Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended January 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________________to_________________
Commission File Number 0-27414
REMEC, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3814301
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9404 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (619) 560-1301
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on April 17, 1998 was approximately $543.7 million based on the last
reported sale price on the Nasdaq National Market of $27.0625 per share of such
stock on April 17, 1998.
The number of outstanding shares of Registrant's Common Stock as of April 17,
1998 was 23,209,956.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders expected to be held on June 12, 1998, a definitive copy of which
will be filed with the SEC within 120 days after the end of the year covered by
this Form 10-K, are incorporated by reference herein in Part III of this Form
10-K.
This document contains 94 pages.
The Exhibit Index begins on page 48.
2
REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1998
TABLE OF CONTENTS
PAGE
----
PART I............................................................................................................1
ITEM 1. BUSINESS............................................................................................1
ITEM 2. PROPERTIES.........................................................................................11
ITEM 3. LEGAL PROCEEDINGS..................................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS....................................................12
PART II..........................................................................................................12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..........................12
ITEM 6. SELECTED FINANCIAL DATA............................................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............18
PART III.........................................................................................................19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................19
ITEM 11. EXECUTIVE COMPENSATION.............................................................................20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................21
PART IV..........................................................................................................21
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................................................................21
i
3
PART I
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the risks
described in this Annual Report and the other documents the Registrant files
from time to time with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
INTRODUCTION
REMEC, Inc. ("REMEC" or the "Company") is a leader in the design and
manufacture of microwave multi-function modules (MFMs) for microwave
transmission systems used in defense applications and has recently entered, and
now derives significant revenue from, the commercial wireless telecommunications
market. The Company believes that its expertise in microwave transmission system
components such as filters, amplifiers, mixers, switches and oscillators and its
expertise in integrating these components into MFMs give REMEC a strong
competitive position in the emerging commercial wireless infrastructure
equipment market. The Company's capabilities enable it to develop and
manufacture MFMs with reduced size, weight, parts count and cost, and increased
reliability and performance.
The Company's products operate at radio (300 MHz to 1 GHz), microwave
(1 GHz to 20 GHz) and millimeter wave (20 GHz to 50 GHz) frequencies (these
frequencies are collectively referred to elsewhere in this Annual Report on Form
10-K as "microwave"). Modern wireless telecommunications systems employ
microwave transmission technology pioneered in the defense industry. Microwave
frequency bands have been used for emerging wireless telecommunications
applications because they are less congested and have more available bandwidth,
affording greater voice, data and video transmission capacity than lower
frequency bands. Driven by technological advances and regulatory changes, demand
for wireless telecommunications products has increased in recent years for
applications such as mobile telephony (cellular and PCS), rural telephony
(VSAT), paging, wireless cable, interactive television and wireless local loop.
These emerging wireless applications require a large infrastructure of microwave
transmission equipment such as base stations and point-to-point radios. The
Company believes that the evolution of cellular and PCS infrastructure, as well
as other wireless telecommunications systems, will require increased integration
in order to reduce size, weight and cost and to increase reliability and
producibility of base station equipment.
The Company also designs and manufactures precision instruments for
guidance, control and measurement systems used by the defense, aerospace,
petroleum and mining industries.
INDUSTRY BACKGROUND
In recent years there has been a significant increase in demand for
wireless telecommunications services from business and consumer users worldwide.
This trend has led to significant growth in the number of subscribers for
existing wireless communications systems and to the emergence of new wireless
applications. In response to the increasing demand, governmental regulatory
agencies continue to allocate additional frequencies for a broad range of
wireless voice, data and facsimile services. All of these services require
substantial deployment or expansion of microwave transmission infrastructure
equipment to meet traffic demand.
1
4
Cellular and PCS mobile telephony has accounted for much of the growth
in the wireless telecommunications industry. Cellular service uses radio base
stations that transmit and receive calls in localized areas. Each base station
has a finite capacity so as demand increases, the number of base stations
required to provide services also increases. A number of other factors are
currently increasing demand for base station infrastructure equipment.
Additional PCS frequency bands have recently been licensed, requiring new
equipment operating at frequencies different than current cellular frequencies.
Conversion from analog to CDMA/TDMA digital cellular systems requires the
replacement and/or expansion of current cellular networks. In large urban areas,
increased demand has required the deployment of micro base stations to maintain
service quality and reliability. Wireless "local loop" services, which use the
same equipment as cellular/PCS networks, are being installed in developing
regions of the world, since they can be implemented more rapidly and
economically than wired telephone systems.
The wireless telecommunications industry has also seen significant
growth from point-to-point and point-to-multipoint radio systems which operate
at higher frequencies and with much higher capacities. Point-to-point radios
have been traditionally used in low volumes for high capacity trunking
applications in telephony networks. As a result of telecommunications industry
deregulation, these radios are now being used in large area networks and in
telephone bypass applications by competitors to the traditional phone companies.
New cellular and PCS networks are now typically interconnected using
point-to-point radios. New point-to-multipoint systems are being developed by
certain other companies to provide voice and data services in large urban areas
in direct competition with the local telephone companies. The FCC has announced
that it will auction additional frequency spectrum in 1998 for LMDS (local
multi-point distribution system) services.
Another growing segment of the wireless communications industry is VSAT
(very small aperture terminals), which are communications systems utilizing
fixed-site satellite terminals. Historically, these systems were primarily
designed for certain specific data applications. However, recent improvements in
VSAT technology for satellite-based wireless voice and data networks have led to
their increasing use in a variety of broader, higher system throughput
commercial applications such as mobile and rural telephony and more complicated
data transmissions. Satellite telephony systems are being utilized by developing
countries that lack a terrestrial-based telecommunication infrastructure, and
which seek to provide telephone service for large areas fairly rapidly and on a
cost-effective basis. Additionally, even where terrestrial systems exist,
satellite systems are used to fill in coverage for remote areas.
Wireless transmissions require the conversion of information into a
higher frequency signal that can be transmitted and received through the air.
Generally, the frequency spectrum is allocated for different wireless uses by
governmental entities. The following diagram illustrates the frequency ranges at
which various wireless applications operate or are expected to operate.
2
5
ALLOCATION OF FREQUENCY RANGE FOR WIRELESS APPLICATIONS
- -----------------------------------------------------------------------------------------------
BAND FREQUENCY RANGE USES
- -----------------------------------------------------------------------------------------------
LOW FREQUENCY (LF) <300 MHz Navigation Equipment
VERY HIGH FREQUENCY (VHF) (Aeronautical/Marine)
AM/FM Radio
Amateur/CB Radio
Television
Dispatch Radio
- -----------------------------------------------------------------------------------------------
ULTRA HIGH FREQUENCY (UHF) 300 - 800 MHz UHF Television
Specialized Mobile Radio (SMR)
Paging
Wireless Data Collection
- -----------------------------------------------------------------------------------------------
HIGH RADIO FREQUENCY (RF) 800 MHz - 1 GHz Analog Cellular
Digital Cellular
Two-way Messaging
Cordless Phone
- -----------------------------------------------------------------------------------------------
MICROWAVE 1 - 2 GHz Private Radio Networks
PCS
Mobile Satellite Telephony
Military Communication/Navigation
- -----------------------------------------------------------------------------------------------
MICROWAVE/MILLIMETER WAVE 2 - 50 GHz VSAT
Satellite Voice/Messaging
Point-to-Point Radios
Wireless TV
Radar
Electronic Warfare
- -----------------------------------------------------------------------------------------------
THE REMEC OPPORTUNITY
All of the wireless communications services described above require
substantial deployment or expansion of microwave transmission infrastructure
equipment. The Company believes that it is particularly well suited to address
those requirements due to its broad portfolio of microwave capabilities and its
expertise at integrating microwave functions in a single package.
Historically, microwave systems for defense applications were built by
prime contractors who would procure single function components (such as filters,
amplifiers and mixers) from various specialized manufacturers. These single
function components were then connected to create the complete microwave
transmission system. In order to prevent components from interfering with each
other or being damaged, components were individually packaged. In response to
the demands of the Department of Defense to increase performance for microwave
transmission systems (especially systems on aircraft and missiles), prime
contractors integrated more functionality into the systems while reducing
3
6
size and weight. To accomplish this, the prime contractors demanded higher
levels of integration from component suppliers.
The Company, which started in 1983 as a producer of single function
components, took a leadership role in developing microwave MFMs in which
numerous component functions are integrated into a single module. Integrating
multiple functions into one module reduces packaging and interconnects, permits
improved performance through optimal partitioning and implementation of
functions and minimizes "over engineering." The result has been significant
reductions in size, weight and cost and improvements in producibility and
reliability.
The Company believes that the evolution of commercial wireless
telecommunications systems also requires increased integration to reduce size,
weight and cost and to increase reliability and producibility of base station
equipment. The Company believes that the high cost of facilities, power and
maintenance necessitates the development of small, highly reliable and cost
effective microwave "front ends" (the circuitry of the radio that enables
signals to be transmitted and received at microwave frequencies) for wireless
transmission systems, requiring the increased use of MFMs. In addition,
increasing use of MFMs facilitates higher volume commercial production of
wireless infrastructure equipment.
The Company believes that the following core competencies enable it to
address the microwave requirements of customers in the wireless
telecommunications market:
Integration Expertise. Integration is a key part of designing high
performance equipment that operates at higher frequencies or that must operate
over a broad frequency range. By effectively integrating multiple functions into
single modules, REMEC has been able to accomplish the following:
- reduce packaging and interconnects
- improve performance through optimal partitioning and implementation
of functions
- reduce product size and parts count
- increase reliability
- minimize "over engineering" (e.g., avoid using higher performance,
more costly components that are necessary in order to compensate for
the performance degration effects resulting from combining different
components into one system)
- reduce unit cost
Concurrent Engineering. The Company has excelled at developing products
optimized in design, process and manufacturing implementation by employing
"concurrent engineering" during the product development cycle. REMEC's
concurrent engineering approach extends to both its customer and supplier base.
REMEC often participates in its customers' product development cycle during the
conceptual design stage and is able to influence its customers' system
architecture/design in order to optimize for cost and performance at the MFM
level. Likewise, REMEC invites suppliers to participate in the design process to
optimize material and device selection. In the product design process, product
teams with design, process, quality and manufacturing engineering expertise
review the product design in an effort to assure its producibility, high quality
and affordability. Manufacturing process development and tooling occurs
concurrently with product development. REMEC believes that its concurrent
engineering process reduces cycle times and costly product redesigns when
products move to volume production.
4
7
Technology Leadership. Since its inception in 1983, the Company has
developed over 2,500 microwave MFMs and components and has become an important
supplier of MFMs to many of the nation's leading telecommunication OEMs and
defense contractors. The Company is strategically partnered with a number of
OEMs, including P-COM, Inc., STM Wireless, Inc., Digital Microwave Corporation,
and Lucent Technologies, Inc. where the Company provides all, or a large
percentage of, the microwave content in an OEM product. This partnership
typically includes concurrent engineering activity and shared technology
development. The Company also has received significant recognition, including
"preferred supplier" designations, from numerous defense customers including
Lockheed Martin Corporation, TRW Inc., Northrop Grumman Corporation, Raytheon
Company and Motorola Inc. These distinctions generally carry with them the
opportunity to bid on all new product procurements by the customer in the
Company's area of expertise allowing REMEC to increase market share. REMEC has
developed a large number of proprietary designs that provide performance/cost
advantage to its customers. These designs are continuously improved through
technological evolution which is guided by the Company's Technology Board. These
designs can be re-applied or re-used resulting in rapid product development and
time to market. A large number of proprietary manufacturing processes have also
been developed to support large volume production of microwave circuits.
Vertical Integration in Design and Manufacturing. With vertical
integration, the Company focuses on and retains control of each step of the
entire design and manufacturing process while minimizing the use of outside
sources and subcontractors for key services. Vertical integration reduces time
to market and unit costs and improves quality control, reliability and the
Company's ability to implement volume production. The Company has enhanced its
vertical integration capability with recent acquisitions, including a surface
mount board assembly manufacturer and several microwave component companies
which provide key functional capabilities that can be used in the Company's MFM
designs.
STRATEGY
REMEC intends to enhance its position as a leading developer and
supplier of microwave MFMs and components to wireless telecommunications
infrastructure OEMs and to retain leadership in developing and supplying
microwave MFMs and components to the defense industry. Execution of the
Company's strategy incorporates the following key elements:
Leverage Breadth of Microwave Capabilities in Telecom Equipment Market.
Through internal development and acquisitions, the Company believes that it has
compiled one of the broadest portfolio of microwave capabilities in the
industry. The Company intends to leverage that breadth of expertise by offering
total microwave solutions to telecommunications infrastructure OEMs for all of
their microwave component and subsystem needs. The Company believes that it can
provide such customers significant benefits in cost, performance, and time to
market compared to other microwave vendors who can supply only single function
components.
