<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K/A
(Amendment No. 1)
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
______________________________ to _______________________________
Commission File Number 0-27414
REMEC, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3814301
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (619) 560-1301
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety (90) days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on April 8, 1997 was approximately $248.7 million based on the last
reported sale price on the Nasdaq National Market of $23 3/4 per share of such
stock on April 8, 1997.
The number of outstanding shares of Registrant's Common Stock as of April 8,
1997 was 12,301,266.
<PAGE> 2
LIST OF ITEMS AMENDED
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
PART II
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 9
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . 9
</TABLE>
TEXT OF AMENDMENT
Each of the above-listed Items is hereby amended by deleting the Item
in its entirety appearing in the Form 10-K of REMEC, Inc. (the "Company" or
"REMEC") filed with the Securities and Exchange Commission on April 17, 1997
(the "Initial Filing"), and replacing each such Item with the corresponding Item
that appears in this Amendment to Annual Report on Form 10-K (the "Amendment").
The purpose of this Amendment is to restate the Consolidated Financial
Statements of REMEC to reflect its acquisition of Radian Technology, Inc.
("Radian") that was completed on February 28, 1997 and accounted for by REMEC as
a pooling of interests.
2
<PAGE> 3
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements for REMEC and Notes thereto and Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The selected consolidated financial
data set forth below with respect to the Company's statements of income for
each of the years in the three year period ended January 31, 1997 and with
respect to the balance sheets at January 31, 1996 and 1997, are derived from
the consolidated financial statements that have been audited by Ernst & Young
LLP, independent auditors, which are included elsewhere in this Annual Report
on Form 10-K and are qualified by reference to such financial statements. The
statement of operations data for the years ended January 31, 1993 and 1994 and
the balance sheet data at January 31, 1993, 1994 and 1995, are derived from
audited financial statements not included in this Annual Report on Form 10-K.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $48,204 $51,949 $64,604 $71,245 $95,072
Cost of sales................... 34,216 37,102 47,911 53,194 69,971
------- ------- ------- ------- -------
Gross profit.................. 13,988 14,847 16,693 18,051 25,101
Operating expenses:
Selling, general and
administrative.............. 7,126 7,915 9,944 10,359 12,831
Research and development...... 1,322 1,022 1,348 2,786 3,182
------- ------- ------- ------- -------
Total operating
expenses............. 8,448 8,937 11,292 13,145 16,013
------- ------- ------- ------- -------
Income from operations.......... 5,540 5,910 5,401 4,906 9,088
Interest (income) expense and
other......................... 112 55 335 43 (365)
------- ------- ------- ------- -------
Income before provision for
income taxes.................. 5,428 5,855 5,066 4,863 9,453
Provision for income taxes...... 1,659 1,893 2,079 2,009 3,725
------- ------- ------- ------- -------
Income before extraordinary
item.......................... 3,769 3,962 2,987 2,854 5,728
Extraordinary item.............. 167 -- -- -- --
------- ------- ------- ------- -------
Net income...................... $ 3,936 $ 3,962 $ 2,987 $ 2,854 $ 5,728
======= ======= ======= ======= =======
Net income per share............ $ .43 $ .53 $ .41 $ .39 $ .59
======= ======= ======= ======= =======
Shares used in per share
calculations.................. 9,055 7,478 7,293 7,265 9,680
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 3,363 $ 3,678 $ 2,139 $ 1,872 $ 63,078
Working capital................... 10,497 14,072 13,007 13,207 81,574
Total assets...................... 23,421 32,789 31,682 36,782 112,066
Long-term debt.................... 1,358 839 1,217 1,900 --
Total shareholders' equity........ 13,828 17,810 19,820 21,899 98,566
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
----------- -----------
<S> <C> <C>
BACKLOG(1):
Commercial.............................................................. $ 45,134 $ 67,614
Defense................................................................. 48,037 70,640
-------- --------
Total......................................................... $ 93,171 $138,254
======== ========
</TABLE>
- ---------------
(1) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation.
3
<PAGE> 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the design
and manufacture of MFMs for the defense industry. 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") and Radian Technology, Inc. ("Radian").
All revenue and related costs of sales are recognized when products are
shipped or engineering services are performed. In fiscal 1996 and 1997, sales to
REMEC's top ten customers accounted for approximately 60% and 62%, respectively,
of total net sales; sales to REMEC's top three customers accounted for
approximately 30% and 31%, respectively, of total net sales; and sales to the
top customer accounted for 11% and 16%, respectively, of total net sales. REMEC
recorded revenue of approximately $11.0 million (15%) and $27.9 million (32%)
for fiscal 1996 and 1997 to the commercial wireless telecommunications market.
