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 OCTOBER 31, 1997
Commission File Number 0-27414
REMEC, INC.
- - --------------------------------------------------------------------------------
(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: OCTOBER 31, 1997
- - ----- -----------------------------------
Common shares,
$.01(cent) par value 21,080,959
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..........................................11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................................................14
SIGNATURES..................................................................................15
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PART I - FINANCIAL INFORMATION
ITEM 1
REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31,
1997 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 48,885,039 $ 63,172,362
Accounts receivable, net ........................ 22,760,680 15,972,993
Inventories, net ................................ 28,142,382 19,332,056
Prepaid expenses and other current assets ....... 3,462,851 3,616,359
------------ ------------
Total current assets .................................... 103,250,952 102,093,770
Property, plant and equipment, net ...................... 26,842,094 18,543,405
Intangible and other assets, net ........................ 17,648,463 4,803,307
------------ ------------
$147,741,509 $125,440,482
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit and
other short-term debt ...................... $ -- $ 2,298,424
Accounts payable ................................ 8,603,619 6,017,998
Accrued expenses ................................ 12,246,269 9,635,079
------------ ------------
Total current liabilities ............................... 20,849,888 17,951,501
Deferred income taxes and other long-term liabilities ... 3,897,027 3,934,326
Shareholders' equity .................................... 122,994,594 103,554,655
------------ ------------
$147,741,509 $125,440,482
============ ============
See Accompanying Notes.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Nine months ended
October 31, 1997 November 3, 1996 October 31, 1997 November 3, 1996
---------------- ---------------- ---------------- ----------------
Net sales $38,560,919 $ 30,556,924 $111,850,276 $85,499,416
Cost of sales 26,788,816 22,182,293 77,861,350 61,631,666
----------- ------------ ------------ -----------
Gross profit 11,772,103 8,374,631 33,988,926 23,867,750
Operating expenses:
Selling, general and
administrative 6,442,512 4,781,458 18,008,794 13,464,974
Research and development 1,217,040 943,347 3,862,233 3,487,885
----------- ------------ ------------ -----------
7,659,552 5,724,805 21,871,027 16,952,859
----------- ------------ ------------ -----------
Income from operations 4,112,551 2,649,826 12,117,899 6,914,891
Gain on sale of RF Microsystems, Inc. 2,833,240 -- 2,833,240 --
Interest income (expense) 608,390 (41,185) 1,833,624 63,440
----------- ------------ ------------ -----------
Income before provision for income taxes 7,554,181 2,608,641 16,784,763 6,978,331
Provision for income taxes 2,621,027 1,232,417 5,993,812 3,001,675
----------- ------------ ------------ -----------
Net income $ 4,933,154 $ 1,376,224 $ 10,790,951 $ 3,976,656
=========== ============ ============ ===========
Net income per common share $ 0.23 $ 0.08 $ 0.50 $ 0.24
=========== ============ ============ ===========
Shares used in per share calculations 21,876,548 16,711,073 21,532,379 16,619,394
=========== ============ ============ ===========
See Accompanying Notes.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Common stock
--------------------
Shares Amount Paid-in capital Retained earnings Total
------ -------- ---------------- ----------------- -----------
Balance at February 1, 1997 20,535,455 $205,355 $85,787,686 $17,561,614 $103,554,655
Issuance of common shares in acquisitions 320,183 3,202 6,620,465 - 6,623,667
Issuance of common shares upon
exercise of stock options 122,840 1,228 460,861 - 462,089
Issuance of common shares under
employee stock purchase plan 102,481 1,025 1,414,640 - 1,415,665
Net income - - - 10,790,951 10,790,951
Adjustment for net equity activity of pooled
companies - - - 147,567 147,567
---------- -------- ----------- ----------- ------------
Balance at October 31, 1997 21,080,959 $210,810 $94,283,652 $28,500,132 $122,994,594
========== ======== =========== =========== ============
See Accompanying Notes.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
----------------------------------
October 31, 1997 November 3, 1996
---------------- ----------------
OPERATING ACTIVITIES
Net income $ 10,790,951 $ 3,976,656
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 3,916,830 2,492,804
Gain on sale of RF Microsystems, Inc. (2,833,240) --
Changes in operating assets and liabilities:
Accounts receivable (4,260,780) (5,662,918)
Inventories (7,644,546) (3,672,290)
