<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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REMEC, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 3812 95-3814301
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classified Code Number) Identification No.)
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9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123, (619) 560-1301
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
RONALD E. RAGLAND, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123, (619) 560-1301
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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VICTOR A. HEBERT DOUGLAS J. REIN
RICHARD FRIEDMAN PAUL E. HURDLOW
HELLER EHRMAN WHITE & MCAULIFFE GRAY CARY WARE & FREIDENRICH
601 SOUTH FIGUEROA STREET 4365 EXECUTIVE DRIVE, SUITE 1600
LOS ANGELES, CA 90017-5758 SAN DIEGO, CALIFORNIA 92121-2189
(213) 689-0200 (619) 677-1400
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable following the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
AGGREGATE PROPOSED MAXIMUM
TITLE OF EACH AMOUNT OFFERING AGGREGATE AMOUNT
CLASS OF SECURITIES TO BE PRICE PER OFFERING OF
TO BE REGISTERED REGISTERED(2) SHARE(2) PRICE(2) REGISTRATION FEE
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Common Stock, par value $0.01 per
share............................. 2,587,500 $18.50 $47,868,750 $16,507
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(1) Includes 337,500 shares which the Underwriters will be granted the option to
purchase to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933 based upon the
average of the high and low prices of the Common Stock reported on the
Nasdaq National Market on December 17, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
REMEC, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
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ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION
STATEMENT LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page of Registration Statement;
Outside Front Cover Page
2. Inside Front Cover and Outside Back Cover
Pages of Prospectus...................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Principal and Selling Shareholders
8. Plan of Distribution....................... Outside Front and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered............................... Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the
Registrant............................... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Capitalization;
Price Range of Common Stock and Dividend
Policy; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Principal and Selling Shareholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Available
Information; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1996
PROSPECTUS
2,250,000 Shares
[REMEC LOGO]
Common Stock
---------------------
Of the 2,250,000 shares of Common Stock offered hereby, 1,750,000 shares
are being sold by REMEC, Inc. ("REMEC" or the "Company") and 500,000 shares are
being sold by certain shareholders of the Company (the "Selling Shareholders").
The Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. See "Principal and Selling Shareholders." The Common Stock
is traded on the Nasdaq National Market under the symbol "REMC." On December 19,
1996, the last reported sale price for the Company's Common Stock was $21 per
share. See "Price Range of Common Stock."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN INFORMATION WHICH SHOULD
BE CAREFULLY CONSIDERED BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
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Per Share.................... $ $ $ $
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Total(3)..................... $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$400,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to an additional 337,500 shares of Common
Stock solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Shareholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
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The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, subject to the right of the Underwriters to reject any order
in whole or in part. It is expected that certificates for the shares of Common
Stock will be available for delivery at the offices of Needham & Company, Inc.,
445 Park Avenue, New York, New York 10022, on or about January , 1997.
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NEEDHAM & COMPANY, INC.
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC.
The date of this Prospectus is January , 1997
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMPANY'S SECURITIES ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10(b)-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere in this
Prospectus.
THE COMPANY
REMEC is a leader in the design and manufacture of microwave multi-function
modules ("MFMs") for microwave transmission systems used in defense applications
and has recently entered, and now derives significant revenue from, the
commercial wireless telecommunications market. The Company believes that its
expertise in microwave transmission system components such as filters,
amplifiers, mixers, switches and oscillators and its expertise in integrating
these components into MFMs give REMEC a strong competitive position in the
emerging commercial wireless infrastructure equipment market. The Company's
capabilities enable it to develop and manufacture MFMs with reduced size,
weight, parts count and cost, and increased reliability and performance.
The Company's products operate at high RF (800 MHz to 1 GHz), microwave (1
GHz to 20 GHz) and millimeter wave (20 GHz to 50 GHz) frequencies (collectively
referred to in this Prospectus as "microwave"). Modern wireless
telecommunications systems employ microwave transmission technology pioneered in
the defense industry. Microwave frequency bands have been used for emerging
wireless telecommunications applications because they are less congested and
have more available bandwidth, affording greater voice, data and video
transmission capacity than lower frequency bands. Fueled by technological
advances and regulatory changes, demand for wireless telecommunications products
has increased in recent years for applications such as mobile telephony
(cellular and PCS), rural telephony (VSAT), paging, wireless cable, interactive
television and wireless local loop. These emerging wireless applications require
a large infrastructure of microwave transmission equipment such as base stations
and point-to-point radios. The Company believes that the evolution of cellular
and PCS infrastructure, as well as other wireless telecommunications systems,
will require increased integration in order to reduce size, weight and cost and
to increase reliability and producability of base station equipment.
An MFM typically consists of one or a number of microwave circuit boards
and/or ceramic substrates mounted into a single package on which electronic
components are interconnected to perform signal processing functions such as
switching, amplification, conversion from one frequency to another and
filtering. Integrating multiple functions into one assembly results in reduced
packaging and interconnects, permits improved performance through optimal
partitioning and implementation of functions, reduces product size and parts
count and increases reliability at lower costs.
REMEC's strategy is to maintain and enhance its core MFM technology
leadership through selective participation in defense industry programs and to
leverage this technology leadership by designing and manufacturing MFMs for
original equipment manufacturers ("OEMs") supplying wireless telecommunications
infrastructure equipment. REMEC's customers for commercial wireless MFMs and
components include Alcatel Network Systems, AT&T Corp., Glenayre Technologies,
Inc., Farinon Division of Harris Corporation, Lucent Technologies Inc.,
Motorola, Inc., Orbital Sciences Corporation, Pacific Communications Sciences,
Inc., P-COM, Inc. and STM Wireless, Inc. REMEC's customers for defense microwave
MFMs and components include The Boeing Company, Hughes Aircraft Co., Lockheed
Martin Corporation, Motorola, Inc., Northrop Grumman Corporation and TRW Inc. As
of November 3, 1996, REMEC's total backlog of $131.9 million was comprised of
$69.0 million (52%) commercial wireless backlog and $62.9 million (48%) defense
backlog.
The Company pursues acquisitions to augment MFM technology by acquiring
specialized component firms and to take advantage of opportunities to
consolidate smaller, niche companies in a currently fragmented microwave
equipment industry. In 1996, REMEC acquired Magnum Microwave Corporation, a
leading supplier of oscillators and mixers, and RF Microsystems, a satellite
communications engineering company.
3
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THE OFFERING
Common Stock Offered by the Company......... 1,750,000 Shares
Common Stock Offered by the Selling
Shareholders................................ 500,000 Shares
Common Stock to be Outstanding After the
Offering.................................... 10,764,342 Shares(1)
Use of Proceeds............................. General corporate purposes,
including working capital. See
"Use of Proceeds."
Nasdaq National Market Symbol............... REMC
SUMMARY FINANCIAL INFORMATION (2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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NINE MONTHS ENDED
YEARS ENDED JANUARY 31, ------------------------
------------------------------------------- OCTOBER 22, NOVEMBER 3,
1992 1993 1994 1995 1996 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................... $42,567 $42,347 $46,577 $57,553 $62,145 $45,565 $62,461
Gross profit........................ 13,145 12,598 13,381 14,846 15,547 11,309 15,656
Income from operations.............. 5,082 5,122 5,343 4,574 3,690 2,729 5,134
Net income.......................... $ 3,532 $ 3,694 $ 3,545 $ 2,532 $ 2,156 $ 1,546 $ 3,215
Net income per share(3)............. $ 0.41 $ 0.44 $ 0.52 $ 0.38 $ 0.32 $ 0.23 $ 0.36
Shares used in per share
calculations...................... 8,659 8,429 6,852 6,667 6,639 6,664 8,983
</TABLE>
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JANUARY 31, 1996 NOVEMBER 3, 1996
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ACTUAL ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,326 $ 6,513 $ 40,842
Working capital.......................................... 11,912 25,964 60,293
Total assets............................................. 33,739 54,016 88,345
Long-term debt........................................... 1,900 -- --
Total shareholders' equity............................... 20,094 41,519 75,848
</TABLE>
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JANUARY 31, 1996 NOVEMBER 3, 1996
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BACKLOG(5)
Commercial...................................................... $ 45,134 $ 68,957
Defense......................................................... 42,382 62,928
---------------- ---------- ------
Total................................................. $ 87,516 $131,885
================ ================
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(1) Based on shares outstanding as of November 3, 1996. Does not include 481,864
shares of Common Stock issuable upon the exercise of outstanding options.
See Note 5 to Consolidated Financial Statements.
(2) Includes results of operations, balance sheet data and backlog of Magnum
Microwave Corporation acquired on August 26, 1996, which was accounted for
as a pooling of interests. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Computed on the basis described in Note 1 to Consolidated Financial
Statements.
(4) As adjusted to reflect the sale by the Company of 1,750,000 shares of Common
Stock offered by the Company hereby at an assumed price of $21 per share.
See "Capitalization."
(5) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Risk Factors -- Backlog" and
"Business -- Backlog."
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.
The Company was incorporated in California in January 1983. The Company's
executive offices are located at 9404 Chesapeake Drive, San Diego, California
92123. Its phone number at that address is (619) 560-1301.
4
<PAGE> 7
RISK FACTORS
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements. The Company's future operations,
financial performance, business and share price may be affected by a number of
factors, including the factors listed below, any of which could cause actual
results to vary materially from anticipated results. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company 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.
DEPENDENCE ON COMMERCIAL WIRELESS TELECOMMUNICATIONS MARKET
Until recently, the Company's business has been almost exclusively focused
on the defense market. The Company believes that its future growth depends on
continued success in the commercial wireless telecommunications market. The
Company believes that, while the technologies used in the defense and commercial
industries are very similar, the two industries differ significantly in terms of
the customer base, manufacturing requirements and lead times, the need to expend
substantial resources for research and development without the assurance of
reimbursement or recovery of those costs, and credit risks with customers. As a
result, the Company is subject to risks inherent in the operation of a new
business enterprise, including risks associated with attracting and servicing a
new customer base, manufacturing products in a cost effective and profitable
manner, managing the expansion of a business operation and attracting and
retaining qualified engineering, manufacturing and marketing personnel with
industry experience. For example, the Company believes that microwave engineers
with the skills necessary to develop products for the wireless
telecommunications market currently are in high demand and that the Company may
not be able to attract and retain sufficient engineering expertise.
A number of the commercial markets for the Company's products in the
wireless telecommunications area have only recently begun to develop. Because
these markets are relatively new, it is difficult to predict the rate at which
these markets will grow, if at all. Existing or potential wireless
telecommunications market applications for the Company's products may fail to
develop or may erode for many different reasons, including insufficient growth
to support expensive infrastructure equipment, insufficient consumer demand for
wireless products or services because of pricing or otherwise, or real or
perceived security risks associated with wireless communications. If the markets
for the Company's products in commercial wireless telecommunications fail to
grow, or grow more slowly than anticipated, the Company's business, operating
results and financial condition could be materially adversely affected. See
"Business -- Customers."
DEPENDENCE ON DEFENSE MARKET
A substantial portion of the Company's sales has been to the defense
market. As a result, the Company's sales could be materially adversely impacted
by a decrease in defense spending by the United States government because of
defense spending cuts, general budgetary constraints or otherwise. The United
States defense budget has recently been reduced and may be further reduced.
Fewer available defense industry production programs, coupled with continued
pricing pressure on follow-on orders for programs on which the Company
participates, caused sales of the Company's core defense products -- MFMs and
components for microwave systems -- to decline from $35.3 million in the year
ended January 31, 1994 to $26.9 million for the year ended January 31, 1996. The
Company expects to continue to derive a substantial portion of its revenues from
these business segments and to develop microwave products for defense
applications. Failure of the Company to replace sales attributable to a
significant defense program or contract at the end of that program or contract,
whether due to cancellation, spending cuts, budgetary constraints or otherwise,
could have a material adverse effect upon the Company's business, operating
results and financial condition in subsequent periods. In addition, a large
portion of the Company's expenses are fixed and difficult to reduce, thus
magnifying the material adverse effect of any revenue shortfall. Also, defense
contracts frequently contain provisions that are not standard in private
commercial transactions, such as provisions permitting the cancellation of a
contract if funding for a program is reduced or canceled. For example, the
government terminated a large defense program in December 1992 for which the
Company had been supplying in excess
5
<PAGE> 8
of $4.0 million of products on an annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CUSTOMER CONCENTRATION AND EXCLUSIVITY
As of November 3, 1996, two customers, P-COM, Inc. ("P-COM") and STM
Wireless, Inc. ("STM"), accounted for a substantial portion of both total
backlog (44%) and backlog scheduled for shipment in the fiscal year ending
January 31, 1998 (33%). P-COM, which produces point-to-point millimeter wave
radio systems for use in wireless telecommunications applications, was founded
in August 1991 and began commercial shipment of its products in October 1993.
P-COM experiences intense competition worldwide from a number of leading
telecommunications companies, most of which have substantially greater installed
bases, financial resources and other capabilities than P-COM, and is subject to
the risks inherent in the operation of a new business enterprise. The sales
agreement between the Company and P-COM provides that all of the units will be
delivered by December 1998. REMEC has agreed to sell the products which are the
subject of the agreement with P-COM exclusively to P-COM and not to compete with
P-COM in the sale of point-to-point radios under conditions applicable to both
parties. In 1996, REMEC received orders from STM for $30.4 million for the
design and manufacture of C-Band VSAT equipment. STM experiences intense
competition worldwide from a number of leading telecommunications companies,
most of which have substantially greater installed bases, financial resources
and other capabilities than STM. Aside from P-COM and STM, the Company derives
significant revenues from a limited group of customers, including Department of
Defense, Hughes Aircraft Co. ("Hughes Aircraft"), Texas Instruments Inc.,
Lockheed Martin Corporation ("Lockheed Martin"), Northrop Grumman Corporation.
("Northrop Grumman"), GEC Marconi Aerospace, Inc. ("GEC Marconi"), TRW Inc.
("TRW"), Motorola, Inc. ("Motorola"), Alcatel Network Systems ("Alcatel") and
Farinon Division of Harris Corporation ("Harris-Farinon"). The Company
anticipates that it will continue to sell products to a relatively small group
of customers. As a result, any cancellation, reduction or delay in orders by or
shipments to P-COM, STM or any other significant customer, as a result of
manufacturing or supply difficulties or otherwise, or the inability of any
customer to finance its purchases of the Company's products would materially
adversely affect the Company's business, financial condition and results of
operations. The Company has granted P-COM and STM exclusivity for certain
products and expects that in order to enter into other significant relationships
in the wireless telecommunications industry, customers will either expressly or
implicitly require exclusivity. In entering into such exclusive arrangements,
the Company will have to forego opportunities to supply products to competing
companies. If the Company enters into exclusive relationships with customers who
prove to be unsuccessful, the Company may be materially adversely affected and
the Company may be unable then to establish relationships with the industry
leaders. There can be no assurance that the Company will be able to locate, or
negotiate acceptable arrangements with, significant customers or that its
current or future arrangements with significant customers will continue or will
be successful. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Customers."
MERGER WITH MAGNUM; POTENTIAL FUTURE ACQUISITIONS
In August 1996, the Company completed its merger (the "Merger") with
Magnum. The anticipated benefits of the Merger will not be achieved unless the
Company and Magnum are successfully combined in an efficient and effective
manner. The transition to a combined Company in which Magnum is a wholly owned
subsidiary of the Company will require substantial attention from management,
which has limited experience in integrating companies the size of REMEC and
Magnum. The diversion of management attention and any difficulties encountered
in the transition process could have an adverse impact on the business and
results of operations of the Company. There can be no assurance that the two
companies will be successfully integrated or that the consolidated operations of
REMEC and Magnum will be profitable. The Company will face similar risks in the
integration of any future acquisitions.
6
<PAGE> 9
MANAGEMENT OF GROWTH
The growth in size and complexity of the Company's business and expansion
of its product lines and customer base have placed, and are expected to continue
to place, significant demands on the Company's management and operations. The
Company's ability to compete effectively and to manage future growth will depend
on its ability to continue to implement and improve operational and financial
systems on a timely basis. There can be no assurance that the Company will be
able to manage its future growth, and the failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly results have in the past been, and will continue to
be, subject to significant variations due to a number of factors, any one of
which could substantially affect the Company's results of operations for any
particular fiscal quarter. In particular, quarterly results of operations can
vary due to the timing, cancellation or rescheduling of customer orders and
shipments, the pricing and mix of products sold, new product introductions by
the Company, the Company's ability to obtain components and subassemblies from
contract manufacturers and suppliers, and variations in manufacturing
efficiencies. In addition, with the decline in available defense industry
production programs, the Company has placed more reliance on development
contracts as a source of defense revenues, resulting in an increased
susceptibility to fluctuations due to an increase in revenues from fixed price
development contracts as a percentage of total revenues. Development contracts
carry reduced gross margins and are typically for minimal hardware deliveries
and sporadic non-hardware revenue items which results in fluctuating sales and
gross margins. Accordingly, the Company's performance in any one fiscal quarter
is not necessarily indicative of financial trends or future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BACKLOG
The Company's order backlog is subject to fluctuations and is not
necessarily indicative of future sales. There can be no assurance that current
order backlog will necessarily lead to sales in any future period. The Company's
order backlog as of November 3, 1996 was approximately $131.9 million,
approximately 52% of which was attributable to commercial customers and
approximately 48% of which was attributable to defense customers. A substantial
amount of the Company's order backlog can be canceled at any time without
penalty, except, in some cases, the recovery of the Company's actual committed
costs and profit on work performed up to the date of cancellation. Cancellations
of pending purchase orders or termination or reductions of purchase orders in
progress from customers of the Company could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Backlog."
RISKS OF COST OVERRUNS AND PRODUCT NON-PERFORMANCE; LOSS OF INVESTMENT IN DESIGN
AND ENGINEERING
The Company's customers establish demanding specifications for product
performance, reliability and cost. The Company's contract with P-COM to produce
microwave front ends for point-to-point radios and its contract with STM to
produce C-Band VSAT equipment, and a significant portion of the Company's
defense contracts are firm fixed-price ("FFP") contracts that provide for a
predetermined fixed price for stipulated products, regardless of the costs
incurred. The Company has made pricing commitments to P-COM and STM and to other
customers in anticipation of achieving more cost effective product designs and
introducing more widespread manufacturing automation. A substantial portion of
the P-COM backlog involves the re-design by the Company of a substantial portion
of the point-to-point radio front end. The Company faces the risk of
experiencing cost overruns or order cancellation if it fails to achieve
forecasted product design and manufacturing efficiencies or if products cost
more to produce because of increased cost of materials, components or labor or
otherwise. Manufacture of the Company's products is an extremely complex
process. The Company has in the past experienced cost overruns on FFP contracts.
There can be no assurance that cost overruns or problems with performance or
reliability of Company products will not occur in the future. Any such cost
overruns or performance problems may have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company often makes significant investments in
7
<PAGE> 10
design and engineering of new products for customers without any commitment by
the customer for the future purchase of such products. Failure to receive
initial or follow-on orders may have a material adverse effect on results of
operations. See "Business -- Manufacturing."
NECESSITY OF IMPLEMENTING HIGH VOLUME MANUFACTURING
Historically, the volume of the Company's production requirements in the
defense market was not sufficient to justify the widespread implementation of
automated manufacturing processes. Fulfillment of substantial orders in the
wireless telecommunications industry will require a significant increase in the
Company's manufacturing capacity. For example, the Company is introducing more
automated manufacturing processes in order to fulfill its obligations to P-COM,
some of which are specialized processes that must be developed. There can be no
assurance that the Company will be able to implement the desired automated
manufacturing processes on a timely basis or at all or that, if implemented,
such manufacturing processes will be sufficient to fulfill the Company's current
and future production commitments in a cost effective manner or that the Company
will obtain a sufficient amount of high volume orders to absorb the capital
costs incurred. See "Business -- Manufacturing."
COMPETITION
The markets for the Company's products are extremely competitive and are
characterized by technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition is
intense and significant price erosion generally occurs over the life of a
product. The Company faces some competition from component manufacturers which
have integration capabilities, but believes that its primary competition is from
the captive manufacturing operations of large wireless telecommunications OEMs
(including all of the major telecommunications equipment providers) and defense
prime contractors which are responsible for a substantial majority of the
present worldwide production of MFMs. The Company's future success is dependent
upon the extent to which these OEMs and defense prime contractors elect to
purchase from sources rather than manufacture their own microwave MFMs and
components. The Company's customers and large manufacturers of microwave
transmission equipment could also elect to enter into the non-captive market for
microwave products and compete directly with the Company. Many of the Company's
current and potential competitors have substantially greater technical,
financial, marketing, distribution and other resources than the Company and have
greater name recognition and market acceptance of their products and
technologies. No assurance can be given that the Company's competitors will not
develop new technologies or enhancements to existing products or introduce new
products that will offer superior price or performance features or that new
products or technologies will not render obsolete the products of the Company's
customers. For example, Magnum experienced a $2.3 million permanent reduction in
cavity oscillator shipments in its 1996 fiscal year to Harris-Farinon due to
obsolescence. In addition, innovations such as a wireless telephone system
utilizing satellites instead of terrestrial base stations or a device that
integrates microwave functionality could significantly reduce the potential
market for the Company's products. The Company believes that to remain
competitive in the future it will need to invest significant financial resources
in research and development. See "Business -- Competition" and -- "Research and
Development."
DECLINING AVERAGE SELLING PRICES
Many of the Company's customers are under continuous pressure to reduce
prices and, therefore, the Company expects to continue to experience downward
pricing pressure on its products. The Company's customers frequently negotiate
supply arrangements well in advance of delivery dates, requiring the Company to
commit to price reductions before it is determined that assumed cost reductions
can be achieved. To offset declining average sales prices, the Company believes
that it must achieve manufacturing cost reductions and obtain orders for higher
volume products. If the Company is unable to offset declining average selling
prices, the Company's gross margins will decline, and such decline will have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8
<PAGE> 11
ENVIRONMENTAL REGULATIONS AND RISKS
The Company is subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
News reports have asserted that power levels associated with hand held
cellular telephones and infrastructure equipment may pose certain health risks.
If it were determined or perceived that electromagnetic waves carried through
wireless telecommunications equipment create a significant health risk, the
market for these products could be materially adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, if wireless telecommunications systems or
other systems or devices that rely on or incorporate the Company's products are
determined or alleged to create a significant health risk, the Company could be
named as a defendant, and held liable, in product liability lawsuits commenced
by individuals alleging that the Company's products harmed them, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless telecommunications
systems that are subject to regulation domestically by the Federal
Communications Commission ("FCC") and internationally by other government
agencies. Although the equipment operators and not the Company are responsible
for compliance with such regulations, regulatory changes, including changes in
the allocation of available frequency spectra, could materially adversely affect
the Company's operations by restricting development efforts by the Company's
customers, obsoleting current products or increasing the opportunity for
additional competition. Changes in, or the failure by the Company to manufacture
products in compliance with, applicable domestic and international regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the increasing demand for
wireless telecommunications has exerted pressure on regulatory bodies worldwide
to adopt new standards for such products, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this governmental approval process have in the past caused and may
in the future cause the cancellation, postponement or rescheduling of the
installation of communications systems by the Company's customers, which in turn
may have a material adverse effect on the sale of products by the Company to
such customers. See "Business -- Government Regulations."
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on the Company's business, financial condition or
results of operations.
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
The Company relies on contract manufacturers and suppliers, in some cases
sole suppliers or limited groups of suppliers, to provide it with services and
materials necessary for the manufacture of products. Certain ceramic low drift
substrates (supplied by NTK of Japan and Alpha Industries, Inc.), certain
semiconductors (supplied by Alpha Industries, Inc., NEC Corp., M/A-Com, Inc.,
MWT and others) and certain components used in VCO products (supplied by Alpha
Industries, Inc., Lockheed Martin and Micrometrics, Ltd.) used by the Company
are sole source items and would require significant effort, time or design
changes to develop alternate sources. The Company is also dependent on P-COM to
supply it with
9
<PAGE> 12
certain modules necessary for the production of microwave front ends for
point-to-point radios for P-COM. The Company's reliance on contract
manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced control
over production costs, delivery schedules, reliability and quality of components
or assemblies. Any inability to obtain timely deliveries of acceptable quality,
or any other circumstance that would require the Company to seek alternative
contract manufacturers or suppliers, could delay the Company's ability to
deliver products to customers, which in turn would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, in the event that costs for the Company's contract manufacturers or
suppliers increase, the Company may suffer losses due to an inability to recover
such cost increases under fixed price production commitments to its customers.
See "Business -- Sales and Marketing."
LIMITATION ON PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY CLAIMS
The Company does not presently hold any significant patents applicable to
its products. In order to protect its intellectual property rights, the Company
relies on a combination of trade secret, copyright and trademark laws and
employee and third-party nondisclosure agreements, as well as limiting access to
and distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of the Company's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that, in the future, third parties will not assert
infringement claims against the Company or with respect to its products for
which the Company has indemnified certain of its customers. Asserting the
Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, financial condition and results of operations.
In the event a third party were successful in a claim that one of the Company's
products infringed its proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Intellectual Property."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified engineering, management, manufacturing,
quality assurance, marketing and support personnel. The Company does not
maintain key man life insurance on its key executive officers and, except for
Joseph Lee (Executive Vice President), such personnel do not have employment or
non-competition agreements with the Company. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. For example, the Company believes that
microwave engineers with the skills necessary to develop products for the
wireless telecommunications market currently are in high demand and that the
Company may not be able to attract and retain sufficient engineering expertise.
See "Business -- Employees" and "Management."
CONTROL BY MANAGEMENT
The Company's executive officers beneficially own a substantial portion of
the outstanding shares of the Common Stock of the Company and comprise five of
the ten members of the Board of Directors. As a result, such persons have the
ability to exercise influence over significant matters regarding the Company.
Such a high level of influence may have a significant effect in delaying,
deferring or preventing a change in control of the Company. See "Management" and
"Principal and Selling Shareholders."
VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock, like the stock prices of
many technology companies, is subject to wide fluctuations in response to such
factors as actual or anticipated operating results, announcements of
technological innovations, new products or new contracts by the Company, its
competitors or their customers, government regulatory action, developments with
respect to wireless telecommunications, general
10
<PAGE> 13
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the stocks of technology companies
and that have often been unrelated to the operating performance of particular
companies. The market price of REMEC Common Stock has been volatile and may
continue to be highly volatile. See "Price Range of Common Stock."
DILUTION
The public offering price is expected to be substantially higher than the
net tangible book value per share of Common Stock. Investors purchasing shares
of Common Stock in this offering will therefore incur immediate and substantial
net tangible book value dilution. To the extent that stock options (currently
outstanding or subsequently granted) to purchase Common Stock are exercised,
there will be further dilution.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares in the public market or the prospect
of such sales could adversely affect the market price of the Common Stock. Upon
completion of the offering, the Company will have outstanding 10,764,342 shares
of Common Stock. Immediately upon the effectiveness of this offering, the
2,250,000 shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable. Of the remaining
8,514,342 shares, 2,174,969 are subject to lock-up agreements pursuant to which
the holders of such shares have agreed not to sell or otherwise dispose of such
shares for a period of 180 days after the date of the offering without the prior
written consent of Needham & Company, Inc. The shares not subject to lock-up
agreements may be freely sold after the offering. The Company has filed
registration statements under the Securities Act of 1933, as amended (the
"Securities Act") covering the sale of 1,206,551 shares of Common Stock reserved
for issuance under the Company's Equity Incentive Plan, 1996 Nonemployee
Directors Stock Option Plan, Employee Stock Purchase Plan and the Magnum
Microwave Corporation 1990 Employee Stock Option Plan. See "Shares Eligible for
Future Sale" and "Underwriting."
11
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock being offered by the Company at an assumed public offering price of
$21 per share are approximately $34,328,750, ($36,065,187 if the Underwriters'
over-allotment option is exercised in full) after deducting the underwriting
discount and estimated offering expenses payable by the Company.
