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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-27414
REMEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3814301
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9404 CHESAPEAKE DRIVE, 92123
SAN DIEGO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 560-1301
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether 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 [ ] No [X]
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 14, 2000 was approximately $1.046 billion based on the last
reported sale price on the Nasdaq National Market of $48.00 per share of such
stock on March 14, 2000.
The number of outstanding shares of Registrant's Common Stock as of March
14, 2000 was 25,534,690.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for REMEC's Annual Meeting of Shareholders
expected to be held on June 2, 2000, 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.
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This document contains 86 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, 2000
TABLE OF CONTENTS
PAGE
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PART I..................................................................... 3
ITEM 1. BUSINESS.................................................... 3
Introduction................................................ 3
Industry Background......................................... 3
The REMEC Solution.......................................... 6
Strategy.................................................... 7
Products.................................................... 8
Sales and Marketing......................................... 9
Product and Manufacturing Groups............................ 10
Manufacturing............................................... 10
Competition................................................. 11
Research and Development.................................... 11
Government Regulations...................................... 12
Intellectual Property....................................... 12
Employees................................................... 12
ITEM 2. PROPERTIES.................................................. 13
ITEM 3. LITIGATION.................................................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS............. 13
PART II.................................................................... 14
ITEM 5. MARKET FOR REMEC'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS..................................................... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16
Results of Operations....................................... 16
Fiscal Year Ended January 31, 2000 vs. Fiscal Year Ended
January 31, 1999............................................ 16
Fiscal Year Ended January 31, 1999 vs. Fiscal Year Ended
January 31, 1998............................................ 17
Liquidity and Capital Resources............................. 18
Year 2000................................................... 19
ITEM QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
7(a). RISK........................................................ 19
Interest Rate Risk.......................................... 19
Foreign Currency Exchange Rate.............................. 19
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 REMEC................... 20
ITEM 11. EXECUTIVE COMPENSATION...................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 23
PART IV.................................................................... 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 24
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PART I
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the risks
described in this Annual Report and the other documents 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
We are a leading designer and manufacturer of high frequency subsystems
used in the transmission of voice, video and data traffic over wireless
communications networks. Our products are designed to improve the capacity,
efficiency, quality and reliability of wireless communications infrastructure
equipment. We also develop and manufacture highly sophisticated wireless
communications equipment used in the defense industry, including communications
equipment integrated into tactical aircraft, satellites, missile systems and
smart weapons. We manufacture products that operate at the full range of
frequencies currently used in wireless communications transmission, including at
radio frequencies, or RF, microwave frequencies and millimeter wave frequencies.
By offering products that cover the entire frequency spectrum for wireless
communications, we are able to address opportunities in the worldwide mobile
wireless communications market as well as the global fixed access broadband
wireless market.
INDUSTRY BACKGROUND
DEREGULATION OF THE TELECOMMUNICATIONS INDUSTRY FOSTERS COMPETITION BY
SERVICE PROVIDERS. Global telecommunications deregulation is fostering
significant competition among providers of advanced communications services. In
the U.S., regional Bell operating companies, such as Ameritech, Bell Atlantic,
BellSouth, GTE, Pacific Bell, SBC Communications and US West, until recently
were the exclusive owners and operators of the copper wire connections between
network backbones and their subscribers, commonly known as the "last mile." The
federal Telecommunications Act of 1996 intensified the competitive environment
in the U.S. by requiring these telephone companies to provide access to portions
of their networks, including the last mile, to competing service providers.
Similar to the U.S., other countries have begun to privatize state-owned
telecommunications companies to encourage competition among communications
service providers. These events have been significant factors in creating
worldwide competition in the communications services industry. To compete in
this environment, many network service providers seek to differentiate
themselves and increase market share by offering integrated voice, video and
data services, which require broadband access and deployment of additional
communications infrastructure equipment.
DEMAND FOR HIGH SPEED INTERNET ACCESS AND OTHER DATA SERVICES INCREASES THE
NEED FOR BROADBAND ACCESS. Consumers around the world are using the Internet for
an ever increasing range of purposes, including email, high quality audio,
streaming video and other multimedia services. Businesses are also using the
Internet to enhance their reach to both residential and business consumers with
applications such as electronic commerce, global marketing, customer support,
web hosting, order fulfillment and supply management. The Internet also permits
access to corporate data networks, including intranets and extranets,
facilitating communication among corporate sites or with telecommuters or
traveling employees. This increased usage requires an expanded capacity for the
quick and reliable transmission of voice, video and data, which can be
accomplished through broadband access.
INCREASED DEMAND FOR MOBILE WIRELESS SERVICES NECESSITATES EXPANSION OF
WIRELESS INFRASTRUCTURE. Wireless network service providers to date have focused
primarily on satisfying the increasing demand for wireless telephony and paging
services through the transmission of voice and low speed data signals over
analog cellular
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systems and digital personal communication systems, or PCS. It is estimated that
the number of global cellular/PCS subscribers will grow from 308 million in 1998
to 975 million by 2003. Since each cellular or PCS base station has a finite
capacity, the demand created by increased subscribers will require a substantial
increase in capital investment in wireless communications infrastructure
equipment. It is estimated that wireless base stations, cell site equipment and
switch equipment sales will grow from $35.1 billion in 1998 to $75.2 billion in
2003.
ADVANCES IN MOBILE WIRELESS COMMUNICATIONS NETWORK TECHNOLOGY WILL REQUIRE
ADDITIONAL WIRELESS INFRASTRUCTURE EQUIPMENT. The capacity and quality of
domestic and international mobile wireless communications networks have evolved
with advances in technology. In response to capacity and level of service
demands, service providers are expanding their current infrastructure and also
are implementing new wireless technologies, such as third generation, or 3G,
networks. The level of technology advancement used in wireless mobile networks
is generally grouped into the following three categories:
- First generation, or 1G, networks. These mobile networks feature analog
technology that provides voice and low speed data services.
- Second generation, or 2G, networks. Second generation cellular networks
feature digital technology, including PCS. Digital technology provides
network service providers and subscribers with advantages over analog
technology, including increased system capacity, secure voice
communications, short messaging service and other enhanced services. This
technology can be implemented with new infrastructure or as an expansion
of existing IG networks.
- Third generation, or 3G, networks. Third generation cellular networks
feature increased capacity and data speeds that permit wireless
transmission of integrated voice, video and data traffic. This technology
can be implemented with new infrastructure or also as an equipment
overlay to existing 2G networks. Network services providers are
anticipated to begin to upgrade their networks to 3G levels over the next
few years as regulatory agencies around the world begin to license the
frequency band for this digital technology. Licenses to use this
frequency band have been recently awarded in Japan and are expected to be
awarded in Europe in 2000, with the U.S. following over the next several
years.
COPPER WIRE, CABLE AND FIBER OPTIC BROADBAND ACCESS IS COSTLY TO DEPLOY AND
HAS OTHER LIMITATIONS. Applications requiring high capacity data transmission or
high speed Internet access traditionally have been satisfied through deployment
of broadband last mile connections consisting of enhanced copper wire called
digital subscriber lines, or DSL, coaxial cable and fiber optic cable, each of
which are described below:
- Digital subscriber line. DSL has a data transmission rate of up to 1.5
Mbps. While the necessary copper infrastructure for DSL is already in
place through existing telephone copper wires, transmission rates and
availability are limited by the quality of the subscriber's existing
copper wire infrastructure and distance from the telephone company
switch.
- Coaxial cable. Cable has a data transmission rate of up to 27 Mbps. As
with DSL, the necessary cable infrastructure for residential use is
already in place. However, existing cable networks must be upgraded to
provide for two-way data transmission, and many businesses are not
currently wired for cable.
- Fiber optic cable. Fiber optic networks have data transmission rates of
up to 10 billion bits per second, or 10 Gbps, the fastest rate of any
current broadband access solution. However, optic cable is very expensive
to deploy and may exceed the data transmission needs of many subscribers.
Currently to add capacity, these land line networks require right of way
access and a labor intensive process of physically laying wires or cables in
order to connect consumers to the network backbone. As a result of the
difficulties in deploying additional wires or cables, increased demand for
communication access may create a "last mile bottleneck" between subscribers and
the backbone of these land line networks.
FIXED ACCESS BROADBAND WIRELESS TECHNOLOGY IS EMERGING AS A COST EFFECTIVE
ALTERNATIVE TO BROADBAND LAND LINE TRANSMISSION. New fixed access broadband
wireless technology can provide quality of service comparable to the best land
line network alternatives at speeds that are significantly faster than
conventional copper wire-
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based networks. Fixed access broadband wireless technology is designed to be
integrated with the existing network backbone to address the last mile
bottleneck problem. In addition, certain types of fixed access broadband
wireless technology provide an alternative for selective network backbone
applications. Broadband wireless systems include point-to-point-to-multipoint
and satellite-to-multipoint broadband technologies, which are described below:
- Point-to-point wireless. Point-to-point wireless systems generally have
data transmission rates of up to 155 Mbps. While point-to-point systems
have traditionally been deployed for high capacity trunking applications
between two wireless telephony networks, recently they have been used to
interconnect digital cellular networks. Point-to-point wireless networks
can also provide a last mile connection for large communications end
users, such as large office buildings, hospitals and universities.
