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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended January 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________________to_________________
Commission File Number 0-27414
REMEC, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3814301
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (619) 560-1301
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on April 17, 1998 was approximately $543.7 million based on the last
reported sale price on the Nasdaq National Market of $27.0625 per share of such
stock on April 17, 1998.
The number of outstanding shares of Registrant's Common Stock as of April 17,
1998 was 23,209,956.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders expected to be held on June 12, 1998, a definitive copy of which
will be filed with the SEC within 120 days after the end of the year covered by
this Form 10-K, are incorporated by reference herein in Part III of this Form
10-K.
This document contains 94 pages.
The Exhibit Index begins on page 48.
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REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1998
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TABLE OF CONTENTS
PAGE
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PART I............................................................................................................1
ITEM 1. BUSINESS............................................................................................1
ITEM 2. PROPERTIES.........................................................................................11
ITEM 3. LEGAL PROCEEDINGS..................................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS....................................................12
PART II..........................................................................................................12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..........................12
ITEM 6. SELECTED FINANCIAL DATA............................................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............18
PART III.........................................................................................................19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................19
ITEM 11. EXECUTIVE COMPENSATION.............................................................................20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................21
PART IV..........................................................................................................21
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................................................................21
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PART I
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the risks
described in this Annual Report and the other documents the Registrant files
from time to time with the Securities and Exchange Commission. 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.
ITEM 1. BUSINESS
INTRODUCTION
REMEC, Inc. ("REMEC" or the "Company") is a leader in the design and
manufacture of microwave multi-function modules (MFMs) for microwave
transmission systems used in defense applications and has recently entered, and
now derives significant revenue from, the commercial wireless telecommunications
market. The Company believes that its expertise in microwave transmission system
components such as filters, amplifiers, mixers, switches and oscillators and its
expertise in integrating these components into MFMs give REMEC a strong
competitive position in the emerging commercial wireless infrastructure
equipment market. The Company's capabilities enable it to develop and
manufacture MFMs with reduced size, weight, parts count and cost, and increased
reliability and performance.
The Company's products operate at 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 Annual Report on Form
10-K 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 a significant increase in demand for
wireless telecommunications services from business and consumer users worldwide.
This trend has led to significant growth in the number of subscribers for
existing wireless communications systems and to the emergence of new wireless
applications. In response to the 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.
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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.
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 VSAT
(very small aperture terminals), which are communications systems utilizing
fixed-site satellite terminals. Historically, these systems were primarily
designed for certain specific data applications. However, recent improvements in
VSAT technology for satellite-based wireless voice and data networks have led to
their increasing use in a variety of broader, higher system throughput
commercial applications such as mobile and rural telephony and more complicated
data transmissions. Satellite telephony systems are being utilized by developing
countries that lack a terrestrial-based telecommunication infrastructure, and
which seek to provide telephone service for large areas fairly rapidly and on a
cost-effective basis. Additionally, even where terrestrial systems exist,
satellite systems are used to fill in coverage for remote areas.
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.
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ALLOCATION OF FREQUENCY RANGE FOR WIRELESS APPLICATIONS
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- -----------------------------------------------------------------------------------------------
BAND FREQUENCY RANGE USES
- -----------------------------------------------------------------------------------------------
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LOW FREQUENCY (LF) <300 MHz Navigation Equipment
VERY HIGH FREQUENCY (VHF) (Aeronautical/Marine)
AM/FM Radio
Amateur/CB Radio
Television
Dispatch Radio
- -----------------------------------------------------------------------------------------------
ULTRA HIGH FREQUENCY (UHF) 300 - 800 MHz UHF Television
Specialized Mobile Radio (SMR)
Paging
Wireless Data Collection
- -----------------------------------------------------------------------------------------------
HIGH RADIO FREQUENCY (RF) 800 MHz - 1 GHz Analog Cellular
Digital Cellular
Two-way Messaging
Cordless Phone
- -----------------------------------------------------------------------------------------------
MICROWAVE 1 - 2 GHz Private Radio Networks
PCS
Mobile Satellite Telephony
Military Communication/Navigation
- -----------------------------------------------------------------------------------------------
MICROWAVE/MILLIMETER WAVE 2 - 50 GHz VSAT
Satellite Voice/Messaging
Point-to-Point Radios
Wireless TV
Radar
Electronic Warfare
- -----------------------------------------------------------------------------------------------
</TABLE>
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
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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.
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 that are necessary in order to compensate for
the performance degration 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 in an effort to assure its producibility, high quality
and affordability. Manufacturing process development and tooling occurs
concurrently with product development. REMEC believes that its concurrent
engineering process reduces cycle times and costly product redesigns when
products move to volume production.
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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, Inc., STM Wireless, Inc., Digital Microwave Corporation,
and Lucent Technologies, Inc. where the Company provides all, or a large
percentage of, the microwave content in an 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 Corporation, TRW Inc., Northrop Grumman Corporation, Raytheon
Company and Motorola Inc. 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 in
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 to
focus on developing significant customer alliances with leading wireless OEMs
and defense prime contractors. The Company
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concentrates its efforts on applications which offer the potential for recurring
high volume production. In wireless telecommunications, the Company's strategy
is to enter into strategic alliances with selected leaders in each of the
wireless market segments targeted by the Company. REMEC supports its customers
during their conceptual design stage to influence the system architecture/design
to optimize for cost, performance and producibility, further enhancing the
likelihood of follow-on business.
Maintain Cost Competitiveness. The Company intends to 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, through a
maquiladora program, 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 the 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 toward 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 SCPOC (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 to customers such as Motorola Inc. The Company
expects to
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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 concerters and frequency
multipliers for three different microwave subsystems (CNI, Radar and Electronic
Warfare); (ii) the Airborne Self-Protection 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 lists certain of the Company's microwave components
and MFMs:
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PRODUCT TYPES FUNCTION
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<S> <C>
Filters, Duplexers and Multiplexers............... Separate desired frequency bands from undesired
bands
Amplifiers........................................ Increase signal strength and power
Frequency Mixers.................................. Provide frequency conversion function
Voltage Controlled Oscillators.................... Generate frequency controlled by an input voltage
Dielectric Resonator Oscillators.................. Generate fixed frequency microwave signal
Cavity Oscillators................................ Generate fixed frequency microwave signal
Switches.......................................... Switch signal between different signal paths
Switch Attenuators................................ Select discrete attenuation values
Variable Attenuators.............................. Select continuously variable attenuation values
Switch Matrices................................... Allow MxN connectivity between M-inputs and
N-outputs
Switched Delay Lines.............................. Select discrete phase delays
Switched Filters.................................. Select between multiple filters
Multipliers....................................... Multiply an input frequency by an integer
Comb Generators................................... Provide several multiplied frequencies in a
single output
Frequency Generators.............................. Generate multiple discrete frequency outputs
Frequency Synthesizers............................ Generate a discrete stepped frequency output
Frequency Converters.............................. Provide frequency conversion function
Tranceivers....................................... Transmit, receive and channel select
microwave signals for satellite applications
Point-to-Point Radio Front Ends................... Transmit, receive and channel select
microwave signals for terrestrial applications
</TABLE>
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CUSTOMERS
The Company's customers for commercial wireless MFMs and components
include P-COM, Inc., STM Wireless, Inc., Digital Microwave Corporation, General
Instrument Corp., Alcatel Network Systems, Inc. and Motorola Inc. The Company's
customers for defense microwave MFMs and components include Lockheed Martin
Corporation, Motorola Inc., Northrop Grumman Corporation and Raytheon Company
(including portions of Hughes Aircraft Co. and Texas Instruments which Raytheon
acquired in 1997). During fiscal 1997 and 1998, sales to P-COM, Inc. accounted
for approximately 13% and 14%, respectively, 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, in February 1998, the Company received an order
valued at $21.8 million from an existing customer for the continued supply of
REMEC products relating to the customer's point-to-point radios. 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.
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%, 7% and 7% of net sales in fiscal years ended January 31, 1996,
1997 and 1998, 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 in the following locations: 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
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specifications. The Company received ISO-9001 certification from the Defense
Electronics Supply Center for its microwave facilities. ISO-9001 is a standard
established by the International Organization for Standardization that provides
a methodology by which manufacturers can obtain quality certification. Although
this certification is not currently required by any of its customers, REMEC
believes that it will be beneficial to the acquisition of future business. To
assure the highest product quality and reliability and to maximize control over
the complete manufacturing cycle and costs, the Company seeks to achieve
vertical integration in the manufacturing process wherever appropriate.
Historically, the volume of the Company's production requirements in
the defense markets was not sufficient to justify the widespread implementation
of automated manufacturing processes. The Company anticipates that increased
sales of its products to the wireless telecommunications industry will require a
significant increase in the Company's manufacturing capacity. Accordingly, the
Company has 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 and contract manufacturers by
purchase order on an as needed basis.
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 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
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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, 1996, 1997 and 1998 were approximately
$4,016,000, $4,605,000 and $5,108,000, 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 and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that may cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on the Company's business, financial condition or
results of operation.
The Company believes that it operates its business in material
compliance with applicable government regulations.
10
<PAGE> 13
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 April 10, 1998, the Company had a total of 1,886 employees,
including 1,375 in manufacturing and operations, 206 in research, development
and engineering (including 51 designers and drafters, 21 manufacturing
engineers, 10 quality engineers and 124 electrical and mechanical engineers), 94
in quality assurance, 29 in sales and marketing and 182 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.
ITEM 2. PROPERTIES
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 in 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.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently subject to
any material litigation, nor to the Company's knowledge, is such litigation
threatened against the Company or its subsidiaries, other than routine actions
and administrative proceedings arising in the ordinary course of business, all
of which collectively are not anticipated to have a material adverse effect on
the business or financial condition of the Company.
11
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the Company's shareholders
during the last quarter of its fiscal year ended January 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
Prior to the quotation of the Common Stock on the Nasdaq National
Market beginning on February 1, 1996, there was no established trading market
for the Common Stock. Since February 1, 1996, the Common Stock has been quoted
on the Nasdaq National Market under the symbol "REMC." The following table sets
forth the range of high and low closing sale prices of the Common Stock as
reported on the Nasdaq National Market for the quarterly periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31, 1997 HIGH LOW
------ ------
<S> <C> <C>
First Quarter (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 ENDING 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 April 17, 1998) .... 29.000 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 April 17, 1998 was $27.063. As of April 17, 1998 there were
approximately 676 holders of record of Common Stock.
DIVIDEND POLICY
The Company currently intends to retain all future earnings, if any,
for use in the operation and development of its business and, therefore, does
not expect to declare or pay any cash dividends on its Common Stock in the
foreseeable future. The Company's line of credit agreement restricts the amount
of cash dividends that the Company may pay. See Note 4 to Consolidated Financial
Statements.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's statements of income for each of the years in the three year
period ended January 31, 1998 and with respect to the balance sheets at January
31, 1997 and 1998, are derived from the audited consolidated financial
statements which are included elsewhere in this Annual Report on Form 10-K and
are qualified by reference to such financial statements. The statement of
operations data for the years ended January 31, 1994 and 1995 and the balance
sheet data at January 31, 1994, 1995 and 1996, are derived from audited
financial statements not included in this Annual Report on Form 10-K. The
following selected financial data should be read in conjunction with the
Consolidated Financial Statements for REMEC and notes thereto and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Net sales .................................. $ 66,599 $ 81,978 $ 93,228 $118,554 $156,057
Cost of sales .............................. 45,427 57,994 66,172 85,659 108,053
-------- -------- -------- -------- --------
Gross profit ............................... 21,172 23,984 27,056 32,895 48,004
Operating expenses:
Selling, general and administrative ...... 13,332 15,646 16,611 19,349 24,773
Research and development .................. 1,323 2,067 4,016 4,605 5,108
-------- -------- -------- -------- --------
Total operating expenses ............. 14,655 17,713 20,627 23,954 29,881
-------- -------- -------- -------- --------
Income from operations ..................... 6,517 6,271 6,429 8,941 18,123
Gain on sale of subsidiary ................. -- -- -- -- 2,833
Interest income (expense) and other, net .... (191) (590) (401) 48 2,280
-------- -------- -------- -------- --------
Income before provision for income taxes ... 6,326 5,681 6,028 8,989 23,236
Provision for income taxes ................. 1,830 2,394 2,429 4,017 8,501
-------- -------- -------- -------- --------
Net income ................................. $ 4,496 $ 3,287 $ 3,599 $ 4,972 $ 14,735
======== ======== ======== ======== ========
Earnings per share:
Basic ................................. $ .34 $ .25 $ .28 $ .30 $ .71
======== ======== ======== ======== ========
Diluted ............................... $ .34 $ .25 $ .28 $ .30 $ .68
======== ======== ======== ======== ========
Shares used in per share calculations:
computing earnings per share:
Basic ................................. 13,309 12,965 12,892 16,517 20,841
======== ======== ======== ======== ========
Diluted ............................... 13,309 12,965 13,009 16,828 21,534
======== ======== ======== ======== ========
AT JANUARY 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA(1):
Cash and cash equivalents ................... $ 4,156 $ 3,628 $ 3,828 $ 63,172 $ 41,937
Working capital ............................. 16,607 15,620 17,575 84,112 84,496
Total assets ................................ 42,424 42,357 48,558 125,440 153,865
Long-term debt .............................. 5,846 3,235 4,781 2,462 --
Total shareholders' equity .................. 22,177 24,489 27,247 103,555 128,495
JANUARY 31,
------------------------
1997 1998
-------- --------
BACKLOG(1)(2):
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 above table have been restated to include the financial
results and data of Magnum, Radian, C&S Hybrid and Q-bit for all periods
presented. The Company acquired Verified Technical Corporation in March
1997 and Nanowave Technologies Inc. in October 1997 in transactions
accounted for as purchases.
(2) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Item 1. Business - Backlog."
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the design
and manufacture of 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 flows 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
14
<PAGE> 17
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 fiscal 1998 consolidated statements of income and cash
flows include Nanowave's operating results from October 31, 1997.
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>
YEARS ENDED JANUARY 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 69 72 71
--- --- ---
Gross profit 31 28 29
Operating expenses:
Selling, general & administrative 16 17 18
Research and development 3 4 4
--- --- ---
Total operating expenses 19 21 22
--- --- ---
Income from operations 12 7 7
Gain on sale of subsidiary 1 -- --
Interest income (expense) and other, net 1 -- --
--- --- ---
Income before income taxes 14 7 7
Provision for income taxes 5 3 3
--- --- ---
Net income 9% 4% 4%
=== === ===
</TABLE>
FISCAL YEAR ENDED JANUARY 31, 1998 VS. FISCAL YEAR ENDED JANUARY 31, 1997
Net Sales. Net sales increased 32% from $118.6 million during fiscal
1997 to $156.1 million during fiscal 1998. Commercial sales increased 75% from
$48.8 million to $85.4 million and defense sales increased 1% from $69.8 million
to $70.7 million during those 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 46% from $32.9 million in fiscal
1997 to $48.0 million in fiscal 1998. Consolidated gross margins increased from
28% during fiscal 1997 to 31% during fiscal 1998. Gross margins for defense
increased from 27% to 30% and commercial gross margins increased from 29% to 31%
for the above periods primarily as a result of changes in the mix of products
shipped and due to the lower unit costs arising from improved overhead
absorption attributable to the increase in sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 28% from $19.3 million during fiscal
1997 to $24.8 million during fiscal 1998. 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 declined from 17% in fiscal
1997 to 16% in fiscal 1998, due to increased sales volume.
15
<PAGE> 18
Research and Development Expenses. Research and development expenses
increased 11% from $4.6 million during fiscal 1997 to $5.1 million during fiscal
1998. These expenditures are almost entirely attributable to the commercial
wireless business.
Gain on Sale of Subsidiary. The Company's results of operations for the
year ended January 31, 1998 includes 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 (expense) and
other, net increased from $48,000 during fiscal 1997 to $2.3 million during
fiscal 1998. This increase was due to the increased level of cash available for
investment as a result of the funds generated from the Company's follow-on
public offering which was completed in January 1997.
Provision for Income Taxes. The Company's effective tax rate declined
from 45% during fiscal 1997 to 37% during fiscal 1998. The decrease reflected
the pre-acquisition net income generated at the Company's Q-bit subsidiary in
fiscal 1998. Prior to its acquisition by REMEC, Q-bit had operated as an S
corporation for federal and state income tax purposes and, accordingly, all
taxable income generated by Q-bit during the pre-acquisition period in fiscal
1998 was allocated to the shareholders of Q-bit and included on their personal
income tax returns. Therefore, the Company's effective tax rate in fiscal 1998
reflects no provision for income taxes on Q-bit's pre-acquisition earnings. The
reduction in the effective tax rate in fiscal 1998 also reflects 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
16
<PAGE> 19
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% in fiscal 1997. The increase reflected
the pre-acquisition net loss generated at the Company's Q-bit subsidiary in
1997. Prior to its acquisition by REMEC, Q-bit had operated as an S corporation
for federal and state income tax purposes and all taxable income (losses)
generated by Q-bit during the pre-acquisition years were allocated to the
shareholders and included on their personal income tax returns. Accordingly, the
consolidated financial statements reflect no benefit for Q-bit's fiscal 1997 net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, REMEC had $84.5 million of working capital which
included cash and cash equivalents totaling $41.9 million. REMEC also has $17.0
million available under two credit facilities consisting of a $9.0 million
revolving working capital line of credit and a $8.0 million revolving term loan.
The borrowing rate under both credit facilities is prime. The revolving working
capital line of credit terminates July 1, 1998. The revolving period under the
term loan expires July 1, 1998, at which time any loan amount outstanding
converts to a term loan to be fully amortized and paid in full by January 2,
2002. As of January 31, 1998, there were no borrowings outstanding under REMEC's
credit facilities.
During fiscal 1998, net cash provided by operations totaled $.8 million
as the cash flows from earnings and non-cash expenses (primarily depreciation
and amortization) more than offset the $15.8 million increase in accounts
receivable and inventories. The increase in accounts receivable and inventories
during fiscal 1998 resulted from REMEC's increased level of sales. Investing
activities utilized $17.3 million during fiscal 1998, primarily as a result of
$17.4 million in capital expenditures and $5.1 million used for the acquisition
of Veritek and Nanowave, net of the proceeds from the sale of the Company's RFM
subsidiary. 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 $4.4 million during 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 February 1998, the Company completed an underwritten public offering
of its Common Stock. In this offering, the Company issued 1,990,000 shares of
its Common Stock and received net proceeds of approximately $49.6 million.
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.
17
<PAGE> 20
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries to represent years. For example, the year
"1998" would be represented by "98." 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 without material cost or expense. The anticipated costs of any Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties. In addition, there can be no
assurance that Year 2000 compliance problems will not be revealed in the future
which could have a material adverse affect on the Company's business, financial
condition and results of operations. Many of the Company's customers and
suppliers may be affected by Year 2000 issues that may require them to expend
significant resources to modify or replace their existing systems, which may
result in those customers having reduced funds to purchase the Company's
products or those suppliers experiencing difficulties in producing or shipping
key components to the Company on a timely basis or at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included as a separate section following
Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
18
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to directors of the Registrant is set forth
under the caption "Election of Directors -- Nominees" in the Registrant's Proxy
Statement (the "1998 Proxy Statement") for the Annual Meeting of Shareholders
expected to be held on June 12, 1998 and is herein incorporated by reference.
Information relating to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is set forth in the 1998 Proxy Statement under the caption
"Management -- Compliance with Section 16(a) of the Exchange Act" and is herein
incorporated by reference.