Prepaid expenses and other current assets 245,308 (955,729)
Accounts payable 1,145,856 166,424
Accrued expenses, deferred income taxes and
other long-term liabilities 37,894 591,122
------------ ------------
Net cash provided (used) by operating activities 1,398,273 (3,063,931)
INVESTING ACTIVITIES
Additions to property, plant and equipment (10,785,093) (6,370,390)
Proceeds from sale of RF Microsystems, Inc. 5,000,000 --
Payment for acquisitions, net of cash acquired (5,066,075) (4,011,735)
Other assets 539,001 1,299,463
------------ ------------
Net cash used by investing activities (10,312,167) (9,082,662)
FINANCING ACTIVITIES
Borrowings under credit facilities and long-term debt 11,628,387 2,257,326
Repayments on credit facilities and long-term debt (18,553,066) (3,871,111)
Proceeds from sale of common stock 1,877,754 18,354,132
Deferred offering costs -- 1,108,424
------------ ------------
Net cash provided (used) by financing activities (5,046,925) 17,848,771
------------ ------------
Increase (decrease) in cash and cash equivalents (13,960,819) 5,702,178
Cash and cash equivalents at beginning of period 63,172,362 2,345,632
Adjustment for net cash activity of pooled companies (326,504) (33,559)
------------ ------------
Cash and cash equivalents at end of period $ 48,885,039 $ 8,014,251
============ ============
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, 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 October 31, 1997
and the results of its operations for the three and nine-month periods
ended October 31, 1997 and November 3, 1996. The results of operations
for the interim periods ended October 31, 1997 are not necessarily
indicative of the results which may be reported for any other interim
period or for the entire fiscal year.
On October 24, 1997, the Company acquired Q-bit Corporation ("Q-bit") in
a transaction accounted for as a pooling of interests. The Company had
previously acquired Magnum Microwave Corporation ("Magnum"), Radian
Technology, Inc. ("Radian") and C&S Hybrid, Inc. ("C&S") in transactions
that were also accounted for as poolings 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.
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, 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.
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, Radian, C&S
Hybrid and Q-bit after adjusting the Magnum, Radian, C&S Hybrid and
Q-bit information to reflect the conversion of their respective
outstanding common shares into REMEC shares as stipulated in the
respective acquisition agreements.
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 payable on June 27, 1997 to shareholders of record as
of June 20, 1997. All stock related data in the condensed consolidated
financial statements have been adjusted to reflect the stock dividend
for all periods presented.
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 dilutive effects of securities like employee stock options.
Statement No. 128 is effective for financial statements issued for
periods ending after December 15, 1997. The presentation of diluted
earnings per share is expected to be substantially equivalent to amounts
previously reported as primary earnings per share as calculated under
APB Opinion No. 15.
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3. INVENTORIES
Inventories consist of the following:
October 31, 1997 January 31, 1997
---------------- ----------------
Raw materials $14,466,258 $10,648,813
Work in progress 14,302,910 11,055,742
-------------- --------------
28,769,168 21,704,555
Less unliquidated progress payments (626,786) (2,372,499)
-------------- --------------
$ 28,142,382 $ 19,332,056
============== ==============
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses
of $2,256,000 and $1,642,000 at October 31, 1997 and January 31, 1997,
respectively.
4. ACQUISITIONS
Q-bit
In October 1997, the Company acquired Q-bit, a manufacturer of amplifier
based microwave components and multi-function modules, in exchange for
1,047,482 shares of the Company's common stock. Prior to the
combination, Q-bit's fiscal year ended on December 31, 1996. In
recording the business combination, Q-bit's financial statements for the
interim periods ended October 31, 1997 were combined with REMEC's for
the same period. Q-bit's statements of operations and cash flows for the
three and nine months ended September 30, 1996 were combined with
REMEC's for the three and nine months ended November 3, 1996. Q-bit's
balance sheet as of December 31, 1996 was combined with REMEC's as of
January 31, 1997.
Included in the consolidated statement of operations for the three and
nine months ended October 31, 1997 are costs of $333,000 related to the
combination and integration of Q-bit and REMEC. These costs are
comprised primarily of professional fees and other costs associated with
the merger and the registration of shares issued in connection with the
merger.