The Company plans to use the proceeds of the offering for general corporate
purposes, including routine capital expenditures and working capital. The
Company currently has no specific plans for any significant portion of the
proceeds. The Company may use a portion of the proceeds to acquire technologies,
products or businesses that complement the Company's current business, as such
opportunities may arise. Although the Company does consider such acquisitions
from time to time, as a part of its normal business operations and planning, it
has no present commitments or agreements with respect to any such acquisitions.
Pending their use, the proceeds will be invested in short-term, United
States Government or investment grade interest-bearing securities. The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
PRICE RANGE OF COMMON STOCK
Prior to the quotation of the Common Stock on the Nasdaq National Market
beginning on February 1, 1996, there was no established trading market for the
Common Stock. Since February 1, 1996, the Common Stock has been quoted on the
Nasdaq National Market under the symbol "REMC." The following table sets forth
the range of high and low closing sale prices of the Common Stock as reported on
the Nasdaq National Market for the quarterly periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31, 1997 HIGH LOW
- ----------------------------------------------------------------------------- ---- ---
<S> <C> <C>
First Quarter (from February 1, 1996)........................................ $17 3/8 $ 8 1/8
Second Quarter............................................................... 22 3/8 11 3/8
Third Quarter................................................................ 15 3/4 11 1/4
Fourth Quarter (through December 19, 1996)................................... 21 14
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on December 19, 1996 was $21. As of November 3, 1996, there were
approximately 560 holders of record of Common Stock.
DIVIDEND POLICY
The Company currently intends to retain all future earnings, if any, for
use in the operation and development of its business and, therefore, does not
expect to declare or pay any cash dividends on its Common Stock in the
foreseeable future. The Company's line of credit agreement restricts the amount
of cash dividends that the Company may pay. See Note 5 to Consolidated Financial
Statements.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 3, 1996 and as adjusted to reflect the sale of 1,750,000 shares of
Common Stock offered by the Company in this offering at an assumed public
offering price of $21 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
NOVEMBER 3, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt...................................................... $ -- $ --
Shareholders' equity (1):
Common Stock, $.01 par value; 40,000,000 shares authorized;
9,014,342 shares issued and outstanding, actual; 10,764,342
shares issued and outstanding, as adjusted..................... 90,143 107,643
Additional paid-in capital........................................ 30,192,869 64,504,119
Retained earnings................................................. 11,236,467 11,236,467
---------- ----------
Total shareholders' equity........................................ 41,519,479 75,848,229
---------- ----------
Total capitalization...................................... $41,519,479 $75,848,229
========== ==========
</TABLE>
- ---------------
(1) Excludes 87,500 shares of Common Stock issuable by the Company upon the full
exercise of the Underwriters' over-allotment option. Excludes 481,864
shares of Common Stock issuable upon exercise of options outstanding as of
November 3, 1996, which have a weighted average exercise price of $13.58
per share. Also excludes 724,687 additional shares reserved for issuance
under the Equity Incentive Plan, 1996 Nonemployee Directors Stock Option
Plan, Employee Stock Purchase Plan and the Magnum Microwave Corporation
1990 Employee Stock Option Plan. See "Management -- Benefit Plans" and Note
5 to Consolidated Financial Statements.
(2) Common Stock and Additional paid-in capital are $108,518 and $66,239,681,
respectively, if the Underwriters' over-allotment option is exercised in
full.
13
<PAGE> 16
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's statements of income for each of the years in the three year
period ended January 31, 1996 and with respect to the balance sheets at January
31, 1995 and 1996, are derived from the consolidated financial statements that
have been audited by Ernst & Young LLP, independent auditors, which are included
elsewhere in this Prospectus and are qualified by reference to such financial
statements. The statement of operations data for the years ended January 31,
1992 and 1993 and the balance sheet data at January 31, 1992, 1993 and 1994, are
derived from audited financial statements not included in this Prospectus. The
statement of operations data for the nine months ended October 22, 1995 and
November 3, 1996, and the balance sheet data at November 3, 1996 are derived
from unaudited financial statements which are included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the nine months ended
November 3, 1996, are not necessarily indicative of the results that may be
expected for the year ending January 31, 1997. The following selected financial
data should be read in conjunction with the Consolidated Financial Statements
for REMEC and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, -------------------------
----------------------------------------------- OCTOBER 22, NOVEMBER 3,
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales........................................... $42,567 $42,347 $46,577 $57,553 $62,145 $45,565 $62,461
Cost of sales....................................... 29,422 29,749 33,196 42,707 46,598 34,256 46,805
------- ------- ------- ------- ------- ------- -------
Gross profit...................................... 13,145 12,598 13,381 14,846 15,547 11,309 15,656
Operating expenses:
Selling, general and administrative............... 6,847 6,484 7,256 9,244 9,583 7,135 8,234
Research and development.......................... 1,216 992 782 1,028 2,274 1,445 2,288
------- ------- ------- ------- ------- ------- -------
8,063 7,476 8,038 10,272 11,857 8,580 10,522
------- ------- ------- ------- ------- ------- -------
Income from operations............................ 5,082 5,122 5,343 4,574 3,690 2,729 5,134
Interest expense and other.......................... 441 (43) (38) 299 35 47 (248)
------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes............ 4,641 5,165 5,381 4,275 3,655 2,682 5,382
Provision for income taxes.......................... 1,759 1,638 1,836 1,743 1,499 1,136 2,167
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item.................... 2,882 3,527 3,545 2,532 2,156 1,546 3,215
Extraordinary item.................................. 650 167 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income.......................................... $ 3,532 $ 3,694 $ 3,545 $ 2,532 $ 2,156 $ 1,546 $ 3,215
======= ======= ======= ======= ======= ======= =======
Net income per share(2)............................. $ 0.41 $ 0.44 $ 0.52 $ 0.38 $ 0.32 $ 0.23 $ 0.36
======= ======= ======= ======= ======= ======= =======
Shares used in per share calculations............... 8,659 8,429 6,852 6,667 6,639 6,664 8,983
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NOVEMBER 3, 1996
----------------------------------------------- ----------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(3)
------- ------- ------- ------- ------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents........................ $ 7,697 $ 3,349 $ 3,671 $ 1,755 $ 1,326 $ 6,513 $ 40,842
Working capital.................................. 13,797 10,332 13,367 11,993 11,912 25,964 60,293
Total assets..................................... 26,223 21,378 30,878 29,190 33,739 54,016 88,345
Long-term debt................................... 4,020 1,008 3,895 1,165 1,900 -- --
Total shareholders' equity....................... 15,030 13,593 17,158 18,713 20,094 41,519 75,848
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, NOVEMBER 3,
1996 1996
----------- -----------
<S> <C> <C>
BACKLOG(1)(4):
Defense.............................................................................................. $45,134 $ 68,957
Commercial........................................................................................... 42,382 62,928
------- -------
Total........................................................................................ $87,516 $ 131,885
======= =======
</TABLE>
- ---------------
(1) The Company acquired Magnum in August 1996 in a transaction that was
accounted for as a pooling of interests and, as such, all financial amounts
contained in the table and the accompanying Consolidated Financial
Statements have been restated to include the financial results and data of
Magnum for all periods presented.
(2) Computed on the basis described in Note 1 to Consolidated Financial
Statements.
(3) As adjusted to reflect the sale by the Company of 1,750,000 shares of Common
Stock offered by the Company hereby at an assumed price of $21 per share.
See "Use of Proceeds" and "Capitalization."
(4) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Risk Factors -- Backlog" and
"Business -- Backlog."
14
<PAGE> 17
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 MFMs for the defense industry. The Company's consolidated
results of operations include the operations of REMEC Microwave ("Microwave"),
REMEC Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems,
Inc. ("RFM") and Magnum Microwave Corporation ("Magnum").
All revenue and related costs of sales are recognized when products are
shipped or engineering services are performed. In fiscal 1996 and the nine
months ended November 3, 1996, sales to the Company's top ten customers
accounted for approximately 60% and 68%, respectively, of total net sales; sales
to the Company's top three customers accounted for approximately 30% and 34%,
respectively, of total net sales; and sales to the top customer accounted for
13% and 19%, respectively, of total net sales. The Company recorded revenue of
approximately $21.0 million (34%) of total revenue for the nine months ended
November 3, 1996 to the wireless telecommunications market. As of November 3,
1996, the Company had an order backlog of $131.9 million, with $69.0 million
(52%) representing commercial wireless telecommunications orders. The Company
expects sales to the commercial telecommunications market to represent an
increasing percentage of revenue in the near future because of its backlog and
the Company's strategy to increase its presence in the commercial wireless
telecommunications market. The Company's international sales as a percentage of
net sales for fiscal year 1996 and the nine months ended November 3, 1996 were
16% and 11%, respectively. The international sales percentages do not include
products sold to foreign end users by the Company's domestic OEM customers.
The Company's research and development efforts in the defense industry are
conducted in direct response to the unique requirements of a customer's order
and, accordingly, expenditures related to such efforts are included in cost of
sales and the related funding is included in net sales. As a result, historical
Company funded research and development expenses have been minimal. As the
Company's commercial business has expanded, research and development expenses
have generally increased in amount and as a percentage of sales. The Company
expects this trend to continue, although research and development expenses may
fluctuate on a quarterly basis both in amount and as a percentage of sales.
Effective January 31, 1994, the Company acquired all the outstanding stock
of Humphrey in a transaction that was accounted for as a purchase. Humphrey
designs and manufactures precision instruments for guidance, control and
measurement systems used in defense and commercial applications. Since the
acquisition was effective on January 31, 1994, the consolidated statements of
income and cash flows for the periods prior to the fiscal year ended January 31,
1995, do not include Humphrey's operating results. Subsequent statements of
income, cash flows and balance sheets include Humphrey operating results and
assets and liabilities. Effective April 30, 1996, the Company acquired all of
the outstanding common stock of RFM and various VSAT (very small aperture
terminals) microwave design and manufacturing resources from STM in a
transaction that was accounted for as a purchase. RFM provides the Department of
Defense with research and analysis, systems engineering and test evaluation
services. Since the acquisition was effective on April 30, 1996, only the
consolidated statements of income and cash flows for the nine months ended
November 3, 1996, and the balance sheet as of November 3, 1996, include RFM's
operating results and assets and liabilities, respectively.
On August 26, 1996, the Company acquired all of the outstanding common
stock of Magnum in a transaction that was accounted for as a pooling of
interests. All historical financial statements have been restated to include
Magnum's operations and assets and liabilities. Magnum's results of operations,
which are reflected in the financial statements on a pooling of interests basis,
for the periods indicated are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, -------------------------
---------------------------------------------- OCTOBER 22, NOVEMBER 3,
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $12,331 $11,707 $11,299 $11,306 $9,360 $ 6,948 $ 8,033
Net income.................... $ 1,784 $ 1,912 $ 1,627 $ 1,104 $ 676 $ 492 $ 683
</TABLE>
15
<PAGE> 18
The Company's microwave defense business is conducted at Microwave, Magnum
and RFM, its commercial wireless telecommunications business is conducted
through Wireless and Magnum and its precision instrument business is conducted
at Humphrey.
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.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
JANUARY 31, -------------------------
------------------ OCTOBER 22, NOVEMBER 3,
1994 1995 1996 1995 1996
---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................... 100% 100% 100% 100% 100%
Cost of goods sold...................................... 71 74 75 75 75
--- --- --- --- ---
Gross profit.......................................... 29 26 25 25 25
Operating expenses:
Selling, general & administrative..................... 16 16 15 16 13
Research and development.............................. 2 2 4 3 4
--- --- --- --- ---
Total operating expenses...................... 18 18 19 19 17
--- --- --- --- ---
Income from operations.................................. 11 8 6 6 8
Interest (income) expense............................... (1) 1 -- -- (1)
--- --- --- --- ---
Income before income taxes.............................. 12 7 6 6 9
Provision for income taxes.............................. 4 3 3 3 4
--- --- --- --- ---
Net income.............................................. 8% 4% 3% 3% 5%
=== === === === ===
</TABLE>
NINE MONTHS ENDED NOVEMBER 3, 1996 vs. NINE MONTHS ENDED OCTOBER 22, 1995
Net Sales. Net sales increased 37% from $45.6 million for the nine months
ended October 22, 1995 to $62.5 million for the nine months ended November 3,
1996. The effects of a reduction in defense Microwave sales were offset by
increased Humphrey, commercial Wireless and Magnum sales. In addition, net sales
for the nine months ended November 3, 1996, includes $3.3 million of net sales
of RFM from the effective date of the acquisition, April 30, 1996. Microwave
sales decreased from $21.7 million for the nine months ended October 22, 1995,
to $18.2 million for the nine months ended November 3, 1996. During the same
nine month periods, Humphrey net sales increased from $15.0 million in 1995 to
$16.4 million in 1996, Wireless net sales increased from $2.0 million to $16.5
million and Magnum net sales increased from $6.9 million to $8.0 million.
The decrease in Microwave net sales is attributable to decreased defense
bookings in 1995 due to continued reductions in available defense industry
production programs as well as continued pricing pressure on follow-on orders
for programs in which the Company participates. Results for the nine months
ended October 22, 1995 include $2.4 million of non-recurring Microwave revenue,
$0.9 million of gross profit and $0.3 million of selling, general and
administrative expenses associated with the settlement of a termination claim
for a large defense contract that was terminated in December 1992. The increase
in Humphrey revenue is primarily attributable to increased shipments on
production contracts for existing programs and customers. Sales to commercial
wireless customers were almost entirely attributable to the production of
microwave front-ends and VSAT equipment for P-COM and STM, respectively. Magnum
sales include commercial wireless sales of $4.3 million and $4.5 million for the
1995 and 1996 nine month periods. With the inclusion of Magnum commercial
wireless sales, consolidated commercial wireless sales are $6.3 million and
$21.0 million, or 14% and 34%, of total sales for the nine months ended October
22, 1995 and November 3, 1996, respectively.
Gross Profit. Gross profit increased 38% from $11.3 million for the nine
months ended October 22, 1995 to $15.7 million for the nine months ended
November 3, 1996. Gross margin remained constant at 25% for the nine months
ended October 22, 1995 and November 3, 1996. Gross margins for Microwave were
20% for both
16
<PAGE> 19
periods. Gross margins for Humphrey were 28% for the 1995 nine months versus 29%
for the 1996 nine months. Humphrey gross profit for the nine months ended
October 22, 1995 was adversely affected by a $1.1 million provision for
additional losses on certain long-term contracts in place at the time of the
Company's acquisition of Humphrey. Gross margin for Wireless for the nine months
ended October 22, 1995 was 14% versus 22% for the comparable 1996 period.
Wireless gross margins increased due to the increased sales volume. Magnum gross
margins increased from 38% for the nine months ended October 22, 1995 to 39% for
the comparable 1996 period. The improved gross margin is attributable to the
increased sales volume. With the inclusion of the gross profit on Magnum
commercial wireless sales of $1.6 million and $1.8 million, respectively,
consolidated commercial wireless gross margins are 30% for the nine months ended
October 22, 1995, and 26% for the nine months ended November 3, 1996. Gross
profit for the nine months ended November 3, 1996 includes $493,000 of gross
profit from RFM with a gross margin of 15%.
Selling, General and Administrative Expenses. Selling, general and
administrative ("S,G&A") expenses increased 15% from $7.1 million during the
nine months ended October 22, 1995 to $8.2 million for the nine months ended
November 3, 1996. This increase is primarily attributable to additional S,G&A
costs associated with the Wireless and RFM operations, neither of which were
significant contributors to prior year S,G&A costs. Wireless was operating at
start-up levels during fiscal 1996, while RFM was not included in prior year
results as it was not acquired until the second quarter of fiscal 1997. In
addition, S,G&A for the nine months ended November 3, 1996 increased due to
$424,000 of non-recurring acquisition costs associated with the Magnum merger.
S,G&A declined as a percentage of net sales from 16% for the nine months ended
October 22, 1995 to 13% for the nine months ended November 3, 1996, due to
increased sales volume. The Company expects S,G&A expenses to increase in
absolute dollars in the future as it pursues opportunities in the commercial
wireless telecommunications market.
Research and Development Expenses. Research and development expenses
increased from $1.4 million for the nine months ended October 22, 1995 to $2.3
million for the nine months ended November 3, 1996. This increase resulted
primarily from commercial wireless telecommunications research and development
expenses totaling $1.3 million during the nine months ended November 3, 1996
versus $477,000 for the comparable 1995 period. This increase is a result of the
start-up of the commercial wireless business.
Interest (Income) Expense. Interest expense decreased from $48,000 of
interest expense for the nine months ended October 22, 1995 to $248,000 of
interest income for the nine months ended November 3, 1996. The change is
primarily attributable to the increased level of cash on hand as a result of the
funds generated from the Company's initial public offering which was consummated
in February 1996. The interest expense incurred during the prior year reflects
interest on debt obligations incurred in connection with the Humphrey
acquisition, net of interest income generated at Magnum.
Provision for Income Taxes. The Company's effective income tax rate
declined from 42% for the nine months ended October 22, 1995 to 40% for the nine
months ended November 3, 1996. The decrease reflects the benefit of available
tax credits on certain capital expenditures. The Company expects its fiscal 1997
effective tax rate to be approximately 40%.
FISCAL YEAR ENDED JANUARY 31, 1996 VS. FISCAL YEAR ENDED JANUARY 31, 1995
Net Sales. Net sales increased 8% from $57.6 million in fiscal year ended
January 31, 1995 to $62.1 million in fiscal year ended January 31, 1996. The
effects of a reduction in defense Microwave and Magnum sales were offset by
increased Humphrey and Wireless sales. Microwave sales decreased from $30.2
million for fiscal 1995 to $26.8 million for fiscal 1996. Magnum sales decreased
from $11.3 million in fiscal 1995 to $9.4 million in fiscal 1996. Humphrey net
sales increased from $15.8 million in fiscal 1995 to $20.6 million in fiscal
1996, while Wireless net sales were $5.4 million for fiscal 1996 versus no sales
during fiscal 1995.
The decrease in Microwave sales is attributable to continued reductions in
available defense industry production programs as well as the defense
marketplace factors discussed above. This decrease was offset by $2.4 million of
non-recurring Microwave revenue associated with the settlement of a claim
relating to a large defense contract that was terminated in December 1992. The
increase in Humphrey revenue is primarily attributable to increased shipments on
production contracts for existing programs and customers. Sales to
17
<PAGE> 20
commercial wireless customers were almost entirely attributable to the
production of microwave front-ends for P-COM. The primary reason for the
decrease in Magnum sales was a $2.3 million reduction in cavity oscillator
shipments to Harris-Farinon, Magnum's single largest customer. While the
decrease represents a permanent reduction in this business, Magnum has designed
a series of oscillators to replace the obsolete cavity oscillators and has begun
shipments of these products to Harris-Farinon. To a lesser extent, the decrease
in revenue is attributable to the relocation of Magnum's facility from Fremont
to San Jose which temporarily disrupted production.
Gross Profit. Gross profit increased 5% from $14.8 million for fiscal 1995
to $15.6 million for fiscal 1996. Gross margin declined from 26% in fiscal 1995
to 25% in fiscal 1996. Gross margins for Microwave were 20% for both periods. A
decrease in Microwave gross profit on recurring contracts was offset by the
gross profit on the non-recurring revenue associated with the settlement
described above. Gross margins for Humphrey were 26% for fiscal 1995 and 30% for
fiscal 1996. Gross margin for Wireless for fiscal 1996 was 12%. Wireless gross
margins were affected by start-up costs associated with the P-COM contract.
Magnum gross margins decreased from 40% in fiscal 1995 to 37% in fiscal 1996.
This decrease is due primarily to the reduced revenue levels in the cavity
oscillator product line, the disruption in operations created by the facility
relocation and the continued erosion of the average selling prices in many of
Magnum's products.
Selling, General and Administrative Expenses. S,G&A expenses increased 4%
from $9.2 million during fiscal 1995 to $9.6 million for fiscal 1996. The
increase in S,G&A is primarily attributable to the recognition of expenses
associated with the settlement described above. These expenses as a percentage
of net sales declined from 16% for fiscal 1995 to 15% for fiscal 1996.
Research and Development Expenses. Research and development expenses
increased from $1.0 million for fiscal 1995 to $2.3 million for fiscal 1996.
This increase resulted primarily from initial commercial wireless
telecommunications research and development expenses totaling $937,000 during
fiscal 1996.
Interest (Income) Expense. Interest expense decreased from $298,000 for
fiscal 1995 to $35,000 for fiscal 1996. The decrease is attributable to
continued reductions in average bank borrowings as the Company reduced the debt
attributable to the Humphrey acquisition.
Provision for Income Taxes. The Company's effective income tax rate was
41% in fiscal 1995 and 1996.
FISCAL YEAR ENDED JANUARY 31, 1995 vs. FISCAL YEAR ENDED JANUARY 31, 1994
Net Sales. Net sales increased 24% from $46.6 million in fiscal 1994 to
$57.6 million in fiscal 1995. This increase is primarily attributable to the
inclusion of approximately $16.0 million of Humphrey revenue in fiscal 1995
results. This increase was offset by a reduction of approximately $5 million (or
14%) in Microwave revenue. Microwave revenue decreased due to continued
reductions in available defense industry production programs as well as
continued pricing pressure for follow-on orders on programs on which the Company
participates. Humphrey revenue for its fiscal year prior to being acquired by
REMEC, the year ended December 31, 1993, were $24.1 million. Humphrey revenue
declined $8.1 million from the year ended December 31, 1993 to fiscal 1995
because of a decrease in customer demand for Humphrey products. Magnum revenue
remained constant at $11.3 million for both fiscal 1994 and 1995.
Gross Profit. Gross profit increased 11% from $13.3 million in fiscal 1994
to $14.8 million in fiscal 1995. Gross margin declined from 29% in fiscal 1994
to 26% in fiscal 1995. Microwave gross margins decreased from 24% in fiscal year
1994 to 20% in fiscal 1995. The reduction in Microwave gross margins is
attributable to continued industry pricing pressure, reduced volume and
additional development versus production business. Humphrey gross margins were
26% in fiscal 1995. Magnum gross margins were 43% for fiscal 1994 and 40% for
fiscal 1995. The decrease is attributable primarily to declining average selling
prices brought about by the intense competition in Magnum's markets.
Selling, General and Administrative Expenses. S,G&A expenses increased 27%
from $7.3 million in fiscal 1994 to $9.2 million in fiscal 1995. This increase
is primarily attributable to the inclusion of the operating results of Humphrey
in fiscal 1995. As a percentage of net sales, these expenses remained constant
at 16% for both fiscal 1994 and 1995.
18
<PAGE> 21
Research and Development Expenses. Research and development expenses
increased from $0.8 million in fiscal 1994 to $1.0 million in fiscal 1995. The
increase is primarily attributable to Humphrey.
Interest (Income) Expense. Interest (income) expense changed from $39,000
of income in fiscal 1994 to $298,000 of expense in fiscal 1995. The expense in
fiscal 1995 is primarily attributable to borrowings associated with the Humphrey
acquisition.
Provision for Income Taxes. The effective income tax rate was 34% in
fiscal 1994 and 41% in fiscal 1995. The 34% rate in 1994 is comprised of a 24%
rate at Magnum and a 41% rate on all other operations. Magnum's reduced rate in
1994 is attributable to a favorable change in valuation allowance of deferred
tax assets.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial information
for each of the Company's last seven quarters. The information for each of these
quarters is unaudited but includes all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of this information when read in conjunction with the Consolidated
Financial Statements and notes thereto appearing elsewhere in this Prospectus.
The results of operations for any quarter and any quarter-to-quarter trends are
not necessarily indicative of the results to be expected for any future periods.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------------------ ---------------------------------
APRIL 30, JULY 30, OCTOBER 22, JANUARY 31, MAY 5, AUGUST 4, NOVEMBER 3,
1995 1995 1995 1996 1996 1996 1996
--------- -------- ----------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 15,415 $ 15,021 $15,129 $16,579 $18,934 $21,062 $22,466
Cost of goods sold......... 11,449 11,847 10,959 12,342 14,345 15,731 16,730
------- ------- ------- ------- ------- ------- -------
Gross profit............... 3,966 3,174 4,170 4,237 4,589 5,331 5,736
Operating expenses:
Selling, general &
administrative........ 2,422 2,238 2,475 2,448 2,362 2,866 3,006
Research & development... 366 274 805 829 866 943 479
------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 2,788 2,512 3,280 3,277 3,228 3,809 3,485
------- ------- ------- ------- ------- ------- -------
Income from operations..... 1,178 662 890 960 1,361 1,522 2,251
Interest (income)
expense.................. 15 4 29 (13) (131) (71) (46)
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 1,163 658 861 973 1,492 1,593 2,297
Provision for income
taxes.................... 491 278 366 363 624 621 922
------- ------- ------- ------- ------- ------- -------
Net income....... $ 672 $ 380 $ 495 $ 610 $ 868 $ 972 $ 1,375
======= ======= ======= ======= ======= ======= =======
Net income per share....... $ 0.10 $ 0.06 $ 0.07 $ 0.09 $ 0.10 $ 0.11 $ 0.15
======= ======= ======= ======= ======= ======= =======
Shares used in
computation.............. 6,654 6,654 6,685 6,639 8,883 8,864 9,042
</TABLE>
19
<PAGE> 22
The following table sets forth the above unaudited financial information as a
percentage of total net sales.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------------------ -----------------------------------
APRIL 30, JULY 30, OCTOBER 22, JANUARY 31, MAY 5, AUGUST 4, NOVEMBER 3,
1995 1995 1995 1996 1996 1996 1996
--------- -------- ----------- ----------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold.......... 75 79 72 74 76 74 74
--- --- --- --- --- --- ---
Gross profit................ 25 21 28 26 24 26 26
Operating expenses:
Selling, general &
administrative......... 16 15 17 15 12 14 14
Research & development.... 2 2 5 5 5 4 2
--- --- --- --- --- --- ---
Total operating
expenses........ 18 17 22 20 17 18 16
--- --- --- --- --- --- ---
Income from operations...... 7 4 6 6 7 8 10
Interest (income) expense... -- -- -- -- (1) -- --
--- --- --- --- --- --- ---
Income before income
taxes..................... 7 4 6 6 8 8 10
Provision for income
taxes..................... 3 2 3 2 3 3 4
--- --- --- --- --- --- ---
Net income........ 4% 2% 3% 4% 5% 5% 6%
=== === === === === === ===
</TABLE>
The Company experienced reduced net sales, gross margins and income from
operations for the second quarter of fiscal 1996. This decline was due to
reduced microwave volume primarily attributable to a reduction in production
programs as well as the Company commencing its commercial wireless operations
with only minimal Wireless net sales during the second quarter of fiscal 1996.
Research and development expenses increased from 2% in the second quarter of
fiscal 1996 to 5% in the third quarter of fiscal 1996 as a result of the
start-up of the Wireless operations. The decline in research and development
expenses in the third quarter of fiscal 1997 is due to the Company's completion
of significant development efforts associated with wireless products for P-COM
and STM. The Company believes this reduction to be temporary and therefore these
expenses are expected to increase in the future as new development activities
arise.
The Company's quarterly results have fluctuated in the past and may
continue to fluctuate in the future due to a number of factors, including the
timing, cancellation or delay of customer orders, mix of products sold, the
timing of new product introductions by the Company or its competitors, the long
sales cycles associated with the Company's application-specific products, market
acceptance of the Company's and its customers' products, and other competitive
factors. In addition, with the decline in available defense industry production
programs, the Company has placed more reliance on development contracts as a
source of defense revenues, resulting in quarterly fluctuations due to this
changed product mix. Development contracts carry reduced gross margins and
typically call for minimal hardware deliveries and sporadic non-hardware revenue
items, which results in fluctuating revenues and gross margins. 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 of any net sales shortfall. Any unfavorable changes
in the factors listed above or others could have a material adverse effect on
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to maintain quarterly profitability
in the future.