- Point-to-multipoint wireless. Point -to- multipoint wireless systems
generally have data transmission rates of up to 500 Mbps. Point-
to-multipoint wireless systems use a single central hub radio to serve
multiple end users. Point- to- multipoint wireless systems have
additional advantages over point-to-point wireless systems. These include
reduced equipment costs as the addition of new customers requires only
new customer premises equipment, as well as allocation of bandwidth based
on demand, so customers only pay for what they use. As a result, point-
to-multipoint systems can provide cost effective last mile access to
customers that do not have as much traffic as point-to-point customers.
- Satellite-to-multipoint wireless. The current generation of
satellite-based multipoint systems are implemented with networks using
very small aperture terminals, or VSATs. These networks are deployed for
a wide range of business data applications such as point-of-sale
transactions and inventory management. Recently, VSAT networks have been
adapted for cost effective use in rural telephony applications, primarily
in countries that do not have fully developed land line telephone
networks. Recent advances in satellite digital processing and component
and device technology, based on a newly licensed frequency spectrum
called the Ka band, are being used in the development of broadband
satellite networks such as Teledesic and Hughes Spaceway. These next
generation satellite networks are designed to provide broadband access to
residential and business users for applications such as high speed
Internet access, videoconferencing and other data rich applications.
FREQUENCY ALLOCATIONS BY THE FCC AND INTERNATIONAL AGENCIES MAY LEAD TO
WIRELESS INFRASTRUCTURE EXPANSION. In response to the increasing demand for
wireless communications services, regulatory bodies like the FCC and other
international agencies continue to allocate new frequency spectrum. For example,
the FCC has recently licensed several frequency bands, including bands for local
multipoint distribution systems, or LMDS, and multichannel multipoint
distribution systems, or MMDS, for two-way broadband wireless data services. The
FCC has also adopted orders to allocate additional spectrum through auctions
during 2000 which can be used by high speed data transmission service providers.
It is anticipated that these frequencies could be used to deliver fixed wireless
Internet access to business and residential customers. To take advantage of
these licenses, network operators must deploy new infrastructures specific to
the licensed frequency band. Each frequency band requires unique transmission
equipment designed to work with the technical requirements of the particular
band. Thus, as additional frequencies are allocated by regulatory agencies
around the world, wireless infrastructure equipment must be deployed to
commercialize these licenses.
WIRELESS INFRASTRUCTURE OEMS RELY ON SUBSYSTEM PROVIDERS. In order to meet
the demand for mobile wireless and fixed access broadband wireless services,
service providers are turning to systems integrators or OEMs to build out
infrastructure quickly, efficiently and in accordance with exacting performance
specifications. In addition, OEMs are looking to outsource the design and
manufacture of highly integrated, reliable subsystems in a cost effective
manner. This permits OEMs to accelerate their time to market and allows them to
leverage their core competencies of full system design and integration. By
outsourcing subsystems, OEMs promote competition among developers and
manufacturers, which leads to technological innovations in wireless
infrastructure equipment. Concurrently, OEMs are seeking to select a core group
of subsystem and component providers in order to reduce the supply and
management risks associated with the currently fragmented supplier base.
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THE REMEC SOLUTION
We are a leading designer and manufacturer of high frequency subsystems and
integrated components used in the transmission of voice, video and data traffic
over wireless communications networks and in defense applications. We market our
products to OEMs of wireless communications networks and network services
providers as well as to prime contractors in the defense industry.
We believe that our core competencies enable us to effectively address the
existing and emerging opportunities in the wireless communications
infrastructure equipment and defense markets. These core competencies include
the following:
INTEGRATION EXPERTISE. We design high performance subsystems over a broad
range of RF, microwave and millimeter frequencies, which require sophisticated
component integration. By effectively integrating a number of required microwave
functions into a single package, we are able to:
- improve performance and reduce cost through reduction in product size and
parts count;
- enhance performance through optimal partitioning and implementation of
functional elements; and
- reduce cost by minimizing "over engineering," through avoiding, the use
of higher performance, more costly components than are necessary in order
to compensate for performance degradation resulting from inefficiencies
due to combining stand alone components that are not designed to be
integrated into one system.
CONCURRENT ENGINEERING. We streamline and optimize the product development
cycle by employing "concurrent engineering," which includes the following
elements:
- joint participation with our customers at the conceptual design stage,
allowing us to suggest an architecture/ design that reduces cost and
increases performance at the integrated subsystem level;
- participation by our suppliers in the design process, thereby optimizing
material and device selections; and
- consideration of manufacturing constraints and limitations while
developing a product design in order to expedite the implementation of
the manufacturing process.
VERTICAL INTEGRATION OF DESIGN AND MANUFACTURING. Vertical integration of
design and manufacturing reduces product time to market and unit costs. With
vertical integration, we retain control of each step of the design and
manufacturing process while minimizing the use of outside sources and
subcontractors for key manufacturing processes and services. This vertical
integration also improves quality control, reliability and our ability to
implement volume production. We have enhanced our vertical integration
capability with recent acquisitions. These acquisitions include a surface mount
board assembly manufacturer, as well as several microwave component companies
that provide key functional capabilities to be used in the design of our
integrated subsystems.
BROAD FREQUENCY RANGE. Our technologies support the range of frequencies
utilized for mobile wireless and broadband wireless applications. Our microwave
technology expertise covers the full range of the frequency spectrum used for
existing wireless communications. Many of our subsystem competitors only address
select frequency bands in the subsystems they design, which makes them
vulnerable to technological advances in products that use frequency bands they
do not address. By being able to design and manufacture products across the
breadth of the wireless communications market, we can better address our
customers' needs and capitalize on our overall design and manufacturing
capabilities.
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STRATEGY
Our objective is to build on the strength of our core competencies to be
the supplier of choice of OEMs in the wireless infrastructure equipment industry
and prime contractors in the defense electronics industry. Our strategy includes
the following key elements:
LEVERAGE TECHNOLOGY LEADERSHIP. Through seventeen years of leadership in
high frequency applications in the defense and commercial industries, we believe
that we have one of the most advanced portfolios of products encompassing RF,
microwave and millimeter wave technologies. The skills that we developed in the
defense industry and honed in the commercial wireless market have enabled us to
develop solutions to achieve substantial reductions in the size and cost of
wireless infrastructure equipment. We intend to continue to integrate additional
functions into smaller packaging with fewer parts while meeting the reliability
and performance specifications of next generation wireless infrastructure
equipment.
CONTINUE TO DEVELOP STRONG STRATEGIC ALLIANCES WITH CUSTOMERS. By forming
lasting customer relationships through working closely with customers, we are
better able to develop insight into their system requirements and to design
specific products that meet their needs. We intend to continue to expand our key
customer alliances with leading infrastructure OEMs, such as Motorola, Digital
Microwave and Nokia, as well as working with emerging wireless equipment
suppliers, such as SpectraPoint. In addition, we intend to expand our
participation in significant defense programs with key prime contractors, such
as Raytheon, Northrop Grumman and Lockheed Martin. We will concentrate our
efforts on the commercial customers we believe will be the most successful in
selling their systems to service providers that require high volume production.
SUPPLY INTEGRATED MICROWAVE SUBSYSTEMS TO OEMS' WORLDWIDE OPERATIONS AND
EXPAND OUR INTERNATIONAL PRESENCE. Historically, we have been primarily a
supplier to the domestic operations of OEMs. Some of these and other OEMs also
have a significant global presence, including operations in Europe and Asia.
There is an opportunity to become the supplier for these OEMs in all of their
global markets. We believe that we are one of only a few microwave subsystem
companies that have the breadth of expertise in wireless communications
technology necessary to service these OEMs' worldwide operations. In addition to
servicing OEMs' worldwide operations, with our acquisition of United
Kingdom-based Airtech, we intend to increase our operations in Europe, initially
focusing on the mobile wireless market. We also intend to expand our existing
sales offices in Kuala Lumpur, Malaysia and Beijing, China to increase our sales
and distribution capabilities in Asia. Additional international activities may
include entering into strategic partner relationships with local marketing or
manufacturing companies in Asia.
SUPPLY NICHE PRODUCTS DIRECTLY TO NETWORK SERVICE PROVIDERS. We intend to
expand our marketing efforts to sell certain niche mobile wireless products
directly to network service providers. Although we do not intend to enter into
direct competition with our OEM customers, there are several niche microwave
transmission products that are not being marketed aggressively by OEMs,
including base station tower top products and mobile wireless coverage
enhancement products. We intend to expand our efforts to market these products
to network service providers when we can do so without competing directly with
our OEM customers.
