<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under
the Securities Act of
1933 in connection with
Registration No. 333-45595
and Registration No. 333-46891
filed on February 25, 1998
PROSPECTUS
2,600,000 Shares
REMEC LOGO
Common Stock
------------------------
Of the 2,600,000 shares of Common Stock offered hereby, 1,600,000 shares
are being sold by REMEC, Inc. ("REMEC" or the "Company") and 1,000,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Common Stock is traded on the Nasdaq National Market under the symbol
"REMC." On February 24, 1998, the last reported sale price for the Company's
Common Stock was $26.50 per share. See "Price Range of Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN INFORMATION WHICH SHOULD
BE CAREFULLY CONSIDERED BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
======================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------
Per Share..................... $26.50 $1.35 $25.15 $25.15
- ------------------------------------------------------------------------------------------------------
Total(3)...................... $68,900,000 $3,510,000 $40,240,000 $25,150,000
======================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 390,000 shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Shareholders will be $79,235,000, $4,036,500,
$50,048,500 and $25,150,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, subject to the right of the Underwriters to reject any order
in whole or in part. It is expected that certificates for the shares of Common
Stock will be available for delivery at the offices of Needham & Company, Inc.,
445 Park Avenue, New York, New York 10022, on or about March 2, 1998.
------------------------
NEEDHAM & COMPANY, INC.
CIBC OPPENHEIMER
A.G. EDWARDS & SONS, INC.
The date of this Prospectus is February 25, 1998
<PAGE> 2
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company
files proxy statements, annual reports and other information with the United
States Securities and Exchange Commission (the "Commission"). Such material
concerning the Company is available for inspection and copying at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10008 and 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material also can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1993, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as part thereof. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office, Public Reference Room of the
Securities and Exchange Commission, 450 Fifth Street, Washington, D.C. 20549,
and at the Commission's regional offices at 7 World Trade Center, Suite 1300,
New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661.
Copies of all or any part thereof may be obtained from the Commission at its
principal office in Washington, D.C. after payment of fees prescribed by the
Commission. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
0-027414) pursuant to the Exchange Act are hereby incorporated by reference in
this Prospectus: (1) the Company's Annual Report on Form 10-K for the year ended
January 31, 1997 and all amendments thereto on Form 10-K/A; (2) the Company's
Quarterly Reports on Form 10-Q for the quarters ended May 4, 1997, August 1,
1997 and October 31, 1997; and (3) the description of the Company's Common Stock
contained in its Registration Statement on Form 8-A, filed with the Commission
on December 13, 1995.
Any statement contained in a document incorporated by reference into this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written or oral request of such person, a copy of any or all of
the foregoing documents incorporated by reference into this Prospectus (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be submitted in writing to Investor Relations, REMEC, Inc., 9404
Chesapeake Drive, San Diego, California 92123, (619) 560-1301.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S
SECURITIES ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere in this
Prospectus.
THE COMPANY
REMEC is a leader in the design and manufacture of microwave multi-function
modules ("MFMs") for microwave transmission systems used in commercial
telecommunications and defense applications. The Company believes that its
expertise in microwave transmission system components such as filters,
amplifiers, mixers, switches and oscillators and its expertise in integrating
these components into MFMs give REMEC a strong competitive position in the
commercial wireless infrastructure equipment market. The Company's capabilities
enable it to develop and manufacture MFMs with reduced size, weight, parts count
and cost, and increased reliability and performance.
The Company's products operate at radio (300 MHz to 1 GHz), microwave (1
GHz to 20 GHz) and millimeter wave (20 GHz to 50 GHz) frequencies (collectively
referred to in this Prospectus as "microwave"). Modern wireless
telecommunications systems employ microwave transmission technology pioneered in
the defense industry. Microwave frequency bands have been used for emerging
wireless telecommunications applications because they are less congested and
have more available bandwidth, affording greater voice, data and video
transmission capacity than lower frequency bands. Driven by technological
advances and regulatory changes, demand for wireless telecommunications products
has increased in recent years for applications such as mobile telephony
(cellular and PCS), rural telephony (VSAT), paging, wireless cable, interactive
television and wireless local loop. These emerging wireless applications require
a large infrastructure of microwave transmission equipment such as base stations
and point-to-point radios. The Company believes that the evolution of cellular
and PCS infrastructure, as well as other wireless telecommunications systems,
will require increased integration in order to reduce size, weight and cost and
to increase reliability and producibility of base station equipment.
An MFM typically consists of one or a number of microwave circuit boards
and/or ceramic substrates mounted into a single package on which electronic
components are interconnected to perform signal processing functions such as
switching, amplification, frequency conversion and filtering. Integrating
multiple functions into one assembly results in reduced packaging and
interconnects, permits improved performance through optimal partitioning and
implementation of functions, reduces product size and parts count and increases
reliability at lower costs.
REMEC's strategy is to maintain and enhance its core MFM technology
leadership through selective participation in defense industry programs and to
leverage this technology leadership by designing and manufacturing MFMs for
original equipment manufacturers ("OEM") supplying wireless telecommunications
infrastructure equipment. REMEC's customers for commercial wireless MFMs and
components include P-COM, Inc., Digital Microwave Corporation, STM Wireless,
Inc. and Alcatel Network Systems. REMEC's customers for defense microwave MFMs
and components include Lockheed Martin Corporation, Motorola, Inc., Northrop
Grumman Corporation, Raytheon Company (including business from Hughes Aircraft
Co. and Texas Instruments which were acquired by Raytheon in 1997) and TRW Inc.
As of January 31, 1998, REMEC's total backlog of $214.9 million was comprised of
$136.0 million (63%) commercial wireless backlog and $78.9 million (37%) defense
backlog.
The Company pursues acquisitions to augment MFM technology by acquiring
specialized component firms and to take advantage of opportunities to
consolidate smaller, niche companies in a currently fragmented microwave
equipment industry. Over the last two years, REMEC acquired Magnum Microwave
Corporation (August 1996), Radian Technology, Inc. (February 1997), Verified
Technical Corporation (March 1997), C&S Hybrid, Inc. (June 1997), Q-bit
Corporation (October 1997), and Nanowave Technologies Inc. (October 1997). The
Company believes that each of these acquired companies has industry leading
niche microwave capabilities which further complement the Company's broad
microwave technology base.
3
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................. 1,600,000 Shares
Common Stock Offered by the Selling Shareholders.... 1,000,000 Shares
Common Stock to be Outstanding After the Offering... 22,782,651 Shares(1)
Use of Proceeds..................................... General corporate purposes, including
working capital. See "Use of Proceeds."
Nasdaq National Market Symbol....................... REMC
</TABLE>
SUMMARY FINANCIAL INFORMATION(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, ------------------------
------------------------------------------------- NOVEMBER 3, OCTOBER 31,
1993 1994 1995 1996 1997 1996 1997
------- ------- -------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales.................... $62,627 $66,599 $ 81,978 $93,228 $118,554 $85,499 $ 111,850
Gross profit................. 19,744 21,172 23,984 27,056 32,895 23,868 33,989
Income from operations....... 6,355 6,517 6,271 6,429 8,941 6,915 12,118
Net income................... $ 4,481 $ 4,496 $ 3,287 $ 3,599 $ 4,972 $ 3,977 $ 10,791
Net income per share......... $ 0.29 $ 0.34 $ 0.25 $ 0.28 $ 0.30 $ 0.24 $ 0.50
Shares used in per share
calculations............... 15,559 13,309 13,031 12,989 16,669 16,619 21,532
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1997 OCTOBER 31, 1997
---------------- -------------------------
ACTUAL ACTUAL AS ADJUSTED(3)
---------------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 63,172 $ 48,885 $ 88,775
Working capital......................................... 84,142 82,401 122,291
Total assets............................................ 125,440 147,742 187,632
Long-term debt.......................................... 2,493 -- --
Total shareholders' equity.............................. 103,555 122,995 162,885
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1997 JANUARY 31, 1998
---------------- ----------------
<S> <C> <C>
BACKLOG(4):
Commercial.................................................... $ 75,118 $136,005
Defense....................................................... 71,711 78,850
-------- --------
Total............................................... $146,829 $214,855
======== ========
</TABLE>
- ---------------
(1) Based on shares outstanding as of January 31, 1998. Does not include
1,685,974 shares of Common Stock issuable upon the exercise of outstanding
options at a weighted average price of $14.93 per share of which options to
purchase 254,959 shares are currently exercisable.
(2) Includes statements of operations, balance sheet data and backlog of Magnum
Microwave Corporation (acquired in August 1996), Radian Technology, Inc.
(acquired February 1997), C&S Hybrid, Inc. (acquired June 1997) and Q-bit
Corporation (acquired October 1997), each of which was accounted for as a
pooling of interests. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) As adjusted to reflect the sale by the Company of 1,600,000 shares of Common
Stock offered by the Company hereby at a price of $26.50 per share. See
"Capitalization."
(4) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Risk Factors -- Backlog" and
"Business -- Backlog."
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.
The Company was incorporated in California in January 1983. The Company's
executive offices are located at 9404 Chesapeake Drive, San Diego, California
92123. Its phone number at that address is (619) 560-1301.
4
<PAGE> 5
RISK FACTORS
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements. The Company's future operations,
financial performance, business and share price may be affected by a number of
factors, including the factors listed below, any of which could cause actual
results to vary materially from anticipated results. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
DEPENDENCE ON COMMERCIAL WIRELESS TELECOMMUNICATIONS MARKET
Historically, the Company's business has been almost exclusively focused on
the defense market. The Company believes that its future growth depends on
continued success in the commercial wireless telecommunications market. The
Company believes that, while the technologies used in the defense and commercial
industries are very similar, the two industries differ significantly in terms of
the customer base, manufacturing requirements and lead times, the need to expend
substantial resources for research and development without the assurance of
reimbursement or recovery of those costs, and credit risks with customers. As a
result, the Company is subject to risks inherent in the operation of a new
business enterprise, including risks associated with attracting and servicing a
new customer base, manufacturing products in a cost effective and profitable
manner, managing the expansion of a business operation and attracting and
retaining qualified engineering, manufacturing and marketing personnel with
industry experience. For example, the Company believes that microwave engineers
with the skills necessary to develop products for the wireless
telecommunications market currently are in high demand and that the Company may
not be able to attract and retain sufficient engineering expertise.
A number of the commercial markets for the Company's products in the
wireless telecommunications area have only recently begun to develop. Because
these markets are relatively new, it is difficult to predict the rate at which
these markets will grow, if at all. Existing or potential wireless
telecommunications market applications for the Company's products may fail to
develop or may erode for many different reasons, including insufficient growth
to support expensive infrastructure equipment, insufficient consumer demand for
wireless products or services because of pricing or otherwise, or real or
perceived security risks associated with wireless communications. If the markets
for the Company's products in commercial wireless telecommunications fail to
grow, or grow more slowly than anticipated, the Company's business, financial
condition and results of operations could be materially adversely affected.
DEPENDENCE ON DEFENSE MARKET
A substantial portion of the Company's sales has been to the defense
market. As a result, the Company's sales could be materially adversely impacted
by a decrease in defense spending by the United States government because of
defense spending cuts, general budgetary constraints or otherwise. The United
States defense budget has been reduced over the last several years and may be
further reduced. Fewer available defense industry production programs, coupled
with continued pricing pressure on follow-on orders for programs on which the
Company participates, caused sales of the Company's core defense
products -- MFMs and components for microwave systems -- to decline from $35.3
million in the year ended January 31, 1994 to $27.5 million for the year ended
January 31, 1997. The Company expects to continue to derive a substantial
portion of its revenues from these business segments and to develop microwave
products for defense applications. Failure of the Company to replace sales
attributable to a significant defense program or contract at the end of that
program or contract, whether due to cancellation, spending cuts, budgetary
constraints or otherwise, could have a material adverse effect upon the
Company's business, financial condition and results of operations in subsequent
periods. In addition, a large portion of the Company's expenses are fixed and
difficult to reduce, thus magnifying the material adverse effect of any revenue
shortfall. Also, defense contracts frequently contain provisions that are not
standard in private commercial transactions, such as provisions permitting the
cancellation of a contract if funding for a program is reduced or canceled. For
example, the government terminated a large defense program in December 1992 for
which the Company had been
5
<PAGE> 6
supplying in excess of $4.0 million of products on an annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMER CONCENTRATION AND EXCLUSIVITY
The Company derives significant revenues from a limited group of customers,
including, P-COM, Inc. ("P-COM"), STM Wireless, Inc. ("STM"), Digital Microwave
Corporation ("Digital Microwave"), General Instrument Corporation ("General
Instrument"), Northrop Grumman Corporation ("Northrop Grumman"), Motorola, Inc.