Maintain and Enhance Leadership in Microwave Technology. The Company
intends to maintain and enhance its leadership in microwave technology in
continuing its participation in selected defense programs that involve highly
sophisticated, state-of-the-art microwave technology. The Company has formed a
Technology Board comprised of its key executives and chief engineers to
disseminate throughout the Company technological improvements made in various
subsidiaries of the Company and to anticipate changes in technology and the
evolving technological needs of its customers. The Company believes that the
skills developed by REMEC in the defense industry and honed in the commercial
wireless market will continue to be a key factor in achieving substantial
reductions in the size and cost of commercial wireless infrastructure equipment.
Build Strategic Customer Alliances. The Company intends to continue to
focus on developing significant customer alliances with leading wireless OEMs
and defense prime contractors. The Company
5
8
concentrates its efforts on applications which offer the potential for recurring
high volume production. In wireless telecommunications, the Company's strategy
is to enter into strategic alliances with selected leaders in each of the
wireless market segments targeted by the Company. REMEC supports its customers
during their conceptual design stage to influence the system architecture/design
to optimize for cost, performance and producibility, further enhancing the
likelihood of follow-on business.
Maintain Cost Competitiveness. The Company intends to continue to
implement process manufacturing automation and believes that its ability to
develop a high level of automated product alignment and test capability offers
an important competitive advantage. The Company also intends to expand its
foreign manufacturing operations (in Canada, Costa Rica and, through a
maquiladora program, Mexico) when appropriate to lower its costs and/or to
access an available workforce. The Company also believes that its capabilities
in integrating numerous functions into single modules will enable it to continue
to produce high performance products at competitive cost.
Pursue Acquisitions. The Company pursues acquisitions to augment
technology by acquiring specialized component firms and to take advantage of
opportunities to consolidate niche companies in the currently fragmented
microwave equipment industry. The Company believes that expansion of capability
through the acquisition of component firms when combined with the Company's
technological and manufacturing skills at the component level will allow it to
achieve improved levels of MFM integration. The Company believes that it will
thereby be better able to respond to customer requirements for reduced size and
weight and lower cost.
PRODUCTS
Every microwave transmission system contains a microwave "front end"
that performs the function of transforming modulated voice, data or video from
an intermediate frequency ("IF") signal (generally 10 MHz to 500 MHz) into a
microwave frequency signal for transmission and/or converting an incoming signal
from microwave frequencies back into an IF modulated voice, data or video
signal. A microwave front end will usually consist of several interconnected
MFMs and single function components.
Point-to-Point Radio Market. In the point-to-point radio market, REMEC
manufactures microwave front ends or outdoor units (ODUs) as well as the
individual microwave modules (including diplexers, transceivers, synthesizers)
that provide the microwave front end functionality. Traditionally, radio
companies such as P-COM purchased individual modules and performed ODU
integration internally. As these radio companies have grown, there has been a
significant trend toward outsourcing the entire ODU. Using REMEC's broad
functional microwave capability, the Company has been able to obtain a large
portion of ODU business from its existing customers. REMEC also supplies a
significant portion of microwave modules to traditional customers with
established in-house integration capability.
VSAT Market. Like the point-to-point radio business, the Company has
focused its VSAT business at the ODU level. Most VSAT system integrators procure
the complete ODU. REMEC also provides microwave modules such as power amplifiers
to ODU integrators. A significant portion of this business is with STM, although
the Company is currently marketing an industry standard SCPOC (single channel
per carrier) ODU at C-Band with plans to develop an additional product this
year. The Company has also completed development of a low cost SES VSAT terminal
for STM for rural telephony applications.
Cellular/PCS Market. In the cellular/PCS market, the Company sells
components including filters, amplifiers, VCOs and mixers that are used in base
station infrastructure equipment. The Company also sells a number of MFMs
including delay filter assemblies and filter/LNA assemblies for higher
performance digital base stations to customers such as Motorola Inc. The Company
expects to
6
9
derive significant synergy from recently acquired component capability to
provide more fully integrated radio solutions to this industry much like the
VSAT and point-to-point radio business.
Defense Market. REMEC focuses its efforts on defense programs which it
believes have the highest probability of follow-on production. Tactical
aircraft, satellites, missile systems and smart weapons comprise the majority of
the platforms of the Company's customers. Defense industry programs from which
REMEC derives or may derive significant revenues include: (i) the F-22 Stealth
Tactical Fighter Aircraft program for the U.S. Air Force for which the Company
is developing switch amplifiers, switch filters, integrated switch modules,
power amplifiers, frequency generators, frequency concerters and frequency
multipliers for three different microwave subsystems (CNI, Radar and Electronic
Warfare); (ii) the Airborne Self-Protection Jammer (ASPJ) program for foreign
military customers and the U.S. Navy for which the Company has developed and
produced a 28-channel switched filter bank and multi-function components such as
frequency modulators; (iii) the Advanced Medium Range Air to Air Missile
(AMRAAM) program for the U.S. Air Force for which the Company has developed and
produced frequency multipliers, converters and filters; and (iv) the Longbow
Missile and Radar programs for the U.S. Army for which the Company has developed
and is producing MFMs, amplifiers, VCOs and filters.
The following table lists certain of the Company's microwave components
and MFMs:
PRODUCT TYPES FUNCTION
------------- --------
Filters, Duplexers and Multiplexers............... Separate desired frequency bands from undesired
bands
Amplifiers........................................ Increase signal strength and power
Frequency Mixers.................................. Provide frequency conversion function
Voltage Controlled Oscillators.................... Generate frequency controlled by an input voltage
Dielectric Resonator Oscillators.................. Generate fixed frequency microwave signal
Cavity Oscillators................................ Generate fixed frequency microwave signal
Switches.......................................... Switch signal between different signal paths
Switch Attenuators................................ Select discrete attenuation values
Variable Attenuators.............................. Select continuously variable attenuation values
Switch Matrices................................... Allow MxN connectivity between M-inputs and
N-outputs
Switched Delay Lines.............................. Select discrete phase delays
Switched Filters.................................. Select between multiple filters
Multipliers....................................... Multiply an input frequency by an integer
Comb Generators................................... Provide several multiplied frequencies in a
single output
Frequency Generators.............................. Generate multiple discrete frequency outputs
Frequency Synthesizers............................ Generate a discrete stepped frequency output
Frequency Converters.............................. Provide frequency conversion function
Tranceivers....................................... Transmit, receive and channel select
microwave signals for satellite applications
Point-to-Point Radio Front Ends................... Transmit, receive and channel select
microwave signals for terrestrial applications
7
10
CUSTOMERS
The Company's customers for commercial wireless MFMs and components
include P-COM, Inc., STM Wireless, Inc., Digital Microwave Corporation, General
Instrument Corp., Alcatel Network Systems, Inc. and Motorola Inc. The Company's
customers for defense microwave MFMs and components include Lockheed Martin
Corporation, Motorola Inc., Northrop Grumman Corporation and Raytheon Company
(including portions of Hughes Aircraft Co. and Texas Instruments which Raytheon
acquired in 1997). During fiscal 1997 and 1998, sales to P-COM, Inc. accounted
for approximately 13% and 14%, respectively, of net sales.
BACKLOG
The Company's backlog of orders as of January 31, 1997 and January 31,
1998 was $146.8 million ($75.1 million commercial and $71.7 million defense) and
$214.9 million ($136.0 million commercial and $78.9 million defense),
respectively. In addition, in February 1998, the Company received an order
valued at $21.8 million from an existing customer for the continued supply of
REMEC products relating to the customer's point-to-point radios. The Company
includes in its backlog only those orders for which it has accepted purchase
orders. However, backlog is not necessarily indicative of future sales. A
substantial amount of the Company's backlog can be canceled at any time without
penalty, except, in most cases, for the recovery of the Company's actual
committed costs and profit on work performed up to the date of cancellation. A
failure to develop products meeting contract specifications could lead to a
cancellation of the related purchase orders.
SALES AND MARKETING
The Company uses a team-based sales approach to facilitate close
management by Company personnel of relationships at multiple levels of the
customer's organization, including management, engineering and purchasing
personnel. The Company's integrated sales approach involves a team consisting of
a senior executive, a business development specialist, members of the Company's
engineering department and, occasionally, a local technical sales
representative. In particular, the use of experienced engineering personnel as
part of the sales effort enables close technical collaboration with the customer
during the design and qualification phase of new communications equipment which,
the Company believes, is critical to the integration of its products into its
customers equipment. The Company's executive officers are also involved in all
aspects of the Company's relationships with its major customers and work closely
with their senior management. The Company utilizes manufacturers and sales
representatives to identify opportunities.
To date, the Company has sold its products overseas with the assistance
of independent sales representatives. Sales outside of the United States
represented 11%, 7% and 7% of net sales in fiscal years ended January 31, 1996,
1997 and 1998, respectively. Sales outside of the United States are denominated
in U.S. dollars in order to reduce the risks associated with the fluctuations of
foreign currency exchange rates. The international sales do not include products
sold to foreign end users by the Company's domestic OEM customers.
MANUFACTURING
The Company assembles, tests, packages and ships products at its
manufacturing facilities in the following locations: San Diego, Escondido, San
Jose, Santa Clara and Milpitas, California; Melbourne, Florida; Toronto, Canada;
San Jose, Costa Rica; and Tijuana, Mexico. The Company believes that process
expertise and discipline are key elements of successful high volume production
of microwave MFMs because of the precise specifications required. Since
inception, the Company has been manufacturing products for defense programs in
compliance with the stringent MIL-Q-9858
8
11
specifications. The Company received ISO-9001 certification from the Defense
Electronics Supply Center for its microwave facilities. ISO-9001 is a standard
established by the International Organization for Standardization that provides
a methodology by which manufacturers can obtain quality certification. Although
this certification is not currently required by any of its customers, REMEC
believes that it will be beneficial to the acquisition of future business. To
assure the highest product quality and reliability and to maximize control over
the complete manufacturing cycle and costs, the Company seeks to achieve
vertical integration in the manufacturing process wherever appropriate.
Historically, the volume of the Company's production requirements in
the defense markets was not sufficient to justify the widespread implementation
of automated manufacturing processes. The Company anticipates that increased
sales of its products to the wireless telecommunications industry will require a
significant increase in the Company's manufacturing capacity. Accordingly, the
Company has introduced automated manufacturing techniques for product assembly
and testing and is currently planning to expand its facilities.
The Company attempts to utilize standard parts and components that are
available from multiple vendors. However, certain components used in the
Company's products are currently available only from single sources, and other
components are available from only a limited number of sources. The Company's
reliance on contract manufacturers and on sole suppliers involves several risks,
including a potential inability to obtain critical materials or services and
reduced control over production costs, delivery schedules, reliability and
quality of components or assemblies. Any inability to obtain timely deliveries
of acceptable quality, or any other circumstance that would require the Company
to seek alternative contract manufacturers or suppliers, could delay the
Company's ability to deliver its products to its customers, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, the Company
has made the strategic decision to select single source or limited source
suppliers in order to obtain lower pricing, receive more timely delivery and
maintain quality control. In 1997, the Company acquired Veritek which provides
surface mount capabilities and expertise. The Company also relies on contract
manufacturers for circuit board assembly. The Company generally orders
components and circuit boards from its suppliers and contract manufacturers by
purchase order on an as needed basis.
COMPETITION
The markets for the Company's products are extremely competitive and
are characterized by rapid technological change, new product development,
product obsolescence and evolving industry standards. In addition, price
competition is intense and significant price erosion generally occurs over the
life of a product. The Company faces some competition from component
manufacturers who have integration capabilities, but believes that its primary
competition is from the captive manufacturing operations of large wireless
telecommunications OEMs (including all of the major telecommunications equipment
providers) and defense prime contractors who are responsible for a substantial
majority of the present worldwide production of MFMs. The Company's future
success is dependent upon the extent to which these OEMs and defense prime
contractors elect to purchase from outside sources rather than manufacture their
own microwave MFMs and components. The Company's customers and large
manufacturers of microwave transmission equipment could also elect to enter into
the non-captive market for microwave products and compete directly with the
Company. Many of the Company's current and potential competitors have
substantially greater technical, financial, marketing, distribution and other
resources than the Company and have greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
the Company's competitors will not develop new technologies or enhancements to
existing products or new products that will offer superior price or performance
features or that new products or technologies will not render obsolete the
products of the Company's customers. For example, innovations such as a wireless
telephone system utilizing satellites
9
12
instead of terrestrial base stations or a device that integrates microwave
functionality could significantly reduce the potential market for the Company's
products. The Company believes that to remain competitive in the future it will
need to invest significant financial resources in research and development.
