit 25.5 27.6 25.1 24.8
Operating expenses:
Selling, general and administrative 13.4 16.4 13.2 15.7
Research and development 2.1 5.3 3.7 3.1
----- ----- ----- -----
Total operating expenses 15.5 21.7 16.9 18.8
----- ----- ----- -----
Income from operations 10.0 5.9 8.2 6.0
Interest (income) expense (0.2) 0.2 (0.4) 0.1
----- ----- ----- -----
Income before income taxes 10.2 5.7 8.6 5.9
Provision for income taxes 4.1 2.4 3.5 2.5
----- ----- ----- -----
Net income 6.1% 3.3% 5.1% 3.4%
===== ===== ===== =====
Net Sales. Net sales were $22.5 million for the three months ended November
3, 1996 and $62.5 million for the nine month period ended November 3, 1996,
representing increases of $7,337,000 or 48% and $16,896,000 or 37%,
respectively, over the comparable prior year periods. The effects of a
reduction in sales at Microwave were more than offset by increased sales at
Humphrey, Wireless and Magnum. In addition, consolidated sales for the three
and nine month periods ended November 3, 1996 include $1.8 million and $3.3
million of sales by RFM, which was acquired in April 1996. For the nine month
period ended November 3, 1996, Microwave net sales decreased $3.5 million,
Humphrey net sales increased $1.4 million, Wireless net sales increased $14.5
million and Magnum net sales increased $1.1 million versus the comparable
prior year period.
Net sales at Microwave for the nine month period ended October 22, 1995
included $2.4 million of non-recurring revenue. Excluding this item, which is
discussed below, Microwave sales decreased by approximately $1.1 million as a
result of continued reductions in available defense industry production
programs as well as continued pricing pressures on follow-on orders for
programs for which the Company participates. The increase in Humphrey revenues
is primarily attributable to increased shipments on production contracts for
existing programs and customers. The increase in sales to commercial wireless
customers is almost entirely attributable to the production of microwave
front-ends for P-COM and the production of commercial C-Band VSAT equipment for
STM. The increase in Magnum revenues is primarily attributable to growth in
the markets in which Magnum operates.
The Company believes that in the near term defense procurement in the areas
addressed by the Company is stabilizing; however, there continues to be
uncertainty in the amount of defense business that will be available to the
Company. In an effort to offset the potential of declining defense revenues,
the Company is focusing heavily upon the commercial wireless telecommunications
business. However, there can be no assurance that the Company will be
successful in the commercial wireless telecommunications market or that the
deployment of resources to that market will not have a material adverse affect
on the Company's defense business.
Results for the nine month period ended October 22, 1995 include $2.4 million
of non-recurring revenue, $0.9 million of gross profit and $0.3 million of
selling, general and administrative expenses associated with the settlement of
a termination claim for a large defense contract that was terminated in
December 1992.
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Gross Profit. Gross profit was $5.7 million for the three months ended
November 3, 1996 and $15.7 million for the nine month period ended November 3,
1996, representing increases of $1,567,000 or 38% and $4,346,000 or 38%,
respectively, over the comparable prior year periods. Gross margin was 26% for
the three months ended November 3, 1996 and 25% for the first nine months of
fiscal 1997 compared with 28% and 25%, respectively, for the corresponding
prior year periods. On a year to year basis, gross margins at Microwave were
essentially unchanged at 20%. Gross margins at Humphrey increased from 28%
for the nine months ended October 22, 1995 to 29% for the nine month period
ended November 3, 1996. Humphrey gross margins for the nine month period ended
October 22, 1995 were adversely affected by losses on certain long-term
contracts in place at the time of the Company's acquisition of Humphrey. Gross
margins at Wireless increased from 14% for the nine months ended October 22,
1995 to 22% for the nine month period ended November 3, 1996 and gross margins
at Magnum increased from 38% for the nine months ended December 29, 1995 to 39%
for the nine months ended November 3 1996. The improved gross margins at
Wireless and Magnum reflect improved overhead absorption associated with
increased volume.
