Caleres Inc (CAL) 2002 Q1 法說會逐字稿

Good day everyone. Welcome to the Remec conference call. This call is being recorded. At this time for opening remarks I would like to turn the call over to Mr. Ron Ragland, Chief Executive Officer. Please go ahead, sir.

Thank you all for joining us on this important call. We are very pleased to tell you about our plans, Remec and Spectrian. In today's call we have myself, Tom Waechter who is President and CEO of Spectrian and Dave Morash who is our Chief Financial Officer. We are going to limit the comments and questions today to the Spectrian acquisition. It will be an one-hour conference call. We are calling in from multiple locations, so we may not be choreographed ideally, but we will do our best. It is not our intent to disclose all aspects of the merger agreement. We will be filing a merger agreement approximately the time of the proxy filing. And we do not intend to address arbitrage questions in the call today. I am going to read the safe harbor language. Statements in the press release and this conference call that are not historical are forward-looking statements which involve known and unknown risks and uncertainties, particularly relative to the forecast of income and cash flow. Actual results could differ materially from those implied by such forward-looking statements due to a variety of factors, including general and industry economic conditions, competition, development factors, operating costs and other risks and uncertainties that are detailed from time to time in our filings with the Securities and Exchange Commission. Well, again, thanks for joining us. We are very excited about the deal, that it brings the Spectrian and Remec families together as a team. We have gone through a very methodical and detailed due diligence process on both sides of the equation. It will be Tom and mine, and Dave's job today to try to tell you why we are excited about this, and why we think it's good for the shareholders of our respective companies. It's been Remec's goal all along and our battle cry from the day we started Remec to deliver an optimum solution using the best technology available, and provide our customers a product with the most affordable cost. This deal leverages that thesis in a dynamic way in our mobile wireless infrastructure business. Tom brings a very strong team to this merger of capabilities, and I have to tell you, from a personal and a business perspective, I'm thrilled to have Tom joining the team as the Chief Operating Officer and President. Errol Ekaireb who has been planning retirement has been an incredible asset to this corporation, and I don't know what we would have ever done without Errol. Again, a wonderful contribution. He will be continuing through a transition period, and then will continue to be available to the company on special assignments, and -- so I take this moment to thank Errol for his tremendous contribution as we look forward, excitingly to Tom and what he brings to our team. We have, in this merger, an excellent combination of technologies. Although Remec is relatively new to the power amplifier market, we have been praised by the customer community on our technology achievements, and when we blend these technology achievements and the really significant opportunities that we are looking into and merge those with the Spectrian technology excellence, it's very, very powerful combination. Quite frankly, we expect to give our very talented competitors some real challenges in the competitive market place. We also -- Remec, as those of you who have followed Remec in the past know, that our secret to success is integrating the product to a system level, and in doing so, providing an optimum solution at the most affordable cost. With Tom and Spectrian joining our team, we believe we will be at the forefront of giving our customer an integrated base station solution. And that's very exciting to us. Another real, I'm going to use the word irony, another real irony of the deal is that Remec and Spectrian have not been head-on competitors. Where we have focused, they have not. And where they have focused, we have not. What we find when we add the two companies and our customer bases, that it's just extremely complimentary. Tom's going to give you some detail in his presentation, but let me just use an example. Our largest customer at nominally 20 to 25 percent is Nokia. Tom, Spectrian doesn't do a dollar's worth of business with Nokia. Tom's got a tremendous activity in Korea, a significant part of the business. Remec has never sold a dollar to Korea. It goes farther than that and it's stronger than that. But that gives you the flavor of our excitement in that area. So this is going to give us an expanded global platform and an expanded customer base that's pretty impressive. Tom's been practicing there at Spectrian a flexible outsourcing model, and has two excellent partners that have been supporting him. Needless to say that Remec with its offshore manufacturing capability will find a dual benefit in this in being able to have a larger manufacturing base to spread the infrastructure costs of our company, and also to have the flexibility to work with, and team with these gentlemen who have provided excellent contract manufacturing services to Tom in the past. We also are going to get a significant boost to our purchasing power equation, and there are some unique and specific competitive advantages we will gain with this combination. So my global manufacturing organization is really excited about this, also. And it's an area where we will be experiencing substantial synergies. The combination, also, underwrites a very effective sales and worldwide marketing organization. Tom has an extensive organization, as do we. And again, because of our global and customer-based differences, what we end up with is an excellent byproduct of the best of both. So I think that's a key point to share with you. For those of you who followed Remec for some time, you know that I have talked in the past about the chicken egg of building an infrastructure that's capable of taking this corporation forward to a billion, and then a multi-billion dollar performance level in revenue. And you have heard me cite that we are building an infrastructure that needs, as a starting platform, a $500 million revenue run rate to fully absorb the structure we have put together. This deal, with modest growth, puts us at that platform. And I think that's a very important aspect of this transaction. Further, we are combining two very strong balance sheets to end up with the strongest balance sheet in our competitive market place. And that balance sheet is going to fuel our ability to serve our customers, take advantage of opportunities in the marketplace and be able to have the resources to back up and succeed with our initiatives. I mentioned earlier, that we are fundamentally, our core belief is that we deliver value to our customers. So being able to deliver in the mobile wireless market place and to our customer community the optimum solution at the most affordable cost is critical. This deal adds substantial leverage to this thesis. You know, it's easy to sit here and talk about synergies, but I want to emphasize that in our due diligence process, we went through a formal process with Spectrian and jointly put together the synergy list and we have some very specific expectations. They will be refined as we go forward, but we are confident that within the first year of our combination, we will deliver a minimum $20 million of synergies to the bottom line. And in excess of $30 million annually thereafter. I have talked with Tom and my team extensively about the importance of developing a transition team to do the important planning to assure a smooth, effective integration. Our most precious resource going forward is time. And to the degree that we properly prepare in our planning for a subsequent execution once the shareholders authorize this deal, is essential. I have asked Tom, as the future Chief Operating Officer and President of Remec to run this group, and we are going to staff it with our best and brightest on both sides. So that this execution, this transitional execution, which I expect to be very straight forward, I'm going to sidebar for a second and say, this only affects -- this is mobile infrastructure, it will not affect our broadband wireless group. It obviously will not affect our defense group. It does not affect our advanced technologies activities that are going on. For the production group, the global manufacturing group, I think it's very important to point out that Tom's already gone through the outsource model. So in terms of documentation and discipline of working with a separate organization, we are expecting a very, very smooth transition and integration. Nevertheless, we are going to have this transaction planned in detail, and have the total situation wired, and the day we hit closing, we are flipping the circuit breaker and moving out smartly with the implementation. I will be making some more comments at the close but right now I would like to turn it over to Tom.

