<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1997
REGISTRATION NO. 333-27023
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
REMEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 3812 95-3814301
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123, (619) 560-1301
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD E. RAGLAND, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123, (619) 560-1301
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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VICTOR A. HEBERT DENNIS R. DEBROECK
PAUL H. GREINER MARK A. LEAHY
HELLER EHRMAN WHITE & MCAULIFFE FENWICK & WEST LLP
601 SOUTH FIGUEROA STREET TWO PALO ALTO SQUARE
LOS ANGELES, CALIFORNIA 90017 PALO ALTO, CALIFORNIA 94306
TELEPHONE: (213) 689-0200 TELEPHONE: (415) 494-0600
FACSIMILE: (213) 614-1868 FACSIMILE: (415) 494-1417
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
REMEC, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS
IN FORM S-4 AND PROSPECTUS PURSUANT TO
ITEM 501(B) OF REGULATION S-K
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ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
- -------- --------------------------------------- ---------------------------------------------
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Item 1 Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus........................... Outside Front Cover Page of Prospectus/Proxy
Statement
Item 2 Inside Front and Outside Back Cover
Pages of Prospectus.................. Available Information; Table of Contents
Item 3 Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information.......................... Summary; Risk Factors; The Merger and Related
Transactions
Item 4 Terms of the Transaction............... Summary; Introduction; The Merger and Related
Transactions; Terms of the Merger;
Description of REMEC Capital Stock
Item 5 Pro Forma Financial Information........ Summary; Unaudited Pro Forma Combined
Financial Statements
Item 6 Material Contacts with the Company
Being Acquired....................... The Merger and Related Transactions
Item 7 Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............ Inapplicable
Item 8 Interests of Named Experts and
Counsel.............................. Legal Matters; Experts
Item 9 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Inapplicable
Item 10 Information with Respect to S-3
Registrants.......................... Inapplicable
Item 11 Incorporation of Certain Information by
Reference............................ Inapplicable
Item 12 Information with Respect to S-2 or S-3
Registrants.......................... Inapplicable
Item 13 Incorporation of Certain Information by
Reference............................ Inapplicable
Item 14 Information with Respect to Registrants
Other Than S-2 or S-3 Registrants.... Summary; Price Range of Common Stock; REMEC
Selected Financial Data; Voting and
Proxies; Information Concerning REMEC;
REMEC's Management Discussion and Analysis
of Financial Condition and Results of
Operations; REMEC Financial Statements
Item 15 Information with Respect to S-3
Companies............................ Inapplicable
Item 16 Information with Respect to S-2 or S-3
Companies............................ Inapplicable
Item 17 Information with Respect to Companies
Other than S-2 or S-3 Companies...... Summary; C&S Hybrid Selected Financial Data;
Voting and Proxies; C&S Hybrid's Management
Discussion and Analysis of Financial
Condition and Results of Operations;
Information Concerning C&S Hybrid; C&S
Hybrid Financial Statements
</TABLE>
<PAGE> 3
<TABLE>
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ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
- -------- --------------------------------------- ---------------------------------------------
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Item 18 Information if Proxies, Consents or
Authorization are to be Solicited.... Summary; Voting and Proxies; Terms of the
Merger; Information Concerning REMEC;
Information Concerning C&S Hybrid
Item 19 Information if Proxies, Consents or
Authorizations are not to be
Solicited, or in an Exchange Offer... Inapplicable
</TABLE>
<PAGE> 4
PRELIMINARY COPY -- FOR INFORMATION OF
SECURITIES AND EXCHANGE COMMISSION ONLY
C&S HYBRID, INC.
804 BUCKEYE COURT
MILPITAS, CALIFORNIA 95035
June 17, 1997
Dear Shareholder:
A Special Meeting of Shareholders (the "Special Meeting") of C&S Hybrid,
Inc., a California corporation ("C&S Hybrid"), will be held at C&S Hybrid's
principal executive offices, located at 804 Buckeye Court, Milpitas, California
95035, on June 27, 1997, at 10:00 a.m., local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve an Agreement and Plan of Reorganization and Merger dated as
of April 10, 1997 (the "Agreement of Reorganization") by and among C&S Hybrid,
REMEC, Inc., a California corporation ("REMEC"), and C&S Acquisition
Corporation, a California corporation and wholly owned subsidiary of REMEC
("Merger Sub"), and related Agreement of Merger (the "Agreement of Merger" and
collectively with the Agreement of Reorganization the "Merger Agreement")
providing for the merger (the "Merger") of Merger Sub with and into C&S Hybrid.
Pursuant to the Merger, C&S Hybrid will be the surviving corporation and will
become a wholly owned subsidiary of REMEC. Pursuant to the terms of the Merger
Agreement, each outstanding share of Common Stock of C&S Hybrid, no par value
("C&S Hybrid Common Stock"), will be converted into the right to receive
0.1654618 of a share of Common Stock of REMEC (other than shares, if any, as to
which dissenters' rights have been exercised pursuant to California law). REMEC
will also assume all outstanding options to purchase C&S Hybrid Common Stock,
which will be adjusted to reflect the exchange ratio.
The Merger is expected to become effective as soon as practicable following
approval by the shareholders of C&S Hybrid at the Special Meeting.
After careful consideration, your Board of Directors has unanimously
approved the Merger Agreement described in the attached materials and the
transactions contemplated thereby and has concluded that the Merger is in the
best interests of C&S Hybrid and its shareholders. Your Board of Directors
unanimously recommends that C&S Hybrid's shareholders vote for approval of the
Merger and the Merger Agreement.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Prospectus/Proxy Statement relating to the actions to
be taken by C&S Hybrid's shareholders at the Special Meeting and a proxy card.
The Prospectus/Proxy Statement more fully describes the proposed Merger and
includes information about C&S Hybrid and REMEC.
Under California law, the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock and Preferred Stock of C&S Hybrid, each
voting separately as a class, is required to approve the Merger.
All shareholders are cordially invited to attend the Special Meeting in
person. If you attend the Special Meeting, you may vote in person if you wish,
even though you have previously returned your proxy. Whether or not you plan to
attend the Special Meeting, it is important that your shares be represented and
voted at the Special Meeting, regardless of the number of shares you hold.
Therefore, please complete, sign, date and return your proxy in the enclosed
envelope.
Sincerely,
Tao Chow
President
<PAGE> 5
PRELIMINARY COPY -- FOR INFORMATION OF
SECURITIES AND EXCHANGE COMMISSION ONLY
C&S HYBRID, INC.
804 BUCKEYE COURT
MILPITAS, CALIFORNIA 95035
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of C&S Hybrid, Inc.
A Special Meeting of Shareholders (the "Special Meeting") of C&S Hybrid,
Inc., a California corporation ("C&S Hybrid"), will be held at 10:00 a.m., local
time, on June 27, 1997, at the principal executive offices of C&S Hybrid,
located at 804 Buckeye Court, Milpitas, California 95035 for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Reorganization and Merger dated as of April 10, 1997 among C&S
Hybrid, REMEC, Inc., a California corporation ("REMEC"), and C&S
Acquisition Corporation, a California corporation and wholly owned
subsidiary of REMEC ("Merger Sub"), and related Agreement of Merger, and
the merger (the "Merger") contemplated thereby of Merger Sub with and into
C&S Hybrid, with C&S Hybrid being the surviving corporation and becoming a
wholly owned subsidiary of REMEC. In connection with the Merger, each
outstanding share of Common Stock of C&S Hybrid, no par value ("C&S Hybrid
Common Stock"), will be converted into the right to receive 0.1654618 of a
share of Common Stock of REMEC (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to California law). REMEC
will also assume all outstanding options to purchase C&S Hybrid Common
Stock, which will be adjusted to reflect the exchange ratio.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The foregoing is more fully described in the Prospectus/Proxy Statement
accompanying this Notice.
Only shareholders of record at the close of business on June 16, 1997 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting or
any adjournment thereof. Approval of the Merger will require the affirmative
vote of the holders of a majority of the outstanding shares of C&S Hybrid Common
Stock and Preferred Stock, each voting separately as a class.
Milpitas, California
June 17, 1997
BY ORDER OF THE
BOARD OF DIRECTORS
Tao Chow
President and Director
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE URGED
TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE
IT IS VOTED.
<PAGE> 6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
REMEC, INC. C&S HYBRID, INC.
SUBJECT TO COMPLETION, DATED JUNE 13, 1997
PROSPECTUS/PROXY STATEMENT
------------------------
PROSPECTUS
REMEC, INC.
860,000 SHARES OF COMMON STOCK
------------------------
PROXY STATEMENT
C&S HYBRID, INC.
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 27, 1997
------------------------
REMEC, Inc., a California corporation ("REMEC"), has filed a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission" or the "SEC") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), for the registration of 860,000
shares of its authorized but unissued Common Stock, $.01 par value per share
("REMEC Common Stock"), to be issued pursuant to the terms of the Agreement and
Plan of Reorganization and Merger dated as of April 10, 1997 (the "Agreement of
Reorganization", which, together with the Agreement of Merger to be entered into
pursuant thereto, is referred to herein as the "Merger Agreement") among REMEC,
C&S Acquisition Corporation, a California corporation and a wholly owned
subsidiary of REMEC ("Merger Sub"), and C&S Hybrid, Inc., a California
corporation ("C&S Hybrid"), under which REMEC has agreed to acquire C&S Hybrid
through the merger (the "Merger") of Merger Sub with and into C&S Hybrid. As a
result of the Merger, C&S Hybrid will become a wholly owned subsidiary of REMEC
and each outstanding share of Common Stock of C&S Hybrid, no par value ("C&S
Hybrid Common Stock"), will be converted into the right to receive 0.1654618 of
a share of REMEC Common Stock (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to California law). Further,
pursuant to the terms of the Merger Agreement, REMEC will assume all outstanding
options to purchase shares of C&S Hybrid Common Stock, which will be adjusted to
reflect the exchange ratio. As a result of and upon the Merger, assuming no
exercise by any shareholder of C&S Hybrid of dissenters' rights and no exercise
or termination of any outstanding options to purchase C&S Hybrid Common Stock
prior to that time, the shareholders of C&S Hybrid will receive an aggregate of
860,000 shares of REMEC Common Stock and the outstanding options to purchase C&S
Hybrid Common Stock will be exercisable for up to an aggregate of 26,639 shares
of REMEC Common Stock. The consummation of the Merger is subject to a number of
conditions. See "Terms of the Merger."
The Merger does not require approval of the shareholders of REMEC but does
require approval of the shareholders of C&S Hybrid. See "Voting and
Proxies -- Vote Required." If the Merger and the Merger Agreement are approved
by the shareholders of C&S Hybrid at their Special Meeting to be held on June
27, 1997 to consider and vote upon the Merger and the Merger Agreement (the
"Special Meeting"), the Merger is expected to be consummated as soon as
practicable after the Special Meeting.
Holders of C&S Hybrid Common Stock and Preferred Stock who object to the
Merger may, under certain circumstances and by following prescribed statutory
procedures, exercise dissenters' rights to receive cash for their shares. See
"Terms of the Merger -- Dissenters' Rights."
This Prospectus/Proxy Statement constitutes: (i) the Proxy Statement of C&S
Hybrid relating to the solicitation of proxies by the Board of Directors of C&S
Hybrid for use at the Special Meeting and (ii) the Prospectus of REMEC for the
related issuance of REMEC Common Stock pursuant to the Merger, filed as part of
the Registration Statement. All information contained herein with respect to
REMEC and its subsidiaries has been furnished by REMEC, and all information
contained herein with respect to C&S Hybrid has been furnished by C&S Hybrid.
REMEC Common Stock is traded on The Nasdaq National Market under the symbol
"REMC." On June 11, 1997, the last reported sale price of REMEC Common Stock was
$32.50 per share.
This Prospectus/Proxy Statement and the accompanying form of proxy are first
being mailed to shareholders of C&S Hybrid on or about June 17, 1997.
------------------------
THE MERGER INVOLVES CERTAIN RISKS TO REMEC AND C&S HYBRID SHAREHOLDERS. SEE
"RISK FACTORS" ON PAGES 14 TO 24 FOR A DESCRIPTION OF CERTAIN RISK FACTORS TO BE
CONSIDERED BY C&S HYBRID SHAREHOLDERS BEFORE VOTING ON THE MERGER AND THE MERGER
AGREEMENT.
------------------------
THE SECURITIES OF REMEC TO BE ISSUED IN THE MERGER 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/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Prospectus/Proxy Statement is June , 1997.
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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SUMMARY............................................................................... 3
The Companies....................................................................... 3
Special Meeting of Shareholders of C&S Hybrid....................................... 3
The Merger.......................................................................... 4
Selected Financial Information and Comparative Per Share Data....................... 9
Comparative Per Share Data.......................................................... 12
Price Range of Common Stock......................................................... 12
RISK FACTORS.......................................................................... 14
Risks Related to the Merger......................................................... 14
Risks Related to REMEC.............................................................. 15
Risks Related to C&S Hybrid......................................................... 20
INTRODUCTION.......................................................................... 25
VOTING AND PROXIES.................................................................... 26
Date, Time and Place of Special Meeting............................................. 26
Record Date and Outstanding Shares of C&S Hybrid.................................... 26
Voting of Proxies................................................................... 26
Vote Required....................................................................... 26
Solicitation of Proxies and Expenses................................................ 27
THE MERGER AND RELATED TRANSACTIONS................................................... 28
Background of the Merger............................................................ 28
Reasons for the Merger.............................................................. 29
Management After the Merger......................................................... 32
Prior Relationship Between REMEC and C&S Hybrid..................................... 32
TERMS OF THE MERGER................................................................... 33
Effective Date of the Merger........................................................ 33
Manner and Basis of Converting Shares of C&S Hybrid Common Stock and
Outstanding C&S Hybrid Options................................................... 33
Exchange of Certificates............................................................ 34
Interests of Certain Persons........................................................ 34
Conduct of Business Prior to the Merger............................................. 35
Conditions to the Merger............................................................ 36
Termination or Amendment of Agreement of Reorganization............................. 37
Representations and Warranties...................................................... 37
Indemnification..................................................................... 38
Employment Agreements............................................................... 38
New Stock Option Grants............................................................. 38
Certain United States Federal Income Tax Considerations............................. 39
Accounting Treatment................................................................ 41
Affiliates' Restrictions on Sale of C&S Hybrid and REMEC Stock...................... 41
Governmental and Regulatory Approvals............................................... 41
Merger Expenses..................................................................... 42
Articles of Incorporation and Bylaws................................................ 42
Dissenters' Rights.................................................................. 42
Financial Advisor Fee............................................................... 43
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS........................... 44
REMEC SELECTED FINANCIAL DATA......................................................... 51
</TABLE>
i
<PAGE> 8
<TABLE>
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PAGE
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REMEC'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 52
Results of Operations............................................................... 53
Three Months Ended May 4, 1997 vs. Three Months Ended May 5, 1996................... 53
Fiscal Year Ended January 31, 1997 vs. Fiscal Year Ended January 31, 1996........... 54
Fiscal Year Ended January 31, 1996 vs. Fiscal Year Ended January 31, 1995........... 55
Liquidity and Capital Resources..................................................... 55
C&S HYBRID SELECTED FINANCIAL DATA.................................................... 57
C&S HYBRID'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 58
Results of Operations............................................................... 58
Three Months Ended March 29, 1996 vs. Three Months Ended March 28, 1997............. 58
Fiscal Year Ended December 22, 1995 vs. Fiscal Year Ended December 27, 1996......... 59
Fiscal Year Ended December 16, 1994 vs. Fiscal Year Ended December 22, 1995......... 60
Liquidity and Capital Resources..................................................... 60
INFORMATION CONCERNING REMEC.......................................................... 61
Introduction........................................................................ 61
Industry Background................................................................. 61
Technology.......................................................................... 63
Products............................................................................ 64
Customers........................................................................... 66
Backlog............................................................................. 68
Sales and Marketing................................................................. 68
Manufacturing....................................................................... 68
Competition......................................................................... 69
Research and Development............................................................ 69
Government Regulations.............................................................. 69
Intellectual Property............................................................... 70
Employees........................................................................... 70
Facilities.......................................................................... 71
Principal Shareholders.............................................................. 71
Executive Officers and Directors.................................................... 72
Executive Compensation.............................................................. 75
Benefit Plans....................................................................... 76
INFORMATION CONCERNING C&S HYBRID..................................................... 78
Introduction........................................................................ 78
Markets and Customers............................................................... 78
Products............................................................................ 79
Backlog............................................................................. 80
Research and Development............................................................ 80
Sales and Marketing................................................................. 81
Manufacturing....................................................................... 81
Competition......................................................................... 81
Intellectual Property............................................................... 82
Government Regulations.............................................................. 82
Employees........................................................................... 83
Facilities.......................................................................... 83
Principal Shareholders.............................................................. 84
Certain Relationships and Related Transactions...................................... 85
</TABLE>
ii
<PAGE> 9
<TABLE>
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DESCRIPTION OF REMEC CAPITAL STOCK.................................................... 86
Common Stock........................................................................ 86
Preferred Stock..................................................................... 86
Transfer Agent and Registrar........................................................ 86
DESCRIPTION OF C&S HYBRID CAPITAL STOCK............................................... 87
C&S Hybrid Common Stock............................................................. 87
C&S Hybrid Preferred Stock.......................................................... 87
COMPARISON OF SHAREHOLDERS' RIGHTS.................................................... 89
LEGAL MATTERS......................................................................... 90
EXPERTS............................................................................... 90
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
APPENDIX A............................................................................ A-1
EXHIBIT 1............................................................................. 1-1
APPENDIX B............................................................................ B-1
APPENDIX C............................................................................ C-1
</TABLE>
iii
<PAGE> 10
AVAILABLE INFORMATION
REMEC has filed with the Commission a Registration Statement under the
Securities Act on Form S-4 (together with all amendments and exhibits thereto)
with respect to the REMEC Common Stock offered hereby. This Prospectus/Proxy
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. For
such information, reference is made to the Registration Statement and the
exhibits and schedules thereto. In addition, REMEC is subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith is required to file periodic reports, proxy
statements and other information with the Commission. Copies of such materials
may be obtained from the Commission at prescribed rates by addressing written
requests for such copies to the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement and such
reports, proxy statements and other information can also be inspected and copied
at the Commission's public reference facilities referred to above 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. The Commission
maintains a Web site that contains reports, proxy and information statement and
other materials that are filed through the Commission's Electronic Data
Gathering, Analysis, and Retrieval system. This Web site can be accessed at
http://www.sec.gov. This material may also be inspected at the offices of the
National Association of Securities Dealers, Inc., at 1735 K Street, N.W.,
Washington, DC 20006.
FORWARD-LOOKING STATEMENTS
The statements in this Prospectus/Proxy Statement that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including REMEC's success
in penetrating the commercial wireless market, risks associated with the
cancellation or reduction of orders by significant commercial or defense
customers, trends in the commercial wireless and defense markets, risks of cost
overruns and product nonperformance and the factors described in "Risk Factors"
beginning on page 14 and the other risks described in this Prospectus/Proxy
Statement. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Neither
REMEC nor C&S Hybrid undertakes any 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.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY REMEC OR C&S HYBRID. THIS PROSPECTUS/PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE COMMON STOCK OF REMEC TO BE ISSUED IN THE MERGER, OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
2
<PAGE> 11
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus/Proxy Statement. This summary does not contain a complete
statement of all material features of the merger proposal to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Prospectus/Proxy Statement and in the Appendices hereto.
THE COMPANIES
REMEC...................... REMEC, Inc., a California corporation ("REMEC"),
designs and manufactures microwave multi-function
modules ("MFMs") for microwave transmission
systems used in defense applications and in the
commercial wireless telecommunications market.
REMEC's principal executive offices are located at
9404 Chesapeake Drive, San Diego, California
92123, and its telephone number at that address is
(619) 560-1301. See "Information Concerning
REMEC."
C&S Hybrid................. C&S Hybrid, Inc., a California corporation ("C&S
Hybrid"), designs, manufactures and markets
transmitter and receiver hardware assemblies
("transceivers") that are integrated by C&S
Hybrid's customers into terrestrial-based
point-to-point microwave radios primarily for use
in commercial applications. C&S Hybrid was
incorporated in 1984. C&S Hybrid's principal
executive offices are located at 804 Buckeye
Court, Milpitas, California 95035, and its
telephone number at that address is (408)
526-9310. See "Information Concerning C&S Hybrid."
SPECIAL MEETING OF SHAREHOLDERS OF C&S HYBRID
Time, Date, Place and
Purpose.................... A Special Meeting of Shareholders of C&S Hybrid
(the "Special Meeting") will be held on June 27,
1997 at 10:00 a.m., local time, at C&S Hybrid's
principal executive offices, located at 804
Buckeye Court, Milpitas, California 95035.
At the Special Meeting, shareholders of C&S Hybrid
(the "C&S Hybrid Shareholders") will be asked to
consider and vote upon a proposal to approve (i)
the merger (the "Merger") of C&S Acquisition
Corporation, a California corporation and wholly
owned subsidiary of REMEC ("Merger Sub"), with and
into C&S Hybrid, and (ii) the Agreement and Plan
of Reorganization and Merger dated as of April 10,
1997 (the "Agreement of Reorganization") by and
among C&S Hybrid, REMEC and Merger Sub (a copy of
which is attached hereto as Appendix A) and the
related Agreement of Merger (a copy of which is
attached hereto as Appendix B) (the "Agreement of
Merger" and, collectively with the Agreement of
Reorganization, the "Merger Agreement") which sets
forth the terms of the Merger. See "Voting and
Proxies."
Record Date; Vote
Required................... The record date for C&S Hybrid Shareholders
entitled to vote upon the Merger and the Merger
Agreement at the Special Meeting is June 16, 1997
(the "Record Date"). Under applicable law,
approval of the Merger requires the affirmative
vote of the holders of a majority of the
outstanding shares of C&S Hybrid's Common Stock,
no par value (the "C&S Hybrid Common Stock"), and
Preferred Stock, no par value (the "C&S Hybrid
Preferred Stock"), each voting separately as a
class. The presence, either in person or by
properly executed proxy, at the Special
3
<PAGE> 12
Meeting of the holders of a majority of the
outstanding shares entitled to vote is necessary
to constitute a quorum at the Special Meeting.
Consummation of the Merger is also subject to a
number of other conditions. See "Terms of the
Merger -- Conditions to the Merger." As of the
Record Date, 4,797,575 shares of C&S Hybrid Common
Stock and 400,000 shares of C&S Hybrid Preferred
Stock were outstanding and entitled to vote at the
Special Meeting. Each such share will be entitled
to one vote at the Special Meeting. Tao Chow,
President and a director of C&S Hybrid, has agreed
to vote all shares of C&S Hybrid capital stock
held beneficially by him as of the Record Date
(consisting of 3,000,000 shares of C&S Hybrid
Common Stock, representing approximately 62.5% of
the C&S Hybrid Common Stock outstanding as of the
Record Date, and 400,000 shares of C&S Hybrid
Preferred Stock, representing 100% of the C&S
Hybrid Preferred Stock outstanding as of the
Record Date) in favor of the Merger and the Merger
Agreement. As a result, by virtue of Mr. Chow's
ownership, the proposal to approve the Merger and
the Merger Agreement will be approved by the C&S
Hybrid Shareholders regardless of the vote of any
other C&S Hybrid Shareholders.
THE MERGER
Effect of Merger........... Merger Sub will be merged with and into C&S
Hybrid, with C&S Hybrid being the surviving
corporation and becoming a wholly owned subsidiary
of REMEC. All of the outstanding shares of C&S
Hybrid Common Stock (which will include shares of
C&S Hybrid Common Stock issued upon conversion of
outstanding C&S Hybrid Preferred Stock, which
conversion is a condition of the Merger) will be
converted into shares of Common Stock of REMEC,
$.01 par value ("REMEC Common Stock").
Effective Date of the
Merger..................... The Merger will be effective when the Agreement of
Merger is filed with the Secretary of State of the
State of California (the "Effective Date"). If
approved by the C&S Hybrid Shareholders, as soon
as practicable following the Special Meeting, the
Agreement of Merger is expected to be filed with
the Secretary of State of the State of California
(currently expected to be filed on or about June
27, 1997). The Merger is also subject to the
satisfaction or waiver of the conditions precedent
to the Merger set forth in the Agreement of
Reorganization. See "Terms of the
Merger -- Effective Date of the Merger" and "Terms
of the Merger -- Conditions to the Merger."
Terms of the Merger........ As a result of the Merger, each outstanding share
of C&S Hybrid Common Stock (other than shares, if
any, as to which dissenters' rights have been
exercised pursuant to California law) will be
converted into the right to receive 0.1654618 of a
share of REMEC Common Stock (the "Exchange
Ratio"). REMEC will assume all options to acquire
shares of C&S Hybrid Common Stock that are
outstanding at the Effective Date (the
"Outstanding C&S Hybrid Options"). After such
assumption, REMEC will issue, upon exercise of
each such option, in lieu of shares of C&S Hybrid
Common Stock, the number of shares of REMEC Common
Stock equal to the product of the number of shares
of C&S Hybrid Common Stock purchasable under the
option at the Effective Date (without regard to
vesting) multiplied by the Exchange
4
<PAGE> 13
Ratio. The price per share of REMEC Common Stock
to be paid upon the exercise of each such option
will be adjusted to equal the quotient of the
exercise price per share of C&S Hybrid Common
Stock with respect to the option divided by the
Exchange Ratio. See "Terms of the Merger -- Manner
and Basis of Converting Shares of C&S Hybrid
Common Stock and Outstanding C&S Hybrid Options."
Exchange Ratio............. Based upon the Exchange Ratio and the number of
shares of C&S Hybrid Common Stock and REMEC Common
Stock outstanding as of the Record Date and
assuming that: (i) no C&S Hybrid Shareholders
exercise dissenters' rights; and (ii) no
outstanding REMEC or C&S Hybrid options are
exercised prior to the Merger, approximately
13,095,418 shares of REMEC Common Stock will be
outstanding upon consummation of the Merger, of
which approximately 860,000 shares (approximately
6.6% of the total) will be held by former C&S
Hybrid Shareholders. See "Terms of the
Merger -- Manner and Basis of Converting Shares of
C&S Hybrid Common Stock and Outstanding C&S Hybrid
Options."
Interests of Certain
Persons in the Merger and
Voting Agreement........... Mr. Tao Chow, the President and a director of C&S
Hybrid, owns beneficially a majority of the
outstanding C&S Hybrid Common Stock and all of the
outstanding C&S Hybrid Preferred Stock. Pursuant
to the terms of the Agreement of Reorganization,
Mr. Chow will enter into an employment agreement
as the President of C&S Hybrid and an executive
officer of REMEC commencing on the Effective Date.
Pursuant to that agreement, Mr. Chow will agree
not to engage in the business of C&S Hybrid for a
three year period beginning on the date of the
agreement. In addition, Mr. Chow has executed a
voting agreement, pursuant to which he has agreed
to vote all shares of capital stock of C&S Hybrid
owned beneficially or controlled by him,
individually or as trustee, in favor of the
Merger. REMEC has agreed to assume Mr. Chow's
obligations under his personal guaranty of C&S
Hybrid's office and facility leases. Pursuant to
the terms of the Agreement of Reorganization,
certain other persons who presently are employees
and shareholders of C&S Hybrid will enter into
employment agreements with C&S Hybrid. Following
the Effective Date, REMEC will issue options to
purchase REMEC Common Stock to certain C&S Hybrid
employees designated by Mr. Chow. From and after
the closing of the Merger, REMEC and C&S Hybrid
will be required under the Agreement of
Reorganization to fulfill the obligations of C&S
Hybrid pursuant to any indemnification agreements
between C&S Hybrid and its directors and officers
existing on or prior to the date of the Agreement
of Reorganization. See "Terms of the
Merger -- Interests of Certain Persons," "Terms of
the Merger -- Indemnification," "Terms of the
Merger -- Employment Agreements" and "Terms of the
Merger -- New Stock Option Grants."
Recommendation of the Board
of Directors of C&S
Hybrid..................... The Board of Directors of each company has
unanimously approved the Merger Agreement and the
transactions contemplated thereby as being in the
best interests of such company and its
shareholders. THE BOARD OF DIRECTORS OF C&S HYBRID
UNANIMOUSLY
5
<PAGE> 14
RECOMMENDS THAT C&S HYBRID SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
For a discussion of the factors considered by each
company's Board of Directors in approving the
Merger, see "The Merger and Related
Transactions -- Reasons for the Merger."
Exchange of Shares......... At the Effective Date, each issued and outstanding
share of C&S Hybrid Common Stock (other than
shares, if any, as to which dissenters' rights
have been exercised pursuant to California law)
automatically will be converted into the right to
receive 0.1654618 of a share of REMEC Common
Stock. Exchange of certificates evidencing shares
of C&S Hybrid Common Stock for certificates
evidencing shares of REMEC Common Stock will be
made upon surrender of the former to ChaseMellon
Shareholder Services, as exchange agent.
CERTIFICATES SHOULD NOT BE SURRENDERED FOR
EXCHANGE PRIOR TO THE APPROVAL OF THE MERGER BY
C&S HYBRID SHAREHOLDERS. C&S Hybrid Shareholders
will be provided with a letter of transmittal and
related materials needed to exchange their
certificates after such approval. Promptly after
the Effective Date, REMEC will notify holders of
Outstanding C&S Hybrid Options of the procedure to
be followed in connection with REMEC's assumption
of such options. See "Terms of the
Merger -- Manner and Basis of Converting Shares of
C&S Hybrid Common Stock and Outstanding C&S Hybrid
Options" and "Terms of the Merger -- Exchange of
Certificates."
Conditions to the Merger;
Termination................ Notwithstanding approval of the Merger by C&S
Hybrid Shareholders, the consummation of the
Merger is subject to a number of conditions which,
if not fulfilled or waived, permit termination of
the Agreement of Reorganization. The Agreement of
Reorganization may also be terminated by mutual
consent or, in certain circumstances, by REMEC
alone or C&S Hybrid alone if the Merger has not
taken place by July 31, 1997. See "Terms of the
Merger -- Conditions to the Merger" and "Terms of
the Merger -- Termination or Amendment of
Agreement of Reorganization."
Governmental and Regulatory
Approvals.................. Consummation of the Merger is subject to
compliance with the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended (the "HSR
Act"). The notifications required under the HSR
Act as well as certain information have been
furnished to the Federal Trade Commission (the
"FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division")
and the specified waiting period under the HSR Act
for the Merger has expired. The Merger will also
need to satisfy the requirements of the federal
securities laws and applicable securities and
"blue sky" laws of various states. See "Terms of
the Merger -- Governmental and Regulatory
Approvals."
Certain United States
Federal Income Tax
Consequences............... The Merger is intended to qualify as a
reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the
"Code"), in which case no gain or loss generally
should be recognized by C&S Hybrid Shareholders on
the exchange of their shares of C&S Hybrid Common
Stock solely for shares of REMEC Common Stock.
6
<PAGE> 15
As a condition to the consummation of the Merger,
C&S Hybrid is to receive an opinion from its tax
counsel that the Merger, if consummated on the
terms described in this Prospectus/Proxy Statement
and based on certain representation certificates,
will constitute a reorganization under Section
368(a) of the Code. However, all C&S Hybrid
Shareholders are urged to consult their own tax
advisors. See "Terms of the Merger -- Certain
United States Federal Income Tax Considerations."
Accounting Treatment....... The Merger is intended to be treated as a pooling
of interests for accounting purposes. As a
condition to the consummation of the Merger, REMEC
is to receive a letter, dated as of the effective
date of the Registration Statement of which this
Prospectus/Proxy Statement forms a part (the
"Registration Statement"), from Ernst & Young LLP
regarding the firm's concurrence with REMEC
management's and C&S Hybrid management's
conclusions, respectively, as to the
appropriateness of pooling of interests accounting
for the Merger under Accounting Principles Board
Opinion No. 16 if closed and consummated in
accordance with the Agreement of Reorganization.
To ensure pooling of interests treatment, certain
C&S Hybrid Shareholders will provide
representation letters to REMEC and C&S Hybrid
pursuant to which they will agree, among other
things, to certain restrictions on the sale of
their shares of capital stock of C&S Hybrid and
REMEC. See "Terms of the Merger -- Accounting
Treatment."
Dissenters' Rights......... C&S Hybrid Shareholders are entitled to certain
rights under California law to receive cash, in
lieu of REMEC Common Stock, for their shares
provided that they follow certain prescribed
statutory procedures. The failure of a dissenting
shareholder to follow the appropriate procedure
may result in the termination or waiver of such
rights. In the event that the aggregate number of
shares held by C&S Hybrid Shareholders for which
dissenter's rights may be exercised exceeds 10%
(or such lesser percentage that would allow the
Merger to be accounted for as a pooling of
interests) of the shares of REMEC Common Stock to
be issued in the Merger, REMEC has the right under
the Agreement of Reorganization not to proceed
with the Merger. See "Terms of the Merger --
Conditions to the Merger" and "Terms of the
Merger -- Dissenters' Rights."
Certain Effects of the
Merger on the Rights of C&S
Hybrid Shareholders........ The internal affairs of C&S Hybrid are currently
governed by C&S Hybrid's Articles of Incorporation
and Bylaws. Upon consummation of the Merger, C&S
Hybrid Shareholders will become shareholders of
REMEC and their rights will be governed by REMEC's
Articles of Incorporation and Bylaws, which differ
from C&S Hybrid's Articles of Incorporation and
Bylaws. See "Description of REMEC Capital Stock"
and "Comparison of Shareholders' Rights."
No Solicitation............ C&S Hybrid may not, with respect to any purchase
of all or any substantial portion of the assets
of, or any equity interest in, C&S Hybrid or any
merger, consolidation or business combination with
C&S Hybrid: (i) solicit, initiate or further the
submission of proposals or offers by, or enter
into any agreement with, any third party relating
to such a transaction, (ii) participate in any
discussions or negotiations regarding, or furnish
to any third party any confidential information
with
7
<PAGE> 16
respect to C&S Hybrid in connection with, such a
transaction or (iii) otherwise cooperate in any
way with, or assist or participate in, facilitate
or encourage, any effort or attempt by any third
party to undertake or seek to undertake such a
transaction. See "Terms of the Merger -- Conduct
of Business Prior to the Merger."
Financial Advisor Fee...... C&S Hybrid has retained Mr. Robert Tillman in
connection with the transactions contemplated by
the Agreement of Reorganization. At the closing of
the Merger, C&S Hybrid will be obligated to pay to
Mr. Tillman in cash a fee equal to the fair market
value of 2,975 shares of REMEC Common Stock, which
value will be determined by the last reported
sales price for such securities on the last
trading day prior to the consummation of the
Merger. Additionally, Tao Chow, Ming Chow, Tri
Dinh and Peter Liu, each of whom is a C&S Hybrid
Shareholder, have agreed to pay Mr. Tillman at the
closing of the Merger an aggregate of 5,525 shares
of REMEC Common Stock. See "Terms of the Merger --
Financial Advisor Fee."
8
<PAGE> 17
SELECTED FINANCIAL INFORMATION AND COMPARATIVE PER SHARE DATA
The following tables present selected historical and pro forma combined
financial data and comparative per share data for REMEC and C&S Hybrid. The
unaudited pro forma combined financial information is calculated after giving
effect to the Merger at the Exchange Ratio of 0.1654618 of a share of REMEC
Common Stock for each outstanding share of C&S Hybrid Common Stock using the
pooling of interests method of accounting. The unaudited pro forma combined
financial information is not necessarily indicative of future operations or the
actual results that would have occurred had the Merger been consummated at the
beginning of the periods presented. This information should be read in
conjunction with unaudited pro forma combined financial statements and notes
thereto and with the historical financial statements and notes thereto of the
separate companies included elsewhere in this Prospectus/Proxy Statement. See
"Unaudited Pro Forma Condensed Combined Financial Statements" and "Index to
Financial Statements."
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REMEC
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, THREE MONTHS ENDED
--------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 MAY 5, 1996 MAY 4, 1997
------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $48,204 $51,949 $64,604 $71,245 $95,072 $20,424 $26,216
Cost of sales................... 34,216 37,102 47,911 53,194 69,971 15,279 18,309
------- ------- ------- ------- --------
Gross profit.................. 13,988 14,847 16,693 18,051 25,101 5,145 7,907
Operating expenses:
Selling, general and
administrative.............. 7,126 7,915 9,944 10,359 12,831 2,575 3,984
Research and development...... 1,322 1,022 1,348 2,786 3,182 992 623
------- ------- ------- ------- --------
Total operating
expenses............. 8,448 8,937 11,292 13,145 16,013 3,567 4,607
------- ------- ------- ------- --------
Income from operations.......... 5,540 5,910 5,401 4,906 9,088 1,578 3,300
Interest (income) expense and
other......................... 112 55 335 43 (365) (137) (756)
------- ------- ------- ------- --------
Income before provision for
income taxes.................. 5,428 5,855 5,066 4,863 9,453 1,715 4,056
Provision for income taxes...... 1,659 1,893 2,079 2,009 3,725 707 1,583
------- ------- ------- ------- --------
Income before extraordinary
item.......................... 3,769 3,962 2,987 2,854 5,728 1,008 2,473
Extraordinary item.............. 167 -- -- -- -- -- --
------- ------- ------- ------- --------
Net income...................... $ 3,936 $ 3,962 $ 2,987 $ 2,854 $ 5,728 $ 1,008 $ 2,473
======= ======= ======= ======= ========
Net income per share............ $ .43 $ .53 $ .41 $ .39 $ .59 $ .11 $ .20
======= ======= ======= ======= ========
Shares used in per share
calculations.................. 9,055 7,478 7,293 7,265 9,680 9,553 12,611
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT MAY
AT JANUARY 31, 4,
------------------------------------------------------------ --------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 3,363 $ 3,678 $ 2,139 $ 1,872 $ 63,078 $ 56,555
Working capital................... 10,497 14,072 13,007 13,207 81,574 80,683
Total assets...................... 23,421 32,789 31,682 36,782 112,066 117,490
Long-term debt.................... 1,358 839 1,217 1,900 -- --
Total shareholders' equity........ 13,828 17,810 19,820 21,899 98,566 103,050
</TABLE>
<TABLE>
<CAPTION>
AT MAY 4,
---------
1997
---------
<S> <C> <C> <C> <C> <C>
BACKLOG(1):
Commercial............................................................................ $ 59,895
Defense............................................................................... 71,199
---------
Total....................................................................... $ 131,094
========
</TABLE>
- ---------------
(1) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation.
9
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
C&S HYBRID
<TABLE>
<CAPTION>
THREE MONTHS ENDED(2)
FISCAL YEARS ENDED(1)(2) -----------------------
---------------------------------------------------- MARCH 29, MARCH 28,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales............. $3,897 $4,640 $8,217 $10,939 $13,026 $ 2,653 $ 4,621
Cost of sales......... 1,974 2,408 4,350 5,410 7,590 1,254 2,904
------ ------ ------ ------- ------- ------ ------
Gross profit........ 1,923 2,232 3,867 5,529 5,436 1,399 1,717
Operating expenses:
Selling, general and
administrative... 1,606 1,708 2,981 3,861 4,058 1,030 1,142
Research and
development...... 203 301 298 666 527 90 115
------ ------ ------ ------- ------- ------ ------
Total
operating
expenses... 1,809 2,009 3,279 4,527 4,585 1,120 1,257
------ ------ ------ ------- ------- ------ ------
Income from
operations.......... 114 223 588 1,002 851 279 460
Interest income
(expense) and
other............... 16 (1) (7) (60) (66) (7) (29)
------ ------ ------ ------- ------- ------ ------
Income before
provision for income
taxes............... 130 222 581 942 785 272 431
Provision for income
taxes............... 160 90 314 419 292 127 206
------ ------ ------ ------- ------- ------ ------
Net income (loss)..... $ (30) $ 132 $ 267 $ 523 $ 493 $ 145 $ 225
====== ====== ====== ======= ======= ====== ======
Net income (loss) per
share............... $ (.01) $ .03 $ .06 $ .12 $ .11 $ .03 $ .04
====== ====== ====== ======= ======= ====== ======
Shares used in per
share
calculations........ 3,743 4,208 4,208 4,208 4,438 4,208 5,198
====== ====== ====== ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1)(2) AT MARCH 28,
---------------------------------------------------- ------------
1992 1993 1994 1995 1996 1997(2)
------ ------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 478 $ 135 $ 241 $ 303 $ -- $ 414
Working capital........ 1,196 1,595 1,408 1,670 2,087 2,159
Total assets........... 2,252 2,760 3,989 5,098 7,290 8,843
Long-term debt......... 132 299 110 98 579 834
Total shareholders'
equity............... 1,780 2,065 2,332 2,855 3,744 3,969
</TABLE>
- ---------------
(1) C&S Hybrid's fiscal years for the periods noted above ended as follows:
December 18, 1992, December 17, 1993, December 16, 1994, December 22, 1995
and December 27, 1996.
(2) All periods are unaudited except for the fiscal year ended December 27,
1996.
10
<PAGE> 19
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma condensed combined financial data give
effect to the Merger using the pooling of interests method of accounting and are
based upon the respective historical financial statements and notes thereto of
C&S Hybrid and REMEC appearing elsewhere in this Prospectus/Proxy Statement. To
reflect the pooling of interests, the operating results of C&S Hybrid for each
of its three fiscal years ended December 27, 1996 and the unaudited three months
ended March 28, 1997 have been combined with the REMEC's operating results for
each of its three fiscal years ended January 31, 1997 and for the three months
ended May 4, 1997. The unaudited pro forma condensed combined financial data
should be read in conjunction with each of the historical financial statements
referred to above and the pro forma condensed combined financial statements
appearing elsewhere herein. The Merger requires the approval of a majority of
the outstanding shares of C&S Hybrid. The pro forma condensed combined financial
data are presented for comparative purposes only and do not purport to be
indicative of what the actual results of operations or financial position would
have been for the periods presented had the transactions occurred on the dates
indicated and do not purport to indicate the results of future operations.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------- THREE MONTHS ENDED
1995 1996 1997 MAY 4, 1997
------- ------- ----------- ------------------
<S> <C> <C> <C> <C>
PRO FORMA REMEC AND C&S HYBRID COMBINED
STATEMENT OF INCOME DATA:
Net sales................................ $72,821 $82,184 $ 108,098 $ 30,837
Net income............................... 3,254 3,378 6,221 2,698
Net income per share..................... .41 .42 .60 .20
Shares used in per share calculations.... 7,989 7,961 10,414 13,471
</TABLE>
<TABLE>
<CAPTION>
AT MAY 4, 1997
--------------
<S> <C> <C> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital.............................................................. $ 82,575
Total assets................................................................. 126,332
Long-term debt............................................................... 834
Shareholders' equity......................................................... 106,752
</TABLE>
11
<PAGE> 20
COMPARATIVE PER SHARE DATA
The following tabulation reflects: (a) the historical income per share of
REMEC Common Stock in comparison with the pro forma income per share after
giving effect to the Merger on a "pooling of interests" accounting method with
C&S Hybrid; and (b) the historical net income per share of REMEC Common Stock in
comparison with the pro forma net income attributable to 0.1654618 of a share of
REMEC Common Stock which will be received for each share of C&S Hybrid Common
Stock. The information presented in this tabulation should be read in
conjunction with the pro forma combined financial data and the separate
financial statements of the respective companies and the notes thereto appearing
elsewhere herein. The unaudited pro forma combined condensed financial data are
not necessarily indicative of the operating results that would have been
achieved had the transaction been in effect as of the beginning of the periods
present and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------- THREE MONTHS ENDED
1995 1996 1997 MAY 4, 1997
----- ----- ----- ------------------
<S> <C> <C> <C> <C>
Historical -- REMEC
Net income............................ $ .41 $ .39 $ .59 $ .20
Book value............................ $3.22 $3.66 $8.12 $ 8.42
Historical -- C&S Hybrid
Net income............................ $ .06 $ .12 $ .11 $ .04
Book value............................ $ .55 $ .68 $ .72 $ .76
Pro Forma Combined
Net income............................ $ .41 $ .42 $ .60 $ .20
Book value............................ $3.23 $3.70 $7.87 $ 8.15
Equivalent Pro Forma Combined
Net income............................ $ .07 $ .07 $ .10 $ .03
Book value............................ $ .53 $ .61 $1.30 $ 1.35
</TABLE>
PRICE RANGE OF COMMON STOCK
REMEC. Prior to the quotation of the REMEC Common Stock on The Nasdaq
National Market ("Nasdaq") beginning on February 1, 1996, there was no
established trading market for the REMEC Common Stock. Since February 1, 1996,
the REMEC Common Stock has been quoted on Nasdaq under the symbol "REMC." The
following table sets forth the range of high and low closing sale prices of the
REMEC Common Stock as reported on Nasdaq for the quarterly periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ---
<S> <C> <C>
FISCAL YEAR ENDING JANUARY 31, 1998
Second Quarter (through June 11, 1997)............................. $34.25 $25
First Quarter...................................................... 28.25 21
FISCAL YEAR ENDED JANUARY 31, 1997
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..................................................... 26 1/4 14
</TABLE>
REMEC is unable to estimate accurately the number of beneficial holders of
the shares held in street name.
On April 10, 1997, the last trading day prior to the first public
announcement by REMEC and C&S Hybrid concerning the Merger, the closing price of
the REMEC Common Stock reported on Nasdaq was $24 per share. On April 11, 1997,
the closing price of REMEC Common Stock reported on Nasdaq was $21 1/8 per
share.
12
<PAGE> 21
Following the Merger, REMEC Common Stock will continue to be traded on
Nasdaq under the symbol "REMC."
REMEC declared and paid cash dividends of approximately $55,000 ($0.01 per
share) in July 1993, 1994 and 1995 to holders of REMEC Common Stock and
Preferred Stock (on an as-converted basis). REMEC intends currently to retain
all future earnings, if any, for use in the development and operation of its
business and, therefore, does not plan to pay dividends on its Common Stock in
the foreseeable future.
C&S Hybrid. There is no public market for the C&S Hybrid Common Stock. C&S
Hybrid has not paid cash dividends on the C&S Common Stock during its last three
fiscal years. As of the Record Date, C&S Hybrid had 20 shareholders of record.
13
<PAGE> 22
RISK FACTORS
RISKS RELATED TO THE MERGER
Difficulties and Costs of Integration. The anticipated benefits of the
Merger will not be achieved unless REMEC and C&S Hybrid are successfully
combined in an efficient and effective manner. That combination may require the
integration of the companies' research and development, administrative and
marketing organizations and corporate cultures, as well as the coordination of
their sales efforts. No assurance can be given that the level of sales to
current customers of REMEC and C&S Hybrid will not be adversely affected by the
Merger, or that the integration of the various organizations within the combined
company will be completed in the manner anticipated.
The integration of C&S Hybrid as a wholly owned subsidiary of REMEC will
require substantial attention from management of REMEC. The diversion of
management attention and any difficulties encountered in the transition process
could have a material adverse effect on the business, financial condition and
operating results of the combined company.
C&S Hybrid and REMEC estimate that they will incur substantial direct
transaction costs associated with the Merger, which will be charged to
operations during the course of the transaction. REMEC expects to incur
additional transaction related costs associated with integrating the two
companies. These transaction costs cannot be estimated accurately at this time.
There can be no assurance that REMEC will not incur additional costs in the
future associated with integrating the two companies or that these costs will
not have a material adverse effect on the business, financial condition and
operating results of the combined company.
Fixed Exchange Ratio Does Not Reflect Changes in Stock Price. Under the
terms of the Agreement of Reorganization, each share of C&S Hybrid Common Stock
issued and outstanding at the Effective Date will be converted into the right to
receive 0.1654618 of a share of REMEC Common Stock. Thus the Exchange Ratio is
fixed and the Agreement of Reorganization does not contain any provisions for
its adjustment based on fluctuations in the trading price of REMEC Common Stock
or other factors. The price of REMEC Common Stock at the Effective Date may vary
significantly from the price at the date of execution of the Agreement of
Reorganization, the date of this Prospectus/Proxy Statement or the date on which
shareholders vote on the Merger Agreement and the Merger due to, among other
factors, market perception of the Merger and the synergies expected to be
achieved by the Merger, changes in the business, operations or prospects of
REMEC or C&S Hybrid, market assessments of the likelihood that the Merger will
be consummated and the timing thereof, and general market and economic
conditions. Because the Exchange Ratio will not be adjusted to reflect changes
in the value of the REMEC Common Stock issuable in the Merger, C&S Hybrid
Shareholders may receive shares of REMEC Common Stock with a market value
different from the value of such shares at the time the Merger was negotiated.
Federal Income Tax Considerations and Continuity of Interest. One of the
requirements for the Merger being treated as a "reorganization" that is
generally tax free under the Code is that the "continuity of interest"
requirement be met. Under this requirement, holders of C&S Hybrid Stock must
intend, at the time of the Merger, to retain a portion of their REMEC Common
Stock, such that C&S Hybrid Shareholders, as a group, have a significant equity
interest in REMEC after the Merger. If former C&S Hybrid Shareholders should
collectively sell in excess of 50% of the REMEC Common Stock to be delivered at
the Effective Date within a relatively short period after the Effective Date,
for example one to two years, the Internal Revenue Service (the "IRS") may
contend that this requirement is not met. In such event, the Merger would be a
taxable transaction and former C&S Hybrid Shareholders would recognize taxable
income as of the date of the Merger based on the difference between the tax
basis in their shares of C&S Hybrid Stock and the fair market value of REMEC
Common Stock received by them on that date (even if such fair market value
declines after the Merger). See "The Merger -- Certain United States Federal
Income Tax Considerations."
Lock-up of Affiliates' Shares. In order to qualify the Merger as a pooling
of interests for accounting and financial reporting purposes, affiliates of C&S
Hybrid and REMEC may not sell any shares of stock of either C&S Hybrid or REMEC
during the period beginning 30 days preceding the Effective Date and ending on
the date that REMEC publishes financial statements which reflect 30 days of
combined operations of REMEC
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<PAGE> 23
and C&S Hybrid. Assuming that the Merger is completed and the Effective Date
occurs on or about June 30, 1997, it is not expected that such combined
financial results would be published until the latter part of August 1997. The
affiliates of C&S Hybrid and REMEC will, therefore, bear the risk of a decline
in the price of REMEC Common Stock until such publication without being able to
sell or otherwise reduce their economic interest in their REMEC Common Stock. As
a condition to consummation of the Merger, affiliates of C&S Hybrid and REMEC
must enter into agreements setting forth the restrictions described above. See
"Terms of the Merger -- Accounting Treatment."
Possible Dilution. REMEC and C&S Hybrid anticipate that the results of
operations for REMEC in the quarter in which the Merger is completed will be
adversely affected by transaction and other costs associated with the Merger.
See "-- Risks Related to the Merger -- Difficulties and Costs of Integration."
However, for the fiscal year ending January 31, 1998, REMEC does not anticipate
that the Merger will be dilutive for shareholders of the combined company. If
the anticipated benefits of the Merger are not achieved or the Merger is not
otherwise completed in the manner anticipated, no assurances can be given that
the Merger will not have a dilutive effect on REMEC's earnings per share for the
1998 fiscal year or for any subsequent period.
RISKS RELATED TO REMEC
Dependence on Commercial Wireless Telecommunications Market. Until
recently, REMEC's business has been almost exclusively focused on the defense
market. REMEC believes that its future growth depends on continued success in
the commercial wireless telecommunications market. REMEC 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, REMEC 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, REMEC believes that microwave engineers with the skills necessary to
develop products for the wireless telecommunications market currently are in
high demand and that REMEC may not be able to attract and retain sufficient
engineering expertise.
