<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1999
REGISTRATION NO. 333-85145
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CENTURY ELECTRONICS MANUFACTURING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3672 04-3334332
STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER)
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
274 CEDAR HILL ROAD, MARLBOROUGH, MASSACHUSETTS 01752
(508) 485-0275
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LESLIE J. SAINSBURY, PRESIDENT AND CHIEF EXECUTIVE OFFICER
274 CEDAR HILL ROAD, MARLBOROUGH, MASSACHUSETTS 01752
(508) 485-0275
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
Copies To:
<TABLE>
<S> <C>
KEITH F. HIGGINS, ESQ. WILLIAM P. GELNAW, JR., ESQ.
Ropes & Gray Choate, Hall & Stewart
One International Place Exchange Place
Boston, Massachusetts 02110-2624 53 State Street
(617) 951-7000 Boston, Massachusetts 02109
(617) 951-7050 (fax) (617) 248-5000
(617) 248-4000 (fax)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED SEPTEMBER 21, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
4,000,000 SHARES
CENTURY ELECTRONICS MANUFACTURING, INC.
[CENTURY LOGO]
Common Stock
------------------
This is our initial public offering of common stock. All of the shares in
this offering are being sold by us, Century Electronics Manufacturing.
We currently expect the public offering price to be between $8.00 and $10.00
per share. After pricing of the offering, we expect that our common stock will
trade on the Nasdaq National Market under the symbol "CEMI."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public Offering Price................................................................. $ $
Underwriting Discount................................................................. $ $
Proceeds, before expenses, to Century................................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT, NOR HAS ANY STATE SECURITIES
REGULATOR, APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to 600,000
additional shares of our common stock to cover overallotments. We expect the
underwriters to deliver the shares of common stock to purchasers on or about
, 1999.
------------------------
ADVEST, INC.
J.C. BRADFORD & CO.
NEEDHAM & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
Inside front cover:
[Map of world with the following:
line going from Massachusetts to picture of Century's Marlborough, MA
facility;
line going from Florida to picture of Century's Boca Raton, FL facility;
line going from United Kingdom to picture of Century's St. Albans
facility and Hemel Hemstead facility;
line going from California to picture of Century's Santa Clara, CA
facility; and
line going from Thailand to picture of Century's Bangkok, Thailand
facility.
Note: all facility pictures are labeled by location]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE AND
THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT
INFORMATION. WE AND THE UNDERWRITERS ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF OUR COMMON STOCK.
TABLE OF CONTENTS
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PAGE
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<S> <C>
Disclosure Regarding Forward-Looking Statements............................................................ i
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 4
Use of Proceeds............................................................................................ 12
Dividend Policy............................................................................................ 12
Capitalization............................................................................................. 13
Dilution................................................................................................... 14
Selected Consolidated Financial Data....................................................................... 15
Unaudited Pro Forma Financial Data......................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21
Business................................................................................................... 30
Management................................................................................................. 38
Principal Stockholders..................................................................................... 44
Certain Relationships and Related Transactions............................................................. 46
Description of Securities.................................................................................. 49
Shares Eligible for Future Sale............................................................................ 54
Underwriting............................................................................................... 56
Validity of Common Stock................................................................................... 58
Experts.................................................................................................... 58
Where You Can Find More Information........................................................................ 59
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. For example, statements
included in this prospectus regarding the future of the industry in which we
operate and our financial position, business strategy and other plans and
objectives for future operations, and assumptions and predictions about future
customer relationships, product demand, supply, manufacturing, costs, marketing
and pricing factors are all forward-looking statements. When we use words like
"intend," "may," "will," "strategy," "should," "continue," "anticipate,"
"believe," "estimate," "plan" or "expect" or other similar words we are making
forward-looking statements. We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information currently available to us, but we cannot assure you that these
assumptions and expectations will prove to have been correct or that we will
take any action that we may presently be planning. Our actual results and future
events may differ materially from what we currently expect. We have disclosed
important factors that could cause our actual results to differ materially from
our current expectations under the section entitled "Risk Factors" and elsewhere
in this prospectus. Forward-looking statements made in connection with this
offering should be read with these factors in mind.
i
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION. BECAUSE THIS IS ONLY A
SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU.
YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK FACTORS," BEGINNING ON
PAGE 4, AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE
DECIDING TO INVEST IN OUR COMMON STOCK.
CENTURY
<TABLE>
<S> <C>
OUR BUSINESS: We are a worldwide provider of electronics manufacturing
services to leading original equipment manufacturers, or
OEMs, primarily in the communications and networking
industries. We have established manufacturing facilities in
several of the world's major electronics markets to meet the
requirements of our OEM customers. We offer a broad range of
manufacturing services from product design and prototyping
through volume production and order fulfillment. In
addition, we have substantial expertise in manufacturing and
testing radio frequency, or RF, assemblies. The products we
manufacture include, or can be found in, a wide range of end
products, including cable modems, wireless phones,
communications and networking switching equipment, two-way
radio equipment, and digital imaging products.
OUR INDUSTRY: The electronics manufacturing services industry has grown in
response to OEMs outsourcing an increasing portion of their
manufacturing requirements and the overall growth of the
electronics industry. In some instances, OEMs have sold
their manufacturing operations to electronics manufacturing
service providers, and at the same time established
contractual manufacturing relationships with those
providers. Outsourcing allows OEMs to take advantage of the
manufacturing expertise and capital investments of
electronics manufacturing service providers and allows them
to concentrate on their core competencies such as product
development, marketing and sales.
OUR CUSTOMERS: Our existing customer base includes industry leaders in the
communications and networking industries, such as Nortel
Networks, Motorola, Lucent Technologies, and 3Com, currently
our four largest customers. For the fiscal year ended June
30, 1999, Nortel represented 49% and Motorola represented
28% of our total pro forma net sales. Additionally, our
expertise in manufacturing complex products and our loca-
tions in several of the world's technology centers makes us
an attractive manufacturing partner for emerging companies.
OUR STRATEGY: Our principal strategic focus is on the manufacture of
complex, high-density electronic assemblies in low- to
medium-volume production runs. We believe this focus enables
us to compete effectively against many of the largest
electronic manufacturing service providers that tend to
focus on higher volume production with a less flexible
approach to customer service.
Global manufacturing capabilities are becoming increasingly
important as many OEMs expand their international revenues
and seek to manufacture their products in multiple
locations. Our strategy of establishing regionally focused
operations on a global basis allows us to develop
relationships with OEMs and emerging technology companies
and presents opportunities for us to expand our business
with our existing customers. We believe our strategy
benefits our customers by reducing logistical barriers and
costs, improving supply-chain management, increasing
flexibility, lowering transportation costs, reducing
turnaround times, and accelerating time-to-market of the
OEMs' products.
</TABLE>
1
<PAGE>
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<S> <C>
ACQUISITIONS: Growth through selective acquisitions is an important
element in our strategy. We have completed three
acquisitions since April 1998, including our July 1999
acquisition of Amitek Corporation, a Florida-based
electronics manufacturing services provider. Motorola is
Amitek's largest customer. Amitek supports Motorola
locations in Florida, Illinois, Iowa, and Georgia,
domestically, and Brazil, Ireland, Israel, Malaysia, and
Germany, internationally. We will continue to selectively
seek other acquisition opportunities. We believe that
acquisitions can strengthen our market position by expanding
our geographic presence, enlarging our target OEM customer
base, broadening our service offerings, and expanding our
management team.
</TABLE>
We are a Delaware corporation incorporated in 1996. Our principal executive
offices are located at 274 Cedar Hill Road, Marlborough, Massachusetts 01752 and
our telephone number is (508) 485-0275.
THE OFFERING
The following assumes that the underwriters do not exercise the option that
we have granted them to purchase additional shares in this offering. Please see
"Underwriting."
<TABLE>
<S> <C>
Common stock offered by Century.............. 4,000,000 shares
Common stock to be outstanding after the
offering................................... 16,896,043 shares
Use of proceeds.............................. To pay down existing indebtedness and for
working capital and general corporate
purposes, including possible acquisitions.
Nasdaq National Market Symbol................ CEMI
</TABLE>
This information and, unless otherwise noted, the information throughout
this prospectus are based upon the number of our shares of common stock
outstanding as of June 30, 1999 and gives effect to the conversion of all
outstanding shares of our convertible preferred stock into 4,337,900 shares of
our common stock automatically upon the closing of this offering. This
information excludes, as of the date of this prospectus:
- 1,341,905 shares subject to options outstanding at a weighted average
exercise price of $2.47 per share;
- 187,397 shares subject to warrants outstanding at a weighted average
exercise price of $5.12 per share; and
- 1,079,875 additional shares that could be issued under our stock option
and employee stock purchase plans.
Since 1996, our fiscal year has ended on June 30. References to "fiscal
1999" refer to the fiscal year ended June 30, 1999, references to "fiscal 1998"
refer to the fiscal year ended June 30, 1998 and references to "fiscal 1997"
refer to the fiscal year ended June 30, 1997.
2
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables summarize selected historical and pro forma financial
data for our business. The pro forma as adjusted statement of operations data
give effect to the acquisition of Amitek and this offering as if each had
occurred on July 1, 1998. The pro forma balance sheet data give effect to the
Amitek acquisition as if it had occurred on June 30, 1999. The pro forma as
adjusted balance sheet data give effect to the application of the estimated net
proceeds from the sale of common stock in this offering and the conversion of
all outstanding convertible preferred stock into common stock. You should read
this information with the discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes to those statements, our unaudited pro forma financial data
and the related notes and the audited financial statements of Amitek and the
notes to those statements.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
AS ADJUSTED
1997 1998 1999 1999
--------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.............................................................. $ 70,744 $ 69,945 $ 121,677 $ 177,497
Cost of sales.......................................................... 63,428 65,079 107,618 157,754
--------- --------- --------- -----------
Gross profit........................................................... 7,316 4,866 14,059 19,743
--------- --------- --------- -----------
Operating costs and expenses:
Selling, marketing, general and administrative expenses.............. 2,493 5,989 7,623 10,052
Stock compensation expense........................................... 1,775 1,186 -- --
Goodwill write-off................................................... -- 7,489 -- --
Goodwill amortization................................................ 788 18 95 1,954
--------- --------- --------- -----------
Operating income (loss)................................................ 2,260 (9,816) 6,341 7,737
--------- --------- --------- -----------
Other (income) expenses:
Interest expense, net................................................ 558 1,136 1,873 2,211
Other, net........................................................... (26) (280) (34) (34)
--------- --------- --------- -----------
Income (loss) before income taxes...................................... 1,728 (10,672) 4,502 5,560
Income tax expense (benefit)........................................... 1,451 (218) 1,688 2,855
--------- --------- --------- -----------
Net income (loss)...................................................... $ 277 $ (10,454) $ 2,814 $ 2,705
--------- --------- --------- -----------
--------- --------- --------- -----------
Net income (loss) per share--basic..................................... $ 0.03 $ (1.33) $ 0.44 $ 0.16
--------- --------- --------- -----------
--------- --------- --------- -----------
Net income (loss) per share--diluted................................... $ 0.03 $ (1.33) $ 0.24 $ 0.15
--------- --------- --------- -----------
--------- --------- --------- -----------
Weighted average common shares outstanding--basic...................... 9,889 7,870 6,447 17,021
Weighted average common shares outstanding--diluted.................... 9,889 7,870 11,517 17,753
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash............................................................................ $ 1,219 $ 2,780 $ 6,228
Working capital................................................................. 3,609 (6,156) 19,105
Total assets.................................................................... 57,231 113,054 116,502
Total debt...................................................................... 13,563 41,581 15,014
Total stockholders' equity...................................................... 17,751 31,781 64,261
</TABLE>
3
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW BEFORE YOU DECIDE TO PURCHASE OUR COMMON STOCK. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY BELIEVE TO BE IMMATERIAL MAY ALSO ADVERSELY AFFECT OUR BUSINESS IN THE
FUTURE. IF ANY OF THE FOLLOWING RISKS WERE TO OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THAT EVENT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART
OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN A SHORT PERIOD OF TIME AND MAY HAVE
TROUBLE MANAGING OUR EXPANSION
We have experienced significant growth since 1996 and intend to pursue
continued growth through internal expansion and acquisitions. Such growth has
placed and will continue to place a significant strain on our management and
financial resources, and on our management information, operating and financial
systems. Our success will depend in part on our ability to manage this growth
effectively. To do so, we will need to:
- enhance our management information, operating and financial systems, and
internal controls;
- expand our management team;
- develop the skills of our operations managers and supervisors; and
- train, motivate, manage, retain and increase the number of our employees.
No assurances can be given that we will continue to grow or that we will
effectively manage such growth. Our failure to grow or to manage growth
effectively could interrupt our operations, affect our ability to compete with
other electronic manufacturing service providers and materially adversely affect
our business and operating results.
WE RELY ON TWO SIGNIFICANT CUSTOMERS AND THE LOSS OF EITHER OF THEM COULD CAUSE
OUR NET SALES TO DECLINE OR HINDER OUR ABILITY TO ACHIEVE PROFITABILITY
We have historically relied on a small number of customers to generate a
significant percentage of our net sales. Two customers currently account for a
substantial majority of our net sales. The loss of either of our two major
customers or a material reduction in the net sales produced by these customers
would materially adversely affect us. On a pro forma basis, giving effect to the
acquisition of Amitek, Nortel accounted for 49% of our total pro forma net sales
and Motorola accounted for 28% of our total pro forma net sales in fiscal 1999.
We expect to continue to depend on sales to our largest customers. Any loss of
our relationship with these customers or material delay, cancellation or
reduction of orders from these or other significant customers could adversely
affect our results of operations. For example, our sales to 3Com decreased by
approximately $15.0 million from approximately $37.1 million in fiscal 1997 to
approximately $22.1 million fiscal 1998 and decreased by approximately $18.6
million to approximately $3.5 million in fiscal 1999, as a result, among other
things, of the loss of production of certain products. In addition, the
insolvency or other inability of a significant customer to pay outstanding
receivables could adversely affect our net sales and results of operations and
financial condition.
We are exposed to the life cycles of our customers' products. Our ability to
continue manufacturing new or updated products for existing customers is
important to our sales and results of operations. We derive substantial revenues
from a single product program with Nortel. In fiscal 1999,
4
<PAGE>
all of our net sales to Nortel were attributable to this product program. If
Nortel were to cancel this program or the product's life cycle were to wind
down, our net sales would decline.
WE MAY EXPERIENCE DIFFICULTY IN INTEGRATING ACQUIRED BUSINESSES WHICH MAY
INTERRUPT OUR BUSINESS OPERATIONS
Since April 1998, we have made three acquisitions, including our recent
acquisition of Amitek. Amitek is the most significant acquisition we have made
to date. Although we expect to integrate Amitek into our operations, we may not
be able to do so successfully or without undue cost or delay. For example, when
we acquired Quality Manufacturing Services, we lost one of its customers during
the transition into our operations. We have also had difficulty in integrating
the operations, technologies, systems, management, and products and services of
acquired companies. Acquisitions of other companies require us to focus our
attention away from our primary business operations to integration issues with
which we may not be familiar. Acquisitions involve numerous other risks,
including some or all of the following:
- entering markets in which we have no or limited prior experience and where
competitors have stronger market positions;
- potential loss of key employees and customers of acquired companies; and
- financial risks, such as
- potential liabilities of the acquired businesses;
- the dilutive effect of the issuance of additional equity securities;
- the incurrence of additional debt;
- the financial impact of amortizing or writing off goodwill and other
intangible assets involved in any transactions that are accounted for
using the purchase method of accounting; and
- possible adverse tax and accounting effects.
The occurrence of any one or a combination of these risks may adversely affect
our ability to operate our business successfully and produce consistent
financial results.
We have acquired companies that are located outside of Massachusetts. The
difficulties of integrating these businesses have been further complicated by
geographic distances between us and them, as we attempt to parallel systems and
production. In addition, during the integration of an acquired company, our
financial performance may suffer from disruption of operations and the financial
impact of expenses necessary to finance and close the transaction and realize
benefits from the acquisition.
OUR INABILITY TO IDENTIFY, FINANCE, AND CLOSE ANY FUTURE ACQUISITIONS MAY LIMIT
OUR ABILITY TO EXECUTE OUR BUSINESS STRATEGY AND OPERATE SUCCESSFULLY
We expect to pursue acquisitions as part of our overall growth strategy.
Competition for attractive companies in our industry is substantial. In
executing this part of our strategy, we may experience difficulty in identifying
suitable acquisition candidates or in completing selected transactions. In
addition, our existing credit facilities restrict our ability to acquire the
assets or businesses of other companies. If we are able to identify acquisition
candidates, such acquisitions may be financed with cash or substantial
borrowings. The use of cash or borrowings may affect our financial liquidity. In
addition, we may choose to finance transactions with potentially dilutive
issuances of equity securities.
5
<PAGE>
WE HAVE HAD RECENT OPERATING LOSSES AND MAY NOT BE ABLE TO SUSTAIN PROFITABILITY
As of June 30, 1999, we had an accumulated deficit of approximately $11.1
million. We have experienced net losses in three of the last five fiscal years.
We may not be profitable in future periods. If we are not profitable, the market
price of our common stock would be materially adversely affected. For a
discussion of our results of operations, please turn to "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
SHORTAGES OR PRICE FLUCTUATIONS IN COMPONENT PARTS SPECIFIED BY OUR CUSTOMERS
COULD DELAY PRODUCT SHIPMENT AND AFFECT OUR PROFITABILITY
A substantial portion of our sales are derived from "turnkey" sales. In
turnkey manufacturing, we provide both the materials and the manufacturing
services. As a result, we often bear the risk of fluctuations in materials
costs, scrap and excess inventory, each of which can affect our gross profit
margins and liquidity. We forecast our future needs based upon the anticipated
needs of our customers. Inaccuracies in making these forecasts or estimates
could result in a shortage or an excess of materials, which could affect
production schedules, margins and profitability.
Many of the products we manufacture require one or more components that we
order from sole-source suppliers. Supply shortages for a particular component
can delay production of all products using that component or cause cost
increases in the services we provide. In addition, in the past some of the
materials we use, such as memory and logic devices, have been subject to
industry-wide shortages. As a result, suppliers have been forced to allocate
available quantities among their customers and we have not been able to obtain
all of the materials desired. Our inability to obtain these needed materials
could slow production or assembly, delay shipments to our customers and impact
profitability. Also, we may bear the risk of component price increases that
occur between periodic repricings during the term of a customer contract.
Accordingly, some component price increases could adversely affect our gross
profit margins.
LONG-TERM CONTRACTS ARE NOT TYPICAL IN OUR INDUSTRY AND REDUCTIONS,
CANCELLATIONS, OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT OUR
PROFITABILITY
As is typical in the electronic manufacturing services industry, we do not
obtain long-term purchase orders or commitments from our customers. Instead, we
work closely with customers to develop nonbinding forecasts of the future volume
of orders. Customers may cancel their orders, change production quantities from
forecast volumes or delay production for a number of reasons beyond our control.
Significant or numerous cancellations, reductions or delays in orders by
customers would have a material adverse effect on us. In addition, because many
of our costs are fixed, a reduction in customer demand could have an adverse
affect on our gross profit margins and operating income.
COMPETITION IN OUR INDUSTRY MAY HINDER OUR ABILITY TO EXECUTE OUR BUSINESS
STRATEGY, ACHIEVE PROFITABILITY OR MAINTAIN RELATIONSHIPS WITH EXISTING
CUSTOMERS
We are in a highly competitive industry. We compete against numerous other
domestic and foreign providers of electronic manufacturing services, some of
which are more established in the industry and have substantially greater
revenues or resources than we do. Competition could cause price reductions,
reduced profits or losses, or loss of market share, any of which could
materially adversely affect us. To compete effectively, we must:
- provide technologically advanced manufacturing services;
- maintain strict quality standards;
- offer geographic flexibility in production and delivery;
6
<PAGE>
- respond flexibly and rapidly to customers' design and schedule changes;
and
- deliver products on a reliable basis at competitive prices.
Our inability to do any of these things could materially adversely affect our
ability to execute our business strategy and develop new customers. We also face
competition from the manufacturing operations of our current and potential
customers who are continually evaluating the relative merits of internal
manufacturing versus outsourcing. A shift away from outsourcing on behalf of our
current or potential customers could materially adversely impact our earnings.
Finally, a number of OEMs, including some of our customers, are currently
focusing on divesting some or all of their manufacturing facilities. These
divestitures may adversely affect us if our competitors acquire these
facilities. Among other things, this may adversely affect our ability to
continue as an electronic manufacturing service provider to such OEMs.
FLUCTUATIONS OR SLOWDOWNS IN THE OVERALL ELECTRONICS OR TECHNOLOGY INDUSTRIES
COULD ADVERSELY AFFECT OUR NET SALES AND OVERALL BUSINESS OPERATIONS
Our financial performance depends on our customers' continued growth,
viability and financial stability. Factors affecting the electronics industry in
general could have a material adverse effect on our customers and, as a result,
on us. Our customers substantially depend on the growth of the communications
and networking industries. These industries are characterized by rapidly
changing technologies and short product life cycles. These industries have also
experienced pricing and margin pressures. A downturn in demand for technology
products, such as cellular phones or cable modems, would adversely affect our
business. If our customers' existing demand changes, our business would likely
be adversely affected. In addition, we are currently seeking to add emerging
technology companies to our customer base. If there is a slowdown in
technological development, or new technological companies do not emerge, our
ability to attract new customers or expand our customer base may be limited. Our
success will depend to a significant extent on the success achieved by our
customers in developing and marketing their products, some of which are new and
untested. If our customers' products become obsolete or fail to gain widespread
commercial acceptance, customer orders could decline, which would decrease our
net sales. Our customers' markets are also subject to economic cycles and are
likely to experience recessionary periods in the future. A recession in the
industries we serve could have a material adverse effect on us by reducing net
sales.
VARIABILITY IN OUR ANNUAL AND QUARTERLY RESULTS COULD CAUSE OUR STOCK PRICE TO
BE VOLATILE OR DECLINE
Our operating results have fluctuated in the past. Our annual and quarterly
results are particularly sensitive to our customers' operations and depend on
various factors affecting us or our customers, many of which are beyond our
control. In the past, we have experienced fluctuations in results due to
declining sales to customers in reorganization periods, such as when Nortel
acquired Bay Networks. Delays in forecasting demand or in product development
cycles have also impacted our results. Other factors which have affected our
results in the past or may do so in the future include:
- variations in the timing and volume of customer orders relative to our
capacity due to, among other things,
- a customer's attempts to balance its inventory;
- changes in a customer's manufacturing strategy; and
- variation in demand for a customer's products;
- customer introduction and market acceptance of new products;
- changes in demand for our customers' products;
7
<PAGE>
- our effectiveness in managing manufacturing processes;
- changes in competitive and economic conditions generally or in our
customers' markets; and
- the impact of any accounting issues arising in connection with past or
future acquisitions, including the amortization or write-off of goodwill.
We were required to write-off significant goodwill related to the loss of
production for the significant customer of our United Kingdom subsidiary,
TRIAX, in fiscal 1998.
In addition, we cannot forecast the level of customer orders with certainty
because our customers typically do not commit to firm production schedules for
more than 30 to 90 days in advance. Accordingly, this makes it difficult to
schedule production and maximize utilization of our manufacturing capacity. To
the extent we have too little or too great capacity to meet actual customer
needs, our results of operations will fluctuate.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results may be below
the expectations of public market analysts and investors. This could cause the
trading price of our common stock to decline.
WE MUST MAINTAIN OUR TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE TO KEEP
EXISTING CUSTOMERS AND ATTRACT NEW CUSTOMERS
The market for our manufacturing services is characterized by rapidly
changing technology and continuing process development. We are continually
evaluating the advantages and feasibility of new manufacturing processes. We
believe that our future success will depend upon our ability to develop and
provide manufacturing services which meet our customers' changing needs,
maintain technological leadership, and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. As technologies evolve and product life cycles shrink, we will need to
develop new manufacturing solutions to reduce the time between a customer's
product idea and the time it is sold commercially. If our efforts at process
development are not successful, our ability to be competitive may be hindered,
and we may be materially adversely affected.
WE MAY EXPERIENCE YEAR 2000 PROBLEMS WHICH COULD ADVERSELY AFFECT OUR REGULAR
BUSINESS OPERATIONS
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. We
are actively taking steps to ensure that our information technology
infrastructure and business system applications, manufacturing equipment and
systems will be Year 2000 compliant. We have not completed this process. If Year
2000 problems should occur with our systems, we may suffer an interruption in
our business which might adversely affect our financial performance. We are also
seeking assurances of Year 2000 compliance from our suppliers, customers and
other third parties with whom we conduct business. However, we cannot be certain
that our efforts will be appropriate, adequate or complete. We believe our
largest customers, including Motorola and Nortel, have taken reasonable steps to
prepare for Year 2000. We have not, however, received responses from all of our
customers and suppliers as to their state of readiness and are not sure whether
all of our customers will be prepared for Year 2000 issues. If Year 2000
problems should occur with their systems they may be unable to process purchase
orders, make payments or suffer other interruptions in their business. This, in
turn, might adversely affect our net sales. Please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
8
<PAGE>
OUR CREDIT FACILITIES RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS
Our existing credit facilities contain financial and operating covenants
that limit our management's discretion with respect to certain business matters.
Among other things, these covenants restrict our ability and our subsidiaries'
ability to incur additional debt, create liens or other encumbrances, make
certain payments including dividends and investments, sell or otherwise dispose
of assets and merge or consolidate with other entities. Our credit facilities
also contain covenants concerning financials ratios and events of default which
could require us to pay off the credit facilities before their maturity. At June
30, 1999, we were in violation of a covenant to maintain a minimum level of
tangible net worth of one of our subsidiaries, Quality Manufacturing Services,
Inc. A waiver has been obtained from our lender and the covenant has been
amended to a level that QMS currently meets. We are currently in compliance with
all other financial and operating covenants contained in our credit facilities.
For a further description of these restrictions, please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The restrictions imposed by our
credit facilities or the failure of our lenders to advance funds under such
facilities could adversely effect us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND STATE LAW MAY MAKE IT HARDER FOR OTHERS
TO OBTAIN CONTROL OF US EVEN THOUGH SOME STOCKHOLDERS MIGHT CONSIDER SUCH A
DEVELOPMENT FAVORABLE
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could suffer.
Please see "Description of Securities."
OUR DIRECTORS, EXECUTIVE AND KEY EMPLOYEES HAVE SUBSTANTIAL CONTROL OVER OUR
BUSINESS OPERATIONS AND MAY TAKE ACTIONS WITH WHICH YOU DO NOT AGREE
Our directors, executive officers and key employees currently beneficially
own in the aggregate approximately 58% of the outstanding shares of our common
stock, and after the offering will beneficially own approximately 45% of the
outstanding shares of our common stock. Accordingly, they will have significant
influence in determining the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, and also
the power to prevent or cause a change in control. The interests of these
stockholders may differ from your interests or the interests of other
stockholders.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL
Recruiting personnel in the electronic manufacturing services industry is
highly competitive. We depend on the services of our senior key executives,
including Leslie J. Sainsbury, Ian McEwan and Mark Lombardo. In particular, our
success depends on the continued efforts of several senior executives who have
strong relationships with our existing customers. Our ability to maintain and
develop these customer relationships is heavily dependent on these executives.
For example, at Amitek, Mr. Lombardo's continued services are critical to
Amitek's relationship with Motorola. The loss of the services of one or several
of these key employees or an inability to attract or retain qualified employees
could result in the loss of customers or otherwise adversely affect our ability
to operate our business successfully.
RISKS PARTICULAR TO OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR
OVERALL RESULTS
Pro forma net sales generated outside of the United States were
approximately 23% of total pro forma net sales during fiscal 1998 and 14% for
fiscal 1999. Our manufacturing operations are located in Thailand, the United
Kingdom and the United States. The geographical distances between Asia, the
9
<PAGE>
United States and Europe create a number of logistical and communications
challenges. In addition, we purchase a substantial portion of our materials from
international suppliers. International operations are subject to inherent risks,
which may adversely affect us, including:
- fluctuations in the value of currencies;
- changes in labor conditions and difficulties in staffing and managing
foreign operations;
- longer payment cycles;
- greater difficulty in collecting accounts receivable;
- unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
- political and economic instability;
- increases in duties and taxation;
- imposition of restrictions on currency conversion or the transfer of
funds;
- limitations on imports or exports;
- expropriation of private enterprises; and
- reversal of the current policies (including favorable tax and lending
policies) encouraging foreign investment or foreign trade by our host
countries.
The attractiveness of our services to our customers can be affected by
changes in U.S. trade policies, such as favorable trade status and trade
preferences for certain Asian nations. In addition, our international operations
are subject to significant political, economic and legal uncertainties outside
the United States. In the recent past, for instance, Thailand has experienced
economic turmoil and a devaluation of its currency. The risks related to such
economic turmoil could result in the reversal of current policies encouraging
foreign investment and trade, restrictions on the transfer of funds overseas or
other domestic economic problems that could adversely affect us.