Thanks, Ron. Thanks for all the positive comments about Spectrian and this opportunity in front of us. As the President and CEO of Spectrian, I would like to take a few minutes to really explain to you what I think are the benefits and opportunities to our customers, our shareholders, and as well, the employees of Spectrian, and why I have been so enthusiastic about this merger between the two companies. I think if I look at the major benefits, one of the things that the market and our customers have been demanding of us is to come to an integrated RF solution for the base station. Spectrian has looked at various ways we could achieve that, and when we were able to match up with Remec and look at what they have, and the number of solutions, and the technology, we are extremely excited about that because it really accelerates what we could do internally by three to four years with this integrated model. So, we believe we can move very quickly, it's going to provide a very efficient and cost effective solution to our customer base. We know that price is a very important issue out there, and efficiency, and we believe we can move down that path very, very quickly. For our customers, it will provide one-stop stopping. Where today they maybe have to deal with three or four different suppliers and try to marry the equipment together, they will now be able to go to one, Remec, for a full integrated solution. And if you look at between the two organizations and our capabilities in the R&D groups, this is really going to allow us to get more done with the same combined entities that we have in R&D. We won't be duplicating as many efforts as we do today. Therefore, we can take on more projects for our customers. We see quite a bit of those today in the market. Also, we will be working with the ever widening customer base. I think for those who have followed Spectrian, you know we have worked very diligently over the last couple of years to really expand our customer base. Going back two years ago we had one major customer that was about 80 percent of our business. We have been able to broaden that, but I'm extremely excited when I look on one piece of paper now the major customers that we will be working with between Remec and Spectrian. Remec has a very strong presence with the OEMs in Europe, a very strong relationship that Spectrian desperately needs today. We really don't have that kind of presence. I think we both have very strong interests in China. We have done a lot of the right things and by localization, having a strong presence with our people. And now combined, I think that will strengthen that much more. And, of course, Spectrian has a really strong heritage in Korea. It's a major base for us. We've done extremely well, and that will open up now to the combined entity. And an area where Remec doesn't really play today, in the North American and Latin American network operators, Spectrian has developed a really strong business. So if I just look at a list of some of the major customers, to me, again it's very exciting. I have seen what it's taken Spectrian to get to an expanded customer base. Now, that starts to explode for all of us. Looking at people like Nokia Samsung, Lucent, Motorola, Nortel, Verizon, Cingular, these are the key players in the industry. We will have those as a strong customer base at this point. I also think, for our shareholders, we will improve the stability. Spectrian today has one major product offering, a broad portfolio within that, but we are a stand alone power amplifier business. As a result there are is a lot of ups and downs. There are a lot of cycles. If I look at merging in our amplifier business into Remec's mobile wireless business, it's quite exciting. Plus you also have two other strong businesses there that Remec has, defense and the broadband wireless. Ron mentioned earlier, and I'll tell you this is something that gets me extremely excited, is the combined balance sheet that both companies will have. I don't think there's anyone in the industry that will have the strength of Remec once we combine our two balance sheets. We will have no debt and approximately $150 million in cash going forward. That really allows us to make those kinds of decisions that are the right once for our customers and really looking at the long-term pay back for our investors. The other thing to me that was very, very important and I have been feeling better and better about it as we went through due diligence and I got to meet Ron more and his team of people, we are closely aligned between our corporate cultures. I think any time you do this type of acquisition and we are merging Spectrian into Remec, you can't underestimate how important that is. And I think both of our teams from the comments and to see how smoothly this has gone up to this point, I am very encouraged by the fact that we really have a lot of synergies between our corporate cultures. So those are some of the benefits I see, and the things that really encouraged me to look at, you know, merging Spectrian into the Remec organization. Just if I look ahead, Ron mentioned being prepared, getting ready to go as soon as the deal's closed. We flip the switch and we are on with it. I think that's extremely important. The market's moving quickly, the integrated solution is important. We really need to achieve the synergies both from a revenue standpoint and a cost standpoint as we go forward. So I'm very excited to have the opportunity to be leading this charge. Again, I think we have very good people on both sides. We will put our best on there, as Ron mentioned. We will be ready to go and we'll charge out of the starting blocks very, very quickly. I think, as a result, our shareholders, which today are separate as Spectrian and Remec, as this gets combined, they will see some very important synergies and I think some very nice paybacks over time. At this point I would like to turn it over to Dave Morash for some comments.