RESEARCH AND DEVELOPMENT
Research and development expenses recorded by the Company for the
fiscal years ended January 31, 1996, 1997 and 1998 were approximately
$4,016,000, $4,605,000 and $5,108,000, respectively. The Company's research and
development efforts in the defense industry are conducted in direct response to
the unique requirements of a customer's order and, accordingly, are included in
cost of sales and the related funding in net sales. The Company expects that as
its commercial business expands, research and development expenses will increase
in amount and as a percentage of sales.
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless
telecommunications systems that are subject to regulation domestically by the
FCC and internationally by other government agencies. Although the equipment
operators and not the Company are responsible for compliance with such
regulations, regulatory changes, including changes in the allocation of
available frequency spectrum, could materially adversely affect the Company's
operations by restricting development efforts by the Company's customers,
obsoleting current products or increasing the opportunity for additional
competition. Changes in, or the failure by the Company to manufacture products
in compliance with, applicable domestic and international regulations could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the increasing demand for wireless
telecommunications has exerted pressure on regulatory bodies worldwide to adopt
new standards for such products, generally following extensive investigation of
and deliberation over competing technologies. The delays inherent in this
governmental approval process have in the past caused and may in the future
cause the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of products by the Company to such
customers.
The Company is also subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that may cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on the Company's business, financial condition or
results of operation.
The Company believes that it operates its business in material
compliance with applicable government regulations.
10
13
INTELLECTUAL PROPERTY
The Company does not presently hold a patent applicable to its products
which is significant. In order to protect its intellectual property rights, the
Company relies on a combination of trade secret, copyright and trademark laws
and employee and third-party nondisclosure agreements, as well as limiting
access to and distribution of proprietary information. There can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from independently developing such technology. Furthermore,
there can be no assurance that, in the future, third parties will not assert
infringement claims against the Company or with respect to its products for
which the Company has indemnified certain of its customers. Asserting the
Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, financial condition and results of operations.
In the event a third party were successful in a claim that one of the Company's
products infringed its proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
EMPLOYEES
As of April 10, 1998, the Company had a total of 1,886 employees,
including 1,375 in manufacturing and operations, 206 in research, development
and engineering (including 51 designers and drafters, 21 manufacturing
engineers, 10 quality engineers and 124 electrical and mechanical engineers), 94
in quality assurance, 29 in sales and marketing and 182 in administration. The
Company believes its future performance will depend in large part on its ability
to attract and retain highly skilled employees. None of the Company's employees
is represented by a labor union and the Company has not experienced any work
stoppage. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering and manufacturing
facilities are located in eight buildings aggregating approximately 200,000
square feet in San Diego and Escondido, California, consisting of one 21,000
square foot facility owned by the Company and seven leased facilities, pursuant
to leases which expire in January 2000 through March 2007. The Company's
Northern California operations are located in four leased buildings aggregating
approximately 101,000 square feet in San Jose, Milpitas and Santa Clara,
California. These leases expire on various dates beginning in March 1998 through
October 2003. Q-bit owns a 51,000 square foot building located in Melbourne,
Florida and leases 8,000 square feet in a building in San Jose, Costa Rica, with
lease expiration in June 1998. Nanowave leases approximately 25,000 square feet
in two buildings located in Toronto, Canada, under leases which expire in
September 2001. The Company believes that its existing facilities are adequate
to meet its current needs and that suitable additional or alternative space will
be available on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently subject to
any material litigation, nor to the Company's knowledge, is such litigation
threatened against the Company or its subsidiaries, other than routine actions
and administrative proceedings arising in the ordinary course of business, all
of which collectively are not anticipated to have a material adverse effect on
the business or financial condition of the Company.
11
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the Company's shareholders
during the last quarter of its fiscal year ended January 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
Prior to the quotation of the Common Stock on the Nasdaq National
Market beginning on February 1, 1996, there was no established trading market
for the Common Stock. Since February 1, 1996, the Common Stock has been quoted
on the Nasdaq National Market under the symbol "REMC." The following table sets
forth the range of high and low closing sale prices of the Common Stock as
reported on the Nasdaq National Market for the quarterly periods indicated.
FISCAL YEAR ENDING JANUARY 31, 1997 HIGH LOW
------ ------
First Quarter (1) ......................... $ 11.578 $ 5.422
Second Quarter (1) ........................ 14.922 7.578
Third Quarter (1) ......................... 10.500 7.500
Fourth Quarter (1) ........................ 17.500 9.328
FISCAL YEAR ENDING JANUARY 31, 1998
First Quarter (1) ......................... $ 18.828 $ 14.000
Second Quarter (1) ........................ 31.250 16.828
Third Quarter ............................. 38.313 20.000
Fourth Quarter ............................ 27.250 17.125
FISCAL YEAR ENDING JANUARY 31, 1999
First Quarter (through April 17, 1998) .... 29.000 25.875
- --------------------
(1) Adjusted for a three-for-two stock split paid on June 27, 1997 to
shareholders of record as of June 20, 1997.
The last reported sale price of the Common Stock on the Nasdaq National
Market on April 17, 1998 was $27.063. As of April 17, 1998 there were
approximately 676 holders of record of Common Stock.
DIVIDEND POLICY
The Company currently intends to retain all future earnings, if any,
for use in the operation and development of its business and, therefore, does
not expect to declare or pay any cash dividends on its Common Stock in the
foreseeable future. The Company's line of credit agreement restricts the amount
of cash dividends that the Company may pay. See Note 4 to Consolidated Financial
Statements.
12
15
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's statements of income for each of the years in the three year
period ended January 31, 1998 and with respect to the balance sheets at January
31, 1997 and 1998, are derived from the audited consolidated financial
statements which are included elsewhere in this Annual Report on Form 10-K and
are qualified by reference to such financial statements. The statement of
operations data for the years ended January 31, 1994 and 1995 and the balance
sheet data at January 31, 1994, 1995 and 1996, are derived from audited
financial statements not included in this Annual Report on Form 10-K. The
following selected financial data should be read in conjunction with the
Consolidated Financial Statements for REMEC and notes thereto and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
YEARS ENDED JANUARY 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except share data)
STATEMENTS OF OPERATIONS DATA(1):
Net sales .................................. $ 66,599 $ 81,978 $ 93,228 $118,554 $156,057
Cost of sales .............................. 45,427 57,994 66,172 85,659 108,053
-------- -------- -------- -------- --------
Gross profit ............................... 21,172 23,984 27,056 32,895 48,004
Operating expenses:
Selling, general and administrative ...... 13,332 15,646 16,611 19,349 24,773
Research and development .................. 1,323 2,067 4,016 4,605 5,108
-------- -------- -------- -------- --------
Total operating expenses ............. 14,655 17,713 20,627 23,954 29,881
-------- -------- -------- -------- --------
Income from operations ..................... 6,517 6,271 6,429 8,941 18,123
Gain on sale of subsidiary ................. -- -- -- -- 2,833
Interest income (expense) and other, net .... (191) (590) (401) 48 2,280
-------- -------- -------- -------- --------
Income before provision for income taxes ... 6,326 5,681 6,028 8,989 23,236
Provision for income taxes ................. 1,830 2,394 2,429 4,017 8,501
-------- -------- -------- -------- --------
Net income ................................. $ 4,496 $ 3,287 $ 3,599 $ 4,972 $ 14,735
======== ======== ======== ======== ========
Earnings per share:
Basic ................................. $ .34 $ .25 $ .28 $ .30 $ .71
======== ======== ======== ======== ========
Diluted ............................... $ .34 $ .25 $ .28 $ .30 $ .68
======== ======== ======== ======== ========
Shares used in per share calculations:
computing earnings per share:
Basic ................................. 13,309 12,965 12,892 16,517 20,841
======== ======== ======== ======== ========
Diluted ............................... 13,309 12,965 13,009 16,828 21,534
======== ======== ======== ======== ========
AT JANUARY 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA(1):
Cash and cash equivalents ................... $ 4,156 $ 3,628 $ 3,828 $ 63,172 $ 41,937
Working capital ............................. 16,607 15,620 17,575 84,112 84,496
Total assets ................................ 42,424 42,357 48,558 125,440 153,865
Long-term debt .............................. 5,846 3,235 4,781 2,462 --
Total shareholders' equity .................. 22,177 24,489 27,247 103,555 128,495
JANUARY 31,
------------------------
1997 1998
-------- --------
BACKLOG(1)(2):
Commercial......................................................................... $75,118 $136,005
Defense............................................................................ 71,711 78,850
-------- --------
Total..................................................................... $146,829 $214,855
======== ========
- ----------
(1) The Company acquired Magnum in August 1996, Radian in February 1997, C&S
Hybrid in June 1997 and Q-bit in October 1997, each of which was accounted
for as a pooling of interests and, as such, all financial amounts
contained in the above table have been restated to include the financial
results and data of Magnum, Radian, C&S Hybrid and Q-bit for all periods
presented. The Company acquired Verified Technical Corporation in March
1997 and Nanowave Technologies Inc. in October 1997 in transactions
accounted for as purchases.
(2) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Item 1. Business - Backlog."
13
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the design
and manufacture of microwave multi-function modules ("MFMs") for microwave
transmission systems used in defense applications and the commercial wireless
telecommunications industry. REMEC's consolidated results of operations include
the operations of REMEC Microwave ("Microwave"), REMEC Wireless, Inc.
("Wireless"), Humphrey, Inc. ("Humphrey"), RF Microsystems, Inc. ("RFM"), Magnum
Microwave Corporation ("Magnum"), Radian Technology, Inc. ("Radian"), Verified
Technical Corporation ("Veritek"), C&S Hybrid, Inc. ("C&S Hybrid"), Q-bit
Corporation ("Q-bit") and Nanowave Technologies Inc. ("Nanowave").
REMEC's research and development efforts in the defense industry are
conducted in direct response to the unique requirements of a customer's order
and, accordingly, expenditures related to such efforts are included in cost of
sales and the related funding is included in net sales. As a result, historical
REMEC funded research and development expenses in the defense industry have been
minimal. As REMEC's commercial business has expanded, research and development
expenses have generally increased in amount and as a percentage of sales. REMEC
expects this trend to continue, although research and development expenses may
fluctuate on a quarterly basis both in amount and as a percentage of sales.
Effective January 31, 1994, REMEC acquired all of the outstanding stock
of Humphrey in a transaction that was accounted for as a purchase. Humphrey
designs and manufactures precision instruments for guidance, control and
measurement systems used in defense and commercial applications. Effective April
30, 1996, REMEC acquired all of the outstanding common stock of RFM and various
VSAT microwave design and manufacturing resources from STM in a transaction that
was accounted for as a purchase. RFM provides the Department of Defense with
research and analysis, systems engineering and test evaluation services. The
consolidated statements of income and cash flows for all periods subsequent to
April 30, 1996 include RFM's operating results from April 30, 1996. On August
26, 1997, the Company sold RFM in exchange for cash consideration of $5.0
million. The sale resulted in an after-tax gain of $1,728,000, or $0.08 per
share.
On August 26, 1996, REMEC acquired all of the outstanding common stock
of Magnum in a transaction that was accounted for as a pooling of interests.
Magnum is a leading supplier of oscillators and mixers. On February 28, 1997,
REMEC acquired all of the outstanding common stock of Radian, in a transaction
that was accounted for as a pooling of interests. Radian provides the defense
market with microwave components, primarily synthesizers, receivers, oscillators
and filters. On June 27, 1997, REMEC acquired all of the outstanding common
stock of C&S Hybrid in a transaction that was accounted for as a pooling of
interests. C&S Hybrid is a manufacturer of transmitter and receiver hardware
assemblies that are integrated into terrestrial-based point-to-point microwave
radios primarily for use in commercial applications. On October 24, 1997, REMEC
acquired all of the outstanding common stock of Q-bit in a transaction that was
accounted for as a pooling of interests. Q-bit is a manufacturer of
amplifier-based microwave components and multi-function modules. All
accompanying historical financial statement information has been restated to
include the operations, assets and liabilities of Magnum, Radian, C&S Hybrid,
and Q-bit.
In March 1997, REMEC acquired Veritek, a producer of high quality
surface mount manufacturing assemblies in a transaction accounted for as a
purchase. The consolidated statements of income and cash flows for all periods
subsequent to March 31, 1997 include Veritek's operating results from April 1,
1997. In October 1997, REMEC formed REMEC Canada (as a wholly owned subsidiary)
for the purpose of facilitating the acquisition of Canadian companies, including
the then contemplated acquisition of Nanowave, a manufacturer of amplifier based
microwave and millimeter wave
14
17
components and multi-function modules, in a transaction accounted for as a
purchase. REMEC Canada completed the acquisition of Nanowave effective as of
October 29, 1997. The fiscal 1998 consolidated statements of income and cash
flows include Nanowave's operating results from October 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total net sales,
certain consolidated statements of income data for the periods indicated.
