-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PqQNr9bT7ALxZ1EtbptuJt1Dp7FsEix0w5LNqR77vxrcquJxYHNMxZ66UmWz0hz5 G3zKu0zkgUbqRfaBth1btA== 0000912057-02-021670.txt : 20020523 0000912057-02-021670.hdr.sgml : 20020523 20020522215417 ACCESSION NUMBER: 0000912057-02-021670 CONFORMED SUBMISSION TYPE: 425 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20020523 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: REMEC INC CENTRAL INDEX KEY: 0000769874 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 953814301 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 425 BUSINESS ADDRESS: STREET 1: 9404 CHESAPEAKE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 6195601301 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRIAN CORP /CA/ CENTRAL INDEX KEY: 0000925054 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770023003 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 425 SEC ACT: 1934 Act SEC FILE NUMBER: 000-24360 FILM NUMBER: 02660353 BUSINESS ADDRESS: STREET 1: 350 W JAVA DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087455400 MAIL ADDRESS: STREET 1: 350 WEST JAVA DRIVE STREET 2: C/O CORPORATE CONTROLLER CITY: SUNNYVALE STATE: CA ZIP: 94089 425 1 a2080887z425.txt 425 Filed by REMEC, Inc. pursuant to Rule 425 under the Securities Act of 1933 and deemed filed under Rule 14d-2 of the Securities Exchange Act of 1934 Subject Company: Spectrian Corporation Commission File No.: 000-24360 The following is a transcript of a conference call held by Ronald E. Ragland, REMEC, Inc.'s Chairman and Chief Executive Officer, Thomas H. Waechter, Spectrian Corporation's President and Chief Executive Officer, and David L. Morash, REMEC, Inc.'s Chief Financial Officer. Announcement of the Proposed Merger By REMEC, Inc. and Spectrian Corporation May 21, 2002 4:30 p.m. Eastern Daylight Time 1 BRENT: Good day everyone, and welcome to this 2 REMEC conference call. This call is being recorded. At 3 this time, for opening remarks, I would like to turn the 4 call over Mr. Ron Ragland, Chief Executive Officer. 5 Please go ahead, sir. 6 RON RAGLAND: Well, thank you all for joining 7 us on this important call. We're very pleased to tell 8 you about our plans, REMEC and Spectrian. And in 9 today's call, we have myself; Tom Waechter, who's CEO and 10 President of Spectrian; and Dave Morash, who's our Chief 11 Financial Officer. 12 We're going to limit the comments and the 13 questions today to the Spectrian acquisition. It's 14 going to be a one hour conference call. We are calling in from 15 multiple locations, so we may not be choreographed 16 ideally, but we'll do our best. 17 It is not our intent to disclose all aspects of 18 the merger agreement. We will be filing a merger 19 agreement approximately the time of the proxy filing, 20 and we do not intend to address arbitrage questions in 21 the call today. 22 I'm going to read the Safe Harbor language, 23 "Statements in the press release in this conference call 24 that are not historical are forward-looking statements 25 which involve known and unknown risks and uncertainties, 1 1 particularly relative to the forecast of income and cash 2 flow. Actual results could differ materially from those 3 implied by such forward-looking statements due to a 4 variety of factors including general and industry 5 economic conditions, competition, development factors, 6 operating costs, and other risks and uncertainties that 7 are detailed from time to time in our filings with the 8 Securities and Exchange Commission." 9 Well, again, thanks for joining us, and we're very 10 excited about the deal in that it brings the Spectrian and 11 REMEC families together as a team. We've gone through a 12 very methodical and detailed due diligence process on 13 both sides of the equation. It will be Tom and mine and 14 Dave's job today to try to tell you why we're excited 15 about this and why we think it's good for the 16 shareholders of our respective companies. 17 It's been REMEC's goal all along and our battle 18 cry from the day we started REMEC to deliver an optimum 19 solution using the best technology available, and 20 provide our customers a product with the most affordable 21 cost. This deal leverages that thesis in a dynamic way 22 in our Mobile Wireless Infrastructure business. 23 Tom brings a very strong team to this merger of 24 capabilities, and I have to tell you from a personal and 25 a business perspective, I'm thrilled to have Tom joining 2 1 the team as the Chief Operating Officer and President. 2 Errol Ekaireb, who has been planning a 3 retirement, has been an incredible asset to this 4 corporation, and I don't know what we would have ever 5 done without Errol; just again, a wonderful contribution. He 6 will be continuing through a transition period, and then 7 will continue to be available to the company on special 8 assignments. And so I take this moment to thank Errol 9 for his tremendous contribution as we look forward 10 excitedly to Tom and what he brings to our team. 11 We have in this merger, an excellent 12 combination of technologies. Although REMEC is 13 relatively new to the power amplifier market, we have 14 been praised by the customer community on our technology 15 achievements. And when we blend these technology 16 achievements and the really significant opportunities 17 that we're looking into and merge those with the 18 Spectrian technology excellence, it's a very, very 19 powerful combination. Quite frankly, we expect to give 20 our very talented competitors some real challenges in 21 the competitive marketplace. 22 We also -- REMEC, as those of you who followed 23 REMEC in the past know, that our secret to success is 24 integrating the product to system level, and in doing so, 25 providing an optimum solution at the most affordable 3 1 cost. With Tom and Spectrian joining our team, we 2 believe we'll be at the forefront of giving our customer 3 an integrated base station solution and that's very 4 exciting to us. 5 Another real -- and I'm going to use the word 6 "irony" -- another real irony of the deal is that REMEC 7 and Spectrian have not been head-on competitors, and 8 where we've focused, they have not, and where they have 9 focused, we have not. And what we find when we add the 10 two companies and our customer bases, that it's just 11 extremely complimentary. 12 Tom's going to give you some detail in his 13 presentation, but let me just use an example. Our 14 largest customer at nominally 20 to 25 percent is Nokia. 