Thanks very much, Tom. I will address the deal structure and the synergies statements on the synergies are also covered under the forward-looking statement. I will not be answering any questions today on our quarter, or any anticipated restructuring charges. Remec will acquire Spectrian for $14 per share for approximately $160 million in aggregate. Remec will have, at its sole discretion, the ability to deliver up to $45 million as part of the acquisition consideration at any time prior to five days before closing. Frankly, we don't like our stock where it is, so if we need to, we will spend cash rather than issue too cheap a stock. I know that you will like to know what we -- excuse me. I know that you would like to know what will make us decide one way or another. We have made no decision. We don't have a formula. We will look at our price, at our prospects on an ongoing basis, and when we feel the time is right to move in one direction, we will decide and announce. Candidly, I expect it will be later rather than sooner so that Remec keeps most flexibility in the process. The stock portion of the offer price will be based upon a minimum and a maximum value for Remec's stock of a floor of $7 and a ceiling of $10.50 respectively. If the deal is all stock, minimum exchange ratio of 1.33 giving upside potential to Spectrian above $10.50 per share for Remec. Maximum $2 minimizing paying for Remec at $7 or below. If the deal is all stock, we will issue a minimum of 15.2 million shares and a maximum of 22.8 million shares. Based on 45.2 million Remec shares currently outstanding, this results in Spectrian stockholders ownership of between 25.2 percent and 33.5 percent of the combined company. If things stay on plan, the process should work as follows. We will file an 8-K shortly. We will work on the proxy and meet SEc requirements, mail the proxy sometime in June. Sometime in July we'll make our cash election filed by shareholder votes of both companies. Rest assured the Spectrian shareholders will know, with sufficient notice, how much cash they will be offered in the aggregate. They will have to wait for proration results after the vote to know how much each shareholder will receive in cash and stock. With regard to the collar, I would like to give more details, but I will leave it at that during the call. Feel free to call me or my financial advisors after the call if you have additional collar questions. You should know that as a principal, the Spectrian shareholders are protected from the downside or share in the upside of Remec stock only in the non-cash portion of the deal. We are paying $14 or $160 million in aggregate. But if our stock runs up, the Spectrian shareholders' benefit, not on the whole $14 price, but only on that part of the $14 that we do not pay in cash. It is probably easier to work out specific examples. I will help you with the math on three examples with Remec stock at the 7 to $10 collar range, at the collar range or below the collar range. Let's say that we use 20 million in cash, about $1.75 a share. That leaves $160 million less $20 million in cash, or $140 million to pay in stock value. We will do that based on Remec's average closing sales price for a 10-day period prior to the meetings. If our average price is within the collar range between 7 and $10.50, we will issue shares worth $140 million. We just divide the $140 million by the average price. If the average price is above the ceiling, say $14, as we hope we issue -- as we hope, we issue $140 million, divided by the maximum value of $10.50 so 13.3 million shares. At closing this could be worth a total of 20 million in cash, plus value of 13.3 million shares at $14. 186 million for a total of 206 million or an average of $18 a share. Then Spectrian shareholders will be happy, but so will Remec shareholders. In reverse, if our stock is $6, we will issue stock valued at no less than $7 or 20 million shares. We will issue 20 million shares to pay the 140 million in stock value at the floor level of $7, not $6. The total actual value will then be 20 million in cash, plus 120 million in stock, or 140 million or less than the 160 million within the range. Because of the potential cash component, you cannot effectively use the exchange ratios of 1.33 or $2 to figure out the values received by Spectrian outside the collar. Within the collar, it is the $14. But outside it is more or less influenced not by the whole value of the transaction, but only by the portion which we do not elect in cash. Again, to make our decision, we will look at all factors. Do we like our stock price? Do we need the cash? And decide. But you will have sufficient notice to determine your choice. There is, I should mention take there is a $6 million break-up fee. There is no walk away point if the stock price and the normal merger conditions in the contract such others regulatory approvals. In terms of synergies, as we stated in the press release, Remec expects that the transaction will generate a very substantial synergies and will be accretive to its earnings in the first year following closing. Excluding, of course, the transaction related expenses, based on achieving expected synergies. A preliminary evaluation of synergies conducted by Remec and Spectrian indicates estimated operating synergies in excess of 20 million in the 12 months following closing and in excess of 30 million as an exit thereafter. Fundamentally with our larger size, the transaction will absorb unused capacity in a number of areas. We expect to generate synergies from a number of areas including the elimination duplicative expenses in sales and marketing, research and development, finance and accounting, general and administrative, corporate spending, a number of department items such as repair cost reduction, QA spending, I.T. network spending and HR spending. These are combined with raw materials purchasing leverage, as well as savings on redundant facilities. We have assumed a modest amount of additional revenues based upon our larger market presence and combined effort. Now, I would like to turn the call back over to Ron. Ron?