ENHANCE HIGH VOLUME MANUFACTURING CAPABILITY. We intend to continue to
implement process manufacturing automation and believe that our ability to
develop a high level of automated product alignment and test capability will
help us to further improve our cost effectiveness and time to market. We also
intend to expand our foreign manufacturing operations, particularly in Costa
Rica, when appropriate, in order to lower our costs or to access an available
workforce. In addition, we intend to offer our manufacturing services to OEMs
and subsystem and component developers or manufacturers who need high volume
manufacturing of their own products either because of capacity constraints or
lack of manufacturing expertise.
PURSUE STRATEGIC ACQUISITIONS. We intend to continue to augment our
existing technology base by acquiring specialized technology companies that
complement our product offerings and market strategies. We believe that
expansion of our core competencies through the acquisition of such specialized
technology companies, when combined with our technological and manufacturing
skills, will allow us to achieve improved levels of integration.
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PRODUCTS
Virtually every wireless system contains a microwave transport subsystem
that performs the function of transforming modulated voice, data or video from
an intermediate frequency, or IF, signal into a microwave frequency signal for
transmitting or converting an incoming signal from microwave frequencies back
into an IF modulated voice, data or video signal. A microwave transport
subsystems may consist of a completely integrated unit or of several
interconnected modules and single function components.
MOBILE WIRELESS PRODUCTS. In this market, we sell multi-function microwave
modules, including delay filter assemblies, filter/low noise amplifier
assemblies and filter panel assemblies. We also supply components, including
filters, amplifiers, voltage controlled oscillators, or VCOs, and mixers that
are used by OEMs in base station infrastructure equipment. In addition, we also
sell directly to service providers complete microwave subsystems for network
coverage enhancement applications, including tower mounted amplifiers and tower
mounted boosters. These products eliminate the cable between the radio at the
bottom of the base station and the antenna at the top of the base station by
filtering and amplifying the transmit/receive signals at the base station tower
top. These tower top base stations may extend coverage by up to 30% to 40%. As
fully integrated microwave "front ends," these products provide the circuitry of
the radio that enables signals to be transmitted and received at microwave
frequencies and that can be used as the front end of low power transceiver
units. Active antenna and remote RF head products that allow IF, RF, microwave
or fiber optic backhaul are currently being developed to provide levels of
integration similar to that of the fixed wireless access and broadband satellite
access products. To address the niche but high growth in-building coverage
market, we have also developed in-building coverage products, including
repeaters, bi-directional amplifiers, multicarrier combiners/amplifiers and
fiber optic distribution modules. Our selling prices for mobile wireless
subsystems and components range from approximately $20 to $3,500.
POINT-TO-POINT BROADBAND WIRELESS PRODUCTS. We develop and supply high
(OC-3) and medium (Tl to 8T1) capacity point-to-point wireless transport
equipment deployed by network operators for backhaul of a variety of
communications traffic. Our products are utilized in systems that provide a cost
effective approach to data transport where land line access to TI lines or fiber
optic cable is not deployed or otherwise unavailable. For this market, we
manufacture microwave transport subsystems, including radios, outdoor units, or
ODUs, as well as individual microwave modules, including antennas, diplexers,
transceivers, synthesizers and power supplies, that provide microwave transport
functionality. As the market has become more horizontally segmented, there has
been a significant trend towards outsourcing the entire ODU, which allows our
OEM customers to focus on system engineering and network software. Using our
broad microwave engineering capabilities, we have been able to supply complete
microwave transport subsystems, which aids our customers in achieving their cost
reduction and time to market objectives. Our selling prices for point-to-point
broadband wireless subsystems and components range from approximately $80 to
$10,000.
POINT-TO-MULTIPOINT BROADBAND WIRELESS PRODUCTS. For this market, we
manufacture microwave transport subsystems, such as radios, customer premise
equipment and coverage enhancement products, as well as the individual microwave
modules that provide the microwave transport functionality. These modules
include antennas, diplexers, transceivers, synthesizers and power supplies.
Network systems integrators in this market typically outsource the entire radio
and, in many cases, the entire customer premises equipment. This outsourcing
allows these integrators to focus on their core competencies of system
engineering and network architecture. Our network service provider customers in
this market typically require specialized solutions to network-wide functional
needs. An example is our coverage enhancement product used in LMDS to solve
line-of-sight obstructions between base stations and potential customer sites,
which frequently impair transmission performance of our customers' LMDS
networks. Our selling prices for point-to-point multipoint subsystems and
components range from approximately $300 to $5,000.
SATELLITE-TO-MULTIPOINT BROADBAND PRODUCTS. Like the point-to-point and
point-to-multipoint markets, we have focused our VSAT and broadband satellite
business on ODU and customer premises equipment. We also provide microwave
modules such as power amplifiers to ODU integrators. Our satellite-to-multipoint
subsystems and components sell for less than $1,000.
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DEFENSE PRODUCTS. We focus our efforts in the defense electronics industry
on providing communication systems, subsystems and integrated components to
defense programs which we believe have the highest probability of follow-on
production. Our products are integrated into various defense tactical aircraft,
satellites, missile systems and smart weapons comprise the majority of the
platforms of our customers. The systems, subsystems and integrated components
are comprised of specialized combinations of components that perform a variety
of microwave functions, including filters, couplers, power dividers switches,
amplifiers, VCOs, mixers and multipliers, among others. Defense industry
programs for which we provide communication systems, subsystems and integrated
components include the following:
- the F-22 Stealth Tactical Fighter Aircraft program for the U.S. Air
Force;
- the Integrated Defensive Electronic Countermeasure System (IDECM) for the
U.S. Navy;
- the Advanced Medium Range Air to Air Missile (AMRAAM) program for the
U.S. Air Force;
- the Longbow Missile and Radar programs for the U.S. Army; and
- the Standard Missile for the U.S. Navy.
Our selling prices for defense subsystems and components range from
approximately $100 to $200,000.
CUSTOMERS
We derive significant revenues from a limited group of customers. For the
fiscal year ended January 31, 2000, our top ten customers comprised
approximately 60% of revenues, with no customer accounting for more than 10% of
total fiscal 2000 revenues other than the combined sales to Motorola, Inc. and
General Instrument which Motorola acquired in January 2000. The combined sales
to Motorola and General Instrument in fiscal 2000 accounted for 15.6% of fiscal
2000 revenues. In addition, in December 1999, we entered into a strategic supply
agreement with SpectraPoint Wireless LLC which we anticipate will provide a
significant portion of our revenues in the near future. We anticipate that we
will continue to derive significant revenues from sales to a relatively small
group of customers. If any of these customers cancels, reduces or delays orders
or product estimates given to us or shipments on account of their manufacturing
or supply difficulties, financial difficulties or reduction in demand for their
systems and products or otherwise, our revenues would be significantly reduced.
We sell our commercial wireless communications products primarily to OEMs,
that in turn integrate our products into wireless infrastructure equipment
solutions sold to network service providers. In addition, we also sell certain
niche products directly to network service providers. Our customers for
commercial wireless subsystems include the following:
- - Motorola - Digital Microwave
- - General Instrument - Nokia
- - Alcatel - Lucent Technologies
- - P-COM - STM Wireless
- - SpectraPoint - Nortel Networks
We also sell our wireless communications equipment to the major U.S.
defense prime contractors for integration into larger systems. Our customers for
defense communications equipment include the following:
- - Raytheon - Northrop Grumman
- - ITT Industries - Lockheed Martin
- - TRW - Boeing
SALES AND MARKETING
We use a team-based sales approach to facilitate close management of
relationships at multiple levels of a customer's organization, including
management, engineering and purchasing personnel. Our integrated sales approach
involves a team consisting of a senior executive, a business development
specialist, members of our
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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,
we believe, is critical to the integration of our products into our customers'
equipment. Our executive officers are also involved in all aspects of our
relationships with our major customers and work closely with their senior
management. To identify sales opportunities, we primarily utilize a direct sales
force that is supplemented by a group of manufacturer sales representatives.
We are rapidly expanding our international sales presence with direct sales
offices in Europe and Asia. Sales to customers residing outside of the U.S.
represented 15%, 13% and 18% of net sales in fiscal years ended January 31,
1998, 1999 and 2000, respectively. Our international sales do not include
products sold to foreign end users by our domestic customers.
PRODUCT AND MANUFACTURING GROUPS
Our business is divided among three major product-based groups, the
Broadband Wireless Group, the Integrated RF Solutions Group and the Defense
Products Group, as well as a fourth group named the Manufacturing Group. The
Broadband Wireless Group develops and manufactures fixed access wireless
communications infrastructure equipment integrated into wireless networks for
high speed voice, video, data and internet services. These services may be
offered by communications services providers to business and residential
customers through various distribution systems, including local multipoint
distribution systems, or LMDS, multichannel multipoint distribution systems, or
MMDS, and satellite systems. Subsidiaries within this group include REMEC
Magnum, REMEC Wireless, REMEC Nanowave and REMEC CSH. The products produced by
members of this group include high capacity point-to-point and
point-to-multipoint radios, system enhancing microwave repeaters and low cost
satellite ground systems.