("Motorola"), ITT Industries ("ITT"), Raytheon Company ("Raytheon," including
revenues from Hughes Aircraft Co. and Texas Instruments, portions of which were
acquired by Raytheon in 1997), Lockheed Martin Corporation ("Lockheed Martin"),
TRW Inc. ("TRW") and Alcatel Network Systems ("Alcatel"). As of January 31,
1998, these customers comprised 74% of total backlog, with Digital Microwave
(22%) being the only customer that accounted for more than 10% of total backlog
as of such date. The Company anticipates that it will continue to sell products
to a relatively small group of customers. As a result, any cancellation,
reduction or delay in orders by or shipments by any significant customer, as a
result of manufacturing or supply difficulties or otherwise, or the inability of
any customer to finance its purchases of the Company's products would materially
adversely affect the Company's business, financial condition and results of
operations. The Company has granted some of its customers 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 on components used in their
products. In entering into such exclusive arrangements, the Company may have to
forego opportunities to supply products to competing companies. If the Company
enters into exclusive relationships with customers who prove to be unsuccessful,
the Company may be materially adversely affected and the Company may be unable
then to establish relationships with the industry leaders. There can be no
assurance that the Company will be able to locate, or negotiate acceptable
arrangements with, significant customers or that its current or future
arrangements with significant customers will continue or will be successful. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers."
INTEGRATION OF ACQUISITIONS
The Company recently acquired two companies of significant size: C&S
Hybrid, Inc. ("C&S Hybrid"), which was acquired in June 1997, and Q-bit
Corporation ("Q-bit"), which was acquired in October 1997. The anticipated
benefits of the acquisitions of C&S Hybrid and Q-bit will not be achieved unless
these companies are successfully combined with the Company in an efficient and
effective manner. The transition to a combined Company in which C&S Hybrid and
Q-bit are wholly owned subsidiaries of the Company will require substantial
attention from management, which has limited experience in integrating companies
the size of REMEC, C&S Hybrid and Q-bit. In addition, the Company acquired in
1996 and 1997 Magnum Microwave Corporation ("Magnum"), Radian Technology, Inc.
("Radian"), Verified Technical Corporation ("Veritek") and Nanowave Technologies
Inc. ("Nanowave"). The collective integration of Magnum, Radian, Veritek and
Nanowave also will require substantial attention from management. The diversion
of management attention and any difficulties encountered in the integration of
Magnum, Radian, Veritek, C&S Hybrid, Q-bit and Nanowave as a group could have an
adverse impact on the business, financial condition and results of operations of
the Company. There can be no assurance that Magnum, Radian, Veritek, C&S Hybrid,
Q-bit or Nanowave will be successfully integrated or that the consolidated
operations of REMEC and its subsidiaries will be profitable. The Company will
face similar risks in the integration of any future acquisitions.
MANAGEMENT OF GROWTH
The growth in size and complexity of the Company's business and expansion
of its product lines and customer base have placed, and are expected to continue
to place, significant demands on the Company's management and operations. The
Company's ability to compete effectively and to manage future growth will depend
on its ability to continue to implement and improve operational and financial
systems on a timely basis.
6
<PAGE> 7
There can be no assurance that the Company will be able to manage its future
growth, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly results have in the past been, and will continue to
be, subject to significant variations due to a number of factors, any one of
which could substantially affect the Company's results of operations for any
particular fiscal quarter. In particular, quarterly results of operations can
vary due to the timing, cancellation or rescheduling of customer orders and
shipments, the pricing and mix of products sold, new product introductions by
the Company, the Company's ability to obtain components and subassemblies from
contract manufacturers and suppliers, and variations in manufacturing
efficiencies. In addition, with the decline in available defense industry
production programs, the Company has placed more reliance on development
contracts as a source of defense revenues, resulting in an increased
susceptibility to fluctuations due to an increase in revenues from fixed price
development contracts as a percentage of total revenues. Development contracts
carry reduced gross margins and are typically for minimal hardware deliveries
and sporadic non-hardware revenue items which results in fluctuating sales and
gross margins. Accordingly, the Company's performance in any one fiscal quarter
is not necessarily indicative of financial trends or future performance.
BACKLOG
The Company's order backlog is subject to fluctuations and is not
necessarily indicative of future sales. There can be no assurance that current
order backlog will necessarily lead to sales in any future period. The Company's
order backlog as of January 31, 1998 was approximately $214.9 million,
approximately 63% of which was attributable to commercial customers and
approximately 37% of which was attributable to defense customers. In certain
circumstances, customers place purchase orders but release quantities
incrementally against those purchase orders, subject to an agreed period of
performance. At the time a purchase order is placed, the Company records the
entire amount of the purchase order as backlog, even if the customer releases
quantities incrementally against the purchase order. A substantial amount of the
Company's order backlog can be canceled at any time without penalty, except, in
some cases, the recovery of the Company's actual committed costs and profit on
work performed up to the date of cancellation. Cancellations of pending purchase
orders or termination or reductions of purchase orders in progress from
customers of the Company could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS OF COST OVERRUNS AND PRODUCT NON-PERFORMANCE; LOSS OF INVESTMENT IN DESIGN
AND ENGINEERING
The Company's customers establish demanding specifications for product
performance, reliability and cost. Certain contracts with its commercial
customers and a significant portion of the Company's defense contracts are firm
fixed-price ("FFP") contracts that provide for a predetermined fixed price for
stipulated products, regardless of the costs incurred. The Company has made
pricing commitments to certain customers in anticipation of achieving more cost
effective product designs and introducing more widespread manufacturing
automation. The Company faces the risk of experiencing cost overruns or order
cancellation if it fails to achieve forecasted product design and manufacturing
efficiencies or if products cost more to produce because of increased cost of
materials, components or labor or otherwise. Manufacture of the Company's
products is an extremely complex process. The Company has in the past
experienced cost overruns on FFP contracts. There can be no assurance that cost
overruns or problems with performance or reliability of Company products will
not occur in the future. Any such cost overruns or performance problems may have
a material adverse effect on the Company's business, financial condition and
results of operation. In addition, the Company 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 the
Company's business, financial condition and results of operations.
7
<PAGE> 8
NECESSITY OF IMPLEMENTING HIGH VOLUME MANUFACTURING
Historically, the volume of the Company's production requirements in the
defense market was not sufficient to justify the widespread implementation of
automated manufacturing processes. Fulfillment of substantial orders in the
commercial wireless telecommunications industry will require continued increase
in the Company's manufacturing capacity. There can be no assurance that the
Company will be able to implement the desired automated manufacturing processes
on a timely basis or at all or that, if implemented, such manufacturing
processes will be sufficient to fulfill the Company's current and future
production commitments in a cost effective manner or that the Company will
obtain a sufficient amount of high volume orders to absorb the capital costs
incurred.
COMPETITION
The markets for the Company's products are extremely competitive and are
characterized by technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition is
intense and significant price erosion generally occurs over the life of a
product. The Company faces some competition from component manufacturers which
have integration capabilities, but believes that its primary competition is from
the captive manufacturing operations of large wireless telecommunications OEMs
(including all of the major telecommunications equipment providers) and defense
prime contractors which are responsible for a substantial majority of the
present worldwide production of MFMs. The Company's future success is dependent
upon the extent to which these OEMs and defense prime contractors elect to
purchase from outside sources rather than manufacture their own microwave MFMs
and components. The Company's customers and large manufacturers of microwave
transmission equipment could also elect to enter into the non-captive market for
microwave products and compete directly with the Company. Many of the Company's
current and potential competitors have substantially greater technical,
financial, marketing, distribution and other resources than the Company and have
greater name recognition and market acceptance of their products and
technologies. No assurance can be given that the Company's competitors will not
develop new technologies or enhancements to existing products or introduce new
products that will offer superior price or performance features or that new
products or technologies will not render obsolete the products of the Company's
customers. For example, Magnum experienced a $2.3 million reduction in cavity
oscillator shipments to a customer in its 1996 fiscal year due to obsolescence.
In addition, innovations such as a wireless telephone system utilizing
satellites instead of terrestrial base stations or a device that integrates
microwave functionality could significantly reduce the potential market for the
Company's products. The Company believes that to remain competitive in the
future it will need to invest significant financial resources in research and
development.
DECLINING AVERAGE SELLING PRICES
Many of the Company's customers are under continuous pressure to reduce
prices and, therefore, the Company expects to continue to experience downward
pricing pressure on its products. The Company's customers frequently negotiate
supply arrangements well in advance of delivery dates, requiring the Company to
commit to price reductions before it is determined that assumed cost reductions
can be achieved. To offset declining average sales prices, the Company believes
that it must achieve manufacturing cost reductions and obtain orders for higher
volume products. If the Company is unable to offset declining average selling
prices, the Company's gross margins will decline, and such decline will have a
material adverse effect on the Company's business, financial condition and
results of operations.
ENVIRONMENTAL REGULATIONS AND RISKS
The Company is subject to a variety of local, state, federal and foreign
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
8
<PAGE> 9
News reports have asserted that power levels associated with hand held
cellular telephones and infrastructure equipment may pose certain health risks.
If it were determined or perceived that electromagnetic waves carried through
wireless telecommunications equipment create a significant health risk, the
market for these products could be materially adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, if wireless telecommunications systems or
other systems or devices that rely on or incorporate the Company's products are
determined or alleged to create a significant health risk, the Company could be
named as a defendant, and held liable, in product liability lawsuits commenced
by individuals alleging that the Company's products harmed them, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless telecommunications
systems that are subject to regulation domestically by the Federal
Communications Commission ("FCC") and internationally by other government
agencies. Although the equipment operators and not the Company are responsible
for compliance with such regulations, regulatory changes, including changes in
the allocation of available frequency spectra, could materially adversely affect
the Company's operations by restricting development efforts by the Company's
customers, obsoleting current products or increasing the opportunity for
additional competition. Changes in, or the failure by the Company to manufacture
products in compliance with, applicable domestic and international regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the increasing demand for
wireless telecommunications has exerted pressure on regulatory bodies worldwide
to adopt new standards for such products, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this governmental approval process have in the past caused and may
in the future cause the cancellation, postponement or rescheduling of the
installation of communications systems by the Company's customers, which in turn
may have a material adverse effect on the sale of products by the Company to
such customers.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also from time to time
conduct inquiries or investigations that cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on the Company's business, financial condition or
results of operations.