15 Tom, Spectrian doesn't do a dollar's worth of business 16 with Nokia. Tom's got tremendous activity in Korea, a 17 significant part of the business. REMEC has never sold 18 a dollar to Korea. And it goes farther than that, and 19 it's stronger than that, but that gives you the flavor 20 of our excitement in that area. 21 So this is going to give us an expanded global 22 platform and an expanded customer base that's pretty 23 impressive. Tom's been practicing there at Spectrian a 24 flexible outsourcing model, and has two excellent 25 partners that have been supporting him. Needless to 4 1 say, that REMEC with its offshore manufacturing 2 capability will find a dual benefit in this in being 3 able to have a larger manufacturing base to spread the 4 infrastructure cost of our company, and also to have the 5 flexibility to work with and team with these gentlemen 6 who have provided excellent contract manufacturing 7 services to Tom in the past. 8 We also are going to get a significant boost to 9 our purchasing power equation, and there are some unique 10 and specific competitive advantages we will gain with 11 this combination. So my Global Manufacturing 12 organization is really excited about this also, and 13 it's an area where we will be experiencing substantial 14 synergies. 15 The combination also underwrites a very 16 effective Worldwide Sales and Marketing organization. 17 Tom has an extensive organization as do we. And again, 18 because of our global and customer base differences, 19 what we end up with is an excellent by-product of the 20 best of both, and so I think that's a key point to share 21 with you. 22 For those of you who have followed REMEC for 23 some time, you know that I've talked in the past about 24 the chicken egg of building an infrastructure that's 25 capable of taking this corporation forward to a billion, 5 1 and then a multibillion-dollar performance level in 2 revenue. And you've heard me cite that we're building 3 an infrastructure that needs as a starting platform a 4 $500,000,000 revenue run rate to fully absorb the 5 structure we put together. This deal with modest growth 6 puts us at that platform, and I think that's a very 7 important aspect of this transaction. 8 Further, we're combining two very strong 9 balance sheets to end up with the strongest balance 10 sheet in our competitive marketplace, and that balance 11 sheet is going to fuel our ability to serve our 12 customers, take advantage of opportunities in the 13 marketplace, and be able to have the resources to back 14 up and succeed with our initiatives. 15 I mentioned earlier that we are 16 fundamentally -- our core belief is that we deliver 17 value to our customers, and so being able to deliver in 18 the Mobile Wireless marketplace and to our customer 19 community the optimum solution at the most affordable 20 cost is critical. This deal adds substantial leverage 21 to this thesis. 22 You know, it's easy to sit here and talk about 23 synergies, but I want to emphasize that in our due 24 diligence process, we went through a formal process with 25 Spectrian, and jointly put together the synergy list, 6 1 and we have some very specific expectations that will be 2 refined as we go forward. But we're confident that 3 within the first year of our combination, we'll deliver 4 a minimum $20,000,000 of synergies to the bottom line 5 and in excess of $30,000,000 annually thereafter. I 6 have talked with Tom and my team extensively about the 7 importance of developing a transition team to do the 8 important planning to assure a smooth, effective 9 integration. Our most precious resource going forward 10 is time. And to the degree that we properly prepare in 11 our planning for a subsequent execution once the 12 shareholders authorize this deal is essential. 13 I've asked Tom as the future Chief Operating 14 Officer and President of REMEC to run this group, and 15 we're going to staff it with our best and brightest on 16 both sides so that this execution, this 17 transitional execution, which I expect to be very 18 straight forward. 19 I'm going to sidebar for a second and say this 20 only affects -- this is mobile infrastructure. It will 21 not affect our Broadband Wireless group. It obviously 22 will not affect our Defense group. It does not affect 23 our advanced technologies activities that are going on. 24 And then for the production group or the Global 25 Manufacturing group, I think it's very important to 7 1 point out that Tom's already gone to the outsource 2 model, so in terms of documentation and discipline of 3 working with a separate organization, we're expecting a 4 very, very smooth transition and integration. 5 Nevertheless, we're going to have this transaction 6 planned in detail and have the total situation wired, 7 and the day we hit closing, we're flipping the circuit 8 breaker, and moving out smartly with the implementation. 9 I'll be making some more comments at the close, 10 but right now, I'd like to turn it over to Tom. 11 TOM WAECHTER: Thanks, Ron, and thanks for all 12 the positive comments about Spectrian and this 13 opportunity in front us. 14 As the President and CEO of Spectrian, I'd like 15 to take a few minutes to really explain to you what I 16 think are the benefits and opportunities to our 17 customers, our shareholders, and as well, the employees 18 of Spectrian, and why I've been so enthusiastic about 19 this merger between the two companies. If I look at the 20 major benefits, one of the things that the market and 21 our customers have been demanding of us is to come to an 22 integrated RF solution for the base stations. Spectrian 23 has looked at various ways that we could achieve that, 24 and when we were able to match up with REMEC and look at 25 what they have and the number of solutions and the 8 1 technology, we were extremely excited about that, 2 because it really accelerates what we could do 3 internally by three to four years with this integrated 4 model. So we believe we can move very quickly. It's 5 going to provide a very efficient and cost-effective 6 solution to our customer base. We know that price is a 7 very important issue out there and efficiency, and we 8 believe we can move down that path very, very quickly. 9 For our customers, it will provide one-stop 10 shopping. Where today they maybe have to deal with 11 three or four different suppliers and try to marry the 12 equipment together, they're now going to be able to go 13 to one, REMEC, for a full integrated solution. 14 And if you look at between the two 15 organizations and our capabilities in the R&D groups, 16 this is really going to allow us to get more done with 17 the same combined entities that we have in R&D. We won't 18 be duplicating as many efforts as we do today, and 19 therefore, we can take on more projects for our 20 customers, and we see quite a bit of those today in the 21 market. 22 Also, we will be working with an ever-widening 23 customer base. I think for those who have followed 24 Spectrian, you know we've worked very diligently over 25 the last couple of years to really expand our customer 9 1 base. Going back two years ago, we had one major 2 customer that was about 80 percent of our business. 