Okay. Thanks, Dave. Make a couple other comments and go into questions. First of all, there will be a test on all that math we just threw at you. And the -- want to point out that we're going to have a webcast that we do on the 10th of June which will expand on the information we have presented today. The webcast will also talk about the broader companies and outlooks. We will, in New York, be at an investor conference in both Spectrian and Remec will be presenting at that investor conference on the 11th of June. We also intend to have a webcast and a road show followed by a road show at an appropriate point in time before the shareholder vote where we intend to address investors and customers. I would tell you that a random feedback is that the substantial number of investor calls and customer calls into both companies have been exceedingly positive and that buoys our confidence that we feel in the goodness of this merger. With those comments, Brent, let's go to questions.

Thank you. Today's Q&A session will be conducted electronically. If you would like to ask a question please hit the star followed by the digit one on your touch tone phone. Again, that's star, one for questions. We will take them in the order as presented and as many time as allows. Our first question is from Rich Valera with Needham and Company.

Congratulations gentlemen. Congratulations on the market reaction yesterday. It's pretty rare these days to see even the acquiring company's stock price go up. First question I think for you, Tom. On the product side, we know your products pretty well, your power end product. Can you talk about how they fit within what Remec has on the power amp side and if there's some complimentary products there or some overlap? Thanks.

I think as Ron mentioned we haven't seen each other a lot in the market as far as direct competition in the customer base. I think what we have evaluated with the Remec technology as we have gone through due diligence it's quite impressive. They have worked on some advance technology that I think is being very well received by the OEM. I think in most cases it's complimentary. As you know, Spectrian has been working on the [INAUDIBLE] technology and digital pre-distortion and I think they are complimentary types of technologies from everything we have seen. And again, I want to emphasize by putting the two R&D groups together the resources we have to really address solutions for our customer base is very significant in this industry. So I would see mostly complimentary, and actually allowing us to get more projects done over a period of time as a combined entity rather than doing it alone.

On the integrated product front can you give us an idea, either Ron or Tom, where you think you first might attack in terms of integrating products? Presumably integrating some components in with the power amps, maybe first?