Selling, General and Administrative Expenses. Selling, general and
administrative ("S,G&A") expenses were $3.0 million for the three months ended
November 3, 1996 and $8.2 million for the nine month period ended November 3,
1996, representing increases of $530,000 or 21% and $1,098,000 or 15%,
respectively, over the comparable prior year periods. These increases were
primarily attributable to S,G&A costs associated with the Wireless and RFM
operations, neither of which were significant contributors to prior year S,G&A
costs. Wireless was operating at start up levels during the third quarter of
fiscal 1996, while RFM was not included in prior year results at all as it was
not acquired until the second quarter of fiscal 1997. S,G&A expenses for the
three and nine month periods ended November 3, 1996 also include $100,000 and
$424,000 of expenses associated with the Magnum acquisition. S,G&A expenses
continue to decline as a percentage of net sales as compared with the prior
year, from 16% for the nine month period ended October 22, 1995 to 13% for the
nine month period ended November 3, 1996. The Company expects to incur
additional S,G&A expenses in the future as it pursues the commercial wireless
telecommunications market.
Research and Development Expenses. Research and development expenses were
$479,000 for the three months ended November 3, 1996 and $2,288,000 for the
nine month period ended November 3, 1996, as compared with $805,000 and
$1,445,000, respectively, for the comparable prior year periods. The decrease
in such costs during the three month period ended November 3, 1996 as compared
with the comparable prior year period resulted from the conclusion of certain
development efforts associated with the Company's contract with PCOM. Research
and development expenses on a year to date basis continue to run at an
increased level over the comparable prior year period primarily as a result of
expenses related to the Company's commercial wireless telecommunications
operations. Such expenses have totaled $1,322,000 during the first nine months
of the year.
Interest (Income)Expense. The Company's results of operations for the three
and nine month periods ended October 22, 1995 included interest expense of
$29,000 and $48,000. By contrast, results of operations for the three and nine
month periods ended November 3, 1996, included net interest income of $46,000
and $248,000. The interest income during the current year reflects the
increased level of cash on hand as a result of the funds generated from the
Company's initial public offering which was consummated in February 1996. The
interest expense incurred during the prior year reflects interest on debt
obligations incurred in connection with the Humphrey acquisition, net of
interest income generated at Magnum.
Provision for Income Taxes. The Company's effective income tax rate declined
from 42% for the nine month period ended October 22, 1995 to 40% for the nine
month period ended November 3, 1996. The decrease reflects a state tax benefit
attributable to credits for certain capital expenditures. The Company expects
its future effective tax rate to be approximately 40%.
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LIQUIDITY AND CAPITAL RESOURCES
At November 3, 1996, the Company had $6.5 million of cash and cash equivalents
and $26.0 million of working capital. The company also has $15.0 million in
available credit facilities consisting of a $9.0 million revolving working
capital line-of-credit and a $6.0 million revolving term loan. The borrowing
rates are prime and prime plus 0.5%, respectively. The revolving working
capital line-of-credit terminates June 1, 1997. The revolving period under the
term loan expires June 1, 1997, at which time any loan amount outstanding
converts to a term loan to be fully amortized and paid in full by November 1,
2000. As of November 3, 1996, there were no borrowings outstanding under the
Company's credit facilities.
During the nine month period ended November 3, 1996, the Company's operations
used net cash of approximately $3.7 million, primarily as a result of the
increases in accounts receivable and inventories resulting from the Company's
increased level of sales.
Investing activities utilized $7.6 million in cash during the nine month period
ended November 3, 1996, primarily as a result of the acquisition of RFM in
exchange for cash consideration of approximately $4.0 million and approximately
$5.0 million of capital expenditures, the bulk of which were associated with
the expansion of the Company's commercial wireless telecommunications business.