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
The Company relies on contract manufacturers and suppliers, in some cases
sole suppliers or limited groups of suppliers, to provide it with services and
materials necessary for the manufacture of products. For example, certain
ceramic low drift substrates (supplied by NTK of Japan and Alpha Industries,
Inc.), certain semiconductors (supplied by Alpha Industries, Inc., Nippon
Electric Corporation, M/A-Com Inc., Microwave Technology, Inc., Raytheon,
Raytheon TI Systems, Inc., Siemens A.G., Fujitsu Compound Semiconductor, Inc.,
Litton Solid State and others) and certain components used in amplifiers and VCO
products (supplied by Alpha Industries, Inc., Lockheed Martin, Scientific
Components Corp. (d/b/a "Mini Circuits"), M/A Com Inc., Lockheed Martin
Microwave -- FSI (a division of Lockheed Martin), L3 Communications and
Micrometrics, Ltd.) and prescalers, carriers and transformers (supplied by
Sciteq Communications, Inc., United Monolithic Semiconductors, Hewlett-Packard
Company, Elcon, Inc. and Mini Circuits) used by the Company are sole source or
critical supply items and would require significant effort, time or design
changes to develop alternate sources. The Company's reliance on contract
manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced control
over production costs, delivery schedules, reliability and quality of components
or assemblies. Any inability to obtain timely deliveries of acceptable quality,
or any other circumstance that would require
9
<PAGE> 10
the Company to seek alternative contract manufacturers or suppliers, could delay
the Company's ability to deliver products to customers, which in turn would have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, in the event that costs for the Company's
contract manufacturers or suppliers increase, the Company may suffer losses due
to an inability to recover such cost increases under fixed price production
commitments to its customers.
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 or new products developed by, or new contracts
acquired by, the Company, 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.
LIMITATION ON PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY CLAIMS
The Company does not presently hold any significant patents applicable to
its products. In order to protect its intellectual property rights, the Company
relies on a combination of trade secret, copyright and trademark laws and
employee and third-party nondisclosure agreements, as well as limiting access to
and distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of the Company's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that, in the future, third parties will not assert
infringement claims against the Company or with respect to its products for
which the Company has indemnified certain of its customers. Asserting the
Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, financial condition and results of operations.
In the event a third party were successful in a claim that one of the Company's
products infringed its proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
INTERNATIONAL SALES
Although less than 5% of the Company's revenue is derived from sales to its
customers located in Southeast Asia (excluding Japan), certain of the Company's
customers may sell products into Southeast Asian markets. Recent adverse
economic developments in Southeast Asia could affect sales by certain of the
Company's customers into this region which may, in turn, have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified engineering, management, manufacturing,
quality assurance, marketing and support personnel. The Company does not
maintain key man life insurance on its key executive officers and, except for
Joseph Lee (Executive Vice President), Tao Chow (Senior Vice President), James
Mongillo (Senior Vice President) and Justin Miller (Vice President), such
personnel do not have employment or non-competition agreements with the Company.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. For
example, the Company believes that microwave engineers with the skills necessary
to develop products for the wireless telecommunications market currently
10
<PAGE> 11
are in high demand and that the Company may not be able to attract and retain
sufficient engineering expertise.
CONTROL BY MANAGEMENT
The Company's executive officers comprise five of the ten members of the
Board of Directors. As a result, such persons have the ability to exercise
influence over significant matters regarding the Company. Such a high level of
influence may have a significant effect in delaying, deferring or preventing a
change in control of the Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries to represent years. For example, the year
"1997" would be represented by "97." These systems and products will need to be
able to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. The Company believes that its internal systems are Year 2000
compliant or will be upgraded or replaced in connection with previously planned
changes to information systems prior to the need to comply with Year 2000
requirements. However, many of the Company's customers may be affected by Year
2000 issues that require that they expend significant resources to modify or
replace their existing systems, which may result in such clients having reduced
funds to purchase the Company's products.
11
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock being offered by the Company at a price of $26.50 per share are
approximately $39,890,000 (approximately $49,699,000 if the Underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discount and estimated offering expenses payable by the Company.
The Company plans to use the proceeds of the offering for general corporate
purposes, including routine capital expenditures and working capital. The
Company currently has no specific plans for any significant portion of the
proceeds. The Company may use a portion of the proceeds to acquire technologies,
products or businesses that complement the Company's current business, as such
opportunities may arise. Although the Company does consider such acquisitions
from time to time, as a part of its normal business operations and planning, it
has no present commitments or agreements with respect to any such acquisitions.
Pending their use, the proceeds will be invested in short-term, United
States Government or investment grade interest-bearing securities. The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
PRICE RANGE OF COMMON STOCK
Prior to the quotation of the Common Stock on the Nasdaq National Market
beginning on February 1, 1996, there was no established trading market for the
Common Stock. Since February 1, 1996, the Common Stock has been quoted on the
Nasdaq National Market under the symbol "REMC." The following table sets forth
the range of high and low closing sale prices of the Common Stock as reported on
the Nasdaq National Market for the quarterly periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1997 HIGH LOW
------- -------
<S> <C> <C>
First Quarter (1).............................................. $11.578 $ 5.422
Second Quarter (1)............................................. 14.922 7.578
Third Quarter (1).............................................. 10.500 7.500
Fourth Quarter (1)............................................. 17.500 9.328
FISCAL YEAR ENDED JANUARY 31, 1998
First Quarter (1).............................................. 18.828 14.000
Second Quarter (1)............................................. 31.250 16.828
Third Quarter.................................................. 38.313 20.000
Fourth Quarter................................................. 27.250 17.125
FISCAL YEAR ENDING JANUARY 31, 1999
First Quarter (through February 24, 1998)...................... 28.875 25.875
</TABLE>
(1) Adjusted for a three-for-two stock split paid on June 27, 1997 to
shareholders of record as of June 20, 1997.
The last reported sale price of the Common Stock on the Nasdaq National
Market on February 24, 1998 was $26.50. As of January 30, 1998, there were
approximately 640 holders of record of Common Stock.
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1997 and as adjusted to reflect the sale of 1,600,000 shares of
Common Stock offered by the Company in this offering at a price of $26.50 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term debt.................................................. $ -- $ --
Shareholders' equity(1)(2):.....................................
Common Stock, $.01 par value; 40,000,000 shares authorized;
21,080,959 shares issued and outstanding, actual;
22,680,959 shares issued and outstanding, as adjusted...... 210,810 226,810
Additional paid-in capital...................................... 94,283,652 134,157,652
Retained earnings............................................... 28,500,132 28,500,132
-------- --------
Total shareholders' equity...................................... 122,994,594 162,884,594
-------- --------
Total capitalization....................................... $122,994,594 $162,884,594
======== ========
</TABLE>
- ---------------
(1) Excludes 390,000 shares of Common Stock issuable by the Company upon the
full exercise of the Underwriters' over-allotment option. Excludes 1,721,685
shares of Common Stock issuable upon exercise of options outstanding as of
October 31, 1997, which have a weighted average exercise price of $13.73 per
share. Also excludes 2,363,215 additional shares reserved for issuance under
the Equity Incentive Plan, 1996 Nonemployee Directors Stock Option Plan and
Employee Stock Purchase Plan.
(2) Common Stock and Additional paid-in capital, as adjusted, will be $230,710
and $143,962,252, respectively, if the Underwriters' over-allotment option
is exercised in full.
13
<PAGE> 14
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein and the Consolidated Financial Statements
for REMEC and the Notes thereto incorporated herein by reference. The selected
consolidated financial data set forth below with respect to the Company's
statements of operations 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 audited consolidated financial statements. These
consolidated financial statements are incorporated herein by reference 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 and unaudited
financial statements not included or incorporated by reference herein. The
statement of operations data for the nine months ended November 3, 1996 and
October 31, 1997, and the balance sheet data at October 31, 1997 are derived
from unaudited financial statements which are incorporated by reference into
this Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the nine months ended
October 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending January 31, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
YEARS ENDED JANUARY 31, NOVEMBER
------------------------------------------------ 3, OCTOBER 31,
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- -------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Net sales......................................... $62,627 $66,599 $81,978 $93,228 $118,554 $ 85,499 $111,850
Cost of sales..................................... 42,883 45,427 57,994 66,172 85,659 61,631 77,861
------ ------ ------ ------ ------- ------ ------
Gross profit.................................... 19,744 21,172 23,984 27,056 32,895 22,868 33,989
Operating expenses:
Selling, general and administrative............. 11,864 13,332 15,646 16,611 19,349 13,465 18,009
Research and development........................ 1,525 1,323 2,067 4,016 4,605 3,488 3,862
------ ------ ------ ------ ------- ------ ------
Total operating expenses.................. 13,389 14,655 17,713 20,627 23,954 16,953 21,871
------ ------ ------ ------ ------- ------ ------
Income from operations............................ 6,355 6,517 6,271 6,429 8,941 6,915 12,118
Gain on sale of subsidiary........................ -- -- -- -- -- -- 2,833
Interest (income) expense and other, net.......... 222 191 590 401 (48) (63) (1,834)
------ ------ ------ ------ ------- ------ ------
Income before provision for income taxes.......... 6,133 6,326 5,681 6,028 8,989 6,978 16,785
Provision for income taxes........................ 1,819 1,830 2,394 2,429 4,017 3,001 5,994
------ ------ ------ ------ ------- ------ ------
Income before extraordinary item.................. 4,314 4,496 3,287 3,599 4,972 3,977 10,791
Extraordinary item................................ 167 -- -- -- -- -- --
------ ------ ------ ------ ------- ------ ------
Net income........................................ $ 4,481 $ 4,496 $ 3,287 $ 3,599 $ 4,972 $ 3,977 $ 10,791
====== ====== ====== ====== ======= ====== ======
Net income per share.............................. $ 0.29 $ 0.34 $ 0.25 $ 0.28 $ 0.30 $ 0.24 $ 0.50
====== ====== ====== ====== ======= ====== ======
Shares used in per share calculations............. 15,559 13,309 13,031 12,989 16,669 16,619 21,532
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31, 1997
------------------------------------------------ ---------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED(2)
------- ------- ------- ------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents......................... $ 4,248 $ 4,156 $ 3,628 $ 3,828 $ 63,172 $ 48,885 $ 88,775
Accounts receivable, net.......................... 6,823 8,580 9,092 10,043 15,973 22,761 22,761
Inventory, net.................................... 11,188 14,439 14,633 16,476 19,332 28,142 28,142
Total current assets.............................. 22,887 29,434 28,808 32,698 102,094 103,251 143,141
Fixed assets...................................... 7,150 11,284 10,999 13,416 18,543 26,842 26,842
Total assets...................................... 30,143 42,424 42,357 48,558 125,440 147,742 187,632
Current liabilities............................... 9,084 12,827 13,188 15,123 17,982 20,850 20,850
Long-term debt.................................... 2,446 5,846 3,235 4,781 2,493 -- --
Total liabilities................................. 12,172 20,247 17,868 21,311 21,886 24,747 24,747
Total shareholders' equity........................ 17,971 22,177 24,489 27,247 103,555 122,995 162,885
</TABLE>
<TABLE>
<CAPTION>
JANUARY
31, JANUARY 31,
1997 1998
---------- --------------
<S> <C> <C>
BACKLOG(1)(3):
Commercial.......................................................................................... $ 75,118 $136,005
Defense............................................................................................. 71,711 78,850
------- -------
Total....................................................................................... $146,829 $214,855
======= =======
</TABLE>
- ---------------
(1) The Company acquired Magnum in August 1996, Radian in February 1997, C&S
Hybrid in June 1997 and Q-bit in October 1997, each of which was accounted
for as a pooling of interests and, as such, all financial amounts contained
in the table have been restated to include the financial results and data of
Magnum, Radian, C&S Hybrid and Q-bit for all periods presented.
(2) As adjusted to reflect the sale by the Company of 1,600,000 shares of Common
Stock offered by the Company hereby at a price of $26.50 per share. See "Use
of Proceeds" and "Capitalization."
(3) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Risk Factors -- Backlog" and
"Business -- Backlog."
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the design
and manufacture of microwave multi-function modules ("MFMs") for microwave
transmission systems used in defense applications and the commercial wireless
telecommunications industry. REMEC's consolidated results of operations include
the operations of REMEC Microwave ("Microwave"), REMEC Wireless, Inc.
("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems, Inc. ("RFM"), Magnum
Microwave Corporation ("Magnum"), Radian Technology, Inc. ("Radian"), Verified
Technical Corporation ("Veritek"), C&S Hybrid, Inc. ("C&S Hybrid"), Q-bit
Corporation ("Q-bit") and Nanowave Technologies Inc. ("Nanowave").