Our success will depend among other things on our successful expansion into
new foreign markets in order to offer our customers lower-cost production
options. In our experience, entry into new international markets requires
considerable management time as well as start-up expenses for market
development, hiring and establishing office facilities before any significant
revenues are generated. As a result, operations in a new market may operate at
low margins or may be unprofitable.
RISKS RELATED TO THIS OFFERING
WE MAY USE SOME OF THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT
AGREE
We have not committed all of the net proceeds of this offering to a specific
purpose. Our management will therefore have flexibility in applying a portion of
the net proceeds of this offering, including ways with which stockholders may
disagree. If we do not apply the funds we receive effectively, our accumulated
deficit may increase and we may lose significant business opportunities. Please
see "Use of Proceeds."
THERE IS CURRENTLY NO PUBLIC MARKET FOR OUR COMMON STOCK AND YOUR ABILITY TO
EXIT AN INVESTMENT IN OUR STOCK COULD BE LIMITED BY FACTORS BEYOND OUR CONTROL
Prior to the offering, there has been no public market for our common stock.
We cannot assure you that an active trading market for our common stock will
develop or be sustained after the offering. The initial public offering price
for our common stock will be determined by negotiations between the underwriters
and us. The price of our common stock that will prevail in the market after the
offering may be higher or lower than the price you pay and could fluctuate
widely due to factors beyond our
10
<PAGE>
control. We cannot assure you that the price at which our common stock will
trade in the public market subsequent to the offering will reflect our actual
financial performance or that you will be able to exit your investment at a
favorable price.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION
WHICH IS EXPENSIVE AND WOULD RESULT IN A DIVERSION OF RESOURCES
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Many companies have been subject to this type
of litigation in the past. We may also become involved in this type of
litigation. Litigation is often expensive and diverts management's attention and
resources. Such litigation, if it were to occur, could have a material adverse
effect upon our business, financial condition and results of operations.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD DEPRESS OUR STOCK
PRICE
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. These sales also might
make it difficult for us to sell equity securities in the future at a time and
at a price that we deem appropriate. See "Shares Eligible For Future Sale." In
addition, some existing stockholders have the ability to require us to register
their shares. Please see "Description of Securities--Registration Rights."
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT FOLLOWING THIS OFFERING
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their
investment. For additional information about this dilution, please turn to
"Dilution."
------------------------
THE INDUSTRY STATISTICAL DATA PRESENTED IN THIS PROSPECTUS HAVE BEEN
COMPILED FROM AN ELECTRONICS MANUFACTURING SERVICES INDUSTRY REPORT -- "CONTRACT
MANUFACTURING FROM A GLOBAL PERSPECTIVE, 1997 UPDATE" -- PREPARED BY TECHNOLOGY
FORECASTERS, INC., A CALIFORNIA BASED MANAGEMENT CONSULTING FIRM SPECIALIZING IN
THE ELECTRONICS MANUFACTURING INDUSTRY, EXCEPT WHERE OTHERWISE NOTED. TECHNOLOGY
FORECASTERS IS COMMONLY RELIED UPON AS AN INFORMATION SOURCE IN THE ELECTRONICS
MANUFACTURING SERVICES INDUSTRY. ALTHOUGH WE HAVE NOT INDEPENDENTLY VERIFIED ANY
SUCH DATA, WE BELIEVE THAT THE INFORMATION PROVIDED BY TECHNOLOGY FORECASTERS IN
THIS PROSPECTUS IS RELIABLE.
11
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of common stock will be
approximately $32.5 million, assuming an initial public offering price of $9.00
and after deducting the estimated underwriting discounts and offering expenses
payable by us. If the underwriters' overallotment option is exercised in full,
we estimate that our net proceeds will be approximately $37.5 million.
We expect to use the net proceeds from this offering for the following
purposes:
- approximately $7.2 million to pay notes issued to Amitek stockholders as a
portion of the consideration for the Amitek acquisition. These notes bear
interest at prime plus 1% and mature in five years, but are payable
earlier upon an initial public offering;
- approximately $1.5 million to pay compensation owed to three current or
former Amitek employees and a consultant. Of this $1.5 million,
approximately $458,000 will be paid to Mark Lombardo, Amitek's Vice
President of Sales and Marketing, approximately $400,000 will be paid to
Donald Winans, a former employee of Amitek, approximately $400,000 will be
paid to Milton Dropkin, a former employee of Amitek, and approximately
$198,000 will be paid to Lawrence Simmons, a consultant who provided
financial management and advisory services to Amitek. These amounts bear
interest at prime plus 1% and mature September 2004, but are payable
earlier upon an initial public offering;
- approximately $13.5 million to pay down the Amitek revolving credit
facility. This indebtedness bears interest at prime plus 1.5% and matures
June 2001;
- approximately $5.8 million to pay down indebtedness under our revolving
credit facility. This indebtedness bears interest at prime plus 1% and
matures December 2001. A portion of such indebtedness was used to pay the
purchase price and transaction costs incurred in connection with the
Amitek acquisition;
- approximately $965,000 to pay the unpaid balance of a fee owed by Amitek
to Advest for Advest's investment banking services to Amitek in connection
with our acquisition of Amitek;
- to make future acquisitions, although we currently have no agreements or
understandings about any specific acquisition; and
- for working capital and general corporate purposes.
With respect to the balance of the net proceeds, we have not determined the
amount of net proceeds to be used for the other purposes indicated. Accordingly,
our management will have flexibility in applying the net proceeds of the
offering. Pending any use, we will invest the net proceeds of this offering in
short-term, investment-grade interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid a cash dividend on our common stock, and we
do not intend to do so in the foreseeable future. Our existing credit facilities
restrict our ability and the ability of our subsidiaries to pay dividends. We
currently intend to retain earnings to finance future operations and expansion.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis to give effect to our acquisition of Amitek as if it
occurred on June 30, 1999; and
- on a pro forma basis as adjusted to reflect the conversion of all
outstanding convertible preferred stock, the application of the estimated
net proceeds from the sale of common stock in this offering, assuming an
initial public offering price of $9.00 per share and after deducting the
estimated underwriting discount and estimated offering expenses payable by
us.
You should read this information together with our consolidated financial
statements and notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
<S> <C> <C> <C>
Long-term obligations........................................................ $ 4,224 $ 12,627 $ 5,408
Stockholders' equity
Series A preferred stock, $0.01 par value per share; 3,726,027 shares
authorized and 3,671,233 shares issued and outstanding (actual and pro
forma); no shares authorized, issued and outstanding (pro forma as
adjusted).................................................................. 13,282 13,282 --
Series B preferred stock, $0.01 par value per share; 666,667 shares
authorized, issued and outstanding (actual and pro forma); no shares
authorized, issued and outstanding (pro forma as adjusted)................. 4,000 4,000 --
Common stock, $0.01 par value per share; 17,593,607 shares authorized (actual
and pro forma); 50,000,000 shares authorized (pro forma as adjusted);
6,321,877 shares, issued and outstanding (actual); 8,558,143 shares, issued
and outstanding (pro forma); 16,896,043 shares, issued and outstanding (pro
forma as adjusted)......................................................... 63 85 169
Additional paid-in capital................................................... 11,717 25,725 75,403
Accumulated deficit.......................................................... (11,101) (11,101) (11,101)
Foreign currency translation (loss).......................................... (210) (210) (210)
---------- ---------- -----------
Total stockholders' equity................................................. 17,751 31,781 64,261
---------- ---------- -----------
Total capitalization....................................................... $ 21,975 $ 44,408 $ 69,669
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
13
<PAGE>
DILUTION
At June 30, 1999, our pro forma net tangible book value was approximately
$3.4 million, or $0.40 per share of common stock. Our pro forma net tangible
book value per share of common stock represents our total tangible assets less
total liabilities divided by the total number of shares of our common stock
outstanding at such date, in each case giving effect to the acquisition of
Amitek.
After giving effect to the sale of shares of our common stock in this
offering, our pro forma net tangible book value as of June 30, 1999 would have
been approximately $35.9 million or $2.12 per share. This represents an
immediate increase in pro forma net tangible book value of $1.72 per share to
the existing stockholders and an immediate dilution in pro forma net tangible
book value of $6.88 per share to new investors purchasing shares in this
offering.
The following table illustrates the dilution in pro forma net tangible book
value per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 9.00
Pro forma net tangible book value per share as of June 30, 1999............ $ 0.40
Increase in net tangible book value per share attributable to new
investors................................................................ 1.72
---------
Pro forma net tangible book value per share after the offering (after
deducting underwriting commissions and estimated expenses of the offering
payable by us)............................................................. 2.12
---------
Dilution per share to new investors.......................................... $ 6.88
---------
---------
</TABLE>
If the initial public offering price is higher or lower, the dilution to new
investors will be greater or less.
The table below summarizes, as of June 30, 1999 on a pro forma basis, the
difference between:
- the number of shares of common stock issued by us to our existing
stockholders since our inception;
- the number of shares of common stock purchased by new investors in this
offering;
- the aggregate cash consideration paid by existing stockholders and to be
paid by new investors; and
- the average purchase price per share paid by the existing stockholders and
to be paid by the new investors.
The table below assumes an initial public offering price of $9.00 per share
before deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ 12,896,043 76.2% $ 43,092,000 54.5% $ 3.34
New investors.................................... 4,000,000 23.8 36,000,000 45.5 9.00
------------ ----- ------------- ----- -----
Total........................................ 16,896,043 100.0% $ 79,092,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The information in this table assumes that the underwriters' over-allotment
option and outstanding stock options and warrants are not exercised. We have
outstanding options and warrants exercisable for a total of 1,529,302 shares of
our common stock at a weighted average exercise price of $2.80 per share. To the
extent any of those options or warrants are exercised, there would be further
dilution to new investors.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes to those
statements and other financial information included elsewhere in this
prospectus. In 1995, we changed our fiscal year end from October 31 to June 30
beginning June 30, 1996. The statement of operations data for the years ended
October 31, 1994 and 1995, for the eight-month period ended June 30, 1996, and
for the years ended June 30, 1997, 1998 and 1999, and the related balance sheet
data are derived from our audited financial statements that have been audited by
KPMG LLP. The historical results presented herein are not necessarily indicative
of future results. These historical results do not include the operations of
Amitek.
<TABLE>
<CAPTION>
EIGHT
MONTHS
YEAR ENDED ENDED
OCTOBER 31, JUNE 30, YEAR ENDED JUNE 30,
-------------------- ----------- -------------------------------
1994 1995 1996 1997 1998 1999
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.................................................... $ 8,482 $ 9,070 $ 11,450 $ 70,744 $ 69,945 $ 121,677
Cost of sales................................................ 6,926 8,814 10,782 63,428 65,079 107,618
--------- --------- ----------- --------- --------- ---------
Gross profit................................................. 1,556 256 668 7,316 4,866 14,059
--------- --------- ----------- --------- --------- ---------
Operating costs and expenses:
Selling, marketing, general and administrative expenses.... 1,171 1,244 1,109 2,493 5,989 7,623
Stock compensation expense................................. -- 98 -- 1,775 1,186 --
Goodwill write-off......................................... -- -- -- -- 7,489 --
Goodwill amortization...................................... -- -- -- 788 18 95
--------- --------- ----------- --------- --------- ---------
Operating income (loss)...................................... 385 (1,086) (441) 2,260 (9,816) 6,341
--------- --------- ----------- --------- --------- ---------
Other (income) expenses:
Interest expense, net...................................... 197 348 202 558 1,136 1,873
Other, net................................................. (22) -- (3) (26) (280) (34)
--------- --------- ----------- --------- --------- ---------
Income (loss) before income taxes............................ 210 (1,434) (640) 1,728 (10,672) 4,502
Income tax expense (benefit)................................. 39 (16) -- 1,451 (218) 1,688
--------- --------- ----------- --------- --------- ---------
Net income (loss)............................................ $ 171 $ (1,418) $ (640) $ 277 $ (10,454) $ 2,814
--------- --------- ----------- --------- --------- ---------
--------- --------- ----------- --------- --------- ---------
Net income (loss) per share--basic........................... $ 0.03 $ (0.23) $ (0.10) $ 0.03 $ (1.33) $ 0.44
--------- --------- ----------- --------- --------- ---------
--------- --------- ----------- --------- --------- ---------
Net income (loss) per share--diluted......................... $ 0.03 $ (0.23) $ (0.10) $ 0.03 $ (1.33) $ 0.24
--------- --------- ----------- --------- --------- ---------
--------- --------- ----------- --------- --------- ---------
Weighted average common shares
outstanding--basic........................................... 6,092 6,256 6,256 9,889 7,870 6,447
Weighted average common shares
outstanding--diluted......................................... 6,092 6,256 6,256 9,889 7,870 11,517
BALANCE SHEET DATA:
Cash......................................................... $ 28 $ 2 $ 385 $ 2,556 $ 1,630 $ 1,220
Working capital.............................................. 49 (299) (688) (1,092) 403 3,609
Total assets................................................. 4,977 6,136 6,475 46,348 36,821 57,231
Total debt................................................... 2,237 2,352 2,099 10,284 9,851 13,563
Total stockholders' equity................................... 1,252 599 305 13,901 12,128 17,751
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined financial statements as of and
for the twelve months ended June 30, 1999 give effect to the acquisition of
Amitek Corporation and this offering. The pro forma combined balance sheet
presents our financial position as if the acquisition of Amitek and the offering
had occurred on June 30, 1999. The pro forma combined statements of operations
present results for us as if the acquisition of Amitek and the offering had
occurred on July 1, 1998. The actual results of Amitek for the year ended June
30, 1999 were compiled by adding Amitek's interim results for the six month
period ended June 30, 1999 to Amitek's results for the year ended December 31,
1998, and deducting its interim results for the six month period ended June 30,
1998.
The pro forma combined financial statements include, in management's
opinion, all material adjustments necessary to reflect the acquisition of
Amitek. The pro forma combined financial statements do not represent the actual
historical results of our operations, or of Amitek, nor do they purport to
predict or indicate our financial position or results of operations at any
future date or for any future period. The pro forma combined financial
statements should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our financial
statements and notes to those statements and Amitek's financial statements and
notes to those statements included elsewhere in the prospectus.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA PRO FORMA
PRO FORMA FOR OFFERING AS
CENTURY ACTUAL AMITEK ACTUAL ADJUSTMENTS ACQUISITION ADJUSTMENTS ADJUSTED
-------------- ------------- ------------- ----------- ------------- -----------
Net sales........................ $ 121,677 $ 55,820 $ -- $ 177,497 $ -- $ 177,497
Cost of sales.................... 107,618 52,218 (2,082) (d) 157,754 -- 157,754
-------------- ------------- ------------- ----------- ------------- -----------
Gross profit..................... 14,059 3,602 2,082 19,743 -- 19,743
-------------- ------------- ------------- ----------- ------------- -----------
Operating costs and expenses:
Selling, marketing, general and
administrative expenses...... 7,623 2,307 655(d) 10,052 -- 10,052
(533) (l)
Goodwill amortization.......... 95 -- 1,859(e) 1,954 -- 1,954
-------------- ------------- ------------- ----------- ------------- -----------
Operating income (loss).......... 6,341 1,295 101 7,737 -- 7,737
-------------- ------------- ------------- ----------- ------------- -----------
Other (income) expenses:
Interest expense, net.......... 1,873 1,064 1,253(c) 4,370 (2,159) (i) 2,211
180(c)
Other, net..................... (34) -- -- (34) -- (34)
-------------- ------------- ------------- ----------- ------------- -----------
Income (loss) before income
taxes.......................... 4,502 231 (1,332) 3,401 2,159 5,560
Income tax expense............... 1,688 -- 303(h) 1,991 864(h) 2,855
-------------- ------------- ------------- ----------- ------------- -----------
Net income (loss)................ $ 2,814 $ 231 $ (1,635) $ 1,410 $ 1,295 $ 2,705
-------------- ------------- ------------- ----------- ------------- -----------
-------------- ------------- ------------- ----------- ------------- -----------
Net income per share-basic....... $ 0.44 $ 0.16 $ 0.16
-------------- ----------- -----------
-------------- ----------- -----------
Net income per share-diluted..... $ 0.24 $ 0.10 $ 0.15
-------------- ----------- -----------
-------------- ----------- -----------
Weighted average common shares
outstanding-basic.............. 6,447 8,683 17,021
Weighted average common shares
outstanding-diluted............ 11,517 13,753 17,753
</TABLE>
16
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------------------------------------------------
PRO FORMA PRO FORMA
CENTURY AMITEK PRO FORMA FOR OFFERING AS
ACTUAL ACTUAL ADJUSTMENTS ACQUISITION ADJUSTMENTS ADJUSTED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash....................................... $ 1,220 $ 1,560 $ (5,654) (a) $ 2,780 $ 3,448(g) $ 6,228
5,654(c)
Accounts receivable, less allowance for
doubtful accounts........................ 20,152 10,856 -- 31,008 -- 31,008
Inventories................................ 14,878 10,974 (511) (d) 25,341 -- 25,341
Prepaid expenses........................... 1,473 -- -- 1,473 -- 1,473
Receivable from stockholders and
affiliates............................... 327 1,926 (1,641) (k) 612 -- 612
Deferred income taxes...................... 380 -- -- 380 -- 380
Other...................................... -- 41 -- 41 -- 41
----------- ----------- ----------- ----------- ----------- -----------
Total current assets..................... 38,430 25,357 (2,152) 61,635 3,448 65,083
Property, plant, equipment and land.......... 17,162 4,614 -- 21,776 -- 21,776
Goodwill, net................................ 498 -- 27,882(a) 28,380 -- 28,380
Other assets................................. 1,141 122 1,263 -- 1,263
----------- ----------- ----------- ----------- ----------- -----------
Total assets................................. $ 57,231 $ 30,093 $ 25,730 $ 113,054 $ 3,448 $ 116,502
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES:
Current liabilities:
Revolving note payable..................... $ 7,783 $ 13,517 $ 2,154(c) $ 23,034 $ (13,517) (g) $ 3,686
(420) (c) (5,831) (g)
Note payable............................... -- -- 3,500(c) 3,500 -- 3,500
Payable to affiliates...................... -- 10,730 (10,730) (d) -- -- --
Current portion of bank term note.......... 485 83 -- 568 -- 568
Current portion of capital leases.......... 1,070 782 -- 1,852 -- 1,852
Accounts payable........................... 22,401 668 10,219(d) 33,288 -- 33,288
Income taxes payable....................... 451 -- -- 451 -- 451
Accrued expenses and other current
liabilities.............................. 2,631 -- 2,467(a) 5,098 (2,465) (g) 2,633
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities................ 34,821 25,780 7,190 67,791 (21,813) 45,978
Long term portion of bank term note.......... 3,133 493 -- 3,626 -- 3,626
Notes payable to stockholder................. -- 1,641 7,219 ,(c 7,219 (7,219) (g) --
(1,641) (k)
Capital leases payable, net of current
installments............................... 1,091 691 -- 1,782 -- 1,782
Deferred income taxes........................ 435 -- -- 435 -- 435
Other liabilities............................ -- -- 420(c) 420 -- 420
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities............................ 39,480 28,605 13,188 81,273 (29,032) 52,241
STOCKHOLDERS' EQUITY:
Series A preferred stock................... 13,282 -- -- 13,282 (13,282) (j) --
Series B preferred stock................... 4,000 -- -- 4,000 (4,000) (j) --
Common stock............................... 63 1 22(a) 85 40(f) 169
(1) (b) -- 44(j)
Additional paid-in capital................. 11,717 2,700 13,284(a) 25,725 17,238(j) 75,403
724(a)
(2,700) (b) 32,440(f)
Accumulated deficit........................ (11,101) (1,213) 1,213(b) (11,101) -- (11,101)
Foreign currency translation gain (loss)... (210) -- -- (210) -- (210)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' equity................... 17,751 1,488 12,542 31,781 32,480 64,261
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity... $ 57,231 $ 30,093 $ 25,730 $ 113,054 $ 3,448 $ 116,502
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
17
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(a) We acquired Amitek for aggregate merger consideration of approximately
$27,000. The merger consideration is subject to adjustment for changes in
the audited adjusted net equity of Amitek between December 31, 1998 and the
date of the acquisition, and any future tax benefit realized by us relating
to the Amitek vested options. The acquisition is expected to result in an
excess of the purchase price over the historical carrying value of net
assets to be acquired as follows:
<TABLE>
<S> <C>
Purchase price:
Cash..................................................................... $ 5,654
Issuance of 2,236,266 shares of common stock, par value $0.01
Common stock........................................................... 22
Additional paid-in capital............................................. 13,284
Value of vested options issued........................................... 724
Notes payable to former stockholders..................................... 7,219
---------
$ 26,903
---------
---------
Historical carrying value of net assets:
Total net assets......................................................... $ 1,488
Less: accrued transaction costs.......................................... (2,467)
---------
Historical carrying value of net assets acquired......................... (979)
---------
Excess of net purchase price over net assets acquired...................... $ 27,882
---------
---------
</TABLE>
The allocation of the Amitek purchase price is based on preliminary estimates
of the fair value of the assets and liabilities. Final determination of the
allocation of the purchase price is currently being completed. Accordingly,
final amounts could differ from those used in those statements. However, we
do not expect that the impact of any differences will have a material effect
on our financial statements.
(b) To eliminate the historical net book value of Amitek:
<TABLE>
<S> <C>
Common stock............................................................... $ (1)
Additional paid-in capital................................................. (2,700)
Accumulated deficit........................................................ 1,213
---------
$ (1,488)
---------
---------
</TABLE>
18
<PAGE>
(c) We incurred additional debt to finance our acquisition of Amitek. The terms
of the debt and related adjustments are as follows:
<TABLE>
<CAPTION>
INTEREST
EXPENSE
<S> <C>
FOR THE YEAR
ENDED
JUNE 30, 1999
---------------
Term note-Suntrust
($3,500 at Prime +1%)................................................................ $ 341
Line of credit
($2,154 at Prime +1%)................................................................ 210
Notes payable to former stockholders
($7,219 at Prime +1%)................................................................ 702
------
$ 1,253
------
------
</TABLE>
In return for increasing our line of credit, we granted our lender a warrant
to purchase 60,000 shares of our common stock at an exercise price of $6.00
per share. Pursuant to the warrant, the holder has the option at any time on
or after the first anniversary of its grant date and prior to July 15, 2004
to require us to repurchase the entire warrant at a price of $360. The value
of the warrant has been recorded as a discount to our line of credit and a
corresponding liability. This discount will be amortized through December
2001, which is the remaining life of the credit agreement.
(d) Prior to being acquired by Century, Amitek purchased all of its inventory
from an affiliated company which charged Amitek a fee equal to 5% of
material cost. We did not acquire the affiliated company as part of the
Amitek acquisition. As of the date of the acquisition, all of the employees
of the affiliated company's purchasing department became employees of
Amitek.
These pro forma adjustments eliminate the effects of the 5% charge from the
affiliated company from Amitek's financial statements and recognize the cost
of the purchasing department.
<TABLE>
<CAPTION>
FOR THE YEAR
AS OF ENDED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Inventories............................................................... $ (511) --
Payables to affiliates.................................................... (10,730) --
Accounts payable.......................................................... 10,219 --
Cost of sales............................................................. -- $ (2,082)
Selling, marketing, general and administrative............................ -- 655
</TABLE>
(e) To reflect the pro forma adjustments as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
JUNE 30, 1999
-------------
<S> <C> <C> <C>
Amortization (over a period of 15 years) of goodwill established in the
acquisition............................................................... $ 1,859
(f) To reflect the par value and anticipated additional paid-in capital as a result of this offering, based
upon an offering price of $9.00 per share:
Common stock, par value $0.01 per share; 4,000,000 shares................. $ 40
Additional paid-in capital (net proceeds of $32,480 less $40 par value)... 32,440
-------------
$ 32,480
-------------
-------------
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C>
(g) To reflect the application of the anticipated net proceeds from this
offering:
Repayment of notes payable to Amitek former stockholders.... $ 7,219
Repayment of Amitek's line of credit........................ 13,517
Repayment of Century's line of credit....................... 5,831
Payment of Amitek's accrued compensation.................... 1,500
Payment of Amitek's accrued investment banking fee.......... 965
Increase in cash............................................ 3,448
-----------
$ 32,480
-----------
-----------
</TABLE>
(h) To reflect the income tax provision based on applying the pro forma
estimated effective income tax rate of the combined companies. The estimated
effective tax rate applied differs from the federal statutory tax rate of
34% due principally to state income taxes and nondeductible goodwill
amortization.
(i) The offering adjustments reflect the use of proceeds to repay existing debt:
<TABLE>
<CAPTION>
INTEREST
EXPENSE
REDUCTION
PRO-FORMA FOR THE YEAR
HISTORICAL PRINCIPAL OFFERING ENDED
CENTURY AMOUNT ADJUSTMENTS ADJUSTMENTS JUNE 30, 1999
- ------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revolving note payable................................. $ 7,783 $ 1,734 $ (5,831) $ 525
Notes payable--stockholders............................ -- 7,219 (7,219) 702
Note payable--Suntrust................................. -- 3,500 -- --
Bank note.............................................. 3,618 -- -- --
Capital lease obligation............................... 2,161 -- -- --
</TABLE>
<TABLE>
<CAPTION>
AMITEK
- ---------------
<S> <C> <C> <C> <C>
Revolving note payable................................. $ 13,517 -- $ (13,517) $ 932
Bank term note......................................... 576 -- -- --
Capital lease obligation............................... 1,473 -- -- --
----------- ----------- ----------- ------
Total interest reduction............................... $ 2,159
------
------
</TABLE>
(j) To reflect the one-for-one conversion of our series A and series B preferred
stock into common stock.
(k) To offset the Amitek receivable due from affiliates against the Amitek note
payable to stockholder in accordance with the merger agreement.
(l) To reflect the elimination of transaction costs associated with the
acquisition of Amitek by Century incurred by Amitek.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH THE "SELECTED
CONSOLIDATED FINANCIAL DATA" SECTION OF THIS PROSPECTUS AND OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. UNLESS THE CONTEXT OTHERWISE INDICATES, THIS DISCUSSION RELATES
SOLELY TO OUR OPERATIONS AND DOES NOT REFLECT THE OPERATIONS OF AMITEK. THE
FORWARD-LOOKING STATEMENTS IN THIS DISCUSSION REGARDING THE ELECTRONICS
MANUFACTURING SERVICES INDUSTRY, OUR EXPECTATIONS REGARDING OUR FUTURE
PERFORMANCE, LIQUIDITY AND CAPITAL RESOURCES AND OTHER NON-HISTORICAL STATEMENTS
IN THIS DISCUSSION INCLUDE NUMEROUS RISKS AND UNCERTAINTIES, AS DESCRIBED IN THE
"RISK FACTORS" SECTION OF THIS PROSPECTUS. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.
OVERVIEW
We are a worldwide provider of electronics manufacturing services to leading
OEMs primarily in the communications and networking industries. Our headquarters
are in Marlborough, Massachusetts and we have local manufacturing operations in
Marlborough, Massachusetts, Santa Clara, California, St. Albans and Hemel
Hempstead, United Kingdom, Bangkok, Thailand, and Boca Raton, Florida (Amitek
Corporation). We have established manufacturing facilities in several of the
world's major electronics markets, to serve the increasing international needs
of our OEM customers. We have grown primarily through internal growth and
strategic acquisitions.
Most of our net sales are derived from the manufacture of products for OEM
customers. Sales, net of estimated product returns and warranty costs, are
recognized at the time of product shipment.
Our cost of sales includes the cost of raw materials and components that
comprise the manufactured products, the cost of labor and manufacturing
overhead, and provisions for excess and obsolete inventory.
OUR CORPORATE HISTORY
On July 10, 1996, Centennial Technologies, Inc., or Centennial, and a group
of investors acquired all of the outstanding common stock of Design Circuits,
Inc., or DCI, and redeemed all of the outstanding preferred stock, common stock
warrants, and common stock options of DCI in exchange for cash and stock of
Centennial. A portion of the total consideration paid by Centennial and the
other investors in the acquisition was paid to DCI's employees in consideration
for the cancellation of their outstanding DCI stock options. As a result of
these transactions, Centennial acquired approximately 75% of DCI.
On July 24, 1996, Centennial formed us as Century Manufacturing, Inc., a
Delaware corporation. We were later renamed Century Electronics Manufacturing,
Inc. In October 1996, Centennial and the other investors exchanged their shares
in DCI for our shares. As a result, we became the parent company of DCI. DCI was
later renamed Century Electronics Manufacturing (NE) Inc.
In November 1996, we acquired all of the outstanding capital stock of TRIAX
Technology Group, Ltd. in exchange for 2,119,500 shares of our common stock,
valued at approximately $4.5 million, and approximately $5.0 million in cash,
including transaction costs. This transaction was accounted for under the
purchase method of accounting.