The above expenditures were financed primarily by funds raised in the Company's
initial public offering. The Company's future capital expenditures will be
substantially higher than historical levels as a result of commercial wireless
telecommunications expansion requirements.
In February, 1996, the Company completed an initial public offering ("IPO") of
its common stock in which the Company sold a total of 2.3 million shares of
common stock at $8.00 per share. The Company's proceeds from the offering
after deducting underwriting commissions and expenses was approximately $15.6
million. The Company also realized proceeds of approximately $2.7 million from
additional issuances of stock primarily attributable to stock purchases through
the Company's Employee Stock Purchase Plan and a private equity placement at
the Company's Magnum subsidiary prior to its merger in August 1996. During the
nine months ended November 3, 1996, approximately $2.9 million of long-term
debt was repaid, including $526,000 of obligations assumed in the acquisition
of RFM.
The Company's future capital requirements will depend upon many factors,
including the nature and timing of orders by OEM customers, the progress of the
Company's research and development efforts, expansion of the Company's
marketing and sales efforts, and the status of competitive products. The
Company believes that available capital resources and the proceeds from its
initial public offering will be adequate to fund its operations for at least
twelve months. There can be no assurance, however, that the Company will not
require additional financing prior to such date. There can be no assurance
that any additional financing will be available to the Company on acceptable
terms, or at all. The inability to obtain such financing could have a material
adverse effect on the Company's business, financial position and results of
operations.
OTHER MATTERS
The statements in this Report on Form 10-Q that relate to future
plans, events or performance are forward-looking statements. REMEC's future
operations, financial performance, business and share price may be affected by
a number of factors, including the factors listed below, any of which could
cause actual results to vary materially from anticipated results. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. REMEC undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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Merger with Magnum. In August, 1996, the Company completed its merger (the
"Merger") with Magnum. The anticipated benefits of the Merger will not be
achieved unless the Company and Magnum are successfully combined in an
efficient and effective manner. The transition to a combined Company in which
Magnum is a wholly-owned subsidiary of the Company will require substantial
attention from management, which has limited experience in integrating
companies the size of REMEC and Magnum. The diversion of management attention
and any difficulties encountered in completing the merger or affecting the
transition process could have an adverse impact on the revenues and operating
results of the Company. There can be no assurance that the two companies will
be successfully integrated or that the consolidated operations of REMEC and
Magnum will be profitable.
Control by Management. The Company's executive officers beneficially own a
substantial portion of the outstanding shares of the Common Stock of the
Company and comprise five of the ten members of the Board of Directors. As a
result, such persons have the ability to exercise influence over significant
matters regarding the Company. Such a high level of influence may have a
significant effect in delaying, deferring or preventing a change in control of
the Company.
Potential Volatility of Stock Price. The market price of the shares of Common
Stock, like the stock prices of many technology companies, may be subject to
wide fluctuations in response to such factors as actual or anticipated
operating results, announcements of technological innovations, new products or
new contracts by the Company, its competitors or their customers, government
regulatory action, developments with respect to wireless telecommunications,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the stocks of technology
companies and that have often been unrelated to the operating performance of
particular companies. The market price of REMEC Common Stock has been volatile
and may continue to be highly volatile.
Risks Associated With Entering Commercial Wireless Telecommunications Market.
Historically, the Company's business has been focused on the defense market.
The Company believes that its future growth depends on its success in the
commercial wireless telecommunications market, a market in which it has only
recently begun to compete. The Company believes that while the technologies
used in the defense and commercial industries are very similar, the two
industries differ significantly in terms of the customer base, manufacturing
requirements and lead times, the need to expend substantial resources for
research and development without the assurance of reimbursement or recovery of
those costs, and credit risks with customers. As a result, the Company is
subject to risks inherent in the operation of a new business enterprise,
including risks associated with attracting and servicing a new customer base,
manufacturing products in a cost effective and profitable manner, managing the
expansion of a business operation and attracting and retaining qualified
engineering, manufacturing and marketing personnel with industry experience.