The executive officers of the Registrant, and their ages as of April
17, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
------------------ --- -------------------------------------------------------------
<S> <C> <C>
Ronald E. Ragland 56 Chairman of the Board and Chief Executive Officer
Errol Ekaireb 59 President, Chief Operating Officer and Director
Jack A. Giles 56 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
</TABLE>
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 President of the Company's Northern
California Operations in December 1997. Prior to the acquisition of Magnum
Microwave Corporation ("Magnum Microwave") by the Company in August
19
<PAGE> 22
1996, he was Chairman of the Board, President and Chief Executive Officer of
Magnum Microwave. 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 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
Microwave by the Company, he had been Vice President and Chief Financial Officer
of Magnum Microwave. Prior to joining Magnum Microwave 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.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under the
caption "Management -- Executive Compensation" in the 1998 Proxy Statement and
is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of the Registrant's Common
Stock is set forth under "Management -- Security Ownership of Certain Beneficial
Owners and Management" in the 1998 Proxy Statement and is herein incorporated by
reference.
20
<PAGE> 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions is set forth under "Certain Relationships and Related Transactions"
in the 1998 Proxy Statement and is herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at January 31, 1998 and 1997
Consolidated Statements of Income for the
years ended January 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
as of January 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended January 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedules or because the information required is
included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1(1) Agreement and Plan of Reorganization and Merger dated
as of May 16, 1996 among Magnum Microwave Corporation,
the Registrant and REMEC Acquisition Corporation
2.2(7) Agreement and Plan of Reorganization and Merger dated as of
February 24, 1997 among the Registrant, RTI Acquisition
Corporation and Radian Technology, Inc.
2.3(6) Agreement and Plan of Reorganization and Merger dated as of
April 10, 1997 among the Registrant, C&S Acquisition
Corporation and C&S Hybrid, Inc.
2.4(6) Agreement and Plan of Reorganization and Merger dated as of
October 24, 1997 among the Registrant, RQB Acquisition
Corporation and Q-bit Corporation
2.5(6) Share Purchase Agreement dated as of September 30, 1997 among
Justin Miller, Ph.D., RoyNat, Inc., REMEC Canada ULC and the
Registrant
3.1(3) Restated Articles of Incorporation
3.2(3) By-Laws, as amended
</TABLE>
21
<PAGE> 24
<TABLE>
<S> <C>
10.1(3) Equity Incentive Plan
10.2(3) Employee Stock Purchase Plan
10.3(3) Form of Indemnification Agreements between Registrant and its
officers and directors
10.4(3) Standard Industrial Lease between the Registrant and
Transcontinental Realty Investors, Inc., dated February 1,
1990, as amended.
10.5(3) Standard Industrial Lease between the Registrant and
Chesapeake Business Park 1983, dated December 13, 1988, as
amended.
10.6(4) 1996 Nonemployee Directors Stock Option Plan
10.7(7) Amended and Restated Loan Agreement between the Registrant
and The Union Bank of California, N.A., dated
January 17, 1997
21.1(6) Subsidiaries of the Registrant
23.1(7) Consent of Ernst & Young LLP, Independent Auditors
23.2(7) Consent of Ireland San Filippo LLP, Independent Public
Accountants
23.3(7) Consent of Bray, Beck & Koetter, Independent Auditors
24.1(7) Power of Attorney (included on Page S-1 of this Annual Report
on Form 10-K)
27(7) Financial Data Schedule
</TABLE>
- ----------
(1) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-4 (No.
333-05343) filed on July 30, 1996 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Form 8-K filed on May 3, 1996 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-80381) filed on February 1, 1996 and incorporated herein by
reference.
(4) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-8 (No.
333-16687) filed on November 25, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-18325) filed on December 20, 1996.
(6) Previously filed with the Securities and Exchange Commission as an
exhibit to Amendment No. 2 to Registrant's Annual Report on Form 10-K/A
filed on January 30, 1998 and incorporated herein by reference.
(7) Filed with this Annual Report on Form 10-K.
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of
fiscal 1998.
22
<PAGE> 25
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMEC, INC.
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Report of Ireland San Filippo LLP, Independent Auditors.................... F-3
Report of Bray, Beck & Koetter, Independent Auditors....................... F-4
Consolidated Balance Sheets at January 31, 1998 and 1997................... F-5
Consolidated Statements of Income for the years ended
January 31, 1998, 1997 and 1996......................................... F-6
Consolidated Statements of Shareholders' Equity as of
January 31, 1998, 1997 and 1996......................................... F-7
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, 1997 and 1996......................................... F-8
Notes to Consolidated Financial Statements................................. F-9
</TABLE>
F-1
<PAGE> 26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
REMEC, Inc.
We have audited the accompanying consolidated balance sheets of REMEC,
Inc. as of January 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of Radian Technology, Inc. and Q-bit Corporation, wholly-owned
subsidiaries, which statements reflect total assets constituting 8% in 1997, and
total revenues constituting 17% in 1997 and 22% in 1996 of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Radian Technology, Inc. and Q-bit Corporation, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of REMEC, Inc. at January 31, 1998
and 1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended January 31, 1998 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------------
ERNST & YOUNG LLP
San Diego, California
February 27, 1998
F-2
<PAGE> 27
REPORT OF IRELAND SAN FILIPPO LLP, INDEPENDENT AUDITORS
To the Board of Directors
Radian Technology, Inc.
Santa Clara, California
We have audited the balance sheet of Radian Technology, Inc. (a California
corporation), as of December 27, 1996, and the related statements of income and
expense, stockholders' equity, and cash flows for each of the years ended
December 29, 1995, and December 27, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Radian Technology, Inc. as of
December 27, 1996, and the results of its operations and its cash flows for each
of the years ended December 29, 1995, and December 27, 1996, in conformity with
generally accepted accounting principles.
IRELAND SAN FILIPPO, LLP
March 6, 1997
F-3
<PAGE> 28
REPORT OF BRAY, BECK & KOETTER, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Q-bit Corporation
Palm Bay, Florida
We have audited the balance sheets of Q-bit Corporation (an S Corporation) as of
December 31, 1996 and the related statements of operations, retained earnings
(deficit) and cash flows for the years then ended December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Q-bit Corporation as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information on pages 15
and 16 is presented for the purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ BRAY, BECK & KOETTER
Melbourne, Florida
February 28, 1997
F-4
<PAGE> 29
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 41,937,101 $ 63,172,362
Accounts receivable, net ............................ 25,494,474 15,972,993
Inventories, net .................................... 30,380,941 19,332,056
Deferred income taxes ............................... 6,241,957 3,033,818
Prepaid expenses and other current assets ........... 589,053 582,542
------------ ------------
Total current assets ................... 104,643,526 102,093,771
Property, plant and equipment, net .................. 31,988,934 18,543,405
Intangible and other assets ......................... 17,232,241 4,803,307
------------ ------------
$153,864,701 $125,440,483
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under bank line of credit and other
short-term debt ................................. $ -- $ 1,891,449
Accounts payable .................................... 8,531,756 5,973,537
Accrued salaries, benefits and related taxes ........ 5,999,248 4,845,956
Income taxes payable ................................ 2,546,479 2,249,087
Accrued expenses .................................... 3,070,515 2,540,037
Current portion of notes payable and
capital lease obligations ....................... -- 482,200
------------ ------------
Total current liabilities .............. 20,147,998 17,982,266
Deferred rent ............................................ 104,236 262,432
Deferred income taxes .................................... 5,117,933 1,179,353
Notes payable, less current portion ...................... -- 1,882,776
Capital lease obligations, less current portion .......... -- 579,000
Commitments
Shareholders' equity:
Preferred shares -- $.01 par value, 5,000,000 shares
authorized; none issued and outstanding ......... -- --
Common shares -- $.01 par value, 40,000,000 shares
authorized; issued and outstanding shares --
21,182,663 and 20,535,457 at January 31, 1998 and
1997, respectively .............................. 211,828 205,356
Paid-in capital ..................................... 95,303,154 85,787,686
Retained earnings ................................... 32,979,552 17,561,614
------------ ------------
Total shareholders' equity ............. 128,494,534 103,554,656
------------ ------------
$153,864,701 $125,440,483
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 30
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales .................................. $156,056,929 $118,553,842 $ 93,228,090
Cost of sales .............................. 108,052,891 85,658,524 66,172,461
------------ ------------ ------------
Gross profit .......................... 48,004,038 32,895,318 27,055,629
Operating expenses:
Selling, general & administrative ..... 24,773,466 19,349,733 16,610,999
Research and development .............. 5,107,984 4,605,000 4,016,335
------------ ------------ ------------
Total operating expenses ................... 29,881,450 23,954,733 20,627,334
------------ ------------ ------------
Income from operations ..................... 18,122,588 8,940,585 6,428,295
Gain on sale of subsidiary ................. 2,833,240 -- --
Interest income (expense) and other, net ... 2,280,329 48,405 (400,593)
------------ ------------ ------------
Income before provision for income taxes ... 23,236,157 8,988,990 6,027,702
Provision for income taxes ................. 8,500,799 4,016,667 2,428,658
------------ ------------ ------------
Net income ................................. $ 14,735,358 $ 4,972,323 $ 3,599,044
============ ============ ============
Earnings per share:
Basic ................................. $ .71 $ .30 $ .28
============ ============ ============
Diluted ............................... $ .68 $ .30 $ .28
============ ============ ============
Shares used in computing earnings per share:
Basic ................................. 20,841,000 16,517,000 12,892,000
============ ============ ============
Diluted ............................... 21,534,000 16,828,000 13,009,000
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 31
REMEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED SHARES COMMON SHARES
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 31, 1995 ............ 718,607 $ 7,186 11,322,880 $ 113,229
Issuance of common shares upon
exercise of stock options ......... -- -- 28,365 284
Repurchase of common shares ......... -- -- (277,706) (2,777)
Cash dividends ...................... -- -- -- --
Net income .......................... -- -- -- --
------------- ------------- ------------- -------------
Balance at January 31, 1996 ............ 718,607 7,186 11,073,539 110,736
Issuance of common shares in
initial public offering ........... -- -- 3,397,340 33,973
Conversion of preferred shares ...... (718,607) (7,186) 1,616,864 16,169
Issuance of common shares
for cash .......................... -- -- 443,467 4,435
Issuance of common shares under
employee stock purchase plan ...... -- -- 347,850 3,479
Issuance of common shares upon
exercise of stock options ......... -- -- 37,647 376
Income tax benefits related to
employee stock purchase plan
and stock options exercised ....... -- -- -- --
Issuance of common shares in
stock offering .................... -- -- 3,618,750 36,188
Net income .......................... -- -- -- --
Adjustment for Magnum activity
for the duplicated two months
ended March 29, 1996 .............. -- -- -- --
------------- ------------- ------------- -------------
Balance at January 31, 1997 ............ -- -- 20,535,457 205,356
Issuance of common shares in
acquisitions ...................... -- -- 320,183 3,202
Issuance of common shares under
employee stock purchase plan ...... -- -- 150,023 1,500
Issuance of common shares upon
exercise of stock options ......... -- -- 177,000 1,770
Income tax benefits related to
employee stock purchase plan and
stock options exercised ........... -- -- -- --
Net income .......................... -- -- -- --
Adjustment for net equity activity of
pooled companies .................. -- -- -- --
------------- ------------- ------------- -------------
Balance at January 31, 1998 ............ -- $ -- 21,182,663 $ 211,828
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 31, 1995 ............ $ 15,123,296 $ 9,244,989 $ 24,488,700
Issuance of common shares upon
exercise of stock options ......... 67,176 -- 67,460
Repurchase of common shares ......... ) (785,726) -- (788,503)
Cash dividends ...................... -- (119,470) (119,470)
Net income .......................... -- 3,599,044 3,599,044
------------- ------------- -------------
Balance at January 31, 1996 ............ 14,404,746 12,724,563 27,247,231
Issuance of common shares in
initial public offering ........... 15,615,236 -- 15,649,209
Conversion of preferred shares ...... (8,983) -- --
Issuance of common shares
for cash .......................... 1,872,140 -- 1,876,575
Issuance of common shares under
employee stock purchase plan ...... 1,670,637 -- 1,674,116
Issuance of common shares upon
exercise of stock options ......... 88,824 -- 89,200
Income tax benefits related to
employee stock purchase plan
and stock options exercised ....... 209,399 -- 209,399
Issuance of common shares in
stock offering .................... 51,935,687 -- 51,971,875
Net income .......................... -- 4,972,323 4,972,323
Adjustment for Magnum activity
for the duplicated two months
ended March 29, 1996 .............. -- (135,272) (135,272)
------------- ------------- -------------
Balance at January 31, 1997 ............ 85,787,686 17,561,614 103,554,656
Issuance of common shares in
acquisitions ...................... 6,620,465 -- 6,623,667
Issuance of common shares under
employee stock purchase plan ...... 2,143,385 -- 2,144,885
Issuance of common shares upon
exercise of stock options ......... 751,618 -- 753,388
Income tax benefits related to
employee stock purchase plan and
stock options exercised ........... -- 535,013 535,013
Net income .......................... -- 14,735,358 14,735,358
Adjustment for net equity activity of
pooled companies .................. -- 147,567 147,567
------------- ------------- -------------
Balance at January 31, 1998 ............ $ 95,303,154 $ 32,979,552 $ 128,494,534
============= ============= =============
</TABLE>
See accompanying notes.
F-7
<PAGE> 32
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................ $ 14,735,358 $ 4,972,323 $ 3,599,044
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................ 5,380,811 3,647,507 2,946,040
Gain on sale of Subsidiary ................... (2,833,240) -- --
Deferred income taxes ........................ (2,407,832) (767,151) (779,470)
Changes in operating assets and liabilities:
Accounts receivable ..................... (6,525,349) (4,862,195) (786,153)
Inventories ............................. (9,303,804) (2,539,276) (2,008,355)
Prepaid expenses and other
current assets ...................... 201,838 (256,477) 33,297
Accounts payable ........................ 686,941 78,089 1,726,676
Accrued expenses, income taxes
payable and deferred rent ........... 852,733 556,250 1,355,040
------------ ------------ ------------
Net cash provided by operating activities .... 787,456 829,070 6,086,119
INVESTING ACTIVITIES:
Additions to property, plant and equipment ....... (17,351,394) (7,362,734) (4,808,031)
Payment for acquisitions, net of
cash acquired ................................ (5,066,075) (4,011,735) --
Proceeds from sale of subsidiary ................. 5,000,000 -- --
Purchase of short-term investments ............... -- -- (981,607)
Sale of short-term investments ................... -- 1,482,565 953,657
Other assets ..................................... 120,637 (133,320) 99,820
------------ ------------ ------------
Net cash used by investing activities ........ (17,296,832) (10,025,224) (4,736,161)
FINANCING ACTIVITIES:
Proceeds from bank revolving term loan,
line-of-credit and long-term debt ............ 12,212,858 1,100,000 14,367,464
Repayments on bank revolving term loan,
line-of-credit and long-term debt ............ (19,510,512) (3,412,956) (14,056,928)
Repurchase of common stock ....................... -- -- (788,503)
Proceeds from issuance of common stock ........... 2,898,273 71,260,975 67,460
Change in deferred offering costs ................ -- 1,108,424 (1,108,424)
Cash dividends ................................... -- -- (119,470)
------------ ------------ ------------
Net cash provided (used) by financing activities (4,399,381) 70,056,443 (1,638,401)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ...... (20,908,759) 60,860,289 (288,443)
Cash and cash equivalents at beginning of year ........ 63,172,362 2,345,632 2,634,075
Adjustment for net cash activity of
pooled companies ................................. (326,504) (33,559) --
------------ ------------ ------------
Cash and cash equivalents at end of year .............. $ 41,937,101 $ 63,172,362 $ 2,345,632
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ..................................... $ 321,000 $ 414,000 $ 568,000
============ ============ ============
Income taxes ................................. $ 10,162,000 $ 3,091,000 $ 2,558,000
============ ============ ============
Supplemental disclosure of noncash investing
and financing activities:
Assets acquired under capital leases
and notes payable obligations ........... $ -- $ 962,000 $ 371,000
============ ============ ============
Common shares issued in connection with
acquisitions ............................ $ 6,623,667 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes
F-8
<PAGE> 33
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business and Basis of Presentation
REMEC, Inc. (the "Company") was incorporated in the State of California
in January 1983. The Company is engaged in a single business segment consisting
of the research, design, development and manufacture of microwave and radio
frequency (RF) components and subsystems and precision instruments for control
and measurement systems. Prior to fiscal 1996, the majority of the Company's
sales were to prime contractors to various agencies of the U.S. Department of
Defense and to foreign governments. In May 1995, the Company incorporated REMEC
Wireless, Inc. (a wholly owned subsidiary) to research, design, develop and
manufacture products based on microwave technologies for commercial customers.
In fiscal 1997, the Company acquired Magnum Microwave Corporation, a
manufacturer of microwave components and subsystems, in a transaction accounted
for as a pooling of interests. During 1997, the Company also acquired RF
Microsystems, Inc. ("RFM"), a satellite communications engineering company, in a
transaction accounted for as a purchase. During fiscal 1998, the Company
acquired Radian Technology, Inc., C&S Hybrid, Inc., and Q-bit Corporation, in a
series of transactions accounted for as poolings of interests. The Company's
consolidated financial statements for all periods prior to these acquisitions
have been restated to include each of the acquired Company's financial position,
results of operations and cash flows. During fiscal 1998, the Company also
acquired Verified Technical Corporation and Nanowave Technologies Inc. in
transactions which were accounted for as purchases and sold its RFM subsidiary.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Humphrey, Inc., REMEC Wireless, Inc.,
RF Microsystems, Inc., Magnum Microwave Corporation, Radian Technology, Inc.,
Verified Technical Corporation, C&S Hybrid, Inc., Nanowave Technologies Inc. and
Q-bit Corporation. All intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. Short-term investments are recorded at the amortized cost plus
accrued interest which approximates market value. The Company evaluates the
financial strength of institutions at which significant investments are made and
believes the related credit risk is limited to an acceptable level.
The Company has adopted Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. Statement
No. 115 requires companies to record certain debt and equity security
investments at market value. At January 31, 1998 and 1997, the cost of cash
equivalents and short-term investments approximated fair value.
Concentration of Credit Risk
Accounts receivable are principally from U.S. government contractors,
companies in foreign countries and domestic customers in the telecommunications
industry. Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. The Company performs
periodic credit evaluations of its customers and maintains reserves for
potential credit losses.
F-9
<PAGE> 34
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Inventory
Inventories are stated at the lower of weighted average cost or market.
In accordance with industry practice, the Company has adopted a policy of
capitalizing general and administrative costs as a component of the cost of
government contract related inventories to achieve a better matching of costs
with the related revenues.
Progress Payments
Progress payments received from customers are offset against
inventories associated with the contracts for which the payments were received.
Long-Lived Assets
Property, plant and equipment, including equipment under capital
leases, is stated at cost less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which range from three to thirty years. Depreciation
expense includes the amortization of equipment under capital leases. Leasehold
improvements and equipment under capital leases are amortized using the
straight-line method over the shorter of their estimated useful lives or the
lease period.
Intangible assets in the accompanying balance sheets represent the
excess of costs over the fair value of net assets acquired and are primarily
comprised of goodwill and acquired technology recorded in connection with the
acquisitions of Humphrey, Inc. (in February 1994), RF Microsystems, Inc.,
Verified Technical Corporation and Nanowave Technologies Inc. (See Note 2).
These assets are being amortized using the straight-line method over the
estimated useful lives of the relevant intangibles ranging from nine to fifteen
years, respectively. Amortization expense related to intangible assets totaled
$766,616, $345,531 and $148,956 for fiscal years 1998, 1997 and 1996,
respectively.
Effective February 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for Long-Lived Assets and Long-Lived
Assets to be Disposed Of" which established standards for recording the
impairment of long-lived assets, including property, equipment and leasehold
improvements, intangible assets and goodwill.
In accordance with this Statement, the Company reviews the carrying
value of property, equipment and leasehold improvements for evidence of
impairment through comparison of the undiscounted cash flows generated from
those assets to the related carrying amounts of those assets. The carrying value
of intangible assets are evaluated for impairment through comparison of the
undiscounted cash flows derived from those assets to the carrying value of the
related intangibles.