Net sales and net income reported by REMEC and Q-bit for periods prior
to the acquisition are as follows:
Nine months ended
--------------------------------------
October 31, 1997 November 3, 1996
---------------- ----------------
Net sales:
REMEC $ 99,535,411 $77,187,099
Q-bit 12,314,865 8,312,317
------------ -----------
$111,850,276 $85,499,416
============ ===========
Net income:
REMEC $ 9,212,618 $4,203,919
Q-bit 1,578,333 (227,263)
----------- ----------
$10,790,951 $3,976,656
=========== ==========
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Nanowave Technologies, Inc. ("Nanowave")
In October 1997, the Company formed REMEC Canada (as a wholly owned
subsidiary) for the purpose of acquiring Nanowave, a manufacturer of
amplifier based microwave and millimeter wave components and
multi-function modules. Effective October 29, 1997, REMEC Canada
acquired all of the outstanding common stock of Nanowave in exchange for
cash consideration of $4,025,000 and 182,183 Dividend Access Shares with
a fair value of $4,646,000. These Dividend Access Shares are convertible
into an equivalent number of shares of REMEC Common Stock. 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
$11,130,000 is being carried as intangible assets, and will be amortized
over periods ranging from 9 to 15 years. The Company's consolidated
financial statements include the results of Nanowave from October 29,
1997 forward.
Assuming that the acquisition of Nanowave had occurred on the first day
of the Company's fiscal year ended January 31, 1997, pro forma condensed
consolidated results of operations would be as follows:
Nine months ended
-----------------------------------------
October 31, 1997 November 3, 1996
---------------- ----------------
Net sales $ 116,374,000 $ 89,598,000
Net income $ 10,834,000 $ 3,881,000
Net income per share $ 0.50 $ 0.23
C&S Hybrid
In June 1997, the Company acquired C&S Hybrid, a manufacturer of
transmitter and receiver hardware assemblies ("transceivers") that are
integrated by C&S Hybrid's customers into terrestrial-based
point-to-point microwave radios primarily for use in commercial
applications, in exchange for approximately 1,290,000 shares of the
Company's common stock. Prior to the combination, C&S Hybrid's fiscal
year ended on December 27, 1996. In recording the business combination,
C&S Hybrid's financial statements for the three and nine month periods
ended October 31, 1997 were combined with REMEC's for the same period.
C&S Hybrid's statements of operations and cash flows for the three and
nine months ended September 27, 1996 were combined with REMEC's for the
three and nine months ended November 3, 1996. C&S Hybrid'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 and
nine months ended October 31, 1997 are costs of $560,000 related to the
combination and integration of C&S Hybrid and REMEC. These costs are
comprised primarily of professional fees and other costs associated with
the merger and the registration of shares issued in connection with the
merger.
Radian
In February 1997, the Company acquired Radian, a manufacturer of
microwave components, in exchange for approximately 950,024 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 three and nine month periods ended
October 31, 1997 were combined with REMEC's for the same period.
Radian's statements of operations and cash flows for the three and nine
months ended September 30, 1996 were combined with REMEC's for the three
and nine months ended November 3, 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 and
nine months ended October 31, 1997 are costs of $176,000 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.
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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 138,000 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.
Proforma results of operation assuming Veritek had been acquired on
February 1, 1996 would not have been materially different than amounts
previously reported.
5. SALE OF SUBSIDIARY
On August 26, 1997, the Company sold its RF Microsystems subsidiary in
exchange for cash consideration of $5.0 million. The sale resulted in an
after tax gain of $1,728,000, or $0.08 per share. RF Microsystems
provided satellite communications engineering services to agencies of
the U.S. Government.
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ITEM 2
MANAGEMENT'S 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 microwave multifunction modules ("MFM's") for microwave
transmission systems used in defense applications and the commercial wireless
telecommunications industry. REMEC's consolidated results of operations include
the operations of REMEC Microwave ("Microwave"), REMEC Wireless, Inc.
("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems, Inc. ("RFM"), Magnum
Microwave Corporation ("Magnum"), Radian Technology, Inc. ("Radian"), Verified
Technical Corporation ("Veritek"), C&S Hybrid, Inc. ("C&S"), Q-bit Corporation
("Q-bit") and Nanowave Technologies, Inc. ("Nanowave").