20
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
At November 3, 1996, the Company had $6.5 million of cash and cash
equivalents and $26.0 million of working capital. The Company also has $15.0
million in available credit facilities consisting of a $9.0 million revolving
working capital line-of-credit and a $6.0 million revolving term loan. The
borrowing rates are prime and prime plus 0.5%, respectively. The revolving
working capital line-of-credit terminates June 1, 1997. The revolving period
under the term loan expires June 1, 1997, at which time any loan amount
outstanding converts to a term loan to be fully amortized and paid in full by
November 1, 2000. As of November 3, 1996, there were no borrowings outstanding
under the Company's credit facilities.
During the nine month period ended November 3, 1996, the Company's
operations used net cash of approximately $3.7 million, primarily as a result of
the increase in accounts receivable and inventories resulting from the Company's
increased level of sales.
Investing activities utilized $7.6 million in cash during the nine month
period ended November 3, 1996, primarily as a result of the acquisition of RFM
in exchange for cash consideration of $4.0 million; and $5.0 million of capital
expenditures, the bulk of which were associated with the expansion of the
Company's commercial wireless telecommunications business. The above
expenditures were financed primarily by funds raised in the Company's initial
public offering ("IPO") completed in February 1996. The Company's future capital
expenditures will continue to be substantially higher than historical levels as
a result of commercial wireless telecommunications expansion requirements.
In February 1996, the Company completed the IPO in which it sold a total of
2.3 million shares of Common Stock at $8.00 per share. The Company's proceeds
from the offering after deducting underwriting commissions and expenses was
$15.6 million. The Company also realized proceeds of approximately $2.7 million
from additional issuances of stock primarily attributable to the Company's
Employee Stock Purchase Plan and a private equity placement by the Company's
Magnum subsidiary completed prior to its merger in August 1996. In addition to
the funds invested in connection with the acquisition of RFM, an additional $2.4
million of the IPO proceeds was utilized to pay down certain bank obligations,
including $526,000 of obligations assumed in the acquisition of RFM.
The Company's future capital requirements will depend upon many factors,
including the nature and timing of orders by OEM customers, the progress of the
Company's research and development efforts, expansion of the Company's marketing
and sales efforts, and the status of competitive products. The Company believes
that available capital resources and the proceeds from the IPO will be adequate
to fund its operations for at least twelve months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date. There can be no assurance that any additional financing will be available
to the Company on acceptable terms, or at all. The inability to obtain such
financing could have a material adverse effect on the Company's business,
financial condition and results of operations.
21
<PAGE> 24
BUSINESS
INTRODUCTION
REMEC is a leader in the design and manufacture of microwave multi-function
modules (MFMs) for microwave transmission systems used in defense applications
and has recently entered, and now derives significant revenue from, the
commercial wireless telecommunications market. The Company believes that its
expertise in microwave transmission system components such as filters,
amplifiers, mixers, switches and oscillators and its expertise in integrating
these components into MFMs give REMEC a strong competitive position in the
emerging commercial wireless infrastructure equipment market. The Company's
capabilities enable it to develop and manufacture MFMs with reduced size,
weight, parts count and cost, and increased reliability and performance.
The Company's products operate at high RF (800 MHz to 1 GHz), microwave (1
GHz to 20 GHz) and millimeter wave (20 GHz to 50 GHz) frequencies (these
frequencies are collectively referred to elsewhere in this Prospectus as
microwave). Modern wireless telecommunications systems employ microwave
transmission technology pioneered in the defense industry. Microwave frequency
bands have been used for emerging wireless telecommunications applications
because they are less congested and have more available bandwidth, affording
greater voice, data and video transmission capacity than lower frequency bands.
Fueled by technological advances and regulatory changes, demand for wireless
telecommunications products has increased in recent years for applications such
as mobile telephony (cellular and personal communications services ("PCS")),
rural telephony (VSAT), paging, wireless cable, interactive television and
wireless local loop. These emerging wireless applications require a large
infrastructure of microwave transmission equipment such as base stations and
point-to-point radios.
The Company also designs and manufactures precision instruments for
guidance, control and measurement systems used by the defense, aerospace,
petroleum and mining industries.
INDUSTRY BACKGROUND
In recent years there has been a significant increase in demand for
wireless telecommunications services from business and consumer users worldwide.
This trend has led to significant growth in the number of subscribers for
existing wireless communications systems and to the emergence of new wireless
applications. An industry study estimated that there were 109 million wireless
subscribers worldwide through June 1996, increasing to more than 140 million
subscribers by year end 1996. In response to the increasing demand, governmental
regulatory agencies are allocating additional frequencies for PCS which can be
used for a broad range of wireless voice, data and facsimile services.
The Company expects demand for PCS and cellular infrastructure equipment to
increase. As of February 1996, service providers had paid in excess of $7.0
billion for licenses auctioned in the United States. The Company believes that
these licensees will rapidly deploy infrastructure equipment in order to begin
offering service from which to recover their investment. In addition, the
licensees are required by FCC regulations to establish a PCS infrastructure to
service approximately 33% of the population in their respective service areas
within five years and 67% within ten years or risk forfeiting their licenses.
This requirement is expected to drive a rapid build-up of base station equipment
in advance of the start of subscriber service. Additional development of
infrastructure is expected in the cellular industry as well. In response to
increased demand, existing cellular service providers in densely populated urban
areas are expanding the capacity of their existing cellular systems by
incorporating microcellular networks that divide current cells into several
smaller radius cells in order to maintain service quality and availability,
requiring deployment of infrastructure equipment.
Microwave frequency bands have been allocated for evolving wireless
telecommunications applications because they are less congested and have more
available bandwidth, affording greater voice, data and video transmission
capacity than lower radio frequency bands. The microwave technology used in
modern wireless telecommunications systems employs technology pioneered in the
defense industry. Governments worldwide
22
<PAGE> 25
have funded the development of microwave transmission technologies for defense
purposes including missile guidance, electronic warfare, communications, radar,
radar jamming, navigation and identification of other aircraft. Higher frequency
transmissions have been desirable for defense applications because they have
traditionally been less congested, afford greater positional accuracy at shorter
range, and allow for the use of smaller equipment, especially important
characteristics in satellites, aircraft and missiles.
A typical cellular or PCS communications system contains a number of cells,
each with a base station, which are networked to form a service provider's
coverage area. Each base station or cell site houses the equipment that
transmits and receives telephone calls to and from the cellular or PCS
subscriber within the cell and to and from the switching office of the local
wireline telephone system. This equipment usually consists of several
multi-channel radios, some of which operate at lower frequencies to communicate
with the subscriber (phone, modem, etc.) and others operating at higher
frequencies to communicate with the local switching office and with adjacent
base stations. In the past, base stations typically were interconnected through
leased telephone lines, but with the advent of less expensive radio systems, it
is often easier and more cost effective to use microwave point-to-point radios
for wireless interconnection links.
The following diagram illustrates the use of point-to-point radios to
interconnect base stations in a PCS or cellular network.
POINT-TO-POINT RADIO NETWORK SUPPORTING PCS/CELLULAR APPLICATIONS
(Paste-Up)
23
<PAGE> 26
Wireless technology has other potentially broad applications beyond
cellular and PCS systems. The recent worldwide trend toward privatization of
public telephone operators and deregulation of local telephone or "local loop"
services has resulted in increased competition in the delivery of telephone
service from alternative access providers. Many of these new access providers,
such as long-distance telephone carriers, public utilities and cable television
companies, must install or upgrade infrastructure to support basic and enhanced
services. In addition, worldwide demand for basic telephone service has grown,
especially in developing countries. As new infrastructure is established to
deliver local telephone service, service providers are increasingly choosing
wireless microwave transmission systems, which involve a number of short-haul
radio connections, instead of a traditional wired approach, to connect
subscribers to the public telephone network because wireless systems generally
offer lower cost and faster installation. Wireless systems can also be used to
bypass local telephone operating companies for private networking applications.
A growing segment of the wireless communications industry involves VSATs
(very small aperture terminals), which are communications systems utilizing
fixed-site satellite terminals. Historically, these systems were primarily
designed for certain specific data applications. However, recent improvements in
VSAT technology for satellite-based wireless voice and data networks have led to
their increasing use in a variety of broader, higher system throughput
commercial applications such as mobile and rural telephony and more complicated
data transmissions. Satellite telephony systems are being utilized by developing
countries that lack a terrestrial-based telecommunication infrastructure, and
which seek to provide telephone service for large areas fairly rapidly and on a
cost-effective basis. Additionally, even where terrestrial systems exist,
satellite systems are used to fill in coverage for remote areas.
THE REMEC OPPORTUNITY
Historically, microwave systems for defense applications were built by
prime contractors who would procure single function components (such as filters,
amplifiers and mixers) from various specialized manufacturers. These single
function components were then connected to create the complete microwave
transmission system. In order to prevent components from interfering with each
other or being damaged, components were individually packaged. In response to
the demands of the Department of Defense to increase performance for microwave
transmission systems (especially systems on aircraft and missiles), prime
contractors integrated more functionality into the systems while reducing size
and weight. To accomplish this, the prime contractors demanded higher levels of
integration from component suppliers.
The Company, which started in 1983 as a producer of single function
components, was well positioned to respond to the prime contractors' demands and
took a leadership role in developing microwave MFMs in which numerous component
functions are integrated into a single module. Integrating multiple functions
into one module reduces packaging and interconnects, permits improved
performance through optimal partitioning and implementation of functions and
minimizes "over engineering." The result has been significant reductions in
size, weight and cost and improvements in producibility and reliability. In the
nine months ended November 3, 1996, sales of MFMs accounted for more than 90% of
the Company's microwave product sales.
The Company believes that the evolution of commercial wireless
telecommunications systems will also require increased integration in order to
reduce size, weight and cost and to increase reliability and producibility of
base station equipment. The Company believes that the high cost of facilities,
power and maintenance will necessitate the development of small, highly reliable
and cost effective microwave "front ends" (the circuitry of the radio that
enables signals to be transmitted and received at microwave frequencies) for
wireless transmission systems, requiring the increased use of MFMs. In addition,
increasing use of MFMs will facilitate higher volume commercial production of
wireless infrastructure equipment.
24
<PAGE> 27
The following diagram illustrates the integration of functional and
physical characteristics of components into an MFM.
[PASTE-UP -- NEW DIAGRAM #24]
The Company believes that the following core competencies will enable it to
address the opportunities presented in the emerging wireless telecommunications
market:
Integration Expertise. Integration is a key part of designing high
performance equipment that operates at higher frequencies (over 1 GHz) or
that must operate over a broad frequency range. By effectively integrating
multiple functions into single modules, REMEC has been able to accomplish
the following:
- reduce packaging and interconnects
- improve performance through optimal partitioning and implementation of
functions
- reduce product size and parts count
- increase reliability
- minimize "over engineering" (e.g., avoid using higher performance,
more costly components than are necessary in order to compensate for
the performance degradation effects resulting from combining different
components into one system)
- reduce unit cost
Concurrent Engineering. The Company has excelled at developing
products optimized in design, process and manufacturing implementation by
employing "concurrent engineering" during the product development cycle.
REMEC's concurrent engineering approach extends to both its customer and
supplier base. REMEC often participates in its customers' product
development cycle during the conceptual design stage and is able to
influence its customers' system architecture/design in order to optimize
for cost and performance at the MFM level. Likewise, REMEC invites
suppliers to participate in the design process to optimize material and
device selection. In the product design process, product teams with design,
process, quality and manufacturing engineering expertise review the product
design to assure its
25
<PAGE> 28
producibility, high quality and affordability. Manufacturing process
development and tooling occurs concurrently with product development. REMEC
believes that its concurrent engineering process reduces cycle times and
costly product redesigns when products move to volume production.
Technology Leadership. Since its inception in 1983, the Company has
developed over 2,500 microwave MFMs and components and has become an
important supplier of MFMs to many of the nation's leading defense
contractors. The Company has received significant recognition, including
"preferred supplier" designations, from customers including Hughes
Aircraft, Lockheed Martin, TRW, Northrop Grumman and Raytheon Company.
These distinctions generally carry with them the opportunity to bid on all
new product procurements by the customer in the Company's area of expertise
and to ship products without the customer performing a quality inspection
prior to shipment. REMEC has developed many proprietary design techniques
and manufacturing processes which have been standardized within the Company
in the form of documented design rules and standards that are used
throughout the engineering staff. This proprietary library is used by the
Company in applying its expertise to commercial wireless telecommunications
infrastructure equipment.
Vertical Integration in Design and Manufacturing. With vertical
integration, the Company focuses on and retains control of each step of the
entire design and manufacturing process while minimizing the use of outside
sources and subcontractors for key services. Vertical integration reduces
time to market and unit costs and improves quality control, reliability and
the Company's ability to implement volume production.
STRATEGY
REMEC intends to become a leading developer and supplier of microwave MFMs
and components to wireless telecommunications infrastructure OEMs and to retain
leadership in developing and supplying microwave MFMs and components to the
defense industry. Execution of the Company's strategy incorporates the following
key elements:
Leverage Expertise in New Markets for Wireless Infrastructure
Equipment. The Company uses the technological expertise it developed in
the defense industry to respond to the increasing demand for wireless
telecommunications infrastructure equipment. To better focus on these
opportunities, the Company formed REMEC Wireless, Inc. in May 1995, which
operates as a separate business entity with dedicated design and
manufacturing resources. REMEC Wireless is producing point-to-point radio
front ends, VSAT terminals, MFMs and components for customers in the PCS,
paging and satellite market segments.
Maintain and Enhance Leadership in Microwave Technology. The Company
intends to maintain and enhance its leadership in microwave technology by
continuing its participation in selected defense programs that involve
highly sophisticated, state-of-the-art microwave technology. The Company
believes that the technological capability to integrate increased microwave
functionality into single modules -- skills acquired by REMEC in the
defense industry -- will be a key factor in achieving substantial
reductions in the size and cost of commercial wireless infrastructure
equipment.
Build Strategic Customer Alliances. The Company intends to continue
its focus on developing significant customer alliances with leading
wireless OEMs and defense prime contractors. The Company concentrates its
efforts on applications which offer the potential for recurring high volume
production. In wireless telecommunications the Company's strategy is to
enter into strategic alliances with selected leaders in each of the
wireless market segments targeted by the Company. REMEC supports its
customers during their conceptual design stage to influence the system
architecture/design to optimize for cost, performance and producibility,
further enhancing the likelihood of follow-on business.
Maintain Cost Competitiveness. The Company intends to implement more
extensive process manufacturing automation and believes that its ability to
develop a high level of automated product alignment and test capability
will offer an important competitive advantage. The Company also believes
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that its capabilities in integrating numerous functions into single modules
will enable it to continue to produce high performance products at
competitive cost.
Pursue Acquisitions. The Company pursues acquisitions to augment
technology by acquiring specialized component firms and to take advantage
of opportunities to consolidate niche companies in a currently fragmented
microwave equipment industry. The Company believes that expansion of
capability through the acquisition of component firms when combined with
the Company's technological and manufacturing skills at the component level
will allow it to achieve improved levels of MFM integration. The Company
believes that it will thereby be better able to respond to customer
requirements for reduced size and weight and lower cost.
TECHNOLOGY
Wireless transmissions require the conversion of information into a higher
frequency signal that can be transmitted and received through the air.
Generally, the frequency spectrum is allocated for different wireless uses by
governmental entities. The following diagram illustrates the frequency ranges at
which various wireless applications operate or are expected to operate.
ALLOCATION OF FREQUENCY RANGE FOR WIRELESS APPLICATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
BAND FREQUENCY RANGE USES
- ----------------------------------------------------------------------------------------
<S> <C> <C>
LOW FREQUENCY (LF) -- <300 MHz Navigation Equipment
VERY HIGH FREQUENCY (VHF) (Aeronautical/Marine)
AM/FM Radio
Amateur/CB Radio
Television
Dispatch Radio
- ----------------------------------------------------------------------------------------
ULTRA HIGH FREQUENCY (UHF) 300 - 800 MHz UHF Television
Specialized Mobile Radio (SMR)
Paging
Wireless Data Collection
- ----------------------------------------------------------------------------------------
HIGH RADIO FREQUENCY (RF) 800 MHz - 1 GHz Analog Cellular
Digital Cellular
Two-way Messaging
Cordless Phone
- ----------------------------------------------------------------------------------------
MICROWAVE 1 - 2 GHz Private Radio Networks
PCS
Mobile Satellite Telephony
Military Communications/
Navigations
- ----------------------------------------------------------------------------------------
MICROWAVE/MILLIMETER WAVE 2 - 50 GHz VSAT
Satellite Voice/Messaging
Point-to-Point Radios
Wireless TV
Radar
Electronic Warfare
- ----------------------------------------------------------------------------------------
</TABLE>
As new applications emerge for wireless technology, higher and higher
frequencies must be used due to congestion at lower frequencies. Additionally,
higher frequency bands allow a greater number of channels to be allocated to the
same percentage of spectrum compared with lower frequencies, affording greater
capacity at similar cost. The microwave transmission systems and associated
equipment required to implement these applications are similar in nature and
require similar design and manufacturing expertise as those developed for
defense applications. Examples of such equipment are millimeter wave
point-to-point radios which have
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<PAGE> 30
been increasingly utilized for short-haul wireless connections such as
interconnecting cellular and PCS base stations or providing private local loop
service. High frequency radios are well suited for these applications because
the signal strength fades out very quickly in the atmosphere, allowing
frequencies to be "re-used" beyond relatively small geographic areas such as
cellular systems. For example, the signal of a 23 GHz point-to-point radio has a
range of approximately 10 miles.
Every microwave transmission system contains a microwave "front end" that
performs the function of transforming modulated voice, data or video from an
intermediate frequency ("IF") signal (generally 10 MHz to 500 MHz) into a
microwave frequency signal for transmission and/or converting an incoming signal
from microwave frequencies back into an IF modulated voice, data or video
signal. A microwave front end will usually consist of several interconnected
MFMs and single function components. A typical microwave radio front end is
shown in the following diagram.
TYPICAL MICROWAVE TRANSMITTER/RECEIVER FRONT END BLOCK DIAGRAM
(PASTE-UP)
1. Amplifiers are used in the transmitter and receiver to increase the power
level of the signal to a usable range. In the transmitter, a power amplifier
is used at the output prior to transmission of the signal to increase the
signal to the necessary power so that it will have enough strength when it
is transmitted through the air to reach the desired location. In the
receiver, a low noise amplifier is used at the input to minimize degradation
of the received signal which is usually low in signal strength due to the
attenuation that occurs in the atmosphere while the signal is traveling to
the receiver.
2. The oscillator is a component that oscillates at a set frequency, thereby
generating a signal. Oscillators, multipliers and mixers work together in
the transmitter to convert voice, data or video signals at low frequencies
(generally, under 20 MHz) into signals at higher frequencies (as high as 50
GHz) for transmission and in the receiver, to convert transmit signals with
higher frequencies back to the original voice, data, or video signal. In
systems that operate at microwave frequencies, a signal may go through the
process of having its frequency increased/decreased two or three times in
order to get the signal to the desired frequency level.
3. The multiplier increases the frequency of the signal produced by the
oscillator by an integer multiple.
4. In the transmitter, the mixer combines the signal generated by the
oscillator and multiplier with the input signal (the signal being
transmitted) to generate an output signal that has a frequency equal to the
sum of the frequencies of the input signal and the signal produced by the
oscillator and multiplier. In the receiver, the mixer combines the signal
generated by the oscillator and multiplier with input signal (the signal
being received) to generate an output signal that has a frequency equal to
the difference of the frequencies of the two combined signals in order to
reduce its frequency to that of the original signal prior to transmission.
5. Filters provide the important function in various stages of a transmission
or receiver system of eliminating signals that are outside of the desired
frequency range, while allowing signals of the desire frequency to pass
through. Generally, after the frequency or strength of a signal has been
increased or decreased, a filter is used to eliminate undesired signals.
6. A variable attenuator adjusts the strength of a signal an optimal range.
Often, a variable attenuator is used to decrease the strength of a signal so
as to avoid overloading the system or to reduce distortion.
7. A switch selects the path of a signal. For example, switches are used to
change between transmit and receive on radar systems. Switches can also be
used to switch between available channels on communication systems.
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PRODUCTS
Microwave MFMs and Components. The Company designs customized microwave
MFMs and components, as well as subsystems incorporating multiple MFMs and
components, to address the specific requirements of its OEM and defense
contractor customers.
An MFM typically consists of one or a number of microwave circuit boards
and/or ceramic substrates mounted into a single package on which semiconductor
devices and other electronic components are interconnected to perform signal
processing functions such as amplification, conversion from one frequency to
another and filtering. The performance of the MFM is affected by the
characteristics of the semiconductor devices and other electronic components,
the interconnectivity patterns of various components, the shape, size and
location of the components with respect to each other, the type of material used
for the circuit board or substrate, and the size, shape and type of enclosure
that is designed to hold the circuit boards and/or substrates. Predicting and
controlling performance in module designs at microwave frequencies requires a
combination of design experience using accurate modeling of component
performance and manufacturing experience employing repeatable and precise
tolerance manufacturing processes. Perfecting module designs also requires
expertise in partitioning circuit blocks. Knowledge of which functions to
integrate or separate and how various blocks will interact in the system results
in better overall performance and smaller size. Knowledge of which materials,
devices and technology best implement each function results in lower cost.
The Communication, Navigation and Identification (CNI) system for the F-22
Stealth Tactical Fighter Aircraft illustrates the benefits derived from the
application of REMEC's MFM technology. A product team comprised of TRW Inc. and
REMEC engineers concurrently developed the requirements documents for 15 unique
MFMs and several components that comprise the microwave front end of the CNI
system. The product team optimized TRW's preliminary design for maximum
electrical performance, minimal package size and weight, minimum number of
unique MFMs and low manufacturing cost. The product team was able to reduce the
number of unique MFMs from 15 to 13, the weight from 24 to 17 pounds and the
volume by 30%, while improving performance and reducing the cost of production.
When the Company was founded in 1983, its first products were filters,
single function components. Since inception, the Company has excelled at
developing a broad range of filter products. The Company believes that its core
filter technology has been a significant enabler in the MFM business. Today, the
Company designs and manufactures a number of components, including filters,
switches, variable attenuators, amplifiers, oscillators, mixers and multipliers.
The Company believes that its component level expertise is a key competitive
advantage in designing MFMs. The Company's components generally are able to
operate at high frequencies and are relatively small in size. Although most of
the Company's revenues currently are from sales of MFMs, the Company does sell a
significant number of single-function filters, switches, multipliers and
amplifiers.
Commercial systems which utilize these products include infrastructure
radio equipment for cellular and PCS systems. Defense applications which utilize
these products include radar, radar jamming, communications and navigation
systems on aircraft, satellites and missile guidance systems. During the nine
months ended November 3, 1996, the sale of microwave MFMs and components
accounted for approximately 69% of the Company's total sales. The Company's
$131.9 million backlog as of November 3, 1996 included $112.6 million of orders
for microwave MFMs and components.
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The following table lists certain of the Company's microwave components and
MFMs:
<TABLE>
<CAPTION>
PRODUCT TYPES FUNCTION PRICE RANGE(1)
- ---------------------------------------------- -------------------------------------------- --------------
<S> <C> <C>
Filters, Duplexers and Multiplexers........... Separate desired frequency bands from $10-500
undesired bands
Frequency Mixers.............................. Provide frequency conversion function $25-2,500
Voltage Controlled Oscillators................ Generate frequency controlled by an input $10-1,000
voltage
Dielectric Resonator Oscillators.............. Generate fixed frequency microwave signal $250-2,000
Cavity Oscillators............................ Generate fixed frequency microwave signal $250-4,000
Switches...................................... Switch signal between different signal paths $100-2,000
Switch Attenuators............................ Select discrete attenuation values $100-3,000
Variable Attenuators.......................... Select continuously variable attenuation $100-3,000
values
Switch Matrices............................... Allow MxN connectivity between M-inputs and $5,000-50,000
N-outputs
Switched Delay Lines.......................... Select discrete phase delays $1,000-3,000
Switched Filters.............................. Select between multiple filters $500-25,000
Multipliers................................... Multiply an input frequency by an integer $100-2,000
Comb Generators............................... Provide several multiplied frequencies in a $500-2,000
single output
Frequency Generators.......................... Generate multiple discrete frequency outputs $1,000-25,000
Frequency Synthesizers........................ Generate a discrete stepped frequency output $300-25,000
Switched Amplifiers........................... Provide multiple amplified signal functions $500-5,000
Frequency Converters.......................... Provide frequency conversion function $300-5,000
VSAT Tranceivers.............................. Transmit, receive and channel select $500-6,000
microwave signals for satellite applications
Point to Point Radio Front Ends............... Transmit, receive and channel select $2,000-5,000
microwave signals for terrestrial
applications
</TABLE>
- ---------------
(1) Price is affected by complexity and tolerance of specifications and
production quantities.
The Company began shipping the front end of a 23 GHz point-to-point radio
for P-COM in November 1995. This subsystem consists of the integration of a
number of MFMs and components which perform multiple frequency conversions
between the baseband IF signal and the 23 GHz transmit/receive signal. The
re-design involves circuit optimization to reduce component count, size and cost
and re-packaging to combine multiple functions into a smaller number of MFMs.
As a result of the acquisition of RFM in April 1996, the Company obtained
the technology and began producing a standard C-Band transceiver. In August
1996, the Company began production of a fully integrated DAMA (demand assigned
multiple access) C-Band Tranceiver. This transceiver provides band width on
demand allowing a large number of data channels to be multiplexed into a single
communications link which provides a cost advantage over current single channel
products.
In the satellite communications market, the Company has developed with
Orbital Sciences Corporation transmit and receive modules used in the satellites
that comprise their LEO (low earth orbit) constellation designed to provide
two-way data and messaging service anywhere on the globe. Two prototype
satellites which include the Company's microwave products have been launched.
The Company also supplies components to Motorola, Inc. on the Iridium satellite
program.
The Company has commenced development of radio transceivers for other
frequency bands, but has no contract for production. REMEC is also developing a
low cost single channel SES (subscriber earth station) VSAT terminal for STM to
provide satellite-based phone services to outlying areas in underdeveloped
countries. In addition, the Company is developing several cellular and PCS radio
modules that integrate filters, amplifiers, switches, isolators and distribution
circuits for higher performance and lower cost.
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<PAGE> 33
Inertial Guidance Products. REMEC also designs and manufactures precision
instruments for guidance, control and measurement systems through a wholly owned
subsidiary, Humphrey, Inc., which was incorporated in 1951 and acquired by the
Company effective January 31, 1994. These instruments are used by the defense,
aerospace, petroleum and mining industries. Humphrey's primary products are
gyroscopes used for military missile and bomb guidance. During the nine months
ended November 3, 1996, Humphrey accounted for approximately 26% of the
Company's sales. The Company's $131.9 million backlog as of November 3, 1996
included $15.8 million of orders by Humphrey's customers.
Most of Humphrey's business is the design, manufacture and sale of guidance
and control components, including gyroscopes, rate sensors, accelerometers,
potentiometers, pendulums, magnetometers, north-seeking devices and related
products for control and instrumentation systems. These products indicate
changes in the direction and speed of moving objects and are sold to a wide
variety of missile and defense aircraft manufacturers for use in primary control
systems for the stabilization and guidance of missiles and in instrumentation
systems. In addition, these products are purchased by manufacturers of
commercial and general aviation aircraft. Humphrey's products are designed for
use in defense, aircraft, aerospace and oceanographic applications. A smaller
portion of Humphrey's business is directional survey equipment consisting of
directional gyroscopes, cameras, optical compasses and related instruments used
for subsurface directional surveying in exploration and production drilling in
the petroleum and mining industries.
Satellite Engineering Services. RF Microsystems, acquired by REMEC in
April 1996, provides engineering and design services for the Department of
Defense in the satellite communications area.
