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 MAY 4, 1997
--------------------------------------------------
Commission File Number 0-27414
----------------------------------------------------------
REMEC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3814301
- --------------------------------------------------------------------------------
(State of other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
9404 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA 92123
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 560-1301
- --------------------------------------------------------------------------------
(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: MAY 4, 1997
----------- ------------------------------
Common shares,
$.01(cent)par value 12,235,418
2
Index Page No.
- ----- --------
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 4. Submission of Matters to a Vote of Security Holders ..............13
Item 6. Exhibits and Reports on Form 8-K .................................13
SIGNATURES....................................................................14
- 2 -
3
PART I - FINANCIAL INFORMATION
ITEM 1
REMEC, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 4, January 31,
------------ ------------
1997 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 56,555,051 $ 63,078,177
Accounts receivable, net 16,409,483 12,533,473
Inventories, net 17,810,065 14,927,908
Prepaid expenses and other current assets 3,021,414 3,093,229
------------ ------------
Total current assets 93,796,013 93,632,787
Property, plant and equipment, net 16,785,047 13,761,284
Intangible and other assets 6,908,462 4,672,409
------------ ------------
$117,489,522 $112,066,480
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,087,101 $ 3,743,304
Accrued expenses 8,026,106 8,315,575
------------ ------------
Total current liabilities 13,113,207 12,058,879
Other long-term liabilities 1,326,194 1,441,785
Shareholders' equity 103,050,121 98,565,816
------------ ------------
$117,489,522 $112,066,480
============ ============
SEE ACCOMPANYING NOTES.
- 3 -
4
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
---------------------------
May 4, 1997 May 5, 1996
----------- -----------
Net sales $26,216,071 $20,423,709
Cost of sales 18,309,254 15,279,179
----------- -----------
Gross profit 7,906,817 5,144,530
Operating expenses:
Selling, general and administrative 3,983,527 2,575,225
Research and development 623,015 991,261
----------- -----------
4,606,542 3,566,486
----------- -----------
Income from operations 3,300,275 1,578,044
Interest income 755,610 136,887
----------- -----------
Income before provision for income taxes 4,055,885 1,714,931
Provision for income taxes 1,583,000 707,082
----------- -----------
Net income $ 2,472,885 $ 1,007,849
=========== ===========
Net income per share $ 0.20 $ 0.11
=========== ===========
Shares used in per share calculations 12,610,923 9,552,537
=========== ===========
SEE ACCOMPANYING NOTES.
- 4 -
5
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Common stock
------------
Shares Amount Paid-in capital Retained earnings Total
---------- ----------- ----------- ---------------- -------------
Balance at January 31, 1997 12,131,982 $ 121,320 $83,250,684 $15,193,812 $ 98,565,816
Issuance of common shares in acquisition
of Verified Technical Corporation 92,000 920 1,977,080 1,978,000
Issuance of common shares upon
exercise of stock options 11,436 114 43,324 43,438
Net income 2,472,885 2,472,885
Adjustment for Radian net loss for the one
month ended January 31, 1997 (10,018) (10,018)
---------- ----------- ----------- ------------ ------------
Balance at May 4, 1997 12,235,418 $ 122,354 $85,271,088 $17,656,679 $103,050,121
========== =========== =========== =========== ============
SEE ACCOMPANYING NOTES.
