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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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
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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, 92123
CALIFORNIA
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (619) 560-1301
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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
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Indicate by check mark whether REMEC (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 REMEC 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
REMEC on March 5, 1999 was approximately $359.8 million based on the last
reported sale price on the Nasdaq National Market of $17.625 per share of such
stock on March 5, 1999.
The number of outstanding shares of Registrant's Common Stock as of March 5,
1999 was 23,194,753.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for REMEC's Annual Meeting of Shareholders
expected to be held on June 4, 1999, 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 188 pages.
The Exhibit Index begins on page 50.
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REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1999
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................................................... 11
PART II.................................................................................................... 12
ITEM 5. MARKET FOR REMEC'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
Results of Operations...................................................................................... 15
Fiscal Year Ended January 31, 1999 vs. Fiscal Year Ended January 31, 1998.................................. 15
Fiscal Year Ended January 31, 1998 vs. Fiscal Year Ended January 31, 1997.................................. 16
Liquidity and Capital Resources............................................................................ 17
Interest Rate Risk......................................................................................... 17
Year 2000 Readiness Disclosure............................................................................. 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................................. 19
PART III................................................................................................... 20
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 20
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 22
PART IV.................................................................................................... 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................................................... 22
i
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 REMEC 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. REMEC 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. is a leader in the design and manufacture of microwave
multi-function modules (MFMs) for microwave transmission systems used in defense
applications and has recently entered, and now derives significant revenue from,
the commercial wireless telecommunications market. REMEC believes that its
expertise in microwave transmission system components such as filters,
amplifiers, mixers, switches and oscillators and its expertise in integrating
these components into MFMs give REMEC a strong competitive position in the
emerging commercial wireless infrastructure equipment market. REMEC's
capabilities enable it to develop and manufacture MFMs with reduced size,
weight, parts count and cost, and increased reliability and performance.
REMEC comprises an expanding family of companies that provide components,
MFMs and sub-systems across the total functionality of a microwave transmission
system. Corporate offices are located in San Diego, California with engineering
and manufacturing facilities located in: the San Diego and San Jose areas of
California; Etobicoke, Ontario, Canada; and Palm Bay, Florida. Manufacturing
operations are established in San Jose, Costa Rica and in Tijuana, Mexico,
supporting high volume component fabrication and electronic assembly and test
functions. REMEC's customer base consists primarily of US based wireless
infrastructure original equipment manufacturers (OEMs) and prime defense
contractors.
REMEC'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 personal communication systems (PCS)), rural
telephony, very small aperture terminals (VSAT), paging, wireless cable,
interactive television and wireless local loop. These emerging wireless
applications require a large infrastructure of microwave transmission equipment
such as base stations and point-to-point radios. REMEC 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.
REMEC 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
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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.
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 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.
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 land-based telecommunication infrastructure, and which
seek to provide telephone service for large areas fairly rapidly and on a
cost-effective basis. Additionally, even where land 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.
2
ALLOCATION OF FREQUENCY RANGE FOR WIRELESS APPLICATIONS
BAND FREQUENCY RANGE USES
- --------------------------------- --------------------- ------------------------------------------
LOW FREQUENCY (LF)VERY HIGH < 300 MHz Navigation Equipment
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
THE REMEC OPPORTUNITY
All of the wireless communications services described above require
substantial deployment or expansion of microwave transmission infrastructure
equipment. REMEC believes that it is particularly well suited to address those
requirements due to its broad portfolio of microwave capabilities and its
expertise at integrating microwave functions in a single package.
Historically, microwave systems for defense applications were built by prime
contractors who would procure single function components (such as filters,
amplifiers and mixers) from various specialized manufacturers. These single
function components were then connected to create the complete microwave
transmission system. In order to prevent components from interfering with each
other or being damaged, components were individually packaged. In response to
the demands of the Department of Defense to increase performance for microwave
transmission systems (especially systems on aircraft and missiles), prime
contractors integrated more functionality into the systems while reducing size
and weight. To accomplish this, the prime contractors demanded higher levels of
integration from component suppliers.
REMEC, 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 of products. The result has been significant
reductions in size, weight and cost and improvements in producibility and
reliability.
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REMEC 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. REMEC
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.
REMEC 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 of products (e.g., avoid using higher
performance, more costly components than are necessary
- reduce unit cost
CONCURRENT ENGINEERING. REMEC has excelled at developing products optimized
in design, process and manufacturing implementation by employing a concurrent
engineering approach 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.
TECHNOLOGY LEADERSHIP. Since its inception in 1983, REMEC 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. REMEC is strategically partnered with a number of OEMs, including
P-COM, Inc., STM Wireless, Inc., Digital Microwave Corporation, and Lucent
Technologies, Inc. where REMEC 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. REMEC 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 REMEC'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 REMEC'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
4
proprietary manufacturing processes have also been developed to support large
volume production of microwave circuits.
VERTICAL INTEGRATION IN DESIGN AND MANUFACTURING. With vertical
integration, REMEC 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 REMEC's ability to
implement volume production. REMEC 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 REMEC's product 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, REMEC believes that it
has compiled one of the broadest portfolio of microwave capabilities in the
industry. REMEC 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. REMEC 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. REMEC 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. REMEC 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. REMEC believes that the skills developed by it 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. REMEC intends to continue to focus on
developing significant customer alliances with leading wireless OEMs and defense
prime contractors. REMEC concentrates its efforts on applications which offer
the potential for recurring high volume production. In wireless
telecommunications, REMEC'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. REMEC 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. REMEC 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.
REMEC 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.
5
PURSUE ACQUISITIONS. REMEC 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. REMEC believes that expansion of capability through the acquisition of
component firms when combined with REMEC's technological and manufacturing
skills at the component level will allow it to achieve improved levels of MFM
integration. REMEC 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/POINT-TO-MULTIPOINT 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, REMEC 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, REMEC 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
REMEC is currently marketing an industry standard SCPOC (single channel per
carrier) ODU at C-Band with plans to develop an additional product this year.
REMEC 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, REMEC sells components
including filters, amplifiers, VCOs and mixers that are used in base station
infrastructure equipment. REMEC 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. REMEC expects to derive significant
synergy from recently acquired component capability to provide more fully
integrated radio solutions to this industry much like the VSAT and
point-to-point radio business.
DEFENSE MARKET. REMEC focuses its efforts on defense programs which it
believes have the highest probability of follow-on production. Tactical
aircraft, satellites, missile systems and smart weapons comprise the majority of
the platforms of REMEC'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 REMEC 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 REMEC 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 REMEC has developed and produced frequency
multipliers, converters and filters; and (iv) the Longbow Missile and Radar
programs for the U.S. Army for which REMEC has developed and is producing MFMs,
amplifiers, VCOs and filters.
6
The following table lists certain of REMEC's microwave components and MFMs:
PRODUCT TYPES FUNCTION
- --------------------------------------------- --------------------------------------------------------
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
CUSTOMERS
REMEC'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. REMEC'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. During fiscal 1999, sales
to Motorola, Inc. and Raytheon Company accounted for 14% and 11%, respectively,
of net sales.
BACKLOG
REMEC's order backlog as of January 31, 1998 and January 31, 1999 was $214.9
million and $222.8 million, respectively. REMEC includes in its backlog only
those orders for which it has accepted purchase orders. However, backlog is not
necessarily indicative of future sales. In certain circumstances, customers
place purchase orders but release quantities incrementally against those
purchase orders, subject to an agreed period of performance. At the time a
purchase order is placed, REMEC records the entire amount of the purchase order
as backlog, even if the customer releases quantities incrementally against the
purchase order. A substantial amount of REMEC's backlog can be canceled at any
time without penalty, except, in most cases, for the recovery of REMEC's actual
committed costs and profit on
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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
REMEC 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.
REMEC's integrated sales approach involves a team consisting of a senior
executive, a business development specialist, members of REMEC's engineering
department and, occasionally, a local technical sales representative. In
particular, the use of experienced engineering personnel as part of the sales
effort enables close technical collaboration with the customer during the design
and qualification phase of new communications equipment which, REMEC believes,
is critical to the integration of its products into its customers equipment.
REMEC's executive officers are also involved in all aspects of REMEC's
relationships with its major customers and work closely with their senior
management. REMEC utilizes manufacturers and sales representatives to identify
opportunities.
To date, REMEC has sold its products overseas with the assistance of
independent sales representatives. Sales outside of the United States
represented 7%, 7% and 6% of net sales in fiscal years ended January 31, 1997,
1998 and 1999, respectively. Sales outside of the United States are denominated
in U.S. dollars in order to reduce the risks associated with the fluctuations of
foreign currency exchange rates. The international sales do not include products
sold to foreign end users by REMEC's domestic OEM customers.