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 in the defense industry 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 of 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
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, 1997, the Company sold RFM in exchange for cash consideration of $5.0
million. The sale resulted in an after tax gain of $1,728,000, or $0.08 per
share.
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. On June 27, 1997, REMEC acquired all of the outstanding common stock of
C&S Hybrid in a transaction that was accounted for as a pooling of interests.
C&S Hybrid is a manufacturer of transmitter and receiver hardware assemblies
that are integrated into terrestrial-based point-to-point microwave radios
primarily for use in commercial applications. On October 24, 1997, REMEC
acquired all of the outstanding common stock of Q-bit in a transaction that was
accounted for as a pooling of interests. Q-bit is a manufacturer of
amplifier-based microwave components and multi-function modules. All
accompanying historical financial statement information has been restated to
include the operations, assets and liabilities of Magnum, Radian, C&S Hybrid,
and Q-bit.
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 flow for all periods subsequent to
March 31, 1997 include Veritek's operating results from April 1, 1997. In
October 1997, REMEC formed REMEC Canada (as a wholly owned subsidiary) for the
purpose of facilitating the acquisition of Canadian companies, including the
then contemplated acquisition of Nanowave, a manufacturer of amplifier based
microwave and millimeter wave components and multi-function modules, in a
transaction accounted for as a purchase. REMEC Canada completed the acquisition
of Nanowave effective as of October 29, 1997. The consolidated balance sheet at
October 31, 1997 includes the assets and liabilities of Nanowave.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total net sales, certain
consolidated statements of income data for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
JANUARY 31, ---------------------------
---------------------- NOVEMBER 3, OCTOBER 31
1995 1996 1997 1996 1997
---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales....................................... 100% 100% 100% 100% 100%
Cost of goods sold.............................. 71 71 72 72 70
--- --- --- --- ---
Gross profit.................................. 29 29 28 28 30
Operating expenses:
Selling, general & administrative............. 19 18 17 16 16
Research and development...................... 2 4 4 4 4
--- --- --- --- ---
Total operating expenses.............. 21 22 21 20 20
--- --- --- --- ---
Income from operations.......................... 8 7 7 8 10
Gain on sale of subsidiary...................... - - - - 3
Interest (income) expense and other, net........ 1 - - - 2
--- --- --- --- ---
Income before income taxes...................... 7 7 7 8 15
Provision for income taxes...................... 3 3 3 3 5
--- --- --- --- ---
Net income...................................... 4 % 4 % 4 % 5% 10%
=== === === === ===
</TABLE>
NINE MONTHS ENDED OCTOBER 31, 1997 VS. NINE MONTHS ENDED NOVEMBER 3, 1996
Net Sales. Net sales increased 31% from $85.5 million for the nine months
ended November 3, 1996 to $111.9 million for the nine months ended October 31,
1997. Commercial sales increased 67% from $35.6 million to $59.4 million and
defense sales increased 5% from $49.9 million to $52.5 million during these
periods. The increase in commercial sales was primarily attributable to
increased customer demand for the Company's wireless products. The increase in
defense sales was attributable to increased MFM and component sales offsetting
reduced precision instrument sales.
Gross Profit. Gross profit increased 42% from $23.9 million for the nine
months ended November 3, 1996 to $34.0 million for the nine months ended October
31, 1997. Gross margins increased from 28% to 30% for the periods indicated due
to the mix of products shipped and improved margins on defense products. Gross
margins for defense increased from 25% to 29% and commercial gross margins
remained constant at 31% in both periods.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 34% from $13.5 million during the
nine months ended November 3, 1996 to $18.0 million for the nine months ended
October 31, 1997. This increase was primarily attributable to increased
personnel, legal and other administrative costs resulting from the Company's
growth, as well as approximately $1.1 million of direct transaction costs
associated with the Radian, C&S Hybrid and Q-bit mergers. As a percentage of net
sales, SG&A expenses remained constant at 16% for the periods indicated.
Research and Development Expenses. Research and development expenses
increased 11% from $3.5 million during the nine months ended November 3, 1996 to
$3.9 million for the nine months ended October 31, 1997. These expenditures are
almost entirely attributable to the commercial wireless business.
Gain on Sale of Subsidiary. The Company's results of operations for the
nine months ended October 31, 1997 included the gain from the sale of the
Company's RFM subsidiary. There was no similar gain in the prior fiscal year.
Interest (Income) Expense and Other, Net. Interest income and other, net
increased from $63,000 during the nine months ended November 3, 1996 to $1.8
million for the nine months ended October 31, 1997. This increase was due to the
increased level of cash on hand as a result of the funds generated from the
Company's follow-on public offering which was completed in January 1997.
16
<PAGE> 17
Provision for Income Taxes. The Company's effective tax rate declined from
43% during the nine months ended November 3, 1996 to 36% for the nine months
ended October 31, 1997. The decrease in the effective tax rate was a result of
the Company's merger with Q-bit, which had operated as an S corporation under
the Internal Revenue Code prior to the acquisition by REMEC, and the reduction
in REMEC's tax rate due to the benefit of tax credits for certain capital
expenditures.
FISCAL YEAR ENDED JANUARY 31, 1997 VS. FISCAL YEAR ENDED JANUARY 31, 1996
Net Sales. Net sales increased 27% from $93.2 million during fiscal 1996 to
$118.6 million for fiscal 1997. The increase in net sales was due to sales
increases at all of the Company's operating subsidiaries, including $4.8 million
of net sales of RFM from the effective date of the acquisition. Commercial sales
increased 62% from $30.2 million to $48.8 million due primarily to the
production of microwave front ends and VSAT equipment for P-COM and STM,
respectively. Defense sales increased 11% from $63.0 million to $69.8 million as
a result of increased bookings during fiscal 1997 and increased shipments on
production contracts for existing programs and customers.
Gross Profit. Gross profit increased 22% from $27.1 million in fiscal 1996
to $32.9 million in fiscal 1997. Gross margins decreased from 29% in fiscal 1996
to 28% for fiscal 1997. Gross margins for defense were 26% in fiscal 1996 and
27% in fiscal 1997. Commercial gross margins were 36% in fiscal 1996 and 29% in
fiscal 1997. The decline in commercial margins was primarily the result of a
change in sales mix and start-up costs associated with the introduction of new
products at certain of the Company's subsidiaries.
Selling, General and Administrative Expenses. SG&A expenses increased 16%
from $16.6 million during fiscal 1996 to $19.3 million for fiscal 1997. This
increase was primarily attributable to additional SG&A costs associated with the
Wireless and RFM operations, neither of which were significant contributors to
fiscal 1996 SG&A costs. Wireless was operating at start-up levels during fiscal
1996, while RFM was not included in fiscal 1996 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. As a percentage of net sales, SG&A expenses declined
from 18% in fiscal 1996 to 17% in fiscal 1997, due to increased sales volume.
Research and Development Expenses. Research and development expenses
increased 15% from $4.0 million in fiscal 1996 to $4.6 million for fiscal 1997.
This increase resulted primarily from wireless telecommunications research and
development expenses arising from the expansion of the Company's commercial
business. As a percentage of net sales, research and development expenses
remained constant at 4% for the periods indicated.
Interest (Income) Expense and Other, Net. Interest expense was $401,000 in
fiscal 1996 as compared to interest income of $48,000 for fiscal 1997. The
change was primarily attributable to the increased interest income associated
with the increased level of cash on hand as a result of the funds generated from
the Company's initial public offering which was completed in February 1996.
Provision for Income Taxes. The Company's effective income tax rate
increased from 40% in fiscal 1996 to 45% for fiscal 1997. The increase reflected
the net loss generated at the Company's Q-bit subsidiary. Prior to its
acquisition by REMEC, Q-bit had operated as an S corporation under the Internal
Revenue Code. Accordingly, the consolidated financial statements reflect no
benefit for Q-bit's fiscal 1997 net operating losses.
17
<PAGE> 18
FISCAL YEAR ENDED JANUARY 31, 1996 VS. FISCAL YEAR ENDED JANUARY 31, 1995
Net Sales. Net sales increased 14% from $82.0 million during fiscal 1995 to
$93.2 million for fiscal 1996. Commercial sales increased 38% from $21.9 million
in fiscal 1995 to $30.2 million for fiscal 1996 and defense sales increased 5%
from $60.1 million in fiscal 1995 to $63.0 million for fiscal 1996.
Gross Profit. Gross profit increased 13% from $24.0 million in fiscal 1995
to $27.1 million for fiscal 1996. Gross margins were 29% in both fiscal 1995 and
fiscal 1996. Commercial gross margins decreased from 42% in fiscal 1995 to 36%
for fiscal 1996. Commercial gross margins were affected by a change in sales mix
from the Company's subsidiaries and start-up costs associated with the Company's
new P-COM contract. Defense gross margins increased from 25% in fiscal 1995 to
26% for fiscal 1996.
Selling, General and Administrative Expenses. SG&A expenses increased 6%
from $15.6 million during fiscal 1995 to $16.6 million during fiscal 1996. As a
percentage of net sales, SG&A expenses decreased from 19% in fiscal 1995 to 18%
for fiscal 1996 due to increased sales volume.
Research and Development Expenses. Research and development expenses
increased from $2.1 million in fiscal 1995 to $4.0 million for fiscal 1996. This
increase resulted primarily from increased commercial wireless
telecommunications research and development expenses.
Interest (Income) Expense and Other, Net. Interest expense decreased from
$590,000 for fiscal 1995 to $401,000 for fiscal 1996. The decrease was
attributable to continued reductions in average bank borrowings as the Company
reduced the debt attributable to the Humphrey acquisition.
Provision for Income Taxes. The Company's effective income tax rate
decreased from 42% in fiscal 1995 to 40% for fiscal 1996 primarily as a result
of the benefit of Q-bit's status as an S corporation under the Internal Revenue
Code.