- 5 -
6
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
------------------
May 4, 1997 May 5, 1996
------------ ------------
OPERATING ACTIVITIES
Net income $ 2,472,885 $ 1,007,849
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,014,041 737,345
Changes in operating assets and liabilities:
Accounts receivable (3,084,763) (2,449,306)
Inventories (2,610,946) (1,038,194)
Prepaid expenses and other current assets 295,445 (200,221)
Accounts payable 839,848 (1,160,527)
Accrued expenses and other long-term
liabilities (340,981) (475,841)
------------ ------------
Net cash used by operating activities (1,414,471) (3,578,895)
INVESTING ACTIVITIES
Additions to property, plant and equipment (3,112,707) (1,331,999)
Payment for acquisition, net of cash acquired (1,018,286) (4,006,000)
Other assets 78,024 523,152
------------ ------------
Net cash used by investing activities (4,052,969) (4,814,847)
FINANCING ACTIVITIES
Repayments on bank revolving term loan, line-of-credit and
long-term debt (566,031) (2,439,474)
Proceeds from sale of common stock 43,438 15,914,703
Deferred offering costs 1,108,424
------------ ------------
Net cash (used) provided by financing activities (522,593) 14,583,653
------------ ------------
Increase (decrease) in cash and cash equivalents (5,990,033) 6,189,911
Cash and cash equivalents at beginning of period 63,078,177 1,871,923
Adjustment for Radian's net cash activity for the month
ended January 31, 1997 (533,093)
Elimination of Magnum's net cash activities for the
duplicated two months ended March 31, 1996 (33,559)
------------ ------------
Cash and cash equivalents at end of period $ 56,555,051 $ 8,028,275
============ ============
SEE ACCOMPANYING NOTES
- 6 -
7
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, 1997 included in the Company's
Form 10-K, as amended. 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 May 4, 1997 and the results of its operations for the three-month
periods ended May 4, 1997 and May 5, 1996. The results of operations
for the interim period ended May 4, 1997 are not necessarily indicative
of the results which may be reported for any other interim period or
for the entire fiscal year.
On August 26, 1996, the Company acquired Magnum Microwave Corporation
("Magnum"). On February 28, 1997, the Company acquired Radian
Technology, Inc. ("Radian"). Both acquisitions have been accounted for
as pooling of interests. Accordingly, the Company's consolidated
financial statements for the periods prior to these acquisitions have
been restated to include each of the acquired Company's financial
position, results of operations and cash flows.
2. 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. The calculation of earnings per share
reflects the historical information for REMEC, Magnum and Radian after
adjusting the Magnum and Radian information to reflect the conversion
of Magnum and Radian common shares into REMEC shares as stipulated in
the respective acquisition agreements.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, Earnings
per Share, which supersedes APB Opinion No. 15. Statement No. 128
replaces the presentation of primary EPS with "Basic EPS" which
includes no dilution and is based on weighted-average common shares
outstanding for the period. Companies with complex capital structures,
including REMEC, Inc., will also be required to present "Diluted EPS"
that reflects the potential dilution of securities like employee stock
options. Statement No. 128 is effective for financial statements issued
for periods ending after December 15, 1997. The Company has not yet
determined what the impact of Statement No. 128 will be on the
calculation of earnings per share.
3. INVENTORIES
Inventories consist of the following:
May 4, 1997 January 31, 1997
----------- ----------------
Raw materials $8,996,921 $8,426,423
Work in progress 10,907,501 8,873,984
----------- -----------
19,904,422 17,300,407
Less unliquidated
progress payments (2,094,357) (2,372,499)
----------- -----------
$17,810,065 $14,927,908
=========== ===========
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$1,853,000 and $1,642,000 at May 4, 1997 and January 31, 1997,
respectively.
- 7 -
8
4. ACQUISITIONS
Radian
In February 1997, the Company acquired Radian, a manufacturer of
microwave components, in exchange for 633,349 shares of the Company's
common stock. Prior to the combination, Radian's fiscal year ended on
December 27, 1996. In recording the business combination, Radian's
financial statements for the interim period ended May 4, 1997 were
combined with REMEC's for the same period. Radian's statements of
operations and cash flows for the three months ended March 31, 1996
were combined with REMEC's for the three months ended May 5, 1996.
Radian's balance sheet as of December 27, 1996 was combined with
REMEC's as of January 31, 1997.
Included in the consolidated statement of operations for the three
months ended May 4, 1997 are costs of $100,000 related to the
combination and integration of Radian and REMEC. These costs are
comprised primarily of professional fees and other costs associated
with the registration of shares issued in connection with the merger.
