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 APRIL 30, 1999
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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
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Indicate number of shares outstanding of each of the issuer's classes of common
stock, at the latest practicable date:
Class Outstanding as of: APRIL 30, 1999
----------- -------------------------------------
Common shares,
$.01 par value 24,998,965
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 (Loss).......................4
Condensed Consolidated Statements of Cash Flows..........................5
Notes to Condensed Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................10
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................15
Item 2. Changes in Securities and Use of Proceeds........................................15
Item 3. Qualitative and Quantitative Disclosures About Market Risk.......................15
Item 6. Exhibits and Reports on Form 8-K.................................................15
SIGNATURES .................................................................................16
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PART I - FINANCIAL INFORMATION
ITEM 1
REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
April 30, January 31,
1999 1999
--------- -----------
ASSETS
Cash and cash equivalents $73,713,918 $83,011,819
Accounts receivable, net 30,662,537 27,294,544
Inventories, net 42,481,342 38,311,527
Prepaid expenses and other current assets 7,538,750 8,021,745
--------- ---------
Total current assets 154,396,547 156,639,635
Property, plant and equipment, net 50,141,934 44,706,757
Intangible and other assets, net 17,996,402 17,224,432
---------- ----------
$222,534,883 $218,570,824
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $11,453,763 $8,155,490
Accrued expenses and other current liabilities 18,986,580 14,677,273
---------- ----------
Total current liabilities 30,440,343 22,832,763
Deferred income taxes and other long-term liabilities 4,194,606 4,131,534
Shareholders' equity 187,899,934 191,606,527
----------- -----------
$222,534,883 $218,570,824
============ ============
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Three months ended
------------------
April 30, 1999 May 1, 1998
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Net sales $43,166,417 $50,637,060
Cost of sales 32,429,756 34,836,181
---------- ----------
Gross profit 10,736,661 15,800,879
Operating expenses:
Selling, general and administrative 9,151,444 9,096,419
Research and development 3,525,938 2,407,541
Transaction costs 3,130,000 ---
--------- ----------
Total operating expenses 15,807,382 11,503,960
---------- ----------
Income (loss) from operations (5,070,721) 4,296,919
Interest income 699,611 704,053
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Income (loss) before provision (credit) for income taxes (4,371,110) 5,000,972
Provision (credit) for income taxes (926,212) 2,707,000
--------- ---------
Net income (loss) ($3,444,898) $2,293,972
============ ==========
Earnings (loss) per share:
Basic ($0.14) $0.09
======= =====
Diluted ($0.14) $0.09
======= =====
Shares used in computing earnings (loss) per share:
Basic 24,957,000 24,266,000
========== ==========
Diluted 24,957,000 25,037,000
========== ==========
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
---------------------------------
April 30, 1999 May 1, 1998
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OPERATING ACTIVITIES
Net income $(3,444,898) $2,293,972
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 2,862,304 2,464,213
Changes in operating assets and liabilities:
Accounts receivable (4,253,454) (1,991,858)
Inventories (2,844,868) (4,425,790)
Prepaid expenses and other current assets 545,389 (900,235)
Accounts payable 3,348,390 (3,214,153)
Accrued expenses, deferred income taxes and
other long-term liabilities 4,159,223 1,314,251
--------- ---------
Net cash provided (used) by operating activities 372,086 (4,459,600)
INVESTING ACTIVITIES
Additions to property, plant and equipment (4,506,075) (7,077,262)
Payment for acquisitions, net of cash acquired (5,825,237) ---
Other assets (115,552) 108,335
--------- ---------
Net cash used by investing activities (10,446,864) (6,968,927)
FINANCING ACTIVITIES
Borrowings under credit facilities and long-term debt 616,964 ---
Repayments on credit facilities and long-term debt (229,825) (391,088)
Proceeds from sale of common stock 652,662 50,521,359
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Net cash provided by financing activities 1,039,801 50,130,271
Effect of exchange rate changes on cash 264 118,249
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Increase (decrease) in cash and cash equivalents (9,034,713) 38,819,993
Cash and cash equivalents at beginning of period 83,011,819 47,966,101
Adjustment for net cash activity of pooled companies (263,188) ---
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Cash and cash equivalents at end of period $73,713,918 $86,786,094
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SEE ACCOMPANYING NOTES
-5-
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, 1999 included in the Company's
Annual Report on Form 10-K. 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 April 30, 1999 and the results of its operations for the three month
periods ended April 30, 1999 and May 1, 1998. The results of operations
for the interim period ended April 30, 1999 are not necessarily
indicative of the results which may be reported for any other interim
period or for the entire fiscal year.