MANUFACTURING
REMEC assembles, tests, packages and ships products at its manufacturing
facilities in the following locations: San Diego, Escondido, San Jose, Santa
Clara and Milpitas, California; Melbourne, Florida; Toronto, Canada; San Jose,
Costa Rica. REMEC also has products manufactured through a contract
manufacturing operation in Tijuana, Mexico. REMEC believes that process
expertise and discipline are key elements of successful high volume production
of microwave MFMs because of the precise specifications required. Since
inception, REMEC has been manufacturing products for defense programs in
compliance with the stringent MIL-Q-9858 specifications. REMEC received ISO-9001
certification from the Defense Electronics Supply Center for its microwave
facilities. ISO-9001 is a standard established by the International Organization
for Standardization that provides a methodology by which manufacturers can
obtain quality certification. Although this certification is not currently
required by any of its customers, REMEC believes that it will be beneficial to
the acquisition of future business. To assure the highest product quality and
reliability and to maximize control over the complete manufacturing cycle and
costs, REMEC seeks to achieve vertical integration in the manufacturing process
wherever appropriate.
Historically, the volume of REMEC's production requirements in the defense
markets was not sufficient to justify the widespread implementation of automated
manufacturing processes. REMEC anticipates that increased sales of its products
to the wireless telecommunications industry will require a significant increase
in REMEC's manufacturing capacity. Accordingly, REMEC has introduced automated
manufacturing techniques for product assembly and testing and is currently
planning to expand its facilities.
REMEC attempts to utilize standard parts and components that are available
from multiple vendors. However, certain components used in REMEC's products are
currently available only from single sources, and other components are available
from only a limited number of sources. REMEC's reliance on contract
manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced control
over production costs, delivery schedules, reliability and quality of components
or assemblies. Any inability to obtain timely deliveries of acceptable quality,
or any other circumstance that would require REMEC to seek alternative contract
manufacturers or suppliers, could
8
delay REMEC's ability to deliver its products to its customers, which in turn
would have a material adverse effect on REMEC's business, financial condition
and results of operations. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, REMEC has
made the strategic decision to select single source or limited source suppliers
in order to obtain lower pricing, receive more timely delivery and maintain
quality control. In 1997, REMEC acquired Veritek which provides surface mount
capabilities and expertise. REMEC also relies on contract manufacturers for
circuit board assembly. REMEC generally orders components and circuit boards
from its suppliers and contract manufacturers by purchase order on an as needed
basis.
COMPETITION
The markets for REMEC's products are extremely competitive and are
characterized by rapid technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition is
intense and significant price erosion generally occurs over the life of a
product. REMEC faces some competition from component manufacturers who have
integration capabilities, but believes that its primary competition is from the
captive manufacturing operations of large wireless telecommunications OEMs
(including all of the major telecommunications equipment providers) and defense
prime contractors who are responsible for a substantial majority of the present
worldwide production of MFMs. REMEC's future success is dependent upon the
extent to which these OEMs and defense prime contractors elect to purchase from
outside sources rather than manufacture their own microwave MFMs and components.
REMEC's customers and large manufacturers of microwave transmission equipment
could also elect to enter into the non-captive market for microwave products and
compete directly with REMEC. Many of REMEC's current and potential competitors
have substantially greater technical, financial, marketing, distribution and
other resources than REMEC and have greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
REMEC's competitors will not develop new technologies or enhancements to
existing products or new products that will offer superior price or performance
features or that new products or technologies will not render obsolete the
products of REMEC's customers. For example, innovations such as a wireless
telephone system utilizing satellites instead of terrestrial base stations or a
device that integrates microwave functionality could significantly reduce the
potential market for REMEC's products. REMEC believes that to remain competitive
in the future it will need to invest significant financial resources in research
and development.
RESEARCH AND DEVELOPMENT
Research and development expenses recorded by REMEC for the fiscal years
ended January 31, 1997, 1998 and 1999 were approximately $4,605,000, $5,108,000
and $7,851,000, respectively. REMEC's research and development efforts in the
defense industry are conducted in direct response to the unique requirements of
a customer's order and, accordingly, are included in cost of sales and the
related funding in net sales. REMEC expects that as its commercial business
expands, research and development expenses will increase in amount and as a
percentage of sales.
GOVERNMENT REGULATIONS
REMEC's products are incorporated into wireless telecommunications systems
that are subject to regulation domestically by the FCC and internationally by
other government agencies. Although the equipment operators and not REMEC are
responsible for compliance with such regulations, regulatory changes, including
changes in the allocation of available frequency spectrum, could materially
adversely affect REMEC's operations by restricting development efforts by
REMEC's customers, obsoleting current products or increasing the opportunity for
additional competition. Changes in, or the failure by REMEC to manufacture
products in compliance with, applicable domestic and international regulations
could have a material adverse effect on REMEC's business, financial condition
and results of operations. In addition,
9
the increasing demand for wireless telecommunications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products, generally
following extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past caused and may in the future cause the cancellation, postponement or
rescheduling of the installation of communications systems by REMEC's customers,
which in turn may have a material adverse effect on the sale of products by
REMEC to such customers.
REMEC is also subject to a variety of local, state and federal governmental
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture REMEC's products. The failure to comply with current or future
regulations could result in the imposition of substantial fines on REMEC,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
Because of its participation in the defense industry, REMEC is subject to
audit from time to time for its compliance with government regulations by
various agencies, including the Defense Contract Audit Agency, the Defense
Investigative Service and the Office of Federal Control Compliance Programs.
These and other governmental agencies may also, from time to time, conduct
inquiries or investigations that may cover a broad range of 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 REMEC's business, financial condition or results of
operation.
REMEC believes that it operates its business in material compliance with
applicable government regulations.
INTELLECTUAL PROPERTY
REMEC does not presently hold a patent applicable to its products which is
significant. In order to protect its intellectual property rights, REMEC relies
on a combination of trade secret, copyright and trademark laws and employee and
third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. There can be no assurance that the
steps taken by REMEC to protect its intellectual property rights will be
adequate to prevent misappropriation of REMEC's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that, in the future, third parties will not assert
infringement claims against REMEC or with respect to its products for which
REMEC has indemnified certain of its customers. Asserting REMEC's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting REMEC's
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of REMEC's products infringed its
proprietary rights, REMEC may have to pay substantial royalties or damages,
remove that product from the marketplace or expend substantial amounts in order
to modify the product so that it no longer infringes such proprietary rights,
any of which could have a material adverse effect on REMEC's business, financial
condition and results of operations.
EMPLOYEES
As of March 1, 1999, REMEC had a total of 1,904 employees, including 1,204
in manufacturing and operations, 258 in research, development and engineering
129 in quality assurance, 28 in sales and marketing and 284 in administration,
material procurement and planning. REMEC believes its future performance will
depend in large part on its ability to attract and retain highly skilled
employees. None of REMEC's employees is represented by a labor union and REMEC
has not experienced any work stoppage. REMEC considers its employee relations to
be good.
10
ITEM 2. PROPERTIES
REMEC'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 REMEC and seven leased facilities, pursuant to leases which
expire in December 2002 through March 2007. REMEC's Northern California
operations are located in three leased buildings aggregating approximately
79,000 square feet in San Jose, Milpitas and Santa Clara, California. These
leases expire on various dates beginning in August 1999 through October 2003.
Q-bit owns a 51,000 square foot building located in Melbourne, Florida. REMECINC
S.A. is located in San Jose, Costa Rica in a 39,000 square foot building. REMEC
is in the process of purchasing this property. Nanowave leases approximately
25,000 square feet in two buildings located in Toronto, Canada, under leases
which expire in September 2001. REMEC believes that its existing facilities are
adequate to meet its current needs and that suitable additional or alternative
space will be available on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Neither REMEC nor any of its subsidiaries is presently subject to any
material litigation, nor to REMEC's knowledge, is such litigation threatened
against REMEC 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 REMEC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of REMEC's shareholders during the last
quarter of its fiscal year ended January 31, 1999.
11
PART II
ITEM 5. MARKET FOR REMEC'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Prior to the quotation of REMEC's 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.
HIGH LOW
--------- ---------
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..................................................................... $ 29.000 $ 24.875
Second Quarter.................................................................... 25.125 7.625
Third Quarter..................................................................... 10.625 7.313
Fourth Quarter.................................................................... 21.938 11.469
FISCAL YEAR ENDING JANUARY 31, 2000
First Quarter (through March 5, 1999)............................................. $ 20.500 $ 15.125
- ------------------------
(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 March 5, 1999 was $17.625. As of March 5, 1999 there were
approximately 764 holders of record of Common Stock.
DIVIDEND POLICY
REMEC 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.
REMEC's line of credit agreement restricts the amount of cash dividends that
REMEC may pay. See Note 4 to Consolidated Financial Statements.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
REMEC's statements of income for each of the years in the three year period
ended January 31, 1999 and with respect to the balance sheets at January 31,
1998 and 1999, 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, 1995 and 1996 and the balance sheet data at
January 31, 1995, 1996 and 1997, 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.