For example, the Company believes that microwave engineers with the skills
necessary to develop products for the wireless telecommunications market
currently are in high demand and that the Company may not be able to attract
sufficient engineering expertise. There can be no assurance that the Company
will be successful in the commercial wireless telecommunications market or that
the deployment of resources to that market will not have a material adverse
effect on the Company's defense business.
Reliance on P-COM and STM; Customer Concentration and Exclusivity. As of
November 3, 1996, two customers, P-COM and STM, accounted for a substantial
portion of both total backlog and backlog scheduled for shipment in the fiscal
year ending January 31, 1997. P-COM, which produces point-to-point millimeter
wave radio systems for use in wireless telecommunications applications, was
founded in August 1991 and began commercial shipment of its products in October
1993. P-COM experiences intense competition worldwide from a number of leading
telecommunications companies, most of which have substantially greater
installed bases, financial resources and other capabilities than P-COM, and is
subject to the risks inherent in the operation of a new business enterprise.
The sales agreement between the Company and P-COM provides that all of the
units will be delivered by December 1998. REMEC has agreed to sell the
products which are the subject of the agreement with P-COM exclusively to P-COM
and not to compete with P-COM in the sale of point-to-point
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radios under conditions applicable to both parties. In 1996, REMEC received
orders from STM for $30.3 million for the design and manufacture of C-Band VSAT
equipment. Aside from P-COM and STM, the Company derives significant revenues
from a limited group of customers, including TRW, Inc., Hughes Aircraft
Company, Inc., Northrop Grumman Corporation, GEC Marconi Aerospace, Inc., Texas
Instruments, Motorola and Lockheed-Martin Corporation. The Company anticipates
that it will continue to sell products to a relatively small group of
customers. As a result, any cancellation, reduction or delay in orders by or
shipments to P-COM, STM, or any other significant customer, as a result of
manufacturing or supply difficulties or otherwise, or the inability of any
customer to finance its purchases of the Company's products would materially
adversely affect the Company's business, financial condition and results of
operations. The Company has granted P-COM exclusivity for certain products and
expects that in order to enter into other significant relationships in the
wireless telecommunications industry, customers will either expressly or
implicitly require exclusivity. In entering into such exclusive arrangements,
the Company will have to forego opportunities to supply products to competing
companies. If the Company enters into exclusive relationships with customers
who prove to be unsuccessful, the Company may be materially adversely affected
and the Company may be unable then to establish relationships with the industry
leaders. There can be no assurance that the Company will be able to locate, or
negotiate acceptable arrangements with, significant customers or that its
current or future arrangements with significant customers will continue or will
be successful.
Uncertainty of Emerging Markets in Wireless Telecommunications. A number of
the commercial markets for the Company's products in the wireless
telecommunications area have only recently begun to develop. Because these
markets are relatively new, it is difficult to predict the rate at which these
markets will grow, if at all. Existing or potential wireless
telecommunications market applications for the Company's products may fail to
develop or may erode for many different reasons, including insufficient growth
to support expensive infrastructure equipment, insufficient consumer demand for
wireless products or services because of pricing or otherwise, or real or
perceived security risks associated with wireless communications. If the
markets for the Company's products in commercial wireless telecommunications
fail to grow, or grow more slowly than anticipated, the Company's business,
operating results and financial position could be materially adversely
affected.