On April 29, 1999, the Company acquired Airtech plc in a transaction
accounted for as a pooling of interests. Accordingly, the Company's
consolidated financial statements for all periods prior to this
acquisition have been restated to include Airtech's financial position,
results of operations and cash flows.
During 1998, REMEC adopted Statement of Financial Accounting Standard
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" and
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131"),
"Segment Information." SFAS 130 requires that all components of
comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized.
Comprehensive income is defined as a change in equity during a period
from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign
currency translation adjustments and unrealized gains and losses on
investments, are required to be reported, net of their related tax
effect, to arrive at comprehensive income. The Company's Comprehensive
income is not materially different from net income. SFAS No. 131 amends
the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments.
Operating segments, as defined in SFAS No. 131, are components of an
enterprise for which separate financial information is available and
is evaluated regularly by management in deciding how to allocate
resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for
evaluating this segment performance. The Company operates in one
business and operating segment only, and therefore adoption of this
standard did not have a material impact on the Company's financial
statements.
The statements in this report on Form 10-Q that relate to future plans,
events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the
Company's success in penetrating the commercial wireless market, risks
associated with the cancellation or reduction of orders by significant
commercial or defense customers, trends in the commercial wireless and
defense markets, risks of cost overruns and product nonperformance and
other factors and considerations described in the Company's Annual
Report on Form 10-K, and the other documents the company files from
time to time with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of
the date hereof. Other than as required by applicable law, the Company
undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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2. NET INCOME PER SHARE
The Company presents its earnings per share information in accordance
with FAS No. 128, "Earnings per Share". Statement 128 replaced the
previously reported primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share, which includes the effects of options, warrants and convertible
securities to the extent they are dilutive, is very similar to the
previously reported fully diluted earning per share.
The following table reconciles the shares used in computing basic and
diluted earnings per share for the periods indicated:
Three Months Ended
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April 30, 1999 May 1, 1998
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Weighted average common shares
outstanding used in basic earnings per
share calculation 24,957,000 24,266,000
Effect of dilutive stock options --- 771,000
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Shares used in diluted earnings per share
calculation 24,957,000 25,037,000
========== ==========
3. INVENTORIES
Inventories consist of the following:
April 30, 1999 January 31, 1999
-------------- ----------------
Raw materials $24,185,177 $21,995,702
Work in progress 18,609,466 16,410,256
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42,794,643 38,405,958
Less unliquidated progress payments (313,301) (94,431)
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$42,481,342 $38,311,527
=========== ===========
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,229,000 and $2,076,000 at April 30, 1999 and January 31, 1999,
respectively.
4. ACQUISITIONS
AIRTECH PLC ("AIRTECH")
On April 29, 1999, the Company acquired Airtech, a United Kingdom -
based manufacturer of coverage enhancement products for wireless mobile
communications networks, in exchange for approximately 1.7 million
shares of the Company's common stock. Prior to the combination,
Airtech's fiscal year ended on December 31, 1998. In recording the
business combination, Airtech's financial statements for the three
month period ended April 30, 1999 were combined with REMEC's for the
same period. Airtech's statements of operations and cash flows for the
three months ended March 31, 1998 were combined with REMEC's for the
three months ended May 1, 1998. Airtech's balance sheet as of December
31, 1998 was combined with REMEC's as of January 31, 1999.
Included in the consolidated statement of operations for the three
months ended April 30, 1999 are costs of approximately $3.0 million
related to the acquisition of Airtech. These costs are comprised
primarily of
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professional fees and other transaction costs associated with the
merger.
Net sales and net income reported by REMEC and Airtech for the periods
prior to the acquisition are as follows:
Three months ended
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April 30, 1999 May 1, 1998
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Net Sales:
REMEC $37,529,534 $45,751,384
Airtech 5,636,883 4,885,676
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$43,166,417 $50,637,060
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Net Income:
REMEC ($1,763,309) $4,408,134
Airtech (1,681,589) (2,114,162)
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($3,444,898) $2,293,972
============ ==========
WACOM PRODUCTS, INC. ("WACOM PRODUCTS").