The Integrated RF Solutions Group develops and manufactures highly
integrated RF products that improve the performance and cost effectiveness of
mobile wireless communications infrastructure equipment. The subsidiaries within
this group include REMEC Airtech, REMEC Wacom and REMEC Q-bit. The products
produced by this group are provided to worldwide OEMs and service providers and
include masthead amplifiers, boosters, high power and low noise amplifiers, as
well as integrated filtering and combining systems.
The Defense Products Group provides a broad spectrum of RF, microwave and
guidance products for systems integrated by prime contractors in military and
space applications. This group currently consists of REMEC Microwave and
Humphrey, with defense products also being produced by REMEC Magnum, REMEC
Nanowave and REMEC Q-bit. The Defense Group products range from critical
components and integrated modules to advanced integrated microwave assemblies
for radar, missiles, electronic warfare and communication/navigation systems.
The Manufacturing Group provides high volume production of microwave
products, including test and critical hybrid circuits, to the other product
groups. Subsidiaries or divisions within this group include REMEC Veritek, a
microwave adept automated surface mount assembly facility, REMEC Metal
Fabrication Center, a sophisticated metal fabrication design and volume
production facility, and REMEC Costa Rica and an affiliated maquiladora
operation in Mexico, both of which have high volume manufacturing facilities.
Members of the product groups also have manufacturing facilities.
MANUFACTURING
With the precise specifications required by our customers, we believe that
process expertise and discipline are key elements of successful high volume
production of wireless subsystems. We assemble, test, package and ship products
at our manufacturing facilities located in the following cities:
- San Diego, Poway, Escondido, San Jose, Santa Clara and Milpitas,
California;
- West Palm Bay, Florida;
- Waco, Texas;
- Toronto, Canada;
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- San Jose, Costa Rica;
- Tijuana, Mexico; and
- Aylesbury, United Kingdom.
Since inception, we have been manufacturing products for defense programs
in compliance with the stringent MIL-Q-9858 specifications. We received ISO-9001
certification from the Defense Electronics Supply Center for our facilities at
Microwave. Other REMEC facilities that are ISO-9001 qualified include Wireless,
Humphrey, Q-bit, and Airtech. In addition, facilities at Veritek and REMEC Costa
Rica facilities are ISO-9002 qualified. ISO-9001 and ISO-9002 are standards
established by the International Organization for Standardization that provide a
methodology by which manufacturers can obtain quality certification. To assure
the highest product quality and reliability and to maximize control over the
complete manufacturing cycle and costs, we seek to achieve vertical integration
in the manufacturing process wherever appropriate.
Historically, the volume of our production requirements in the defense
markets was not sufficient to justify the widespread implementation of automated
manufacturing processes. As a result of expected growth in our commercial
wireless business, we are significantly increasing our manufacturing capacity.
Accordingly, we have introduced automated manufacturing techniques for product
assembly and testing and anticipate significant capital expenditures for this
purpose in the future.
We attempt to utilize standard parts and components that are available from
multiple vendors. However, certain components used in our products are currently
available only from single sources, and other components are available from only
a limited number of sources. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, we have 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, we acquired Veritek which provides surface mount capabilities
and expertise. We also rely on contract manufacturers for circuit board
assembly. We generally order components and circuit boards from our suppliers
and contract manufacturers by purchase order on an as needed basis.
COMPETITION
The markets for our 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 the market prices and margins of our products may decline if
competitors begin making similar products. We face some competition from
component manufacturers who have integration capabilities, but we believe that
our primary competition is from the captive manufacturing operations of large
wireless communications OEMs, including all of the major telecommunications
equipment providers, and defense prime contractors. We believe that our future
success depends largely upon the extent to which these OEMs and defense prime
contractors elect to purchase subsystems and integrated components from outside
sources such as us. OEMs and defense prime contractors could develop greater
internal capabilities and manufacture these products exclusively in-house,
rather than outsourcing them, which would have a negative impact on our sales.
RESEARCH AND DEVELOPMENT
Our core competencies, including our emphasis on concurrent engineering,
rely heavily on our research and development capabilities. These capabilities,
including our breadth of engineering skills, have allowed us to develop products
that operate at the full range of existing frequencies used in commercial
wireless communications. Research and development expenses for the fiscal years
ended January 31, 1998, 1999 and 2000 were approximately $7.9 million, $10.9
million and $14.0 million, respectively. We expect that as our commercial
business expands, research and development expenses will increase in amount and
as a percentage of sales. Our 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. We believe that to remain competitive in the future we
will need to invest significant financial resources in research and development.
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GOVERNMENT REGULATIONS
Our products are incorporated into commercial wireless communications
systems that are subject to regulation domestically by the FCC and
internationally by other government agencies. Although typically the equipment
operators and not us are responsible for compliance with these regulations,
regulatory changes, including changes in the allocation of available frequency
spectrum, could negatively affect our business by restricting development
efforts by our customers, making current products obsolete or increasing the
opportunity for additional competition. In addition, the increasing demand for
wireless telecommunications has exerted pressure on regulatory bodies worldwide
to adopt new standards for these 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 our customers.
We are also subject to a variety of local, state, federal and foreign
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture our products. The failure to comply with current or future
regulations could result in the imposition of substantial fines on us,
suspension of production, alteration of our manufacturing processes or cessation
of operations.
Because of our participation in the defense industry, we are subject to
audit from time to time for our compliance with government regulations by
various agencies, including the Defense Contract Audit Agency, the Defense
Security Service, the Office of Federal Contract Compliance Programs and the
Defense Supply Center Columbus. These and other governmental agencies may also,
from time to time, conduct inquiries or investigations that may cover a broad
range of our business activity. Responding to any governmental 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.
We believe that we operate our business in material compliance with
applicable government regulations.
INTELLECTUAL PROPERTY
We do not presently hold any patents on our significant products. In order
to protect our intellectual property rights, we rely on a combination of trade
secrets, copyrights and trademarks and employee and third party nondisclosure
agreements. We also limit access to and distribution of proprietary information.
The steps that we have taken to protect our intellectual property rights may not
be adequate to prevent misappropriation of our technology or to preclude
competitors from independently developing similar technology. Furthermore, in
the future, third parties may assert infringement claims against us or with
respect to our products. As to some of our products, we have agreed to indemnify
our customers against possible claims by third parties that the products
infringe their intellectual property rights. Asserting our rights or defending
against third party claims could involve substantial costs and diversion of
resources. If a third party was successful in a claim that one of our products
infringed the third party's proprietary rights, we may have to pay substantial
royalties or damages or remove that product from the marketplace. We might also
have to expend substantial financial and engineering resources in order to
modify the product so that it would no longer infringe on those proprietary
rights.
EMPLOYEES
As of January 31, 2000, we had a total of 2,388 employees, including 1,622
in manufacturing and operations, 305 in research, development and engineering,
140 in quality assurance, 59 in sales and marketing, and 262 in administration
and material procurement. We believe our future performance will depend in large
part on our ability to attract and retain highly skilled employees. None of our
employees is represented by a labor union, and we have not experienced any work
stoppage. We consider our employee relations to be good.
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ITEM 2. PROPERTIES
Our principal administrative, engineering and manufacturing facilities are
located in ten buildings aggregating approximately 262,000 square feet in the
Southern California area. Our Southern California operations consist of five
facilities owned by us and five leased facilities located in San Diego,
Escondido and Poway, California. The leases of these facilities expire on
various dates beginning in June 2000 through February 2010. Our Northern
California operations are located in four leased buildings aggregating
approximately 80,000 square feet in San Jose, Milpitas, Burlingame and Santa
Clara, California. These leases expire on various dates between in November 2000
and October 2004. Q-bit owns a 51,000 square foot building located in West Palm
Bay, Florida. REMEC S.A. owns a 50,000 square foot building located in San Jose,
Costa Rica. Nanowave leases approximately 25,000 square feet in three buildings
located in Toronto, Canada, under leases that expire in September 2001. WACOM
owns a 31,000 square foot building located in Waco, Texas. Airtech owns a 33,000
square foot building located in Aylesbury, England. We believe that our existing
facilities are adequate to meet our current needs and that suitable additional
or alternative space will be available on commercially reasonable terms as
needed.
ITEM 3. LITIGATION
On April 19, 1999, a class action lawsuit was filed against us, some of our
officers and directors and the investment banking firms who served as the
representatives of the underwriters of our public offering completed in February
1998. The lawsuit was filed by the law firm Milberg Weiss Bershad Hynes and
Lerach and its colleagues in the United States District Court for the Southern
District of California as counsel for Charles Vezzetti and all others similarly
situated. The lawsuit alleges violations of the Securities Exchange Act of 1934
by us and the other defendants between December 1, 1997 and June 12, 1998.
Specifically, the complaint alleges that we made falsely positive statements
which artificially inflated the price of our stock prior to a secondary offering
completed in February 1998 in which REMEC and some of our officers and directors
sold stock, and that our stock price fell on a series of adverse disclosures in
late May and early June 1998. The complaint in the lawsuit does not specify an
amount of claimed damages. Since the lawsuit was filed, the underwriters have
been dismissed without prejudice.