YEARS ENDED JANUARY 31,
-----------------------------
1998 1997 1996
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 69 72 71
--- --- ---
Gross profit 31 28 29
Operating expenses:
Selling, general & administrative 16 17 18
Research and development 3 4 4
--- --- ---
Total operating expenses 19 21 22
--- --- ---
Income from operations 12 7 7
Gain on sale of subsidiary 1 -- --
Interest income (expense) and other, net 1 -- --
--- --- ---
Income before income taxes 14 7 7
Provision for income taxes 5 3 3
--- --- ---
Net income 9% 4% 4%
=== === ===
FISCAL YEAR ENDED JANUARY 31, 1998 VS. FISCAL YEAR ENDED JANUARY 31, 1997
Net Sales. Net sales increased 32% from $118.6 million during fiscal
1997 to $156.1 million during fiscal 1998. Commercial sales increased 75% from
$48.8 million to $85.4 million and defense sales increased 1% from $69.8 million
to $70.7 million during those periods. The increase in commercial sales was
primarily attributable to increased customer demand for the Company's wireless
products. The increase in defense sales was attributable to increased MFM and
component sales offsetting reduced precision instrument sales.
Gross Profit. Gross profit increased 46% from $32.9 million in fiscal
1997 to $48.0 million in fiscal 1998. Consolidated gross margins increased from
28% during fiscal 1997 to 31% during fiscal 1998. Gross margins for defense
increased from 27% to 30% and commercial gross margins increased from 29% to 31%
for the above periods primarily as a result of changes in the mix of products
shipped and due to the lower unit costs arising from improved overhead
absorption attributable to the increase in sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 28% from $19.3 million during fiscal
1997 to $24.8 million during fiscal 1998. This increase was primarily
attributable to increased personnel, legal and other administrative costs
resulting from the Company's growth, as well as approximately $1.1 million of
direct transaction costs associated with the Radian, C&S Hybrid and Q-bit
mergers. As a percentage of net sales, SG&A expenses declined from 17% in fiscal
1997 to 16% in fiscal 1998, due to increased sales volume.
15
18
Research and Development Expenses. Research and development expenses
increased 11% from $4.6 million during fiscal 1997 to $5.1 million during fiscal
1998. These expenditures are almost entirely attributable to the commercial
wireless business.
Gain on Sale of Subsidiary. The Company's results of operations for the
year ended January 31, 1998 includes the gain from the sale of the Company's RFM
subsidiary. There was no similar gain in the prior fiscal year.
Interest Income (Expense) and Other, Net. Interest income (expense) and
other, net increased from $48,000 during fiscal 1997 to $2.3 million during
fiscal 1998. This increase was due to the increased level of cash available for
investment as a result of the funds generated from the Company's follow-on
public offering which was completed in January 1997.
Provision for Income Taxes. The Company's effective tax rate declined
from 45% during fiscal 1997 to 37% during fiscal 1998. The decrease reflected
the pre-acquisition net income generated at the Company's Q-bit subsidiary in
fiscal 1998. Prior to its acquisition by REMEC, Q-bit had operated as an S
corporation for federal and state income tax purposes and, accordingly, all
taxable income generated by Q-bit during the pre-acquisition period in fiscal
1998 was allocated to the shareholders of Q-bit and included on their personal
income tax returns. Therefore, the Company's effective tax rate in fiscal 1998
reflects no provision for income taxes on Q-bit's pre-acquisition earnings. The
reduction in the effective tax rate in fiscal 1998 also reflects the benefit of
tax credits for certain capital expenditures.
FISCAL YEAR ENDED JANUARY 31, 1997 VS. FISCAL YEAR ENDED JANUARY 31, 1996
Net Sales. Net sales increased 27% from $93.2 million during fiscal
1996 to $118.6 million for fiscal 1997. The increase in net sales was due to
sales increases at all of the Company's operating subsidiaries, including $4.8
million of net sales of RFM from the effective date of the acquisition.
Commercial sales increased 62% from $30.2 million to $48.8 million due primarily
to the production of microwave front ends and VSAT equipment for P-COM and STM,
respectively. Defense sales increased 11% from $63.0 million to $69.8 million as
a result of increased bookings during fiscal 1997 and increased shipments on
production contracts for existing programs and customers.
Gross Profit. Gross profit increased 22% from $27.1 million in fiscal
1996 to $32.9 million in fiscal 1997. Gross margins decreased from 29% in fiscal
1996 to 28% for fiscal 1997. Gross margins for defense were 26% in fiscal 1996
and 27% in fiscal 1997. Commercial gross margins were 36% in fiscal 1996 and 29%
in fiscal 1997. The decline in commercial margins was primarily the result of a
change in sales mix and start-up costs associated with the introduction of new
products at certain of the Company's subsidiaries.
Selling, General and Administrative Expenses. SG&A expenses increased
16% from $16.6 million during fiscal 1996 to $19.3 million for fiscal 1997. This
increase was primarily attributable to additional SG&A costs associated with the
Wireless and RFM operations, neither of which were significant contributors to
fiscal 1996 SG&A costs. Wireless was operating at start-up levels during fiscal
1996, while RFM was not included in fiscal 1996 results as it was not acquired
until the second quarter of fiscal 1997. In addition, SG&A expenses for fiscal
1997 increased due to $424,000 of non-recurring acquisition costs associated
with the Magnum merger. As a percentage of net sales, SG&A expenses declined
from 18% in fiscal 1996 to 17% in fiscal 1997, due to increased sales volume.
Research and Development Expenses. Research and development expenses
increased 15% from $4.0 million in fiscal 1996 to $4.6 million for fiscal 1997.
This increase resulted primarily from wireless telecommunications research and
development expenses arising from the expansion of the Company's
16
19
commercial business. As a percentage of net sales, research and development
expenses remained constant at 4% for the periods indicated.
Interest Income Expense and Other, Net. Interest expense was $401,000
in fiscal 1996 as compared to interest income of $48,000 for fiscal 1997. The
change was primarily attributable to the increased interest income associated
with the increased level of cash on hand as a result of the funds generated from
the Company's initial public offering which was completed in February 1996.
Provision for Income Taxes. The Company's effective income tax rate
increased from 40% in fiscal 1996 to 45% in fiscal 1997. The increase reflected
the pre-acquisition net loss generated at the Company's Q-bit subsidiary in
1997. Prior to its acquisition by REMEC, Q-bit had operated as an S corporation
for federal and state income tax purposes and all taxable income (losses)
generated by Q-bit during the pre-acquisition years were allocated to the
shareholders and included on their personal income tax returns. Accordingly, the
consolidated financial statements reflect no benefit for Q-bit's fiscal 1997 net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, REMEC had $84.5 million of working capital which
included cash and cash equivalents totaling $41.9 million. REMEC also has $17.0
million available under two credit facilities consisting of a $9.0 million
revolving working capital line of credit and a $8.0 million revolving term loan.
The borrowing rate under both credit facilities is prime. The revolving working
capital line of credit terminates July 1, 1998. The revolving period under the
term loan expires July 1, 1998, at which time any loan amount outstanding
converts to a term loan to be fully amortized and paid in full by January 2,
2002. As of January 31, 1998, there were no borrowings outstanding under REMEC's
credit facilities.
During fiscal 1998, net cash provided by operations totaled $.8 million
as the cash flows from earnings and non-cash expenses (primarily depreciation
and amortization) more than offset the $15.8 million increase in accounts
receivable and inventories. The increase in accounts receivable and inventories
during fiscal 1998 resulted from REMEC's increased level of sales. Investing
activities utilized $17.3 million during fiscal 1998, primarily as a result of
$17.4 million in capital expenditures and $5.1 million used for the acquisition
of Veritek and Nanowave, net of the proceeds from the sale of the Company's RFM
subsidiary. The bulk of the capital expenditures were associated with the
expansion of REMEC's commercial wireless telecommunications business. The above
expenditures were financed primarily by funds raised in REMEC's public offering
of Common Stock completed in January 1997. REMEC's future capital expenditures
will continue to be substantially higher than historical levels as a result of
commercial wireless telecommunications expansion requirements. Financing
activities utilized approximately $4.4 million during fiscal 1998, principally
as a result of the Company's repayment of certain bank and other obligations
assumed in certain of the Company's acquisitions.
In February 1998, the Company completed an underwritten public offering
of its Common Stock. In this offering, the Company issued 1,990,000 shares of
its Common Stock and received net proceeds of approximately $49.6 million.
REMEC's future capital requirements will depend upon many factors,
including the nature and timing of orders by OEM customers, the progress of
REMEC's research and development efforts, expansion of REMEC's marketing and
sales efforts, and the status of competitive products. REMEC believes that
available capital resources will be adequate to fund its operations for at least
twelve months.
17
20
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries to represent years. For example, the year
"1998" would be represented by "98." These systems and products will need to be
able to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. The Company believes that its internal systems are Year 2000
compliant or will be upgraded or replaced in connection with previously planned
changes to information systems prior to the need to comply with Year 2000
requirements without material cost or expense. The anticipated costs of any Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties. In addition, there can be no
assurance that Year 2000 compliance problems will not be revealed in the future
which could have a material adverse affect on the Company's business, financial
condition and results of operations. Many of the Company's customers and
suppliers may be affected by Year 2000 issues that may require them to expend
significant resources to modify or replace their existing systems, which may
result in those customers having reduced funds to purchase the Company's
products or those suppliers experiencing difficulties in producing or shipping
key components to the Company on a timely basis or at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included as a separate section following
Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
18
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to directors of the Registrant is set forth
under the caption "Election of Directors -- Nominees" in the Registrant's Proxy
Statement (the "1998 Proxy Statement") for the Annual Meeting of Shareholders
expected to be held on June 12, 1998 and is herein incorporated by reference.
Information relating to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is set forth in the 1998 Proxy Statement under the caption
"Management -- Compliance with Section 16(a) of the Exchange Act" and is herein
incorporated by reference.
The executive officers of the Registrant, and their ages as of April
17, 1998, are as follows:
NAME AGE POSITION WITH THE COMPANY
------------------ --- -------------------------------------------------------------
Ronald E. Ragland 56 Chairman of the Board and Chief Executive Officer
Errol Ekaireb 59 President, Chief Operating Officer and Director
Jack A. Giles 56 Executive Vice President, President of REMEC Microwave
and Director
Joseph T. Lee 43 Executive Vice President, President
of Northern California Operations and Director
Denny Morgan 44 Senior Vice President, Chief Engineer and Director
Tao Chow 46 Senior Vice President and President of C&S Hybrid
Michael McDonald 44 Senior Vice President, Chief Financial Officer and Secretary
James Mongillo 59 Senior Vice President and President of Radian and Magnum
Justin Miller 48 Vice President and President of REMEC Canada and Nanowave
MR. RAGLAND was a founder of the Company and has served as Chairman of
the Board and Chief Executive Officer of the Company since January 1983. Prior
to joining the Company, he was General Manager of KW Engineering and held
program management positions with Ford Aerospace Communications Corp.,
E-Systems, Inc. and United Telecommunications, Inc. Mr. Ragland was a Captain in
the United States Army and holds a B.S.E.E. degree from Missouri University at
Rolla and an M.S.E.E. degree from St. Louis University.
MR. EKAIREB has served as President and Chief Operating Officer of the
Company since 1990 and a director of the Company since 1985. Mr. Ekaireb served
as Vice President of the Company from 1984 to 1987 and as Executive Vice
President and Chief Operating Officer from 1987 to 1990. Prior to joining the
Company, he spent 23 years with Ford Aerospace Communications Corp. Mr. Ekaireb
holds B.S.E.E. and B.S.M.E. degrees from West Coast University and has completed
the University of California, Los Angeles Executive Program.
MR. GILES joined the Company in 1984. He was elected as a director in
1984, Vice President in 1985, Executive Vice President in 1987 and was elected
President of REMEC Microwave in 1994. Prior to joining the Company he spent
approximately 19 years with Texas Instruments in program management and
marketing. Mr. Giles holds a B.S.M.E. degree from the University of Arkansas and
is a graduate of Defense Systems Management College.
MR. LEE has been a director and Executive Vice President of the Company
since September 1996 and was elected President of the Company's Northern
California Operations in December 1997. Prior to the acquisition of Magnum
Microwave Corporation ("Magnum Microwave") by the Company in August
19
22
1996, he was Chairman of the Board, President and Chief Executive Officer of
Magnum Microwave. Mr. Lee holds a B.S.E.E. degree from the University of
Michigan and M.S.E.E. and ENGINEER (Doctor of Engineering) degrees from Stanford
University.
MR. MORGAN was a founder of the Company and has served as Senior Vice
President, Chief Engineer and a director of the Company since January 1983.