3 We've been able to broaden that, but I'm extremely 4 excited when I look on one piece of paper now, the major 5 customers that we'll be working with between REMEC and 6 Spectrian. 7 REMEC has a very strong presence with the OEM's 8 in Europe, a very strong relationship that Spectrian 9 desperately needs today. We really don't have that kind 10 of presence. I think we both have very strong 11 interest in China. We've done a lot of the right 12 things, and by localization, have a strong presence 13 there with our people, and now combined, I think that's 14 just going to even strengthen that much more, and of 15 course, Spectrian has a really strong heritage in Korea. 16 That's a major base for us. We've done extremely well, 17 and that will open up now to the combined entity. 18 And an area where REMEC doesn't really play 19 today in the North American and Latin American network 20 operators, Spectrian has developed a really strong 21 business. So if I just look at a list of some of the 22 major customers, to me, again, it's very exciting, 23 because I've seen what it has taken Spectrian to get to an 24 expanded customer base. Now that starts to explode 25 for all of us. 10 1 Looking at people like Nokia, Samsung, Lucent, 2 Motorola, Nortel, Verizon, Cingular. These are the key 3 players in the industry, and we will have those as a 4 strong customer base at this point. I also think for 5 our shareholders, we will improve the stability. 6 Spectrian today has one major product offering and a broad 7 portfolio within that, but we are a standalone power 8 amplifier business, and as a result, there is a lot of 9 ups and downs. There's a lot of cycles. If I look at 10 merging in our amplifier business into REMEC's Mobile 11 Wireless business, it's quite exciting. Plus, you also 12 have two other strong business there - that REMEC has 13 Defense and the Broadband Wireless. 14 Ron mentioned earlier, and I'll tell you this 15 is something that gets me extremely excited, is the 16 combined balance sheet that both companies will have. I 17 don't think there's anyone in the industry that will 18 have the strength of REMEC once we combine our two 19 balance sheets. We have no debt, and we'll have 20 approximately $150,000,000 in cash going forward, and 21 that really allows to us make those kinds of decisions 22 that are the right ones for our customers and really 23 looking at the long-term payback for our investors. 24 The other thing to me that was very, very 25 important, and I've been just feeling better and better 11 1 about it as we went through due diligence and I got to 2 meet Ron more and his team of people is that we are 3 closely aligned between our corporate cultures. And I 4 think any time you do this type of acquisition, and we're 5 merging Spectrian into REMEC, you can't underestimate 6 how important that is. And I think both of our teams -- 7 from the comments and to see how smoothly this has gone 8 up to this point -- I'm very encouraged by the fact that 9 we really have a lot of synergies between our corporate 10 cultures. 11 So those are some of the benefits I see and the 12 things that really encourage me to look at merging in 13 Spectrian into the REMEC organization. Just if I look 14 ahead, Ron mentioned being prepared, getting ready to go 15 as soon as the deal is closed. We flip the switch, and 16 we're on with it, and I think that's extremely 17 important. The market's moving quickly. This integrated 18 solution is important. We really need to achieve the 19 synergies both from a revenue standpoint and a cost standpoint 20 as we go forward, so I'm very excited to have the 21 opportunity to be leading that charge. Again, I think 22 we have very good people on both sides. We're going to 23 put our best on there. As Ron mentioned, we're 24 going to be ready to go. We're going to charge out of 25 the starting blocks very, very quickly. 12 1 I think as a result, our shareholders, which 2 today are separate, as the Spectrian and REMEC, as this is 3 combined, they'll see some very important synergies and I 4 think some very nice paybacks over time. 5 At this point, I'd like to turn it over to Dave 6 Morash for some comments. 7 DAVE MORASH: Thanks very much, Tom. I will 8 address the deal structure and the synergies -- 9 statements on the synergies are also covered under the 10 forward-looking statement. 11 I will not be answering any questions today on 12 our Quarter or any anticipated restructuring charges. 13 REMEC will acquire Spectrian for $14 per share 14 for approximately $160,000,000 in aggregate. REMEC will 15 have at its sole discretion the ability to deliver up to 16 $45 million as part of the acquisition consideration at 17 any time prior to five days before closing. 18 Frankly, we don't like our stock where it is, 19 so if we need to, we will spend cash rather than issue 20 too-cheap a stock. I know that you would like to know 21 what will make us decide one way or another. We have 22 made no decision. We don't have a formula. We will 23 look at our price, at our prospects on an ongoing basis, 24 and when we feel that the time is right to move in one 25 direction, we'll decide and announce. Candidly, I 13 1 expect it will be later rather than sooner, so that 2 REMEC keeps most flexibility in the process. 3 The stock portion of the offer price will be 4 based upon a minimum and a maximum value per REMEC's 5 stock of a floor of $7 and a ceiling of $10.50 6 respectively. If the deal is all stock, minimum 7 exchange ratio of 1.33 giving upside potential to 8 Spectrian above $10.50 a share for REMEC, maximum 2.00[exchange] 9 (correction)ratio for REMEC at $7 or below. If the deal 10 is all stock, we will issue a minimum of 15.2 million 11 shares and a maximum of 22.8 million shares. Based on 12 45.2 million REMEC shares currently outstanding, this 13 results in Spectrian's share of the stockholders 14 ownership of between 25.2 percent and 33.5 percent of 15 the combined company. 16 If things were, say, on plan, the process should 17 work as follows: We will file an 8-K shortly. We'll 18 work on a proxy and meet SEC requirements, and mail the 19 proxy sometime in June. Sometime in July, we'll make 20 our cash election followed by shareholder votes of both 21 companies. 22 Rest assured, the Spectrian shareholders will 23 know with sufficient notice how much cash they will be 24 offered in the aggregate. They will have to wait for 25 proration results after the vote to know how much each 14 1 shareholder will receive in cash and stock. 2 With regard to the collar, I would like to give 3 more details, but I will leave it at that during the 4 call. 5 Feel free to call me or my financial advisors 6 after the call if you have additional collar questions. 