Dependence on Defense Market. A substantial portion of the Company's sales has
been to the defense market. As a result, the Company's sales could be
materially adversely impacted by a decrease in defense spending by the United
States government because of defense spending cuts, general budgetary
constraints or otherwise. The United States defense budget has recently been
reduced and may be further reduced. Fewer available defense industry
production programs, coupled with continued pricing pressure on follow-on
orders for programs on which the Company participates, caused sales of the
Company's core defense products - MFMs and components for microwave systems -
to decline from $35.3 million in the year ended January 31, 1994 to $26.9
million for the year ended January 31, 1996. The Company expects to continue
to derive a substantial portion of its revenues from government defense
programs and to develop microwave products for defense applications. Failure
of the Company to replace sales attributable to a significant defense program
or contract at the end of that program or contract, whether due to
cancellation, spending cuts, budgetary constraints or otherwise, could have a
material adverse effect upon the Company's business, operating results and
financial condition in subsequent periods. In addition, a large portion of the
Company's expenses are fixed and difficult to reduce, thus magnifying the
material adverse effect of any revenue shortfall. Also, defense contracts
frequently contain provisions that are not standard in private commercial
transactions, such as provisions permitting the cancellation of a contract if
funding for a program is reduced or canceled. For example, the government
terminated a large defense program in December 1992 for which the Company had
been supplying in excess of $4 million of products on an annual basis.
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16
Risks of Cost Overruns and Product Non-performance. The Company's customers
establish demanding specifications for product performance, reliability and
cost. The Company's contract with P-COM to produce microwave front ends for
point-to-point radios and its contract with STM to produce C-Band VSAT
equipment, and a significant portion of the Company's defense contracts are
firm fixed-price ("FFP") contracts that provide for a predetermined fixed price
for stipulated products, regardless of the costs incurred. The Company has
made pricing commitments to P-COM and to other customers in anticipation of
achieving more cost effective product designs and introducing more widespread
manufacturing automation. A substantial portion of the P-COM backlog involves
the re-design by the Company of the entire point-to-point radio front end. The
Company faces the risk of experiencing cost overruns or order cancellation if
it fails to achieve forecasted product design and manufacturing efficiencies or
if products cost more to produce because of increased cost of materials,
components or labor or otherwise. Manufacture of the Company's products is an
extremely complex process. The Company has in the past experienced cost
overruns on FFP contracts. There can be no assurance that cost overruns or
problems with performance or reliability of Company products will not occur in
the future. Any such cost overruns or performance problems may have a material
adverse effect on the Company's business, operating results and financial
condition.
Fluctuations in Quarterly Results. The Company's quarterly results have in the
past been, and will continue to be, subject to significant variations due to a
number of factors, any one of which could substantially affect the Company's
results of operations for any particular fiscal quarter. In particular,
quarterly results of operations can vary due to the timing, cancellation or
rescheduling of customer orders and shipments, the pricing and mix of products
sold, new product introductions by the Company, the Company's ability to obtain
components and sub- assemblies from contract manufacturers and suppliers, and
variations in manufacturing efficiencies. In addition, with the decline in
available defense industry production programs, the Company has placed more
reliance on development contracts as a source of defense revenues, resulting in
an increased susceptibility to fluctuations due to an increase in revenues from
fixed price development contracts as a percentage of total revenues.
Development contracts carry reduced gross margins and are typically for minimal
hardware deliveries and sporadic non-hardware revenue items which results in
fluctuating sales and gross margins. Accordingly, the Company's performance in
any one fiscal quarter is not necessarily indicative of financial trends or
future performance.
Backlog. The Company's order backlog is subject to fluctuations and is not
necessarily indicative of future sales. There can be no assurance that current
order backlog will necessarily lead to sales in any future period. The
Company's order backlog as of November 3, 1996 was approximately $131.9
million, approximately 52% of which was attributable to commercial customers
and approximately 48% of which was attributable to defense customers. A
substantial amount of the Company's order backlog can be canceled at any time
without penalty, except, in some cases, the recovery of the Company's actual
committed costs and profit on work performed up to the date of cancellation.
Cancellations of pending purchase orders or termination or reductions of
purchase orders in progress from customers of the Company could have a material
adverse effect on the Company's business, operating results and financial
condition.