Revenue Recognition
Revenues from commercial contracts are recognized upon shipment of
product and transfer of title to customers. Revenues on long-term fixed-price
contracts with prime contractors to U.S. Government Agencies are recognized
using the units of delivery method. Revenues associated with the performance of
non-recurring engineering and development contracts are recognized when earned
under the terms of the related contract. Revenues for cost-reimbursement
contracts are recorded as costs are incurred and includes estimated earned fees
in the proportion that costs incurred to date bears to estimated costs.
Prospective losses on long-term contracts are based upon the anticipated excess
of inventoriable manufacturing costs over the selling price of the remaining
units to be delivered. Actual losses could differ from those estimated due to
changes in the ultimate manufacturing costs and contract terms.
Research and Development
Research and development costs incurred by the Company are expensed in
the period incurred.
F-10
<PAGE> 35
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the Company's previously reported earnings
per share. In accordance with Statement 128, all earnings per share amounts for
all periods presented have been restated. The calculation of net income per
share reflects the historical information for REMEC and its acquired
subsidiaries and the conversion of the common shares of those companies acquired
in pooling of interests transactions into REMEC shares as stipulated in the
respective acquisition agreements. (See Note 2.)
The following table reconciles the shares used in computing basic and
diluted earnings per share in the respective fiscal years:
<TABLE>
<CAPTION>
Years Ended January 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding ...... 20,841,000 16,517,000 11,306,000
Effect of assumed conversion of preferred of ....
-- -- 1,617,000
---------- ---------- ----------
Shares used in basic earnings per share
calculation .................................. 20,841,000 16,517,000 12,892,000
Effect of dilutive stock options ................ 693,000 311,000 117,000
---------- ---------- ----------
Shares used in diluted earnings per share
calculation .................................. 21,534,000 16,828,000 13,009,000
========== ========== ==========
</TABLE>
On June 6, 1997, the Company's Board of Directors approved a
three-for-two stock split of the Company's common stock in the form of a 50%
stock dividend payable on June 27, 1997 to shareholders of record as of June 20,
1997. All share and per share related data in the consolidated financial
statements have been adjusted to reflect the stock dividend for all periods
presented.
Stock Options
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123") requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions about the future that affect the amounts reported in the
consolidated financial statements. These estimates include assessing the
collectibility of accounts receivable, the usage and recoverability of
inventories and long-lived assets and the incurrence of losses on long term
contracts and warranty costs. Actual results could differ from those estimates.
F-11
<PAGE> 36
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued FAS No.
130, "Reporting Comprehensive Income" and FAS No. 131, "Segment Information."
Both of these standards are effective for fiscal years beginning after December
15, 1997. FAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company believes that comprehensive income or loss
will not be materially different than net income or loss. FAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in FAS No. 131, are components of an enterprise for which separate
financial information is required to be reported on the basis that is used
internally for evaluating the segment performance. As stated above, the Company
believes it operates in one business and operating segment and that adoption of
these standards will not have a material impact on the Company's financial
statements.
2. ACQUISITION TRANSACTIONS
Q-bit Corporation ("Q-bit")
In October 1997, the Company acquired all of the outstanding shares of
common stock of Q-bit, a manufacturer of amplifier based microwave components
and multi-function modules, in exchange for 1,047,482 shares of the Company's
common stock. Prior to the combination, Q-bit's fiscal year ended on December
31, 1996. In recording the business combination, Q-bit's financial statements
for the fiscal years ended December 31, 1995 and 1996 were combined with REMEC's
for the fiscal years ended January 31, 1996 and 1997, respectively. Q-bit's net
sales and net income for the one month period ended January 31, 1997 were
$1,295,557 and $103,610, respectively. In accordance with Accounting Principles
Board Opinion No. 16 ("APB No. 16"), Q-bit's results of operations and cash
flows for the one-month period ended January 31, 1997 have been added directly
to the retained earnings and cash flows of the Company and excluded from
reported fiscal 1998 results of operations and cash flows. Q-bit's revenues and
net income for the period from February 1, 1997 through the date of acquisition
totalled $12,315,818 and $1,578,333, respectively.
C&S Hybrid ("C&S Hybrid")
In June 1997, the Company acquired all of the outstanding shares of
common stock of C&S Hybrid, a manufacturer of transmitter and receiver hardware
assemblies ("transceivers") that are integrated by C&S Hybrid's customers into
terrestrial-based point-to-point microwave radios primarily for use in
commercial applications, in exchange for 1,290,000 shares of the Company's
common stock. Prior to the combination, C&S Hybrid's fiscal year ended on
December 27, 1996. In recording the business combination, C&S Hybrid's financial
statements for the fiscal years ended December 22, 1995 and December 27, 1996
were combined with REMEC's for the fiscal years ended January 31, 1996 and 1997,
respectively. C&S Hybrid's net sales and net income for the one month ended
January 31, 1997 were $1,569,129 and $53,976, respectively. In accordance with
APB No. 16, C&S Hybrid's results of operations and cash flows for the one-month
period ended January 31, 1997 have been added directly to the retained earnings
and cash flows of the Company and excluded from reported fiscal 1998 results of
operations and cash flows. C&S Hybrid's revenues and net income for the period
from February 1, 1997 through the date of acquisition totalled $8,033,729 and
$357,249, respectively.
Radian Technology, Inc. ("Radian")
On February 28, 1997, the Company issued 950,024 shares of its common
stock in exchange for all of the outstanding shares of common stock of Radian, a
manufacturer of microwave components and subsystems. Prior to the combination,
Radian's fiscal year ended on the Friday closest to December 31. In recording
the business combination, Radian's financial statements for the fiscal years
ended December 29, 1995 and December 27, 1996
F-12
<PAGE> 37
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
were combined with REMEC's for the fiscal years ended January 31, 1996 and 1997,
respectively. Radian's net sales and net loss for the one month period ended
January 31, 1997 were $299,000 and $10,019, respectively. In accordance with APB
No. 16, Radian's results of operations and cash flows for the one-month period
ended January 31, 1997 have been added directly to the retained earnings and
cash flows of the Company and excluded from reported fiscal 1998 results of
operations and cash flows. Radian's revenues and net income for the period from
February 1, 1997 through the date of acquisition totalled $731,089 and $141,888,
respectively.
Magnum Microwave Corporation ("Magnum")
On August 26, 1996, the Company issued 1,612,399 shares of its common
stock in exchange for all of the outstanding shares of common stock of Magnum, a
manufacturer of microwave components and subsystems. Immediately prior to the
acquisition, Magnum issued 197,187 equivalent shares of stock for cash of
approximately $1,500,000. Prior to the combination, Magnum's fiscal year ended
on the Friday closest to March 31. In recording the business combination,
Magnum's financial statements for the 1996 fiscal year were combined with
REMEC's for the fiscal year ended January 31, 1996. Consolidated operating
results and the net change in consolidated cash and cash equivalents for the
year ended January 31, 1997 include Magnum's results of operations and change in
cash flows for the two months ended March 29, 1996. Magnum's net sales and net
income for the two month period ended March 29, 1996 were $1,743,000 and
$135,000, respectively. Included in general and administrative expenses in the
consolidated statement of income for the year ended January 31, 1997 are costs
of $424,000 related to the acquisition of Magnum.
Verified Technical Corporation ("Veritek")
On March 31, 1997, the Company acquired all of the outstanding common
stock of Veritek in exchange for cash consideration of $1,000,000 and 138,000
shares of the Company's common stock with a fair value of approximately $2.0
million and the assumption of liabilities totaling $1.1 million. The acquisition
has been accounted for as a purchase, and accordingly, the total purchase price
has been allocated to the acquired assets and liabilities assumed at their
estimated fair values in accordance with the provisions of Accounting Principles
Board Opinion No. 16. The excess of the purchase price over the net assets
acquired of $2,406,000 has been recorded as an intangible asset, and is being
amortized over an estimated life of 15 years. The pro forma results of
operations of REMEC and Veritek assuming Veritek was acquired on the first day
of the Company's 1997 fiscal year would not be materially different from
reported results.
Nanowave Technologies Inc. ("Nanowave")
In October 1997, the Company 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. Effective October 29, 1997, REMEC Canada acquired all of
the outstanding common stock of Nanowave in exchange for cash consideration of
$4,025,000 and 182,183 Dividend Access Shares with a fair value of $4,646,000
which was equal to the fair value of an equivalent number of common shares of
the Company on the date of acquisition. These Dividend Access Shares are
convertible at any time into an equivalent number of shares of REMEC Common
Stock at the option of the security holder. The acquisition has been accounted
for as a purchase, and accordingly, the total purchase price has been allocated
to the acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of APB No. 16. The excess of the purchase price
over the net assets acquired of $11,130,000 has been recorded as intangible
assets (acquired technology, trademarks, assembled workforce and goodwill), and
will be amortized over periods ranging from 9 to 15 years.
Assuming that the acquisition of Nanowave had occurred on the first day
of the Company's fiscal year ended January 31, 1997, pro forma condensed
consolidated results of operations would be as follows (in thousands except per
share amounts):
F-13
<PAGE> 38
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Years ended January 31,
----------------------------
1998 1997
-------- ----------
(Unaudited)
<S> <C> <C>
Net sales ......... $ 160,581 $ 124,434
Net income ........ 14,288 4,441
Earnings per share:
Basic ........... $ .68 $ .27
Diluted ......... $ .66 $ .26
</TABLE>
RF Microsystems, Inc. ("RFM")
Effective April 30, 1996, the Company acquired all of the outstanding
common stock of RFM and certain other assets in exchange for cash consideration
of approximately $4,066,000. RFM provided satellite communications engineering
services to agencies of the U.S. Government. The acquisition was accounted for
as a purchase, and accordingly, the total purchase price was allocated to the
acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The excess of the purchase price over the net assets acquired of $3,559,000 was
recorded as intangible assets, and was being amortized over an estimated life of
15 years. Upon completion of the acquisition, certain tangible and intangible
assets associated with the design and production of commercial wireless products
with a fair value of approximately $3.8 million were transferred to another
subsidiary of the Company. On August 26, 1997, the Company sold its RFM
subsidiary in exchange for cash consideration of $5.0 million. The sale resulted
in an after-tax gain of $1,728,000 or $.08 per share. The Company's consolidated
financial statements include the results of RFM from April 30, 1996 through
August 26, 1997.
3. FINANCIAL STATEMENT DETAILS
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw Materials ....................... $ 16,087,158 $ 10,017,387
Work in progress .................... 14,968,767 11,687,168
------------ ------------
31,055,925 21,704,555
Less unliquidated progress payments.... (674,984) (2,372,499)
------------ ------------
$ 30,380,941 $ 19,332,056
============ ============
</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,076,000 and $1,642,000 at January 31, 1998 and 1997, respectively.
Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land, building and improvements ................ $ 3,293,776 $ 3,351,885
Machinery and equipment ........................ 54,574,755 37,932,615
Furniture and fixtures ......................... 3,270,147 2,312,295
Leasehold improvements ......................... 3,049,130 2,364,977
------------ ------------
64,187,808 45,961,772
Less accumulated depreciation and amortization.. (32,198,874) (27,418,367)
------------ ------------
$ 31,988,934 $ 18,543,405
============ ============
</TABLE>
F-14
<PAGE> 39
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Intangible and Other Assets
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Acquired technology .................... $ 8,358,556 $ 3,559,000
Goodwill ............................... 7,775,775 1,489,619
Trademarks and other intangible assets.. 2,250,000 --
------------ ------------
18,384,331 5,048,619
Less accumulated amortization .......... (1,391,456) (624,833)
------------ ------------
16,992,875 4,423,786
Other assets ........................... 239,366 379,521
------------ ------------
$ 17,232,241 $ 4,803,307
============ ============
</TABLE>
4. BANK REVOLVING TERM CREDIT FACILITY AND LINE-OF-CREDIT
The Company has a $9,000,000 working capital line-of-credit with a
bank, which expires July 1, 1998. Interest is due monthly on advances at the
bank's prime interest rate (8.5% at January 31, 1998). At January 31, 1998,
there were no outstanding borrowings on the facility.
The Company also has a $8,000,000 term credit facility with the bank
which is available until July 1, 1998. Outstanding borrowings at July 1, 1998
under this facility automatically convert into a term note payable in 42 monthly
installments. Interest is due monthly on advances under the facility at the
bank's prime interest rate. At January 31, 1998, there were no outstanding
borrowings on the facility.
Advances under these agreements are secured by substantially all assets
of the Company. The agreements also contain covenants which require the Company
to maintain certain financial ratios, achieve specified levels of profitability,
restrict the incurrence of additional debt, restrict the incurrence of capital
expenditures in excess of specified amounts, limit the payment of cash
dividends, and include certain other restrictions. As of January 31, 1998, the
Company was in compliance with all covenants specified.
5. SHAREHOLDERS' EQUITY
Equity Offerings
In January 1997, the Company issued in a public offering an additional
3,618,750 shares of common stock. The net proceeds from this offering were
$51,971,875. Certain shareholders also sold 1,125,000 shares as part of this
offering.
In February 1996, the Company completed an initial public offering
("IPO") of its common stock in which the Company issued a total of 3,397,340
shares of common stock. The net proceeds from the offering were $15,649,209.
Concurrent with the closing of the Company's IPO, all of the then outstanding
shares of the Company's preferred stock were converted into 1,616,864 shares of
common stock. In connection with the Company's IPO, certain shareholders also
sold 1,777,660 shares as part of the offering.
Dividends
In the year ended January 31, 1996, the Company paid a cash dividend of
$.01 per share including a payment to preferred shareholders on an as converted
basis. The Company's Q-bit subsidiary also paid a cash dividend totaling $64,670
during the fiscal year ended January 31, 1996. The Company currently anticipates
that it will not pay dividends in the foreseeable future.
F-15
<PAGE> 40
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Stock Option Plans
The Company's 1995 Equity Incentive Plan provides for the grant of
incentive stock options, non-qualified stock options, restricted stock awards,
stock purchase rights or performance shares to employees and non-employee
directors of the Company. During fiscal 1998, the Company's shareholders
approved an increase in the number of shares available for issuance under the
Plan by 2,250,000 shares to a total of 3,375,000 shares of common stock. The
exercise price of the incentive stock options must at least equal the fair
market value of the common stock on the date of grant, and the exercise price of
non-qualified options may be no less than 85% of the fair market value of the
common stock on the date of grant. Options granted under the plans vest over a
period of three to four years and expire from four and one-half years to nine
years from the date of grant.
The Company had maintained previous stock option plans prior to the
inception of the 1995 Equity Incentive Plan. These incentive plans were
terminated upon the closing of the Company's IPO in February 1996 and all
outstanding options remain exercisable in accordance with their original terms.
A summary of the Company's stock option activity and related
information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year .................... 928,538 $ 7.71 305,380 $ 2.25 230,046 $ 2.07
Granted ................. 1,024,214 22.42 668,012 9.90 128,501 2.65
Exercised ............... (170,965) 4.37 (37,649) 2.37 (26,865) 2.36
Forfeited ............... (90,813) 10.17 (7,205) 6.79 (26,302) 2.61
---------- --------- ---------- -------- ---------- --------
Outstanding -- end of year.. 1,690,974 $ 16.86 928,538 $ 7.71 305,380 $ 2.25
========== ========= ========== ======== ========== ========
</TABLE>
The following table summarizes by price range the number, weighted
average exercise price and weighted average life (in years) of options
outstanding and the number and weighted average exercise price of exercisable
options as of January 31, 1998:
<TABLE>
<CAPTION>
TOTAL OUTSTANDING TOTAL EXERCISABLE
-------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER ----------------------- NUMBER AVERAGE
OF EXERCISE OF EXERCISE
PRICE RANGE SHARES PRICE LIFE SHARES PRICE
- -------------- --------- -------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
$1.61-$7.40 191,120 $ 2.18 2.2 103,780 $ 2.13
$7.41-$11.10 338,350 $ 9.55 2.8 85,439 $ 9.51
$11.11-$14.80 325,919 $ 14.14 3.3 48,052 $ 13.96
$14.81-$22.20 484,676 $ 20.89 3.8 16,535 $ 15.15
$22.21-$25.90 168,875 $ 25.37 3.8 -- --
$25.91-$37.00 182,034 $ 32.99 4.0 -- --
--------- ---------
Total Plan 1,690,974 $ 16.86 3.3 253,806 $ 7.71
========= =========
</TABLE>
At January 31, 1998, options for 1,641,746 shares were available for
future grant.
F-16
<PAGE> 41
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and net income per share is
required by Statement 123, and has been determined as if the Company has
accounted for its employee stock options and employee stock purchase plan shares
under the fair value method of that statement. The fair value of these options
or employee stock purchase rights was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997, respectively: risk-free interest rates of 6.0%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 71.3% and 90.9%, a weighted-average life of the option
of 3.2 years; and a weighted-average life of the stock purchase rights of three
months.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and rights under the
employee stock purchase plan have characteristics significantly different from
those of trade options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair market
value of its employee stock options or the rights granted under the employee
stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options and the shares granted under the employee stock purchase plan is
amortized to expense over their respective vesting or option periods. The
effects of applying Statement 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1996. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Net income:
As reported................. $ 14,735,358 $ 4,972,323 $ 3,599,044
Pro forma................... 10,603,372 2,083,189 3,589,792
Earning per share:
As reported -
Basic..................... $ .71 $ .30 $ .28
Diluted................... .68 .30 .28
Pro forma -
Basic..................... $ .51 $ .13 $ .28
Diluted................... .49 .12 .28
Weighted average
fair value of options
granted during the year..... $ 11.48 $ 5.09 $ .52
</TABLE>
Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan")
provides for the issuance of shares of the Company's common stock to eligible
employees. During fiscal 1998, the Company's shareholders approved an increase
in the number of shares available for issuance under the Plan by 825,000 shares
to a total of 1,200,000 shares of common stock. The price of the common shares
purchased under the Purchase Plan will be equal to 85% of the fair market value
of the common shares on the first or last day of the offering period, whichever
is lower. As of January 31, 1998, 702,127 shares remain available for issuance
under the Purchase Plan.
6. COMMITMENTS
Deferred Savings Plan
The Company has established a Deferred Savings Plan for its employees,
which allows participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. The Company matches contributions
up to $100 per quarter, per employee, subject to the attainment of certain
quarterly profit
F-17
<PAGE> 42
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
levels by the Company. Employees vest immediately in their contributions and
Company contributions vest over a two year period. The Company has charged to
operations contributions of approximately $399,000, $218,000 and $88,000 for the
years ended January 31, 1998, 1997 and 1996, respectively.
Prior to its acquisition in fiscal 1997, the Company's Magnum
subsidiary maintained a separate defined contribution 401(k) retirement plan for
substantially all of its employees. Magnum made contributions to this plan of
$88,000 for fiscal 1996. This plan was merged into the REMEC plan in March 1997.
The Company's C&S Hybrid subsidiary maintained a separate defined
contribution 401(k) retirement plan for substantially all of its employees. C&S
Hybrid made contributions to this plan of $42,000 and $33,000 for fiscal 1997
and 1996, respectively. This plan was merged into the REMEC plan in February
1998.
Prior to its acquisition in fiscal 1998, the Company's Q-bit subsidiary
maintained a separate defined contribution 401(k) retirement plan for
substantially all of its employees. Q-bit made contributions to this plan of
$95,000 and $54,000 for fiscal 1997 and 1996, respectively. This plan was merged
into the REMEC plan in April 1998.
Leases
The Company leases offices and production facilities under
noncancelable agreements classified as operating leases. At January 31, 1998,
future minimum payments under these operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999 ............................... $ 3,464,000
2000 ............................... 3,595,000
2001 ............................... 1,918,000
2002 ............................... 989,000
2003 ............................... 842,000
Thereafter ......................... 1,093,000
-----------
Total minimum lease payments........ $11,901,000
===========
</TABLE>
Certain of these lease agreements provide for annual rental adjustments
based on changes in the Consumer Price Index. Certain of these lease agreements
also include renewal options.