CUSTOMERS
Commercial. The Company has received orders totaling $48.1 million for the
manufacture of point-to-point radio front ends and related MFMs for P-COM. The
Company, through its Magnum subsidiary, produces numerous MFMs and components,
such as mixers and oscillators, which are critical to the transmit and receive
functions of microwave radios for customers such as Harris-Farinon, Alcatel
Network Systems and California Microwave, Inc. The Company also has received
$30.4 million in orders from STM for the design and manufacture of C-Band VSAT
equipment. Of the $69.0 million of commercial backlog as of November 3, 1996,
orders from P-COM and STM were $30.6 million and $27.9 million, respectively.
REMEC also has received orders for microwave MFMs and components from Alcatel
Network Systems, AT&T Corp., Caterpillar Inc., Glenayre Technologies, Inc.,
Lucent Technologies, Inc., Motorola, Inc., Orbital Sciences Corporation and
Pacific Communications Sciences, Inc.
The Company expects that sales of its wireless commercial products will
continue to be concentrated among a limited number of major customers. If the
Company were to lose a major customer or if orders by such customer were to be
canceled or otherwise decrease, the Company's business, financial condition and
results of operations would be materially adversely affected. See "Risk
Factors -- Customer Concentration and Exclusivity."
P-COM. P-COM produces point-to-point millimeter wave radio systems for use
in wireless telecommunications applications. P-COM and the Company entered into
an agreement in August 1995 for the production by the Company of microwave front
ends for 23 GHz point-to-point radios in quantities and at fixed prices set
forth in purchase orders issued by P-COM and accepted by the Company. The
Company has accepted orders to produce in excess of 15,000 units for P-COM. The
orders are being executed in three phases. In the first phase, the Company
produced and shipped in late 1995 a small number of units in accordance with
P-COM's original product design. In the second phase, the Company re-designed
several MFMs to lower cost and increase producability and re-designed
significant portions of the unit which are currently being produced. In the
third phase, the Company completed the re-design of MFMs and is currently
transitioning that design into production. The Company's November 3, 1996
backlog contains $30.6 million of orders from P-COM. The Company produces the
units based on a rolling six-month forecast provided by P-COM. The agreement
provides that all of the units will be delivered by December 1998. The Company
has agreed to sell the products which are the subject of the agreement
exclusively to P-COM and not to compete with P-COM in the sale of point-to-point
radios under conditions applicable to both parties. The Company
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<PAGE> 34
faces the risk of cost overruns if it fails to achieve forecasted product design
goals and manufacturing efficiencies in the production of point-to-point radio
front ends for P-COM. See "Risk Factors -- Customer Concentration and
Exclusivity" and "-- Risks of Cost Overruns and Product Non-Performance; Loss of
Investment in Design and Engineering."
STM. STM sells complete VSAT network systems to foreign governments and
corporate entities to provide both voice and data communications over long
distance through use of satellite communications. In connection with the
acquisition of RFM from STM, REMEC received orders from STM for approximately
$20.0 million and recently has received additional orders for approximately
$10.4 million for VSAT transceivers.
Defense. REMEC focuses its efforts on defense programs which it believes
have the highest probability of follow-on production. Tactical aircraft,
satellites, missile systems and smart weapons comprise the majority of the
platforms of the Company's customers. Defense industry programs from which REMEC
derives or may derive significant revenues include: the F-22 Stealth Tactical
Fighter Aircraft program for the U.S. Air Force for which the Company is
developing switch amplifiers, switch filters, integrated switch modules, power
amplifiers, frequency generators, frequency converters and frequency multipliers
for three different RF subsystems (CNI, Radar and Electronic Warfare); the
Airborne Self-Protection Jammer (ASPJ) program for foreign military customers
for which the Company has developed and produced a 28-channel switched filter
bank and multi-function components such as frequency modulators; the Advanced
Medium Range Air to Air Missile (AMRAAM) program for the U.S. Air Force for
which the Company has developed and produced frequency multipliers, converters
and filters; and the radar warning receiver program (ALR 56M) for the U.S. Air
Force for which the Company has developed and produced switch filters, notch
filters, switches and filters.
The Company sells microwave MFMs and components to prime contractors such
as Hughes Aircraft, Northrop Grumman and Lockheed Martin. In fiscal 1996 and the
nine months ended November 3, 1996, sales to Hughes Aircraft accounted for 13%
and 7%, respectively, of total net sales. The Company through Humphrey sells
inertial guidance products primarily to defense prime contractors such as Texas
Instruments, Inc., British Aerospace plc and Lockheed Martin.
Historically, most of the Company's revenues have been derived from sales
to the defense market. Revenues for defense applications constituted
approximately 87%, 82% and 66% of the Company's revenues for each of the years
ended January 31, 1995 and 1996 and the nine month period ended November 3,
1996, respectively. The Company expects to continue to derive a substantial
portion of its revenues from the defense industry and to develop products for
defense applications. As a result, the Company's sales could be materially
adversely impacted by a decrease in government defense budgets because of
spending cuts, general budgetary constraints or otherwise. See "Risk
Factors -- Dependence on Defense Market."
BACKLOG
The Company's backlog of orders as of November 3, 1996 and January 31, 1996
was $131.9 million ($69.0 million commercial and $62.9 million defense) and
$87.5 million ($45.1 million commercial and $42.4 million defense),
respectively. The Company includes in its backlog only those orders for which it
has accepted purchase orders. However, backlog is not necessarily indicative of
future sales. A substantial amount of the Company's backlog can be canceled at
any time without penalty, except, in most cases, for the recovery of the
Company's actual committed costs and profit on work performed up to the date of
cancellation. For example, the government terminated a large defense program in
December 1992 for which the Company had been supplying in excess of $4.0 million
of products on an annual basis. A substantial portion of the purchase orders
comprising backlog at November 3, 1996 include product specifications not yet
achieved by the Company. A failure to develop products meeting such
specifications could lead to a cancellation of the related purchase orders. See
"Risk Factors -- Customer Concentration and Exclusivity," "-- Risk of Cost
Overruns and Product Non-Performance; Loss of Investment in Design and
Engineering" and "-- Backlog."
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<PAGE> 35
SALES AND MARKETING
The Company uses a team-based sales approach to facilitate close management
by Company personnel of relationships at multiple levels of the customer's
organization, including management, engineering and purchasing personnel. The
Company's integrated sales approach involves a team consisting of a senior
executive, a business development specialist, members of the Company's
engineering department and, occasionally, a local technical sales
representative. In particular, the use of experienced engineering personnel as
part of the sales effort enables close technical collaboration with the customer
during the design and qualification phase of new communications equipment which,
the Company believes, is critical to the integration of its products into its
customers equipment. The Company's executive officers are also involved in all
aspects of the Company's relationships with its major customers and work closely
with their senior management. The Company utilizes manufacturers and sales
representatives to identify opportunities.
To date, the Company has sold its products overseas with the assistance of
independent sales representatives. Sales outside of the United States
represented 12%, 16% and 11% of net sales in fiscal years ended January 31, 1995
and 1996 and the nine months ended November 3, 1996, respectively. Sales outside
of the United States are denominated in U.S. dollars in order to reduce the
risks associated with the fluctuations of foreign currency exchange rates. The
international sales do not include products sold to foreign end users by the
Company's domestic OEM customers.
MANUFACTURING
The Company assembles, tests, packages and ships products at its
manufacturing facilities located in San Diego and San Jose, California. The
Company believes that process expertise and discipline are key elements of
successful high volume production of microwave MFMs because of the precise
specifications required. Since inception, the Company has been manufacturing
products for defense programs in compliance with the stringent MIL-Q-9858
specifications. The Company believes that it can readily bring to the commercial
market the manufacturing quality and discipline it has demonstrated in the
defense market. The Company received ISO-9001 certification from the Defense
Electronics Supply Center for its microwave facilities. ISO-9001 is a standard
established by the International Organization for Standardization that provides
a methodology by which manufacturers can obtain quality certification. Although
this certification is not currently required by any of its customers, REMEC
believes that it will be beneficial to the acquisition of future business. To
assure the highest product quality and reliability and to maximize control over
the complete manufacturing cycle and costs, the Company seeks to achieve
vertical integration in the manufacturing process wherever appropriate.
Historically, the volume of the Company's production requirements in the
defense markets was not sufficient to justify the widespread implementation of
automated manufacturing processes. The Company anticipates that increased sales
of its products to the wireless telecommunications industry will require a
significant increase in the Company's manufacturing capacity. Accordingly, the
Company has begun to introduce automated manufacturing techniques for product
assembly and testing and is currently planning to expand its facilities.
The Company attempts to utilize standard parts and components that are
available from multiple vendors. However, certain components used in the
Company's products are currently available only from single sources, and other
components are available from only a limited number of sources. The Company's
reliance on contract manufacturers and on sole suppliers involves several risks,
including a potential inability to obtain critical materials or services and
reduced control over production costs, delivery schedules, reliability and
quality of components or assemblies. Any inability to obtain timely deliveries
of acceptable quality, or any other circumstance that would require the Company
to seek alternative contract manufacturers or suppliers, could delay the
Company's ability to deliver its products to its customers, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, the Company
has made the strategic decision to select single source or limited source
suppliers in order to obtain lower pricing, receive more timely delivery and
maintain quality control. The Company also relies on contract
33
<PAGE> 36
manufacturers for circuit board assembly. The Company generally orders
components and circuit boards from its suppliers and contract manufacturers by
purchase order on an as needed basis. See "Risk Factors -- Dependence on
Suppliers and Contract Manufacturers" and "-- Government Regulations."
COMPETITION
The markets for the Company's products are extremely competitive and are
characterized by rapid technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition is
intense and significant price erosion generally occurs over the life of a
product. The Company faces some competition from component manufacturers who
have integration capabilities, but believes that its primary competition is from
the captive manufacturing operations of large wireless telecommunications OEMs
(including all of the major telecommunications equipment providers) and defense
prime contractors who are responsible for a substantial majority of the present
worldwide production of MFMs. The Company's future success is dependent upon the
extent to which these OEMs and defense prime contractors elect to purchase from
outside sources rather than manufacture their own microwave MFMs and components.
The Company's customers and large manufacturers of microwave transmission
equipment could also elect to enter into the non-captive market for microwave
products and compete directly with the Company. Many of the Company's current
and potential competitors have substantially greater technical, financial,
marketing, distribution and other resources than the Company and have greater
name recognition and market acceptance of their products and technologies. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing products or introduce new products that
will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company's customers.
For example, innovations such as a wireless telephone system utilizing
satellites instead of terrestrial base stations or a device that integrates
microwave functionality could significantly reduce the potential market for the
Company's products. The Company believes that to remain competitive in the
future it will need to invest significant financial resources in research and
development.
RESEARCH AND DEVELOPMENT
Research and development expenses recorded by the Company for the fiscal
years ended January 31, 1994, 1995 and 1996 and for the nine month period ended
November 3, 1996 were approximately $782,000, $1,028,000, $2,274,000 and
$2,288,000, respectively. The Company's research and development efforts in the
defense industry are conducted in direct response to the unique requirements of
a customer's order and, accordingly, are included in cost of sales and the
related funding in net sales. The Company expects that as its commercial
business expands, research and development expenses will increase in amount and
as a percentage of sales.
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless telecommunications
systems that are subject to regulation domestically by the FCC and
internationally by other government agencies. Although the equipment operators
and not the Company are responsible for compliance with such regulations,
regulatory changes, including changes in the allocation of available frequency
spectrum, could materially adversely affect the Company's operations by
restricting development efforts by the Company's customers, obsoleting current
products or increasing the opportunity for additional competition. Changes in,
or the failure by the Company to manufacture products in compliance with,
applicable domestic and international regulations could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the increasing demand for wireless telecommunications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused and may in the future cause the cancellation,
postponement or rescheduling of the installation of communications systems by
the Company's customers, which in turn may have a material adverse effect on the
sale of products by the Company to such customers.
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<PAGE> 37
The Company is also subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that may cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on the Company's business, financial condition or
results of operation.
The Company believes that it operates its business in material compliance
with applicable government regulations.
INTELLECTUAL PROPERTY
The Company does not presently hold a patent applicable to its products
which is significant. In order to protect its intellectual property rights, the
Company relies on a combination of trade secret, copyright and trademark laws
and employee and third-party nondisclosure agreements, as well as limiting
access to and distribution of proprietary information. There can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from independently developing such technology. Furthermore,
there can be no assurance that, in the future, third parties will not assert
infringement claims against the Company or with respect to its products for
which the Company has indemnified certain of its customers. Asserting the
Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, financial condition and results of operations.
In the event a third party were successful in a claim that one of the Company's
products infringed its proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
EMPLOYEES
As of November 3, 1996, the Company had a total of 981 employees, including
641 in manufacturing and operations, 169 in research, development and
engineering (including 42 designers and drafters, 12 manufacturing engineers, 5
quality engineers and 110 electrical and mechanical engineers), 49 in quality
assurance, 43 in sales and marketing and 79 in administration. The Company
believes its future performance will depend in large part on its ability to
attract and retain highly skilled employees. None of the Company's employees is
represented by a labor union and the Company has not experienced any work
stoppage. The Company considers its employee relations to be good.
FACILITIES
The Company's principal administrative, engineering and manufacturing
facilities are located in seven buildings aggregating approximately 181,000
square feet in San Diego, California, consisting of one 23,000 square foot
facility owned by the Company and six leased facilities, pursuant to leases
which expire in December 1998 and January 2000. The facilities of Magnum, the
Company's wholly owned subsidiary, are located in a 31,000 square feet building
in San Jose, California, under a lease which expires in January 2001. The
Company believes that its existing facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available on
commercially reasonable terms as needed.
35
<PAGE> 38
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
November 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ---------------------------------------------------
<S> <C> <C>
Ronald E. Ragland(1)...... 55 Chairman of the Board and Chief Executive Officer
Errol Ekaireb............. 58 President, Chief Operating Officer and Director
Jack A. Giles............. 54 Executive Vice President, President of REMEC
Microwave and Director
Denny Morgan.............. 43 Senior Vice President, Chief Engineer and Director
Joseph T. Lee............. 42 Executive Vice President, President of Magnum and
Director
Thomas A. George.......... 41 Senior Vice President, Chief Financial Officer and
Secretary
Andre R. Horn(3).......... 68 Director
Jeffrey M. Nash(2)(3)..... 49 Director
Gary L. Luick(3).......... 56 Director
Thomas A. Corcoran(1)(2).. 52 Director
William H. Gibbs(1)(2).... 53 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Mr. Ragland was a founder of the Company and has served as Chairman of the
Board and Chief Executive Officer of the Company since January 1983. Prior to
joining the Company, he was General Manager of KW Engineering and held program
management positions with Ford Aerospace Communications Corp., E-Systems, Inc.
and United Telecommunications, Inc. Mr. Ragland was a Captain in the United
States Army and holds a B.S.E.E. degree from Missouri University at Rolla and an
M.S.E.E. degree from St. Louis University.
Mr. Ekaireb has served as President and Chief Operating Officer of the
Company since 1990 and a director of the Company since 1985. Mr. Ekaireb served
as Vice President of the Company from 1984 to 1987 and as Executive Vice
President and Chief Operating Officer from 1987 to 1990. Prior to joining the
Company, he spent 23 years with Ford Aerospace Communications Corp. Mr. Ekaireb
holds B.S.E.E. and B.S.M.E. degrees from West Coast University and has completed
the University of California, Los Angeles Executive Program.
Mr. Giles joined the Company in 1984. He was elected as a director in 1984,
Vice President in 1985, Executive Vice President in 1987 and was elected
President of REMEC Microwave in 1994. Prior to joining the Company he spent
approximately 19 years with Texas Instruments in program management and
marketing. Mr. Giles holds a B.S.M.E. degree from the University of Arkansas and
is a graduate of Defense Systems Management College.
Mr. Morgan was a founder of the Company and has served as Senior Vice
President, Chief Engineer and a director of the Company since January 1983.
Prior to joining the Company, he worked with KW Engineering, Micromega, General
Dynamics Corporation and Pacific Aerosystems, Inc. Mr. Morgan holds a B.S.E.E.
degree from the Massachusetts Institute of Technology and was the Four Year
Chancellor's Intern Fellowship Recipient at the University of California, Los
Angeles.
36
<PAGE> 39
Mr. Lee has been a director and Executive Vice President of the Company
since September 1996. Prior to the acquisition of Magnum by the Company he was
Chairman of the Board, President and Chief Executive Officer of Magnum. Mr. Lee
holds a B.S.E.E. from the University of Michigan, a M.S.E.E. and an ENGINEER
(Doctor of Engineering) degrees from Stanford University.
Mr. George has served as Chief Financial Officer and Senior Vice President
of the Company since 1990 and Secretary of the Company since November 1995. He
served as Director of Finance of the Company from 1987 to 1988 and as Vice
President, Finance from 1988 to 1990. Prior to joining the Company, he worked
for International Totalizator Systems, Inc., Loral Data Systems and Coopers &
Lybrand. He holds a B.S. degree from University of Southern California and is a
Certified Public Accountant.
Mr. Horn has been a director of the Company since 1988. Mr. Horn is the
retired Chairman of the Board of Joy Manufacturing Company. From 1985 to 1991,
Mr. Horn served as the Chairman of the Board of Needham & Company, Inc., which
is serving as one of the representatives of the underwriters in the offering
made hereby. He currently holds the honorary position of Chairman Emeritus of
Needham & Company, Inc. Mr. Horn is a director of Western Digital Corporation, a
computer equipment manufacturer, and Varco International, Inc., a manufacturer
of petroleum industry equipment.
Dr. Nash has been a director of the Company since 1988. Since August, 1995
he has been the President, Chief Executive Officer and a Director of TransTech
Information Management Systems, Inc. From 1994 to 1995, Dr. Nash was Chairman,
Chief Executive Officer and President of Digital Perceptions, Inc., and, from
1989 to 1994, was the Chief Executive Officer and President of Visqus as well as
Conner Technology, Inc., both subsidiaries of Conner Peripherals, Inc. Dr. Nash
is currently a director of Proxima Corporation, a computer equipment
manufacturer, ViaSat, Inc., a manufacturer of satellite communication equipment,
and Esscor, Inc., an electrical utility simulation company.
Mr. Luick has been a director of the Company since 1994. Mr. Luick served
as President and a director of GTI Corporation from 1989 through 1995 and as
Chief Executive Officer of GTI Corporation from 1991 through 1995.
Mr. Corcoran was elected a director of the Company in May, 1996. Mr.
Corcoran has been the President and Chief Operating Officer of the Electronic
Systems sector of Lockheed Martin Corporation since March 1995. From 1993 to
1995 Mr. Corcoran was President of the Electronics Group of Martin Marietta
Corporation, and from 1983 to 1993 he held various management positions with the
Aerospace segment of General Electric Company. Mr. Corcoran is a member of the
Board of Trustees of Worcester Polytechnic Institute, the Board of Trustees of
Stevens Institute of Technology and the Board of Governors of the Electronic
Industries Association and a Director of the U.S. Navy Submarine League.
Mr. Gibbs was elected a director of the Company in May, 1996. Mr. Gibbs has
been the President and Chief Executive Office of DH Technology, Inc. since
November 1985 and Chairman of DH Technology, Inc. since February 1987. From
August 1983 to November 1985, he held various positions, including those of
President and Chief Operating Officer, with Computer and Communications
Technology, a supplier of rigid disc magnetic recording heads to the peripheral
equipment segment of the computer industry.
Members of the Company's Board of Directors are each elected for one year
terms at the annual shareholders meeting. Officers are elected at the first
Board of Directors meeting following the shareholders meeting at which directors
are elected and serve at the discretion of the Board of Directors.
The Board of Directors has a standing Compensation Committee, Audit
Committee and Nominating Committee. The Compensation Committee provides
recommendations to the Board concerning salaries and incentive compensation for
officers of the Company and approves equity grants to the Company's officers.
The Audit Committee recommends the Company's independent auditors and reviews
the results of and scope of audits and other accounting-related services
provided by such auditors. The Nominating Committee reviews potential candidates
for service on the Board.
37
<PAGE> 40
The Company's outside directors receive an annual retainer fee of $5,000
for serving on the Board of Directors and receive a fee of $1,000 for each Board
meeting attended plus $500 for each committee meeting attended. Board members
also receive reimbursement for their reasonable travel expenses in attending
Board and committee meetings.
In May 1996, the Company adopted, subject to shareholder approval, the 1996
Nonemployee Directors Stock Option Plan ("Directors Plan"). Under the Directors
Plan, each nonemployee director of the Company, upon such director's first
election to the Board, is entitled to receive an automatic nondiscretionary
grant of a nonqualified stock option ("NQO") to purchase 10,000 shares of Common
Stock ("Initial Grant"). In addition, on May 29, 1996 and on the first date of
May each year thereafter, each director (other than a director who received an
Initial Grant on that date or in the previous months) is entitled to receive an
NQO to purchase 3,500 shares of Common Stock ("Annual Grant"). The exercise
price of the NQOs granted under the Directors Plan is equal to the fair market
value of such shares on the date of grant. Each NQO granted under the Directors
Plan has a term of four and one half years. The Initial Grant becomes
exercisable with respect to 30% of the shares covered thereby on the first
anniversary of grant, 30% on the second anniversary of grant and 40% on the
third anniversary of grant. The Annual Grants become exercisable daily beginning
on the day after the date of grant so that 30% of the shares covered thereby are
exercisable on the first anniversary of grant, 30% on the second anniversary of
grant and 40% on the third anniversary of grant. See "Benefit Plans."
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee of the Company consists of Messrs. Corcoran, Gibbs and
Nash. During the fiscal year ended January 31, 1996, no executive officer of the
Company served on the board of directors or compensation committee of another
company that had an executive officer serving on the Company's Board of
Directors or Compensation Committee.
38
<PAGE> 41
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation received
by the Chief Executive Officer and the five other most highly paid executive
officers of the Company for the fiscal years ended January 31, 1995 and 1996
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL ------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION($)(2)
- ----------------------------------------------- ------ ------------ -------- ------------------
<S> <C> <C> <C> <C>
Ronald E. Ragland.............................. 1996 $266,667 $82,000 $ 11,242(3)
Chairman of the Board and Chief Executive 1995 242,497 78,697 11,635(3)
Officer
Errol Ekaireb.................................. 1996 214,167 82,000 12,099(4)
President and Chief Operating Officer 1995 200,000 78,697 9,200
Jack A. Giles.................................. 1996 198,333 82,000 10,723(5)
Executive Vice President 1995 184,833 78,697 9,648(5)
Joseph T. Lee.................................. 1996 160,000 298,738 2,310(6)
Executive Vice President 1995 165,000 -- 2,310(6)
Denny Morgan................................... 1996 135,834 32,000 722(7)
Senior Vice President 1995 127,000 20,000 216(7)
Thomas A. George............................... 1996 125,042 24,000 200
Senior Vice President, Chief Financial 1995 112,000 15,000 200
Officer and Secretary
</TABLE>
- ---------------
(1) Includes amounts deferred at the option of the officer pursuant to REMEC's
deferred compensation plan for employee directors.
(2) Includes an automobile allowance in the amount of $9,000 for all Named
Executive Officers other than Mr. Morgan and Mr. George and a $200
contribution to the REMEC 401(k) plan for all Named Executive Officers.
(3) Includes $2,042 in life insurance premiums for 1996 and $2,435 in life
insurance premiums for 1995.
(4) Includes $2,899 in life insurance premiums for 1996.
(5) Includes $1,523 in life insurance premiums for 1996 and $448 in life
insurance premiums for 1997.
(6) Consists of contributions to Magnum 401(k) plan.
(7) Includes $522 in life insurance premiums for 1996 and $16 in life insurance
premiums for 1995.
The Company did not grant any stock options or stock appreciation rights to
the Named Executive Officers in the fiscal year ended January 31, 1996. No Named
Executive Officer held any stock options on January 31, 1996. The following
table sets forth certain information regarding the value of options exercised by
the Named Executive Officers during the fiscal year ended January 31, 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($)
- -------------------------------------------------------------------- --------------- -----------
<S> <C> <C>
Ronald E. Ragland................................................... -- --
Errol Ekaireb....................................................... -- --
Jack A. Giles....................................................... -- --
Denny Morgan........................................................ -- --
Thomas A. George.................................................... 1,250 5,000(1)
</TABLE>
- ---------------
(1) Value realized is the difference between the exercise price of $4.00 per
share and the estimated fair market value of the Common Stock issuable upon
option exercise at the end of the fiscal year ($8.00 per share).
39
<PAGE> 42
In connection with the acquisition of Magnum, the Company entered into an
employment agreement with Joseph Lee which terminates on March 31, 1998. Under
this agreement, Mr. Lee is entitled to a base salary of $200,000 per year with
bonuses and fringe benefits equivalent to the three other most senior officers
of the Company. Mr. Lee also was granted an option under the Equity Incentive
Plan to purchase 30,000 shares of the Company's Common Stock at an exercise
price of $15 1/8. In addition, Mr. Lee entered into a non-competition agreement
pursuant to which he received a lump-sum payment of $50,000.
BENEFIT PLANS
Equity Incentive Plan. As of November 3, 1996, a total of 750,000 shares
of Common Stock were reserved for issuance under the Company's Equity Incentive
Plan (the "Equity Incentive Plan"), including 380,500 shares issuable upon
exercise of outstanding options. The Equity Incentive Plan provides for grants
of options, restricted stock, stock purchase rights and performance shares to
directors, key employees of the Company, including executive officers, and
consultants. Options granted under the Equity Incentive Plan may be incentive
stock options or nonqualified stock options. The option price per share for an
incentive stock option may not be less than 100% of the fair market value of a
share of Common Stock on the grant date or not less than 110% of such fair
market value in the case of grants made to a person owning stock possessing more
than 10% of the total combined voting power of all classes of stock. The option
price per share for a nonqualified stock option may not be less than 85% of the
fair market value of a share of Common Stock on the grant date. Restricted stock
awards under the Equity Incentive Plan consist of shares of Common Stock subject
to transfer restrictions. Generally, the transfer restrictions on the shares of
Common Stock lapse over a period of not more than ten years and may be
accelerated or waived by the Board of Directors. Stock purchase rights awarded
under the Equity Incentive Plan consist of a grant to purchase shares of Common
Stock at a purchase price of not less than 85% of the fair market value of the
Common Stock on the date of grant and are generally exercisable for a period of
up to 30 days after the grant date. Performance share awards consist of shares
of Common Stock granted upon attainment of performance criteria during a
specified performance period. The Board of Directors determines the performance
targets and the performance period.
Employee Stock Purchase Plan. A total of 250,000 shares of the Common
Stock has been reserved for issuance under the Company's Employee Stock Purchase
Plan (the "Purchase Plan"), 161,672 shares of which have been issued as of
November 3, 1996. The Purchase Plan permits eligible employees to purchase
Common Stock at a discount through payroll deductions during offering periods of
up to 24 months. Offering periods generally will begin on the first trading day
of each February, May, August and November. The price at which stock is
purchased under the Purchase Plan equals 85% of the fair market value of Common
Stock on the first or last day of the offering period, whichever is lower.
1996 Nonemployee Directors Stock Option Plan. The Board adopted on May 29,
1996, subject to shareholder approval, the 1996 Nonemployee Directors Stock
Option Plan (the "Directors Plan"). A total of 200,000 shares of Common Stock
are reserved for issuance upon exercise of NQOs granted thereunder. Under the
Directors Plan, each nonemployee director of the Company, upon such director's
first election to the Board, is entitled to receive an automatic
nondiscretionary grant of a nonqualified stock option ("NQO") to purchase 10,000
shares of Common Stock ("Initial Grant"). In addition, on May 29, 1996 and on
the first date of May each year thereafter, each director (other than a director
who received an Initial Grant on that date or in the previous months) is
entitled to receive an NQO to purchase 3,500 shares of Common Stock ("Annual
Grant"). The exercise price of the NQOs granted under the Directors Plan is
equal to the fair market value of such shares on the date of grant. Each NQO
granted under the Directors Plan has a term of four and one half years. The
Initial Grant becomes exercisable with respect to 30% of the shares covered
thereby on the first anniversary of grant, 30% on the second anniversary of
grant and 40% on the third anniversary of grant. The Annual Grants become
exercisable daily beginning on the day after the date of grant so that 30% of
the shares covered thereby are exercisable on the first anniversary of grant,
30% on the second anniversary of grant and 40% on the third anniversary of
grant.