A number of the commercial markets for REMEC'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 REMEC'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 REMEC's products in
commercial wireless telecommunications fail to grow, or grow more slowly than
anticipated, REMEC's business, operating results and financial condition could
be materially adversely affected. See "Information Concerning
REMEC -- Customers."
Dependence on Defense Market. A substantial portion of REMEC's sales has
been to the defense market. As a result, REMEC'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 REMEC
participates, caused sales of REMEC's core defense products -- MFMs and
components for microwave systems -- to decline from $35.3 million in the year
ended January 31, 1994 to $27.5 million for the year ended January 31, 1997.
REMEC 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 REMEC 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 REMEC's business, operating results and financial
condition in
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<PAGE> 24
subsequent periods. In addition, a large portion of REMEC'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 REMEC had been supplying in excess of $4.0 million of
products on an annual basis. See "REMEC's Management Discussion and Analysis of
Financial Condition and Results of Operations."
Customer Concentration and Exclusivity. As of May 4, 1997, two customers,
P-COM, Inc. ("P-COM") and STM Wireless, Inc. ("STM"), accounted for a
substantial portion of total backlog. 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 REMEC 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, REMEC
derives significant revenues from a limited group of customers, including
Department of Defense, Hughes Aircraft Co., Texas Instruments Inc., Lockheed
Martin Corporation ("Lockheed Martin"), Northrop Grumman Corporation, GEC
Marconi Aerospace, Inc., TRW Inc., Motorola, Inc., Alcatel Network Systems, and
Farinon Division of Harris Corporation ("Harris-Farinon"). REMEC 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 REMEC's products would materially adversely affect REMEC's
business, financial condition and operating results. REMEC 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, REMEC will have to forego opportunities to
supply products to competing companies. If REMEC enters into exclusive
relationships with customers who prove to be unsuccessful, the business,
financial condition and operating results of REMEC may be materially adversely
affected and REMEC may be unable then to establish relationships with the
industry leaders. There can be no assurance that REMEC 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 "REMEC's Management Discussion and Analysis of Financial
Condition and Results of Operations" and "Information Concerning
REMEC -- Customers."
Integration of Acquisitions. In August 1996, REMEC completed a merger (the
"Magnum Merger") of a newly formed subsidiary of REMEC into Magnum Microwave
Corporation ("Magnum"). The anticipated benefits of the Magnum Merger will not
be achieved unless REMEC 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 REMEC will require substantial attention from
management, which has limited experience in integrating companies the size of
REMEC and Magnum. In addition to Magnum, REMEC has recently acquired RF
Microsystems, Inc. ("RFM" or "RF Microsystems"), Radian Technology, Inc.
("Radian") and Veritek. The collective integration of RF Microsystems, Radian,
Veritek and C&S Hybrid also will require substantial attention from management
of REMEC. The diversion of management attention and any difficulties encountered
in the integration of Magnum, RF Microsystems, Radian, Veritek and C&S Hybrid as
a group could have an adverse impact on the business and operating results of
REMEC. There can be no assurance that Magnum, Radian, Veritek or C&S Hybrid will
be successfully integrated or that the consolidated operations of REMEC and its
subsidiaries will be profitable. REMEC will face similar risks in
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<PAGE> 25
the integration of any future acquisitions. See "REMEC's Management Discussion
and Analysis of Financial Condition and Results of Operations."
Management of Growth. The growth in size and complexity of REMEC's
business and expansion of its product lines and customer base have placed, and
are expected to continue to place, significant demands on REMEC's management and
operations. REMEC'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 REMEC will
be able to manage its future growth, and the failure to do so could have a
material adverse effect on REMEC's business, financial condition and operating
results.
Fluctuations in Quarterly Results. REMEC'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 REMEC'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 REMEC, REMEC'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, REMEC 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, REMEC's performance in any one fiscal quarter is not
necessarily indicative of financial trends or future performance. See "REMEC's
Management Discussion and Analysis of Financial Condition and Results of
Operations" and "Index to Financial Statements."
Backlog. REMEC'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. REMEC's order
backlog as of May 4, 1997 was approximately $131.1 million, approximately 46% of
which was attributable to commercial customers and approximately 54% of which
was attributable to defense customers. A substantial amount of REMEC's order
backlog can be canceled at any time without penalty, except, in some cases, the
recovery of REMEC'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 REMEC
could have a material adverse effect on REMEC's business, operating results and
financial condition. See "REMEC's Management Discussion and Analysis of
Financial Condition and Results of Operations" and "Information Concerning
REMEC -- Backlog."
Risks of Cost Overruns and Product Non-Performance; Loss of Investment in
Design and Engineering. REMEC's customers establish demanding specifications for
product performance, reliability and cost. REMEC'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 REMEC's defense
contracts are firm fixed-price ("FFP") contracts that provide for a
predetermined fixed price for stipulated products, regardless of the costs
incurred. REMEC 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 REMEC of a substantial portion of
the point-to-point radio front end. REMEC 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
REMEC's products is an extremely complex process. REMEC 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 REMEC products will not
occur in the future. Any such cost overruns or performance problems may have a
material adverse effect on REMEC's business, operating results and financial
condition. In addition, REMEC often makes significant investments in 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 operating results. See
"-- Declining
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<PAGE> 26
Average Selling Prices," "-- Competition," "REMEC's Management Discussion and
Analysis of Financial Condition and Results of Operations" and "Information
Concerning REMEC -- Manufacturing."
Necessity of Implementing High Volume Manufacturing. Historically, the
volume of REMEC'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 REMEC's manufacturing capacity.
For example, REMEC 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 REMEC 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 REMEC's current and future production commitments in a
cost effective manner or that REMEC will obtain a sufficient amount of high
volume orders to absorb the capital costs incurred. See "Information Concerning
REMEC -- Manufacturing."
Competition. The markets for REMEC'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. REMEC 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 Original
Equipment Manufacturers ("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. REMEC'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. REMEC'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 REMEC. Many of REMEC's
current and potential competitors have substantially greater technical,
financial, marketing, distribution and other resources than REMEC and have
greater name recognition and market acceptance of their products and
technologies. No assurance can be given that REMEC'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 REMEC'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 REMEC's products. REMEC believes that to remain competitive in the
future it will need to invest significant financial resources in research and
development. See "Information Concerning REMEC -- Competition," "Information
Concerning REMEC -- Research and Development" and "REMEC's Management Discussion
and Analysis of Financial Condition and Results of Operations."
Declining Average Selling Prices. Many of REMEC's customers are under
continuous pressure to reduce prices and, therefore, REMEC expects to continue
to experience downward pricing pressure on its products. REMEC's customers
frequently negotiate supply arrangements well in advance of delivery dates,
requiring REMEC to commit to price reductions before it is determined that
assumed cost reductions can be achieved. To offset declining average sales
prices, REMEC believes that it must achieve manufacturing cost reductions and
obtain orders for higher volume products. If REMEC is unable to offset declining
average selling prices, REMEC's gross margins will decline, and such decline
will have a material adverse effect on REMEC's business, financial condition and
operating results. See "REMEC's Management Discussion and Analysis of Financial
Condition and Results of Operations."
Environmental Regulations and Risks. REMEC 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 REMEC's products. The failure to
comply with current or future regulations could result in the imposition of
substantial fines on REMEC, suspension of production, alteration of its
manufacturing processes or cessation of operations.
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<PAGE> 27
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 REMEC's business, financial condition and
operating results. Moreover, if wireless telecommunications systems or other
systems or devices that rely on or incorporate REMEC's products are determined
or alleged to create a significant health risk, REMEC could be named as a
defendant, and held liable, in product liability lawsuits commenced by
individuals alleging that REMEC's products harmed them, which could have a
material adverse effect on REMEC's business, financial condition and operating
results.
Government Regulations. REMEC'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 REMEC are
responsible for compliance with such regulations, regulatory changes, including
changes in the allocation of available frequency spectra, could materially
adversely affect REMEC's operations by restricting development efforts by
REMEC's customers, obsoleting current products or increasing the opportunity for
additional competition. Changes in, or the failure by REMEC to manufacture
products in compliance with, applicable domestic and international regulations
could have a material adverse effect on REMEC's business, financial condition
and operating results. 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 REMEC's customers, which in turn may have a material
adverse effect on the sale of products by REMEC to such customers.
Because of its participation in the defense industry, REMEC 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 REMEC 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 REMEC's business, financial condition or operating
results. See "Information Concerning REMEC -- Government Regulations."
Dependence on Suppliers and Contract Manufacturers. REMEC 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 REMEC are sole source items and would
require significant effort, time or design changes to develop alternate sources.
REMEC is also dependent on P-COM to supply it with certain modules necessary for
the production of microwave front ends for point-to-point radios for P-COM.
REMEC'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 REMEC to seek alternative contract manufacturers or suppliers, could
delay REMEC's ability to deliver products to customers, which in turn would have
a material adverse effect on REMEC's business, financial condition and operating
results. In addition, in the event that costs for REMEC's contract manufacturers
or suppliers increase, REMEC may suffer losses due to an inability to recover
such cost increases under fixed price production commitments to its customers.
See "Information Concerning REMEC -- Sales and Marketing."
Limitation on Protection of Proprietary Technology; Risk of Third Party
Claims. REMEC does not presently hold any significant patents applicable to its
products. In order to protect its intellectual property rights, REMEC relies on
a combination of trade secret, copyright and trademark laws and employee and
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<PAGE> 28
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 REMEC to protect its intellectual property rights will be
adequate to prevent misappropriation of REMEC'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 REMEC or with respect to its products for which
REMEC has indemnified certain of its customers. Asserting REMEC's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting REMEC's
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of REMEC's products infringed its
proprietary rights, REMEC 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 REMEC's business, financial
condition and results of operations. See "Information Concerning
REMEC -- Intellectual Property."
Dependence on Key Personnel. REMEC 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.
REMEC does not maintain key man life insurance on its key executive officers
and, except for Joseph Lee (Executive Vice President) and James Mongillo (Vice
President), such personnel do not have employment or non-competition agreements
with REMEC. Competition for such personnel is intense, and there can be no
assurance that REMEC will be successful in attracting or retaining such
personnel. For example, REMEC believes that microwave engineers with the skills
necessary to develop products for the wireless telecommunications market
currently are in high demand and that REMEC may not be able to attract and
retain sufficient engineering expertise. See "Information Concerning REMEC --
Employees" and "Information Concerning REMEC -- Executive Officers and
Directors."
Control by Management. REMEC's executive officers beneficially own a
substantial portion of the outstanding shares of the Common Stock of REMEC 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 REMEC. Such a high level of influence may have a significant effect in
delaying, deferring or preventing a change in control of REMEC. See "Information
Concerning REMEC -- Executive Officers and Directors" and "Information
Concerning REMEC -- Principal 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 REMEC, its competitors or their customers, government regulatory
action, developments with respect to wireless telecommunications, general 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 "Summary -- Price Range of Common Stock."
RISKS RELATED TO C&S HYBRID
Customer Concentration. C&S Hybrid's sales of its products are
concentrated among a few major customers. During C&S Hybrid's fiscal year ended
December 27, 1996, its largest two customers accounted for 92% of total
revenues, with Digital Microwave Corporation accounting for 62% and
Harris-Farinon accounting for 30% of such total revenues. C&S Hybrid's sales to
any single customer are also subject to significant variability from quarter to
quarter. Such fluctuations could have a material adverse effect on C&S Hybrid's
business, operating results or financial condition. C&S Hybrid expects that
sales of its products to a limited number of customers will continue to account
for a high percentage of its net sales for the foreseeable future. Moreover,
there can be no assurance that C&S Hybrid's current customers will continue to
place orders with C&S Hybrid or that C&S Hybrid will be able to obtain orders
from new customers. The loss of a major customer or any cancellation of or
reduction in orders by such customers, including reductions due to market or
competitive conditions in the wireless communications markets, could have a
material adverse
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effect on C&S Hybrid's business, operating results and financial condition. C&S
Hybrid's ability to increase its customer base and to take advantage of
available growth opportunities with existing customers requires increased
investment in research and development, manufacturing facilities, and marketing
and distribution and, therefore, is limited by C&S Hybrid's current financial
resources and access to capital. Sales of C&S Hybrid's products depend in
significant part upon the decision of prospective OEM customers to develop and
market microwave radios that incorporate C&S Hybrid's transceivers. C&S Hybrid
believes that its future success will depend in part upon its ability to obtain
orders from new customers, as well as the financial condition and success of its
customers and the general economy. C&S Hybrid's OEM customers' orders are
affected by factors such as new product introductions, regulatory approvals,
product life cycles, inventory levels, manufacturing strategy, competitive
conditions and general economic conditions. C&S Hybrid's agreements with OEM
customers typically do not require minimum purchase quantities, and a
significant reduction in orders from any of these customers could have a
material adverse effect on C&S Hybrid's business, operating results and
financial condition. See "C&S Hybrid's Management Discussion and Analysis of
Financial Condition and Results of Operations" and "Information Concerning C&S
Hybrid -- Markets and Customers."
Future Additional Capital Requirements. C&S Hybrid's future capital
requirements will depend upon many factors, including the nature and timing of
orders by its customers, the progress of its research and development efforts,
the expansion of its marketing and sales efforts and the status of its
competitors. In order to take advantage of available growth opportunities, C&S
Hybrid believes that it needs to increase investment in research and
development, manufacturing facilities, and marketing and distribution. C&S
Hybrid believes that capital resources presently available to it may not be
sufficient to fund in full such an increase in investment. See "C&S Hybrid's
Management Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Emerging Markets in Microwave Radio Communications. A number of the
markets for microwave radios 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. If the markets for microwave radios fail to grow,
or grow more slowly than anticipated, C&S Hybrid's business, operating results
and financial condition could be materially adversely affected. See "Information
Concerning C&S Hybrid -- Markets and Customers."
New Products and Technological Change. C&S Hybrid believes that its future
success will depend on its ability to develop and introduce on a timely basis
new products that compete effectively on the basis of price and performance and
that address customer requirements. The success of new product introductions is
dependent upon several factors, including timely completion of new product
designs, achievement of acceptable product costs and market acceptance. No
assurance can be given that C&S Hybrid's product and process development efforts
will be successful or timely or that its new products will achieve market
acceptance. In addition, the average selling prices of transceivers tend to
decrease over the products' lives. To offset such decreases, C&S Hybrid relies
primarily on obtaining yield improvements and corresponding cost reductions in
the manufacture of existing products and on introducing new products that
incorporate advanced features and, therefore, can be sold at higher average
selling prices. To the extent that such cost reductions and new product
introductions do not occur in a timely manner or C&S Hybrid's or its customers'
products do not achieve market acceptance, C&S Hybrid's business, operating
results and financial condition could be materially adversely affected.
The markets in which C&S Hybrid's customers compete are characterized by
rapidly changing technologies, evolving industry standards and continuous
improvements in products and services. If technologies or standards supported by
C&S Hybrid's products become obsolete or fail to gain widespread commercial
acceptance, C&S Hybrid's business, operating results and financial condition
could be materially adversely affected. C&S Hybrid's future prospects will
depend in part on its ability to enhance the functionality of its existing
products in a timely manner and to identify, develop and achieve market
acceptance of new products that address new technologies and standards and meet
customer needs in wireless communications markets. There can be no assurance
that C&S Hybrid will be able to respond to technological advances, changes in
customer requirements or changes in regulatory requirements or industry
standards, and any significant delays in the development, introduction or
shipment of products could have a material adverse effect on C&S
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Hybrid's business, operating results and financial condition. See "C&S Hybrid's
Management Discussion and Analysis of Financial Condition and Results of
Operations," "Information Concerning C&S Hybrid -- Markets and Customers" and
"Information Concerning C&S Hybrid -- Products."
Potential Fluctuations in Operating Results. Although C&S Hybrid has
experienced growth in revenues in recent years, there can be no assurance that
C&S Hybrid's revenue growth will continue or that C&S Hybrid will be able to
maintain annual profitability in the future. C&S Hybrid's annual results have in
the past and may in the future vary significantly due to a number of factors,
including timing, cancellation or delay of customer orders; gain or loss of
significant customers; variations in average selling prices; variations in
manufacturing yields; the timing and level of product and process development
costs; changes in inventory levels; changes in manufacturing capacity and
variations in the utilization of this capacity; the long sales cycles associated
with C&S Hybrid's products custom-designed to customer specifications; changes
in the prices of raw materials incorporated into C&S Hybrid's products; timing
of announcement and introduction of new products by C&S Hybrid and its
competitors; market acceptance of C&S Hybrid's and its customers' products; and
competitive factors. Any unfavorable changes in such factors or others could
have a material adverse effect on C&S Hybrid's business, operating results and
financial condition. In addition, C&S Hybrid operates its own manufacturing
facility which entails a high level of fixed costs and requires an adequate
volume of production and sales to be profitable. During periods of decreased
demand, these high fixed costs could have a material adverse effect on C&S
Hybrid's business, operating results and financial condition. See "C&S Hybrid's
Management Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Customer-Specific Products. A substantial portion of C&S
Hybrid's products are designed to address the needs of individual customers. C&S
Hybrid believes that its future success depends on its ability to select
customer-specific development projects that will result in sufficient volume
production to enable C&S Hybrid to achieve manufacturing efficiencies. C&S
Hybrid expects that some of its current and future customer-specific products
may never be produced in high volume. In addition, in the event of significant
delays in completing designs or C&S Hybrid's failure to obtain development
contracts from customers whose products achieve and sustain anticipated market
demand, C&S Hybrid's business, operating results and financial condition could
be materially and adversely affected. See "Information Concerning C&S
Hybrid -- Products."
Manufacturing. C&S Hybrid has in the past and may in the future experience
lower than expected production yields which could be caused by marginal design,
poor workmanship, defective material or unproven process. Lower production
yields could delay product shipments and adversely affect gross margins, and
there can be no assurance that C&S Hybrid will be able to maintain acceptable
yields in the future. To the extent C&S Hybrid does not achieve acceptable
manufacturing yields or experiences product shipment delays, its business,
operating results and financial condition could be materially and adversely
affected. C&S Hybrid has recently moved its operations to a new facility and any
unanticipated difficulties in establishing high volume production or any
prolonged inability to utilize this facility would have a material adverse
effect on C&S Hybrid's business, operating results and financial condition. See
"Information Concerning C&S Hybrid -- Manufacturing."
Backlog. C&S Hybrid's backlog is subject to fluctuations and is not
necessarily indicative of future sales. In addition, there can be no assurance
that current backlog will necessarily lead to sales in any future period. A
substantial amount of C&S Hybrid's firm backlog can be canceled at any time with
negotiated cancellation charges which may only cover the actual committed costs
of the work performed up to the date of cancellation. Cancellations of pending
purchase orders or termination or reductions of purchase orders in progress
could have a material adverse effect on C&S Hybrid's business, operating results
and financial condition. See "C&S Hybrid's Management Discussion and Analysis of
Financial Condition and Results of Operations" and "Information Concerning C&S
Hybrid -- Backlog."
Dependence on Key Suppliers. Certain components used in C&S Hybrid's
products are currently available only from single sources, and other components
are currently available or acquired from only a limited number of sources. C&S
Hybrid's reliance on contract manufacturers and on sole suppliers involves
several risks, including potential inability to obtain critical materials or
services and reduced control over
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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 C&S Hybrid to seek alternative
contract manufacturers or suppliers, could delay C&S Hybrid's ability to deliver
its products to its customers, which in turn would have a material adverse
effect on C&S Hybrid's business, financial condition and operating results. See
"Information Concerning C&S Hybrid -- Manufacturing" and "Information Concerning
C&S Hybrid -- Certain Relationships and Related Transactions."
Competition. The markets for C&S Hybrid's products are extremely
competitive and are characterized by rapid technological change, new product
development and product obsolescence. In addition, price competition is intense
and significant price erosion generally occurs over the life of a product.
Further, as demand for microwave radio subassemblies has increased, C&S Hybrid
believes that the number of its competitors has increased. C&S Hybrid's primary
competitors are specialized manufacturers of RF and microwave signal processing
components and large, vertically integrated systems producers that are able to
manufacture their own components, including Microelectronic Technology,
Celeritek, Milliwave, DBS Microwave, Aydin Microwave and Hewlett-Packard. C&S
Hybrid'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 C&S Hybrid. Many of C&S Hybrid's current and potential
competitors have substantially greater technical, financial, manufacturing,
marketing, distribution and other resources than C&S Hybrid and have greater
name recognition and market acceptance of their products and technologies. The
ability of C&S Hybrid to compete successfully depends upon a number of factors,
including the rate at which customers incorporate C&S Hybrid's products into
their systems, product quality and performance, price, experienced sales and
marketing personnel, rapid development of new products and features, evolving
industry standards and the number and nature of C&S Hybrid's competitors. No
assurance can be given that C&S Hybrid'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 C&S Hybrid's customers.
See "Information Concerning C&S Hybrid -- Competition."
Limited Protection of C&S Hybrid's Intellectual Property. C&S Hybrid does
not presently hold any patents applicable to its products. In order to protect
its intellectual property rights, C&S Hybrid 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 C&S Hybrid to
protect its intellectual property rights will be adequate to prevent
misappropriation of C&S Hybrid's technology or to preclude competitors from
independently developing such technology. The failure of C&S Hybrid to protect
its proprietary information could have a material adverse effect on C&S Hybrid's
business, operating results and financial condition.
There can be no assurance that, in the future, third parties will not
assert infringement claims against C&S Hybrid or with respect to its products
for which C&S Hybrid has indemnified certain of its customers. Asserting C&S
Hybrid's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting C&S Hybrid's business, financial condition and operating results. In
the event a third party were successful in a claim that one of C&S Hybrid's
products infringed its proprietary rights, C&S Hybrid 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 C&S Hybrid's business, financial condition and operating results. See
"Information Concerning C&S Hybrid -- Intellectual Property."
FCC and Other Government Regulations. C&S Hybrid'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 C&S Hybrid are responsible
for compliance with such regulations, regulatory changes, including changes in
the allocation of available frequency spectrum, could materially adversely
affect C&S Hybrid's operations by restricting development efforts by C&S
Hybrid's customers, obsoleting current products or increasing the opportunity
for additional competition. There can be no assurance that the FCC or other
regulatory bodies will not promulgate new
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regulations that could have a material adverse effect on C&S Hybrid's business,
operating results and financial condition. Changes in, or the failure by C&S
Hybrid to manufacture products in compliance with, applicable domestic and
international regulations could have a material adverse effect on C&S Hybrid's
business, financial condition and operating results. 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 C&S Hybrid's customers, which in
turn may have a material adverse effect on the sale of products by C&S Hybrid to
such customers. See "Information Concerning C&S Hybrid -- Government
Regulations."
Environmental Regulations. C&S Hybrid is also subject to a variety of
local, state and federal governmental laws, rules and regulations relating to
the storage, discharge, handling, emission, generation, manufacture and disposal
of toxic or other hazardous substances used to manufacture C&S Hybrid's
products. The failure to comply with current or future regulations could result
in the imposition of substantial fines on C&S Hybrid, suspension of production,
alteration of its manufacturing processes or cessation of operations. See
"Information Concerning C&S Hybrid -- Government Regulations."
Dependence on Key Employees. C&S Hybrid believes that its future success
depends in large part on the continued service of its key technical, marketing
and management personnel and on its ability to continue to attract and retain
qualified employees, particularly those highly skilled design, process and test
engineers involved in the manufacture of existing products and the development
of new products and processes. Competition for such personnel is intense, and
there can be no assurance that C&S Hybrid can retain its key employees or that
it can attract, assimilate or retain other highly qualified personnel in the
future. In particular, the loss of Tao Chow, who is C&S Hybrid's President,
would have a material adverse effect on C&S Hybrid's development and marketing
efforts. See "Information Concerning C&S Hybrid -- Employees."
Management of Growth. C&S Hybrid has recently experienced a period of
significant growth that has placed strain upon its management systems and
resources. In the future, C&S Hybrid will be required to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and expand, train and manage its employee work force. There can be no
assurance that C&S Hybrid will be able to effectively manage such growth and the
failure to do so would have a material adverse effect upon its business,
operating results and financial condition.
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INTRODUCTION
This Prospectus/Proxy Statement is furnished in connection with the
solicitation by C&S Hybrid of proxies to be voted at the Special Meeting, which
will be held on June 27, 1997.
The principal purpose of the Special Meeting is to consider and vote upon a
proposal to approve the Merger Agreement and the Merger.
Pursuant to the Merger Agreement, Merger Sub will be merged with and into
C&S Hybrid and C&S Hybrid, as the surviving corporation, will become a wholly
owned subsidiary of REMEC. Upon consummation of the Merger, each outstanding
share of C&S Hybrid Common Stock (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to California law) will be
converted into the right to receive 0.1654618 of a share of REMEC Common Stock.
Cash will be paid in lieu of fractional shares of REMEC Common Stock otherwise
issuable upon consummation of the Merger. C&S Hybrid Shareholders who do not
vote their shares in favor of the Merger Agreement and the Merger may, under
certain circumstances and by following prescribed statutory procedures, have the
right to require such shares to be purchased for cash. See "Terms of the
Merger -- Dissenters' Rights." In addition, each Outstanding C&S Hybrid Option
will be assumed by REMEC upon consummation of the Merger. After such assumption,
REMEC will issue, upon exercise of each such option, in lieu of shares of C&S
Hybrid Common Stock, the number of shares of REMEC Common Stock equal to the
product of the number of shares of C&S Hybrid Common Stock purchasable under the
option at the Effective Date (without regard to vesting) multiplied by the
Exchange Ratio. The price per share of REMEC Common Stock to be paid upon the
exercise of each such option will be adjusted to equal the quotient of the
exercise price per share of C&S Hybrid Common Stock with respect to the option
divided by the Exchange Ratio. Only whole shares of REMEC Common Stock will be
issued upon exercise of an Outstanding C&S Hybrid Option. See "Terms of the
Merger -- Manner and Basis of Converting Shares of C&S Hybrid Common Stock and
Outstanding C&S Hybrid Options."
THE BOARD OF DIRECTORS OF EACH OF REMEC AND C&S HYBRID HAS UNANIMOUSLY
CONCLUDED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
ARE IN THE BEST INTERESTS OF SUCH COMPANY AND ITS SHAREHOLDERS. THE BOARD OF
DIRECTORS OF C&S HYBRID UNANIMOUSLY RECOMMENDS THAT C&S HYBRID SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
The principal executive offices of REMEC are located at 9404 Chesapeake
Drive, San Diego, California 92123, and its telephone number at that address is
(619) 560-1301. The principal executive offices of C&S Hybrid are located at 804
Buckeye Court, Milpitas, California 95053, and its telephone number at that
address is (408) 526-9310.
This Prospectus/Proxy Statement is first being mailed to C&S Hybrid
Shareholders on or about June 17, 1997.
The information set forth in this Prospectus/Proxy Statement concerning
REMEC has been furnished by REMEC. The information set forth in this
Prospectus/Proxy Statement concerning C&S Hybrid has been furnished by C&S
Hybrid.
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VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held at C&S Hybrid's principal executive
offices, located at 804 Buckeye Court, Milpitas, California 95053, on June 27,
1997, at 10:00 a.m., local time.
RECORD DATE AND OUTSTANDING SHARES OF C&S HYBRID
Only shareholders of record of C&S Hybrid Common Stock and Preferred Stock
at the close of business on the Record Date are entitled to notice of and to
vote at the Special Meeting. At the Record Date, there were 20 C&S Hybrid
Shareholders of record, and 4,797,575 shares of C&S Hybrid Common Stock and
400,000 shares of C&S Hybrid Preferred Stock issued and outstanding. Except for
the shareholders identified under "Information Concerning C&S
Hybrid -- Principal Shareholders," there were no persons known to the management
of C&S Hybrid to be the beneficial owners of more than 5% of the outstanding C&S
Hybrid Common Stock or more than 5% of the outstanding C&S Hybrid Preferred
Stock. A majority of these shares of C&S Hybrid Common Stock and Preferred Stock
together, present in person or represented by proxy, will constitute a quorum
for the transaction of business at the Special Meeting. Proxies marked to
abstain from voting on a proposal will be included in determining the presence
of a quorum. Each C&S Hybrid Shareholder is entitled to one vote at the Special
Meeting for each share of C&S Hybrid Common Stock and Preferred Stock held as of
the Record Date.
VOTING OF PROXIES
The proxy accompanying this Prospectus/Proxy Statement is solicited on
behalf of the Board of Directors of C&S Hybrid (the "C&S Hybrid Board") for use
at the Special Meeting. C&S Hybrid Shareholders are requested to complete, date
and sign the accompanying proxy and promptly return it in the accompanying
envelope or otherwise mail or deliver it to C&S Hybrid. All properly executed
proxies that are returned and are not revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. Such proxies
containing no instructions regarding the proposal specified in the form of proxy
will be voted for approval of the Merger Agreement and the Merger in accordance
with the recommendation of the C&S Hybrid Board. The C&S Hybrid Board does not
presently intend to bring any business before the Special Meeting other than the
proposal referred to in this Prospectus/Proxy Statement and specified in the
Notice of the Special Meeting. So far as is known to the C&S Hybrid Board, no
other matters are to be brought before the Special Meeting. If any other matters
are properly brought before the Special Meeting and submitted to a vote, all
proxies will be voted in accordance with the judgment of the persons voting the
proxies. Any shareholder signing a proxy has the power to revoke it prior to the
Special Meeting or at the Special Meeting prior to the vote pursuant to the
proxy. A proxy may be revoked by (i) delivering to the Secretary of C&S Hybrid
(by any means, including facsimile) a written notice, bearing a date later than
the proxy, stating that the proxy is revoked, (ii) signing and so delivering a
proxy relating to the same shares and bearing a date later than the proxy or
(iii) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not, by itself, revoke a proxy).
VOTE REQUIRED
Under California law, approval of the Merger requires the affirmative vote
of the holders of a majority of the outstanding shares of the C&S Hybrid Common
Stock and Preferred Stock entitled to vote at the Special Meeting, each voting
separately as a class. Each share of C&S Hybrid Common Stock and Preferred Stock
is entitled to one vote at the Special Meeting. The presence, in person or by
proxy, of the holders of at least a majority of the outstanding shares of C&S
Hybrid Common Stock and Preferred Stock together entitled to vote, is necessary
to constitute a quorum at the Special Meeting. Proxies marked to abstain from
voting will have the same effect as votes against approval of the Merger
Agreement and the Merger. Tao Chow, President and a director of C&S Hybrid, has
agreed to vote all shares of C&S Hybrid capital stock owned beneficially or
controlled by him as of the Record Date (consisting of 3,000,000 shares of C&S
Hybrid Common Stock, representing approximately 62.5% of the C&S Hybrid Common
Stock outstanding as of the Record Date, and
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400,000 shares of C&S Hybrid Preferred Stock, representing 100% of the C&S
Hybrid Preferred Stock outstanding as of the Record Date) in favor of the Merger
Agreement and the Merger. Accordingly, by virtue of Mr. Chow's ownership, the
proposal to approve the Merger Agreement and Merger will be adopted by the C&S
Hybrid Shareholders without the vote of any other shareholder of C&S Hybrid.
Officers, directors and affiliates of C&S Hybrid own beneficially 64.1% of the
C&S Hybrid Common Stock and 100% of the C&S Hybrid Preferred Stock outstanding
as of the Record Date and have advised C&S Hybrid that they intend to vote such
shares in favor of the Merger. The consummation of the Merger is also
conditioned upon a number of other conditions. See "Terms of the
Merger -- Conditions to the Merger."
Under the terms of the Merger Agreement, REMEC will issue 860,000 shares of
previously authorized REMEC Common Stock (or 7.0% of the outstanding number of
shares of REMEC Common Stock before the Merger) to the C&S Hybrid Shareholders.
Accordingly, approval of the shareholders of REMEC is not required to consummate
the proposed Merger.
SOLICITATION OF PROXIES AND EXPENSES
C&S Hybrid will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, the directors, officers and
employees of C&S Hybrid may solicit proxies from shareholders by telephone,
facsimile, telegram or letter or in person.
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THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
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. REMEC believes that the evolution of commercial 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. REMEC 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. REMEC believes that expansion of capability through the acquisition of
component firms when combined with REMEC's technological and manufacturing
skills at the component level will allow it to achieve improved levels of MFM
integration. C&S Hybrid is thought to be a particularly attractive source of
such components and combining with C&S Hybrid could help achieve REMEC's goal of
establishing superior component development and manufacturing capabilities.
In November 1996, Ronald Ragland, Chairman and Chief Executive Officer of
REMEC, contacted Tao Chow, President and a director of C&S Hybrid, by telephone
to discuss the possibility of combining REMEC with C&S Hybrid. Mr. Chow
requested that, due to the demands at that time of relocating C&S Hybrid's
business operations to a new facility, Mr. Ragland contact him in early 1997 to
discuss further such a combination.
On February 20, 1997, Joseph Lee, an Executive Vice President and director
of REMEC, contacted Mr. Chow by telephone to arrange a meeting to discuss the
possibility of combining REMEC with C&S Hybrid. Mr. Chow and Mr. Lee had
previously known each other as casual business acquaintances.
On February 25, 1997, the C&S Hybrid Board met at C&S Hybrid's offices and
discussed the possibility of combining REMEC with C&S Hybrid.
On February 26, 1997, Messrs. Ragland, Lee and Chow met to discuss in
general terms a potential merger of C&S Hybrid with REMEC. All parties expressed
interest in continuing discussions.
On March 6, 1997, Mr. Chow visited REMEC's executive offices and met with
various members of REMEC's senior management team.
On March 7, 1997, the C&S Hybrid Board met by conference call and discussed
the possibility of combining REMEC with C&S Hybrid.
On March 19, 1997, Messrs. Ragland, Lee and Chow and Robert Tillman, a
financial advisor to C&S Hybrid, met at offices of Heller Ehrman White &
McAuliffe, counsel to REMEC. At this meeting, the parties discussed possible
terms of a combination of C&S Hybrid with REMEC. No agreement was reached at
this meeting.
From March 24 to April 3, 1997, Messrs. Tillman and Lee discussed specific
terms of a proposed combination of C&S Hybrid with REMEC, including the amount
and form of consideration to be provided to C&S Hybrid Shareholders.
On April 4, 1997, Messrs. Ragland, Lee, Chow and Tillman met and further
discussed the terms of a potential combination and agreed upon certain essential
terms and conditions of the Merger, including the effective exchange ratio of
shares of REMEC Common Stock for shares of C&S Hybrid Common Stock, pending
Board of Director approval of each company.
From April 4 to April 8, 1997, counsel to REMEC prepared and circulated to
both parties a draft of the Agreement of Reorganization and the respective
counsel for C&S Hybrid and REMEC discussed the proposed terms of the Merger.
On April 9, 1997, Messrs. Tillman and Lee and attorneys for both C&S Hybrid
and REMEC met at offices of Heller Ehrman White & McAuliffe and negotiated
provisions of the Agreement of Reorganization and other related documents, which
embodied the terms and conditions agreed upon at the April 4, 1997 meeting
between Messrs. Ragland, Lee, Chow and Tillman.
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On April 10, 1997, a meeting of the C&S Hybrid Board was held at which the
C&S Hybrid Board unanimously approved the Merger and the Merger Agreement and
recommended that the C&S Hybrid Shareholders vote for approval of the Merger and
the Merger Agreement. Counsel for C&S Hybrid and Mr. Tillman were in attendance
at the meeting.
On April 10, 1997, certain senior members of management of C&S Hybrid and
REMEC met at C&S Hybrid's offices to discuss the business of C&S Hybrid.
On April 10, 1997, Messrs. Lee, Chow and Tillman and respective counsel for
C&S Hybrid and REMEC completed negotiations of the terms of the Agreement of
Reorganization and related documents and Messrs. Lee and Chow, on behalf of
REMEC and C&S Hybrid, respectively, signed and delivered the Agreement of
Reorganization.
On April 28, 1997, a meeting of the REMEC Board was held at which the REMEC
Board unanimously approved the Merger and the Merger Agreement.
REASONS FOR THE MERGER
The Boards of Directors of REMEC and C&S Hybrid believe that the
combination of REMEC and C&S Hybrid will bring together for the benefit of their
shareholders the complementary strengths of their organizations. Both REMEC and
C&S Hybrid provide, among others, microwave based products to the commercial
wireless communications industry, and the Merger will allow the combined company
to strengthen and broaden its microwave product lines. The size of the combined
company also will be greater than the size of REMEC or C&S Hybrid independently,
which the Boards of Directors of both companies believe will enhance the
combined company's profile with customers and with the investment community.
During the Merger discussions, both companies reviewed with each other and
independently business and financial reasons for the Merger. The business
factors considered by both companies included each company's products,
reputation, research and development capabilities, manufacturing facilities,
sale activities and customer bases, and operating efficiencies that may be
derived from the combination of the businesses. The financial factors considered
by both companies included the operating histories and balance sheets of the two
companies. The prospects of the combined company are subject to a number of
risks which were considered by the Boards of Directors. See "Risk Factors."
REMEC: On April 28, 1997, a meeting of the Board of Directors of REMEC
(the "REMEC Board") was held at which the REMEC Board unanimously approved the
Merger and the Merger Agreement. In reaching its decision to approve the Merger,
the REMEC Board considered a number of factors, including the factors described
below. In light of the variety of factors considered in its evaluation of the
Merger, the REMEC Board did not find it practical to and did not quantify or
otherwise attempt to assign relative weights to the specific factors considered
in reaching its determination. After a presentation by management of REMEC, the
REMEC Board determined that the Merger is in the best interests of REMEC and its
shareholders and authorized the Merger for the following reasons, among others:
- C&S Hybrid's business would strengthen REMEC's position in the wireless
MFM market by giving REMEC the opportunity to compete more effectively in
the commercial wireless point-to-point radio market. C&S Hybrid's
business is 100% commercial wireless.
- Certain economies of scale could result by combining the two companies'
product lines and sales and marketing operations and such a combination
could further strengthen and broaden REMEC's core microwave technology.
- C&S Hybrid had been consistently profitable in the wireless MFM business
and its revenues grew at an average rate of 29.6% over the last four
years.
- The companies have managerial and technical strengths that will benefit
from the combination of the companies. In particular, it is believed that
Tao Chow, the President of C&S Hybrid, will bring substantial and
valuable industry expertise to the combined company as a Senior Vice
President of REMEC and President of C&S Hybrid following the Merger.
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- Consistent with its growth objectives, it would be in REMEC's best
interest to acquire additional expertise in producing microwave
components, particularly components such as amplifiers and frequency
sources. C&S Hybrid is a company long known to REMEC as having a strong
reputation in the industry for producing products that would complement
the MFMs produced by REMEC.
- Customers are increasingly requiring broad capability in component
technology to be incorporated in ever more complex MFMs. It is
anticipated that the acquisition of C&S Hybrid's component expertise
coupled with REMEC's existing capabilities will enable REMEC to be more
responsive to these customer requirements.
- All of C&S Hybrid's business is commercial which will assist REMEC to
penetrate the commercial market.
- The REMEC Board believes that combining the two companies is in the best
interests of REMEC and its shareholders and that issuance of the REMEC
Common Stock pursuant to the terms of the Merger Agreement may not be
dilutive to REMEC shareholders over the long term.
At that meeting, the REMEC Board also considered risks associated with
combining the two companies in evaluating the Merger, including risks solely
associated with the business of C&S Hybrid and risks related to the combination
of the companies. In evaluating the risks associated with the business of C&S
Hybrid, the REMEC Board considered (i) the strains upon C&S Hybrid's business
infrastructure resulting from its growth in revenues, (ii) C&S Hybrid's reliance
on the managerial skills of Mr. Tao Chow, (iii) the differing compensation
structures of C&S Hybrid and REMEC, (iv) the material costs used in C&S Hybrid's
technology, (v) the need for additional experienced engineers, and (vi) the
anticipated research and development costs involved in a planned automation of
C&S Hybrid's manufacturing processes. In addition, the REMEC Board considered
the risks associated with combining two separate business operations. The REMEC
Board considered the above in light of its knowledge of the business and
operations of REMEC, information presented by REMEC management, and its business
judgment. While the REMEC Board did not assign a relative weight to any of the
factors considered, it placed special emphasis on its belief in the
complementary business, financial and management strengths of REMEC and C&S
Hybrid, its view that those complementary strengths would enhance the value of
the combined company in the eyes of its customers and the investment community,
and its view that the Merger is in the best interests of REMEC and its
shareholders. The REMEC Board decided that the potential benefits of the Merger
to REMEC and its shareholders outweighed these risks.
C&S Hybrid: On April 10, 1997, a meeting of the C&S Hybrid Board was held
at which the C&S Hybrid Board unanimously approved the Merger and the Merger
Agreement and recommended that the C&S Hybrid Shareholders vote FOR approval of
the Merger and the Merger Agreement. In reaching its decision to authorize C&S
Hybrid to enter into the Merger Agreement and to recommend approval of the
Merger and the Merger Agreement by the C&S Hybrid Shareholders, the C&S Hybrid
Board considered a number of factors, including the factors described below. The
C&S Hybrid Board had met earlier on February 25, 1997 and March 7, 1997 and
discussed the possibility of combining REMEC with C&S Hybrid. In light of the
variety of factors considered in its evaluation of the Merger, the C&S Hybrid
Board did not find it practical to and did not quantify or otherwise attempt to
assign relative weights to the specific factors considered in reaching its
determination.
- The C&S Hybrid Board considered the liquidity offered by the proposed
Merger to the C&S Hybrid Shareholders. The C&S Hybrid Board believed that
(i) it was unlikely that C&S Hybrid would be able to complete an initial
public offering of its stock in the foreseeable future, (ii) the Merger
offered shareholders the opportunity to own a publicly traded stock of a
significantly larger business enterprise and (iii) C&S Hybrid
Shareholders would have the opportunity to participate in the potential
for growth of the combined company after the closing of the Merger. In
addition, the C&S Hybrid Board considered the tax-free nature of the
Merger, which will permit C&S Hybrid Shareholders to retain their
investment without immediate taxation of any gain.
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- The C&S Hybrid Board considered general business and competitive
conditions in its industry. The C&S Hybrid Board also considered C&S
Hybrid's growth opportunities as an independent company compared with the
growth opportunities available to a publicly traded and larger company
such as REMEC. The C&S Hybrid Board believed that the competitive
conditions in the industry would remain more difficult for smaller
companies and, in order to compete more effectively and take advantage of
available growth opportunities, C&S Hybrid would need to increase
investment in research and development, manufacturing facilities and
marketing and distribution. The C&S Hybrid Board considered management's
view that capital resources available to C&S Hybrid may not be sufficient
to fund in full such an increase in investment and that REMEC, which has
greater financial resources and access to capital than C&S Hybrid, may
assist the funding of such investment. The C&S Hybrid Board also
considered management's belief that the combination with REMEC would give
the combined company greater leverage and visibility in dealing with
customers and suppliers.
- The C&S Hybrid Board considered the opportunities available from REMEC's
experience in the wireless market and the potential for creating a
broader line of products, particularly given the complementary nature of
the two companies' product lines. The C&S Hybrid Board also considered
that C&S Hybrid's revenues are primarily generated by sales to two
customers. The C&S Hybrid Board believed that the Merger would permit C&S
Hybrid to reduce its dependency on a few customers and to enhance its
market penetration by offering complimentary products and, particularly
since there is little overlap between REMEC's and C&S Hybrid's customer
bases, pursuing with REMEC cross-selling opportunities.
- The C&S Hybrid Board considered the strategic and operating
opportunities, as well as other benefits, that could result from the
integration of C&S Hybrid and REMEC. For example, the C&S Hybrid Board
believed that C&S Hybrid's ability to recruit and retain engineers could
be enhanced by the Merger, and that C&S Hybrid's marketing and sales
efforts would benefit from the resources of REMEC's 46 person marketing
and sales group which currently markets products complementary to those
of C&S Hybrid.
- The C&S Hybrid Board considered C&S Hybrid's management view that REMEC
has an experienced, strong and disciplined management team with a history
of consistent performance.
The C&S Hybrid Board, in considering the Merger, considered the terms of
the proposed offer, including the valuation of C&S Hybrid. Based on the $24.25
price per share of REMEC Common Stock on April 9, 1997, the equivalent of about
$4.01 per share of C&S Hybrid Common Stock was considered a favorable premium to
the C&S Hybrid Shareholders. The C&S Hybrid Board also considered the financial
performance of REMEC in recent years, its price/earnings ratio and balanced
these factors against the risks associated with the potential volatility of the
REMEC Common Stock. The C&S Hybrid Board also considered management's comments
about REMEC's strategic direction and the added value that C&S Hybrid could
contribute to the combined company.
In the course of its deliberations, the C&S Hybrid Board reviewed with C&S
Hybrid management a number of additional factors relevant to the Merger,
including (i) historical information concerning C&S Hybrid's and REMEC's
respective businesses, prospects, financial performance and condition,
operations, management and competitive position, including REMEC's public
reports filed with the SEC and analyst coverage of REMEC; (ii) C&S Hybrid's
management's view as to the financial condition, results of operations,
businesses and products of C&S Hybrid and REMEC before and after giving effect
to the Merger based on management due diligence and publicly available financial
and other information; (iii) current financial market conditions and historical
market prices, volatility and trading information with respect to REMEC Common
Stock; (iv) management's assessment of the strategic and other benefits expected
to result from the Merger; (v) the consideration to be received by C&S Hybrid
Shareholders in the Merger and the relationship between the market value of the
REMEC Common Stock to be issued in exchange for each share of C&S Hybrid Common
Stock and a comparison of comparable merger transactions; (vi) C&S Hybrid's view
on the strength of REMEC's overall management and sales organization; (vii) the
belief that the terms of the Merger Agreement, including the parties'
representations, warranties and covenants and the conditions
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to their respective obligations, are reasonable; (viii) C&S Hybrid management's
view as to the prospects of C&S Hybrid as an independent company, particularly
in light of C&S Hybrid's dependence on two customers and need for additional
investment; (ix) C&S Hybrid management's view as to the potential for other
third parties to enter into strategic relationships with or to acquire C&S
Hybrid or REMEC; (x) the impact of the Merger on C&S Hybrid's customers and
employees; and (xi) reports from management and financial advisors as to the
results of their due diligence investigation of REMEC. The C&S Hybrid Board also
considered the terms of the Merger Agreement regarding limitations on C&S
Hybrid's rights to consider and negotiate other acquisition proposals and the
voting agreement to be signed by C&S Hybrid's majority shareholder. In addition,
the C&S Hybrid Board noted that the Merger is expected to be accounted for as a
pooling of interests and that no goodwill is expected to be created on the books
of the combined company as a result thereof. The C&S Hybrid Board considered the
financial presentations by Robert Tillman who acted as a financial advisor to
C&S Hybrid, including his analysis of other mergers involving REMEC.
The C&S Hybrid Board also identified and considered a variety of
potentially negative factors in its deliberations concerning the Merger,
including, but not limited to: (i) the timing and risks associated with the
integration by REMEC of C&S Hybrid with the other businesses that REMEC has
recently acquired and whether the potential benefits sought in the Merger and
such other acquisitions might not be fully realized; (ii) the possibility that
the Merger might not be consummated and the effect of public announcement of the
Merger on C&S Hybrid's sales and operating results and C&S Hybrid's ability to
attract and retain key management, marketing and technical personnel; (iii) the
fact that the REMEC Common Stock price had fluctuated in the past and, because
the Merger provided for a fixed exchange ratio of REMEC Common Stock for C&S
Hybrid Common Stock, there was no adjustment in the amount of consideration that
would be received by the C&S Hybrid Shareholders if the REMEC Common Stock price
declined; (iv) the potential dilutive effect to C&S Hybrid Shareholders of the
issuance of REMEC Common Stock in the Merger; (v) the possibility of management
disruption associated with the Merger and the risk that despite the efforts of
REMEC and C&S Hybrid, key technical and management personnel might not remain
employed by C&S Hybrid; (vi) the possibility that the business combination with
REMEC might adversely affect C&S Hybrid's relationship with sales
representatives, customers or other third parties; (vii) the risks associated
with the fact that C&S Hybrid Shareholders initially would not have any
representation on the Board of REMEC following the Merger; (viii) the charges to
be incurred in connection with the Merger, including costs of integrating the
businesses and transaction expenses arising from the Merger; and (ix) the other
risks described under "Risk Factors" herein. The C&S Hybrid Board believed that
these risks were outweighed by the potential benefits of the Merger.
THE BOARD OF DIRECTORS OF EACH COMPANY BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF SUCH COMPANY AND ITS SHAREHOLDERS. C&S HYBRID'S BOARD OF
DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
MANAGEMENT AFTER THE MERGER
The REMEC Board currently consists of Messrs. Ronald Ragland, Errol
Ekaireb, Jack Giles, Joseph Lee, Denny Morgan, Thomas Corcoran, William Gibbs,
Andre Horn, Gary Luick and Jeffrey Nash. The REMEC Board and the executive
officers of REMEC will not change as a result of the Merger.
On the Effective Date, present members of the Board of Directors of C&S
Hybrid will resign and the Board of Directors of C&S Hybrid will consist of
Joseph Lee, Errol Ekaireb and Tao Chow. Mr. Chow will remain the President of
C&S Hybrid and will become a Senior Vice President of REMEC following the
Merger.
PRIOR RELATIONSHIP BETWEEN REMEC AND C&S HYBRID
To the best of each company's knowledge, the companies have not had prior
commercial dealings with each other.
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TERMS OF THE MERGER
The detailed terms of, and conditions to, the Merger are contained in the
Agreement of Reorganization and the Agreement of Merger, copies of which are
attached to this Prospectus/Proxy Statement as Appendix A and Appendix B,
respectively, and incorporated herein by reference. The statements made in this
Prospectus/Proxy Statement with respect to the terms of the Merger and related
transactions are qualified in their entirety by the text of those agreements.
EFFECTIVE DATE OF THE MERGER
The Merger Agreement provides for the merger of Merger Sub with and into
C&S Hybrid with C&S Hybrid remaining as the surviving corporation. As a result
of the Merger, C&S Hybrid will become a wholly owned subsidiary of REMEC, Merger
Sub will cease to exist and each issued and outstanding share of C&S Hybrid
Common Stock will be converted into the right to receive 0.1654618 of a share of
REMEC Common Stock (other than shares, if any, as to which dissenters' rights
have been exercised pursuant to California law).
It is anticipated that, if the Merger is approved at the Special Meeting
and all other conditions to the Merger have been fulfilled or waived, the
Agreement of Merger will be filed as soon as practicable following the Special
Meeting or the latest adjournment thereof with the Secretary of State of the
State of California (expected to be filed on or about June 27, 1997). The Merger
will become effective upon such filing. See "-- Conditions to the Merger."
MANNER AND BASIS OF CONVERTING SHARES OF C&S HYBRID COMMON STOCK AND
OUTSTANDING C&S HYBRID OPTIONS
As of the Effective Date, each share of C&S Hybrid Common Stock issued and
outstanding immediately prior to the Effective Date (other than shares, if any,
as to which dissenters' rights have been exercised pursuant to California law)
will be converted into the right to receive 0.1654618 of a share of REMEC Common
Stock. No fractional shares of REMEC Common Stock will be issued in connection
with the Merger. In lieu of fractional shares, each C&S Hybrid Shareholder who
would otherwise be entitled to a fractional share will receive cash equal to the
arithmetic average of the closing sales prices of REMEC Common Stock on Nasdaq
for the five trading days immediately preceding the Effective Date multiplied by
the fraction of a share of REMEC Common Stock to which the shareholder would
otherwise be entitled.