Prior to joining the Company, he worked with KW Engineering, Micromega, General
Dynamics Corporation and Pacific Aerosystems, Inc. Mr. Morgan holds a B.S.E.E.
degree from the Massachusetts Institute of Technology and was the Four Year
Chancellor's Intern Fellowship Recipient at the University of California, Los
Angeles.
MR. CHOW has served as the President and a director of C&S Hybrid and
Senior Vice President of REMEC since July 1997. Prior to the acquisition of C&S
Hybrid by REMEC, Mr. Chow was a founder of C&S Hybrid and has served as
President and a director of C&S Hybrid since September 1984. Mr. Chow has also
served as a director and the President and Chief Financial Officer of Custom
Micro Machining, Inc. since 1990, and as a director of Applied Thin-Film
Products since April 1995. Mr. Chow holds a B.S.E.E. degree from National
Chiao-Tung University in Taiwan and a M.S.E.E. degree from the University of
California, Los Angeles.
MR. MCDONALD was appointed Senior Vice President, Chief Financial
Officer and Secretary in December 1997. Prior to the acquisition of Magnum
Microwave by the Company, he had been Vice President and Chief Financial Officer
of Magnum Microwave. Prior to joining Magnum Microwave in 1984, he worked at
Watkins-Johnson Company. Mr. McDonald holds a B.S. degree from the University of
San Francisco and an M.B.A. degree from California Polytechnic State University
at San Luis Obispo.
MR. MONGILLO joined the Company in February 1997 as part of the Radian
Technology acquisition. He is a Senior Vice President of the Company, and is
serving as President of both Radian Technology and Magnum Microwave. Prior to
the acquisition of Radian Technology, he was the Chairman of the Board,
President and Chief Executive Officer of Radian. Mr. Mongillo holds a B.S.E.E.
degree from Brown University.
DR. MILLER has served as President and director of Nanowave Technologies
and REMEC Canada and Vice President of REMEC since October 1997. Prior to the
Nanowave acquisition by REMEC, he was a founder of Nanowave and served as its
President and a director since 1992. Prior to that he served as Vice President
- -- Engineering of Microwave Technologies, a division of Lucas Industries plc.
Dr. Miller holds a Ph.D. from the University of Warwick.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under the
caption "Management -- Executive Compensation" in the 1998 Proxy Statement and
is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of the Registrant's Common
Stock is set forth under "Management -- Security Ownership of Certain Beneficial
Owners and Management" in the 1998 Proxy Statement and is herein incorporated by
reference.
20
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions is set forth under "Certain Relationships and Related Transactions"
in the 1998 Proxy Statement and is herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at January 31, 1998 and 1997
Consolidated Statements of Income for the
years ended January 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
as of January 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended January 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedules or because the information required is
included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
Exhibit No. Description
----------- -----------
2.1(1) Agreement and Plan of Reorganization and Merger dated
as of May 16, 1996 among Magnum Microwave Corporation,
the Registrant and REMEC Acquisition Corporation
2.2(7) Agreement and Plan of Reorganization and Merger dated as of
February 24, 1997 among the Registrant, RTI Acquisition
Corporation and Radian Technology, Inc.
2.3(6) Agreement and Plan of Reorganization and Merger dated as of
April 10, 1997 among the Registrant, C&S Acquisition
Corporation and C&S Hybrid, Inc.
2.4(6) Agreement and Plan of Reorganization and Merger dated as of
October 24, 1997 among the Registrant, RQB Acquisition
Corporation and Q-bit Corporation
2.5(6) Share Purchase Agreement dated as of September 30, 1997 among
Justin Miller, Ph.D., RoyNat, Inc., REMEC Canada ULC and the
Registrant
3.1(3) Restated Articles of Incorporation
3.2(3) By-Laws, as amended
21
24
10.1(3) Equity Incentive Plan
10.2(3) Employee Stock Purchase Plan
10.3(3) Form of Indemnification Agreements between Registrant and its
officers and directors
10.4(3) Standard Industrial Lease between the Registrant and
Transcontinental Realty Investors, Inc., dated February 1,
1990, as amended.
10.5(3) Standard Industrial Lease between the Registrant and
Chesapeake Business Park 1983, dated December 13, 1988, as
amended.
10.6(4) 1996 Nonemployee Directors Stock Option Plan
10.7(7) Amended and Restated Loan Agreement between the Registrant
and The Union Bank of California, N.A., dated
January 17, 1997
21.1(6) Subsidiaries of the Registrant
23.1(7) Consent of Ernst & Young LLP, Independent Auditors
23.2(7) Consent of Ireland San Filippo LLP, Independent Public
Accountants
23.3(7) Consent of Bray, Beck & Koetter, Independent Auditors
24.1(7) Power of Attorney (included on Page S-1 of this Annual Report
on Form 10-K)
27(7) Financial Data Schedule
- ----------
(1) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-4 (No.
333-05343) filed on July 30, 1996 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Form 8-K filed on May 3, 1996 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-80381) filed on February 1, 1996 and incorporated herein by
reference.
(4) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-8 (No.
333-16687) filed on November 25, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-18325) filed on December 20, 1996.
(6) Previously filed with the Securities and Exchange Commission as an
exhibit to Amendment No. 2 to Registrant's Annual Report on Form 10-K/A
filed on January 30, 1998 and incorporated herein by reference.
(7) Filed with this Annual Report on Form 10-K.
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of
fiscal 1998.
22
25
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REMEC, INC.
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Report of Ireland San Filippo LLP, Independent Auditors.................... F-3
Report of Bray, Beck & Koetter, Independent Auditors....................... F-4
Consolidated Balance Sheets at January 31, 1998 and 1997................... F-5
Consolidated Statements of Income for the years ended
January 31, 1998, 1997 and 1996......................................... F-6
Consolidated Statements of Shareholders' Equity as of
January 31, 1998, 1997 and 1996......................................... F-7
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, 1997 and 1996......................................... F-8
Notes to Consolidated Financial Statements................................. F-9
F-1
26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
REMEC, Inc.
We have audited the accompanying consolidated balance sheets of REMEC,
Inc. as of January 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of Radian Technology, Inc. and Q-bit Corporation, wholly-owned
subsidiaries, which statements reflect total assets constituting 8% in 1997, and
total revenues constituting 17% in 1997 and 22% in 1996 of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Radian Technology, Inc. and Q-bit Corporation, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of REMEC, Inc. at January 31, 1998
and 1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended January 31, 1998 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------------
ERNST & YOUNG LLP
San Diego, California
February 27, 1998
F-2
27
REPORT OF IRELAND SAN FILIPPO LLP, INDEPENDENT AUDITORS
To the Board of Directors
Radian Technology, Inc.
Santa Clara, California
We have audited the balance sheet of Radian Technology, Inc. (a California
corporation), as of December 27, 1996, and the related statements of income and
expense, stockholders' equity, and cash flows for each of the years ended
December 29, 1995, and December 27, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Radian Technology, Inc. as of
December 27, 1996, and the results of its operations and its cash flows for each
of the years ended December 29, 1995, and December 27, 1996, in conformity with
generally accepted accounting principles.
IRELAND SAN FILIPPO, LLP
March 6, 1997
F-3
28
REPORT OF BRAY, BECK & KOETTER, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Q-bit Corporation
Palm Bay, Florida
We have audited the balance sheets of Q-bit Corporation (an S Corporation) as of
December 31, 1996 and the related statements of operations, retained earnings
(deficit) and cash flows for the years then ended December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Q-bit Corporation as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information on pages 15
and 16 is presented for the purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ BRAY, BECK & KOETTER
Melbourne, Florida
February 28, 1997
F-4
29
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
--------------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 41,937,101 $ 63,172,362
Accounts receivable, net ............................ 25,494,474 15,972,993
Inventories, net .................................... 30,380,941 19,332,056
Deferred income taxes ............................... 6,241,957 3,033,818
Prepaid expenses and other current assets ........... 589,053 582,542
------------ ------------
Total current assets ................... 104,643,526 102,093,771
Property, plant and equipment, net .................. 31,988,934 18,543,405
Intangible and other assets ......................... 17,232,241 4,803,307
------------ ------------
$153,864,701 $125,440,483
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under bank line of credit and other
short-term debt ................................. $ -- $ 1,891,449
Accounts payable .................................... 8,531,756 5,973,537
Accrued salaries, benefits and related taxes ........ 5,999,248 4,845,956
Income taxes payable ................................ 2,546,479 2,249,087
Accrued expenses .................................... 3,070,515 2,540,037
Current portion of notes payable and
capital lease obligations ....................... -- 482,200
------------ ------------
Total current liabilities .............. 20,147,998 17,982,266
Deferred rent ............................................ 104,236 262,432
Deferred income taxes .................................... 5,117,933 1,179,353
Notes payable, less current portion ...................... -- 1,882,776
Capital lease obligations, less current portion .......... -- 579,000
Commitments
Shareholders' equity:
Preferred shares -- $.01 par value, 5,000,000 shares
authorized; none issued and outstanding ......... -- --
Common shares -- $.01 par value, 40,000,000 shares
authorized; issued and outstanding shares --
21,182,663 and 20,535,457 at January 31, 1998 and
1997, respectively .............................. 211,828 205,356
Paid-in capital ..................................... 95,303,154 85,787,686
Retained earnings ................................... 32,979,552 17,561,614
------------ ------------
Total shareholders' equity ............. 128,494,534 103,554,656
------------ ------------
$153,864,701 $125,440,483
============ ============
See accompanying notes.
F-5
30
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Net sales .................................. $156,056,929 $118,553,842 $ 93,228,090
Cost of sales .............................. 108,052,891 85,658,524 66,172,461
------------ ------------ ------------
Gross profit .......................... 48,004,038 32,895,318 27,055,629
Operating expenses:
Selling, general & administrative ..... 24,773,466 19,349,733 16,610,999
Research and development .............. 5,107,984 4,605,000 4,016,335
------------ ------------ ------------
Total operating expenses ................... 29,881,450 23,954,733 20,627,334
------------ ------------ ------------
Income from operations ..................... 18,122,588 8,940,585 6,428,295
Gain on sale of subsidiary ................. 2,833,240 -- --
Interest income (expense) and other, net ... 2,280,329 48,405 (400,593)
------------ ------------ ------------
Income before provision for income taxes ... 23,236,157 8,988,990 6,027,702
Provision for income taxes ................. 8,500,799 4,016,667 2,428,658
------------ ------------ ------------
Net income ................................. $ 14,735,358 $ 4,972,323 $ 3,599,044
============ ============ ============
Earnings per share:
Basic ................................. $ .71 $ .30 $ .28
============ ============ ============
Diluted ............................... $ .68 $ .30 $ .28
============ ============ ============
Shares used in computing earnings per share:
Basic ................................. 20,841,000 16,517,000 12,892,000
============ ============ ============
Diluted ............................... 21,534,000 16,828,000 13,009,000
============ ============ ============
See accompanying notes.