YEARS ENDED JANUARY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA(1)(3):
Net sales................................................... $ 81,978 $ 93,228 $ 118,554 $ 156,057 $ 158,402
Cost of sales............................................... 57,994 66,172 85,659 108,053 113,013
--------- --------- --------- --------- ---------
Gross profit................................................ 23,984 27,056 32,895 48,004 45,389
Operating expenses:
Selling, general and administrative..................... 15,646 16,611 19,349 24,773 28,206
Research and development................................ 2,067 4,016 4,605 5,108 7,851
--------- --------- --------- --------- ---------
Total operating expenses............................ 17,713 20,627 23,954 29,881 36,057
--------- --------- --------- --------- ---------
Income from operations...................................... 6,271 6,429 8,941 18,123 9,332
Gain on sale of subsidiary.................................. -- -- -- 2,833 --
Interest income (expense) and other, net.................... (590) (401) 48 2,280 3,111
--------- --------- --------- --------- ---------
Income before provision for income taxes.................... 5,681 6,028 8,989 23,236 12,443
Provision for income taxes.................................. 2,394 2,429 4,017 8,501 2,115
--------- --------- --------- --------- ---------
Net income.................................................. $ 3,287 $ 3,599 $ 4,972 $ 14,735 $ 10,328
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share:
Basic................................................... $ .25 $ .28 $ .30 $ .71 $ .45
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. $ .25 $ .28 $ .30 $ .68 $ .44
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculations:
Basic................................................... 12,965 12,892 16,517 20,841 23,028
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. 12,965 13,009 16,828 21,534 23,482
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA(1)(3):
Cash and cash equivalents................................... $ 3,628 $ 3,828 $ 63,172 $ 41,937 $ 82,314
Working capital............................................. 15,620 17,575 84,112 84,496 133,681
Total assets................................................ 42,357 48,558 125,440 153,865 206,585
Long-term debt.............................................. 3,235 4,781 2,462 -- --
Total shareholders' equity.................................. 24,489 27,247 103,555 128,495 188,934
JANUARY 31,
--------------------
1998 1999
--------- ---------
BACKLOG(1)(2):.............................................................................. $ 214,855 $ 222,787
- ------------------------------
(1) REMEC 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. REMEC
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."
(3) In February 1999, REMEC announced its plan to acquire Airtech plc in
exchange for common stock with a value of approximately $32.0 million. The
acquisition will be accounted for as a pooling of interests and accordingly,
all financial amounts contained in the above table will be restated to
include the financial results and data of Airtech plc for all periods
presented. See Note 10--Subsequent Event in the accompanying financial
statements for presentation of the proforma results.
13
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, Inc. (Microwave), REMEC Wireless, Inc.
(Wireless), Humphrey, Inc. (Humphrey), REMEC Magnum, Inc. (Magnum), Verified
Technical Corporation (Veritek), C&S Hybrid, Inc. (C&S Hybrid), Q-bit
Corporation (Q-bit) and Nanowave Technologies Inc. (Nanowave) and REMECINC S.A.
(REMEC Costa Rica). REMEC's consolidated results of operations also include the
operations of RF Microsystems (RFM) for the period from April 30, 1996 to August
26, 1997.
REMEC's research and development efforts for customers in the defense
industry are conducted in direct response to the unique requirements of a
customer's order and, accordingly, expenditures related to such efforts are
included in cost of sales and the related funding is included in net sales. As a
result, historical REMEC funded research and development expenses have been
minimal. As REMEC's commercial business has expanded, research and development
expenses have generally increased in amount and as a percentage of sales. REMEC
expects this trend to continue, although research and development expenses may
fluctuate on a quarterly basis both in amount and as a percentage of sales.
Effective 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, REMEC 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 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.
14
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.
YEARS ENDED JANUARY 31,
-------------------------------------
1999 1998 1997
----- ----- -----
Net sales............................................................. 100% 100% 100%
Cost of sales......................................................... 71 69 72
--- --- ---
Gross profit...................................................... 29 31 28
Operating expenses:
Selling, general & administrative................................. 18 16 17
Research and development.......................................... 5 3 4
--- --- ---
Total operating expenses...................................... 23 19 21
--- --- ---
Income from operations................................................ 6 12 7
Gain on sale of subsidiary............................................ -- 1 --
Interest income and other, net........................................ 2 1 --
--- --- ---
Income before provision for income taxes.............................. 8 14 7
Provision for income taxes............................................ 1 5 3
--- --- ---
Net income............................................................ 7% 9% 4%
--- --- ---
--- --- ---
FISCAL YEAR ENDED JANUARY 31, 1999 VS. FISCAL YEAR ENDED JANUARY 31, 1998
NET SALES. Net sales increased 2% from $156.1 million during fiscal 1998 to
$158.4 million during fiscal 1999. The increase in sales was primarily
attributable to the increased revenues from REMEC's Veritek and Nanowave
subsidiaries (which were acquired in March and October 1997, respectively, and
therefor do not have a full year's operations included in the fiscal 1998
results of operations) which offset the reduction in demand from REMEC's
commercial customers as a result of the economic difficulties in certain
international markets in which those customers operate and a decline in sales of
REMEC's precision instrument products.
GROSS PROFIT. Gross profit decreased 5% from $48.0 million in fiscal 1998
to $45.4 million in fiscal 1999. Consolidated gross margins decreased from 31%
during fiscal 1998 to 29% during fiscal 1999. The fluctuations in REMEC's gross
margins are primarily attributable to changes in the mix of products sold and to
reduced production volume at certain of REMEC's production facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased 14% from $24.8 million during fiscal
1998 to $28.2 million during fiscal 1999. The increase in SG&A was primarily
attributable to inclusion of a full year of SG&A costs from REMEC's Veritek and
Nanowave subsidiaries, accounting and legal expenses associated with an income
tax credit study completed during fiscal 1999, and increased personnel, legal
and other administrative costs resulting from REMEC's growth. As a percentage of
net sales, SG&A expenses increased from 16% in fiscal 1998 to 18% in fiscal
1999, due to the factors discussed above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 54% from $5.1 million during fiscal 1998 to $7.9 million during fiscal
1999. These expenditures are almost entirely attributable to the commercial
wireless business and reflect an increase in activity associated with product
development.
15
GAIN ON SALE OF SUBSIDIARY. REMEC's results of operations for the year
ended January 31, 1998 includes the gain from the sale of REMEC's RFM
subsidiary. There was no similar gain in the current fiscal year.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $2.3 million during fiscal 1998 to $3.1 million during fiscal 1999. This
increase was due to the increased level of cash available for investment as a
result of the funds generated from REMEC's follow-on public offering which was
completed in March 1998.
PROVISION FOR INCOME TAXES. REMEC's effective tax rate declined from 37%
during fiscal 1998 to 17% during fiscal 1999. The decrease in the effective
income tax rate reflects the tax benefit of $1,992,000 related to the
recognition of research and experimentation tax credits pertaining to previously
filed tax returns. The reduction in the effective tax rate during fiscal 1999
also reflects the benefit of tax credits for certain capital expenditures and
the effect of tax exempt interest income.
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. The increase in sales was primarily
attributable to increased customer demand for REMEC's commercial wireless
products.
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. The increase in gross margins was
primarily the 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 REMEC'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.
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. REMEC's results of operations for the year
ended January 31, 1998 includes the gain from the sale of REMEC's RFM
subsidiary. There was no similar gain in the prior fiscal year.
INTEREST INCOME AND OTHER, NET. Interest income 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 REMEC's follow-on public offering which was
completed in January 1997.
PROVISION FOR INCOME TAXES. REMEC'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 REMEC'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, REMEC'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.
16
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, REMEC had $133.7 million of working capital which
included cash and cash equivalents totaling $82.3 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 based on a fixed spread over
the London Interbank Offered Rate (LIBOR). The revolving working capital line of
credit terminates July 3, 2000. The revolving period under the term loan expires
July 1, 2000, at which time any loan amount outstanding converts to a term loan
to be fully amortized and paid in full by January 2, 2004. As of January 31,
1999, there were no borrowings under REMEC's credit facilities.
During fiscal 1999, net cash provided by operations totaled $9.5 million as
the cash flows from earnings and non-cash expenses (primarily depreciation and
amortization) more than offset the $3.5 million increase in inventories and the
$6.7 million repayment of trade accounts payable and other accrued expenses.
Inventories increased during this period due to requests by certain commercial
customers to delay delivery of previously announced requirements. Investing
activities utilized $19.0 million during fiscal 1999, primarily as a result of
capital expenditures of $17.4 million and deposits associated with the
acquisition of land and a manufacturing facility in Costa Rica of $1.5 million.
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 cash on hand. REMEC's future capital expenditures may
continue to be substantially higher than historical levels as a result of
commercial wireless telecommunications expansion requirements. Financing
activities generated approximately $49.8 million during fiscal 1999, principally
as a result of the net proceeds of $49.6 million from the follow-on offering and
the proceeds of $3.0 million generated by the issuance of shares in connection
with REMEC's Employee Stock Purchase Plan and from exercises of stock options,
net of $2.9 million utilized for the repurchase and retirement of Company common
stock.
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 from February 1, 1999.
INTEREST RATE RISK
REMEC is exposed to changes in interest rates to the extent of its
borrowings under its revolving working capital line of credit and revolving term
loan. At January 31, 1999, REMEC had no borrowings under these credit facilities
and, therefore, no exposure to interest rate movement on its debt. REMEC also
will be affected by changes in interest rates in its investments in certain
held-to-maturity securities. Under its current policies, REMEC does not use
interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point increase in interest rates in REMEC's
held-to-maturity securities would not materially effect the fair value of these
securities at January 31, 1999.