I'll just make a knee-jerk reaction to that. I think the biggest, probably one of the biggest next steps with each of the OEMs we serve is how are you going to provide us an integrated solution? Needless to say this is how Remec has built our company, is being at the forefront of integrating an optimum solution up toward the system level. So, Tom said in his remarks, that the customers were demanding this vertical integration. I would go so far as to say the customers are screaming for it. And it's -- I believe, I don't want to speak for Tom here, but I'll toss it over to him but I'll say that was a major motivation for Spectrian to have these discussions.

Yeah, it was, Ron. As I mentioned earlier, as we looked at what the customer's needs were and looked at technology road maps, it was very clear that this integration model was coming faster than any of us anticipated, even six months ago. So, again, this gives us three or four steps very quickly with the integration. I think back to your question specifically, Rich, I would say one that is very obviously is the amplifiers and filters. That's something we are hearing on a regular basis. But, without giving any secrets out, we have some ideas where we can be proactive and offer some solutions something beyond what the customer is actually thinking today as well.

Great.

We go next to Dale Fowl with CIBC World Markets.

Congratulations, gentlemen. Ron, for one time I have you. I'm in China this time and you are finally, I guess, back in San Diego for awhile.

That's a flip isn't it?

That's a new one. Congratulations, guys. Great merger of the two. I have a question, I guess, that's a financial thing. Taking a look at synergies a you are talking about, both Remec and certainly Spectrian recently have suffered from margin deterioration and stagnating margins in the low 20s. With the synergies and with your outlooks in the businesses, can we see the margins creep up any time soon? Or are we looking -- what is your outlook for the combined company for where we can actually get to in margins over the next 12 to 18 months?

The company will not get anywhere near our stock expectation without delivering our shareholder community, the investor community strong bottom line profits and damn good margins. We are -- we are of the belief that we can have competitively differentiated product that gives good value and gives Remec good margins going forward. And I would say that operating margins approximately 30 percent would be a reasonable target. Needless to say, the customer community would always like to see it lower, and we would always like to see it higher. So -- but I think that that's a reasonable balance between the two influences.

One of the things that we have seen is with this integration of the technology, if you do it inside one company, I think you can make that technology much more efficient and cost effective. Both the customer and the company can benefit from that rather than multiple companies designing the product trying to bolt them together later. You build in a lot of redundancy that way. So I think there's some uptick in the margin and benefit directly to the customer from those synergies of planning it in advance.

Our deteriorated margins, at this point in time, are more volume based than they are individual achievement based. In other words, back to my point about $500 million. And I'm use a stupid example, my paycheck. It's much better for my paycheck to be absorbed by $500 million revenue than it is by a $350 million revenue. So I think the deteriorating margins are not a function of the product design, the price the customer is paying. I think it's the fact that we had such a steep and abrupt cutback in business. We are not going to layoff, not to live for another day. Now, I say that, at the same time Tom's taking his team from 700 to 250 and outsourced his manufacturing, and we have laid-off just shy of a third of the Remec team over the past year which is painful as hell. We cannot layoff infrastructure and capability that are required to become the billion dollar company we hope to become in the near future.

I guess I would add to that, that this is probably the first transaction that we have done where we really are planning a full integration of the operation. So I think, you know, of any size, anyway. So I think that this -- our ability to execute will then allow us to generate some pretty significant synergies relatively rapidly and improve the margins that you have talked about.

I mentioned in many previous conference calls that the reorganization and restructuring of the company is going to allow a significant extraction of synergies as we bring additional teams into the family. This is going to be an exemplar situation, I think, that proves out that prediction.

Ron, just a clarification. You said 30 percent net operating. Do you mean 30 percent gross margins?

Yes, I'm sorry. I thought I said gross margins.

Okay.

The delirium of the moment. 30 percent gross margins. I do want you to know, we have said this in previous conference calls, we are not going to be satisfied unless we have pre-tax profits well into double digits. Very important aspect of the total Remec structuring is the clever and effective tax consideration we have worked -- that we have worked out, and the fact that we have manufacturing facilities in tax free zones. So we understand what it takes, we believe, to be valued in the market in the future by our investors, and we intend to deliver strong bottom line.

And one other question. Obviously you have been a leader in the consolidation and sort of the infrastructure, sub-assembly component space. Should we look for more of that in the industry?

Only if it makes sense. I guess that's a way of being cute, isn't it? I'd say that we are not in a frenzy. There are some very significant opportunities for consolidation of talented teams. This is one such. We have been extremely pleased with some of the other values. We have been able to extract from the marketplace. And what a wonderful feeling to reiterate a tune that I have been singling for some time, what a wonderful aspect of the this downturn to extinguish non-viable business plans. So we think we got a viable model here, we got a viable team going forward, and we're going to be competing against other viable business plans.