7 You should know that as a principle, the Spectrian 8 shareholders are protected from the downside or share in 9 the upside of REMEC's stock only in the non-cash portion 10 of the deal. We are paying $14 or $160 million in 11 aggregate. But if our stock runs up, the Spectrian 12 shareholder's benefit, not on the whole $14 price, but 13 only on that part of the $14 that we do not pay in cash. 14 It is probably easier to work out specific example. I 15 will help you with the math on three examples. With 16 REMEC's stock at the $7 to $10[.50] (correction) collar range, above the 17 collar range or below the collar range. Let's say that 18 we use $20 million in cash, about $1.75 a share. That 19 leaves $160 million, less $20 million in cash, or 20 $140 million to pay in stock value. We will do that 21 based on REMEC's average closing sales price for a 22 ten-day period prior to the meetings. If our average 23 price is within the collar range between $7.00 and $10.50, 24 we will issue shares worth $140 million. We just divide the $140 25 million by the average price. If the average price is 15 1 above the ceiling, say, $14, as we hope, we issue 2 $140 million, divide it by the maximum value of $10.50, 3 so 13.3 million shares. At closing, this could be worth 4 a total of $20 million in cash plus a value of 13.3 5 million shares at $14 --$186 million for a total of 6 $206 million, or an average of $18 a share. Then 7 Spectrian shareholders will be happy, but so will REMEC 8 shareholders. 9 In reverse, if our stock is $6, we will issue 10 stock valued at no less than $7 or 20 million shares. We 11 will issue 20 million shares to pay the $140 million 12 in stock value at the floor level of $7, not $6. The 13 total actual value will then be $20 million in cash plus 14 $120 million in stock or a $140 million or less than the 15 $160 million within the range. 16 Because of the potential cash component, you 17 cannot effectively use exchange ratios of 1.33 or 2.00 to 18 figure out the values received by Spectrian outside the 19 collar. 20 Within the collar, it is the $14, but outside, 16 1 it is more or less influenced not by the whole value of 2 the transaction, but only by the portion which we do not 3 elect in cash. 4 Again, to make our decision, we will look at 5 all factors -- do we like our stock price, do we need the 6 cash, and decide, but you will have sufficient notice to 7 determine your choice. 8 I should mention that there is a $6,000,000 9 break-up fee. There is no walk-away point at the stock 10 price, and there are normal merger conditions in the 11 contract, such as regulatory approvals. 12 In terms of synergies as we stated in the press 13 release, REMEC expects that the transaction will 14 generate very substantial synergies, and will be accretive to 15 its earnings in the first year following closing 16 excluding, of course, the transaction-related expenses 17 based on achieving expected synergies. 18 A preliminary evaluation of synergies conducted 19 by REMEC and Spectrian indicates estimated operating 20 synergies in excess of $20 million in the 12 months 21 following closing, and in excess of $30 million as an exit, 22 thereafter. Fundamentally, with our larger size, 23 the transaction will absorb unused capacity in a number 24 of areas. 25 We expect to generate synergies from a number 17 1 of areas including the elimination of duplicate expenses 2 in sales and marketing, research and development, 3 finance and accounting, general and administrative, 4 corporate spending, a number of department items, such 5 as repair cost reduction, QA spending, IT network 6 spending, and HR spending. These are combined with raw 7 materials purchasing leverage as well as savings on 8 redundant facilities, and we've assumed a modest amount 9 of additional revenues based upon our larger market 10 presence and combined effort. 11 Now I'd like to turn the call back over to Ron. 12 Ron? 13 RON RAGLAND: Okay. Thanks, Dave, I'll make a 14 couple of other comments and go into questions. 15 First of all, there will be a test on all that 16 math that we just threw at you. And I want to point out 17 that we're going to have a webcast that we do on the 18 10th of June which will expand on the information we've 19 presented today. The webcast will also talk about the 20 broader companies and how it looks. We will be in New York 21 at an investor conference, and both Spectrian and 22 REMEC will be presenting at that investor conference on 23 the 11th of June. We also intend to have a webcast 24 followed by a road show at an appropriate 25 point in time before the shareholder vote where we 18 1 intend to address investors and customers. 2 I would tell you that a random feedback is that 3 the substantial number of investor calls and customer 4 calls into both companies have been exceedingly 5 positive, and that buoys our confidence that we feel in 6 the goodness of this merger. 7 So with those comments, Brent, let's go to 8 questions. 9 BRENT: Thank you, Mr. Ragland. 10 Today's question-and-answer session will be 11 conducted electronically. If you would like to ask a 12 question, please hit the * followed by the digit 1 on 13 your touch-tone phone. Again, that's *1 for questions. 14 We'll take them in the order that they are presented in 15 as much time is allowed. 16 Our first question is from Rich Valera with 17 Needham & Company. 18 MR. VALERA: Good afternoon, gentlemen, and 19 congratulations on the market reaction yesterday. It's 20 pretty rare these days to see even the acquired 21 company's stock price go up. 22 First, the question I think for you, Tom, on 23 the product side, we know your products pretty well, 24 your power amp products, can you talk about how they fit 25 within what REMEC has on the power amp side, and if 19 1 there's some complimentary products there and if there's 2 some overlap? Thanks. 3 TOM WAECHTER: Yeah, I think as Ron mentioned, 4 we haven't seen each other a lot in the market as far as 5 direct competition and a customer base, but I think what 6 we have evaluated with the REMEC technology as we've 7 gone through due diligence is quite impressive. They've 8 really worked up some advanced technology that I think 9 is being very well received by the OEM's. I think in 10 most cases, it's complimentary. As you know, Spectrian 11 has been working on the XNN technology and digital 12 predistortion, and those types of areas. And I think really 13 they're complimentary types of technologies from 14 everything we've seen. 15 And again, I want to emphasize by putting the 16 two R&D groups together, the resources we have to really 17 address solutions for our customer base is very 18 significant in this industry, so I would say mostly 19 complimentary and actually allowing us to get more 20 projects done over a period of time as a combined entity 21 rather than doing it alone. 22 MR. VALERA: Great, and on the integrated product front, 23 can you give us an idea, Ron and Tom, where you think 24 you first might attack in terms of integrating products, 25 you know, presumably integrating some components in with 20 1 the power amps maybe first? 