YEAR 2000 READINESS DISCLOSURE
GENERAL. Many currently available installed computer systems, software
products and equipment are coded to accept only two digit entries to recognize
years. These date-sensitive systems, products and equipment may not be able to
accurately recognize the year 2000. As a result, these systems, products and
equipment may need to be upgraded or replaced in order to become year 2000
ready.
REMEC's Vice President of Information Technology is responsible for
coordinating REMEC's efforts relating to year 2000 readiness. These efforts
include the following phases: (i) identification of potential year 2000
problems; (ii) assessment of the potential impact on and risks to REMEC's
business; (iii) determination of specific solutions; (iv) implementation of
solutions; and (v) evaluation of all of the
17
foregoing. The Vice President of Information Technology reports to REMEC's
President and Chief Operating Officer on these matters. In addition, REMEC's
Audit Committee and Board of Directors provides supervisorial oversight of
REMEC's efforts relating to year 2000 readiness.
MANUFACTURING. REMEC utilizes various tools and equipment in connection
with the manufacture of its products which may have embedded technology that is
date sensitive. REMEC is testing substantially all of its critical tools and
equipment currently being utilized by REMEC in the manufacture of its products,
and continues to monitor year 2000 readiness in this area. Based on its efforts
to date, REMEC believes that its critical tools and equipment will be year 2000
ready on or before December 31, 1999. As a result, REMEC currently does not
anticipate significant interruption of its manufacturing capabilities due to the
failure of its tools and equipment to be year 2000 ready.
INFORMATION SYSTEMS. REMEC has various internal financial information and
reporting systems, human resources and payroll applications, procurement
requirements, customer billing applications, manufacturing monitoring systems,
communications systems, desktop computers and computer networks. REMEC is
testing all of these internal systems and applications and upgrading or
replacing software and hardware where needed. Based on its efforts to date,
REMEC currently does not anticipate significant interruption of its operations
due to the failure of its information systems to be year 2000 ready.
In addition to testing existing information systems for year 2000
compliance, REMEC is phasing in the installation of a new management information
system which will be used by REMEC and a majority of its operating subsidiaries
in connection with internal financial information and reporting, production
planning and manufacturing monitoring and procurement requirements. The purchase
and installation of this system is estimated to cost approximately $3.0 million
and will be paid for by REMEC out of existing funds when installed at the
various Company facilities. Although this system is not being purchased
exclusively to address year 2000 compliance issues, this management information
system is certified by the manufacturer to be year 2000 compliant. This system
has been implemented in two of REMEC's subsidiaries, is in the process of being
implemented in another subsidiary and is estimated to be completely installed
and operational in a majority of REMEC's facilities over the next two years. The
information systems in place at REMEC's remaining subsidiaries are being
upgraded to year 2000 compliance. This process will be completed by December 31,
1999 and is anticipated to cost approximately $250,000.
FACILITIES. REMEC is also testing all of its facilities and infrastructure
systems, including the heating/ ventilation/air conditioning (HVAC) systems,
security systems and health, safety and environment systems at each of its
facilities. REMEC currently has manufacturing operations or management personnel
in thirteen leased facilities. Based on its efforts to date, REMEC currently
does not anticipate significant interruption of its operations due to the
failure of its facilities and infrastructure systems to be year 2000 ready.
SUPPLIERS. REMEC is implementing a system to monitor the year 2000
readiness of its suppliers. The system will include awareness/notification
letters, warranties and a review of suppliers' web-site statements regarding
year 2000 readiness. If a supplier is identified as having a high risk of year
2000 non-readiness, REMEC will develop alternative sourcing plans to minimize
the year 2000 risks.
COSTS. REMEC estimates that the aggregate costs for its year 2000 readiness
program incurred by REMEC to date and anticipated to be incurred by REMEC
through December 31, 1999 is approximately $350,000. Approximately $125,000 of
the aggregate estimated costs relate to internal resources incurred or
anticipated to be incurred in connection with REMEC's readiness program. Through
December 31, 1999, REMEC estimates that it has incurred approximately $100,000
on internal and external costs relating to its year 2000 readiness program. No
information technology or other capital expenditure projects have been delayed
due to REMEC's year 2000 efforts and the costs relating thereto.
18
WORST CASE SCENARIO: CONTINGENCY PLAN. The most reasonably likely worst
case year 2000 scenario which may affect REMEC is a significant disruption in
the business operations of REMEC's customers due to year 2000 problems. REMEC
manufactures components and systems for commercial customers and various
government agencies. To the extent that the customers' business is disrupted by
year 2000 problems, these customers may be unable to purchase or pay for REMEC's
products which may have a material adverse effect on REMEC's business, financial
condition and results of operation will be adversely effected.
UNCERTAINTIES. The above description of REMEC's year 2000 efforts contains
forward-looking statements, including: the expected state of readiness of
REMEC's manufacturing equipment, information systems and facilities; the future
impact of REMEC's business, financial condition and results of operation due to
its year 2000 readiness; the anticipated state of readiness of REMEC's
suppliers; the estimated costs associated with REMEC's year 2000 readiness
program; and REMEC's most reasonably likely worst case scenario. There are many
factors that could cause REMEC's actual results to differ materially from those
year 2000 related forward-looking statements.
Some of the factors that could affect the anticipated impact of REMEC's year
2000 readiness include the availability and cost of personnel trained in this
area, the ability of company personnel, vendors, customers and suppliers to
locate an correct all relevant computer codes; the reliability of statements of
third parties (customers, suppliers and vendors) regarding their own year 2000
readiness; and similar uncertainties. In addition, the anticipated costs of any
year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events. Many of these factors
and assumptions are beyond REMEC's control and no assurances can be given that
REMEC, its suppliers and customers will be able to resolve all of their year
2000 readiness problems in a timely manner to avoid a material adverse effect on
REMEC's business, financial condition or results of operations.
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.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REMEC
Information pertaining to directors of REMEC is set forth under the caption
"Election of Directors-- Nominees" in REMEC's Proxy Statement (the "1999 Proxy
Statement") for the Annual Meeting of Shareholders expected to be held on June
4, 1999 and is incorporated by reference into this Annual Report on Form 10-K.
Information relating to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is set forth in the 1999 Proxy Statement under the caption
"Management--Compliance with Section 16(a) of the Exchange Act" and is
incorporated by reference into this Annual Report on Form 10-K.
The executive officers of REMEC, and their ages as of March 5, 1999, are as
follows:
NAME AGE POSITION WITH REMEC
- ------------------------------------ --- -----------------------------------------------------------
Ronald E. Ragland................... 57 Chairman of the Board and Chief Executive Officer
Errol Ekaireb....................... 60 President, Chief Operating Officer and Director
Jack A. Giles....................... 57 Executive Vice President, President of REMEC Microwave and
Director
Joseph T. Lee....................... 44 Executive Vice President, President of Northern California
Operations and Director
Denny Morgan........................ 45 Senior Vice President, Chief Engineer and Director
Tao Chow............................ 47 Senior Vice President and President of C&S Hybrid and REMEC
Wireless
Michael McDonald.................... 45 Senior Vice President, Chief Financial Officer and
Secretary
James Mongillo...................... 60 Senior Vice President and President of REMEC Magnum
Justin Miller....................... 49 Vice President and President of REMEC Canada and Nanowave
H. Clark Hickock.................... 43 Senior Vice President, Business Operations
Jon E. Opalski...................... 36 Senior Vice President, Marketing and Strategic Planning
MR. RAGLAND was a founder of REMEC and has served as Chairman of the Board
and Chief Executive Officer of REMEC since January 1983. Prior to joining REMEC,
he was General Manager of KW Engineering and held program management positions
with Ford Aerospace Communications Corp.,
E-Systems, Inc. and United Telecommunications, Inc. Mr. Ragland was a Captain in
the United States Army and holds a B.S.E.E. degree from Missouri University at
Rolla and an M.S.E.E. degree from St. Louis University.
MR. EKAIREB has served as President and Chief Operating Officer of REMEC
since 1990 and a director of REMEC since 1985. Mr. Ekaireb served as Vice
President of REMEC from 1984 to 1987 and as Executive Vice President and Chief
Operating Officer from 1987 to 1990. Prior to joining REMEC, he spent 23 years
with Ford Aerospace Communications Corp. Mr. Ekaireb holds B.S.E.E. and B.S.M.E.
degrees from West Coast University and has completed the University of
California, Los Angeles Executive Program.
MR. GILES joined REMEC in 1984. He was elected as a director in 1984, Vice
President in 1985, Executive Vice President in 1987 and was elected President of
REMEC Microwave in 1994. Prior to joining REMEC, he spent approximately 19 years
with Texas Instruments in program management and marketing. Mr. Giles
20
holds a B.S.M.E. degree from the University of Arkansas and is a graduate of
Defense Systems Management College.
MR. LEE has been a director and Executive Vice President of REMEC since
September 1996 and was elected President of REMEC's Northern California
Operations in December 1997. Prior to the acquisition of Magnum Microwave
Corporation ("Magnum Microwave") by REMEC in August 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
degrees from Stanford University and is a graduate of the AEA Stanford Executive
Institute.