In July 1997, we entered into an agreement that provided for a series of
related transactions. We acquired from Centennial a 51% interest in our Thailand
subsidiary, a company now known as Century Electronics Manufacturing (Thailand)
Limited, for $1,250,000. As part of these transactions, we repurchased 3,000,000
shares of our common stock held by Centennial. To effect our repurchase, we
issued Centennial a 6% convertible subordinated debenture in the amount of
$6,000,000 and due June 25, 2007. Centennial also transferred 928,000 shares of
our common stock to a trust for the
21
<PAGE>
benefit of employees and others who were former stockholders of TRIAX to settle
potential litigation against Centennial. As a result, Centennial's ownership of
our common stock was reduced below 50%.
In November 1997, we purchased the remaining 49% of Century Thailand from
CTN Thailand Holdings Limited (now Century Electronics Holdings Limited) for
750,000 shares of our common stock and a warrant to purchase 100,000 shares of
our common stock at $5.00 per share at any time prior to September 2000. Both of
these transactions were accounted for under the purchase method of accounting.
In April 1998, we acquired all of the outstanding capital stock of Quality
Manufacturing Services, Inc., an electronics manufacturing service provider
located in California, for a total purchase price of $300,000 in cash and the
issuance of 200,000 common stock options at an exercise price of $4.00 per
share. In connection with the transaction, we assumed approximately $500,000 of
outstanding indebtedness. We may be responsible for up to $200,000 of additional
cash consideration in April 2001 if defined operating targets are met. This
transaction was recorded under the purchase method of accounting.
In August 1998, we acquired all of the outstanding capital stock of YMC
Manufacturing Inc., an electronics manufacturing service provider located in
California, for a total purchase price of approximately $250,000 in cash. In
connection with the transaction, we assumed approximately $2.2 million of
outstanding indebtedness. This transaction was recorded under the purchase
method of accounting. Subsequent to this acquisition, the operations of Quality
Manufacturing Services, Inc. were moved to this facility.
Finally in July 1999, we acquired all of the outstanding capital stock of
Amitek Corporation, a Florida electronics manufacturing service provider, for a
total purchase price of approximately $27.0 million, subject to adjustment, of
which we paid approximately $5.7 million in cash, approximately $7.2 million in
notes, $724,000 in vested stock options and 2,236,266 shares of our common stock
valued at approximately $13.3 million. The purchase price will be adjusted to
reflect changes in Amitek's net book value from December 31, 1998 to the closing
date (up to a maximum adjustment of $1.0 million). To the extent any adjustment
is paid by us, 50% will be paid in our common stock. We also assumed obligations
of Amitek to its employees in an aggregate of $1.8 million representing
compensatory amounts owed to three past or current employees and a consultant of
Amitek with respect to bonuses and compensatory arrangements for past services.
In addition, we agreed with Mr. Park and Mrs. Park, the principal Amitek
stockholders, to pay them an amount equal to the tax benefits received by us
from the compensatory payments and from the exercise of 147,905 non-qualified
options issued to Amitek employees in exchange for their existing options. These
payments to Mr. Park and Mrs. Park, if made, will be made at the time we realize
the tax benefit and will be made 50% in cash and 50% in stock, valued at the
time of payment.
The Amitek merger agreement includes customary provisions for transactions
of this type, including indemnification for breaches of representations and
warranties. To the extent we are required to make any indemnification payments,
we will make them 50% in cash and 50% in our common stock, valued at the time of
payment.
In connection with the Amitek acquisition, we recorded $27.9 million as
goodwill. Goodwill will be amortized as a non-cash charge to our income
statement over a period of 15 years. The pro forma impact of this amortization
expense is approximately $1.9 million per year.
Please also refer to "Certain Relationships and Related Transactions" for
more information about some of these transactions.
22
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain information concerning our results of
operations, including certain information presented as a percentage of net
sales:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- --------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE
AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................................................... $ 70,744 100.0% $ 69,945 100.0% $ 121,677 100.0%
Cost of sales................................................. 63,428 89.7 65,079 93.0 107,618 88.4
--------- --------- --------- --------- --------- ---------
Gross profit.................................................. 7,316 10.3 4,866 7.0 14,059 11.6
Operating costs and expenses:
Selling, marketing, general and administrative expenses..... 2,493 3.5 5,989 8.6 7,623 6.3
Stock compensation expense.................................. 1,775 2.5 1,186 1.7 -- --
Goodwill write-off.......................................... -- -- 7,489 10.7 -- --
Goodwill amortization....................................... 788 1.1 18 0.0 95 0.1
--------- --------- --------- --------- --------- ---------
Operating income (loss)....................................... 2,260 3.2 (9,816) (14.0) 6,341 5.2
Other expense, net............................................ 532 0.8 856 1.2 1,839 1.5
--------- --------- --------- --------- --------- ---------
Net income (loss) before income taxes......................... 1,728 2.4 (10,672) (15.2) 4,502 3.7
Income tax expense (benefit).................................. 1,451 2.0 (218) (0.3) 1,688 1.4
--------- --------- --------- --------- --------- ---------
Net income (loss)............................................. $ 277 0.4 $ (10,454) (14.9) $ 2,814 2.3
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share--basic............................ $ 0.03 $ (1.33) $ 0.44
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share--diluted.......................... $ 0.03 $ (1.33) $ 0.24
--------- --------- ---------
--------- --------- ---------
Weighted average common shares--basic......................... 9,889 7,870 6,447
--------- --------- ---------
--------- --------- ---------
Weighted average common shares--diluted....................... 9,889 7,870 11,517
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES
Net sales for fiscal 1999 increased $51.8 million, or 74.0%, to $121.7
million from $69.9 million for fiscal 1998. The increase in net sales was
primarily attributable to growth in sales to a customer in the broadband
networking technology industry from $29.7 million in fiscal 1998 to $85.8
million in fiscal 1999 and sales of $5.1 million generated by our West Coast
operations acquired in April and August 1998. This increase was partially offset
by a reduction in sales of approximately $18.6 million because of the loss in
fiscal 1998 of production for the significant customer of TRIAX. We believe that
this loss of production by TRIAX in fiscal 1998 was principally due to the OEM's
decision to utilize a different electronic manufacturing service provider for
the next generation of the product TRIAX manufactured for this customer. Sales
of that product represented a substantial majority of the TRIAX business.
COST OF SALES
Cost of sales for fiscal 1999 increased $42.5 million, or 65.3%, to $107.6
million from $65.1 million for fiscal 1998. Cost of sales as a percentage of net
sales decreased to 88.4% for fiscal 1999 from 93.0% for fiscal 1998, primarily
as a result of changes in product mix and increased utilization of our
production facilities.
OPERATING EXPENSES
Operating expenses for fiscal 1999 decreased $7.0 million, or 47.6%, to $7.7
million from $14.7 million for fiscal 1998. The decrease in operating expenses
was primarily due to the write-off of goodwill of $7.5 million in fiscal 1998
associated with our acquisition of TRIAX. Such goodwill was written off due to
the loss of production of a product for a significant customer of TRIAX. Also in
fiscal 1998, Centennial transferred 928,000 shares of our stock to a trust for
the benefit of several of our employees who were the former owners of TRIAX in
exchange for a mutual release. We recorded stock compensation expense of $1.2
million related to this transfer. Operating expenses as a percentage of net
sales were 6.4% for fiscal 1999 compared to 21.0%, 8.6% excluding the two
charges, for fiscal
23
<PAGE>
1998. Excluding the two charges, operating expenses as a percentage of sales for
fiscal 1999 decreased compared to fiscal 1998 because our fixed costs did not
increase proportionally with sales.
OTHER EXPENSE, NET
Other expense, net for fiscal 1999 increased $0.9 million to $1.8 million
from $0.9 million for fiscal 1998, primarily due to the higher interest costs
resulting from increased borrowings under our revolving facility.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense for fiscal 1999 increased $1.9 million to $1.7 million
from a benefit of $0.2 million for fiscal 1998. The effective tax rate for
fiscal 1999 of 37.5% was 3.5% higher than the federal statutory rate of 34%
principally due to state income taxes with an effective tax rate of 6.8% and
taxes on foreign operations which increased the effective tax rate by 3.8%,
offset by a decrease in our valuation allowance for deferred taxes reducing the
effective tax rate by 14.1%.
NET INCOME (LOSS)
For the reasons set forth above, net income for fiscal 1999 increased $13.3
million to $2.8 million, or $0.44 per share--basic, from a loss of $10.5
million, or ($1.33) per share--basic, for fiscal 1998.
PRO FORMA RESULTS OF OPERATIONS
After the inclusion of Amitek and the application of the anticipated net
proceeds from this offering, pro forma as adjusted net sales were $177.5 million
and pro forma as adjusted net income for fiscal 1999 was $2.7 million, or $0.16
per share--basic, compared to our actual results of net sales of $121.7 million
and net income of $2.8 million, or $0.44 per share--basic for the same period.
The results of operations on a pro forma basis include the amortization of
goodwill that results from the net difference between the purchase price of
Amitek and the fair value of the net assets of Amitek on the date of
acquisition. See "Unaudited Pro Forma Financial Data." These results are not
necessarily indicative of the results that would have been achieved had the
Amitek acquisition occurred on July 1, 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales for fiscal 1998 decreased $0.8 million, or 1.1%, to $69.9 million
from $70.7 million for fiscal 1997. The decrease in the net sales was
attributable to the loss of production for the significant customer of TRIAX of
approximately $15.0 million from $37.1 million in fiscal 1997 to $22.1 million
in fiscal 1998. This decrease was offset by increases in sales of $8.5 million
to a major customer in the broadband technology industry and net increases of
$8.8 million to other OEM customers. We believe that this loss of production by
TRIAX in fiscal 1998 was principally due to the OEM's decision to utilize a
different electronic manufacturing service provider for the next generation of
that product. Sales of that product represented a substantial majority of the
TRIAX business.
COST OF SALES
Cost of sales for fiscal 1998 increased $1.7 million, or 2.7%, to $65.1
million from $63.4 million for fiscal 1997. Cost of sales as a percentage of net
sales increased to 93.0% for fiscal 1998 from 89.7% for fiscal 1997 primarily as
a result of changes in customer mix combined with a decrease in utilization of
our UK production facilities related to the loss of production of a product for
a significant customer.
OPERATING EXPENSES
Operating expenses for fiscal 1998 increased $9.6 million, to $14.7 million
from $5.1 million for fiscal 1997. The increase in operating expenses was
primarily due to the write-off of goodwill of $7.5 million in fiscal 1998
associated with our UK operation due to the loss of production of a product
24
<PAGE>
for a significant customer. When Centennial and other investors acquired DCI in
1996, a portion of the consideration was paid to DCI employees by DCI for their
stock options. We recorded additional paid-in capital and stock compensation
expense of $1.8 million in fiscal 1997 related to this transaction. Also in
fiscal 1998, Centennial transferred 928,000 shares of our stock to a trust for
the benefit of several of our employees who were the former owners of TRIAX in
exchange for a mutual release. We recorded stock compensation expense of $1.2
million related to this transfer. Operating expenses as a percentage of net
sales were 21.0% for fiscal 1998 compared to 7.1% for fiscal 1997. Excluding the
two charges in fiscal 1998, operating expenses as a percentage of net sales were
8.6% for fiscal 1998.
OTHER EXPENSE, NET
Other expense, net for fiscal 1998 increased $0.4 million to $0.9 million
from $0.5 million for fiscal 1997.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense for fiscal 1998 decreased $1.7 million to an income tax
benefit of $0.2 million from an expense of $1.5 million for fiscal 1997. Our
effective tax rate for fiscal 1998 of 2.0% was 32.0% less than the federal
statutory tax rate of 34.0% due to the write-off of non-deductible goodwill, an
increase in our valuation allowance for deferred tax assets and losses from
foreign losses for which no benefit was taken. Our effective tax rate for fiscal
1997 of 84.0% was 50.0% higher than the federal statutory tax rate of 34.0% due
primarily to non-deductible goodwill amortization and an increase in the
valuation allowance for deferred tax assets.
NET INCOME (LOSS)
For reasons set forth above, net income for fiscal 1998 decreased $10.8
million to a net loss of $10.5 million, or ($1.33) per share, from net income of
$0.3 million, or $0.03 per share, for fiscal 1997.
QUARTERLY RESULTS OF OPERATIONS
Selected information from our results of operations on a quarterly basis is
presented below. The quarterly information is obtained from unaudited financial
statements that are not included in this prospectus. These statements were
prepared on the same basis as our audited financial statements and include all
adjustments necessary to present fairly the quarterly information. The quarterly
information should be read along with our consolidated financial statements and
related notes included elsewhere in this prospectus. The operating results for
the quarters presented below are not necessarily indicative
25
<PAGE>
of the results of a full year of operations or of any future quarters and do not
include the results of operations of Amitek.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1999
--------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................................... $ 21,403 $ 25,747 $ 36,895 $ 37,632
Gross profit................................................ 1,812 2,517 4,568 5,163
Operating income (loss)..................................... 268 317 2,756 2,998
Income (loss) before tax.................................... 6 (301) 2,365 2,433
Net income (loss)........................................... $ 4 $ (181) $ 1,471 $ 1,521
Net income (loss) per share--basic.......................... $ 0.00 $ (0.03) $ 0.23 $ 0.24
Net income (loss) per share--diluted........................ $ 0.00 $ (0.02) $ 0.14 $ 0.13
Weighted average shares outstanding--basic.................. 6,559 6,573 6,337 6,322
Weighted average shares outstanding--diluted................ 9,966 10,308 10,702 11,364
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998
--------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................................... $ 16,841 $ 15,404 $ 17,374 $ 20,326
Gross profit................................................ 1,331 1,196 666 1,673
Operating income (loss)..................................... (8,640) (199) (925) (52)
Income (loss) before tax.................................... (8,773) (423) (1,204) (272)
Net income (loss)........................................... $ (8,593) $ (414) $ (1,184) $ (263)
Net income (loss) per share--basic and diluted.............. $ (0.97) $ (0.04) $ (0.16) $ (0.04)
Weighted average shares outstanding--basic and diluted...... 8,875 9,500 7,290 5,855
</TABLE>
These quarterly results were impacted by the following significant factors:
During the first quarter of fiscal 1998, we wrote off $7.5 million of TRIAX
goodwill and recorded $1.2 million of compensation expense related to the
transfer of 928,000 shares of our common stock to former owners of TRIAX.
During the third quarter of fiscal 1998, we recorded a $0.6 million accrual
related to customs and duty claims in the U.K. This accrual is discussed in Note
12 to our consolidated financial statements.
During the second quarter of fiscal 1999, we wrote off $0.2 million in
deferred commitment fees paid to Congress Financial in connection with the
refinancing of the loan facility with Fidelity Funding for our United States
subsidiaries. Also during the second quarter of fiscal 1999, we made $0.2
million of severance payments to employees of our west coast operations.
During the third and fourth quarters of fiscal 1999, sales to Nortel
increased by $8.4 million over the second quarter net sales and $5.2 million
over the third quarter net sales, which improved operating margins through
increased utilization of our production facilities.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal years 1997, 1998 and 1999 we primarily funded operations
through borrowings under credit facilities with banks, and debt and equity
investments by shareholders. We generated negative cash flow from operations of
$1.6 million for fiscal 1997 and $1.9 million for fiscal 1998, and $0.7 million
of cash was provided from operations for fiscal 1999.
Cash used in investing activities was $7.3 million for fiscal 1997, $1.6
million for fiscal 1998 and $3.9 million for fiscal 1999. Cash was paid
(assumed) in connection with our acquisitions of $4.5 million for fiscal 1997,
($0.9 million) for fiscal 1998 and $0.4 million for the fiscal 1999. Capital
expenditures were $2.7 million for fiscal 1997, $2.5 million for fiscal 1998 and
$3.4 million for fiscal 1999.
Cash provided by financing activities was $11.1 million for fiscal 1997,
$2.6 million for fiscal 1998 and $3.0 million for fiscal 1999. In fiscal 1997,
we raised $5.0 million from the issuance of common stock to fund the acquisition
of TRIAX, $3.9 million in capital contributions was received from
26
<PAGE>
shareholders to repurchase employee stock options and to repay existing debt,
and $4.1 million was received from shareholder notes to fund operations. In
fiscal 1998, we received $9.9 million from the issuance series A of preferred
stock, $2.0 million from the issuance of convertible notes, and $3.2 million
from borrowings under our credit facility. These amounts were utilized to
repurchase and retire $5.7 million of common stock from Centennial, to repay the
$4.1 million of notes payable to Centennial, to purchase assets under capital
lease from Centennial for $2.2 million, to make $1.4 million of principal
payments on capital lease obligations and to fund operating and capital
expenditures. Also, in fiscal 1998, the $2.0 million in convertible notes were
converted into 705,424 shares of common stock. In fiscal 1999 we received $3.4
million of net proceeds from borrowings under credit facilities and $3.4 million
for the issuance of preferred stock, offset by $2.6 million of principal
payments on capital lease obligations and debt. In addition, we received $1.0
million of bridge financing, which was paid off upon the issuance of the
preferred stock.
During fiscal 1999, we experienced significant growth in operations. As a
result we used cash from operations, vendor trade payables and our revolving
credit facility to finance increases in our inventory and accounts receivable.
In the event that we experience significant growth in the future, we may need to
finance such growth and any corresponding working capital needs with additional
borrowings as well as additional public and private offerings of our debt and
equity. However, we currently do not know if such funds will be available to us
in the future on terms that would be favorable to us, or at all.
In December 1998, our U.S. subsidiaries entered into a three-year, $14.0
million loan facility with Fidelity Funding, Inc., which is guaranteed by us.
The credit facility provides for a $2.0 million term loan and a $12.0 million
revolving credit facility. The amount of credit available under the revolving
credit facility is based upon the levels of eligible receivables and inventory.
Loans under this facility bear interest at prime plus 1%, currently 9.25%, and
are secured by substantially all of the assets of our United States operations.
This facility includes conditions to borrowing, certain financial and other
affirmative and negative covenants, including, among others, limits on the
incurrence of indebtedness, covenants concerning financial ratios, restrictions
on dividends, and events of default. As of June 30, 1999, we had borrowed $1.8
million on the term loan and $7.8 million on the revolving loan.
As of June 30, 1999, we had outstanding 3,671,233 shares of series A
preferred stock and 666,667 shares of series B preferred stock. Series A
preferred stock is convertible into common stock on a one-for-one basis and has
a liquidation preference of $26.8 million. Series B preferred stock is
convertible into common stock on a one-for-one basis and has a liquidation
preference of $4.0 million which is subordinate to the series A shareholders.
All preferred shares will be automatically converted into common stock in the
event of an initial public offering.
In July 1999, we acquired Amitek in a merger. The acquisition will be
accounted for using the purchase method of accounting. The purchase price of
approximately $27.0 million, which is subject to adjustment, comprised of
approximately $5.7 million in cash, approximately $7.2 million in notes,
$724,000 in vested options and 2,236,266 shares of our common stock valued at
approximately $13.3 million. In connection with the acquisition we assumed
approximately $15.6 million of indebtedness (based on Amitek's June 30, 1999
balance sheet). The notes payable to former Amitek stockholders bear interest at
prime plus 1%, currently 9.25%, and are payable on a quarterly basis over a
five-year period or, if sooner, at the time of closing of this offering. The
indebtedness assumed is under a $14.0 million revolving credit agreement with
National Bank of Canada that we anticipate will remain in place to fund the
operations of Amitek. We have agreed to guaranty all of Amitek's obligations
under the revolving credit facility. The amount of credit available under the
revolving credit facility is based upon levels of eligible receivables and
inventory. Borrowings under the facility bear interest at prime plus 1.5%,
currently 9.75%, and are secured by substantially all of the assets of Amitek.
This facility includes conditions to borrowing, certain financial and other
affirmative and negative covenants, including, among others, limits on the
incurrence of indebtedness, covenants concerning financial ratios, restrictions
on dividends, and events of default. The revolving credit facility matures in
2001.
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<PAGE>
Also in July 1999, in connection with the acquisition of Amitek, we amended
our loan facility with Fidelity Funding to increase the revolving credit
facility to $15.0 million. The limit on the revolving credit facility will be
reduced to $12.0 million by March 2000. In addition, we entered into a $3.5
million term loan with Suntrust Bank. The term loan bears interest at prime plus
1%, currently 9.25%, is payable over two years and contains covenants and
restrictions substantially identical to those under our revolving credit
facility. Proceeds from the term loan and additional borrowings on the revolving
credit facility were utilized to make the cash payment for the acquisition.
We intend to continue pursuing attractive acquisition opportunities. The
timing, size or success of any acquisition and the associated potential capital
commitments are unpredictable. We currently plan to fund future acquisitions
primarily through a combination of working capital, including the proceeds from
this offering, cash flow from operations and borrowings, as well as the
issuances of debt and/or equity securities. However, we currently do not know if
such funds will be available to us in the future at terms that would be
favorable to us or at all. We believe that our cash flows from operations, cash
on hand and cash from the net proceeds of this offering, together with the
availability under our credit facilities, will be sufficient to meet our
anticipated working capital and capital expenditure requirements and provide us
with adequate liquidity to meet our anticipated operating needs for at least the
next 3 years. Although operating activities are expected to provide cash, to the
extent we grow significantly in the future or make material acquisitions, our
operating and investing activities may use cash and, consequently, growth or
acquisitions may require us to obtain additional sources of financing. There can
be no assurance that any necessary additional financing will be available to us
on commercially reasonable terms, if at all.
YEAR 2000
GENERAL
The year 2000 issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
fact that certain computer systems, embedded systems and hardware use two
digits, rather than four, to define the applicable year. On January 1, 2000,
these systems and programs may recognize the date as January 1, 1900 and may
process data incorrectly or stop processing data altogether. We rely upon
vendor-supplied technology and recognize the potential business risk to our
assets and systems associated with the arrival of the year 2000.
STATE OF READINESS
We have identified three phases in our year 2000 project: identify, test and
validate. The identification phase involves the collection and validation of an
inventory of computer related devices and an evaluation and assessment of each
inventoried item. The testing phase includes remediation (repair, replace or
retire) and various levels of testing for compliance. The validation phase
includes the verification that the system or process will continue to function
in the year 2000 and beyond.
In addressing the year 2000 issues and risks, we have focused on our mission
critical systems, including our information systems used in manufacturing, sales
and finance, and have begun converting these systems to systems that are
certified to be year 2000 compliant by the vendors providing the new or upgraded
systems. Conversion efforts, including testing, will be completed by the end of
September 1999. We are also in the process of evaluating our non-information
technology systems and will seek assurance of Year 2000 compliance from
providers of our material non-information technology systems. We expect to
complete this review by the end of September 1999. Until testing is complete and
we contact those providers, we will not be able to evaluate whether our
information technology or non-information technology systems will need to be
revised or replaced.
We expect to complete all year 2000 remediation for these projects by the
end of October 1999. The failure to complete the remedial actions on a timely
basis could have a material adverse effect on our business, results of
operations and financial condition.
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<PAGE>
THIRD PARTY COMPLIANCE
Our year 2000 project scope extends to assessing issues affecting suppliers'
and customers' products, services, systems and operations. In early 1999, we
sent questionnaires to our principal vendors and suppliers requesting
information regarding their year 2000 compliance, and we are following up on all
unsatisfactory responses. As of August 1, 1999, we had received responses from
almost half of our vendors and suppliers. Until we have received responses from
all of our vendors and suppliers we will not be able to evaluate the impact of
their compliance on our business.
In addition to these formal inquiries, we have been working closely on year
2000 issues with those third parties with which we have significant
relationships, including, in particular, significant customers and suppliers. We
believe that our largest customers, including Motorola and Nortel, have taken
reasonable steps to prepare for Year 2000. However, we have not received
assurance from all of our customers as to their Year 2000 readiness. If any of
our customers should suffer a Year 2000 failure, they may be unable to process
purchase orders, make payments or suffer other interruptions in their business.
This might cause our revenues to decline. Mutual testing of electronic data
interfaces between us and our significant customers and suppliers is also being
performed in an effort to ensure their year 2000 compliance.
CONTINGENCY PLANS
We intend to develop, where practicable, contingency plans for all mission
critical processes. We plan to complete these contingency plans by the end of
1999.
ESTIMATED COSTS AND RISKS
We currently estimate that the total costs for our year 2000 remediation
projects will be approximately $1.0 million. As of August 1, 1999, we had
incurred $0.7 million for year 2000 projects. Year 2000 expenditures are
financed through funds generated from operations. We have not deferred any major
information technology projects as a result of our year 2000 remediation
efforts.
Under a reasonably likely worst case scenario:
- we may not be able to deliver products to our customers at all, or in a
timely manner;
- we or our customers may not be able to process orders; and
- our suppliers may not be able to supply us with critical components
needed to make our products.
In the event of a Year 2000 failure, we would devote the resources necessary
to attempt to remedy such problems.
We have not assessed the financial impact of not being year 2000 compliant.
Failure to be year 2000 compliant could have a material adverse effect on our
business, results of operations and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value. This statement, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The effects of adopting
SFAS 133 are not expected to have a material impact on our financial condition,
results of operations or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have financial instruments which are subject to interest rate risk,
principally debt obligations under our credit facilities. Historically, we have
not experienced significant fluctuations in operating results due to interest
rate changes. The carrying value of our long-term debt, including current
29
<PAGE>
maturities, was approximately $5.8 million at June 30, 1999. We also have
borrowings under a revolving note payable with a carrying value of approximately
$7.8 million at June 30, 1999. After giving effect to the use of the anticipated
net proceeds from this offering, the pro forma as adjusted carrying value of our
long-term debt would have been $7.8 million at June 30, 1999 and the carrying
value of borrowings under our notes payable would have been $7.6 million at June
30, 1999. Due to the nature of the debt instruments, management has determined
that the fair value was not materially different from carrying value. Based upon
a hypothetical ten-percent increase in interest rates, the potential losses in
future earnings before taxes would be immaterial to us.
We are subject to foreign currency exchange rate risk primarily for the
operations in the United Kingdom and Thailand. We currently do not enter into
any derivative financial instruments to either hedge our foreign currency risk
or for trading purposes. Based upon the size of our operations outside the
United States, and our corresponding exposure to changes in exchange rates, we
do not consider our exposure relating to currency exchange to be material.
30
<PAGE>
BUSINESS
BACKGROUND
We are a worldwide provider of electronics manufacturing services to leading
original equipment manufacturers, or OEMs, primarily in the communications and
networking industries. We have established regionally-focused manufacturing
facilities in several of the world's major electronics markets to meet the
requirements of our OEM customers. Our principal strategic focus is on the
manufacture of complex, high-density electronic assemblies and products in low-
to medium-volume production runs. We offer a broad range of manufacturing
services from product design and prototyping through volume production and order
fulfillment. In addition we have substantial expertise in manufacturing and
testing radio frequency, or RF, assemblies. Our customers include industry
leaders, such as Nortel, Motorola, Lucent and 3Com.
RECENT DEVELOPMENTS
On July 30, 1999 we acquired Amitek Corporation, a Florida-based electronics
manufacturing services provider, for aggregate consideration of approximately
$27.0 million in cash, notes, and stock and options in a transaction accounted
for as a purchase. The merger consideration is subject to adjustment for changes
in the audited adjusted net equity of Amitek between December 31, 1998 and the
date of the acquisition, and any future tax benefit realized by us relating to
the Amitek vested options and compensatory payments. Amitek had net sales of
$45.2 million for the year ended December 31, 1998 and $32.6 million for the six
months ended June 30, 1999. From 1995 to 1998, Amitek achieved a compound annual
growth rate of net sales of 78%. Amitek's largest customer is Motorola. Motorola
represented 88% of Amitek's net sales in 1998 and 90% of net sales for the six
months ended June 30, 1999. Motorola has been a customer since 1994. Amitek
supports Motorola locations in Florida, Illinois, Iowa, and Georgia,
domestically, and Brazil, Ireland, Israel, Malaysia and Germany,
internationally. The Amitek acquisition has provided us with a new
regionally-focused manufacturing operation.
After giving effect to the Amitek acquisition, our pro forma combined net
sales were $177.5 million for fiscal 1999.
OVERVIEW OF THE ELECTRONICS MANUFACTURING SERVICES INDUSTRY
The electronic manufacturing services industry provides a range of
manufacturing services to OEMs in the electronics industry. According to
Technology Forecaster's estimates, the electronics manufacturing services
industry grew from $10.0 billion in 1988 to $89.6 billion in 1998, a compound
annual growth rate of 25%. Technology Forecasters forecasts that the electronics
manufacturing services industry will continue to grow annually at approximately
25% into the next decade, with industry revenue projected at $178.0 billion by
2001.