2 RON RAGLAND: I'll just make a knee-jerk 3 reaction to that. I think the biggest -- probably one 4 of the biggest next steps with each of OEM's we serve is 5 "how are you going to provide us an integrated solution?" 6 Needless to say, this is how REMEC has built our 7 company. It is being at the forefront of integrating an 8 optimum solution up toward the system level. So Tom 9 said in his remarks that the customers were demanding 10 this vertical integration. I would go so far as to say 11 the customers are screaming for it, and it's, I 12 believe -- I don't want to speak for Tom here, but I'll 13 toss it over to him, and say that I think that was a 14 major motivation for Spectrian to have these 15 discussions. 16 TOM WAECHTER: Yeah, it was, Ron. You know, as 17 I mentioned earlier, as we look at what the customers' 18 needs were and we looked at technology road maps, it was 19 very clear that this integration model was coming faster 20 than any of us anticipated even six months ago, so 21 again, this gives us three or four steps very quickly 22 with the integration. 23 I think back to your question, specifically, 24 Rich, I would say, one, that it's very obviously the 25 amplifiers and filters. I mean, that's something we're 21 1 hearing on a regular basis now, but, you know, I think 2 without giving any secrets out, we've got some ideas 3 where we can be proactive and offer some solutions even 4 beyond that what may be the customers actually thinking 5 today as well. 6 MR. VALERA: Great. 7 BRENT: Now we go next to Dale Pfau of CIBC 8 World Markets. 9 MR. PFAU: Congratulations, gentlemen. 10 RON RAGLAND: Thanks. 11 MR. PFAU: Ron, for one time, I've got you. 12 I'm in China this time, and you're finally, I guess, 13 back in San Diego for awhile? 14 RON RAGLAND: That's a flip, isn't it? 15 MR. PFAU: That's a new one. 16 Congratulations, guys, great merger of the two. 17 I've got a question, I guess, that's a financial thing. 18 Taking a look at the synergies you're talking about, you 19 know, both REMEC and, certainly, Spectrian, recently have 20 suffered from margin deterioration and stagnating 21 margins in the low 20's. With the synergies and with 22 your outlooks in the businesses, can we see those 23 margins creep up any time soon, or are we 24 looking -- and what is your outlook for the combined 25 company now for where we can actually get to in margins 22 1 over the next 12 to 18 months? 2 RON RAGLAND: The Company is not going to get 3 anywhere near our stock expectation without delivering 4 our shareholder community, the investor community, 5 strong bottom line profits and damn good margins. We're of 6 the belief that we can have a competitively differentiated 7 product that gives good value and gives REMEC good 8 margins going forward, and I would say that operating 9 margins at approximately 30 percent would be a 10 reasonable target. Needless to say, the customer 11 community would always like to see it lower, and we'd 12 always like to see it higher, so -- but I think that 13 that's a reasonable balance between the two influences. 14 TOM WAECHTER: One of the things that we've seen is with this 15 integration of the technology, if you do it inside one 16 company, I think you can make that technology much more 17 efficient and cost effective, and then both the customer 18 and the company can benefit from that rather than 19 multiple companies designing the product trying to bolt 20 them together later. You build in a lot of redundancy 21 that way, but I think there's some uptake in the margin 22 and benefit directly to the customer, you know, from 23 those synergies of planning it in advance. 24 RON RAGLAND: Our deteriorated margins at this point in time 25 are more volume based than they are individual 23 1 achievement based; in other words, back to my point 2 about $500,000,000 -- and I'll use it -- just stupid 3 example. My paycheck -- it's much better for my paycheck 4 to be absorbed by a $500,000,000 revenue than it is by a 5 $350,000,000 revenue, so I think the deteriorating 6 margins are not a function of the product design, the 7 price the customer's paying. I think it's the fact that 8 we had such a steep and abrupt cutback in business, and 9 we're not going to layoff, not to live for another day. 10 Now, I say that at the same time Tom's taken 11 his team from 700 to 250 and outsourced his 12 manufacturing, and we've laid off just shy of a third of 13 the REMEC team over the past year, which is painful as 14 hell, so -- but we cannot layoff infrastructure and 15 capability that are required to become the 16 billion-dollar company that we hope to become in the 17 near future. 18 DAVE MORASH: I guess I would add to that -- 19 this is probably the first transaction that we've done 20 where we really are planning a full integration of the 21 operation, and so I think -- you know, of any size 22 anyway. And so I think this -- our ability to execute 23 will then allow us to generate some pretty significant 24 synergies relatively rapidly and improve those margins 25 that you talked about. 24 1 RON RAGLAND: Yeah, I've mentioned in perhaps 2 many previous conference calls that the reorganization 3 and restructuring of the company is going to allow a 4 significant extraction of synergies as we bring 5 additional teams into the family. This is going to be 6 an exemplar situation, I think, that proves out that 7 prediction. 8 MR. PFAU: Ron, just a correction, you said 9 30 percent net operating; do you actually mean 10 30 percent gross margins? 11 RON RAGLAND: Yes, is what I -- I'm sorry. I 12 thought I said gross margins. 13 MR. PFAU: Okay. 14 RON RAGLAND: The delirium of the moment, so, 15 yeah, 30 percent gross margins. I do want you to know 16 and we've said this in previous conference calls, we're 17 not going to be satisfied unless we have pretax profits 18 well into double digits, and a very important aspect of 19 the total REMEC structuring is the clever and effective 20 tax consideration we've worked -- that we've worked out 21 and the fact that we have manufacturing facilities in 22 tax-free zones, so we understand what it takes, we 23 believe, to be valued in the market in the future by our 24 investors, and we intend to deliver a strong bottom 25 line. 25 1 MR. PFAU: And one other question. Obviously, 2 you've been a leader in the consolidation and sort of 3 the infrastructure subassembly components base. Should 4 we look for more of that in the industry? 5 RON RAGLAND: Only if it makes sense. I guess 6 that's a way of being cute, isn't it? I'd say that we're 7 not in a frenzy. There are some very significant 8 opportunities for consolidation of talented teams. This 9 is one such where we've been extremely pleased with some 10 of the other values we've been able to extract from the 11 marketplace. And what a wonderful feeling to reiterate 12 a tune that I've been singing for some time. What a 13 wonderful aspect of this downturn to extinguish 14 nonviable business plans. 