MR. MORGAN was a founder of REMEC and has served as Senior Vice President,
Chief Engineer and a director of REMEC since January 1983. Prior to joining
REMEC, he worked with KW Engineering, Micromega, General Dynamics Corporation
and Pacific Aerosystems, Inc. Mr. Morgan holds a B.S.E.E. degree from the
Massachusetts Institute of Technology and was the Four Year Chancellor's Intern
Fellowship Recipient at the University of California, Los Angeles.
MR. 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 of REMEC in December 1997. Prior to the acquisition of Magnum
Microwave by REMEC, 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 REMEC in February 1997 as part of the Radian Technology
acquisition. He is a Senior Vice President of REMEC, and is serving as President
of REMEC Magnum, Inc. Prior to the acquisition of Radian Technology, he was the
Chairman of the Board, President and Chief Executive Officer of Radian. Mr.
Mongillo holds a B.S.E.E. degree from Brown University.
DR. MILLER has served as President and director of Nanowave Technologies and
REMEC Canada and Vice President of REMEC since October 1997. Prior to the
Nanowave acquisition by REMEC, he was a founder of Nanowave and served as its
President and a director since 1992. Prior to that he served as Vice
President--Engineering of Microwave Technologies, a division of Lucas Industries
plc. Dr. Miller holds a Ph.D. from the University of Warwick.
MR. HICKOCK has served as Senior Vice President, Business Operations of
REMEC since 1998 and Vice President, Business Operations since 1994. Prior to
joining REMEC, he was with E-Systems Garland Division for 16 years. Mr. Hickock
holds a B.A. in Economics and Finance from the University of Texas.
MR. OPALSKI has served in a variety of positions with REMEC since 1984, most
recently as Senior Vice President, Marketing and Strategic Planning. He holds a
B.S.E.E. from Massachusetts Institute of Technology.
21
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under the
caption "Management-- Executive Compensation" in the 1999 Proxy Statement and is
incorporated by reference into this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of REMEC's Common Stock is set
forth under "Management--Security Ownership of Certain Beneficial Owners and
Management" in the 1999 Proxy Statement and is incorporated by reference into
this Annual Report on Form 10-K.
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 1999
Proxy Statement and is incorporated by reference into this Annual Report on Form
10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at January 31, 1999 and 1998
Consolidated Statements of Income for the years ended January 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity as of January 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended January
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
22
3. Exhibits
EXHIBIT NO. DESCRIPTION
- ------------- --------------------------------------------------------------------------------
3.1(1) Restated Articles of Incorporation
3.2(1) By-Laws, as amended
10.1(1) Equity Incentive Plan
10.2(1) Employee Stock Purchase Plan
10.3(1) Form of Indemnification Agreements between Registrant and its officers and
directors
10.4(2) 1996 Nonemployee Directors Stock Option Plan
10.5(3) Second Amended and Restated Loan Agreement between REMEC and The Union Bank of
California, N.A., dated June 25, 1998, as amended
10.6(3) Participation Agreement dated as of August 25, 1998 among REMEC, Union Bank of
California N.A., and certain other parties identified therein
10.7(3) Master Lease dated as of August 25, 1998, between Union Bank of California,
N.A., as Certificate Trustee, and REMEC
10.8(3) Lessee Guarantee executed by REMEC dated as of August 25, 1998
21.1(3) Subsidiaries of REMEC
23.1(3) Consent of Ernst & Young LLP, Independent Auditors
23.2(3) Consent of Ireland San Filippo LLP, Independent Public Accountants
23.3(3) Consent of Bray, Beck & Koetter, Independent Auditors
24.1 Power of Attorney (included on Page S-1 of this Annual Report on Form 10-K)
27.1(3) Financial Data Schedule
- ------------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-1 (No. 333-80381) filed on
February 1, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-8 (No. 333-16687) filed on
November 25, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(3) 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
1999.
23
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
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, 1999 and 1998................................................... F-5
Consolidated Statements of Income for the years ended January 31, 1999, 1998 and 1997...................... F-6
Consolidated Statements of Shareholders' Equity as of January 31, 1999, 1998 and 1997...................... F-7
Consolidated Statements of Cash Flows for the years ended January 31, 1999, 1998 and 1997.................. F-8
Notes to Consolidated Financial Statements................................................................. F-9
F-1
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, 1999 and 1998, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 1999. These financial statements are the responsibility
of REMEC'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 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, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended January 31, 1999 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
February 26, 1999
F-2
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 REMEC'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
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 REMEC'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
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
------------------------------
1999 1998
-------------- --------------
ASSETS
Cash and cash equivalents........................................................ $ 82,314,098 $ 41,937,101
Accounts receivable, net......................................................... 23,624,034 25,494,474
Inventories, net................................................................. 33,879,801 30,380,941
Deferred income taxes............................................................ 4,259,925 6,241,957
Prepaid expenses and other current assets........................................ 3,123,687 589,053
-------------- --------------
Total current assets......................................................... 147,201,545 104,643,526
Property, plant and equipment, net............................................... 42,159,384 31,988,934
Intangible and other assets...................................................... 17,224,432 17,232,241
-------------- --------------
$ 206,585,361 $ 153,864,701
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................................. $ 5,031,923 $ 8,531,756
Accrued salaries, benefits and related taxes..................................... 5,246,418 5,999,248
Income taxes payable............................................................. -- 2,546,479
Accrued expenses................................................................. 3,241,898 3,070,515
-------------- --------------
Total current liabilities.................................................... 13,520,239 20,147,998
Deferred rent.................................................................... -- 104,236
Deferred income taxes............................................................ 4,131,534 5,117,933
Commitments
Shareholders' equity:
Preferred shares--$.01 par value, 5,000,000 shares authorized; none issued and
outstanding.................................................................... -- --
Common shares--$.01 par value, 70,000,000 shares authorized; issued and
outstanding shares--23,185,491 and 21,182,663 at January 31, 1999 and 1998..... 231,853 211,828
Paid-in capital.................................................................. 145,929,471 95,838,167
Retained earnings................................................................ 42,772,264 32,444,539
-------------- --------------
Total shareholders' equity....................................................... 188,933,588 128,494,534
-------------- --------------
$ 206,585,361 $ 153,864,701
-------------- --------------
-------------- --------------
See accompanying notes.
F-5
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Net sales....................................................... $ 158,401,981 $ 156,056,929 $ 118,553,842
Cost of sales................................................... 113,012,547 108,052,891 85,658,524
-------------- -------------- --------------
Gross profit.................................................... 45,389,434 48,004,038 32,895,318
Operating expenses:
Selling, general & administrative............................... 28,206,291 24,773,466 19,349,733
Research and development........................................ 7,850,765 5,107,984 4,605,000
-------------- -------------- --------------
Total operating expenses........................................ 36,057,056 29,881,450 23,954,733
-------------- -------------- --------------
Income from operations.......................................... 9,332,378 18,122,588 8,940,585
Gain on sale of subsidiary...................................... -- 2,833,240 --
Interest income and other, net.................................. 3,110,820 2,280,329 48,405
-------------- -------------- --------------
Income before provision for income taxes........................ 12,443,198 23,236,157 8,988,990
Provision for income taxes...................................... 2,115,473 8,500,799 4,016,667
-------------- -------------- --------------
Net income...................................................... $ 10,327,725 $ 14,735,358 $ 4,972,323
-------------- -------------- --------------
-------------- -------------- --------------
Earnings per share:
Basic....................................................... $ .45 $ .71 $ .30
-------------- -------------- --------------
-------------- -------------- --------------
Diluted..................................................... $ .44 $ .68 $ .30
-------------- -------------- --------------
-------------- -------------- --------------
Shares used in computing earnings per share:
Basic....................................................... 23,028,000 20,841,000 16,517,000
-------------- -------------- --------------
-------------- -------------- --------------
Diluted..................................................... 23,482,000 21,534,000 16,828,000
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes.