In March 1999, the Company formed a limited partnership, REMEC WACOM,
L.P. ( REMEC WACOM), for the purpose of acquiring WACOM Products, a
manufacturer of commercial radio frequency filters for specialized
communications applications. On March 29, 1999, REMEC WACOM acquired
the assets and assumed all of the obligations of WACOM Products, in
exchange for cash consideration of $6,850,000. 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 ("APB") No. 16. The estimated
excess of the purchase price over the net assets acquired of $1,867,000
is being carried as intangible assets, and will be amortized over 8
years. The Company's consolidated financial statements include the
results of REMEC WACOM from March 29, 1999 forward.
Assuming that the acquisition of WACOM Products had occurred on
February 1, 1998, pro forma condensed consolidated results of
operations would be as follows (in thousands except per share amounts):
Three months ended
------------------
April 30, 1999 May 1, 1998
-------------- -----------
Net sales $44,262 $51,638
Net income (loss) (3,284) 2,338
Earnings (loss) per share:
Basic ($.13) $.10
Diluted ($.13) $.09
SMARTWAVES INTERNATIONAL ("SMARTWAVES")
On February 12, 1999, the Company acquired the assets of Smartwaves in
exchange for cash consideration of $200,000 and 30,000 shares of
REMEC's common stock with a fair value of $540,000. The acquisition has
been accounted for as a purchase, and accordingly, the total purchase
price has been allocated to the acquired assets at their estimated fair
values in accordance with the provisions of APB No. 16. The pro forma
results of operations of REMEC and Smartwaves assuming that Smartwaves
was acquired on February 1, 1998 would not be materially different than
reported results.
5. SUBSEQUENT EVENTS
In May 1999, REMEC entered into a commitment letter with STM Wireless,
Inc. ("STM") under which REMEC committed to acquire a minority interest
in Direc-To-Phone International, Inc. ("DTPI") (a
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subsidiary of STM) in exchange for $4.56 million. As part of this
transaction, REMEC also committed to loan DTPI an additional $5.0
million in the form of a promissory note which may be convertible
into preferred shares of DTPI. The transaction is subject to
completion of definitive documentation.
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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, Inc. ("Microwave"), REMEC
Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey"), REMEC Magnum, Inc.,
("Magnum"), Verified Technical Corporation ("Veritek"), C&S Hybrid, Inc.
("C&S"), Q-bit Corporation ("Q-bit"), Nanowave Technologies, Inc.
("Nanowave"), REMEC WACOM L.P. ("REMEC WACOM"), Airtech plc, ("Airtech") and
REMEC, Inc. S.A., ("REMEC Costa Rica").
On April 29, 1999, REMEC acquired the outstanding shares of Airtech in a
transaction accounted for as a pooling of interests. Accordingly, all
accompanying historical financial statement information has been restated to
include Airtech's operations, assets and liabilities.
In March 1999, REMEC acquired WACOM Products in a transaction accounted
for as a purchase. The condensed consolidated statements of income and cash
flows for the three month period ended April 30, 1999 include REMEC WACOM's
results of operations from March 29, 1999. REMEC's April 30, 1999 balance
sheet includes REMEC WACOM's assets and liabilities.
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 related to defense
programs 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.
Currently, REMEC derives significant revenues from a limited group of
customers and expects that it will continue to do so in the immediate future.
In certain circumstances, customers place purchase orders but release
quantities incrementally against those purchase orders, subject to an agreed
period of performance. At the time a purchase order is placed, the Company
records the entire amount of the purchase order as backlog, even if the
customer releases quantities incrementally against the purchase order. An
amount of the Company's backlog with these customers can be canceled at any
time generally without substantial penalties. As a result, any cancellation,
reduction or delay in orders by or delays in shipments to any significant
customer may have a material adverse effect on the Company's business,
financial condition and results of operations. For example, the Company's
results of operations beginning in the second quarter of fiscal 1999 have
been adversely affected by the significant decline in commercial revenues
from their level for the first quarter of fiscal 1999. This decline in
commercial revenues was primarily attributable to requests by certain
customers to delay deliveries of previously announced requirements. REMEC
believes that some of the customer delays have been attributable to the
continuing economic difficulties in the Asian markets or other international
markets in which REMEC's customers operate, and to the increased competition
among the participants in those markets. There can be no assurance that
similar delays will not recur in the future. The Company has also experienced
continued pricing pressure on follow-on orders for existing defense programs
on which the Company participates, and the Company anticipates that there
will be fewer available defense programs to which it can market its products
in the future. 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, may have a material adverse effect on the Company's business,
financial condition or results of operations.