15 So we think we've got a viable model here. 16 We've got a viable team going forward, and we're going 17 to be competing against other viable business plans. 18 BRENT: And we go next to Charles DiSanza with 19 GKM. 20 MR. DISANZA: Hello, gentleman. Ron, I don't 21 think we've met before. 22 RON RAGLAND: No, I don't think so, Charles, 23 and I'm having trouble hearing, and I'm guessing that 24 everybody else might be, so -- 25 MR. DISANZA: Okay. 26 1 RON RAGLAND: -- push a little more volume. 2 MR. DISANZA: I'll push a little more volume 3 out. 4 RON RAGLAND: There you go. 5 MR. DISANZA: What specifically do you sell to 6 Nokia for the infrastructure -- 7 RON RAGLAND: Yeah, basically -- 8 MR. DISANZA: -- and secondly, who provides the 9 power supplies? 10 RON RAGLAND: You know, I don't know who 11 provides their power supplies. That's not in our world. 12 We develop primarily microwave and millimeterwave product 13 here, so power supply, I don't know. 14 But we provide front end, passive, distribution 15 filtering. We have also into their base station 16 products, various coverage enhancement products that we 17 provide to them, and we have been working with them 18 diligently to expand that product offering. And I think 19 this combination with Spectrian, although our 20 technology, I believe, is exciting, we're a relatively 21 new entrant from in terms of legacy and critical mass to 22 a major OEM and the size of their needs. So I believe 23 that the OEM community will view this combination as 24 putting a -- oh, I believe we already have a checkmark 25 in technology in power amplification. This is going to 27 1 give an addition to that and positive checkmarks on 2 cost. It's going to add legacy and critical mass to 3 our credential, and I think it's going to be very 4 powerful. 5 MR. DISANZA: Tom, any comments to that? 6 TOM WAECHTER: No, I think if you look again at 7 the technology that REMEC's working on, our technology 8 at Spectrian, and then you know, we have 850,000 power 9 amplifiers installed around the world, so it's a huge 10 knowledge base that was developed with time, and I think 11 again, combining that with what REMEC has to offer, it's 12 quite powerful. 13 MR. DISANZA: But away from the microwave and 14 millimeterwave stuff, what are you really talking -- are you talking 15 about receive channel filtering, existing products -- 16 I'm sorry. 17 RON RAGLAND: I'm talking about everything in 18 a base station that operates at microwave, and certainly, 19 when we look at base station backhaul, we'll be looking at 20 millimeter wave also. So I would say you're welcome if 21 you're interested to call in, and we'll line you up 22 with -- 23 MR. DISANZA: Right. 24 RON RAGLAND: -- the right information, the right folks that can give 25 you a technical description 28 1 MR. DISANZA: You spoke about other teams, and 2 the allusion that maybe you have more acquisitions. 3 What about other products? What kind of 4 product would help you fill out your importance to the 5 carriers? 6 RON RAGLAND: Charles, I don't wish to be the 7 least bit rude. You're welcome to call me personally, 8 but this conference call is primarily on the Spectrian 9 acquisition, and I'm going to go to a next call, so 10 you're welcome to call me, and I'd be glad to address 11 that with you. 12 BRENT: Our next question is from Mark Jordon 13 with A.G. Edwards. 14 MR. JORDAN: Good afternoon, gentlemen. 15 First of about, I'd like to talk about the 16 manufacturing capabilities that REMEC has and how that 17 can be leveraged with this acquisition. 18 Do you have the capabilities, or where would 19 you potentially shift the work ACT Thailand is doing to 20 Philippines, Costa Rica or China, and do they have 21 the capabilities in-house today to assume that 22 work? 23 RON RAGLAND: Hi, Mark. How are you doing? 24 MR. JORDAN: Just great. 25 RON RAGLAND: For those of you who have 29 1 listened to me before, you know we've got a strength of 2 being open and direct and a weakness of being open and 3 direct. 4 Right now, there's a couple manufacturers 5 sitting out there who were serving Spectrian who are 6 very interested in what I have to say on the subject. 7 I'm going to try to find a construct that fully 8 utilizes our manufacturing capabilities and still treats 9 them as a partner and tries to understand their needs 10 having served Spectrian. 11 I personally believe that we're going to be 12 generating substantial additional revenues in our 13 combination. David has stated that in our synergies, 14 we've taken a very conservative look at that. But there 15 will be a significant impact on our purchasing power, 16 and we will be moving as we grow product into both Costa 17 Rica, the Philippines, and China. So I see this as a 18 very, very important step in creating the absorption 19 base for our global manufacturing infrastructure. I'm 20 very hopeful that we're able to deal -- interact, 21 communicate with the Spectrian's existing suppliers and 22 find a win/win instead of a disappointment. That would 23 be my goal. Recognize that it's a sensitive subject. 24 MR. JORDAN: Right. As you've mentioned, your 25 combined balance sheets would have upwards of 30 1 $150,000,000 worth of cash as we speak. Ron, you've 2 placed an emphasis on maintaining a strong balance 3 sheet, you know, during these tough times here. How 4 far -- with the client companies, how far would you be 5 willing to allow your cash position to work down, 6 either, you know, by incremental acquisitions or use 7 cash for, again, offsetting the acquisition loss? 8 RON RAGLAND: Mark, you know, I think if you 9 ask -- David, unless you want to jump in there, I'd be 10 reluctant to want to put a number on it. I don't feel 11 like this acquisition was made to acquire cash. That 12 wasn't on my list of synergies. I felt very comfortable 13 where we were. 14 The fact of the matter is, though, there are 15 incredible values of different varieties in a 16 marketplace that is under as much pressure as this 17 marketplace. So I think we look at each deal 18 individually and separately and make a judgment. 19 I think that the $150 million plus that we'll 20 have without debt puts us in an excellent position to 21 make value judgments going forward. 22 And Tom had a comment that he wanted to add to 23 your last question, also. 24 TOM WAECHTER: Yeah, I want to take a second. 