F-6
REMEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED SHARES COMMON SHARES
---------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- --------- --------- ----------- ---------- -----------
Balance at January 31, 1996.... 718,607 $ 7,186 11,073,539 $ 110,736 $14,404,746 $12,724,563 $27,247,231
Issuance of common shares in
initial public offering.... -- -- 3,397,340 33,973 15,615,236 -- 15,649,209
Conversion of preferred
shares..................... (718,607) (7,186) 1,616,864 16,169 (8,983) -- --
Issuance of common shares for
cash....................... -- -- 443,467 4,435 1,872,140 -- 1,876,575
Issuance of common shares
under employee stock
purchase plan.............. -- -- 347,850 3,479 1,670,637 -- 1,674,116
Issuance of common shares
upon exercise of stock
options.................... -- -- 37,647 376 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............. -- -- 3,618,750 36,188 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.... -- -- 20,535,457 205,356 85,787,686 17,561,614 103,554,656
Issuance of common shares in
acquisitions............... -- -- 320,183 3,202 6,620,465 -- 6,623,667
Issuance of common shares
under employee stock
purchase plan.............. -- -- 150,023 1,500 2,143,385 -- 2,144,885
Issuance of common shares
upon exercise of stock
options.................... -- -- 177,000 1,770 751,618 -- 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.... -- -- 21,182,663 211,828 95,838,167 32,444,539 128,494,534
Issuance of common shares in
stock offering............... -- -- 1,990,000 19,900 49,543,600 -- 49,563,500
Issuance of common shares
upon exercise of stock
options.................... -- -- 93,801 937 452,437 -- 453,374
Issuance of common shares
under employee stock
purchase plan.............. -- -- 245,900 2,457 2,300,570 -- 2,303,027
Issuance of common shares.... -- -- 39,627 396 355,854 -- 356,250
Purchase and retirement of
common shares.............. -- -- (366,500) (3,665) (2,847,741) -- (2,851,406)
Income tax benefits related
to employee stock purchase
plan and stock options
exercised.................. -- -- -- -- 286,584 -- 286,584
Net income................... -- -- -- -- -- 10,327,725 10,327,725
--------- ----------- --------- --------- ----------- ---------- -----------
Balance at January 31, 1999.... -- $ -- 23,185,491 $ 231,853 $145,929,471 $42,772,264 $188,933,588
--------- ----------- --------- --------- ----------- ---------- -----------
--------- ----------- --------- --------- ----------- ---------- -----------
See accompanying notes.
F-7
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income........................................................... $ 10,327,725 $ 14,735,358 $ 4,972,323
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 8,827,248 5,380,811 3,647,507
Gain on sale of Subsidiary....................................... -- (2,833,240) --
Deferred income taxes............................................ 1,282,214 (2,407,832) (767,151)
Changes in operating assets and liabilities:
Accounts receivable............................................ 1,870,440 (6,525,349) (4,862,195)
Inventories.................................................... (3,498,860) (9,303,804) (2,539,276)
Prepaid expenses and other current assets...................... (2,534,634) 201,838 (256,477)
Accounts payable............................................... (3,499,833) 686,941 78,089
Accrued expenses, income taxes payable and deferred rent....... (3,232,162) 852,733 556,250
------------- ------------- -------------
Net cash provided by operating activities........................ 9,542,138 787,456 829,070
INVESTING ACTIVITIES:
Additions to property, plant and equipment......................... (17,400,506) (17,351,394) (7,362,734)
Payment for acquisitions, net of cash acquired..................... -- (5,066,075) (4,011,735)
Proceeds from sale of subsidiary................................... -- 5,000,000 --
Sale of short-term investments..................................... -- -- 1,482,565
Other assets....................................................... (1,589,380) 120,637 (133,320)
------------- ------------- -------------
Net cash used by investing activities............................ (18,989,886) (17,296,832) (10,025,224)
FINANCING ACTIVITIES:
Proceeds from credit facilities and long-term debt................. -- 12,212,858 1,100,000
Repayments on credit facilities and long-term debt................. -- (19,510,512) (3,412,956)
Purchase and retirement of common shares........................... (2,851,406) -- --
Proceeds from issuance of common shares............................ 52,676,151 2,898,273 71,260,975
Change in deferred offering costs.................................. -- -- 1,108,424
------------- ------------- -------------
Net cash provided (used) by financing activities................. 49,824,745 (4,399,381) 70,056,443
Increase (decrease) in cash and cash equivalents..................... 40,376,997 (20,908,757) 60,860,289
Cash and cash equivalents at beginning of year....................... 41,937,101 63,172,362 2,345,632
Adjustment for net cash activity of pooled companies................. -- (326,504) (33,559)
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 82,314,098 $ 41,937,101 $ 63,172,362
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest......................................................... $ -- $ 321,000 $ 414,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes..................................................... $ 4,661,000 $ 10,162,000 $ 3,091,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of noncash investing and financing
activities:
Assets acquired under capital leases and notes payable
obligations.................................................... $ -- $ -- $ 962,000
------------- ------------- -------------
------------- ------------- -------------
Common shares issued in connection with acquisitions............. $ -- $ 6,623,667 $ --
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes.
F-8
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS AND BASIS OF PRESENTATION
REMEC, Inc. was incorporated in the State of California in January 1983.
REMEC 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 REMEC's sales were to prime
contractors to various agencies of the U.S. Department of Defense and to foreign
governments. In May 1995, REMEC 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, REMEC acquired
Magnum Microwave Corporation, a manufacturer of microwave components and
subsystems, in a transaction accounted for as a pooling of interests. During
1997, REMEC also acquired RF Microsystems, Inc. ("RFM"), a satellite
communications engineering company, in a transaction accounted for as a
purchase. During fiscal 1998, REMEC acquired Radian Technology, Inc., C&S
Hybrid, Inc., and Q-bit Corporation, in a series of transactions accounted for
as poolings of interests. REMEC'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, REMEC 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 REMEC and its
wholly owned subsidiaries REMEC Microwave, Inc., REMEC Wireless, Inc., Humphrey,
Inc., RF Microsystems, Inc., REMEC Magnum, Inc., Verified Technical Corporation,
C&S Hybrid, Inc., Nanowave Technologies Inc., Q-bit Corporation and REMECINC
S.A. All intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
REMEC considers all highly liquid investments with an original maturity of
three months or less at the date of acquisition to be cash equivalents. REMEC
evaluates the financial strength of institutions at which significant
investments are made and believes the related credit risk is limited to an
acceptable level.
REMEC has adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity Securities."
SFAS No. 115 requires companies to record certain debt and equity security
investments at market value. At January 31, 1999 and 1998, 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. REMEC performs periodic
credit evaluations of its customers and maintains reserves for potential credit
losses.
F-9
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventories are stated at the lower of weighted average cost or market. In
accordance with industry practice, REMEC 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 is stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets which range from three to thirty years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the lease period. Substantially all
long-lived assets are held within the United States, except for the assets held
in Costa Rica (see Note 6).
Intangible assets in the accompanying balance sheets 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 $1,597,189, $766,616
and $345,531 for fiscal years 1999, 1998 and 1997, respectively.
Effective February 1, 1996, REMEC 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, REMEC 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.
F-10
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 REMEC are expensed in the period
incurred.
NET INCOME PER SHARE
REMEC calculates earnings per share in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings per Share." Basic earnings per
share is computed using the weighted average shares outstanding for each period
presented. Diluted earnings per share is computed using the weighted average
shares outstanding plus potentially dilutive common shares using the treasury
stock method at the average market price during the reporting period. 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:
YEARS ENDED JANUARY 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Weighted average common shares outstanding used in basic
earnings per share calculation.............................. 23,028,000 20,841,000 16,517,000
Effect of dilutive stock options.............................. 454,000 693,000 311,000
------------ ------------ ------------
Shares used in diluted earnings per share calculation......... 23,482,000 21,534,000 16,828,000
------------ ------------ ------------
------------ ------------ ------------
On June 6, 1997, REMEC's Board of Directors approved a three-for-two stock
split of REMEC'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
REMEC 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 Statement of Financial Accounting Standard No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation" 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 REMEC'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
F-11
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The markets for REMEC's products are
extremely competitive and are characterized by rapid technological change, new
product development, product obsolescence and evolving industry standards. In
addition, price competition is intense and significant price erosion generally
occurs over the life of a product. As a result of such factors, actual results
could differ from the estimates used by management.
NEW ACCOUNTING STANDARDS
During 1998, REMEC adopted Statement of Financial Accounting Standard No.
130 ("SFAS No.130"), "Reporting Comprehensive Income" and Statement of Financial
Accounting Standard No. 131 ("SFAS No.131"), "Segment Information." SFAS 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 a 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, are required to
reported, net of their related tax effect, to arrive at comprehensive income.
Comprehensive income is not materially different from net income. SFAS No.131
amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. Operating
segments, as defined in SFAS No.131, are components of an enterprise for which
separate financial information is available and is evaluated regularly by REMEC
in deciding how to allocate resources and in assessing performance. The
financial information is required to be reported on the basis that is used
internally for evaluating this segment performance. REMEC operates in one
business and operating segment only, and therefore adoption of this standard did
not have a material impact on REMEC's financial statements.
2. ACQUISITION TRANSACTIONS
Q-BIT CORPORATION
In October 1997, REMEC 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 REMEC'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 REMEC 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.
F-12
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION TRANSACTIONS (CONTINUED)
C&S HYBRID
In June 1997, REMEC 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 REMEC'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 REMEC 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.
On February 28, 1997, REMEC 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 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 REMEC 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
On August 26, 1996, REMEC 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.
F-13
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION TRANSACTIONS (CONTINUED)
VERIFIED TECHNICAL CORPORATION
On March 31, 1997, REMEC acquired all of the outstanding common stock of
Veritek in exchange for cash consideration of $1,000,000 and 138,000 shares of
REMEC'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 APB 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 REMEC's 1997 fiscal year would not be materially
different from reported results.
NANOWAVE TECHNOLOGIES INC.