We believe that the lawsuit is without merit, and we have been defending
against it vigorously through a motion to dismiss and otherwise. In addition, we
believe the ultimate resolution will not have a material adverse impact on our
business or financial condition. However, if the plaintiffs are successful in
pursuing their claims against us and our officers and directors, such a result
could have a significant negative impact on our business and financial
condition.
Other than the securities class action lawsuit described above, 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, 2000.
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PART II
ITEM 5. MARKET FOR REMEC'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our common stock has been traded on the Nasdaq National Market since
February 1, 1996 under the symbol "REMC." The following table sets forth the
range of high and low closing sale prices of our common stock as reported on the
Nasdaq National Market for the quarterly periods indicated.
HIGH LOW
------- -------
FISCAL 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 2000
First Quarter.............................. $20.875 $11.063
Second Quarter............................. 17.688 12.188
Third Quarter.............................. 15.000 10.438
Fourth Quarter............................. 25.500 9.500
FISCAL 2001
First Quarter (through March 16, 2000)..... $54.000 $20.250
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.
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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, 2000 and with respect to the balance sheets at January 31,
1999 and 2000, 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, 1996 and 1997 and the balance sheet data at
January 31, 1996, 1997 and 1998, 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.
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS(1):
Net sales......................................... $97,700 $131,643 $191,008 $179,215 $189,189
Cost of sales..................................... 68,776 95,359 132,349 137,443 143,580
------- -------- -------- -------- --------
Gross profit...................................... 28,924 36,284 58,659 41,772 45,609
Operating expenses:
Selling, general and administrative............. 18,159 23,313 31,210 36,835 38,189
Research and development........................ 4,707 6,349 7,887 10,903 13,994
Transaction costs............................... -- -- 1,069 -- 3,130
------- -------- -------- -------- --------
Total operating expenses................. 22,866 29,662 40,166 47,738 55,313
------- -------- -------- -------- --------
Income (loss) from operations..................... 6,058 6,622 18,493 (5,966) (9,704)
Gain on sale of subsidiary........................ -- -- 2,833 -- --
Interest income (expense) and other, net.......... (426) 15 2,314 3,008 2,601
------- -------- -------- -------- --------
Income (loss) before provision for income taxes... 5,632 6,637 23,640 (2,958) (7,103)
Provision (credit) for income taxes............... 2,328 3,780 8,886 1,873 (428)
------- -------- -------- -------- --------
Net income (loss)................................. 3,304 2,857 14,754 (4,831) (6,675)
Dividend accrued on Preferred Stock............... (80) (128) -- -- --
------- -------- -------- -------- --------
Income (loss) applicable to Common Stock.......... $ 3,224 $ 2,729 $ 14,754 $ (4,831) $ (6,675)
======= ======== ======== ======== ========
Earnings per share:
Basic........................................... $ .23 $ .15 $ .65 ($ .20) ($ .27)
======= ======== ======== ======== ========
Diluted......................................... $ .23 $ .15 $ .64 ($ .20) ($ .27)
======= ======== ======== ======== ========
Shares used in per share calculations computing
earnings per share:
Basic........................................... 13,819 17,633 22,535 24,722 25,147
======= ======== ======== ======== ========
Diluted......................................... 13,936 17,944 23,228 24,722 25,147
======= ======== ======== ======== ========
AT JANUARY 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA(1):
Cash and cash equivalents......................... $ 4,146 $ 75,134 $ 47,966 $ 83,012 $ 34,836
Working capital................................... 19,575 100,673 99,221 133,807 95,610
Total assets...................................... 53,798 151,524 179,082 218,571 223,929
Long-term debt.................................... 4,781 3,234 -- -- 5,049
Total shareholders' equity........................ 29,722 121,639 145,990 191,607 187,892
- ---------------
(1) REMEC acquired Airtech in April 1999, Q-bit in October 1997, C&S Hybrid in
June 1997, Radian in February 1997, and Magnum in August 1996, and 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 Airtech, Q-bit, C&S Hybrid, Radian and
Magnum, and for all periods presented. REMEC acquired WACOM Products, Inc.
in March 1999, Smartwaves International in February 1999, Nanowave
Technologies Inc. in October 1997 and Verified Technical Corporation in
March 1997 in transactions accounted for as purchases.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We commenced operations in 1983 and have become a leader in the design and
manufacture of subsystems and integrated components used in the wireless
communications industry and the defense industry. Our consolidated results of
operations include the operations of: REMEC Microwave, Inc., or Microwave; REMEC
Wireless, Inc., or Wireless; Humphrey, Inc., or Humphrey; REMEC Magnum, Inc., or
Magnum; REMEC Veritek, Inc., or Veritek; REMEC CSH, Inc., or CSH; REMEC Q-bit,
Inc., or Q-bit; REMEC Nanowave, Inc., or Nanowave; REMEC WACOM, LP, or WACOM;
REMEC Airtech Ltd, or Airtech; and REMEC Inc., S.A., or REMEC Costa Rica. Our
consolidated results of operations also include the operations of RF
Microsystems, or RFM for the period from April 30, 1996 to August 26, 1997.
Our 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, our
historical funded research and development expenses have been minimal. As our
commercial business has expanded, research and development expenses have
generally increased in amount and as a percentage of sales. We expect this trend
to continue, although research and development expenses may fluctuate on a
quarterly basis both in amount and as a percentage of sales.
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.
FISCAL YEARS ENDED
JANUARY 31,
-----------------------
1998 1999 2000
----- ----- -----
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 69.3 76.7 75.9
----- ----- -----
Gross profit...................................... 30.7 23.3 24.1
Operating expenses:
Selling, general and administrative............... 16.3 20.6 20.1
Research and development.......................... 4.1 6.1 7.4
Transaction costs................................. 0.6 -- 1.7
----- ----- -----
Total operating expenses....................... 21.0 26.7 29.2
----- ----- -----
Income (loss) from operations....................... 9.7 (3.4) (5.1)
Gain on sale of subsidiary.......................... 1.5 -- --
Interest income and other, net...................... 1.2 1.7 1.4
----- ----- -----
Income (loss) before provision (credit) for income
taxes............................................. 12.4 (1.7) (3.7)
Provision (credit)for income taxes.................. 4.7 1.0 (0.2)
----- ----- -----
Net income (loss)................................... 7.7% (2.7)% (3.5)%
===== ===== =====
FISCAL YEAR ENDED JANUARY 31, 2000 VS. FISCAL YEAR ENDED JANUARY 31, 1999
NET SALES. Net sales increased 5.6% from $179.2 million during fiscal 1999
to $189.2 million during fiscal 2000. The increase in sales was primarily
attributable to the increased demand from REMEC's commercial customers,
including approximately $3.8 million of revenue generated by customers of WACOM,
which was acquired during fiscal 2000.
GROSS PROFIT. Gross profit increased 9.2% from $41.8 million in fiscal 1999
to $45.6 million in fiscal 2000. Despite charges to operations during fiscal
2000 of approximately $7.35 million associated with inventory obsolescence,
anticipated product warranty costs and write-downs of certain fixed assets,
gross margins as a percentage of net sales increased from 23.3% in fiscal 1999
to 24.1% in fiscal 2000. In fiscal 1999, gross
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margins were adversely affected by costs associated with Airtech's MHA warranty
upgrade program. The improvement in gross margins during fiscal 2000 is
primarily attributable to the absence of such costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, or SG&A, increased 3.7% from $36.8 million in fiscal
1999 to $38.2 million in fiscal 2000. The increase in SG&A was primarily
attributable to costs incurred at WACOM, which was acquired during fiscal 2000.
As a percentage of net sales, SG&A expenses decreased from 20.6% in fiscal 1999
to 20.1% in fiscal 2000 due to the increase in sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 28.3% from $10.9 million in fiscal 1999 to $14.0 million in fiscal
2000, and as a percentage of net sales, increased from 6.1% in fiscal 1999 to
7.4% in fiscal 2000. These expenditures are almost entirely attributable to the
wireless communications business and reflect increased activity associated with
new product development.
TRANSACTION COSTS. REMEC's results of operations for fiscal 2000 include
$3.1 million of transaction costs associated with REMEC's acquisition of Airtech
and the terminated acquisition of STM Wireless, Inc. There were no similar costs
in the comparable prior year period.
INTEREST INCOME AND OTHER, NET. Interest income and other, net decreased
13.5% from $3.0 million in fiscal 1999 to $2.6 million in fiscal 2000. The
decrease in interest income was due to a decrease in the amount of cash
available for investing as a result of significant capital expenditures
associated with the expansion of REMEC's wireless communications business and
the cash paid for the acquisitions of Smartwaves International and Wacom
Products, Inc.
PROVISION (CREDIT) FOR INCOME TAXES. Income tax expense decreased 121.1%
from $1.9 million in fiscal year 1999 to a credit for income taxes of $.4
million in fiscal 2000. The decrease in income tax expense reflects the tax
benefit of $1.0 million related to research and experimentation tax credits, the
benefit of tax credits for certain capital expenditures, the effect of tax
exempt interest income and a decrease in domestic income before taxes of $11.3
million.