25 We were talking about manufacturing. One of the things 31 1 that really excites me about the combination of the 2 low-cost offshore manufacturing that REMEC has today, a 3 very high quality, and our outsourcing model, it gives 4 us a lot of flexibility for upticks in the market. I do 5 believe when the market starts to turn, it can turn very 6 quickly, and I think it gives us -- the ongoing REMEC 7 entity, one of the few companies out there that have 8 redundant manufacturing capabilities to offer to the 9 major customers. And I know that's very important to 10 large customers to ensure our outsource of supply, so 11 I'm pretty excited about the balance we can reach 12 between the two going forward. 13 DAVE MORASH: Okay. And I guess I would add 14 just in terms of the cash side, that obviously, that 15 changes as we improve our cash flow position, and 16 you know, so our No. 1 focus at this point is to improve 17 and get to a strong positive cash flow, which then 18 allows us greater flexibility in terms of the use of the 19 cash for acquisitions and other things. 20 BRENT: We go next to Lee Parker with Compass 21 Fund. 22 MR. PARKER: Hi, guys. 23 RON RAGLAND: Hi. 24 TOM WAECHTER: Hi. 25 MR. PARKER: I'm just, I don't know a little curious as to 32 1 the timing of the acquisition. It seems that 2 Spectrian's business has been, you know, very weak 3 lately. You know, quarterly revenues declining, and 4 probably getting down to about $20 million this quarter, 5 and yet you seem to be implying that on a run rate basis, 6 the revenue might be $150 million. 7 I'm just wondering -- I don't know if you can 8 talk a little bit more about why you're doing this 9 acquisition now and why not wait a little while? 10 RON RAGLAND: Well, I guess that's always a 11 good question. I would say that it's not -- it hasn't 12 been a knee-jerk. It's been -- I've been looking and talking 13 with Spectrian for six years, so it's not a recent 14 familiarity. I would say that as both companies looked 15 at the market going forward, we both saw excellent 16 reasons to do the deal now, and I'm going to let it go 17 at that, and invite Tom to make any comments he might 18 want to make. You know, I think the entire market's 19 under pressure. Both stocks are under pressure from a 20 relative point of view. We thought that this was a good 21 transaction. We think we accurately understand their 22 future. They think they accurately understand our 23 future. I believe we're both right. 24 And Tom, what have you got to say about it? 25 TOM WAECHTER: Yeah, I would say from a timing 33 1 standpoint, a lot of it, to me, was dictated by what the 2 customers' needs were. And as we said earlier, the 3 integrated model is something that the customers are 4 getting very, very interested in and has really come 5 upon us very quickly. 6 I think not to go down a rat hole here, but if 7 you look at the Spectrian revenue, we actually, in our 8 December quarter from September, had about 27, 9 28 percent gross, and we had 8 percent from December to 10 March, and that was the first fiscal fourth quarter that 11 we had an up quarter in about three or four years, so I 12 don't think we've been in a declining revenue situation 13 from that standpoint. 14 BRENT: And we go next to Mike Walkley with RBC 15 Capital Market. 16 MR. WALKLEY: Thank you. Congratulations on 17 the deal. It seems like a great fit. 18 I was wondering if you could just go back to the synergies real 19 quick and could you maybe share how much of the 20 $20 million of synergies comes from cross-selling 21 opportunities and maybe receive the most of those cross-selling opportunities and how much would come from 23 on the cost side? 24 RON RAGLAND: That's a good question, and I'd 25 say -- I would say that a large part of the synergies 34 1 that we've evaluated, and Dave -- 2 Dave and Tom, I'm going to throw out a knee-jerk of 85 3 to 90 percent is going to be from cost synergies. 4 We have actually put very little speculation -- 5 although we have substantial enthusiasm, we've put various 6 speculation into prospective increased sales or cross 7 sales, although they're clearly there. I would say 8 we're dealing with a little higher order in terms of the 9 rationale and the basis for the synergy estimates that 10 we've done, therefore, they tend to be predominantly 11 cost based. 12 Tom? 13 MR. WALKLEY: I'm sorry? 14 DAVE MORASH: Go ahead. I'm sorry. The -- 15 certainly, the analysis that we've done is based upon 16 the fact that, you know, we're two public companies, and 17 so there's duplicates costs there and duplicate costs in 18 terms of how we operate. And so we really more looked 19 at the expense side. Really, the revenue side, we 20 figured while we think it's significant, we think that 21 that takes a little while longer to get it going and so 22 forth. And we've got to bid on things, and those have 23 got to turn into sales. So we really have not spent 24 much in the way of synergy forecast relative to the 25 sales. And I would say that Ron is correct in the 35 1 estimate -- it might even be a little bit higher than 2 that, so it's probably 90 percent is cost synergies. 3 RON RAGLAND: Tom? 4 TOM WAECHTER: Yeah. I think Dave, is very 5 accurate in the way we've gone through the synergy 6 analysis between the two teams and came to the 7 conclusion. I think the cost part is always the part 8 that's more predictable and use more manageable. The 9 revenue synergies are there. It's a matter of spending some 10 more time out with the customer bases now. We've become 11 public with this announcement, and are able to see what 12 kind of levels we're talking about as we go forward on 13 our revenue side. 14 MR. WALKLEY: Okay. Great, thank you. 15 One quick question for you, Tom. We've seen the 16 Andrew Celiant-- and now the REMEC and Spectrian combined. Any 17 thoughts on a long-term remaining independent power amp supplier 18 in the market? 19 TOM WAECHTER: Well, you know, I don't want to 20 single out a specific competitor, but I would say that 21 one of the things that did catch my eye would be -- was 22 the Andrews Celient combination of the move towards 23 integrated solutions. I felt very good about this 24 combination between REMEC and Spectrian with where we're 25 going to come out as this thing closes and can come out 36 1 very quickly. But as you can see from my enthusiasm 2 about it, I do believe it's the right model to follow. 3 And again, I think there's a lot of synergies by doing 4 it that way. 5 RON RAGLAND: I think I would be at fault if I 6 did not state that REMEC was getting substantial 7 traction in the marketplace promoting an integrated 8 solution. It's our skill. It's what we built the 9 company around. It's the secret to our success in 10 defense, and we believe it's "deja vu all over again" here 11 in the commercial world. So I've mentioned why the 12 addition of Spectrian to our thesis makes us so much 13 more powerful. Point made, I guess. 14 BRENT: Thank you. We go next to John Cardoza 15 with Chesapeake Partners. 16 MR. CARDOZA: First of all, just 17 congratulations on the transaction. 