At January 31, 1997, equipment under capital leases amounted to
$1,231,000. Related accumulated amortization for the same period of time was
$440,000. During fiscal 1998, all obligations under capital leases were repaid
and ownership of the related assets was transferred to the Company.
Rent expense totaled $3,186,000, $2,717,000 and $2,587,000 during
fiscal 1998, 1997 and 1996, respectively.
7. INCOME TAXES
For financial reporting purposes, income before taxes includes the
following components:
<TABLE>
<CAPTION>
Years Ended January 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Pretax income:
United States $22,369,180 $ 8,988,990 $ 6,027,702
Foreign 866,977 -- --
----------- ----------- -----------
$23,236,157 $ 8,988,990 $ 6,027,702
=========== =========== ===========
</TABLE>
F-18
<PAGE> 43
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation ....... $4,270,000 $1,293,000
Inventory costs capitalization.... 846,000 248,000
Other ............................ 2,000 47,000
---------- ----------
5,118,000 1,588,000
---------- ----------
Deferred tax assets:
Inventory and other reserves..... 3,696,000 1,771,000
Deferred rent ................... 65,000 108,000
Accrued expenses ................ 1,623,000 1,221,000
Other ........................... 858,000 342,000
---------- ----------
Total deferred tax assets ........... 6,242,000 3,442,000
---------- ----------
Net deferred tax assets ............. $1,124,000 $1,854,000
========== ==========
</TABLE>
The provision for taxes based on income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal........................................... $ 7,933,000 $3,910,000 $2,619,000
Foreign........................................... 308,000 -- --
State............................................. 1,634,000 874,000 588,000
Deferred:
Federal........................................... (1,188,000) (646,000) (624,000)
State............................................. ( 186,000) (121,000) (154,000)
---------- ---------- ----------
$8,501,000 $4,017,000 $2,429,000
========== ========== ==========
</TABLE>
A reconciliation of the effective tax rates and the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal rate..................... $8,115,000 35% $3,146,000 35% $2,110,000 35%
State income tax net of federal......... 941,000 4 605,000 7 295,000 5
Loss (Earnings) distributed to
S Corporation shareholders........... (642,000) (2) 438,000 5 (78,000) (2)
Other................................... 87,000 -- (172,000) (2) 102,000 2
---------- --- ---------- --- ---------- ---
$8,501,000 37% $4,017,000 45% $2,429,000 40%
========== === ========== === ========== ===
</TABLE>
Prior to its acquisition by the Company in October 1997, Q-bit
Corporation had elected to be treated as an "S corporation" for income tax
purposes and, accordingly, any liability for income taxes was that of the
shareholders and not Q-bit.
F-19
<PAGE> 44
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. SIGNIFICANT CUSTOMERS AND EXPORT SALES
During fiscal 1998 and 1997, respectively, one customer accounted for
14% and 13% of the Company's net sales. No customer accounted for more than 10%
of the Company's net sales during 1996.
Export sales were 7%, 7% and 11% of net sales for fiscal 1998, 1997 and
1996, respectively.
9. RELATED PARTY TRANSACTIONS
An officer of the Company holds certain interests in various suppliers
to one of the Company's subsidiaries. Amounts paid to these suppliers in fiscal
1998, 1997 and 1996 totaled $2,667,000, $1,054,000 and $307,000, respectively.
10. SUBSEQUENT EVENT
In March 1998, the Company sold in an underwritten public offering an
additional 1,990,000 shares of common stock. The net proceeds received by the
Company from this offering totaled approximately $49.6 million. Certain
shareholders of the Company also sold 1,000,000 shares as part of this offering.
F-20
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on April 28, 1998.
REMEC, INC.
By: /s/ Ronald E. Ragland
-------------------------------------
Ronald E. Ragland
Chairman of the Board and
Chief Executive Officer
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald E. Ragland, Errol Ekaireb and
Michael D. McDonald, jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Ronald E. Ragland Chairman of the Board and April 28, 1998
--------------------------- Chief Executive Officer
Ronald E. Ragland (Principal Executive Officer)
/s/ Errol Ekaireb President, Chief Operating April 28, 1998
--------------------------- Officer and Director
Errol Ekaireb
/s/ Jack A. Giles Executive Vice President, President April 28, 1998
--------------------------- of REMEC Microwave Division
Jack A. Giles and Director
/s/ Denny Morgan Director, Senior Vice President April 28, 1998
--------------------------- and Chief Engineer
Denny Morgan
</TABLE>
S-1
<PAGE> 46
<TABLE>
<S> <C> <C>
/s/ Joseph T. Lee Executive Vice President April 28, 1998
- --------------------------- and Director
Joseph T. Lee
/s/ Michael D. McDonald Chief Financial Officer, Senior Vice April 28, 1998
- --------------------------- President and Secretary (Principal
Michael D. McDonald Financial and Accounting Officer)
/s/ Andre R. Horn Director April 28, 1998
- --------------------------
Andre R. Horn
/s/ Gary L. Luick Director April 28, 1998
- --------------------------
Gary L. Luick
/s/ Jeffrey M. Nash Director April 28, 1998
- --------------------------
Jeffrey M. Nash
/s/ Thomas A. Corcoran Director April 28, 1998
- --------------------------
Thomas A. Corcoran
/s/ William H. Gibbs Director April 28, 1998
- --------------------------
William H. Gibbs
</TABLE>
S-2
<PAGE> 47
SCHEDULE II
REMEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
CONTRACT LOSS RESERVE PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------------- ------ -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended January 31, 1996 ...... $ 1,906,000 $ 2,139,000 $(2,675,000) $ 1,370,000
Year ended January 31, 1997 ...... 1,370,000 821,991 (620,000) 1,571,991
Year ended January 31, 1998 ...... 1,571,991 478,009 -- 2,050,000
</TABLE>
<PAGE> 48
REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1998
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Pages
- ----------- ----------- --------------
<S> <C> <C>
2.1(1) Agreement and Plan of Reorganization and Merger dated
as of May 16, 1996 among Magnum Microwave Corporation,
the Registrant and REMEC Acquisition Corporation
2.2(7) Agreement and Plan of Reorganization and Merger dated as of
February 24, 1997 among the Registrant, RTI Acquisition
Corporation and Radian Technology, Inc.
2.3(6) Agreement and Plan of Reorganization and Merger dated as of
April 10, 1997 among the Registrant, C&S Acquisition
Corporation and C&S Hybrid, Inc.
2.4(6) Agreement and Plan of Reorganization and Merger dated as of
October 24, 1997 among the Registrant, RQB Acquisition
Corporation and Q-bit Corporation
2.5(6) Share Purchase Agreement dated as of September 30, 1997 among
Justin Miller, Ph.D., RoyNat, Inc., REMEC Canada ULC and the
Registrant
3.1(3) Restated Articles of Incorporation
3.2(3) By-Laws, as amended
10.1(3) Equity Incentive Plan
10.2(3) Employee Stock Purchase Plan
10.3(3) Form of Indemnification Agreements between Registrant and its
officers and directors
10.4(3) Standard Industrial Lease between the Registrant and
Transcontinental Realty Investors, Inc., dated February 1,
1990, as amended.
10.5(3) Standard Industrial Lease between the Registrant and
Chesapeake Business Park 1983, dated December 13, 1988, as
amended.
10.6(4) 1996 Nonemployee Directors Stock Option Plan
10.7(7) Amended and Restated Loan Agreement between the Registrant
and The Union Bank of California, N.A., dated January 17, 1997
21.1(6) Subsidiaries of the Registrant
23.1(7) Consent of Ernst & Young LLP, Independent Auditors
23.2(7) Consent of Ireland San Filippo LLP, Independent Public
Accountants
23.3(7) Consent of Bray, Beck & Koetter, Independent Auditors
24.1(7) Power of Attorney (included on Page S-1 of this Annual Report
on Form 10-K)
27(7) Financial Data Schedule
</TABLE>
- ----------
(1) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-4 (No.
333-05343) filed on July 30, 1996 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Form 8-K filed on May 3, 1996 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-80381) filed on February 1, 1996 and incorporated herein by
reference.
(4) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-8 (No.
333-16687) filed on November 25, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-18325) filed on December 20, 1996.
(6) Previously filed with the Securities and Exchange Commission as an
exhibit to Amendment No. 2 to Registrant's Annual Report on Form 10-K/A
filed on January 30, 1998 and incorporated herein by reference.
(7) Filed with this Annual Report on Form 10-K.
<PAGE> 1
EXHIBIT 2.2
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
BY AND AMONG
REMEC, INC., RTI ACQUISITION CORPORATION AND
RADIAN TECHNOLOGY, INC.
FEBRUARY 24, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS........................................................... 1
ARTICLE II MERGER, CLOSING AND CONVERSION OF SHARES.............................. 3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE
COMPANY............................................................... 6
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB........................................................17
ARTICLE V COVENANTS OF THE COMPANY..............................................21
ARTICLE VI COVENANTS OF PARENT AND MERGER SUB....................................23
ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF PARENT
AND MERGER SUB........................................................25
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE
COMPANY...............................................................26
ARTICLE IX COVENANTS OF THE COMPANY, PARENT AND
MERGER SUB............................................................27
ARTICLE X MISCELLANEOUS.........................................................28
LIST OF EXHIBITS
EXHIBIT A Form of Agreement of Merger
EXHIBIT 3.3 Shareholder and Investment Letter
EXHIBIT 5.9 Form of Affiliate's Letter
EXHIBIT 5.11 Form of Registration Rights Agreement
EXHIBIT 7.4 Form of Opinion of Wilson Sonsini Goodrich &
Rosati
EXHIBIT 7.11 Forms of Employment Agreements
EXHIBIT 8.4 Form of Opinion of Heller Ehrman White & McAuliffe
</TABLE>
-i-
<PAGE> 3
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
This Agreement and Plan of Reorganization and Merger (the "Agreement")
is made as of February 24, 1997 by and among REMEC, Inc., a California
corporation ("Parent"), RTI Acquisition Corporation, a California corporation
and wholly owned subsidiary of Parent ("Merger Sub") and Radian Technology,
Inc., a California corporation (the "Company").
Background
Parent, Merger Sub and the Company desire that Merger Sub be merged with
and into the Company; that the Company be the surviving corporation and become a
wholly owned subsidiary of Parent and that each share of the Common Stock of the
Company which is outstanding immediately prior to the effective time of the
merger be converted as set forth in this Agreement and the Agreement of Merger
into shares of the Common Stock of Parent. Parent, Merger Sub and the Company
intend that the merger constitute a "reorganization" under Section 368(a)(1)(A),
by application of Section 368(a)(2)(E), of the Internal Revenue Code of 1986, as
amended.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
1.1 Definitions. The terms defined in this Article I, whenever used
herein, shall have the following meanings for all purposes of this Agreement:
"Affiliate" means, with respect to any corporation, any person or entity
which controls, is controlled by or is under common control with such
corporation.
"Agreement of Merger" means the agreement of merger between the Company
and Merger Sub, together with the related officers' certificates required by
Section 1103 of the Corporations Code, in the form attached to this Agreement as
Exhibit A.
"Audited Balance Sheet" means the balance sheet included in
the Audited Financials.
"Audited Financials" means the balance sheets of the Company at December
31, 1995 and December 27, 1996 and the related statements of income,
shareholders' equity and cash flows for the two years then ended, including the
notes thereto, in each case accompanied by an unqualified report of Ireland San
Filippo, LLP, certified public accountants.
<PAGE> 4
"Closing" means the delivery by the Company, Parent and Merger Sub of
the various documents contemplated by this Agreement and otherwise required in
order to consummate the Merger.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Radian Technology, Inc., a California corporation.
"Company Common" means shares of Company Common Stock, no par value.
"Company Options" means the options to purchase shares of Company Common
outstanding as of the date of this Agreement.
"Corporations Code" means the Corporations Code of the State of
California.
"Dissenting Shares" means those shares of Company Common which at any
time become "dissenting shares" within the meaning of Section 1300(b) of the
Corporation Code.
"Effective Time" means the time when the Agreement of Merger is filed
with the Secretary of State of the State of California and the Merger becomes
effective.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Ratio" shall have the meaning ascribed to it in
Section 2.3 of this Agreement.
"GAAP" means generally accepted accounting principles and practices as
promulgated by the Accounting Research Board, Accounting Principles Board and
Financial Accounting Standards Board or any superseding or supplemental
documentation of equal authority promulgating generally accepted accounting
principles and practices, all as in effect from time to time.
"Hazardous Material" means any material, substance, waste or component
thereof which is identified to be "hazardous" or "toxic" or otherwise poses an
actual or potential risk to public health and safety or to the environment by
virtue of being actually or potentially toxic, corrosive, bioaccumulative,
reactive, ignitable, radioactive, infectious or otherwise harmful to public
health and safety or the environment, the handling or disposal of, or exposure
to which, is regulated under any applicable United States federal, state or
local environmental or health and safety law, rule or regulation.
"Holder" means the holder of shares of Company Common immediately prior
to the Effective Time.
-2-
<PAGE> 5
"Merger Sub Common" means the Common Stock of Merger Sub, par value
$.01.
"1933 Act" means the Securities Act of 1933, as amended, and the rules,
regulations and forms of the SEC promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and
the rules, regulations and forms of the SEC promulgated thereunder.
"Parent Common" means the Common Stock of Parent, par value $.01.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any entity, any corporation or other
organization, whether incorporated or unincorporated, of which at least a
majority of the securities or interests having by their terms ordinary voting
power to elect a majority of the board of directors or others performing similar
functions is owned, directly or indirectly, by such entity.
ARTICLE II
MERGER, CLOSING AND CONVERSION OF SHARES
2.1 Merger. Subject to and in accordance with the terms and conditions
of this Agreement and the Agreement of Merger, the Company and Merger Sub shall
execute and file the Agreement of Merger with the Secretary of State of the
State of California, whereupon Merger Sub shall be merged with and into the
Company pursuant to Sections 1100 et seq. of the Corporations Code.
2.2 Closing. The Closing shall take place at the offices of Heller
Ehrman White & McAuliffe, 525 University Avenue, Palo Alto, California 94301 at
11:00 a.m. California time, on February 28, 1997 or at such other place, date or
time as the Company, Parent and Merger Sub shall agree writing (the "Closing
Date") after all of the conditions to the parties' obligations to consummate the
Merger set forth in Articles VII and VIII of this Agreement have been satisfied
or waived. The Company and Merger Sub shall file the Agreement of Merger with
the Secretary of State of the State of California immediately after the Closing.
2.3 Conversion of Shares. In accordance with the Merger Agreement, (i)
each share of Merger Sub Common issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted at and as of the Effective Time, into one
share of Company Common, and (ii) each share of Company Common outstanding
immediately prior to the Effective Time (except those shares of Company Common
which are Dissenting Shares and whose holder and the Company do not thereafter
agree in writing should not be treated as Dissenting Shares) shall, by
-3-
<PAGE> 6
virtue of the Merger and without any action on the part of the holder thereof be
converted, at and as of the Effective Time into the right to receive .13755818
of a share of Parent Common (the "Exchange Ratio") for each share of Company
Common. Holders of Company Common shall receive only whole shares of Parent
Common; in lieu of any fractional share of Parent Common, Holders shall receive
in cash the fair market value of such fractional share valuing Parent Common at
the average of the closing prices of the Parent Common on the Nasdaq National
Market on the five trading days immediately preceding the Closing Date as listed
in The Wall Street Journal.
2.4 Company Options. At the Effective Time, each outstanding option to
purchase Company Common ("Company Option"), whether vested or unvested, issued
under the Company's 1987 Stock Option Plan (the "Company Plan") shall thereafter
entitle the holder thereof to receive, upon exercise thereof, that number of
Parent Common (rounded down to the nearest whole number) equal to the product of
the number of shares of Company Common that were purchasable under the Company
Option immediately prior to the Effective Time multiplied by the Exchange Ratio,
at an exercise price for each full share of Parent Common equal to the quotient
obtained by dividing (i) the exercise price per share of Company Common with
respect to such Company Option, by (ii) the Exchange Ratio, which exercise price
per share shall be rounded up to the nearest one cent. The number of shares of
Parent Common that may be purchased by a holder on the exercise of any Company
Option shall not include any fractional share of Parent Common but shall be
rounded down to the next lower whole share of Parent Common. Parent shall assume
in full the Company Plan, Company Options outstanding under the Company Plan,
and shall register the underlying shares of Parent Common issued under the
Company Plan under the 1933 Act on a Registration Statement on Form S-8 within
30 days following the Effective Time. The assumption of a Company Option by
Parent shall not terminate or modify (except as required hereunder) any right of
first refusal, right of repurchase, vesting schedule, or other restriction on
transferability relating to the Company Option. Continuous employment with the
Company prior to the Effective Time shall be credited to an optionee for
purposes of determining the number of shares subject to exercise, vesting or
repurchase after the Effective Time. After such assumption, Parent shall issue,
upon any partial or total exercise of any Company Option, in lieu of shares of
Company Common, the number of shares of Parent Common to which the holder of the
Company Option is entitled pursuant to this Agreement. The assumption by Parent
of Company Options shall not give the holders of such Company Options any
additional benefits under their respective Company Options, which such holder
did not have immediately prior to the Effective Time nor shall such assumption
cause such holders to forego any existing rights or benefits under such Company
Options other than as specifically provided in this Section 2.4. Nothing
contained in this Section 2.4 shall require Parent to offer or sell shares of
Parent Common upon the exercise prior to the Effective Time of Company Options
assumed by Parent if, in the reasonable judgment
-4-
<PAGE> 7
of Parent and its counsel, such offer or sale might not be in accordance with
applicable federal or state securities laws.
2.5 Rights After the Effective Time. As soon as practicable after the
Effective Time, each holder of record of a certificate or certificates which,
prior to the Effective Time, represented outstanding shares of the Company
Common shall be entitled, upon surrender of such certificate or certificates to
Parent (or in the case of certificates that have been lost, stolen or destroyed,
lost certificate affidavits therefor and indemnification in connection
therewith) or to an exchange agent designated by Parent, in form suitable for
transfer, to receive a certificate or certificates representing the number of
whole shares of Parent Common to which such shareholder is entitled under this
Article II together with cash in lieu of any fractional share of Parent Common
in an amount calculated in accordance with Section 2.3.
2.6 Dissenting Shares. Holders of Dissenting Shares shall have those
rights, but only those rights, of holders of "dissenting shares" under Sections
1300 et seq. of the Corporations Code. The Company shall give Parent prompt
notice of any demand, purported demand or other communication received by the
Company with respect to any Dissenting Shares or shares claimed to be Dissenting
Shares, and Parent shall have the right to participate in all negotiations and
proceedings with respect to such shares. The Company agrees that, without the
prior written consent of Parent, it shall not voluntarily make any payment with
respect to, or settle or offer to settle, any demand or purported demand
respecting such shares.
2.7 Adjustments. Appropriate adjustments shall be made in this
Agreement, the Agreement of Merger and the number and type of securities into
which shares of the Company Common shall be converted in connection with the
Merger and which shall be issued upon exercise of the Company Options to be
assumed by Parent, in order to reflect any recapitalization, reclassification,
split-up, merger, consolidation, exchange, stock dividend, stock split or
similar event made, declared or effected with respect to Parent Common between
the date of this Agreement and the date such shares are issued.
-5-
<PAGE> 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure letter, a true and correct copy of
which has been delivered to Parent on or prior to the date of this Agreement
(the "Company Disclosure Letter"), the Company represents to Parent that:
3.1 Organization and Authority. The Company: (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California; (ii) has all necessary corporate power to own and lease its
properties, to carry on its business as now being conducted and to enter into
and perform this Agreement and all agreements to which the Company is or will be
a party that are exhibits to this Agreement; and (iii) is qualified to do
business in all jurisdictions in which the failure to so qualify would have a
material adverse effect on its business or financial condition. The Company does
not have any Subsidiaries and does not directly or indirectly own any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity. The Company
has delivered to Parent and its representatives complete and correct copies of
its Articles of Incorporation, as amended, and Bylaws as in effect on the date
of this Agreement, certified as true, complete and correct copies by the
Company's Secretary. Such Articles of Incorporation and Bylaws are in full force
and effect. The Company is not in violation of any provisions of its Articles of
Incorporation or Bylaws.