18
<PAGE> 19
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial information
for each of the Company's last seven quarters. The information for each of these
quarters is unaudited but includes all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of this information when read in conjunction with the Consolidated
Financial Statements and Notes thereto incorporated herein by reference. The
results of operations for any quarter and any quarter-to-quarter trends are not
necessarily indicative of the results to be expected for any future periods.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
-------------------------------------------- -------------------------------
MAY 5, AUGUST 4, NOVEMBER 3, JANUARY 31, MAY 4, AUGUST 1, OCTOBER 31,
1996 1996 1996 1997 1997 1997 1997
------- --------- ----------- ----------- ------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $25,619 $29,324 $30,557 $33,054 $33,861 $39,428 $38,561
Cost of goods sold................... 18,363 21,086 22,182 24,027 23,684 27,388 26,789
------ ------ ------ ------ ------ ------ ------
Gross profit......................... 7,256 8,238 8,375 9,027 10,177 12,040 11,772
Operating expenses:
Selling, general and
administrative................... 4,175 4,509 4,782 5,896 5,378 6,189 6,442
Research and development........... 1,206 1,331 943 1,113 1,322 1,323 1,217
------ ------ ------ ------ ------ ------ ------
Total operating expenses.... 5,381 5,840 5,725 7,009 6,700 7,512 7,659
------ ------ ------ ------ ------ ------ ------
Income from operations............... 1,875 2,398 2,650 2,018 3,477 4,528 4,113
Gain on sale of subsidiary........... -- -- -- -- -- -- (2,833)
Interest (income) expense and other,
net................................ (70) (27) 41 7 (644) (580) (608)
------ ------ ------ ------ ------ ------ ------
Income before income taxes........... 1,945 2,425 2,609 2,011 4,123 5,108 7,554
Provision for income taxes........... 834 936 1,233 1,015 1,691 1,682 2,621
------ ------ ------ ------ ------ ------ ------
Net income........................... $ 1,111 $ 1,489 $ 1,376 $ 996 $ 2,432 $ 3,426 $ 4,933
====== ====== ====== ====== ====== ====== ======
Net income per share................. $ 0.07 $ 0.09 $ 0.08 $ 0.06 $ 0.11 $ 0.16 $ 0.23
====== ====== ====== ====== ====== ====== ======
Shares used per share calculations... 16,461 16,446 16,711 17,354 21,307 21,490 21,877
</TABLE>
The following table sets forth the above unaudited financial information as
a percentage of total net sales.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
----------------------------------------------- ---------------------------------
MAY 5, AUGUST 4, NOVEMBER 3, JANUARY 31, MAY 4, AUGUST 1, OCTOBER 31,
1996 1996 1996 1997 1997 1997 1997
------- ---------- ------------ ------------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold................... 71 72 73 73 70 70 69
--- --- --- --- --- --- ---
Gross profit......................... 29 28 27 27 30 30 31
Operating expenses:
Selling, general and
administrative................... 16 15 15 18 16 16 17
Research and development........... 5 5 3 3 4 3 3
--- --- --- --- --- --- ---
Total operating expenses.... 21 20 18 21 20 19 20
--- --- --- --- --- --- ---
Income from operations............... 7 8 9 6 10 11 11
Gain on sale of subsidiary........... -- -- -- -- -- -- (7)
Interest (income) expense and other,
net................................ (1) -- -- -- (2) (2) (2)
--- --- --- --- --- --- ---
Income before income taxes........... 8 8 9 6 12 13 20
Provision for income taxes........... 3 3 4 3 5 4 7
--- --- --- --- --- --- ---
Net income........................... 5% 5% 5% 3% 7% 9% 13%
=== === === === === === ===
</TABLE>
The increase in net sales in the second quarter of fiscal 1998 as compared
to the first quarter of fiscal 1998 was primarily due to the contribution of
sales from Veritek, which was purchased in March 1997, as well as an
approximately $1 million increase in REMEC Wireless sales. The decline in net
sales in the third quarter of fiscal 1998 was primarily due to the loss of sales
from RFM following the Company's divestiture of RFM on
19
<PAGE> 20
August 26, 1997. In addition, sales from Humphrey decreased in the third quarter
of fiscal 1998. Gross margins increased to 30% in the first quarter of fiscal
1998 from 27% in the fourth quarter of fiscal 1997 as a result of increased
contribution to total sales from Radian and Magnum as well as higher gross
margins on those sales.
The Company's quarterly results have fluctuated in the past and may
continue to fluctuate in the future due to a number of factors, including the
timing, cancellation or delay of customer orders, mix of products sold, the
timing of new product introductions by the Company or its competitors, the long
sales cycles associated with the Company's application-specific products, market
acceptance of the Company's and its customers' products, and other competitive
factors. In addition, with the decline in available defense industry production
programs, the Company has placed more reliance on development contracts as a
source of defense revenues, resulting in quarterly fluctuations due to this
changed product mix. Development contracts carry reduced gross margins and
typically call for minimal hardware deliveries and sporadic non-hardware revenue
items, which result in fluctuating revenues and gross margins. A large portion
of the Company's expenses are fixed and difficult to reduce. If net sales do not
meet the Company's expectations, the fixed nature of the Company's expenses
would exacerbate the effect of any net sales shortfall. Any unfavorable changes
in the factors listed above or others could have a material adverse effect on
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to maintain quarterly profitability
in the future.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, REMEC had $82.4 million of working capital which
included cash and cash equivalents totaling $48.9 million. 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. The Company's Q-bit subsidiary had a $1.65 million line of credit facility
which was terminated at the time it was acquired by the Company. As of October
31, 1997, there were no borrowings outstanding under REMEC's credit facilities.
During the nine month period ended October 31, 1997, net cash provided by
operations totaled $1.4 million as the cash flow from earnings and depreciation
expense more than offset the $11.9 million increase in receivables and
inventory. Investing activities utilized $10.3 million during the nine months
ended October 31, 1997, primarily as a result of $10.8 million in capital
expenditures. The bulk of the capital expenditures were associated with the
expansion of REMEC's commercial wireless telecommunications business. The above
expenditures were financed primarily by funds raised in REMEC's public offering
of Common Stock completed in 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. Financing
activities utilized approximately $5.0 million during the first nine months of
fiscal 1998, principally as a result of the Company's repayment of certain bank
and other obligations assumed in certain of the Company's acquisitions. In
addition, from January 31, 1997 to October 31, 1997, inventory increased 46% to
$28.1 million and fixed assets increased 45% to $26.8 million. These increases
were required to support the increased level of the Company's operations and
backlog.
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 will be adequate to fund its operations for at least
twelve months.
20
<PAGE> 21
BUSINESS
INTRODUCTION
REMEC is a leader in the design and manufacture of microwave multi-function
modules ("MFMs") for microwave transmission systems used in commercial
telecommunications and defense applications. The Company believes that its
expertise in microwave transmission system components such as filters,
amplifiers, mixers, switches and oscillators and its expertise in integrating
these components into MFMs give REMEC a strong competitive position in the
commercial wireless infrastructure equipment market. The Company's capabilities
enable it to develop and manufacture MFMs with reduced size, weight, parts count
and cost, and increased reliability and performance.
The Company's products operate at radio (300 MHz to 1 GHz), microwave (1
GHz to 20 GHz) and millimeter wave (20 GHz to 50 GHz) frequencies (these
frequencies are collectively referred to elsewhere in this Prospectus as
"microwave"). Modern wireless telecommunications systems employ microwave
transmission technology pioneered in the defense industry. Microwave frequency
bands have been used for emerging wireless telecommunications applications
because they are less congested and have more available bandwidth, affording
greater voice, data and video transmission capacity than lower frequency bands.
Driven by technological advances and regulatory changes, demand for wireless
telecommunications products has increased in recent years for applications such
as mobile telephony (cellular and PCS), rural telephony (VSAT), paging, wireless
cable, interactive television and wireless local loop. These emerging wireless
applications require a large infrastructure of microwave transmission equipment
such as base stations and point-to-point radios. The Company believes that the
evolution of cellular and PCS infrastructure, as well as other wireless
telecommunications systems, will require increased integration in order to
reduce size, weight and cost and to increase reliability and producibility of
base station equipment.
The Company also designs and manufactures precision instruments for
guidance, control and measurement systems used by the defense, aerospace,
petroleum and mining industries.
INDUSTRY BACKGROUND
In recent years there has been continually increasing demand for wireless
telecommunications services from businesses and consumers 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. In
response to this increasing demand, governmental regulatory agencies continue to
allocate additional frequencies for a broad range of wireless voice, data and
facsimile services. All of these services require substantial deployment or
expansion of microwave transmission infrastructure equipment to meet traffic
demand.
Cellular and PCS mobile telephony has accounted for much of the growth in
the wireless telecommunications industry. Cellular service uses radio base
stations that transmit and receive calls in localized areas. Each base station
has a finite capacity so as demand increases, the number of base stations
required to provide services also increases. A number of other factors are
currently increasing demand for base station infrastructure equipment.
Additional PCS frequency bands have recently been licensed, requiring new
equipment operating at frequencies different than current cellular frequencies.
Conversion from analog to CDMA/TDMA digital cellular systems requires the
replacement and/or expansion of current cellular networks. In large urban areas,
increased demand has required the deployment of micro base stations to maintain
service quality and reliability. Wireless "local loop" services, which use the
same equipment as cellular/PCS networks, are being installed in developing
regions of the world, since they can be implemented more rapidly and
economically than wired telephone systems.
The wireless telecommunications industry has also seen significant growth
from point-to-point and point-to-multipoint radio systems which operate at
higher frequencies and with much higher capacities. Point-to-point radios have
been traditionally used in low volumes for high capacity trunking applications
in telephony networks. As a result of telecommunications industry deregulation,
these radios are now being used in large area networks and in telephone bypass
applications by competitors to the traditional phone companies.
21
<PAGE> 22
New cellular and PCS networks are now typically interconnected using
point-to-point radios. New point-to-multipoint systems are being developed by
certain other companies to provide voice and data services in large urban areas
in direct competition with the local telephone companies. The FCC has announced
that it will auction additional frequency spectrum in 1998 for LMDS (local
multi-point distribution system) services.
Another growing segment of the wireless communications industry is VSATs
(very small aperture terminals), which are communications systems utilizing
fixed-site satellite terminals. Historically, these systems were primarily
designed for 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.
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> <C>
- ------------------------------------------------------------------------------------------
BAND FREQUENCY RANGE USES
- ------------------------------------------------------------------------------------------
LOW FREQUENCY (LF) <300 MHz Navigation Equipment
VERY HIGH FREQUENCY (VHF) (Aeronautical/Marine)
AM/FM Radio
Amateur/CB Radio
Television
Dispatch Radio
- ------------------------------------------------------------------------------------------
ULTRA HIGH FREQUENCY (UHF) 300 - 800 MHz UHF Television
Specialized Mobile Radio (SMR)
Paging
Wireless Data Collection
- ------------------------------------------------------------------------------------------
HIGH RADIO FREQUENCY (RF) 800 MHz - 1 GHz Analog Cellular
Digital Cellular
Two-way Messaging
Cordless Phone
- ------------------------------------------------------------------------------------------
MICROWAVE 1 - 2 GHz Private Radio Networks
PCS
Mobile Satellite Telephony
Military Communications/
Navigations
- ------------------------------------------------------------------------------------------
MICROWAVE/MILLIMETER WAVE 2 - 50 GHz VSAT
Satellite Voice/Messaging
Point-to-Point Radios
Wireless TV
Radar
Electronic Warfare
- ------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
THE REMEC OPPORTUNITY
All of the wireless communications services described above require
substantial deployment or expansion of microwave transmission infrastructure
equipment. The Company believes that it is particularly well suited to address
those requirements due to its broad portfolio of microwave capabilities and its
expertise at integrating microwave functions in a single package.
Historically, microwave systems for defense applications were built by
prime contractors who would procure single function components (such as filters,
amplifiers and mixers) from various specialized manufacturers. These single
function components were then connected to create the complete microwave
transmission system. In order to prevent components from interfering with each
other or being damaged, components were individually packaged. In response to
the demands of the Department of Defense to increase performance for microwave
transmission systems (especially systems on aircraft and missiles), prime
contractors integrated more functionality into the systems while reducing size
and weight. To accomplish this, the prime contractors demanded higher levels of
integration from component suppliers.
The Company, which started in 1983 as a producer of single function
components, took a leadership role in developing microwave MFMs in which
numerous component functions are integrated into a single module. Integrating
multiple functions into one module reduces packaging and interconnects, permits
improved performance through optimal partitioning and implementation of
functions and minimizes "over engineering." The result has been significant
reductions in size, weight and cost and improvements in producibility and
reliability.
The Company believes that the evolution of commercial wireless
telecommunications systems also requires increased integration to reduce size,
weight and cost and to increase reliability and producibility of base station
equipment. The Company believes that the high cost of facilities, power and
maintenance necessitates the development of small, highly reliable and cost
effective microwave "front ends" (the circuitry of the radio that enables
signals to be transmitted and received at microwave frequencies) for wireless
transmission systems, requiring the increased use of MFMs. In addition,
increasing use of MFMs facilitates higher volume commercial production of
wireless infrastructure equipment.
23
<PAGE> 24
The following diagram illustrates the integration of functional and
physical characteristics of components into an MFM.
[GRAPH]
The Company believes that the following core competencies enable it to
address the microwave requirements of customers in the wireless
telecommunications market:
Integration Expertise. Integration is a key part of designing high
performance equipment that operates at higher frequencies or that must operate
over a broad frequency range. By effectively integrating multiple functions into
single modules, REMEC has been able to accomplish the following:
- reduce packaging and interconnects
- improve performance through optimal partitioning and implementation of
functions
- reduce product size and parts count
- increase reliability
- minimize "over engineering" (e.g., avoid using higher performance, more
costly components than are necessary in order to compensate for the
performance degradation effects resulting from combining different
components into one system)
- reduce unit cost
Concurrent Engineering. The Company has excelled at developing products
optimized in design, process and manufacturing implementation by employing
"concurrent engineering" during the product development cycle. REMEC's
concurrent engineering approach extends to both its customer and supplier base.