Magnum 1990 Stock Option Plan. As of November 3, 1996, a total of 6,551
shares of the Company's Common Stock has been reserved for issuance under the
Magnum Microwave 1990 Employee Stock Option Plan. No shares of the Company's
Common Stock have been issued under this plan. This plan provides for the
40
<PAGE> 43
grant of options to purchase shares of the Company's authorized but unissued
Common Stock to selected employees, directors, consultants and others who may be
expected to contribute to the success of Magnum. Options granted under this plan
may be incentive stock options or nonqualified stock options. The purchase price
of the Common Stock underlying each option must not be less than 100% of the
fair market value of the stock at the time of the grant of the options. The term
of each option must be no more than 10 years from the date of grant, and is
subject to earlier termination on certain conditions.
Other Option Issuances. As of November 3, 1996, 94,825 shares of Common
Stock were issuable upon exercise of options issued under the Company's
Incentive Stock Option Plan III, 6,551 shares of Common Stock were issuable upon
exercise of options issued under the Magnum Microwave Corporation 1990 Employee
Stock Option Plan.
401(k) Profit Sharing Plan. The Company has adopted a tax-qualified
employee savings and profit sharing plan (the "401(k) Plan") covering
substantially all of the Company's employees, including officers, after one year
of service. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by up to the lesser of 15% of eligible compensation or the
annual limit prescribed by law ($9,500 in 1996) and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not
require, additional cash contributions to the 401(k) Plan by the Company. Such
Company contributions are allocated either in proportion to each participant's
eligible compensation or as a designated percentage of each participant's
elective contribution, up to a $400 "matching" contribution per year. Such
Company contributions allocated to a participant vest at the rate of 50% per
year of service. The trustee under the 401(k) Plan, at the direction of each
participant, invests the assets of the 401(k) Plan in designated investment
options. The 401(k) Plan is intended to qualify under section 401(a) and (k) of
the Internal Revenue Code so that contributions to the 401(k) Plan, and income
earned on the contributions, are not taxable to employees until distributed
following termination of employment, and so that the contributions are currently
deductible by the Company for income tax purposes.
41
<PAGE> 44
PRINCIPAL AND SELLING SHAREHOLDERS
The following sets forth certain information regarding the beneficial
ownership of the Common Stock as of November 3, 1996, and as adjusted to reflect
the sale of the shares offered by this Prospectus (i) by each of the Company's
directors and each of the Named Executive Officers, (ii) by all directors and
executive officers as a group, (iii) by each person who is known by the Company
to own beneficially more than 5% of the Common Stock, and (iv) by the Selling
Shareholders:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OFFERING(1)
---------------------- OF SHARES ----------------------
NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ronald E. Ragland(3)........................ 1,052,500 11.7 210,148 842,352 7.8
Joseph T. Lee(4)............................ 509,783 5.7 101,786 407,997 3.8
Denny Morgan(5)............................. 344,625 3.8 68,810 275,815 2.6
Jack A. Giles(6)............................ 240,800 2.7 48,080 192,720 1.8
Errol Ekaireb............................... 148,787 1.7 29,708 119,079 1.1
Gary L. Luick(7)............................ 3,875 * 3,875 *
Andre R. Horn(8)............................ 13,375 * 2,496 10,879 *
Jeffrey M. Nash(8).......................... 43,375 * 8,486 34,889 *
Thomas A. Corcoran.......................... 6,000 * 1,198 4,802 *
Thomas A. George............................ 7,072 * 1,412 5,660 *
William H. Gibbs............................ --
Jerry Collum................................ 123,434 1.4 2,000 121,434 1.1
Herb Koga................................... 26,973 * 1,500 25,473 *
Michael McDonald............................ 67,962 * 6,000 61,962 *
Michael Streitmatter........................ 92,033 1.0 18,376 73,657 *
All directors and executive officers as a
group (11 persons)(9)..................... 2,370,192 26.3 472,124 1,898,068 17.6
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of Common Stock.
(1) Assumes no exercise of the Underwriters' over-allotment option. Except
pursuant to applicable community property laws or as indicated in the
footnotes to this table, to the Company's knowledge, each shareholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
shareholder.
(2) Applicable percentage of ownership prior to offering for each shareholder is
based on 9,014,342 shares of Common Stock outstanding as of November 3,
1996, together with applicable options for such shareholders. Applicable
percentage of ownership after offering for each shareholder is based on
10,764,342 shares of Common Stock, together with applicable options for
such shareholders. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes voting
and investment power with respect to the shares. Shares of Common Stock
subject to outstanding options are deemed outstanding for computing the
percentage of ownership of the person holding such options, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Includes 10,000 shares held by Mr. Ragland's minor children and 2,500 shares
held by Mr. Ragland's spouse. Mr. Ragland's address is 9404 Chesapeake
Drive, San Diego, California 92123.
(4) Mr. Lee's address is 1990 Concourse Drive, San Jose, California 95131.
(5) All shares beneficially owned by Mr. Morgan are held in the Morgan Trust, of
which Mr. Morgan and his spouse act as co-trustees.
(6) Includes 7,750 shares held by Mr. Giles' spouse.
(7) Issuable upon exercise of outstanding options that are exercisable on or
before March 31, 1997.
(8) Includes 875 shares issuable upon exercise of outstanding options that are
exercisable on or before March 31, 1997.
(9) Includes 5,625 shares issuable upon exercise of outstanding options that are
exercisable on or before March 31, 1997.
42
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 40,000,000
shares of Common Stock, par value $0.01 per share, and 5,000,000 shares of
preferred stock, par value $0.01 per share.
COMMON STOCK
As of November 3, 1996, there were 9,014,342 shares of Common Stock
outstanding held of record with approximately 560 shareholders of record.
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the shareholders of the Company. Additionally, cumulative
voting is permitted in connection with the election of directors so long as at
least one shareholder has given notice at the meeting prior to the voting of
that shareholder's intention to cumulate votes. Subject to the preferences that
may be applicable to any outstanding preferred stock, the holders of Common
Stock are entitled to a ratable distribution of any dividends that may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to the prior liquidation rights of any
outstanding preferred stock. The Common Stock has no preemptive, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the offering, when issued and paid for, will be fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any preferred stock which the Company may designate and
issue in the future. See "Dividend Policy."
PREFERRED STOCK
The Board of Directors is authorized, without further shareholder approval,
to issue up to 5,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted or imposed upon
any unissued shares of preferred stock and to fix the number of shares
constituting any series and the designations of such series.
The issuance of preferred stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of preferred stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the affect of decreasing the market
price of the Common Stock. As of the closing of the offering, no shares of
preferred stock will be outstanding, and the Company currently has no plans to
issue any shares of preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
43
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding
10,764,342 shares of Common Stock. Of these shares, the 2,250,000 shares sold in
the offering (plus any shares issued upon exercise of the Underwriters'
overallotment option) will be freely tradeable without restriction under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. Of the remaining 8,514,342 shares,
holders of 2,174,969 shares, including all officers and directors (except for
two directors who only own options to purchase an aggregate of 7,225 shares of
Common Stock that are exercisable prior to July 29, 1997), have entered into
contractual "lock-up" agreements generally providing that they will not offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
the shares of Common Stock or any securities exercisable for or convertible into
Common Stock owned by them for a period of 180 days after the date of the
offering without the prior written consent of Needham & Company, Inc. The
6,339,373 shares outstanding prior to the offering that are not subject to
lock-up agreements are not held by the affiliates of the Company and may be
freely sold after the offering. Pursuant to Rule 144, affiliates may not sell in
any three-month period a number of shares exceeding the greater of: (i) one
percent of the number of shares of Common Stock then outstanding (which will
equal approximately 107,643 shares immediately after the offering); or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale.
No predictions can be made as to the effect, if any, that market sales of
shares of Common Stock will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of significant numbers of
shares of the Common Stock in the public market could adversely affect the
market price of the Common Stock and could impair the Company's future ability
to raise capital through an offering of its equity securities.
44
<PAGE> 47
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Needham & Company, Inc., A.G.
Edwards & Sons, Inc. and Oppenheimer & Co., Inc. are acting as representatives
(the "Representatives"), have severally agreed to purchase from the Company and
Selling Shareholders, and the Company and Selling Shareholders have agreed to
sell to each Underwriter, the aggregate number of shares of Common Stock set
forth opposite their respective names in the table below. The Underwriting
Agreement provides that the obligations of the Underwriters to pay for and
accept delivery of the shares of Common Stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase and pay for all
shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Needham & Company, Inc...........................................................
A.G. Edwards & Sons, Inc.........................................................
Oppenheimer & Co., Inc...........................................................
----------
Total.................................................................. 2,250,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not in excess of
$ per share, of which $ may be reallowed to other dealers.
After the offering to the public, the offering price and other selling terms may
be changed by the Representatives. No such reduction shall change the amount of
the proceeds to be received by the Company and the Selling Shareholders as set
forth on the cover page of this Prospectus.
The Company and certain Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 337,500 shares of Common Stock at the same price
per share as the Company receives for the 2,250,000 shares that the Underwriters
have agreed to purchase. Of the 337,500 shares the first 250,000 shares will be
sold by Selling Shareholders and up to 87,500 shares will be sold by the
Company. To the extent the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock to be purchased by such Underwriter, as shown in the
above table, bears to the total shown.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Company and the Underwriters and the Selling Shareholders against
certain civil liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements all officers, directors (except
for two directors who only own options to purchase an aggregate of 7,225 shares
of Common Stock that are exercisable prior to July 29, 1997) and Selling
Shareholders have agreed with the Representatives not to sell, otherwise dispose
of, contract to sell, grant any option to sell, transfer or otherwise dispose
of, directly or indirectly, shares of Common Stock or securities exchangeable
for or convertible into shares of Common Stock or any substantially similar
securities for a period of 180 days after the date of this Prospectus, without
the prior written consent of Needham & Company, Inc. The Company has agreed,
with certain limited exceptions, not to sell, contract to sell, grant any option
to sell, transfer or otherwise dispose of, directly or indirectly, shares of
Common Stock or any
45
<PAGE> 48
substantially similar securities for a period of 180 days after the date of this
Prospectus, without the prior written consent of Needham & Company, Inc., except
that the Company may issue securities pursuant to the Incentive Stock Option
Plan III, Magnum Microwave Corporation 1990 Employee Stock Option Plan, 1996
Nonemployee Directors Stock Option Plan, Equity Incentive Plan and the Purchase
Plan, and upon the exercise of outstanding stock options or purchase rights
under such plans. See "Shares Eligible for Future Sale."
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of 5% of the number of shares of Common
Stock offered hereby, and (ii) unless they obtain specific written consent of
the customer.
In connection with the offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on the Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") during a period before the commencement of offers of sales of
the Common Stock offered hereby. The passive market making transactions must
comply with applicable volume and price limits and be identified as such.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Los Angeles, California. Certain
legal matters relating to the offering will be passed upon for the Underwriters
by Gray Cary Ware & Freidenrich, San Diego, California.
EXPERTS
The financial statements of REMEC at January 31, 1995 and 1996 and for each
of the years in the three-year period ended January 31, 1996 appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act. In accordance therewith, the Company files proxy statements, annual reports
and other information with the United States Securities and Exchange Commission
(the "Commission"). Such material concerning the Company is available for
inspection and copying at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at 7 World Trade Center, Suite 1300, New
York, New York 10008 and 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
46
<PAGE> 49
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act of 1993, as amended,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office, Public Reference
Room of the Securities and Exchange Commission, 450 Fifth Street, Washington,
D.C. 20549, and at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Chicago,
Illinois 60661. Copies of all or any part thereof may be obtained from the
Commission at its principal office in Washington, D.C. after payment of fees
prescribed by the Commission. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
47
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMEC, INC.
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Consolidated Balance Sheets at January 31, 1995 and 1996 and November 3, 1996....... F-3
Consolidated Statements of Income for the years ended January 31, 1994, 1995 and
1996 and the nine months ended October 22, 1995 and November 3, 1996............. F-4
Consolidated Statements of Shareholders' Equity as of January 31, 1994, 1995, and
1996 and the nine months ended November 3, 1996.................................. F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1994, 1995 and
1996 and for the nine months ended October 22, 1995 and November 3, 1996......... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 51
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
REMEC, Inc.
We have audited the accompanying consolidated balance sheets of REMEC, Inc. as
of January 31, 1995 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of REMEC, Inc. at
January 31, 1995 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended January 31, 1996
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
February 29, 1996,
except for the first paragraph of Note 2,
as to which the date is August 26, 1996
F-2
<PAGE> 52
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------- NOVEMBER 3,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,754,929 $ 1,326,292 $ 6,513,399
Short-term investments............................ 953,657 1,482,548 --
Accounts receivable, net.......................... 5,338,149 5,385,500 11,953,527
Inventories, net.................................. 10,669,352 12,223,871 16,473,955
Deferred income taxes............................. 931,844 1,669,314 1,670,114
Prepaid expenses and other current asses.......... 254,444 218,911 610,924
----------- ----------- -----------
Total current assets........................... 19,902,375 22,306,436 37,221,919
Long-term investments............................... 500,941 -- --
Property, plant and equipment, net.................. 7,294,191 9,026,482 11,887,806
Deferred offering costs............................. -- 1,108,424 --
Intangible and other assets......................... 1,492,971 1,298,029 4,906,071
----------- ----------- -----------
$29,190,478 $33,739,371 $54,015,796
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank revolving term loan and line-of credit....... $ 175,610 $ -- $ --
Accounts payable.................................. 2,014,266 3,301,216 4,457,635
Accrued salaries, benefits and related taxes...... 3,242,908 3,956,951 3,458,634
Income taxes payable.............................. 745,679 1,144,943 1,048,508
Accrued expenses.................................. 1,576,177 1,550,811 2,293,435
Current portion of notes payable.................. 154,353 440,838 --
----------- ----------- -----------
Total current liabilities...................... 7,908,993 10,394,759 11,258,212
Deferred rent....................................... 578,824 420,628 301,981
Deferred income taxes............................... 824,000 930,000 936,124
Bank revolving term loan and line-of-credit, less
current portion................................... 724,390 1,900,000 --
Notes payable, less current portion................. 440,838 -- --
Commitments
Shareholders' equity:
Convertible preferred shares -- $.01 par value,
718,607 shares authorized; 718,607 shares
issued and outstanding (none at November 3,
1996 -- unaudited); aggregate liquidation
preference of $6,000,000....................... 7,186 7,186 --
Common shares -- $.01 par value, 40,000,000 shares
authorized; issued and outstanding
shares -- 5,528,183 and 5,361,956 at January
31, 1995 and 1996, respectively (9,014,342 at
November 3, 1996 -- unaudited)................. 55,282 53,620 90,143
Paid-in capital................................... 12,596,205 11,876,824 30,192,869
Retained earnings................................. 6,054,760 8,156,354 11,236,467
----------- ----------- -----------
Total shareholders' equity................ 18,713,433 20,093,984 41,519,479
----------- ----------- -----------
$29,190,478 $33,739,371 $54,015,796
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 53
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED
--------------------------------------- -----------------------------------
1994 1995 1996 OCTOBER 22, 1995 NOVEMBER 3, 1996
----------- ----------- ----------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................... $46,577,310 $57,553,458 $62,144,707 $ 45,565,484 $ 62,461,159
Cost of sales............... 33,196,118 42,706,883 46,597,521 34,256,020 46,805,491
----------- ----------- ----------- ----------- -----------
Gross profit........... 13,381,192 14,846,575 15,547,186 11,309,464 15,655,668
Operating expenses:
Selling, general and
administrative......... 7,256,393 9,244,258 9,582,819 7,135,158 8,233,536
Research and
development............ 781,965 1,028,476 2,273,902 1,444,807 2,287,914
----------- ----------- ----------- ----------- -----------
8,038,358 10,272,734 11,856,721 8,579,965 10,521,450
----------- ----------- ----------- ----------- -----------
Income from
operations........... 5,342,834 4,573,841 3,690,465 2,729,499 5,134,218
Interest (income) expense... (38,600) 298,441 35,172 47,699 (247,983)
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes..... 5,381,434 4,275,400 3,655,293 2,681,800 5,382,201
Provision for income
taxes..................... 1,836,240 1,743,471 1,498,899 1,135,848 2,166,816
----------- ----------- ----------- ----------- -----------
Net income............. $ 3,545,194 $ 2,531,929 $ 2,156,394 $ 1,545,952 $ 3,215,385
=========== =========== =========== =========== ===========
Net income per share........ $ 0.52 $ 0.38 $ 0.32 $ 0.23 $ 0.36
=========== =========== =========== =========== ===========
Shares used in per share
calculations.............. 6,851,737 6,667,018 6,639,215 6,663,652 8,982,908
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
REMEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED SHARES COMMON SHARES
------------------ ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- ------- --------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1993....................... 718,607 $ 7,186 5,710,464 $57,105 $13,441,293 $ 86,966 $13,592,550
Issuance of common
shares................... -- -- 25,000 250 99,750 -- 100,000
Issuance of common shares
upon exercise of stock
options.................. -- -- 1,878 19 981 -- 1,000
Repurchase of common
shares................... -- -- (7,827) (78) (26,589) -- (26,667)
Cash dividends............. -- -- -- -- -- (54,540) (54,540)
Net income................. -- -- -- -- -- 3,545,194 3,545,194
-------- ------- --------- ------- ---------- ---------- -----------
Balance at January 31,
1994..................... 718,607 7,186 5,729,515 57,296 13,515,435 3,577,620 17,157,537
Issuance of common shares
upon exercise of stock
options.................. -- -- 6,262 62 7,048 -- 7,110
Repurchase of common
shares................... -- -- (207,594) (2,076) (926,278) -- (928,354)
Cash dividends............. -- -- -- -- -- (54,789) (54,789)
Net income................. -- -- -- -- -- 2,531,929 2,531,929
-------- ------- --------- ------- ---------- ---------- -----------
Balance at January 31,
1995....................... 718,607 7,186 5,528,183 55,282 12,596,205 6,054,760 18,713,433
Issuance of common shares
upon exercise of stock
options.................. -- -- 18,910 189 67,271 -- 67,460
Repurchase of common
shares................... -- -- (185,137) (1,851) (786,652) -- (788,503)
Cash dividends............. -- -- -- -- -- (54,800) (54,800)
Net income................. -- -- -- -- -- 2,156,394 2,156,394
-------- ------- --------- ------- ---------- ---------- -----------
Balance at January 31,
1996....................... 718,607 7,186 5,361,956 53,620 11,876,824 8,156,354 20,093,984
Issuance of common shares
in initial public
offering (unaudited)..... -- -- 2,264,893 22,649 15,626,560 -- 15,649,209
Conversion of preferred
shares (unaudited)....... (718,607) (7,186) 1,077,909 10,779 (3,593) -- --
Issuance of common shares
under employee stock
purchase plan
(unaudited).............. -- -- 161,672 1,616 1,149,682 -- 1,151,298
Issuance of common shares
upon exercise of stock
options (unaudited)...... -- -- 16,075 161 64,139 -- 64,300
Issuance of common shares
for cash (unaudited)..... -- -- 131,837 1,318 1,479,257 -- 1,480,575
Net income (unaudited)..... -- -- -- -- -- 3,215,385 3,215,385
Elimination of Magnum
activity for the
duplicated two months
ended March 31, 1996
(unaudited).............. -- -- -- -- -- (135,272) (135,272)
-------- ------- --------- ------- ---------- ---------- -----------
Balance at November 3, 1996
(unaudited)................ -- $ -- 9,014,342 $90,143 $30,192,869 $11,236,467 $41,519,479
======== ======= ========= ======= ========== ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 55
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, -------------------------
---------------------------------------- OCTOBER 22, NOVEMBER 3,
1994 1995 1996 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income........................................ $ 3,545,194 $ 2,531,929 $ 2,156,394 $ 1,545,952 $ 3,215,385
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization................... 1,654,076 1,941,520 2,012,794 1,488,301 2,060,213
Deferred income taxes........................... (621,322) 810,558 (631,470) -- --
Changes in operating assets and liabilities:
Accounts receivable........................... 884,006 (293,626) (47,351) (2,917,742) (5,916,505)
Inventories................................... 669,103 263,824 (1,554,519) 1,041,495 (3,303,104)
Prepaid expenses and other current
assets..................................... (79,832) 6,194 56,513 12,810 (402,878)
Accounts payable.............................. (319,731) 126,137 1,286,950 609,316 598,802
Accrued expenses, income taxes payable and
deferred rent.............................. 869,068 (775,201) 929,745 403,159 1,961
---------- ----------- ------------ ------------ ------------
Net cash provided (used) by operating
activities............................... 6,600,562 4,611,335 4,209,056 2,183,291 (3,746,126)
Investing activities:
Additions to property, plant and equipment........ (1,785,380) (1,476,654) (3,571,123) (2,051,635) (4,954,220)
Payment for purchase of RF Microsystems, net of
$60,337 cash acquired........................... -- -- -- -- (4,011,735)
Payment for purchase of Humphrey, net of $75,257
cash acquired................................... (7,610,093) -- -- -- --
Purchase of short term investments................ -- (1,454,598) (981,607) (981,607)
Sale of short term investments.................... -- -- 953,657 953,657 1,482,565
Other assets...................................... (6,999) (22,053) -- 20,964 (136,225)
---------- ----------- ------------ ------------ ------------
Net cash used by investing activities...... (9,402,472) (2,953,305) (3,599,073) (2,058,621) (7,619,615)
Financing activities:
Proceeds from bank revolving term loan,
line-of-credit and long-term debt............... 5,000,000 11,102,000 14,600,000 10,150,000 --
Repayments on bank revolving term loan,
line-of-credit and long-term debt............... (1,895,954) (13,700,397) (13,754,353) (9,454,353) (2,867,399)
Repurchase of common stock........................ (26,667) (928,354) (788,503) -- --
Proceeds from sale of common stock................ 101,000 7,110 67,460 63,340 18,345,382
Deferred offering costs........................... -- -- (1,108,424) -- 1,108,424
Cash dividends.................................... (54,540) (54,789) (54,800) (54,800) --
---------- ----------- ------------ ------------ ------------
Net cash provided (used) by financing
activities............................... 3,123,839 (3,574,430) (1,038,620) 704,187 16,586,407
---------- ----------- ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents.... 321,929 (1,916,400) (428,637) 828,857 5,220,666
Cash and cash equivalents at beginning of period.... 3,349,400 3,671,329 1,754,929 1,754,929 1,326,292
Elimination of Magnum's net cash activities for the
duplicated two months ended March 31, 1996........ -- -- -- -- (33,559)
---------- ----------- ------------ ------------ ------------
Cash and cash equivalents at end of period.......... $ 3,671,329 $ 1,754,929 $ 1,326,292 $ 2,583,786 $ 6,513,399
========== =========== ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest........................................ $ 1,050 $ 397,650 $ 175,839 $ 157,099 $ 21,986
========== =========== ============ ============ ============
Income taxes.................................... $ 1,989,500 $ 1,307,955 $ 1,713,105 $ 2,084,105 $ 1,611,453
========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 56
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
REMEC, Inc. (the "Company") was incorporated in the State of California in
January 1983. The Company is engaged in a single business segment consisting of
the research, design, development and manufacture of microwave and radio
frequency (RF) components and subsystems and precision instruments for control
and measurement systems. Historically, substantially all of the Company's sales
have been to prime contractors to various agencies of the U.S. Department of
Defense and to foreign governments. In May 1995 the Company incorporated REMEC
Wireless, Inc. (a wholly owned subsidiary) to research, design, develop and
manufacture products based on microwave technologies for commercial customers.
In fiscal 1997, the Company acquired Magnum Microwave Corporation, a
manufacturer of microwave components and subsystems, and RF Microsystems, Inc.,
a satellite communication engineering company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries Humphrey, Inc., REMEC Wireless, Inc., RF
Microsystems, Inc. and Magnum Microwave Corporation. All intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of six months or less at the date of acquisition to be cash
equivalents. The Company evaluates the financial strength of institutions at
which significant investments are made and believes the related credit risk is
limited to an acceptable level.
The Company has adopted Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. Statement
No. 115 requires companies to record certain debt and equity security
investments at market value.
Concentration of Credit Risk
Accounts receivable are principally from U.S. government contractors,
companies in foreign countries and domestic customers in the telecommunications
industry. Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. The Company performs
periodic credit evaluations of its customers and maintains reserves for
potential credit losses.
Inventory
Inventories are stated at the lower of average cost or market. In
accordance with industry practice, the Company has adopted a policy of
capitalizing general and administrative costs as a component of the cost of
government contract related inventories to achieve a better matching of costs
with the related revenues.
Progress Payments
Progress payments received from customers are offset against inventories
associated with the contracts for which the payments were received.
F-7
<PAGE> 57
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets which range from three to
thirty years. Leasehold improvements are amortized using the straight-line
method over the shorter of their estimated useful lives or the lease period.
Intangible Assets
Intangible assets in the accompanying balance sheets consist of goodwill
and a covenant not-to-compete recorded in connection with the acquisition of
Humphrey, Inc. and RF Microsystems, Inc. (see Note 2). These assets are being
amortized using the straight-line method over ten and fifteen years,
respectively. Amortization expense related to the intangible assets totaled
$173,962 for both fiscal 1995 and 1996.
In March 1995 the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recognized for long lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. Adoption of
Statement No. 121 on February 1, 1996 did not have a significant impact on the
Company's financial position or results of operations.
Revenue Recognition
Revenues on fixed-price long-term and commercial contracts are recognized
using the units of delivery method. Revenues associated with the performance of
non-recurring engineering and development contracts are recognized when earned
under the terms of the related contract. Prospective losses on long-term
contracts are recorded in the period when such losses are known. Loss provisions
are based upon the anticipated excess of inventoriable manufacturing costs over
the selling price of the remaining units to be delivered. Actual losses could
differ from those estimated due to changes in the ultimate manufacturing costs
and contract terms.
Research and Development
Research and development costs incurred by the Company are expensed in the
period incurred.
Net Income Per Share
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during each period using the
treasury stock method. Pursuant to the requirements of the Securities and
Exchange Commission, common and common equivalent shares issued during the
twelve-month period prior to the initial public offering (See Note 9) have been
included in the calculations as if they were outstanding for all periods
presented using the treasury stock method. In addition, the calculation of the
number of shares used in computing net income per share also includes
convertible preferred stock, which converted into 1,077,909 common shares upon
the closing of the initial public offering, as if they were converted into
common shares as of their original dates of issuance. The calculation of net
income per share reflects the historical information for both REMEC and Magnum
after adjusting the Magnum information to reflect the conversion of Magnum
common shares into REMEC shares as stipulated in the acquisition agreement
between REMEC and Magnum (See Note 2).
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock option equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-8
<PAGE> 58
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions about the future that affect the amounts reported in the
consolidated financial statements. These estimates include assessing the
collectability of accounts receivable, the usage and recoverability of
inventories and long-lived assets and the incurrence of losses on long term
contracts and warranty costs. Actual results could differ from those estimates.
Interim Financial Information
The accompanying consolidated financial statements and related notes for
the nine month periods ended October 22, 1995 and November 3, 1996 are unaudited
but include all adjustments (consisting of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of financial
position, results of operations and cash flows for these interim periods. The
results of operations for the nine months ended November 3, 1996 are not
necessarily indicative of operating results to be expected for the full fiscal
year.