Based on the Exchange Ratio of 0.1654618 of a share of REMEC Common Stock
for each share of C&S Hybrid Common Stock, and based on the closing sale price
of REMEC Common Stock of $32.50 on Nasdaq on June 11, 1997, each share of C&S
Hybrid Common Stock will have a market value of approximately $5.38.
In addition, each Outstanding C&S Hybrid Option will be assumed by REMEC
upon consummation of the Merger. After such assumption, REMEC will issue, upon
any partial or total exercise of any Outstanding C&S Hybrid Option, in lieu of
shares of C&S Hybrid Common Stock, the number of shares of REMEC Common Stock
equal to the product of the number of shares of C&S Hybrid Common Stock
purchasable (without regard to vesting) under the Outstanding C&S Hybrid Option
immediately prior to the Effective Date multiplied by the Exchange Ratio. The
price per share of REMEC Common Stock to be paid upon the exercise of each
Outstanding C&S Hybrid Option assumed by REMEC will be adjusted to equal the
quotient of the exercise price per share of C&S Hybrid Common Stock with regard
to the Outstanding C&S Hybrid Option divided by the Exchange Ratio. Only whole
shares of REMEC Common Stock will be issued upon exercise of an Outstanding C&S
Hybrid Option. An Outstanding C&S Hybrid Option will not be exercisable for a
fractional share of REMEC Common Stock unless it is exercised to the full extent
of shares then subject to it, in which case, in lieu of receiving any fractional
share of REMEC Common Stock, the holder of the option will receive in cash the
fair market value of the fractional share on the date of exercise. Continuous
employment with C&S Hybrid prior to the Effective Date will be credited to an
optionee for purposes of determining vesting after the Effective Date. REMEC
will register the shares of REMEC Common Stock issued or issuable under C&S
Hybrid's 1996 Equity Incentive Plan, under which the Outstanding C&S Hybrid
Options were issued, under the Securities Act of 1933, as amended (the
"Securities Act") on a Registration Statement on Form S-8 within 90 days
following the Effective Date.
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Based upon the number of outstanding shares of REMEC Common Stock on June
11, 1997 and C&S Hybrid Common Stock as of the Record Date, and assuming that:
(i) all outstanding shares of C&S Hybrid Preferred Stock convert to C&S Hybrid
Common Stock; (ii) no C&S Hybrid Shareholders exercise dissenters' rights; and
(iii) no outstanding REMEC or C&S Hybrid options are exercised prior to the
Effective Date and following such respective dates, approximately 13,095,418
shares of REMEC Common Stock will be outstanding as of the Effective Date, of
which approximately 860,000 shares (approximately 6.6% of the total) will be
issued to the former holders of C&S Hybrid Common Stock. Mr. Tao Chow, C&S
Hybrid's President, will receive 562,570 shares of REMEC Common Stock and will
become the second largest shareholder of REMEC. Accordingly, the former C&S
Hybrid Shareholders as a group, and Mr. Chow in particular, will be in a
position to have a significant influence on the election of directors and other
corporate matters which require the vote of REMEC shareholders.
EXCHANGE OF CERTIFICATES
Immediately after the Effective Date, REMEC will cause to be mailed or
otherwise delivered to each C&S Hybrid Shareholder of record a letter of
transmittal with instructions to be used by such shareholder in surrendering
certificates that, immediately prior to the Merger, represented shares of C&S
Hybrid Common Stock (the "C&S Hybrid Stock Certificates"). Promptly after the
Effective Date, REMEC will notify the holders of Outstanding C&S Hybrid Options
of the procedures to be followed in connection with REMEC's assumption of the
Outstanding C&S Hybrid Options, which may include delivery of certain
documentation to REMEC.
Upon surrender of a C&S Hybrid Stock Certificate to REMEC or its designated
agent, together with a duly executed letter of transmittal, REMEC and
ChaseMellon Shareholder Services, REMEC's transfer agent, will arrange for the
holder of such certificate to receive in exchange therefor a certificate
evidencing the number of shares of REMEC Common Stock to which such holder of
C&S Hybrid Common Stock is entitled plus cash for any fractional share. In the
event there has been a transfer of ownership of shares of C&S Hybrid Common
Stock that is not reflected on the transfer records of C&S Hybrid, REMEC Common
Stock may be delivered to a transferee if the certificate representing such C&S
Hybrid Common Stock is presented to REMEC, together with the related letter of
transmittal, and accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have been
paid.
Until a C&S Hybrid Stock Certificate has been surrendered to REMEC, each
such certificate shall be deemed at any time after the Effective Date to
represent the right to receive, upon such surrender, certificates for such
number of shares of REMEC Common Stock (and cash in lieu of fractional shares)
as the shareholder is entitled under the Merger Agreement. After the Effective
Date, there will be no further registration of transfers of C&S Hybrid Common
Stock.
C&S HYBRID SHAREHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES FOR
EXCHANGE PRIOR TO APPROVAL OF THE MERGER BY THE C&S HYBRID SHAREHOLDERS AND
RECEIPT OF THE TRANSMITTAL LETTER FROM THE EXCHANGE AGENT.
INTERESTS OF CERTAIN PERSONS
Upon the closing of the Merger, C&S Hybrid and each of Tao Chow, Ming Chow,
Tri Dinh and Peter Lieu, each of whom is an employee and a shareholder of C&S
Hybrid, will enter into employment agreements. See "-- Employment Agreements."
Following the Effective Date, REMEC will issue options to purchase REMEC
Common Stock to certain employees of C&S Hybrid designated by Tao Chow. See
"-- New Stock Option Grants."
From and after the closing of the Merger, REMEC and C&S Hybrid are required
to fulfill the obligations of C&S Hybrid pursuant to any indemnification
agreements between C&S Hybrid and its directors and officers existing on or
prior to the date of the Agreement of Reorganization. See "-- Indemnification."
Tao Chow, President and a director and shareholder of C&S Hybrid, owns
approximately (i) 39% of the outstanding shares and is a director of Excelics
Semiconductor, Inc., a supplier to C&S Hybrid, (ii) 45% of
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the outstanding shares and is a director and the President and the Chief
Financial Officer of Custom Micro Machining, Inc., a supplier of machine parts
to C&S Hybrid, and (iii) 33% of the outstanding shares and is a director of
Applied Thin-Film Products, a supplier of circuits to C&S Hybrid.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Under the Agreement of Reorganization, C&S Hybrid has agreed that it will
carry on its business in the ordinary course consistent with prior practices and
in a prudent, business-like fashion and that it will not: (i) merge with or into
or consolidate with any other corporation; (ii) amend its articles of
incorporation or bylaws; (iii) change the benefit structure or salary rates for
its executive management and employees not covered by collective bargaining
agreements; (iv) enter into or materially modify any employment contracts or
severance arrangements; (v) enter into collective bargaining or similar
agreements; (vi) change its authorized or outstanding capital stock or its
capital structure; (vii) incur any indebtedness for borrowed money; (viii) issue
or deliver any stock, bonds or other securities or debt instruments, or any
options, warrants or other rights calling for the issuance or delivery thereof
except to effect the exercise of Outstanding C&S Hybrid Options; (ix) declare or
make, or agree to declare or make, any payments or distributions on its capital
stock; (x) purchase or redeem, or agree to purchase or redeem, any of its
capital stock or other securities; (xi) enter into transactions other than in
the ordinary course of business; (xii) terminate or amend any material contract,
agreement, license or other instrument to which C&S Hybrid is a party or by
which any of its assets are bound, except agreements which by their terms are
terminable in the ordinary course of business; or (xiii) enter into certain
long-term or significant contracts.
Prior to the earlier of July 31, 1997, termination of the Agreement of
Reorganization or consummation of the Merger, C&S Hybrid will not, and will not
cause or permit through any officer, director, agent or representative to, (i)
solicit, initiate or further the submission of proposals or offers from, or
enter into any agreement with, any firm, corporation, partnership, association,
group or other person or entity, individually or collectively (including,
without limitation, any managers or other employees of C&S Hybrid or any
affiliates) (a "Third Party"), relating to any acquisition or purchase of all or
any substantial portion of the assets of, or any equity interest in, C&S Hybrid
or any merger, consolidation or business combination with C&S Hybrid; (ii)
participate in any discussions or negotiations regarding, or furnish to any
Third Party any confidential information with respect to, C&S Hybrid in
connection with any acquisition or purchase of all or any substantial portion of
the assets of, or any equity interest in, C&S Hybrid or any merger,
consolidation or business combination with C&S Hybrid; or (iii) otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any Third Party to undertake or seek to undertake any
acquisition or purchase of all or any substantial portion of the assets of, or
any equity interest in, C&S Hybrid, or any merger, consolidation or business
combination with C&S Hybrid. C&S Hybrid agreed to cease any existing activities,
discussions or negotiations with any Third Party relating to any acquisition or
purchase of all or any substantial portion of the assets of, or any equity
interest in, C&S Hybrid or any merger, consolidation or business combination
with C&S Hybrid conducted prior to the date of the Agreement of Reorganization.
C&S Hybrid has agreed to advise promptly REMEC in writing of any and all
material events and developments concerning its financial position, assets,
liabilities, results of operations or business or any of the items or matters
covered by C&S Hybrid's representations and warranties contained in the
Agreement of Reorganization.
Further, C&S Hybrid has represented to REMEC that, until the closing of the
Merger, there would not be (i) any transaction by C&S Hybrid other than in the
ordinary course of business or as contemplated by the Agreement of
Reorganization or any loss or damage to any of the manufacturing facilities of
C&S Hybrid due to fire or other casualty amounting to more than $100,000 in
aggregate replacement value; any event that materially and adversely affects the
ability of C&S Hybrid to operate its business as a whole in a manner consistent
with the way in which such business has been conducted prior to December 31,
1996 or any change in the financial position, assets, liabilities, results of
operations or business of C&S Hybrid other than changes in the ordinary course
of business which in the aggregate have not been materially adverse; (ii) any
dividend or other distribution to or for the holder of any capital stock of C&S
Hybrid; (iii) any lawsuit, proceeding or governmental investigation likely to
have a material adverse effect on the business of C&S Hybrid; (iv) any
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event or condition having or likely to have a material adverse effect on the
financial position, assets, liabilities, results of operations or business of
C&S Hybrid; (v) any increase or decrease in the rates of compensation by C&S
Hybrid to any director, officer, employee, agent or consultant, or any bonus,
percentage compensation, service award or other benefit, granted, made or
accrued to or to the credit of any such person, or any welfare, pension,
retirement or similar payment or arrangement made or agreed to by C&S Hybrid
other than salary adjustments for non-officer employees in accordance with past
practice; (vi) any modification or rescission of, or waiver by C&S Hybrid of
rights under, any existing contract of C&S Hybrid having or likely to have a
material adverse effect on C&S Hybrid's business; (vii) any discharge or
satisfaction by C&S Hybrid of any lien or encumbrance, or any payment of any
obligation or liability, other than current liabilities shown on its December
31, 1996 balance sheet and current liabilities incurred since December 31, 1996
in the ordinary course of business; or (viii) any mortgage, pledge, imposition
of any security interest, claim, encumbrance or other restriction on any of the
assets, tangible or intangible, of C&S Hybrid likely to have a material adverse
effect on C&S Hybrid's business or financial condition.
Each party to the Agreement of Reorganization has agreed to give prompt
notice to the other party as soon as practicable after it has actual knowledge
of (i) the occurrence, or failure to occur, of any event which would or would be
likely to cause any party's representations or warranties contained in the
Agreement of Reorganization to be untrue or incorrect in any material respect at
any time from the date of the Agreement of Reorganization to the Effective Date,
or (ii) any failure on its part or on the part of any of its subsidiaries,
officers, directors, employees, representatives or agents (other than persons or
entities who are such employees, representatives or agents only because they are
appointed insurance agents of such parties) to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by such party under the Agreement of Reorganization. Each party has
the right to deliver to the other party a written disclosure letter as to any
matter of which it becomes aware following execution of the Agreement of
Reorganization which would constitute a breach of any representation, warranty
or covenant of the Agreement of Reorganization by such party. The non-disclosing
party will have 5 business days from receipt of such disclosure letter to notify
the disclosing party that (a) it will close notwithstanding the nondisclosure,
(b) it will not close based on such nondisclosure or (c) further investigation
or negotiation is required for it to reach a determination whether or not to
close based on such nondisclosure.
Except as otherwise required by applicable law, each party to the Agreement
of Reorganization will keep confidential data, information or documents it
obtains from the other and will not disclose (other than to its attorneys,
accountants, advisors or prospective investors, who are themselves required to
keep such information confidential) prior to the Merger (or ever, if the Merger
does not occur) to any third party such data, information or documents obtained
from the other or from any director, officer, employee or agent of the other or
any data or documents prepared on the basis of such data, information or
documents except in each case for any data, information or document which: (i)
was or is in the public domain; (ii) was already known prior to its disclosure
by the other or (iii) is disclosed to a party by a third party that is not an
agent of the other.
In addition, each company has agreed to afford to the other reasonable
access to information and documents relating to the Agreement of Reorganization
and the Merger, and providing reasonably requested financial, technical and
operating data and other information pertaining to its business.
CONDITIONS TO THE MERGER
The obligations of REMEC to consummate the Merger are subject to the
satisfaction or waiver of a number of conditions, including but not limited to
the following: (i) the representations and warranties of C&S Hybrid contained in
the Agreement of Reorganization will be true in all material respects and C&S
Hybrid will have duly performed all covenants required by the Agreement of
Reorganization to be performed; (ii) REMEC and Merger Sub will have received a
certain legal closing opinion of counsel to C&S Hybrid; (iii) each director of
C&S Hybrid will have resigned; (iv) all consents required for the consummation
of the Merger under any agreement or license to which C&S Hybrid is a party or
by or under which it is bound or licensed will have been received; (v) C&S
Hybrid will have caused to be furnished to REMEC good standing certificates and
tax good standing certificates from the jurisdictions in which C&S Hybrid is
qualified to conduct business; (vi) the Registration Statement will have been
declared effective by the SEC; (vii) the
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Merger Agreement and the Merger will have been approved by the C&S Hybrid
Shareholders and no more than 10% of the C&S Hybrid Common Stock (or such
greater percentage that would allow the Merger to be accounted for as a pooling
of interests) will have not been voted in favor of the Merger; (viii) REMEC will
have received a satisfactory letter from Ernst & Young LLP to the effect that
the Merger will be accounted for as a pooling of interests; (ix) REMEC will have
received certain representation letters from certain C&S Hybrid Shareholders for
the purpose of obtaining pooling of interests accounting treatment; (x) C&S
Hybrid will not have suffered a material adverse change in its financial
condition, assets, or business or liabilities; (xi) REMEC will not have
determined that the Merger has become inadvisable or impractical by reason of
the institution or threat of institution, by any person, of litigation or other
proceedings; (xii) the waiting period under the HSR Act will have expired (this
waiting period has expired); (xiii) Messrs. Tao Chow, Ming Chow, Peter Liu and
Tri Dinh will have entered into employment agreements with REMEC and/or C&S
Hybrid; and (xiv) all of the shares of C&S Hybrid Preferred Stock will have
converted into C&S Hybrid Common Stock.
The obligations of C&S Hybrid to consummate the Merger are subject to the
satisfaction or waiver of a number of conditions, including but not limited to
the following: (i) the representations and warranties of REMEC and Merger Sub
contained in the Agreement of Reorganization will be true in all material
respects; (ii) REMEC and Merger Sub will have duly performed all covenants
required by the Agreement of Reorganization to be performed; (iii) C&S Hybrid
will have received a certain legal closing opinion of counsel to REMEC; (iv) the
Merger Agreement and the Merger will have been approved by C&S Hybrid
Shareholders; (v) C&S Hybrid will have received an opinion of its counsel as to
the tax-free nature of the Merger; (vi) the Registration Statement will have
been declared effective by the SEC; (vii) REMEC will have caused to be furnished
to C&S Hybrid good standing certifications and tax good standing certificates
from the jurisdictions in which REMEC is qualified to do business; (viii)
Messrs. Tao Chow, Ming Chow, Peter Liu and Tri Dinh will have entered into
employment agreements with REMEC and/or C&S Hybrid; (ix) there will have been no
material adverse changes in REMEC's financial condition, business, assets or
liabilities; (x) the waiting period under the HSR Act will have expired (this
waiting period has expired); (xi) all consents required for the consummation of
the Merger under any agreement or license to which REMEC is a party or by or
under which it is bound or licensed will have been received; (xii) C&S Hybrid
will have received a copy of the letter from Ernst & Young LLP to the effect
that the Merger will be accounted for as a pooling of interests; (xiii) C&S
Hybrid will not have determined that the Merger has become inadvisable or
impractical by reason of the institution or threat of institution, by any
person, of litigation or other proceedings; and (xiv) REMEC will have assumed
Tao Chow's obligations under his personal guaranty relating to C&S Hybrid's
leases of its offices and facility.
TERMINATION OR AMENDMENT OF AGREEMENT OF REORGANIZATION
The Agreement of Reorganization may be terminated at any time prior to the
Effective Date, without regard to whether approval of the C&S Hybrid
Shareholders to the Merger has been obtained: (a) by mutual consent of REMEC and
C&S Hybrid; or (b) by either REMEC or C&S Hybrid if any of the conditions
precedent to the obligations of such party have not been fulfilled. See
" -- Conditions to the Merger." The Agreement of Reorganization may be
terminated by REMEC alone or C&S Hybrid alone if the Merger has not taken place
by July 31, 1997; provided, such right is not available to any party whose
failure to fulfill any obligation under the Agreement of Reorganization is a
principal cause of or resulted in the failure of the Merger to occur on or
before that date.
The Merger Agreement may be amended by the parties thereto at any time by
written approval of C&S Hybrid, Merger Sub and REMEC.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Agreement of Reorganization, C&S Hybrid has made certain
representations and warranties to REMEC and the Merger Sub with respect to,
among other things, C&S Hybrid's organization, capitalization, authority to
perform under the Agreement of Reorganization, consents required to perform
under the Agreement of Reorganization, ownership of assets (including certain
intellectual property rights),
37
<PAGE> 46
contractual and other commitments, liabilities, litigation, financial
statements, compliance with applicable law, tax matters and other
representations customary in transactions of this type.
Pursuant to the Agreement of Reorganization, REMEC and the Merger Sub have
made certain representations and warranties to C&S Hybrid with respect to, among
other things, their organization, capitalization, authority to perform under the
Agreement of Reorganization, consents required to perform under the Agreement of
Reorganization, liabilities, litigation, financial statements, compliance with
applicable law, including filing and reporting obligations as a public company,
tax matters and other representations customary in transactions of this type.
INDEMNIFICATION
From and after the closing of the Merger, REMEC will fulfill and honor and
cause C&S Hybrid to fulfill and honor in all respects the obligations of C&S
Hybrid pursuant to any indemnification agreements between C&S Hybrid and its
directors and officers existing on or prior to the date of the Agreement of
Reorganization. On or prior to the date of the Agreement of Reorganization, C&S
Hybrid has entered into indemnification agreements with each of Tao Chow, Chieh
Chang and Christina Ma. From and after the closing of the Merger, the Articles
of Incorporation and Bylaws of C&S Hybrid will contain the provisions with
respect to indemnification and elimination of liability set forth in C&S
Hybrid's Articles of Incorporation and Bylaws in effect on the closing of the
Merger, which provisions will not be amended, repealed or modified from the
closing of the Merger in any manner that would adversely affect the rights
thereunder of individuals who, immediately prior to the closing of the Merger,
were directors, officers, employees or agents of C&S Hybrid.
In the event of any claim, actions, suit, proceeding or investigation to
restrain, enjoin, prevent, set aside, invalidate or seek damages with respect to
the Agreement of Reorganization or the Merger or seek damages from or to impose
obligations upon C&S Hybrid or its directors or officers by reason of the
Agreement of Reorganization or the Merger (a "Claim"), then, subject to certain
conditions, REMEC will indemnify and hold harmless C&S Hybrid, its officers and
directors from any proceedings, investigations, demands, judgments, damages,
expenses and costs arising out of such Claim.
EMPLOYMENT AGREEMENTS
It is a condition to the consummation of the Merger that C&S Hybrid and
each of Tao Chow, Ming Chow, Tri Dinh and Peter Lieu enter into employment
agreements.
Pursuant to the employment agreement with Tao Chow, (i) Mr. Chow will be
employed as President of C&S Hybrid and Senior Vice President of REMEC, (ii) C&S
Hybrid will pay to Mr. Chow a base salary of $200,000 per year and grant to Mr.
Chow an option to purchase 30,000 shares of REMEC Common Stock, which option
will be exercisable at the closing price of REMEC Common Stock on the date of
the closing of the Merger and will vest over a three year period, (iii) Mr. Chow
will receive certain benefits, including the right to participate in benefit
plans generally available to employees of REMEC, six weeks of paid vacation,
relocation expenses in certain circumstances and a $1,000,000 life insurance
policy, (iv) Mr. Chow will agree during the three year period beginning upon the
date of the employment agreement not to engage in the business of C&S Hybrid as
conducted on the date of the employment agreement, and (v) upon termination of
Mr. Chow's employment not for "cause," (A) C&S Hybrid will pay to Mr. Chow his
base salary for the remaining term of the employment agreement, (B) C&S Hybrid
will pay to Mr. Chow a prorated portion of his prior year's bonus and (C) Mr.
Chow's 30,000 share option will become fully exercisable.
NEW STOCK OPTION GRANTS
Following the Effective Date, REMEC will issue options, vesting over a
three year period, to purchase 60,500 shares of REMEC Common Stock (not
including any options granted separately to Tao Chow under his employment
agreement with REMEC) to certain C&S Hybrid employees designated by Mr. Chow at
an exercise price equal to the closing price of REMEC Common Stock on the date
of issuance.
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<PAGE> 47
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain U.S. federal income tax
consequences of the Merger that are generally applicable to REMEC, Merger Sub,
C&S Hybrid and C&S Hybrid Shareholders. This discussion is based on currently
existing provisions of the Code, existing regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences described herein.
The following discussion is intended only as a summary of certain principal
U.S. federal income tax consequences of the Merger and does not purport to be a
complete analysis or listing of all of the potential tax effects relevant to a
decision on whether to vote in favor of approval and adoption of the Merger
Agreement and the Merger. In particular, this discussion does not deal with all
U.S. federal income tax considerations that may be relevant to particular C&S
Hybrid Shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, who are subject to the alternative
minimum tax provisions of the Code, who are foreign persons, or who acquired
their shares in connection with stock warrants, stock option or stock purchase
plans, or in other compensatory transactions. The discussion also does not
address the effects of the Merger on holders of Outstanding C&S Hybrid Options.
In addition, the following discussion does not address the tax consequences of
the Merger under foreign, state or local tax laws or the tax consequences of
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger), including without limitation
transactions in which C&S Hybrid Common Stock is acquired or REMEC Common Stock
is disposed of.
ACCORDINGLY, C&S HYBRID SHAREHOLDERS AND OTHERS AFFECTED BY THE MERGER ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE CONSEQUENCES OF THE MERGER,
INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
TO THEM.
The Merger has been structured with the intent that it be tax free to
REMEC, C&S Hybrid and their respective shareholders for U.S. federal income tax
purposes. Fenwick & West LLP, counsel to C&S Hybrid, will render an opinion that
the Merger, if consummated on the terms described in this Prospectus/Proxy
Statement, will constitute a reorganization under Section 368(a) of the Code (a
"Reorganization"). The tax opinion referenced above shall be referred to as the
"Tax Opinion." The Tax Opinion will be based on and will be subject to certain
assumptions and limitations as well as representations received from REMEC,
Merger Sub and C&S Hybrid, discussed below. An opinion of counsel only
represents counsel's best legal judgment, and has no binding effect or official
status of any kind, and no assurance can be given that contrary positions may
not be taken by the IRS or a court considering the issues. Neither C&S Hybrid
nor REMEC has requested or will request a ruling from the IRS with regard to any
of the U.S. federal income tax consequences of the Merger.
Tax Consequences Generally Applicable to REMEC, the Merger Sub, C&S Hybrid and
C&S Hybrid Shareholders
Subject to the limitations, qualifications and assumptions referred to
herein, the following U.S. federal income tax consequences will result from the
Merger:
(a) The Merger will constitute a Reorganization if carried out in the
manner set forth in the Merger Agreement, and the agreements referred to
therein. In such event, no gain or loss will be recognized by holders of
C&S Hybrid Common Stock upon exchange of such shares solely for REMEC
Common Stock in the Merger, except for cash received in lieu of a
fractional share of REMEC Common Stock. Cash payments received by holders
of C&S Hybrid Common Stock in lieu of a fractional share of REMEC Common
Stock would be treated as if such fractional share of REMEC Common Stock
had been issued in the Merger and then redeemed by REMEC. A C&S Hybrid
Shareholder receiving such cash will recognize gain or loss, upon such
payment, measured by the difference (if any) between the amount of cash
received and the shareholder's adjusted tax basis in such fractional share.
A C&S Hybrid Shareholder who qualifies as a dissenting shareholder under
California law and who receives cash will recognize gain or loss upon
receipt of such payment, measured by the difference (if any) between the
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<PAGE> 48
amount of cash received and the shareholder's basis in his C&S Hybrid
Common Stock which qualifies as dissenting shares. Such gain or loss
generally would be treated as capital gain or capital loss for each such
shareholder if he or she held his or her C&S Hybrid Common Stock as a
capital asset at the time of the Merger.
(b) The aggregate tax basis of the REMEC Common Stock received by C&S
Hybrid Shareholders in the Merger (including any fractional share of REMEC
Common Stock not actually received) will be the same as the aggregate tax
basis of the C&S Hybrid Common Stock surrendered in exchange for the REMEC
Common Stock (including any fractional shares of REMEC Common Stock not
actually received). The aggregate tax basis of the whole shares of REMEC
Common Stock actually received by C&S Hybrid Shareholders will be the total
aggregate basis described in the immediately preceding sentence, reduced by
the basis allocable to fractional shares.
(c) The holding period of the REMEC Common Stock received by each C&S
Hybrid Shareholder in the Merger will include the period for which the C&S
Hybrid Common Stock surrendered in exchange therefor were considered to be
held, provided that the C&S Hybrid Common Stock so surrendered is held as a
capital asset at the time of the Merger.
(d) No gain or loss will be recognized by REMEC, the Merger Sub or C&S
Hybrid in connection with the Merger.
Limitations on Opinion and Discussion
The discussion of certain U.S. federal income tax consequences presented
above and the Tax Opinion which will be delivered by C&S Hybrid's counsel will
be subject to certain assumptions and will be based on the accuracy of the
representations in the Merger Agreement, exhibits thereto, and the agreements,
documents and representation certificates referred to therein. Among the
principal assumptions upon which the above tax discussion and Tax Opinion will
be based include that the Merger will be consummated pursuant to the Merger
Agreement, that C&S Hybrid after the Merger will have retained substantially all
of its assets, that C&S Hybrid will continue its business as a wholly owned
subsidiary of REMEC, that not more than twenty percent (20%) of the total
consideration received by C&S Hybrid Shareholders in exchange for their C&S
Hybrid Common Stock will be other than REMEC Common Stock in the Merger and that
the significant historic C&S Hybrid Shareholders have not disposed of C&S Hybrid
Common Stock in contemplation of the Merger and do not have any plan or
intention, existing at or prior to the time of the Merger, to dispose of the
REMEC Common Stock to be received in the Merger such that they would not have a
significant continuing equity interest after the Merger by virtue of their
ownership of REMEC Common Stock.
A successful IRS challenge to the status of the Merger as a Reorganization
would result in C&S Hybrid Shareholders being treated as if they sold their C&S
Hybrid Common Stock in a taxable transaction. In such event, each C&S Hybrid
Shareholder would be required to recognize gain or loss with respect to the
disposition of each of his or her shares of C&S Hybrid Common Stock equal to the
difference between the C&S Hybrid Shareholder's basis in such shares and the
fair market value, as of the date the Merger becomes effective, of the REMEC
Common Stock received in exchange therefor (plus any cash received for
fractional shares). Such gain or loss would be treated as capital gain or
capital loss for each such shareholder if he or she held his or her C&S Hybrid
Common Stock as a capital asset at the time of the Merger. In such event, a C&S
Hybrid Shareholder's aggregate basis in the REMEC Common Stock so received would
equal their fair market value as of the Effective Date of the Merger, and the
C&S Hybrid Shareholder's holding period for such REMEC Common Stock would begin
the date after the Merger. C&S Hybrid Shareholders who qualify as dissenting
shareholders under California law will be treated as described above.
Even if the Merger qualifies as a Reorganization, a recipient of REMEC
Common Stock at the time of the Merger would recognize gain to the extent that
such shares were considered to be received in exchange for services or property
(other than solely in exchange for C&S Hybrid Common Stock). Gain would also
have to be recognized to the extent that a C&S Hybrid Shareholder was treated as
receiving (directly or indirectly)
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<PAGE> 49
consideration other than REMEC Common Stock in exchange for C&S Hybrid Common
Stock. All or a portion of such gain amounts may be taxable as ordinary income.
ACCOUNTING TREATMENT
The acquisition of C&S Hybrid by REMEC through the Merger is intended to be
accounted for by REMEC as a pooling of interests. Under this method of
accounting, the assets and liabilities of C&S Hybrid and REMEC will be combined
based on the respective carrying values of the accounts in the historical
financial statements of each entity. Results of operations of REMEC will include
income of C&S Hybrid and REMEC for the entire fiscal period in which the
combination occurs and the historical results of operations of the separate
companies for years prior to the Merger will be combined and reported as the
results of operations of REMEC.
To support the treatment of the Merger as a pooling of interests, the
affiliates of C&S Hybrid have entered into agreements imposing certain resale
limitations on their C&S Hybrid Common Stock prior to the consummation of the
Merger and their REMEC Common Stock following consummation of the Merger.
Certain affiliates of REMEC have entered into similar agreements. See
"-- Affiliates' Restrictions on Sale of C&S Hybrid and REMEC Stock."
REMEC's obligation to consummate the Merger is conditioned upon the receipt
by REMEC of a letter from Ernst & Young LLP regarding the firm's concurrence
with REMEC management's and C&S Hybrid management's conclusions, respectively,
as to the appropriateness of pooling of interests accounting for the Merger
under Accounting Principles Board Opinion No. 16 if closed and consummated in
accordance with the Agreement of Reorganization.
AFFILIATES' RESTRICTIONS ON SALE OF C&S HYBRID AND REMEC STOCK
The shares of REMEC Common Stock to be issued in the Merger have been
registered under the Securities Act by the Registration Statement, thereby
allowing such securities to be traded without restriction by any former holder
of C&S Hybrid Common Stock: (i) who is not deemed to be an "affiliate" of C&S
Hybrid prior to the consummation of the Merger, as "affiliate" is defined for
purposes of Rule 145 under the Securities Act; and (ii) who does not become an
"affiliate" of REMEC after the Merger. C&S Hybrid Shareholders who may be deemed
affiliates of C&S Hybrid will be so advised prior to the Merger.
C&S Hybrid will use best efforts to cause each C&S Hybrid shareholder who
is an affiliate to agree (i) not to make any public sale of any REMEC Common
Stock received upon consummation of the Merger except in compliance with Rule
145 under the Securities Act or otherwise in compliance with the Securities Act,
(ii) not to sell, transfer or dispose of, or reduce such person's risk of
ownership or investment in, any securities of C&S Hybrid owned by such affiliate
during the 30 day period prior to the Effective Date and (iii) not to sell,
transfer or dispose of, or reduce such person's risk of ownership or investment
in, any securities of REMEC until a financial report including the combined
sales and net income of REMEC and C&S Hybrid covering at least 30 days of
combined operations after the Effective Date has been publicly released by
REMEC. In general, Rule 145, as currently in effect, imposes restrictions on the
manner in which such affiliates may make resales of REMEC Common Stock and also
on the quantity of resales that such shareholders, and others with whom they may
act in concert, may make within any three month period for a period of one year
after consummation of the Merger (or longer for a person if that person is an
affiliate of REMEC). To ensure that the issuance of REMEC Common Stock in the
Merger complies with the Securities Act, certain shareholders of C&S Hybrid will
agree that they will not offer to sell, sell or otherwise dispose of any REMEC
Common Stock issued to such person in the Merger in violation of the Securities
Act.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given and certain
information has been furnished to the FTC or the Antitrust Division and the
specified waiting period has been satisfied. The notifications required under
the HSR Act as well as certain information have been furnished to the FTC and
the Antitrust Division and the
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<PAGE> 50
specified waiting period under the HSR Act has expired. At any time before or
after consummation of the Merger, and notwithstanding that the HSR Act waiting
period has expired, the Antitrust Division, the FTC or any state or foreign
governmental authority could take such action under the antitrust laws as it
deems necessary or desirable in the public interest. Such action could include
seeking to enjoin the consummation of the Merger or seeking divestiture by REMEC
of businesses of C&S Hybrid or REMEC. Private parties may also seek to take
legal action under the antitrust laws under certain circumstances.
Based on information available to them, REMEC and C&S Hybrid believe that
the Merger will be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, C&S Hybrid and REMEC would prevail.
MERGER EXPENSES
Whether or not the Merger is consummated, REMEC and C&S Hybrid will be
responsible for their own costs and expenses incurred in connection with the
Merger and the transactions contemplated thereby.
ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation and Bylaws of Merger Sub, each as in effect
immediately prior to the Effective Date, will remain in effect as the Articles
of Incorporation and the Bylaws of C&S Hybrid after the Merger, and thereafter
may be amended in accordance with their respective terms and applicable law.
DISSENTERS' RIGHTS
If the Merger is consummated, any holder of shares of C&S Hybrid Common
Stock or C&S Hybrid Preferred Stock which were outstanding on the Record Date
for the Special Meeting who votes such shares against the Merger or does not
vote such shares in favor of the Merger (including abstaining) and who fully
complies with all applicable provisions of Chapter 13 of the California
Corporations Code (the "Corporations Code"), is entitled to require C&S Hybrid
to purchase such shares (any and all of such shares being referred to in this
Prospectus/Proxy Statement as "Dissenting Shares") for cash at their "fair
market value" as of the day preceding the first announcement of the terms of the
proposed Merger, excluding any appreciation or depreciation in consequence of
the proposed Merger. The terms of the proposed Merger were first announced on
April 11, 1997 (the "Merger Announcement Date").
Dissenters' rights are exercisable only by the holder of record, not by a
beneficial owner who does not hold the shares of record.
A C&S HYBRID SHAREHOLDER WHO WISHES TO DEMAND THAT C&S HYBRID PURCHASE ALL
OR A PORTION OF HIS OR HER SHARES OF C&S HYBRID COMMON STOCK OR PREFERRED STOCK
WHICH WERE OUTSTANDING AS OF THE RECORD DATE FOR CASH AT SUCH VALUE MUST DO ALL
OF THE FOLLOWING WITH RESPECT TO SUCH SHARES:
1. Vote such shares against the Merger or abstain from voting such
shares on the Merger;
2. Make a written demand on C&S Hybrid for the purchase of such shares
and for the payment in cash of the fair market value of such shares. A vote
against, or abstaining from voting on, the Merger does not itself
constitute a demand for appraisal under the Corporations Code. If C&S
Hybrid Shareholders approve the Merger, then C&S Hybrid will mail to each
such shareholder who votes against, or abstains from voting on, the Merger
a notice of shareholder approval of the Merger. A written demand by a
shareholder seeking dissenter's rights will not be effective unless it is
received by C&S Hybrid within thirty days after the date on which such
notice of shareholder approval of the Merger is mailed to such shareholder
by C&S Hybrid.
3. Submit to C&S Hybrid, within thirty days after the date on which
notice of shareholder approval of the Merger is mailed to such shareholder
by C&S Hybrid, the stock certificates representing the shares which such
shareholder demands that C&S Hybrid purchase. C&S Hybrid will endorse such
certificates to indicate that they represent Dissenting Shares.
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<PAGE> 51
The written demand and the stock certificates should be delivered and
addressed to C&S Hybrid, Inc., 804 Buckeye Court, Milpitas, California 95305,
Attention: Mr. Tao Chow.
The required written demand (the second-numbered requirements above) must
state: the number and class of shares of C&S Hybrid Common Stock or Preferred
Stock held of record which the shareholder demands be purchased and the amount
that such shareholder claims to be the fair market value of such shares as of
the day preceding the Merger Announcement Date. The statement of fair market
value will constitute an offer by the shareholder to sell such shares at the
price set forth in the statement. Thereafter, the shareholder may withdraw a
demand for payment only if C&S Hybrid consents to such withdrawal.
If C&S Hybrid and such shareholder agree that the shareholder has properly
exercised dissenters' rights in accordance with Chapter 13 of the Corporations
Code, and agree upon the relevant fair market value of the Dissenting Shares,
then C&S Hybrid, upon timely surrender of the certificates representing such
shares as set forth above, will make payment of the agreed upon amount (plus
interest at the legal rate from the date of such agreement) within thirty (30)
days after such agreement (or within thirty (30) days after the Effective Date
of the Merger, if later). If C&S Hybrid denies that such shareholder has
properly exercised dissenters' rights, or C&S Hybrid and such shareholder fail
to agree on the relevant fair market value of such shares, such shareholder may,
within six (6) months after the date on which the notice of shareholder approval
of the Merger is mailed to such shareholder, but not thereafter, file a
complaint in the Superior Court for the County of Santa Clara, State of
California, requesting the purchase of and payment for such shares or to
determine their fair market value or both. The cost of any such action would be
assessed or apportioned as the court considered equitable. However, if the court
were to determine that the fair market value exceeded the price offered to the
shareholder, then C&S Hybrid would be required to pay costs (including, in the
court's discretion, attorneys' fees, fees of expert witnesses and interest at
the legal rate, if the fair market value were determined to exceed the price
offered by C&S Hybrid by at least 25%).
In the event that the aggregate number of shares held by C&S Hybrid
Shareholders for which dissenters' rights may be exercised exceeds 10% of the
shares of REMEC Common Stock to be issued in the Merger, REMEC has the right
under the Merger Agreement not to proceed with the Merger. See " -- Conditions
to the Merger."
THE FOREGOING IS MERELY A SUMMARY AND DOES NOT PURPORT TO BE A COMPLETE
STATEMENT OF THE RIGHTS OF DISSENTING SHAREHOLDERS. IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE APPLICABLE STATUTORY PROVISIONS OF CHAPTER 13 OF
THE CORPORATIONS CODE WHICH ARE SET FORTH IN FULL IN APPENDIX C TO THIS
PROSPECTUS/PROXY STATEMENT.
FINANCIAL ADVISOR FEE
C&S Hybrid has retained Robert Tillman in connection with the transactions
contemplated by the Agreement of Reorganization. At the closing of the Merger,
C&S Hybrid will be obligated to pay to Mr. Tillman in cash a fee equal to the
fair market value of 2,975 shares of REMEC Common Stock, which value will be
determined by the last reported sales price for such securities on the last
trading day prior to the consummation of the Merger. Additionally, Tao Chow,
Ming Chow, Tri Dinh and Peter Liu, each of whom is a shareholder of C&S Hybrid,
has agreed to pay Mr. Tillman at the closing of the Merger an aggregate of 5,525
shares of REMEC Common Stock.
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<PAGE> 52
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the Merger using the pooling of interests method of accounting
and are based upon the respective historical financial statements and notes
thereto of C&S Hybrid and REMEC appearing elsewhere in this Prospectus/Proxy
Statement. To reflect the pooling of interests, the operating results of C&S
Hybrid for each of its three fiscal years ended December 27, 1996 and for the
three months ended March 28, 1997 have been combined with REMEC's operating
results for each of its three fiscal years ended January 31, 1997 and for the
three months ended May 4, 1997. The unaudited pro forma condensed combined
financial statements should be read in conjunction with each of the historical
financial statements referred to above and the notes thereto. The proposed
Merger requires the approval of a majority of the outstanding shares of C&S
Hybrid. The pro forma condensed combined financial statements are not
necessarily indicative of what the actual results of operations would have been
for the periods presented had the transactions occurred on the dates indicated
and do not purport to indicate the results of future operations.
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<PAGE> 53
REMEC, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MAY 4, 1997
UNAUDITED, IN THOUSANDS
<TABLE>
<CAPTION>
MARCH 28,
MAY 4, 1997 1997 PRO FORMA PRO FORMA
REMEC C&S HYBRID ADJUSTMENT COMBINED
----------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 56,555 $ 414 $ 56,969
Accounts receivable.......................... 16,410 2,405 18,815
Inventories.................................. 17,810 2,881 20,691
Other current assets......................... 3,021 499 3,520
-------- ------ --------
Total current assets....................... 93,796 6,199 99,995
Property, plant and equipment................ 16,785 2,580 19,365
Intangible and other assets.................. 6,908 64 6,972
-------- ------ --------
Total assets............................... $ 117,489 $8,843 $ 126,332
======== ====== ========
Current liabilities:
Short term debt and current portion of long
term debt.................................. $ -- $ 801 $ 801
Accounts payable............................. 5,087 2,201 7,288
Accrued expenses............................. 8,026 1,038 267 9,331
-------- ------ --------
Total current liabilities.................. 13,113 4,040 17,420
Other long term liabilities.................. 1,326 834 2,160
Total shareholders' equity................... 103,050 3,969 (267) 106,752
-------- ------ --------
Total liabilities and shareholders'
equity.................................. $ 117,489 $8,843 $ 126,332
======== ====== ========
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements.
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<PAGE> 54
REMEC, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MAY 4, 1997
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
----------------------
MAY 4, MARCH 28,
1997 1997 PRO FORMA
REMEC C&S HYBRID COMBINED
------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................. $26,216 $4,621 $ 30,837
Cost of sales.............................................. 18,309 2,904 21,213
--
------- ------
Gross profit............................................. 7,907 1,717 9,624
Operating expenses:
Selling, general and administrative...................... 3,984 1,142 5,126
Research and development................................. 623 115 738
--
------- ------
Total operating expenses......................... 4,607 1,257 5,864
--
------- ------
Income from operations..................................... 3,300 460 3,760
Interest (income) expense and other........................ (756) 29 (727)
--
------- ------
Income before provision for income taxes................... 4,056 431 4,487
Provision for income taxes................................. 1,583 206 1,789
--
------- ------
Net income................................................. $ 2,473 $ 225 $ 2,698
======= ====== ==
Net income per common share................................ $ .20 $ .20
======= ==
Shares used in computing per share amounts................. 12,611 13,471
======= ==
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
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<PAGE> 55
REMEC, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1997
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 27,
1997 1996 PRO FORMA
REMEC C&S HYBRID COMBINED
----------- ------------ ---------
<S> <C> <C> <C>
Net sales................................................ $95,072 $ 13,026 $ 108,098
Cost of sales............................................ 69,971 7,590 77,561
------- ------- --------
Gross profit........................................... 25,101 5,436 30,537
Operating expenses:
Selling, general and administrative.................... 12,831 4,058 16,889
Research and development............................... 3,182 527 3,709
------- ------- --------
Total operating expenses....................... 16,013 4,585 20,598
------- ------- --------
Income from operations................................... 9,088 851 9,939
Interest (income) expense and other...................... (365) 66 (299)
------- ------- --------
Income before provision for income taxes................. 9,453 785 10,238
Provision for income taxes............................... 3,725 292 4,017
------- ------- --------
Net income............................................... $ 5,728 $ 493 $ 6,221
======= ======= ========
Net income per common share.............................. $ .59 $ .60
======= ========
Shares used in computing per share amounts............... 9,680 10,414
======= ========
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
47
<PAGE> 56
REMEC, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1996
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 22,
1996 1995 PRO FORMA
REMEC C&S HYBRID COMBINED
----------- ------------ ---------
<S> <C> <C> <C>
Net sales................................................ $71,245 $ 10,939 $82,184
Cost of sales............................................ 53,194 5,410 58,604
------- ------- -------
Gross profit........................................... 18,051 5,529 23,580
Operating expenses:
Selling, general and administrative.................... 10,359 3,861 14,220
Research and development............................... 2,785 666 3,451
------- ------- -------
Total operating expenses....................... 13,144 4,527 17,671
------- ------- -------
Income from operations................................... 4,907 1,002 5,909
Interest expense and other............................... 43 60 103
------- ------- -------
Income before provision for income taxes................. 4,864 942 5,806
Provision for income taxes............................... 2,009 419 2,428
------- ------- -------
Net income............................................... $ 2,855 $ 523 $ 3,378
======= ======= =======
Net income per common share.............................. $ .39 $ .42
======= =======
Shares used in computing per share amounts............... 7,265 7,961
======= =======
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
48
<PAGE> 57
REMEC, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1995
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 16,
1995 1994 PRO FORMA
REMEC C&S HYBRID COMBINED
----------- ------------ ---------
<S> <C> <C> <C>
Net sales................................................ $64,604 $ 8,217 $72,821
Cost of sales............................................ 47,912 4,350 52,262
------- ------- -------
Gross profit........................................... 16,692 3,867 20,559
Operating expenses:
Selling, general and administrative.................... 9,944 2,981 12,925
Research and development............................... 1,347 298 1,645
------- ------- -------
Total operating expenses....................... 11,291 3,279 14,570
------- ------- -------
Income from operations................................... 5,401 588 5,989
Interest expense and other............................... 335 7 342
------- ------- -------
Income before provision for income taxes................. 5,066 581 5,647
Provision for income taxes............................... 2,079 314 2,393
------- ------- -------
Net income............................................... $ 2,987 $ 267 $ 3,254
======= ======= =======
Net income per common share.............................. $ .41 $ .41
======= =======
Shares used in computing per share amounts............... 7,293 7,989
======= =======
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
49
<PAGE> 58
REMEC, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- MERGER
REMEC anticipates acquiring all of the outstanding shares of C&S Hybrid
Common Stock in exchange for approximately 860,000 shares of REMEC Common Stock
except for fractional shares which will be acquired for cash. The transaction
will be accounted for as a pooling of interests; accordingly, all of the assets
and liabilities of C&S Hybrid will be carried forward as their historical cost
basis, and the operating results of C&S Hybrid will be combined with those of
REMEC for all periods presented.
The unaudited pro forma condensed combined balance sheet as of May 4, 1997
has been adjusted to reflect the accrual of certain estimated costs of the
transaction. The actual costs of the transaction will be expensed as incurred.
50
<PAGE> 59
REMEC SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements for REMEC and the notes
thereto and "REMEC's Management Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. The selected consolidated
financial data set forth below for each of the years in the five-year period
ended January 31, 1997 are derived from the audited consolidated financial
statements of REMEC. The consolidated financial statements as of January 31,
1996 and 1997 and for each of the years in the three-year period ended January
31, 1997 are included elsewhere in this Prospectus/Proxy Statement. The
statement of income data for the three month periods ended May 4, 1997 and May
5, 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 REMEC
considers necessary for a fair presentation of financial position and results of
operations for these periods. Operating results for the three months ended May
4, 1997 are not necessarily indicative of the results that may be expected for
the year ending January 31, 1998.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, THREE MONTHS ENDED
--------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 MAY 5, 1996 MAY 4, 1997
------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $48,204 $51,949 $64,604 $71,245 $95,072 $20,424 $26,216
Cost of sales................... 34,216 37,102 47,911 53,194 69,971 15,279 18,309
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 13,988 14,847 16,693 18,051 25,101 5,145 7,907
Operating expenses:
Selling, general and
administrative.............. 7,126 7,915 9,944 10,359 12,831 2,575 3,984
Research and development...... 1,322 1,022 1,348 2,786 3,182 992 623
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 8,448 8,937 11,292 13,145 16,013 3,567 4,607
------- ------- ------- ------- ------- ------- -------
Income from operations.......... 5,540 5,910 5,401 4,906 9,088 1,578 3,300
Interest (income) expense and
other......................... 112 55 335 43 (365) (137) (756)
------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes.................. 5,428 5,855 5,066 4,863 9,453 1,715 4,056
Provision for income taxes...... 1,659 1,893 2,079 2,009 3,725 707 1,583
------- ------- ------- ------- ------- ------- -------
Income before extraordinary
item.......................... 3,769 3,962 2,987 2,854 5,728 1,008 2,473
Extraordinary item.............. 167 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income...................... $ 3,936 $ 3,962 $ 2,987 $ 2,854 $ 5,728 $ 1,008 $ 2,473
======= ======= ======= ======= ======= ======= =======
Net income per share............ $ .43 $ .53 $ .41 $ .39 $ .59 $ .11 $ .20
======= ======= ======= ======= ======= ======= =======
Shares used in per share
calculations.................. 9,055 7,478 7,293 7,265 9,680 9,553 12,611
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT MAY
AT JANUARY 31, 4,
------------------------------------------------------------ --------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 3,363 $ 3,678 $ 2,139 $ 1,872 $ 63,078 $ 56,555
Working capital................... 10,497 14,072 13,007 13,207 81,574 80,683
Total assets...................... 23,421 32,789 31,682 36,782 112,066 117,490
Long-term debt.................... 1,358 839 1,217 1,900 -- --
Total shareholders' equity........ 13,828 17,810 19,820 21,899 98,566 103,050
</TABLE>
<TABLE>
<CAPTION>
AT MAY 4,
---------
1997
---------
<S> <C> <C> <C> <C> <C>
BACKLOG(1):
Commercial.............................................................. $ 59,895
Defense................................................................. 71,199
---------
Total......................................................... $ 131,094
========
</TABLE>
- ---------------
(1) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation.
51
<PAGE> 60
REMEC'S MANAGEMENT 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. REMEC's consolidated results
of operations include the operations of REMEC Microwave ("Microwave"), REMEC
Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems
("RFM"), Magnum Microwave ("Magnum"), Radian Technology, Inc. ("Radian") and
Verified Technical Corporation ("Veritek").
All revenue and related costs of sales are recognized when products are
shipped or engineering services are performed. In fiscal 1997 and the three
months period ended May 4, 1997, sales to REMEC's top ten customers accounted
for approximately 62% and 65%, respectively, of total net sales; sales to
REMEC's top three customers accounted for approximately 31% and 36%,
respectively, of total net sales; and sales to the top customer accounted for
16% and 17%, respectively, of total net sales. REMEC recorded revenue of
approximately $27.9 million (32%) and $10.0 million (38%) for fiscal 1997 and
the three month period ended May 4, 1997 to the wireless telecommunications
market. Prior to fiscal 1997, such revenues were not significant. REMEC expects
sales to the commercial telecommunications market to represent an increasing
percentage of revenue in the near future because of its backlog and REMEC's
strategy to increase its presence in the commercial wireless telecommunications
market. As of May 4, 1997, REMEC had an order backlog of $131.1 million, with
$59.9 million representing commercial wireless telecommunications orders.
REMEC's international sales as a percentage of net sales for fiscal year 1997
and the three months ended May 4, 1997 were 9% and 7%, respectively. The
international sales percentages do not include products sold to foreign end
users by REMEC's domestic OEM customers.
REMEC's research and development efforts in the defense industry are
conducted in direct response to the unique requirements of a customer's order
and, accordingly, expenditures related to such efforts are included in cost of
sales and the related funding is included in net sales. As a result, historical
REMEC funded research and development expenses have been minimal. As REMEC's
commercial business has expanded, research and development expenses have
generally increased in amount and as a percentage of sales. REMEC expects this
trend to continue, although research and development expenses may fluctuate on a
quarterly basis both in amount and as a percentage of sales.
Effective January 31, 1994, REMEC 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. Effective April 30, 1996,
REMEC 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. The consolidated statements of income and cash flows for
all periods subsequent to April 30, 1996 include RFM's operating results from
April 30, 1996.