Verified Technology Corporation ("Veritek")
Effective March 31, 1997, the Company acquired all of the outstanding
common stock of Veritek, a producer of high quality surface mount
manufacturing assemblies, in exchange for cash consideration of $1.0
million and 92,000 shares of common stock with a fair value of
$1,978,000. 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 provisions of Accounting Principles Board
Opinion No. 16. The estimated excess of the purchase price over the net
assets acquired of $2,406,000 is being carried as intangible assets,
and will be amortized over 15 years. The Company's consolidated
financial statements include the results of Veritek from March 31, 1997
forward.
A summary of the Veritek acquisition costs and an allocation of the
purchase price to the assets acquired and liabilities assumed is as
follows:
ACQUISITION COST:
Cash paid $1,000,000
Fair value of Company stock issued to
selling shareholders 1,978,000
Payment of acquisition related expenses 61,000
-----------
$3,039,000
===========
ALLOCATED AS FOLLOWS:
Current assets $851,000
Machinery and equipment and
other long term assets 838,000
Acquired intangibles 2,406,000
Liabilities assumed (1,056,000)
-----------
$3,039,000
===========
- 8 -
9
C&S Hybrid, Inc. ("C&S")
On April 10, 1997, the Company entered into an agreement to acquire C&S
in exchange for 860,000 shares of the Company's common stock. The
transaction will be accounted for as a pooling of interests;
accordingly, commencing with the second quarter of fiscal 1998, all of
the Company's prior period financial statements will be restated as if
the transaction took place at the beginning of such periods. During its
most recent fiscal year ended December 27, 1996, C&S reported revenues
of $13.0 million and net income of $493,000.
5. SUBSEQUENT EVENT
On June 6, 1997, the Company's Board of Directors approved a
three-for-two stock split of the Company's common stock in the form of
a 50% stock dividend. The stock dividend is payable on June 27, 1997 to
shareholders of record as of June 20, 1997. The stock split will
increase REMEC's outstanding shares of common stock to approximately
18,353,000 shares.
- 9 -
10
ITEM 2
REMEC'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the
design and manufacture of MFMs for the defense industry. REMEC's consolidated
results of operations include the operations of REMEC Microwave ("Microwave"),
REMEC Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems
("RFM"), Magnum Microwave ("Magnum"), Radian Technology, Inc. ("Radian") and
Verified Technical Corporation ("Veritek").
All revenue and related costs of sales are recognized when products are
shipped or engineering services are performed. During the three month period
ended May 4, 1997, sales to REMEC's top ten customers accounted for
approximately 65% of total net sales; sales to REMEC's top three customers
accounted for approximately 36% of total net sales; and sales to the top
customer accounted for 17% of total net sales. REMEC recorded revenue of
approximately $10.0 million (38%) for the three month period ended May 4, 1997
from the sale of products to the commercial wireless telecommunications market.
REMEC expects sales to the commercial telecommunications market to represent an
increasing percentage of revenue in the near future because of its backlog and
REMEC's strategy to increase its presence in the commercial wireless
telecommunications market. As of May 4, 1997, REMEC had an order backlog of
$131.1 million, with $59.9 million representing commercial wireless
telecommunications orders. REMEC's international sales as a percentage of net
sales for the three months ended May 4, 1997 were 7%. The international sales
percentages do not include products sold to foreign end users by REMEC's
domestic OEM customers.
REMEC'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
REMEC funded research and development expenses have been minimal. As REMEC's
commercial business has expanded, research and development expenses have
generally increased in amount and as a percentage of sales. REMEC expects this
trend to continue, although research and development expenses may fluctuate on a
quarterly basis both in amount and as a percentage of sales.
Effective January 31, 1994, REMEC acquired all the outstanding stock of
Humphrey in a transaction that was accounted for as a purchase. Humphrey designs
and manufactures precision instruments for guidance, control and measurement
systems used in defense and commercial applications. Effective April 30, 1996,
REMEC acquired all of the outstanding common stock of RFM and various VSAT (very
small aperture terminals) microwave design and manufacturing resources from STM
in a transaction that was accounted for as a purchase. RFM provides the
Department of Defense with research and analysis, systems engineering and test
evaluation services.