3.2 Capitalization.
3.2.1 The authorized capital stock of the Company consists of
25,000,000 shares of Common Stock, of which 4,604,250 shares are issued and
outstanding. The Company has no shares of Preferred Stock outstanding. A list of
all of the shareholders of the Company, with the number of shares owned by each
of them as of the date of this Agreement, is contained in Section 3.2 of the
Company Disclosure Letter. All such issued and outstanding shares have been duly
authorized and validly issued, and are fully paid and nonassessable, and have
been issued in compliance with all applicable federal and state securities laws.
The Company has outstanding options to purchase 657,500 shares of Company Common
pursuant to the Company Plan of which options to purchase 484,506 are fully
vested as of the date of this Agreement. Except as set forth in the preceding
sentence, there are no outstanding warrants, options, agreements, convertible or
exchangeable securities or other commitments pursuant to which the Company is or
may become obligated to issue, sell, purchase, retire or redeem any shares of
capital stock or other securities.
-6-
<PAGE> 9
3.2.2 All Company Options have been issued in accordance with the
Company Option Plan and all applicable securities laws, including pursuant to
valid permits or exemptions therefrom. The Company Plan and all amendments
thereto have been approved by all requisite Company shareholder action. The
Company does not have in effect any stock appreciation rights plan and no stock
appreciation rights are currently outstanding. The consummation of the Merger
shall not cause an acceleration in the vesting of any Company's capital stock.
3.2.3 There is no right of first refusal, co-sale right, right of
participation, right of first offer, option or other restriction on transfer
applicable to any shares of Company capital stock which apply to or survive the
transactions contemplated by this Agreement.
3.2.4 The Company is not a party or subject to any agreement or
understanding, and there is no agreement or understanding between or among any
persons that affects or relates to the voting or giving of written consent with
respect to any outstanding security of the Company.
3.3 Authority Relating to this Agreement; No Violation of Other
Instruments.
3.3.1 The execution and delivery of this Agreement and all
agreements to which the Company is or will be a party that are exhibits to this
Agreement and the performance hereunder and thereunder by the Company have been
duly authorized by all necessary corporate action on the part of the Company,
and, assuming execution of this Agreement and such other agreements by each of
the other parties thereto, this Agreement and such other agreements will
constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, subject as to enforcement:
(i) to bankruptcy, insolvency, reorganization, arrangement, moratorium and other
laws of general applicability relating to or affecting creditors' rights; and
(ii) to general principles of equity, whether such enforcement is considered in
a proceeding in equity or at law. The Company has obtained executed copies of
the Shareholder and Investment Letter in the form attached hereto as Exhibit 3.3
(the "Investment Letter") from the persons identified in Section 3.3 of the
Company Disclosure Letter.
3.3.2 Neither the execution of this Agreement or any other agreement
to which the Company or any Shareholder is or will be a party that is an exhibit
to this Agreement nor the performance of any of them by the Company will: (i)
conflict with or result in any breach or violation of the terms of any decree,
judgment, order, or to its knowledge, any law or regulation of any court or
other governmental body now in effect applicable to the Company; (ii) conflict
with, or result in, with or without the passage of time or the giving of notice,
any breach of any of the terms, conditions and provisions of, or
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constitute a default under or otherwise give another party the right to
terminate, or result in the creation of any lien, charge, or encumbrance upon
any of the assets or properties of the Company pursuant to, any material
indenture, mortgage, lease, agreement or other instrument to which the Company
is a party or by which it or any of its assets or properties are bound; (iii)
permit the acceleration of the maturity of any indebtedness of the Company or of
any other person secured by the assets or properties of the Company; or (iv)
violate or conflict with any provision of the Company's Articles of
Incorporation, Bylaws, or similar organizational instruments.
3.3.3 No consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any government or
regulatory authority is required to be made or obtained by the Company in order
to permit the execution, delivery or performance of this Agreement or any other
agreement to which the Company is or will be a party that is an exhibit to this
Agreement, or the consummation of the transactions contemplated by this
Agreement and such other agreements.
3.4 Compliance With Law. The Company holds all licenses, permits and
authorizations necessary for the lawful conduct of the Company's business as
currently conducted pursuant to all applicable statutes, laws, ordinances, rules
and regulations of all governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over the Company or over any part of the
Company's operations, and the Company knows of no violation thereof, other than
any such violation that would not have a material adverse effect on the
Company's business or financial results. The Company is not in violation of any
decree, judgment, order, or to its knowledge, any law or regulation, of any
court or other governmental body (including without limitation, applicable
environmental protection legislation and regulations, equal employment and civil
rights regulations, wages, hours and the payment of social security taxes and
occupational health and safety legislation), which violation would reasonably be
expected to have a material adverse effect on the condition, financial or
otherwise, assets, liabilities, business or results of operations of the
Company. Section 3.4 of the Company Disclosure Letter contains a true and
complete list of all licenses, permits and authorizations necessary for the
lawful conduct of the Company's business wherever conducted pursuant to all
applicable statutes, laws, ordinances, rules and regulations of all governmental
bodies, agencies and subdivisions having, asserting or claiming jurisdiction
over the Company or over any part of the Company's operations.
3.5 Investments in Others. The Company does not have any investment in
or advance or loan to or guarantee of, or any commitment to make any investment
in, advance or loan to or guarantee of, any person.
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3.6 Financial Statements. The Audited Financials: (i) have been prepared
in accordance with the books and records of the Company; (ii) fairly present the
financial position, results of operations, owners equity and cash flow of the
Company as of the dates and for the periods indicated therein; and (iii) have
been prepared in accordance with GAAP consistently applied.
3.7 Absence of Undisclosed Liabilities. Except for obligations incurred
in the ordinary course of business which are not required under GAAP to be
reflected on a balance sheet or set forth in the notes thereto, the Company does
not have any indebtedness or any other liability (absolute, contingent, asserted
or known) which is not reflected on or provided for in full on the Audited
Balance Sheet.
3.8 Tax Returns and Payments. All tax returns, reports and forms
required to be filed by, or with respect to any activities or income of, the
Company have been or will be timely filed, all such returns are true and correct
in all material respects, and all taxes, fees, penalties, interest and other
material governmental charges of any nature whatsoever which were shown to be
due or claimed to be due on such returns, reports and forms or which otherwise
may be owed have been paid or adequate provision for the payment thereof has
been made. Section 3.8 of the Company Disclosure Letter includes a complete and
correct list of all such returns, reports and forms filed in connection with any
year or portion thereof which ended on or after December 31, 1991. The Company
has no knowledge of any assessment of deficiency or additional tax or other
governmental charge respecting the Company or its business or affairs, or any
knowledge of any completed, pending or threatened tax audit or investigation
respecting the Company or its business or affairs by any taxing or other
governmental authority, and no waivers of statutes of limitations have been
requested with respect to the Company or any of its corporate Affiliates. The
amounts provided for taxes on the Audited Balance Sheet are sufficient for the
payment of all accrued and unpaid U.S. federal, state, or local taxes, interest,
penalties, assessments and deficiencies for all periods prior to the dates of
such balance sheets.
3.9 Absence of Certain Changes and Events. Since the date of the Audited
Balance Sheet there has not been, and prior to the Closing there will not be:
(i) any transaction entered into by the Company other than in the
ordinary course of business or as contemplated by this Agreement or any
loss or damage to any of the manufacturing facilities of the Company due
to fire or other casualty, whether or not insured, amounting to more
than $50,000 in aggregate replacement value; any event that materially
and adversely affects the ability of the Company to operate its business
as a whole in a manner consistent with the way in which such business
has been conducted prior to December 27, 1996 or any change in the
financial position, assets, liabilities, results of operations or
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business of the Company other than changes in the ordinary course of
business which in the aggregate have not been materially adverse;
(ii) any declaration, payment or setting aside of any dividend or
other distribution to or for the holder of any capital stock of the
Company;
(iii) any lawsuit, proceeding or governmental investigation which is
likely to have a material adverse effect on the business of the Company;
(iv) any event or condition of any character which had or is
reasonably likely to have a material adverse effect on the financial
position, assets, liabilities, results of operations or business of the
Company that has not been disclosed in the Company Disclosure Letter;
(v) any increase or decrease in the rates of compensation payable or
to become payable by the Company to any director, officer, employee,
agent or consultant, or any bonus, percentage compensation, service
award or other benefit, granted, made or accrued to or to the credit of
any such person, or any welfare, pension, retirement or similar payment
or arrangement made or agreed to by the Company other than salary
adjustments for non-officer employees in accordance with past practice;
(vi) any modification or rescission of, or waiver by the Company of
rights under, any existing contract which has had or is reasonably
likely to have a material adverse effect on its business;
(vii) any discharge or satisfaction by the Company of any lien or
encumbrance, or any payment of any obligation or liability (absolute or
contingent) other than current liabilities shown on the Audited Balance
Sheet and current liabilities incurred since the date of the Audited
Balance Sheet in the ordinary course of business; or
(viii) any mortgage, pledge, imposition of any security interest,
claim, encumbrance or other restriction on any of the assets, tangible
or intangible, of the Company.
3.10 Payables; Receivable.
3.10.1 All accounts payable and notes payable by the Company to
third parties as of the date of the Audited Balance Sheet, arose in the ordinary
course of business.
3.10.2 The accounts receivable reflected on the Audited Balance
Sheet are based on the Company's reasonable judgment and its normal credit
review procedures, business practices and GAAP and are collectible in accordance
with their
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terms in an amount not less than their aggregate book value. "Aggregate book
value," for this purpose, shall mean the recorded amounts of such accounts
receivable less any recorded allowance for doubtful accounts, trade allowances
and return allowances, all as established in accordance with GAAP consistently
applied.
3.11 Inventories. The inventories reflected on the Audited Balance Sheet
are valued in accordance with GAAP consistently applied and as described in
clause (i) of Section 3.6 of this Agreement.
3.12 Interests in Real Property. Section 3.12 of the Company Disclosure
Letter comprises a complete and correct list and a brief description of all real
property leased by the Company. The Company owns no real property. All real
property leases to which the Company is a party are valid and enforceable
(subject, as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium and similar laws affecting creditors'
rights, and, with respect to the remedy of specific performance, equitable
doctrines applicable thereto) and no party thereto is in default of any material
provision thereof. All improvements and fixtures on real properties leased by
the Company conform to all applicable material health, fire, safety,
environmental, zoning and building laws and ordinances. All materials,
buildings, structures and fixtures used by the Company in the conduct of its
business are in good operating condition and repair, ordinary wear and tear
excepted, and are sufficient for the type and magnitude of their respective
operations.
3.13 Personal Property. The Company has good and marketable title, free
and clear of all title defects, security interests, pledges, options, claims,
liens, encumbrances and restrictions of any nature whatsoever (except for such
non-monetary imperfections of title and encumbrances, if any, as do not
materially detract from the value of or materially interfere with the present
use of such property) to (or, in the case of leased properties and assets, valid
leasehold interests in) all inventory and receivables and to any item of
machinery, equipment, or tangible or intangible personal property reflected on
the Audited Balance Sheet or used in the Company's business (regardless of
whether reflected on the Audited Balance Sheet). Section 3.13 of the Company
Disclosure Letter sets forth a list of all items of machinery, equipment, and
other personal tangible property used in the Company's business. Except as shown
on Section 3.13 to the Company Disclosure Letter, all the machinery, equipment
and other tangible personal property is in good operating condition and repair,
normal wear and tear excepted, and is sufficient for the type and magnitude of
their operations as currently conducted. At the Closing Date, the Company will
possess all of the personal property wherever located used to conduct its
business as conducted prior to the Closing.
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3.14 Directors and Officers. Section 3.14 of the Company Disclosure
Letter sets forth a complete and correct list of all present officers and
directors of the Company.
3.15 Certain Transactions. No Affiliate is presently a party to any
agreement or arrangement with the Company: (i) providing for the furnishing of
raw materials, products or services to or by, or (ii) providing for the sale or
rental of real or personal property to or from, any such entity.
3.16 Patents, Trademarks, Etc. All rights, patents, trademarks, trade
names, service marks, mask work rights, copyrights, processes, designs,
formulas, inventions, trade secrets, know-how, technology or other intellectual
rights and any applications or registrations therefor, and all mask works, net
lists, schematics, source code, computer software programs and all other
tangible and intangible information or material (collectively, the "Intellectual
Property Rights") which are necessary to the current conduct of the Company's
business are owned, licensed or possessed, by the Company. To the Company's
knowledge, the current conduct of the Company's business does not infringe any
Intellectual Property Rights of any other person. No litigation is pending or,
to the knowledge of the Company, has been threatened against the Company or any
officer, director, shareholder, employee or agent of the Company, for the
infringement of any Intellectual Property Rights of any other party or for the
misuse or misappropriation of any Intellectual Property Rights owned by any
other party nor does any basis exist for such litigation. To the Company's
knowledge, there has been no infringement or unauthorized use by any other party
of any Intellectual Property Rights belonging to the Company. Section 3.16 of
the Company Disclosure Letter sets forth a list of all Intellectual Property
Rights belonging to or used by the Company.
3.17 Litigation and Other Proceedings. Neither the Company nor any of
its officers or directors in such capacity is a party to any pending or, to the
best knowledge of the Company, threatened action, suit, claim, proceeding or
investigation in the United States (including the Defense Contract Audit Agency,
the Inspector General or the General Accounting Office) or elsewhere, and the
Company is not subject to any order, writ, judgment, decree or injunction which
materially adversely affects or may reasonably be expected to so affect the
business or assets of the Company or which prevents or may reasonably be
expected to prevent completion of the Merger. Section 3.17 to the Disclosure
Letter contains a complete list of all claims brought against the Company since
December 31, 1991, together with a brief statement of the nature and amount of
the claim, the court and jurisdiction in which the claim was brought, the
resolution (if resolved), and the availability of insurance to cover the claim.
3.18 Contracts. Section 3.18 to the Company Disclosure Letter lists all
currently effective contracts to which the Company is a party or by which the
Company or any of its
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<PAGE> 15
respective properties or assets are bound which (i) involve the payment by the
Company of more than $25,000 over the remaining term of the contract; (ii) are
financing documents, loan agreements or promissory notes; (iii) are otherwise
material to the business of the Company and are not for the purchase or sale of
goods or services in the ordinary course of business; or (iv) are
distributorship or other agreements relating to the marketing of products. The
Company, and to the knowledge of the Company, all of the other parties to such
agreements, are in compliance with all material provisions of all such
agreements in which failure to so comply would have a material adverse effect on
the condition, financial or otherwise, assets, liabilities, business or results
of operations of the Company, and to the knowledge of the Company no fact exists
which is, or with the passage of time is reasonably likely to become, a material
default under any of them.
3.19 Insurance and Banking Facilities. Section 3.19 to the Company
Disclosure Letter sets forth a complete and correct list of (i) all contracts of
insurance and indemnity of or relating to the Company (except insurance related
to employee benefits) in force at the date of this Agreement (including name of
insurer or indemnitor, agent, annual charge, coverage and expiration date); (ii)
the names and locations of all banks in which the Company has accounts; and
(iii) the names of all persons authorized to draw on such accounts. All premiums
and other payments due with respect to all contracts of insurance or indemnity
in force as of the date of this Agreement have been or will be paid.
3.20 Personnel. Section 3.20 to the Company Disclosure Letter sets forth
a complete and correct list of (i) all employment contracts, collective
bargaining agreements, and all compensation plans, agreements, programs,
practices, commitments or other arrangements of any type, including bonus,
profit sharing, incentive compensation, pension and retirement agreements
respecting or affecting any employees of the Company; and (ii) all insurance,
health, medical, hospitalization, dependent care, severance, fringe or other
employee benefit plans, agreements, programs, practices, commitments or other
arrangements of any type in effect for employees of the Company; provided,
however, that clauses (i) and (ii) of this Section shall be deemed inapplicable
to any employee benefit plan which is required to be listed in Section 3.25 of
the Company Disclosure Letter. Section 3.20 of the Disclosure Letter includes a
list of all employees of the Company and their compensation levels sorted by
exempt and non-exempt status. The Company has been and is in compliance with the
terms of, and any material laws or regulations applicable to, all such plans,
agreements, practices, commitments or programs.
3.21 Powers of Attorney and Suretyships. The Company does not have any
power of attorney outstanding (other than a power of attorney issued in the
ordinary course of business with respect to tax matters or to customs agents and
customs brokers), and, except for obligations as an endorser of negotiable
instruments
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incurred in the ordinary course of business, the Company does not have any
obligations or liabilities (absolute or contingent) as guarantor, surety,
co-signer, endorser, co-maker, indemnitor or otherwise respecting the obligation
of any other person.
3.22 Minutes and Stock Records. The Company has provided Parent and
Merger Sub and their representatives complete and correct copies of the minute
books and stock records of the Company. Such items contain an accurate and
correct record of all proceedings and actions taken at all meetings of, and all
actions taken by written consent by, the holders of capital stock of the Company
and its Board of Directors and any committees thereof, and all original
issuances and subsequent transfers and repurchases of its capital stock.
3.23 Governmental Compliance and Consents. The Company has complied with
all laws and regulations of the United States Department of Defense and other
governmental agencies with which Company has contracts, directly or indirectly,
relating to contracts including estimation of costs and reporting. Except as
described in the Company Disclosure Letter, the Company has not been audited by
any agency of the United States, including the Defense Investigative Service,
the Criminal Defense Investigative Service, the Inspector General or the Defense
Contract Administrative Agency. Section 3.23 to the Company Disclosure Letter
comprises a complete and correct list of all consents, approvals, orders and
authorizations from, and all registrations, qualifications, designations,
declarations and rulings with, any United States federal, state or local
governmental authority, required by or with respect to the Company in connection
with the consummation of the transactions contemplated by this Agreement or, to
the extent not listed in Section 3.4 to the Disclosure Letter, necessary to
enable the Company to conduct its business as it was conducted immediately
before the Closing.
3.24 Product Warranties. Attached to the Company Disclosure Letter are
copies of the standard forms of agreements containing warranties or guarantees
relating to the catalog products of the Company. No agreement to which the
Company is a party provides any warranty for a period longer than three years
from the date of the agreement.
3.25 Compliance with ERISA. Section 3.25 to the Company Disclosure
Letter sets forth a complete and correct list of all "employee pension benefit
plans" and all "employee welfare benefit plans" ("Plans") of the Company or in
which any of its employees participate. To the Company's knowledge, each such
Plan intended to qualify under Section 401(a) or Section 501(c)(9) of the Code
has received a favorable determination letter as to its qualification and has
been administered in compliance with ERISA and the Code and to the knowledge of
the Company no fact or circumstance exists which would preclude continuing, good
faith reliance on such determination letter or would adversely affect the
qualified status of any such Plan. No fact or circumstance exists, including,
without limitation, any
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"reportable event" (within the meaning of ERISA), in connection with any such
Plan which would reasonably be expected to constitute grounds for termination of
such Plan by the Pension Benefit Guaranty Corporation (the "PBGC") or of the
appointment by a court of a trustee to administer such Plan. The Company has not
incurred any liability to the PBGC (other than for payment of premiums which
have been timely paid), and the Company has complied in full with the minimum
funding requirements and in all material respects with the reporting, disclosure
and fiduciary requirements of ERISA and the Code.