REMEC often participates in its customers' product development cycle during the
conceptual design stage and is able to influence its customers' system
architecture/design in order to optimize for cost and performance at the MFM
level. Likewise, REMEC invites suppliers to participate in the design process to
optimize material and device selection. In the product design process, product
teams with design, process, quality and manufacturing engineering expertise
review the product design to assure its producibility, high quality and
affordability. Manufacturing process development and tooling occurs concurrently
with product development. REMEC
24
<PAGE> 25
believes that its concurrent engineering process reduces cycle times and costly
product redesigns when products move to volume production.
Technology Leadership. Since its inception in 1983, the Company has
developed over 2,500 microwave MFMs and components and has become an important
supplier of MFMs to many of the nation's leading telecommunication OEMs and
defense contractors. The Company is strategically partnered with a number of
OEMs, including P-COM, STM, Digital Microwave, and Lucent Technologies where the
Company provides all, or a large percentage of, the microwave content in the OEM
product. This partnership typically includes concurrent engineering activity and
shared technology development. The Company also has received significant
recognition, including "preferred supplier" designations, from numerous defense
customers including Lockheed Martin, TRW, Northrop Grumman and Raytheon. These
distinctions generally carry with them the opportunity to bid on all new product
procurements by the customer in the Company's area of expertise allowing REMEC
to increase market share. REMEC has developed a large number of proprietary
designs that provide performance/cost advantage to its customers. These designs
are continuously improved through technological evolution which is guided by the
Company's Technology Board. These designs can be re-applied or re-used resulting
in rapid product development and time to market. A large number of proprietary
manufacturing processes have also been developed to support large volume
production of microwave circuits.
Vertical Integration in Design and Manufacturing. With vertical
integration, the Company focuses on and retains control of each step of the
entire design and manufacturing process while minimizing the use of outside
sources and subcontractors for key services. Vertical integration reduces time
to market and unit costs and improves quality control, reliability and the
Company's ability to implement volume production. The Company has enhanced its
vertical integration capability with recent acquisitions, including a surface
mount board assembly manufacturer and several microwave component companies
which provide key functional capabilities that can be used in the Company's MFM
designs.
STRATEGY
REMEC intends to enhance its position as a leading developer and supplier
of microwave MFMs and components to wireless telecommunications infrastructure
OEMs and to retain leadership in developing and supplying microwave MFMs and
components to the defense industry. Execution of the Company's strategy
incorporates the following key elements:
Leverage Breadth of Microwave Capabilities in Telecom Equipment
Market. Through internal development and acquisitions, the Company believes that
it has compiled one of the broadest portfolio of microwave capabilities in the
industry. The Company intends to leverage that breadth of expertise by offering
total microwave solutions to telecommunications infrastructure OEMs for all of
their microwave component and subsystem needs. The Company believes that it can
provide such customers significant benefits in cost, performance, and time to
market compared to other microwave vendors who can supply only single function
components.
Maintain and Enhance Leadership in Microwave Technology. The Company
intends to maintain and enhance its leadership in microwave technology by
continuing its participation in selected defense programs that involve highly
sophisticated, state-of-the-art microwave technology. The Company has formed a
Technology Board comprised of its key executives and chief engineers to
disseminate throughout the Company technological improvements made in various
subsidiaries of the Company and to anticipate changes in technology and the
evolving technological needs of its customers. The Company believes that the
skills developed by REMEC in the defense industry and honed in the commercial
wireless market will continue to be a key factor in achieving substantial
reductions in the size and cost of commercial wireless infrastructure equipment.
Build Strategic Customer Alliances. The Company intends to continue its
focus on developing significant customer alliances with leading wireless OEMs
and defense prime contractors. The Company concentrates its efforts on
applications which offer the potential for recurring high volume production. In
wireless telecommunications the Company's strategy is to enter into strategic
alliances with selected leaders in each of the wireless market segments targeted
by the Company. REMEC supports its customers during their conceptual design
25
<PAGE> 26
stage to influence the system architecture/design to optimize for cost,
performance and producibility, further enhancing the likelihood of follow-on
business.
Maintain Cost Competitiveness. The Company intends to continue to implement
process manufacturing automation and believes that its ability to develop a high
level of automated product alignment and test capability offers an important
competitive advantage. The Company also intends to expand its foreign
manufacturing operations (in Canada, Costa Rica and Mexico) when appropriate to
lower its costs and/or to access an available workforce. The Company also
believes that its capabilities in integrating numerous functions into single
modules will enable it to continue to produce high performance products at
competitive cost.
Pursue Acquisitions. The Company pursues acquisitions to augment
technology by acquiring specialized component firms and to take advantage of
opportunities to consolidate niche companies in a currently fragmented microwave
equipment industry. The Company believes that expansion of capability through
the acquisition of component firms when combined with the Company's
technological and manufacturing skills at the component level will allow it to
achieve improved levels of MFM integration. The Company believes that it will
thereby be better able to respond to customer requirements for reduced size and
weight and lower cost.
PRODUCTS
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.
Point-to-Point Radio Market. In the point-to-point radio market, REMEC
manufactures microwave front ends or outdoor units (ODUs) as well as the
individual microwave modules (including diplexers, transceivers, synthesizers)
that provide the microwave front end functionality. Traditionally, radio
companies such as P-COM purchased individual modules and performed ODU
integration internally. As these radio companies have grown, there has been a
significant trend towards outsourcing the entire ODU. Using REMEC's broad
functional microwave capability, the Company has been able to obtain a large
portion of ODU business from its existing customers. REMEC also supplies a
significant portion of microwave modules to traditional customers with
established in-house integration capability.
VSAT Market. Like the point-to-point radio business, the Company has
focused its VSAT business at the ODU level. Most VSAT system integrators procure
the complete ODU. REMEC also provides microwave modules such as power amplifiers
to ODU integrators. A significant portion of this business is with STM, although
the Company is currently marketing an industry standard SCPC (single channel per
carrier) ODU at C-Band with plans to develop an additional product this year.
The Company has also completed development of a low cost SES VSAT terminal for
STM for rural telephony applications.
Cellular/PCS Market. In the cellular/PCS market, the Company sells
components including filters, amplifiers, VCOs and mixers that are used in base
station infrastructure equipment. The Company also sells a number of MFMs
including delay filter assemblies and filter/LNA assemblies for higher
performance digital base stations. The Company expects to derive significant
synergy from recently acquired component capability to provide more fully
integrated radio solutions to this industry much like the VSAT and
point-to-point radio business.
Defense Market. REMEC focuses its efforts on defense programs which it
believes have the highest probability of follow-on production. Tactical
aircraft, satellites, missile systems and smart weapons comprise the majority of
the platforms of the Company's customers. Defense industry programs from which
REMEC derives or may derive significant revenues include: (i) the F-22 Stealth
Tactical Fighter Aircraft program for the U.S. Air Force for which the Company
is developing switch amplifiers, switch filters, integrated switch modules,
power amplifiers, frequency generators, frequency converters and frequency
multipliers for three different microwave subsystems (CNI, Radar and Electronic
Warfare); (ii) the Airborne Self-Protection
26
<PAGE> 27
Jammer (ASPJ) program for foreign military customers and the U.S. Navy for which
the Company has developed and produced a 28-channel switched filter bank and
multi-function components such as frequency modulators; (iii) the Advanced
Medium Range Air to Air Missile (AMRAAM) program for the U.S. Air Force for
which the Company has developed and produced frequency multipliers, converters
and filters; and (iv) the Longbow Missile and Radar programs for the U.S. Army
for which the Company has developed and is producing MFMs, amplifiers, VCOs and
filters.
The following table delineates a more complete list of certain of the
Company's microwave components and MFMs:
<TABLE>
<CAPTION>
PRODUCT TYPES FUNCTION PRICE RANGE(1)
- --------------------------------- ----------------------------------------------------- ---------------
<S> <C> <C>
Filters, Duplexers and
Multiplexers................... Separate desired frequency bands from undesired bands $10 - 500
Amplifiers....................... Increase signal strength and power $25 - 5,000
Frequency Mixers................. Provide frequency conversion function $25 - 2,500
Voltage Controlled Oscillators... Generate frequency controlled by an input voltage $10 - 1,000
Dielectric Resonator
Oscillators.................... Generate fixed frequency microwave signal $250 - 2,000
Cavity Oscillators............... Generate fixed frequency microwave signal $250 - 4,000
Switches......................... Switch signal between different signal paths $100 - 2,000
Switch Attenuators............... Select discrete attenuation values $100 - 3,000
Variable Attenuators............. Select continuously variable attenuation values $100 - 3,000
Switch Matrices.................. Allow MxN connectivity between M-inputs and N-outputs $5,000 - 50,000
Switched Delay Lines............. Select discrete phase delays $1,000 - 3,000
Switched Filters................. Select between multiple filters $500 - 25,000
Multipliers...................... Multiply an input frequency by an integer $100 - 2,000
Comb Generators.................. Provide several multiplied frequencies in a single
output $100 - 2,000
Frequency Generators............. Generate multiple discrete frequency outputs $300 - 25,000
Frequency Synthesizers........... Generate a discrete stepped frequency output $300 - 50,000
Frequency Converters............. Provide frequency conversion function $300 - 5,000
Tranceivers...................... Transmit, receive and channel select microwave
signals $500 - 6,000
Point-to-Point Radio Front Transmit, receive and channel select microwave
Ends........................... signals for terrestrial applications $500 - 12,000
</TABLE>
- ---------------
(1) Price is affected by complexity and tolerance of specifications and
production quantities.
CUSTOMERS
The Company's customers for commercial wireless MFMs and components include
P-COM, STM, Digital Microwave, General Instrument and Alcatel. The Company's
customers for defense microwave MFMs and components include Lockheed Martin,
Motorola, Northrop Grumman and Raytheon (including portions of Hughes Aircraft
Co. and Texas Instruments which Raytheon acquired in 1997). During fiscal 1997,
sales to P-COM accounted for approximately 13% of net sales.
BACKLOG
The Company's backlog of orders as of January 31, 1997 and January 31, 1998
was $146.8 million ($75.1 million commercial and $71.7 million defense) and
$214.9 million ($136.0 million commercial and $78.9 million defense),
respectively. In addition, on February 24, 1998, the Company received an order
for ODUs valued at approximately $21.8 million. The Company includes in its
backlog only those orders for which it has accepted purchase orders. However,
backlog is not necessarily indicative of future sales. A substantial amount of
the Company's backlog can be canceled at any time without penalty, except, in
most cases, for the recovery of the Company's actual committed costs and profit
on work performed up to the date of cancellation. A failure to develop products
meeting contract specifications could lead to a cancellation of the related
purchase orders. See "Risk Factors -- Customer Concentration and Exclusivity,"
"-- Risk of Cost Overruns and Product Non-Performance; Loss of Investment in
Design and Engineering" and "-- Backlog."
27
<PAGE> 28
SALES AND MARKETING
The Company uses a team-based sales approach to facilitate close management
by Company personnel of relationships at multiple levels of the customer's
organization, including management, engineering and purchasing personnel. The
Company's integrated sales approach involves a team consisting of a senior
executive, a business development specialist, members of the Company's
engineering department and, occasionally, a local technical sales
representative. In particular, the use of experienced engineering personnel as
part of the sales effort enables close technical collaboration with the customer
during the design and qualification phase of new communications equipment which,
the Company believes, is critical to the integration of its products into its
customers equipment. The Company's executive officers are also involved in all
aspects of the Company's relationships with its major customers and work closely
with their senior management. The Company utilizes manufacturers and sales
representatives to identify opportunities.