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<PAGE>
ELECTRONICS MANUFACTURING SERVICES REVENUES (ESTIMATED)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BILLIONS OF
DOLLARS
<S> <C>
1996 59.3
1997 (1) 72.6
1998 (1) 89.6
1999 (1) 112.0
2000 (1) 140.5
2001 (1) 178.0
</TABLE>
Source: Technology Forecasters
OEMs are increasingly outsourcing their manufacturing requirements. In some
instances, OEMs have sold their manufacturing operations to electronics
manufacturing service providers, and at the same time established contractual
manufacturing relationships with those providers. Technology Forecasters
estimates that by 2001, outsourcing by OEMs to electronics manufacturing service
providers will increase to 26% of the projected total cost of goods sold for the
electronics industry:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OUTSOURCING OPPORTUNITY
<S> <C>
(ESTIMATED ELECTRONICS MANUFACTURING SERVICES DEMAND AS A PERCENTAGE OF THE ELECTRONICS INDUSTRY COST OF GOODS
SOLD)
Total Electronics
Cost of Goods Sold -
$554.0 billion
(1998)
Total Electronics
Cost of Goods Sold -
$682.0 billion
(2001)
<CAPTION>
OUTSOURCING OPPORTUNITY
<S> <C>
(ESTIMATED ELECTRONICS MANUFACTURING SERVICES DEMAND AS A PERCENTAGE OF THE ELECTRONICS INDUSTRY COST OF GOODS
SOLD)
16% ($89.6 billion)
(1998)
26% ($178.0
billion)
(2001)
</TABLE>
Source: Technology Forecasters
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<PAGE>
Outsourcing allows OEMs to take advantage of the manufacturing expertise and
capital investments of electronics manufacturing service providers. It also
enables OEMs to concentrate on their core competencies, such as product
development, marketing and sales. We believe that an electronics manufacturing
service provider can enhance an OEM's competitive position by:
- reducing overall production costs;
- accelerating product time-to-market and time-to-volume;
- providing access to advanced manufacturing capabilities;
- improving inventory management and purchasing power; and
- reducing capital investment in equipment and facilities.
In order to meet the evolving needs of OEMs, electronic manufacturing
service providers are focused on establishing manufacturing facilities around
the world that can shorten and simplify an OEM's supply chain and significantly
reduce the time it takes to bring products to market. In addition, electronic
manufacturing service providers are locating facilities in regions such as
Mexico, Asia and Central Europe in order to expand their services offerings to
include a lower-cost manufacturing alternative.
The electronics content of many of today's commercial and consumer products
has increased dramatically, with more products involving complex, high density
assemblies in low to medium-volume production. The growth of the Internet and
the increased usage of personal communications systems have spawned development
of a multitude of complex electronics products addressing these trends. This
development is helping to drive the growth of the electronic manufacturing
services industry. For many users of the Internet, particularly those seeking
broadband access, the cable modem has become a desired method of connecting to
the Internet. Wireless communications is one of the fastest growing sectors of
the communications industry. Nokia, a leading wireless communications equipment
provider, expects the number of wireless subscribers worldwide to reach 1
billion in 2005, up from an estimated 300 million subscribers at the end of
1998, representing approximately a 20% compound annual growth rate. These trends
are proving favorable for providers of electronics manufacturing services,
particularly those with the ability to effectively meet the production
requirements of these markets as well as those with RF expertise. We believe
that the diversity of electronics products provides significant opportunities
for low- to medium-volume manufacturers to capture substantial production
opportunities.
OUR BUSINESS STRATEGY
Our goal is to be the leading global provider of complex, high-density
electronic assemblies. To achieve this, we are implementing the following
business strategy:
- PROVIDE MANUFACTURING SERVICES THROUGH REGIONALLY-FOCUSED OPERATIONS ON A
GLOBAL BASIS. Global manufacturing capabilities are becoming increasingly
more important as many OEMs expand their international revenues. We
believe our strategy of establishing regionally-focused operations on a
global basis will enable us to increase penetration with our existing OEM
customers as we have the ability to manufacture the same product in
multiple locations. Furthermore, in the United States and the United
Kingdom, we have manufacturing operations that are strategically
positioned close to our customers. This local presence enables us to be
more responsive to our customers' requirements, while reducing costs and
accelerating time to market. We believe this global strategy will enable
us to increase our penetration with existing OEM customers and establish
new relationships with leading OEMs in our targeted markets.
- PROVIDE A BROAD RANGE OF MANUFACTURING SERVICES. We offer a broad range of
services from initial product design, prototyping, electromechanical and
printed circuit board assembly and testing, to
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<PAGE>
final product assembly. We also have significant expertise in
manufacturing and testing radio frequency assemblies. In recent years we
have expanded our service offering to include distribution and repair and
warranty services.
- ATTRACT PROMISING EMERGING COMPANIES. Our expertise in manufacturing
complex products for the communications and networking industries and our
proximity to several of the world's technology centers make us an
attractive manufacturing partner for emerging companies. Emerging
companies present us with opportunities to maintain our technological
expertise, which helps strengthen our competitive position, while
providing attractive growth opportunities as their products gain market
acceptance.
- PURSUE STRATEGIC ACQUISITIONS. Growth through selective acquisitions is an
important element in our strategy. We have completed three acquisitions
since April 1998, including the recent acquisition of Amitek, and will
continue to selectively seek other opportunities that will further our
strategy of locating operations near existing and potential customers. We
may also seek acquisition opportunities similar to our facility in
Thailand that will provide a lower-cost manufacturing alternative for our
OEM customers. We believe that acquisitions can strengthen our market
position by, among other things:
- expanding our geographic presence to serve our current and future OEM
customers;
- enlarging our target OEM customer base;
- broadening our service offerings; and/or
- adding experienced management.
There can be no assurance that our strategies will be successful or will reduce
the risks associated with our business. See "Risk Factors--Risks Related to Our
Business and Industry."
OUR SERVICES
We provide a broad range of electronics manufacturing services with advanced
production capabilities on three continents. The services we offer include:
ASSEMBLY AND MANUFACTURING SERVICES. Our assembly and manufacturing
services include printed circuit board assembly, electromechanical assembly and
final product assembly. A substantial portion of our sales are derived from the
manufacture and assembly of complete products (rather than components). As OEMs
seek to provide greater functionality in smaller products, they increasingly
require more sophisticated manufacturing technologies and processes. We have
invested in advanced manufacturing equipment and have experience in packaging
and interconnect technologies, such as ball grid array, micro ball grid arrays,
x-ray analysis, bare die attach and chip-on-board. We view our ability to
provide manufacturing services using our expertise in these advanced
technologies as one of our core strengths.
MATERIALS PROCUREMENT AND MANAGEMENT. Materials procurement and management
involves planning, purchasing and expediting the delivery of components and
materials used in the manufacturing process. We employ various inventory
management techniques such as just-in-time, ship-to-stock and autoreplenish
programs. We have developed direct relationships with component suppliers that
reduce our customers' material acquisition costs. We have also established
distribution relationships with Avnet Electronics, Arrow Electronics, and Future
Electronics in the United States and Pioneer in the United Kingdom. These
relationships help to protect us from price fluctuations, as a portion of the
risk is often borne by our customers and/or the distributors. In addition, we
have established in-house stores at our facilities which effectively shorten the
supply chain between component suppliers and our customers.
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<PAGE>
DESIGN AND ENGINEERING SERVICES. Our engineers collaborate with customers
to refine and complete product design. We coordinate our design, prototype and
other engineering capabilities to design for manufacturability and design for
test requirements. We also offer mechanical design and metal forming
capabilities from our St. Albans, U.K. facility. We believe this collaborative
approach strengthens our relationships with our customers.
TESTING SERVICES. We provide testing services for assembled printed circuit
boards, subsystems and systems, which enable us to deliver high-quality products
on a consistent basis. We also work with our customers to develop
product-specific test strategies. Our test capabilities include manufacturing
defect analysis, in-circuit tests, functional tests, accelerated stress and life
tests, and environmental stress tests of board or system assemblies. Our
capabilities include custom design test equipment and software. We have also
developed an expertise in radio frequency testing protocols to meet customer
needs. Radio frequency technology involves the wireless transmission and
reception of electromagnetic radiation in the radio frequency range through the
use of a transmitter and a receiver. Advanced applications of radio frequency
technology include analog and digital mobile phone communications, paging
services and wireless data transmission services such as e-mail, facsimile and
wireless connections to computer networks.
DISTRIBUTION AND FULFILLMENT SERVICES. We offer our customers flexible,
just-in-time delivery programs allowing product shipments to be closely
coordinated with customers' requirements. We also offer direct order fulfillment
services and increasingly deliver final products we assemble for our customers
directly into customers' distribution channels or directly to the end-user. We
believe that these services provide our customers with a comprehensive solution
and enable them to be more responsive to market demands.
DEPOT REPAIR SERVICES. We have full product testing and diagnostic
capabilities and depot repair services of product, including system upgrades, in
and out of warranty repair services.
CUSTOMERS
We target leading OEMs in the communications and networking industries and
other growing sectors of the electronics industry. A small number of customers
and industry segments have historically comprised a major portion of our net
sales. Our customers include industry leaders Nortel, Motorola, Lucent and 3Com.
During fiscal 1999, giving effect to the Amitek acquisition, Nortel represented
49% of total pro forma net sales, and Motorola represented 28% of total pro
forma net sales. During fiscal 1998, giving effect to the Amitek acquisition,
Nortel represented 28% of our pro forma net sales, and Motorola represented 31%
of our pro forma net sales.
SALES AND MARKETING
We market our services through a direct sales force and through independent
marketing representatives. In addition, our divisional and executive management
teams are an integral part of our relationships with customers. We seek to
develop our business by participating in product design and development,
leveraging relationships with existing customers and executing formal marketing
efforts. Each of our salespeople has been carefully selected for his/her
knowledge of the local market around his/her particular facility. We believe
this knowledge of a specific marketplace is key to understanding who the
customers are and where the business development opportunities exist.
We recognize the importance of customer relationships. We cooperate with
existing and potential customers to transform their ideas into finished
products. Once a marketable product is conceived, we work with a client to
design a manufacturable product that meets desired specifications. We then
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<PAGE>
prototype the design and produce a small quantity of assemblies for the
customer. During this "start up" phase, we will assemble a customer specific
team consisting of:
- a program manager;
- a manufacturing/test engineer;
- a quality engineer; and
- a materials/purchasing manager.
Our teams manage all phases of the product development and production
process for the customer. As the product matures, we meet with our customer to
evaluate on-going needs and respond to customer concerns.
COMPETITION
The electronic manufacturing services industry is extremely competitive. We
compete against numerous domestic and foreign electronics manufacturing service
providers, including companies such as ACT Manufacturing, Benchmark Electronics,
Jabil Circuit, Sanmina, and Solectron Corporation. Many of these companies are
substantially larger than us and have greater financial, operating,
manufacturing and marketing resources than we do. Some of our competitors have
broader geographic breadth, broader ranges of services and more established
overseas operations than we do. In addition, some of our customers may have
broader relationships with our customers than we do. We also face competition
from the manufacturing operations of our current and potential customers, who
continually evaluate the relative benefits of internal manufacturing versus
outsourcing. As more OEMs dispose of their manufacturing assets, we face
increasing competitive pressures to grow our business. We believe that the
principal competitive factors in our target markets are product quality,
flexibility and timeliness in responding to design and schedule changes,
reliability in meeting product delivery schedules, pricing, technological
sophistication, and geographic location. To remain competitive, we believe we
must continue to provide technologically advanced manufacturing services,
maintain quality levels, offer flexible delivery schedules, deliver finished
products on a reliable basis and compete effectively on the basis of price.
Please see "Risk Factors."
SUPPLIERS
Many of the products we manufacture require one or more components that are
ordered from only one source. In addition, many assemblies require components
that are available from only a single source. Some of these components are or
may be allocated by the supplier in response to supply shortages. We attempt to
ensure continuity of supply of these components. One way we have done this is by
establishing in-house stores with a select group of component suppliers to
improve their ability to effectively meet our customers' short lead times. In
cases where unanticipated customer demand or supply shortages occur, we attempt
to arrange for alternative sources of supply, where available, or defer planned
production to meet the anticipated availability of the critical component. In
some cases, supply shortages will substantially curtail production of all
assemblies using a particular component. In addition, at various times there
have been industry wide shortages of electronic components. Please see "Risk
Factors."
EMPLOYEES
As of June 30, 1999, including Amitek, we had 835 full-time employees, of
whom 728 worked in manufacturing and 107 worked in sales and administration. Two
hundred forty employees joined us as a result of the Amitek acquisition. We
consider our relations with our employees to be good.
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<PAGE>
GEOGRAPHIC SALES
For fiscal 1999, we had net sales of approximately $22.3 million in Europe,
$97.2 million in North America, and $2.2 million in Asia. In fiscal 1998, we had
net sales of approximately $23.3 million in Europe, $45.7 million in North
America, and $0.9 million in Asia. In fiscal 1997, we had net sales of
approximately $39.2 million in Europe, $31.5 million in North America and none
in Asia. Please see note 10 of the notes to our consolidated financial
statements for additional information with respect to our foreign and domestic
operations and export sales.
FACILITIES
Our principal executive offices are located in Marlborough, Massachusetts,
under a lease that expires in July 31, 2007. We also lease manufacturing and
warehouse space in the following locations and employ the following number of
persons at such locations:
<TABLE>
<CAPTION>
LOCATION SPACE EMPLOYEES
- ----------------------------------------------------------------- ----------- ----------------
<S> <C> <C>
(SQ. FEET)
Marlborough, Massachusetts....................................... 70,000 245 employees
Santa Clara, California.......................................... 44,000 152 employees
Boca Raton, Florida.............................................. 51,000 240 employees
Hemel Hempstead, United Kingdom.................................. 70,000 88 employees
Bangkok, Thailand................................................ 10,000 70 employees
</TABLE>
We own a 45,000 square foot facility in St. Albans, United Kingdom where we
have 40 employees. Our operations at the St. Albans facility consist of
mechanical design and metal forming and processing.
The leases for these locations expire between 2000 and 2013. All of our
manufacturing facilities, except Florida, are ISO 9002 certified. Amitek's
Florida location has a QSR rating from Motorola and Amitek is in the process of
applying for ISO 9002 certification.
BACKLOG
Although we obtain firm purchase orders from our customers, OEM customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe that the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or cancelled.
LEGAL PROCEEDINGS
We are party to certain lawsuits in the ordinary course of business. We do
not believe that these proceedings individually or in the aggregate will have a
material adverse effect on our financial position, results of operations and
cash flows.
GOVERNMENT REGULATION
We are subject to extensive environmental, health and safety laws and
regulations, including measures relating to the release, use, storage,
treatment, transportation, discharge, disposal and remediation of contaminants,
hazardous substances and wastes, as well as practices and procedures applicable
to the construction and operation of our plants. We believe that we comply in
all material respects with current environmental laws.
Our operations, and the operations of businesses that we acquire, are
subject to certain federal, state and local regulatory requirements relating to
environmental, waste management and health and safety matters. There can be no
assurance that material costs and liabilities will not be incurred or that
37
<PAGE>
past or future operations will not result in exposure to injury or claims of
injury by employees or the public. Although some risk of costs and liabilities
related to these matters is inherent in our business, as with many similar
businesses, we believe that our business is operated in substantial compliance
with applicable regulations. However, new, modified or more stringent
requirements or enforcement policies could be adopted, which could adversely
affect us.
We periodically generate and temporarily handle limited amounts of materials
that are considered hazardous waste under applicable law. We contract for the
off-site disposal of these materials and have implemented a waste management
program to address related regulatory issues.
We are not presently aware of any facts or circumstances that would cause us
to incur significant costs or liabilities in the future.
38
<PAGE>
MANAGEMENT
Our executive officers and directors and their respective ages and positions
as of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE(S)
- ---------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Leslie J. Sainsbury 48 President and Chief Executive Officer; Director
Louis Gaviglia 53 Senior Vice President of Operations; Director (nominee)
Ian McEwan 44 President, New England Operations; Director
Mark A. Lombardo 35 President, Amitek Operations
Paul Wilson 35 Managing Director, United Kingdom Operations
Walter J. Conroy, Jr. 63 President, West Coast Operations; Director
Robert F. Wennerstrand 44 Vice President, Business Development
James M. Roller 47 Vice President of Finance
Ofer Nemirovsky 41 Director
C. Michael Jacobi 57 Director (nominee)
</TABLE>
MR. SAINSBURY joined us in November 1996 and has held the position of
President of Century since that time. At the time of our acquisition of TRIAX,
Mr. Sainsbury had served as Managing Director of TRIAX from February 1995 to
October 1996. Before joining TRIAX, Mr. Sainsbury served as a director and
Managing Director of Stanley Precision Ltd., an electronics manufacturing
services provider, from July 1993 until January 1995 when it was placed in
receivership under the laws of the United Kingdom. At the time Mr. Sainsbury
joined Stanley, Stanley had financial problems and Mr. Sainsbury was brought in
to help turn around the company. In February 1995, TRIAX, of which Mr. Sainsbury
was a director and shareholder, purchased the assets of Stanley Precision out of
receivership. Before joining Stanley, Mr. Sainsbury spent over two years as the
Sales and Marketing Director of Welwyn Systems Ltd., an electronics
manufacturing services provider, in England where he was responsible for
developing and implementing strategic marketing, sales and profit, customer care
and service, and new corporate identity plans. Mr. Sainsbury's previous
experience also includes serving as a Managing Director of Interactive
Electronics Ltd. and as General Sales and Customer Support Manager for Marconi
Instruments.
MR. GAVIGLIA joined us on September 1, 1999. Prior to joining us, Mr.
Gaviglia was President and General Manager of Madison Cable Corporation from
1993 to 1999. From 1967 to 1993, Mr. Gaviglia was employed in various positions
of increasing responsibility at Digital Equipment Corporation, a manufacturer of
personal computers, including Vice President, US Manufacturing, Logistics &
Administration, and Vice President & Group Manager, Computer Systems
Manufacturing. Mr. Gaviglia has been nominated to serve as a director.
MR. MCEWAN joined us in November 1996 and serves as President of our New
England Operations. He was Managing Director of Century U.K. from November 1996
to February 1998. At the time of our acquisition of TRIAX, Mr. McEwan had served
as a director and Materials/Operations Director of TRIAX from February 1995 to
November 1996. Mr. McEwan served as Materials / Operations Director of Stanley
Precision, an electronics manufacturing services provider, from September 1993
to January 1995 when it was placed in receivership under the laws of the United
Kingdom. In February 1995, TRIAX, of which Mr. McEwan was a director and
shareholder, purchased the assets of Stanley Precision out of receivership. Mr.
McEwan was Materials Director at Welwyn Systems, an electronics manufacturing
services provider, for three years prior to joining Stanley Precision. His
experience also includes tenures with Philips Communications, a manufacturer of
telecommunications equipment and business systems, Wang Computers, a
manufacturer of mainframe and personal computers, and Mitsubishi Video, a
manufacturer of high volume consumer video recorders, covering the following
management disciplines: materials, distribution and manufacturing.
39
<PAGE>
MR. LOMBARDO joined us in July 1999 and serves as President of our Amitek
operations. Mr. Lombardo was co-founder of Amitek in 1992 and served as its Vice
President from September 1992 until our acquisition of Amitek in July 1999.
Prior to starting at Amitek, Mr. Lombardo was the Director of Engineering and
Operations for Megassembly, Inc., an electronics manufacturing service provider.
Prior to this, Mr. Lombardo served in senior level engineering positions at
Racal Corporation, a manufacturer of communications equipment, and Universal
Instrument Corporation, a manufacturer of automated assembly equipment.
MR. WILSON joined us in September 1997 and has served as Managing Director
of United Kingdom Operations since that time. Prior to joining us, he had over
eleven years experience in electronics manufacturing. He was Materials Director,
responsible for manufacturing, materials and engineering at Welwyn Systems Ltd.
from 1995 to 1997. From 1993 to 1995, Mr. Wilson was Factory Manager at Samsung
Electronics Manufacturing UK Ltd., a manufacturer of televisions. Other
positions Mr. Wilson held at Welwyn included Production Manager, Manufacturing
Manager and Technical Manager, with responsibilities for Production, Test,
Quality and Maintenance Engineering.
MR. CONROY joined us in October 1996 and has served as President of our West
Coast Operations since that time. Previously, Mr. Conroy served as our President
of New England Operations. Prior to joining us Mr. Conroy served as President
and CEO of Design Circuits, Inc., an electronics manufacturing service provider,
from 1991 to 1996. Mr. Conroy co-founded SACON Industries, a contract
manufacturing company, in 1990. Mr. Conroy was a Senior Vice President and
General Manager with Flextronics International, an electronics manufacturing
service provider, from 1988 to 1991, and served in several Vice President and
General Manager positions for SCI Manufacturing, an electronics manufacturing
service provider, from 1983 to 1988, including Vice President of the Business
Machines Group designing and manufacturing custom products.
MR. WENNERSTRAND joined us in January 1997 and has served as our Vice
President of Business Development since that time. Prior to joining us, Mr.
Wennerstrand was New England Director of Sales for Matco Electronics Group, an
electronics manufacturing services provider of high technology products, where
he managed accounts such as 3Com, Monarch Marching Systems, Telxon Corp. and
G.A.P. Technologies from March 1996 to January 1997. Prior to his experience at
Matco, Mr. Wennerstrand spent twelve years as a Senior Account Manager with Pagg
Corporation, an electronics manufacturing service provider.
MR. ROLLER joined us in September 1998 as Vice President of Finance. Prior
to joining us, Mr. Roller was the Corporate Controller for Openroute Networks,
Inc., a publicly traded manufacturer of networking products designed for the
Internet, from July 1996 to September 1998. From August 1995 to July 1996, Mr.
Roller served as CFO for Old Neighborhood Foods, a private food processing
company. From December 1991 to May 1995, he served as Director of Product
Engineering for Town & Country Fine Jewelry Group, a publicly traded jewelry
manufacturer. Mr. Roller began his career as a CPA working twelve years for
Arthur Andersen in its New York, Johannesburg and Cape Town offices.
MR. NEMIROVSKY has served as a director since March 1998. Mr. Nemirovsky has
been a Managing Director of HarbourVest Partners, LLC, a venture capital firm,
since January 1997. HarborVest Partners was formed by the management team of
Hancock Venture Partners, Inc., where Mr. Nemirovsky served in various
capacities since 1986. Prior to joining Hancock, Mr. Nemirovsky held various
computer sales and marketing positions at Hewlett-Packard Company, a
measurement, computation and communications company. He is currently a director
of Ultimate Software Group, Inc., a vendor of human resource management and
payroll software solutions, Primix Solutions, Inc. (formerly OneWave, Inc.), an
Internet software and services company, and Paradigm Geophysical, a software
company engaged in the provision of seismic data processing and interpretation
40
<PAGE>
services to facilitate the exploration and development of oil and gas reserves,
as well as several privately-held companies.
MR. JACOBI has been nominated to serve as a director. Mr. Jacobi served as
President and Chief Executive Officer of Timex Corporation, a developer,
manufacturer, marketer and distributor of watches, from December 1993 to July
1999. Prior to serving as President and Chief Executive Officer, Mr. Jacobi
served in senior positions in marketing, sales, finance and manufacturing at
Timex. Mr. Jacobi is currently a member of the board of directors of Timex
Corporation, Webster Financial Corporation, a Connecticut bank, and Timex
Watches Limited (India), a designer, manufacturer, marketer and distributor of
watches in India, and is Chairman of the board of directors of Beepwear Paging
Products, LLC, a designer and manufacturer of wrist pager watches.
Pursuant to an agreement among us, HarbourVest Partners V, Messrs.
Sainsbury, McEwan and other of our stockholders, Messrs. Conroy, McEwan and
Sainsbury were elected to our board as the nominees of the holders of our common
stock and Mr. Nemirovsky was elected to the board as the nominee of the holders
of our preferred stock. This agreement will expire upon the effectiveness of
this offering.
Effective upon the closing of this offering, we will implement a classified
board of directors pursuant to which our board of directors will be divided into
three classes of directors as nearly equal in size as possible, serving
staggered three year terms. Please see "Description of Securities." Executive
officers are elected annually and serve at the discretion of the board of
directors.
COMMITTEES
Prior to this offering, we had not established any committees. Historically,
the board of directors has made compensation decisions. We intend for the board
of directors to establish a compensation committee and an audit committee. The
compensation committee will have the authority to approve salaries and bonuses
and other compensation matters for our officers, to approve employee health and
benefit plans and to administer our stock plans. The audit committee will have
the authority to recommend the appointment of our independent auditors and to
review the results and scope of audits, internal accounting controls and tax and
other accounting related matters.
DIRECTOR COMPENSATION
No director receives separate compensation for services rendered as a
director.
EXECUTIVE COMPENSATION
The following table shows the cash compensation paid or accrued for the year
ended June 30, 1999, to our Chief Executive Officer and to each of our three
highest paid executive officers other than
41
<PAGE>
the Chief Executive Officer who received more than $100,000 in salary and bonus
during the year ended June 30, 1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#) ($)
- ---------------------------------------------------------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Leslie J. Sainsbury,
PRESIDENT AND CHIEF EXECUTIVE OFFICER................... $ 202,266 $ -- -- $ --
Walter J. Conroy, Jr.
PRESIDENT, WEST COAST OPERATIONS........................ 178,978 -- -- --
Ian McEwan,
PRESIDENT, NEW ENGLAND OPERATIONS....................... 140,000 -- -- --
Robert F. Wennerstrand,
VICE PRESIDENT, BUSINESS DEVELOPMENT.................... 115,000 -- -- --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant any stock options or stock appreciation rights to the named
executive officers during the year ended June 30, 1999.
FISCAL YEAR-END OPTION VALUES
The table below sets forth information for the named executive officers with
respect to options held as of June 30, 1999. There was no public trading market
for our common stock as of June 30, 1999. Accordingly, the values in the table
have been calculated on the basis of an initial public offering price of $9.00
per share less the applicable exercise price, multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL-YEAR-END
--------------------------------- --------------------------------
EXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) UNEXERCISABLE (#) ($) ($)
- -------------------------------------------- -------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
Leslie J. Sainsbury......................... 275,000 -- $ 1,925,000 $ --
Walter J. Conroy, Jr........................ 191,000 -- 1,353,500 --
Ian McEwan.................................. 150,000 -- 1,050,000 --
Robert F. Wennerstrand...................... 30,000 10,000 210,000 70,000
</TABLE>
The weighted average exercise price of the options listed in this table is
$1.98 per share.
EMPLOYMENT CONTRACTS
We have entered into executive employment agreements with Messrs. Sainsbury
and Lombardo.
Mr. Sainsbury's employment agreement provides for a base salary of $200,000
per year, and an initial stock option to purchase 25,000 shares of our common
stock at the fair market value determined by our board of directors upon signing
of the agreement, which was $2.00 per share. He is also entitled to participate
in our health, group insurance plan, or pension insurance and benefits plan. Mr.
Sainsbury's employment agreement terminates on November 5, 1999, but is subject
to earlier termination. Mr. Sainsbury's employment agreement provides that if he
is terminated by us without cause, he will be entitled to receive from us as
severance pay an amount equal to:
- his base salary for a period equal to three months; less
42
<PAGE>
- applicable taxes and other required withholdings; and less
- any amounts he may owe us.
Mr. Sainsbury will also be entitled to receive all health and insurance
benefits paid for by us that he enjoyed at the time of termination for a period
equal to three months.
Mr. Sainsbury's employment agreement prohibits him from doing any business
for a period of two years from the date of his termination of employment with
any person, firm or company who was a client, customer, supplier, agent or
distributor of ours during the period of one year prior to the end of his
employment and with whom he had contact during such period. In addition, he is
prohibited from rendering services similar or related to those he has rendered
during the period of one year prior to the end of his employment to any person
or entity which competes with us in any line of business engaged in by us.
Mr. Lombardo's employment agreement provides for a base salary of $150,000
per year and the granting of an option to purchase 30,000 shares of our common
stock at its fair market value as determined by our board of directors, which
was $6.34 per share. The employment agreement also provides that, subject to
achieving performance targets, Mr. Lombardo shall receive an annual performance
bonus of $50,000 and up to 30,000 additional stock options. The employment
agreement also provides that he will be reimbursed in the amount of $650.00 per
month for motor vehicle costs. He is also entitled to participate in our health,
group insurance plan, or pension insurance plan and benefit program. Mr.
Lombardo's employment agreement terminates on July 31, 2002, but is subject to
earlier termination. Mr. Lombardo's employment agreement provides that if he is
terminated without cause, he will be entitled to receive from us as severance
pay an amount equal to:
- his base salary for a period equal to the greater of:
- six months or
- the amount of time remaining in the term of the agreement at the time
of termination, but in any event not less than three months; less
- applicable taxes and other required withholdings; and less
- any amounts he may owe to us.