In October 1997, REMEC formed REMEC Canada (as a wholly owned subsidiary)
for the purpose of facilitating the acquisition of Canadian companies, including
the then contemplated acquisition of Nanowave, a manufacturer of amplifier based
microwave and millimeter wave components and multi-function modules. 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 REMEC 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
REMEC's fiscal year ended January 31, 1997, pro forma condensed consolidated
results of operations would have been as follows (in thousands except per share
amounts):
YEARS ENDED JANUARY
31,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
Net sales................................................... $ 160,581 $ 124,434
Net income.................................................. 14,288 4,441
Earnings per share:
Basic................................................... $ .68 $ .27
Diluted................................................. $ .66 $ .26
RF MICROSYSTEMS, INC.
Effective April 30, 1996, REMEC 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
F-14
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION TRANSACTIONS (CONTINUED)
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 $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 REMEC. On
August 26, 1997, REMEC 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. REMEC'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:
JANUARY 31,
----------------------------
1998 1997
------------- -------------
Raw Materials.................................................. $ 19,750,063 $ 16,087,158
Work in progress............................................... 14,224,169 14,968,767
------------- -------------
33,974,232 31,055,925
Less unliquidated progress payments............................ (94,431) (674,984)
------------- -------------
$ 33,879,801 $ 30,380,941
------------- -------------
------------- -------------
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,076,000 at January 31, 1999 and 1998, respectively.
REMEC had a reserve for obsolete and unusable inventory of $3,341,000 and
$2,941,000 as of January 31, 1999 and 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JANUARY 31,
------------------------------
1999 1998
-------------- --------------
Land, building and improvements............................... $ 3,361,097 $ 3,293,776
Machinery and equipment....................................... 69,899,873 54,574,755
Furniture and fixtures........................................ 4,153,572 3,270,147
Leasehold improvements........................................ 4,173,772 3,049,130
-------------- --------------
81,588,314 64,187,808
Less accumulated depreciation and amortization................ (39,428,930) (32,198,874)
-------------- --------------
$ 42,159,384 $ 31,988,934
-------------- --------------
-------------- --------------
F-15
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL STATEMENT DETAILS (CONTINUED)
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
JANUARY 31,
------------------------------
1999 1998
-------------- --------------
Acquired technology........................................... $ 8,358,556 $ 8,358,556
Goodwill...................................................... 7,775,775 7,775,775
Trademarks and other intangible assets........................ 2,250,000 2,250,000
-------------- --------------
18,384,331 18,384,331
Less accumulated amortization................................. (2,988,645) (1,391,456)
-------------- --------------
15,395,686 16,992,875
Other assets.................................................. 1,828,746 239,366
-------------- --------------
$ 17,224,432 $ 17,232,241
-------------- --------------
-------------- --------------
4. BANK REVOLVING TERM CREDIT FACILITY AND LINE-OF-CREDIT
REMEC has a $9,000,000 working capital line-of-credit with a bank, which
expires July 3, 2000. Interest is due monthly on advances at a fixed spread over
the London Interbank Offered Rate (6.2% at January 31, 1999). At January 31,
1999, there were no outstanding borrowings on the facility.
REMEC also has a $8,000,000 term credit facility with the bank which is
available until July 1, 2000. Outstanding borrowings at July 1, 2000 under this
facility automatically convert into a term note payable in 42 monthly
installments. Interest is due monthly on advances under the facility at a fixed
spread over the London Interbank Offered Rate. At January 31, 1999, there were
no outstanding borrowings on the facility.
Advances under these agreements are secured by substantially all assets of
REMEC. The agreements also contain covenants which require REMEC to maintain
certain financial ratios, achieve specified levels of profitability, restrict
the incurrence of additional debt, limit the payment of cash dividends, and
include certain other restrictions. As of January 31, 1999, REMEC was in
compliance with all covenants specified.
5. SHAREHOLDERS' EQUITY
EQUITY OFFERINGS
In March 1998, REMEC issued in a public offering an additional 1,990,000
shares of common stock. The net proceeds from this offering were $49,563,500.
Certain shareholders also sold 1,000,000 shares of REMEC common stock as part of
this offering.
In January 1997, REMEC 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, REMEC completed an initial public offering of its common
stock in which REMEC 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
REMEC's initial public offering, all of the then outstanding shares of
F-16
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
REMEC's preferred stock were converted into 1,616,864 shares of common stock. In
connection with REMEC's initial public offering, certain shareholders also sold
1,777,660 shares as part of the offering.
STOCK OPTION PLANS
REMEC'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 of REMEC. During fiscal 1998, REMEC'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.
REMEC also maintains the 1996 Nonemployee Directors Stock Option Plan under
which 300,000 common shares have been reserved for non-qualified stock option
grants to nonemployee directors of REMEC. Under the Plan, option grants are
automatically made on an annual basis at the fair market value of the stock on
the date of grant. Options granted under the Plan vest over three to four years
and expire four and one-half to nine years from the date of grant.
REMEC 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 REMEC's initial public offering in February 1996 and all outstanding
options remain exercisable in accordance with their original terms.
A summary of REMEC's stock option activity and related information is as
follows:
YEARS ENDED JANUARY 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- -----------
Outstanding--beginning of year................. 1,690,974 $ 16.86 928,538 $ 7.71 305,380 $ 2.25
Granted...................................... 1,141,120 15.99 1,024,214 22.42 668,012 9.90
Exercised.................................... (93,801) 4.85 (170,965) 4.37 (37,649) 2.37
Forfeited.................................... (362,822) 25.44 (90,813) 10.17 (7,205) 6.79
--------- ----------- --------- ----------- --------- -----
Outstanding--end of year....................... 2,375,471 $ 15.60 1,690,974 $ 16.86 928,538 $ 7.71
--------- ----------- --------- ----------- --------- -----
--------- ----------- --------- ----------- --------- -----
F-17
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
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, 1999:
TOTAL OUTSTANDING TOTAL EXERCISABLE
------------------------------------ ----------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER ------------------------ NUMBER AVERAGE
OF EXERCISE OF EXERCISE
PRICE RANGE SHARES PRICE LIFE SHARES PRICE
- ----------------------------------------------------- ---------- ----------- --- --------- -----------
$ 1.61-$ 7.40........................................ 128,497 $ 2.21 1.4 103,269 $ 2.28
$ 7.41-$11.10........................................ 995,750 $ 9.41 6.3 184,235 $ 9.59
$11.11-$14.80........................................ 319,051 $ 14.03 2.6 137,821 $ 14.07
$14.81-$22.20........................................ 486,383 $ 20.84 1.4 154,994 $ 20.40
$22.21-$25.90........................................ 191,125 $ 25.35 3.7 47,662 $ 25.47
$25.91-$37.00........................................ 254,665 $ 30.97 4.8 50,100 $ 32.90
---------- ---------
Total Plan........................................... 2,375,471 $ 15.60 4.5 678,081 $ 14.70
---------- ---------
---------- ---------
At January 31, 1999, options for 863,985 shares of REMEC common stock were
available for future grant.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if REMEC 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 1999,
1998 and 1997, respectively: risk-free interest rates of 6.0%; dividend yields
of 0%; volatility factors of the expected market price of REMEC's common stock
of 76.0%, 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 REMEC'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 SFAS No. 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
F-18
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
consideration pro forma compensation expense related to grants made prior to
1996. REMEC's pro forma information follows:
YEARS ENDED JANUARY 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
Net income:
As reported.............................................. $ 10,327,725 $ 14,735,358 $ 4,972,323
Pro forma................................................ 3,891,411 10,603,372 2,083,189
Earning per share:
As reported--
Basic.................................................. $ .45 $ .71 $ .30
Diluted................................................ .44 .68 .30
Pro forma--
Basic.................................................. $ .17 $ .51 $ .13
Diluted................................................ .17 .49 .12
Weighted average fair value of options granted during the
year..................................................... $ 12.92 $ 11.48 $ 5.09
STOCK PURCHASE PLAN
REMEC's Employee Stock Purchase Plan provides for the issuance of shares of
REMEC's common stock to eligible employees. During fiscal 1998, REMEC's
shareholders approved an increase in the number of shares available for issuance
under the Employee Stock Purchase 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
Employee Stock 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, 1999, 456,227 shares of REMEC common stock remain
available for issuance under the Purchase Plan.
6. COMMITMENTS
DEFERRED SAVINGS PLAN
REMEC 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. REMEC matches contributions up to
$100 per quarter, per employee, subject to the attainment of certain quarterly
profit levels by REMEC. Employees vest immediately in their contributions and
company contributions vest over a two-year period. REMEC has charged to
operations contributions of approximately $272,000, $399,000 and $218,000 for
the years ended January 31, 1999, 1998 and 1997, respectively.
REMEC's Canadian subsidiary maintains a separate defined contribution
retirement savings plan for substantially all of its employees. Participants may
contribute a portion of their annual salaries subject to statutory annual
limitations. REMEC matches a percentage of the employees contributions as
specified in the plan agreement. Contributions by REMEC totalled $49,000 and
$19,000 in 1999 and 1998, respectively.
REMEC'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 for fiscal 1997. This plan was merged into
the REMEC plan in February 1998.
F-19
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS (CONTINUED)
Prior to its acquisition in fiscal 1998, REMEC'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 for fiscal 1997.
This plan was merged into the REMEC plan in April 1998.