To date, the Company has sold its products overseas with the assistance of
independent sales representatives. Sales outside of the United States
represented 11%, 17% and 7% of net sales in fiscal years ended January 31, 1996
and 1997 and the nine months ended October 31, 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 the
Company's domestic OEM customers.
MANUFACTURING
The Company assembles, tests, packages and ships products at its
manufacturing facilities located in: San Diego, Escondido, San Jose, Santa Clara
and Milpitas, California; Melbourne, Florida; Toronto, Canada; San Jose, Costa
Rica; and Tijuana, Mexico. The Company believes that process expertise and
discipline are key elements of successful high volume production of microwave
MFMs because of the precise specifications required. Since inception, the
Company has been manufacturing products for defense programs in compliance with
the stringent MIL-Q-9858 specifications. The Company received ISO-9001
certification from the Defense Electronics Supply Center for its facilities at
REMEC Microwave. ISO-9001 is a standard established by the International
Organization for Standardization that provides a methodology by which
manufacturers can obtain quality certification. Although this certification is
not currently required by any of its customers, REMEC believes that it will be
beneficial to the acquisition of future business. To assure the highest product
quality and reliability and to maximize control over the complete manufacturing
cycle and costs, the Company seeks to achieve vertical integration in the
manufacturing process wherever appropriate.
Historically, the volume of the Company's production requirements in the
defense markets was not sufficient to justify the widespread implementation of
automated manufacturing processes. The Company anticipates that increased sales
of its products to the wireless telecommunications industry will require a
significant increase in the Company's manufacturing capacity. Accordingly, the
Company has introduced automated manufacturing techniques for product assembly
and testing and is currently planning to expand its facilities.
The Company attempts to utilize standard parts and components that are
available from multiple vendors. However, certain components used in the
Company's products are currently available only from single sources, and other
components are available from only a limited number of sources. The Company's
reliance on contract manufacturers and on sole suppliers involves several risks,
including a potential inability to obtain critical materials or services and
reduced control over production costs, delivery schedules, reliability and
quality of components or assemblies. Any inability to obtain timely deliveries
of acceptable quality, or any other circumstance that would require the Company
to seek alternative contract manufacturers or suppliers, could delay the
Company's ability to deliver its products to its customers, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, the Company
has made the strategic decision to select single source or limited source
suppliers in order to obtain lower pricing, receive more timely delivery and
maintain quality control. In 1997, the Company acquired Veritek which provides
surface mount capabilities and expertise. The Company also relies on contract
manufacturers for circuit board assembly. The Company generally orders
components and circuit boards from its suppliers
28
<PAGE> 29
and contract manufacturers by purchase order on an as needed basis. See "Risk
Factors Dependence on Suppliers and Contract Manufacturers" and "-- Government
Regulations."
COMPETITION
The markets for the Company's products are extremely competitive and are
characterized by rapid technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition is
intense and significant price erosion generally occurs over the life of a
product. The Company faces some competition from component manufacturers who
have integration capabilities, but believes that its primary competition is from
the captive manufacturing operations of large wireless telecommunications OEMs
(including all of the major telecommunications equipment providers) and defense
prime contractors who are responsible for a substantial majority of the present
worldwide production of MFMs. The Company's future success is dependent upon the
extent to which these OEMs and defense prime contractors elect to purchase from
outside sources rather than manufacture their own microwave MFMs and components.
The Company's customers and large manufacturers of microwave transmission
equipment could also elect to enter into the non-captive market for microwave
products and compete directly with the Company. Many of the Company's current
and potential competitors have substantially greater technical, financial,
marketing, distribution and other resources than the Company and have greater
name recognition and market acceptance of their products and technologies. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing products or introduce new products that
will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company's customers.
For example, innovations such as a wireless telephone system utilizing
satellites instead of terrestrial base stations or a device that integrates
microwave functionality could significantly reduce the potential market for the
Company's products. The Company believes that to remain competitive in the
future it will need to invest significant financial resources in research and
development.
RESEARCH AND DEVELOPMENT
Research and development expenses recorded by the Company for the fiscal
years ended January 31, 1995, 1996 and 1997 and for the nine months ended
October 31, 1997 were approximately $2,067,000, $4,016,000, $4,605,000 and
$3,862,000, respectively. The Company's research and development efforts in the
defense industry are conducted in direct response to the unique requirements of
a customer's order and, accordingly, are included in cost of sales and the
related funding in net sales. The Company expects that as its commercial
business expands, research and development expenses will increase in amount and
as a percentage of sales.
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless telecommunications
systems that are subject to regulation domestically by the FCC and
internationally by other government agencies. Although the equipment operators
and not the Company are responsible for compliance with such regulations,
regulatory changes, including changes in the allocation of available frequency
spectrum, could materially adversely affect the Company's operations by
restricting development efforts by the Company's customers, obsoleting current
products or increasing the opportunity for additional competition. Changes in,
or the failure by the Company to manufacture products in compliance with,
applicable domestic and international regulations could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the increasing demand for wireless telecommunications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused and may in the future cause the cancellation,
postponement or rescheduling of the installation of communications systems by
the Company's customers, which in turn may have a material adverse effect on the
sale of products by the Company to such customers.
The Company is also subject to a variety of local, state, federal and
foreign governmental regulations relating to the storage, discharge, handling,
emission, generation, manufacture and disposal of toxic or other
29
<PAGE> 30
hazardous substances used to manufacture the Company's products. The failure to
comply with current or future regulations could result in the imposition of
substantial fines on the Company, suspension of production, alteration of its
manufacturing processes or cessation of operations.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that may cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on the Company's business, financial condition or
results of operation.
The Company believes that it operates its business in material compliance
with applicable government regulations.
INTELLECTUAL PROPERTY
The Company does not presently hold a patent applicable to its products
which is significant. In order to protect its intellectual property rights, the
Company relies on a combination of trade secret, copyright and trademark laws
and employee and third-party nondisclosure agreements, as well as limiting
access to and distribution of proprietary information. There can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from independently developing such technology. Furthermore,
there can be no assurance that, in the future, third parties will not assert
infringement claims against the Company or with respect to its products for
which the Company has indemnified certain of its customers. Asserting the
Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, financial condition and results of operations.
In the event a third party were successful in a claim that one of the Company's
products infringed its proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
EMPLOYEES
As of January 16, 1998, the Company had a total of 1,820 employees,
including 1,340 in manufacturing and operations, 227 in research, development
and engineering (including 54 designers and drafters, 27 manufacturing
engineers, 14 quality engineers and 132 electrical and mechanical engineers), 98
in quality assurance, 31 in sales and marketing and 124 in administration. The
Company believes its future performance will depend in large part on its ability
to attract and retain highly skilled employees. None of the Company's employees
is represented by a labor union and the Company has not experienced any work
stoppage. The Company considers its employee relations to be good.
FACILITIES
The Company's principal administrative, engineering and manufacturing
facilities are located in eight buildings aggregating approximately 200,000
square feet in San Diego and Escondido, California, consisting of one 21,000
square foot facility owned by the Company and seven leased facilities, pursuant
to leases which expire on various dates beginning January 2000 through March
2007. The Company's Northern California operations are located in four leased
buildings aggregating approximately 101,000 square feet in San Jose, Milpitas
and Santa Clara, California. These leases expire on various dates beginning in
March 1998 through October 2003. Q-bit owns a 51,000 square foot building
located in Melbourne, Florida and leases 8,000 square feet in a building in San
Jose, Costa Rica, with lease expiration in June 1998. Nanowave leases
approximately 25,000 square feet in two buildings located in Toronto, Canada,
under leases which expire in September 2001. The Company believes that its
existing facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available on commercially reasonable
terms as needed.
30
<PAGE> 31
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
January 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ---- ---------------------------------------------------------------------
<S> <C> <C>
Ronald E. Ragland(1)....... 56 Chairman of the Board and Chief Executive Officer
Errol Ekaireb.............. 59 President, Chief Operating Officer and Director
Jack A. Giles.............. 55 Executive Vice President, President of REMEC Microwave and Director
Joseph T. Lee.............. 43 Executive Vice President, President of Northern California Operations
and Director
Denny Morgan............... 44 Senior Vice President, Chief Engineer and Director
Tao Chow................... 46 Senior Vice President and President of C&S Hybrid
Michael McDonald........... 44 Senior Vice President, Chief Financial Officer and Secretary
James Mongillo............. 59 Senior Vice President and President of Radian and Magnum
Justin Miller.............. 48 Vice President and President of REMEC Canada and Nanowave
Thomas A. Corcoran(1)(2)... 53 Director
William H. Gibbs(1)(2)..... 54 Director
Andre R. Horn(3)........... 69 Director
Gary L. Luick(3)........... 57 Director
Jeffrey M. Nash(2)(3)...... 50 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Mr. Ragland was a founder of the Company and has served as Chairman of the
Board and Chief Executive Officer of the Company since January 1983. Prior to
joining the Company, he was General Manager of KW Engineering and held program
management positions with Ford Aerospace Communications Corp., E-Systems, Inc.
and United Telecommunications, Inc. Mr. Ragland was a Captain in the United
States Army and holds a B.S.E.E. degree from Missouri University at Rolla and an
M.S.E.E. degree from St. Louis University.
Mr. Ekaireb has served as President and Chief Operating Officer of the
Company since 1990 and a director of the Company since 1985. Mr. Ekaireb served
as Vice President of the Company from 1984 to 1987 and as Executive Vice
President and Chief Operating Officer from 1987 to 1990. Prior to joining the
Company, he spent 23 years with Ford Aerospace Communications Corp. Mr. Ekaireb
holds B.S.E.E. and B.S.M.E. degrees from West Coast University and has completed
the University of California, Los Angeles Executive Program.
Mr. Giles joined the Company in 1984. He was elected as a director in 1984,
Vice President in 1985, Executive Vice President in 1987 and was elected
President of REMEC Microwave in 1994. Prior to joining the Company he spent
approximately 19 years with Texas Instruments in program management and
marketing. Mr. Giles holds a B.S.M.E. degree from the University of Arkansas and
is a graduate of Defense Systems Management College.
Mr. Lee has been a director and Executive Vice President of the Company
since September 1996 and was elected as President of the Company's Northern
California Operations in December 1997. Prior to the acquisition of Magnum by
the Company he was Chairman of the Board, President and Chief Executive Officer
of Magnum. Mr. Lee holds a B.S.E.E. degree from the University of Michigan and
M.S.E.E. and ENGINEER (Doctor of Engineering) degrees from Stanford University.
Mr. Morgan was a founder of the Company and has served as Senior Vice
President, Chief Engineer and a director of the Company since January 1983.
Prior to joining the Company, he worked with KW Engineering, Micromega, General
Dynamics Corporation and Pacific Aerosystems, Inc. Mr. Morgan holds a
31
<PAGE> 32
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. Chow has served as the President and a director of C&S Hybrid and
Senior Vice President of REMEC since July 1997. Prior to the acquisition of C&S
Hybrid by 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 also
served as a director and the President and Chief Financial Officer of Custom
Micro Machining, Inc. since 1990, and as a director of Applied Thin-Film
Products since April 1995. Mr. Chow holds a B.S.E.E. degree from National
Chiao-Tung University in Taiwan and a M.S.E.E. degree from the University of
California, Los Angeles.
Mr. McDonald was appointed Senior Vice President, Chief Financial Officer
and Secretary in December 1997. Prior to the acquisition of Magnum by the
Company, he had been Vice President and Chief Financial Officer of Magnum. Prior
to joining Magnum in 1984, he worked at Watkins-Johnson Company. Mr. McDonald
holds a B.S. degree from the University of San Francisco and an M.B.A. degree
from California Polytechnic State University at San Luis Obispo.