-10-
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
----------------------------------
April 30, 1999 May 1, 1998
-------------- -----------
Net sales................................... 100% 100%
Cost of sales............................... 75 69
-- --
Gross profit................................ 25 31
Operating expenses:
Selling, general & administrative........... 21 18
Research and development.................... 8 5
Transaction costs .......................... 8 --
- --
Total operating expenses.................... 37 23
-- --
Income (loss) from operations............... (12) 8
Interest income ............................ 2 2
- -
Income (loss) before income taxes........... (10) 10
Provision (credit) for income taxes......... (2) 5
--- -
Net income (loss)........................... (8%) 5%
==== ==
NET SALES. Net sales were $43.2 million for the three month period
ended April 30, 1999, representing a decrease of $7.5 million or 15% over the
comparable prior year period. The decrease in sales was primarily
attributable to a reduction in demand from the Company's commercial customers
as a result of the economic difficulties in certain international markets in
which those customers operate.
GROSS PROFIT. Gross profit was $10.7 million for the three month
period ended April 30, 1999, representing a decrease of $5.1 million or 32%
over the comparable prior year period. Gross margins were 25% for the three
month period ended April 30, 1999, compared with 31% for the comparable prior
year period. The decrease in the Company's gross margins are primarily
attributable to decreased production volume at certain of the Company's
production facilities and the establishment of reserves for certain product
warranty costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG & A") were $9.2 million for the three month
period ended April 30, 1999, representing an increase of $.1 million or 1%
over the comparable prior year period. The increase in SG&A was attributable
to increased legal costs. As a percentage of net sales, SG&A expenses
increased from 18% in fiscal 1999 to 21% in the current fiscal year due to
the decline in sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $3.5 million for the three month period ended April 30, 1999,
representing an increase of $1.1 million or 46% over the comparable prior
year period. The expenditures are mostly attributable to the Company's
commercial wireless business and reflect an increase in activity associated
with product development. Research and development expenditures fluctuate on
a quarterly basis both in amount and as a percentage of sales.
TRANSACTION COSTS. REMEC's results of operations for the three
months ended April 30, 1999 include $3.1 million of transaction costs
associated with the Company's acquisition of Airtech and the terminated
acquisition of STM Wireless, Inc. There were no similar costs in the
comparable prior year period.
INTEREST INCOME. Interest income was $.7 million for the three month
period ended April 30, 1999 and was essentially unchanged from the comparable
prior year period.
PROVISION (CREDIT) FOR INCOME TAXES. The Company reported a credit
for income taxes of $.9 million during the three month period ended April 30,
1999, as compared with income tax expense of $2.7 million recognized during
the comparable prior year period. The credit reflects the recognition of the
tax benefit associated with the Company's first quarter net operating loss.
-11-
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, REMEC had $124.0 million of working capital,
which included cash and cash equivalents totaling $73.7 million. REMEC also
has $17.0 million available under two 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 based on a
fixed spread over the London Interbank Offered Rate (LIBOR). The revolving
working capital line of credit terminates July 3, 2000. The revolving period
under the term loan expires July 1, 2000, at which time any loan amount
outstanding converts to a term loan to be fully amortized and paid in full by
January 2, 2004. As of April 30, 1999, there were no borrowings outstanding
under REMEC's credit facilities.
During the three month period ended April 30, 1999, net cash used by
operations totaled $.4 million as a $7.1 million increase in trade
receivables and inventories was offset by a $7.5 million increase in trade
accounts payable and other accrued expenses. The increase in trade
receivables during this period was primarily due to the increase in sales
from the previous quarter and an increase in the length of time that
customers were taking to pay invoices. The increase in inventories (and trade
accounts payable) was due to the need to support anticipated future sales
growth. Other accrued expenses increased as a result of costs associated with
the Company's acquisition of Airtech and the establishment of reserves for
the anticipated costs of certain litigation and product warranty costs.
Investing activities required $10.4 million during the three months
ended April 30, 1999, primarily as a result of $4.5 million in capital
expenditures and $5.8 million (net of cash acquired) paid in connection with
the acquisition of WACOM Products and the assets of Smartwaves International.