FISCAL YEAR ENDED JANUARY 31, 1999 VS. FISCAL YEAR ENDED JANUARY 31, 1998
NET SALES. Net sales decreased 6.2% from $191.0 million in fiscal 1998 to
$179.2 million during fiscal 1999. The decrease in sales was primarily
attributable to the decreased revenues from our Airtech subsidiary, which was
acquired in April 1999 in a transaction accounted for as pooling of interests.
The decline in Airtech's sales was attributable to delays in new PCS mobile
infrastructure "roll-outs" in the United States, delays to one customer's new
product program, financial instability in the Far East that impacted new mobile
infrastructure projects in the region and customers delaying orders pending
availability of Airtech's next generation production, the G3 MHA.
GROSS PROFIT. Gross profit decreased 28.8% from $58.7 million in fiscal
1998 to $41.8 million in fiscal 1999. As a percentage of net sales, gross profit
decreased from 30.7% in fiscal 1998 to 23.3% in fiscal 1999. The fluctuations in
gross margins are primarily attributable to costs associated with Airtech's MHA
warranty upgrade program, changes in the mix of products sold and reduced
production volume at certain of our subsidiaries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased 18.0%
from $31.2 million in fiscal 1998 to $36.8 million in fiscal 1999. The increase
in SG&A was primarily attributable to inclusion of a full year of SG&A expenses
from our Veritek subsidiary, which was acquired in March 1999, and our Nanowave
subsidiary, which was acquired in October 1997, both in transactions accounted
for as purchases. Therefore, a full year's operations is not included in fiscal
1998 results of operations for Veritek and Nanowave. In addition, the increase
in SG&A was also due to increased administrative expenses related to Airtech's
continued development of its international sales infrastructure in the Far East
and accounting and legal expenses associated with an income tax credit study
completed during fiscal 1999. As a percentage of net sales, SG&A expenses
increased from 16.3% in fiscal 1998 to 20.6% in fiscal 1999, due to the factors
discussed above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 38.2% from $7.9 million in fiscal 1998 to $10.9 million in fiscal
1999, and as a percentage of net sales, research and
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development expenses increased from 4.1% in fiscal 1998 to 6.1% in fiscal 1999.
These expenditures are almost entirely attributable to the commercial wireless
business and reflect an increase in activity associated with new product
development.
TRANSACTION COSTS. Our results of operations for fiscal 1998 include $1.1
million of transaction costs associated with our acquisitions of Radian
Technology, Inc., C&S Hybrid, Inc. and Q-bit Corporation. There were no similar
costs in fiscal 1999.
GAIN ON SALE OF SUBSIDIARY. Our results of operations for fiscal 1998
include the gain from the sale of RFM. There was no similar gain in fiscal 1999.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $2.3 million in fiscal 1998 to $3.0 million in 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. Income tax expense decreased 78.9% from $8.9
million in fiscal 1998 to $1.9 million in fiscal 1999. The decrease in income
tax expense reflects the tax benefit of $2.0 million related to the recognition
of research and experimentation tax credits pertaining to previously filed
income tax returns, the benefit of tax credits for certain capital expenditures,
the effect of tax exempt interest income and a decrease in domestic income
before taxes of $12.1 million
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000, we had $95.6 million of working capital which included
cash and cash equivalents totaling $34.8 million. We also have a $9.0 million
revolving working capital line of credit with a bank. The borrowing rate under
this credit facility is based on a fixed spread over the London Interbank
Offered Rate, or LIBOR. The revolving working capital line of credit terminates
on July 3, 2000. As of January 31, 2000, there were no borrowings under this
credit facility. In February 2000, we amended leasing arrangements relating to
some of our facilities by pledging $17.0 million in cash as collateral for the
remaining lease payments on these facilities. At January 31, 2000, our Airtech
subsidiary had borrowings of $5.3 million under a long term credit facility.
This obligation was repaid in February 2000.
During fiscal 2000, the cash flows from non-cash expenses (primarily
depreciation and amortization) were offset by our operating loss and the
increase in inventories and trade accounts receivable. Receivables increased
during this period due to the increase in sales and an increase in the length of
time that customers were taking to pay invoices. Inventories increased due to
the need to support anticipated sales growth.
During fiscal 2000, $55.9 million was used in investing activities
primarily in connection with: $23.2 million incurred in capital expenditures;
$5.8 million (net of cash acquired) paid to acquire Wacom Products and the
assets of Smartwaves International; an increase in restricted cash of $17.0
million; and a $9.8 million increase in other assets, primarily consisting of a
$4.6 million investment in an unconsolidated company and a $5.0 million loan to
this same company. The bulk of the capital expenditures were associated with the
expansion of our wireless communications business. The above expenditures were
financed primarily by cash on hand. Our future capital expenditures may continue
to be significant as a result of wireless communications expansion requirements.
Financing activities generated approximately $7.9 million during fiscal
2000, principally as a result of the proceeds borrowed under a mortgage
obligation at our Airtech subsidiary, net of repayments, and net proceeds of
$3.3 million generated by the issuance of shares in connection with our Employee
Stock Purchase Plan and from stock option exercises.
Our future capital requirements will depend upon many factors, including
the nature and timing of orders by OEM customers, the progress of our research
and development efforts, expansion of our marketing and sales efforts, and the
status of competitive products. We believe that available capital resources will
be adequate to fund our operations for at least the twelve-month period ending
January 31, 2001.
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YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems, and we believe those systems
successfully responded to the year 2000 date change. We are not aware of any
material problems resulting from year 2000 issues, either with our products, our
internal systems or the products and services of third parties. We will continue
to monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are 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, 2000, we had no borrowings under these credit facilities and,
therefore, no exposure to interest rate movement on its debt. We also will be
affected by changes in interest rates in its investments in certain
held-to-maturity securities. Under our current policies, we do not use interest
rate derivative instruments to manage exposure to interest rate changes. A
hypothetical 100 basis point increase in interest rates in our held-to-maturity
securities would not materially effect the fair value of these securities at
January 31, 2000.
FOREIGN CURRENCY EXCHANGE RATE
Our earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. To a certain extent, foreign currency exchange
rate movements also affect our competitive position, as exchange rate changes
may affect business practices and/or pricing strategies on non-U.S. based
competitors. The primary foreign currency risk exposure is related to U.S.
dollar to British pound and U.S. dollar and British pound to euro conversions.
Considering both the anticipated cash flows from firm sales commitments and
anticipated sales for the next quarter and the foreign currency derivative
instruments in place at year end, a hypothetical 10% weakening of the U.S.
dollar relative to all other currencies would not materially adversely affect
expected first quarter 2001 earnings or cash flows. This analysis is dependent
on actual export sales during the next quarter occurring within 90% of budgeted
forecasts. The effect of the hypothetical change in exchange rates ignores the
effect this movement may have on other variables including competitive risk. If
it were possible to quantify this competitive impact, the results could well be
different than the sensitivity effects described above. In addition, it is
unlikely that all currencies would uniformly strengthen or weaken relative to
the U.S. dollar. In reality, some currencies may weaken while others may
strengthen. We review our position each month for expected currency exchange
rate movements.
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.
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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 "2000 Proxy
Statement") for the Annual Meeting of Shareholders expected to be held on June
2, 2000 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 2000 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.
MANAGEMENT
OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of January 31,
2000, are as follows:
NAME AGE POSITION
---- --- --------
Ronald E. Ragland(l) 58 Chairman of the Board and Chief Executive Officer
Errol Ekaireb 61 President, Chief Operating Officer and Director
Jack A. Giles 57 Executive Vice President, President Defense Group and REMEC
Microwave and Director
Joseph T. Lee 45 Executive Vice President, Chief Strategic Officer and
Director
James Mongillo 61 Executive Vice President and President Broadband Wireless
Group and REMEC Magnum
Nicholas J.S. Randall 48 Executive Vice President, President Integrated RF Solutions
Group and REMEC Airtech Ltd.
Denny E. Morgan 46 Senior Vice President, Chief Engineer and Director
Tao Chow 48 Senior Vice President and President REMEC CSH
Michael D. McDonald 46 Senior Vice President, Chief Financial Officer and Secretary
H. Clark Hickock 44 Senior Vice President, Business Operations
Jon E. Opalski 37 Senior Vice President, General Manager Integrated RF
Solution Group and Managing Director REMEC Airtech
Jerry B. Collum 62 Senior Vice President and President Metal Fab Center
Justin Miller 50 Vice President and President REMEC Canada and REMEC Nanowave
Thomas A. Corcoran(1)(2) 55 Director
Mark D. Dankberg(3) 44 Director
William H. Gibbs(1)(2) 56 Director
Andre R. Horn(3) 71 Director
Jeffrey M. Nash(2)(3) 52 Director
- ---------------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
RONALD E. RAGLAND was a founder of REMEC and has served as our Chairman of
the Board and Chief Executive Officer since January 1983. Prior to founding
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
20
21
and holds a B.S.E.E. degree from Missouri University at Rolla and an M.S.E.E.
degree from St. Louis University.