F-6
31
REMEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CONVERTIBLE
PREFERRED SHARES COMMON SHARES
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
Balance at January 31, 1995 ............ 718,607 $ 7,186 11,322,880 $ 113,229
Issuance of common shares upon
exercise of stock options ......... -- -- 28,365 284
Repurchase of common shares ......... -- -- (277,706) (2,777)
Cash dividends ...................... -- -- -- --
Net income .......................... -- -- -- --
------------- ------------- ------------- -------------
Balance at January 31, 1996 ............ 718,607 7,186 11,073,539 110,736
Issuance of common shares in
initial public offering ........... -- -- 3,397,340 33,973
Conversion of preferred shares ...... (718,607) (7,186) 1,616,864 16,169
Issuance of common shares
for cash .......................... -- -- 443,467 4,435
Issuance of common shares under
employee stock purchase plan ...... -- -- 347,850 3,479
Issuance of common shares upon
exercise of stock options ......... -- -- 37,647 376
Income tax benefits related to
employee stock purchase plan
and stock options exercised ....... -- -- -- --
Issuance of common shares in
stock offering .................... -- -- 3,618,750 36,188
Net income .......................... -- -- -- --
Adjustment for Magnum activity
for the duplicated two months
ended March 29, 1996 .............. -- -- -- --
------------- ------------- ------------- -------------
Balance at January 31, 1997 ............ -- -- 20,535,457 205,356
Issuance of common shares in
acquisitions ...................... -- -- 320,183 3,202
Issuance of common shares under
employee stock purchase plan ...... -- -- 150,023 1,500
Issuance of common shares upon
exercise of stock options ......... -- -- 177,000 1,770
Income tax benefits related to
employee stock purchase plan and
stock options exercised ........... -- -- -- --
Net income .......................... -- -- -- --
Adjustment for net equity activity of
pooled companies .................. -- -- -- --
------------- ------------- ------------- -------------
Balance at January 31, 1998 ............ -- $ -- 21,182,663 $ 211,828
============= ============= ============= =============
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
------------- ------------- -------------
Balance at January 31, 1995 ............ $ 15,123,296 $ 9,244,989 $ 24,488,700
Issuance of common shares upon
exercise of stock options ......... 67,176 -- 67,460
Repurchase of common shares ......... ) (785,726) -- (788,503)
Cash dividends ...................... -- (119,470) (119,470)
Net income .......................... -- 3,599,044 3,599,044
------------- ------------- -------------
Balance at January 31, 1996 ............ 14,404,746 12,724,563 27,247,231
Issuance of common shares in
initial public offering ........... 15,615,236 -- 15,649,209
Conversion of preferred shares ...... (8,983) -- --
Issuance of common shares
for cash .......................... 1,872,140 -- 1,876,575
Issuance of common shares under
employee stock purchase plan ...... 1,670,637 -- 1,674,116
Issuance of common shares upon
exercise of stock options ......... 88,824 -- 89,200
Income tax benefits related to
employee stock purchase plan
and stock options exercised ....... 209,399 -- 209,399
Issuance of common shares in
stock offering .................... 51,935,687 -- 51,971,875
Net income .......................... -- 4,972,323 4,972,323
Adjustment for Magnum activity
for the duplicated two months
ended March 29, 1996 .............. -- (135,272) (135,272)
------------- ------------- -------------
Balance at January 31, 1997 ............ 85,787,686 17,561,614 103,554,656
Issuance of common shares in
acquisitions ...................... 6,620,465 -- 6,623,667
Issuance of common shares under
employee stock purchase plan ...... 2,143,385 -- 2,144,885
Issuance of common shares upon
exercise of stock options ......... 751,618 -- 753,388
Income tax benefits related to
employee stock purchase plan and
stock options exercised ........... -- 535,013 535,013
Net income .......................... -- 14,735,358 14,735,358
Adjustment for net equity activity of
pooled companies .................. -- 147,567 147,567
------------- ------------- -------------
Balance at January 31, 1998 ............ $ 95,303,154 $ 32,979,552 $ 128,494,534
============= ============= =============
See accompanying notes.
F-7
32
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income ............................................ $ 14,735,358 $ 4,972,323 $ 3,599,044
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................ 5,380,811 3,647,507 2,946,040
Gain on sale of Subsidiary ................... (2,833,240) -- --
Deferred income taxes ........................ (2,407,832) (767,151) (779,470)
Changes in operating assets and liabilities:
Accounts receivable ..................... (6,525,349) (4,862,195) (786,153)
Inventories ............................. (9,303,804) (2,539,276) (2,008,355)
Prepaid expenses and other
current assets ...................... 201,838 (256,477) 33,297
Accounts payable ........................ 686,941 78,089 1,726,676
Accrued expenses, income taxes
payable and deferred rent ........... 852,733 556,250 1,355,040
------------ ------------ ------------
Net cash provided by operating activities .... 787,456 829,070 6,086,119
INVESTING ACTIVITIES:
Additions to property, plant and equipment ....... (17,351,394) (7,362,734) (4,808,031)
Payment for acquisitions, net of
cash acquired ................................ (5,066,075) (4,011,735) --
Proceeds from sale of subsidiary ................. 5,000,000 -- --
Purchase of short-term investments ............... -- -- (981,607)
Sale of short-term investments ................... -- 1,482,565 953,657
Other assets ..................................... 120,637 (133,320) 99,820
------------ ------------ ------------
Net cash used by investing activities ........ (17,296,832) (10,025,224) (4,736,161)
FINANCING ACTIVITIES:
Proceeds from bank revolving term loan,
line-of-credit and long-term debt ............ 12,212,858 1,100,000 14,367,464
Repayments on bank revolving term loan,
line-of-credit and long-term debt ............ (19,510,512) (3,412,956) (14,056,928)
Repurchase of common stock ....................... -- -- (788,503)
Proceeds from issuance of common stock ........... 2,898,273 71,260,975 67,460
Change in deferred offering costs ................ -- 1,108,424 (1,108,424)
Cash dividends ................................... -- -- (119,470)
------------ ------------ ------------
Net cash provided (used) by financing activities (4,399,381) 70,056,443 (1,638,401)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ...... (20,908,759) 60,860,289 (288,443)
Cash and cash equivalents at beginning of year ........ 63,172,362 2,345,632 2,634,075
Adjustment for net cash activity of
pooled companies ................................. (326,504) (33,559) --
------------ ------------ ------------
Cash and cash equivalents at end of year .............. $ 41,937,101 $ 63,172,362 $ 2,345,632
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ..................................... $ 321,000 $ 414,000 $ 568,000
============ ============ ============
Income taxes ................................. $ 10,162,000 $ 3,091,000 $ 2,558,000
============ ============ ============
Supplemental disclosure of noncash investing
and financing activities:
Assets acquired under capital leases
and notes payable obligations ........... $ -- $ 962,000 $ 371,000
============ ============ ============
Common shares issued in connection with
acquisitions ............................ $ 6,623,667 $ -- $ --
============ ============ ============
See accompanying notes
F-8
33
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business and Basis of Presentation
REMEC, Inc. (the "Company") was incorporated in the State of California
in January 1983. The Company is engaged in a single business segment consisting
of the research, design, development and manufacture of microwave and radio
frequency (RF) components and subsystems and precision instruments for control
and measurement systems. Prior to fiscal 1996, the majority of the Company's
sales were to prime contractors to various agencies of the U.S. Department of
Defense and to foreign governments. In May 1995, the Company incorporated REMEC
Wireless, Inc. (a wholly owned subsidiary) to research, design, develop and
manufacture products based on microwave technologies for commercial customers.
In fiscal 1997, the Company acquired Magnum Microwave Corporation, a
manufacturer of microwave components and subsystems, in a transaction accounted
for as a pooling of interests. During 1997, the Company also acquired RF
Microsystems, Inc. ("RFM"), a satellite communications engineering company, in a
transaction accounted for as a purchase. During fiscal 1998, the Company
acquired Radian Technology, Inc., C&S Hybrid, Inc., and Q-bit Corporation, in a
series of transactions accounted for as poolings of interests. The Company's
consolidated financial statements for all periods prior to these acquisitions
have been restated to include each of the acquired Company's financial position,
results of operations and cash flows. During fiscal 1998, the Company also
acquired Verified Technical Corporation and Nanowave Technologies Inc. in
transactions which were accounted for as purchases and sold its RFM subsidiary.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Humphrey, Inc., REMEC Wireless, Inc.,
RF Microsystems, Inc., Magnum Microwave Corporation, Radian Technology, Inc.,
Verified Technical Corporation, C&S Hybrid, Inc., Nanowave Technologies Inc. and
Q-bit Corporation. All intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. Short-term investments are recorded at the amortized cost plus
accrued interest which approximates market value. The Company evaluates the
financial strength of institutions at which significant investments are made and
believes the related credit risk is limited to an acceptable level.
The Company has adopted Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. Statement
No. 115 requires companies to record certain debt and equity security
investments at market value. At January 31, 1998 and 1997, the cost of cash
equivalents and short-term investments approximated fair value.
Concentration of Credit Risk
Accounts receivable are principally from U.S. government contractors,
companies in foreign countries and domestic customers in the telecommunications
industry. Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. The Company performs
periodic credit evaluations of its customers and maintains reserves for
potential credit losses.
F-9
34
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Inventory
Inventories are stated at the lower of weighted average cost or market.
In accordance with industry practice, the Company has adopted a policy of
capitalizing general and administrative costs as a component of the cost of
government contract related inventories to achieve a better matching of costs
with the related revenues.
Progress Payments
Progress payments received from customers are offset against
inventories associated with the contracts for which the payments were received.
Long-Lived Assets
Property, plant and equipment, including equipment under capital
leases, is stated at cost less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which range from three to thirty years. Depreciation
expense includes the amortization of equipment under capital leases. Leasehold
improvements and equipment under capital leases are amortized using the
straight-line method over the shorter of their estimated useful lives or the
lease period.
Intangible assets in the accompanying balance sheets represent the
excess of costs over the fair value of net assets acquired and are primarily
comprised of goodwill and acquired technology recorded in connection with the
acquisitions of Humphrey, Inc. (in February 1994), RF Microsystems, Inc.,
Verified Technical Corporation and Nanowave Technologies Inc. (See Note 2).
These assets are being amortized using the straight-line method over the
estimated useful lives of the relevant intangibles ranging from nine to fifteen
years, respectively. Amortization expense related to intangible assets totaled
$766,616, $345,531 and $148,956 for fiscal years 1998, 1997 and 1996,
respectively.
Effective February 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for Long-Lived Assets and Long-Lived
Assets to be Disposed Of" which established standards for recording the
impairment of long-lived assets, including property, equipment and leasehold
improvements, intangible assets and goodwill.
In accordance with this Statement, the Company reviews the carrying
value of property, equipment and leasehold improvements for evidence of
impairment through comparison of the undiscounted cash flows generated from
those assets to the related carrying amounts of those assets. The carrying value
of intangible assets are evaluated for impairment through comparison of the
undiscounted cash flows derived from those assets to the carrying value of the
related intangibles.
Revenue Recognition
Revenues from commercial contracts are recognized upon shipment of
product and transfer of title to customers. Revenues on long-term fixed-price
contracts with prime contractors to U.S. Government Agencies are recognized
using the units of delivery method. Revenues associated with the performance of
non-recurring engineering and development contracts are recognized when earned
under the terms of the related contract. Revenues for cost-reimbursement
contracts are recorded as costs are incurred and includes estimated earned fees
in the proportion that costs incurred to date bears to estimated costs.
Prospective losses on long-term contracts are based upon the anticipated excess
of inventoriable manufacturing costs over the selling price of the remaining
units to be delivered. Actual losses could differ from those estimated due to
changes in the ultimate manufacturing costs and contract terms.
Research and Development
Research and development costs incurred by the Company are expensed in
the period incurred.
F-10
35
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the Company's previously reported earnings
per share. In accordance with Statement 128, all earnings per share amounts for
all periods presented have been restated. The calculation of net income per
share reflects the historical information for REMEC and its acquired
subsidiaries and the conversion of the common shares of those companies acquired
in pooling of interests transactions into REMEC shares as stipulated in the
respective acquisition agreements. (See Note 2.)
The following table reconciles the shares used in computing basic and
diluted earnings per share in the respective fiscal years:
Years Ended January 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Weighted average common shares outstanding ...... 20,841,000 16,517,000 11,306,000
Effect of assumed conversion of preferred of ....
-- -- 1,617,000
---------- ---------- ----------
Shares used in basic earnings per share
calculation .................................. 20,841,000 16,517,000 12,892,000
Effect of dilutive stock options ................ 693,000 311,000 117,000
---------- ---------- ----------
Shares used in diluted earnings per share
calculation .................................. 21,534,000 16,828,000 13,009,000
========== ========== ==========
On June 6, 1997, the Company's Board of Directors approved a
three-for-two stock split of the Company's common stock in the form of a 50%
stock dividend payable on June 27, 1997 to shareholders of record as of June 20,
1997. All share and per share related data in the consolidated financial
statements have been adjusted to reflect the stock dividend for all periods
presented.
Stock Options
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123") requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions about the future that affect the amounts reported in the
consolidated financial statements. These estimates include assessing the
collectibility of accounts receivable, the usage and recoverability of
inventories and long-lived assets and the incurrence of losses on long term
contracts and warranty costs. Actual results could differ from those estimates.
F-11
36
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued FAS No.
130, "Reporting Comprehensive Income" and FAS No. 131, "Segment Information."
Both of these standards are effective for fiscal years beginning after December
15, 1997. FAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company believes that comprehensive income or loss
will not be materially different than net income or loss. FAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in FAS No. 131, are components of an enterprise for which separate
financial information is required to be reported on the basis that is used
internally for evaluating the segment performance. As stated above, the Company
believes it operates in one business and operating segment and that adoption of
these standards will not have a material impact on the Company's financial
statements.
2. ACQUISITION TRANSACTIONS
Q-bit Corporation ("Q-bit")
In October 1997, the Company acquired all of the outstanding shares of
common stock of Q-bit, a manufacturer of amplifier based microwave components
and multi-function modules, in exchange for 1,047,482 shares of the Company's
common stock. Prior to the combination, Q-bit's fiscal year ended on December
31, 1996. In recording the business combination, Q-bit's financial statements
for the fiscal years ended December 31, 1995 and 1996 were combined with REMEC's
for the fiscal years ended January 31, 1996 and 1997, respectively. Q-bit's net
sales and net income for the one month period ended January 31, 1997 were
$1,295,557 and $103,610, respectively. In accordance with Accounting Principles
Board Opinion No. 16 ("APB No. 16"), Q-bit's results of operations and cash
flows for the one-month period ended January 31, 1997 have been added directly
to the retained earnings and cash flows of the Company and excluded from
reported fiscal 1998 results of operations and cash flows. Q-bit's revenues and
net income for the period from February 1, 1997 through the date of acquisition
totalled $12,315,818 and $1,578,333, respectively.