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 cash on hand. REMEC's future capital
expenditures may continue to be significant as a result of commercial
wireless telecommunications expansion requirements. Financing activities
generated approximately $1.0 million during the three month period ended
April 30, 1999, principally as a result of the net proceeds of $.65 million
generated by the issuance of shares in connection with the Company's Employee
Stock Purchase Plan and from exercises of stock options.
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.
YEAR 2000 READINESS DISCLOSURE
GENERAL. Many currently available installed computer systems and
software products are coded to accept only two digit entries to represent
years. These date-sensitive systems, products and equipment may not be able
to accurately recognize the year 2000. As a result, these systems, products
and equipment may need to be upgraded or replaced in order to become year
2000 ready.
The Company's Vice President of Information Technology is
responsible for coordinating REMEC's efforts relating to year 2000 readiness.
These efforts include the following phases: (i) identification of potential
year 2000 problems; (ii) assessment of the potential impact on and risks to
the Company's business; (iii) determination of specific solutions; (iv)
implementation of solutions; and (v) evaluation of all of the foregoing. The
Vice President of Information Technology reports to the Company's President
and Chief Operating Officer on these matters. In addition, the Company's
Audit Committee and Board of Directors provides supervisorial oversight of
the Company's efforts relating to year 2000 readiness.
MANUFACTURING. The Company utilizes various tools and equipment in
connection with the manufacture of its products which may have embedded
technology that is date sensitive. The Company is testing substantially all
of its critical tools and equipment currently being utilized by the Company
in the manufacture of its products, and continues to monitor year 2000
readiness in this area. Based on its efforts to date, the Company believes
that its critical tools and equipment will be year 2000 ready on or before
December 31, 1999. As a result, the Company currently does not anticipate
significant interruption of its manufacturing capabilities due to the failure
of its tools and equipment to be year 2000 ready.
-12-
INFORMATION SYSTEMS. The Company has various internal financial
information and reporting systems, human resources and payroll applications,
procurement requirements, customer billing applications, manufacturing
monitoring systems, communications systems, desktop computers and computer
networks. The Company is testing all of these internal systems and
applications and upgrading or replacing software and hardware where needed.
Based on its efforts to date, the Company currently does not anticipate
significant interruption of its operations due to the failure of its
information systems to be year 2000 ready.
In addition to testing existing information systems for year 2000
compliance, the Company is phasing in the installation of a new management
information system which will be used by the Company and all of its operating
subsidiaries in connection with internal financial information and reporting,
production planning and manufacturing monitoring and procurement
requirements. The purchase and installation of this system is estimated to
cost approximately $3.0 million and will be paid for by the Company out of
existing funds when installed at the various Company facilities. Although
this system is not being purchased exclusively to address year 2000
compliance issues, this management information system is certified by the
manufacturer to be year 2000 compliant. This system has been implemented in
three of the Company's subsidiaries, is in the process of being implemented
in another subsidiary and is estimated to be completely installed and
operational in a majority of the Company's facilities over the next two
years. The information systems in place at certain of the Company's remaining
subsidiaries are also being upgraded to year 2000 compliance. This process
will be completed by December 31, 1999 and is anticipated to cost
approximately $250,000. REMEC has recently completed the acquisition of
Airtech plc and WACOM Products. The Company has initiated year 2000 readiness
reviews at each of these entities. Although REMEC has yet to develop a formal
plan to ensure year 2000 readiness at Airtech and REMEC WACOM, the company
intends to be compliant prior to year 2000.
FACILITIES. The Company is also testing all of its facilities and
infrastructure systems, including the heating/ventilation/air conditioning
(HVAC) systems, security systems and health, safety and environment systems
at each of its facilities. The Company currently has manufacturing operations
or management personnel in thirteen leased or Company-owned facilities. Based
on its efforts to date, the Company currently does not anticipate significant
interruption of its operations due to the failure of its facilities and
infrastructure systems to be year 2000 ready.
SUPPLIERS. The Company is implementing a system to monitor the year
2000 readiness of its suppliers. The system will include
awareness/notification letters, warranties and a review of suppliers'
web-site statements regarding year 2000 readiness. If a supplier is
identified as having a high risk of year 2000 non-readiness, the Company will
develop alternative sourcing plans to minimize the year 2000 risks.