Necessity of Implementing High Volume Manufacturing. Historically, the volume
of the Company's production requirements in the defense market was not
sufficient to justify the widespread implementation of automated manufacturing
processes. Fulfillment of substantial orders in the wireless
telecommunications industry will require a significant increase in the
Company's manufacturing capacity. For example, the Company plans to introduce
more automated manufacturing processes in order to fulfill its obligations to
P-COM, some of which are specialized processes that must be developed. There
can be no assurance that the Company will be able to implement the desired
automated manufacturing processes on a timely basis or at all or that, if
implemented, such manufacturing processes will be sufficient to fulfill the
Company's current and future production commitments in a cost effective manner
or that the Company will obtain a sufficient amount of high volume orders to
absorb the capital costs incurred.
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17
Competition. The markets for the Company's products are extremely competitive
and are characterized by rapid technological change, new product development,
product obsolescence and evolving industry standards. In addition, price
competition is intense and significant price erosion generally occurs over the
life of a product. The Company faces some competition from component
manufacturers who have integration capabilities, but believes that its primary
competition is from the captive manufacturing operations of large wireless
telecommunications OEMs (including all of the major telecommunications
equipment providers) and defense prime contractors who are responsible for a
substantial majority of the present worldwide production of MFMs. The
Company's future success is dependent upon the extent to which these OEMs and
defense prime contractors elect to purchase from outside sources rather than
manufacture their own microwave MFMs and components. The Company's customers
and large manufacturers of microwave transmission equipment could also elect to
enter into the non-captive market for microwave products and compete directly
with the Company. Many of the Company's current and potential competitors have
substantially greater technical, financial, marketing, distribution and other
resources than the Company and have greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
the Company's competitors will not develop new technologies or enhancements to
existing products or introduce new products that will offer superior price or
performance features or that new products or technologies will not render
obsolete the products of the Company's customers. For example, innovations
such as a wireless telephone system utilizing satellites instead of land-based
base stations or a device that integrates microwave functionality could
significantly reduce the potential market for the Company's products. The
Company believes that to remain competitive in the future it will need to
invest significant financial resources in research and development.
Declining Average Selling Prices. The Company's customers are under continuous
pressure to reduce prices and, therefore, the Company expects to continue to
experience downward pricing pressure on its products. The Company's customers
frequently negotiate supply arrangements well in advance of delivery dates,
requiring the Company to commit to price reductions before it is determined
that assumed cost reductions can be achieved. To offset declining average
sales prices, the Company believes that it must achieve manufacturing cost
reductions and obtain orders for higher volume products. If the Company is
unable to offset declining average selling prices, the Company's gross margins
will decline, and such decline will have material adverse effects on the
Company's business, financial condition and results of operations.
Environmental Regulations and Risks. The Company is subject to a variety of
local, state and federal governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture the Company's products. The
failure to comply with current or future regulations could result in the
imposition of substantial fines on the Company, suspension of production,
alteration of its manufacturing processes or cessation of operations.
News reports have asserted that power levels associated with hand held cellular
telephones and infrastructure equipment may pose certain health risks. If it
were determined or perceived that electromagnetic waves carried through
wireless telecommunications equipment create a significant health risk, the
market for these products could be materially adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, if wireless telecommunications systems or
other systems or devices that rely on or incorporate the Company's products are
determined or alleged to create a significant health risk, the Company could be
named as a defendant, and held liable, in product liability lawsuits commenced
by individuals alleging that the Company's products harmed them, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Government Regulations. The Company's products are incorporated into wireless
telecommunications systems that are subject to regulation domestically by the
Federal Communications Commission ("FCC") and internationally by other
government agencies. Although the equipment operators and not the Company are
responsible for compliance with such regulations, regulatory changes, including
changes in the allocation of available frequency spectrum, could materially
adversely affect the Company's operations by restricting development efforts by
the Company's customers, obsoleting current products or increasing the
opportunity for additional competition. Changes in, or the failure by the
Company to manufacture products in compliance with, applicable domestic and
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international regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
increasing demand for wireless telecommunications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products, generally
following extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have
in the past caused and may in the future cause the cancellation, postponement
or rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers.