The Company's fiscal quarters end on Sundays with its fiscal year ending on
January 31. Interim quarters approximate 90 days, to accommodate the January 31
fiscal year end.
2. ACQUISITIONS
Magnum Microwave Corporation ("Magnum")
On August 26, 1996, the Company issued 1,081,486 shares of its common stock
in exchange for all of the outstanding shares of common stock of Magnum, a
manufacturer of microwave components and subsystems. Immediately prior to the
acquisition, Magnum issued 131,458 equivalent shares of stock for cash of
approximately $1,500,000. The acquisition of Magnum was accounted for as a
pooling of interests. Therefore, the Company's consolidated financial statements
for all periods prior to the acquisition of Magnum have been restated to include
the financial position, results of operations, and cash flows of Magnum.
Prior to the combination, Magnum's fiscal year ended on the Friday closest
to March 31. In recording the business combination, Magnum's financial
statements for the fiscal years ended April 1, 1994, March 31, 1995 and March
29, 1996 were combined with REMEC's for the fiscal years ended January 31, 1994,
1995 and 1996, respectively. Magnum's statement of income and cash flows for the
nine months ended December 29, 1995 was combined with REMEC's for the nine
months ended October 22, 1995. Magnum's financial statements for the nine months
ended November 3, 1996 were combined with REMEC's for the same period.
Consolidated operating results and the net change in consolidated cash and
cash equivalents for the nine months period ended November 3, 1996 include
Magnum's results of operations and change in cash flows for the two months ended
March 31, 1996. Magnum's net sales and net income for the two month period ended
March 31, 1996 were $1,743,000 and $135,000, respectively. Included in general
and administrative expenses in the consolidated statement of income for the
interim period ended November 3, 1996 are costs of $424,000 related to the
acquisition of Magnum.
F-9
<PAGE> 59
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net sales and net income reported by REMEC and Magnum for periods prior to
the acquisition are as follows:
<TABLE>
<CAPTION>
NINE
MONTHS SIX MONTHS
YEARS ENDED JANUARY 31, ENDED ENDED
--------------------------------------- OCTOBER 22, AUGUST 4,
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Remec......................... $35,278,514 $46,296,959 $52,784,385 $38,617,569 $34,771,300
Magnum........................ 11,298,796 11,256,499 9,360,322 6,947,915 5,224,187
----------- ----------- ----------- ----------- -----------
Total................. $46,577,310 $57,553,458 $62,144,707 $45,565,484 $39,995,487
========== ========== ========== ========== ==========
Net income:
Remec......................... $ 1,918,183 $ 1,427,925 $ 1,480,744 $ 1,054,021 $ 1,465,447
Magnum........................ 1,627,011 1,104,004 675,650 491,931 374,146
----------- ----------- ----------- ----------- -----------
Total................. $ 3,545,194 $ 2,531,929 $ 2,156,394 $ 1,545,952 $ 1,839,593
========== ========== ========== ========== ==========
</TABLE>
RF Microsystems, Inc. ("RFM")
Effective April 30, 1996, the Company acquired all of the outstanding
common stock of RFM and certain other assets in exchange for cash consideration
of approximately $4,066,000. The acquisition has been accounted for as a
purchase, and accordingly, the total purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The estimated excess of the purchase price over the net assets acquired of
$3,559,000 is being carried as intangible assets, and will be amortized over an
estimated life of 15 years. The Company's consolidated financial statements
include the results of RFM from April 30, 1996.
A summary of the RFM acquisition costs and an allocation of the purchase
price to the assets acquired and liabilities assumed is as follows:
<TABLE>
<S> <C>
Total acquisition cost:
Cash paid............................................................. $ 3,933,000
Payment of acquisition related expenses............................... 133,000
-----------
$ 4,066,000
===========
Allocated as follows:
Current assets........................................................ $ 1,622,000
Machinery and equipment............................................... 320,000
Acquired intangibles.................................................. 3,559,000
Liabilities assumed................................................... (1,435,000)
-----------
$ 4,066,000
===========
</TABLE>
F-10
<PAGE> 60
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assuming that the acquisition of RFM had occured on the first day of the
Company's fiscal year-ended January 31, 1996, pro forma condensed consolidated
results of operations would be as follows:
PRO FORMA RESULTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, 1996 NOVEMBER 3, 1996
---------------- -----------------
<S> <C> <C>
Net Sales..................................................... $ 70,216 $64,426
Net Income.................................................... 1,941 3,174
Net Income Per Share.......................................... $ 0.29 $ 0.35
</TABLE>
Humphrey, Inc. ("Humphrey")
Effective January 31, 1994, the Company acquired the outstanding stock of
Humphrey, a company engaged in the development and manufacture of precision
instruments for control and measurement systems. The acquisition was accounted
for as a purchase. Accordingly, the financial position and operating results of
Humphrey have been reported in the Company's consolidated financial statements
since the date of acquisition.
A summary of the Humphrey acquisition costs and allocation of the purchase
price to the assets acquired and liabilities assumed is as follows:
<TABLE>
<S> <C>
Total acquisition cost:
Cash paid............................................................. $ 7,477,498
Assumption of Humphrey liabilities.................................... 2,378,485
Payment of acquisition related expenses............................... 207,852
-----------
$ 10,063,835
===========
Allocated to assets as follows:
Current assets........................................................ $ 6,429,470
Property, plant and equipment, including $1,300,000 of land and
building........................................................... 2,094,746
Covenant not-to-compete............................................... 50,000
Goodwill.............................................................. 1,489,619
-----------
$ 10,063,835
===========
</TABLE>
3. FINANCIAL STATEMENT DETAILS
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Raw materials............................................. $ 6,964,166 $ 7,953,813
Work in progress.......................................... 7,509,765 8,375,730
----------- -----------
14,473,931 16,329,543
Less unliquidated progress payments....................... 3,804,579 4,105,672
----------- -----------
$ 10,669,352 $ 12,223,871
=========== ===========
</TABLE>
F-11
<PAGE> 61
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,093,000 and $1,924,000 at January 31, 1995 and 1996, respectively.
During fiscal 1993, the Company received notice to terminate, for
convenience, a product contract and in turn, the Company terminated related
subcontracts. In fiscal 1996, the Company obtained final approval to bill the
contractors for remaining inventory and fees associated with the contract. The
accompanying consolidated statements of income for the year ended January 31,
1996 and the nine months ended October 22, 1995 include $2,444,000 of revenue
and $1,803,000 of costs related to this contract.
Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Land, building and improvements......................... $ 1,385,620 $ 1,412,895
Machinery and equipment................................. 19,844,097 22,938,912
Furniture and fixtures.................................. 1,064,319 1,215,859
Leasehold improvements.................................. 1,599,997 1,726,344
------------ ------------
23,894,033 27,294,010
Less accumulated depreciation and amortization.......... (16,599,842) (18,267,528)
------------ ------------
$ 7,294,191 $ 9,026,482
============ ============
</TABLE>
4. BANK REVOLVING TERM CREDIT FACILITY AND LINE-OF-CREDIT
The Company has a $9,000,000 working capital line of credit with a bank,
which is due June 1, 1997. Interest is due monthly on advances at the bank's
prime interest rate (8.50% at January 31, 1996) and at January 31, 1996
outstanding borrowings totaled $1,900,000.
The Company also has a $6,000,000 term credit facility with the bank which
is available until June 1, 1997. Outstanding borrowings at June 1, 1997 under
this facility automatically convert into a 41 month term note payable in monthly
installments. Interest is due monthly on advances under the facility at 0.50%
over the Bank's prime interest rate (9.00% at January 31, 1996). At January 31,
1996 there were no outstanding borrowings on the facility.
Advances under these agreements are secured by substantially all assets of
the Company. The agreements also contain covenants which require the Company to
maintain certain financial ratios, achieve specified levels of profitability,
restrict the incurrence of additional debt, restrict the incurrence of capital
expenditures in excess of specified amounts, limit the payment of cash
dividends, and include certain other restrictions. As of January 31, 1996 the
Company was in compliance with all covenants specified.
The Company's Magnum subsidiary has a separate revolving accounts
receivable line of credit with a bank under which it may borrow up to $1.5
million. At January 31, 1996 there were no outstanding borrowings on the
facility. Subsequent to the closing of the acquisition, this credit facility was
cancelled.
F-12
<PAGE> 62
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY
Convertible Preferred Shares
A summary of the convertible preferred shares issued and outstanding is as
follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PREFERENCE IN
OUTSTANDING PAR VALUE LIQUIDATION
----------- --------- --------------
<S> <C> <C> <C>
Series A................................. 461,538 $ 4,615 $3,000,000
Series B................................. 257,069 2,571 3,000,000
------- ------ ----------
718,607 $ 7,186 $6,000,000
======= ====== ==========
</TABLE>
Concurrent with the closing of the Company's initial public offering
("IPO") in February 1996 all of the outstanding shares of Series A and Series B
preferred stock were converted into 1,077,909 shares of common stock. The holder
of each share of preferred stock is entitled to one vote for each common share
into which it would convert.
Dividends
In each of the three years ended January 31, 1996, the Company paid a cash
dividend of $.01 per share including payment to preferred shares on an as
converted basis.
Stock Option Plans
The following table summarizes activity under the Company's incentive stock
option plans.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at January 31, 1993.................... 111,261 $0.21-4.00
Granted.......................................... 17,628 2.77-4.00
Exercised........................................ (26,878) 0.21-4.00
Forfeited........................................ (17,547) 0.21-4.00
------- ----------
Outstanding at January 31, 1994.................... 84,464 0.21-4.00
Granted.......................................... 19,439 4.00-4.47
Exercised........................................ (6,262) 0.21-4.00
Forfeited........................................ (27,740) 0.21-4.00
------- ----------
Outstanding at January 31, 1995.................... 69,901 0.21-4.47
Granted.......................................... 82,916 4.00-4.26
Exercised........................................ (17,910) 0.21-4.00
Forfeited........................................ (16,503) 0.21-4.47
------- ----------
Outstanding at January 31, 1996.................... 118,404 $0.21-4.47
======= ==========
</TABLE>
At January 31, 1996, options to purchase 20,257 common shares were
exercisable. Options granted under the plans vest over a period of three years
and expire four and one-half years from the date of grant. The incentive plans
were terminated upon the closing of the Company's IPO in February 1996 and all
outstanding options remain exercisable in accordance with their original terms.
During fiscal 1996 non-qualified stock options for 1,000 shares of common stock
were exercised and options for 4,000 shares were canceled.
In January 1996, the Company's shareholders approved the 1995 Equity
Incentive Plan, under which 750,000 common shares are reserved for issuance
pursuant to stock options, restricted stock awards, stock purchase rights or
performance shares. The Plan provides for the grant of incentive and
non-statutory stock
F-13
<PAGE> 63
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options. The exercise price of the incentive stock options must at least equal
the fair market value of the common stock on the date of grant, and the exercise
price of nonstatutory options may be no less than 85% of the fair market value
of the common stock on the date of grant.
Stock Purchase Plan
Also in January 1996, the Company's shareholders approved the Employee
Stock Purchase Plan (the Purchase Plan) under which 250,000 common shares may be
issued to eligible employees. The price of the common shares purchased under the
Purchase Plan will be equal to 85% of the fair market value of the common shares
on the first or last day of the offering period, whichever is lower.
Changes in Capitalization
In January 1996, the Company's shareholders approved an increase in the
authorized common stock of the Company to 40,000,000 shares, the creation of a
new undesignated class of preferred stock consisting of 5,000,000 shares and a
1-for-2 reverse split of the Company's common stock. Fractional shares resulting
from the split were settled in cash. All share, per share and stock option
amounts have been restated to reflect retroactively the reverse stock split.
6. COMMITMENTS
Deferred Savings Plan
The Company has established a Deferred Savings Plan for its employees,
which allows participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. The Company matches contributions
up to $100 per quarter, per employee, subject to the attainment of certain
quarterly profit levels by the Company. Employees vest immediately in their
contributions and Company contributions vest over a two year period. The Company
has charged to operations contributions of approximately $120,000, $65,000 and
$88,000, for the years ended January 31, 1994, 1995 and 1996, respectively.
Prior to the acquisition, the Company's Magnum subsidiary maintained a
separate defined contribution 401(k) retirement plan for substantially all of
its employees. Magnum made contributions to this plan of $53,000, $55,000 and
$38,000 for fiscal 1994, 1995 and 1996, respectively. This plan will be merged
into the REMEC plan in January 1997.
Leases
The Company leases office and production facilities under operating leases
through 2001. Minimum future obligations under non-cancelable operating leases
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------
<S> <C>
1997........................................ $1,872,000
1998........................................ 1,802,000
1999........................................ 1,731,000
2000........................................ 1,272,000
2001........................................ 181,000
----------
$6,858,000
==========
</TABLE>
Certain of these lease agreements provide for annual rental adjustments
based on changes in the Consumer Price Index.
Rent expense totaled $1,681,000, $1,955,000 and $2,196,000 in 1994, 1995
and 1996, respectively.
F-14
<PAGE> 64
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation...................... $ 1,120,000 $ 1,168,000
Inventory costs capitalization.................. 543,000 524,000
Other........................................... -- 47,000
---------- ----------
1,663,000 1,739,000
---------- ----------
Deferred tax assets:
Inventory and other reserves.................... 783,000 999,000
Deferred rent................................... 296,000 238,000
Other........................................... 114,000 58,000
Other accrued expenses.......................... 578,000 1,183,000
---------- ----------
Total deferred tax assets......................... 1,771,000 2,478,000
---------- ----------
Net deferred tax liabilities (assets)............. $ (108,000) $ (739,000)
========== ==========
</TABLE>
The provision for taxes based on income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.............................. $1,930,000 $ 659,000 $1,752,000
State................................ 557,000 260,000 377,000
Deferred:
Federal.............................. (512,000) 722,000 (497,000)
State................................ (139,000) 102,000 (133,000)
---------- --------- ----------
$1,836,000 $1,743,000 $1,499,000
========== ========= ==========
</TABLE>
A reconciliation of the effective tax rates and the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------------------
1994 1995 1996
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal rate........ $1,862,000 35% $1,478,000 35% $1,268,000 35%
State income tax net of
federal.................. 273,000 5 283,000 6 159,000 4
Change in valuation
allowance................ (350,000) (7) -- -- -- --
Other...................... 51,000 1 (18,000) -- 72,000 2
-- - -- -
---------- --- --------- ----------
$1,836,000 34% $1,743,000 41% $1,499,000 41%
========== === ========= === ========== ===
</TABLE>
The Company's effective income tax rate of 40% for the nine month period
ended November 3, 1996 is based on management's expectation of the tax rate for
the full fiscal year.
F-15
<PAGE> 65
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SIGNIFICANT CUSTOMERS AND EXPORT SALES
The following table summarizes the percentage of sales by customers when
sales to such customers exceeded 10% or more of the Company's net sales for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CUSTOMER A.............................................. 11% 10% 13%
CUSTOMER B.............................................. 17% 12% --
CUSTOMER C.............................................. 16% -- --
</TABLE>
Export sales were 3%, 12% and 16% of net sales for the years ended January
31, 1994, 1995 and 1996, respectively.
9. SUBSEQUENT EVENTS (UNAUDITED)
Initial Public Offering
In February 1996, the Company completed the IPO of its common stock in
which the Company sold a total of 2,264,893 shares of common stock at $8.00 a
share. Concurrent with the closing of the IPO, the 461,538 outstanding shares of
Series A preferred stock and 257,069 outstanding shares of Series B preferred
stock were converted into 1,077,909 shares of common stock. The Company's
proceeds from the offering after deducting underwriting commissions of
$1,268,340 and expenses of $1,201,595 were $15,649,209. In connection with the
Company's IPO, certain shareholders also sold 1,185,107 shares as part of the
offering.
F-16
<PAGE> 66
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 12
Price Range of Common Stock........... 12
Dividend Policy....................... 12
Capitalization........................ 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 22
Management............................ 36
Principal and Selling Shareholders.... 42
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Available Information................. 46
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,250,000 Shares
[REMEC LOGO]
Common Stock
-------------------
PROSPECTUS
-------------------
Needham & Company, Inc.
A.G. Edwards & Co., Inc.
Oppenheimer & Co., Inc.
------------------------
January , 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the Common Stock being registered. All amounts are estimated
except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Additional Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................................. $ 16,507
NASD Filing Fee................................................................... 5,287
Nasdaq National Market Additional Listing Fee..................................... 17,500
Blue Sky Qualification Fees and Expenses.......................................... 3,000
Accounting Fees and Expenses...................................................... 50,000
Legal Fees and Expenses........................................................... 175,000
Transfer Agent and Registrar Fees................................................. 5,000
Printing and Engraving............................................................ 80,000
Miscellaneous..................................................................... 47,706
----------
Total................................................................... 400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has the power to indemnify its officers and directors
against liability for certain acts pursuant to Section 317 of the General
Corporation Law of California. Articles Fifth and Sixth of the registrant's
Amended and Restated Articles of Incorporation provide as follows:
"Fifth: The liability of directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law."
"Sixth: This Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) for
breach of duty to this Corporation and its shareholders through bylaw
provisions, or through agreements with the agents, or otherwise, in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject to the limits on such excess indemnification set
forth in Section 204 of the Code."
In addition, Article V of the registrant's By-laws provides that the
registrant shall indemnify its directors and executive officers to the fullest
extent not prohibited by California General Corporation Law and provides for the
advancement of expenses upon a receipt of an undertaking to repay such amounts
if the person is determined ultimately not to be entitled to indemnification.
The registrant has entered into Indemnification Agreements (Exhibit 10.3
hereto) with its officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Act").
Option issuances to, and exercises by, employees and directors. From
December 1, 1992 to present, the registrant issued options to purchase a total
of 271,000 shares of Common Stock at an exercise price of $2.00 per share to 56
employees and directors. No consideration was paid to the registrant by any
recipient of any of the foregoing options for the grant of any such options.
From December 1, 1992 to present, the registrant issued a total of 83,600 shares
of Common Stock to 12 employees and directors upon exercise of stock options at
exercise prices of $2.00 per share. All of the foregoing issuances and exercises
were exempt from registration pursuant to Section 3(b) of the Act and Rule 701
promulgated thereunder. The share amounts
II-1
<PAGE> 68
and purchase prices set forth above have not been adjusted to give effect to the
one-for-two reverse stock split of the Common Stock effected in January 1996.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ---------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement
2.1(3) -- Agreement and Plan of Reorganization and Merger between Magnum Microwave
Corporation, the Registrant and REMEC Acquisition Corporation
2.2(4) -- Stock Purchase Agreement dated March 31, 1996 between STM Wireless, Inc., a
Delaware Corporation, and the Registrant
3.1(2) -- Restated Articles of Incorporation
3.2(2) -- By-Laws, as amended
4.1(2) -- Specimen Common Stock Certificate
5.1(1) -- Opinion of Heller Ehrman White & McAuliffe
10.1(2) -- Equity Incentive Plan
10.2(2) -- Employee Stock Purchase Plan
10.3(2) -- Form of Indemnification Agreements between registrant and its officers and
directors
10.4(2) -- Credit Agreement between the registrant and The Bank of California, N.A., dated
June 17, 1993, as amended
+10.5(2) -- Manufacturing Agreement Terms and Conditions dated August 10, 1995 between the
registrant and P-COM, Inc.
10.6(2) -- Standard Industrial Lease between the registrant and Transcontinental Realty
Investors, Inc., dated February 1, 1990, as amended.
10.7(2) -- Standard Industrial Lease between the registrant and Chesapeake Business Park
1983, dated December 13, 1988, as amended.
10.8(3) -- Form of Employment and Non-Competition Agreement with Joseph Lee (attached as
Exhibit 1 to Agreement and Plan of Reorganization and Merger filed as Exhibit
2.1)
10.9(1) -- Magnum Microwave Corporation 1990 Employee Stock Option Plan
11.1(1) -- Statement of computation of net income per common share
13.1(5) -- Annual Report
21.1 -- Subsidiaries of the registrant
23.1 -- Consent of Ernst & Young LLP, independent auditors
23.2 -- Consent of Heller Ehrman White & McAuliffe (contained in opinion filed as Exhibit
5.1)
24.1 -- Power of Attorney (included on Page II - 4 to this Registration Statement)
</TABLE>
- ---------------
(1) To be filed by Amendment.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Registration Statement on Form S-1 filed on February 1,
1996 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Registration Statement on Form S-4 filed on July 30, 1996
and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Form 8-K filed on May 3, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to Form 10-K filed on April 30, 1996 and incorporated herein by reference.
+ Confidential treatment granted
(b) FINANCIAL STATEMENT SCHEDULE
II. Valuation and Qualifying Accounts
II-2
<PAGE> 69
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 70
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, REMEC, Inc. has
duly caused this Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in San Diego, California on
December 19, 1996.
REMEC, INC.
By: /s/ RONALD E. RAGLAND
-------------------------------
Ronald E. Ragland
Chairman of the Board and
Chief Executive Officer
EACH person whose signature appears below constitutes and appoints Ronald
E. Ragland, Errol Ekaireb, Jack A. Giles and Thomas A. George his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to the Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
or her substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ RONALD E. RAGLAND Chairman of the Board and December 19, 1996
- --------------------------------------------- Chief Executive Officer
Ronald E. Ragland (Principal Executive
Officer)
/s/ ERROL EKAIREB President, Chief Operating December 19, 1996
- --------------------------------------------- Officer and Director
Errol Ekaireb
Executive Vice President, December , 1996
- --------------------------------------------- President of REMEC
Jack A. Giles Microwave Division and
Director
/s/ DENNY MORGAN Director, Senior Vice December 19, 1996
- --------------------------------------------- President and Chief
Denny Morgan Engineer
/s/ JOSEPH T. LEE Executive Vice President December 19, 1996
- --------------------------------------------- and Director
Joseph T. Lee
/s/ THOMAS A. GEORGE Chief Financial Officer, December 19, 1996
- --------------------------------------------- Senior Vice President and
Thomas A. George Secretary (Principal
Financial and Accounting
Officer)
Director December , 1996
- ---------------------------------------------
Andre R. Horn
</TABLE>
II-4
<PAGE> 71
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ GARY L. LUICK Director December 19, 1996
- ---------------------------------------------
Gary L. Luick
/s/ JEFFREY M. NASH Director December 19, 1996
- ---------------------------------------------
Jeffrey M. Nash
/s/ THOMAS A. CORCORAN Director December 19, 1996
- ---------------------------------------------
Thomas A. Corcoran
Director December , 1996
- ---------------------------------------------
William H. Gibbs
</TABLE>
II-5
<PAGE> 72
Schedule II
REMEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
CONTRACT LOSS RESERVE PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
- ------------------------------------ ------------ ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 1994......... $ 566,000 $ 216,000 $2,650,000(1) $ (182,000) $3,250,000
Year ended January 31, 1995......... 3,250,000 455,000 -- (1,799,000) 1,906,000
Year ended January 31, 1996......... 1,906,000 2,139,000 -- (2,675,000) 1,370,000
</TABLE>
- ---------------
(1) Reserve for contract losses recorded in connection with the acquisition of
Humphrey, Inc. on January 31, 1994.
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- --------------------------------------------------------------------- ------------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement
2.1(3) -- Agreement and Plan of Reorganization and Merger between Magnum
Microwave Corporation, the Registrant and REMEC Acquisition
Corporation
2.2(4) -- Stock Purchase Agreement dated March 31, 1996 between STM Wireless,
Inc., a Delaware Corporation, and the Registrant
3.1(2) -- Restated Articles of Incorporation
3.2(2) -- By-Laws, as amended
4.1(2) -- Specimen Common Stock Certificate
5.1(1) -- Opinion of Heller Ehrman White & McAuliffe
10.1(2) -- Equity Incentive Plan
10.2(2) -- Employee Stock Purchase Plan
10.3(2) -- Form of Indemnification Agreements between registrant and its
officers and directors
10.4(2) -- Credit Agreement between the registrant and The Bank of California,
N.A., dated June 17, 1993, as amended
+10.5(2) -- Manufacturing Agreement Terms and Conditions dated August 10, 1995
between the registrant and P-COM, Inc.
10.6(2) -- Standard Industrial Lease between the registrant and Transcontinental
Realty Investors, Inc., dated February 1, 1990, as amended.
10.7(2) -- Standard Industrial Lease between the registrant and Chesapeake
Business Park 1983, dated December 13, 1988, as amended.
10.8(3) -- Form of Employment and Non-Competition Agreement with Joseph Lee
(attached as Exhibit 1 to Agreement and Plan of Reorganization and
Merger filed as Exhibit 2.1)
10.9(1) -- Magnum Microwave Corporation 1990 Employee Stock Option Plan
11.1(1) -- Statement of computation of net income per common share
13.1(5) -- Annual Report
21.1 -- Subsidiaries of the registrant
23.1 -- Consent of Ernst & Young LLP, independent auditors
23.2 -- Consent of Heller Ehrman White & McAuliffe (contained in opinion
filed as Exhibit 5.1)
24.1 -- Power of Attorney (included on Page II - 4 to this Registration
Statement)
</TABLE>
- ---------------
(1) To be filed by Amendment.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Registration Statement on Form S-1 filed on February 1,
1996 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Registration Statement on Form S-4 filed on July 30, 1996
and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Form 8-K filed on May 3, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to Form 10-K filed on April 30, 1996 and incorporated herein by reference.
+ Confidential treatment granted
<PAGE> 1
Exhibit 1.1
2,250,000 SHARES(1)
REMEC, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
January ____, 1997
NEEDHAM & COMPANY, INC.
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC.
As Representatives of the Underwriters
c/o Needham & Company, Inc.
400 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
REMEC, Inc., a California corporation (the "Company") and
certain stockholders of the Company named in Schedule II hereto (the "Selling
Shareholders") propose to sell 2,250,000 shares (the "Firm Shares") of Common
Stock, $0.01 per share par value, of the Company (the "Common Stock"), to you
and to the other Underwriters (as defined below). The Company and the Selling
Shareholders have agreed to grant to you and the other Underwriters named in
Schedule I hereto (collectively, the "Underwriters"), an option (the "Option")
to purchase up to an additional 337,500 shares of Common Stock (the "Option
Shares") on the terms and for the purposes set forth in Section 1(b). In the
event the Option is exercised, _____________ of the Option Shares will be
purchased by the Underwriters from the Company and _____________ of the Option
Shares will be purchased by the Underwriters from the Selling Shareholders. The
Firm Shares and the Option Shares are referred to collectively herein as the
"Shares."
It is understood that, subject to the conditions hereinafter
stated, the Firm Shares will be sold to you and the Underwriters, for whom you
are acting as the Representatives (the "Representatives").
The Company and the Selling Shareholders confirm as follows
their agreement with the Representatives and the other Underwriters.
1. Agreement to Sell and Purchase.
a. On the basis of the representations,
warranties and agreements herein contained and subject to all the terms and
conditions of this Agreement, (i) the Company agrees to issue and sell an
aggregate of 1,750,000 shares of Common Stock to the Underwriters, (ii) each
Selling Shareholder agrees to sell to the Underwriters the number of shares of
Common Stock set forth opposite his, her, or its name in Schedule II hereto, and
(iii) each of the Underwriters, severally and not jointly, agrees to purchase
from the Company and the Selling Shareholders the respective number of Firm
Shares set forth opposite that Underwriter's name in Schedule I hereto, at the
purchase price of $ _________ for each Firm Share.
b. Subject to all the terms and conditions of
this Agreement, the Company and certain of the Selling Shareholders severally
and not jointly grant the Option to the Underwriters to purchase, severally and
not jointly, up to ____________ Option shares from the Company and up to the
maximum number of Option Shares set forth opposite the Selling Shareholder's
name on Schedule II hereto at the same price per share as the Underwriters shall
pay for the Firm Shares. The Option may be exercised only to cover
- ------------
1 Plus an option to purchase up to an additional 337,500 shares to cover
over-allotments.