Charles DeSanza with GKM.

Hello, gentlemen. Ron, I don't think we have met before.

No, I don't think so, Charles. I'm having trouble hearing. I'm guessing everybody else might be so if you could push a little more volume.

I'll push a little more volume out. What specifically do you sell to Nokia for infrastructure? And secondly, who provides the power supplies?

You know, I don't know who provides their power supplies. That's not in our world. We develop, primarily, microwave and millimeterwave product here. Power supply, I don't know. We provide front end passive distribution, filtering, we have, also into their base station products, various coverage enhancement product we provide to them. We have been working with them diligently to expand that product offering, and I think this combination with Spectrian, although our technology, I believe, is exciting, we are a relatively new entrant in terms of legacy and critical mass to a major OEM and the size of their needs. So I believe that the OEM community will view this combination as putting -- I believe we already have a check mark in technology in power amplification, this is going to give in addition to that and positive checkmarks on cost, it's add legacy and critical mass to our credential. I think it will be very powerful. Tom any comment to that?

No, I think if you look at technology that Remec's working on, our technology at Spectrian and then, you know, we have 850,000 power amplifiers installed around the world. So it's a huge knowledge base that we have developed with time. And I think, again, combining that with what Remec has to offer is quite powerful.

But away from the microwave and millimeter stuff, what are you talking about? Are you talking about receive channel filtering? Existing products? I'm sorry.

We are talking about everything in a base station that operates at microwave and certainly when we look at base station back haul, we will be looking at millimeterwave, also. So I would say that you are welcome, if you are interested, to call in and we'll line you up with the right information, right folks that can give you a technical description.

You spoke about other teams and the illusion that maybe you have more acquisitions. What about other products? What kind of product would help you fill out your importance to the carriers?

Charles, I don't wish to be the least bit rude, you are welcome to call me personally, but this conference call is primarily on the Spectrian acquisition and I will go to a next call. So you are welcome to call me, and I would be glad to address that with you.

Next question from Mark Jordan with AG Edwards.

Good afternoon, gentlemen. First I would like to talk about the manufacturing capabilities that Remec has, and how that can be leveraged with this acquisition. Do you have the capabilities, or where would you potentially shift the work that [INAUDIBLE] Thailand is doing to Philippines, Costa Rica or China and do they have the capabilities inhouse today to assume that work?

Hi, Mark, how are you doing?

Just great.

Those of you who have listened to me before, you know we have a strength of being open and direct and a weakness of being open and direct. Right now there's a couple of manufacturers sitting out there who were serving Spectrian, very interested in what I have to say on the subject. I will try to find a construct that fully utilizes our manufacturing capabilities, and still treats them as a partner and tries to understand their needs having served Spectrian. I personally believe that we will be generating substantial additional revenues in our combination. David has stated that in our synergies we have taken a very conservative look at that. But, there will be a significant impact on our purchasing power, and we will be moving as we grow product into both Costa Rica, the Philippines and China. So I see this as a very, very important step in creating the absorption base for our global manufacturing infrastructure. I am very hopeful that we are able to deal, interact, communicate, with the Spectrian's existing suppliers and find a win/win instead of a disappointment. That would be my goal. Recognize that it's a sensitive subject.

Right. As you mentioned your combined balance sheets would have upwards of $150 million of cash as we speak. Ron, you placed an emphasis on maintaining a strong balance sheet during these tough times here. How far, with the combined companies, how far would you be willing to allow your cash position to work down either by incremental acquisitions or use cash for, again, offsetting the acquisition costs?

Um -- Mark, you know, I think, David unless you want to jump in there, I would be reluctant to want to put a number on it. I don't feel like this acquisition was made to acquire cash. That would be the -- that wasn't on my list of synergies. I felt very comfortable where we were. The fact of the matter is, though, there are incredible values of different varieties in a marketplace that is under as much pressure as this marketplace. So I think we would look at each deal individually, and separately, and make a judgment. I think that the 150 million plus that we will have without debt puts us in an excellent position to make value judgments going forward. And Tom had a comment that he wanted to add to your last question, also.

Just if I could take a second. We were talking about manufacturing. One of the things that really excites me about the combination of the low cost offshore manufacturing that Remec has today, very high quality, and our outsourcing model, it gives us a lot of flexibility for upticks in the market. I do believe when the market starts to turn, it can turn very quickly. I think it gives us the ongoing Remec entity, one of the few companies out there that have redundant manufacturing capabilities who offer to the major customers. And I know that's very important to large customers to insure a source of supply. So I'm pretty excited about the balance we can reach between the two going forward.