Because of its participation in the defense industry, the Company is subject to
audit from time to time for its compliance with government regulations by
various agencies, including the Defense Contract Audit Agency, the Defense
Investigative Service and the Office of Federal Control Compliance Programs.
An adverse finding in any such audit could adversely affect the Company's
ability to complete for and obtain future defense business.
Dependence on Suppliers and Contract Manufacturers. The Company relies on
contact manufacturers and suppliers, in some cases sole suppliers or limited
groups of suppliers, to provide it with services and materials necessary for
the manufacture of products. Certain ceramic low drift substrates (supplied by
NTK of Japan and Alpha Industries) and certain semiconductors (supplied by
Alpha Industries, MaCom MWT and others) used by the Company are sole source
items and would require significant effort, time or design changes to develop
alternate sources. The Company is also dependent on P-COM to supply it with
certain modules necessary for the production of microwave front ends for
point-to-point radios for P- COM. The Company's reliance on contract
manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced
control over production costs, delivery schedules, reliability and quality of
components or assemblies. Any inability to obtain timely deliveries of
acceptable quality, or any other circumstance that would require the Company to
seek alternative contract manufacturers or suppliers, could delay the Company's
ability to deliver products to customers, which in turn would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, in the event that costs for the Company's contract
manufacturers or suppliers increase, the Company may suffer losses due to an
inability to recover such cost increases under fixed price production
commitments to its customers.
Limitation on Protection of Proprietary Technology; Risk of Third Party Claims.
The Company does not presently hold any patents applicable to its products. In
order to protect its intellectual property rights, the Company relies on a
combination of trade secret, copyright and trademark laws and employee and
third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of the Company's technology or to
preclude competitors from independently developing such technology.
Furthermore, there can be no assurance that, in the future, third parties will
not assert infringement claims against the Company or with respect to its
products for which the Company has indemnified certain of its customers.
Asserting the Company's rights or defending against third party claims could
involve substantial costs and diversion of resources, thus materially and
adversely affecting the Company's business, financial condition and results of
operations. In the event a third party were successful in a claim that one of
the Company's products infringed its proprietary rights, the Company may have
to pay substantial royalties or damages, remove that product from the
marketplace or expend substantial amounts in order to modify the product so
that it no longer infringes such proprietary rights, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel. The Company is highly dependent on the continued
service of, and on its ability to attract and retain, qualified engineering,
management, manufacturing, quality assurance, marketing and support personnel.
The Company does not maintain key man life insurance on its key personnel and
such personnel do not have employment or non-competition agreements with the
Company. Competition for such
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personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. For example, the Company
believes that microwave engineers with the skills necessary to develop products
for the wireless telecommunications market currently are in high demand and
that the Company may not be able to attract sufficient engineering expertise.
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
- Exhibit 11.1 - Computation of Net Income per Common Share
- Exhibit 27 - Financial Data Schedule
(b) The following report on Form 8-K was filed during the
quarter ended November 3, 1996.
- Report on Form 8-K dated August 26, 1996 was filed
with the Securities and Exchange Commission on
September 9, 1996 in connection with the acquisition
of Magnum Microwave Corporation by the Registrant.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
REMEC, Inc.
(Registrant)
By: /s/ Ronald E. Ragland
------------------------------------
Ronald E. Ragland
Chairman and Chief Executive Officer
By: /s/ Thomas A. George
------------------------------------
Thomas A. George
Senior Vice President
Chief Financial Officer
Date: December 17, 1996
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EXHIBIT INDEX
Exhibit
Number
- -------
11.1 Computation of Net Income per Common Share
27 Financial Data Schedule
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