On August 26, 1996, REMEC acquired all of the outstanding common stock of
Magnum in a transaction that was accounted for as a pooling of interests. Magnum
is a leading supplier of oscillators and mixers. On February 28, 1997, REMEC
acquired all of the outstanding common stock of Radian, in a transaction that
was accounted for as a pooling of interests. Radian provides the defense market
with microwave components, primarily synthesizers, receivers, oscillators and
filters. All accompanying historical financial statement information has been
restated to include Magnum's and Radian's operations and assets and liabilities.
In March 1997, REMEC acquired Veritek, a producer of high quality surface
mount manufacturing assemblies in a transaction accounted for as a purchase. The
consolidated statements of income and cash flows for the three month period
ended May 4, 1997 include Veritek's results from March 31, 1997. REMEC's May 4,
1997 balance sheet includes Veritek's assets and liabilities.
In April 1997, REMEC reached a definitive agreement to acquire C&S Hybrid
through a merger of C&S Hybrid into a newly formed subsidiary of REMEC. C&S
Hybrid designs, manufactures and markets transmitter and receiver hardware
assemblies that are integrated by C&S Hybrid's customers into terrestrial-
52
<PAGE> 61
based point-to-point microwave radios primarily for use in commercial
applications. The C&S Hybrid Shareholders are expected to receive approximately
860,000 shares of REMEC's Common Stock in the acquisition. Completion of the
acquisition is subject to satisfaction of customary conditions and, if
completed, will be treated as a pooling of interests.
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 THREE MONTHS ENDED
---------------------- ---------------------------
1995 1996 1997 MAY 4, 1996 MAY 5, 1997
---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100% 100% 100% 100% 100%
Cost of goods sold........................... 74 75 74 75 70
--- --- --- --- ---
Gross profit.............................. 26 25 26 25 30
Operating expenses:
Selling, general & administrative............ 16 15 14 12 15
Research and development..................... 2 4 3 5 3
--- --- --- --- ---
Total operating expenses.................. 18 19 17 17 18
--- --- --- --- ---
Income from operations......................... 8 6 9 8 12
Interest (income) expense and other............ 1 -- (1) (1) (3)
--- --- --- --- ---
Income before income taxes..................... 7 6 10 9 15
Provision for income taxes..................... 3 3 4 4 6
--- --- --- --- ---
Net income..................................... 4 % 3 % 6 % 5% 9%
=== === === === ===
</TABLE>
THREE MONTHS ENDED MAY 4, 1997 VS. THREE MONTHS ENDED MAY 5, 1996
Net Sales. Net sales increased 28% from $20.4 million during the three
months ended May 5, 1996 to $26.2 million for the three months ended May 4,
1997. Defense sales increased from $13.8 million in the fiscal 1997 period to
$16.2 million in the fiscal 1998 period, an 17% increase. Commercial wireless
sales increased from $6.6 million in the fiscal 1997 period to $10.0 million in
the fiscal 1998 period, a 53% increase. The increased defense sales are
attributable to increased Microwave MFM and component sales offsetting reduced
precision instrument sales. In addition, the fiscal 1998 period includes $1.1
million of RFM sales as opposed to no sales in the fiscal 1997 period due to the
acquisition occurring subsequent to the fiscal 1997 period. The commercial sales
increase is primarily attributable to the production of VSAT equipment for STM.
Gross Profit. Gross profit increased 54% from $5.1 million in the fiscal
1997 period to $7.9 million in the fiscal 1998 period. Gross margins increased
from 25% in the fiscal 1997 period to 30% in the fiscal 1998 period. Gross
margins for defense increased from 29% for fiscal 1997 period to 35% for the
fiscal 1998 period. Commercial gross margins increased from 17% in the fiscal
1997 period to 23% in the fiscal 1998 period. The increased military and
commercial margins are primarily attributable to the increased sales volume
resulting in lower unit costs through improved overhead absorption.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 55% from $2.6 million during fiscal
1997 period to $4.0 million during the fiscal 1998 period. These expenses as a
percentage of sales increased from 12% for the fiscal 1997 period to 15% for the
fiscal 1998 period. The increased expenses are primarily attributable to
increased personnel, legal and other administrative costs resulting from REMEC's
growth, costs associated with operating as a publicly owned company, SG&A
expenses from REMEC's RFM subsidiary whose operations are not reflected in the
first quarter results for the fiscal 1997 period, as well as approximately
$100,000 of direct transaction costs associated with the Radian merger.
53
<PAGE> 62
Research and Development Expenses. Research and development expenses
decreased from $1.0 million during the fiscal 1997 period to $0.6 million during
the fiscal 1998 period. The expenditures are almost entirely attributable to the
commercial wireless telecommunications business. Research and development
expenditures have generally increased in amount and as a percentage of sales
over the past two years; however these expenses may fluctuate on a quarterly
basis both in amount and as a percentage of sales.
Interest (Income) Expense and Other. Interest income increased from
$137,000 in the fiscal 1997 period to $756,000 for the fiscal 1998 period. The
change is primarily attributable to the increased level of cash on hand as a
result of the funds generated from REMEC's follow-on public offering which was
consummated in January 1997.
Provision for Income Taxes. REMEC's effective income tax rate declined from
41% in fiscal 1997 to 39% for fiscal 1998 period due to the benefit of available
tax credits for certain capital expenditures.
FISCAL YEAR ENDED JANUARY 31, 1997 VS. FISCAL YEAR ENDED JANUARY 31, 1996
Net Sales. Net sales increased 33% from $71.2 million during fiscal 1996 to
$95.1 million for fiscal 1997. The increase in net sales is attributable to
sales increases at all of REMEC's operating subsidiaries, including $4.8 million
of net sales of RFM from the effective date of the acquisition. Defense sales
increased from $60.2 million for fiscal 1996, to $65.1 million for fiscal 1997,
an 8% increase. Commercial sales increased from $11.0 million in fiscal 1996 to
$30.0 million in fiscal 1997, a 172% increase. The increase in defense net sales
is attributable to increased bookings during fiscal 1997 and increased shipments
on production contracts for existing programs and customers. Results for fiscal
1996 include $2.4 million of non-recurring revenue, $0.9 million of gross profit
and $0.3 million of selling, general and administrative expenses associated with
the settlement of a termination claim for a large defense contract. 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.
Gross Profit. Gross profit increased 39% from $18.1 million for fiscal 1996
to $25.1 million for fiscal 1997. Gross margin increased from 25% in fiscal 1996
to 26% in fiscal 1997. Gross margins for defense were 25% in fiscal 1996 and 27%
in fiscal 1997. The improved defense gross margins in fiscal 1997 is primarily
attributable to the increased sales volume in fiscal 1997 resulting in lower
unit costs through improved overhead absorption. Commercial gross margins were
25% for both fiscal 1996 and fiscal 1997. The constant commercial margins are
attributable to additional costs associated with the start up of production of
products for STM Wireless being offset by improvements in overhead absorption
attributable to the increased sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 24% from $10.4 million during fiscal
1996 to $12.8 million for fiscal 1997. This increase is primarily attributable
to additional SG&A costs associated with the Wireless and RFM operations,
neither of which were significant contributors to prior year SG&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, SG&A expenses for fiscal 1997 increased due to
$424,000 of non-recurring acquisition costs associated with the Magnum merger.
SG&A declined as a percentage of net sales from 15% for fiscal 1996 to 13% for
fiscal 1997, due to increased sales volume. REMEC expects SG&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 $2.8 million for fiscal 1996 to $3.2 million for fiscal 1997.
This increase resulted primarily from commercial wireless telecommunications
research and development expenses totaling $1.5 million during fiscal 1997
versus $937,000 for the comparable fiscal 1996 period. This increase is a result
of the start-up of the commercial wireless business.
Interest (Income) Expense and Other. Interest expense was $43,000 for
fiscal 1996 as compared to interest income of $366,000 for fiscal 1997. The
change is primarily attributable to the increased level of cash
54
<PAGE> 63
on hand as a result of the funds generated from REMEC's initial public offering
which was consummated in February 1996.
Provision for Income Taxes. REMEC's effective income tax rate declined from
41% for fiscal 1996 to 39% for fiscal 1997. The decrease reflects the benefit of
available tax credits on certain capital expenditures.
FISCAL YEAR ENDED JANUARY 31, 1996 VS. FISCAL YEAR ENDED JANUARY 31, 1995
Net Sales. Net sales increased 10% from $64.6 million in fiscal year ended
January 31, 1995 to $71.2 million in fiscal year ended January 31, 1996. Defense
sales increased from $57.8 million in fiscal 1995 to $60.2 million in fiscal
1996, a 4% increase. Commercial sales increased from $6.8 million in fiscal 1995
to $11.0 million in fiscal 1996, a 62% increase.
Gross Profit. Gross profit increased 8% from $16.7 million for fiscal 1995
to $18.1 million for fiscal 1996. Gross margin declined from 26% in fiscal 1995
to 25% in fiscal 1996. Gross margins for commercial were 40% in fiscal 1995
versus 25% in fiscal 1996. Commercial gross margins were affected by start-up
costs associated with the Company's new wireless operation and the P-COM
contract. Gross margins for defense were 24% in fiscal 1995 versus 25% in fiscal
1996. The improved defense gross margins in fiscal 1996 are primarily
attributable to the increased sales volume in fiscal 1996 resulting in lower
unit costs through improved overhead absorption.
Selling, General and Administrative Expenses. SG&A expenses increased 4%
from $9.9 million during fiscal 1995 to $10.4 million for fiscal 1996. These
expenses as a percentage of net sales remained constant at 15% for fiscal 1995
and fiscal 1996.
Research and Development Expenses. Research and development expenses
increased from $1.4 million for fiscal 1995 to $2.8 million for fiscal 1996.
This increase resulted primarily from commercial wireless telecommunications
research and development expenses.
Interest (Income) Expense and Other. Interest expense decreased from
$335,000 for fiscal 1995 to $43,000 for fiscal 1996. The decrease is
attributable to continued reductions in average bank borrowings as REMEC reduced
the debt attributable to the Humphrey acquisition.
Provision for Income Taxes. REMEC's effective income tax rate was 41% in
fiscal 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
At May 4, 1997, REMEC had $56.6 million of cash and cash equivalents and
$80.7 million of working capital. REMEC also has $17.0 million in available
credit facilities consisting of a $9.0 million revolving working capital line of
credit and a $8.0 million revolving term loan. The borrowing rate under both
credit facilities is prime. The revolving working capital line of credit
terminates July 1, 1998. The revolving period under the term loan expires July
1, 1998, at which time any loan amount outstanding converts to a term loan to be
fully amortized and paid in full by January 2, 2002. As of May 4, 1997, there
were no borrowings outstanding under REMEC's credit facilities. During fiscal
1997, REMEC's net cash provided by operations was approximately $1.3 million.
The fiscal year 1997 net cash provided by operations primarily consisted of
approximately $8.5 million of net income and depreciation and amortization
expenses offsetting increases in accounts receivable and inventories of $4.7
million and $1.9 million, respectively. The increase in accounts receivable and
inventories during fiscal 1997 resulted from REMEC's increased level of sales.
During the three month period ended May 4, 1997 net cash used by operations
totaled $1.4 million, the use of cash is primarily attributable to increases in
receivables and inventories totaling $5.7 million; with these increases
resulting from the Company's increased revenue volume.
Investing activities utilized $9.1 million in cash during fiscal 1997,
primarily a result of the $4.0 million cash acquisition of RFM and $6.5 million
of capital expenditures offset by approximately $1.4 million in sales of
short-term investments. Investing activities utilized $4.1 million during the
three months ended May 4, 1997, primarily as a result of $3.1 million in capital
expenditures and $1.0 million paid to shareholders of Veritek in the
acquisition. The bulk of the fiscal 1997 and first quarter fiscal 1998 capital
expenditures were
55
<PAGE> 64
associated with the expansion of REMEC's commercial wireless telecommunications
business. The above expenditures were financed primarily by funds raised in
REMEC's public offerings completed in February 1996 and January 1997. REMEC's
future capital expenditures will continue to be substantially higher than
historical levels as a result of commercial wireless telecommunications
expansion requirements.
In February 1996, REMEC completed an initial public offering in which it
sold a total of approximately 2.3 million shares of Common Stock at $8.00 per
share. The net proceeds from the offering after deducting underwriting
commissions and expenses totaled $15.6 million. In January 1997, REMEC sold
approximately 2.4 million shares of Common Stock at $23.00 per share in a public
offering. The net proceeds from the offering after deducting underwriting
commissions and expenses totaled $52.0 million. REMEC also realized proceeds of
approximately $3.2 million from additional issuances of stock primarily
attributable to REMEC's Employee Stock Purchase Plan and a private equity
placement by REMEC'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 initial public offering proceeds were
utilized to pay down certain bank obligations, including $526,000 of obligations
assumed in the acquisition of RFM. Financing activities utilized approximately
$523,000 during the first quarter of fiscal 1998, principally as a result of
REMEC's paying off certain bank obligations assumed in the acquisition of
Veritek.
REMEC's future capital requirements will depend upon many factors,
including the nature and timing of orders by OEM customers, the progress of
REMEC's research and development efforts, expansion of REMEC's marketing and
sales efforts, and the status of competitive products. REMEC believes that
available capital resources and the proceeds from its public offerings will be
adequate to fund its operations for at least twelve months.
56
<PAGE> 65
C&S HYBRID SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements for C&S Hybrid and the notes thereto and "C&S Hybrid's
Management Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The selected financial data set forth
below for each of the years in the five-year period ended December 27, 1996 are
derived from the financial statements of C&S Hybrid. The financial statements as
of and for each of the years in the three-year period ended December 27, 1996
are included elsewhere in this Prospectus/Proxy Statement. The statement of
income data for the three month periods ended March 28, 1997 and March 29, 1996
are derived from unaudited financial statements which are included elsewhere in
this Prospectus/Proxy Statement. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, which C&S Hybrid
considers necessary for a fair presentation of financial position and results of
operations for these periods. Operating results for the three months ended March
28, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 26, 1997.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED(2)
FISCAL YEARS ENDED(1)(2) ---------------------
-------------------------------------------- MARCH 29, MARCH 28,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................................. $3,897 $4,640 $8,217 $10,939 $13,026 $ 2,653 $ 4,621
Cost of sales.............................. 1,974 2,408 4,350 5,410 7,590 1,254 2,904
------ ------ ------ ------- ------- ------ ------
Gross profit............................. 1,923 2,232 3,867 5,529 5,436 1,399 1,717
Operating expenses:
Selling, general and administrative...... 1,606 1,708 2,981 3,861 4,058 1,030 1,142
Research and development................. 203 301 298 666 527 90 115
------ ------ ------ ------- ------- ------ ------
Total operating expenses.......... 1,809 2,009 3,279 4,527 4,585 1,120 1,257
------ ------ ------ ------- ------- ------ ------
Income from operations..................... 114 223 588 1,002 851 279 460
Interest income (expense) and other........ 16 (1) (7) (60) (66) (7) (29)
------ ------ ------ ------- ------- ------ ------
Income before provision for income taxes... 130 222 581 942 785 272 431
Provision for income taxes................. 160 90 314 419 292 127 206
------ ------ ------ ------- ------- ------ ------
Net income (loss).......................... $ (30) $ 132 $ 267 $ 523 $ 493 $ 145 $ 225
====== ====== ====== ======= ======= ====== ======
Net income (loss) per share................ $ (.01) $ .03 $ .06 $ .12 $ .11 $ .03 $ .04
====== ====== ====== ======= ======= ====== ======
Shares used in per share calculations...... 3,743 4,208 4,208 4,208 4,438 4,208 5,198
====== ====== ====== ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1)(2) AT MARCH 28,
------------------------------------------ ------------
1992 1993 1994 1995 1996 1997(2)
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $ 478 $ 135 $ 241 $ 303 $ -- $ 414
Working capital..................................... 1,196 1,595 1,408 1,670 2,087 2,159
Total assets........................................ 2,252 2,760 3,989 5,098 7,290 8,843
Long-term debt...................................... 132 299 110 98 579 834
Total shareholders' equity.......................... 1,780 2,065 2,332 2,855 3,744 3,969
</TABLE>
- ---------------
(1) C&S Hybrid's fiscal years for the periods noted above ended as follows:
December 18, 1992, December 17, 1993, December 16, 1994, December 22, 1995
and December 27, 1996.
(2) All periods are unaudited except for the fiscal year ended December 27,
1996.
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<PAGE> 66
C&S HYBRID'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
C&S Hybrid was formed in 1984 and designs, manufactures and markets
transmitter and receiver hardware assemblies that are integrated by C&S Hybrid's
customers into terrestrial-based point-to-point microwave radios primarily for
use in commercial applications.
C&S Hybrid had net sales of $13.0 million in its fiscal year ended December
27, 1996 and, as of December 27, 1996, had working capital of $2.1 million and
shareholders' equity of $3.7 million. All revenue and related costs of sales are
recognized when products are shipped. Research and development expense is
recognized as it is incurred. See "Risk Factors -- Risks Related to C&S
Hybrid -- Potential Fluctuations in Operating Results."
C&S Hybrid's sales of its products are concentrated among a few major
customers. During C&S Hybrid's fiscal year ended December 27, 1996, its largest
two customers accounted for 92% of total revenues, with Digital Microwave
Corporation accounting for 62% and Harris-Farinon accounting for 30% of such
total revenues. C&S Hybrid believes that its future success will depend in part
upon its ability to obtain orders from new customers, as well as the financial
condition and success of its customers and the general economy. See "Risk
Factors -- Risks Related to C&S Hybrid -- Customer Concentration" and
"Information Concerning C&S Hybrid -- Markets and Customers."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statement of income data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR -----------------------
---------------------------- MARCH 29, MARCH 28,
1994(1) 1995(1) 1996 1996(1) 1997(1)
------- ------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales............................ 100% 100% 100% 100% 100%
Cost of sales........................ 53 50 58 47 63
--- ---
Gross Profit.................... 47 50 42 53 37
Operating Expenses:
Selling, general &
administrative.................. 36 35 31 39 25
Research and development........... 4 6 4 3 2
--- ---
Total operating expenses........ 40 41 35 42 27
--- ---
Income from operations............... 7 9 7 11 10
--- ---
Interest income (expense) and
other.............................. -- -- 1 1 1
Income before income taxes........... 7 9 6 10 9
Provision for income taxes........... 4 4 2 5 4
--- ---
Net Income........................... 3% 5% 4 % 5% 5%
=== ===
</TABLE>
- ---------------
(1) Unaudited
THREE MONTHS ENDED MARCH 29, 1996 VS. THREE MONTHS ENDED MARCH 28, 1997
Net Sales. Net sales were $2.7 million in the quarter ended March 29, 1996
compared to $4.6 million in the quarter ended March 28, 1997, an increase of
74%. The increase was primarily attributable to increased product sales by C&S
Hybrid to Digital Microwave Corporation, Harris-Farinon, Innova Corporation, and
Alcatel Network Systems.
Gross Profit. Gross profit was $1.4 million in the quarter ended March 29,
1996 compared to $1.7 million in the quarter ended March 28, 1997, an increase
of $.3 million. Gross margin was 53% in the quarter ended March 29, 1996
compared to 37% in the quarter ended March 28, 1997, a decrease of 16%. Net
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<PAGE> 67
sales per direct labor person were approximately $154,000 in the quarter ended
March 29, 1996 compared to approximately $127,000 in the quarter ended March 28,
1997. The decrease in gross margin was primarily due to increased labor costs.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A"), expenses were $1.0 million in the quarter ended March
29, 1996 compared to $1.1 million in the quarter ended March 28, 1997, an
increase of 11%. SG&A expenses as a percent of sales was 39% in the quarter
ended March 29, 1996 compared to 25% in the quarter ended March 28, 1997. The
decrease in SG&A expenses as a percent of sales was primarily attributable to an
increase in sales while SG&A headcount and expenses remained materially
unchanged.
Research and Development Expenses. Research and development ("R&D")
expenses were approximately $90,000 in the quarter ended March 29, 1996 compared
to approximately $115,000 in the quarter ended March 28, 1997, an increase of
28%. R&D expenses as a percent of sales was 3% in the quarter ended March 29,
1996 compared to 2% in the quarter ended March 28, 1997. The increase in total
R&D expenses was primarily due to increased R&D activity during the quarter
ended March 28, 1997 relating to increased product sales by C&S Hybrid to
Digital Microwave Corporation, Harris-Farinon, Innova Corporation and Alcatel
Network Systems.
Interest Income (Expense) and Other. Net interest expense was approximately
$7,000 in the quarter ended March 29, 1996 compared to approximately $29,000 in
the quarter ended March 28, 1997. The increase in net interest expense was
primarily due to increases in debt financing through a revolving working capital
line of credit and a capital lease line of credit.
Provision for Income Taxes. The effective income tax rate was 47% in the
quarter ended March 29, 1996 compared to 48% in the quarter ended March 28,
1997.
FISCAL YEAR ENDED DECEMBER 22, 1995 VS. FISCAL YEAR ENDED DECEMBER 27, 1996
Net Sales. Net sales were $10.9 million in 1995 compared to $13.0 million
in 1996, an increase of 19%. The increase was primarily attributable to
increased product sales by C&S Hybrid to two existing customers, Digital
Microwave Corporation and Harris-Farinon.
Gross Profit. Gross profit was $5.5 million in 1995 compared to $5.4
million in 1996, a decrease of approximately $100,000. Gross margin was 50% in
1995 compared to 42% in 1996, a decrease of 8%. Net sales per direct labor
person were approximately $162,000 in 1995 compared to approximately $138,000 in
1996. The decrease in gross margin was primarily due to an increase in direct
labor costs related to hiring of additional employees in manufacturing. The
decrease in gross margin was also due to the sale by C&S Hybrid of new products,
which tend to have a higher cost of production at the beginning of the sales
cycle.
Selling, General and Administrative Expenses. SG&A expenses were $3.9
million in 1995 compared to $4.1 million in 1996, an increase of 5%. SG&A
expenses as a percent of sales was 35% in 1995 compared to 31% in 1996. The
increase in SG&A expenses was primarily attributable to an increase of employees
in customer service and administration.
Research and Development Expenses. R&D expenses were approximately
$666,000 in 1995 compared to approximately $527,000 in 1996, a decrease of 21%.
R&D expenses as a percent of sales was 6% in 1995 compared to 4% in 1996. The
decrease in R&D expenses was primarily due to increased R&D activity during 1995
relating to obtaining an expanded supplier base to provide key components and to
design new products. During 1996, C&S Hybrid decided to no longer seek such
additional suppliers and instead focused on introducing newly designed products
into the market. This resulted in decreased R&D activity in 1996.
Interest Income (Expense) and Other. Net interest expense was
approximately $60,000 in 1995 compared to approximately $66,000 in 1996. The
increase in net interest expense was primarily due to increases in debt
financing through a revolving working capital line of credit and a capital lease
line of credit.
Provision For Income Taxes. The effective income tax rate was 44% in 1995
compared to 37% in 1996. The decrease was primarily due to an increase in tax
credits for certain capital expenditures.
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<PAGE> 68
FISCAL YEAR ENDED DECEMBER 16, 1994 VS. FISCAL YEAR ENDED DECEMBER 22, 1995
Net Sales. Net sales were $8.2 million in 1994 compared to $10.9 million in
1995, an increase of 33%. The increase was primarily attributable to increased
product sales by C&S Hybrid to two existing customers, Digital Microwave
Corporation, and Harris-Farinon.
Gross Profit. Gross profit was $3.9 million in 1994 compared to $5.5
million in 1995, an increase of $1.7 million. Gross margin was 47% in 1994
compared to 50% in 1995. Net sales per direct labor person were $178,000 in 1994
compared to approximately $162,000 in 1995. The increase in gross profit was
primarily due to a reduction in material usage during 1995, resulting from
increased efficiencies during assembly and improved pricing from vendors.
Selling, General and Administrative Expenses. SG&A expenses were $3.0
million in 1994 compared to $3.9 million in 1995, an increase of 30%. SG&A
expenses as a percent of sales was 36% in 1994 compared to 35% in 1995. The
decrease in SG&A expenses as a percentage of sales was primarily attributable to
an increase in sales while SG&A headcount remained materially unchanged.
Research and Development Expenses. R&D expenses were approximately $298,000
in 1994 compared to approximately $666,000 in 1995, an increase of 123%. R&D
expenses as a percent of sales was 4% in 1994 compared to 6% in 1995. The
increase in R&D expenses was primarily due to increased R&D activity during 1995
relating to obtaining an expanded supplier base to provide key components and to
design new products.
Interest Income (Expense) and Other. Net interest expense was approximately
$7,000 in 1994 compared to approximately $60,000 in 1995. The increase in net
interest expense was primarily due to increases in debt financing through a
revolving working capital line of credit and a capital lease line of credit.
Provision for Income Taxes. The effective income tax rate was 54% in 1994
compared to 44% in 1995. The decrease was primarily due to an increase in tax
credits for certain capital expenditures in 1995 and the disallowance of certain
compensation expense as a deduction in 1994.
LIQUIDITY AND CAPITAL RESOURCES
C&S Hybrid finances its activities through the sales of products, borrowing
under existing revolving working capital and equipment financing lines of credit
and an open capital lease line of credit and, to a lesser extent, the issuance
of equity to certain employees and directors. At June 9, 1997, C&S Hybrid had
$1.7 million available for borrowing under the revolving working capital line of
credit and $1 million available for borrowing under an equipment financing line
of credit. Financing is available under the open capital lease line of credit
upon request by C&S Hybrid and approval of each such request by the lender
thereunder. Cash and cash equivalents were approximately $414,000 at March 28,
1997. At March 28, 1997, C&S Hybrid had $2.2 million in working capital.
C&S Hybrid's future capital requirements will depend upon many factors,
including the nature and timing of orders by its customers, the progress of its
research and development efforts, the expansion of its marketing and sales
efforts and the status of its competitors. C&S Hybrid believes that available
capital resources will be adequate to fund its operations at current levels for
at least twelve months. However, in order to take advantage of available growth
opportunities, C&S Hybrid believes that it needs to increase investment in
research and development, manufacturing facilities, and marketing and
distribution. C&S Hybrid believes that capital resources presently available to
it may not be sufficient to fund in full such an increase in investment.
Following the Merger, REMEC, which has greater financial resources and access to
capital than C&S Hybrid, may assist the funding of such investment. See "Risk
Factors -- Risks Related to C&S Hybrid -- Future Additional Capital
Requirements."
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INFORMATION CONCERNING REMEC
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. REMEC 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. REMEC's capabilities enable it to
develop and manufacture MFMs with reduced size, weight, parts count and cost,
and increased reliability and performance.
REMEC'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/Proxy Statement 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.
REMEC also designs and manufactures precision instruments for guidance,
control and measurement systems used by the defense, aerospace, petroleum and
mining industries.
REMEC 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, a leading supplier of
oscillators and mixers, and RF Microsystems, a satellite communications
engineering company. In February 1997, REMEC acquired Radian. Radian provides
the defense market with microwave components, primarily synthesizers, receivers,
oscillators and filters. In March 1997, REMEC acquired Veritek, a producer of
high quality surface mount manufacturing assemblies.
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.
REMEC 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. REMEC 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
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<PAGE> 70
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 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.
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.
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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 Communication/Navigation
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 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.
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<PAGE> 72
A typical microwave radio front end contains, among other things, the
following components:
- 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.
- 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.
- The multiplier increases the frequency of the signal produced by the
oscillator by an integer multiple.
- 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.
- 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 desired
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.
- A variable attenuator adjusts the strength of a signal to 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.
- 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.
PRODUCTS
Microwave MFMs and Components. REMEC 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
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<PAGE> 73
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 REMEC was founded in 1983, its first products were filters, single
function components. Since inception, REMEC has excelled at developing a broad
range of filter products. REMEC believes that its core filter technology has
been a significant enabler in the MFM business. Today, REMEC designs and
manufactures a number of components, including filters, switches, variable
attenuators, amplifiers, oscillators, mixers and multipliers. REMEC believes
that its component level expertise is a key competitive advantage in designing
MFMs. REMEC's components generally are able to operate at high frequencies and
are relatively small in size. Although most of REMEC's revenues currently are
from sales of MFMs, REMEC 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.
The following table lists certain of REMEC's microwave components and MFMs:
<TABLE>
<CAPTION>
PRODUCT TYPES FUNCTION
---------------------------------------- ----------------------------------------
<S> <C>
Filters, Duplexers and Multiplexers Separate desired frequency bands from
undesired bands
Frequency Mixers Provide frequency conversion function
Voltage Controlled Oscillators Generate frequency controlled by an
input voltage
Dielectric Resonator Oscillators Generate fixed frequency microwave
signal
Cavity Oscillators Generate fixed frequency microwave
signal
Switches Switch signal between different signal
paths
Switch Attenuators Select discrete attenuation values
Variable Attenuators Select continuously variable attenuation
values
Switch Matrices Allow MxN connectivity between M-inputs
and N-outputs
Switched Delay Lines Select discrete phase delays
Switched Filters Select between multiple filters
Multipliers Multiply an input frequency by an
integer
Comb Generators Provide several multiplied frequencies
in a single output
Frequency Generators Generate multiple discrete frequency
outputs
Frequency Synthesizers Generate a discrete stepped frequency
output
Switched Amplifiers Provide multiple amplified signal
functions
Frequency Converters Provide frequency conversion function
VSAT Transceivers Transmit, receive and channel select
microwave signals for satellite
applications
Point to Point Radio Front Ends Transmit, receive and channel select
microwave signals for terrestrial
applications
</TABLE>
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<PAGE> 74
REMEC 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, REMEC obtained the
technology and began producing a standard C-Band transceiver. In August 1996,
REMEC began production of a fully integrated DAMA (demand assigned multiple
access) C-Band Transceiver. 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, REMEC 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 REMEC's microwave products have been launched. REMEC also supplies
components to Motorola, Inc. on the Iridium satellite program.
REMEC 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
the cellular/PCS market, REMEC is developing and producing a number of filter
and integrated filter products for base station applications. Products include
both ceramic and cavity filters, diplexers, LNA and distribution and delay
assemblies. REMEC is currently transitioning to production for Motorola, Inc.
("Motorola") a complex filter MFM integrating switches, detectors, isolators and
distribution circuits used in Motorola's base station infrastructure.
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 REMEC
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.
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. As of January 31, 1997, REMEC has received orders totaling
$51.5 million for the manufacture of point-to-point radio front ends and related
MFMs for P-COM. REMEC, 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 ("Alcatel") and California Microwave, Inc. REMEC also
has received orders for microwave MFMs and components from Alcatel, AT&T Corp.,
Caterpillar Inc., Glenayre Technologies, Inc., Lucent Technologies, Inc.,
Motorola, Orbital Sciences Corporation and Pacific Communications Sciences, Inc.
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REMEC expects that sales of its wireless commercial products will continue
to be concentrated among a limited number of major customers. If REMEC were to
lose a major customer or if orders by such customer were to be canceled or
otherwise decrease, REMEC's business, financial condition and results of
operations would be materially adversely affected.
P-COM. P-COM produces point-to-point millimeter wave radio systems for use
in wireless telecommunications applications. P-COM and REMEC entered into an
agreement in August 1995 for the production by REMEC 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 REMEC. REMEC 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, REMEC produced and shipped in late 1995 a
small number of units in accordance with P-COM's original product design. In the
second phase, REMEC re-designed several MFMs to lower cost and increase
producability. In the third phase, REMEC completed the re-design of MFMs and is
currently transitioning that design into production. REMEC 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. REMEC 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. REMEC 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.
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 of VSAT transceivers.
Motorola. In the cellular/PCS market, REMEC has received $3.8 million in
awards from Motorola for the development and production of numerous filter and
filter MFM products.
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 REMEC'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 REMEC 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
REMEC 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 REMEC 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 REMEC
has developed and produced switch filters, notch filters, switches and filters.
REMEC sells microwave MFMs and components to prime contractors such as
Hughes Aircraft Co. ("Hughes Aircraft"), Northrop Grumman Corporation ("Northrop
Grumman") and Lockheed Martin. REMEC 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 REMEC's revenues have been derived from sales to the
defense market. Revenues for defense applications constituted approximately 87%,
82%, and 65% of REMEC's revenues for each of the years ended January 31, 1995,
1996 and 1997, respectively. REMEC 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, REMEC's sales could be materially adversely
impacted by a decrease in government defense budgets because of spending cuts,
general budgetary constraints or otherwise.
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BACKLOG
REMEC's backlog of orders as of May 4, 1997 and May 5, 1996 was $131.1
million ($59.9 million commercial and $71.2 million defense) and $138.6 million
($65.4 million commercial and $73.2 million defense), respectively. REMEC
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 REMEC's backlog can be canceled at any time without
penalty, except, in most cases, for the recovery of REMEC'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
REMEC 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
January 31, 1997 include product specifications not yet achieved by REMEC. A
failure to develop products meeting such specifications could lead to a
cancellation of the related purchase orders.
SALES AND MARKETING
REMEC uses a team-based sales approach to facilitate close management by
REMEC personnel of relationships at multiple levels of the customer's
organization, including management, engineering and purchasing personnel.
REMEC's integrated sales approach involves a team consisting of a senior
executive, a business development specialist, members of REMEC'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, REMEC believes,
is critical to the integration of its products into its customers equipment.
REMEC's executive officers are also involved in all aspects of REMEC's
relationships with its major customers and work closely with their senior
management. REMEC utilizes manufacturers and sales representatives to identify
opportunities.
To date, REMEC has sold its products overseas with the assistance of
independent sales representatives. Sales outside of the United States
represented 11%, 14% and 9% of net sales in fiscal years ended January 31, 1995,
1996 and 1997, 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 REMEC's domestic OEM customers.
MANUFACTURING
REMEC assembles, tests, packages and ships products at its manufacturing
facilities located in San Diego, San Jose and Santa Clara, California. REMEC
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, REMEC has been manufacturing products for defense
programs in compliance with the stringent MIL-Q-9858 specifications. REMEC
believes that it can readily bring to the commercial market the manufacturing
quality and discipline it has demonstrated in the defense market. REMEC 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, REMEC seeks to achieve vertical integration in the
manufacturing process wherever appropriate.
Historically, the volume of REMEC's production requirements in the defense
markets was not sufficient to justify the widespread implementation of automated
manufacturing processes. REMEC anticipates that increased sales of its products
to the wireless telecommunications industry will require a significant increase
in REMEC's manufacturing capacity. Accordingly, REMEC has introduced automated
manufacturing techniques for product assembly and testing and is currently
planning to expand its facilities. Following the acquisition of Veritek in March
1997, REMEC now has the in-house capability for cost effective, optimized cycle
time manufacture of surface mount assemblies, including microwave soft substrate
assemblies.
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REMEC attempts to utilize standard parts and components that are available
from multiple vendors. However, certain components used in REMEC's products are
currently available only from single sources, and other components are available
from only a limited number of sources. REMEC'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 REMEC to seek alternative contract
manufacturers or suppliers, could delay REMEC's ability to deliver its products
to its customers, which in turn would have a material adverse effect on REMEC'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, REMEC 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. REMEC also relies on contract
manufacturers for circuit board assembly. REMEC generally orders components and
circuit boards from its suppliers and contract manufacturers by purchase order
on an as needed basis.
COMPETITION
The markets for REMEC'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. REMEC 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. REMEC'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.
REMEC'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 REMEC. Many of REMEC's current and potential competitors
have substantially greater technical, financial, marketing, distribution and
other resources than REMEC and have greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
REMEC's competitors will not develop new technologies or enhancements to
existing products or new products that will offer superior price or performance
features or that new products or technologies will not render obsolete the
products of REMEC'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 REMEC's products. REMEC 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 REMEC for the fiscal years
ended January 31, 1995, 1996 and 1997 were approximately $1,347,000, $2,785,000
and $3,182,000 respectively. REMEC's research and development efforts in the
defense industry are conducted in direct response to the unique requirements of
a customer's order and, accordingly, are included in cost of sales and the
related funding in net sales. REMEC expects that as its commercial business
expands, research and development expenses will increase in amount and as a
percentage of sales.
GOVERNMENT REGULATIONS
REMEC'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 REMEC are
responsible for compliance with such regulations, regulatory changes, including
changes in the allocation of available frequency spectrum, could materially
adversely affect REMEC's operations by restricting development efforts by
REMEC's customers, obsoleting current products
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or increasing the opportunity for additional competition. Changes in, or the
failure by REMEC to manufacture products in compliance with, applicable domestic
and international regulations could have a material adverse effect on REMEC'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 REMEC's customers,
which in turn may have a material adverse effect on the sale of products by
REMEC to such customers.
REMEC 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 REMEC's products. The failure to comply with current or future
regulations could result in the imposition of substantial fines on REMEC,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
Because of its participation in the defense industry, REMEC 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 REMEC 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 REMEC's business, financial condition or results of
operation.
REMEC believes that it operates its business in material compliance with
applicable government regulations.
INTELLECTUAL PROPERTY
REMEC does not presently hold any significant patents applicable to its
products. In order to protect its intellectual property rights, REMEC 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 REMEC to protect its intellectual property rights will be
adequate to prevent misappropriation of REMEC'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 REMEC or with respect to its products for which
REMEC has indemnified certain of its customers. Asserting REMEC's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting REMEC's
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of REMEC's products infringed its
proprietary rights, REMEC 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 REMEC's business, financial
condition and results of operations.
EMPLOYEES
As of April 1, 1997, REMEC had a total of 1,166 employees, including 793 in
manufacturing and operations, 178 in research, development and engineering
(including 43 designers and drafters, 14 manufacturing engineers, 5 quality
engineers and 116 electrical and mechanical engineers), 55 in quality assurance,
46 in sales and marketing and 94 in administration. REMEC believes its future
performance will depend in large part on its ability to attract and retain
highly skilled employees. None of REMEC's employees is represented by a labor
union and REMEC has not experienced any work stoppage. REMEC considers its
employee relations to be good.
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FACILITIES
REMEC's principal administrative, engineering and manufacturing facilities
are located in eight buildings aggregating approximately 199,000 square feet in
San Diego, California, consisting of one 23,000 square foot facility owned by
REMEC and seven leased facilities, pursuant to leases which expire in December
1998 and January 2000. The facilities of Magnum and Radian are located in 31,000
and 23,000 square feet buildings located in San Jose and Santa Clara,
California, respectively. The Magnum lease expires in January 2001 and the
Radian lease expires in March 1998. REMEC 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.
PRINCIPAL SHAREHOLDERS
The following sets forth certain information regarding beneficial ownership
of the REMEC Common Stock as of May 4, 1997 (i) by each person who is known by
REMEC to own beneficially more than 5% of the Common Stock, (ii) by each of
REMEC's directors, (iii) by the Chief Executive Officer and the four other most
highly paid executive officers of REMEC at fiscal year end (the "Named Executive
Officers") and (iv) by all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIAL
BENEFICIALLY OWNED OWNERSHIP
PRIOR TO MERGER(1) AFTER MERGER
--------------------- ------------
NUMBER PERCENT PERCENT(2)
---------- ------- ------------
<S> <C> <C> <C>
Ronald E. Ragland(3)........................................ 756,727 6.2% 5.8%
Errol Ekaireb(4)............................................ 113,606 * *
Jack A. Giles(5)............................................ 177,677 1.5% 1.4%
Joseph T. Lee............................................... 356,783 2.9% 2.7%
Denny Morgan(6)............................................. 247,097 2.0% 1.9%
Thomas A. Corcoran(7)....................................... 8,687 * *
William H. Gibbs(8)......................................... 3,187 * *
Andre R. Horn(9)............................................ 11,241 * *
Gary L. Luick(10)........................................... 4,237 * *
Jeffrey M. Nash(11)......................................... 30,937 * *
All directors and executive officers as a group(12)......... 1,892,285 15.4% 19.2%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) This table is based upon information supplied by directors, officers and
principal shareholders. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, each of the
shareholders identified in this table has sole voting and investment power
with respect to the shares shown. Percentage of ownership is based on
12,235,418 shares of Common Stock outstanding as of May 4, 1997. Shares
issuable upon exercise of outstanding options are considered outstanding
for purposes of calculating the percentage of ownership of Common Stock of
the person holding such options, but are not considered outstanding for
computing the percentage of ownership of any other person.
(2) Assumes the issuance of 860,000 shares of REMEC Common Stock in the Merger
and that 13,095,418 shares of REMEC Common Stock will be outstanding
immediately after the Merger.
(3) Includes 22,500 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997, 12,000 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) Includes 9,000 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997 and 8,000 shares held by Mr.
Ekaireb's spouse.
(5) Includes 9,000 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997 and 7,750 shares held by Mr.
Giles' spouse.
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(6) Includes 6,000 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997. All shares beneficially
owned by Mr. Morgan are held in the Morgan Trust, of which Mr. Morgan and
his spouse act as co-trustees.
(7) Includes 3,187 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997.
(8) Consists of 3,187 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997.
(9) Includes 1,237 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997.
(10) Consists of 4,237 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997.
(11) Includes 1,237 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997.
(12) Includes 64,085 shares issuable upon exercise of outstanding options that
are exercisable within 60 days of May 4, 1997. Upon the closing of the
Merger, Mr. Chow will be named an executive officer of REMEC. Accordingly,
the shares held by Mr. Chow are included in the percentage of ownership
after the Merger. There are 12 executive officers and directors of REMEC
and there will be 13 executive officers and directors after the Merger.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of REMEC, and their ages as of May 4,
1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Ronald E. Ragland................ 55 Chairman of the Board and Chief Executive Officer
Errol Ekaireb.................... 58 President, Chief Operating Officer and Director
Jack A. Giles.................... 55 Executive Vice President, President of REMEC
Microwave and Director
Joseph T. Lee.................... 42 Executive Vice President, President of Magnum and
Director
Denny Morgan..................... 43 Senior Vice President, Chief Engineer and Director
Thomas A. George................. 41 Senior Vice President, Chief Financial Officer and
Secretary
Thomas A. Corcoran(1)(2)......... 52 Director
William H. Gibbs(1)(2)........... 53 Director
Andre R. Horn(3)................. 68 Director
Gary L. Luick(3)................. 56 Director
Jeffrey M. Nash(1)(2)(3)......... 49 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 REMEC and has served as Chairman of the Board
and Chief Executive Officer of REMEC since January 1983. Prior to joining REMEC,
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 REMEC
since 1990 and a director of REMEC since 1985. Mr. Ekaireb served as Vice
President of REMEC from 1984 to 1987 and as Executive Vice President and Chief
Operating Officer from 1987 to 1990. Prior to joining REMEC, he spent 23 years
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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 REMEC 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 REMEC 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. Lee has been a director and Executive Vice President of REMEC since
September 1996. Prior to the acquisition of Magnum by REMEC 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. Morgan was a founder of REMEC and has served as Senior Vice President,
Chief Engineer and a director of REMEC since January 1983. Prior to joining
REMEC, 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.
Mr. George has served as Chief Financial Officer and Senior Vice President
of REMEC since 1990 and Secretary of REMEC since November 1995. He served as
Director of Finance of REMEC from 1987 to 1988 and as Vice President, Finance
from 1988 to 1990. Prior to joining REMEC, 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. Corcoran was elected a director of REMEC 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 GE Aerospace, a division
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 REMEC 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.
Mr. Horn has been a director of REMEC 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. 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.
Mr. Luick has been a director of REMEC since 1994. Since March 1997, Mr.
Luick has been the President, Chief Executive Officer and director of Coded
Communications Corporation. 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.
Dr. Nash has been a director of REMEC 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
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computer equipment manufacturer, ViaSat, Inc., a manufacturer of satellite
communication equipment, and Esscor, Inc., an electrical utility simulation
company.
Tao Chow is not currently an officer or director of REMEC. However, at the
closing of the Merger, Mr. Chow will remain as the President and a director of
C&S Hybrid and become a Senior Vice President of REMEC. Mr. Chow was a founder
of C&S Hybrid and has served as President and a director of C&S Hybrid since
September 1984. Mr. Chow has served as a director and the President and Chief
Financial Officer of Custom Micro Machining, Inc. since 1990, a director of
Applied Thin-Film Products since April 1995, and a director of Excelics
Semiconductors, Inc. since April 1995. Mr. Chow holds a BSEE degree from
National Chiao-Tung University in Taiwan and a MSEE degree from the University
of California at Los Angeles.
Members of REMEC'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 REMEC Board 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 REMEC and
approves equity grants to REMEC's officers. The Audit Committee recommends
REMEC'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.
REMEC's outside directors receive an annual retainer fee of $5,000 for
serving on the REMEC Board and receive a fee of $1,250 for each meeting of the
REMEC Board attended plus $500 for each committee meeting attended. REMEC Board
members also receive reimbursement for their reasonable travel expenses in
attending REMEC Board and committee meetings.
In May 1996, REMEC adopted the 1996 Nonemployee Directors Stock Option Plan
("Directors Plan"). Under the Directors Plan, each nonemployee director of
REMEC, 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 REMEC consists of Messrs. Corcoran, Gibbs and Nash.
During the fiscal year ended January 31, 1997, no executive officer of REMEC
served on the board of directors or compensation committee of another company
that had an executive officer serving on the REMEC Board or Compensation
Committee.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total
compensation received by the Chief Executive Officer and the four other most
highly paid executive officers of REMEC for the fiscal years ended January 31,
1995, 1996 and 1997 (the "Named Executive Officers"). None of the Named
Executive Officers earned any bonuses or compensation for the fiscal years other
than as set forth in the table or received any restricted stock awards, stock
appreciation rights or long-term incentive plan payouts.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL ------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION($)
- ---------------------------------------------- ------ ------------ -------- ---------------
<S> <C> <C> <C> <C>
Ronald E. Ragland............................. 1997 $295,000 $ 86,750 $16,809(2)
Chairman and Chief Executive Officer 1996 266,667 82,000 11,242(3)
1995 242,497 78,697 11,635(4)
Errol Ekaireb................................. 1997 231,833 86,750 18,904(5)
President and Chief Operating Officer 1996 214,167 82,000 12,099(6)
1995 200,000 78,697 9,200(7)
Jack A. Giles................................. 1997 213,333 86,750 14,839(8)
Executive Vice President 1996 198,333 82,000 10,723(9)
1995 184,833 78,697 9,648(10)
Joseph T. Lee................................. 1997 192,308 86,750 11,046(11)
Executive Vice President 1996 160,000 298,738 2,310(12)
1995 165,000 -- 2,310(13)
Denny Morgan.................................. 1997 147,833 20,000 2,464(14)
Senior Vice President 1996 135,834 32,000 722(15)
1995 127,000 20,000 216(16)
</TABLE>
- ---------------
(1) Includes amounts deferred at the option of the officer pursuant to REMEC's
deferred compensation plan for employee directors.
(2) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $400 contribution to the REMEC 401(k) plan and $7,409
in life insurance premiums.
(3) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $200 contribution to the REMEC 401(k) plan and $2,042
in life insurance premiums.
(4) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $200 contribution to the REMEC 401(k) plan and $2,435
in life insurance premiums.
(5) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $400 contribution to the REMEC 401(k) plan and $9,504
in life insurance premiums.
(6) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $200 contribution to the REMEC 401(k) plan and $2,899
in life insurance premiums.
(7) Consists of compensation in the form of an automobile allowance in the
amount of $9,000 and a $200 contribution to the REMEC 401(k) plan.
(8) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $400 contribution to the REMEC 401(k) plan and $5,439
in life insurance premiums.
(9) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $200 contribution to the REMEC 401(k) plan and $1,523
in life insurance premiums.
(10) Consists of compensation in the form of an automobile allowance in the
amount of $9,000, a $200 contribution to the REMEC 401(k) plan and $448 in
life insurance premiums.
(11) Consists of compensation in the form of an automobile allowance in the
amount of $7,616, $1,965 in contributions to the REMEC and Magnum Microwave
401(k) plans and $1,465 in life insurance premiums.
(12) Consists of compensation in the form of $2,310 in contributions to the
Magnum Microwave 401(k) plan.
(13) Consists of compensation in the form of $2,310 in contributions to the
Magnum Microwave 401(k) plan.
(14) Consists of compensation in the form of a $400 contribution to the REMEC
401(k) plan and $2,064 in life insurance premiums.
(15) Consists of compensation in the form of a $200 contribution to the REMEC
401(k) plan and $522 in life insurance premiums.
(16) Consists of compensation in the form of a $200 contribution to the REMEC
401(k) plan and $16 in life insurance premiums.
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<PAGE> 84
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
PERCENT OF OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE PER EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR SHARE(1) DATE 5% 10%
- ------------------- -------------------- --------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Ronald E.
Ragland.......... 75,000 18.9% $21.13 11/29/00 $389,680 851,494
Errol Ekaireb...... 30,000 7.6 15.75 11/01/00 116,185 253,877
Jack A. Giles...... 30,000 7.6 15.75 11/01/00 116,185 253,877
Joseph T. Lee...... 30,000 7.6 15.13 02/26/01 111,611 243,883
Denny Morgan....... 20,000 5.0 15.75 11/01/00 77,457 169,251
</TABLE>
- ---------------
(1) Options were granted at 100% of fair market value on the date of grant.
(2) The dollar amounts set forth under these columns are the result of
calculations of assumed annual rates of stock appreciation of 5% and 10%,
the two assumed rates of stock price appreciation required under the rules
of the Securities and Exchange Commission. The calculations are for the
period beginning on the date of grant of the fiscal 1997 option awards (Mr.
Ragland -- May 29, 1996; Messrs. Ekaireb, Giles and Morgan -- May 1, 1996;
and Mr. Lee -- August 26, 1996) and ending on the date of expiration of such
options (Mr. Ragland -- November 29, 2000; Messrs. Ekaireb, Giles and
Morgan -- November 1, 2000; and Mr. Lee -- February 26, 2001). Based on the
assumed annual rates of stock price appreciation of 5% and 10%, REMEC's
projected stock price at the dates of expiration of these options are as
follows: $26.33 and $32.48, respectively, on the expiration date of Mr.
Ragland's options (November 29, 2000); $19.62 and $24.21, respectively, on
the expiration date of options of Messrs. Ekaireb, Giles and Morgan
(November 1, 2000); and $18.85 and $23.26, respectively, on the expiration
date of Mr. Lee's options (February 26, 2001). These assumed annual rates of
stock price appreciation are not intended to forecast future appreciation of
REMEC's stock price. Indeed, REMEC's stock price may increase or decrease in
value over the time period set forth above. The potential realizable value
computation also does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock. The 5% and
10% assumed rates of stock price appreciation used to calculate potential
gains to optionees are provided pursuant to the rules of the Securities and
Exchange Commission. No Named Executive Officer exercised any stock options
during the fiscal year ended January 31, 1997.
In connection with the acquisition of Magnum, REMEC 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 REMEC. Mr. Lee also was granted an option under the Equity Incentive Plan to
purchase 30,000 shares of REMEC'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 May 4, 1997, a total of 750,000 shares of
Common Stock were reserved for issuance under REMEC's Equity Incentive Plan (the
"Equity Incentive Plan"), including 663,685 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 REMEC, 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
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<PAGE> 85
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. The REMEC Board has approved an increase in
the number of shares available under the Equity Incentive Plan by 1,500,000
shares. The shareholders of REMEC approved such an increase at the Annual
Meeting of Shareholders held on June 6, 1997.
Employee Stock Purchase Plan. A total of 250,000 shares of the Common
Stock has been reserved for issuance under REMEC's Employee Stock Purchase Plan
(the "Purchase Plan"), 231,900 shares of which have been issued as of May 4,
1997. 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. The REMEC Board has
approved an increase in the number of shares available under the Purchase Plan
by 550,000 shares. The shareholders of REMEC approved such increase at the
Annual Meeting of the Shareholders held on June 6, 1997.