3.26 Labor Matters. The Company is and has been in material compliance
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
any such laws respecting employment discrimination, occupational safety and
health, and unfair labor practices. There is no unfair labor practice complaint
against the Company pending or, to the knowledge of the Company, threatened
before the National Labor Relations Board, Office of Federal Contract Compliance
Programs, or any comparable state, local or foreign agency. There is no (i)
labor strike, dispute, slowdown or stoppage actually pending, or, to the
knowledge of the Company, threatened against or directly affecting the Company;
(ii) grievance or arbitration proceeding pending and, to the knowledge of the
Company, no claims therefor exist; (iii) agreement which is binding on the
Company which restricts the Company from relocating or closing any of its
operations. The Company has not experienced any material work stoppage in the
last 18 months. The Company is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them or amounts required to be
reimbursed to such employees. Upon termination of the employment of any of the
employees of the Company before or after the Closing Date, neither the Company
nor Parent will be liable to such employee for severance pay. The Company is not
a party to or bound by any collective bargaining agreements.
3.27 Hazardous Materials. Except as set forth in Section 3.27 of the
Company Disclosure Letter:
(i) the Company has not caused, and is not causing or threatening
to cause, any disposals or releases of any Hazardous Material on or
under any properties which it (A) leases, occupies or operates or (B)
previously owned, leased, occupied or operated and to the Company's
knowledge, no such disposals or releases occurred prior to the Company
having taken title to, or possession or operation of, any of such
properties; and no such disposals or releases are (and in case of such
disposals or releases referred to in (B) above to the Company's
knowledge) migrating or have migrated off of such properties in
subsurface soils, groundwater or surface waters;
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(ii) the Company has neither (A) arranged for the disposal or
treatment of Hazardous Material at any facility owned or operated by
another person, or (B) accepted any Hazardous Material for transport to
disposal or treatment facilities or other sites selected by the Company
from which facilities or sites there has been a release or there is a
release or threatened release of a Hazardous Material; any facility
identified in Section 3.27 of the Company Disclosure Letter under (A)
above has represented to the Company that it was duly licensed in
accordance with applicable law and that such facility was operated in
accordance with applicable laws and, to the Company's knowledge, has not
been listed in connection with the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) by the United States
Environmental Protection Agency's Comprehensive Environmental Response,
Compensation, and Liability Information System (CERCLIS) or National
Priorities List (NPL) or any equivalent or like listing of sites under
state or local law (whether for potential releases of substances listed
in CERCLA or other substances).
(iii) the Company has no actual knowledge of, or any reason to
believe or suspect that, any release or threatened release of any
Hazardous Material originating from a property other than those leased
or operated by the Company has come to be (or may come to be) located on
or under properties leased, occupied or operated by the Company;
(iv) the Company has never installed, used, buried or removed any
surface impoundment or underground tank or vessel on properties owned,
leased, occupied or operated by the Company;
(v) the Company is and has been in compliance in all material
respects for the last three years with all federal, state, local or
foreign laws, ordinances, regulations, permits, approvals and
authorizations relating to air, water, industrial hygiene and worker
health and safety, anti-pollution, hazardous or toxic wastes, materials
or substances, pollutants or contaminants, and, to the Company's
knowledge, no condition exists on any of the real property owned by or
used in the business of the Company that would constitute a violation of
any such law or that constitutes or threatens to constitute a public or
private nuisance; and
(vi) There has been no litigation, administrative proceedings or
investigations or any other actions, claims, demands notices of
potential responsibility or requests for information brought or, to the
knowledge of the Company, threatened against the Company or any
settlement reached with any person or persons alleging the presence,
disposal, release or threatened release of any Hazardous Material on,
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from or under any of such properties or as otherwise relating to
potential environmental liabilities.
3.28 Order Backlog; Customer Complaints. Section 3.28 of the Company
Disclosure Letter contains a list of the aggregate backlog of orders for the
Company's products as of January 24, 1997, and identifies for each such order
the customer, product and price.
3.29 Brokers and Finders. The Company has not retained any broker or
finder in connection with the transactions contemplated by this Agreement.
3.30 Accuracy of Documents and Information. Neither the representations
or warranties made by the Company in this Agreement, nor those contained in any
document or written information prepared by the Company or its representatives,
financial statement, certificate, schedule or exhibit furnished or to be
furnished (or caused to be furnished) by the Company to Parent pursuant to this
Agreement, taken together as a whole contain or will contain any untrue
statement of a material fact, or omit or will omit a material fact necessary to
make the statements or facts contained herein or therein, in light of the
circumstances under which they were made, not misleading.
3.31 Collapsible Corporation; Parachute Payments. No election has been
made to treat the Company as a "consenting corporation" under Section 341(f) of
the Code, and the Company is not a party to any written or oral, formal or
informal, agreement or contract with a "disqualified individual" (as defined in
Section 280G(c) of the Code) which could result in a disallowance of the
deduction for any "excess parachute payment" (as defined in Section 280G(b)(1)
of the Code) under Section 280G of the Code.
3.32 Credit Cards. Section 3.33 of the Company Disclosure Letter sets
forth a complete and correct list of all credit cards issued or caused to be
issued by the Company to any person, firm or entity or under which the Company
is or may be liable for charges or payments.
3.33 Business Practices. The Company has not made, offered or agreed to
offer anything of value to any government official, political party or candidate
for government office nor has it taken any action which would cause it to be in
violation of the Foreign Corrupt Practices Act of 1977.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure letter, a true and correct copy of
which has been delivered to Company on or prior to the date of this Agreement
(the "Parent Disclosure Letter"), Parent and Merger Sub represent to the Company
that:
4.1 Organization and Authority. Each of Parent and Merger Sub (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California; (ii) has all necessary corporate power to own and
lease its properties, to carry on its business as now being conducted and to
enter into and perform this Agreement; and (iii) is qualified to do business in
all jurisdictions in which the failure to so qualify would have a material
adverse effect on its business or financial condition.
4.2 Capitalization. (i) The authorized capital stock of Parent is
5,000,000 shares of Preferred Stock, none of which are issued and outstanding,
and 40,000,000 shares of Parent Common, of which 11,502,655 shares were issued
and outstanding as of January 31, 1997. All such issued and outstanding shares
have been duly authorized and validly issued, and are fully paid and
nonassessable. As of January 31, 1997, Parent had outstanding options to
purchase 403,163 shares of Parent Common pursuant to its existing plans. Except
as set forth in the preceding sentence, there are no outstanding warrants,
options, agreements, convertible or exchangeable securities or other commitments
pursuant to which the Company is or may become obligated to issue, sell,
purchase, retire or redeem any shares of capital stock or other securities. The
Parent has delivered to the Company copies of its Articles of Incorporation, as
amended, and Bylaws as in effect on the date of this Agreement.
(ii) The authorized capital stock of Merger Sub is One Million
(1,000,000) shares of Merger Sub Common, of which One Thousand (1,000) shares
are issued and outstanding. All such issued and outstanding shares have been
duly authorized and validly issued, are fully paid an nonassessable, and are
held by Parent. There are no outstanding warrants, options, agreements,
convertible or exchangeable securities or other commitments pursuant to which
Merger Sub is or may become obligated to issue, sell, purchase, retire or redeem
any shares of stock or other securities.
4.3 Authority Relating to this Agreement; No Violation of Other
Instruments.
4.3.1 The execution and delivery of this Agreement and all other
agreements to which Parent or Merger Sub is a party or will be a party that are
exhibits to this Agreement and the performance hereunder and thereunder by
Parent or Merger Sub have been duly authorized by all necessary corporate action
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<PAGE> 21
on the part of Parent or Merger Sub and, assuming execution of this Agreement
and such other agreements by the Company and each of the parties thereto, this
Agreement and such other agreements will constitute a legal, valid and binding
obligation of Parent or Merger Sub, enforceable against Parent or Merger Sub in
accordance with its terms, subject as to enforcement: (i) to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other laws of general
applicability relating to or affecting creditors' rights; and (ii) to general
principles of equity, whether such enforcement is considered in a proceeding in
equity or at law.
4.3.2 Neither the execution of this Agreement or any other
agreements to which Parent or the Merger Sub is a party or will be a party that
is an exhibit to this Agreement nor the performance of any of them by Parent or
Merger Sub will: (i) conflict with or result in the breach or violation of the
terms of any decree, judgment, order, law or regulation of any court or other
governmental body now in effect applicable to Parent or Merger Sub; (ii)
conflict with, or result in, with or without the passage of time or the giving
of notice, any breach of any of the terms, conditions and provisions of, or
constitute a default under, any material indenture, mortgage, lease, agreement
or other instrument to which Parent or Merger Sub is a party or by which it is
bound; or (iii) violate or conflict with any provisions of Parent's or Merger
Sub's Articles of Incorporation, Bylaws, or similar organizational instruments.
4.3.3 No consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority is required to be made or obtained by Parent or Merger
Sub in order to permit the execution, delivery or performance of this Agreement
or any other agreement to which Parent or Merger Sub is a party or will be a
party that is an exhibit to this Agreement, or the consummation of the
transactions contemplated by this Agreement and such other agreements.
4.4 Financial Statements. Parent has delivered the following
consolidated financial statements of Parent (the "Parent Financial Statements")
to the Company:
(i) Balance Sheet of Parent as of November 3, 1996, (unaudited);
(ii) Statement of Income for the period ended November 3, 1996
(unaudited);
(iii) Audited Balance Sheets of Parent dated as of January 31, 1996
together with audited Statements of Operations, Shareholders' Equity and Changes
in Cash Flow during the three years ended January 31, 1996.
Each Parent Financial Statement together with the notes thereto is in accordance
with the books and records of Parent, fairly
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presents the financial position of Parent and the results of operations of
Parent for the period indicated, and has been prepared in accordance with
generally accepted accounting principles consistently applied, except that the
unaudited income statement does not contain all the notes required under
generally accepted accounting principles and comply as to form with applicable
accounting requirements of the SEC.
4.5 Absence of Undisclosed Liabilities. As of November 3, 1996, Parent
had no indebtedness or liability (absolute or contingent) which is not shown or
provided for in full on the Balance Sheet dated November 3, 1996 included in the
Parent Financial Statements. Except as set forth in the Balance Sheet dated
November 3, 1996 included in the Parent Financial Statements, Parent and its
Subsidiaries do not have outstanding on the date of this Agreement, nor will it
have outstanding on the Closing Date, any indebtedness or liability (absolute or
contingent) other than those incurred since November 3, 1996 in the ordinary
course of business.
4.6 Shares Issued in Connection With the Merger. The shares of Parent
Common to be issued to the Holders pursuant to the Merger, when issued in
accordance with this Agreement and the Merger Agreement, will be duly
authorized, validly issued, fully paid and nonassessable. The shares of Parent
Common to be issued to the holders of Company Options upon exercise of the
Company Options after the Merger, when issued upon exercise of the Company
Options in accordance with this Agreement, the Merger Agreement, and the Company
Plan, will be duly authorized, validly issued, fully paid and nonassessable.
4.7 Full Disclosure. All reports, schedules and statements (including
all exhibits and schedules thereto and all documents incorporated by reference
therein) required to be filed by the Parent within the year prior to the date of
this Agreement under the Exchange Act, copies of which have been furnished to
the Company, have been duly filed, were in substantial compliance with the
requirements of their respective forms, and were complete and correct in all
material respects as of the dates at which the information was furnished. As of
the date of filing, no such report contained any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. Since November 3, 1996, except as contemplated by this
Agreement, Parent has conducted its business in the ordinary course and there
has not been any material adverse change in the business, financial condition or
results or operations or cash flows of Parent.
4.8 Activities of Merger Sub. Merger Sub was formed for the purpose of
participating in the Merger as contemplated in this Agreement. Parent has
carried on no business on behalf of the Merger Sub.
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4.9 Litigation. Except as disclosed to the Company or in Parent's
filings with the SEC, there is no pending or, to the best of Parent's knowledge,
threatened lawsuit, administrative proceeding, arbitration, labor dispute or
governmental investigation to which Parent is a party or by which any material
portion of its assets taken as a whole may be bound, and which, if adversely
determined, would have a material adverse effect on Parent. There are no
outstanding orders, judgments, awards or decrees of any court, governmental or
regulatory body or arbitration tribunal against Parent.
4.10 Compliance with Laws. Parent has not violated in any material
respect and is not, to its knowledge, in violation in any material respect of
any law, statute, ordinance or regulation applicable to the business or affairs
of Parent where such violation could reasonably be expected to have a material
adverse effect on Parent.
4.11 Eligibility to Use Form S-3. Parent meets the eligibility
requirements for use of a registration statement on Form S-3.
ARTICLE V
COVENANTS OF THE COMPANY
5.1 Access to Properties and Records. Throughout the period between the
date of this Agreement and the Closing, the Company shall give Parent and its
authorized officers, employees, attorneys, and independent public accountants
and other representatives reasonable access to information and documents
relating to this Agreement and the transactions contemplated by this Agreement,
and shall provide Parent with such financial, technical and operating data and
other information pertaining to the business of the Company as Parent may
request, including the auditors work papers in connection with the Audited
Financials. No investigation by Parent or its representatives made before or
after the date of this Agreement shall affect the representations or warranties
of the Company contained in this Agreement, and all such representations and
warranties shall survive any such investigation to the extent set forth in
Section 11.1 of this Agreement.
5.2 Conduct of Business Prior to Closing. The Company agrees that, after
the date of this Agreement and before the Closing, except as otherwise
permitted, required or contemplated by this Agreement or expressly permitted by
Parent in writing, the business of the Company shall be conducted in the
ordinary course consistent with prior practices and in a prudent, businesslike
fashion. Without limiting in any way the generality of the foregoing and except
as so permitted, required or contemplated, the Company shall not:
(i) merge with or into or consolidate with any other corporation;
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<PAGE> 24
(ii) amend its Articles of Incorporation or Bylaws;
(iii) change its benefit structures or salary rates (other than
normal merit increases or promotions), enter into or materially modify
any employment contracts or severance arrangements, or enter into
collective bargaining or similar agreements;
(iv) make any change in its authorized or outstanding capital stock
or otherwise in its capital structure;
(v) incur any indebtedness for borrowed money;
(vi) issue or deliver any stock, bonds or other securities or debt
instruments, or any options, warrants or other rights calling for the
issuance or delivery thereof;
(vii) declare or make, or agree to declare or make, any payment or
dividends or distributions or purchase or redeem, or agree to purchase
or redeem, any of its capital stock or other securities;
(viii) enter into any transactions other than in the ordinary course
of business (including make any capital expenditure in an amount greater
than $25,000 in the aggregate);
(ix) terminate or amend any material contract, agreement, license or
other instrument to which the Company is a party or by which any of the
Company or any of its assets are bound, except agreements which by their
terms are terminable in the ordinary course of business; or
(x) enter into any contract or commitment in the ordinary course of
business which involves more than $25,000 or has a duration longer than
one year without prior consultation with and consent of Parent which
consent shall not be unreasonably withheld.
Without limiting the generality of the foregoing, the Company shall
continue to pay accounts payable and to collect accounts receivable in the
ordinary course of business in accordance with past practice, to maintain and
preserve customer relations and to maintain insurance; and the Company shall not
change or permit to be changed in any material respect the accounting or
valuation practices applicable to its assets or businesses.
5.3 Notice of Events. Throughout the period between the date of this
Agreement and the Closing, the Company shall promptly advise Parent in writing
of any and all material events and developments concerning its financial
position, assets, liabilities, results of operations or business or any of the
items or matters covered by the Company's representations and warranties
contained in this Agreement.
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<PAGE> 25
5.4 Shareholders Approval and Board Recommendation. The Company shall
submit this Agreement and the Merger to its shareholders for approval in
accordance with all applicable laws and the Articles of Incorporation and Bylaws
of the Company.
5.5 No Other Negotiations. Prior to the Closing, the Company shall not
conduct negotiations or discussions with any other party regarding a possible
acquisition of the Company or of all or a substantial part of its business or
assets.
5.6 Cooperation. The Company shall cooperate with Parent in preparing
and making all filings or submissions to governmental agencies required in
connection with the transactions contemplated by this Agreement. The Company, at
any time before or after the Closing, shall execute, acknowledge and deliver any
further assignments, assurances, documents and instruments of transfer
reasonably requested by Parent and Merger Sub and shall take any other action
consistent with the terms of this Agreement that may reasonably be requested by
Parent and Merger Sub for the purpose of consummating the Merger.
5.7 Employees. The Company shall use its best efforts to assist Parent
and Merger Sub in retaining the continued services of its key employees.
5.8 Best Efforts to Close. The Company shall use its best efforts to
fulfill the conditions set forth in Article 5 of this Agreement over which it
has control or influence, and to complete the transactions contemplated by this
Agreement.
5.9 Agreements with Respect to Affiliates. The Company shall deliver to
Parent a letter (the "Affiliate Letter") identifying all persons who are
"affiliates" of the Company under the 1933 Act. The Company shall use its best
efforts to cause each person who is identified as an "affiliate" in the
Affiliate Letter to deliver to Parent, prior to the Effective Time a written
agreement (an "Affiliate Agreement") in connection with restrictions on
affiliates in respect of pooling of interests accounting treatment, in
substantially the form of Exhibit 5.9.
5.10 Shareholder Agreement and Investment Letter. The Company shall use
its best efforts to cause each shareholder of the Company to execute the
Investment Letter concurrently with the execution of this Agreement or as
promptly as practicable after (i) the date of this Agreement (with respect to
shareholders as of the date of this Agreement) or (ii) the date such persons
become a shareholder.
5.11 Registration Rights Agreement. The Company shall use
its best efforts to cause each Holder to execute and deliver the
Registration Rights Agreement ("Rights Agreement") in the form
attached hereto as Exhibit 5.11.
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ARTICLE VI
COVENANTS OF PARENT AND MERGER SUB
6.1 Access to Properties and Records. Throughout the period between the
date of this Agreement and the Closing, Parent shall give the Company and its
authorized officers, employees, attorneys, and independent public accountants
and other representatives reasonable access to information and documents
relating to this Agreement and the transactions contemplated by this Agreement,
and shall provide the Company with such financial, technical and operating data
and other information pertaining to the business of Parent as the Company may
request, including the auditors work papers in connection with Parent's
financial statements. No investigation by the Company or its representatives
made before or after the date of this Agreement shall affect the representations
or warranties of Parent contained in this Agreement, and, subject to Section
10.1, all such representations and warranties shall survive any such
investigation.
6.2 Information. Parent shall supply to the Company such information as
the Company shall reasonably request in connection with the Company's
solicitation of shareholder approval of this Agreement and the Merger.
6.3 Notice of Events. Throughout the period between the date of this
Agreement and the Closing, Parent shall promptly advise the Company in writing
of any and all material events and developments concerning its financial
position, assets, liabilities, results of operations or business or any of the
items or matters covered by the Parent's representations and warranties
contained in this Agreement.
6.4 Employee Benefits. With respect to the employees of the Company at
the Closing Date, Parent and Merger Sub shall continue coverage of such
employees under employee benefit plans of the Company as they exist at the
Closing Date or shall include such employees under benefit plans of Parent. Such
employees who become covered under Parent's plans shall receive credit for
length of service for the period of their continuous service as employees of the
Company.
6.5 Best Efforts to Close. Parent and Merger Sub shall use their best
efforts to fulfill all of the conditions set forth in Article 6 of this
Agreement over which they have control or influence, and to complete the
transactions contemplated by this Agreement.
6.6 Nasdaq Listing. Parent shall file with the National Association of
Securities Dealers, Inc. a Notification Form for Listing of Additional Shares on
the Nasdaq Stock Market of the Parent Common to be received by the Holders in
the Merger and upon exercise of the Company options assumed by Parent.
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6.7 No Actions Inconsistent with Tax-Free Reorganization. Parent and
Merger Sub shall (and, following the Effective Time, Parent shall cause the
Company to) take no action with respect to the capital stock, assets or
liabilities of the Company that would cause the Merger to fail to qualify as a
"reorganization" within the meaning of Sections 368(a)(1)(A) and (a)(2)(E) of
the Code. Without limitation on the generality of the foregoing, following the
Effective Time, Parent shall cause the Company to either continue the historic
business of the Company or use a significant portion of the Company's historic
business assets in a business.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to consummate the Merger are
subject to the fulfillment, at or before the Closing, of each and every one of
the following conditions, any one or more of which may be waived by Parent and
Merger Sub.