Prior to fiscal 1996, 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 January 31, 1997, REMEC had an order backlog of $138.3 million, with $67.6
million representing commercial wireless telecommunications orders. REMEC's
international sales as a percentage of net sales for fiscal 1996 and 1997 were
14% and 9%, 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 Verified Technical Corporation ("Veritek"), a
producer of high quality surface mount manufacturing assemblies in a transaction
accounted for as a purchase. Since Veritek was acquired after the 1997 fiscal
year end (and accounted for as a purchase), the consolidated results of
operations of REMEC presented herein do not include the operations of Veritek.
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-
4
<PAGE> 5
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
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales...................................... 100% 100% 100%
Cost of goods sold........................... 74 75 74
--- --- ---
Gross profit.............................. 26 25 26
Operating expenses:
Selling, general & administrative............ 16 15 14
Research and development..................... 2 4 3
--- --- ---
Total operating expenses.................. 18 19 17
--- --- ---
Income from operations......................... 8 6 9
Interest (income) expense and other............ 1 -- (1)
--- --- ---
Income before income taxes..................... 7 6 10
Provision for income taxes..................... 3 3 4
--- --- ---
Net income..................................... 4% 3% 6%
=== === ===
</TABLE>
5
<PAGE> 6
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
6
<PAGE> 7
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 January 31, 1997, REMEC had $63.1 million of cash and cash equivalents
and $81.6 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 January 31, 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.
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 $1.5 million in sales of
short-term investments. The bulk of the fiscal 1997 capital expenditures were
7
<PAGE> 8
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.
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.
8
<PAGE> 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included as a separate section following
Item 14 of this Amendment to Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at January 31, 1996 and 1997
Consolidated Statements of Income for the
years ended January 31, 1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity
as of January 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years
ended January 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedules or because
the information required is included in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1(1) Agreement and Plan of Reorganization and Merger between Magnum Microwave
Corporation, the Registrant and REMEC Acquisition Corporation
2.2(2) Stock Purchase Agreement dated March 31, 1996 between STM Wireless, Inc., a
Delaware Corporation, and the Registrant
3.1(3) Restated Articles of Incorporation
3.2(3) By-Laws, as amended
10.1(3) Equity Incentive Plan
10.2(3) Employee Stock Purchase Plan
10.3(3) Form of Indemnification Agreements between Registrant and its officers and
directors
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.4(3) Credit Agreement between the Registrant and The Bank of California, N.A., dated
June 17, 1993, as amended
+ 10.5(3) Manufacturing Agreement Terms and Conditions dated August 10, 1995 between the
Registrant and P-COM, Inc.
10.6(3) Standard Industrial Lease between the Registrant and Transcontinental Realty
Investors, Inc., dated February 1, 1990, as amended.
10.7(3) Standard Industrial Lease between the Registrant and Chesapeake Business Park
1983, dated December 13, 1988, as amended.
10.8(1) Form of Employment and Non-Competition Agreement with Joseph Lee (attached as
Exhibit 1 to Agreement and Plan of Reorganization and Merger filed as Exhibit
2.1)
10.9(4) 1996 Nonemployee Directors Stock Option Plan
10.10(6) Employment and Non-Competition Agreement between Jim Mongillo and the
Registrant
11.1(7) Statement Re: Computation of per Share Data
21.1(5) Subsidiaries of the Registrant
23.1(7) Consent of Ernst & Young LLP, Independent Auditors
24.1(6) Power of Attorney (included on Page S-1 of the Initial Filing of the Annual
Report on Form 10-K)
</TABLE>
- ----------
(1) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-4 (No. 333-
05343) filed on July 30, 1996 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Form 8-K filed on May 3, 1996 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No. 333-
80381) filed on February 1, 1996 and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-8 (No. 333-
16687) filed on November 25, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No. 333-
18325) filed on December 20, 1996.
(6) Filed with the Initial Filing of the Annual Report on Form 10-K.
(7) Filed with this Amendment to Annual Report on Form 10-K.
+ Confidential treatment granted
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of
fiscal 1997.