Mr. Mongillo joined the Company in February 1997 as part of the Radian
Technology acquisition. He is a Senior Vice President of the Company, and is
serving as President of both Radian Technology and Magnum Microwave. Prior to
the acquisition of Radian Technology, he was the Chairman of the Board,
President and Chief Executive Officer of Radian. Mr. Mongillo holds a B.S.E.E.
degree from Brown University.
Dr. Miller has served as President and director of Nanowave Technologies
and REMEC Canada and Vice President of REMEC since October 1997. Prior to the
Nanowave acquisition by REMEC, he was a founder of Nanowave and served as its
President and a director since 1992. Prior to that he served as Vice
President -- Engineering of Microwave Technologies, a division of Lucas
Industries plc. Dr. Miller holds a Ph.D. from the University of Warwick.
Mr. Corcoran was elected a director of the Company in May, 1996. Mr.
Corcoran has been the President and Chief Operating Officer of the Electronic
Systems sector of Lockheed Martin Corporation since March 1995. From 1993 to
1995 Mr. Corcoran was President of the Electronics Group of Martin Marietta
Corporation, and from 1983 to 1993 he held various management positions with the
Aerospace segment of General Electric Company. Mr. Corcoran is a member of the
Board of Trustees of Worcester Polytechnic Institute, the Board of Trustees of
Stevens Institute of Technology and the Board of Governors of the Electronic
Industries Association and a Director of the U.S. Navy Submarine League.
Mr. Gibbs was elected a director of the Company in May, 1996. Mr. Gibbs has
been the President and Chief Executive Office of DH Technology, Inc. since
November 1985 and Chairman of DH Technology, Inc. since February 1987. From
August 1983 to November 1985, he held various positions, including those of
President and Chief Operating Officer, with Computer and Communications
Technology, a supplier of rigid disc magnetic recording heads to the peripheral
equipment segment of the computer industry.
Mr. Horn has been a director of the Company since 1988. Mr. Horn is the
retired Chairman of the Board of Joy Manufacturing Company. From 1985 to 1991,
Mr. Horn served as the Chairman of the Board of Needham & Company, Inc., which
is serving as one of the representatives of the underwriters in the offering
made hereby. He currently holds the honorary position of Chairman Emeritus of
Needham & Company, Inc. Mr. Horn is a director of Western Digital Corporation, a
computer equipment manufacturer, and Varco International, Inc., a manufacturer
of petroleum industry equipment.
Mr. Luick has been a director of the Company since 1994. Currently, Mr.
Luick is President, Chief Executive Officer and Director of Coded Communications
Corporation, a manufacturer of mobile wireless data networking and
communications systems providing connectivity to public safety, government and
commercial customers worldwide. 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 the Company since 1988. From 1995 to 1998,
he was the President, Chief Executive Officer and a Director of TransTech
Information Management Systems, Inc. From 1994 to
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<PAGE> 33
1995, Dr. Nash was Chairman, Chief Executive Officer and President of Digital
Perceptions, Inc., and, from 1989 to 1994, was the Chief Executive Officer and
President of Visqus as well as Conner Technology, Inc., both subsidiaries of
Conner Peripherals, Inc. Dr. Nash is currently a director of Proxima
Corporation, a computer equipment manufacturer, ViaSat, Inc., a manufacturer of
satellite communication equipment, and Chairman of the Board of Esscor, Inc., a
producer of power plant simulators for the electrical utility industry.
Members of the Company's Board of Directors are each elected for one year
terms at the annual shareholders meeting. Officers are elected at the first
Board of Directors meeting following the shareholders meeting at which directors
are elected and serve at the discretion of the Board of Directors.
The Board of Directors has a standing Compensation Committee, Audit
Committee and Nominating Committee. The Compensation Committee provides
recommendations to the Board concerning salaries and incentive compensation for
officers of the Company and approves equity grants to the Company's officers.
The Audit Committee recommends the Company's independent auditors and reviews
the results of and scope of audits and other accounting-related services
provided by such auditors. The Nominating Committee reviews potential candidates
for service on the Board.
33
<PAGE> 34
PRINCIPAL AND SELLING SHAREHOLDERS
The following sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 31, 1998, and as adjusted to reflect
the sale of the shares offered by this Prospectus (i) by each of the Company's
directors and each of the Named Executive Officers, (ii) by all directors and
executive officers as a group, (iii) by each person who is known by the Company
to own beneficially more than 5% of the Common Stock, and (iv) by the Selling
Shareholders:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) NUMBER AFTER OFFERING(1)
------------------------ OF SHARES ------------------------
NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ronald E. Ragland(3)............... 1,146,090 5.40% 292,180 853,910 3.74%
Tao Chow........................... 837,324 3.95% 213,464 623,860 2.74%
Joseph T. Lee(4)................... 548,674 2.59% 139,877 408,797 1.79%
Denny Morgan(5).................... 374,748 1.77% 56,212 318,536 1.40%
Jack A. Giles(6)................... 279,878 1.32% 66,063 213,815 *
James Mongillo..................... 257,920 1.22% 65,753 192,167 *
Justin Miller(7)................... 182,671 * 45,000 137,671 *
Errol Ekaireb(8)................... 169,819 * 43,293 126,526 *
Michael McDonald(9)................ 86,775 * 22,122 64,653 *
Jeffrey M. Nash(10)................ 49,400 * 12,594 36,806 *
Andre R. Horn(10).................. 19,856 * 5,000 14,856 *
Thomas A. Corcoran(11)............. 19,088 * 0 19,088 *
Gary L. Luick(12).................. 12,350 * 0 12,350 *
William H. Gibbs(12)............... 10,838 * 0 10,838 *
All directors and executive
officers as a group (14
persons)(13)..................... 3,995,431 18.76% 961,558 3,033,873 13.25%
Jon Opalski(14).................... 89,819 * 2,500 87,319 *
Gary Callaway...................... 84,813 * 21,622 63,191 *
Keith Butler(15)................... 56,070 * 5,820 50,250 *
Clark Hickock(16).................. 37,884 * 7,500 30,384 *
Harold Kries(17)................... 12,286 * 1,000 11,286 *
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of Common Stock.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to the Company's knowledge, each shareholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
shareholder.
(2) Applicable percentage of ownership prior to offering for each shareholder
is based on 21,182,651 shares of Common Stock outstanding as of January 31,
1998, together with applicable options for such shareholders. Applicable
percentage of ownership after offering for each shareholder is based on
22,782,651 shares of Common Stock, together with applicable options for
such shareholders. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes voting
and investment power with respect to the shares. Shares of Common Stock
subject to outstanding options are deemed outstanding for computing the
percentage of ownership of the person holding such options, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Includes 19,000 shares held by Mr. Ragland's minor children, 3,750 shares
held by Mr. Ragland's spouse and 26,650 shares issuable upon exercise of
outstanding options that are exercisable on or before April 1, 1998. Mr.
Ragland's address is 9404 Chesapeake Drive, San Diego, California 92123.
(4) Includes 13,500 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(5) Includes 11,700 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998. All shares beneficially owned
by Mr. Morgan are held in the Morgan Trust, of which Mr. Morgan and his
spouse act as co-trustees.
(6) Includes 11,625 shares held by Mr. Giles' spouse and 4,000 shares issuable
upon exercise of outstanding options that are exercisable on or before
April 1, 1998.
(7) Issuable upon conversion of dividend access shares of REMEC Canada, a
wholly owned subsidiary of the Company.
(8) Includes 12,000 shares held by Mr. Ekaireb's spouse and 13,500 shares
issuable upon exercise of outstanding options that are exercisable on or
before April 1, 1998.
(9) Includes 2,835 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(10) Includes 4,850 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(11) Includes 10,838 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(12) Issuable upon exercise of outstanding options that are exercisable on or
before April 1, 1998.
(13) Includes 115,911 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(14) Includes 2,511 shares held by Mr. Opalski's spouse and 30,937 shares
issuable upon exercise of outstanding options that are exercisable on or
before April 1, 1998.
(15) Includes 2,250 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(16) Includes 4,050 shares issuable upon exercise of outstanding options that
are exercisable on or before April 1, 1998.
(17) Includes 900 shares issuable upon exercise of outstanding options that are
exercisable on or before April 1, 1998.
34
<PAGE> 35
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Needham & Company, Inc., CIBC
Oppenheimer Corp. and A.G. Edwards & Sons, Inc. are acting as representatives
(the "Representatives"), have severally agreed to purchase from the Company and
Selling Shareholders, and the Company and Selling Shareholders have agreed to
sell to each Underwriter, the aggregate number of shares of Common Stock set
forth opposite their respective names in the table below. The Underwriting
Agreement provides that the obligations of the Underwriters to pay for and
accept delivery of the shares of Common Stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase and pay for all
shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Needham & Company, Inc. .......................................... 718,334
CIBC Oppenheimer Corp. ........................................... 718,333
A.G. Edwards & Sons, Inc. ........................................ 718,333
BancAmerica Robertson Stephens ................................... 90,000
Donaldson, Lufkin & Jenrette Securities Corporation .............. 90,000
Hambrecht & Quist LLC ............................................ 90,000
Lehman Brothers, Inc. ............................................ 90,000
Wessels, Arnold & Henderson ...................................... 55,000
Loewenbaum & Company Incorporated ................................ 30,000
---------
Total................................................... 2,600,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not in excess of $0.80
per share, of which $0.10 may be reallowed to other dealers. After the offering
to the public, the offering price and other selling terms may be changed by the
Representatives. No such reduction shall change the amount of the proceeds to be
received by the Company and the Selling Shareholders as set forth on the cover
page of this Prospectus.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 390,000
shares of Common Stock at the same price per share as the Company and the
Selling Shareholders receive for the 2,600,000 shares that the Underwriters have
agreed to purchase from them. To the extent the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by such
Underwriter, as shown in the above table, bears to the total shown.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Company and the Underwriters and the Selling Shareholders against
certain civil liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, all officers, directors and
Selling Shareholders have agreed with the Representatives not to sell, otherwise
dispose of, contract to sell, grant any option to sell, transfer or otherwise
dispose of, directly or indirectly, shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock or any substantially
similar securities for a period of 180 days after the date of this Prospectus,
without the prior written consent of Needham & Company, Inc. The Company has
agreed, with certain limited exceptions, not to sell, contract to sell, grant
any option to sell, transfer or otherwise dispose of, directly or indirectly,
shares of Common Stock or any substantially similar securities for a period of
180 days after the date of this Prospectus, without the prior written consent of
Needham & Company, Inc.
35
<PAGE> 36
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of 5% of the number of shares of Common
Stock offered hereby, and (ii) unless they obtain specific written consent of
the customer.
In connection with the offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on the Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 103 of Regulation M during a period before the commencement of offers
of sales of the Common Stock offered hereby. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Los Angeles, California. Certain
legal matters relating to the offering will be passed upon for the Underwriters
by Gray Cary Ware & Freidenrich, San Diego, California.
EXPERTS
The consolidated financial statements and schedule of REMEC, Inc. at
January 31, 1997 and 1996, and for each of the three years in the period ended
January 31, 1997 have been audited by Ernst & Young LLP, independent auditors,
as set forth in their reports thereon included therein and incorporated herein
by reference which, as to the years 1997, 1996 and 1995, are based in part on
the report of Ireland San Filippo, LLP, independent auditors, and on the report
of Bray, Beck & Koetter, independent auditors. Such consolidated financial
statements are incorporated by reference in this Prospectus and Registration
Statement in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
36
<PAGE> 37
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 12
Price Range of Common Stock........... 12
Capitalization........................ 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 21
Management............................ 31
Principal and Selling Shareholders.... 34
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
</TABLE>
======================================================
======================================================
2,600,000 Shares
REMEC LOGO
Common Stock
-------------------
PROSPECTUS
-------------------
Needham & Company, Inc.
CIBC Oppenheimer
A.G. Edwards & Sons, Inc.
------------------------
February 25, 1998
======================================================