- Mr. Lombardo will also be entitled to receive all health and insurance
benefits paid for by us that he enjoyed at the time of termination for a
period equal to the greater of:
- six months or
- the amount of time remaining in the term of the agreement at the time
of termination, but in any event not less than three months.
Mr. Lombardo's employment agreement prohibits him from, for a period of two
years after the termination of his employment, doing any business or having any
dealings with any person, firm, or company who was a client, customer, supplier,
agent, or distributor of ours during the period of one year prior to the end of
his employment and with whom he had contact during the period of one year prior
to the end of his employment. In addition, he is prohibited, for a period of two
years after the termination of his employment, from rendering services similar
to those which he has rendered during the one year period prior to the end of
his employment to any person which competes with us in any line of business. Mr.
Lombardo's employment agreement prohibits him, for a period of one year
following the termination of his employment, from enticing or encouraging any of
our then-current employees of ours to leave his or her employment, and he also
may not assist any company, entity, recruitment firm, employment agency, or
other organization in the hiring of any of our then-current employees.
43
<PAGE>
STOCK INCENTIVE PLANS
1996 STOCK OPTION PLAN
Our 1996 Stock Option Plan was adopted by our board of directors on August
4, 1996 and approved by our stockholders on August 4, 1996. A total of 750,000
shares of common stock were originally authorized for issuance under the 1996
Stock Option Plan. The number of shares of common stock available for issuance
under the 1996 Plan has subsequently been increased to 2,000,000.
Under the 1996 Plan, eligible individuals in our employ or service may, at
the discretion of the plan administrator, be granted options to purchase shares
of common stock at an exercise price determined by the plan administrator.
Eligible individuals include all employees, consultants, directors and other
non-employees.
The 1996 Plan is administered by our board of directors or any one or more
committees that the board of directors may, from time to time, delegate any of
its functions to under the Plan. As plan administrator, the board and/or any
committee has complete discretion to determine which eligible individuals are to
receive option grants, the time or times when option grants are to be made, the
number or shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option under
the Federal tax laws, the vesting schedule to be in effect for the option grant
and the maximum term for which any granted option is to remain outstanding.
The exercise price for the shares of common stock subject to option grants
made under the 1996 Plan may be paid partly or completely in shares of our stock
valued at fair market value, or by any such other lawful consideration as the
board may determine.
The board of directors may terminate, amend or modify the 1996 Plan at any
time, subject to required stockholder approval for amendments increasing the
number of shares covered by the plan or affecting certain subject matter. The
1996 Plan will terminate on the earliest of the date determined by the board or
September 30, 2006. Options under the 1996 Plan, however, will remain
outstanding in accordance with their terms.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was approved by our board of directors
and our stockholders in 1999 and is intended to qualify under section
423 of the Internal Revenue Code. A total of 300,000 shares of our common stock
has been reserved for issuance under the stock purchase plan. Purchases under
the plan will occur at the end of each option period. The first option period
will commence on the date of this Prospectus and will end on June 30, 2000.
Thereafter, each option period will be successive six-month purchase periods. An
employee who both has completed six months or more of continuous service in our
employ and whose customary employment is more than 20 hours per week is eligible
to participate.
The stock purchase plan permits eligible employees to purchase our common
stock through payroll deductions that may not exceed 10% of an employee's base
compensation, including commissions, bonuses, and overtime, at a price equal to
85% of the fair market value of the common stock at the beginning or the end of
a purchase period, whichever is lower. Unless terminated sooner, the stock
purchase plan will terminate 10 years from its effective date. The board of
directors has authority to amend or terminate the stock purchase plan, provided
no such action may adversely affect the rights of any participant.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 17, 1999 and as adjusted to
reflect the sale of the shares offered by us in this offering for:
- each person who is known by us to own beneficially more than 5% of our
outstanding shares of common stock;
- each director and named executive officer; and
- all directors and executive officers as a group.
As of September 17, 1999, there were 12,896,043 shares of outstanding common
stock prior to giving effect to the shares to be sold in this offering and after
giving effect to the conversion of all outstanding convertible preferred stock.
Unless otherwise indicated below, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of common
stock, except to the extent authority is shared by spouses under applicable law.
Unless otherwise indicated below, each entity or person listed below maintains a
mailing address of c/o Century Electronics Manufacturing, Inc., 274 Cedar Hill
Road, Marlborough, Massachusetts 01752.
The number of shares beneficially owned by each stockholder is determined in
accordance with the rules of the Securities and Exchange Commission and is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after September 17, 1999 through the exercise of any option, warrant or other
right. We have included the number of shares that may be acquired in such time
period under the column entitled "Option/Warrant Shares Beneficially Owned." The
percentage ownership of the outstanding common stock, however, is based on the
assumption, expressly required by the rules of the Securities and Exchange
Commission, that only the person or entity whose ownership is being reported has
converted options or warrants into shares of common stock.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
------------------------------------
SHARES OPTION/WARRANT SHARES PRIOR TO
NAME OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED OFFERING AFTER OFFERING
- ----------------------------------------- ---------- --------------------- --------------- -------------------
<S> <C> <C> <C> <C>
HarbourVest Partners V-Direct Fund,
L.P.(1)................................ 3,671,233 27,397 28.6% 21.9%
Ofer Nemirovsky(2)....................... 3,671,233 27,397 28.6% 21.9%
Leslie J. Sainsbury...................... 955,600 275,000 9.3% 7.2%
Yoon Jung Park(3)........................ 1,796,507 0 13.9% 10.6%
Myung Ho Park(4)......................... 1,796,507 0 13.9% 10.6%
Thomas DePetrillo(5)..................... 893,533 0 6.9% 5.3%
Ian McEwan............................... 730,600 150,000 6.8% 5.2%
Century Electronics Holdings Limited..... 750,000 100,000 6.5% 5.0%
AIM Overseas Ltd.(6)..................... 750,000 100,000 6.5% 5.0%
Centennial Technologies, Inc.(7)......... 666,667 0 5.2% 4.0%
Walter J. Conroy, Jr..................... 60,000 191,000 1.9% 1.5%
Robert F. Wennerstand.................... 0 30,000 * *
Louis Gaviglia........................... 0 0 * *
C. Michael Jacobi........................ 0 0 * *
All Directors and Executive Officers as a
Group (10 persons)..................... 5,417,433 812,170 45.8% 35.4%
</TABLE>
- ------------------------
* Indicates beneficial ownership of less than 1% of the issued and outstanding
common stock.
45
<PAGE>
(1) c/o HarborVest Partners, LLC, One Financial Center, 44th Floor, Boston,
Massachusetts 02111. Includes 3,671,233 shares of series A preferred stock
convertible into shares of common stock and 27,397 shares of series A
preferred stock, or common stock, following this offering, subject to a
warrant. The sole general partner of HarbourVest Partners V-Direct Fund L.P.
is HVP-Direct Associates L.L.C., the managing member of which is HarbourVest
Partners, LLC Mr. Nemirovsky is a Managing Director of HarbourVest Partners,
LLC as well as a member of HVP-Direct Associates L.L.C. The members of
HVP-Direct Associates L.L.C. and HarbourVest Partners, L.L.C., including Mr.
Nemirovsky, may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Securities Exchange Act of 1934) in an
indeterminate portion of the shares beneficially owned by HarbourVest
Partners V-Direct Fund L.P. Such members disclaim beneficial ownership of
these shares within the meaning of Rule 13d-3 of the Exchange Act.
(2) c/o HarborVest Partners, LLC, One Financial Center, 44th Floor, Boston,
Massachusetts 02111. Includes 3,671,233 shares of series A preferred stock
held by HarbourVest Partners V-Direct Fund L.P. and 27,397 shares of series
A preferred stock subject to a warrant held by Fund V. Mr. Nemirovsky is a
member of the general partner of Fund V and a member of the managing member
of the general partner of Fund V. As such, he may be considered to share
beneficial ownership of the shares held by Fund V. Mr. Nemirovsky disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 of the
Exchange Act.
(3) c/o Amitek Corporation, 1701 Clint Moore Road, Boca Raton, Florida 33487.
Includes 656,012 shares held by Myung Ho Park, Mrs. Park's spouse.
(4) c/o Amitek Corporation, 1701 Clint Moore Road, Boca Raton, Florida 33487.
Includes 1,140,495 shares held by Yoon Jung Park, Mr. Park's spouse.
(5) c/o Providence Capital Group, 988 Centerville Road, Providence, Rhode Island
02886. Includes 200,000 shares owned by Kellygreen Ltd., a corporation
wholly-owned by Mr. DePetrillo, 50,000 shares held by Carol Keefe, Mr.
DePetrillo's wife, and 18,000 shares held by other family members.
(6) Includes 750,000 shares of common stock and 100,000 shares of common stock
subject to the warrant held by Century Electronics Holdings Limited, an
entity unrelated to us. Century Electronics Holdings Limited is a
wholly-owned subsidiary of AIM Overseas Ltd.
(7) 7 Lopez Road, Wilmington, Massachusetts 01887. Includes 666,667 shares of
series B preferred stock convertible into shares of common stock.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1996, all of the stockholders of Design Circuits Inc., or DCI,
exchanged their shares in DCI for an aggregate of 6,256,332 shares of our common
stock. Consequently, we became the parent company of DCI. As a result of this
transaction, Thomas DePetrillo and members of his family exchanged 6,300 shares
of DCI stock for an aggregate 315,000 shares of our common stock and Centennial
Technologies, Inc., or Centennial, exchanged 94,270.08 shares of DCI stock for
4,713,504 shares of our common stock. Mr. DePetrillo became approximately a 5%
stockholder and Centennial became approximately a 75% stockholder as a result of
this transaction.
In November 1996, we purchased all of the outstanding capital stock of TRIAX
Technology Group, Ltd. from the TRIAX shareholders for a purchase price of
approximately $5.0 million in cash, including transaction costs and 2,119,500
shares of our common stock. Of the shares of our common stock issued in
connection with such purchase to the selling shareholders of TRIAX, Messrs.
Sainsbury, McEwan and Raymond Stanley each received 605,600 shares of our common
stock. As a result of this transaction, Messrs. Sainsbury, McEwan and Stanley
each became approximately a 5% stockholder. Each of Messrs. Sainsbury and McEwan
currently serves as an officer and director of Century. In addition, to help
finance the cash portion of the purchase price and certain transaction costs, we
issued 3,073,130 shares of our common stock, for an aggregate of $5.0 million,
to Centennial. Finally, as a fee for his services in connection with the
transaction, Mr. DePetrillo received 120,000 shares of our common stock and
25,000 shares of Centennial common stock.
During the period in which we were a majority owned subsidiary of
Centennial, there were intercompany transactions between us and Centennial that
are customary in parent-subsidiary relationships. These included office and
equipment sharing arrangements. In November 1996, we and DCI, as then
subsidiaries of Centennial, entered into guaranties pursuant to which we
guaranteed the payment of all obligations of Centennial to BankBoston, N.A.
pursuant to a revolving credit agreement. To secure our guaranties, we and DCI
granted a security interest in all of our assets to BankBoston. BankBoston
released us and DCI from our guarantees and its security interest in our assets
in July 1997. At this time, we also purchased certain assets from Centennial
valued at $2.2 million.
In March 1997, DCI issued a promissory note to Centennial in the aggregate
principal amount of $4,129,099 payable on demand at a rate of 8.25% to evidence
intercompany indebtedness. This note was paid in full in June 1997.
In July 1997, we entered into an agreement that provided for a series of
related transactions. We repurchased 3,000,000 shares of our common stock held
by Centennial in exchange for a 6% convertible subordinated debenture in the
amount of $6,000,000 and due June 25, 2007. We acquired from Centennial a 51%
interest in Centennial Technologies (Thailand) Limited (now, Century Electronics
Manufacturing (Thailand) Limited), our Thailand subsidiary, from Centennial
Technologies, Inc. for $1,250,000. At the same time, Centennial transferred
928,000 shares of common stock to a trust for the benefit of former owners of
TRIAX in exchange for their delivery of a mutual general release executed by
them, TRIAX, DCI, and us. Such mutual release was entered into in order to
settle potential litigation by the former owners of TRIAX against Centennial
arising from allegations of securities fraud against Centennial. As a result of
the mutual release, Centennial and its officers and directors were released from
any claims or suits by any of the parties executing the mutual release. Also, we
entered into an Indemnification Agreement with Centennial acknowledging that
three of our stockholders failed to sign the mutual release and agreeing to
indemnify Centennial for any adverse consequences which occurred as a result of
that failure. Of the 928,000 shares transferred by Centennial to former owners
of TRIAX, 350,000 are beneficially owned by Mr. Sainsbury, 150,000 are
beneficially owned by Mr. McEwan, 200,000 are beneficially owned by Mr.
DePetrillo through Kellygreen Ltd., 50,000 are beneficially owned by Raymond
Stanley and 50,000 are beneficially owned by Mr. Conroy. Mr. Conroy is both an
officer and director of Century. In addition, we issued 75,000
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shares of our common stock to Mr. DePetrillo as a fee for his services in
connection with these transactions. To finance the cash requirements of these
transactions, we also issued to Centennial a promissory note in the face amount
of $1,891,125 at a rate of 9% due January 1999 and a warrant to purchase 250,000
shares of our common stock at $3.00 per share. As a result, we reduced
Centennial's ownership of our common stock to below 50%. In order to secure
payment of that $6,000,000 debenture, DCI granted a security interest in certain
of its assets to Centennial.
In November 1997, we purchased the remaining 49% interest in Centennial
Technologies (Thailand) Limited from CTN Thailand Holdings Limited (now Century
Electronics Holdings Limited) in exchange for 750,000 shares of our common stock
and a warrant to purchase 100,000 shares of our common stock at $5.00 per share
at any time prior to September 2000.
In February 1998, we issued 666,667 shares of series B preferred stock to
Centennial for a purchase price of $6.00 per share (an aggregate purchase price
of $4,000,000) and paid approximately $9.72 million in cash in exchange for the
redemption of 3,683,635 shares of our common stock owned by Centennial,
cancellation of the $6,000,000 convertible subordinated debenture due on June
25, 2007, cancellation of the promissory note issued by us to Centennial on July
1, 1997 in the face amount of $1,891,125, and cancellation of the warrant to
purchase 250,000 shares of our common stock at $3.00 per share. In addition, Mr.
DePetrillo received 175,000 shares of our common stock from Centennial as a fee
for his services in connection with the transaction.
In February 1998, we also sold 2,739,726 shares of series A preferred stock
to HarbourVest Partners V--Direct Fund, L.P. for a purchase price of $3.65 per
share (an aggregate purchase price of $10,000,000). As a result of this
transaction, HarbourVest Partners V became approximately a 30% stockholder. In
August 1998, we also issued a 10% promissory note due September 30, 1998 to
HarbourVest in the aggregate principal amount of $400,000. In November 1998, we
issued a 10% promissory note due November 1, 1999 or earlier to HarbourVest
Partners V in the aggregate principal amount of $1,000,000 and a warrant to
purchase 27,397 shares of series A preferred stock at an exercise price of $3.65
per share at any time on or before December 31, 2003. Both notes were repaid in
December 1998 as part of the purchase price when we sold an additional 931,507
shares of series A preferred stock to HarbourVest Partners V for a purchase
price of $3.65 per share (an aggregate purchase price of approximately
$3,400,000). Mr. Nemirovsky, one of our directors, is a member of the general
partner of HarbourVest Partners V, and a member of the managing member of the
general partner of Direct Fund.
In February 1998, Mr. DePetrillo purchased the securities of several
companies owned by Centennial. In order to finance part of the transaction, we
loaned Mr. DePetrillo $410,000 evidenced by a note to us which accrues interest
at the IRS safe harbor imputed interest rate, which was 5.48% for fiscal 1999,
and is due March 31, 2000. The note is collateralized by 175,000 shares of our
common stock owned by Mr. DePetrillo. There is currently outstanding $310,000 on
the note due to us.
In January 1999, we repurchased 200,000 shares of our common stock from Mr.
Stanley for an aggregate purchase price of $400,000. Prior to this time, Mr.
Stanley had been approximately a 5% stockholder since the TRIAX transaction.
In July 1999, we purchased all of the outstanding capital stock of Amitek
for a total purchase price of approximately $27.0 million, subject to
adjustment, of which we paid approximately $5.7 million in cash, approximately
$7.2 million in notes, $724,000 in vested stock options and 2,236,266 shares of
our common stock valued at approximately $13.3 million. Of those shares of our
common stock issued to the selling shareholders of Amitek, Myung Ho Park
received 656,012 shares of our common stock and Yoon Jung Park received
1,140,495 shares of our common stock. As of result of this transaction, Myung Ho
Park became approximately a 5% stockholder and Yoon Jung Park became
approximately a 9% stockholder.
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In connection with the acquisition of Amitek, we entered into an employment
agreement with Mr. Park which provides for a base salary of $210,000 per year.
He is entitled to participate in our health, group insurance plan, or pension
insurance and benefits, and to the reimbursement of all reasonable business
expenses incurred by Mr. Park in the performance of his duties and
responsibilities for us. Mr. Park's employment agreement terminates on December
31, 1999, but is subject to earlier termination. Mr. Park's employment agreement
provides that if he is terminated by us, whether or not for cause, or by him for
good reason, we will pay him on the date of termination a lump sum severance
payment equal to his base salary for the remainder of the term of his employment
agreement. In the event Mr. Park terminates his employment without good reason,
his employment agreement provides that we will pay him on the date of
termination any base salary earned but not paid through the date of termination
and pay for any vacation time accrued but not used to that date. In the event of
any termination of Mr. Park's employment through December 31, 1999, we will
continue, at our expense, his participation, and, that of his eligible
dependents, in all benefit plans, programs and perquisites in which he, or they,
were eligible to participate immediately prior to the termination of his
employment.
In connection with the Amitek transaction, we assumed obligations of Amitek
to its employees, including compensatory arrangements with three past or current
employees and a consultant pursuant to which Amitek agreed to pay an aggregate
of approximately $1.8 million to such individuals, including $808,000 to Mr.
Lombardo, President of our Amitek operations, $400,000 to Donald Winans,
$400,000 to Milton Dropkin, and $198,000 to Lawrence Simmons, a consultant who
provided financial management and advisory services to Amitek. Of the $808,000
due to Mr. Lombardo, $350,000 was paid to him shortly after the acquisition of
Amitek. The amounts are payable over a five-year schedule or, if sooner, upon
the closing of this offering. In addition, as part of the acquisition, we issued
options to acquire an aggregate of 147,905 shares of our common stock at an
exercise price of $1.31 per share, including 113,773 options to Mr. Lombardo.
The options were issued in exchange for Amitek options and are immediately
exercisable.
Prior to our acquisition of Amitek, Mr. Park and his affiliates did business
with Amitek, including the provision of certain services by Amitek for Mr.
Park's affiliated companies. We anticipate that Amitek may continue to provide
electronic manufacturing services on an arm's-length basis for entities
affiliated with Mr. Park in the future.
We will require that all future transactions with parties affiliated with
us, including loans between us and our officers, directors, principal
stockholders and their affiliates, be approved by a majority of the board of
directors, including a majority of independent and disinterested directors, and
that such transactions will need to be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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DESCRIPTION OF SECURITIES
GENERAL
Our amended and restated certificate of incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
50,000,000 shares of common stock, par value $0.01 per share, and 1,000,000
shares of preferred stock, par value $0.01 per share, the rights and preferences
of which may be established from time to time by our board of directors. As of
September 17, 1999, 8,558,143 shares of common stock were outstanding, held of
record by 70 stockholders, assuming no shares of convertible preferred stock are
converted.
COMMON STOCK
Under our certificate of incorporation, holders of our common stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders, including the election of directors. They do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding series of preferred stock, holders of our common stock are entitled
to share ratably in any dividends that may be declared by the board of directors
out of legally available funds. In case of a liquidation, dissolution or winding
up of Century, the holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to shareholders, in each case
after payment of all of our liabilities and subject to preferences that may be
applicable to any series of preferred stock then outstanding. The holders of
common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. The rights, preferences and privileges of holders of common stock
are subject to the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future. After the closing of this
offering, there will be no shares of preferred stock outstanding.
PREFERRED STOCK
Under our certificate of incorporation, our board of directors has the
authority, without further action by the stockholders, to issue from time to
time, shares of preferred stock in one or more series. The board of directors
may fix the number of shares, designations, preferences, powers and other
special rights of the preferred stock. The preferences, powers, rights and
restrictions of different series of preferred stock may differ. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to holders of common stock or affect adversely the rights and
powers, including voting rights, of the holders of common stock. The issuance
may also have the effect of discouraging, delaying or preventing a change in
control of Century, regardless of whether the transaction may be beneficial to
stockholders. We have no current plans to issue any additional shares of
preferred stock.
WARRANTS
In July 1999, we granted Guaranty Business Credit Corporation a warrant to
purchase 60,000 shares of our common stock at an exercise price of $6.00 per
share. The warrant is exercisable at any time prior to July 15, 2004, and may be
put to us at any time on or after the first anniversary of the grant date and
prior to July 15, 2004 for $360,000. The warrant is subject to anti-dilution
protection and includes piggyback registration rights.
In November 1997, we granted a warrant to purchase 100,000 shares of our
common stock to Century Electronics Holdings Limited. This warrant is
exercisable at $5.00 per share at any time prior to September 2000. In November
1998, we granted a warrant to purchase 27,397 shares of our series A preferred
stock to HarbourVest Partners V. This warrant is exercisable at $3.65 per share
at any time prior to December 31, 2003. These warrants are also described under
the section entitled "Certain Relationships and Related Transactions."
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LIABILITY OF DIRECTORS
Our certificate of incorporation provides that our directors shall not be
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty, except to the extent otherwise required by the Delaware General
Corporation Law. This provision will not prevent our stockholders from obtaining
injunctive or other relief against our directors. This provision also does not
shield our directors from liability under federal or state securities laws.
REGISTRATION RIGHTS
In connection with the private placement of an aggregate of 3,671,233 shares
of series A preferred stock and a warrant to acquire 27,397 shares of our common
stock in February 1998 and December 1998, we granted HarbourVest registration
rights. At any time after this offering, if demanded by the holders of more than
50% of the common stock issued upon conversion of our series A preferred stock,
we must use our diligent best efforts to effect a registration statement under
the Securities Act covering all registrable shares requested to be included. We
are required to effect up to two such demand registrations. Also, if any of our
directors or officers holding other securities requests inclusion in any such
registration initiated by the investor, or if a holder of our securities is
entitled by contract to have securities included in such registration, the
investor shall include the securities of such officers, directors and other
shareholders in the underwriting. In addition, such holders have piggyback
registration rights. If we propose to register any of our securities under the
Securities Act after this offering, then such holders may have the right to
include all or a portion of their shares in such registration. The underwriter
of any such offering has the right to limit the number of shares in such
registration. We will bear all registration expenses in connection with any
registration, excluding underwriting discounts, selling commissions and transfer
taxes applicable to the sale of registrable securities. We have agreed to
indemnify the holders in connection with the registration of their shares of
common stock.
In connection with our private placement of an aggregate of 666,667 shares
of series B preferred stock in February 1998, we granted the investor,
Centennial Technologies, Inc., registration rights. At any time after this
offering of our securities, if requested by the holders of more than 50% of the
common stock issued upon conversion of our series B preferred stock, then we
must use our diligent best efforts to effect a registration statement under the
Securities Act covering all registrable shares requested to be included by such
holders. We are required to effect up to two such demand registrations. Also, if
any of our directors or officers holding other securities request inclusion in
any such registration initiated by the investor, or if a holder of our
securities is entitled by contract to have securities included in such
registration, the investor shall include the securities of such officers,
directors and other shareholders in the underwriting. In addition, such holders
have piggyback registration rights. If we propose to register any of our
securities under the Securities Act then such holders may require us to include
all or a portion of their shares in such registration. The underwriter of any
such offering has the right to limit the number of shares in such registration.
All registration expenses incurred by us in connection with any registration
shall generally be borne by us, except underwriting discounts, selling
commissions and transfer taxes applicable to the sale of registrable securities.
We have agreed to indemnify the holders in connection with the registration of
their shares of common stock.
In connection with the issuance of notes in July 1997 that were converted
into an aggregate 705,424 shares of our common stock, we granted the holders of
such notes demand registration rights. At any time after six months after this
offering, the holders of at least 20% of these converted securities may
collectively demand only one registration of these securities. In addition, we
granted the holders of such notes piggyback registration rights. If we propose
to register any of our securities under the Securities Act after this offering,
then such holders may require us to include all or a portion of their shares in
such registration. The managing underwriter of any such piggyback registration
has the right to limit the number of shares in such registration. We have agreed
to bear all registration
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expenses incurred in connection with any registration, excluding underwriting
discounts or commissions and filing fees related to the securities to be
registered. We have also agreed to indemnify the holders in connection with the
registration of their shares of common stock.
In connection with our acquisition of Amitek, we granted Myung Ho Park, Yoon
Jung Park and Sung Woo Kwon registration rights with respect to 2,236,266 shares
of our common stock owned by them. At any time after six months after this
offering, one or more holders holding at least 50% of the securities issued in
connection with the acquisition may request registration of such securities. We
are required to effect only one such demand registration. The managing
underwriter has the right to limit the number of shares included in such
registration. Additionally, at any time after we become eligible to file a
registration statement on Form S-3, any of the holders may request us to effect
the registration on Form S-3 of such number of their securities having a market
value of not less than $100,000, but we are not required to effect more than one
such registration per year. We may postpone for a period of up to 60 days the
filing of any such registration if our board of directors in good faith
determines that such registration is likely to have an adverse effect on any
present or future financing, acquisition, recapitalization, reorganization, or
other material transaction. The managing underwriter of any such registration
has the right to limit the number of shares included in such registration. We
have also granted the holders piggyback registration rights. If we propose to
register any of our securities under the Securities Act, then the holders may
have the right to include all or a portion of their shares in such registration.
The managing underwriter of any such registration has the right to limit the
number of shares in such registration. We shall bear all registration expenses
incurred by us in connection with any registration, including the fees and
disbursements of one counsel for the holders, but excluding underwriting
discounts, applicable transfer taxes, and commissions and filing fees related to
the securities to be registered. We have agreed to indemnify the holders in
connection with the registration of their securities.
In connection with our grant of a warrant to Guaranty Business Credit
Corporation, an affiliate of our senior lender, we granted Guaranty piggyback
registration rights. If we propose to register any of our securities under the
Securities Act after this offering, Guaranty may have the right to include all
or a portion of the shares underlying their warrant. The underwriter of any such
offering has the right to limit the number of shares included in such offering.
We have agreed to cover all registration expenses, excluding underwriting
discounts and commissions and fees and expenses of Guaranty's counsel. We have
agreed to indemnify Guaranty in connection with the registration of its common
stock.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BYLAWS
Certain provisions of the Delaware General Corporation Law and our
certificate of incorporation and by-laws may be deemed to have an anti-takeover
effect and may discourage, delay or prevent a tender offer or takeover attempt
that a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders. These provisions are summarized in the following paragraphs.
BUSINESS COMBINATIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a publicly-held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to limited exceptions, an "interested stockholder" is:
- a person who together with affiliates and associates owns 15% or more of
the voting stock of the corporation or,
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- an affiliate or associate of the corporation who within the three years
preceding the date of the proposed transaction owned 15% or more of the
voting stock of the corporation.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors, as nearly
equal in size as possible, serving staggered three-year terms. Upon expiration
of the term of a class of directors, the directors in that class will be elected
for three-year terms at the annual meeting of stockholders in the year in which
the term for that class of directors expires. In addition, our certificate of
incorporation and by-laws provide that directors may be removed only for cause
by the affirmative vote of the holders of two-thirds of the shares of capital
stock entitled to vote. Under our certificate of incorporation and the by-laws,
any vacancy on the board of directors, however occurring, including a vacancy
resulting from an enlargement of the board of directors, may only be filled by
vote of a majority of the directors then in office. The classification of the
board of directors and the limitations on the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of us.
CUMULATIVE VOTING
Our certificate of incorporation expressly denies stockholders the right to
cumulate votes in the election of directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our certificate of incorporation eliminates the ability of stockholders to
act by written consent. It further provides that special meetings of our
stockholders may be called only by the chairman of the board of directors, the
chief executive officer or, if none, the president, or a majority of the board
of directors. These provisions could have the effect of delaying until the next
annual meeting of stockholders those actions which are favored by the holders of
a majority of our outstanding voting securities. These provisions may also
discourage another person from making a tender offer for our common stock,
because that person, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder, such as electing new
directors or approving a merger, only at a duly called meeting of stockholders
and not by written consent.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS
NOMINATIONS
Our by-laws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be received at our
principal executive offices not less than 60 days nor more than 90 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for a date that is
not within 30 days before or after the anniversary date, in order to be timely,
notice from the stockholder must be received no later than the tenth day
following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. In the case of a
special meeting of stockholders called for the purpose of electing directors,
notice by the stockholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our by-laws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
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AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or by-laws, unless a
corporation's certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. Our certificate of incorporation imposes
supermajority vote requirements in connection with the amendment of provisions
of our amended and restated certificate of incorporation and by-laws, including
those provisions relating to the classified board of directors and the ability
of our stockholders to take action by written consent or to call special
meetings. The supermajority vote would be in addition to any separate class vote
required in accordance with the terms of any then outstanding preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe, L.P.