Prior to 1995, the majority of the Company's sales have been to prime
contractors to various agencies of the U.S. Department of Defense and foreign
defense contractors and governments. Beginning in 1995, the Company entered the
commercial wireless telecommunications market via the establishment of Wireless.
During 1996 and 1997, the Company increased its capability in this market by
purchasing certain VSAT microwave design and manufacturing resources from STM
Wireless and through its acquisitions of Magnum, Veritek, C&S, Q-bit and
Nanowave. Accordingly, the Company expects sales to the commercial
telecommunications market to represent an increasing percentage of revenues in
the future.
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 in the defense industry 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.
On October 24, 1997, the Company acquired all of the outstanding shares
of Q-bit Corporation in a transaction accounted for as a pooling of interests.
The Company has previously acquired Magnum, Radian and C&S Hybrid in a series of
transactions accounted for as poolings of interests. Accordingly, all
accompanying historical financial statement information has been restated to
include Magnum's, Radian's, C&S Hybrid's and Q-bit's operations, assets and
liabilities.
In October 1997, REMEC acquired Nanowave, a manufacturer of amplifier
based microwave and millimeter wave components and multi-function modules, in a
transaction accounted for as a purchase. In March 1997, the Company acquired
Veritek, in a transaction which had also been accounted for as a purchase. The
consolidated statements of income and cash flows for the nine month period ended
October 31, 1997 include Veritek's and Nanowave's results from March 31, 1997
and October 29, 1997, respectively. REMEC's October 31, 1997 balance sheet
includes Veritek's and Nanowave's assets and liabilities.
On August 26, 1997, REMEC sold its RFM subsidiary. The sales resulted in
an after tax gain of $1,728,000. RF Microsystems provided satellite
communications engineering services to agencies of the U.S. Government.
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's
defense business 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.
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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 NINE MONTHS ENDED
------------------------------------- ------------------------------------
OCTOBER 31, 1997 NOVEMBER 3, 1996 OCTOBER 31, 1997 NOVEMBER 3, 1996
---------------- ---------------- ---------------- ----------------
Net sales ........................... 100% 100% 100% 100%
Cost of goods sold .................. 69 73 70 72
--- --- --- ---
Gross profit ................ 31 27 30 28
Operating expenses:
Selling, general & administrative . 17 15 16 16
Research and development .... 3 3 4 4
--- --- --- ---
Total operating expenses 20 18 20 20
---
Income from operations .............. 11 9 10 8
Gain on sale of RF Microsystems, Inc. 7 - 3 -
Interest income (expense) ........... 2 - 2 -
--- --- --- ---
Income before income taxes .......... 20 9 15 8
Provision for income taxes .......... 7 4 5 3
--- --- --- ---
Net income .......................... 13% 5% 10% 5%
=== === === ===
Net Sales. Net sales were $38.6 million and $111.9 million for the
three and nine month periods ended October 31, 1997, representing increases of
$8,004,000 or 26% and $26,351,000 or 31%, respectively, over the comparable
prior year periods. Defense sales were $16.1 million and $52.5 million for the
three and nine month periods ended October 31, 1997, representing a decrease of
$1,485,000 or 8% and an increase of $2,589,000 or 5%, respectively, over the
comparable prior year periods. Commercial wireless sales were $22.5 million and
$59.4 million for the three and nine month periods ended October 31, 1997,
representing increases of $9,488,000 or 73% and $23,763,000 or 67%,
respectively, over the comparable prior year periods. The decrease in defense
sales during the three months ended October 31, 1997 is primarily attributable
to the sale of RF Microsystems in August 1997; results of operations for this
period include only one month of RFM operations. The increased defense sales
during the nine months ended October 31, 1997 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 $3.8
million from RFM as opposed to $3.3 million in the fiscal 1997 period due to the
inclusion of seven months of RFM operations in the fiscal 1998 period versus six
months of RFM operations in the fiscal 1997 period (RFM was acquired in the
second quarter of fiscal 1997). The increase in commercial sales is primarily
attributable to increased customer demand for the Company's products.