7.1 Representations and Warranties True at Closing. Each of the
representations and warranties of the Company contained in this Agreement shall
be deemed to have been made again at and as of the Effective Time and shall be
true and correct in all material respects.
7.2 Performance of Covenants. All of the covenants required to be
performed by the Company at or before the Closing pursuant to the terms of this
Agreement shall have been duly performed.
7.3 Certificate. Parent and Merger Sub shall have received a certificate
signed by the Company to the effect that the conditions set forth in Sections
7.1 and 7.2 have been satisfied.
7.4 Opinion of Counsel. Parent and Merger Sub shall have received the
opinion of Wilson Sonsini Goodrich & Rosati, counsel to the Company, in form
attached hereto as Exhibit 7.4.
7.5 Resignations of Directors. Parent shall have received from each
director of the Company a duly executed resignation of such director effective
as of the Effective Time.
7.6 Material Changes. Between the date of this Agreement and the Closing
there shall not have occurred any event or transaction of the nature described
in Section 3.9 of this Agreement.
7.7 Consents. Parent shall have received, in writing and in form and
substance reasonably acceptable to Parent, all necessary consents, approvals and
waivers with respect to the consummation of the transactions contemplated by
this Agreement.
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7.8 Shareholder Approval; Potential Dissenting Shares. The Agreement and
the Merger shall have been duly approved by the shareholders of the Company in
accordance with all applicable laws, the Articles of Incorporation and Bylaws of
the Company and otherwise and there shall be no Dissenting Shares.
7.9 Pooling Letter from Accountants. The Board of Directors of Parent
shall have received a letter from each of Ernst & Young LLP and Ireland San
Filippo, dated as of the Closing in form and substance satisfactory to Parent,
stating that the Merger will be treated as a pooling of interests for financial
accounting purposes.
7.10 No Action to Prevent Completion. Parent shall not have determined,
in the reasonable exercise of its discretion, that the transactions contemplated
by this Agreement have become inadvisable or impractical by reason of the
institution or threat of institution, by any federal, state, local or foreign
governmental authority or any other person or entity, of litigation or other
proceedings with respect to or affecting the transactions contemplated by this
Agreement.
7.11 Employment and Non-Competition Agreements. Each of James L.
Mongillo, Patrick W. McLaughlin, John L. Matson, Nam S. Han, Thomas Criswell,
Leonard Johnson, Michael England and William Pfund shall have entered into his
respective employment and non-competition agreement (the "Employment Agreement")
with Parent in the form attached hereto as Exhibit 7.11.
7.12 No Material Adverse Changes. There shall have been no material
adverse changes in the Company's financial condition, business, assets or
liabilities (actual or contingent) from the date of this Agreement through the
Closing.
7.13 Agreements with Respect to Affiliates. Parent shall have received
executed Affiliates Letters.
7.14 Investment Letter. Parent shall have received an executed
Investment Letter from each Holder.
7.15 Approval of the Merger. The Board of Directors of Parent and Merger
Sub and the shareholder of Merger Sub shall have approved the Merger.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement are subject to the
fulfillment, at or before the Closing, of each and every one of the following
conditions, any one or more of which may be waived by the Company.
8.1 Representations and Warranties True at Closing. The representations
and warranties of Parent and Merger Sub contained
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in this Agreement shall be deemed to have been made again at and as of the
Effective Time and shall be true in all material respects.
8.2 Performance of Covenants. All of the covenants required to be
performed by Parent and Merger Sub at or before the Closing pursuant to the
terms of this Agreement shall have been duly performed.
8.3 Certificate. At the Closing, the Company shall have received a
certificate signed on behalf of Parent and Merger Sub to the effect that the
conditions set forth in Sections 8.1 and 8.2 have been satisfied.
8.4 Opinion of Counsel. The Company shall have received an opinion of
Heller Ehrman White & McAuliffe, counsel to Parent and Merger Sub, dated as of
the Closing Date in the form attached as Exhibit 8.4.
8.5 Consents. The Company shall have received all necessary consents,
approvals and waivers with respect to the consummation of the transactions
contemplated by this Agreement.
8.7 Shareholder Approval. This Agreement and the Merger shall have been
duly approved by the shareholders of the Company in accordance with all
applicable laws, the Articles of Incorporation and Bylaws of the Company and
otherwise.
8.8 Pooling of Interests. The Board of Directors of the Company shall
have received copies of the letter set forth in Section 7.9 above.
8.9 Employment Agreements. Each of Messrs. Mongillo,
McLaughlin, Matson, Han, Criswell, Johnson, England and Pfund
shall have entered into his respective Employment Agreement with
Parent.
8.10 Approval of Merger. The Board of Directors of Parent and Merger Sub
and the shareholder of Merger Sub shall have approved the Merger.
8.11 Rights Agreement. Parent shall have entered into the Rights
Agreement with each Holder.
8.12 No Material Adverse Changes. There shall have been no material
adverse changes in Parent's financial condition, business, assets or liabilities
(actual or contingent) from the date of this Agreement through the Closing.
ARTICLE IX
COVENANTS OF THE COMPANY, PARENT AND MERGER SUB
9.1 Press Releases. No party hereto, nor any of their Affiliates, shall
issue any press release, make any public
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announcement or otherwise release any information publicly regarding the Merger,
without the consent of the other parties which shall not be unreasonably
withheld or delayed.
9.2 Confidential Information. Except as otherwise required by applicable
law, each party to this Agreement will keep confidential data, information or
documents it obtains from the other and will not disclose (other than to its
attorneys, accountants, or advisors, who are themselves required to keep such
information confidential) prior to the Closing (or ever, if the Closing does not
occur) to any third party such data, information or documents obtained from the
other or from any director, officer, employee or agent of the other or any data
or documents prepared on the basis of such data, information or documents except
in each case for any data, information or document which: (i) was or is in the
public domain; (ii) was already known prior to its disclosure by the other or
(iii) is disclosed to a party by a third party that is not an agent of the
other.
9.3 Eligibility for Use of S-3. Parent covenants to use its reasonable
best efforts to remain eligible for the use of a Registration Statement on Form
S-3 during the term of the Rights Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Survival of Representations and Warranties. The representations and
warranties of the Company contained in this Agreement, including those contained
in the exhibits, schedules and other documents delivered pursuant to this
Agreement, shall survive until and expire upon the Closing.
10.2 Expenses. Each party to this Agreement shall pay its own costs and
expenses (including all legal, accounting, broker, finder and investment banker
fees) relating to this Agreement, the negotiations leading up to this Agreement
and the transactions contemplated by this Agreement.
10.3 Amendment. This Agreement shall not be amended except by a writing
duly executed by the Company, Parent and Merger Sub. This Agreement may be
amended by the parties hereto at any time before or after the approval of the
Merger by the shareholders of the Company; provided, however, that following
approval of the Merger by the shareholders of the Company, no amendment shall be
made that by law requires the further approval of such shareholders without
obtaining such further approval.
10.4 Entire Agreement. This Agreement and the Agreement or Merger,
including the exhibits, schedules and other documents delivered pursuant to this
Agreement, contain all of the terms and conditions agreed upon by the parties
relating to the subject matter of this Agreement and supersede all prior and
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contemporaneous agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written, respecting the subject matter.
10.5 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
10.6 Headings. The headings contained in this Agreement are intended
solely for convenience and shall not affect the rights of the parties to this
Agreement.
10.7 Mutual Contribution. The parties to this Agreement and their
counsel have mutually contributed to its drafting. Consequently, no provision of
this Agreement shall be construed against any party on the ground that party
drafted the provision or caused it to be drafted.
10.8 Notices. All notices, requests, demands, and other communications
made in connection with this Agreement shall be in writing and shall be deemed
to have been duly given on the date of delivery if delivered by hand delivery or
by facsimile to the persons identified below, two days after dispatch if sent by
a nationally-recognized overnight courier service or five days after mailing if
mailed by certified or registered mail postage prepaid return receipt requested
addressed as follows:
If to Parent or Merger Sub:
Mr. Ronald E. Ragland
REMEC, INC.
9404 Chesapeake Drive
San Diego, California 92123
Facsimile: (619) 560-4512
Confirmation Number: (619) 560-1301
With a copy to:
Victor A. Hebert, Esq.
Heller Ehrman White & McAuliffe
333 Bush Street, 31st Floor
San Francisco, California 94104
Facsimile: (415) 772-6268
Confirmation Number: (415) 772-6000
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If to the Company:
Radian Technology, Inc.
4211 Burton Drive
Santa Clara, California 95054-1512
Attention: President
Facsimile: (408)-980-1614
Confirmation Number: (408)980-9877
With a copy to:
Jeffrey Saper, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (415) 493-6811
Confirmation Number: (415) 493-9300
Such persons and addresses may be changed, from time to time, by means of a
notice given in the manner provided in this Section.
10.9 Waiver. Waiver of any term or condition of this Agreement by any
party shall not be construed as a waiver of any subsequent breach or failure of
the same term or condition, or a waiver of any other term or condition of this
Agreement.
10.10 Binding Effect; Assignment. The parties agree that this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors and assigns. No party to this Agreement may assign or
delegate, by operation of law or otherwise, all or any portion of its rights,
obligations or liabilities under this Agreement without the prior written
consent of all other parties to this Agreement, which they may withhold in their
absolute discretion.
10.11 No Third Party Beneficiaries. Nothing in this Agreement shall
confer any rights upon any person or entity which is not a party or an assignee
of a party to this Agreement.
10.12 Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument. All counterparts shall be deemed an original of this
Agreement.
10.13 Further Assurances. After the Closing the parties to this
Agreement shall take such further actions as they agree may be reasonably
necessary to carry out the transactions contemplated by this Agreement.
10.14 Termination.
10.14.1 Mutual Consent. This Agreement may be terminated at any
time prior to the Closing by means of the written consent of Parent and the
Company.
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10.14.2 Failure to Satisfy Conditions Not Waived. This Agreement
may be terminated by Parent and Merger Sub alone if there is a failure to
satisfy a condition set forth in Article VII which condition is not waived, and
by the Company if there is a failure to satisfy a condition set forth in Article
VIII which condition is not waived.
10.14.3 Closing Has Not Occurred. This Agreement may be terminated
by Parent alone or the Company alone, by written notice, if the Closing shall
not have taken place by March 31, 1997.
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IN WITNESS WHEREOF, REMEC, Inc., RTI Acquisition Corporation and Radian
Technology, Inc. have executed this Agreement and Plan of Reorganization and
Merger as of the first date written above.
REMEC, INC.
By /s/ RONALD E. RAGLAND
-------------------------------------
Ronald E. Ragland, Chairman and
Chief Executive Officer
RTI ACQUISITION CORPORATION
By /s/ RONALD E. RAGLAND
-------------------------------------
Ronald E. Ragland, Chairman and
Chief Executive Officer
RADIAN TECHNOLOGY, INC.
By /s/ JAMES MONGILLO
-------------------------------------
James Mongillo, President
<PAGE> 1
EXHIBIT 10.7
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and
entered into as of January 17, 1997 by and between REMEC, Inc., a California
corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A. ("Bank"). This
Agreement amends and restates in its entirety that certain loan agreement dated
June 17, 1993 between Bank and Borrower, as amended.
SECTION 1. THE LOAN
1.1.1 THE REVOLVING L0AN. Bank will loan to Borrower an
amount not to exceed Nine Million Dollars ($9,000,000) outstanding in the
aggregate at any one time (the "Revolving Loan"). Borrower may borrow, repay
and reborrow all or part of the Revolving Loan in amounts of not less than One
Thousand Dollars ($1,000) in accordance with the terms of the Revolving Note.
All borrowings of the Revolving Loan must be made before July 1, 1998 at which
time all unpaid principal and interest of the Revolving Loan shall be due and
payable. The Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") on the standard form used by Bank for commercial loans. Bank
shall enter each amount borrowed and repaid in Bank's records and such entries
shall be deemed to be the amount of the Revolving Loan outstanding. Omission of
Bank to make any such entries shall not discharge Borrower of its obligation to
repay in full with interest all amounts borrowed.
1.1.1.1 THE STANDBY L/C SUBLIMIT. As a sublimit to the
Revolving Loan, Bank shall issue, for the account of Borrower, one or more
irrevocable standby letters of credit (individually, an "L/C" and collectively,
the "L/Cs"). All such L/Cs shall be drawn on such terms and conditions as are
acceptable to Bank. The aggregate amount available to be drawn under all
outstanding L/Cs and the aggregate amount of unpaid reimbursement obligations
under drawn L/Cs shall not exceed Five Hundred Thousand Dollars ($500,000) and
shall reduce, dollar for dollar, the maximum amount available under the
Revolving Loan. No L/C shall have an expiry date more than twelve months from
its date of issuance and each L/C shall be governed by the terms of (and
Borrower agrees to execute) Bank's standard form of standby letter of credit
application and reimbursement agreement. No L/C shall expire after July 1, 1998.
1.1.2 THE REVOLVER-TO-TERM LOAN. Bank will loan to
Borrower an amount not to exceed Eight Million Dollars ($8,000,000) outstanding
in the aggregate at any one time (the "Revolver-To-Term Loan"). Borrower may
borrow, repay and reborrow all or part of the Revolver-To-Term in amounts of not
less than One Hundred Thousand Dollars ($100,000) in accordance with the terms
of the Revolver-To-Term Note. All borrowings of the Revolver-To-Term Loan must
be made before July 1, 1998, at which time all unpaid principal under the
Revolver-To-Term Loan shall be converted to a fully amortizing term loan as set
forth in Section 1.1.3. The Revolver-To-Term Loan shall be evidenced by a
promissory note (the "Revolver-To-Term Note") on the standard form used by Bank
for commercial loans. Bank shall enter each amount borrowed and repaid in Bank's
records and such entries shall be deemed to be the amount of the
Revolver-To-Term Loan outstanding. Omission of Bank to make any such entries
shall not discharge Borrower of its obligation to repay in full with interest
all amounts borrowed.
1.1.3 THE TERM LOAN. Solely to repay the
Revolver-To-Term Loan, Bank will loan to Borrower the sum outstanding at the
maturity of the Revolver-To-Term Loan in one disbursement on or before July 1,
1998 (the "Term Loan"). In the event of a prepayment of principal and payment of
any resulting fees, any prepaid amounts shall be applied to the scheduled
principal payments in the reverse order of their maturity. The Term Loan shall
be evidenced by a promissory note (the "Term Note") on the standard form used by
Bank for commercial loans.
1.2 TERMINOLOGY.
As used herein the word "Loan" shall mean, collectively, all
the credit facilities described above.
As used herein the word "Note" shall mean, collectively, all
the promissory notes described above and all reimbursement agreements entered
into with respect to L/Cs.
As used herein, the words "Loan Documents" shall mean all
documents executed in connection with this Agreement.
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<PAGE> 2
1.3 BORROWING BASE. Borrower will not be subject to a
borrowing base so long as the principal amount of the Revolving Loan does not
exceed Five Million Dollars ($5,000,000). Notwithstanding any other provision
of this Agreement, Bank shall not be obligated to advance funds under the
Revolving Loan in a principal amount in excess of Five Million Dollars
($5,000,000) if the outstanding amount of Borrower's obligations to Bank under
the Revolving Loan exceeds, or after giving effect to the requested advance
would exceed, the sum of (a) eighty percent (80%)of the combined Eligible
Accounts of Borrower, Remec Wireless, Inc., Humphrey, Inc., RF Microsystems,
Inc., Magnum Microwave Corporation and Radian Technology, Inc. (Remec Wireless,
Inc., Humphrey, Inc., RF Microsystems, Inc., Magnum Microwave Corporation and
Radian Technology, Inc.) being hereinafter referred to individually as a
"Pledgor" and collectively as the "Pledgors"), and (b) twenty-five percent (25%)
of the combined Eligible Inventory of Borrower and all Pledgors; provided,
however, that loan availability based upon Eligible Inventory shall not exceed
Seven Hundred Fifty Thousand Dollars ($750,000) unless (x) Bank shall have
completed, or shall have caused to be completed, an inventory appraisal the
results of which are satisfactory to Bank in its sole reasonable discretion,
and (y) Bank shall have specifically approved such excess advance; and, provided
further, that loan availability based upon Eligible Inventory shall in no event
exceed One Million Five Hundred Thousand Dollars ($1,500,000). If at any time
Borrower's obligations to Bank under the above facilities exceed the sum so
permitted, Borrower shall immediately repay to Bank such excess.
1.3.1 ELIGIBLE ACCOUNTS. The term "Accounts" means all
presently existing and hereafter arising accounts receivable, contract rights,
chattel paper, and all other forms of obligations owing to Borrower or any
Pledgor, payable in United States Dollars, arising out of the sale or lease of
goods, or the retention of services by Borrower or a Pledgor, as the case may
be, whether or not earned by performance, and any and all credit insurance,
guaranties and other security therefor, as well as all merchandise returned to
or reclaimed by Borrower or a Pledgor, as the case may be, and Borrower's and
each Pledgor's books and records relating to any of the foregoing.
The term "Eligible Accounts" means those Accounts, net of finance
charges, which are due and payable within ninety (90) days, or less, from the
date of the invoice, have been validly assigned to Bank and strictly comply
with all of Borrower's or the relevant Pledgor's, as the case may be,
warranties and representations to Bank, but Eligible Accounts shall not include
the following:
(a) Any Account with respect to which the account
debtor is an officer, shareholder, director, employee or agent of Borrower or a
Pledgor;
(b) Any Account with respect to which the account
debtor is a subsidiary of, related to, or affiliated or has common officers or
directors with Borrower or a Pledgor;
(c) Any Account relating to goods placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the account debtor may be conditional;
(d) That portion of the Accounts owed by account
debtors that are not residents of the United States or Canada ("Foreign
Account Debtors") which exceeds twenty-five percent (25%) of all Accounts owed
by Foreign Account Debtors; provided, however, that any Account owed by a
Foreign Account Debtor which is insured by FCIA or supported by a letter of
credit, and all Accounts owed by GEC-Marconi Ltd. or British Aerospace PLC
(whether or not the same are insured by FCIA or supported by a letter of
credit) shall be deemed not to be Accounts owed by Foreign Account Debtors for
purposes of this clause (d), and shall not be subject to the foregoing
limitation;
(e) Any Account with respect to which the account
debtor is the United States or any department, agency or instrumentality of the
United states;
(f) Any Account with respect to which Borrower or a
Pledgor, as the case may be, is or may become liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower or such
Pledgor provided, however, that the exclusion of any accounts shall be limited
to the amount of Borrower's or Pledgor's liabilities to the account debtor, as
the case may be;
(g) Any Account with respect to which there is
asserted a defense, counterclaim, discount or set off, whether well-founded or
otherwise, except for those discounts, allowances and returns arising in the
ordinary course of Borrower's or the relevant Pledgor's, as the case may be,
business;
(h) Any Account with respect to which the account
debtor becomes insolvent, fails to pay its debts as they mature or goes out of
business or that is owed by an account debtor which has become the subject of a
proceeding under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including, but not
limited to, assignments for the benefit of creditors, formal or informal
moratoriums, compositions or extensions with all or substantially all of its
creditors;
(i) Any Account owed by any account debtor with
respect to which twenty percent (20%) or more of the aggregate dollar amount
of its Accounts are not paid within ninety (90) days from the due date of the
invoice;
(j) Any Account that is not paid by the account
debtor within ninety (90) days of the invoice date;
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(k) Any Account that is not paid by the account debtor and for which
a credit memo has been issued which is over 90 days old;
(l) That portion of the Accounts owned by any single account debtor
which exceeds twenty-five percent (25%) of all of the Accounts; and
(m) Any Account which Bank deems not to be an Eligible Account.