Okay. I guess I would add, just in terms of the cash side, that obviously that changes as we improve our cash flow position, and, you know, so our number one focus, at this point, is to improve and get to a strong positive cash flow which then allows us greater flexibility in terms of the use of the cash for acquisitions and other things.

Next we go to Lee Parker with Compass Fund.

Hi, guys.

Hi.

Hi.

I'm just, I don't know, a little curious as to the timing of the acquisition. It seems that Spectrian's business has been very weak lately. Quarterly revenues declining and probably getting down to about 20 million this quarter. And yet you seem to be implying on a run rate basis the revenue might be 150 million. I'm just wondering, I don't know if you can talk a little bit more about why you are doing the acquisition now and why not wait a little while?

Well, I guess that's always a good question. I would say that it is not -- it hasn't been a knee jerk. I have been looking, and talking with Spectrian for six years. So, it's not a recent familiarity. I would say that, as both companies looked at the market going forward, we both saw excellent reasons to do the deal now. And I'm going to let it go at that and invite Tom to make any comments he might want to make. You know, I think the entire market's under pressure, both stocks are under pressure. From a relative point of view, we thought this was a good transaction. We think we accurately understand their future. They think they accurately understand our future. I believe we are both right, and Tom, what do you have to say about it?

Yeah, I would say from a timing standpoint, a lot of it, to me, was dictated by what the customers' needs were. As we said earlier the integrated model is something that the customers are getting very, very interested in. And has really come upon us very quickly. I think, not to go down a rat hole here, but if you look at the Spectrian revenue, we actually, in our December quarter from September, had about 27, 28 percent growth and we had eight percent from December to March and that was the first fiscal fourth quarter we had an up quarter in about three or four years. So I don't think we have been in a declining revenue situation from that standpoint.

Next Mike Walky with RBC Capital Markets.

Thank you. Congratulations on the deal. Seems like a great fit. I was wondering if you could go back to the synergies real quick and maybe could you share how much in the 20 million in synergies comes from cross-selling opportunities and were you able to receive the most from the cross-selling opportunities and how much would come from the cost side?

That's a good question. I would say -- I would say that a large part of the synergies that we have evaluated, and Dave, I'm gonna throw -- Dave and Tom, I will throw out a knee jerk of 85 to 90 percent is going to be from cost synergies. We have actually put very little speculation, although we have substantial enthusiasm, we put various speculation into prospective increased sales, cross sales, although they are clearly there. I would say we are dealing with a little higher order in terms of the rational and the basis for the synergy estimates that we have done. Therefore, they tend to be predominantly cost-based. Tom?

I'm sorry. The -- certainly the analysis we have done is based upon the fact that, you know, with two public companies and so there's duplicate costs there and duplicate costs in terms of how we operate, and so we are really more looked at the expense side, really the revenue side we figured while we think it's significant, we think that that takes a little while longer to kind of get it going and so forth. You have to bid on things, and those have got to turn into sales. So, we really have not spent much in the way of synergy forecast relative to the sales. And I would say that Ron is correct in the estimate, it might even be a little higher than that. So it's probably 90 percent is cost synergies.

Tom?

Yeah, I think Dave's very accurate in the way we have gone through the synergy analysis between the two teams and came to the conclusion. I think the cost part is always the part that's more predictable. It's more manageable. The revenue synergies are there, it's a matter of spending some more time out with the customer base as now we have come public with the announcement and are able to see, what kind of levels we are talking about as we go forward in the revenue side.

Okay great, thank you. Maybe one question for you, Tom. We have seen [INAUDIBLE] and now Remec and Spectrian combine. Any thoughts on long term remaining an independent power amp supplier in the market?

I don't want to single out a specific competitor, but I would say that one of the things that did catch my eye was the [INAUDIBLE] combination the move towards integrated solutions. I feel very good about this combination between Remec and Spectrian with where we are going to come out as this thing closes and can come out very quickly. But, as you can see from my enthusiasm about it, that I do believe it's the right model to follow, and again, I think there's a lot of synergies by doing it that way.

I think I would be at fault if I did not state that Remec was getting substantial traction in the market place promoting an integrated solution. It's our skills, it's what we have built the company around, it's the secret to our success and defense and we believe it's deja vu all over again here in the commercial world. So I have mentioned why the addition of Spectrian to our thesis makes us so much more powerful. Point made, I guess.

Thank you. We go next to John Cardoza with Chesapeake Partners.

First of all, just congratulations on the transaction.