LEASES
REMEC leases offices and production facilities under noncancelable
agreements classified as operating leases. At January 31, 1999, future minimum
payments under these operating leases are as follows:
OPERATING
LEASES
-------------
2000................................................................. $ 2,678,000
2001................................................................. 2,373,000
2002................................................................. 2,144,000
2003................................................................. 2,160,000
2004................................................................. 1,538,000
Thereafter........................................................... 413,000
-------------
Total minimum lease payments......................................... $ 11,306,000
-------------
-------------
Certain of these lease agreements include renewal options.
Rent expense totaled $3,254,000, $3,186,000, and $2,717,000 during fiscal
1999, 1998 and 1997, respectively.
CAPITAL EXPENDITURE
REMEC has entered into an agreement for the purchase of land and a
manufacturing facility in Costa Rica with a purchase price of $2,566,000.
Deposits totalling $1,486,000 have been made in connection with this agreement.
Such deposits are included in other assets in REMEC's consolidated balance sheet
as of January 31, 1999.
7. INCOME TAXES
For financial reporting purposes, income before taxes includes the following
components:
YEARS ENDED JANUARY 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
Pretax income:
United States................................ $ 11,475,003 $ 22,369,180 $ 8,988,990
Foreign...................................... 968,195 866,977 --
------------- ------------- ------------
$ 12,443,198 $ 23,236,157 $ 8,998,990
------------- ------------- ------------
------------- ------------- ------------
F-20
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Significant components of REMEC's deferred tax liabilities and assets are as
follows:
JANUARY 31,
--------------------------
1999 1998
------------ ------------
Deferred tax liabilities:
Tax over book depreciation.............................................. $ 4,132,000 $ 4,270,000
Inventory costs capitalization.......................................... 1,037,000 846,000
Other................................................................... 36,000 2,000
------------ ------------
5,205,000 5,118,000
------------ ------------
Deferred tax assets:
Inventory and other reserves............................................ 3,493,000 3,696,000
Deferred rent........................................................... -- 65,000
Accrued expenses........................................................ 1,588,000 1,623,000
Other................................................................... 252,000 858,000
------------ ------------
Total deferred tax assets................................................... 5,333,000 6,242,000
------------ ------------
Net deferred tax assets..................................................... $ 128,000 $ 1,124,000
------------ ------------
------------ ------------
The provision for taxes based on income consists of the following:
YEARS ENDED JANUARY 31,
-----------------------------------------
1999 1998 1997
------------ ------------- ------------
Current:
Federal.................................................. $ 1,165,000 $ 7,933,000 $ 3,910,000
Foreign.................................................. 260,000 308,000 --
State.................................................... (306,000) 1,634,000 874,000
Deferred:
Federal.................................................. 1,085,000 (1,188,000) (646,000)
Foreign.................................................. 13,000 -- --
State.................................................... (102,000) (186,000) (121,000)
------------ ------------- ------------
$ 2,115,000 $ 8,501,000 $ 4,017,000
------------ ------------- ------------
------------ ------------- ------------
F-21
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
A reconciliation of the effective tax rates and the statutory Federal income
tax rate is as follows:
YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------
1998 1997
1999 ----------------------- -----------------------
------------------------ % %
AMOUNT % AMOUNT -- AMOUNT --
------------- --- ------------ ------------
Tax at Federal rate............................... $ 4,355,000 35% $ 8,115,000 35% $ 3,146,000 35%
State income tax net of federal................... 747,000 6% 941,000 4 605,000 7
Tax Credits....................................... (2,987,000) (24%) -- -- -- --
Loss (Earnings) distributed to S Corporation
shareholders.................................... -- -- (642,000) (2) 438,000 5
Other............................................. -- -- 87,000 -- (172,000) (2)
-- -- --
------------- ------------ ------------
$ 2,115,000 17% $ 8,501,000 37% $ 4,017,000 45%
-- -- --
-- -- --
------------- ------------ ------------
------------- ------------ ------------
Approximately $2.0 million of the above tax credits are related to the
recognition of research and development tax credits pertaining to previously
filed tax returns.
Prior to its acquisition by REMEC 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.
8. SIGNIFICANT CUSTOMERS AND EXPORT SALES
During fiscal 1999, two customers accounted for 14% and 11%, of REMEC's net
sales. During fiscal 1998 and 1997, respectively, one customer accounted for 14%
and 13% of REMEC's net sales.
Export sales were 6%, 7% and 7% of net sales for fiscal 1999, 1998 and 1997,
respectively.
9. RELATED PARTY TRANSACTIONS
An officer of REMEC holds certain interests in various suppliers to one of
REMEC's subsidiaries. Amounts paid to these suppliers in fiscal 1999, 1998 and
1997 totaled $1,122,000, $2,667,000 and $1,054,000, respectively.
10. SUBSEQUENT EVENT
On February 26, 1999, REMEC announced its plan to acquire Airtech plc in
exchange for common stock with a value of approximately $32.0 million.
Completion of the transaction is contingent upon the approval of the
shareholders of Airtech plc. The acquisition will be accounted for as a pooling
of interests.
F-22
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT (CONTINUED)
Assuming that the acquisition of Airtech plc had occurred on the first day
of REMEC's fiscal year ended January 31, 1998, unaudited pro forma condensed
consolidated results of operations would be as follows (in thousands except per
share amounts):
1999 1998
---------- ----------
(UNAUDITED)
Net sales............................................................. $ 179,215 $ 191,008
Net income (loss)..................................................... (4,831) 14,754
Earnings (loss) per share:
Basic............................................................. $ (.20) $ .65
Diluted........................................................... $ (.20) $ .63
F-23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, REMEC has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1999.
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 REMEC and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
/s/ RONALD E. RAGLAND Chief Executive Officer
- ------------------------------ (Principal Executive March 25, 1999
Ronald E. Ragland Officer)
/s/ ERROL EKAIREB
- ------------------------------ President, Chief Operating March 25, 1999
Errol Ekaireb Officer and Director
Executive Vice President,
/s/ JACK A. GILES President of REMEC
- ------------------------------ Microwave Division and March 25, 1999
Jack A. Giles Director
/s/ DENNY MORGAN Director, Senior Vice
- ------------------------------ President and Chief March 25, 1999
Denny Morgan Engineer
/s/ JOSEPH T. LEE
- ------------------------------ Executive Vice President March 25, 1999
Joseph T. Lee and Director
S-1
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
Chief Financial Officer,
/s/ MICHAEL E. MCDONALD Senior Vice President
- ------------------------------ and Secretary (Principal March 25, 1999
Michael E. McDonald Financial and Accounting
Officer)
/s/ ANDRE R. HORM
- ------------------------------ Director March 25, 1999
Andre R. Horn
/s/ JEFFREY M. NASH
- ------------------------------ Director March 25, 1999
Jeffrey M. Nash
/s/ THOMAS A. CORCORAN
- ------------------------------ Director March 25, 1999
Thomas A. Corcoran
- ------------------------------ Director March , 1999
William H. Gibbs
S-2
SCHEDULE II
REMEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
CONTRACT LOSS RESERVE PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------- ------------ ----------- ----------- ------------
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
Year ended January 31, 1999...................... 2,050,000 (345,781) (754,219) 950,000
RESERVE FOR BALANCE AT CHARGED TO BALANCE
OBSOLETE AND BEGINNING OF COSTS AND AT END
UNUSABLE INVENTORY PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------------------- ------------ ------------ ------------- ------------
Year ended January 31, 1997.................... $ 1,357,000 $ 655,000 $ (126,000) $ 1,886,000
Year ended January 31, 1998.................... 1,886,000 1,353,000 (298,000) 2,941,000
Year ended January 31, 1999.................... 2,941,000 1,479,000 (1,079,000) 3,341,000
REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1999
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ------------- ---------------------------------------------------------------------------------------- -------------
3.1(1) Restated Articles of Incorporation
3.2(1) By-Laws, as amended
10.1(1) Equity Incentive Plan
10.2(1) Employee Stock Purchase Plan
10.3(1) Form of Indemnification Agreements between REMEC and its officers and directors
10.4(2) 1996 Nonemployee Directors Stock Option Plan
10.5(3) Second Amended and Restated Loan Agreement between REMEC and The Union Bank of
California, N.A., dated June 25, 1998, as amended
10.6(3) Participation Agreement dated as of August 25, 1998 among REMEC, Union Bank of
California, N.A., and certain other parties identified therein
10.7(3) Master Lease dated as of August 25, 1998, between Union Bank of California, N.A., as
Certificate Trustee, and REMEC
10.8(3) Lessee Guarantee executed by REMEC dated as of August 25, 1998
21.1(3) Subsidiaries of REMEC
23.1(3) Consent of Ernst & Young LLP, Independent Auditors
23.2(3) Consent of Ireland San Filippo LLP, Independent Public Accountants
23.3(3) Consent of Bray, Beck & Koetter, Independent Auditors
24.1 Power of Attorney (included on Page S-1 of this Annual Report on Form 10-K)
27.1(3) Financial Data Schedule
- ------------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-1 (No. 333-80381) filed on
February 1, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-8 (No. 333-16687) filed on
November 25, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(3) Filed with this Annual Report on Form 10-K.