<PAGE> 2
over-allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on or before
the 30th day after the date of this Agreement upon written or telegraphic notice
(the "Option Shares Notice") by the Representatives to the Custodian (as defined
herein), no later than 12:00 noon, New York City time, at least two and no more
than four business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date"), setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company and certain of the Selling Shareholders will
sell to the Underwriters the number of Option Shares set forth in the Option
Shares Notice, and each Underwriter will purchase such percentage of the Option
Shares as is equal to the percentage of the Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as it deems
advisable to avoid fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares
shall be made to the Representatives for the accounts of the Underwriters
against payment of the purchase price by wire transfer or by certified or
official bank checks payable in New York Clearing House (next-day) funds to the
order of the Company and the Selling Shareholders, at the offices of Gray Cary
Ware & Freidenrich, at 7:00 a.m., San Francisco time, on the third business day
following the commencement of the offering contemplated by this Agreement, or at
such time on such other date, not later than five business days after the date
of this Agreement, as may be agreed upon by the Company and the Representatives
(such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the offices specified above for the Closing Date at the time and
date (which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form
and shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company and the Custodian, as that term is defined in Section 4(b) hereof. For
the purpose of expediting the checking and packaging of certificates for the
Shares, the Company agrees to make such certificates available for inspection at
least 24 hours prior to the Closing Date or the Option Closing Date, as the case
may be.
The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance or sale to
such Underwriter of the Shares.
3. Representations and Warranties of the Company. The
Company represents, warrants and covenants to each Underwriter that:
a. A registration statement (Registration No.
___________) on Form S-1 relating to the Shares, including a preliminary
prospectus and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The term "preliminary prospectus" as used herein
means a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the
Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If the registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed
2
<PAGE> 3
promptly by the Company with the Commission in accordance with Rule 424(b) of
the Rules and Regulations. The term "Registration Statement" means the
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits and any
information deemed to be included by Rule 430A. The term "Prospectus" means the
prospectus as filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no such filing is required, the form of final prospectus
included in the Registration Statement at the Effective Date.
b. On the Effective Date, the date the
Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act and the Rules and Regulations and will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any posteffective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement, the Prospectus or any such amendment or supplement did
or will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges that
the statements set forth under the heading "Underwriting" in the Prospectus and
the statements relating to underwriting commissions set forth on the cover page
of the Prospectus and the Preliminary Prospectus constitute the only information
relating to any Underwriter furnished in writing to the Company by the
Representatives specifically for inclusion in the Registration Statement.
c. The Company and each of its subsidiaries
is, and at the Closing Date and, if later, the Option Closing Date will be,
corporations duly organized, validly existing and in good standing under the
laws of the jurisdiction of their incorporation. The Company and each of its
subsidiaries have, and at the Closing Date and, if later, the Option Closing
Date will have, full power and authority to conduct all the activities conducted
by them, to own or lease all the material assets owned by or leased by them and
to conduct their business as described in the Registration Statement and the
Prospectus. The Company and each of its subsidiaries is, and at the Closing Date
and, if later, the Option Closing Date will be, duly licensed or qualified to do
business and in good standing as foreign corporations in all jurisdictions in
which the nature of the activities conducted by them or the character of the
assets owned or leased by them makes such license or qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not materially and adversely affect the Company or its business,
properties, condition (financial or other) or results of operations. Except as
disclosed in the Registration Statement and Prospectus, the Company (i) does not
own, and at the Closing Date and, if later, the Option Closing Date will not
own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
corporation, firm, partnership, joint venture, association or other entity and
(ii) is not, and at the Closing Date and, if later, the Option Closing Date will
not be, engaged in any discussions or a party to any agreement or understanding,
written or oral, regarding the acquisition of an interest in any corporation,
firm, partnership, joint venture, association or other entity where such
discussions, agreements or understandings would require amendment to the
Registration Statement pursuant to applicable securities laws. Complete and
correct copies of the articles of incorporation and of the by-laws of the
Company and each of its subsidiaries and all amendments thereto have been
delivered to the Representatives, and no changes therein will be made subsequent
to the date hereof and prior to the Closing Date or, if later, the Option
Closing Date.
3
<PAGE> 4
d. All of the outstanding shares of capital
stock of the Company (including the Shares when delivered and paid for as
contemplated herein) have been duly authorized and validly issued, are fully
paid and nonassessable and were issued in compliance with all applicable state
and federal securities laws; the Firm Shares and the Option Shares have been
duly authorized and when issued and paid for as contemplated herein, as
applicable, will be validly issued, fully paid and nonassessable; no preemptive
or similar rights exist with respect to any of the Shares. The description of
the capital stock of the Company in the Registration Statement and the
Prospectus is, and at the Closing Date and, if later, the Option Closing Date
will be, complete and accurate in all respects. Except as set forth in the
Prospectus, the Company does not have outstanding, and at the Closing Date and,
if later, the Option Closing Date will not have outstanding, any options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
any shares of Common Stock, or any such warrants, convertible securities or
obligations. All of the outstanding shares of capital stock of each of the
Company's subsidiaries are owned by the Company, have been validly issued, are
fully paid and non-assessable, and are free of any liens and any pre-emptive or
similar rights.
e. The financial statements and schedules
included in the Registration Statement or the Prospectus present fairly the
financial condition of the Company and its subsidiaries, taken as a whole, as of
the respective dates thereof and the results of operations and cash flows of the
Company and its subsidiaries, taken as a whole, for the respective periods
covered thereby, all in conformity with generally accepted accounting principles
applied on a consistent basis throughout the entire period involved, except as
otherwise disclosed in the Prospectus. No other financial statements or
schedules of the Company are required by the Act or the Rules and Regulations to
be included in the Registration Statement or the Prospectus. Ernst & Young (the
"Accountants"), who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The summary financial and statistical data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the financial
statements presented therein.
f. Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus and
prior to the Closing Date and, if later, the Option Closing Date, except as set
forth in or contemplated by the Registration Statement and the Prospectus, (i)
there has not been and will not have been any change in the capitalization of
the Company (other than grants of options or rights to acquire securities of the
Company under the Company's Equity Incentive Plan, Employee Stock Purchase Plan,
or Incentive Stock Option Plan III or any material adverse change in the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company, arising for any reason whatsoever, (ii)
the Company and its subsidiaries have not incurred nor will any of them incur,
except in the ordinary course of business as described in the Prospectus, any
material liabilities or obligations, direct or contingent, nor has it entered
into nor will it enter into, except in the ordinary course of business as
described in the Prospectus, any material transactions other than pursuant to
this Agreement and the transactions referred to herein and (iii) the Company has
not and will not have paid or declared any dividends or other distributions of
any kind on any class of its capital stock.
g. The Company is not an "investment company"
or an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
h. Except as set forth in the Registration
Statement and the Prospectus, there are no actions, suits or proceedings pending
or, to the knowledge of the Company, threatened against or affecting the Company
or any of its subsidiaries or any of the directors or officers of the Company or
any of its subsidiaries in their capacity as such, nor to the knowledge of the
Company any reasonable basis therefor, before or by any federal or state court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, wherein an unfavorable ruling, decision or finding would
materially and adversely affect the Company or its business, properties,
business prospects, condition (financial or otherwise) or results of operations.
4
<PAGE> 5
i. The Company and each of its subsidiaries
have, and at the Closing Date and, if later, the Option Closing Date will have,
performed all obligations required to be performed by each of them,
respectively, and each of them are not, and at the Closing Date and, if later,
the Option Closing Date will not be, in default, under any contract or other
instrument to which they are a party or by which their property is bound or
affected, which default might materially and adversely affect the Company or its
business, properties, business prospects, condition (financial or other) or
results of operations. To the Company's knowledge, no other party under any
contract or other instrument to which it or any of its subsidiaries is a party
is in default in any respect thereunder, which default would materially and
adversely affect the Company or its business, properties, business prospects,
condition (financial or other) or results of operations. Neither the Company nor
any of its subsidiaries is, and at the Closing Date and, if later, the Option
Closing Date will be, in violation of any provision of their articles of
incorporation or by-laws.
j. No consent, approval, authorization or
order of, or any filing or declaration with, any court or governmental agency or
body is required for the consummation by the Company of the transactions on its
part contemplated herein, except such as have been obtained under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or the Rules
and Regulations and such as may be required under state securities or Blue Sky
laws or the by-laws and rules of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with the purchase and distribution by the
Underwriters of the Shares to be sold by the Company.
k. The Company has full power and authority
to enter into this Agreement. This Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
except as to (i) rights to indemnity and contribution hereunder which may be
limited by applicable law, (ii) bankruptcy and laws relating to the rights and
remedies of creditors generally and (iii) the availability of equitable
remedies. The performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in the action or imposition of
any lien, charge or encumbrance upon any of the assets of the Company pursuant
to the terms or provisions of, or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or give any party a right
to terminate any of its obligations under, or result in the acceleration of any
obligation under the articles of incorporation or by-laws of the Company, any
indenture, mortgage, deed of trust, voting trust agreement, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument to which the Company is a party or by
which the Company or any of its properties is bound or affected, or to the
knowledge of the Company violate or conflict with any judgment, ruling, decree,
order, statute, rule or regulation of any court or other governmental agency or
body applicable to the business or properties of the Company presently in
effect.
l. The Company and each of its subsidiaries
have good and marketable title to all properties and assets described in the
Prospectus as owned by them, free and clear of all liens, charges, encumbrances
or restrictions, except such liens, charges, encumbrances or restrictions as are
described in the Prospectus and those which, individually and in the aggregate,
are not material in amount or which, individually and in the aggregate, do not
adversely affect the use made or proposed to be made of such properties and
assets by the Company. The Company and each of its subsidiaries have, as lessee,
valid, subsisting and enforceable leases for the properties described in the
Prospectus as leased by it, except such as are described in the Prospectus or
are not material to the business of the Company. The agreements to which the
Company or any of its subsidiaries is a party and which are described in the
Prospectus are valid agreements, enforceable by the Company or any of its
subsidiaries (as applicable), except as the enforcement thereof may be limited
by bankruptcy and laws relating to the rights and remedies of creditors
generally or by the availability of general equitable remedies. The Company and
its subsidiaries own or lease all such properties as are necessary to their
operations as now conducted or as proposed to be conducted, except where the
failure to so own or lease would not materially and adversely affect the Company
or its business, properties, condition (financial or otherwise) or results of
operations.
m. There is no document or contract of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
5
<PAGE> 6
not described or filed as required. All such contracts to which the Company is a
party have been duly authorized, executed and delivered by the Company,
constitute valid and binding agreements of the Company and are enforceable
against the Company in accordance with the terms thereof, except as to (i)
rights to indemnity and contribution thereunder which may be limited by
applicable law, (ii) bankruptcy and laws relating to the rights and remedies of
creditors generally and (iii) the availability of equitable remedies.
n. No statement, representation, warranty or
covenant made by the Company in this Agreement or made in any certificate or
document required by Section 7(l) of this Agreement to be delivered to the
Representatives was or will be, when made, inaccurate, untrue or incorrect.
o. Neither the Company nor any of its
directors, officers or controlling persons has taken, directly or indirectly,
any action designed, or which might reasonably be expected, to cause or result,
under the Act or otherwise, in, or which has constituted, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares.
p. Except as disclosed in the Prospectus, no
holder of securities of the Company has rights to the registration of any
securities of the Company because of the filing of the Registration Statement.
q. The Common Stock is listed and duly
admitted to trading on the Nasdaq National Market (the "NASDAQ/NM") and the
Company has received notification that the listing by the NASDAQ/NM of the
Shares has been approved, subject only to official notice of issuance of the
Shares.
r. The Company and each of its subsidiaries
have sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals and governmental authorizations to conduct its business as now
conducted and as proposed to be conducted, where the failure to have any such
right would have a material and adverse effect on the Company or its business,
properties, condition (financial or otherwise) or results of operations. The
Company and each of its subsidiaries is not infringing any rights, copyrights,
trade secrets or other similar rights of others or, to the best knowledge of the
Company, any trademarks, trade name rights or patent rights of others, where
such infringement would have a material and adverse effect on the Company or its
business, properties, condition (financial or otherwise) or results of
operations. No claim has been made against the Company or any of its
subsidiaries regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which would have a material and adverse effect on
the Company or its business, properties, condition (financial or otherwise) or
results of operations.
s. The Company has timely filed all federal,
state and foreign income tax returns which have been required to be filed and
has paid all taxes and assessments received by it to the extent that such taxes
or assessments have become due. The Company has no tax deficiency which has been
or to the Company's knowledge might be asserted or threatened against the
Company which could have a material and adverse effect on the Company or its
business, properties, condition (financial or otherwise) or results of
operations.
t. The pro forma financial information set
forth in the Registration Statement reflects, subject to the limitations set
forth in the Registration Statement as to such pro forma financial information,
the results of operations of the Company purported to be shown thereby for the
periods indicated and conforms to the requirements of Regulation S-X of the
Rules and Regulations.
u. The Company and its subsidiaries owns or
possesses all authorizations, approvals, orders, licenses, registrations, other
certificates and permits of and from all governmental regulatory officials and
bodies necessary to conduct their business as contemplated in the Prospectus,
except where the failure to own or possess all such authorizations, approvals,
orders, licenses, registrations, other certificates and permits would not
materially and adversely affect the Company or its business, properties,
business prospects, condition (financial or otherwise) or results of operations.
There is no proceeding pending or threatened, or to the Company's knowledge any
reasonable basis therefor, which may cause any such authorization, approval,
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<PAGE> 7
order, license, registration, certificate or permit to be revoked, withdrawn,
canceled, suspended or not renewed; and the Company and each of its subsidiaries
is conducting its business in compliance with all laws, rules and regulations
applicable thereto, including, without limitation, all applicable local, state
and federal environmental laws and regulations.
v. The Company and each of its subsidiaries
maintains insurance of the types and in the amounts generally deemed adequate
for its business, including, but not limited to, insurance covering real and
personal property owned or leased by the Company or its subsidiaries, as
applicable, against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect.
w. Neither the Company nor any of its
subsidiaries has at any time during the last five years (i) made any unlawful
contribution to any candidate for foreign office, or failed to disclose fully
any contribution in violation of law, or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
x. The Company has not taken and shall not
take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to cause or result
in, under the Exchange Act, the Exchange Act Rules and Regulations or otherwise,
the stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares. No bid or purchase by the Company
and, to the best knowledge of the Company, no bid or purchase that could be
attributed to the Company (as a result of bids or purchases by an "affiliated
purchaser" within the meaning of Rule 10b-6 under the Exchange Act) for or of
the Shares, the Common Stock, any securities of the same class or series as the
Common Stock or any securities convertible into or exchangeable for or that
represent any right to acquire the Common Stock is now pending or in progress or
will have commenced at any time prior to the completion of the distribution of
the Shares.
y. No labor disturbance by the employees of
the Company or any of its subsidiaries exists, is imminent or, to the knowledge
of the Company, is contemplated or threatened; and the Company is not aware of
an existing, imminent or threatened labor disturbance by the employees of any
principal suppliers, contract manufacturing organizations, manufacturers,
authorized dealers or distributors that might be expected to result in any
material change in the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company and its subsidiaries taken as
a whole. No collective bargaining agreement exists with any of the Company's or
any of the Company's subsidiaries' employees and, to the best knowledge of the
Company, no such agreement is imminent.
z. There are no outstanding loans, advances
or guaranties of indebtedness by the Company to or for the benefit of any of (i)
its "affiliates," as such term is deemed in the Rules and Regulations, (ii) any
of the officers or directors of any of its subsidiaries or (iii) any of the
members of the families of any of them.
aa. Except as may be disclosed in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), neither the Company nor any
of its subsidiaries has any liability, absolute or contingent, relating to: (i)
public health or safety; (ii) worker health or safety; (iii) product defect or
warranty; or (iv) pollution, damage to or protection of the environment,
including, without limitation, relating to damage to natural resources,
emissions, discharges, releases or threatened releases of hazardous materials
into the environment (including, further without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or otherwise
relating to the manufacture, processing, use, treatment, storage, generation,
disposal, transport or handling of any hazardous materials, which, in any case
or in the aggregate, would have a material adverse effect on the Company and its
subsidiaries taken as a whole. As used herein, "hazardous material" includes
chemical substances, wastes, pollutants, contaminants, hazardous or toxic
substances, constituents, materials or wastes, whether solid, gaseous or liquid
in nature.
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<PAGE> 8
ab. The Company has not distributed and will
not distribute prior to the Closing Date or on or prior to any date on which the
Option Stock is to be purchased, as the case may be, any prospectus or other
offering material in connection with the offering and sale of the Stock other
than the Prospectus, the Registration Statement and any other material which may
be permitted by the Act and the Rules and Regulations.
ac. The Company has complied in all respects
with the requirements of the Act and the Securities and Exchange Act of 1934, as
amended, and the rules and regulation thereunder (the "Exchange Act"), including
the periodic reporting requirements under the Exchange Act, and each such filing
has conformed in all respects to the requirements of the Act or the Exchange
Act, as applicable, and, as of its date, did not include any untrue misstatement
of a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
4. Representations and Warranties of the Selling
Shareholders. Except as to Sections 4(e) and 4(f), as to which only the
Principal Selling Shareholders (as herein defined) make any representation,
warranty or agreement, each Selling Shareholder severally represents, warrants
and agrees that:
a. The Selling Shareholder has, and
immediately prior to the Closing Date (as defined in Section 2 hereof) the
Selling Shareholder will have, good and marketable title to the shares of Common
Stock to be sold by the Selling Shareholder hereunder on such date, free and
clear of all liens, encumbrances, equities or claims; and upon delivery of such
shares and payment therefor pursuant hereto, good and valid title to such
shares, free and clear of all liens, encumbrances, equities or claims, will pass
to the Underwriters.
b. The Selling Shareholder has placed in
custody under a custody agreement (the "Custody Agreement" and, together with
all other similar agreements executed by the other Selling Shareholders, the
"Custody Agreements") with Ronald Ragland and Thomas George, or either of them
individually, as custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a commercial bank
or trust company having an office or correspondent in the United States or a
member firm of the New York or American Stock Exchanges) representing the shares
of Common Stock to be sold by the Selling Shareholder hereunder.
c. The Selling Shareholder has duly and
irrevocably executed and delivered a power of attorney (the "Power of Attorney"
and, together with all other similar agreements executed by the other Selling
Shareholders, the "Powers of Attorney") appointing the Custodian and one or more
other persons, as attorneys-in-fact, with full power of substitution, and with
full authority (exercisable by any one or more of them) to execute and deliver
this Agreement and to take such other action as may be necessary or desirable to
carry out the provisions hereof on behalf of the Selling Shareholder.
d. The Selling Shareholder has full right,
power and authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of the Agreement, the
Power of Attorney and the Custody Agreement by the Selling Shareholder and the
consummation by the Selling Shareholder of the transactions contemplated hereby
will not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Selling
Shareholder is a party or by which the Selling Shareholder is bound or to which
any of the property or assets of the Selling Shareholder is subject, nor will
such actions result in any violation of the provisions of the charter or by-laws
of the Selling Shareholder, the articles of partnership of the Selling
Shareholder or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Selling Shareholder or
the property or assets of the Selling Shareholder; and, except for the
registration of the Shares under the Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the
purchase and distribution of the Shares by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or
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<PAGE> 9
governmental agency or body is required for the execution delivery and
performance of the Agreement, the Power of Attorney or the Custody Agreement by
the Selling Shareholder and the consummation by the Selling Shareholder of the
transactions contemplated hereby.
e. Nothing has come to the attention of any
of ______ (the "Principal Selling Shareholders") to cause it to believe that the
representations and warranties of the Company set forth in Section 3(b) of this
Agreement are not true and correct; provided that no representation or warranty
is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein. The Principal Selling
Shareholders acknowledge that the statements set forth under the heading
"Underwriting" in the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement.
f. Each Principal Selling Shareholder has no
reason to believe that the representations and warranties of the Company
contained in section 3 hereof are not materially true and correct, is familiar
with the Registration Statement and the Prospectus (as amended or supplemented)
and has no knowledge of any material fact, condition or information not
disclosed in the Registration Statement, as of the effective date, or the
Prospectus (or any amendment or supplement thereto), as of the applicable filing
date, which has adversely affected or may adversely affect the business of the
Company and is not prompted to sell shares of Common Stock by any information
concerning the Company which is not set forth in the Registration Statement and
the Prospectus.
g. The Selling Shareholder has not taken and
will not take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the shares of the Stock.
h. To the extent that any statement or
omissions made in the Registration Statement or Prospectus are made in reliance
upon and in conformity with written information furnished to the Company by the
Selling Shareholder specifically for use therein, on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and on the Effective Date
and the Closing Date, the Prospectus did not and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
5. Agreements of the Company. The Company agrees with
the Underwriters as follows:
a. The Company will not, either prior to the
Effective Date or thereafter during such period as the Prospectus is required by
law to be delivered in connection with sales of the Shares by an Underwriter or
dealer, file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
b. The Company will use its best efforts to
cause the Registration Statement to become effective, and will notify the
Representatives promptly, and will confirm such advice in writing, (1) when the
Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (2) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (4) of the happening of
any event during the period mentioned in the second sentence of Section 4(e)
that makes any statement made in the Registration Statement or the Prospectus
untrue or that requires the making of any changes in the Registration Statement
or the Prospectus in order to make the
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<PAGE> 10
statements therein, in light of the circumstances in which they are made, not
misleading, and (5) of receipt by the Company or any Representatives or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will comply with the provisions of, and make all requisite filings with
the Commission pursuant to, said Rule 430A and to notify the Representatives
promptly of all such filings.
c. The Company will furnish to the
Representatives, without charge, three signed copies of the Registration
Statement and of any post-effective amendment thereto, including financial
statements and schedules, and all exhibits thereto, and will furnish to the
Representatives, without charge, for transmittal to each of the other
Underwriters, a copy of the Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, but without
exhibits.
d. The Company will comply with all the
provisions of any undertakings contained in the Registration Statement.
e. On the Effective Date, and thereafter from
time to time, the Company will deliver to each of the Underwriters, without
charge, as many copies of the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request. The Company consents to the use
of the Prospectus or any amendment or supplement thereto by the Underwriters and
by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection therewith.
If during such period of time any event shall occur which in the judgment of the
Company or counsel to the Underwriters should be set forth in the Prospectus in
order to make any statement therein, in light of the circumstances under which
it was made, not misleading, or if it is necessary to supplement or amend the
Prospectus to comply with law, the Company will forthwith prepare and duly file
with the Commission an appropriate supplement or amendment thereto, and will
deliver to each of the Underwriters, without charge, such number of copies of
such supplement or amendment to the Prospectus as the Representatives may
reasonably request.
f. Prior to any public offering of the
Shares, the Company will cooperate with the Representatives and counsel to the
Underwriters in connection with the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of such jurisdictions
as the Representatives may request; provided that in no event shall the Company
be obligated to qualify to do business in any jurisdiction where it is not now
so qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject.
g. During the period of five years commencing
on the Effective Date, the Company will furnish to the Representatives, and each
other Underwriter who may so request, copies of such financial statements and
other periodic and special reports or statements as the Company may from time to
time distribute generally to the holders of any class of its capital stock, and
will furnish to the Representatives, and each other Underwriter who may so
request, a copy of each annual or other report it shall be required to file with
the Commission.
h. The Company will make generally available
to holders of its securities as soon as may be practicable but in no event later
than the last day of the fifteenth full calendar month following the calendar
quarter in which the Effective Date falls, an earnings statement (which need not
be audited but shall be in reasonable detail) for the applicable 12-month period
after the Effective Date, satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
i. Whether or not the transactions
contemplated by this Agreement are consummated or this Agreement is terminated,
the Company will pay, or reimburse if paid by the Representatives, all costs and
expenses incident to the performance of the obligations of the Company and the
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<PAGE> 11
Selling Shareholders under this Agreement, including but not limited to costs
and expenses of or relating to (1) the preparation, printing and filing by the
Company of the Registration Statement and exhibits to it, each preliminary
prospectus, Prospectus and any amendment or supplement to the Registration
Statement or Prospectus, (2) the preparation and delivery of certificates
representing the Shares, (3) the printing of this Agreement, the Agreement Among
Underwriters, any Dealer Agreements and any Underwriters' Questionnaires, (4)
furnishing (including costs of shipping and mailing) such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may be requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (5) the costs of delivering and distributing the
Custody Agreements and the Powers of Attorney, (6) the quotation of the Shares
on the Nasdaq National Market, (7) any filings required to be made by the
Underwriters with the NASD, and the fees, disbursements and other charges of
counsel for the Underwriters in connection therewith, (8) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 5(f), including the
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (9) fees, disbursements and other
charges to the Company (but not those of counsel for the Underwriters, except as
otherwise provided herein) and (10) the transfer agent for the Shares.
j. If this Agreement shall be terminated by
the Company pursuant to any of the provisions hereof (other than pursuant to
Section 10 or Section 11 hereof) or if for any reason the Company shall be
unable to perform its obligations hereunder, the Company will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including the fees,
disbursements and other charges of counsel to the Underwriters) actually
incurred by them in connection herewith.
k. The Company will not at any time, directly
or indirectly, take any action designed, or which might reasonably be expected,
to cause or result in, or which will constitute, stabilization of the price of
the shares of Common Stock to facilitate the sale or resale of any of the
Shares.
l. The Company will apply the net proceeds
from the offering and sale of the Shares to be sold by the Company in the manner
set forth in the Prospectus under "Use of Proceeds," and shall file such reports
with the Commission with respect to the sale of the Shares and the application
of the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
m. During the period of 180 days commencing
at the Effective Date, without the prior written consent of the Representatives,
other than pursuant to the Company's Equity Incentive Plan, Employee Stock
Purchase Plan, or Incentive Stock Option Plan III described in the Prospectus,
the Company will not issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity security.
6. Agreements of the Selling Shareholders. Each
Selling Shareholder agrees:
a. For a period of 180 days from the date of
the Prospectus, not to offer for sale, sell or otherwise dispose of (or enter
into any transaction which is designed to, or could be expected to, result in
the disposition by any person of), directly or indirectly, any shares of Common
Stock (other than the Shares), without the prior written consent of the
Representatives.
b. That the shares of Common Stock to be sold
by the Selling Shareholder hereunder, which are represented by the certificates
held in custody for the Selling Shareholder, are subject to the interest of the
Underwriters and the other Selling Shareholders thereunder, that the
arrangements made by the Selling Shareholder for such custody are to that extent
irrevocable, and that the obligations of the Selling Shareholder hereunder shall
not be terminated by any act of the Selling Shareholder, by operation of law, by
the death or incapacity of any individual Selling Shareholder or the occurrence
of any other event.
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<PAGE> 12
c. To deliver to the Representatives prior to
the Closing Date a properly completed and executed United States Treasury
Department Form W-8 if the Selling Shareholder is a non-United States person or
Form W-9 if the Selling Shareholder is a United States person.