GROSS PROFIT. Gross profit was $11.8 million and $34.0 million for the
three and nine month periods ended October 31, 1997, representing increases of
$3,397,000 or 41% and $10,121,000 or 42%, respectively, over the comparable
prior year periods. Gross margins for defense were 25% and 30% for the three and
nine month periods ended October 31, 1997 compared with 26% and 25%,
respectively, for the comparable prior year periods. Commercial gross margins
were 34% and 31% for the three and nine month periods ended October 31, 1997
compared with 29% and 31%, respectively, for the comparable prior year periods.
The decrease in defense margins during the third quarter of the current fiscal
year as compared to the third quarter of the prior fiscal year is primarily
attributable to costs incurred during the start up of production on several
contracts. The increase in defense gross margins for the nine month period ended
October 31, 1997 is primarily attributable to the increased sales volume
resulting in lower unit costs through improved overhead absorption. The increase
in commercial margins during the three months ended October 31, 1997 as compared
with the three months ended November 3, 1996 is primarily attributable to a
change in the Company's sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG & A") expenses were $6.4 million and $18.0 million
for the three and nine month periods ended October 31, 1997, representing
increases of $1,661,000 or 35% and $4,544,000 or 34%, respectively, over the
comparable prior year periods. These expenses as a percentage of sales increased
to 17% and 16% for the three and nine month periods ended October 31, 1997 from
15% and 16% for the comparable prior year periods. 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, as well as approximately $1,070,000 of direct
transaction costs associated with the Radian, C&S Hybrid and Q-bit mergers.
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13
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1.2 million and $3.9 million for the three and nine month periods ended
October 31, 1997, representing increases of $274,000 or 29% and $374,000 or 11%,
respectively, over the comparable prior year periods. The expenditures are
almost entirely attributable to the commercial wireless business. Research and
development expenditures fluctuate on a quarterly basis both in amount and as a
percentage of sales.
GAIN ON SALE OF RF MICROSYSTEMS, INC. The Company's results of
operations for the three and nine month periods ended October 31, 1997 include
the gain from the sale of the Company's RFM subsidiary. There was no similar
gain in the prior fiscal year.
INTEREST (INCOME) EXPENSE. The Company's results of operations for the
three and nine month periods ended November 3, 1996 included interest expense of
$41,000 and interest income of $63,000, respectively. By contrast, results of
operations for the three and nine month periods ended October 31, 1997, included
net interest income of $608,000 and $1,834,000. The interest income during the
current year reflects the increased level of cash on hand as a result of the
funds generated from REMEC's follow-on public offering which was completed in
January 1997.
PROVISION FOR INCOME TAXES. REMEC's effective tax rate declined from
43% during the nine month period ended November 3, 1996 to 36% during the nine
month period ended October 31, 1997. The fluctuations in the effective tax rate
reflects REMEC's merger with Q-bit, which had operated as a Subchapter S
corporation prior to the merger, as well as a reduction in REMEC's tax rate due
to the benefit of tax credits for certain capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, REMEC had $82.4 million of working capital which
included cash and cash equivalents totaling $48.9 million. 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. The Company's Q-bit subsidiary has a $1.65 million line of credit
facility. Interest is payable monthly at the bank's prime rate, and borrowings
under the line are collateralized by Q-bit's inventory and accounts receivable.
As of October 31, 1997, there were no borrowings outstanding under REMEC's
credit facilities.
During the nine month period ended October 31, 1997, net cash provided
by operations totaled $1.4 million as the cash flow from earnings and
depreciation expense more than offset the $11.9 million increase in receivables
and inventory. Investing activities utilized $10.3 million during the nine
months ended October 31, 1997, primarily as a result of $10.8 million in capital
expenditures. The bulk of the 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 follow-on 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 $5.0 million during the first nine months of
fiscal 1998, principally as a result of the Company's paying off certain bank
and other obligations assumed in certain of the Company's acquisitions.
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.
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14
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) There were no reports on Form 8-K filed during the quarter
ended October 31, 1997.
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15
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/ Michael D. McDonald
--------------------------------------
Michael D. McDonald
Chief Financial Officer and Secretary
Date: December 12, 1997
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16
EXHIBIT INDEX
Exhibit
Number
11.1 Computation of Net Income per Common Share
27 Financial Data Schedule
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