C&S Hybrid ("C&S Hybrid")
In June 1997, the Company acquired all of the outstanding shares of
common stock of C&S Hybrid, a manufacturer of transmitter and receiver hardware
assemblies ("transceivers") that are integrated by C&S Hybrid's customers into
terrestrial-based point-to-point microwave radios primarily for use in
commercial applications, in exchange for 1,290,000 shares of the Company's
common stock. Prior to the combination, C&S Hybrid's fiscal year ended on
December 27, 1996. In recording the business combination, C&S Hybrid's financial
statements for the fiscal years ended December 22, 1995 and December 27, 1996
were combined with REMEC's for the fiscal years ended January 31, 1996 and 1997,
respectively. C&S Hybrid's net sales and net income for the one month ended
January 31, 1997 were $1,569,129 and $53,976, respectively. In accordance with
APB No. 16, C&S Hybrid's results of operations and cash flows for the one-month
period ended January 31, 1997 have been added directly to the retained earnings
and cash flows of the Company and excluded from reported fiscal 1998 results of
operations and cash flows. C&S Hybrid's revenues and net income for the period
from February 1, 1997 through the date of acquisition totalled $8,033,729 and
$357,249, respectively.
Radian Technology, Inc. ("Radian")
On February 28, 1997, the Company issued 950,024 shares of its common
stock in exchange for all of the outstanding shares of common stock of Radian, a
manufacturer of microwave components and subsystems. Prior to the combination,
Radian's fiscal year ended on the Friday closest to December 31. In recording
the business combination, Radian's financial statements for the fiscal years
ended December 29, 1995 and December 27, 1996
F-12
37
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
were combined with REMEC's for the fiscal years ended January 31, 1996 and 1997,
respectively. Radian's net sales and net loss for the one month period ended
January 31, 1997 were $299,000 and $10,019, respectively. In accordance with APB
No. 16, Radian's results of operations and cash flows for the one-month period
ended January 31, 1997 have been added directly to the retained earnings and
cash flows of the Company and excluded from reported fiscal 1998 results of
operations and cash flows. Radian's revenues and net income for the period from
February 1, 1997 through the date of acquisition totalled $731,089 and $141,888,
respectively.
Magnum Microwave Corporation ("Magnum")
On August 26, 1996, the Company issued 1,612,399 shares of its common
stock in exchange for all of the outstanding shares of common stock of Magnum, a
manufacturer of microwave components and subsystems. Immediately prior to the
acquisition, Magnum issued 197,187 equivalent shares of stock for cash of
approximately $1,500,000. Prior to the combination, Magnum's fiscal year ended
on the Friday closest to March 31. In recording the business combination,
Magnum's financial statements for the 1996 fiscal year were combined with
REMEC's for the fiscal year ended January 31, 1996. Consolidated operating
results and the net change in consolidated cash and cash equivalents for the
year ended January 31, 1997 include Magnum's results of operations and change in
cash flows for the two months ended March 29, 1996. Magnum's net sales and net
income for the two month period ended March 29, 1996 were $1,743,000 and
$135,000, respectively. Included in general and administrative expenses in the
consolidated statement of income for the year ended January 31, 1997 are costs
of $424,000 related to the acquisition of Magnum.
Verified Technical Corporation ("Veritek")
On March 31, 1997, the Company acquired all of the outstanding common
stock of Veritek in exchange for cash consideration of $1,000,000 and 138,000
shares of the Company's common stock with a fair value of approximately $2.0
million and the assumption of liabilities totaling $1.1 million. The acquisition
has been accounted for as a purchase, and accordingly, the total purchase price
has been allocated to the acquired assets and liabilities assumed at their
estimated fair values in accordance with the provisions of Accounting Principles
Board Opinion No. 16. The excess of the purchase price over the net assets
acquired of $2,406,000 has been recorded as an intangible asset, and is being
amortized over an estimated life of 15 years. The pro forma results of
operations of REMEC and Veritek assuming Veritek was acquired on the first day
of the Company's 1997 fiscal year would not be materially different from
reported results.
Nanowave Technologies Inc. ("Nanowave")
In October 1997, the Company formed REMEC Canada (as a wholly owned
subsidiary) for the purpose of facilitating the acquisition of Canadian
companies, including the then contemplated acquisition of Nanowave, a
manufacturer of amplifier based microwave and millimeter wave components and
multi-function modules. Effective October 29, 1997, REMEC Canada acquired all of
the outstanding common stock of Nanowave in exchange for cash consideration of
$4,025,000 and 182,183 Dividend Access Shares with a fair value of $4,646,000
which was equal to the fair value of an equivalent number of common shares of
the Company on the date of acquisition. These Dividend Access Shares are
convertible at any time into an equivalent number of shares of REMEC Common
Stock at the option of the security holder. The acquisition has been accounted
for as a purchase, and accordingly, the total purchase price has been allocated
to the acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of APB No. 16. The excess of the purchase price
over the net assets acquired of $11,130,000 has been recorded as intangible
assets (acquired technology, trademarks, assembled workforce and goodwill), and
will be amortized over periods ranging from 9 to 15 years.
Assuming that the acquisition of Nanowave had occurred on the first day
of the Company's fiscal year ended January 31, 1997, pro forma condensed
consolidated results of operations would be as follows (in thousands except per
share amounts):
F-13
38
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended January 31,
----------------------------
1998 1997
-------- ----------
(Unaudited)
Net sales ......... $ 160,581 $ 124,434
Net income ........ 14,288 4,441
Earnings per share:
Basic ........... $ .68 $ .27
Diluted ......... $ .66 $ .26
RF Microsystems, Inc. ("RFM")
Effective April 30, 1996, the Company acquired all of the outstanding
common stock of RFM and certain other assets in exchange for cash consideration
of approximately $4,066,000. RFM provided satellite communications engineering
services to agencies of the U.S. Government. The acquisition was accounted for
as a purchase, and accordingly, the total purchase price was allocated to the
acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The excess of the purchase price over the net assets acquired of $3,559,000 was
recorded as intangible assets, and was being amortized over an estimated life of
15 years. Upon completion of the acquisition, certain tangible and intangible
assets associated with the design and production of commercial wireless products
with a fair value of approximately $3.8 million were transferred to another
subsidiary of the Company. On August 26, 1997, the Company sold its RFM
subsidiary in exchange for cash consideration of $5.0 million. The sale resulted
in an after-tax gain of $1,728,000 or $.08 per share. The Company's consolidated
financial statements include the results of RFM from April 30, 1996 through
August 26, 1997.
3. FINANCIAL STATEMENT DETAILS
Inventories
Inventories consist of the following:
JANUARY 31,
1998 1997
------------ ------------
Raw Materials ....................... $ 16,087,158 $ 10,017,387
Work in progress .................... 14,968,767 11,687,168
------------ ------------
31,055,925 21,704,555
Less unliquidated progress payments.... (674,984) (2,372,499)
------------ ------------
$ 30,380,941 $ 19,332,056
============ ============
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,076,000 and $1,642,000 at January 31, 1998 and 1997, respectively.
Property, Plant and Equipment
Property, plant and equipment consist of the following:
JANUARY 31,
------------------------------
1998 1997
------------ ------------
Land, building and improvements ................ $ 3,293,776 $ 3,351,885
Machinery and equipment ........................ 54,574,755 37,932,615
Furniture and fixtures ......................... 3,270,147 2,312,295
Leasehold improvements ......................... 3,049,130 2,364,977
------------ ------------
64,187,808 45,961,772
Less accumulated depreciation and amortization.. (32,198,874) (27,418,367)
------------ ------------
$ 31,988,934 $ 18,543,405
============ ============
F-14
39
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Intangible and Other Assets
Intangible and other assets consist of the following:
JANUARY 31,
------------------------------
1998 1997
------------ ------------
Acquired technology .................... $ 8,358,556 $ 3,559,000
Goodwill ............................... 7,775,775 1,489,619
Trademarks and other intangible assets.. 2,250,000 --
------------ ------------
18,384,331 5,048,619
Less accumulated amortization .......... (1,391,456) (624,833)
------------ ------------
16,992,875 4,423,786
Other assets ........................... 239,366 379,521
------------ ------------
$ 17,232,241 $ 4,803,307
============ ============
4. BANK REVOLVING TERM CREDIT FACILITY AND LINE-OF-CREDIT
The Company has a $9,000,000 working capital line-of-credit with a
bank, which expires July 1, 1998. Interest is due monthly on advances at the
bank's prime interest rate (8.5% at January 31, 1998). At January 31, 1998,
there were no outstanding borrowings on the facility.
The Company also has a $8,000,000 term credit facility with the bank
which is available until July 1, 1998. Outstanding borrowings at July 1, 1998
under this facility automatically convert into a term note payable in 42 monthly
installments. Interest is due monthly on advances under the facility at the
bank's prime interest rate. At January 31, 1998, there were no outstanding
borrowings on the facility.
Advances under these agreements are secured by substantially all assets
of the Company. The agreements also contain covenants which require the Company
to maintain certain financial ratios, achieve specified levels of profitability,
restrict the incurrence of additional debt, restrict the incurrence of capital
expenditures in excess of specified amounts, limit the payment of cash
dividends, and include certain other restrictions. As of January 31, 1998, the
Company was in compliance with all covenants specified.
5. SHAREHOLDERS' EQUITY
Equity Offerings
In January 1997, the Company issued in a public offering an additional
3,618,750 shares of common stock. The net proceeds from this offering were
$51,971,875. Certain shareholders also sold 1,125,000 shares as part of this
offering.
In February 1996, the Company completed an initial public offering
("IPO") of its common stock in which the Company issued a total of 3,397,340
shares of common stock. The net proceeds from the offering were $15,649,209.
Concurrent with the closing of the Company's IPO, all of the then outstanding
shares of the Company's preferred stock were converted into 1,616,864 shares of
common stock. In connection with the Company's IPO, certain shareholders also
sold 1,777,660 shares as part of the offering.
Dividends
In the year ended January 31, 1996, the Company paid a cash dividend of
$.01 per share including a payment to preferred shareholders on an as converted
basis. The Company's Q-bit subsidiary also paid a cash dividend totaling $64,670
during the fiscal year ended January 31, 1996. The Company currently anticipates
that it will not pay dividends in the foreseeable future.
F-15
40
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Stock Option Plans
The Company's 1995 Equity Incentive Plan provides for the grant of
incentive stock options, non-qualified stock options, restricted stock awards,
stock purchase rights or performance shares to employees and non-employee
directors of the Company. During fiscal 1998, the Company's shareholders
approved an increase in the number of shares available for issuance under the
Plan by 2,250,000 shares to a total of 3,375,000 shares of common stock. The
exercise price of the incentive stock options must at least equal the fair
market value of the common stock on the date of grant, and the exercise price of
non-qualified options may be no less than 85% of the fair market value of the
common stock on the date of grant. Options granted under the plans vest over a
period of three to four years and expire from four and one-half years to nine
years from the date of grant.
The Company had maintained previous stock option plans prior to the
inception of the 1995 Equity Incentive Plan. These incentive plans were
terminated upon the closing of the Company's IPO in February 1996 and all
outstanding options remain exercisable in accordance with their original terms.
A summary of the Company's stock option activity and related
information is as follows:
YEARS ENDED JANUARY 31,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
Outstanding -- beginning of
year .................... 928,538 $ 7.71 305,380 $ 2.25 230,046 $ 2.07
Granted ................. 1,024,214 22.42 668,012 9.90 128,501 2.65
Exercised ............... (170,965) 4.37 (37,649) 2.37 (26,865) 2.36
Forfeited ............... (90,813) 10.17 (7,205) 6.79 (26,302) 2.61
---------- --------- ---------- -------- ---------- --------
Outstanding -- end of year.. 1,690,974 $ 16.86 928,538 $ 7.71 305,380 $ 2.25
========== ========= ========== ======== ========== ========
The following table summarizes by price range the number, weighted
average exercise price and weighted average life (in years) of options
outstanding and the number and weighted average exercise price of exercisable
options as of January 31, 1998:
TOTAL OUTSTANDING TOTAL EXERCISABLE
-------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER ----------------------- NUMBER AVERAGE
OF EXERCISE OF EXERCISE
PRICE RANGE SHARES PRICE LIFE SHARES PRICE
- -------------- --------- -------- ---- --------- ---------
$1.61-$7.40 191,120 $ 2.18 2.2 103,780 $ 2.13
$7.41-$11.10 338,350 $ 9.55 2.8 85,439 $ 9.51
$11.11-$14.80 325,919 $ 14.14 3.3 48,052 $ 13.96
$14.81-$22.20 484,676 $ 20.89 3.8 16,535 $ 15.15
$22.21-$25.90 168,875 $ 25.37 3.8 -- --
$25.91-$37.00 182,034 $ 32.99 4.0 -- --
--------- ---------
Total Plan 1,690,974 $ 16.86 3.3 253,806 $ 7.71
========= =========
At January 31, 1998, options for 1,641,746 shares were available for
future grant.