1996 Nonemployee Directors Stock Option Plan. The Board adopted on May 29,
1996 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 REMEC, 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.
401(k) Profit Sharing Plan. REMEC has adopted a tax-qualified employee
savings and profit sharing plan (the "401(k) Plan") covering substantially all
of REMEC'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 REMEC. Such REMEC 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 REMEC 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 REMEC for income tax purposes.
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<PAGE> 86
INFORMATION CONCERNING C&S HYBRID
INTRODUCTION
C&S Hybrid, which was incorporated in 1984, designs, manufactures and
markets transmitter and receiver hardware assemblies that are integrated by C&S
Hybrid's customers into terrestrial-based point-to-point microwave radios
primarily for use in commercial applications. C&S Hybrid markets both complete
transmitter and receiver assemblies as well as individual subsystems and
components of those assemblies. C&S Hybrid typically customizes its products for
specific applications by customers.
MARKETS AND CUSTOMERS
General. C&S Hybrid markets its products to commercial OEMs, including
Digital Microwave Corporation, Harris-Farinon, Alacatel Network Systems, Innova
Corporation, Repeater Technology, California Microwave, Inc. and Samsung
Electronics Communications Systems. C&S Hybrid's sales of its products are
concentrated among a few major customers. During C&S Hybrid's fiscal year ended
December 27, 1996, its largest two customers accounted for 92% of total
revenues, with Digital Microwave Corporation accounting for 62% and
Harris-Farinon accounting for 30% of such total revenues. The loss of a major
customer or any cancellation of or reduction in orders by such customers,
including reductions due to market or competitive conditions in the wireless
communications markets, could have a material adverse effect on C&S Hybrid's
business, operating results and financial condition. C&S Hybrid's ability to
increase its customer base and to take advantage of available growth
opportunities with existing customers requires increased investment in research
and development, manufacturing facilities, and marketing and distribution and,
therefore, is limited by C&S Hybrid's current financial resources and access to
capital. See "Risk Factors -- Risks Related to C&S Hybrid -- Customer
Concentration."
Terrestrial-Based Point-to-Point Microwave Radios. C&S Hybrid's OEM
customers produce complete microwave radios that carry voice data and video
signals and market those radios, primarily for use in commercial applications,
to major telecommunications service providers, such as AT&T, MCI, Sprint and
Cellular One, and to major users of private communications networks, such as
large financial services companies. These end-user customers utilize microwave
radios in lieu of land lines to transmit and receive very high volume voice,
data and video communications.
The application of microwave and other high frequency technologies to
commercial wireless communications has accelerated as lower frequency bands have
become congested with use of televisions and radios, and more recently cellular
telephones and pagers. Microwave and other high frequency bands currently are
less congested, have more available bandwidth and, therefore, afford greater
voice, data and video transmission capacity than lower frequency bands. In
addition, microwave and other high frequency technologies allow the use of
small, portable transmission equipment and provide precise directional
capabilities. These factors, combined with recent reductions in the costs of
products designed for microwave and other high frequency transmission, have
contributed to the growth of the commercial wireless communications industry.
Initial commercial applications for microwave and other high frequency
transmission systems included point-to-point microwave radio communications.
Microwave radio supports telephone systems transporting telephone traffic.
As cellular telephone, data and video communications have grown significantly in
recent years, use of microwave radios has grown to transmit such communications
and to interconnect cellular base stations with mobile telephone switching
offices where cellular calls are connected to the public switched telephone
network. The increasing use of cellular telephones currently necessitates growth
in the number of base stations in order to increase cellular coverage and
alleviate congestion in high-traffic areas. In certain high-traffic
applications, a microwave radio system is more economical than leased telephone
lines. A microwave radio system might be installed more quickly and at a lower
cost than a fiber or cable wired system, primarily because no right of way is
required as typically for a wired system. Further, developing countries
installing communications systems often prefer to install and utilize microwave
radio communications systems rather than fiber or cable communications systems
because installation of fiber and cable connections may require a much larger
infrastructure
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<PAGE> 87
investment. In addition, the market for point-to-point microwave radios is
increasing generally as companies use microwave radios to bypass local telephone
operating companies for private networking applications. Further, new wireless
personal communications systems in the United States currently use frequencies
presently occupied by private microwave radio communications systems. The
current users of those frequencies, which include large corporations, railroads,
pipeline companies and transporting companies, must therefore utilize other
frequencies for communications and, in doing so, typically purchase and install
new microwave radios which can operate at those new frequencies.
Transmitter and Receiver Assemblies for Microwave Radios. A transmitter
and receiver assembly, also known as a transceiver, serves two signal processing
functions: as a transmitter, it transforms modulated voice, data or video into a
signal for wireless transmission; as a receiver, it converts that incoming
signal back into modulated voice, data or video. In the transmission process,
lower frequency voice, data or video signals are converted to higher frequency
signals in components such as mixers or multipliers by using signals generated
by oscillators. The signals are then amplified so that they will have enough
strength to reach the next location and filtered so that only the desired signal
will be transmitted. When received, the signals are weak and are amplified with
an amplifier and converted with a mixer back to the modulated voice, data or
video that was originally transmitted.
Transceivers and component parts for transceivers are circuits that perform
the functions described above. Those circuits can be either non-integrated
(called hybrid circuits) or integrated (called MMICs). C&S Hybrid uses both
hybrid circuits and MMICs as basic building blocks for its transceiver products.
As use of microwave radio systems has increased, demand for transmitter and
receiver assemblies, which are core components of those radios, has increased.
Further, C&S Hybrid believes that the OEMs' customers are requiring greater
performance of microwave radios at cost-competitive prices and that life-cycles
for microwave radios are decreasing and, as a result, transmitter and receiver
assemblies must meet increasing performance requirements, must remain
cost-competitive and have shorter life-cycles. C&S Hybrid believes that, in
order to meet this greater demand for microwave radios and the greater
performance requirements of the radios and their components, OEMs are
increasingly purchasing transmitter and receiver assemblies from outside
sources, such as C&S Hybrid. See "-- Competition."
PRODUCTS
C&S Hybrid's transmitter and receiver assemblies operate at high RF (800
MHz to 1 GHz), microwave (1 GHz to 20 GHz) and millimeter wave (20 GHz to 26
GHz). The circuits in C&S Hybrid's products are fabricated with alumina
dielectric material, with gold as conductor and talumnitrate (TaN) as resistor.
The circuits are mounted on gold plated metal carriers. Semiconductor chips such
as gallium arsenade field effect transmitters (GaAsFET), diodes and single layer
capacitors are also used to achieve different functional requirements required
by transmitter and receiver assemblies.
Most of C&S Hybrid's products are custom-designed to a customer's
specifications and then sold exclusively to that customer. C&S Hybrid believes
that the advantages to an OEM of integrating a custom-designed, rather than an
off-the-shelf, transmitter and receiver assembly into its microwave radios are:
(i) the assembly is more likely to better match the design and performance
requirements of the radios; (ii) integration of the assembly into the radios
will likely require less time and less labor and material costs, thereby
lowering the OEM's cost of goods sold; and (iii) the radios will perform more
reliably because of better integration of the components within the radio.
In order to lessen time to market and design and support costs, C&S
Hybrid's products are assembled from modular components, which have been
developed for use in products previously designed and manufactured by C&S
Hybrid. Components provide a variety of functions, and are assembled together in
a manner to meet a customer's specifications. C&S Hybrid has a library of
modular components developed for possible use in its products. Predicting and
controlling performance of module designs of transmitter and receiver hardware
to be used at microwave frequencies requires design experience using accurate
modeling of component processes. Perfecting module designs also requires
expertise in partitioning circuit blocks. By designing its products as an
assembly of modules, C&S Hybrid is able to use the modules for different
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applications, thereby improving C&S Hybrid's production costs and improving C&S
Hybrid's time to market for its products.
The following table lists certain product components sold separately or in
combinations by C&S Hybrid:
<TABLE>
<CAPTION>
PRODUCT COMPONENTS FUNCTION
- -------------------------------- -------------------------------------------------------
<S> <C>
Low Noise Amplifier Provide power amplification with minimum signal to
noise degradation
Power Amplifier Provide power amplification for high transmitter output
power
Voltage Controlled Oscillator Generate frequency controlled by an input voltage
Dielectric Resonator Oscillator Oscillator stabilized by dielectric resonator
Switch Switch signal between different signal paths
Variable Attenuator Select continuously variable attenuation values
Frequency Multiplier Multiply an input frequency by an integer
Frequency Converter Provide frequency conversion function
Filter Frequency selection element
Detector Signal strength indicator
Modulator Code baseband signal to intermediate frequency (IF)
signal
Demodulator Decode an intermediate frequency back to baseband
signal
Phase Lock Source A VCO phase locked to a stable reference oscillator
(i.e., crystal oscillator)
</TABLE>
C&S Hybrid has in-house process capabilities for much of its manufacturing
and assembly process, including machining, circuit fabrication, microelectronic
assembly (die attached and bonding), testing and design and manufacturing
capabilities of most microwave components in the frequency range from 800 MHz to
26 GHz. Because C&S Hybrid can oversee those processes, C&S Hybrid believes it
has better control over its product quality, cost, design and delivery and it
can better support the engineering needs of its customers.
BACKLOG
C&S Hybrid's backlog of orders as of March 28, 1997 was approximately $5
million. C&S Hybrid includes in its backlog only those orders for which it has
accepted purchase orders which include delivery with firm delivery dates. In
addition to the firm backlog, as of March 28, 1997, C&S Hybrid had approximately
$1 million of unreleased blanket orders. The majority of these blanket orders
are expected to be released within a 12-month period, and will be added to the
firm backlog as they are released. However, C&S Hybrid's backlog is subject to
fluctuations and is not necessarily indicative of future sales. In addition,
there can be no assurance that current backlog will necessarily lead to sales in
any future period. A substantial amount of C&S Hybrid's firm backlog can be
canceled at any time with negotiated cancellation charges which may only cover
the actual committed costs of the work performed up to the date of cancellation.
Cancellations of pending purchase orders or termination or reductions of
purchase orders in progress could have a material adverse effect on C&S Hybrid's
business, operating results and financial condition. "See "Risk Factors -- Risks
Related to C&S Hybrid -- Customer Concentration" and "Risk Factors -- Risks
Related to C&S Hybrid -- Backlog."
RESEARCH AND DEVELOPMENT
Research and development expenses recorded by C&S Hybrid for the fiscal
years ended 1994, 1995 and 1996 were approximately $298,000, $666,000 and
$527,000, respectively, and for the three month period ended March 28, 1997 were
approximately $115,000. As of March 28, 1997, C&S Hybrid had approximately 26
full-time employees who support the design of new circuits and improvements of
existing device performance, the manufacturing process and device packaging.
Research and development expenses generally include design and development
efforts to meet specific customer requirements and new products developed in
coordination with customers. New products are typically developed in
coordination with customers. Research and development expenses are often
incurred to develop bids and proposals.
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SALES AND MARKETING
C&S Hybrid obtains new business primarily through established customer
relations by responding to requests from its customers on customer supplied
specifications. C&S Hybrid's executive officers are involved in all aspects of
C&S Hybrid's relationships with its major customers and work closely with their
senior management. C&S Hybrid utilizes two sales representatives to identify
opportunities in the United States. C&S Hybrid has entered into written
agreements with its sales representatives, which agreements provide the sales
representatives with exclusive rights to market C&S Hybrid's products and
services in specific territories and may be terminated by either party upon 30
days prior notice.
MANUFACTURING
C&S Hybrid assembles, tests, packages and ships products at its
manufacturing facility located in Milpitas, California. The process consists
primarily of machining of enclosures and covers, fabricating thin-film circuits,
assembling hybrid circuit modules, installing hybrid circuits into enclosures,
electric testing of final assembly and packaging and shipping of products.
C&S Hybrid has in the past and may in the future experience lower than
expected production yields which could be caused by marginal design, poor
workmanship, defective material or unproven process. Lower production yields
could delay product shipments and adversely affect gross margins, and there can
be no assurance that C&S Hybrid will be able to maintain acceptable yields in
the future. To the extent C&S Hybrid does not achieve acceptable manufacturing
yields or experiences product shipment delays, its business, operating results
and financial condition could be materially and adversely affected. C&S Hybrid
has recently moved its operations to a new facility and any unanticipated
difficulties in establishing high volume production or any prolonged inability
to utilize this facility would have a material adverse effect on C&S Hybrid's
business, operating results and financial condition. See "Risk Factors -- Risks
Related to C&S Hybrid -- Manufacturing."
C&S Hybrid attempts to utilize standard parts and components that are
available from multiple vendors. However, certain components used in C&S
Hybrid's products are currently available only from single sources, and other
components are currently available or acquired from only a limited number of
sources. C&S Hybrid's reliance on contract manufacturers and on sole suppliers
involves several risks, including 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 C& S Hybrid to seek alternative contract manufacturers or
suppliers, could delay C&S Hybrid's ability to deliver its products to its
customers, which in turn would have a material adverse effect on C&S Hybrid's
business, financial condition and operating results. See "Risk Factors -- Risks
Related to C&S Hybrid -- Dependence on Key Suppliers" and "-- Certain
Relationships and Related Transactions."
COMPETITION
C&S Hybrid believes that, in order to meet greater demand for microwave
radios and greater performance requirements of the radios and their components,
OEMs are increasingly purchasing transmitter and receiver assemblies from
outside sources, such as C&S Hybrid. However, the markets for C&S Hybrid's
products are extremely competitive and are characterized by rapid technological
change, new product development and product obsolescence. In addition, price
competition is intense and significant price erosion generally occurs over the
life of a product. Further, as demand for microwave radio subassemblies has
increased, C&S Hybrid believes that the number of its competitors has increased.
C&S Hybrid's primary competitors are specialized manufacturers of RF and
microwave signal processing components and large, vertically integrated systems
producers that are able to manufacture their own components, including
Microelectronic Technology, Celeritek, Milliwave, DBS Microwave, Aydin Microwave
and Hewlett-Packard. C&S Hybrid'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 C&S Hybrid. Many of C&S Hybrid's
current and potential competitors have substantially greater technical,
financial, manufacturing,
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marketing, distribution and other resources than C&S Hybrid and have greater
name recognition and market acceptance of their products and technologies. The
ability of C&S Hybrid to compete successfully depends upon a number of factors,
including the rate at which customers incorporate C&S Hybrid's products into
their systems, product quality and performance, price, experienced sales and
marketing personnel, rapid development of new products and features, evolving
industry standards and the number and nature of C&S Hybrid's competitors. No
assurance can be given that C&S Hybrid'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 C&S Hybrid's customers.
See "Risk Factors -- Risks Related to C&S Hybrid -- Competition."
INTELLECTUAL PROPERTY
C&S Hybrid does not presently hold any patents applicable to its products.
In order to protect its intellectual property rights, C&S Hybrid 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 C&S Hybrid to protect its intellectual property rights will be
adequate to prevent misappropriation of C&S Hybrid's technology or to preclude
competitors from independently developing such technology. The failure of C&S
Hybrid to protect its proprietary information could have a material adverse
effect on C&S Hybrid's business, operating results and financial condition.
Furthermore, there can be no assurance that, in the future, third parties will
not assert infringement claims against C&S Hybrid or with respect to its
products for which C&S Hybrid has indemnified certain of its customers.
Asserting C&S Hybrid's rights or defending against third party claims could
involve substantial costs and diversion of resources, thus materially and
adversely affecting C&S Hybrid's business, financial condition and operating
results. In the event a third party were successful in a claim that one of C&S
Hybrid's products infringed its proprietary rights, C&S Hybrid 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 C&S Hybrid's business, financial condition and operating results. See
"Risk Factors -- Risks Related to C&S Hybrid -- Limited Protection of C&S
Hybrid's Intellectual Property."
GOVERNMENT REGULATIONS
C&S Hybrid'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 C&S Hybrid are responsible for compliance with such regulations,
regulatory changes, including changes in the allocation of available frequency
spectrum, could materially adversely affect C&S Hybrid's operations by
restricting development efforts by C&S Hybrid's customers, obsoleting current
products or increasing the opportunity for additional competition. There can be
no assurance that the FCC or other regulatory bodies will not promulgate new
regulations that could have a material adverse effect on C&S Hybrid's business,
operating results and financial condition. Changes in, or the failure by C&S
Hybrid to manufacture products in compliance with, applicable domestic and
international regulations could have a material adverse effect on C&S Hybrid's
business, financial condition and operating results. 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 C&S Hybrid's customers, which in
turn may have a material adverse effect on the sale of products by C&S Hybrid to
such customers. See "Risk Factors -- Risks Related to C&S Hybrid -- FCC and
Other Government Regulations."
C&S Hybrid is also subject to a variety of local, state and federal
governmental laws, rules and regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture C&S Hybrid's products. The failure to
comply with current or future regulations could result in the imposition of
substantial fines on C&S Hybrid, suspension of
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<PAGE> 91
production, alteration of its manufacturing processes or cessation of
operations. See "Risk Factors -- Risks Related to C&S Hybrid -- Environmental
Regulations."
C&S Hybrid believes that it operates its business in material compliance
with applicable government regulations.
EMPLOYEES
As of March 28, 1997, C&S Hybrid had a total of 167 full-time employees,
including 124 in manufacturing and operations, 26 in research, development and
engineering, 10 in quality assurance and seven in sales, marketing and
administration. C&S Hybrid believes that its future success depends in large
part on the continued service of its key technical, marketing and management
personnel and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process and test engineers
involved in the manufacture of existing products and the development of new
products and processes. Competition for such personnel is intense, and there can
be no assurance that C&S Hybrid can retain its key employees or that it can
attract, assimilate or retain other highly qualified personnel in the future. In
particular, the loss of Tao Chow, who is C&S Hybrid's President, would have a
material adverse effect on C&S Hybrid's development and marketing efforts. None
of C&S Hybrid's employees are represented by a labor union and C&S Hybrid has
not experienced any work stoppage. C&S Hybrid has recently experienced a period
of significant growth that has placed strain upon its management systems and
resources. In the future, C&S Hybrid will be required to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and expand, train and manage its employee work force. There can be no
assurance that C&S Hybrid will be able to effectively manage such growth. Its
failure to do so would have a material adverse effect upon its business,
operating results and financial condition. C&S Hybrid considers its employee
relations to be good. See "Risk Factors -- Risks Related to C&S
Hybrid -- Dependence on Key Employees."
FACILITIES
C&S Hybrid's principal administrative, development and manufacturing
facilities are located in approximately 44,000 square feet in Milpitas,
California, pursuant to a lease which expires in 2003. C&S Hybrid also performs
machining functions at its facility located in approximately 2,500 square feet
in Santa Clara, California, pursuant to a lease which expires in August 1997.
C&S Hybrid 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.
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<PAGE> 92
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the Record Date, information relating
to the beneficial ownership of C&S Hybrid Common Stock and C&S Hybrid Preferred
Stock by (i) each person known to C&S Hybrid to be the beneficial owner of more
than five percent of any such class of C&S Hybrid's outstanding voting
securities, (ii) each director and nominee, (iii) each named executive officer,
and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP(1) OUTSTANDING
----------------------- CLASS OF
NAME AND ADDRESS OF BENEFICIAL OWNER(3) COMMON PREFERRED SECURITIES(2)
-------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
Tao Chow(4)....................................... 3,400,000 65.4%
400,000 100.0
Ying Chow(4)...................................... 3,400,000 65.4
400,000 100.0
Seung Nam(5)...................................... 500,000 10.4
Tri Dinh(6)....................................... 410,000 8.5
Ming Chow(7)...................................... 304,687 6.4
Chieh Chang(8).................................... 50,000 1.0
Christina Ma(9)................................... 36,000 *
All executive officers and directors as a group (3
persons)(10).................................... 3,486,000 66.9
400,000 100.0
</TABLE>
- ---------------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Shares of Common Stock subject to options and warrants that are exercisable
as of, or exercisable within 60 days of, the Record Date are deemed to be
outstanding and to be beneficially owned by the person or entity holding
such option or warrant for the purpose of computing the percentage
ownership of such person or entity but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or
entity. Shares of Common Stock issuable upon conversion of Preferred Stock
that are convertible as of, or convertible within 60 days of, the Record
Date are deemed to be outstanding and to be beneficially owned by the
person or entity holding such Preferred Stock for the purpose of computing
the percentage ownership of such person or entity but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person or entity. Percentages of less than 1% are represented by an
asterisk.
(3) The address for the named executive officers, directors and nominees is:
804 Buckeye Court, Milpitas, California 95035.
(4) Represents 3,000,000 shares of Common Stock and 400,000 shares of Common
Stock issuable upon conversion of 400,000 shares of Series A Preferred
Stock, held by Tao Chow and Ying Chow as Trustees of the Tao Chow and Ying
Chow Declaration of Trust dated December 15, 1995. Tao Chow and Ying Chow
are husband and wife. Their address is 804 Buckeye Court, Milpitas,
California 95035. Tao Chow is President and a director of C&S Hybrid.
(5) Mr. Nam's address is 804 Buckeye Court, Milpitas, California 95035.
(6) Mr. Dinh's address is 804 Buckeye Court, Milpitas, California 95035.
(7) Mr. Chow's address is 804 Buckeye Court, Milpitas, California 95035.
(8) Mr. Chang is a director of C&S Hybrid.
(9) Includes 11,000 shares subject to an option exercisable within 60 days
after the Record Date. Ms. Ma is the Chief Financial Officer, Secretary and
a director of C&S Hybrid.
(10) The shares owned by all directors and executive officers as a group include
the shares referred to in footnotes (4), (8), and (9).
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<PAGE> 93
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Tao Chow, President and a director and shareholder of C&S Hybrid, (i) owns
approximately 39% of the outstanding shares and is a director of Excelics
Semiconductor, Inc., a supplier to C&S Hybrid, (ii) owns approximately 45% of
the outstanding shares and is a director and the President and the Chief
Financial Officer of Custom Micro Machining, Inc., a supplier of machine parts
to C&S Hybrid, and (iii) owns approximately 33% of the outstanding shares and is
a director of Applied Thin-Film Products, a supplier of circuits to C&S Hybrid.
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<PAGE> 94
DESCRIPTION OF REMEC CAPITAL STOCK
The authorized capital stock of REMEC 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 May 4, 1997, there were 12,235,418 shares of REMEC Common Stock
outstanding held of record with approximately 500 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 REMEC. 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 REMEC, 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
REMEC 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 REMEC 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 REMEC. 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 REMEC 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.
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<PAGE> 95
DESCRIPTION OF C&S HYBRID CAPITAL STOCK
The authorized capital stock of C&S Hybrid consists of 10,000,000 shares of
C&S Hybrid Common Stock and 800,000 shares of C&S Hybrid Preferred Stock, in
each case without par value. As of the Record Date, there were 4,797,575
outstanding shares of C&S Hybrid Common Stock held of record by 20 shareholders,
400,000 outstanding shares of C&S Hybrid Preferred Stock held of record by one
shareholder and outstanding options to purchase 161,000 shares of C&S Hybrid
Common Stock.
C&S HYBRID COMMON STOCK
Each shareholder is entitled to one vote on all matters for each share of
C&S Hybrid Common Stock held. Each holder of C&S Hybrid Common Stock is entitled
under California law to cumulate such holder's votes at any election of
directors and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such holder's
shares are normally entitled, or distribute the holder's votes on the same
principle among as many candidates as such holder thinks fit; however, no
directors are to be elected at the Special Meeting. The holders of C&S Hybrid
Common Stock have no preemptive or other rights to subscribe for additional
shares. All outstanding shares of C&S Hybrid Common Stock are validly issued,
fully paid and nonassessable. Subject to preferences that may be applicable to
holders of any C&S Hybrid Preferred Stock then outstanding, holders of C&S
Hybrid Common Stock are entitled to such dividends as may be declared by the C&S
Hybrid Board out of funds legally available therefor. Upon liquidation,
dissolution or winding up of C&S Hybrid, the assets legally available for
distribution to shareholders are distributable ratably among the holders of the
C&S Hybrid Common Stock at that time outstanding, subject to prior distribution
rights of creditors of C&S Hybrid and to the preferential rights of any shares
of C&S Hybrid Preferred Stock then outstanding.
C&S HYBRID PREFERRED STOCK
Each shareholder is entitled to one vote on all matters for each whole
share of C&S Hybrid Common Stock into which the shares of C&S Hybrid Preferred
Stock held by such shareholder could be converted. Unless otherwise required by
California law, the holders of C&S Hybrid Preferred Stock vote together with the
holders of C&S Hybrid Common Stock on all matters submitted to a vote of
shareholders, and not as separate classes or series. As of the Record Date, each
share of C&S Hybrid Series A Preferred Stock was convertible into one (1) share
of C&S Hybrid Common Stock. Each holder of C&S Hybrid Preferred Stock is
entitled under California law to cumulate such holder's votes at any election of
directors and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such holder's
shares are normally entitled, or distribute the holder's votes on the same
principle among as many candidates as such holder thinks fit; however, no
directors are to be elected at the Special Meeting. The holders of C&S Hybrid
Preferred Stock have no preemptive or other rights to subscribe for additional
shares. All outstanding shares of C&S Hybrid Preferred Stock are validly issued,
fully paid and nonassessable.
Holders of C&S Hybrid Series A Preferred Stock are entitled to receive, out
of any funds legally available therefor, cash dividends at the rate of one cent
($.01) per annum, on each outstanding share thereof, payable in preference and
priority to any payment of any dividend on C&S Hybrid Common Stock when and as
declared by the C&S Hybrid Board. The right to such dividends on the C&S Hybrid
Series A Preferred Stock is not cumulative. In the event that C&S Hybrid has
declared and unpaid dividends outstanding immediately prior to, and in the event
of, a conversion of C&S Hybrid Series A Preferred Stock, C&S Hybrid must pay in
cash to the holder(s) thereof the full amount of any such dividends. As of the
date of this Prospectus/Proxy Statement, C&S Hybrid has no declared and unpaid
dividends outstanding on any of its C&S Hybrid Common Stock or C&S Hybrid
Preferred Stock.
In the event of any liquidation, dissolution or winding up of C&S Hybrid,
the holders of C&S Hybrid Preferred Stock are entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of C&S
Hybrid to holders of C&S Hybrid Common Stock, an amount of $.25 per share for
each share of C&S Hybrid Series A Preferred Stock then held and, in addition, an
amount equal to all declared but
87
<PAGE> 96
unpaid dividends on such stock. If upon occurrence of such event the assets and
funds thus distributed among the holders of the C&S Hybrid Preferred Stock are
insufficient to permit the payment of such holders of the full preferential
amount, then the entire assets and funds of C&S Hybrid legally available for
distribution will be distributed ratably among the holders of the C&S Hybrid
Preferred Stock in proportion to the preferential amounts fixed therefor upon a
liquidation, dissolution or winding up of C&S Hybrid. After payment has been
made to the holders of the C&S Hybrid Preferred Stock of the full amounts to
which they are entitled, the holders of C&S Hybrid Common Stock are entitled to
receive all remaining assets of C&S Hybrid.
A liquidation, dissolution or winding up of C&S Hybrid is not deemed to be
occasioned by, or to include, C&S Hybrid's sale of all or substantially all of
its assets or the acquisition of C&S Hybrid by another entity by means of merger
or consolidation resulting in the exchange of the outstanding shares of C&S
Hybrid for securities or consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary. The Merger is an acquisition of C&S
Hybrid by another entity by means of merger resulting in the exchange of the
outstanding shares of C&S Hybrid for securities issued by the acquiring
corporation, so the holders of C&S Hybrid Preferred Stock are not entitled to be
paid preference amounts in connection with the Merger.
C&S Hybrid may at any time it may lawfully do so after March 1, 1986, at
the option of the C&S Hybrid Board, redeem in whole or in part the C&S Hybrid
Series A Preferred Stock by paying in cash for each such share to be redeemed
the price of twenty-five Cents ($.25) per share (as appropriately adjusted for
any stock dividends, stock splits, recapitalization or consolidation of C&S
Hybrid Preferred Stock), together with an amount equal to any declared but
unpaid dividends on such series of C&S Hybrid Preferred Stock to the date fixed
for redemption. At least forty (40) days prior to the date fixed for any
redemption of C&S Hybrid Preferred Stock, written notice thereof must be mailed
to each holder of record of C&S Hybrid Preferred Stock to be redeemed. On or
after the date fixed for redemption, all rights of the holders of the C&S Hybrid
Preferred Stock designated for redemption (except the right to receive the
redemption price) will cease and terminate with respect to such shares.
Each share of C&S Hybrid Preferred Stock is convertible, at the option of
the holder thereof, at any time after the date of issuance of such share or on
or prior to the fifth (5th) business day prior to such date, if any, as may have
been fixed for the redemption thereof, into such number of fully paid and
nonassessable shares of C&S Hybrid Common Stock as is determined by dividing
$.25 for each share of C&S Hybrid Series A Preferred Stock by the conversion
price therefor (which is subject to proportional adjustment for stock splits,
stock combinations and stock dividends) in effect at the time of the conversion.
The conversion price on the date of this Prospectus/Proxy Statement for each
share of C&S Hybrid Series A Preferred Stock is $.25. Each share of C&S Hybrid
Preferred Stock automatically converts into shares of C&S Hybrid Common Stock at
the then effective conversion price on the effective date of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale to the public of C&S Hybrid
Common Stock for the account of C&S Hybrid at a price per share of not less than
150% of the conversion price and an aggregate offering price of not less than
$3,000,000.
88
<PAGE> 97
COMPARISON OF SHAREHOLDERS' RIGHTS
REMEC and C&S Hybrid are each incorporated under the laws of the State of
California. The following summarizes differences in the Articles of
Incorporation and Bylaws of REMEC and C&S Hybrid that could materially affect
the rights of shareholders of C&S Hybrid upon consummation of the Merger.
Annual Meeting. REMEC's Bylaws require that an annual shareholders'
meeting be held between 30 and 120 days following the end of REMEC's fiscal
year. C&S Hybrid's Bylaws require that an annual shareholders' meeting be held
each year on a date designated by the C&S Hybrid Board or, if not so designated,
on the third Wednesday of April in each year (or the next full succeeding full
business day if such Wednesday is a legal holiday).
Annual Reports. REMEC's Bylaws require that an annual report be sent to
shareholders not later than 120 days after the close of its fiscal year and at
least 15 days prior to the annual shareholders' meeting. C&S Hybrid's Bylaws
waive the requirement of distributing an annual report to shareholders so long
as the shares of C&S Hybrid are held by fewer than 100 holders of record. At the
Record Date, the shares of C&S Hybrid were held by 20 holders of record.
Number of Directors. REMEC's Bylaws fix the authorized number of directors
at a range from seven to eleven, with the exact number set within that range and
subject to change by the REMEC Board. The range may only be amended by
shareholders holding a majority of voting power. The number of authorized
directors is currently set at 10. C&S Hybrid's Bylaws fix the authorized number
of directors at three. The authorized number may only be amended by shareholders
holding a majority of outstanding shares entitled to vote.
Loans to Officers. REMEC's Bylaws permit REMEC to loan to, or guarantee
obligations of, officers or other employees pursuant to an employee benefit plan
available to executives or other employees if the REMEC Board determines that
such loan or guarantee may reasonably be expected to benefit REMEC. If such plan
includes officers or directors, it must be approved by shareholders. C&S
Hybrid's Bylaws permit C&S Hybrid to loan to, or guarantee obligations of,
officers if the C&S Hybrid Board determines (by a vote sufficient without
counting the vote of any interested directors) that such loan or guarantee may
reasonably be expected to benefit C&S Hybrid and C&S Hybrid has outstanding
shares held of record by 100 or more persons. At the Record Date, the
outstanding shares of C&S Hybrid were held by 20 holders of record.
Indemnification. REMEC's Bylaws provide that REMEC must indemnify its
directors and executive officers to the fullest extent not prohibited by the
Corporations Code; provided, that REMEC may limit the extent of such
indemnification by individual contract; provided further, that REMEC need not
indemnify any director or executive officer in connection with any proceeding
initiated by such person or any proceeding by such person against REMEC or its
directors, officers, employees or agents unless indemnification is expressly
required by law, the proceeding was authorized by the REMEC Board or such
indemnification is provided by REMEC in its sole discretion. REMEC must advance,
prior to the final disposition of any proceeding, all expenses incurred by any
director or executive officer in connection with such proceeding upon receipt of
an undertaking by or on behalf of such person to repay such amount if it is
determined that such person is not entitled to indemnification under the Bylaws.
C&S Hybrid's Bylaws provide that C&S Hybrid must, to the maximum extent
permitted by the Corporations Code, indemnify its directors and officers against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of C&S Hybrid.
Restriction on Transfer of Shares. C&S Hybrid's Bylaws provide that,
before a shareholder may sell or transfer for consideration any shares of C&S
Hybrid, that shareholder must first offer those shares to C&S Hybrid and then to
the other shareholders of C&S Hybrid at the same price and terms as the proposed
sale or transfer. REMEC's Bylaws do not contain such a restriction.
Preferred Stock. REMEC's Articles of Incorporation authorize REMEC to
issue 5,000,000 shares of Preferred Stock in one or more series and authorize
the REMEC Board to determine or alter the rights, preferences, privileges and
restrictions of any wholly unissued series of Preferred Stock and the number of
shares within such series. C&S Hybrid's Articles of Incorporation authorize C&S
Hybrid to issue 800,000
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<PAGE> 98
shares of Series A Preferred Stock with the rights, preferences, privileges and
restrictions set forth in the Articles of Incorporation. See "Description of C&S
Hybrid Capital Stock -- C&S Hybrid Preferred Stock."
LEGAL MATTERS
The validity of the REMEC Common Stock issuable pursuant to the Merger and
certain other legal matters relating thereto will be passed upon for REMEC by
Heller Ehrman White & McAuliffe, Los Angeles, California. Fenwick & West LLP is
acting as counsel for C&S Hybrid in connection with certain legal matters
relating to the Merger and the transactions contemplated thereby.
EXPERTS
The consolidated financial statements and schedule of REMEC as of January
31, 1996 and 1997 and for each of the three years in the period ended January
31, 1997, appearing in this Prospectus/Proxy Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, which, as to the years 1995, 1996 and 1997, are
based in part on the report of Ireland San Filippo LLP, independent auditors.
The financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in auditing and
accounting.
The consolidated financial statements of C&S Hybrid as of December 27, 1996
and for the year then ended appearing in this Prospectus/Proxy Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in auditing and
accounting.
90
<PAGE> 99
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMEC, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Report of Ireland San Filippo LLP, Independent Auditors............................... F-3
Consolidated Balance Sheets at January 31, 1996 and 1997 and at May 4, 1997........... F-4
Consolidated Statements of Income for the years ended January 31, 1995, 1996 and 1997
and the three months ended May 5, 1996 (unaudited) and May 4, 1997 (unaudited)...... F-5
Consolidated Statements of Shareholders' Equity as of January 31, 1995, 1996 and 1997
and May 4, 1997 (unaudited)......................................................... F-6
Consolidated Statements of Cash Flows for the years ended January 31, 1995, 1996 and
1997 and the three months ended May 5, 1996 (unaudited) and May 4, 1997
(unaudited)......................................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
C&S HYBRID, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-19
Balance Sheets at December 22, 1995 (unaudited), December 27, 1996 and March 28, 1997
(unaudited)......................................................................... F-20
Statements of Income for the fiscal years 1994 (unaudited), 1995 (unaudited) and 1996
and the three months ended March 29, 1996 (unaudited) and March 28, 1997
(unaudited)......................................................................... F-21
Statements of Shareholders' Equity for the fiscal years 1994 (unaudited), 1995
(unaudited) and 1996 and for the three months ended March 28, 1997 (unaudited)...... F-22
Statements of Cash Flows for the fiscal years 1994 (unaudited), 1995 (unaudited) and
1996 and for the three months ended March 29, 1996 (unaudited) and March 28, 1997
(unaudited)......................................................................... F-23
Notes to Financial Statements......................................................... F-24
</TABLE>
F-1
<PAGE> 100
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, 1996 and 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 1997. 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 did not audit the financial
statements of Radian Technology, Inc., a wholly-owned subsidiary, which
statements reflect total assets constituting 8% in 1996 and 3% in 1997, and
total revenues constituting 11% in 1995, 13% in 1996, and 10% in 1997 of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
data included for Radian Technology, Inc., is based solely on the report of the
other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of REMEC, Inc. at January 1996 and 1997, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended January 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
February 24, 1997
except for the first paragraph of Note 2, as to which the date is
February 28, 1997
F-2
<PAGE> 101
REPORT OF IRELAND SAN FILIPPO LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Radian Technology, Inc.
Santa Clara, California
We have audited the balance sheet of RADIAN TECHNOLOGY, INC. (a California
corporation), as of December 27, 1996, and December 29, 1995, and the related
statements of income and expense, stockholders' equity, and cash flows for each
of the years ended December 30, 1994, December 29, 1995, and December 27, 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RADIAN TECHNOLOGY, INC. as
of December 27, 1996, and December 29, 1995, and the results of its operations
and its cash flows for each of the years ended December 30, 1994, December 29,
1995, and December 27, 1996.
IRELAND SAN FILIPPO, LLP
March 6, 1997
F-3
<PAGE> 102
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- MAY 4,
1996 1997 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,871,923 $ 63,078,177 $ 56,555,051
Short-term investments.............................. 1,482,548 -- --
Accounts receivable, net............................ 6,716,361 12,533,473 16,409,483
Inventories, net.................................... 12,695,656 14,927,908 17,810,065
Deferred income taxes............................... 1,752,314 2,567,527 2,447,526
Prepaid expenses and other current assets........... 263,984 525,702 573,888
---------- ----------- ------------
Total current assets........................ 24,782,786 93,632,787 93,796,013
Property, plant and equipment, net.................... 9,579,660 13,761,284 16,785,047
Deferred offering costs............................... 1,108,424 -- --
Intangible and other assets........................... 1,311,032 4,672,409 6,908,462
---------- ----------- ------------
$36,781,902 $112,066,480 $117,489,522
========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 3,791,864 $ 3,743,304 $ 5,087,101
Accrued salaries, benefits and related taxes........ 4,358,529 3,943,017 4,710,323
Income taxes payable................................ 1,302,543 2,245,466 1,589,160
Accrued expenses.................................... 1,600,657 2,127,092 1,726,623
Current portion of notes payable.................... 522,491 -- --
---------- ----------- ------------
Total current liabilities................... 11,576,084 12,058,879 13,113,207
Deferred rent......................................... 443,164 262,432 222,883
Deferred income taxes................................. 964,000 1,179,353 1,103,311
Bank revolving term loan and line-of-credit, less
current portion..................................... 1,900,000 -- --
Commitments
Shareholders' equity:
Convertible preferred shares -- $.01 par value,
718,607 shares authorized, issued and outstanding
at January 31, 1996; aggregate liquidation
preference of $6,000,000......................... 7,186 -- --
Common shares -- $.01 par value, 40,000,000 shares
authorized; issued and outstanding
shares -- 5,987,845 and 12,131,982 at January 31,
1996 and 1997, respectively (12,235,418 at May 4,
1997 -- unaudited)............................... 59,879 121,320 122,354
Paid-in capital..................................... 12,230,565 83,250,684 85,271,088
Retained earnings................................... 9,601,024 15,193,812 17,656,679
---------- ----------- ------------
Total shareholders' equity.................. 21,898,654 98,565,816 103,050,121
---------- ----------- ------------
$36,781,902 $112,066,480 $117,489,522
========== =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 103
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, THREE MONTHS ENDED
--------------------------------------- -------------------------
1995 1996 1997 MAY 5, 1996 MAY 4, 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $64,604,488 $71,244,707 $95,071,802 $20,423,709 $26,216,071
Cost of sales................... 47,911,630 53,193,697 69,971,100 15,279,179 18,309,254
----------- ----------- -----------
Gross profit.................. 16,692,858 18,051,010 25,100,702 5,144,530 7,906,817
Operating expenses:
Selling, general and
administrative............. 9,944,421 10,359,199 12,830,753 2,575,225 3,983,527
Research and development...... 1,347,280 2,785,322 3,182,449 991,261 623,015
----------- ----------- -----------
Total operating expenses........ 11,291,701 13,144,521 16,013,202 3,566,486 4,606,542
----------- ----------- -----------
Income from operations........ 5,401,157 4,906,489 9,087,500 1,578,044 3,300,275
Interest (income) expense and
other......................... 335,335 43,286 (365,664) (136,887) (755,610)
----------- ----------- -----------
Income before provision for
income taxes............... 5,065,822 4,863,203 9,453,164 1,714,931 4,055,885
Provision for income taxes...... 2,079,169 2,009,093 3,725,104 707,082 1,583,000
----------- ----------- -----------
Net income.................... $ 2,986,653 $ 2,854,110 $ 5,728,060 $ 1,007,849 $ 2,472,885
=========== =========== ===========
Net income per share............ $ .41 $ .39 $ .59 $ .11 $ .20
=========== =========== ===========
Shares used in per share
calculations.................. 7,293,203 7,265,400 9,679,636 9,552,537 12,610,923
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 104
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, 1994.......... 718,607 $ 7,186 6,355,404 $ 63,555 $13,869,176 $ 3,869,850 $ 17,809,767
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......................... -- -- -- -- -- 2,986,653 2,986,653
------- ------- ---------- -------- ----------- ----------- ------------
Balance at January 31, 1995.......... 718,607 7,186 6,154,072 61,541 12,949,946 6,801,714 19,820,387
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......................... -- -- -- -- -- 2,854,110 2,854,110
------- ------- ---------- -------- ----------- ----------- ------------
Balance at January 31, 1996.......... 718,607 7,186 5,987,845 59,879 12,230,565 9,601,024 21,898,654
Issuance of common shares in
initial public offering.......... -- -- 2,264,893 22,649 15,626,560 -- 15,649,209
Conversion of preferred shares..... (718,607) (7,186) 1,077,909 10,779 (3,593) -- --
Issuance of common shares for
cash............................. -- -- 131,837 1,318 1,479,257 -- 1,480,575
Issuance of common shares under
employee stock purchase plan..... -- -- 231,900 2,319 1,671,797 -- 1,674,116
Issuance of common shares upon
exercise of stock options........ -- -- 25,098 251 88,949 -- 89,200
Income tax benefits related to
employee stock purchase plan and
stock options exercised.......... -- -- -- -- 209,399 -- 209,399
Issuance of common shares in stock
offering......................... -- -- 2,412,500 24,125 51,947,750 -- 51,971,875
Net income......................... -- -- -- -- -- 5,728,060 5,728,060
Elimination of Magnum activity for
the duplicated two months ended
March 31, 1996................... -- -- -- -- -- (135,272) (135,272)
------- ------- ---------- -------- ----------- ----------- ------------
Balance at January 31, 1997.......... -- -- 12,131,982 121,320 83,250,684 15,193,812 98,565,816
Issuance of common shares upon
exercise of stock options
(unaudited)...................... -- -- 11,436 114 43,324 -- 43,438
Issuance of common shares in
acquisition of Veritek
(unaudited)...................... -- -- 92,000 920 1,977,080 -- 1,978,000
Net income (unaudited)............. -- -- -- -- -- 2,472,885 2,472,885
Addition of Radian net loss for the
one month ended January 31, 1997
(unaudited)...................... -- -- -- -- -- (10,018) (10,018)
------- ------- ---------- -------- ----------- ----------- ------------
Balance at May 4, 1997 (unaudited)... -- $ -- 12,235,418 $122,354 $85,271,088 $17,656,679 $103,050,121
======= ======= ========== ======== =========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 105
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, THREE MONTHS ENDED
----------------------------------------- -------------------------
1995 1996 1997 MAY 5, 1996 MAY 4, 1997
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income........................................ $ 2,986,653 $ 2,854,110 $ 5,728,060 $ 1,007,849 $ 2,472,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 2,065,450 2,125,208 2,804,190 737,345 1,014,041
Deferred income taxes......................... 801,099 (597,470) (599,860) -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (455,466) (132,998) (4,746,975) (2,449,306) (2,499,231)
Inventories................................. 234,133 (1,472,428) (1,872,921) (1,038,194) (3,196,478)
Prepaid expenses and other current assets... (4,075) 36,894 (222,912) (200,221) 295,445
Accounts payable............................ 234,873 1,236,307 (646,663) (1,160,527) 839,848
Accrued expenses, income taxes payable and
deferred rent............................ (420,897) 863,751 877,643 (475,841) (340,981)
------------ ------------ -----------
Net cash provided (used) by operating
activities............................. 5,441,770 4,913,374 1,320,562 (3,578,895) (1,414,471)
Investing activities:
Additions to property, plant and equipment...... (1,580,237) (4,062,334) (6,539,801) (1,331,999) (3,112,707)
Payment for purchase of RF Microsystems, net of
$60,337 cash acquired......................... -- -- (4,011,735) (4,006,000) --
Payment for purchase of Veritek, net of $42,473
cash acquired................................. -- -- -- -- (1,018,286)
Purchase of short-term investments.............. (1,454,598) (981,607) -- -- --
Sale of short-term investments.................. -- 953,657 1,482,548 -- --
Other assets.................................... (22,053) -- (36,108) 523,152 78,024
------------ ------------ -----------
Net cash used by investing activities.... (3,056,888) (4,090,284) (9,105,096) (4,814,847) (4,052,969)
Financing activities:
Proceeds from bank revolving term loan,
line-of-credit and long-term debt............. 11,102,000 14,600,000 -- -- --
Repayments on bank revolving term loan,
line-of-credit and long-term debt............. (14,049,883) (13,806,006) (2,949,052) (2,439,474) (566,031)
Repurchase of common stock...................... (928,354) (788,503) -- -- --
Proceeds from issuance of common stock.......... 7,110 67,460 70,864,975 15,914,703 43,438
Change in deferred offering costs............... -- (1,108,424) 1,108,424 1,108,424 --
Cash dividends.................................. (54,789) (54,800) -- -- --
------------ ------------ -----------
Net cash provided (used) by financing
activities............................. (3,923,916) (1,090,273) 69,024,347 14,583,653 (522,593)
------------ ------------ -----------
Increase (decrease) in cash and cash
equivalents..................................... (1,539,034) (267,183) 61,239,813 6,189,911 (5,990,033)
Cash and cash equivalents at beginning of year.... 3,678,140 2,139,106 1,871,923 1,871,923 63,078,177
Elimination of Magnum's net cash activities for
the duplicated two months ended March 31,
1996............................................ -- -- (33,559) (33,559) --
Addition of Radian's net cash activity for the
month ended January 31, 1997.................... -- -- -- -- (533,093)
------------ ------------ -----------
Cash and cash equivalents at end of year.......... $ 2,139,106 $ 1,871,923 $63,078,177 $ 8,028,275 $56,555,051
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest...................................... $ 485,264 $ 188,087 $ 27,047 $ 7,505 $ 111
============ ============ ===========
Income taxes.................................. $ 1,601,434 $ 2,256,777 $ 2,413,850 $ 788,579 $ 1,450,000
============ ============ ===========
Supplemental disclosure of net cash investing
activity:
Issuance of 92,000 common shares as partial
consideration for acquisition of Veritek...... $ -- $ -- $ -- $ -- $ 1,978,000
============ ============ ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 106
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. Prior to fiscal 1996, 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. In fiscal
1998, the Company acquired Radian Technology, Inc., a manufacturer of microwave
components and Verified Technical Corporation, an assembler of wireless circuit
boards.
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., Magnum Microwave Corporation, Radian Technology, Inc. and
Verified Technical 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 three months or less at the date of acquisition to be cash
equivalents. Short-term investments are recorded at amortized cost plus accrued
interest which approximates market value. 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. At January 31, 1996 and 1997, the cost of cash
equivalents and short-term investments approximated fair 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.
F-8
<PAGE> 107
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Progress Payments
Progress payments received from customers are offset against inventories
associated with the contracts for which the payments were received.
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 are primarily
comprised of goodwill and purchased technology recorded in connection with the
acquisitions of Humphrey, Inc. (in February 1994) 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 and $341,868 for fiscal years 1996 and 1997,
respectively.
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. Revenues for cost-reimbursement
contracts are recorded as costs are incurred and includes estimated earned fees
in the proportion that costs incurred to date bears to estimated costs.
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 Company's initial public offering ("IPO") (See
Note 5) 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
REMEC, Magnum and Radian after adjusting the Magnum and Radian information to
reflect the conversion of Magnum and Radian common
F-9
<PAGE> 108
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares into REMEC shares as stipulated in the acquisition agreement between
REMEC, Magnum and Radian. (See Note 2.)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share, which
supersedes APB Opinion No. 15. Statement No. 128 replaces the presentation of
primary EPS with "Basic EPS" which includes no dilution and is based on
weighted-average common shares outstanding for the period. Companies with
complex capital structures, including REMEC, Inc., will also be required to
present "Diluted EPS" that reflects the potential dilution of securities like
employee stock options. Statement No. 128 is effective for financial statements
issued for periods ending after December 15, 1997. The Company has not yet
determined what the impact of Statement No. 128 will be on the calculation of
earnings per share.
Stock Options
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123") requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
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 three month periods ended May 4, 1997 and May 5, 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 three months ended May 4, 1997 are not necessarily
indicative of operating results to be expected for the full fiscal year.
2. ACQUISITIONS
Radian Technology, Inc. ("Radian")
On February 28, 1997, the Company issued 633,349 shares of its common stock
in exchange for all of the outstanding shares of common stock of Radian, a
manufacturer of microwave components and subsystems. The acquisition of Radian
was accounted for as a pooling of interests. Therefore, the Company's
consolidated financial statements for all periods prior to the acquisition of
Radian have been restated to include the financial position, results of
operations, and cash flows of Radian.
Prior to the combination Radian's fiscal year ended on Friday closest to
December 31. In recording the business combination, Radian's financial
statements for the fiscal years ended December 30, 1994, December 29, 1995 and
December 27, 1996 were combined with REMEC's for the fiscal years ended January
31, 1995, 1996 and 1997, respectively. Radian's net sales and net loss for the
one month period ended January 31, 1997 were $299,000 and $10,000, respectively.
F-10
<PAGE> 109
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Magnum Microwave Corporation ("Magnum")
On August 26, 1996, the Company issued 1,074,933 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 March 31, 1995 and March 29, 1996 were
combined with REMEC's for the fiscal years ended January 31, 1995 and 1996,
respectively. Consolidated operating results and the net change in consolidated
cash and cash equivalents for the year ended January 31, 1997 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 year
ended January 31, 1997 are costs of $424,000 related to the acquisition of
Magnum.
Net sales and net income reported by REMEC, Magnum and Radian for periods
prior to the acquisitions are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
REMEC..................................... $46,246,959 $52,784,385 $74,643,897
Magnum.................................... 11,306,499 9,360,322 11,300,351
----------- ----------- -----------
Total previously reported......... 57,553,458 62,144,707 85,944,248
Radian.................................... 7,051,030 9,100,000 9,127,554
----------- ----------- -----------
Total............................. $64,604,488 $71,244,707 $95,071,802
=========== =========== ===========
Net Income:
REMEC..................................... $ 1,427,925 $ 1,480,744 $ 3,765,120
Magnum.................................... 1,104,004 675,650 1,105,188
----------- ----------- -----------
Total previously reported......... 2,531,929 2,156,394 4,870,308
Radian.................................... 454,724 697,716 857,752
----------- ----------- -----------
Total............................. $ 2,986,653 $ 2,854,110 $ 5,728,060
=========== =========== ===========
</TABLE>
Verified Technical Corporation ("Veritek")
Effective March 31, 1997, the Company acquired all of the outstanding
common stock of Veritek and certain other assets in exchange for cash and the
Company's common stock of approximately $3.0 million and the assumption of
certain liabilities totalling $1.1 million. The acquisition has been accounted
for as a purchase, and accordingly, the total purchase price has been allocated
to the acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The estimated excess of the purchase price over the net assets acquired of
$2,406,000 is being carried as an intangible asset, and will be amortized over
an estimated life of 15 years. The Company's consolidated financial statements
include the results of Veritek from March 30, 1997. The pro forma results of
F-11
<PAGE> 110
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations of REMEC and Veritek assuming Veritek was acquired on the first day
of the Company's 1997 fiscal year would not be materially different from
reported results.