10
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMEC, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets at January 31, 1996 and 1997.............................. F-3
Consolidated Statements of Income for the years ended January 31, 1995, 1996
and 1997............................................................................ F-4
Consolidated Statements of Shareholders' Equity as of January 31, 1995, 1996
and 1997............................................................................ F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1995, 1996
and 1997............................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 12
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> 13
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,871,923 $ 63,078,177
Short-term investments.............................. 1,482,548 --
Accounts receivable, net............................ 6,716,361 12,533,473
Inventories, net.................................... 12,695,656 14,927,908
Deferred income taxes............................... 1,752,314 2,567,527
Prepaid expenses and other current assets........... 263,984 525,702
---------- -----------
Total current assets........................ 24,782,786 93,632,787
Property, plant and equipment, net.................... 9,579,660 13,761,284
Deferred offering costs............................... 1,108,424 --
Intangible and other assets........................... 1,311,032 4,672,409
---------- -----------
$36,781,902 $112,066,480
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 3,791,864 $ 3,743,304
Accrued salaries, benefits and related taxes........ 4,358,529 3,943,017
Income taxes payable................................ 1,302,543 2,245,466
Accrued expenses.................................... 1,600,657 2,127,092
Current portion of notes payable.................... 522,491 --
---------- -----------
Total current liabilities................... 11,576,084 12,058,879
Deferred rent......................................... 443,164 262,432
Deferred income taxes................................. 964,000 1,179,353
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...................... 59,879 121,320
Paid-in capital..................................... 12,230,565 83,250,684
Retained earnings................................... 9,601,024 15,193,812
---------- -----------
Total shareholders' equity.................. 21,898,654 98,565,816
---------- -----------
$36,781,902 $112,066,480
========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 14
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales....................... $64,604,488 $71,244,707 $95,071,802
Cost of sales................... 47,911,630 53,193,697 69,971,100
----------- ----------- -----------
Gross profit.................. 16,692,858 18,051,010 25,100,702
Operating expenses:
Selling, general and
administrative............. 9,944,421 10,359,199 12,830,753
Research and development...... 1,347,280 2,785,322 3,182,449
----------- ----------- -----------
Total operating expenses........ 11,291,701 13,144,521 16,013,202
----------- ----------- -----------
Income from operations........ 5,401,157 4,906,489 9,087,500
Interest (income) expense and
other......................... 335,335 43,286 (365,664)
----------- ----------- -----------
Income before provision for
income taxes............... 5,065,822 4,863,203 9,453,164
Provision for income taxes...... 2,079,169 2,009,093 3,725,104
----------- ----------- -----------
Net income.................... $ 2,986,653 $ 2,854,110 $ 5,728,060
=========== =========== ===========
Net income per share............ $ .41 $ .39 $ .59
=========== =========== ===========
Shares used in per share
calculations.................. 7,293,203 7,265,400 9,679,636
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 15
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
======= ======= ========== ======== =========== =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 16
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities:
Net income........................................ $ 2,986,653 $ 2,854,110 $ 5,728,060
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 2,065,450 2,125,208 2,804,190
Deferred income taxes......................... 801,099 (597,470) (599,860)
Changes in operating assets and liabilities:
Accounts receivable......................... (455,466) (132,998) (4,746,975)
Inventories................................. 234,133 (1,472,428) (1,872,921)
Prepaid expenses and other current assets... (4,075) 36,894 (222,912)
Accounts payable............................ 234,873 1,236,307 (646,663)
Accrued expenses, income taxes payable and
deferred rent............................ (420,897) 863,751 877,643
------------ ------------ -----------
Net cash provided (used) by operating
activities............................. 5,441,770 4,913,374 1,320,562
Investing activities:
Additions to property, plant and equipment...... (1,580,237) (4,062,334) (6,539,801)
Payment for purchase of RF Microsystems, net of
$60,337 cash acquired......................... -- -- (4,011,735)
Payment for purchase of Veritek, net of $42,473
cash acquired................................. -- -- --
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)
------------ ------------ -----------
Net cash used by investing activities.... (3,056,888) (4,090,284) (9,105,096)
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)
Repurchase of common stock...................... (928,354) (788,503) --
Proceeds from issuance of common stock.......... 7,110 67,460 70,864,975
Change in deferred offering costs............... -- (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
------------ ------------ -----------
Increase (decrease) in cash and cash
equivalents..................................... (1,539,034) (267,183) 61,239,813
Cash and cash equivalents at beginning of year.... 3,678,140 2,139,106 1,871,923
Elimination of Magnum's net cash activities for
the duplicated two months ended March 31,
1996............................................ -- -- (33,559)
------------ ------------ -----------
Cash and cash equivalents at end of year.......... $ 2,139,106 $ 1,871,923 $63,078,177
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest...................................... $ 485,264 $ 188,087 $ 27,047
============ ============ ===========
Income taxes.................................. $ 1,601,434 $ 2,256,777 $ 2,413,850
============ ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 17
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.
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 and Radian Technology, Inc. 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-7
<PAGE> 18
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-8
<PAGE> 19
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.
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-9
<PAGE> 20
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>
F-10
<PAGE> 21
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-11
<PAGE> 22
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-12
<PAGE> 23
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-13
<PAGE> 24
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-14
<PAGE> 25
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-15
<PAGE> 26
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-16
<PAGE> 27
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)
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 pro forma results of 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.