F-16
41
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and net income per share is
required by Statement 123, and has been determined as if the Company has
accounted for its employee stock options and employee stock purchase plan shares
under the fair value method of that statement. The fair value of these options
or employee stock purchase rights was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997, respectively: risk-free interest rates of 6.0%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 71.3% and 90.9%, a weighted-average life of the option
of 3.2 years; and a weighted-average life of the stock purchase rights of three
months.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and rights under the
employee stock purchase plan have characteristics significantly different from
those of trade options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair market
value of its employee stock options or the rights granted under the employee
stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options and the shares granted under the employee stock purchase plan is
amortized to expense over their respective vesting or option periods. The
effects of applying Statement 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1996. The Company's pro forma information
follows:
YEARS ENDED JANUARY 31,
----------------------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Net income:
As reported................. $ 14,735,358 $ 4,972,323 $ 3,599,044
Pro forma................... 10,603,372 2,083,189 3,589,792
Earning per share:
As reported -
Basic..................... $ .71 $ .30 $ .28
Diluted................... .68 .30 .28
Pro forma -
Basic..................... $ .51 $ .13 $ .28
Diluted................... .49 .12 .28
Weighted average
fair value of options
granted during the year..... $ 11.48 $ 5.09 $ .52
Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan")
provides for the issuance of shares of the Company's common stock to eligible
employees. During fiscal 1998, the Company's shareholders approved an increase
in the number of shares available for issuance under the Plan by 825,000 shares
to a total of 1,200,000 shares of common stock. The price of the common shares
purchased under the Purchase Plan will be equal to 85% of the fair market value
of the common shares on the first or last day of the offering period, whichever
is lower. As of January 31, 1998, 702,127 shares remain available for issuance
under the Purchase Plan.
6. COMMITMENTS
Deferred Savings Plan
The Company has established a Deferred Savings Plan for its employees,
which allows participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. The Company matches contributions
up to $100 per quarter, per employee, subject to the attainment of certain
quarterly profit
F-17
42
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
levels by the Company. Employees vest immediately in their contributions and
Company contributions vest over a two year period. The Company has charged to
operations contributions of approximately $399,000, $218,000 and $88,000 for the
years ended January 31, 1998, 1997 and 1996, respectively.
Prior to its acquisition in fiscal 1997, the Company's Magnum
subsidiary maintained a separate defined contribution 401(k) retirement plan for
substantially all of its employees. Magnum made contributions to this plan of
$88,000 for fiscal 1996. This plan was merged into the REMEC plan in March 1997.
The Company's C&S Hybrid subsidiary maintained a separate defined
contribution 401(k) retirement plan for substantially all of its employees. C&S
Hybrid made contributions to this plan of $42,000 and $33,000 for fiscal 1997
and 1996, respectively. This plan was merged into the REMEC plan in February
1998.
Prior to its acquisition in fiscal 1998, the Company's Q-bit subsidiary
maintained a separate defined contribution 401(k) retirement plan for
substantially all of its employees. Q-bit made contributions to this plan of
$95,000 and $54,000 for fiscal 1997 and 1996, respectively. This plan was merged
into the REMEC plan in April 1998.
Leases
The Company leases offices and production facilities under
noncancelable agreements classified as operating leases. At January 31, 1998,
future minimum payments under these operating leases are as follows:
OPERATING
LEASES
-----------
1999 ............................... $ 3,464,000
2000 ............................... 3,595,000
2001 ............................... 1,918,000
2002 ............................... 989,000
2003 ............................... 842,000
Thereafter ......................... 1,093,000
-----------
Total minimum lease payments........ $11,901,000
===========
Certain of these lease agreements provide for annual rental adjustments
based on changes in the Consumer Price Index. Certain of these lease agreements
also include renewal options.
At January 31, 1997, equipment under capital leases amounted to
$1,231,000. Related accumulated amortization for the same period of time was
$440,000. During fiscal 1998, all obligations under capital leases were repaid
and ownership of the related assets was transferred to the Company.
Rent expense totaled $3,186,000, $2,717,000 and $2,587,000 during
fiscal 1998, 1997 and 1996, respectively.
7. INCOME TAXES
For financial reporting purposes, income before taxes includes the
following components:
Years Ended January 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Pretax income:
United States $22,369,180 $ 8,988,990 $ 6,027,702
Foreign 866,977 -- --
----------- ----------- -----------
$23,236,157 $ 8,988,990 $ 6,027,702
=========== =========== ===========
F-18
43
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Significant components of the Company's deferred tax liabilities and
assets are as follows:
JANUARY 31,
----------------------------
1998 1997
---------- ----------
Deferred tax liabilities:
Tax over book depreciation ....... $4,270,000 $1,293,000
Inventory costs capitalization.... 846,000 248,000
Other ............................ 2,000 47,000
---------- ----------
5,118,000 1,588,000
---------- ----------
Deferred tax assets:
Inventory and other reserves..... 3,696,000 1,771,000
Deferred rent ................... 65,000 108,000
Accrued expenses ................ 1,623,000 1,221,000
Other ........................... 858,000 342,000
---------- ----------
Total deferred tax assets ........... 6,242,000 3,442,000
---------- ----------
Net deferred tax assets ............. $1,124,000 $1,854,000
========== ==========
The provision for taxes based on income consists of the following:
YEARS ENDED JANUARY 31,
-------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Current:
Federal........................................... $ 7,933,000 $3,910,000 $2,619,000
Foreign........................................... 308,000 -- --
State............................................. 1,634,000 874,000 588,000
Deferred:
Federal........................................... (1,188,000) (646,000) (624,000)
State............................................. ( 186,000) (121,000) (154,000)
---------- ---------- ----------
$8,501,000 $4,017,000 $2,429,000
========== ========== ==========
A reconciliation of the effective tax rates and the statutory Federal
income tax rate is as follows:
YEARS ENDED JANUARY 31,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
Tax at Federal rate..................... $8,115,000 35% $3,146,000 35% $2,110,000 35%
State income tax net of federal......... 941,000 4 605,000 7 295,000 5
Loss (Earnings) distributed to
S Corporation shareholders........... (642,000) (2) 438,000 5 (78,000) (2)
Other................................... 87,000 -- (172,000) (2) 102,000 2
---------- --- ---------- --- ---------- ---
$8,501,000 37% $4,017,000 45% $2,429,000 40%
========== === ========== === ========== ===
Prior to its acquisition by the Company in October 1997, Q-bit
Corporation had elected to be treated as an "S corporation" for income tax
purposes and, accordingly, any liability for income taxes was that of the
shareholders and not Q-bit.
F-19
44
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. SIGNIFICANT CUSTOMERS AND EXPORT SALES
During fiscal 1998 and 1997, respectively, one customer accounted for
14% and 13% of the Company's net sales. No customer accounted for more than 10%
of the Company's net sales during 1996.
Export sales were 7%, 7% and 11% of net sales for fiscal 1998, 1997 and
1996, respectively.
9. RELATED PARTY TRANSACTIONS
An officer of the Company holds certain interests in various suppliers
to one of the Company's subsidiaries. Amounts paid to these suppliers in fiscal
1998, 1997 and 1996 totaled $2,667,000, $1,054,000 and $307,000, respectively.
10. SUBSEQUENT EVENT
In March 1998, the Company sold in an underwritten public offering an
additional 1,990,000 shares of common stock. The net proceeds received by the
Company from this offering totaled approximately $49.6 million. Certain
shareholders of the Company also sold 1,000,000 shares as part of this offering.
F-20
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on April 28, 1998.
REMEC, INC.
By: /s/ Ronald E. Ragland
-------------------------------------
Ronald E. Ragland
Chairman of the Board and
Chief Executive Officer
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald E. Ragland, Errol Ekaireb and
Michael D. McDonald, jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Ronald E. Ragland Chairman of the Board and April 28, 1998
--------------------------- Chief Executive Officer
Ronald E. Ragland (Principal Executive Officer)
/s/ Errol Ekaireb President, Chief Operating April 28, 1998
--------------------------- Officer and Director
Errol Ekaireb
/s/ Jack A. Giles Executive Vice President, President April 28, 1998
--------------------------- of REMEC Microwave Division
Jack A. Giles and Director
/s/ Denny Morgan Director, Senior Vice President April 28, 1998
--------------------------- and Chief Engineer
Denny Morgan
S-1
46
/s/ Joseph T. Lee Executive Vice President April 28, 1998
- --------------------------- and Director
Joseph T. Lee
/s/ Michael D. McDonald Chief Financial Officer, Senior Vice April 28, 1998
- --------------------------- President and Secretary (Principal
Michael D. McDonald Financial and Accounting Officer)
/s/ Andre R. Horn Director April 28, 1998
- --------------------------
Andre R. Horn
/s/ Gary L. Luick Director April 28, 1998
- --------------------------
Gary L. Luick
/s/ Jeffrey M. Nash Director April 28, 1998
- --------------------------
Jeffrey M. Nash
/s/ Thomas A. Corcoran Director April 28, 1998
- --------------------------
Thomas A. Corcoran
/s/ William H. Gibbs Director April 28, 1998
- --------------------------
William H. Gibbs
S-2
47
SCHEDULE II
REMEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
CONTRACT LOSS RESERVE PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------------- ------ -------- ---------- ---------
Year ended January 31, 1996 ...... $ 1,906,000 $ 2,139,000 $(2,675,000) $ 1,370,000
Year ended January 31, 1997 ...... 1,370,000 821,991 (620,000) 1,571,991
Year ended January 31, 1998 ...... 1,571,991 478,009 -- 2,050,000
48
REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1998
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Pages
- ----------- ----------- --------------
2.1(1) Agreement and Plan of Reorganization and Merger dated
as of May 16, 1996 among Magnum Microwave Corporation,
the Registrant and REMEC Acquisition Corporation
2.2(7) Agreement and Plan of Reorganization and Merger dated as of
February 24, 1997 among the Registrant, RTI Acquisition
Corporation and Radian Technology, Inc.
2.3(6) Agreement and Plan of Reorganization and Merger dated as of
April 10, 1997 among the Registrant, C&S Acquisition
Corporation and C&S Hybrid, Inc.
2.4(6) Agreement and Plan of Reorganization and Merger dated as of
October 24, 1997 among the Registrant, RQB Acquisition
Corporation and Q-bit Corporation
2.5(6) Share Purchase Agreement dated as of September 30, 1997 among
Justin Miller, Ph.D., RoyNat, Inc., REMEC Canada ULC and the
Registrant
3.1(3) Restated Articles of Incorporation
3.2(3) By-Laws, as amended
10.1(3) Equity Incentive Plan
10.2(3) Employee Stock Purchase Plan
10.3(3) Form of Indemnification Agreements between Registrant and its
officers and directors
10.4(3) Standard Industrial Lease between the Registrant and
Transcontinental Realty Investors, Inc., dated February 1,
1990, as amended.
10.5(3) Standard Industrial Lease between the Registrant and
Chesapeake Business Park 1983, dated December 13, 1988, as
amended.
10.6(4) 1996 Nonemployee Directors Stock Option Plan
10.7(7) Amended and Restated Loan Agreement between the Registrant
and The Union Bank of California, N.A., dated January 17, 1997
21.1(6) Subsidiaries of the Registrant
23.1(7) Consent of Ernst & Young LLP, Independent Auditors
23.2(7) Consent of Ireland San Filippo LLP, Independent Public
Accountants
23.3(7) Consent of Bray, Beck & Koetter, Independent Auditors
24.1(7) Power of Attorney (included on Page S-1 of this Annual Report
on Form 10-K)
27(7) Financial Data Schedule
- ----------
(1) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-4 (No.
333-05343) filed on July 30, 1996 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Form 8-K filed on May 3, 1996 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-80381) filed on February 1, 1996 and incorporated herein by
reference.
(4) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-8 (No.
333-16687) filed on November 25, 1996 and incorporated herein by
reference.
(5) Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Registration Statement on Form S-1 (No.
333-18325) filed on December 20, 1996.
(6) Previously filed with the Securities and Exchange Commission as an
exhibit to Amendment No. 2 to Registrant's Annual Report on Form 10-K/A
filed on January 30, 1998 and incorporated herein by reference.
(7) Filed with this Annual Report on Form 10-K.