7. Conditions of the Obligations of the Underwriters.
The several obligations of each Underwriter hereunder are subject to the
following conditions:
a. Notification that the Registration
Statement has become effective shall be received by the Representatives not
later than 5:00 p.m., New York City time, on the date of this Agreement or at
such later date and time as shall be consented to in writing by the
Representatives and all filings required by Rule 424 and Rule 430A of the Rules
and Regulations shall have been made.
b. (i) No stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for such purpose shall be pending or threatened by the Commission,
(ii) no order suspending the effectiveness of the Registration Statement or the
qualification or registration of the Shares under the securities or Blue Sky
laws of any jurisdiction shall be in effect and no proceeding for such purpose
shall be pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof no amendment or supplement to
the Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Representatives and the Representatives does
not object thereto in good faith, and the Representatives shall have received
certificates, dated the Closing Date and the Option Closing Date and signed by
the Chief Executive Officer and the Chief Financial Officer of the Company (who
may, as to proceedings threatened, rely upon the best of their knowledge), to
the effect of clauses (i), (ii) and (iii) of this Section 7(b).
c. Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i) there
shall not have been a material adverse change in the general affairs, business,
business prospects, properties, management, condition (financial or otherwise)
or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, in each case other than as
described in or contemplated by the Registration Statement and the Prospectus,
and (ii) the Company shall not have sustained any material loss or interference
with its business or properties from fire, explosion, flood, earthquake or other
casualty, whether or not covered by insurance, or from any labor dispute or any
court of legislative or other governmental action, order or decree, which is not
described in the Registration Statement and the Prospectus, if in the judgment
of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the public offering price.
d. Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have been no litigation or other proceeding instituted against the Company
or any of its officers or directors in their capacities as such, before or by
any federal, state or local court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding would materially and
adversely affect the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company.
e. Each of the representations and warranties
of the Company and the Selling Shareholders contained herein shall be true and
correct in all material respects at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, and all covenants and agreements
contained herein to be performed on the part of the Company and the Selling
Shareholders and all conditions contained herein to be fulfilled or complied
with by the Company and the Selling Shareholders at or prior to the Closing Date
and, with respect to the Option Shares, at or prior to the Option Closing Date,
shall have been duly performed, fulfilled or complied with.
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<PAGE> 13
f. The Representatives shall have received an
opinion, dated the Closing Date and, with respect to the Option Shares, the
Option Closing Date, satisfactory in form and substance to the Representatives
and counsel for the Underwriters, from Heller, Ehrman, White & McAuliffe,
counsel to the Company, covering the following matters:
(i) the Company and each of its
subsidiaries have been duly organized, are validly existing as corporations in
good standing under the laws of the of their respective states of incorporation,
have the corporate power and authority to own their property and to conduct
their business as described in the Prospectus and are duly qualified to transact
business and are in good standing in each jurisdiction in which the conduct of
their business or their ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not materially and adversely affect the Company and its
subsidiaries or their business, properties, financial condition or results of
operations;
(ii) the authorized capital stock of
the Company conforms as to legal matters to the description thereof contained in
the Prospectus;
(iii) the authorized, issued and
outstanding number of shares of capital stock of the Company is as set forth
under the caption "Capitalization" in the Prospectus as of the date therein; the
shares of Common Stock outstanding prior to the issuance of the Shares have been
duly authorized and are validly issued, fully paid and nonassessable, and there
is no right of rescission with respect to any outstanding shares of the Company
and none of such shares are void or voidable by reason of the Company's failure
to issue such shares in compliance with federal and state securities laws;
(iv) the specimen certificate
evidencing the Shares filed as an exhibit to the Company's Registration
Statement is in due and proper form under California law, the Shares have been
duly authorized and, when the certificates evidencing the Shares have been
issued and delivered in accordance with the terms of this Agreement, the Shares
will be validly issued, fully paid and non-assessable, and the issuance of such
Shares is not subject to any preemptive rights, or, to the best of such
counsel's knowledge, other rights to subscribe for or purchase securities;
(v) the Registration Statement has
become effective under the Act, and no stop order suspending the effectiveness
of the Registration Statement or preventing the use of the Prospectus has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated by the Commission; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been
made in the manner and within the time period required by such Rule 424(b);
(vi) the Registration Statement and
the Prospectus and any supplements or amendments thereto (except for financial
statements, schedules and financial and statistical information included
therein, as to which such counsel need not express any opinion) comply as to
form in all material respects with the Act and the Rules and Regulations;
(vii) this Agreement has been duly
authorized, executed and delivered by the Company, and the Company has all
requisite corporate power and authority to enter into this Agreement and
consummate the transactions contemplated hereby;
(viii) this Agreement is a valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except as to (a) rights to indemnity and contribution thereunder
which may be limited by applicable law, (b) bankruptcy and laws relating to the
rights and remedies of creditors generally, and (c) the availability of
equitable remedies; the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement does not
contravene any provision of applicable law or the articles of incorporation or
by-laws of the Company or any agreement or other instrument known to such
counsel after due inquiry and which is binding upon and material to the Company
or, any judgment or decree of any governmental body, agency or court having
jurisdiction over
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<PAGE> 14
the Company known to such counsel after due inquiry, presently in effect and a
breach or violation of which, a default under which, a termination of which, an
acceleration under which, or a conflict with which would materially and
adversely affect the Company or its business, properties, financial condition or
results of operations, and no consent, approval or authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may have been obtained under the Act and such as required by the securities
or Blue Sky laws of the various states in connection with the offer and sale of
the Shares by the Underwriters;
(ix) the statements in the Prospectus
under "Management -- Officers and Directors" (but excluding the paragraphs
describing the business experience of such persons), "-- Compensation Committee
Interlocks and Insider Participation," "-- Executive Compensation," "-- Benefit
Plans" (but excluding the Summary Compensation Table, option tables and
footnotes thereto), "-- Limitation of Liability and Indemnification Matters,"
"Certain Transactions," "Description of Capital Stock" and "Shares Eligible for
Future Sale" and in the Registration Statement in Item 14 and Item 15, insofar
as such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, fairly present and summarize the information
with respect to such legal matters, documents and proceedings required under the
Act and the Rules and Regulations;
(x) to such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened to which the
Company or any subsidiary is a party or to which any of the properties of the
Company is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described;
(xi) to such counsel's knowledge,
except as described in the Registration Statement, no holder of securities of
the Company has rights to require the Company to register with the Commission
shares of Common Stock or other securities, as part of the offering contemplated
hereby;
(xii) such counsel does not know of
any contracts or documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or Prospectus or any
supplements or amendments thereto which are not so filed, or described as
required, and to such counsel's knowledge, each description of such contracts
and documents as is contained in the Registration Statement and Prospectus
fairly presents in all material respects the information required under the Act
and the Rules and Regulations; and
(xiii) as of the Effective Date, the
Common Stock of the Company was duly authorized for listing on the Nasdaq
National Market upon official notice of issuance; and
(xiv) the outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
are validly issued, fully paid and non-assessable and are owned by the Company
as set forth in Exhibit 22 to the Registration Statement.
In addition, such counsel shall state that, although
they have not independently verified the accuracy and completeness of the
statements contained in the Registration Statement or the Prospectus, nothing
has come to the attention of such counsel that caused them to believe that the
Registration Statement (other than the financial statements, as to which such
counsel need express no opinion or belief), at the time it was declared
effective, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (other than the
financial statements, as to which such counsel need express no opinion or
belief), at the time the Registration Statement was declared effective (unless
the term "Prospectus" refers to a prospectus that has been provided to the
Underwriters by the Company after the time the Registration Statement was
declared effective for use in connection with the offering of the Firm Shares
that differs from the Prospectus on file at the Commission at the time the
Registration Statement was declared effective, in which case at the time such
Prospectus was first provided to the Underwriters for such use), or at the
Closing Date or any later date on which the Option Shares are to be purchased,
included or includes any untrue statement of a material fact or
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<PAGE> 15
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering such opinion, such counsel may rely as
to matters not involving the laws of the United States or the State of
California upon opinions of local counsel, and as to matters of fact, on
representations or certificates of officers of the Company and of governmental
officials, in which case their opinion is to state that they are so doing, that
they have no actual knowledge of any material misstatement or inaccuracy in such
opinions, representations or certificates and that the Underwriters are
justified in relying on such opinions or certificates and copies of said
opinions or certificates are to be attached to the opinion.
In rendering such opinion, such counsel may rely upon
opinions of counsel satisfactory in form and substance to the Representatives
and counsel for the Underwriters, in which case, the opinion of counsel for the
Company shall state that it has no reason to believe that such counsel, the
Representatives and counsel for the Underwriters are not justified in so
relying.
g. The counsel for the Selling Shareholders
shall have furnished to the Representatives their written opinion, as counsel to
the Selling Shareholders, addressed to the Underwriters and dated the Closing
Date, in form and substance reasonably satisfactory to the Representatives, to
the effect that:
(i) Each Selling Shareholder has full
right, power and authority to enter into this Agreement, the Power of Attorney
and the Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by each Selling
Shareholder and the consummation by each Selling Shareholder of the transactions
contemplated hereby will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any statute,
any indenture, mortgage deed of trust, loan agreement or other agreement or
instrument to which any Selling Shareholder is a party or by which any Selling
Shareholder is bound or to which any of the property or assets of any Selling
Shareholder is subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of any Selling Shareholder or the articles
of partnership of any Selling Shareholder, or any statute, order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over any Selling Shareholder or the property or assets of
any Selling Shareholder; and, except for the registration of the Shares under
the Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution of the Shares
by the Underwriters, no consent, approval, authorization or order of, or filing
or registration with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement, the Power of
Attorney or the Custody Agreement by any Selling Shareholder and the
consummation by any Selling Shareholder of the transactions contemplated hereby;
(ii) This Agreement has been duly
authorized, executed and delivered by or on behalf of each Selling Shareholder;
(iii) A Power-of-Attorney and a
Custody Agreement have been duly authorized, executed and delivered by each
Selling Shareholder and constitute valid and binding agreements of each Selling
Shareholder, enforceable in accordance with their respective terms; and
(iv) Good and valid title to the
Shares to be sold by each Selling Shareholder under this agreement, free and
clear of all liens, encumbrances, equities or claims, has been transferred to
each of the several Underwriters.
In rendering such opinion, such counsel may rely as
to matters not involving the laws of the United States or the State of
California upon opinions of local counsel, and as to matters of fact, on
representations or certificates of officers of the Selling Shareholders and of
governmental officials, in which case their opinion is to state that they are so
doing, that they have no actual knowledge of any material misstatement or
inaccuracy in such opinions, representations or certificates and that the
Underwriters are justified in relying on such opinions or certificates and
copies of said opinions or certificates are to be attached to the opinion.
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<PAGE> 16
h. The Representatives shall have received an
opinion, dated the Closing Date and, with respect to the Option Shares, the
Option Closing Date, from Gray Cary Ware & Freidenrich, A Professional
Corporation, counsel to the Underwriters, with respect to the Registration
Statement, the Prospectus and this Agreement, which opinion shall be
satisfactory in all respects to the Representatives.
i. The Representatives shall have received,
on or prior to the Closing Date, agreements in substantially the form attached
hereto as Schedule III from all directors, officers, and shareholders of the
Company.
j. Concurrently with the execution and
delivery of this Agreement, the Accountants shall have furnished to the
Representatives a letter ("Original Letter"), dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and with
respect to certain financial and other statistical and numerical information
contained in the Registration Statement. At the Closing Date, and, as to the
Option Shares, the Option Closing Date, the Accountants shall have furnished to
the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth in
the letter from the Accountants, that nothing has come to their attention during
the period from the date of the letter referred to in the prior sentence to a
date (specified in the letter) not more than two business days prior to the
Closing Date and the Option Closing Date, as the case may be, which would
require any change in their letter dated the date hereof if it were required to
be dated and delivered at the Closing Date and the Option Closing Date. The
Original Letter shall state that the Accountants have performed the procedures
set out in the Statement of Accounting Standards No. 71 ("SAS 71") for a review
of interim financial information with respect to each of the three quarters
ended November 3, 1996 and October 22, 1995.
k. The Representatives shall have received,
on or prior to the Closing Date, copies of a letter to the Company from the
Accountants stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's financial statements as of and at
____________, 1996, did not disclose any weakness in internal controls that they
considered to be material weaknesses.
l. Concurrently with the execution and
delivery of this Agreement and at the Closing Date and, with respect to the
Option Shares, the Option Closing Date, there shall be furnished to the
Representatives a certificate, dated the date of its delivery, signed by the
Chief Executive Officer and the Chief Financial Officer of the Company and of
any subsidiary reasonably requested by the Representatives, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate
has carefully examined the Registration Statement and the Prospectus and (A) as
of the date of such certificate, the Registration Statement and the Prospectus
do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading and (B) in the case of the certificate
delivered at the Closing Date and the Option Closing Date, since the Effective
Date no event has occurred as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein not untrue or
misleading in any material respect.
(ii) Each of the representations and
warranties of the Company contained in this Agreement were, when originally
made, and are, at the time such certificate is delivered, true and correct in
all material respects.
(iii) Each of the covenants required
to be performed by the Company herein on or prior to the date of such
certificate has been duly, timely and fully performed and each condition herein
required to be satisfied or fulfilled on or prior to the date of such
certificate has been duly, timely and fully satisfied or fulfilled.
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<PAGE> 17
m. Each Selling Shareholder (or the Custodian
or one or more attorneys-in-fact on behalf of the Selling Shareholder) shall
have furnished to the Representatives on the Closing Date a certificate, dated
the Closing Date, signed by, or on behalf of, the Selling Shareholder (or the
Custodian or one or more attorneys-in-fact) stating that the representations,
warranties and agreements of the Selling Shareholder contained herein are true
and correct as of the Closing Date and that the Selling Shareholder has complied
with all agreements contained herein to be performed by the Selling Shareholder
at or prior to the Closing Date.
n. The Shares shall be qualified for sale in
such jurisdictions as the Representatives may reasonably request, and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date or the Option Closing Date.
o. Prior to the Closing Date, the Shares
shall have been duly authorized for listing on the Nasdaq National Market upon
official notice of issuance.
p. The Company shall have furnished to the
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company herein, as to the performance by the Company of its
obligations hereunder, or as to the fulfillment of the conditions concurrent and
precedent to the obligations hereunder of the Representatives.
q. You shall have received from each of the
Company's officers and directors and from those shareholders requested by you,
validly executed lock-up agreements with the Representatives to the effect that
they will not, without the prior written consent of the Representatives, sell,
contract to sell or otherwise dispose of any shares of Common Stock or rights to
acquire such shares according to the terms set forth in Schedule II hereto.
8. Indemnification.
a. The Company will indemnify and hold
harmless each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person, if any, who controls, within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, each Underwriter, from and
against any and all losses, claims, liabilities, expenses and damages arising
out of any action, suit or proceeding brought by a third party (including any
and all investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted by a third party), to which they, or any of
them, may become subject under the Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, liabilities, expenses or damages (i) relate to, arise out of or
are based on any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading in light of the circumstances in which they were made, (ii)
relate to, arise out of or are based on whole or in part on any inaccuracy in
the representations and warranties of the Company or the Selling Shareholders
contained herein or (iii) arise out of or are based upon any failure of the
Company to perform its obligations hereunder or under law in connection with the
transactions contemplated hereby; provided that the Company will not be liable
to the extent that such loss, claim, liability, expense or damage arises from
the sale of the Shares in the public offering to any person by an Underwriter
and is based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives, on
behalf of any Underwriter, expressly for inclusion in the Registration
Statement, the preliminary prospectus or the Prospectus, or any amendment or
supplement thereto, and provided further that the Company will not be liable to
any Underwriter, the directors, officers, employees or agents of such
Underwriter or any person controlling such Underwriter with respect to any loss,
claim, liability, expense, or damage arising out of or based on any untrue
17
<PAGE> 18
statement or omission or alleged untrue statement or omission or alleged
omission to state a material fact in the preliminary prospectus which is
corrected in the Prospectus if the person asserting any such loss, claim,
liability, charge or damage purchased any of the Shares from such Underwriter,
was entitled by law to receive a Prospectus but was not sent or given a copy of
the Prospectus at or prior to the written confirmation of the sale of such
Shares to such person. The Company acknowledges that the statements set forth
under the heading "Underwriting" in the preliminary prospectus and the
Prospectus constitute the only information relating to any Underwriter furnished
in writing to the Company by the Representatives on behalf of the Underwriters
expressly for inclusion in the Registration Statement, the preliminary
prospectus or the Prospectus. This indemnity will be in addition to any
liability that the Company might otherwise have.
b. Each Selling Shareholder, severally in
proportion to the number of Shares to be sold by each of them hereunder, shall
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Shares), to which that Underwriter or
controlling person may become subject, under the Act or otherwise, insofar as
such loss, claim, damage, liability or action relates to, arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by that Underwriter or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Selling Shareholders shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein. The Selling Shareholders acknowledge that
the statements set forth under the heading "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement. The foregoing indemnity agreement is in addition to any
liability which the Selling Shareholders may otherwise have to any Underwriter
or any controlling person of that Underwriter. The liability of each Selling
Shareholder under this Section 8(b) shall be limited to an amount equal to the
initial public offering price of the stock sold by such Selling Shareholder to
the Underwriters less the amount of any discounts or commissions paid by such
Selling Shareholder to the Underwriters.
c. Each Underwriter will indemnify and hold
harmless the Company, each person, if any, who controls, within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, the Company, and each
director of the Company and each officer of the Company who signs the
Registration Statement to the same extent as the foregoing indemnity from the
Company to each Underwriter, as set forth in Section 8(a), but only insofar as
losses, claims, liabilities, expenses or damages relate to, arise out of or are
based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives, on
behalf of such Underwriter, expressly for use in the Registration Statement, the
preliminary prospectus or the Prospectus, or any amendment or supplement
thereto. The Company acknowledges that the statements set forth under the
heading "Underwriting" in the preliminary prospectus and the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives on behalf of the Underwriters expressly
for inclusion in the Registration Statement, the preliminary prospectus or the
Prospectus. This indemnity will be in addition to any liability that each
Underwriter might otherwise have.
d. Any party that proposes to assert the
right to be indemnified under this Section 8, shall, promptly after receipt of
notice of commencement of any action against such party in respect of
18
<PAGE> 19
which a claim is to be made against an indemnifying party or parties under this
Section 8, notify each such indemnifying party in writing of the commencement of
such action, enclosing with such notice a copy of all papers served, but the
omission so to notify such indemnifying party will not relieve it from any
liability that it may have to any indemnified party under the foregoing
provisions of this Section unless, and only to the extent that, such omission
results in the loss of substantive rights or defenses by the indemnifying party.
If any such action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering written notice
to the indemnified party promptly after receiving notice of the commencement of
the action from the indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense, the indemnifying
party will not be liable to the indemnified party for any legal or other
expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in connection with
the defense. The indemnified party will have the right to employ its own counsel
in any such action, but the fees, expenses and other charges of such counsel
will be at the expense of such indemnified party unless (i) the employment of
counsel by the indemnified party has been authorized in writing by the
indemnifying party, (ii) there are legal defenses available to it or other
indemnified parties that are different from or in addition to those available to
the indemnifying party, (iii) the indemnified party has reasonably concluded
that a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees, disbursements and other charges of more than one
separate firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. Any indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
e. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 8 is applicable in accordance with its
terms, but for any reason is held to be unavailable from the Company, the
Selling Shareholders or the Underwriters, the indemnifying party will contribute
to the total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Company or
the Selling Shareholders from persons other than the Underwriters, such as
persons who control the Company or a Selling Shareholder within the meaning of
the Act, officers of the Company who signed the Registration Statement and
directors of the Company, who also may be liable for contribution) to which the
Company, any one or more of the Selling Shareholders and any one or more of the
Underwriters may be subject in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, the Selling Shareholders
and the Underwriters. The relative benefits received by the Company, the Selling
Shareholders and the Underwriters shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence, but also the relative fault of the Company, the Selling
Shareholders and the Underwriters with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Company, the Selling Shareholders or the
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<PAGE> 20
Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Shareholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(d) were to be determined by pro rata allocation (even
if the Selling Shareholders or the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above in this
Section 8(d), shall be deemed to include, for purpose of this Section 8(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts
received by it and no person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 8(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against any such party in respect of which a claim for contribution may be made
under this Section 8(d), will notify any such party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 8(d). No party will be liable for contribution with respect to any
action or claim settled without its written consent (which consent will not be
unreasonably withheld).
f. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 8, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 8 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act. The parties are advised that federal or state
public policy, as interpreted by the courts in certain jurisdictions, may be
contrary to certain of the provisions of this Section 8, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert such public
policy as a defense to a claim under this Section 8 and further agree not to
attempt to assert any such defense.
g. The indemnity and contribution agreements
contained in this Section 8 and the representations and warranties of the
Company and Selling Shareholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any investigation made
by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and
payment therefor or (iii) any termination of this Agreement.
9. Reimbursement of Certain Expenses. In addition to
its other obligations under Section 8(a) of this Agreement, the Company hereby
agrees to reimburse on a quarterly basis the Underwriters for all reasonable
legal and other expenses incurred in connection with investigating or defending
any claim, action, investigation, inquiry or other proceeding brought by a third
party relating to, arising out of or based upon in whole or part, (i) as
described in Section 8(a), any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or the omission or alleged omission to state in
such document a material fact required to be stated in it or necessary to make
the statements in it not misleading in light of the circumstances in which they
were made, (ii) any inaccuracy in the representations and warranties of the
Company or the Selling Shareholders contained herein or (iii) any failure of the
Company or the Selling Shareholders to perform their obligations hereunder or
under law in connection with the transactions contemplated hereby,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the obligations under this Section 9 and the possibility that
such payment might later be held to
20
<PAGE> 21
be improper; provided, however, that, to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them.
10. Termination. The obligations of the Underwriters,
the Company and the Selling Shareholders under this Agreement may be terminated
at any time on or prior to the Closing Date (or, with respect to the Option
Shares, on or prior to the Option Closing Date), by notice to the Company from
the Representatives, without liability on the part of any Underwriter to the
Company and the Selling Shareholders or the Company and the Selling Shareholders
to any underwriter (except as set forth in section 5(i) above) if, prior to
delivery and payment for the Firm Shares or Option Shares, as the case may be,
in the sole judgment of the Representatives, (a) trading in any of the equity
securities of the Company shall have been suspended by the Commission, by an
exchange that lists the Shares or by the Nasdaq National Market, (b) trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or minimum or maximum prices shall have been
generally established on such exchange, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by such exchange or by order of the
Commission or any court or other governmental authority, (c) a general banking
moratorium shall have been declared by either federal or New York State
authorities or (d) any material adverse change in the financial or securities
markets in the United States, or in political, financial or economic conditions
in the United States or any outbreak or material escalation of hostilities or
other calamity or crises, shall have occurred, the effect of which is such as to
make it, in the sole judgment of the Representatives, impracticable to market
the Shares.
11. Substitution of Underwriters. If any one or more of
the Underwriters shall fail or refuse to purchase the Firm Shares which it or
they have agreed to purchase hereunder, and the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares,
the other Underwriters shall be obligated, severally, to purchase the Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Firm Shares which
they have respectively agreed to purchase pursuant to Section 1 bears to the
aggregate number of Firm Shares which all such non-defaulting Underwriters have
so agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Firm Shares which
any Underwriter has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 11 by more than one-ninth of such number of
Firm Shares without the prior written consent of such Underwriter. If any
Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and
the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase exceeds one-tenth of the
aggregate number of the Firm Shares and arrangements satisfactory to the
Representatives and the Company for the purchase of such Firm Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any nondefaulting Underwriter, the Company or the
Selling Shareholders for the purchase or sale of any Shares under this
Agreement. In any such case either the Representatives or the Company shall have
the right to postpone the Closing Date, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or in any other documents or arrangements may be effected.
Any action taken pursuant to this Section 11 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
12. Miscellaneous. Notice given pursuant to any of the
provisions of this Agreement shall be in writing and, unless otherwise
specified, shall be mailed or delivered (a) if to the Company, at the offices of
the Company, 9404 Chesapeake Drive, San Diego, California, 92123, Attention:
Chief Executive Officer, with a copy to Victor A. Hebert, Esq., Heller, Ehrman,
White & McAuliffe, 333 Bush St., San Francisco, 94140-2878, (b) if to any of the
Selling Shareholders, to the address of each as set forth on Schedule II hereto,
or (c) if to the Underwriters, to the Representatives at the offices of Needham
& Company, Inc., 400 Park Avenue, New York, New York 10022, Attention: Corporate
Finance Department, with a copy to Douglas J. Rein, Esq., Gray Cary Ware &
Freidenrich, A Professional Corporation, 4365 Executive Drive, Suite 1600, San
Diego, California 92121. Any such notice shall be effective only upon receipt.
Any notice may be made by telex or facsimile transmission, but if so made shall
be subsequently confirmed in writing.
21
<PAGE> 22
This Agreement has been and is made solely for the benefit of
the Underwriters, the Selling Shareholders and the Company and of the
controlling persons, directors and officers referred to in Section 8, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successors and assigns" as
used in this Agreement shall not include a purchaser, as such purchaser, of
Shares from any of the Underwriters.
This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts made
and to be performed entirely within such State.
This Agreement may be signed in two or more counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
Please confirm that the foregoing correctly sets forth the
Agreement among the Company and the Underwriters.
Very truly yours,
REMEC, INC.
By:
----------------------------------
Title: Chief Executive Officer
The Selling Shareholders named in
Schedule II to this Agreement
By:
----------------------------------
Attorney-in-Fact
The foregoing Agreement is hereby confirmed and
accepted as of the date first above written.
NEEDHAM & COMPANY, INC.
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC
As Representatives of the Underwriters listed on
Schedule I
By: Needham & Company, Inc.
By:
------------------------------
Title: Managing Director
------------------------------
22
<PAGE> 23
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITERS PURCHASED
Needham & Company, Inc........................................
A.G. Edwards & Co., Inc.......................................
Oppenheimer & Co., Inc........................................
-------------
Total...............................................
=============
23
<PAGE> 24
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
NUMBER OF
SHAREHOLDER FIRM SHARES
--------------
Total........................................
==============
NUMBER OF
SHAREHOLDER OPTION SHARES
--------------
Total........................................
==============
24
<PAGE> 25
SCHEDULE III
FORM OF LOCK-UP AGREEMENT TO BE SIGNED BY ALL
DIRECTORS, OFFICERS AND SHAREHOLDERS OF THE COMPANY
The undersigned is a holder of securities of REMEC, Inc., a
California corporation (the "Company") and wishes to facilitate the secondary
public offering of shares of the Common Stock (the "Common Stock") of the
Company (the "Offering"). The undersigned recognizes that such Offering will be
of benefit to the undersigned.
In consideration of the foregoing and in order to induce you
to act as underwriters in connection with the Offering, the undersigned hereby
agrees that he, she or it will not, directly or indirectly, sell, contract to
sell, transfer or encumber the economic risk of ownership interest in, make any
short sale, pledge, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended,
or otherwise dispose of, any shares of Common Stock, options to acquire shares
of Common Stock or securities exchangeable for or convertible into shares of
Common Stock of the Company which he, she or it may own, exclusive of any shares
of Common Stock purchased in connection with the Company's initial public
offering or purchased in the public trading market subsequent to the Company's
initial public offering, without the prior written approval of Needham &
Company, Inc., acting on its own behalf and/or on behalf of other
representatives of the underwriters, for a period commencing as of the day on
which the Form S-1 Registration Statement to be filed on behalf of the Company
in connection with the Offering (the "Registration Statement") shall become
effective by order of the Securities and Exchange Commission (the "Effective
Date") and ending on the date which is one hundred eighty (180) days after the
Effective Date. The undersigned confirms that he, she or it understands that the
underwriters and the Company will rely upon the representations set forth in
this Agreement in proceeding with the Offering. The undersigned further confirms
that the agreements of the undersigned are irrevocable and shall be binding upon
the undersigned's heirs, legal representatives, successors and assigns. The
undersigned agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of securities held by the
undersigned except in compliance with this Agreement.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns upon the
effectiveness of the Registration Statement.
25
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Subsidiary State of Incorporation
---------- ----------------------
REMEC Wireless, Inc. California
Humphrey, Inc. California
RF Microsystems, Inc. California
Magnum Microwave Corporation California
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated February 29, 1996
except for the first paragraph of Note 2, as to which the date is August 26,
1996 with respect to the consolidated financial statements of REMEC, Inc. in the
Registration Statement (Form S-1) and related Prospectus of REMEC, Inc. for the
registration of 2,587,500 shares of its common stock.
Our audits also included the financial statement schedule of REMEC, Inc. listed
in Item 16(b). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
San Diego, California
December 20, 1996