LISTING OF COMMON STOCK
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "CEMI."
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SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock in the public market
after this offering, or the perception that such sales could occur, could
adversely affect the prevailing market price of our common stock. Furthermore,
because only a limited number of shares will be available for sale for a short
period after this offering due to the contractual and legal restrictions on
resale described below, the sale of a substantial amount of common stock in the
public market after these restrictions lapse could adversely affect the
prevailing market price of our common stock and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
16,896,043 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless the
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. Any shares purchased by an affiliate may not be resold
except pursuant to an effective registration statement or an applicable
exemption from registration, including an exemption under Rule 144 of the
Securities Act. The remaining 12,896,043 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. These restricted securities may be sold in the public
market only if they are registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act. These rules
are summarized below.
Upon the expiration of the lock-up agreements described below and subject to
the provisions of Rule 144 and Rule 701, restricted shares totaling will
be available for sale in the public market 90 days after the date of this
prospectus, and an additional restricted shares will be available for sale
in the public market immediately after the date of this prospectus pursuant to
Rule 144(k). The sale of these restricted securities is subject, in the case of
shares held by affiliates, to the volume restrictions contained in those rules.
LOCK-UP AGREEMENTS
We and our directors and executive officers and some of our stockholders and
option and warrantholders, who own in the aggregate shares of our common
stock and options and warrants to acquire an aggregate of shares of common
stock, have entered into lock-up agreements with the underwriters. Under those
agreements, neither we nor any of our directors or executive officers nor any of
those stockholders may dispose of or hedge any shares of common stock or
securities convertible into or exchangeable or exercisable for shares of common
stock. These restrictions will be in effect for a period of 180 days after the
date of this prospectus. At any time and without notice, Advest may, in its sole
discretion, release all or some of the securities from these lock-up agreements.
Transfers or dispositions can be made sooner, provided the transferee becomes
bound to the terms of the lockup:
- with the prior written consent of Advest;
- in the case of some transfers to affiliates;
- as a bona fide gift; or
- to any trust.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours
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would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 168,960 shares immediately after this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years from the later of the date
such shares of common stock were acquired from us or from an affiliate of ours,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted pursuant to the lock-up agreements or otherwise,
those shares may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell those shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with some of the restrictions,
including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market pursuant
to Rule 144 or Rule 701 because this will depend on the market price of our
common stock, the personal circumstances of the sellers and other factors.
Nevertheless, sales of significant amounts of our common stock in the public
market could adversely affect the market price of our common stock.
STOCK PLANS
We intend to file a registration statement under the Securities Act covering
2,000,000 shares of common stock reserved for issuance under our 1996 Stock
Option Plan and 300,000 shares reserved for issuance under our 1999 Employee
Stock Purchase Plan. This registration statement is expected to be filed and
become effective as soon as practicable after the effective date of this
offering.
Currently, there are options to purchase 1,341,905 shares outstanding under
our 1996 Stock Option Plan and otherwise. All of these shares will be eligible
for sale in the public market from time to time, subject to vesting provisions,
Rule 144 volume limitations applicable to our affiliates and, in the case of
some of the options, the expiration of lock-up agreements.
REGISTRATION RIGHTS
Please see "Description of Securities--Registration Rights" for a
description of registration rights held by some of our current stockholders.
56
<PAGE>
UNDERWRITING
Advest, Inc., J.C. Bradford & Co. and Needham & Company, Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in an underwriting agreement between us and the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares of our common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- -----------------
<S> <C>
Advest, Inc.......................................................................
J.C. Bradford & Co................................................................
Needham & Company, Inc............................................................
-
Total.........................................................................
-
-
</TABLE>
In the underwriting agreement, the several underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to the underwriting agreement if any of the
shares of common stock being sold pursuant to such agreements are purchased. In
some circumstances the commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
The underwriters propose initially to offer the shares of our common stock
in part directly to the public at the offering price set forth on the cover page
of this prospectus and in part to some securities dealers at such price less a
concession not in excess of $ per share of common stock. The
underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of common stock on sales to some other securities
dealers. After the offering, the offering price, concession and discount may be
changed.
We have granted options to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 600,000
additional shares of common stock at the offering price set forth on the cover
page of this prospectus, less the underwriting discount. The underwriters may
exercise these options solely to cover over-allotments, if any, made on the sale
of the common stock offered hereby. If the underwriters exercise these options,
each underwriter severally will be obligated, subject to some conditions, to
purchase a number of additional shares of common stock proportionate to such
underwriter's initial amount reflected in the foregoing table.
The following table shows the per share and total underwriting discounts to
be paid by us to the underwriters and the proceeds before expenses to us. The
expenses of the offering are estimated at $1,000,000 and are payable by us. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
----------- ----------- ---------
<S> <C> <C> <C>
Public offering price.......................................... $ $ $
Underwriting discount.......................................... $ $ $
Proceeds, before expenses, to Century.......................... $ $ $
</TABLE>
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of some legal matters by counsel for the underwriters and some other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
57
<PAGE>
We, our directors and executive officers and some of our stockholders and
holders of outstanding options and warrants have entered into lock-up agreements
with the underwriters. Under those agreements, neither we nor any of our
directors or executive officers nor any of those stockholders may dispose of or
hedge any shares of common stock or securities convertible into or exchangeable
or exercisable for shares of common stock. These restrictions will be in effect
for a period of 180 days after the date of this prospectus. At any time and
without notice, Advest may, in its sole discretion, release all or some of the
securities from these lock-up agreements.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered by this prospectus has been determined through negotiations between us
and the representatives of the underwriters. Among the factors considered in
these negotiations were prevailing market conditions, our financial information,
market valuations of other companies that we and the representatives believe to
comparable to us, estimates of our business potential, the current state of our
development and other factors deemed relevant.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed five percent of the
number of shares being offered in this offering.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect thereof.
In connection with the offering, the underwriters may purchase and sell the
common stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the underwriters in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the common stock; and syndicate short positions
involve the sale by the underwriters of a greater number of shares of common
stock than they are required to purchase from us in the offering. The
underwriters also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the securities sold in the offering may be
reclaimed by the underwriters if such shares of common stock are repurchased by
the underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain, or otherwise affect the market price of the common stock,
which may be higher than the price that may otherwise prevail in the open
market; and these activities, if commenced, may be discounted at any time. These
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
Advest provided investment banking services to Amitek in connection with its
acquisition by us for which Advest received customary fees. The underwriters or
their affiliates may provide investment or commercial banking services to us in
the future for which they will receive customary fees and commissions.
58
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for
Century by Ropes & Gray, Boston, Massachusetts. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Choate, Hall & Stewart, Boston, Massachusetts.
EXPERTS
KPMG LLP, independent auditors, have audited our consolidated financial
statements at June 30, 1998 and 1999 and the years ended June 30, 1997, 1998 and
1999 as set forth in their report. We have included our financial statements in
the prospectus and elsewhere in the registration statement in reliance on KPMG
LLP's report, given on their authority as experts in accounting and auditing.
The financial statements of Amitek as of December 31, 1998 and 1997 and for
the years then ended included in this prospectus have been so included in
reliance on the report (which includes a paragraph of emphasis regarding
Amitek's transactions and relationships with affiliates as described in Notes 5
and 7 to the financial statements) of PricewaterhouseCoopers LLP, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
Lawrence N. Legg, CPA, PA, an independent auditor, has audited Amitek
Corporation's financial statements as of and for the year ended December 31,
1996 as set forth in his report dated March 20, 1997, except for notes 9 and 10,
as to which the date is June 30, 1999. We have included required financial
statements in the prospectus in reliance on Lawrence N. Legg, CPA, PA's report,
given on his authority as an expert in accounting and auditing.
59
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules which are part of the registration statement. Any
statements made in this prospectus as to the contents of our certificate of
incorporation and by-laws and any contract, agreement or other document are
necessarily incomplete. With respect to our certificate of incorporation and
by-laws and each such contract, agreement or other document filed as an exhibit
to the Registration Statement we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus shall
be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the Registration Statement or
any reports, statements or other information in the files at the public
reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee by writing
to the Commission. You may call the Commission at 1-800-SEC-0330 for further
information on the operation of its public reference rooms. Our filings,
including the Registration Statement, will also be available to you on the
Internet site maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CENTURY ELECTRONICS MANUFACTURING, INC.
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets at June 30, 1998, and 1999..................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999..................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended June 30, 1997,
1998 and 1999............................................................................................ F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999..................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
AMITEK CORPORATION
Report of Independent Certified Public Accountants......................................................... F-23
Independent Auditor's Report............................................................................... F-24
Balance Sheets as of December 31, 1997, 1998 and June 30, 1999 (Unaudited)................................. F-25
Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and six months ended June 30,
1998 (Unaudited) and June 30, 1999 (Unaudited)........................................................... F-26
Statement of Changes in Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 and six
months ended June 30, 1999 (Unaudited)................................................................... F-27
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and six months ended June 30,
1998 (Unaudited) and June 30, 1999 (Unaudited)........................................................... F-28
Notes to Financial Statements.............................................................................. F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Century Electronics Manufacturing, Inc.
We have audited the accompanying consolidated balance sheets of Century
Electronics Manufacturing, Inc. and subsidiaries as of June 30, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Century Electronics
Manufacturing, Inc. and subsidiaries as of June 30, 1998 and 1999, and the
results of their operations and their cash flows, for each of the years in the
three-year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
August 27, 1999
Boston, Massachusetts
F-2
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 1,629,655 $ 1,219,939
Trade accounts receivable, net of allowance for
doubtful receivables of approximately $320,000 and
$240,000 in 1998 and 1999, respectively (note
10)............................................... 11,526,110 20,152,494
Inventories (notes 2 and 5).......................... 6,433,521 14,877,572
Prepaid expenses..................................... 520,514 1,473,238
Related party note receivable........................ 451,346 326,940
Deferred income taxes (note 7)....................... 98,622 380,091
----------- -----------
Total current assets............................... 20,659,768 38,430,274
Property, plant and equipment, net of accumulated
depreciation and amortization (notes 3, 5 and 6)..... 15,143,382 17,162,225
Goodwill, net of accumulated amortization (note 11).... 123,678 498,121
Other assets (note 5).................................. 893,884 1,140,696
----------- -----------
Total assets....................................... $36,820,712 $57,231,316
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving note payable (note 5)...................... $ 3,811,798 $ 7,782,774
Current portion of term notes payable, bank (note
5)................................................ 200,000 485,400
Current portion of capital leases (notes 6 and 13)... 1,860,341 1,070,462
Accounts payable..................................... 11,843,200 22,402,073
Income taxes payable (note 7)........................ 718,162 450,762
Accrued expenses and other current liabilities (note
4)................................................ 1,823,243 2,630,098
----------- -----------
Total current liabilities.......................... 20,256,744 34,821,569
Long-term note payable (note 5)........................ 2,556,200 3,133,429
Capital lease payable, less current installments (notes
6 and 13)............................................ 1,422,178 1,090,834
Deferred income taxes (note 7)......................... 457,968 434,560
----------- -----------
Total liabilities.................................. 24,693,090 39,480,392
----------- -----------
Stockholders' equity (notes 9 and 13):
Series A preferred stock, $.01 par value, authorized
3,726,027 shares, 2,739,726 and 3,671,233 shares
issued and outstanding at June 30, 1998 and 1999,
respectively. Aggregate liquidation value of
$20,000,000 and $26,800,000, respectively......... 9,900,000 13,281,971
Series B preferred stock, $.01 par value, 666,667
shares authorized, issued and outstanding at June
30, 1998 and 1999. Aggregate liquidation value of
$4,000,000........................................ 4,000,000 4,000,000
Common stock $.01 par value. Authorized 17,593,607
shares, 6,521,877 and 6,321,877 issued and
outstanding in 1998 and 1999, respectively........ 65,219 63,219
Additional paid-in capital........................... 12,093,574 11,716,675
Accumulated deficit.................................. (13,914,396) (11,100,548)
Accumulated other comprehensive income............... (16,775) (210,393)
----------- -----------
Total stockholders' equity......................... 12,127,622 17,750,924
----------- -----------
Commitments and contingencies (notes 6, 8, 10 and 12)
Subsequent events (note 14)
Total liabilities and stockholders' equity......... $36,820,712 $57,231,316
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Net sales......................................................... $ 70,744,344 $ 69,944,592 $ 121,677,408
Cost of sales..................................................... 63,427,776 65,078,570 107,617,612
------------- -------------- --------------
Gross profit.................................................. 7,316,568 4,866,022 14,059,796
Selling, marketing, general and administrative expenses........... 2,493,061 5,988,707 7,623,948
Stock compensation (notes 1, 9 and 13)............................ 1,775,000 1,186,000 --
Goodwill write-off (note 11)...................................... -- 7,488,942 --
Goodwill amortization............................................. 788,000 18,000 94,525
------------- -------------- --------------
Operating income (loss)....................................... 2,260,507 (9,815,627) 6,341,323
Other deductions (income):
Interest expense, net........................................... 557,926 1,136,782 1,872,592
Other, net...................................................... (26,049) (280,109) (33,608)
------------- -------------- --------------
Income (loss) before income tax expense (benefit)............. 1,728,630 (10,672,300) 4,502,339
Income tax expense (benefit) (note 7)............................. 1,451,445 (218,439) 1,688,491
------------- -------------- --------------
Net income (loss)............................................. $ 277,185 $ (10,453,861) $ 2,813,848
------------- -------------- --------------
------------- -------------- --------------
Net income (loss) per share-basic................................. $ 0.03 $ (1.33) $ 0.44
------------- -------------- --------------
------------- -------------- --------------
Net income (loss) per share-diluted............................... $ 0.03 $ (1.33) $ 0.24
------------- -------------- --------------
------------- -------------- --------------
Weighted average common shares outstanding-basic.................. 9,889,000 7,870,000 6,447,050
------------- -------------- --------------
------------- -------------- --------------
Weighted average common shares outstanding-diluted................ 9,889,000 7,870,000 11,516,994
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
PREFERRED PREFERRED PREFERRED ADDITIONAL
STOCK STOCK STOCK COMMON PAID-IN
SERIES A SERIES B SERIES C STOCK CAPITAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996..................... -- $ 2 $ 5 $ 3 $ 4,523,123
Capital contributions by stockholder to
fund payment of stock options buy out and
debt repayment........................... -- -- -- -- 3,868,455
Recapitalization of DCI into Century....... -- (2) (5) 62,560 (689,621)
Issuance of common stock to Centennial
(note 1)................................. -- -- -- 30,732 4,991,439
Issuance of common stock for acquisition of
TRIAX (note 1)........................... -- -- -- 22,395 4,456,605
Exercise of options........................ -- -- -- 261 45,457
Comprehensive income
Net income............................... -- -- -- -- --
Foreign currency translation
adjustment.............................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Total comprehensive income................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Balance as of June 30, 1997.................. -- -- -- 115,951 17,195,458
July 1, 1997 repurchase and retirement of
3,000,000 shares of common stock
including legal costs of $61,364 and
75,000 common shares issued to a
financial intermediary (note 13)......... -- -- -- (29,250) (3,498,741)
Issuance of common stock in connection with
acquisition of Century Thailand (note
13)...................................... -- -- -- 7,500 1,856,500
Issuance of 80,000 common shares in
settlement of legal claim................ -- -- -- 800 223,200
February 1998 repurchase and retirement of
3,683,635 shares of common stock (note
13)...................................... -- -- -- (36,836) (1,792,039)
Issuance of 2,739,726 shares of Series A
preferred stock net of issuance costs
(note 13)................................ 9,900,000 -- -- -- --
Issuance of 666,767 shares of Series B
preferred stock in connection with
February 1998 repurchase and retirement
of common stock (note 13)................ -- 4,000,000 -- -- (4,000,000)
Conversion of notes payable to 705,424
shares of common stock (note 13)......... -- -- -- 7,054 2,109,196
Comprehensive income
Net loss................................. -- -- -- -- --
Foreign currency translation
adjustment.............................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Total comprehensive income................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Balance as of June 30, 1998.................. 9,900,000 4,000,000 -- 65,219 12,093,574
Issuance of Series A preferred stock net of
issuance costs........................... 3,381,971 -- -- -- --
Stock compensation related to stock option
grant.................................... -- -- -- -- 21,101
Repurchase and retirement of 200,000 shares
of common stock from officer at $2 per
share.................................... -- -- (2,000) (398,000)
Comprehensive income
Net income............................... -- -- -- -- --
Foreign currency translation
adjustment.............................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Total comprehensive income................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Balance as of June 30, 1999.................. $13,281,971 $4,000,000 -- $ 63,219 $11,716,675
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY
DEFICIT INCOME STOCK TOTAL
----------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1996..................... $(3,737,720) -- $(627,068) $ 158,345
Capital contributions by stockholder to
fund payment of stock options buy out and
debt repayment........................... -- -- -- 3,868,455
Recapitalization of DCI into Century....... -- -- 627,068 --
Issuance of common stock to Centennial
(note 1)................................. -- -- -- 5,022,171
Issuance of common stock for acquisition of
TRIAX (note 1)........................... -- -- -- 4,479,000
Exercise of options........................ -- -- -- 45,718
Comprehensive income
Net income............................... 277,185 -- -- 277,185
Foreign currency translation
adjustment.............................. -- 50,368 -- 50,368
----------- ------------- --------- -----------
Total comprehensive income................. -- -- -- 327,553
----------- ------------- --------- -----------
Balance as of June 30, 1997.................. (3,460,535) 50,368 -- 13,901,242
July 1, 1997 repurchase and retirement of
3,000,000 shares of common stock
including legal costs of $61,364 and
75,000 common shares issued to a
financial intermediary (note 13)......... -- -- -- (3,527,991)
Issuance of common stock in connection with
acquisition of Century Thailand (note
13)...................................... -- -- -- 1,864,000
Issuance of 80,000 common shares in
settlement of legal claim................ -- -- -- 224,000
February 1998 repurchase and retirement of
3,683,635 shares of common stock (note
13)...................................... -- -- -- (1,828,875)
Issuance of 2,739,726 shares of Series A
preferred stock net of issuance costs
(note 13)................................ -- -- -- 9,900,000
Issuance of 666,767 shares of Series B
preferred stock in connection with
February 1998 repurchase and retirement
of common stock (note 13)................ -- -- -- --
Conversion of notes payable to 705,424
shares of common stock (note 13)......... -- -- -- 2,116,250
Comprehensive income
Net loss................................. (10,453,861) -- -- (10,453,861)
Foreign currency translation
adjustment.............................. -- (67,143) -- (67,143)
----------- ------------- --------- -----------
Total comprehensive income................. -- -- -- (10,521,004)
----------- ------------- --------- -----------
Balance as of June 30, 1998.................. (13,914,396) (16,775) -- 12,127,622
Issuance of Series A preferred stock net of
issuance costs........................... -- -- -- 3,381,971
Stock compensation related to stock option
grant.................................... -- -- -- 21,101
Repurchase and retirement of 200,000 shares
of common stock from officer at $2 per
share.................................... -- -- -- (400,000)
Comprehensive income
Net income............................... 2,813,848 -- -- 2,813,848
Foreign currency translation
adjustment.............................. -- (193,618) -- (193,618)
----------- ------------- --------- -----------
Total comprehensive income................. -- -- -- 2,620,230
----------- ------------- --------- -----------
Balance as of June 30, 1999.................. $(11,100,548) ($210,393) -- $17,750,924
----------- ------------- --------- -----------
----------- ------------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 277,185 $(10,453,861) $ 2,813,848
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation and amortization........................................ 1,846,575 2,218,416 3,064,051
Write-off of TRIAX goodwill (note 11)................................ -- 7,488,942 --
Provision for doubtful accounts...................................... -- 40,000 30,618
Compensation expense related to option grant......................... -- -- 21,100
Change in assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable......................... (2,456,658) (1,144,068) (8,633,196)
Increase in other receivables...................................... (250,631) -- --
Decrease (increase) in inventories................................. (3,408,811) 7,418,379 (8,560,333)
(Increase) decrease in prepaid expenses and other assets........... (99,001) (260,015) (939,974)
Increase (decrease) in accounts payable............................ (148,804) (5,484,810) 12,629,694
(Decrease) increase in income taxes payable........................ 1,077,573 (759,596) (204,459)
Increase (decrease) in accrued expenses and other current
liabilities...................................................... 1,258,688 (1,331,496) 732,141
Change in deferred taxes........................................... 304,786 326,591 (279,584)
------------ ------------ ------------
Net cash (used in) provided by operating activities.............. (1,599,098) (1,941,518) 673,906
------------ ------------ ------------
Cash flows from investing activities
Capital expenditures................................................. (2,680,900) (2,523,384) (3,363,120)
Cash paid for acquisitions, less cash acquired....................... (4,483,383) -- (384,599)
Cash assumed from acquirees, net of cash paid for acquisitions....... -- 891,076 --
Increase (decrease) in other long-term assets........................ (183,473) (7,188) (193,677)
------------ ------------ ------------
Net cash used in investing activities.............................. (7,347,756) (1,639,496) (3,941,396)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds (payments) from revolving note payable.................. (1,936,655) 3,731,298 2,273,659
Net proceeds from term and convertible notes payable................. -- 3,000,000 1,532,521
Principal payments on notes payable.................................. -- (238,576) (1,349,573)
Principal payments on capital lease obligation....................... -- (3,578,499) (2,552,646)
Proceeds from issuance of preferred stock
(note 13).......................................................... -- 9,900,000 3,381,971
Repurchase and retirement of common stock (note 13).................. -- (5,663,875) (400,000)
Change in related party note receivable.............................. (60,978) (397,958) 98,006
Proceeds from issuance of (payment of) related party note payable.... 4,129,099 (4,129,099) --
Capital contributions from shareholder (note 1)...................... 3,868,455 -- --
Issuance of common stock to Centennial for acquisition of TRIAX (note
1)................................................................. 5,025,190 -- --
Proceeds from issuance of common stock............................... 45,718 -- --
------------ ------------ ------------
Net cash provided by financing activities.......................... 11,070,829 2,623,291 2,983,938
------------ ------------ ------------
Effect of exchange rate changes on cash................................ 50,368 31,033 (126,164)
------------ ------------ ------------
Net increase (decrease) in cash...................................... 2,174,343 (926,690) (409,716)
Cash at beginning of year.............................................. 382,002 2,556,345 1,629,655
------------ ------------ ------------
Cash at end of year.................................................... $ 2,556,345 $ 1,629,655 $ 1,219,939
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................... $ 629,838 $ 870,430 $ 1,760,850
------------ ------------ ------------
------------ ------------ ------------
Income taxes....................................................... $ -- $ 107,279 $ 2,374,978
------------ ------------ ------------
------------ ------------ ------------
Property, plant and equipment; acquired through capital lease...... $ -- $ 1,140,770 $ 321,100
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BUSINESS
The consolidated financial statements present the operations of Century
Electronics Manufacturing, Inc. ("Century"), formerly known as Century
Industries, Inc., and its wholly-owned subsidiaries Century Electronics
Manufacturing (NE) Inc. ("Century New England"), formerly known as Design
Circuits, Inc. ("DCI"), TRIAX Technology Group, Ltd. ("TRIAX"), Century Thailand
(see note 13), Quality Manufacturing Services, Inc. (see note 13) ("QMS") and
YMC Manufacturing Services, Inc. (see note 13) ("YMC"), collectively referred to
as the "Company". The Company is a worldwide provider of electronics
manufacturing services to leading original equipment manufacturers principally
in the communications and networking markets. The Company offers a broad range
of integrated electronics manufacturing services from product design and
prototyping through volume production and order fulfillment.
The financial results for 1997 include the results of operations of Century
from July 24, 1996 (date of inception) to June 30, 1997, as well as the results
of operations of DCI for the year ended June 30, 1997.
On July 10, 1996, Centennial and other outside investors acquired all of the
outstanding common stock of DCI, and redeemed all of the outstanding preferred
stock, common stock warrants, and common stock options then outstanding. A
portion of the total consideration paid by Centennial and the other outside
investors for the DCI acquisition was paid to DCI employees by DCI in
consideration for their stock options. The cash for these payments,
approximating $1.8 million, was contributed by Centennial and the outside
investors and has been included as additional paid-in capital and as stock
compensation expense in the year ended June 30, 1997. Concurrent with and
shortly after the acquisition of DCI, Centennial repaid a portion of DCI's
third-party debt of approximately $2.1 million, which has been reflected as
additional paid-in capital at July 10, 1996. As a result of these transactions,
Centennial's ownership of DCI shares outstanding was approximately 75%.
On July 24, 1996, Centennial formed Century and on October 18, 1996,
Centennial and the outside investors transferred their shares in DCI to Century
in exchange for shares of Century. Consequently, Century became the parent
company of DCI. DCI was then later renamed Century Electronics Manufacturing
(NE) Inc.
On November 5, 1996 Century purchased all of the outstanding class "A"
ordinary stock of TRIAX in exchange for 2,239,500 shares of Century's common
stock valued at approximately $4.5 million, and approximately $5.0 million in
cash, including transaction costs. Century also purchased $492,400 of preferred
stock in TRIAX. The cash to purchase TRIAX, as well as payment of certain
transaction costs, was obtained from Centennial through the issuance of
3,073,130 shares of Century common stock to Centennial, valued at approximately
$5.0 million. The transaction was accounted for under the purchase method of
accounting and consequently goodwill of $8.3 million was recorded on the
transaction. Amortization of goodwill was approximately $788,000 in 1997. There
was no amortization recorded in 1998 as the goodwill was considered impaired and
was written off entirely in July 1997. (See note 11). The results of operations
of TRIAX have been included from its acquisition date.
The following table presents pro forma summary results of operations as if
the TRIAX acquisition had occurred on July 1, 1996, and accordingly, includes
adjustments for additional goodwill amortization and related income taxes. It
does not purport to be indicative of what would have actually
F-7
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
occurred had the acquisition occurred on July 1, 1996 nor is it indicative of
results which may occur in the future:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED JUNE 30,
1997
-----------------------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C>
Net sales...................................................................... $ 80,861
Net income..................................................................... $ 487
Net income per share--basic and diluted........................................ $ 0.05
</TABLE>
(b) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Century
Electronics Manufacturing, Inc. and its wholly-owned subsidiaries, Century New
England, TRIAX, Century Thailand, QMS and YMC. All intercompany balances and
transactions have been eliminated in consolidation.
The financial statements of the Company's non-U.S. subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, FOREIGN CURRENCY TRANSLATION. Net assets of
non-U.S. subsidiaries whose "functional" currencies are other than the U.S.
dollar are translated at current rates of exchange. Income and expense items are
translated at the average exchange rate for the period. The resulting
translation adjustments are recorded directly into a separate component of
stockholders' equity.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) STATEMENT OF CASH FLOWS
In accordance with Statement of Financial Accounting Standards No. 95,
Statement of Cash Flows, cash flows from the Company's non-U.S. subsidiaries are
calculated based on their reporting currency. As a result, amounts related to
assets and liabilities reported on the statement of consolidated cash flows will
not necessarily agree to changes in the corresponding balances on the statement
of consolidated financial position. The effect of exchange rate changes on cash
balances held in foreign currencies is reported on a separate line below cash
from financing activities.
(d) REVENUE RECOGNITION
The Company recognizes revenue from product sales and accrues for
anticipated warranty returns at time of shipment.
(e) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
F-8
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is provided over the estimated useful lives of the
respective assets using the straight-line method. Amortization of leased capital
equipment is provided for over the estimated useful life of the assets, or the
lease term for assets under leases which do not provide for title to pass at the
end of the lease, if shorter. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings......................................................... 50 years
Machinery and equipment........................................... 7-10
Furniture, fixtures and office equipment.......................... 3-5
Leasehold improvements............................................ 3
Motor vehicles.................................................... 4-5
</TABLE>
(g) OTHER ASSETS
Other assets consists primarily of the cash surrender value of an insurance
policy in support of the long-term mortgage note on the building housing the
TRIAX facility as well as various lease deposits on buildings and equipment as
well as utility deposits.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) GOODWILL
Goodwill relating to the Company's acquisitions represents the excess of
cost over the fair value of net assets acquired and is amortized on a
straight-line basis over the period of expected benefit. Determination of the
straight-line period is dependent on the nature of the operations acquired. For
acquisitions completed to date, the Company is utilizing periods of five to
fifteen years. The Company evaluates the recoverability of goodwill on a
periodic basis to assure that changes in facts and circumstances do not suggest
that recoverability has been impaired. This analysis relies on a number of
factors, including operating results, business plans, budgets, economic
projections, and changes in management's strategic direction or market emphasis.