18 RON RAGLAND: Thanks, John. 19 MR. CARDOZA: My question was partially 20 answered. It just relates to the time period over which 21 you considered the transaction. It sounds like the 22 companies have known each other for a while. 23 Maybe you can give some more color as to how the 24 discussions lead to what seems like a very good 25 combination? 37 1 TOM WAECHTER: Yeah, I can give some light on 2 that. You know, Spectrian has obviously known REMEC for 3 quite awhile. Again, we are competitors on the market, 4 but we don't tend to fall over each other every day. 5 I've gotten to know Ron through some of the 6 industry forums, panelist meetings, those types of things. 7 Over that time, we've spent some time together to talk 8 about the industry and where we thought this thing was 9 going. I liked what I saw with REMEC, aggressive 10 company. They're out there. They're always pushing the 11 envelope forward, building this integrated model, and you 12 know, that attracted my attention, and then when I started 13 really understanding their business more and how well 14 these two things fit together, and we really didn't have 15 a lot of revenue that we had -- we're sharing, that is, 16 it's pretty much, you know, all additional revenue 17 between the two of us, it was a -- something that I felt 18 very comfortable with. And, you know, I approached Ron 19 and talked about the potentials of the businesses going 20 forward, and I think one thing led to another after that 21 as far as the enthusiasm around, what this could bring 22 to the marketplace. 23 RON RAGLAND: Two other comments. The first 24 one is he called me about a half hour before I would 25 have called him, and it started six months ago in this 38 1 last cycle, and it went through probably three cycles 2 prior to that over the past six years. 3 BRENT: And we'll take our last question from Larry 4 Harris with H.C. Wainright. 5 MR. HARRIS: Yes, thank you, and good afternoon 6 and congratulations on the announcement. 7 I was wondering if I could just get some 8 additional information as to what types of REMEC 9 products might be sold directly to service providers. I 10 know that Spectrian's customers include Cingular, and 11 any clarification would be helpful? 12 RON RAGLAND: Yeah. Right now, you know, the 13 REMEC history was to be initially a prime contractor to 14 defense primes, and then we entered the commercial 15 arena back in 1995 with a cold start under the belief 16 that our defense technology was applicable to the 17 commercial arena. 18 We started out in the same frame, if you will, 19 business model serving the OEM just like we served the 20 prime contractor. One of the attractions to the Airtech 21 acquisition several years ago was the fact that 22 they were in the product business, and we had been 23 primarily OEM. Well, with the squeeze on OEM operating 24 margin, so they get their competitive advantage, 25 products became very attractive to us, because if you've 39 1 got the leading solution in the space, you've got a 2 competitive advantage in technology and the cost of the 3 product. And you do your job really, really right, you 4 can get substantially north of the gross margins that 5 you can earn from the OEM's. So our concept has been 6 moving toward how do we blend a strong niche product 7 business that doesn't step on the toes of our customers 8 with a strong OEM business, and we happen to be very 9 strong believers in the synergy of the two working 10 together constructively between us and our customers and 11 also us and the service providers. 12 Now, the specific answer to the question is we 13 sell mast head amplifiers. We sell boosters for base 14 stations. We're selling fixed wireless access, total 15 solutions, and very -- now, I said I wasn't going to 16 talk about anything else, so I'm not going to tell you 17 how excited I am about that market space in the less 18 developed countries. We'll save that for the 10th and 19 11th. 20 And we sell point-to-point radios. To present 21 there haven't been great sales to the service provider 22 community, but be assured, across the board, we're 23 looking at how to go to a Nirvana downstream of 50/50 24 OEM and niche product, and try to get a blended gross 25 margin north of that 30 percent I was talking about. 40 1 Tom, with his support here in North America 2 of -- for example, of Verizon and Cingular adds to that 3 product perspective, and we see this being able to be 4 accomplished without it being disruptive to our OEM 5 customers. As a matter of fact, we see a strategy that 6 allows it to be very constructive and very favorable in 7 terms of them getting what they want at a lower price 8 across a greater absorption base with some insights and 9 possibly even some market advantages by working together 10 as a team, so I hope that's not too "high fa-lootin" an 11 answer. 12 Tom, would you add to that? 13 TOM WAECHTER: Yeah. I think Ron's very right. 14 You know, we can look at some very integrated, I think, 15 solutions that we already have a strong relationship 16 with these network operators. I think we can just take 17 that to the next level as we look at offering them some new 18 cost savings and efficiencies in their base station and 19 continue to grow a strong relationship with the OEM's at 20 the same time. 21 BRENT: And that concludes today's 22 question-and-answer portion. I'd now like to turn the 23 call back over to Mr. Ragland for any additional or 24 closing remarks. 25 RON RAGLAND: Well, we're, you know, 41 1 historically into -- I mean, we love doing what we're 2 doing, and we love the idea of doing a good job for our 3 shareholder. But I happen to maybe not throw out the 4 right set of adjectives or adverbs, but I'm really 5 tickled with this deal from top to bottom, the 6 synergies, the opportunity to work with Tom, the merging 7 of the technologies. I think probably the only sadness 8 in the whole damn thing is the fondness we have and the 9 respect we have for Errol, and the fact that we all get 10 older, and someday we're going to retire and focus on 11 other things, so that's the only downer. Errol's going 12 to stay near us and close to us, so that's the good 13 news. 14 I also want to point out that Spectrian has 15 been served by RBC, and REMEC has been served by 16 Needham, and so any questions or any appropriate issues 17 you want to address to our investment banking advisors, 18 they would be the targets. 19 And so it's a pleasure to talk to you. We will be, 20 as I said, webcast on the 10th of June, investment 21 conference on the 11th of June in New York, CIBC 22 Conference. We also will be doing a webcast followed by 23 a road show to interested investors and customers before 24 the shareholder vote, and we'll announce that in plenty 25 of time. 42 1 So thanks for joining us, and I appreciate your 2 positive and supportive comments. Bye-bye. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 43 -----END PRIVACY-ENHANCED MESSAGE-----