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>
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
JANUARY 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Net Sales........................................................ $79,316 $97,037
Net Income....................................................... 2,639 5,687
Net Income Per Share............................................. $ .36 $ .58
</TABLE>
F-12
<PAGE> 111
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCIAL STATEMENT DETAILS
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Raw materials............................................. $ 8,080,444 $ 8,426,423
Work in progress.......................................... 8,925,272 8,873,984
----------- -----------
17,005,716 17,300,407
Less unliquidated progress payments....................... (4,310,060) (2,372,499)
----------- -----------
$12,695,656 $14,927,908
=========== ===========
</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$1,924,000 and $1,642,000 at January 31, 1996 and 1997, respectively.
During fiscal 1993, the Company received notice to terminate, for
convenience, a production 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 statement of income for the year ended January 31,
1996 includes $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,
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Land, building and improvements......................... $ 1,412,895 $ 1,440,001
Machinery and equipment................................. 25,722,484 31,611,403
Furniture and fixtures.................................. 1,215,859 1,195,296
Leasehold improvements.................................. 1,726,344 2,288,980
------------ ------------
30,077,582 36,535,680
Less accumulated depreciation and amortization.......... (20,497,922) (22,774,396)
------------ ------------
$ 9,579,660 $ 13,761,284
============ ============
</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 July 1, 1998. Interest is due monthly on advances at the bank's
prime interest rate (8.5% at January 31, 1997). At January 31, 1997, there were
no outstanding borrowings on the facility.
The Company also has a $8,000,000 term credit facility with the bank which
is available until July 1, 1998. Outstanding borrowings at July 1, 1998 under
this facility automatically convert into a term note payable in 42 monthly
installments. Interest is due monthly on advances under the facility at the
bank's prime interest rate. At January 31, 1997, 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
F-13
<PAGE> 112
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
excess of specified amounts, limit the payment of cash dividends, and include
certain other restrictions. As of January 31, 1997, the Company was in
compliance with all covenants specified.
The Company's Radian subsidiary has a separate revolving accounts
receivable line of credit with a bank under which it may borrow up to $750,000.
No borrowings were outstanding on this facility as of January 31, 1997.
Subsequent to the closing of the acquisition, this credit facility was
cancelled.
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.
Equity Offerings
In February 1996, the Company completed an IPO of its common stock in which
the Company sold a total of 2,264,893 shares of common stock at $8.00 per share.
The net proceeds from the offering were $15,649,209. In connection with the
Company's IPO, certain shareholders also sold 1,185,107 shares as part of the
offering.
In January 1997, the Company sold in a public offering 2,412,500 shares of
common stock at $23.00 per share. The net proceeds from this offering were
$51,971,875. Certain shareholders also sold 750,000 shares as part of this
offering.
Dividends
In each of the two 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. The Company currently anticipates that it will not pay
dividends in the foreseeable future.
Stock Option Plans
In January 1996, the Company's shareholders approved the 1995 Equity
Incentive Plan, under which 750,000 common shares were 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 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. 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 Company had maintained previous stock option plans prior to the
inception of the 1995 Equity Incentive Plan. These 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.
F-14
<PAGE> 113
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year........................... 140,760 $ 3.17 153,364 $ 3.11 203,587 $ 3.36
Granted........................ 47,982 $ 3.14 85,667 $ 3.97 407,285 $16.01
Exercised...................... (6,262) $ 1.14 (17,910) $ 3.54 (25,099) $ 3.55
Forfeited...................... (29,116) $ 3.90 (17,534) $ 3.92 (4,803) $10.19
------- ----- ------- ----- ------- ------
Outstanding -- end year.......... 153,364 $ 3.11 203,587 $ 3.36 580,970 $ 6.69
======= ===== ======= ===== ======= ======
Exercisable -- end of year....... 98,878 $ 2.99 85,438 $ 2.81 108,892 $ 3.07
======= ===== ======= ===== ======= ======
</TABLE>
Exercise prices for options outstanding as of January 31, 1997 ranged from
$0.21 to $25.63. Of the options outstanding at January 31, 1997, approximately
92,000 and 96,000 options have a weighted average exercise price of
approximately $2.54 and $4.00 per share, respectively, and the remaining
outstanding options have a weighted average exercise price of $16.41 per share.
The weighted-average remaining contractual life of options outstanding at
January 31, 1997 is approximately 3.95 years. At January 31, 1997, options for
389,239 shares were available for future grant.
Pro forma information regarding net income and net income per share is
required by Statement 123, and has been determined as if the Company has
accounted for its employee stock options and employee stock purchase plan shares
under the fair value method of that statement. The fair value of these options
or employee stock purchase rights was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively: risk-free interest rates of 5.9%
and 6.0%; dividend yields of 0%; volatility factors of the expected market price
of the Company's common stock of 0% and 90.9%; a weighted-average life of the
option of 3.2 years; and a weighted-average life of the stock purchase rights of
three months.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and rights under the
employee stock purchase plan have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options or the rights granted under the employee stock
purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options and the shares granted under the employee stock purchase plan is
amortized to expense over their respective vesting or option periods. The
effects of applying Statement 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1996. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Pro forma net income........................................ $2,844,858 $2,838,926
Pro forma net income per share.............................. $ .39 $ .29
Weighted-average fair value of options granted during the
year...................................................... $ .78 $ 7.64
</TABLE>
F-15
<PAGE> 114
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Purchase Plan
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. During
fiscal 1997, the Company issued a total of 231,900 shares of its common stock
under the Purchase Plan.
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 $65,000, $88,000 and
$218,000, for the years ended January 31, 1995, 1996 and 1997, respectively.
Prior to its acquisition in fiscal 1997, 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
$55,000 and $38,000 for fiscal 1995 and 1996, respectively. This plan was merged
into the REMEC plan in March 1997.
The Company's Radian subsidiary has a separate defined contribution 401(k)
retirement plan for substantially all of its employees. Radian made no
contributions to this plan for fiscal 1995, 1996 and 1997. This plan will be
merged into the REMEC plan in August 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>
YEARS ENDED JANUARY 31,
---------------------------------------------------------
<S> <C>
1998..................................................... $2,409,000
1999..................................................... 2,093,000
2000..................................................... 1,595,000
2001..................................................... 291,000
2002..................................................... 30,000
----------
$6,418,000
==========
</TABLE>
Certain of these lease agreements provide for annual rental adjustments
based on changes in the Consumer Price Index.
F-16
<PAGE> 115
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense totaled $2,138,000, $2,379,000 and $2,392,000 in 1995, 1996
and 1997, respectively.
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
---------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation............................... $1,202,000 $ 1,293,000
Inventory costs capitalization........................... 516,000 248,000
Other.................................................... 47,000 47,000
---------- -----------
1,765,000 1,588,000
---------- -----------
Deferred tax assets:
Inventory and other reserves............................. 999,000 1,476,000
Deferred rent............................................ 238,000 108,000
Accrued expenses......................................... 1,230,000 1,131,000
Other.................................................... 86,000 261,000
---------- -----------
Total deferred tax assets.................................. 2,553,000 2,976,000
---------- -----------
Net deferred tax liabilities (assets)...................... $ (788,000) $(1,388,000)
========== ===========
</TABLE>
The provision for taxes based on income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal...................................... $ 928,000 $2,138,000 $3,533,000
State........................................ 336,000 467,000 792,000
Deferred:
Federal...................................... 715,000 (470,000) (501,000)
State........................................ 100,000 (126,000) (99,000)
---------- ---------- ----------
$2,079,000 $2,009,000 $3,725,000
========== ========== ==========
</TABLE>
A reconciliation of the effective tax rates and the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal rate.......... $1,755,000 35% $1,678,000 34% $3,294,000 35%
State income tax
net of federal............. 330,000 6 234,000 5 569,000 6
Other........................ (6,000) -- 97,000 2 (138,000) (2)
---------- ---------- ----------
-- -- --
$2,079,000 $2,009,000 $3,725,000
41% 41% 39%
========== ========== ==========
== == ==
</TABLE>
F-17
<PAGE> 116
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,
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CUSTOMER A...................................................... -- -- 16%
CUSTOMER B...................................................... -- 11% --
CUSTOMER C...................................................... 11% -- --
</TABLE>
Export sales were 11%, 14% and 9% of net sales for the years ended January
31, 1995, 1996 and 1997, respectively.
9. SUBSEQUENT EVENT (UNAUDITED)
C&S Hybrid, Inc. ("C&S")
On April 10, 1997, the Company entered into an agreement to acquire C&S in
exchange for 860,000 shares of the Company's common stock. The transaction will
be accounted for as a pooling of interests; accordingly, commencing with the
second quarter of fiscal 1998, all of the Company's prior period financial
statements will be restated as if the transaction took place at the beginning of
such periods. During its most recent fiscal year ended December 27, 1996, C&S
reported revenues of $13.0 million and net income of $493,000.
F-18
<PAGE> 117
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
C&S Hybrid, Inc.
We have audited the accompanying balance sheet of C&S Hybrid, Inc. as of
December 27, 1996, and the related statements of income, shareholders' equity,
and cash flows for the year then ended. 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 audit.
We conducted our audit 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 well evaluating the overall financial statement
presentation. We believe that our audit provides reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of C&S Hybrid, Inc. at December
27, 1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Jose, California
June 9, 1997
F-19
<PAGE> 118
C&S HYBRID
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------- MARCH 28,
1996 1997
------ -----------
1995 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 303 $ -- $ 414
Accounts receivable, net of allowance of $25,000 at
fiscal year end 1996 and March 28, 1997.............. 1,540 2,334 2,405
Inventories............................................. 1,644 2,204 2,881
Deferred taxes.......................................... 299 466 466
Other current assets.................................... 29 50 33
------ ------ ------
Total current assets............................ 3,815 5,054 6,199
Property, plant and equipment, net........................ 1,283 2,176 2,580
Deposits.................................................. -- 60 64
------ ------ ------
Total assets.................................... $ 5,098 $7,290 $ 8,843
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases....................... $ 127 $ 280 $ 301
Notes payable........................................... -- 500 500
Accounts payable........................................ 862 1,323 1,786
Accounts payable to related parties..................... 5 236 415
Accrued compensation.................................... 390 318 435
Accrued income taxes.................................... 430 4 286
Other accrued liabilities............................... -- 29 10
Accrued warranty........................................ 210 250 307
Bank overdraft.......................................... -- 27 --
Loans from employees.................................... 121 -- --
------ ------ ------
Total current liabilities....................... 2,145 2,967 4,040
Capital lease obligation, less current portion............ 98 579 834
Commitments
Shareholders' equity:
Common Stock............................................ 77 473 473
Authorized shares -- 10,000,000
Issued and outstanding shares -- 3,807,575 in 1995
and 4,797,575 in 1996 and 1997
Convertible Preferred Stock............................. 100 100 100
Authorized shares -- 800,000
Issued and outstanding shares -- 400,000 (liquidation
preference of $100)
Retained earnings....................................... 2,678 3,171 3,396
------ ------ ------
Total shareholders' equity...................... 2,855 3,744 3,969
------ ------ ------
$ 5,098 $7,290 $ 8,843
====== ====== ======
</TABLE>
See accompanying notes.
F-20
<PAGE> 119
C&S HYBRID
STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
-------------------------------------- ---------------------------
1995 1996 MARCH 29, MARCH 28,
---------- ------- 1996 1997
(UNAUDITED) ----------- -----------
1994 (UNAUDITED) (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 8,217 $ 10,939 $13,026 $ 2,653 $ 4,621
Cost of sales...................... 4,350 5,410 7,590 1,254 2,904
------- -------- -------- ------- -------
Gross profit.................. 3,867 5,529 5,436 1,399 1,717
Operating expenses:
Selling, general &
administrative................ 2,981 3,861 4,058 1,030 1,142
Research and development......... 298 666 527 90 115
------- -------- -------- ------- -------
3,279 4,527 4,585 1,120 1,257
------- -------- -------- ------- -------
Income from operations............. 588 1,002 851 279 460
Other income (expense):
Interest and other income.......... 22 18 38 4 3
Interest expense................... (29) (78) (104) (11) (32)
------- -------- -------- ------- -------
Total other expense...... (7) (60) (66) (7) (29)
------- -------- -------- ------- -------
Income before provision for income
taxes............................ 581 942 785 272 431
Provision for income taxes......... 314 419 292 127 206
------- -------- -------- ------- -------
Net income......................... $ 267 $ 523 $ 493 $ 145 $ 225
======= ======== ======== ======= =======
Net income per common share........ $ .06 $ .12 $ .11 $ .03 $ .04
======= ======== ======== ======= =======
Shares used in computing per share
calculation...................... 4,208 4,208 4,438 4,208 5,198
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-21
<PAGE> 120
C&S HYBRID
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED SHARES COMMON SHARES
------------------ -------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------- -------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 17, 1993 400,000 $ 100 3,807,575 $ 77 $ 1,888 $ 2,065
(unaudited)...................
Net income (unaudited).......... -- -- -- -- 267 267
------- -------- --------- ------- ------ ------
Balance at December 16, 1994 400,000 100 3,807,575 77 2,155 2,332
(unaudited)...................
Net income (unaudited).......... -- -- -- -- 523 523
------- -------- --------- ------- ------ ------
Balance at December 22, 1995.... 400,000 100 3,807,575 77 2,678 2,855
Issuance of common shares....... -- -- 990,000 396 -- 396
Net income...................... -- -- -- -- 493 493
------- -------- --------- ------- ------ ------
Balance at December 27, 1996.... 400,000 100 4,797,575 473 3,171 3,744
Net income (unaudited).......... -- -- -- -- 225 225
------- -------- --------- ------- ------ ------
Balance at March 28, 1997 400,000 $ 100 4,797,575 $ 473 $ 3,396 $ 3,969
(unaudited)...................
======= ======== ========= ======= ====== ======
</TABLE>
See accompanying notes.
F-22
<PAGE> 121
C&S HYBRID
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED -------------------------
---------------------------------- MARCH 29, MARCH 28,
1994 1995 1996 1996 1997
----------- ----------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income....................... $ 267 $ 523 $ 493 $ 145 $ 225
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities:
Depreciation and
amortization................ 357 432 436 116 148
Changes in operating assets
and liabilities:
Accounts receivable......... (765) 153 (794) 113 (71)
Inventories................. (106) (765) (560) (497) (677)
Prepaid expenses and other
current assets........... 2 (4) (21) 1 13
Deferred taxes.............. -- (182) (167) -- --
Accounts payable............ 319 386 692 (152) 615
Bank overdraft.............. -- -- 27 -- --
Accrued compensation........ -- 274 (72) -- 114
Other accrued liabilities... 55 (89) 29 439 42
Accrued income taxes........ 141 224 (426) 216 282
Accrued warranty............ 110 100 40 -- --
----- ------
Net cash provided by
(used in) operating
activities............. 380 1,052 (323) 381 691
Investing activities:
Purchases of property and
equipment..................... (376) (564) (473) (17) (158)
Other long-term assets........... -- -- (60) -- --
----- ------
Net cash used in
investing activities... (376) (564) (533) (17) (158)
Financing activities:
Proceeds from note payable to
bank.......................... 250 (250) 500 -- --
Proceeds from sale of common
stock......................... -- -- 396 -- --
Principal payments under capital
lease obligations............. (88) (142) (222) (68) (119)
Payment of employee loan......... (60) (34) (121) -- --
----- ------
Net cash provided by
(used in) financing
activities............. 102 (426) 553 (68) (119)
----- ------
Net increase (decrease) in cash and
cash equivalents................. 106 62 (303) 296 414
Cash and cash equivalents at
beginning of period.............. 135 241 303 303 --
----- ------
Cash and cash equivalents at end of
period........................... $ 241 $ 303 $ -- $ 599 $ 414
===== ======
Supplemental schedule of noncash
financing and investing
activities:
Assets acquired under capital
obligations and notes
payable....................... $ 255 $ 117 $ 856 $ 313 $ 395
Interest paid.................... $ 29 $ 78 $ 104 $ 11 $ 32
Income taxes paid................ $ 223 $ 301 $ 677 $ 223 $ --
</TABLE>
See accompanying notes.
F-23
<PAGE> 122
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
1. COMPANY AND BUSINESS
C&S Hybrid, Inc. (the Company) was incorporated in the state of California
on September 18, 1984 and was founded for the purpose of developing,
manufacturing, and marketing microwave components and subsystems.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. The Company regularly assesses these estimates and, while
actual results may differ, management believes that the estimates are
reasonable.
Fiscal Year
The Company's most recent three fiscal years ended December 16, 1994,
December 22, 1995 and December 27, 1996.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of the Company's capital leases approximates fair market
value.
Inventories
Inventories are stated at the lower of cost (first in-first out method) or
market.
Advertising Expenses
The cost of advertising is generally expensed as incurred. The Company's
advertising costs have been immaterial.
Revenue Recognition
Revenue from product sales is recognized at the time the product is shipped
with provisions for estimated returns recorded if needed.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers and, if
warranted, maintains reserves for potential credit losses. Such losses have been
within management's expectations. The Company generally requires no collateral
from its customers. For the fiscal years ended 1994, 1995 and 1996, and the
three months ended March 29, 1996 and March 28, 1997 the following customers
represented greater than 10% of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED -----------------------
---------------------- MARCH 29, MARCH 28,
1994 1995 1996 1996 1997
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Customer A........................ 79% 65% 62% 58% 59%
Customer B........................ 16% 24% 30% 37% 21%
</TABLE>
F-24
<PAGE> 123
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
Property and Equipment
Property and equipment, including equipment under capital leases, are
recorded at cost and are depreciated by the straight-line method over the life
of the related asset, which ranges from three to five years. Depreciation
expense includes the amortization of equipment under capital leases. Leasehold
improvements are amortized over the remaining life of the initial lease term, or
the life of the assets, whichever is shorter.
Long-Lived Assets
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 121 is
effective for the fiscal years beginning after December 15, 1995. In accordance
with FAS 121, the Company evaluates whether changes have occurred that would
require revision of the remaining estimated lives of recorded long-lived assets
or render those assets not recoverable. If such circumstances arise,
recoverability is determined by comparing the undiscounted net cash flows of
long-lived assets to their respective recorded net book values. The amount of
impairment, if any, is measured based on projected discounted cash flows using
an appropriate discount rate. At December 27, 1996, the Company believes that no
significant impairment of long-lived assets has occurred, and accordingly, a
writedown of such assets is not warranted.
Accounting for Employee Stock Options
The Company accounts for its employee stock compensation plan using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), which the Company adopted in 1996. Under FAS 123, companies may elect, but
are not required, to use a fair value methodology to recognize compensation
expense for all stock-based awards. In 1996, the Company implemented the
disclosure-only provisions of FAS 123 (see Note 6).
3. LOAN AGREEMENT
At December 27, 1996, the Company had a loan agreement with a bank. Under
the terms of the agreement, the Company had a credit facility of $750,000 that
bore interest at the bank's base rate plus 1.25% (9.5% at December 27, 1996).
Effective April 30, 1997, the loan was renegotiated and the credit facility was
increased to $2,000,000 with an interest rate of the bank's base rate plus
0.50%. The loan is scheduled to mature on October 31, 1997. Under the terms of
this agreement, the Company is also required to maintain certain financial
covenants. The Company was in compliance with these covenants at year end. The
loan is secured by the receivables and inventory of the Company.
In addition, on April 30, 1997, the Company entered into a $1,000,000
equipment line with the bank. Under the terms of the agreement borrowings under
the note agreement are due April 30, 1998. Interest is payable monthly at the
bank's base rate plus 0.5% per annum. After principal is outstanding six months,
or borrowings reach $500,000, the outstanding principal balance shall be
converted to a term note repayable in 36 equal successive installments of
principal plus interest.
F-25
<PAGE> 124
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
4. LEASES
The Company leases equipment under capital leases. The Company also leases
its facility under a noncancelable operating lease that expires in 2003.
Interest rates on capital leases range from 8.5% to 12%. At December 27, 1996,
future minimum payments are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1997................................................ $ 360,000 $ 538,000
1998................................................ 273,000 553,000
1999................................................ 265,000 632,000
2000................................................ 126,000 657,000
2001................................................ -- 682,000
Thereafter.......................................... -- 1,320,000
--------- ----------
Total minimum lease payments........................ 1,024,000 $4,382,000
==========
Less amount representing interest................... (165,000)
---------
859,000
Less current portion................................ (280,000)
---------
Long-term portion................................... $ 579,000
=========
</TABLE>
At December 27, 1995 and 1996, and March 28, 1997 equipment under capital
leases amounted to $511,000, $1,231,000, and $1,626,000. Related accumulated
amortization for the same periods of time were $277,000, $440,000, and $515,000,
respectively.
The Company incurred rental expense under all operating leases of
approximately $126,000, $188,000, and $277,000 for the fiscal years ended 1994,
1995, and 1996, and $55,000 and $166,000 for the fiscal quarter ended March 1996
and 1997.
5. CAPITAL STOCK
Convertible Preferred Stock
All issued and outstanding shares of Series A preferred stock shall be
automatically converted by the Company upon the consummation of a public
offering of the Company's common stock with aggregate net proceeds to the
Company of at least $3,000,000 and a price per share of at least $0.375. Each
share of Series A preferred stock is entitled to one vote for each share of
common stock into which such stock could be converted. Holders of Series A
preferred stock are entitled to receive, out of any funds legally available,
noncumulative cash dividends at a rate of $0.01 per annum on each share
outstanding when and as declared.
Each share of Series A preferred stock is convertible into one share of
common stock, subject to antidilutive provisions under certain specified
conditions, and carries a liquidation preference of $0.25 per share.
6. EQUITY INCENTIVE PLANS
Disclosure of Stock Option Fair Value
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that are not developed for use
in valuing employee stock
F-26
<PAGE> 125
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
options. Under APB Opinion No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
grant date, no compensation expense is recognized.
Pro forma information regarding net loss is required by FAS 123 which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method of that statement. The fair value for these options was
estimated at the date of grant using the following weighted average assumptions:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Expected dividend yield............................................. 0.0%
Risk-free interest rate............................................. 6.5%
Weighted average expected life...................................... 5 years
</TABLE>
The Company's restricted common stock is not publicly traded. The Company
applied the minimum value method to value options granted in 1996. Option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The pro forma
effect of applying FAS 123 was not material to the Company's reported net income
in 1996. Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999
and thereafter.
In 1996, the Company adopted the 1996 Equity Incentive Plan (the 1996
Plan). Under the 1996 Plan, incentive stock options may be granted to the
Company's employees at an exercise price of no less than 100% of the fair value
on the date of grant and nonstatutory stock options may be granted to the
Company's employees, directors, and consultants at an exercise price no less
than 85% of the fair value. In both cases, when the optionees own stock
representing more than 10% of the voting power of all classes of stock of the
Company, the exercise price shall be no less than 110% of the fair value on the
date of grant. Options granted expire ten years from the date of grant. For
initial (new hire) grants, options are generally exercisable beginning at the
anniversary date of the grant over a four-year period. For subsequent grants,
options generally vest monthly from the date of grant over a four-year period.
For the year ended December 27, 1996, options for 238,000 shares of stock were
issued at a price of $0.40 per share. All of these shares were outstanding at
year end.
During 1996, the Company granted 230,000 options at an exercise price of
$0.40 per share. The 230,000 options remained outstanding under the Plan at
December 27, 1996 and were not exercisable. The average remaining contractual
life of all options outstanding at December 27, 1996 was 9.9 years.
In addition, the Company issued 990,000 shares directly to employees under
the provisions of the Plan. The shares vest over four years. At December 27,
1996, 742,500 shares were subject to repurchase.
F-27
<PAGE> 126
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
7. SHARES RESERVED
At December 27, 1996, common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
1996 Equity Plan:
Outstanding..................................................... 230,000
Reserved for future grants...................................... 1,780,000
----------
2,010,000
Conversion of preferred stock..................................... 400,000
----------
2,410,000
========
</TABLE>
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ----- -----
<S> <C> <C> <C>
Federal:
Current........................................... $338 $ 480 $ 377
Deferred.......................................... (99) (154) (145)
---- ----- -----
239 326 232
State:
Current........................................... 93 121 82
Deferred.......................................... (18) (28) (22)
---- ----- -----
75 93 60
---- ----- -----
Total..................................... $314 $ 419 $ 292
==== ===== =====
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate as
a result of the following differences for the years ended December 31 (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Income tax at the federal statutory rate.............. $203 $330 $275
Research and development credits...................... (15) -- (15)
State income taxes.................................... 49 61 36
Nondeductible compensation............................ 78 22 --
Other................................................. (1) 6 (4)
---- ---- ----
Total....................................... $314 $419 $292
==== ==== ====
</TABLE>
F-28
<PAGE> 127
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
Significant components of the Company's deferred tax assets at the
Company's fiscal year end are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Warranty accrual............................................ $ 84 $100
E & O reserve............................................... 81 81
Fringe benefit reserve...................................... 20 20
UNICAP...................................................... 74 74
Inventory reserve........................................... 40 40
Payroll related accruals.................................... -- 70
State taxes................................................. -- 27
Other....................................................... -- 54
---- ----
Total deferred tax assets......................... 299 466
Valuation allowance for deferred tax assets................. -- --
---- ----
Total............................................. $299 $466
==== ====
</TABLE>
9. 401(K) PLAN
In November 1994, the Company established a 401(k) employee benefit plan
that allows voluntary contributions by all employees upon their hire date.
Eligible employees may elect to contribute up to the maximum amount allowed
under Internal Revenue Service regulations. The Company does not currently match
employee contributions. Administrative expenses for the Plan have been
insignificant.
10. RELATED PARTY TRANSACTIONS
The President of the Company, who is also a director and shareholder, (i)
owns approximately 39% of the outstanding shares and is a director of Excelics
Semiconductor, Inc., a supplier to the Company, (ii) owns approximately 45% of
the outstanding shares and is a director and the President and the Chief
Financial Officer of Custom Micro Machining, Inc., a supplier of machine parts
to the Company, and (iii) owns approximately 33% of the outstanding shares and
is a director of Applied Thin-Film Products, a supplier of circuits to the
Company.
Transactions for the fiscal years ended 1994, 1995, and 1996 and the three
months ended March 1996 and 1997 with these entities are summarized below:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Purchases from Excelics............. $ -- $100,000 $692,000 $100,000 $153,000
Purchases from Custom Micro $175,000 $207,000 $244,000 $ 5,000 $298,000
Machining.........................
Purchases from Applied Thin-Film $ -- $ -- $118,000 $ -- $108,000
Products..........................
</TABLE>
F-29
<PAGE> 128
C&S HYBRID, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 28,
1997 AND RELATING TO THE YEARS ENDED DECEMBER 22, 1995 AND DECEMBER 16, 1994 IS
UNAUDITED)
The accounts payable balance at December 22, 1995, December 27, 1996 and
March 28, 1997 related to these entities were as follows:
<TABLE>
<CAPTION>
DECEMBER 22, 1995 DECEMBER 27, 1996 MARCH 28, 1997
----------------- ----------------- --------------
<S> <C> <C> <C>
Excelics......................... $ -- $ 143,000 $210,000
Custom Micro Machinery........... $ 5,000 $ 43,000 $145,000
Applied Thin-Film Products....... $ -- $ 50,000 $ 60,000
</TABLE>
11. SUBSEQUENT EVENT
On April 10, 1997, the Company entered into an agreement and plan of
reorganization and merger with REMEC, Inc., pursuant to which a wholly owned
subsidiary of REMEC, Inc. will be merged with and into the Company, and the
Company will become a wholly owned subsidiary of REMEC, Inc.
F-30
<PAGE> 129
APPENDIX A
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
BY AND AMONG
REMEC, INC., C&S ACQUISITION CORPORATION AND
C&S HYBRID, INC.
APRIL 10, 1997
<PAGE> 130
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER ("Agreement") is made
as of April 10, 1997 among C&S HYBRID, Inc., a California corporation (the
"Company"), REMEC, Inc., a California corporation ("Parent") and C&S Acquisition
Corporation, a California corporation and wholly owned subsidiary of Parent
("Merger Sub").
BACKGROUND
The Company, Parent and Merger Sub desire that Merger Sub be merged with
and into the Company; that the Company be the surviving corporation and become a
wholly owned subsidiary of Parent and that each share of the Common Stock of the
Company which is outstanding immediately prior to the effective time of the
merger be converted as set forth in this Agreement and the Agreement of Merger
into shares of the Common Stock of Parent. The Company, Parent and Merger Sub
intend that the merger constitute a "reorganization" under Section 368(a)(1)(A),
by application of Section 368(a)(2)(E), of the Internal Revenue Code of 1986, as
amended.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
1.1 Definitions. The terms defined in this Article I, whenever used
herein, shall have the following meanings for all purposes of this Agreement:
"1933 Act" means the Securities Act of 1933, as amended, and the rules,
regulations and forms of the SEC promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and the
rules, regulations and forms of the SEC promulgated thereunder.
"1996 Balance Sheet" means the balance sheet of the Company dated December
31, 1996 contained in the Company Financials.
"1997 Balance Sheet" means the balance sheet of the Company dated January
31, 1997.
"Affiliate" means, with respect to any corporation, any person or entity
which controls, is controlled by or is under common control with such
corporation.
"Agreement of Merger" means the agreement of merger among Parent, the
Company and Merger Sub, together with the related officers' certificates
required by Section 1103 of the Corporations Code, in the form attached hereto
as Exhibit A.
"Audited Balance Sheet" means the balance sheets included in the Audited
Financials.
"Audited Financials" means the balance sheet of the Company at January 31,
1997 and the related statements of income, shareholders' equity and cash flows
for the year then ended, including the notes thereto, in each case accompanied
by an unqualified report of Ernst & Young LLP, certified public accountants
("E&Y").
"Closing" means the delivery by Parent, the Company and Merger Sub of the
various documents contemplated by this Agreement and otherwise required in order
to consummate the Merger.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Audit" means the preparation and completion of the Audited
Financials in accordance with GAAP and in accordance with practices utilized by
Parent and the issuance by E&Y of a report thereon.
A-1
<PAGE> 131
"Company Disclosure Letter" means the disclosure letter of the Company
delivered to Parent with respect to the disclosures of the Company contained in
Article III of this Agreement, as supplemented by the Updated Company Disclosure
Letter (defined in Section 5.11).
"Company Common" means the Common Stock of the Company, no par value.
"Company Financials" means the balance sheets of the Company at December
31, 1996 and December 31, 1995 and the related statements of income,
shareholders' equity and cash flows for the years then ended, including the
notes thereto.
"Company Options" shall have the meanings ascribed thereto in Section 2.4
of this Agreement.
"Company Preferred" means the Series A Preferred Stock of the Company, no
par value.
"Company Shareholders" means the holders of shares of the Company Common
and Company Preferred outstanding immediately prior to the Effective Time.
"Corporations Code" means the California Corporations Code.
"Dissenting Shares" means those shares of the Company Common which at any
time become "dissenting shares" within the meaning of Section 1300(b) of the
Corporations Code.
"Effective Time" means the time when the Agreement of Merger is filed with
the Secretary of State of the State of California and the Merger becomes
effective.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Ratio" shall have the meaning ascribed to it in Section 2.3 of
this Agreement.
"GAAP" means generally accepted accounting principles and practices as
promulgated by the Accounting Research Board, Accounting Principles Board and
Financial Accounting Standards Board or any superseding or supplemental
documentation of equal authority promulgating generally accepted accounting
principles and practices, all as in effect from time to time.
"Hazardous Material" means any material, substance, waste or component
thereof which is identified to be "hazardous" or "toxic" or otherwise poses an
actual or potential risk to public health and safety or to the environment by
virtue of being actually or potentially toxic, corrosive, bioaccumulative,
reactive, ignitable, radioactive, infectious or otherwise harmful to public
health and safety or the environment, the handling or disposal of, or exposure
to which, is regulated under any applicable United States federal, state or
local environmental or health and safety law, rule or regulation.
"Merger Sub Common" means the Common Stock of Merger Sub, par value $0.01
per share.
"Parent Common" means the Common Stock of Parent, par value $0.01 per
share.
"Parent Disclosure Letter" means the disclosure letter of Parent delivered
to the Company with respect to the disclosures of Parent referred to in Article
IV.
"Registration Statement" means the registration statement on Form S-4 filed
by Parent with the SEC with respect to the issuance of Parent Common in the
Merger.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any entity, any corporation or other
organization, whether incorporated or unincorporated, of which at least a
majority of the securities or interests having by their terms ordinary voting
power to elect a majority of the board of directors or others performing similar
functions is owned, directly or indirectly, by such entity.
A-2
<PAGE> 132
ARTICLE II
MERGER, CLOSING AND CONVERSION OF SHARES
2.1 Merger. Subject to and in accordance with the terms and conditions of
this Agreement and the Agreement of Merger, Parent, the Company and Merger Sub
shall execute and file the Agreement of Merger with the Secretary of State of
the State of California, whereupon Merger Sub shall be merged with and into the
Company pursuant to Sections 1100 et seq. of the Corporations Code.
2.2 Closing. The Closing shall take place at the offices of Heller Ehrman
White & McAuliffe, 525 University Avenue, Palo Alto, California 94301, at 11:00
a.m. California time, on the date the Company's shareholders approve the Merger
or at such other place, date or time as the Company, Parent and Merger Sub may
agree upon in writing (the "Closing Date") after all of the conditions to the
parties' obligations to consummate the Merger set forth in this Agreement have
been satisfied or waived. The Company, Parent and Merger Sub shall file the
Agreement of Merger with the Secretary of State of the State of California
immediately after the Closing.
2.3 Conversion of Shares. In accordance with the Agreement of Merger, (i)
each share of Merger Sub Common issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted at and as of the Effective Time, into one
share of Company Common, and (ii) each share of Company Common outstanding
immediately prior to the Effective Time (except each of those shares of Company
Common which are Dissenting Shares and the holder of which and the Company do
not thereafter agree in writing should not be treated as a Dissenting Share)
shall, by virtue of the Merger and without any action on the part of the holder
thereof be converted, at and as of the Effective Time, into the right to receive
.1654618 of a share of Parent Common (the "Exchange Ratio") subject to
adjustments, if any, pursuant to Section 2.9 of this Agreement. Company
Shareholders shall receive only whole shares of Parent Common; in lieu of any
fractional share of Parent Common, Company Shareholders shall receive in cash
the fair market value of such fractional share valuing Parent Common at the
average of the closing prices of the Parent Common on the Nasdaq National Market
on the five trading days immediately preceding the Effective Time as listed in
The Wall Street Journal.
2.4 Company Options. At the Effective Time, each outstanding option to
purchase Company Common ("Company Option"), whether vested or unvested, issued
under the Company's 1996 Equity Incentive Plan (the "Company Plan") shall
thereafter entitle the holder thereof to receive, upon exercise thereof, that
number of Parent Common (rounded down to the nearest whole number) equal to the
product of the number of shares of Company Common that were purchasable (without
regard to vesting) under the Company Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, at an exercise price for each full share
of Parent Common equal to the quotient obtained by dividing (i) the exercise
price per share of Company Common with respect to such Company Option, by (ii)
the Exchange Ratio, which exercise price per share shall be rounded up to the
nearest one cent. The number of shares of Parent Common that may be purchased by
a holder on the exercise of any Company Option shall not include any fractional
share of Parent Common but shall be rounded down to the next lower whole share
of Parent Common. Parent shall assume in full the Company Plan, Company Options
outstanding under the Company Plan, and shall register the underlying shares of
Parent Common issued or issuable under the Company Plan under the 1933 Act on a
Registration Statement on Form S-8 within 90 days following the Effective Time.
The assumption of a Company Option by Parent shall not terminate or modify any
right of first refusal, right of repurchase, vesting schedule, or other
restriction on transferability relating to the Company Option. Continuous
employment with the Company prior to the Effective Time shall be credited to an
optionee for purposes of determining the number of shares subject to exercise,
vesting or repurchase after the Effective Time. After such assumption, Parent
shall issue, upon any partial or total exercise of any Company Option, in lieu
of shares of Company Common, the number of shares of Parent Common to which the
holder of the Company Option is entitled pursuant to this Agreement. The
assumption by Parent of Company Options shall not give the holders of such
Company Options any additional benefits under their respective Company Options,
which such holder did not have immediately prior to the Effective Time nor shall
such assumption cause such holders to forego any existing rights or benefits
under such Company Options other than as specifically
A-3
<PAGE> 133
provided in this Section 2.4. Nothing contained in this Section 2.4 shall
require Parent to offer or sell shares of Parent Common upon the exercise prior
to the Effective Time of Company Options assumed by Parent if, in the reasonable
judgment of Parent and its counsel, such offer or sale might not be in
accordance with applicable federal or state securities laws.
2.5 Company Capital Stock Subject Restrictions. All shares of Parent
Common that are received in the Merger in exchange of shares of Company capital
stock that, under applicable stock repurchase, stock restriction or similar
agreements with the Company, are unvested or subject to a repurchase option or
other condition of forfeiture (the "Company Restricted Stock") will also be
unvested or subject to the same repurchase option or other condition, as the
case may be, and the certificates evidencing such shares of Parent Common will
be marked with appropriate legends.
2.6 Rights After the Effective Time. As soon as practicable after the
Effective Time, each holder of record of a certificate or certificates which,
prior to the Effective Time, represented outstanding shares of the Company
Common shall be entitled, upon surrender of such certificate or certificates (or
in the case of certificates that have been lost, stolen or destroyed, lost
certificate affidavits therefor and indemnification in connection therewith) to
Parent or to an exchange agent designated by Parent, in form suitable for
transfer, to receive a certificate or certificates representing the number of
whole shares of Parent Common to which such shareholder is entitled under this
Article II together with cash in lieu of any fractional share of Parent Common
in an amount calculated in accordance with Section 2.3.
2.7 Dissenting Shares. Holders of Dissenting Shares shall have those
rights, but only those rights, of holders of "dissenting shares" under Sections
1300 et seq. of the Corporations Code. The Company shall give Parent prompt
notice of any written demand, written purported demand or other written
communication received by the Company with respect to any Dissenting Shares or
shares claimed to be Dissenting Shares, and Parent shall have the right to
participate in all negotiations and proceedings with respect to such shares. The
Company agrees that, without the prior written consent of Parent, which shall
not be unreasonably withheld, it shall not voluntarily make any payment with
respect to, or settle or offer to settle, any demand or purported demand
respecting such shares.
2.8 Adjustments. In addition to adjustments, if any, pursuant to Section
2.9 of this Agreement, appropriate adjustments shall be made in this Agreement,
the Agreement of Merger and the number and type of securities into which shares
of the Company Common shall be converted in connection with the Merger and which
shall be issued upon exercise of the Company Options to be assumed by Parent, in
order to reflect any recapitalization, reclassification, split-up, merger,
consolidation, exchange, stock dividend, stock split or similar event made,
declared or effected with respect to Parent Common between the date of this
Agreement and the date such shares are issued.
2.9 Audit; Adjustment of Exchange Ratio. Following execution and delivery
of this Agreement by each of the parties hereto, the Company shall (i) engage
E&Y to conduct the Company Audit, (ii) reasonably cooperate with E&Y to permit
such firm to complete the Company Audit on or prior to May 31, 1997, and (iii)
use its best efforts to deliver to Parent on or prior to such date a copy of the
Audited Financials. In the event that the net worth of the Company as reported
in the Audited Financials varies by more than $900,000 from the net worth of the
Company contained in the 1997 Balance Sheet, then the Company and Parent shall
immediately enter into good faith negotiations to determine the number of shares
of Parent Common to be issued in the Merger and shall use their reasonable best
efforts to enter into an agreement reflecting such renegotiation within 7 days
of the completion of the Company Audit. In the event that Parent and Company do
not agree on the number of shares to be issued as a result of such
renegotiation, then within 2 days following such 7 day period (i) Parent shall
have the right to terminate the Agreement if the net worth reflected on the
Audited Financials is less than that reflected in the 1997 Balance Sheet by
$900,000 or more or (ii) the Company shall have the right to terminate this
Agreement if the net worth reflected on the Audited Financials is more than that
reflected in the 1997 Balance Sheet by $900,000 or more. Parent, Merger Sub and
the Company hereby agree to execute any documents, including an amendment to
this Agreement, to reflect the results of such negotiations. This Agreement
shall remain in full force and effect and the Exchange Ratio
A-4
<PAGE> 134
shall remain unchanged, unless the parties agree to change the Exchange Ratio
pursuant to this Section 2.9 or the Agreement is terminated by either party
pursuant to this Section 2.9.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Letter (where, for purposes
of this Article III, the inclusion of a description of an item in the Company
Disclosure Letter with one Section reference will be deemed to be inclusion in
the Company Disclosure Letter for another Section reference where such
disclosure would be appropriate), the Company represents to Parent that:
3.1 Organization and Authority. The Company: (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California; (ii) has all necessary corporate power to own and lease its
properties, to carry on its business as now being conducted and to enter into
and perform this Agreement and all agreements to which the Company is or will be
a party that are exhibits to this Agreement; and (iii) is qualified to do
business in all jurisdictions in which the failure to so qualify would have a
material adverse effect on its business or financial condition. The Company does
not have any Subsidiaries and does not directly or indirectly own any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity. The Company
has delivered to Parent and its representatives complete and correct copies of
its Articles of Incorporation, as amended, and Bylaws as in effect on the date
of this Agreement, certified as true, complete and correct copies by the
Company's Secretary. Such Articles of Incorporation and Bylaws are in full force
and effect. The Company is not in violation of any provisions of its Articles of
Incorporation or Bylaws.
3.2 Capitalization.
3.2.1 The authorized capital stock of the Company consists of 10,000,000
shares of Common Stock and 800,000 shares of Series A Preferred Stock, of which
4,797,575 shares of Common Stock and 400,000 shares of Series A Preferred Stock
are issued and outstanding, each of which is convertible into one share of
Company Common. A list of all of the shareholders of the Company as of the date
of this Agreement, with the number of shares of Company Common and Company
Preferred owned by each of them as of the date of this Agreement, is contained
in Section 3.2 of the Company Disclosure Letter. Section 3.2 of the Company
Disclosure Letter also sets forth a true and complete list of all holders of the
Company Restricted Stock as of the date of this Agreement, including the number
of shares of Company Restricted Stock held as of the date of this Agreement and
a breakdown between the vested and unvested shares and the terms of vesting of
the unvested shares. All such issued and outstanding shares have been duly
authorized and validly issued, and are fully paid and nonassessable, and have
been issued in compliance with all applicable federal and state securities laws.
The Company has as of the date of this Agreement outstanding options to purchase
238,000 (including options to purchase 88,000 shares of Company Common held by a
former employee who has terminated her employment with the Company) shares of
Company Common pursuant to the Company Plan of which options to purchase 22,948
(including options to purchase 11,000 shares held by the employee referred to
above) are fully vested as of the date of this Agreement. Except as set forth in
the preceding sentence and the 400,000 shares of outstanding Company Preferred,
there are no outstanding warrants, options, agreements, convertible or
exchangeable securities or other commitments pursuant to which the Company is or
may become obligated to issue, sell, purchase, retire or redeem any shares of
capital stock or other securities. At the Effective Time, the Company will have
outstanding options to purchase 161,000 shares of Company Common less any
options exercised between the date of this Agreement and the Effective Time.
3.2.2 All Company Options have been issued in accordance with the Company
Option Plan and all applicable securities laws, including pursuant to valid
permits thereunder or exemptions therefrom. The Company Plan and all amendments
thereto have been approved by all requisite Company shareholder action. The
Company does not have in effect any stock appreciation rights plan and no stock
appreciation rights of the
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Company are currently outstanding. The consummation of the Merger shall not
cause an acceleration in the vesting of any of the Company's capital stock,
options or other securities.
3.2.3 There is no right of first refusal, co-sale right, right of
participation, right of first offer, option (other than as described in Section
3.2.1) or other restriction on transfer (other than pursuant to applicable
securities laws) applicable to any shares of Company capital stock which apply
to or survive the transactions contemplated by this Agreement.
3.2.4 The Company is not a party or subject to any agreement or
understanding, and to the Company's knowledge, there is no agreement or
understanding between or among any persons, that affects or relates to the
voting or giving of written consent with respect to any outstanding security of
the Company, other than as contemplated hereby.
3.3 Authority Relating to this Agreement; No Violation of Other
Instruments.
3.3.1 The execution and delivery of this Agreement and all agreements to
which the Company is or will be a party that are exhibits to this Agreement and
the performance hereunder and thereunder by the Company have been duly
authorized by all necessary corporate action by the Board of Directors on the
part of the Company, and, assuming requisite approval by the shareholders of the
Company and execution and delivery of this Agreement and such other agreements
by each of the other parties thereto, this Agreement and such other agreements
will constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, subject as to enforcement:
(i) to bankruptcy, insolvency, reorganization, arrangement, moratorium and other
laws of general applicability relating to or affecting creditors' rights; and
(ii) to general principles of equity, whether such enforcement is considered in
a proceeding in equity or at law.
3.3.2 Neither the execution of this Agreement or any other agreement to
which the Company is or will be a party that is an exhibit to this Agreement
nor, assuming requisite approval by the shareholders of the Company, the
performance of any of them by the Company will: (i) conflict with or result in
any breach or violation of the terms of any decree, judgment, order, or to its
knowledge any law or regulation of any court or other governmental body now in
effect applicable to the Company; (ii) conflict with, or result in, with or
without the passage of time or the giving of notice, any breach of any of the
material terms, conditions and provisions of, or constitute a default under or
otherwise give another party the right to terminate, or result in the creation
of any lien, charge, or encumbrance upon any of the assets or properties of the
Company pursuant to, any material indenture, mortgage, lease, agreement or other
instrument to which the Company is a party or by which it or any of its assets
or properties are bound; (iii) permit the acceleration of the maturity of any
indebtedness of the Company or indebtedness of any other person secured by the
assets or properties of the Company; or (iv) violate or conflict with any
provision of the Company's Articles of Incorporation, Bylaws, or similar
organizational instruments.
3.3.3 No consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any government or
regulatory authority is required to be made or obtained by the Company in order
to permit the execution, delivery or performance by the Company of this
Agreement or any other agreement to which the Company is or will be a party that
is an exhibit to this Agreement, or the consummation by the Company of the
transactions contemplated by this Agreement and such other agreements, except
for (i) the filing of the Agreement of Merger with the Secretary of State of the
State of California, (ii) such consents,approvals,orders, authorizations,
registrations, declarations, and filings as may be required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (iii) applicable requirements of the 1933 Act and state securities laws,
and (iv) requisite approval of the shareholders of the Company.
3.4 Compliance With Law. The Company holds all licenses, permits and
authorizations necessary for the lawful conduct of the Company's business as
currently conducted pursuant to all applicable statutes, laws, ordinances, rules
and regulations of all governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over the Company or over any part of the
Company's operations, and the Company knows of no violation thereof, other than
any such violation that would not have a material adverse effect on
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the Company's business or financial results. The Company is not in violation of
any decree, judgment, order, law or regulation, of any court or other
governmental body (including without limitation, applicable environmental
protection legislation and regulations, equal employment and civil rights
regulations, wages, hours and the payment of social security taxes and
occupational health and safety legislation), which violation would reasonably be
expected to have a material adverse effect on the condition, financial or
otherwise, assets, liabilities, business or results of operations of the
Company. Section 3.4 of the Company Disclosure Letter contains a true and
complete list of all licenses, permits and authorizations necessary for the
lawful conduct of the Company's business wherever conducted pursuant to all
applicable statutes, laws, ordinances, rules and regulations of all governmental
bodies, agencies and subdivisions having, asserting or claiming jurisdiction
over the Company or over any part of the Company's operations.
3.5 Investments in Others. The Company does not have any investment in or
advance or loan to or guarantee of, or any commitment to make any investment in,
advance or loan to or guarantee of, any person, except as set forth in the
Company Financials.
3.6 Financial Statements. The Company Financials (i) have been prepared
in accordance with the books and records of the Company; (ii) fairly present the
financial position results of operations, owners equity and cash flow of the
Company as of the dates and for the periods indicated therein; and (iii) have
been prepared in accordance with GAAP consistently applied, except the Company
Financials do not contain notes required under GAAP.
3.7 Absence of Undisclosed Liabilities. Except for obligations incurred
in the ordinary course of business which are not material or are not required
under GAAP to be reflected on a balance sheet or set forth in the notes thereto,
the Company does not have any indebtedness or any other liability (absolute,
contingent, asserted, unasserted, known or unknown) which is not reflected on or
provided for in full on the 1996 Balance Sheet.
3.8 Tax Returns and Payments. Except where failure would not have a
material adverse effect on the Company's business or financial condition, all
tax returns, reports and forms required to be filed by, or with respect to any
activities or income of, the Company have been or will be timely filed, all such
returns are true and correct in all material respects, and all taxes, fees,
penalties, interest and other governmental charges of any nature whatsoever
which were shown to be due or claimed to be due on such returns, reports and
forms or which otherwise may be owed by the Company have been paid or adequate
provision for the payment thereof has been made. Section 3.8 of the Company
Disclosure Letter includes a complete and correct list of all such returns,
reports and forms filed in connection with any year or portion thereof which
ended on or after December 31, 1992. The Company has no knowledge of any
assessment of deficiency or additional tax or other governmental charge
respecting the Company or its business or affairs, or any knowledge of any
completed, pending or threatened tax audit or investigation respecting the
Company or its business or affairs by any taxing or other governmental
authority, and no waivers of statutes of limitations have been requested with
respect to the Company or any of its corporate Affiliates. The amounts provided
for taxes on the 1996 Balance Sheet are sufficient will be sufficient for the
payment of all accrued and unpaid United States federal, state, or local taxes,
interest, penalties, assessments and deficiencies for all periods prior to the
dates of such balance sheet.
3.9 Absence of Certain Changes and Events. Since the date of the 1996
Balance Sheet, there has not been, and prior to the Closing there will not be:
(i) any transaction entered into by the Company other than in the
ordinary course of business or as contemplated by this Agreement or any
loss or damage to any of the manufacturing facilities of the Company due to
fire or other casualty, whether or not insured, amounting to more than
$100,000 in aggregate replacement value; any event that materially and
adversely affects the ability of the Company to operate its business as a
whole in a manner consistent with the way in which such business has been
conducted prior to the date of the 1996 Balance Sheet or any change in the
financial position, assets, liabilities, results of operations or business
of the Company other than changes in the ordinary course of business which
in the aggregate have not been materially adverse;
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(ii) any declaration, payment or setting aside of any dividend or
other distribution to or for the holder of any capital stock of the
Company;
(iii) any lawsuit, proceeding or governmental investigation which is
likely to have a material adverse effect on the business of the Company;
(iv) any event or condition of any character which has or is likely to
have a material adverse effect on the financial position, assets,
liabilities, results of operations or business of the Company;
(v) any increase or decrease in the rates of compensation payable or
to become payable by the Company to any director, officer, employee, agent
or consultant, or any bonus, percentage compensation, service award or
other benefit, granted, made or accrued to or to the credit of any such
person, or any welfare, pension, retirement or similar payment or
arrangement made or agreed to by the Company other than salary adjustments
for non-officer employees in accordance with past practice;
(vi) any modification or rescission of, or waiver by the Company of
rights under, any existing contract of the Company having or likely to have
a material adverse effect on the Company's business;
(vii) any discharge or satisfaction by the Company of any lien or
encumbrance, or any payment of any obligation or liability (absolute or
contingent) other than current liabilities shown on the 1996 Balance Sheet
and current liabilities incurred since the date of the 1996 Balance Sheet
in the ordinary course of business; or
(viii) any mortgage, pledge, imposition of any security interest,
claim, encumbrance or other restriction on any of the assets, tangible or
intangible, of the Company which is likely to have a material adverse
effect on the Company's business or financial condition.