COSTS. The Company estimates that the aggregate costs for its year
2000 readiness program incurred by the Company to date and anticipated to be
incurred by the Company through December 31, 1999 is approximately $350,000.
Approximately $125,000 of the aggregate estimated costs relate to internal
resources incurred or anticipated to be incurred in connection with the
Company's readiness program. The Company has incurred approximately a third
of its estimated aggregate costs related to its year 2000 readiness program.
No information technology or other capital expenditure projects have been
delayed due to the Company's year 2000 efforts and the costs relating thereto.
WORST CASE SCENARIO: CONTINGENCY PLAN. The most reasonably likely
worst case year 2000 scenario which may affect the Company is a significant
disruption in the business operations of the Company's customers due to year
2000 problems. The Company manufactures components and systems for commercial
customers and various government agencies. To the extent that the customers'
business is disrupted by year 2000 problems, these customers may be unable to
purchase or pay for the Company's products which may have a material adverse
effect on the Company's business, financial condition and results of
operation.
UNCERTAINTIES. The above-description of the Company's year 2000
efforts contains forward-looking statements, including: the expected state of
readiness of the Company's manufacturing equipment, information systems and
facilities; the future impact on the Company's business, financial condition
and results of operation due to its year 2000 readiness; the anticipated
state of readiness of the Company's suppliers; the estimated costs associated
with the Company's year 2000 readiness program; and the Company's most
reasonably likely worst case scenario. There are many factors that could
cause the Company's actual results to differ materially from those year 2000
related forward-looking statements.
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Some of the factors that could effect the anticipated impact of the
Company's year 2000 readiness include the availability and cost of personnel
trained in this area, the ability of Company personnel, vendors, customers
and suppliers to locate and correct all relevant computer codes; the
reliability of statements of third parties (customers, suppliers and vendors)
regarding their own year 2000 readiness; and similar uncertainties. In
addition, the anticipated costs of any year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events. Many of these factors and assumptions are
beyond the Company's control and no assurances can be given that the Company,
its suppliers and customers will be able to resolve all of their year 2000
readiness problems in a timely manner to avoid a material adverse effect on
the Company's business, financial condition or results of operations. .
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PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
CLASS ACTION LAWSUIT. On April 19, 1999, a class action lawsuit was
filed against REMEC, certain of its officers and directors and the investment
bankers who served as co-lead underwriters in the Company's February 1998
public offering. The lawsuit was filed by the law firm Milberg Weiss Bershad
Hynes and Lerach and two of its co-counsel in the United States District
Court for the Southern District of California as counsel for Charles Vezzetti
and all others similarly situated. The lawsuit alleges violations of the
Securities Exchange Act of 1934 by the Company and the other defendants
between December 1, 1997 and June 12, 1998. The Company believes the lawsuit
is totally without merit and it plans to mount a vigorous defense.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 12, 1999, the Company issued 30,000 shares of common
stock in connection with the acquisition of Smartwaves International. These
shares were not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on an exemption provided under Section 4(2) of
the Securities Act for issuance of securities not involving any public
offering.
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
REMEC is exposed to changes in interest rates to the extent of its
borrowings under its revolving working capital line of credit and revolving
term loan. At April 30, 1999, REMEC had no borrowings under these credit
facilities and, therefore, no exposure to interest rate movement on its debt.
REMEC also will be affected by changes in interest rates in its investments
in certain held-to-maturity securities. Under its current policies, REMEC
does not use interest rate derivative instruments to manage exposure to
interest rate changes. A hypothetical 100 basis point increase in interest
rates in REMEC's held-to-maturity securities would not materially effect the
fair value of these securities at April 30, 1999.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
- Exhibit 27 - Financial Data Schedule
(b) There was one report on Form 8-K filed by the registrant during the
quarter ended April 30, 1999, which disclosed the following:
1) The signing on April 13, 1999 of a letter of intent with STM
Wireless, Inc. ("STM") outlining the possible merger of STM
and the registrant, and
2) The filing of a class action lawsuit on April 19, 1999,
alleging violations of the Securities Exchange Act of 1934 by
the Registrant and certain of its officers and directors and
the investment bankers who served as co-lead underwriter's in
the Registrant's February 1998 public offering.
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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/ Michael D. McDonald
------------------------------
Michael D. McDonald
Chief Financial and Accounting Officer and Secretary
Date: June 14, 1999
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EXHIBIT INDEX
Exhibit
Number
27 Financial Data Schedule
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