1.3.2 ELIGIBLE INVENTORY. The term "Eligible Inventory" means that
portion of Borrower's or a Pledgor's inventory of general use raw materials
which is (a) owned by Borrower or a Pledgor free and clear of all liens or
encumbrances except those in favor of Bank, (b) held for sale or lease by
Borrower or a Pledgor and normally and currently saleable in the ordinary course
of Borrower's or such Pledgor's business, (c) of good and merchantable quality,
free from defects, (d) located only at locations of which Bank is notified in
writing, and (e) the subject of a perfected first priority security interest in
favor of Bank. Eligible Inventory does not include any of the following:
finished goods, raw materials which are not generally usable in Borrower's or
the relevant Pledgor's, as the case may be, business, work in process, spare
parts, returned items, damaged, defective or recalled items, items unfit for
further processing, obsolete or unmerchantable items, items used as
salesperson's samples or demonstrators, inventory held in stock more than twelve
(12) months, or inventory which Bank otherwise deems not be Eligible Inventory.
The term "inventory" means and includes all of Borrower's and each
Pledgor's present and future goods and other personal property which are held
for sale or lease or are to be furnished under a contract of service, wherever
located, including those held for display or demonstration or out on lease or
consignment, all raw materials, work in process, finished goods, packing and
shipping materials and other materials used or consumed, or to be used or
consumed, in Borrower's or a Pledgor's, as the case may be, business, and all
documents of title representing any of the above.
1.4 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be used
only for general working capital purposes, and the proceeds of the
Revolver-To-Term Loan shall be used only for general business purposes,
including the purchase of fixed assets or the acquisition of other businesses.
The proceeds of the Term Loan shall be used only for the purpose specified in
Section 1.1.3.
1.5 INTEREST. The unpaid principal balance of the Revolving Loan, the
Revolver-to-Term Loan and the Term Loan shall bear interest at the rates
provided in the Revolving Note, the Revolver-to-Term Note and the Term Note,
respectively, and selected by Borrower. Such loans may be prepaid in full or in
part only in accordance with the terms of such notes and any such prepayment
shall be subject to the prepayment fee provided for therein.
1.6 UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee on the
unutilized portions of the Revolving Loan and the Revolver-to-Term Loan
("Non-utilization Fee") calculated and payable annually in arrears, based on
the combined unutilized amount of such loans, at a rate of 9 basis points per
annum, not to exceed $15,000 per annum. The Non-Utilization Fee shall be
reduced by a credit calculated at the rate of 50 basis points per annum on the
average combined outstanding balance of the Revolving Loan and the
Revolver-To-Term Loan maintained by Borrower. The amount of fee credits not
used to off-set the Non-utilization Fee during the first twelve month period
shall be carried over to the subsequent period of determination.
1.7 L/C FEES. All fees in connection with L/Cs shall be in accordance
with Bank's standard schedule of fees as published from time to time, except
that the issuance/maintenance fee for each L/C shall be one percent (1%) per
annum (minimum $150), payable annually in advance on the date such L/C is
issued and on each anniversary of such date.
1.8 BALANCES. Borrower shall maintain its major depository accounts with
Bank until the Note and all sums payable pursuant to this Agreement have been
paid in full.
1.9 DISBURSEMENT. Following execution hereof, Bank shall disburse the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.10 SECURITY. Prior to any disbursement of the Loan, Borrower and each
Pledgor shall have executed security agreements on Bank's standard form, and
financing statements suitable for filing in the office of the Secretary of
State of the State of California and any other state designated by Bank,
granting to Bank a first priority security interest in such of Borrower's or
the relevant Pledgor's, as the case may be, property as is described in said
security agreements. Exceptions to Bank's first priority, if any, are permitted
only as otherwise provided in this Agreement.
1.11 CONTROLLING DOCUMENT. In the event of any inconsistency between the
terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the term of this
Agreement.
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SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such disbursement,
the following conditions have been fulfilled to Bank's satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and complied with all
terms and conditions required by this Agreement to be performed or complied
with by it prior to or at the date of the making of such disbursement and shall
have executed and delivered to Bank the Note and other documents deemed
necessary by Bank.
2.2 BORROWING RESOLUTION. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 CONTINUING COMPLIANCE. At the time any disbursement is to be
made, there shall not exist any event, condition or act which constitutes an
event of default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such event of default; nor
shall there be any such event, condition, or act immediately after the
disbursement were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is the
manufacture of microwave electronics.
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and
subsidiaries (those entities in which Borrower has either a controlling
interest or at least a 25% ownership interest) and their addresses, and the
names of Borrower's principal shareholders, are as provided on a schedule
delivered to Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and performance of
this Agreement, the Note and all other agreements and instruments required by
Bank in connection with the Loan are not in contravention of any of the terms
of any indenture, agreement or undertaking to which Borrower is a party or by
which it or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of Borrower,
including both a balance sheet at December 1, 1996, together with supporting
schedules, and an income statement for the ten (10) months ended December 1,
1996, have heretofore been furnished to Bank, and are true and complete and
fairly represent the financial condition of Borrower during the period covered
thereby. Since December 1, 1996, there has been no material adverse change in
the financial condition or operations of Borrower.
3.5 TITLE. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
3.6 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely
to affect the financial condition, property or business of Borrower in a
materially adverse manner or result in liability in excess of Borrower's
insurance coverage.
3.7 DEFAULT. Borrower is not now in default in the payment of any of
its material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute such an
event of default.
3.8 ORGANIZATION. Borrower is duly organized and existing under the
laws of the state of its organization, and has the power and authority to carry
on the business in which it is engaged and/or proposes to engage.
3.9 POWER. Borrower has the power and authority to enter into this
Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 AUTHORIZATION. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
3.11 QUALIFICATION. Borrower is duly qualified and in good standing
in any jurisdiction where such qualification is required.
3.12 COMPLIANCE WITH LAWS. Borrower is not in violation with respect
to any applicable laws, rules, ordinances or regulations which materially
affect the operations or financial condition of Borrower.
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3.13 ERISA. Any defined benefit pension plans as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in
ERISA has occurred with respect to any such plan.
3.14 REGULATION U. No action has been taken or is currently planned by
Borrower, or any agent acting on its behalf, which would cause this Agreement
or the Note to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the same may
hereafter be in effect. Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock as one of its
important activities and none of the proceeds of the Loan will be used directly
or indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These representations shall be
considered to have been made again at and as of the date of each disbursement
of the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full, unless Bank waives compliance in
writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan only
as provided in Section 1.4, above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay an discharge promptly
all taxes, assessments and other governmental charges and claims levied or
imposed upon it or its property, or any part thereof, however, that Borrower
shall have the right in good faith to contest any such taxes, assessments,
charges or claims and, pending the outcome of such contest, to delay or refuse
payment thereof provided that adequately funded reserves are established by it
to pay and discharge any such taxes, assessments, charges and claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve
its existence and assets and all rights, franchises, licenses and other
authority necessary for the conduct of its business and will maintain and
preserve its property, equipment and facilities in good order, condition and
repair. Bank may, at reasonable times, visit and inspect any of the properties
of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have access thereto, to make
examination and photocopies thereof, and to make audits during regular business
hours. Costs for such audits shall be paid by Borrower.
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within forty-five (45) days after the close of each fiscal
quarter, except for the final quarter of each fiscal year, Borrower's and each
Pledgor's unaudited balance sheets as of the close of such fiscal quarter, and
unaudited income and expense statements with supportive schedules and statements
of retained earnings for such fiscal quarter, in each case prepared in
accordance with generally accepted accounting principles and accompanied by a
consolidating schedule;
(b) Within ninety (90) days after the close of each fiscal
year, a copy of Borrower's consolidated statement of financial condition
including at least its balance sheet as of the close of such fiscal year, and
its income and expense statement and retained earnings statement for such
fiscal year, examined and prepared on an audited basis by independent certified
public accountants selected by Borrower and reasonably satisfactory to Bank in
accordance with generally accepted accounting principles applied on a basis
consistent with that of previous years, accompanied by an unaudited
consolidating schedule;
(c) As soon as available, copies of such financial statements
and reports as Borrower may file with any state or federal agency, including
its 10-K and 10-Q reports;
(d) Such other financial statements and information as Bank may
reasonably request from time to time;
(e) In connection with each financial statement provided
hereunder, a statement executed by the president or chief financial officer of
Borrower certifying that no default has occurred and no event exists which with
notice of the lapse of time, or both, would result in a default hereunder;
(f) In connection with each fiscal year-end statement required
hereunder, any management letter of Borrower's certified public accountants;
(g) Within forty-five (45) days after each fiscal quarter, a
certification of compliance with all covenants under this Agreement, executed
by Borrower's chief financial officer or other duly authorized officer of
Borrower, in form acceptable to Bank;
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(h) Prompt written notice to Bank of all events of default under
any of the terms or provisions of this Agreement or of any other agreement,
contract, document or instrument entered or to be entered into with Bank, any
litigation in excess of One Million Dollars ($1,000,000) which, if decided
adversely to Borrower, would have a material adverse effect on Borrower's
financial condition, and any other matter which has resulted in, or is likely to
result in, a material adverse change in Borrower's financial condition or
operations:
(i) Prior to written notice to Bank of any changes in Borrower's
officers and other senior management, Borrower's name, and the location of
Borrower's and each Pledgor's assets, principal place of business or chief
executive office; and
(j) Within twenty (20) days after each calendar month end in
which the principal amount outstanding under the Revolving Loan in excess of
Five Million Dollars ($5,000,000),a copy of Borrower's and each Pledgor's
monthly accounts receivable aging and accounts payable aging and, when inventory
advances are outstanding, inventory summary report, together with a
certification of compliance with the Borrowing Base described above, executed
by Borrower's chief financial officer or other duly authorized officer of
Borrower, in form acceptable to Bank, which certificate shall accurately report
Borrower's and each Pledgor's accounts and Eligible Accounts and, when inventory
advances are outstanding, inventory and Eligible inventory. Borrower will permit
Bank to audit, at Borrower's expense, Bank's collateral upon reasonable notice
and during regular business hours. The agings, report and certification
described above will also be required as a condition precedent to any advance
under the Revolving Loan which would cause the principal amount outstanding
under the Revolving Loan to increase from an amount which is less than or equal
to Five Million Dollars ($5,000,000) to an amount which is greater than Five
Million Dollars ($5,000,000) (although the information provided by Borrower may
be as of the last day of the month preceding the most recently ended calendar
month rather than as of the last day of the most recently ended calendar month
if the request for such advance is made during the first twenty (20) days of a
calendar month), and Bank may also require, as a further condition precedent to
the making of any such advance, the completion of a collateral audit the results
of which are satisfactory to Bank in its sole reasonable discretion.
4.6 QUICK RATIO. Borrower shall maintain at all times a ratio of
cash, accounts receivable and marketable securities to current liabilities of
not less than 1.0:1.0, as such terms are defined by generally accepted
accounting principles.
4.7 TANGIBLE NET WORTH. Borrower will at all times maintain a
Tangible Net Worth of not less than the sum of (a) Twenty-Six Million Dollars
($26,000,000), (b) fifty percent (50%) of Borrower's net profit after taxes for
each fiscal year of Borrower ending on or after January 31, 1997 and on or
before the date of computation, and (c) one hundred percent (100%) of the net
proceeds of any equity securities issued by Borrower on or after December 1,
1996. "Tangible Net Worth" shall mean net worth increased by indebtedness of
Borrower subordinated to Bank and decreased by patents, licenses, trademarks,
trade names, goodwill and other similar intangible assets, organizational
expenses, and monies due from affiliates (including officers, shareholders and
directors).
4.8 DEBT TO TANGIBLE NET WORTH. Borrower will at all times maintain a
ratio of total liabilities to Tangible Net Worth of not greater than .75:1.0.
4.9 PROFITABILITY. Borrower will maintain its net profit after
provision for income taxes and deduction for dividends paid at not less than
One Million Dollars ($1,000,000) for any fiscal year.
4.10 INSURANCE. Borrower will keep all of its insurable property,
real, personal or mixed, insured by good and responsible companies against fire
and such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damages to persons and property.
4.11 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand by
Bank, take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
4.12 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly to
Bank upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.13 BANK EXPENSES. Borrower will pay or reimburse Bank for all costs,
expenses and fees incurred by Bank in preparing and documenting this Agreement
and the Loan, and all amendments and modifications thereof, including but not
limited to all filing and recording fees, costs of appraisals, insurance and
attorneys' fees, including the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and legal staff.
4.14 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank, as
soon as possible and in any event within 15 days after Borrower knows or has
reason to know that any event or condition with respect to any defined benefit
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pension plans of Borrower described in Section 3 above has occurred, a
statement of an authorized officer of Borrower describing such event or
condition and the action, if any, which Borrower proposes to take with respect
thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower will not create, assume or
suffer to exist any mortgage, pledge, security interest, encumbrance, or lien
(other than for taxes not delinquent and for taxes and other items being
contested in good faith) on property of any kind, whether real, personal or
mixed, now owned or hereafter acquired, or upon the income or profits thereof,
except to Bank and except for minor encumbrances and easements on real property
which do not affect its market value, and except for existing liens on
Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased.
5.2 BORROWINGS. Borrower will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to Bank or except to a financial institution at face value
for deposit or collection purposes only and without any fee other than fees
normally charged by the financial institution for deposit or collection
services. Borrower will not borrow any money, become contingently liable to
borrow money, nor enter any agreement to directly or indirectly obtain borrowed
money, except pursuant to agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will neither
liquidate nor dissolve nor enter into any consolidation, merger, partnership or
other combination, nor convey, nor sell, nor lease all or the greater part of
its assets or business, nor purchase or lease all or the greater part of the
assets or business of another except as permitted under Section 5.6 without
prior written Bank consent.
5.4 LOANS, ADVANCES AND GUARANTEES. Borrower will not, except in the
ordinary course of business as currently conducted, make any loans or advances,
become a guarantor or surety, pledge its credit or properties in any manner or
extend credit.
5.5 INVESTMENTS. Borrower will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of
deposit of Bank, direct U.S. Government obligations and commercial paper issued
by corporations with the top ratings of Moody's or Standard & Poor's, provided
all such permitted investments shall mature within one year of purchase.
5.6 CHANGES/MERGERS. Borrower will not change its name; liquidate,
dissolve or enter into any consolidation, merger, partnership, joint venture or
other combination; issue, redeem, purchase, retire or otherwise acquire any
shares of any class of capital stock of Borrower in excess of One Million
Dollars ($1,000,000) or grant or issue any warrant, right or option pertaining
thereto or any other security convertible into any of the foregoing except
pursuant to Borrower's employee stock option plan as it may exist from time to
time; reorganize, reclassify or recapitalize its capital stock; prepay any
subordinated debt, debt for borrowed money or debt secured by any permitted
Lien, or enter into or modify any agreement as a result of which the terms of
payment of any such debt are waived or modified.
5.7 RETIREMENT OF STOCK. Borrower will not acquire or retire any
shares of its capital stock for value.
5.8 TRANSACTIONS WITH RELATED PERSONS. Borrower will not directly or
indirectly enter into any transaction with or for the benefit of a Related
Person on terms more favorable to the Related Person than would have been
obtainable in an "arms length" dealing. "Related Person" shall mean any
Affiliate of Borrower, or any officer, employee, director or shareholder of
Borrower or any Affiliate, or a relative of any of the foregoing.
5.9 LOSSES. Borrower will not incur a net loss, after provision for
income taxes, of any amount for any two or more consecutive fiscal quarters.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Note, shall make all sums of
interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
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6.3 Borrower shall default in the due performance or observance of
any covenant or condition of the Loan Documents; or
6.4 Any guaranty or subordination agreement now or hereafter required
hereunder is breached or becomes ineffective, or any guarantor or subordinating
creditor dies, disavows or attempts to revoke or terminate such guaranty or
subordination agreement; or
6.5 There is a change in ownership or control of ten percent (10%) or
more of the issued and outstanding stock of Borrower.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given to
Bank hereunder shall be cumulative and not alternative and shall be in addition
to all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of set off or banker's
lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy shall
not preclude the further exercise thereof. No waiver shall be effective unless
it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assigns of
Borrower, and any assignment by Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection herewith shall be governed by and
construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective. In the event of any conflict between the
provisions of this Agreement and the provisions of any Note or reimbursement
agreement evidencing any indebtedness hereunder, the provisions of such Note or
reimbursement agreement shall prevail.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications,
verbal or written, between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing signed
by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more
counterparts to this Agreement, each of which shall be deemed an original, but
when together shall constitute one and the same instrument.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods
and addressed to the respective party at its address given with the signatures
at the end of this Agreement and shall be considered to have been validly
given: (a) upon delivery, if delivered personally; (b) upon receipt, if mailed,
first class postage prepaid, with the United States Postal Service; (c) on the
next business day, if sent by overnight courier service of recognized standing;
and (d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be
changed from time to time by notice delivered as provided above.
-8-
<PAGE> 9
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. REMEC, INC.
By: [SIG] By: [SIG]
----------------------------- -----------------------------
Title Vice President Title
---------------------------- ---------------------------
By: [SIG] By: [SIG]
------------------------------ -----------------------------
Title Vice President Title Senior V.P. CFO
---------------------------- ---------------------------
Address: 530 "B" Street, 4th Floor Address: 9404 Chesapeake Drive
San Diego, CA 92186-5324 San Diego, CA 9213
Attention: Kent McBeth Attention: Ronald Regland
------------------------ -----------------------
Telecopier: (619) 230-3377 Telecopier: (619) 560-0291
----------------------- ----------------------
Telephone: (619) 230-3766 Telephone: (619) 560-1301
------------------------ -----------------------
-9-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements on
Form S-8 (No.'s 333-04224, 333-27353 and 333-37191) and Form S-3 (No.'s
333-25437, 333-30803, 333-45353, 333-45595 and 333-46891) of our report dated
February 27, 1998, with respect to the consolidated financial statements and
schedule of REMEC, Inc., included in the Annual Report (Form 10-K) for the year
ended January 31, 1998.
Our audits also included the financial statement schedule of REMEC, Inc. listed
in Item 14(a). This schedule is the responsibility of REMEC, Inc.'s management.
Our responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
April 28, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in the registration statements on Form S-8 and Form
S-3 of REMEC, Inc. of our report dated March 6, 1997, with respect to the
financial statements of Radian Technology, Inc. as of December 31, 1996, and for
the three years then ended, included in the consolidated financial statements of
REMEC, Inc. in its Annual Report on Form 10-K for the year ended January 31,
1998.
IRELAND SAN FILIPPO LLP
April 28, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF BRAY, BECK & KOETTER, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statements on Form S-8 and Form S-3 of REMEC, Inc. of our report dated February
28, 1997, with respect to the financial statements of Q-bit Corporation as of
December 31, 1996, and for the two years then ended, included in the
consolidated financial statements of REMEC, Inc. in its Annual Report on Form
10-K for the year ended January 31, 1998.
BRAY, BECK & KOETTER
Melbourne, Florida
April 28, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 41,937,101
<SECURITIES> 0
<RECEIVABLES> 26,141,972
<ALLOWANCES> (647,498)
<INVENTORY> 30,380,941
<CURRENT-ASSETS> 104,643,526
<PP&E> 64,187,808
<DEPRECIATION> (32,198,874)
<TOTAL-ASSETS> 153,864,701
<CURRENT-LIABILITIES> 20,147,998
<BONDS> 0
0
0
<COMMON> 211,828
<OTHER-SE> 128,282,706
<TOTAL-LIABILITY-AND-EQUITY> 153,864,701
<SALES> 156,056,929
<TOTAL-REVENUES> 156,056,929
<CGS> 108,052,891
<TOTAL-COSTS> 108,052,891
<OTHER-EXPENSES> 29,881,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,280,329)
<INCOME-PRETAX> 23,236,157
<INCOME-TAX> 8,500,799
<INCOME-CONTINUING> 14,735,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,735,358
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.68
</TABLE>