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-17
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on June 13, 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 Exchange Act of 1934,
this Amendment to Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Chairman of the Board and June 13, 1997
-------------------- Chief Executive Officer
Ronald E. Ragland (Principal Executive Officer)
* President, Chief Operating Officer June 13, 1997
-------------------- and Director
Errol Ekaireb
* Executive Vice President, President June 13, 1997
-------------------- of REMEC Microwave Division and
Jack A. Giles Director
* Director, Senior Vice President and June 13, 1997
-------------------- Chief Engineer
Denny Morgan
* Executive Vice President and June 13, 1997
-------------------- Director
Joseph T. Lee
</TABLE>
S-1
<PAGE> 29
<TABLE>
<S> <C> <C>
/s/ Thomas A. George Chief Financial Officer, Senior Vice June 13, 1997
--------------------------------------- President and Secretary (Principal
Thomas A. George Financial and Accounting Officer)
* Director June 13, 1997
---------------------------------------
Andre R. Horn
* Director June 13, 1997
---------------------------------------
Gary L. Luick
* Director June 13, 1997
---------------------------------------
Jeffrey M. Nash
* Director June 13, 1997
---------------------------------------
Thomas A. Corcoran
* Director June 13, 1997
---------------------------------------
William H. Gibbs
* By: /s/ Thomas A. George
-------------------------------------------------
Thomas A. George
Attorney-in-Fact
</TABLE>
S-2
<PAGE> 30
SCHEDULE II
REMEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
CONTRACT LOSS RESERVE PERIOD PERIOD DEDUCTIONS OF PERIOD
--------------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Year ended January 31, 1995 . . . . . . . . . . $3,250,000 $ 455,000 $(1,799,000) $1,906,000
Year ended January 31, 1996 . . . . . . . . . . 1,906,000 2,139,000 (2,675,000) 1,370,000
Year ended January 31, 1997 . . . . . . . . . . 1,370,000 821,991 (620,000) 1,571,991
</TABLE>
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1(1) Agreement and Plan of Reorganization and Merger between Magnum Microwave
Corporation, the Registrant and REMEC Acquisition Corporation
2.2(2) Stock Purchase Agreement dated March 31, 1996 between STM Wireless, Inc., a
Delaware Corporation, and the Registrant
3.1(3) Restated Articles of Incorporation
3.2(3) By-Laws, as amended
10.1(3) Equity Incentive Plan
10.2(3) Employee Stock Purchase Plan
10.3(3) Form of Indemnification Agreements between Registrant and its officers and
directors
10.4(3) Credit Agreement between the Registrant and The Bank of California, N.A., dated
June 17, 1993, as amended
+ 10.5(3) Manufacturing Agreement Terms and Conditions dated August 10, 1995 between the
Registrant and P-COM, Inc.
10.6(3) Standard Industrial Lease between the Registrant and Transcontinental Realty
Investors, Inc., dated February 1, 1990, as amended.
10.7(3) Standard Industrial Lease between the Registrant and Chesapeake Business Park
1983, dated December 13, 1988, as amended.
10.8(1) Form of Employment and Non-Competition Agreement with Joseph Lee (attached as
Exhibit 1 to Agreement and Plan of Reorganization and Merger filed as Exhibit
2.1)
10.9(4) 1996 Nonemployee Directors Stock Option Plan
10.10(6) Employment and Non-Competition Agreement between Jim Mongillo and the
Registrant
11.1(7) Statement Re: Computation of per Share Data
21.1(5) Subsidiaries of the Registrant
23.1(7) Consent of Ernst & Young LLP, Independent Auditors
24.1(6) Power of Attorney (included on Page S-1 of the Initial Filing of the Annual
Report on Form 10-K)
</TABLE>
- ----------
(1) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-4 (No. 333-
05343) filed on July 30, 1996 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Form 8-K filed on May 3, 1996 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No. 333-
80381) filed on February 1, 1996 and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-8 (No. 333-
16687) filed on November 25, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No. 333-
18325) filed on December 20, 1996.
(6) Filed with the Initial Filing of the Annual Report on Form 10-K.
(7) Filed with this Amendment to Annual Report on Form 10-K.
+ Confidential treatment granted
<PAGE> 1
EXHIBIT 11.1
REMEC, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended January 31,
------------------------------------
1995 1996 1997
------ ------ ------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Net income per share:
Net income ..................... $2,987 $2,854 $5,728
------ ------ ------
Weighted average shares
outstanding:
Common stock ................... 6,171 6,143 9,583
Effect of common stock
equivalents................... -- -- 97
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
------ ------ ------
Net income per share ............. $ .41 $ .39 $ .59
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 333-16687, 333-23705 and 333-27353) and Form S-3 (No. 333-25437)
of REMEC, Inc. 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, as amended, of REMEC, Inc.
included in the Annual Report on Form 10-K/A of REMEC, Inc. for the year ended
January 31, 1997.
Our audits also included the financial statement schedule of REMEC, Inc. listed
in Item 14(a). This schedule is the responsibility of REMEC, Inc.'s management.
Our responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
June 13, 1997