The test of recoverability for goodwill is a comparison of the unamortized
balance to expected forecasted undiscounted cash flows of the acquired business
or enterprise over the remaining portion of the amortization period. If the book
value of goodwill exceeds undiscounted future operating cash flows, the
writedown is computed as the excess of the unamortized balance of the asset over
the present value of operating cash flows discounted at the Company's weighted
average cost of capital over the remaining amortization period.
F-9
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment, based upon undiscounted
future cash flows, and appropriate losses are recognized whenever the carrying
amount of an asset may not be recovered in accordance with Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS TO BE DISPOSED OF. Impairment is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(k) NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares and dilutive potential common
shares outstanding, including convertible preferred stock assumed converted,
during the period. Under the treasury stock method, unexercised options and
warrants are assumed to be exercised at the beginning of the period or at
issuance, if later. The assumed proceeds are then used to purchase common shares
at the average market price during the period. Dilutive potential common shares
outstanding at June 30, 1999 consisted of approximately 704,647 from unexercised
options and warrants and 4,365,297 million of convertible preferred stock.
Potential common shares for all other periods have been excluded from income
(loss) per share as their inclusion would have the effect of increasing or
decreasing diluted income or loss, respectively, per share (i.e.,
anti-dilutive).
(l) NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and foreign currency translation
adjustment and is presented in the consolidated statements of stockholder's
equity and comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value. This statement, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The effects of adopting
SFAS 133 are not expected to have a material impact on the Company's financial
condition, results of operations or cash flows.
F-10
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) INVENTORIES
The components of inventories at June 30, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
------------ -------------
<S> <C> <C>
Finished goods................................................... $ 65,933 $ --
Work-in-process.................................................. 933,083 2,765,078
Raw materials.................................................... 5,434,505 12,112,494
------------ -------------
$ 6,433,521 $ 14,877,572
------------ -------------
------------ -------------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment at June 30, 1998 and 1999
were as follows:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Buildings...................................................... $ 2,381,329 $ 2,237,798
Machinery and equipment........................................ 15,093,877 19,220,057
Computer equipment............................................. 989,510 1,085,834
Furniture and fixtures......................................... 325,743 472,383
Leasehold improvements......................................... 953,422 1,570,209
Motor vehicles................................................. 217,244 229,218
------------- -------------
19,961,125 24,815,499
Less accumulated depreciation and amortization................. 4,817,743 7,653,274
------------- -------------
$ 15,143,382 $ 17,162,225
------------- -------------
------------- -------------
</TABLE>
(4) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at June 30, 1998 and 1999
were as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
VAT and customs duty payable...................................... $ 778,816 $ 852,075
Accrued expenses.................................................. 554,204 979,404
Accrued payroll................................................... 490,223 798,619
------------ ------------
Total............................................................. $ 1,823,243 $ 2,630,098
------------ ------------
------------ ------------
</TABLE>
(5) LONG-TERM NOTES PAYABLE
The Company has a long-term note payable to a lender in the United Kingdom
with an outstanding balance converted in U.S. dollars of $1,939,534 and
$1,831,724 at June 30, 1998 and 1999, respectively, which is secured by the
building housing one of the TRIAX facilities. Interest on the note is payable
monthly at approximately 12% per annum. The note does not require monthly
principal payments but is due in full in December 2007. The Company currently
makes monthly payments into an insurance/investment vehicle designed to
accumulate monthly payments and investment earnings thereon which are intended
to be sufficient to retire the note in full upon its maturity. At June 30, 1998
and 1999, the accumulated cash value of the insurance policy was approximately
$732,000 and $788,000, respectively. In addition, TRIAX has a cash overdraft
facility with a United Kingdom bank
F-11
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM NOTES PAYABLE (CONTINUED)
which provides for advances based upon eligible accounts receivable and
inventory and is secured by substantially all the assets of TRIAX. The current
loan agreement underlying this facility expired in October 1998. At June 30,
1998, the outstanding balance had exceeded the maximum borrowing limit. In
December 1998, the outstanding balance on this facility was repaid.
In July 1997 and as discussed in note 13, Century New England entered into a
loan facility with Congress Financial (the "Loan Agreement") which provided for
a $1.0 million term loan at prime plus 1.5%, payable in 60 installments, and a
$6.0 million revolving facility at prime plus 1.5% and a $3.0 million letter of
credit facility. The amount of credit available under the revolving facility was
based upon the levels of eligible receivables and raw materials inventory. The
total availability of the loans and letter of credit facility could not exceed
$7.0 million, and the total of the revolving and letter of credit facilities
could not exceed $6.75 million. At June 30, 1998, the amount outstanding on the
revolving facility and the term loan were $3,731,298 and $816,666, respectively.
The loan and credit facility was secured by substantially all the assets of
Century and was cross collateralized and secured by substantially all assets of
Century New England. However, the security did not extend to the assets of the
other subsidiaries of Century. Also, the loan agreement contained various
restrictive covenants which were measured at the Century New England level. At
June 30, 1998, Century New England was not in compliance with a covenant to
maintain at all times a certain level of adjusted net worth; however, a waiver
was obtained from the bank through October 30, 1998. Effective October 31, 1998,
the adjusted net worth covenant was revised to require Century New England to
maintain minimum net worth of $3.25 million.
In December, 1998, Century New England, YMC and QMS collectively entered
into a three year loan facility with Fidelity Funding, Inc. ("Fidelity"), the
proceeds of which were utilized to repay the Congress Financial facility and
provide further working capital. The Fidelity facility provides for up to a $2.0
million term loan at prime plus 1%, with all advances payable in 48 equal
monthly installments with final payment of outstanding balances no later than
November 30, 2001, and a $12.0 million revolving facility at prime plus 1%. The
amount of credit available under the revolving facility is based upon the levels
of eligible receivables and inventory. The total outstanding loans may not
exceed $14.0 million (See also note 14). At June 30, 1999, the amounts
outstanding on the revolving facility and the term loan were approximately $7.8
million and $1.8 million, respectively. At June 30, 1999 the prime rate was
7.75%. The facility is secured by substantially all the assets of Century, YMC
and QMS. In addition, the loan agreement contains various restrictive covenants
with respect to net worth, debt service coverage and net profit requirements
which are measured against Century New England, YMC and QMS individually and
collectively. At June 30, 1999, QMS was in violation of a covenant to maintain a
minimum level of tangible net worth. However, a waiver has been obtained from
Fidelity and the covenant has been amended to a level that QMS currently meets.
As of June 30, 1998, one of the Company's subsidiaries, QMS, had a line of
credit agreement with a bank that was guaranteed by the Small Business
Administration. The line provided for a maximum credit availability of $50,000
with interest on the outstanding balance charged at the bank's prime rate plus
2.25%. The rate of interest charged on the outstanding balance of $37,500 at
June 30, 1998 was 10.9%. The credit agreement was to expire in November 2002 and
was secured by all the assets of QMS and was personally guaranteed by the
officers of QMS. Additionally, QMS had another line of credit facility at June
30, 1998 with an outstanding balance of $43,000. Under this facility, QMS had a
total availability of $60,000. Interest was charged at the bank's prime rate
plus 2.25%. During the
F-12
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM NOTES PAYABLE (CONTINUED)
twelve months ended June 30, 1999, both of the QMS line of credit facilities
were paid off and canceled.
Aggregate maturities of all of the Company's long term debt, are as follows:
<TABLE>
<S> <C>
2000............................................ $ 485,400
2001............................................ 485,400
2002............................................ 485,400
2003............................................ 330,905
2004............................................ --
Thereafter...................................... 1,831,724
---------
$3,618,829
---------
---------
</TABLE>
(6) LEASES
The Company leases various machinery and equipment pursuant to capital
leases. As of June 30, 1997, certain machinery and equipment was sub-leased from
Centennial for a three year term at lease rates which approximated fair market
rates. These sub-leases were bought out by the Company on July 1, 1997 as
discussed in note 13. The Company has also entered into operating leases for
plant and office space. The lease commitments for the plant and office space are
for terms of up to 15 years.
The future minimum lease payments related to these leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED JUNE 30: LEASES LEASES
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
2000............................................................................ $ 1,332,664 $ 1,639,712
2001............................................................................ 777,505 1,535,118
2002............................................................................ 245,252 1,541,978
2003............................................................................ 169,957 1,195,950
2004............................................................................ 85,948 1,215,028
Thereafter...................................................................... -- 2,471,536
------------ ------------
Total minimum lease payments.......................................................... 2,611,326 $ 9,599,322
------------
------------
Less amount representing interest..................................................... 450,030
------------
Net minimum lease payments............................................................ 2,161,296
Less current installments............................................................. 1,070,462
------------
Obligations under capital leases, excluding current installments...................... $ 1,090,834
------------
------------
</TABLE>
The total cost capitalized and accumulated amortization for assets under
capital leases at June 30, 1999 was approximately $4.5 million and $1.1 million,
respectively.
Total rent expense for the years ended June 30, 1997, 1998 and 1999 was
approximately $250,000, $583,000 and $1,568,000, respectively.
F-13
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
1997:
Federal................................................................ $ -- $ -- $ --
State.................................................................. -- -- --
Foreign................................................................ 1,082,080 369,365 1,451,445
------------ ----------- ------------
$ 1,082,080 $ 369,365 $ 1,451,445
------------ ----------- ------------
------------ ----------- ------------
1998:
Federal................................................................ $ 316,864 $ -- $ 316,864
State.................................................................. 110,985 -- 110,985
Foreign................................................................ (829,199) 182,911 (646,288)
------------ ----------- ------------
$ (401,350) $ 182,911 $ (218,439)
------------ ----------- ------------
------------ ----------- ------------
1999:
Federal................................................................ $ 1,556,953 $ (322,626) $ 1,234,327
State.................................................................. 560,219 (100,490) 459,729
Foreign................................................................ (123,804) 118,239 (5,565)
------------ ----------- ------------
$ 1,993,368 $ (304,877) $ 1,688,491
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The effective tax rate differs from the "expected" tax rate (computed as the
U.S. Federal corporate income tax rate of 34%) as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Computed "expected"................................................... $ 587,734 $ (3,628,582) $ 1,530,795
State tax, net of federal benefit..................................... -- 73,250 303,421
Non-deductible goodwill amortization.................................. 268,025 2,610,408 32,139
Stock Compensation.................................................... -- 403,240 7,174
Change in valuation allowance......................................... 687,312 (248,856) (636,123)
Foreign losses not benefited.......................................... -- 202,730 139,022
Difference in foreign statutory tax rate.............................. (72,427) 246,097 30,612
Other, net............................................................ (19,199) 123,274 281,451
------------ ------------- -------------
Income tax expense (benefit)........................................ $ 1,451,445 $ (218,439) $ 1,688,491
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
F-14
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1999 are presented below:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................................... $ 1,487,126 $ 1,378,045
Intercompany profit................................................................. 207,602 207,945
Inventory reserves.................................................................. 160,285 158,762
Inventory principally due to additional cost for tax purposes....................... 85,580 173,103
Accounts receivable reserves........................................................ 60,000 73,972
Accrued liabilities................................................................. 59,300 231,747
Tax credits......................................................................... 145,256 136,023
Other............................................................................... 42,808 28,539
------------ ------------
Total gross deferred tax assets................................................... 2,247,957 2,388,136
Less valuation allowance.............................................................. 1,600,589 964,466
------------ ------------
Net deferred tax assets............................................................... 647,368 1,423,670
------------ ------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in depreciation....... 1,006,714 1,478,139
------------ ------------
Total gross deferred tax liabilities.............................................. 1,006,714 1,478,139
------------ ------------
Net deferred tax liability........................................................ $ 359,346 $ 54,469
------------ ------------
------------ ------------
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1997 was
approximately $2.2 million.
On December 25, 1996 the Company's operation in Thailand, Century Thailand,
was granted an exemption from income taxes for a period of seven years from the
date operating income is first derived. For the year ended June 30, 1999,
Century Thailand generated a net loss of approximately $400,000.
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over which
the deferred tax assets are deductible, the Company believes that the ultimate
realization of the net deferred tax assets for federal and state tax purposes
appear to be more likely than not.
At June 30, 1999, the Company had net operating loss carryforwards for U.S.
and state income tax purposes of approximately $3.3 million and $1.8 million,
respectively, which are available to offset future taxable income, if any,
through 2111 and 2001, respectively; however, the total amount that can be
utilized on an annual basis is limited to approximately $571,000 per year due to
a change in ownership of the Company.
F-15
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE BENEFIT PLAN
Beginning January 1, 1996, the Company sponsors a 401(k) Retirement Plan
under which substantially all employees of the Company's U.S. subsidiaries are
eligible to participate in the Plan. Under the Plan, employees may contribute up
to the lesser of 15% of their compensation or $10,000. The Company, at its
discretion, may contribute an amount up to 7 1/2% of employees' compensation,
and may also, at its discretion, contribute a bonus, which would be determined
using a uniform percentage of the compensation of each employee. No
discretionary contributions were made by the Company in 1997, 1998, or 1999.
(9) STOCK OPTIONS
In 1995, DCI sponsored an option plan ("1995 Option Plan") which was a
non-qualified compensatory stock option plan for certain employee groups.
Options issued under the 1995 Option Plan vested immediately upon issuance and
had an exercise price of $0.50 per share. The options expired ten years from the
date of grant. Compensation expense related to the 1995 Option Plan charged to
operations in 1995 was $98,000 and is included in the accompanying consolidated
statements of operations.
On July 10, 1996, all of the outstanding options issued pursuant to this
option plan were repurchased by DCI in connection with the acquisition of all
the outstanding common shares of DCI by Centennial and other outside investors
as discussed in note 1. The total cost of buying out these options of
approximately $1.8 million has been recorded as stock compensation expense in
the accompanying consolidated statements of operations.
Pursuant to an agreement ratified in August 1996, the Company established
the 1996 Stock Option Plan (the "Plan"), which permits the grant of options to
acquire common stock to officers and key employees of the Company. At June 30,
1998 and 1999, 2,000,000 shares of common stock were reserved for issuance
pursuant to the Plan. The Plan includes various vesting criteria, including
service time and change of control.
The Company applies Accounting Principles Board Opinion No 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES "APB 25"), and related Interpretations in
accounting for its Plan.
Had compensation expense for the options granted been determined based on
the fair value of the options at the grant date consistent with the optional
fair value based method of Statement of Financial Accounting Standards Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"), the Company's net
income (loss) for the year ended June 30, 1997, 1998 and 1999 would have been
approximately $107,000, ($10,472,000), and $2,795,000 on a pro forma basis. Pro
forma basic and diluted income (loss) per share for the years ended June 30,
1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) per share:....................................................
Basic................................................................................... $ 0.01 (1.33) 0.43
Diluted................................................................................. $ 0.01 (1.33) 0.24
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield, no price volatility, risk-free interest rate of approximately
6%, expected life of options of up to 4 years, and fair value of the
F-16
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK OPTIONS (CONTINUED)
Company's shares between $1.75 and $6.00. The fair market value of options
granted in 1997, 1998 and 1999 under this method was between $0.46 and $0.37,
$0.45 and $0.40 and between $0.31 and $0.94 per option, respectively.
A summary of the status of the Company's stock option plan as of June 30,
1997, 1998 and 1999 and the changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... -- $ -- 831,000 $ 1.98 1,158,000 $ 2.36
Granted........................ 863,125 $ 1.98 358,000 $ 3.13 24,000 $ 2.67
Exercised...................... (26,125) $ 2.00 -- -- -- --
Forfeited...................... (6,000) $ 2.00 (31,000) $ 2.00 (54,000) $ 2.00
--------- ----- ---------- ----- ---------- -----
Outstanding at end of year..... 831,000 $ 1.98 1,158,000 $ 2.36 1,128,000 $ 2.36
--------- ----- ---------- ----- ---------- -----
Options exercisable at year-
end.......................... 563,000 $ 1.98 692,000 $ 2.02 871,000 $ 2.29
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------- ------------------
NUMBER NUMBER
EXERCISE PRICES OUTSTANDING EXERCISABLE
- -------------------------------- ----------- WEIGHTED-AVERAGE ------------------
REMAINING
CONTRACTUAL LIFE
-------------------
(YEARS)
<S> <C> <C> <C>
$1.75 66,000 1.0 66,000
$2.00 833,500 1.6 669,000
$4.00 202,000 2.8 136,000
$6.00 4,000 3.8 --
----------- --- -------
Total 1,105,500 871,000
</TABLE>
F-17
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONCENTRATION OF RISK
SEGMENT AND GEOGRAPHIC DATA
The Company is engaged in one line of business, electronic manufacturing
services. The following table presents information about the Company by
geographic area:
<TABLE>
<CAPTION>
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Net revenues:
United States................................................... $ 31,539,433 $ 45,745,101 $ 113,173,351
United Kingdom.................................................. 39,204,911 23,274,212 22,365,776
Thailand........................................................ -- 925,279 2,150,638
------------- -------------- --------------
70,744,344 69,944,592 137,689,765
Elimination of interdivision revenues........................... -- -- (16,012,357)
------------- -------------- --------------
$ 70,744,344 $ 69,944,592 $ 121,677,408
------------- -------------- --------------
------------- -------------- --------------
Operating profit:
United States................................................... $ (1,462,170) $ (32,311) $ 6,319,316
United Kingdom.................................................. 3,190,800 (10,043,724) (447,370)
Thailand........................................................ -- (596,265) (408,887)
------------- -------------- --------------
1,728,630 (10,672,300) 5,463,059
Elimination of interdivision operating profit................... -- -- (960,720)
------------- -------------- --------------
$ 1,728,630 $ (10,672,300) $ 4,502,339
------------- -------------- --------------
------------- -------------- --------------
Identifiable assets:
United States................................................... $ 16,980,777 $ 22,065,584 $ 41,460,776
United Kingdom.................................................. 29,969,517 14,119,437 15,786,520
Thailand........................................................ -- 3,944,065 3,646,571
------------- -------------- --------------
46,950,294 40,129,086 60,893,867
Elimination of interdivision receivables........................ (602,684) (3,308,374) (3,662,551)
------------- -------------- --------------
$ 46,347,610 $ 36,820,712 $ 57,231,316
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
OTHER INFORMATION
During 1997, 1998 and 1999, sales to customers in excess of 10% of total
consolidated sales were as follows (as a percentage of total consolidated
sales):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Nortel 30% 42% 72%
3Com 51% 31% --
--- --- ---
81% 73% 72%
--- --- ---
--- --- ---
</TABLE>
Accounts receivable at June 30, 1999 from Nortel were approximately $11.6
million.
F-18
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONCENTRATION OF RISK (CONTINUED)
In 1998 and 1999, certain Asia Pacific countries, including Thailand, the
location for Century Thailand, were experiencing economic difficulties relating
to currency devaluation and slowdown in growth. Accordingly, the Thai government
sought assistance from the International Monetary Fund to alleviate the economic
crisis and improve the economy over time. At June 30, 1999, total assets,
revenues and operating profit for Century Thailand were as shown in the table
above.
(11) GOODWILL IMPAIRMENT
Of net worldwide sales, 55% and 33% of the revenue for fiscal 1997 and 1998,
respectively, was generated by TRIAX, the Company's United Kingdom operation.
Substantially all of these amounts represented sales under a contract with 3Com
in Israel. In July of 1997, management of TRIAX was notified by 3Com that
production of products for 3Com under this contract would be greatly reduced
from fiscal 1997 levels and would end by March 1998. Shortly before June 30,
1998, such production for 3Com ended.
Upon being notified in July 1997 of the loss of TRIAX's significant
customer, 3Com, the Company performed an analysis of TRIAX's undiscounted future
cash flows without this significant customer to determine if the reforecasted
cash flows would be sufficient to cover all or part of the remaining carrying
value of the goodwill and other long-lived assets. Based on this analysis, which
included the Company's plans to shift a portion of increased production
requirements of its New England facility to TRIAX, the Company concluded that
the remaining carrying value of TRIAX goodwill of approximately $7.5 million was
impaired but that projected undiscounted cash flows from shifting production
from New England to TRIAX would be sufficient to support the carrying value of
the other long-lived assets. Consequently, the entire remaining carrying value
of TRIAX goodwill of $7.5 million was written off in July 1997.
(12) CONTINGENCIES
On February 11, 1998, the Company received a notice from the United Kingdom
Inland Revenue ("Inland Revenue") stating that the Company's operation in St.
Albans had violated various customs, duty and value-added tax ("VAT")
regulations. The Inland Revenue claimed that the amounts due to be paid by the
Company were approximately $740,000 and $3,300,000, plus interest for customs
and duty, and for VAT, respectively, for the period from February 1996 to
January 1998.
During fiscal 1998, the Company conducted a detailed review of its import
procedures with the help of its importer, its primary customer 3Com, and in
conjunction with Inland Revenue as part of a process of determining the ultimate
liability and negotiating a settlement with the Inland Revenue.
Late in fiscal 1998, after completing a review of its import procedures and
reviewing the results with Inland Revenue, the Company concluded that there was
a liability to Inland Revenue for customs and duty; however, no final assessment
has been made by Inland Revenue to date. Based on negotiations with Inland
Revenue, the Company estimated such liability as of June 30, 1998 to be
approximately $623,000. As of June 30, 1999, the Company has revised its
estimate of liability based on its continued discussions with Inland Revenue to
be $760,000, an increase of $137,000. These amounts have been recorded in cost
of sales in the June 30, 1998 and 1999 consolidated statements of operations.
However, the Company continues to appeal Inland Revenue's claim.
F-19
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CONTINGENCIES (CONTINUED)
At this time, the Company continues to negotiate with Inland Revenue
regarding the payment of VAT. The VAT claim of $3,300,000 relates to electronic
components the Company had imported from outside the European community and were
subsequently exported out of the European community in finished products. Since
these components were exported out of the European community, the final amount
payable to Inland Revenue would be fully refundable to the Company by Inland
Revenue under the VAT regulations. Consequently, no amount has been accrued.
The Company is party to various claims, legal actions and complaints arising
in the ordinary course of business. In the opinion of management, all such
matters are adequately covered by insurance or, if not so covered, are without
merit or are of such kind, or involve such amounts, that unfavorable disposition
would not have a material effect on the consolidated financial position or
results of operations of the Company.
(13) EQUITY TRANSACTIONS AND ACQUISITIONS
On July 1, 1997, the Company consummated a series of related transactions
pursuant to a Stock Purchase Agreement between the Company and Centennial dated
May 6, 1997, and as amended on June 25, 1997 (the "Stock Agreement"). Pursuant
to this agreement, the Company repurchased and retired 3,000,000 shares of
Century common stock held by Centennial in exchange for a $6 million 6%
convertible debenture due June 25, 2007 and acquired Centennial's 51% interest
in Centennial Thailand, later renamed Century Thailand for a cash payment of
$1,250,000. The Company also purchased certain assets under capital sub-leases
between the Company and Centennial with an estimated fair market value of $2.2
million. An additional 928,000 shares of the Century stock were transferred
directly from Centennial to former stockholders of TRIAX to settle potential
litigation. In addition, 75,000 shares of Century stock were issued to a
shareholder as a fee for structuring the transaction. The value of these shares
was recorded as a cost of the shares reacquired. Century also repaid its $4.13
million note to Centennial prior to the transaction.
As this series of transactions was negotiated and completed simultaneously,
the total consideration paid of $7,250,000, consisting of the $6 million
debenture and a $1,250,000 cash payment, was allocated as follows based on the
respective fair values of the elements of the transaction:
<TABLE>
<CAPTION>
<S> <C>
- 51% interest in Centennial Thailand $ 2,229,000
- 928,000 Century shares transferred 1,186,000
- 3,000,000 Century shares repurchased and retired 3,835,000
------------
$ 7,250,000
------------
------------
</TABLE>
The value of the 928,000 Century shares transferred to the former
stockholders of TRIAX of $1,186,000 was recorded as a stock compensation charge
in the statement of operations for the year ended June 30, 1998. The 3,000,000
shares acquired were cancelled and therefore recorded as a reduction of
additional paid-in capital. The acquisition of the 51% interest in Century
Thailand was recorded under the purchase method of accounting and resulted in
the consolidation of Century Thailand from the date of acquisition.
F-20
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) EQUITY TRANSACTIONS AND ACQUISITIONS (CONTINUED)
To fund the cash requirements in the transaction, the Company entered into
the following financing activities.
- The Company issued a note payable to Centennial with a face value of $1.89
million due January 1999. The note carries interest at 9%, and has
prepayment requirements based on certain future equity financings. In
addition, the Company provided warrants to Centennial for the purchase of
250,000 Century common shares at $3 per share. The number of warrants is
reduced based on pre-payment of the related note. These warrants were
re-acquired by the Company in February 1998 as a part of the preferred
stock transaction discussed below.
- The Company issued $2.0 million of convertible notes to unrelated
investors with an interest rate of 7.5% due at maturity, which was June
30, 1998. The notes were convertible into common shares of the Company at
a conversion of $3 per share. As of June 30, 1998, the notes have been
fully converted into common shares. A total of 705,424 shares have been
issued as of June 30, 1998.
- DCI entered into the Loan Agreement discussed in Note 5.
In September 1997, the Company entered into a purchase and sales agreement
to acquire the remaining 49% interest in Century Thailand for 750,000 shares of
Century common stock and 100,000 warrants for the purchase of Century common
stock at $5 per share. This warrant expires in September 2000. This transaction
was accounted for under the purchase method of accounting.
In February 1998, a venture fund invested $10 million for 2,739,726 shares
of Series A Convertible Preferred stock ("Series A"). Series A stock has voting
rights equal to the number of shares upon which the stock may convert into, as
well as a liquidation preference of $20 million. Series A stock also has
conversion priviledges upon any public offering of common stock of the Company.
The Company utilized the proceeds of the Series A offering, as well as the
issuance of 666,667 shares of Series B Convertible Preferred stock ("Series B")
to Centennial, to repurchase and retire 3,683,635 shares of Century common stock
held by Centennial. Also pursuant to this transaction, the Company repaid the
$1.89 million note to Centennial, re-acquired the related 250,000 common stock
warrants, and repaid the $6 million convertible debenture to Centennial. Of the
total 3,858,634 shares held by Centennial on the date of the transaction,
175,000 shares were distributed by Centennial as a fee to a shareholder acting
as a financial intermediary.
Subsequent to this transaction, Centennial held only Series B stock. Series
B stock is convertible into common shares of the Company. The stock has no
dividend, and is non-voting. It has liquidation preferences of $4 million senior
to the common shareholders and subordinate to the Series A holders as well as
conversion priviledges.
On April 15, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Quality Manufacturing Services, Inc., a California
contract manufacturing company. The total purchase price consists of $300,000
and the issuance of 200,000 common stock options at an exercise price of $4.00
per share. This transaction was recorded under the purchase method of accounting
and the statement of operations includes the results of this entity's operations
from the date of acquisition. Goodwill of approximately $140,000 was recorded
from the transaction and will be amortized over a period of five years. The
Company is contingently obligated to make additional payments to the former
shareholders of QMS of no more than $200,000. Payment of this amount is
contingent upon the value
F-21
<PAGE>
CENTURY ELECTRONICS MANUFACTURING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) EQUITY TRANSACTIONS AND ACQUISITIONS (CONTINUED)
of the Company's common stock underlying stock options granted to the former
shareholders and will only be paid if these individuals are employees of the
Company on the third anniversary of the QMS acquisition. These payments will be
accounted for as compensation expense over the three year service period.
On August 27, 1998, the Company completed the acquisition of all of the
outstanding capital stock of YMC Manufacturing Inc., a contract manufacturing
company located in California. The purchase price consists of approximately
$250,000 cash. Goodwill of approximately $390,000 was recorded from the
transaction and will be amortized over five years.
In December 1998, the venture fund noted above invested an additional $3.4
million for an additional 931,507 shares of Series A Convertible Preferred
stock. As noted above, Series A stock has voting rights equal to the number of
shares upon which the stock may convert into, as well as a liquidation
preference for these shares of $6.8 million, bringing the total liquidation
value on Series A shares to $26.8 million. Series A stock also has preference in
conversion upon any public offering of common stock of the Company. Proceeds of
this offering were used to retire $1.4 million of bridge financing, plus accrued
interest, provided by the venture fund to the Company in August and November
1998. As part of this financing, the Company issued a warrant to acquire 27,397
shares of Century Series A Preferred stock to the venture fund. This warrant is
exercisable at $3.65 per share at any time prior to December 31, 2003. The
remaining proceeds were transferred to TRIAX as a capital contribution to fund
this subsidiary's operations.
During the year ended June 30, 1999, the Company repurchased and retired
200,000 of its common shares from employees at a total cost of $400,000.