On August 26, 1996, REMEC acquired all of the outstanding common stock
of Magnum in a transaction that was accounted for as a pooling of interests.
Magnum is a leading supplier of oscillators and mixers. On February 28, 1997,
REMEC acquired all of the outstanding common stock of Radian, in a transaction
that was accounted for as a pooling of interests. Radian provides the defense
market with microwave components, primarily synthesizers, receivers, oscillators
and filters. All accompanying historical financial statement information has
been restated to include Magnum's and Radian's operations and assets and
liabilities.
In March 1997, REMEC acquired Veritek, a producer of high quality
surface mount manufacturing assemblies in a transaction accounted for as a
purchase. The consolidated statements of income and cash flows for the three
month period ended May 4, 1997 include Veritek's results from March 31, 1997.
REMEC's May 4, 1997 balance sheet includes Veritek's assets and liabilities.
In April 1997, REMEC reached a definitive agreement to acquire C&S
Hybrid through a merger of C&S Hybrid into a newly formed subsidiary of REMEC.
C&S Hybrid designs and manufactures microwave components and MFMs. The C&S
Hybrid shareholders are expected to receive approximately 860,000 shares of
REMEC's common stock in the acquisition. Completion of the acquisition is
subject to satisfaction of customary conditions and, if completed, will be
treated as a pooling of interests.
- 10 -
11
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.
Three Months Ended
----------------------------
MAY 4, 1997 MAY 5,1996
----------- ----------
Net sales.............................................. 100% 100%
Cost of goods sold.................................. 70 75
---- ----
Gross profit...................................... 30 25
Operating expenses:
Selling, general & administrative................... 15 12
Research and development............................ 3 5
---- ----
Total operating expenses.......................... 18 17
---- ----
Income from operations................................. 12 8
Interest income........................................ 3 1
---- ----
Income before income taxes............................. 15 9
Provision for income taxes............................. 6 4
---- ----
Net income............................................. 9% 5%
==== ====
THREE MONTHS ENDED MAY 4, 1997 VS. THREE MONTHS ENDED MAY 5, 1996.
Net Sales. Net sales increased 28% from $20.4 million during the three
months ended May 5, 1996 to $26.2 million for the three months ended May 4,
1997. Defense sales increased from $13.8 million in the fiscal 1997 period to
$16.2 million in the fiscal 1998 period, a 17% increase. Commercial wireless
sales increased from $6.6 million in the fiscal 1997 period to $10.0 million in
the fiscal 1998 period, a 53% increase. The increased defense sales are
attributable to increased Microwave MFM and component sales offsetting reduced
precision instrument sales. In addition, the fiscal 1998 period includes defense
contract revenues of $1.1 million from RFM as opposed to no revenues in the
fiscal 1997 period due to the acquisition occurring subsequent to the fiscal
1997 period. The commercial sales increase is primarily attributable to the
production of VSAT equipment for STM in the fiscal 1998 period; versus no VSAT
production in the fiscal 1997 period.
Gross Profit. Gross profit increased 54% from $5.1 million in the
fiscal 1997 period to $7.9 million in the fiscal 1998 period. Gross margin
increased from 25% in the fiscal 1997 period to 30% in the fiscal 1998 period.
Gross margins for defense increased from 29% for fiscal 1997 period to 35% for
the fiscal 1998 period. Commercial gross margins increased from 17% in the
fiscal 1997 period to 23% for the fiscal 1998 period. The increased defense and
commercial margins are primarily attributable to the increased sales volume
resulting in lower unit costs through improved overhead absorption.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") expenses increased 55% from $2.6 million
during the fiscal 1997 period to $4.0 million during the fiscal 1998 period.
These expenses as a percentage of sales increased from 13% for the fiscal 1997
to 15% for the fiscal 1998 period. The increased expenses are primarily
attributable to increased personnel, legal and other administrative costs
resulting from the Company's growth, costs associated with operating as a
publicly owned company, SG&A expenses from the Company's RFM subsidiary whose
operations are not reflected in the first quarter results for the fiscal 1997
period, as well as approximately $100,000 of direct transaction costs associated
with the Radian merger.