Thanks, John.

My question was partially answered. It relates to the time period over which you consider the transaction. Sounds like the companies have known each other for awhile. Maybe you can give some more color as to how the discussions led to what seems like a very good combination.

You know, I can give some light on that. You know, Spectrian has obviously known Remec for quite awhile. Again we are competitors in the market. We don't tend to fall over each other every day. I have gotten to know Ron through some of the industry forums, analyst meetings, those types of things. Over that time we have spent some time together to talk about the industry and where we thought this thing was going. I liked what I saw with Remec, aggressive company, they are out there, they are always pushing the envelope forward, building this integrated model. And you know that attracted my attention. And then when I started really understanding the business more and how well these two things fit together, and we really didn't have a lot of revenue that we were sharing, that is pretty much, you know, all additional revenue between the two of us, it was a -- something that I felt very comfortable with. And, you know, approached Ron and talked about the potentials of the businesses going forward. And I think one thing led to another after that, as far as the enthusiasm around what this could bring to the market place.

Two other comments. The first one is he called me about a half hour before I would have called him, and it started six months ago in this last cycle and went through probably three cycles prior to that over the past six years.

We'll take our last question from Larry Harris with HC Wainright.

Thank you. Good afternoon and congratulations on the announcement. I was wondering if I could get some additional information as to what types of Remec products might be sold directly to service providers? I know that Spectrian's customers include Cingular, and any clarification would be helpful.

Right now the Remec history was to be initially a prime contractor to defense primes. Then we entered the commercial arena back in 1995 with a cold start under the belief that our defense technology was applicable to the commercial arena. We started out in the same frame, if you will, business model serving the OEM just like we served the prime contractor. One of the attractions to the Airtech acquisition several years ago was the fact that they were in the product business. And we had been primarily OEM. Well, with the squeeze on OEM operating margins so they get their competitive advantage, product became very attractive to us because, if you've got the leading solution in the space, you've got a competitive advantage in technology and the cost of the product, and you do your job really, really right, you can get substantially north of the gross margins that you can earn from the OEMs. So our concept has been moving toward, how do we blend a strong niche product business that doesn't step on the toes of our customers with a strong OEM business, and we happen to be very strong believers in the synergy of the two working together. Constructively between us and our customers, and also us and the service providers. Now, the specific answer to the question is we sell masthead amplifiers, we sell boosters for base stations. We're selling fixed wireless access, total solutions, and very -- I said I wasn't going to talk about anything else so I will not tell you how excited I am about that market space in the less developed countries. We'll save that for the 10th and the 11th. And we sell point-to-point radios. At present there haven't been great sales to the service provider community. Be assured, across the board, we are looking at how to go to a nirvana downstream of 50/50 OEM and niche product and try to get a blended gross margin north of the 30 percent I was talking about. Tom, with his support here in North America of, for example, of Verizon and Cingular, adds to that product perspective and we see this being able to be accomplished without it being disruptive to our OEM customers. Matter of fact, we see a strategy that allows it to be very constructive and very favorable in terms of them getting what they want at a lower price across a greater absorption base with some insights and possibly even some market advantages by working together as a team. So I hope that's not too high falutant an answer. Tom, would you add to that?

Yes, I think Ron's very right. We can look at some very integrated solutions that we already have a strong relationship with these network operators. I think we can take that to the next level as we look at offering them some new cost savings and efficiencies in their base station. And continue to grow a strong relationship with the OEMs at the same time.

That concludes today's Q&A portion. I would like to turn the call back over to Mr. Ragland for any additional or closing remarks.

Well, we are, you know historically enthused. We love doing what we are doing and we love the idea of doing a good job for our shareholders. But I happen to, maybe not throw out the right set of adjectives or adverbs, but I'm really tickled with this deal from top to bottom. The synergies, the opportunity to work with Tom, the merging of the technologies, I think probably the only sadness in the whole damn thing is the fondness we have and the respect we have for Errol and the fact that we all get older and some day we will retire and focus on other things. That's the only downer. Errol's gonna stay near us and close to us, so that's the good news. I also want to point out that Spectrian has been served by RBC and Remec has been served by Needham, and so any questions or any appropriate issues you want to address to our investment banking advisors, they would be the targets. And so it's a pleasure to talk to you. We will be, as I said, webcast on the 10th of June, investment conference on the 11th of June in New York, CIBC conference. We also will be doing a webcast followed by a road show to interested investors and customers before the shareholder vote. And we'll announce that in plenty of time. So thanks for joining us. Appreciate your positive and supportive comments. Bye-bye