3.10 Accounts Receivable. The accounts receivable reflected on the 1996
Balance Sheet are based on the Company's reasonable judgment and its normal
credit review procedures, business practices and GAAP, collectible in accordance
with their terms in an amount not less than their aggregate book value.
"Aggregate book value," for this purpose, shall mean the recorded amounts of
such accounts receivable less any recorded allowance for doubtful accounts,
trade allowances and return allowances, all as established in accordance with
GAAP consistently applied.
3.11 Inventories. The inventories reflected on the 1996 Balance Sheet are
valued in accordance with GAAP consistently applied and as described in clause
(i) of Section 3.6 of this Agreement.
3.12 Interests in Real Property. Section 3.12 of the Company Disclosure
Letter sets forth a complete and correct list and brief description of all real
property leased by the Company. The Company owns no real property. To the
Company's knowledge, all real property leases to which the Company is a party
are valid and enforceable (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, moratorium and similar laws
affecting creditors' rights, and, with respect to the remedy of specific
performance, equitable doctrines applicable thereto) and no party thereto is in
default of any material provision thereof. All improvements and fixtures on real
properties leased by the Company conform to all material applicable health,
fire, safety, environmental, zoning and building laws and ordinances and all
materials, buildings, structures and fixtures used by the Company in the conduct
of its business are in good operating condition and repair, ordinary wear and
tear excepted, and are sufficient for the type and magnitude of their respective
operations.
3.13 Personal Property. The Company has good and marketable title, free
and clear of all title defects, security interests, pledges, options, claims,
liens, encumbrances and restrictions of any nature whatsoever (except for such
security interests, pledges, options, claims, liens, encumbrances or
restrictions or non-monetary imperfections of title, if any, as do not
materially detract from the value of or materially interfere with the present
use of such property) to (or, in the case of leased properties and assets, valid
leasehold interests in) all inventory and receivables and to any item of
machinery, equipment, or tangible or intangible personal property reflected on
the 1996 Balance Sheet or, regardless of whether reflected on the 1996 Balance
Sheet, used by the Company in its business. Section 3.13 of the Company
Disclosure Letter sets forth a list of all items of machinery, equipment and
tangible personal property used by the Company in the Company's
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business and having a book value in excess of $10,000. Except as shown in
Section 3.13 of the Company Disclosure Letter, all the machinery, equipment and
other tangible personal property is in good operating condition and repair,
normal wear and tear excepted, and is sufficient for the type and magnitude of
their operations as currently conducted. At the Closing Date, the Company will
possess all of the personal property wherever located used by the Company to
conduct its business as conducted immediately prior to the Closing.
3.14 Directors and Officers. Section 3.14 of the Company Disclosure
Letter sets forth a complete and correct list of all present officers and
directors of the Company.
3.15 Certain Transactions. No Affiliate of the Company is presently a
party to any agreement or arrangement with the Company: (i) providing for the
furnishing of raw materials, products or services to or by, or (ii) providing
for the sale or rental of real or personal property to or from, any such entity.
3.16 Patents, Trademarks, Etc. All rights, patents, trademarks, trade
names, service marks, mask work rights, copyrights, processes, designs,
formulas, inventions, trade secrets, know-how, technology or other intellectual
rights and any applications or registrations therefor, and all mask works,
schematics, source code and computer software programs (collectively, the
"Intellectual Property Rights") which are necessary to the conduct by the
Company of the Company's business are owned or are useable, without restriction,
by the Company, the failure to so own or be usable which would result in a
material adverse effect on the Company's business or financial condition. To the
Company's knowledge, the conduct of any business conducted by the Company does
not infringe any Intellectual Property Rights of any other person. No litigation
is pending or, to the knowledge of the Company, has been threatened against the
Company or any officer, director, shareholder or employee of the Company, for
the infringement by the Company of any Intellectual Property Rights of any other
party or for the misuse or misappropriation of any Intellectual Property Rights
owned by any other party nor, to the Company's knowledge does any basis exist
for such litigation. To the Company's knowledge, there has been no infringement
or unauthorized use by any other party of any Intellectual Property Rights
belonging to the Company. Section 3.16 of the Company Disclosure Letter sets
forth a list of all Intellectual Property Rights belonging to or used by the
Company.
3.17 Litigation and Other Proceedings. Neither the Company nor any of its
officers or directors in such capacity is a party to any pending or, to the best
knowledge of the Company, threatened action, lawsuit, claim, administrative
proceeding or governmental investigation in the United States (including the
Defense Contract Audit Agency, the Inspector General or the General Accounting
Office) or elsewhere seeking equitable relief or claiming damages, and which, if
adversely determined would have a material adverse effect on the Company, and
the Company is not subject to any order, writ, judgment, decree or injunction of
any court, governmental body or arbitrator which materially adversely affects or
might so affect the business or assets of the Company or which prevents or might
prevent completion of the Merger. Section 3.17 of the Company Disclosure Letter
contains a complete list of all claims brought against the Company since
December 31, 1992, together with a brief statement of the nature and amount of
the claim, the court and jurisdiction in which the claim was brought, the
resolution (if resolved), and the availability of insurance to cover the claim.
3.18 Contracts. Section 3.18 of the Company Disclosure Letter lists all
currently effective contracts to which the Company is a party or by which the
Company or any of its respective properties or assets are bound which (i)
involve the payment by the Company of more than $25,000 over the remaining term
of the contract; (ii) are financing documents, loan agreements or promissory
notes; (iii) are otherwise material to the business of the Company and are not
for the purchase or sale of goods or services in the ordinary course of
business; or (iv) are distributorship or other agreements relating to the
marketing of products. The Company and, to the knowledge of the Company, all of
the other parties to such agreements, are in compliance with all material
provisions of all such agreements and to the knowledge of the Company no fact
exists which is, or with the passage of time could become, a material default
under any of them.
3.19 Insurance and Banking Facilities. Section 3.19 of the Company
Disclosure Letter sets forth a complete and correct list of (i) all contracts of
insurance and indemnity of or relating to the Company (except insurance related
to employee benefits) in force at the date of this Agreement (including name of
insurer or indemnitor, agent, annual charge, coverage and expiration date); (ii)
the names and locations of all banks in
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which the Company has accounts; and (iii) the names of all persons authorized to
draw on such accounts. All premiums and other payments due with respect to all
contracts of insurance or indemnity in force at the date hereof have been or
will be paid.
3.20 Personnel. Section 3.20 of the Company Disclosure Letter sets forth
a complete and correct list of (i) all employment contracts, collective
bargaining agreements, and all compensation plans, agreements, programs,
practices, commitments or other arrangements of any type, including bonus,
profit sharing, incentive compensation, pension and retirement agreements
respecting or affecting any employees of the Company; and (ii) all insurance,
health, medical, hospitalization, dependent care, severance, fringe or other
employee benefit plans, agreements, programs, practices, commitments or other
arrangements of any type in effect for employees of the Company; provided,
however, that clauses (i) and (ii) hereof shall be deemed inapplicable to any
employee benefit plan which is required to be listed in Section 3.25 of the
Company Disclosure Letter. Section 3.20 of the Company Disclosure Letter
includes a list of all employees of the Company and their compensation levels
sorted by exempt and non-exempt status. The Company has been and is in
compliance with the terms of, and any material laws or regulations applicable
to, all such plans, agreements, practices, commitments or programs.
3.21 Powers of Attorney and Suretyships. The Company does not have any
power of attorney outstanding (other than a power of attorney issued in the
ordinary course of business with respect to tax matters or to customs agents and
customs brokers), and, except for obligations as an endorser of negotiable
instruments incurred in the ordinary course of business, the Company does not
have any obligations or liabilities (absolute or contingent) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise respecting the
obligation of any other person.
3.22 Minutes and Stock Records. The Company has provided Parent and
Merger Sub and their representatives complete and correct copies of the minute
books and stock records of the Company. Such items contain a complete and
correct record of all proceedings and actions taken at all meetings of, and all
actions taken by written consent by, the holders of capital stock of the Company
and its Board of Directors and any committees thereof, and all original
issuances and subsequent transfers and repurchases of its capital stock.
3.23 Governmental Consents. The Company has complied with all laws and
regulations of the United States Department of Defense and other governmental
agencies with which the Company has contracts, directly or indirectly, relating
to contracts including estimation of costs and reporting. Except as described in
the Company Disclosure Letter, the Company has not been audited by any agency of
the United States, including the Defense Investigative Service, the Criminal
Defense Investigative Service, the Inspector General or the Defense Contract
Administrative Agency. Section 3.23 of the Company Disclosure Letter sets forth
a complete and correct list of all consents, approvals, orders and
authorizations from, and all registrations, qualifications, designations,
declarations and rulings with, any United States federal, state or local
governmental authority, required by or with respect to the Company in connection
with the consummation of the transactions contemplated by this Agreement or, to
the extent not listed in Section 3.4 of the Company Disclosure Letter, necessary
to enable the Company to conduct its business as it was conducted immediately
before the Closing.
3.24 Product Warranties. Attached to the Company Disclosure Letter are
copies of the standard forms of agreements containing warranties or guarantees
relating to the catalog products of the Company. No agreement to which the
Company is a party provides any warranty for a period longer than three years
from the date of the agreement.
3.25 Compliance with ERISA. Section 3.25 of the Company Disclosure Letter
sets forth a complete and correct list of all "employee pension benefit plans"
and all "employee welfare benefit plans" (within the meaning of ERISA) ("Plans")
of the Company or in which any of its employees participate. Each such Plan
intended to qualify under Section 401(a) or Section 501(c)(9) of the Code has
received a favorable determination letter as to its qualification and has been
administered in compliance with ERISA and the Code and no fact or circumstance
exists which would preclude continuing, good faith reliance on such
determination letter or would adversely affect the qualified status of any such
Plan. No fact or circumstance exists, including,
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without limitation, any "reportable event" (within the meaning of ERISA), in
connection with any such Plan which might constitute grounds for termination of
such Plan by the Pension Benefit Guaranty Corporation (the "PBGC") or of the
appointment by a court of a trustee to administer such Plan. The Company has not
incurred any liability to the PBGC (other than for payment of premiums which
have been timely paid), and the Company has complied in full with the minimum
funding requirements and in all material respects with the reporting, disclosure
and fiduciary requirements of ERISA and the Code.
3.26 Labor Matters. The Company is and has been in compliance with all
applicable material laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
any such laws respecting employment discrimination, occupational safety and
health, and unfair labor practices. There is no unfair labor practice complaint
against the Company pending or, to the knowledge of the Company, threatened
before the National Labor Relations Board, Office of Federal Contract Compliance
Programs, or any comparable state, local or foreign agency. There is no (i)
labor strike, dispute, slowdown or stoppage actually pending, or, to the
knowledge of the Company, threatened against or directly affecting the Company;
(ii) grievance or arbitration proceeding pending and, to the knowledge of the
Company, no claims therefor exist; or (iii) agreement which is binding on the
Company which restricts the Company from relocating or closing any of its
operations. The Company has not experienced any material work stoppage in the
last 18 months. The Company is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them or amounts required to be
reimbursed to such employees. To the knowledge of the Company, upon termination
of the employment of any of the employees of the Company before or after the
Closing Date, except as contemplated hereby, neither the Company nor Parent will
be liable to such employee for severance pay. The Company is not a party to or
bound by any collective bargaining agreements.
3.27 Hazardous Materials. Except as set forth in Section 3.27 of the
Company Disclosure Letter:
(i) The Company has not caused, and is not causing or threatening to
cause, any disposals or releases of any Hazardous Material on or under any
properties which it (A) leases, occupies or operates or (B) previously
owned, leased, occupied or operated and to the Company's knowledge no such
disposals or releases occurred prior to the Company having taken title to,
or possession or operation of, any of such properties; and no such
disposals or releases are migrating or have migrated off of such properties
in subsurface soils, groundwater or surface waters;
(ii) The Company has neither (A) arranged for the disposal or
treatment of Hazardous Material at any facility owned or operated by
another person, or (B) accepted any Hazardous Material for transport to
disposal or treatment facilities or other sites selected by the Company
from which facilities or sites there has been a release or there is a
release or threatened release of a Hazardous Material; any facility
identified in Section 3.27 of the Company Disclosure Letter under (A) above
was duly licensed in accordance with law and has not been listed in
connection with the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) by the United States Environmental Protection
Agency's Comprehensive Environmental Response, Compensation, and Liability
Information System (CERCLIS) or National Priorities List (NPL) or any
equivalent or like listing of sites under state or local law (whether for
potential releases of substances listed in CERCLA or other substances).
(iii) The Company has no actual knowledge of, or any reason to believe
or suspect that, any release or threatened release of any Hazardous
Material originating from a property other than those leased or operated by
the Company has come to be (or may come to be) located on or under
properties leased, occupied or operated by the Company;
(iv) The Company has never installed, used, buried or removed any
surface impoundment or underground tank or vessel on properties owned,
leased, occupied or operated by the Company;
(v) The Company is and has been in compliance in all material respects
for the last three years with all federal, state, local or foreign laws,
ordinances, regulations, permits, approvals and authorizations relating to
air, water, industrial hygiene and worker health and safety,
anti-pollution, hazardous or toxic wastes, materials or substances,
pollutants or contaminants, and no condition exists on any of the real
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property owned by or used in the business of the Company that would
constitute a violation of any such law or that constitutes or threatens to
constitute a public or private nuisance; and
(vi) There has been no litigation, administrative proceedings or
investigations or any other actions, claims, demands notices of potential
responsibility or requests for information brought or, to the knowledge of
the Company, threatened against the Company or any settlement reached with
any person or persons alleging the presence, disposal, release or
threatened release of any Hazardous Material on, from or under any of such
properties or as otherwise relating to potential environmental liabilities.
3.28 Backlog. Section 3.28 of the Company Disclosure Letter contains a
list of all orders of the Company's products outstanding as of March 31, 1997
identifying for each such order the customer, product, price and expected
delivery date.
3.29 Brokers and Finders. Except as disclosed in Section 3.29 to the
Company Disclosure Letter, the Company has not retained any broker or finder in
connection with the transactions contemplated by this Agreement.
3.30 Accuracy of Documents and Information. Neither the representations
or warranties made by the Company in this Agreement, nor those contained in any
document, written information, financial statement, other statement,
certificate, schedule or exhibit furnished or to be furnished (or caused to be
furnished) by the Company to Parent pursuant to this Agreement, taken together
as a whole contain or will contain any untrue statement of a material fact, or
omit or will omit a material fact necessary to make the statements or facts
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
3.31 Collapsible Corporation; Parachute Payments. No election has been
made to treat the Company as a "consenting corporation" under Section 341(f) of
the Code, and the Company is not a party to any written or oral, formal or
informal, agreement or contract with a "disqualified individual" (as defined in
Section 280G(c) of the Code) which could result in a disallowance of the
deduction for any "excess parachute payment" (as defined in Section 280G(b)(1)
of the Code) under Section 280G of the Code.
3.32 Information Supplied by the Company. Information supplied by the
Company to Parent in connection with the Registration Statement and for use by
the Company in soliciting approval of the Merger and this Agreement from the
Company's shareholders (i) shall comply as to form in all material respects with
the provisions of the 1933 Act and 1934 Act and (ii) shall not contain any
untrue statements of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading.
3.33 Credit Cards. Section 3.33 of the Company Disclosure Letter sets
forth a complete and correct list of all credit cards issued or caused to be
issued by the Company to any person, firm or entity or under which the Company
is or may be liable for charges or payments.
3.34 Business Practices. The Company has not made, offered or agreed to
offer anything of value to any government official, political party or candidate
for government office nor has it taken any action which would cause it to be in
violation of the Foreign Corrupt Practices Act of 1977.
3.35 No Actions Inconsistent with Tax-Free Reorganization. The Company
has not taken any action that would cause the Merger to fail to qualify as a
"reorganization" within the meaning of Sections 368(a)(1)(A) and (a)(2)(E) of
the Code.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure letter (where, for purposes of this
Article IV, the inclusion of a description of an item in Parent Disclosure
Letter with one Section reference will be deemed to be inclusion in Parent
Disclosure Letter for another Section reference where such disclosure would be
appropriate), a true
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and correct copy of which has been delivered to Company on or prior to the date
of this Agreement (the "Parent Disclosure Letter"), Parent and Merger Sub
represent to the Company that:
4.1 Organization and Authority. Each of Parent and Merger Sub (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California; (ii) has all necessary corporate power to own and
lease its properties, to carry on its business as now being conducted and to
enter into and perform this Agreement; and (iii) is qualified to do business in
all jurisdictions in which the failure to so qualify would have a material
adverse effect on its business or financial condition. Parent will deliver to
the Company prior to Closing complete and correct copies of its Articles of
Incorporation and Bylaws, as in effect on the date of this Agreement. Such
Articles of Incorporation and Bylaws are in full force and effect as of the date
of this Agreement, and Parent is not in violation of any provisions thereof.
4.2 Capitalization. (i) The authorized capital stock of Parent is
5,000,000 shares of Preferred Stock, none of which are issued and outstanding,
and 40,000,000 shares of Parent Common, of which 12,409,266 shares were issued
and outstanding as of March 2, 1997. All such issued and outstanding shares have
been duly authorized and validly issued, and are fully paid and nonassessable.
As of March 2, 1997, Parent had outstanding options to purchase 498,642 shares
of Parent Common pursuant to its existing plans. Except as set forth in the
preceding sentence, there are no outstanding warrants, options, agreements,
convertible or exchangeable securities or other commitments pursuant to which
the Company is or may become obligated to issue, sell, purchase, retire or
redeem any shares of capital stock or other securities.
(ii) The authorized capital stock of Merger Sub is 1,000,000 shares of
Merger Sub Common, of which 1,000 shares are issued and outstanding. All such
issued and outstanding shares have been duly authorized and validly issued, are
fully paid an nonassessable, and are held by Parent. There are no outstanding
warrants, options, agreements, convertible or exchangeable securities or other
commitments pursuant to which Merger Sub is or may become obligated to issue,
sell, purchase, retire or redeem any shares of stock or other securities.
4.3 Authority Relating to this Agreement; No Violation of Other
Instruments.
4.3.1 The execution and delivery of this Agreement and all other
agreements to which Parent or Merger Sub is a party or will be a party that are
exhibits to this Agreement and the performance hereunder and thereunder by
Parent or Merger Sub have been duly authorized by all necessary corporate action
on the part of Parent or Merger Sub and, assuming execution and delivery of this
Agreement and such other agreements by the Company and each of the other parties
thereto, this Agreement and such other agreements will constitute a legal, valid
and binding obligations of Parent or Merger Sub, enforceable against Parent or
Merger Sub in accordance with their terms, subject as to enforcement: (i) to
bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws
of general applicability relating to or affecting creditors' rights; and (ii) to
general principles of equity, whether such enforcement is considered in a
proceeding in equity or at law.
4.3.2 Neither the execution of this Agreement or any other agreements to
which Parent or the Merger Sub is a party or will be a party that is an exhibit
to this Agreement nor the performance of any of them by Parent or Merger Sub
will: (i) conflict with or result in the breach or violation of the terms of any
decree, judgment, order, law or regulation of any court or other governmental
body now in effect applicable to Parent or Merger Sub; (ii) conflict with, or
result in, with or without the passage of time or the giving of notice, any
breach of any of the material terms, conditions and provisions of, or constitute
a default under, or otherwise give another party the right to terminate any
material indenture, mortgage, lease, agreement or other instrument to which
Parent or Merger Sub is a party or by which it or any of its assets or
properties is bound; or (iii) violate or conflict with any provisions of
Parent's or Merger Sub's Articles of Incorporation, Bylaws, or similar
organizational instruments.
4.3.3 No consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority is required to be made or obtained by Parent or Merger
Sub in order to permit the execution, delivery or performance of this Agreement
or any other agreement to which Parent or Merger Sub is a party or will be a
party that is an exhibit to this Agreement, or the consummation of the
transactions contemplated by this Agreement and such other agreements, except
for
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(i) the filing of the Agreement of Merger with the Secretary of State of the
State of California, (ii) such consents, approvals, orders, authorizations,
registrations, declarations, filings as may be required under the HSR Act, (iii)
the filing of the Registration Statement with the SEC, and (iv) filings under
the 1934 Act.
4.4 Financial Statements. Parent has delivered the following consolidated
financial statements of Parent (the "Parent Financial Statements") to the
Company:
(i) Balance Sheet of Parent as of March 2, 1997, (unaudited);
(ii) Statement of Income for the period ended March 2, 1997
(unaudited);
(iii) Unaudited Balance Sheets of Parent dated as of January 31, 1997
together with unaudited Statements of Operations, Shareholders' Equity and
Changes in Cash Flow during the three years ended January 31, 1997; and
(iv) Audited Balance Sheets of Parent dated as of January 31, 1996
together with audited Statements of Operations, Shareholders' Equity and
Changes in Cash Flow during the three years ended January 31, 1996.
Each Parent Financial Statement together with the notes thereto is prepared in
accordance with the books and records of Parent, fairly presents the financial
position of Parent and the results of operations, shareholders' equity and cash
flow of Parent as of the dates and for the period indicated, and has been
prepared in accordance with GAAP consistently applied, except that the unaudited
income statement does not contain all the notes required under GAAP and comply
as to form with applicable accounting requirements of the SEC.
4.5 Absence of Undisclosed Liabilities. As of March 2, 1997, Parent had
no indebtedness or liability (absolute or contingent) which is not shown or
provided for in full on the Balance Sheet dated March 2, 1997 included in the
Parent Financial Statements. Except as set forth in the Balance Sheet dated
March 2, 1997 included in the Parent Financial Statements, Parent and its
Subsidiaries do not have outstanding on the date of this Agreement, nor will it
have outstanding on the Closing Date, any indebtedness or liability (absolute or
contingent, asserted or unasserted, known or unknown) other than those incurred
since March 2, 1997 in the ordinary course of business which are not material.
4.6 Shares Issued in Connection With the Merger. The shares of Parent
Common to be issued to the Company Shareholders pursuant to the Merger, when
issued in accordance with this Agreement and the Merger Agreement, will be duly
authorized, validly issued, fully paid and nonassessable, and the issuance of
such shares by Parent does not and will not require any further corporate action
and will not be subject to preemptive rights. The shares of Parent Common to be
issued to the holders of Company Options upon exercise of the Company Options
after the Merger, when issued upon exercise of the Company Options in accordance
with this Agreement, the Merger Agreement, and the Company Plan, will be duly
authorized, validly issued, fully paid and nonassessable and the issuance of
such shares by Parent does not and will not require any further corporate action
and will not be subject to preemptive rights.
4.7 Full Disclosure. All reports, schedules, forms and statements
(including all exhibits and schedules thereto and all documents incorporated by
reference therein) required to be filed by the Parent within the year prior to
the date of this Agreement under the 1933 and 1934 Act, copies of which have
been furnished to the Company, have been duly filed, were in substantial
compliance with the requirements applicable under the 1933 and 1934 Act, and
were complete and correct in all material respects as of the dates at which the
information was furnished. As of the date of filing, no such report, including
any financial statements or schedules included therein, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. The Company is current in all of its
required filings under the 1934 Act. Since March 2, 1997, except as contemplated
by this Agreement, Parent has conducted its business in the ordinary course and
there has not been any material adverse change in the assets, liabilities,
existing contracts, business, condition (financial or otherwise) or results or
operations or cash flows of Parent, and no fact or condition exists or is
contemplated which might cause such a change in the future.
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4.8 Activities of Merger Sub. Merger Sub was formed for the purpose of
participating in the Merger as contemplated in this Agreement. Parent has
carried on no business on behalf of the Merger Sub.
4.9 Litigation. Except as disclosed in Parent's filings with the SEC or
in the Parent Disclosure Letter, there is no pending or, to the best of Parent's
knowledge, threatened action, claim, lawsuit, administrative proceeding,
arbitration, labor dispute or governmental investigation to which Parent or any
of its officers or directors in such capacity is a party or by which any
material portion of its assets taken as a whole may be bound, and which, if
adversely determined, would have a material adverse effect on Parent. There are
no outstanding orders, judgments, awards or decrees of any court, governmental
or regulatory body or arbitration tribunal against Parent.
4.10 Information Supplied by Parent. Information supplied to the Company
in connection with the Company's solicitation of approval from its shareholders
of the Merger and this Agreement and for use by Parent in connection with the
Registration Statement (i) shall comply as to form in all material respects with
the provisions of the 1933 Act and 1934 Act and (ii) shall not contain any
untrue statements of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
4.11 No Actions Inconsistent with Tax-Free Reorganization. Parent and
Merger Sub each has not taken any action that would cause the Merger to fail to
qualify as a "reorganization" within the meaning of Sections 368(a)(1)(A) and
(a)(2)(E) of the Code.
4.12 Compliance with Law and Other Instruments. Parent holds all material
licenses, permits and authorizations necessary for the lawful conduct of its
business as now being conducted pursuant to all applicable statutes, laws,
ordinances, rules and regulations of all governmental bodies, agencies and other
authorities having jurisdiction over it or any part of its respective
operations, and to the knowledge of Parent there are no violations or claimed
violations by Parent of any such license, permit or authorization or any such
statute, law, ordinance, rule or regulation other than any such violation that
would not have a material adverse effect on the financial results of operations
of Parent.
ARTICLE V
COVENANTS OF THE COMPANY
5.1 Access to Properties and Records. Throughout the period between the
date of this Agreement and the Closing or the earlier termination of this
Agreement (the "Pre-Closing Period"), the Company shall give Parent and its
authorized officers, employees, attorneys, and independent public accountants
and other representatives reasonable access to information and documents
relating to this Agreement and the transactions contemplated by this Agreement,
and shall provide Parent with such financial, technical and operating data and
other information pertaining to the business of the Company as Parent may
reasonably request. No investigation by Parent or its representatives made
before or after the date of this Agreement shall affect the representations or
warranties of the Company contained in this Agreement, and, subject to Section
10.1, all such representations and warranties shall survive any such
investigation.
5.2 Conduct of Business Prior to Closing. The Company agrees that, during
the Pre-Closing Period, except as otherwise permitted, required or contemplated
by this Agreement or expressly permitted by Parent in writing, the business of
the Company shall be conducted in the ordinary course consistent with prior
practices and in a prudent, businesslike fashion, and shall not take any actions
which would make the pooling of interest accounting treatment of the Merger
unavailable to Parent. Without limiting in any way the generality of the
foregoing and except as so permitted, required or contemplated, the Company
shall not during the Pre-Closing Period:
(i) merge with or into or consolidate with any other corporation;
(ii) amend its Articles of Incorporation or Bylaws;
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(iii) with respect to executive management and employees not covered
by collective bargaining agreements, change its benefit structures or
salary rates (other than normal merit increases or promotions), enter into
or materially modify any employment contracts or severance arrangements, or
enter into collective bargaining or similar agreements;
(iv) make any change in its authorized or outstanding capital stock or
otherwise in its capital structure;
(v) incur any indebtedness for borrowed money;
(vi) issue or deliver any stock, bonds or other securities or debt
instruments, or any options, warrants or other rights calling for the
issuance or delivery thereof except to effect the exercise of outstanding
options to purchase shares of the Company Common;
(vii) declare or make, or agree to declare or make, any payment or
dividends or distributions on its capital stock, other than as contemplated
by this Agreement, or purchase or redeem, or agree to purchase or redeem,
any of its capital stock or other securities;
(viii) enter into any transactions other than in the ordinary course
of business (including make any capital expenditure in an amount greater
than $500,000 in the aggregate);
(ix) terminate or amend any material contract, agreement, license or
other instrument to which the Company is a party or by which any of the
Company or any of its assets are bound, except agreements which by their
terms are terminable in the ordinary course of business; or
(x) enter into any contract or commitment in the ordinary course of
business which involves more than $100,000 or has a duration longer than
one year without prior consultation with and consent of Parent which
consent shall not be unreasonably withheld.
Without limiting the generality of the foregoing, during the Pre-Closing
Period the Company shall continue to pay accounts payable and to collect
accounts receivable in the ordinary course of business in accordance with past
practice, to maintain and preserve customer relations and to maintain insurance
each in the ordinary course of business in accordance with past practice; and
the Company shall not change or permit to be changed in any material respect the
accounting or valuation practices applicable to its assets or businesses.
5.3 Notice of Events. Throughout the Pre-Closing Period, the Company
shall promptly advise Parent in writing of any and all material events and
developments concerning its financial position, assets, liabilities, results of
operations or business or any of the items or matters covered by the Company's
representations and warranties contained in this Agreement.
5.4 Special Shareholders' Meeting and Board Recommendation. The Company
shall call, notice and hold a meeting of its shareholders not later than 25
business days after the Registration Statement is declared effective by the SEC
and shall submit this Agreement and the Merger to its shareholders for approval
in accordance with all applicable laws and the Articles of Incorporation and
Bylaws of the Company.
5.5 No Other Negotiations. Until the earlier of (i) the Closing or (ii)
July 31, 1997 or (iii) the earlier termination of this Agreement:
(A) the Company shall not, and will not cause or permit, directly or
indirectly, through any officer, director, agent or representative
(including, without limitation, investment bankers, attorneys, accountants
and consultants), or otherwise:
(i) Solicit, initiate or further the submission of proposals or
offers from, or enter into any agreement with, any firm, corporation,
partnership, association, group (as defined in Section 13(d)(3) of the
1934 Act) or other person or entity, individually or collectively
(including, without limitation, any managers or other employees of the
Company or any affiliates) (a "Third Party"), relating to any
acquisition or purchase of all or any substantial portion of the assets
of, or any equity
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interest (excluding the exercise of outstanding stock options under the
Company Plan) in, the Company or any merger, consolidation or business
combination with the Company;
(ii) Participate in any discussions or negotiations regarding, or
furnish to any Third Party any confidential information with respect to
the Company in connection with any acquisition or purchase of all or any
substantial portion of the assets of, or any equity interest (excluding
the exercise of outstanding stock options under the Company Plan) in,
the Company or any merger, consolidation or business combination with
the Company; or
(iii) Otherwise cooperate in any way with, or assist or participate
in, facilitate or encourage, any effort or attempt by any Third Party to
undertake or seek to undertake any acquisition or purchase of all or any
substantial portion of the assets of, or any equity interest (excluding
the exercise of outstanding stock options under the Company Plan) in,
the Company, or any merger, consolidation or business combination with
the Company.
(B) in the event the Company receives any offer or indication of
interest from any Third Party relating to any acquisition or purchase of
all or any substantial portion of the assets of, or any equity interest
(excluding the exercise of outstanding stock options under the Company
Plan) in, the Company or any merger, consolidation or business combination
with the Company, the Company shall promptly notify Parent in writing, and
shall in any such notice, set forth in reasonable detail the identity of
the Third Party, the terms and conditions of any proposal and any other
information requested of it by the Third Party or in connection therewith.
(C) the Company shall immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any Third Party
relating to any acquisition or purchase of all or any substantial portion
of the assets of, or any equity interest in, the Company or any merger,
consolidation or business combination with the Company conducted prior to
the date of this Agreement.
5.6 Cooperation. The Company shall cooperate with Parent in preparing and
making all filings or submissions to governmental agencies required in
connection with the transactions contemplated by this Agreement. The Company, at
any time before or after the Closing, shall execute, acknowledge and deliver any
further assignments, assurances, documents and instruments of transfer
reasonably requested by Parent and Merger Sub and shall take any other action
consistent with the terms of this Agreement that may reasonably be requested by
Parent and Merger Sub for the purpose of consummating the Merger.
5.7 Employees. The Company shall use its best efforts to assist Parent
and Merger Sub in retaining the continued services of the Company's key
employees.
5.8 Best Efforts to Close. The Company shall use its best efforts to
fulfill the conditions set forth in Article VII of this Agreement over which it
has control or influence, and to complete the transactions contemplated by this
Agreement.
5.9 Agreements with Respect to Affiliates. The Company shall deliver to
Parent a letter (the "Affiliate Letter") identifying all persons who are
"affiliates" of the Company under the 1933 Act. The Company shall use its best
efforts to cause each person who is identified as an "affiliate" in the
Affiliate Letter to deliver to Parent, prior to the Effective Time, a written
agreement (an "Affiliate Agreement") in connection with restrictions on
affiliates in respect of pooling of interests accounting treatment of the
Merger, in substantially the form attached hereto as Exhibit 5.9.
5.10 Updated Company Disclosure Letter. The Company shall deliver to
Parent on or before April 21, 1997 a revised disclosure letter (the "Updated
Company Disclosure Letter") with respect to the disclosures by the Company
contained in Article III of this Agreement, and such Updated Disclosure Letter
together with any disclosure letter with respect to the disclosures by the
Company contained in Article III of this Agreement delivered to Parent on the
date of this Agreement shall collectively constitute the Company Disclosure
Letter.
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5.11 Employment Agreements. The Company shall use its best efforts to
cause each of the employees identified by Parent as a "key employee" of the
Company to enter into an employment agreement on or prior to the Closing.
ARTICLE VI
COVENANTS OF PARENT AND MERGER SUB
6.1 Access to Properties and Records. Throughout the period between the
date of this Agreement and the Closing, Parent shall give the Company and its
authorized officers, employees, attorneys, and independent public accountants
and other representatives reasonable access to information and documents
relating to this Agreement and the transactions contemplated by this Agreement,
and shall provide the Company with such financial, technical and operating data
and other information pertaining to the business of Parent as the Company may
request. No investigation by the Company or its representatives made before or
after the date of this Agreement shall affect the representations or warranties
of Parent contained in this Agreement, and, subject to Section 10.1, all such
representations and warranties shall survive any such investigation.
6.2 Registration Statement. Parent shall, as soon as practicable after
the execution of this Agreement at its expense, prepare and file the
Registration Statement with the SEC with respect to the shares of Parent Common
to be issued in the Merger and shall use its best efforts to have the
Registration Statement declared effective as soon as possible thereafter. Parent
and Merger Sub shall cooperate with the Company in preparing and making all
filings or submissions to governmental agencies required in connection with the
transactions contemplated by this Agreement.
6.3 Information. Parent shall supply to the Company such information as
the Company shall reasonably request in connection with the Company's
solicitation of shareholder approval of this Agreement and the Merger.
6.4 Employee Benefits. With respect to the employees of the Company at
the Closing Date, Parent and Merger Sub shall continue coverage of such
employees under employee benefit plans of the Company as they exist at the
Closing Date or shall include such employees under benefit plans of Parent. Such
employees who become covered under Parent's plans shall receive credit for
length of service for the period of their continuous service as employees of the
Company.
6.5 Best Efforts to Close. Parent and Merger Sub shall use their best
efforts to fulfill all of the conditions set forth in Article VIII of this
Agreement over which they have control or influence, and to complete the
transactions contemplated by this Agreement.
6.6 Nasdaq Listing. Parent shall file with the Nasdaq Stock Market a
Notification Form for Listing of Additional Shares on the Nasdaq Stock Market of
the Parent Common to be received by the Company Shareholders in the Merger and
upon exercise of the Company Options assumed by Parent.
6.7 No Actions Inconsistent with Tax-Free Reorganization. Parent and
Merger Sub shall (and, following the Effective Time, Parent shall cause the
Company to) take no action with respect to the capital stock, assets or
liabilities of the Company that would cause the Merger to fail to qualify as a
"reorganization" within the meaning of Sections 368(a)(1)(A) and (a)(2)(E) of
the Code. Without limitation on the generality of the foregoing, following the
Effective Time, Parent shall cause the Company to either continue the historic
business of the Company or use a significant portion of the Company's historic
business assets in a business.
6.8 Issuance of Parent Stock Options. As soon as practicable after the
Effective Time, Parent shall issue options to purchase 60,500 shares of Parent
Common (not including any options granted separately to Tao Chow under Mr.
Chow's employment agreement with Parent) to and among employees designated by
Tao Chow at an exercise price equal to the closing price of Parent Common on the
date of issuance. Such options shall vest yearly over three years.
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6.9 Indemnification.
(A) From and after the Closing, Parent will fulfill and honor and will
cause the Company to fulfill and honor in all respects the obligations of
Company pursuant to any indemnification agreements between Company and its
directors and officers existing on or prior to the date hereof. From and after
the Closing, such obligations shall be the joint and several obligations of
Parent and the Company and, by executing this Agreement, Parent hereby assumes
such obligations. The Articles of Incorporation and the Bylaws of the surviving
corporation in the Merger will contain the provisions with respect to
indemnification and elimination of liability set forth in the Articles of
Incorporation and Bylaws of the Company as in effect on the Closing, which
provisions will not be amended, repealed or otherwise modified from the Closing
in any manner that would adversely affect the rights thereunder of individuals
who, immediately prior to the Closing, were directors, officers, employees or
agents of Company, unless such modification is required by law. The Parent and
Merger Sub acknowledge and agree that prior to the Closing the Company's
Articles of Incorporation and Bylaws will be amended to provide for
indemnification to the fullest extent provided under applicable law.
(B) In the event of any claim, action, suit, proceeding or investigation to
restrain, enjoin, prevent, set aside, invalidate or seek damages with respect to
this Agreement or the transactions hereby contemplated or seek damages from or
to impose obligations upon the Company or its directors or officers by reason of
this Agreement or the transactions hereby contemplated (collectively a "Claim"),
then, subject to the conditions set forth below, Parent agrees to indemnify and
hold harmless Company, its officers and directors from and against any and all
losses, liabilities, obligations, claims, actions, suits, proceedings,
investigations, demands, judgments, damages, expenses and costs (including,
without limitation, reasonable fees, expenses and disbursements of counsel) as
and when incurred, arising out of, based upon, or in connection with any Claim
on the terms set forth in this Section 6.9.
(C) In the event of any (i) claim, action, suit, proceeding or
investigation to which Section 6.9(A) is claimed to apply or (ii) Claim under
Section 6.9(B) (collectively "Indemnifiable Claims"), such party(ies) claiming
indemnity ("Indemnifiable Parties") shall promptly notify Parent in writing of
the institution of such Indemnifiable Claim and Parent shall promptly and in any
event within 10 days assume the defense of such Indemnifiable Claim, including
the employment of counsel (which counsel shall not otherwise be counsel to
Parent and shall otherwise be reasonably satisfactory to such Indemnified
Party(ies); provided, that Indemnified Party(ies)) shall have the right to
employ its or their own additional counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party(ies)
unless (i) the employment of such counsel shall have been authorized in writing
by Parent in connection with the defense of such Indemnifiable Claim or (i)
Parent shall not have promptly employed counsel reasonably satisfactory to such
Indemnified Party(ies) to have charge of defense of such Indemnifiable Claim or
(iii) there is, under applicable standards of professional conduct, a conflict
of any significant issue between the position of any two or more individual
parties to the Indemnifiable Claim, in any of which events such fees and
expenses of one such additional counsel shall be borne and promptly paid by
Parent as they are incurred by such Indemnified Party(ies). The Company and
Parent will cooperate in the defense of any Indemnifiable Claim. Parent shall
not be liable for any settlement of any Indemnifiable Claim effected without its
prior written consent, which shall not be unreasonably withheld. Parent shall
not, without the prior written consent of each Indemnified Party that is not
released as described in this sentence, settle or compromise any Indemnifiable
Claim or permit a default or consent to the entry of judgment in or otherwise
seek to terminate any pending or threatened Indemnifiable Claim in respect of
which indemnity may be sought under this Section 6.9 unless such settlement,
compromise, consent, or termination includes an unconditional release of such
Indemnified Party from all liability in respect of such Indemnifiable Claim.
(D) This Section 6.9 will survive any termination of this Agreement and the
consummation of the Merger at the Closing, is intended to benefit the Company
and the persons who are or were directors or officers of Company on or prior to
the Closing, and will be binding on all successors and assigns of the Company.
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ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to consummate the Merger are
subject to the fulfillment, at or before the Closing, of each and every one of
the following conditions, any one or more of which may be waived by Parent and
Merger Sub.
7.1 Representations and Warranties True at Closing. The representations
and warranties of the Company contained in this Agreement, as amended by the
Company Disclosures Letter and any additional disclosure letters delivered by
the Company and accepted by Parent pursuant to Section 9.3, shall be deemed to
have been made again at and as of the Closing with respect to the state of facts
then existing, and shall then be true and correct in all material respects,
except that if a representation is already limited to matters characterized as
"material," it shall be correct in all respects.
7.2 Performance of Covenants. All of the covenants required to be
performed by the Company at or before the Closing pursuant to the terms of this
Agreement shall have been duly performed.
7.3 Certificate. Parent and Merger Sub shall have received a certificate
signed by the Company to the effect that the conditions set forth in Sections
7.1 and 7.2 have been satisfied.
7.4 Opinion of Counsel. Parent and Merger Sub shall have received the
opinion of Fenwick & West LLP, counsel to the Company, in the form attached
hereto as Exhibit 7.4.
7.5 Resignations of Directors. Parent shall have received from each
director of the Company a duly executed resignation of such director effective
as of the Effective Time.
7.6 Material Changes. Between the date of this Agreement and the Closing
there shall not have occurred any event or transaction of the nature described
in Section 3.9 of this Agreement.
7.7 Consents. Parent shall have received, in writing and in form and
substance reasonably acceptable to Parent, all necessary consents, approvals and
waivers with respect to the consummation of the transactions contemplated by
this Agreement indicated or required to be indicated in Sections 3.3 and 3.23 of
the Company Disclosure Letter. Parent shall have received in writing all
necessary consents, approvals and waivers with respect to the consummation of
the transactions contemplated by this Agreement or required to be indicated in
Section 4.3 of this Agreement.
7.8 Good Standing Certificates. The Company shall have caused to be
furnished to Parent good standing certificates and tax good standing
certificates, dated as near to the date of the Closing as practical, from the
jurisdictions in which the Company is qualified to conduct business.
7.9 Registration Statement. The Registration Statement shall have been
declared effective by the SEC and no stop order or cease and desist order shall
have been issued by the SEC with respect thereto.
7.10 Shareholder Approval; Potential Dissenting Shares. This Agreement
and the Merger shall have been duly approved by the shareholders of the Company
in accordance with all applicable laws, the Articles of Incorporation and Bylaws
of the Company and otherwise. The percentage of the Company Common outstanding
as of the record date for the shareholders' meeting relating to shareholder
approval of the Merger and this Agreement which shall not have affirmatively
voted in favor of the Merger and this Agreement shall not exceed 10%; provided,
however, that such percentage shall be reduced to the extent that such
percentage would allow the Merger to be accounted for as a pooling of interests.
7.11 Pooling Letter from Parent's Accountants. The Board of Directors of
Parent shall have received an opinion from Ernst & Young LLP, dated as of the
Closing in form and substance satisfactory to Parent, stating that the Merger
will be treated as a pooling of interests for financial accounting purposes.
7.12 Affiliates Letters. Parent shall have received executed Affiliates
Letters.
7.13 No Action to Prevent Completion. Parent shall not have determined,
in the reasonable exercise of its discretion, that the transactions contemplated
by this Agreement have become inadvisable or impractical
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by reason of the institution or threat of institution, by any federal, state,
local or foreign governmental authority or any other person or entity, of
litigation or other proceedings with respect to or affecting the transactions
contemplated by this Agreement.
7.14 Employment Agreements. The Company and each of Tao Chow, Ming Chow,
Tri Dinh and Peter Liu shall have entered into his respective employment
agreement (the "Employment Agreement") with Parent in form attached hereto as
Exhibit 7.14.
7.15 No Material Adverse Changes. There shall have been no material
adverse changes in the Company's financial condition, business, assets or
liabilities (actual or contingent) from the date of this Agreement through the
Closing.
7.16 HSR Act. All waiting periods under the HSR Act relating to the
transactions contemplated under the Agreement shall have expired or terminated.
7.17 Conversion of Preferred. All shares of Company Preferred shall have
been converted into Company Common.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement are subject to the
fulfillment, at or before the Closing, of each and every one of the following
conditions, any one or more of which may be waived by the Company.
8.1 Representations and Warranties True at Closing. The representations
and warranties of Parent and Merger Sub contained in this Agreement, as amended
by any additional disclosure letters delivered by Parent and Merger Sub and
accepted by the Company pursuant to Section 9.3, shall be deemed to have been
made again at and as of the Closing with respect to the state of affairs then
existing, and shall then be true in all material respects except that if a
representation is already limited to matters characterized as "material" it
shall be correct in all respects.
8.2 Performance of Covenants. All of the covenants required to be
performed by Parent and Merger Sub at or before the Closing pursuant to the
terms of this Agreement shall have been duly performed.
8.3 Certificate. At the Closing, the Company shall have received a
certificate signed on behalf of Parent and Merger Sub to the effect that the
conditions set forth in Sections 8.1 and 8.2 have been satisfied.
8.4 Opinion of Counsel. The Company shall have received an opinion of
Heller Ehrman White & McAuliffe, counsel to Parent and Merger Sub, in the form
attached hereto as Exhibit 8.4.
8.5 Consents. The Company shall have received in writing all necessary
consents, approvals and waivers with respect to the consummation of the
transactions contemplated by this Agreement or required to be indicated in
Sections 3.3 and 3.23 of the Company Disclosure Letter. Parent shall have
received in writing all necessary consents, appraisals and waivers, copies of
which shall have been provided to the Company, with respect to the consummation
of the transaction contemplated by this Agreement or required to be indicated in
Section 4.3 of the Parent Disclosure Letter.
8.6 Good Standing Certificate. Parent shall have furnished the Company
good standing certificates, dated as near to the date of the Closing as
practical, from each of the Secretary of State of California, the California
Franchise Tax Board and each other jurisdiction in which Parent is qualified to
do business.
8.7 Registration Statement. The Registration Statement shall have been
declared effective and no stop order or cease and desist order shall have been
issued by the SEC with respect thereto.
8.8 Shareholder Approval. This Agreement and the Merger shall have been
duly approved by the Company shareholders in accordance with all applicable
laws, the Articles of Incorporation and Bylaws of the Company and otherwise.
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8.9 Pooling of Interests. The Board of Directors of the Company shall
have received copies of the opinions set forth in Section 7.11 above.
8.10 Tax Opinion. The Company shall have received an opinion of Fenwick &
West LLP as to the tax-free nature of the Merger. The parties to this Agreement
agree to make reasonable representations as requested by such counsel for the
purpose of rendering such opinion.
8.11 No Material Adverse Change. There shall have been no material
adverse changes in Parent's financial condition, business, assets or liabilities
(actual or contingent) from the date of this Agreement through the Closing.
8.12 Guaranty. Parent shall have assumed all of the obligations under the
personal guaranty relating to the Company's lease of its offices and facility
(the "Guaranty") or if the landlord does not accept Parent's assumption, then
Parent shall have indemnified Mr. Chow to his reasonable satisfaction with
respect to his obligations under the Guaranty after the Closing.
8.13 HSR Act. All waiting periods under the HSR Act relating to the
transactions contemplated under the Agreement shall have expired or terminated.
8.14 No Action to Prevent Completion. The Company shall not have
determined, in the reasonable exercise of its discretion, that the transactions
contemplated by this Agreement have become inadvisable or impractical by reason
of the institution or threat of institution, by any federal, state, local or
foreign governmental authority or any other person or entity, of litigation or
other proceedings with respect to or affecting the transactions contemplated by
this Agreement.
8.15 Employment Agreements. The Company and each of Tao Chow, Ming Chow,
Tri Dinh and Peter Liu shall have entered into his respective Employment
Agreement with Parent.
ARTICLE IX
COVENANTS OF THE COMPANY, PARENT AND MERGER SUB
9.1 Press Releases. No party hereto, nor any of their Affiliates, shall
issue any press release, make any public announcement or otherwise release any
information publicly regarding the Merger, without the consent of the other
parties which shall not be unreasonably withheld or delayed.
9.2 Confidential Information. Except as otherwise required by applicable
law, each party to this Agreement will keep confidential data, information or
documents it obtains from the other and will not disclose (other than to its
attorneys, accountants, advisors or prospective investors, who are themselves
required to keep such information confidential) prior to the Closing (or ever,
if the Closing does not occur) to any third party such data, information or
documents obtained from the other or from any director, officer, employee or
agent of the other or any data or documents prepared on the basis of such data,
information or documents except in each case for any data, information or
document which: (i) was or is in the public domain; (ii) was already known prior
to its disclosure by the other or (iii) is disclosed to a party by a third party
that is not an agent of the other.
9.3 Notification of Certain Events. Each party shall give prompt notice
to the other party as soon as practicable after it has actual knowledge of (i)
the occurrence, or failure to occur, of any event which would or would be likely
to cause any party's representations or warranties contained in this Agreement
to be untrue or incorrect in any material respect at any time from the date
hereof to the Effective Time, or (ii) any failure on its part or on the part of
any of its or its Subsidiaries, officers, directors, employees, representatives
or agents (other than persons or entities who are such employees,
representatives or agents only because they are appointed insurance agents of
such parties) to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by such party under this
Agreement. Each party shall have the right to deliver to another party a written
disclosure letter as to any matter of which it becomes aware following execution
of this Agreement which would constitute a breach of any representation,
warranty or covenant of this Agreement by such party, identifying on such
disclosure letter the representation, warranty or
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covenant which would be so breached, provided that each such disclosure letter
shall be delivered as soon as practicable after such party becomes aware of the
matter disclosed therein. The nondisclosing party shall have five business days
from its receipt of such disclosure letter to notify the disclosing party that
(a) it will close notwithstanding the new disclosure, (b) it will not close
based on such new disclosure, or (c) further investigation or negotiation is
required for it to reach a determination whether or not to close based on such
new disclosure.
9.4 Regulatory Approvals. As soon as practicable, Parent and the Company
each shall file with the United States Federal Trade Commission (the "FTC") and
the Antitrust Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions contemplated under
this Agreement as required by the HSR Act. Parent and the Company shall promptly
(i) supply the other with information which may be required in order to
effectuate such filings and (ii) supply any additional information which may be
reasonably required by the FTC and the DOJ which the parties may reasonably deem
appropriate.
ARTICLE X
MISCELLANEOUS
10.1 No Survival of Representations and Warranties. No representations
and warranties contained in this Agreement, including those contained in the
exhibits, schedules and other documents delivered pursuant to this Agreement,
shall survive the Closing and all such representations and warranties shall
expire at the Effective Time.
10.2 Expenses. Each party to this Agreement shall pay its own costs and
expenses (including all legal, accounting, broker, finder and investment banker
fees) relating to this Agreement, the negotiations leading up to this Agreement
and the transactions contemplated by this Agreement.
10.3 Amendment. This Agreement shall not be amended except by a writing
duly executed by the Company, Parent and Merger Sub.
10.4 Entire Agreement. This Agreement and the Agreement of Merger,
including the exhibits, schedules and other documents delivered pursuant to this
Agreement, contain all of the terms and conditions agreed upon by the parties
relating to the subject matter of this Agreement and supersede all prior and
contemporaneous agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written, respecting the subject matter
hereof.
