<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1)
PROSPECTUS under the Securities Act of
1933 in connection with
Registration No. 333-18325
2,750,000 Shares
REMEC LOGO
Common Stock
---------------------
Of the 2,750,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by REMEC, Inc. ("REMEC" or the "Company") and 750,000 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 January 22,
1997, the last reported sale price for the Company's Common Stock was $23.50 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.
<TABLE>
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PROCEEDS TO
PRICE TO PROCEEDS TO SELLING
PUBLIC UNDERWRITING COMPANY(2) SHAREHOLDERS
DISCOUNTS AND
COMMISSIONS(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $23.00 $1.25 $21.75 $21.75
- -------------------------------------------------------------------------------------------------
Total(3)..................... $63,250,000 $3,437,500 $43,500,000 $16,312,500
- -------------------------------------------------------------------------------------------------
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</TABLE>
(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 has granted the Underwriters a 30-day option to purchase up to
an additional 412,500 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 $72,737,500,
$3,953,125, $52,471,875 and $16,312,500, respectively. See "Underwriting."
---------------------
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 28, 1997.
---------------------
NEEDHAM & COMPANY, INC.
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC.
The date of this Prospectus is January 22, 1997
<PAGE> 2
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> 3
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.
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THE OFFERING
Common Stock Offered by the Company......... 2,000,000 Shares
Common Stock Offered by the Selling
Shareholders................................ 750,000 Shares
Common Stock to be Outstanding After the
Offering.................................... 11,014,342 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)
<TABLE>
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NINE MONTHS ENDED
YEARS ENDED JANUARY 31, ------------------------
------------------------------------------- OCTOBER 22, NOVEMBER 3,
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ----------- -----------
<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>
<TABLE>
<CAPTION>
JANUARY 31, 1996 NOVEMBER 3, 1996
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ACTUAL ACTUAL AS ADJUSTED(4)
---------------- ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,326 $ 6,513 $ 49,613
Working capital.......................................... 11,912 25,964 69,064
Total assets............................................. 33,739 54,016 97,116
Long-term debt........................................... 1,900 -- --
Total shareholders' equity............................... 20,094 41,519 84,619
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1996 NOVEMBER 3, 1996
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<S> <C> <C>
BACKLOG(5)
Commercial...................................................... $ 45,134 $ 68,957
Defense......................................................... 42,382 62,928
---------------- ---------- ------
Total................................................. $ 87,516 $131,885
================ ================
</TABLE>
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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 2,000,000 shares of Common
Stock offered by the Company hereby at the public offering price of $23 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> 5
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
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<PAGE> 6
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> 7
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> 8
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 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, Magnum experienced a $2.3 million 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."
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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
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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> 11
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 11,014,342 shares
of Common Stock. Immediately upon the effectiveness of this offering, the
2,750,000 shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable. Of the remaining
8,264,342 shares, 1,918,967 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> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock being offered by the Company at the public offering price of $23
per share are approximately $43,100,000, (approximately $52,072,000 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 January 22, 1997)................................. 24 1/4 14
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on January 22, 1997 was $23.50. 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 4 to Consolidated Financial
Statements.
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 3, 1996 and as adjusted to reflect the sale of 2,000,000 shares of
Common Stock offered by the Company in this offering at the public offering
price of $23 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)(2):
Common Stock, $.01 par value; 40,000,000 shares authorized;
9,014,342 shares issued and outstanding, actual; 11,014,342
shares issued and outstanding, as adjusted..................... 90,143 110,143
Additional paid-in capital........................................ 30,192,869 73,272,869
Retained earnings................................................. 11,236,467 11,236,467
---------- ----------
Total shareholders' equity........................................ 41,519,479 84,619,479
---------- ----------
Total capitalization...................................... $41,519,479 $84,619,479
=========== ===========
</TABLE>
- ---------------
(1) Excludes 412,500 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 $114,268 and $82,240,619,
respectively, if the Underwriters' over-allotment option is exercised in
full.
13
<PAGE> 14
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 $ 49,613
Working capital.................................. 13,797 10,332 13,367 11,993 11,912 25,964 69,064
Total assets..................................... 26,223 21,378 30,878 29,190 33,739 54,016 97,116
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 84,619
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, NOVEMBER 3,
1996 1996
----------- -----------
<S> <C> <C>
BACKLOG(1)(4):
Commercial........................................................................................... $45,134 $ 68,957
Defense.............................................................................................. 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 2,000,000 shares of Common
Stock offered by the Company hereby at the public offering price of $23 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> 15
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.
15
<PAGE> 16
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>
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 net
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, due in part to the
recognition of $2.4 million of non-recurring Microwave revenue for the nine
months ended October 22, 1995 associated with the settlement of a termination
claim for a large defense contract that was terminated in December 1992. 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
16
<PAGE> 17
$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 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 a total interest
income of $248,000 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%.