ERROL EKAIREB has served as President and Chief Operating Officer of REMEC
since 1990 and as a director 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 us, 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.
JACK A. GILES joined REMEC in 1984. He was elected as a director in 1984,
Vice President in 1985, Executive Vice President in 1987, President of REMEC
Microwave in 1994 and President Defense Group in 1999. Prior to joining us, he
spent approximately 19 years with Texas Instruments in program management and
marketing. Mr. Giles holds a B.S.M.E. degree from the University of Arkansas and
is a graduate of Defense Systems Management College.
JOSEPH T. LEE has been a director and Executive Vice President of REMEC
since the completion of our acquisition of Magnum in September 1996. He served
as President of our Northern California Operations from December 1997 until he
was elected Chief Strategic Officer in September, 1999. Prior to our acquisition
of Magnum, he was Chairman of the Board, President and Chief Executive Officer
of Magnum. Mr. Lee holds a B.S.E.E. degree from the University of Michigan and
M.S.E.E. and ENGINEER degrees from Stanford University.
JAMES MONGILLO joined REMEC as a Senior Vice President in February 1997,
following the completion of our acquisition of Radian Technology. In June 1999,
Mr. Mongillo was elected Executive Vice President and named President of the
REMEC Wireless Broadband Group. Mr. Mongillo also serves as President of REMEC
Magnum. 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.
NICHOLAS J.S. RANDALL joined REMEC as Executive Vice President, President
Integrated RF Solutions Group and Executive Chairman of REMEC Europe plc and
REMEC Airtech Ltd. in April 1999, following the completion of our acquisition of
Airtech. Prior to the acquisition, Mr. Randall served as Executive Chairman of
Airtech from the time he purchased the original Airtech business in 1998. From
1980 to 1988, he served as Managing Director of Oxford Technology Ltd., a start
up operation within Oxford Instruments Group. From 1977 to 1980, he was an
Operations Director for EMI Medical, Inc., and prior to that he worked for
Perkins Elmer, Inc. for ten years. Mr. Randall holds a Higher National Diploma
in mechanical engineering from High Wycombe College in England and an M.B.A.
from the University of Connecticut.
DENNY E. 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 us, 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.
TAO CHOW has served as the President and a director of REMEC CSH and Senior
Vice President of REMEC since the completion of our acquisition of C&S Hybrid in
July 1997. Mr. Chow was a founder of C&S Hybrid and served as its President and
as a director from September 1984 until its acquisition by us. 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.
MICHAEL D. MCDONALD was appointed Senior Vice President, Chief Financial
Officer and Secretary in December 1997. Prior to our acquisition of Magnum, he
had been Vice President and Chief Financial Officer of Magnum. Prior to joining
Magnum in 1984, he worked at Watkins-Johnson Company. Mr. McDonald holds a B.S.
degree from the University of San Francisco and an M.B.A. degree from California
Polytechnic State University at San Luis Obispo.
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H. CLARK HICKOCK has served as Senior Vice President, Business Operations
since 1998 and Vice President, Business Operations since 1994. Mr. Hickock is
also currently serving as Acting Vice President, Human Resources. 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.
JON E. OPALSKI has served in a variety of positions with REMEC since 1984.
He was elected Senior Vice President, General Manager Integrated RF Solutions
Group and Managing Director, REMEC Airtech in August 1999, and prior to that Mr.
Opalski served as Senior Vice President, Marketing and Strategic Planning and
President, General Manager, REMEC Wireless. He holds a B.S.E.E. from
Massachusetts Institute of Technology.
JERRY B. COLLUM has served in a variety of positions with REMEC since July
1984. He was elected Senior Vice President and President, Metal Fab Center in
December 1999, and prior to that he served as Vice President and General Manager
Operations Support Division. From February 1968 to July 1984, Mr. Collum was
employed by Texas Instruments. Mr. Collum holds a B.S. in mechanical engineering
from Lamar University.
JUSTIN MILLER has served as President and director of REMEC Nanowave and
REMEC Canada and Vice President of REMEC since October 1997. Prior to our
Nanowave acquisition, 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.
THOMAS A. CORCORAN was elected a director of REMEC in May 1996. Mr.
Corcoran has been the President and Chief Executive Officer of Allegheny
Technologies Incorporated since October 1999. Prior to that, Mr. Corcoran was a
Vice President and the President and Chief Operating Officer of the Space and
Strategic Missiles sector of Lockheed Martin Corporation from October 1998 to
September 1999. From March 1995 to September 1998, he was the President and
Chief Operating Officer of the Electronics sector of Lockheed Martin. From 1993
to 1995 Mr. Corcoran was President of the Electronics Group of Martin Marietta
Corporation, and from 1983 to 1993 he held various management positions with the
Aerospace segment of General Electric Company. Mr. Corcoran is Chairman of the
Board of Teledyne Technologies, Inc., and a director of Allegheny Technologies
and L-3 Communications Holdings, Inc. Mr. Corcoran is a member of the Board of
Trustees of Worcester Polytechnic Institute, the Board of Trustees of Stevens
Institute of Technology and the Board of Governors of the Electronic Industries
Association.
MARK D. DANKBERG joined REMEC as a director in September, 1999. Mr.
Dankberg was a founder of, and has served as Chairman of the Board, President
and Chief Executive Officer of ViaSat, Inc. since its inception in May 1986. Mr.
Dankberg also serves as a director of Connected Systems, a privately held
company that develops and manufacturers digital voice messaging systems. Prior
to founding ViaSat, he was Assistant Vice President of M/A-COM Linkabit, a
manufacturer of satellite telecommunications equipment, from 1979 to 1986 and
Communications Engineer for Rockwell International from 1977 to 1979. Mr.
Dankberg holds B.S.E.E. and M.E.E. degrees from Rice University.
WILLIAM H. GIBBS was elected a director of REMEC in May 1996. Mr. Gibbs was
the President and Chief Executive Office of DH Technology, Inc. from November
1985 to January 1998 and was Chairman Board of Directors of DH Technology, Inc.
from March 1987 through October 1997. From August 1983 to November 1985, he held
various positions, including those of President and Chief Operating Officer,
with Computer and Communications Technology, a supplier of rigid disc magnetic
recording heads to the peripheral equipment segment of the computer industry.
ANDRE R. HORN has been a director of REMEC since 1988. Mr. Horn is the
retired Chairman of the Board of Joy Manufacturing Company. From 1985 to 1991,
Mr. Horn served as the Chairman of the Board of Needham & Company, Inc., which
is serving as one of the representatives of the underwriters in the offering
made by this prospectus. He currently holds the honorary position of Chairman
Emeritus of Needham &
22
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Company, Inc. Mr. Horn is a director of Western Digital Corporation, a computer
equipment manufacturer, and Varco International, Inc., a manufacturer of
petroleum industry equipment.
JEFFREY M. NASH has been a director of REMEC since 1988. From 1995 to 1998,
he was the President, Chief Executive Officer and a Director of TransTech
Information Management Systems, Inc. Since 1994, Dr. Nash has been Chairman,
Chief Executive Officer and President of Digital Perceptions, Inc., and, from
1989 to 1994, he was the Chief Executive Officer and President of Visqus as well
as Conner Technology, Inc., both subsidiaries of Conner Peripherals, Inc. Dr.
Nash is currently a director of ViaSat, Inc., a manufacturer of satellite
communication equipment, and several private companies, including Prisa
Networks, Orincon Corporation, StoragePont.Com and Tiernan Communications Inc.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under the
caption "Management -- Executive Compensation" in the 2000 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 2000 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 2000
Proxy Statement and is incorporated by reference into this Annual Report on Form
10-K.
23
24
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, 2000 and 1999
Consolidated Statements of Income for the years ended January 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity as of January 31, 2000,
1999 and 1998
Consolidated Statements of Cash Flows for the years ended January 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules or because the information required is included in the Consolidated
Financial Statements or Notes thereto.
3. EXHIBITS
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.
10.9(4) Strategic Supply Agreement between REMEC and SpectraPoint
Wireless LLC dated December 23, 1999 (portions of this
agreement have been redacted, and REMEC has requested that
the Securities and Exchange Commission grant confidential
treatment to the redacted portions of this agreement)
10.10(4) Third Amendment to Participation Agreement between REMEC and
the Union Bank of California, N.A., dated February 24, 2000
21.1(4) Subsidiaries of REMEC
23.1(4) Consent of Ernst & Young LLP, Independent Auditors
23.2(4) Consent of Arthur Andersen, Independent Auditors
24.1 Power of Attorney (included on Page S-1 of this Annual
Report on Form 10-K)
27.1(4) Financial Data Schedule
- ---------------
(1) Previously filed with the Securities and Exchange Commission on February 1,
1996 as an exhibit to REMEC's Registration Statement on Form S-1 (No.
333-80381) and incorporated by reference into this Annual Report on Form
10-K.