10.5 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
10.6 Headings. The headings contained in this Agreement are intended
solely for convenience and shall not affect the rights of the parties to this
Agreement.
10.7 Mutual Contribution. The parties to this Agreement and their counsel
have mutually contributed to its drafting. Consequently, no provision of this
Agreement shall be construed against any party on the ground that party drafted
the provision or caused it to be drafted.
10.8 Notices. All notices, requests, demands, and other communications
made in connection with this Agreement shall be in writing and shall be deemed
to have been duly given on the date of delivery if delivered by hand delivery or
by facsimile to the persons identified below, two days after dispatch if sent by
a nationally-
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recognized overnight courier service or five days after mailing if mailed by
certified or registered mail postage prepaid return receipt requested addressed
as follows:
If to Parent or Merger Sub:
Mr. Ronald E. Ragland
REMEC, INC.
9404 Chesapeake Drive
San Diego, California 92123
Facsimile: (619) 560-4512
Confirmation Number: (619) 560-1301
With a copy to:
Victor A. Hebert, Esq.
Heller Ehrman White & McAuliffe
333 Bush Street, 31st Floor
San Francisco, California 94104
Facsimile: (415) 772-6268
Confirmation Number: (415) 772-6000
If to the Company:
C&S Hybrid, Inc.
804 Buckeye Court
Milpitas, California 95035
Attention: President
Facsimile: (408) 526-9318
Confirmation Number: (408) 526-9310
With a copy to:
Dennis DeBroeck, Esq.
Fenwick & West, LLP
Two Palo Alto Square
Palo Alto, California 94306
Facsimile: (415) 494-1417
Confirmation Number: (415) 494-0600
Such persons and addresses may be changed, from time to time, by means of a
notice given in the manner provided in this Section.
10.9 Waiver. Waiver of any term or condition of this Agreement by any
party shall not be construed as a waiver of any subsequent breach or failure of
the same term or condition, or a waiver of any other term or condition of this
Agreement.
10.10 Binding Effect; Assignment. The parties agree that this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors and assigns. No party to this Agreement may assign or
delegate, by operation of law or otherwise, all or any portion of its rights,
obligations or liabilities under this Agreement without the prior written
consent of all other parties to this Agreement, which they may withhold in their
absolute discretion.
10.11 No Third Party Beneficiaries. Except as provided in Section 6.9 of
this Agreement, nothing in this Agreement shall confer any rights upon any
person or entity which is not a party or an assignee of a party to this
Agreement.
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10.12 Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument. All counterparts shall be deemed an original of this
Agreement.
10.13 Further Assurances. After the Closing the parties to this Agreement
shall take such further actions as they agree may be reasonably necessary to
carry out the transactions contemplated by this Agreement.
10.14 Termination.
10.14.1 Mutual Consent. This Agreement may be terminated at any time
prior to the Closing by means of the written consent of Parent, Merger Sub
and the Company.
10.14.2 Failure to Satisfy Conditions Not Waived. This Agreement may
be terminated by Parent and Merger Sub alone by written notice if there is
a failure to satisfy a condition set forth in Article VII which condition
is not waived, and by the Company alone by written notice if there is a
failure to satisfy a condition set forth in Article VIII which condition is
not waived.
10.14.3 Closing Has Not Occurred. This Agreement may be terminated
by Parent alone or the Company alone, by written notice, if the Closing
shall not have taken place by July 31, 1997; provided that such right shall
not be available to any party whose failure to fulfill any obligation under
this Agreement has been a principal cause of or resulted in the failure of
the Merger to occur on or before such date.
10.14.4 Board Approval. This Agreement shall terminate automatically
if the Board of Directors of Parent has not approved this Agreement and the
Merger on or prior to April 28, 1997 or some later date as the parties may
mutually agree.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
C&S HYBRID, INC.
By
------------------------------------
Tao Chow, President and Chief
Executive Officer
REMEC, INC.,
By
------------------------------------
Joseph T. Lee, Executive Vice
President
C&S ACQUISITION CORPORATION,
By
------------------------------------
Joseph T. Lee, Executive Vice
President
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<PAGE> 155
EXHIBIT 1
EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (this "Agreement") is made
and entered into as of , 1997, by and between C & S Hybrid, Inc.,
a California corporation ("C & S"), REMEC, Inc., a California corporation
("REMEC") and Tao Chow ("Employee").
BACKGROUND
This Agreement is being executed in connection with the merger (the
"Merger") of C & S Acquisition Corporation, a California corporation, a wholly
owned subsidiary of REMEC with C & S, pursuant to an Agreement and Plan of
Reorganization and Merger dated April 10, 1997 by and among REMEC, C & S
Acquisition Corporation and C & S. All of Employee's capital stock and other
stockholders capital stock prior to the Merger is being converted into shares of
common stock of REMEC in connection with the Merger. Prior to the Merger,
Employee has been employed by C & S as its President and Chief Executive
Officer. As part of the Acquisition, C & S will become a wholly owned subsidiary
of REMEC. REMEC has asked Employee to continue his employment with C & S as a
subsidiary of REMEC after the Merger to provide, for the term of this Agreement,
the continued benefit of Employee's experience in the business acquired in the
Merger and to become a Vice President of REMEC.
AGREEMENT
THE PARTIES AGREE AS FOLLOWS:
1. Duties. (a) During the term of this Agreement, Employee shall be
employed by and shall serve C & S as its President and REMEC as a Senior Vice
President and C & S and REMEC agree to employ and retain Employee in such
capacity or in such other capacity as C & S and the Board of Directors of REMEC
may from time to time elect in the future provided, however, Employee's duties
may not be materially diminished or changed without his consent. Employee shall
be employed full time in such capacity and shall devote all of Employee's
business time, energy and skill to the affairs of C & S and REMEC (provided that
Employee may serve as a member of the Board of Directors of Exelics). During the
term of this Agreement, Employee shall report directly to Joe Lee or Errol
Ekaireb. Said duties shall be performed at such place or places within Santa
Clara County as C & S shall reasonably designate or as shall be reasonably
appropriate and necessary to the discharge of Employee's duties. Employee will
duly, punctually and faithfully observe the general employment policies and
practices of C & S and REMEC, including, without limitation, any and all rules,
regulations, policies and/or procedures which C & S and REMEC may now or
hereafter establish governing the conduct of its employees generally.
(b) If Employee is elected or appointed a director of C & S or REMEC or an
officer or director of any other subsidiary or affiliate of REMEC for any
periods during the term of this Agreement, Employee will serve in such
capacities without compensation in addition to that specified in Sections 2 and
3 hereof.
2. Term of Employment.
2.1 Basic Term. The term of employment of Employee shall commence on the
date first above written and shall continue for three years, unless terminated
as provided in this Section 2. Employee shall continue to be an employee of C &
S or REMEC after termination of this Agreement on substantially the same terms
set forth in this Agreement on an "At Will" basis.
2.2 Termination by Reason of Disability. In the event that, during the
term of this Agreement, Employee should become Disabled (as defined below), C &
S and REMEC shall have the right to terminate Employee's employment hereunder by
giving at least thirty (30) days written notification to Employee and payment to
Employee of all accrued salary, vested deferred compensation (other than pension
plan or profit
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sharing plan benefits, which will be paid in accordance with the applicable
plan), and all accrued vacation pay, all to the date of termination, but no
other compensation or reimbursement of any kind.
For purposes of this Agreement, "Disabled" shall mean the absence of
Employee performing Employee's duties with C & S and REMEC on a full-time basis
for a period of sixty (60) consecutive business days, or for shorter periods
aggregating ninety (90) or more business days in any twelve (12) month period,
as a result of incapacity due to mental or physical illness which is determined
by a physician selected by C & S or REMEC or their insurers, who is reasonably
acceptable to Employee.
2.3 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the calendar month following the calendar month during which
Employee's death occurred, and C & S or REMEC shall pay to Employee's estate
accrued salary, vested deferred compensation (other that pension plan or profit
sharing plan benefits, which will be paid in accordance with the applicable
plan), and all accrued vacation pay, all to the date of termination, but no
other compensation or reimbursement of any kind.
2.4 Termination For Cause. Termination For Cause (defined below) may be
effected by C & S and REMEC at any time during the term of this Agreement and
shall be effected by written notification to Employee. Upon Termination For
Cause, Employee shall be immediately paid all accrued salary, incentive
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits, which shall be paid in accordance
with the applicable plan), and all accrued vacation pay, all to the date of
termination, but Employee shall not be entitled to any other compensation or
reimbursement of any kind. Termination For Cause shall mean termination by C & S
and REMEC of Employee's employment by reason of Employee's (i) dishonesty
towards, fraud upon, C & S or REMEC; (ii) continued (following written notice)
refusal to obey reasonable and lawful orders or directions of C & S or REMEC; or
(iii) continued (following written notice) willful breach or habitual neglect of
duty.
2.5 Termination Without Cause. Notwithstanding any other provision of
this Section 2, C & S and REMEC shall have the right to terminate Employee's
employment without Cause at any time, but any such termination, other than as
expressly provided in Section 2.1 through 2.4 herein, shall be without prejudice
to Employee's rights to receive (in addition to all amounts due Employee in
connection with Termination For Cause) the Base Salary for the remainder of the
term. In addition, upon a termination without Cause, the Option (as defined in
Section 3.3) shall immediately become fully exercisable with respect to all
shares covered thereby. In the event that the Employee's employment is
terminated for any reason, then Employee, at the Employee's option, shall
continue to provide such services to REMEC and the Company as to allow for the
Employee's Restricted Stock (as defined in the Agreement and Plan of
Reorganization and Merger) to continue to vest. If Employee is terminated
without Cause, Employee may elect to receive a lump sum payment representing the
present value of the aggregate unpaid Base Salary discounted to present value at
a rate of five percent (5%) per annum in lieu of the Employee's right to receive
the base salary for the remainder of the Term.
2.6 Payment of Prorated Bonus. If Employee is terminated under Section
2.2, 2.3 or 2.5 during the first year of Employment, then Employee shall not
receive any bonus. If Employee is terminated under Section 2.2, 2.3 or 2.5 in
the second or third year of Employment, then Employee shall receive a bonus
amount equal to the prior year's bonus amount paid to Employee by Parent
multiplied by a fraction the numerator of which shall be the number of months
elapsed in such year of employment and the denominator of which shall be 12.
3. Salary, Benefits and Incentive Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee
as provided in Section 1 and subject to the terms and conditions of Section 2, C
& S or REMEC agrees to pay to Employee a base salary at the rate of Two Hundred
Thousand Dollars ($200,000) per year, payable at the times and places as C & S
or REMEC pays its payroll in general. Employee's salary shall be reviewed (but
may not be decreased) by REMEC Executive Management and the Board of Directors
of REMEC on an annual basis commencing in April 1998.
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3.2 Fringe Benefits. Employee shall be eligible to participate in such
benefit plans as are now generally available or later made generally available
to employees of REMEC, including, without limitation, medical, dental, life and
disability insurance plans, and the REMEC Employee Bonus Pool. Employee will
also be beneficiary of a $1,000,000 Term Life Insurance Policy.
3.3 Stock Option. Employee shall be granted a stock option (the "Option")
to purchase 30,000 shares of REMEC Common Stock, the price to be at the closing
price of REMEC, Inc., stock listed on the NASDAQ National Market System on the
date of the closing of the Acquisition which is anticipated to be
, 1997. The stock option will be an incentive stock option and shall be
governed by the terms of REMEC's Incentive Stock Option Agreement to be provided
to employee ("Option Documentation").
3.4 Vacation; Sick Time. Employee shall be entitled to six (6) weeks per
year vacation. Employee will be entitled to and sick time in accordance with
existing REMEC policy. Sick time balances will not be payable upon termination.
The days selected for Employee's vacation must be mutually agreeable to the
Company and Employee. Employee hereby waives all claims to sick time in excess
of two hundred forty (240) hours accrued prior to the Merger.
3.5 Relocation Expenses. Notwithstanding any other provision of this
Agreement, C & S and REMEC may not require Employee to relocate his permanent
office outside of the Santa Clara County Area. However, if C & S or REMEC
requests that Employee relocate and Employee consents, in his sole and absolute
discretion, to such request, then C & S or REMEC shall reimburse Employee for:
(i) all expenses actually incurred by Employee in connection with his
relocation, including travel, moving and storage expenses for Employee and his
immediate family and their household effects; and (ii) real estate commissions
incurred by Employee in connection with, at Employee's option, either the sale
of his current residence or the purchase of a new residence.
4. Covenant Not to Compete.
4.1 Definitions. For the purposes of this Section 4, the following terms
shall have the following meanings:
"Business" means the design, manufacture and sale of Products,
including the business of C & S as currently conducted.
"Products" shall mean those microwave components and subassemblies,
including filters, amplifier, up convertors, down convertors, transmit and
receive modules, oscillators and synthesizers or any substantially similar
products, which are currently sold by C&S.
"Restriction Period" shall mean the period commencing upon the date of
this Agreement and ending three years from date of this Agreement.
4.2 Non-Competition. Employee covenants to REMEC that during the
Restriction Period, and except as provided in Section 4.3 below, he shall not:
(i) engage in the Business, directly or indirectly, as a principal,
owner, shareholder, partner, officer, director or employee throughout all
geographical areas in which C & S now conducts the Business and especially
in the California counties of Alameda, Contra Costa, Los Angeles, Marin,
Orange, Riverside, San Diego, San Francisco, San Mateo, Santa Clara, Santa
Cruz, Solano and Ventura;
(ii) induce or attempt to induce, directly or indirectly, any
customer, supplier or distributor of REMEC or C & S to terminate its
relationship with REMEC or C & S in order to enter into any such
relationship with Employee or with any other person in competition with the
Business; or
(iii) solicit or induce or attempt to solicit or induce, directly or
indirectly, any employee of REMEC or C & S, to terminate such employee's
employment relationship with REMEC or C & S in order to enter into any such
relationship with Employee or with any other person in competition with the
Business, whether or not such person would commit a breach of any
employment agreement by reason of leaving service.
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4.3 Exceptions. Notwithstanding the provisions of Section 4.2 above,
nothing shall prevent Employee from (i) owning less than 5% of the outstanding
shares of any corporation traded on a recognized securities exchange or the
NASDAQ Stock Market, (ii) maintaining or disposing of his ownership of capital
stock of Excelics, or (iii) serving as a member of the Board of Directors of
Excelics. The Employee further agrees not to participate in any transactions
either on behalf of REMEC or Excelics which involve Excelics, on the one hand,
and REMEC or any of its subsidiaries, on the other hand.
4.4 Notice. Employee shall notify REMEC of any proposed activity that
might be prohibited by this Agreement and shall describe the proposed activity
in reasonable detail in such notice.
5. Severability. The scope and effect of the covenant contained in this
Agreement shall be as broad as may be permitted under the provisions of
applicable law. To the extent that the language of such covenants may restrict
competition to a greater degree than permitted by such applicable law, that
portion thereof shall be ineffective, but the provisions of the covenants shall
nevertheless remain effective with respect to such portions as shall be
permitted by applicable law.
6. Miscellaneous.
6.1 Confidentiality. Employee shall enter into a customary Invention and
Confidential Disclosure Agreement in a form agreed upon by Employee, C & S and
REMEC.
6.2 Waiver. The waiver of the breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent breach of the
same or other provision hereof.
6.3 Entire Agreement Modifications. Except as otherwise provided herein,
this Agreement and the Option Documentation, taken together, represent the
entire understanding among the parties with respect to the subject matter
hereof, and this Agreement and the Option Documentation, taken together,
supersedes any and all prior understandings, agreements, plans and negotiations,
whether written or oral, with respect to the subject matter hereof, including
without limitation, any understandings, agreements, or obligations respecting
any past or future compensation, bonuses, reimbursements, or other payments to
Employee from C & S and REMEC. All modifications to the Agreement must be in
writing and signed by the party against whom enforcement of such modification is
sought.
6.4 Notices. All notices and other communications under this Agreement
shall be in writing and shall be given by personal delivery or by telegraph or
first class mail, certified or registered with return receipt requested, and
shall be deemed to have been duly given upon receipt if personally delivered,
three days after mailing, if mailed, or 24 hours after transmission, if
delivered by telegram, to the respective persons named below:
<TABLE>
<S> <C>
If to C & S: C & S Hybrid, Inc.
804 Buckeye Court
Milpitas, CA 95035
Attn: President
If to REMEC: REMEC, Inc.
9404 Chesapeake Drive
San Diego, CA 92123
Attention: President
If to Employee: Tao Chow
=======================
-----------------------
</TABLE>
Any party may change such party's address for notices by notice duly given
pursuant to this Section.
6.5 Headings. The Section headings herein are intended for reference and
shall not be used in the construction or interpretation of this Agreement.
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6.6 Governing Law; Consent to Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of California
applicable to contracts entered into and wholly to be performed within the State
of California by California residents. Employee hereby submits to the exclusive
jurisdiction and venue of the Superior Court of the State of California for the
County of Santa Clara or the United States District Court for the Northern
District of California for purposes of any legal action. Employee agrees that
service upon Employee in any such action may be made by first class mail,
certified or registered, in the manner provided for delivery of notices in this
Agreement.
6.7 Assignment/Sale. The rights and obligations of C & S and REMEC under
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of C & S and REMEC and any subsequent assignee. No
assignment of this Agreement by C & S or REMEC shall relieve them of their
obligations hereunder, including any assignment by sale, merger, consolidation,
liquidation or otherwise. Employee may not assign his rights and obligations
under this Agreement.
6.8 Supersedes Prior Agreements. This Agreement supersedes and replaces
all employment contract rights Employee may have had with C & S prior to the
Merger including, without limitation, and Employee acknowledges that all of
Employee's rights under any employment contract(s) with C & S prior to the
Merger have been satisfied.
6.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.10 Withholding. All sums payable to the Employee hereunder shall be
reduced by all federal, state, local and other withholding and similar taxes and
payments required by applicable law.
6.11 Enforcement. If any portion of this Agreement is determined to be
invalid or unenforceable, such portion shall be adjusted, rather than voided, to
achieve the intent of the parties to the extent possible, and the remainder
shall be enforced to the maximum extent possible.
6.12 Arbitration. Any dispute, controversy or claim arising out of or in
respect to this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the request of
either party be submitted to and settled by arbitration conducted before a
single arbitrator in Santa Clara County, California in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. The
arbitration of such issues, including the determination of any amount of damages
suffered, shall be final and binding upon the parties to the maximum extent
permitted by law. The arbitrator in such action shall not be authorized to
change or modify any provision of this Agreement. Judgement upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrator shall award reasonable expenses and attorneys fees
(including reimbursement of the assigned arbitration costs) to the prevailing
party upon application therefor.
6.13 Injunctive Relief. The parties expressly acknowledge that the
services by Employee to C & S and REMEC are of a special, unique, unusual,
extraordinary or intellectual character, and that it is not feasible to
adequately compensate C & S and REMEC in damages in an action at law for the
failure of Employee to perform his obligations hereunder. Accordingly, in the
event of any breach hereunder, C & S and REMEC shall be entitled, from a court
of competent jurisdiction and without posting bond, to full and complete relief
as a court of equity can then afford, in addition to all other relief and
remedies otherwise available.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
C & S HYBRID, INC.
By:
--------------------------------------
Title:
--------------------------------------
REMEC, INC.
By:
--------------------------------------
Title:
--------------------------------------
EMPLOYEE
--------------------------------------
Tao Chow
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<PAGE> 161
APPENDIX B
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement of Merger") is made as of
, by and among REMEC, Inc., a California corporation ("REMEC"),
C&S Hybrid, a California corporation ("C&S"), and C&S Acquisition Corporation, a
California corporation ("Merger Sub"), which is a wholly owned subsidiary of
REMEC.
BACKGROUND
C&S and Merger Sub desire that Merger Sub be merged with and into C&S (the
"Merger"), and that C&S be the surviving corporation and become a wholly owned
subsidiary of REMEC pursuant to the terms and conditions of this Agreement of
Merger.
THE PARTIES AGREE AS FOLLOWS:
1. The Merger. Upon the filing of this Agreement of Merger (the "Effective
Time") and the related officers' certificates with the Secretary of State of the
State of California in accordance with the California Corporations Code, Merger
Sub shall be merged with and into C&S. C&S shall be the surviving corporation.
2. Conversion of Outstanding Shares of Merger Sub. Each share of Merger
Sub Common issued and outstanding immediately prior to the Effective Time shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted at and as of the Effective Time, into one share of Common
Stock of C&S ("C&S Common").
3. Conversion of Outstanding Shares of Radian Common Stock. Each share of
C&S Common outstanding immediately prior to the Effective Time (except those
shares of C&S Common which are "dissenting shares" within the meaning of the
Section 1300(b) of the California Corporations Code) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted at
and as of the Effective Time into the right to receive .1654618 of a share of
Common Stock (the "Exchange Ratio") of REMEC ("REMEC Common") for each share of
C&S Common.
4. Fractional Shares. Holders of C&S Common shall receive only whole
shares of REMEC Common; in lieu of any fractional share of REMEC Common, holders
of C&S Common shall receive in cash the fair market value of such fractional
share valuing REMEC Common at the average of the closing prices of the REMEC
Common on the Nasdaq National Market on the five trading days immediately
preceding the Effective Time as listed in The Wall Street Journal.
5. Conversion of C&S Options. At the Effective Time, each outstanding
option to purchase C&S Common ("C&S Option"), whether vested or unvested, issued
under the C&S's Stock Option Plan (the "C&S Plan") shall thereafter entitle the
holder thereof to receive, upon exercise thereof, that number of REMEC Common
(rounded down to the nearest whole number) equal to the product of the number of
shares of C&S Common that were purchasable under the C&S Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, at an exercise
price for each full share of REMEC Common equal to the quotient obtained by
dividing (i) the exercise price per share of C&S Common with respect to such C&S
Option, by (ii) the Exchange Ratio, which exercise price per share shall be
rounded up to the nearest one cent. The number of shares of REMEC Common that
may be purchased by a holder on the exercise of any C&S Option shall not include
any fractional share of REMEC Common but shall be rounded down to the next lower
whole share of REMEC Common.
6. Rights After the Effective Time. As soon as practicable after the
Effective Time, each holder of record of a certificate or certificates which,
prior to the Effective Time, represented outstanding shares of the C&S Common
shall be entitled, upon surrender of such certificate or certificates to REMEC
(or in the case of certificates that have been lost, stolen or destroyed, lost
certificate affidavits therefor and indemnification in connection therewith) or
to an exchange agent designated by REMEC, in form suitable for transfer, to
receive
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a certificate or certificates representing the number of whole shares of REMEC
Common to which such shareholder is entitled under Section 4 together with cash
in lieu of any fractional share of REMEC Common in an amount calculated in
accordance with Section 4.
7. Articles of Incorporation of C&S. Immediately after the Effective Time
the Articles of Incorporation of C&S shall be amended and restated in its
entirety to read as follows:
"I.
The name of this corporation is C&S Hybrid.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
This corporation is authorized to issue one class of shares, which shall be
known as Common Stock. The total number of shares of Common Stock which this
corporation is authorized to issue is 1,000,000 (one million) shares.
IV.
The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. This
corporation is also authorized, to the fullest extent permissible under
California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by by-law, agreement or otherwise, for
breach of duty to this corporation and its shareholders in excess of that
expressly permitted by Section 317 and to advance defense expenses to its agents
in connection with such matters as they are incurred, subject to the limits on
such excess indemnification set forth in Section 204 of the California
Corporations Code. If, after the effective date of this Article, California law
is amended in a manner which permits a corporation to limit the monetary or
other liability of its directors or to authorize indemnification of, or
advancement of defense expenses to, its directors or other persons, in any such
case to a greater extent than is permitted on such effective date, the
references in this Article to "California law" shall to that extent be deemed to
refer to California law as so amended."
8. Other Effects of the Merger. The other effects of the Merger shall be
as prescribed by law.
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IN WITNESS WHEREOF, REMEC, C&S and Merger Sub have executed this Agreement
as of the first date written above.
REMEC, INC.
By /s/
------------------------------------
Errol Ekaireb, President
By /s/
------------------------------------
Thomas A. George, Secretary
C&S ACQUISITION CORPORATION
By /s/
------------------------------------
Errol Ekaireb, President
By /s/
------------------------------------
Thomas A. George, Secretary
C&S Hybrid
By /s/
------------------------------------
Tao Chow, President
By /s/
------------------------------------
, Secretary
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<PAGE> 164
OFFICERS' CERTIFICATE OF APPROVAL OF
AGREEMENT OF MERGER
Errol Ekaireb and Thomas A. George certify as follows:
1. We are the President and the Secretary, respectively, of C&S Acquisition
Corporation, a California corporation (the "Corporation").
2. The Agreement of Merger by and among REMEC, Inc., a California
corporation, C&S Hybrid, a California corporation, and the Corporation, dated
, 1997 to which this Certificate is attached (the "Agreement of
Merger"), was duly approved by the board of directors and the sole shareholder
of the Corporation.
3. The Corporation has one class of shares outstanding, Common Stock. The
total number of outstanding shares of the Corporation entitled to vote on the
Agreement of Merger was 1,000 shares of Common Stock. The percentage vote
required was the affirmative vote of a majority of the outstanding shares of the
Corporation's Common Stock entitled to vote. The Agreement of Merger was
approved by the vote of the outstanding shares of Common Stock, which equaled or
exceeded the vote required.
4. The vote of the shareholders of REMEC, Inc. was not required.
We further declare under penalty of perjury that the matters set forth in
this Certificate are true and correct of our own knowledge. Executed at San
Diego, California on , 1997.
--------------------------------------
Errol Ekaireb, President
--------------------------------------
Thomas A. George, Secretary
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<PAGE> 165
OFFICERS' CERTIFICATE OF APPROVAL OF
AGREEMENT OF MERGER
Tao Chow and certify as follows:
1. We are the President and the Secretary, respectively, of C&S Hybrid, a
California corporation (the "Corporation").
2. The Agreement of Merger by and among REMEC, Inc., a California
corporation, C&S Acquisition Corporation, a California corporation, and the
Corporation dated , 1997 to which this Certificate is attached (the
"Agreement of Merger"), was duly approved by the board of directors and the
shareholders of the Corporation.
3. The Corporation has one class of shares outstanding, Common Stock. The
total number of outstanding shares of the Corporation entitled to vote on the
Agreement of Merger was shares of Common Stock. The number of shares
voting in favor of the Agreement of Merger equaled or exceeded the vote
required. The percentage vote required was the affirmative vote of a majority of
the outstanding shares of the Common Stock entitled to vote.
We further declare under penalty of perjury that the matters set forth in
this Certificate are true and correct of our own knowledge. Executed at
, California on , 1997.
--------------------------------------
Tao Chow, President
--------------------------------------
, Secretary
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<PAGE> 166
APPENDIX C
CHAPTER 13
GENERAL CORPORATION LAW OF CALIFORNIA
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE; "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of such corporation
entitled to vote on the transaction, and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under
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such sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE; TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within 6 months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISER'S REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
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SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof, but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
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(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by or under common control with, another party
to the reorganization or short-form merger, in any action to attack the validity
of the reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, (1) a party to a reorganization or
short-form merger which controls another party to the reorganization or
short-form merger shall have the burden of proving that the transaction is just
and reasonable as to the shareholders of the controlled party, and (2) a person
who controls two or more parties to a reorganization shall have the burden of
proving that the transaction is just and reasonable as to the shareholders of
any party so controlled.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has the power to indemnify its officers and directors
against liability for certain acts pursuant to Section 317 of the General
Corporation Law of California. Articles Fifth and Sixth of the registrant's
Amended and Restated Articles of Incorporation provide as follows:
"Fifth: The liability of directors of this Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law."
"Sixth: This Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) for breach of
duty to this Corporation and its shareholders through bylaw provisions, or
through agreements with the agents, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject to the limits on such excess indemnification set
forth in Section 204 of the Code."
In addition, Article V of the registrant's By-laws provides that the
registrant shall indemnify its directors and executive officers to the fullest
extent not prohibited by California General Corporation Law and provides for the
advancement of expenses upon a receipt of an undertaking to repay such amounts
if the person is determined ultimately not to be entitled to indemnification.
The registrant has entered into Indemnification Agreements (Exhibit 10.3
hereto) with its officers and directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Reorganization and Merger by and among C&S Hybrid, Inc.,
REMEC, Inc. and C&S Acquisition Corporation dated April 10, 1997 (filed as
Appendix A to the Prospectus/Proxy Statement included in the Registration
Statement)
*2.2 Agreement of Merger by and among C&S Hybrid, Inc., REMEC, Inc. and C&S Acquisition
Corporation (filed as Appendix B to the Prospectus/Proxy Statement included in the
Registration Statement)
*2.3 Voting Agreement between Tao Chow and REMEC, Inc.
3.1 (1) Restated Articles of Incorporation
3.2 (1) Bylaws
4.1 (1) Specimen Common Stock Certificate
5.1 Opinion of Heller Ehrman White & McAuliffe
8.1 Tax Opinion of Fenwick & West LLP
10.1 (1) Equity Incentive Plan
10.2 (1) Employee Stock Purchase Plan
10.3 (1) Form of Indemnification Agreements between registrant and its officers and
directors
10.4 (1) Credit Agreement between the registrant and The Bank of California, N.A., dated
June 17, 1993, as amended
+10.5 (1) Manufacturing Agreement Terms and Conditions dated August 10, 1995 between the
registrant and P-COM, Inc.
10.6 (1) Standard Industrial Lease between the registrant and Transcontinental Realty
Investors, Inc., dated February 1, 1990, as amended.
10.7 (1) Standard Industrial Lease between the registrant and Chesapeake Business Park
1983, dated December 13, 1988, as amended.
</TABLE>
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<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------------------
<C> <S>
10.8 Form of Employment and Noncompetition Agreement between Tao Chow and REMEC, Inc.
(filed as Exhibit 1 to Appendix A of the Prospectus/Proxy Statement included in
the Registration Statement)
11.1 Statement of computation of net income per common share
21.1 Subsidiaries of the registrant
23.1 Consents of Ernst & Young LLP, Independent Auditors
23.2 Consent of Ireland San Filippo, LLP
23.3 Consent of Heller Ehrman White & McAuliffe (contained in opinion filed as Exhibit
5.1)
23.4 Consent of Fenwick & West LLP (contained in opinion filed as Exhibit 8.1)
24.1 Power of Attorney (included on Pages II-3 and II-4)
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Registration Statement on Form S-1 filed on February 1, 1996
and incorporated herein by reference.
+ Confidential treatment granted
* Previously filed
(b) Financial Statement Schedule
II. Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
B. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 173
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, REMEC, Inc. has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in San
Diego, California on June 12, 1997.
REMEC, INC.
By: /s/ THOMAS A. GEORGE
------------------------------------
Thomas A. George
Chief Financial Officer,
Senior Vice President and Secretary
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement on Form S-4 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ ----------------------------------- --------------
<C> <S> <C>
* Chairman of the Board and Chief June 12, 1997
- ------------------------------------------ Executive Officer (Principal
Ronald E. Ragland Executive Officer)
* President, Chief Operating Officer June 12, 1997
- ------------------------------------------ and Director
Errol Ekaireb
* Executive Vice President, President June 12, 1997
- ------------------------------------------ of REMEC Microwave Division and
Jack A. Giles Director
* Executive Vice President and June 12, 1997
- ------------------------------------------ Director
Joseph T. Lee
Senior Vice President, Chief June 12, 1997
- ------------------------------------------ Engineer and Director
Denny Morgan
* Chief Financial Officer, Senior June 12, 1997
- ------------------------------------------ Vice President and Secretary
Thomas A. George (Principal Financial and
Accounting Officer
* Director June 12, 1997
- ------------------------------------------
Thomas A. Corcoran
Director 1997
- ------------------------------------------
William H. Gibbs
</TABLE>
II-3
<PAGE> 174
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ ----------------------------------- --------------
<C> <S> <C>
* Director June 12, 1997
- ------------------------------------------
Andre R. Horn
* Director June 12, 1997
- ------------------------------------------
Gary L. Luick
* Director June 12, 1997
- ------------------------------------------
Jeffrey M. Nash
* /s/ THOMAS A. GEORGE
- ------------------------------------------
Thomas A. George
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 175
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Reorganization and Merger by and among C&S Hybrid, Inc.,
REMEC, Inc. and C&S Acquisition Corporation dated April 10, 1997 (filed as
Appendix A to the Prospectus/Proxy Statement including in the Registration
Statement)
*2.2 Agreement of Merger by and among C&S Hybrid, Inc., REMEC, Inc. and C&S Acquisition
Corporation (filed as Appendix B to the Prospectus/Proxy Statement included in the
Registration Statement)
*2.3 Voting Agreement between Tao Chow and REMEC, Inc.
3.1 (1) Restated Articles of Incorporation
3.2 (1) Bylaws
4.1 (1) Specimen Common Stock Certificate
5.1 Opinion of Heller Ehrman White & McAuliffe
8.1 Tax Opinion of Fenwick & West LLP
10.1 (1) Equity Incentive Plan
10.2 (1) Employee Stock Purchase Plan
10.3 (1) Form of Indemnification Agreements between registrant and its officers and
directors
10.4 (1) Credit Agreement between the registrant and The Bank of California, N.A., dated
June 17, 1993, as amended
+10.5 (1) Manufacturing Agreement Terms and Conditions dated August 10, 1995 between the
registrant and P-COM, Inc.
10.6 (1) Standard Industrial Lease between the registrant and Transcontinental Realty
Investors, Inc., dated February 1, 1990, as amended.
10.7 (1) Standard Industrial Lease between the registrant and Chesapeake Business Park
1983, dated December 13, 1988, as amended.
10.8 Form of Employment and Noncompetition Agreement between Tao Chow and REMEC, Inc.
(filed as Exhibit 1 to Appendix A of the Prospectus/Proxy Statement included in
the Registration Statement)
11.1 Statement of computation of net income per common share
21.1 Subsidiaries of the registrant
23.1 Consents of Ernst & Young LLP, Independent Auditors
23.2 Consent of Ireland San Filippo, LLP
23.3 Consent of Heller Ehrman White & McAuliffe (contained in opinion filed as Exhibit
5.1)
23.4 Consent of Fenwick & West LLP (contained in opinion filed as Exhibit 8.1)
24.1 Power of Attorney (included on Pages II-3 and II-4)
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to Registrant's Registration Statement on Form S-1 filed on February 1, 1996
and incorporated herein by reference.
+ Confidential treatment granted
* Previously filed
<PAGE> 176
C&S HYBRID, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
JUNE __, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF C&S
HYBRID, INC.
The undersigned hereby appoints Tao Chow and ________, or either of
them, as proxies, each with full power of substitution, and hereby authorizes
them to represent and to vote, as designated below, all shares of Common Stock,
no par value, and Preferred Stock, no par value, of C&S Hybrid, Inc. ("C&S
Hybrid"), held of record by the undersigned on June __, 1997 at the Special
Meeting of Shareholders of C&S Hybrid to be held at the executive offices of C&S
Hybrid, located at 804 Buckeye Court, Milpitas, California on June __, 1997, at
____ a.m., local time, and at any adjournments or postponements thereof.
1. Approval of the Merger Agreement and the Merger, as described in the
accompanying Prospectus/Proxy Statement.
/ / FOR / / AGAINST / / ABSTAIN
2. The transaction of such other business as may properly come before the
Special Meeting or any adjournments or postponements of the Special
Meeting.
The Board of Directors recommends that you vote FOR the proposals.
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. WHEN NO CHOICE IS
INDICATED, THIS PROXY WILL BE VOTED FOR THE PROPOSALS. IN THEIR DISCRETION, THE
PROXY HOLDERS ARE AUTHORIZED TO VOTE, IN ACCORDANCE WITH THEIR DISCRETION, UPON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENTS OR POSTPONEMENTS THEREOF.
(Continued and to be signed on reverse side)
<PAGE> 177
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF C&S
HYBRID, INC.
________________________________________
Print Shareholder(s) name
________________________________________
Signatures of Shareholder(s) or
Authorized Signatory(ies)
________________________________________
Dated: ____________________________ 1997
Please sign exactly as your name appears
on your stock certificate. If shares of
stock stand of record in the names of
two or more persons or in the name of
husband and wife, whether as joint
tenants or otherwise, both or all of
such persons should sign the proxy. If
shares of stock are held of record by a
corporation, the proxy should be
executed by the president or vice
president and the secretary or assistant
secretary. Executors, administrators or
other fiduciaries who execute the above
proxy for a deceased shareholder should
give their full title. Please date the
proxy.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE PROXY IN THE
ENCLOSED POSTAGE PAID ENVELOPE SO THAT YOUR SHARES MAY BE
REPRESENTED AT THE SPECIAL MEETING
<PAGE> 1
Exhibit 5.1
June 12, 1997
21860-0007
REMEC, Inc.
9404 Chesapeake Drive
San Diego, California 92123
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to REMEC, Inc., a California corporation (the
"Company"), in connection with the Registration Statement on Form S-4
(Registration No. 333-27023) filed with the Securities and Exchange Commission
on May 13, 1997 (the "Registration Statement") for the purpose of registering
under the Securities Act of 1933, as amended, 860,000 shares of the Common
Stock of the Company, par value $.01 per share (the "Shares"), to be issued in
connection with the proposed merger (the "Merger") of C&S Acquisition
Corporation, a California corporation and wholly owned subsidiary of the
Company ("Merger Sub"), with and into C&S Hybrid, Inc., a California
corporation ("C&S"), pursuant to the Agreement and Plan of Reorganization and
Merger dated April 10, 1997 (the "Agreement") by and among the Company, Merger
Sub and C&S and related Merger Agreement by and among C&S, the Company and
Merger Sub.
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of natural persons and the
conformity to the originals of all records, documents and instruments submitted
to us as copies. We have based our opinion upon our review of the following
records, documents, instruments and certificates:
(a) The Restated Articles of Incorporation of the Company certified
by the Secretary of State of the State of California as of June
9, 1997, and certified to us by an officer of the Company as
being complete and in full force and effect as of the date of
this opinion;
(b) The Bylaws of the Company certified to us by an officer of the
Company as being complete and in full force and effect as of the
date of this opinion;
<PAGE> 2
REMEC, Inc.
June 12, 1997 Page 2
(c) A Certificate of the Secretary of the Company: (i) certifying
that copies of all records of proceedings and actions of the
Board of Directors of the Company, including any committee
thereof, relating to the Merger have been provided to us; and
(ii) certifying as to certain factual matters;
(d) The Registration Statement;
(e) The Agreement;
(f) The Merger Agreement included as exhibit 2.1 to the Registration
Statement; and
(g) A Certificate of ChaseMellon Shareholder Services, Transfer
Agent to the Company, as to the number of shares of Common Stock
issued and outstanding as of June 10, 1997.
This opinion is limited to the laws of the State of California, and we
disclaim any opinion as to the laws of any other jurisdiction. We further
disclaim any opinion as to any other statute, rule, regulation, ordinance, order
or other promulgation of any other jurisdiction or any regional or local
governmental body or as to any related judicial or administrative opinion.
Based upon the foregoing and our examination of such questions of law as
we have deemed necessary or appropriate for the purpose of this opinion, and
assuming that: (i) the Registration Statement becomes and remains effective
during the period when the Shares are offered and sold; (ii) the Shares are
issued, delivered and paid for in accordance with the terms of the Registration
Statement, the Agreement and the Merger Agreement; (iii) the Merger Agreement is
executed in the form contained in exhibit 2.1 to the Registration Statement;
(iv) the shareholders of C&S approve the Merger; and (v) all applicable
securities laws are complied with, it is our opinion that the Shares, when
issued by the Company, will be validly issued, fully paid and nonassessable.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon by
you for any other purpose, or relied upon by any other person, firm, corporation
or other entity for any purpose, without our prior written consent. We disclaim
any obligation to advise you of any developments that come to our attention
after the date of this opinion.
We hereby consent to the filing of this opinion as an exhibit to, and
our being named under the heading "Legal Matters" in, the Registration
Statement.
Very truly yours,
/s/ Heller Ehrman White
and McAuliffe
<PAGE> 3
REMEC, Inc.
June 12, 1997 Page 3
<PAGE> 1
EXHIBIT 8.1
June _____, 1997
VIA FEDEX DELIVERY
C&S HYBRID, INC.
804 Buckeye Court
Milpitas, California 95035
Attention: Board of Directors
Re: Closing Tax Opinion for Merger Transaction Involving C&S
Hybrid, Inc. and REMEC, Inc.
Ladies and Gentlemen:
We have been requested to render this opinion concerning
certain matters of U.S. federal income tax law in connection with the proposed
merger (the "MERGER") involving C&S Hybrid, Inc., a corporation organized and
existing under the laws of the State of California ("C&S HYBRID"), REMEC, Inc.,
a corporation organized and existing under the laws of the State of California
("REMEC") and C&S Acquisition Corporation, a corporation organized and existing
under the laws of the State of California and a wholly-owned subsidiary of REMEC
("REMEC SUB").
The Merger is structured as a statutory merger of REMEC Sub
with and into C&S Hybrid, with C&S Hybrid surviving the merger and becoming a
wholly-owned subsidiary of REMEC pursuant to the applicable corporate laws of
the State of California and in accordance with the Agreement and Plan of
Reorganization and Merger by and among C&S Hybrid, REMEC and REMEC Sub, dated as
of April 10, 1997, and exhibits thereto (collectively, the "AGREEMENT") and the
related Agreement of Merger (collectively, the "MERGER AGREEMENTS"). Except as
otherwise indicated, capitalized terms used herein have the meanings set forth
in the Merger Agreements. All section references, unless otherwise indicated,
are to the Internal Revenue Code of 1986, as amended (the "CODE").
We have acted as legal counsel to C&S Hybrid in connection
with the Merger. As such, and for the purpose of rendering this opinion, we have
examined and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto), among others:
<PAGE> 2
1. The Merger Agreements;
2. An Officers' Tax Certificate of REMEC and REMEC Sub dated
June _______, 1997, signed by an authorized officer of each of REMEC and REMEC
Sub and delivered to us from REMEC and REMEC Sub and incorporated herein by
reference; and
3. An Officer's Tax Certificate of C&S Hybrid dated June
________, 1997, signed by an authorized officer of C&S Hybrid and delivered to
us from C&S Hybrid and incorporated herein by reference.
In addition, we have reviewed such other instruments and
documents related to the formation, organization and operation of C&S Hybrid,
REMEC and REMEC Sub or the consummation of the Merger and the transactions
contemplated thereby as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or
obtained representations and are relying thereon (without any independent
investigation or review thereof) that:
(1) Original documents (including signature) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time) due execution and delivery of all
documents where due execution and delivery are prerequisites to the
effectiveness thereof;
(2) Any representation or statement referred to above made "to
the best of knowledge" or otherwise similarly qualified is correct without such
qualification;
(3) The Merger will be consummated pursuant to the Merger
Agreements and will be effective under applicable state law;
(4) There is no plan or intention on the part of the C&S
Hybrid shareholders to engage in a sale, exchange, transfer, distribution,
pledge, disposition or any other transaction which would result in a direct or
indirect disposition of (a) shares of REMEC Common Stock to be issued to C&S
Hybrid shareholders in the Merger, which shares would have an aggregate fair
market value, as of the Effective Time, in excess of 50% of the aggregate fair
market value, immediately prior to the Merger, of all outstanding shares of C&S
Hybrid stock, or (b) more than 50% of the shares of REMEC Common Stock to be
received in exchange for C&S Hybrid Common Stock in the Merger.
(5) Following the Merger, C&S Hybrid will continue its
historic business or use a significant portion of its historic business assets
in a business;
(6) To the extent any expenses relating to the Merger (or the
"plan of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c)
with respect to the Merger) are funded directly or indirectly by a party other
than the incurring party, such expenses will be within the guidelines
established in Revenue Ruling 73-54, 1973-1 C.B. 187;
2
<PAGE> 3
(7) No outstanding indebtedness of C&S Hybrid, REMEC or REMEC
Sub has or will represent equity for tax purposes; no outstanding equity of C&S
Hybrid, REMEC or REMEC Sub has represented or will represent indebtedness for
tax purposes; no outstanding security, instrument, agreement or arrangement that
provides for, contains, or represents either a right to acquire REMEC capital
stock (or to share in the appreciation thereof) constitutes or will constitute
"stock" for purposes of Section 368(c) of the Code; and
(8) Neither REMEC nor REMEC Sub is, or will be at the time of
the Merger, an investment company as defined in Section 368(a)(2)(F) of the
Code.
Based on the foregoing documents, materials, assumptions and
information, and subject to the qualifications and assumptions set forth herein,
we are of the opinion that, if the Merger is consummated in accordance with the
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the statements set forth in the Officers' Tax Certificates
described in the third paragraph hereof are true and correct as of the Effective
Time, then for federal income tax purposes, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code.
Our opinion set forth above is based on the existing
provisions of the Code, Treasury Regulations (including Temporary Treasury
Regulations) promulgated under the Code, published Revenue Rulings, Revenue
Procedures and other announcements of the Internal Revenue Service (the
"Service") and existing court decisions, any of which could be changed at any
time. Any such changes might be retroactive with respect to transactions entered
into prior to the date of such changes and could significantly modify the
opinion set forth above. Nevertheless, we undertake no responsibility to advise
you of any subsequent developments in the application, operation or
interpretation of the U.S. federal income tax laws.
Our opinion concerning certain of the U.S. federal tax
consequences of the Merger is limited to the specific U.S. federal tax
consequence presented above. No opinion is expressed as to any transaction other
than the Merger, including any transaction undertaken in connection with the
Merger. In addition, this opinion does not address any estate, gift, state,
local or foreign tax consequences that may result from the Merger. In
particular, we express no opinion regarding: (i) the amount, existence, or
availability after the Merger, of any of the U.S. federal income tax attributes
of C&S Hybrid or REMEC; (ii) any transaction in which C&S Hybrid Common Stock is
acquired or REMEC Common Stock is disposed other than pursuant to the Merger;
(iii) the potential application of the "disqualifying disposition" rules of
Section 421 of the Code to dispositions of C&S Hybrid Common Stock; (iv) the
effects of the Merger and REMEC's assumption of outstanding options to acquire
C&S Hybrid stock on the holders of such options under any C&S Hybrid employee
stock option or stock purchase plan or REMEC employee stock option or stock
purchase plan, respectively; (v) the effects of the Merger on any C&S Hybrid
stock acquired by the holder subject to the provision of Section 83(a) of the
Code; (vi) the effects of the Merger on any payment which is or may be subject
to the provisions of Section 280G of the Code; and (vii) the application of the
collapsible corporation provisions of Section 341 of the Code to C&S Hybrid,
REMEC or REMEC Sub as a result of the Merger.
3
<PAGE> 4
No ruling has been or will be requested from the Service
concerning the U.S. federal income tax consequences of the Merger. In reviewing
this opinion, you should be aware that the opinion set forth above represents
our conclusions regarding the application of existing U.S. federal income tax
law to the instant transaction. If the facts vary from those relied upon
(including if any representations, covenant, warranty or assumption upon which
we have relied is inaccurate, incomplete, breached or ineffective), our opinion
contained herein could be inapplicable. You should be aware that an opinion of
counsel represents only counsel's best legal judgment, and has no binding effect
or official status of any kind, and that no assurance can be given that contrary
positions may not be taken by the Service or that a court considering the issues
would not hold otherwise.
This opinion is being delivered solely for the purpose of
satisfying the condition set forth in Section 8.10 of the Agreement. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement filed on Form S-4 with the Securities and Exchange Commission and we
further consent to all references to us in the Registration Statement. This
opinion may not otherwise be relied upon or utilized for any other purpose or by
any other person or entity, and may not be made available to any other person or
entity, without our prior written consent.
Very truly yours,
FENWICK & WEST LLP
A LAW PARTNERSHIP INCLUDING
PROFESSIONAL CORPORATIONS
4
<PAGE> 1
EXHIBIT 11.1
REMEC, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months
Years Ended January 31, Ended
------------------------ -----------------
May 5, May 4,
1995 1996 1997 1996 1997
------ ------ ------ ------ -------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Net income per share:
Net income ..................... $2,987 $2,854 $5,728 $1,008 $ 2,473
------ ------ ------ ------ -------
Weighted average shares
outstanding:
Common stock ................... 6,171 6,143 9,583 9,439 12,176
Effect of common stock
equivalents................... -- -- 97 114 435
Adjustments to reflect
requirements of the
Securities and Exchange
Commission (Effect
of SAB 83).................... 44 44 -- -- --
Effect of assumed conversion
of preferred shares from
date of issuance ............. 1,078 1,078 -- -- --
------ ------ ------ ------ -------
Shares used in per share
calculation..................... 7,293 7,265 9,680 9,553 12,611
------ ------ ------ ------ -------
Net income per share ............. $ .41 $ .39 $ .59 $ .11 $ .20
====== ====== ====== ====== =======
</TABLE>
C&S HYBRID, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended
Years Ended December March
------------------------ ----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ -------
<S> <C>
Net income........................ $ 267 $ 523 $ 493 $ 145 $ 225
------ ------ ------ ------ ------
Weighted average common shares
outstanding .................... 3,808 3,808 4,038 3,808 4,798
Common equivalent shares issuable
under conversion of preferred
stock using the as converted
method ......................... 400 400 400 400 400
------ ------ ------ ------ ------
Common and common equivalent
shares used in computing net
income per share ............... 4,208 4,208 4,438 4,208 5,198
------ ------ ------ ------ ------
Net income per share ............. $ .06 $ .12 $ .11 $ .03 $ .04
====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
Subsidiary State of Incorporation
- ---------- ----------------------
REMEC Wireless, Inc. California
Humphrey, Inc. California
RF Microsystems, Inc. California
Magnum Microwave Corporation California
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 24, 1997, except for the first paragraph of
Note 2, as to which the date is February 28, 1997, with respect to the
consolidated financial statements and schedule of REMEC, Inc., included in the
Proxy Statement of REMEC, Inc. that is made a part of Amendment No. 1 to the
Registration Statement (Form S-4) and Prospectus of REMEC, Inc. for the
registration of 860,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
June 13, 1997
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 9, 1997, with respect to the financial statements
of C&S Hybrid, Inc. included in the Proxy Statement of REMEC, Inc. that is made
a part of Amendment No. 1 to the Registration Statement (Form S-4) and
Prospectus of REMEC, Inc. for the registration of 860,000 shares of its common
stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Jose, California
June 13, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of
our report, dated March 6, 1997, on the financial statements of Radian
Technology, Inc. as of December 27, 1996 and December 29, 1995, and for the
three years ended December 27, 1996, in this Registration Statement on Form S-4
No. 333-27023.
IRELAND SAN FILIPPO, LLP
June 12, 1997
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-04-1997
<CASH> 56,555,051
<SECURITIES> 0
<RECEIVABLES> 16,788,860
<ALLOWANCES> 379,377
<INVENTORY> 17,810,065
<CURRENT-ASSETS> 93,798,013
<PP&E> 40,447,788
<DEPRECIATION> (23,662,741)
<TOTAL-ASSETS> 117,489,522
<CURRENT-LIABILITIES> 13,113,207
<BONDS> 0
0
0
<COMMON> 122,354
<OTHER-SE> 102,927,767
<TOTAL-LIABILITY-AND-EQUITY> 117,489,522
<SALES> 26,216,071
<TOTAL-REVENUES> 0
<CGS> 18,309,254
<TOTAL-COSTS> 22,915,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (755,610)
<INCOME-PRETAX> 4,055,885
<INCOME-TAX> 1,583,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,472,885
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