17
<PAGE> 18
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 $30.5
million for fiscal 1995 to $26.9 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 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.
18
<PAGE> 19
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.
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 increased research and development
activities at 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> 20
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 margin 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 expects these
expenses to increase in absolute dollars and to fluctuate as a percentage of net
sales 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 result 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.
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
20
<PAGE> 21
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 months
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 this offering 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> 22
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 the end of 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> 23
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> 24
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> 25
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> 26
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
26
<PAGE> 27
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>
<S> <C> <C>
- ----------------------------------------------------------------------------------------
BAND FREQUENCY RANGE USES
- ----------------------------------------------------------------------------------------
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
27
<PAGE> 28
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.
28
<PAGE> 29
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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<PAGE> 30
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.
30
<PAGE> 31
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> 32
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> 33
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> 34
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 months 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> 35
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> 36
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.
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<PAGE> 37
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. degree from the University of Michigan and M.S.E.E. and
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> 38
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> 39
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> 40
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.
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, 6,539 shares of Common
40
<PAGE> 41
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. 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> 42
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 11.7 316,973 735,527 6.7
Joseph T. Lee(4)............................ 509,783 5.7 153,000 356,783 3.2
Denny Morgan(5)............................. 344,625 3.8 103,788 240,837 2.2
Jack A. Giles(6)............................ 240,800 2.7 72,520 168,280 1.5
Errol Ekaireb(7)............................ 148,787 1.7 44,810 103,977 *
Gary L. Luick(8)............................ 3,875 * -- -- *
Andre R. Horn(9)............................ 13,375 * 2,496 10,879 *
Jeffrey M. Nash(9).......................... 43,375 * 12,800 30,575 *
Thomas A. Corcoran.......................... 6,000 * 500 5,500 *
Thomas A. George............................ 7,072 * 2,130 4,942 *
William H. Gibbs............................ -- -- -- -- --
All directors and executive officers as a
group (11 persons)(10).................... 2,370,192 26.3 709,017 1,657,300 15.0
Jerry Collum................................ 123,434 1.4 5,003 118,431 1.1
Herb Koga................................... 26,973 * 2,263 24,710 *
Michael McDonald............................ 61,960 * 6,000 55,960 *
Michael Streitmatter........................ 92,033 1.0 27,717 64,316 *
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of Common Stock.
(1) 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
11,014,342 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) Mr. Ekaireb's shares include 10,000 shares held by Mr. Ekaireb's spouse and
500 shares held by Mr. Ekaireb's grandson.
(8) Issuable upon exercise of outstanding options that are exercisable on or
before March 31, 1997.
(9) Includes 875 shares issuable upon exercise of outstanding options that are
exercisable on or before March 31, 1997.
(10) Includes 5,625 shares issuable upon exercise of outstanding options that
are exercisable on or before March 31, 1997.
42
<PAGE> 43
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> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding
11,014,342 shares of Common Stock. Of these shares, the 2,750,000 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 8,264,342 shares,
holders of 1,918,967 shares, including all officers and directors (except for
two directors who only own options to purchase an aggregate of 18,500 shares of
Common Stock of which 7,225 shares 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 6,345,375 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 110,143 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> 45
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.................................................... 601,670
A.G. Edwards & Sons, Inc.................................................. 601,665
Oppenheimer & Co., Inc.................................................... 601,665
Alex. Brown & Sons Incorporated........................................... 125,000
Donaldson, Lufkin & Jenrette Securities Corporation....................... 125,000
Hambrecht & Quist LLC..................................................... 125,000
Lehman Brothers........................................................... 125,000
Robertson, Stephens & Company LLC......................................... 125,000
Smith Barney Inc. ........................................................ 125,000
Rauscher Pierce Refnes, Inc. ............................................. 65,000
Torrey Pines Securities, Inc. ............................................ 65,000
Wessels, Arnold & Henderson, L.L.C. ...................................... 65,000
----------
Total........................................................... 2,750,000
==========
</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 $0.70
per share, of which $0.10 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 has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 412,500
shares of Common Stock at the same price per share as the Company receives for
the 2,000,000 shares that the Underwriters have agreed to purchase from it. 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 18,500 shares
of Common Stock of which 7,225 shares 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
45
<PAGE> 46
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 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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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 communications 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> 55
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> 56
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> 57
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 $46,246,959 $52,784,385 $38,617,569 $34,771,300
Magnum........................ 11,298,796 11,306,499 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> 58
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assuming that the acquisition of RFM had occurred 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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
- ------------------------------------------------------
- ------------------------------------------------------
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>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,750,000 Shares
REMEC LOGO
Common Stock
-------------------
PROSPECTUS
-------------------
Needham & Company, Inc.
A.G. Edwards & Sons, Inc.
Oppenheimer & Co., Inc.
------------------------
January 22, 1997
- ------------------------------------------------------
- ------------------------------------------------------