Research and Development Expenses. Research and development expenses
decreased from $1.0 million during the fiscal 1997 period to $0.6 million during
the fiscal 1998 period. The expenditures are almost entirely attributable to the
commercial wireless business. Research and development expenditures have
generally increased in amount and as a percentage of sales over the past two
years; however these expenses may fluctuate on a quarterly basis both in amount
and as a percentage of sales.
- 11 -
12
Interest Income. Interest income increased from $137,000 in the fiscal
1997 period to $756,000 for the fiscal 1998 period. The change is primarily
attributable to the increased level of cash on hand as a result of the funds
generated from REMEC's follow-on public offering which was consummated in
January 1997.
Provision of Income Taxes. REMEC's effective tax rate declined from 41%
in the fiscal 1997 to 39% in the fiscal 1998 period due to the benefit of tax
credits for certain capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
At May 4, 1997, REMEC had $56.6 million of cash and cash equivalents
and $80.7 million of working capital. REMEC also has $17.0 million in available
credit facilities consisting of a $9.0 million revolving working capital line of
credit and a $8.0 million revolving term loan. The borrowing rate under both
credit facilities is prime. The revolving working capital line of credit
terminates July 1, 1998. The revolving period under the term loan expires July
1, 1998, at which time any loan amount outstanding converts to a term loan to be
fully amortized and paid in full by January 2, 2002. As of May 4, 1997, there
were no borrowings outstanding under REMEC's credit facilities.
During the three month period ended May 4, 1997, net cash used by
operations totaled $1.4 million, the use of cash is primarily attributable to
increases in receivables and inventories totaling $5.7 million; with these
increases resulting from the Company's increased revenue volume. Investing
activities utilized $4.1 million during the three months ended May 4, 1997,
primarily as a result of $3.1 million in capital expenditures and $1.0 million
paid to the selling shareholders in the Veritek acquisition. The bulk of the
first quarter fiscal 1998 capital expenditures were associated with the
expansion of REMEC's commercial wireless telecommunications business. The above
expenditures were financed primarily by funds raised in REMEC's public offering
completed in January 1997. REMEC's future capital expenditures will continue to
be substantially higher than historical levels as a result of commercial
wireless telecommunications expansion requirements. Financing activities
utilized approximately $523,000 during the first quarter of fiscal 1998,
principally as a result of the Company's paying off certain bank and other
obligations assumed in the acquisition of Veritek.
REMEC's future capital requirements will depend upon many factors,
including the nature and timing of orders by OEM customers, the progress of
REMEC's research and development efforts, expansion of REMEC's marketing and
sales efforts, and the status of competitive products. REMEC believes that
available capital resources will be adequate to fund its operations for at least
twelve months.
- 12 -
13
PART II - OTHER INFORMATION
PART 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on June 6, 1997. The
following items were voted upon by the shareholders will all items being
approved.
1. To elect ten directors to serve for the ensuing year and until their
successors are elected.
Number of shares voted Number of shares voted Number of shares
for: 10,689,634 against: 93,175 abstaining: None
2. To approve an amendment to the Company's Equity Incentive Plan to
increase the number of shares available for issuance by 1,500,000.
Number of shares voted Number of shares voted Number of shares
for: 6,853,258 against: 2,447,946 abstaining: 15,938
3. To approve amendments to the Company's Employee Stock Purchase Plan to
increase the number of shares available for issuance by 550,000.
Number of shares voted Number of shares voted Number of shares
for: 9,089,497 against: 332,852 abstaining: 11,605
4. To approve the adoption of the Company's 1996 Nonemployee Directors Stock Option Plan.
Number of shares voted Number of shares voted Number of shares
for: 8,961,205 against: 421,909 abstaining: 50,840
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) There were no reports on Form 8-K filed during the quarter
ended May 4, 1997.
- 13 -
14
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: June 13, 1997
- 14 -
15
EXHIBIT INDEX
Exhibit
Number
- ------
11.1 Computation of Net Income per Common Share
27 Financial Data Schedule
- 15 -