24
25
(2) Previously filed with the Securities and Exchange Commission on November 25,
1996 as an exhibit to REMEC's Registration Statement on Form S-8 (No.
333-16687) and incorporated by reference into this Annual Report on Form
10-K.
(3) Previously filed with the Securities and Exchange Commission on March 25,
1999 as an exhibit to REMEC's Annual Report on Form 10-K for the year ended
January 31, 1999 and incorporated by reference into this Annual Report on
Form 10-K.
(4) 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
2000.
25
26
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REMEC, INC
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Arthur Andersen, Independent Auditors............. F-3
Consolidated Balance Sheets at January 31, 2000 and 1999.... F-4
Consolidated Statements of Income for the years ended
January 31, 2000, 1999 and 1998........................... F-5
Consolidated Statements of Shareholders' Equity as of
January 31, 2000, 1999 and 1998........................... F-6
Consolidated Statements of Cash Flows for the years ended
January 31, 2000, 1999 and 1998........................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
27
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, 2000 and 1999, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 2000. 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 Airtech plc, a wholly-owned subsidiary, which statements reflect
total assets constituting 5% in 1999, and total revenues constituting 12% and
18% in 1999 and 1998, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Airtech plc, is
based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of REMEC, Inc. at January 31, 2000 and 1999,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended January 31, 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
February 25, 2000
F-2
28
REPORT OF ARTHUR ANDERSEN, INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF AIRTECH PLC
We have audited the financial statements of Airtech plc and its
subsidiaries ("Group") as of December 31, 1998 and December 31, 1997 and of the
Group's results from operations and cash flows for each of the years then ended.
These financial statements have not been prepared for the purposes of section
226 of the Companies Act 1985 and are therefor not statutory accounts.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the
financial statements. It is our responsibility to form an independent opinion,
based on our audit, on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board in the United Kingdom which are substantially
consistent with generally accepted auditing standards in the United States. An
audit includes examination, on a test basis, of evidence relevant to the amounts
and disclosures in the financial statements. It also includes an assessment of
the significant estimates and judgements made by the directors in the
preparation of the financial statements, and of whether the accounting policies
are appropriate to the circumstances of the Group, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we have also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the
state of affairs of the Group at December 31, 1998 and December 31, 1997, and of
the Group's results from operations and cash flows for each of the years then
ended in accordance with generally accepted accounting principles in the United
Kingdom.
Accounting practices used by the Group in preparing the accompanying
financial statements conform with generally accepted accounting principles in
the United Kingdom, but do not conform with accounting principles generally
accepted in the United States. A description of these differences and a
reconciliation of consolidated net income and shareholders' equity to U.S.
generally accepted accounting principles is set forth in Note 29 to the
financial statements of the Group.
/s/ ARTHUR ANDERSEN
- ------------------------------------------------------
Arthur Andersen
Chartered Accountants
St. Albans, England
24 March 1999
F-3
29
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 31,
----------------------------
2000 1999
------------ ------------
Cash and cash equivalents................................... $ 34,835,897 $ 83,011,819
Accounts receivable, net of allowance for doubtful accounts
of $908,664 and $1,040,955 at January 31, 2000 and 1999,
respectively.............................................. 33,112,158 27,294,544
Inventories, net............................................ 42,147,112 38,311,527
Deferred income taxes....................................... 8,470,215 4,425,725
Prepaid expenses and other current assets................... 1,615,688 3,596,020
------------ ------------
Total current assets.............................. 120,181,070 156,639,635
Property, plant and equipment, net.......................... 60,289,940 44,706,757
Restricted cash............................................. 17,049,299 --
Intangible and other assets................................. 26,408,693 17,224,432
------------ ------------
$223,929,002 $218,570,824
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of credit borrowings................................... $ -- $ 75,413
Accounts payable............................................ 8,320,165 8,155,490
Accrued salaries, benefits and related taxes................ 5,531,136 5,383,932
Income taxes payable........................................ 1,250,236 --
Accrued expenses and other current liabilities.............. 9,469,204 9,217,867
------------ ------------
Total current liabilities......................... 24,570,741 22,832,702
Deferred income taxes....................................... 6,417,215 4,131,534
Long term debt.............................................. 5,048,783 --
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 -- 25,430,458
and 24,879,870 at January 31, 2000 and 1999,
respectively.............................................. 254,303 248,797
Paid-in capital............................................. 170,133,382 165,632,527
Accumulated other comprehensive income...................... 64,848 257,000
Retained earnings........................................... 17,439,730 25,468,264
------------ ------------
187,892,263 191,606,588
------------ ------------
Total shareholders' equity........................ $223,929,002 $218,570,824
============ ============
See accompanying notes.
F-4
30
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net sales........................................ $189,189,319 $179,214,967 $191,007,929
Cost of sales.................................... 143,580,168 137,442,678 132,348,510
------------ ------------ ------------
Gross profit..................................... 45,609,151 41,772,289 58,659,419
Operating expenses:
Selling, general and administrative.............. 38,189,435 36,835,437 31,210,847
Research and development......................... 13,993,831 10,903,143 7,886,984
Transactions costs............................... 3,130,000 -- 1,069,000
------------ ------------ ------------
Total operating expenses......................... 55,313,266 47,738,580 40,166,831
------------ ------------ ------------
Income (loss) from operations.................... (9,704,115) (5,966,291) 18,492,588
Gain on sale of subsidiary....................... -- -- 2,833,240
Interest income and other, net................... 2,601,255 3,008,099 2,314,329
------------ ------------ ------------
Income (loss) before provision (credit) for
income taxes................................... (7,102,860) (2,958,192) 23,640,157
Provision (credit) for income taxes.............. (428,192) 1,873,083 8,885,799
------------ ------------ ------------
Net income (loss)................................ $ (6,674,668) $ (4,831,275) $ 14,754,358
============ ============ ============
Earnings (loss) per common share:
Basic.......................................... $ (.27) $ (.20) $ .65
============ ============ ============
Diluted........................................ $ (.27) $ (.20) $ .64
============ ============ ============
Shares used in computing earnings (loss) per
common share:
Basic.......................................... 25,147,000 24,722,000 22,535,000
============ ============ ============
Diluted........................................ 25,147,000 24,722,000 23,228,000
============ ============ ============
See accompanying notes.
F-5
31
REMEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON SHARES
--------------------- PAID-IN COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
---------- -------- ------------ ------------- ----------- ------------
Balance at January 31, 1997... 22,229,836 $222,300 $105,339,742 $ 679,000 $15,397,614 $121,638,656
Adjustment for net equity
activity of pooled
companies................. -- -- -- -- 147,567 147,567
Issuance of common shares... 647,206 6,472 9,515,468 -- -- 9,521,940
Income tax benefits related
to employee stock purchase
plan and stock options
exercised................. -- -- 535,013 -- -- 535,013
Compensation related to
stock options granted..... -- -- 12,000 -- -- 12,000
Foreign exchange translation
adjustment................ -- -- -- (620,000) -- (620,000)
Net income.................. -- -- -- -- 14,754,358 14,754,358
----------- ------------
Comprehensive income........ -- -- -- -- -- 14,134,358
---------- -------- ------------ --------- ----------- ------------
Balance at January 31, 1998... 22,877,042 228,772 115,402,223 59,000 30,299,539 145,989,534
Issuance of common shares... 2,369,328 23,690 52,652,461 -- -- 52,676,151
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
Rent free period charges.... -- -- 139,000 -- -- 139,000
Foreign exchange translation
adjustment................ -- -- -- 198,000 -- 198,000
Net loss.................... -- -- -- -- (4,831,275) (4,831,275)
----------- ------------
Comprehensive loss.......... -- -- -- -- -- (4,633,275)
---------- -------- ------------ --------- ----------- ------------
Balance at January 31, 1999... 24,879,870 248,797 165,632,527 257,000 25,468,264 191,606,588
Adjustment for net equity
activity of pooled
company................... -- -- -- (40,514) (1,353,866) (1,394,380)
Issuance of common shares... 550,588 5,506 4,448,113 -- -- 4,453,619
Income tax benefits related
to employee stock purchase
plan and stock options
exercised................. -- -- 52,742 -- -- 52,742
Foreign exchange translation
adjustment................ -- -- -- (151,638) -- (151,638)
Net loss.................... -- -- -- -- (6,674,668) (6,674,668)
----------- ------------
Comprehensive loss.......... -- -- -- -- -- (6,826,306)
---------- -------- ------------ --------- ----------- ------------
Balance at January 31, 2000... 25,430,458 $254,303 $170,133,382 $ 64,848 $17,439,730 $187,892,263
========== ======== ============ ========= =========== ============
See accompanying notes.
F-6
32
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)................................ $ (6,674,668) $ (4,831,275) $ 14,754,358
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization.................... 13,377,751 9,930,248 6,018,811
Gain on sale of subsidiary....................... -- -- (2,833,240)
Rent charge...................................... -- 139,000 --
Compensation related to stock options............ -- -- 12,000
Deferred income taxes............................ (1,924,609)