(14) SUBSEQUENT EVENT
In July 1999, the Company acquired all of the outstanding common stock of
Amitek Corporation ("Amitek"). The acquisition will be accounted for using the
purchase method of accounting. The purchase price is $5.7 million in cash, $7.2
million in notes, $724,000 in vested options and 2.1 million shares of Century
common stock, subject to adjustment in certain circumstances. In addition, the
Company will assume approximately $15.7 million of indebtedness (based on
Amitek's June 30, 1999 balance sheet). The notes payable to former Amitek
shareholders bear interest at prime plus 1% and are payable on a quarterly basis
over a 5 year period or, if sooner, upon the completion of an initial public
offering by the Company. The indebtedness assumed is under a $14.0 million
revolving credit agreement with National Bank of Canada that the Company
anticipates will remain in place to fund the operations of Amitek. We have
agreed to guaranty all of Amitek's obligations under the revolving credit
facility. The amount of credit available under the revolving credit facility is
based upon the levels of eligible receivables and inventory. Borrowings under
the facility bear interest at prime plus 1.5% and are secured by substantially
all of the assets of Amitek. The loan agreement contains various restrictive
covenants with respect to certain financial ratios and restrict the payment of
dividends.
Also in July, 1999, in connection with the acquisition of Amitek, the
Company amended its loan facility with Fidelity Funding to increase the
revolving credit facility to $15 million. In addition, the Company entered into
a $3.5 million term loan with Suntrust Bank. The term loan bears interest at
prime plus 1% and is payable over two years and contains covenants and
restrictions substantially identical to those under the Company's revolving
credit facility. Proceeds from the term loan and additional borrowings on the
revolving credit facility were utilized to make the cash payment for the
acquisition.
F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Amitek Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Amitek Corporation
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. The financial statements for the Company for the year ended December 31,
1996 were audited by other auditors, whose report dated March 20, 1997 expressed
an unqualified opinion.
The Company is a member of a group of affiliated entities and, as disclosed
in Notes 5 and 7 to the accompanying financial statements, has extensive
transactions and relationships with members of the group. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
/s/ PRICEWATERHOUSECOOPERS LLP
- ---------------------------------------------
PricewaterhouseCoopers LLP
June 15, 1999, except as to the fifth paragraph of Note 5,
which is as of June 25, 1999
Miami, Florida
F-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Directors and Stockholders of
Amitek Corporation
Boca Raton, Florida
I have audited the statements of operations, changes in stockholders'
equity, and cash flows of Amitek Corporation (an S Corporation) for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amitek Corporation and the
results of its operations and its cash flows for the year ended December 31,
1996 in conformity with general accepted accounting principles.
The Company is a member of a group of affiliated entities and, as disclosed
in Notes 5 and 7 to the financial statements, has extensive transactions and
relationship with members of the group. Because of these relationships, it is
possible that the terms of these relationships are not the same as those that
would result from transactions among wholly unrelated parties.
As discussed in Note 9 to the financial statements, the Company's December
31, 1996 inventory, as previously reported, was $1,080,667; however, this amount
should have been $1,272,000. Additionally, the Company's previously reported
accumulated deficit as of January 1, 1996 was $2,218,408; however, this amount
should have been $2,043,408. This discovery was made subsequent to the issuance
of the financial statements. The financial statements have been restated to
reflect this correction.
/s/ Lawrence N. Legg CPA, PA
Hollywood, Florida
March 20, 1997, except for Notes 9 and 10, as to which the date is June 30, 1999
F-24
<PAGE>
AMITEK CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30, 1999
1997 1998 (UNAUDITED)
--------- --------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 277 $ -- $ 1,560
Accounts receivable, net of allowance for doubtful accounts of $64 in
1997, 1998 and June 30, 1999............................................ 3,638 6,657 10,856
Due from affiliates....................................................... 517 1,197 1,926
Inventories............................................................... 2,137 3,100 10,974
Prepaid expenses and other current assets................................. 161 71 41
--------- --------- --------------
Total current assets...................................................... 6,730 11,025 25,357
Due from affiliates......................................................... 532 -- --
Property and equipment, net................................................. 2,393 4,182 4,614
Other....................................................................... 33 117 122
--------- --------- --------------
Total assets.............................................................. $ 9,688 $ 15,324 $ 30,093
--------- --------- --------------
--------- --------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses, including bank overdraft of $16 in
1998.................................................................... $ 672 $ 702 $ 668
Due to affiliates......................................................... 2,155 4,872 10,730
Borrowings under lines of credit.......................................... 2,516 4,293 13,517
Current portion of capital lease obligations.............................. 630 709 782
Current portion of long term debt......................................... -- 96 83
--------- --------- --------------
Total current liabilities................................................. 5,973 10,672 25,780
Long term debt.............................................................. -- 267 493
Capital lease obligations................................................... 655 1,005 691
Note payable to stockholder................................................. 1,641 1,641 1,641
--------- --------- --------------
Total liabilities......................................................... 8,269 13,585 28,605
--------- --------- --------------
Commitments and contingencies (Note 6)...................................... -- -- --
--------- --------- --------------
Stockholders' equity:
Common stock $1 par, 1,000 shares authorized issued and outstanding....... 1 1 1
Additional paid in capital................................................ 3,229 2,700 2,700
Accumulated deficit....................................................... (1,811) (962) (1,213)
--------- --------- --------------
Total stockholders' equity.............................................. 1,419 1,739 1,488
--------- --------- --------------
Total liabilities and stockholders' equity.............................. $ 9,688 $ 15,324 $ 30,093
--------- --------- --------------
--------- --------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
AMITEK CORPORATION
STATEMENTS OF OPERATIONS
FOR YEAR ENDED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
DECEMBER 31, ENDED ENDED
------------------------------- JUNE 30, 1998 JUNE 30, 1999
1996 1997 1998 (UNAUDITED) (UNAUDITED)
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales........................................... $ 7,849 $ 23,796 $ 45,181 $ 21,985 $ 32,624
Cost of sales....................................... (7,577) (20,743) (42,456) (20,862) (30,624)
--------- --------- --------- ------------- -------------
Gross profit........................................ 272 3,053 2,725 1,123 2,000
Selling, general and administrative expenses........ (654) (1,848) (1,258) (498) (1,547)
--------- --------- --------- ------------- -------------
(Loss) income from operations....................... (382) 1,205 1,467 625 453
Other income (expense):
Interest expense.................................. (218) (317) (621) (258) (704)
Other income (expense)............................ (54) -- 3 -- --
--------- --------- --------- ------------- -------------
Net (loss) income................................... $ (654) $ 888 $ 849 $ 367 $ (251)
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
AMITEK CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEAR ENDED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID ACCUMULATED
SHARES AMOUNT IN CAPITAL DEFICIT TOTAL
----------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................................. 1000 $ 1 $ 3,368 $ (2,045) $ 1,324
Net loss................................................... -- -- -- (654) (654)
Dividends and distributions................................ -- -- (1) -- (1)
--
----- ----------- ------------ ---------
Balance, December 31, 1996................................. 1,000 1 3,367 (2,699) 669
Net income................................................. -- -- -- 888 888
Dividends and distributions................................ -- -- (138) -- (138)
--
----- ----------- ------------ ---------
Balance, December 31, 1997................................. 1,000 1 3,229 (1,811) 1,419
Net income................................................. -- -- -- 849 849
Dividends and distributions................................ -- -- (529) -- (529)
--
----- ----------- ------------ ---------
Balance, December 31, 1998................................. 1,000 1 2,700 (962) 1,739
Net income (Unaudited)..................................... -- -- -- (251) (251)
--
----- ----------- ------------ ---------
Balance, June 30, 1999 (Unaudited)......................... 1,000 $ 1 $ 2,700 $ (1,213) $ 1,488
--
----- ----------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
AMITEK CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
DECEMBER 31, ENDED ENDED
------------------------------- JUNE 30, 1998 JUNE 30, 1999
1996 1997 1998 (UNAUDITED) (UNAUDITED)
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................. $ (654) $ 888 $ 849 $ 367 $ (251)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 207 292 532 233 427
Loss on disposal of fixed assets................. 65 -- 26 -- --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable,
net............................................ 40 (2,728) (3,019) (1,412) (4,199)
Increase (decrease) in inventory, net............ (181) (865) (963) 192 (7,874)
Increase in receivables from affiliated
companies...................................... (61) (502) (148) (249) (729)
Decrease (increase) in prepaid expenses and other
assets......................................... (7) (116) 6 603 25
Increase in accounts payable, accrued expenses
and commissions payable........................ 1,250 541 30 (14) (34)
Increase in due to affiliates.................... 44 214 2,717 355 10,999
--------- --------- --------- ------------- -------------
Net cash provided by (used in) operating activities.. 703 (2,276) 30 75 (1,636)
--------- --------- --------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment.................. (85) (296) (700) (299) (646)
--------- --------- --------- ------------- -------------
Net cash used in investing activities................ (85) (296) (700) (299) (646)
--------- --------- --------- ------------- -------------
Cash flows from financing activities:
Net increase (decrease) in line of credit.......... (250) 1,825 1,777 954 4,083
Proceeds from note payable to stockholder.......... -- 1,600 -- -- --
Payments on stockholder note payable............... (39) -- -- -- --
Repayment of capital lease obligations............. (395) (450) (855) (409) (241)
Dividends and other distributions.................. (1) (138) (529) (483) --
--------- --------- --------- ------------- -------------
Net cash (used in) provided by financing activities.. (685) 2,837 393 62 3,842
--------- --------- --------- ------------- -------------
Net (decrease) increase in cash and cash
equivalents........................................ (67) 265 (277) (162) 1,560
Cash and cash equivalents, beginning of year......... 79 12 277 277 --
--------- --------- --------- ------------- -------------
Cash and cash equivalents, end of year............... $ 12 $ 277 $ -- $ 115 $ 1,560
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............. $ 220 $ 377 $ 792 $ 348 $ 686
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Supplemental disclosure of non cash investing and
financing activities:
Property and equipment acquired through debt
financing........................................ $ -- $ -- $ 363 -- $ 142
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Property and equipment acquired under capital
leases........................................... $ -- $ 1,237 $ 1,284 $ 1,235 $ --
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Transfer of debt from affiliate.................... -- -- -- $ -- $ 5,141
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
AMITEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. PRINCIPAL BUSINESS ACTIVITIES
Amitek Corporation (the "Company") was formed on June 30, 1987 as a Florida
corporation and is primarily engaged in technology manufacturing, specializing
in turnkey contract manufacturing of instrumentation, communications, computer,
industrial, government and consumer electronics. The Company conducts business
activities, mainly in the United States, with communications, computer,
industrial, government and consumer electronics customers.
The Company is a member of a group of affiliated entities under common
control and management. The Company purchases the majority of its raw materials
requirements from, and has certain borrowing relationships with, M&K
Technologies, Inc. ("M&K"), an entity owned by the Company's stockholders. See
Notes 5 and 7.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market using a first-in,
first-out basis. As the Company manufactures custom products according to
customer specifications only after orders for such products have been secured,
the Company's reserves for obsolete inventory have historically been
insignificant.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight line and accelerated methods over the estimated useful lives of the
assets. When assets are sold, replaced or otherwise retired, the costs and
related accumulated depreciation are removed from the accounts and any related
gains or losses are included in operations. Leased manufacturing equipment
meeting certain criteria is capitalized and the present value of the minimum
lease payments is recorded as a liability. Amortization of capitalized leased
assets is computed using the straight line method over the shorter of the lease
term or the estimated useful lives of the assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when events or changes in circumstances indicate that, based on
estimated future cash flows, the carrying amount of an asset may not be
recoverable. Management reviews long-lived assets for impairment whenever events
or changes in circumstances indicate the assets may be impaired.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment in
accordance with the terms agreed upon by the parties. The Company records a
provision for estimated returns which has historically been insignificant.
F-29
<PAGE>
AMITEK CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF EXPENSES
The Company had an informal agreement with M&K to acquire management
services from month to month until current management could assume all
administrative functions on its own. During 1996, total charges for these
services totaled approximately $86. The Company assumed all administrative
functions in 1997.
The Company allocates a portion of its salaries, fringe benefits, utilities
and other expenses to certain of its affiliates based on the level of effort and
amount of resources dedicated to support the operations of these affiliates.
During 1997, the Company allocated approximately $110 of the previously
described expenses to its affiliates. During 1998, these expenses were properly
assumed and recorded by the Company's affiliates.
The Company is allocated freight and interest expenses by M&K based on
charges incurred by M&K relating to purchases of raw materials for the Company's
contract manufacturing operation. See notes 5 and 7.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
INCOME TAXES
The Company has elected S Corporation status under the Internal Revenue
Code. As an S Corporation, the Company is generally not subject to federal
income taxes since its operating results are included in the tax returns of its
individual stockholders. The Company is directly liable for state income and
franchise taxes in certain jurisdictions.
INTERIM FINANCIAL DATA
The interim financial data of the Company is unaudited; however, in the
opinion of the Company's management, the interim financial data includes all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of results of the interim periods. The results of operations for
the period ended June 30, 1999 are not necessarily indicative of the results
that could be expected for the entire fiscal year ending December 31, 1999.
F-30
<PAGE>
AMITEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
3. INVENTORIES
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- -----------
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................................ $ -- $ -- $ 6,043
Work in process.............................................. 2,037 2,492 3,748
Finished goods............................................... 100 608 1,183
--------- --------- -----------
Total........................................................ $ 2,137 $ 3,100 $ 10,974
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
-------------------- USEFUL
1997 1998 LIVES
--------- --------- -----------
<S> <C> <C> <C>
Manufacturing equipment.......................................................... $ 873 $ 1,602 5-10 years
Manufacturing equipment under capital lease...................................... 2,105 3,433 5-10 years
Leasehold improvements........................................................... 38 177 7 years
Furniture and fixtures........................................................... 86 93 5-7 years
Office equipment................................................................. 39 61 5-7 years
--------- --------- -----------
3,141 5,366
Less accumulated depreciation and amortization................................... (748) (1,184)
--------- ---------
Total property and equipment, net................................................ $ 2,393 $ 4,182
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
totaled $223, $139 and $241, respectively. Accumulated amortization of capital
lease assets totaled $276 and $567 at December 31, 1997 and 1998, respectively,
and amortization of capitalized leases for the years ended December 31, 1997 and
1998 totaled $153 and $291, respectively.
5. DEBT
At December 31, 1997 the Company had borrowings outstanding of $2,516 under
an asset based revolving line of credit which the Company and M&K entered into
with a lender. Borrowings under this line of credit bore interest at prime plus
3.0%. At December 31, 1997, the Company and M&K were not in compliance with
certain covenants under the revolving line of credit and in May 1998 received a
waiver from the lender regarding the instances of noncompliance.
On June 4, 1998, the Company and M&K refinanced amounts outstanding under
the then existing line of credit with an $8,000 revolving credit agreement with
a bank. This agreement was amended on September 23, 1998 and February 8, 1999 to
increase the revolving credit agreement to $10,000 and $14,000, respectively.
The Company and M&K are allowed to borrow under the revolving credit agreement
based on eligible accounts receivable and inventory, subject to certain
restrictions. Borrowings under the revolving credit agreement bear interest at
prime plus 1.5% (9.25% at
F-31
<PAGE>
AMITEK CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. DEBT (CONTINUED)
December 31, 1998). The revolving credit agreement expires on June 24, 2001. At
December 31, 1998, the unused portion of the revolving credit agreement totaled
approximately $566.
Borrowings under the revolving credit agreement are collateralized by the
inventory, accounts receivable and substantially all other assets of the Company
and M&K and by a personal guarantee of the stockholders of the Company. The
Company and M&K have a combined borrowing base of $10,888 at December 31, 1998
of which $6,541 relates to assets recorded in the accounts of the Company and
$4,347 to those in the accounts of M&K. Borrowings by M&K totaled $5,141 at
December 31, 1998. The borrowing bases were calculated by dividing the borrowing
base between the Company and M&K based on their respective eligible inventory
and accounts receivable levels as of December 31, 1998. The revolving credit
agreement further states that if either the Company or M&K become insolvent that
the property of either may be set-off and applied towards the payment of
indebtedness.
The Company agreed to absorb $200 and $78 of interest charges for the years
ended December 31, 1998 and 1997, respectively, related to borrowings by M&K.
These interest costs are included in cost of sales as they are considered to be
related to the inventory which the Company purchases from M&K (see Note 7).
The Company's revolving credit agreement is subject to certain restrictive
financial covenants, which among others, require the Company and M&K, in the
aggregate, to maintain certain financial ratios and restrict the payment of
dividends to shareholders and loans to officers, directors and employees. At
December 31, 1998, the Company and M&K were not in compliance with certain of
the financial covenants under their revolving credit agreement. On June 25,
1999, the Company and M&K obtained a waiver from the lender stating that the
instances of noncompliance were waived through the earlier of January 1, 2000 or
such time as the lender and the Company enter into an amended and restated
revolving credit agreement.
Long-term debt consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Capital expenditures line of credit, interest rate at 1.75% above
prime rate (9.5% at December 31, 1998), line converts to promissory
note on June 4, 1999 with a seven year amortization of principal
balance, collateralized by substantially all of the assets of the
Company. .......................................................... $ 363
Less current portion................................................. (96)
---------
$ 267
---------
---------
</TABLE>
F-32
<PAGE>
AMITEK CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
6. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company leases various manufacturing equipment under capital lease
agreements. Future minimum lease payments, by year, and in the aggregate, under
capital leases are as follows:
<TABLE>
<S> <C>
1999................................................................ $ 839
2000................................................................ 624
2001................................................................ 247
2002................................................................ 208
2003................................................................ 36
Total Minimum lease payments........................................ 1,954
Less amount representing interest................................... (240)
---------
Present value of future net minimum lease payments.................. 1,714
Less current portion................................................ (709)
---------
$ 1,005
---------
---------
</TABLE>
OPERATING LEASES
The Company has entered into operating leases for office space and
automobiles. Future minimum payments, by year and in the aggregate, under
noncancelable operating leases with initial or remaining terms in excess of one
year are as follows:
<TABLE>
<S> <C>
1999................................................................................ $ 310
2000................................................................................ 322
2001................................................................................ 335
2002................................................................................ 349
2003................................................................................ 362
Thereafter.......................................................................... 185
---------
$ 1,863
---------
---------
</TABLE>
Rent expense totaled approximately $264 and $422 for the years ended
December 31, 1997 and 1998, respectively. There was no rent expense for the year
ended December 31, 1996.
7. RELATED PARTY TRANSACTIONS
The Company is a member of a group of affiliated entities and, as disclosed
below and in Note 5, has extensive transactions and relationships with members
of the group. Because of these relationships, it is possible that the terms of
these transactions are not the same as those that would result from transactions
among wholly unrelated parties.
The Company's majority stockholder has loaned the Company $1,641 as of
December 31, 1997 and 1998. The loan is interest free and has no formal
repayment terms. Principal payments on the loan are not scheduled to begin prior
to January 2000.
F-33
<PAGE>
AMITEK CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company purchases the majority of its raw materials inventory from M&K,
a member of the affiliated group, at M&K's cost plus a mark-up of five percent.
These transactions are in the normal course of business and reflect payment
terms of net 30 days. Purchases from M&K totaled $5,150, $17,711 and $34,869 for
the years ended December 31, 1996, 1997 and 1998, respectively. Amounts due to
M&K at December 31, 1997 and 1998 totaled $2,155 and $4,872, respectively.
In January 1999, the Company acquired from M&K all of the raw materials
inventory, at M&K's cost plus five percent (approximately $6,700), relating to
the Company's contract manufacturing operation. In addition, the Company assumed
M&K's portion of the Company's revolving credit agreement at December 31, 1998,
totaling approximately $5,141.
During 1997 and 1998, the Company was allocated approximately $230 and $447,
respectively, of freight costs incurred by M&K relating to purchases of raw
materials for the Company's contract manufacturing operation.
Although not significant to operations, the Company sells electronic
components to and performs services for other companies owned by the Company's
stockholders or members of their families. These transactions are in the normal
course of business and the related receivables are recorded as due from
affiliates. Sales to affiliates totaled approximately $523, $664 and $896 for
the years ended December 31, 1996, 1997 and 1998, respectively.
8. SIGNIFICANT CUSTOMER
The Company has business activities with communications, computer,
industrial, government and consumer electronics customers. The Company is
subject to a significant concentration of credit risk with respect to accounts
receivable as one customer accounted for 87% and 73% of accounts receivable at
December 31, 1997 and 1998, respectively. This customer has a long term
relationship with the Company. The Company has adopted credit policies and
standards intended to accommodate industry growth and inherent risk. The Company
performs ongoing credit evaluations of its customers' financial condition and
requires collateral as deemed necessary. There can be no assurance that the
credit quality of the customers with which the Company transacts business will
be stable or that efforts to diversify receivables will prevent the Company from
incurring material losses.
During 1996, 1997 and 1998, the previously described customer individually
accounted for approximately 61%, 80% and 88%, respectively, of the Company's net
sales.
9. RESTATEMENT OF FINANCIAL STATEMENTS
The Company's December 31, 1996 inventory, as previously reported, was
$1,081; however, this amount should have been $1,272. Additionally, the
Company's previously reported accumulated deficit as of January 1, 1996 was
$2,218; however, this amount should have been a deficit of $2,043. Both
restatements resulted from insufficient capitalization of manufacturing overhead
in beginning and ending inventories. This resulted in a reduction of net loss in
the amount of $16 for the year ended December 31, 1996, reflecting a restated
net loss of $654. This discovery was made subsequent to the issuance of the
financial statements. The financial statements have been restated to reflect
this correction.
10. SUBSEQUENT EVENT (UNAUDITED)
On July 30, 1999, the Company was acquired by Century Electronics
Manufacturing, Inc.
F-34
<PAGE>
Inside back cover:
[picture of a Bizfon small business phone system]
[picture of a Nortel cable modem]
[picture of a Motorola phone]
[picture of a printed circuit board]
<PAGE>
[outside back cover]
------------------------
[Century Logo]
------------------------
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
Securities and Exchange Commission Registration Fee............................. $ 12,788
National Association of Securities Dealers Filing Fee........................... 5,100
Nasdaq National Market Listing Fee.............................................. 95,000
Blue Sky Fees and Expenses...................................................... 20,000
Transfer Agent and Registrar Fees............................................... 5,000
Accounting Fees and Expenses.................................................... 300,000
Legal Fees and Expenses......................................................... 350,000
Printing Expenses............................................................... 150,000
Miscellaneous................................................................... 62,112
------------
Total....................................................................... $ 1,000,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant's Directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the exculpation from liabilities is not permitted
under the Delaware General Corporation Law as in effect at the time such
liability is determined. The Amended and Restated By-Laws provide that the
Registrant shall indemnify its directors to the full extent permitted by the
laws of the State of Delaware.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Registrant has issued the following securities which were not registered under
the Securities Act of 1933, as amended (the "Securities Act"):
In October 1996 we issued 6,256,332 shares of common stock to the following
stockholders in exchange for their shares in Design Circuits, Inc. pursuant to a
Share Exchange Agreement among us and the selling stockholders listed below:
<TABLE>
<CAPTION>
SHARES OF OUR SHARES OF
STOCKHOLDER COMMON STOCK RECEIVED DCI SURRENDERED
- ----------------------------------------------------- --------------------- ---------------
<S> <C> <C>
Thomas L. DePetrillo................................. 247,000 4,940.00
S. Marcus Finkle..................................... 271,739 5,434.78
Gibraltor Management Corp............................ 271,739 5,434.78
Centennial Technologies.............................. 4,713,504 94,270.08
Robert Cohen......................................... 135,870 2,717.39
Arthur Reichstetter.................................. 135,870 2,717.39
Anasarzi Partners.................................... 108,696 2,173.91
S. Wilson............................................ 67,935 1,358.70
James Kelly.......................................... 67,935 1,358.70
Stephanie Rubin...................................... 54,348 1,086.96
Carol Keefe.......................................... 50,000 1,000.00
Leonore Katz......................................... 27,174 543.48
Jeffrey Cohen........................................ 27,174 543.48
CP Baker Venture Fund................................ 27,174 543.48
Allyson Cohen........................................ 27,174 543.48
Paul DePetrillo...................................... 5,000 100.00
Erin DePetrillo...................................... 5,000 100.00
Thomas DePetrillo, Custodian for..................... 3,000 60.00
Amber Rose
Thomas Chadronet..................................... 2,500 50.00
Kimberly Gagne....................................... 2,500 50.00
Thomas M. DePetrillo................................. 5,000 100.00
</TABLE>
These shares were issued pursuant to Section 4(2) under the Securities Act.
In November 1996 we issued an aggregate of 2,119,500 shares of our common
stock to the following individuals as part of the purchase price in connection
with the purchase of all of the outstanding stock of TRIAX Technology Group,
Ltd.:
<TABLE>
<CAPTION>
SHARES OF OUR
STOCKHOLDER COMMON STOCK RECEIVED
- ----------------------------------------------------- ---------------------
<S> <C> <C>
Raymond Stanley...................................... 605,600
Les Sainsbury........................................ 605,600
Ian McEwan........................................... 605,600
Gerald Hayburn....................................... 302,700
</TABLE>
In addition, to help finance the cash portion of the purchase price and
certain transaction costs of the TRIAX purchase, we issued 3,073,130 shares of
our common stock, valued at approximately $5.0 million, to Centennial
Technologies, Inc. In addition, as a brokers' fee for his services in connection
with the TRIAX transaction, we issued 120,000 shares of our common stock to
Thomas DePetrillo. These shares were issued pursuant to Section 4(2) under the
Securities Act.
II-2
<PAGE>
In June 1997 we issued a convertible subordinated debenture in the amount of
$6,000,000 at a rate of 6% due June 25, 2007 to Centennial Technologies, Inc. as
payment for the repurchase of 3,000,000 shares of our common stock from
Centennial. We also issued 75,000 shares of our common stock to Thomas
DePetrillo as a brokers' fee for his services in connection with the repurchase
of shares from Centennial. These shares and the debenture were issued pursuant
to Section 4(2) under the Securities Act.
In July 1997 we issued a promissory note to Centennial in the face amount of
$1,891,125 at an interest rate of 9% due January 1999 and a warrant to purchase
250,000 shares of our common stock at $3.00 per share. This note and warrant
were issued pursuant to Section 4(2) under the Securities Act.
In July 1997 we also issued 7.5% Convertible Notes due June 30, 1998 to the
following individuals in the aggregate principal amount of $2,000,000 which were
converted in June 1998 into an aggregate of 705,424 shares of common stock as
follows:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SHARES OF COMMON STOCK
OF NOTE RECEIVED UPON CONVERSION OF
NOTEHOLDER ISSUED NOTE
- ------------------------------------------------ ------------- -----------------------------
<S> <C> <C>
Robert Cohen.................................... $ 350,000 125,417
Leonore Katz.................................... $ 100,000 35,834
Ellen Cohen..................................... $ 100,000 35,834
Meryl Cohen..................................... $ 300,000 107,500
S&R Holdings.................................... $ 100,000 35,834
Gary Kaplowitz.................................. $ 100,000 35,834
Allen Rothstein................................. $ 100,000 35,834
Louis Silverman................................. $ 100,000 35,834
Stephanie Ruben................................. $ 150,000 53,750
Allen Cohen, Robert............................. $ 100,000 35,834
Cohen, Jeffrey Rubin
Jeffrey Rubin................................... $ 50,000 17,917
Richard Feldman................................. $ 100,000 33,334
Ilana Brodt..................................... $ 150,000 50,000
Abbey Cohen May................................. $ 50,000 16,667
Jennifer Cohen.................................. $ 50,000 16,667
Richard Cohen................................... $ 50,000 16,667
Edward Cohen.................................... $ 50,000 16,667
</TABLE>
These notes and shares were issued pursuant to Section 4(2) under the
Securities Act.
In March 1997 we issued 26,125 shares of our common stock to Sheik Ahmed
pursuant to the exercise of his stock options at $1.75 per share. These shares
were issued pursuant to Section 4(2) and Rule 701 under the Securities Act.
In November 1997 we issued to CTN Thailand Holdings Limited (now Century
Electronics Holdings Limited) 750,000 shares of our common stock and a warrant
to purchase 100,000 shares of our common stock at $5.00 per share in connection
with the purchase of 49% of the stock of Centennial Technologies (Thailand)
Limited. These shares and warrant were issued pursuant to Section 4(2) under the
Securities Act.
In November 1997 we issued 80,000 shares of our common stock, with an
estimated fair value of approximately $240,000, to DDL Electronics, Inc. as part
of a Settlement Agreement resulting from a failed merger attempt. These shares
were issued pursuant to Section 4(2) under the Securities Act.
In February 1998 we issued 666,667 shares of our Series B Preferred Stock to
Centennial Technologies, Inc. for a purchase price of $6.00 per share (an
aggregate purchase price of $4,000,000).
II-3
<PAGE>
We also sold 2,739,726 shares of Series A Preferred Stock to HarbourVest Venture
Partners V--Direct Fund, L.P. for a purchase price of $3.65 per share (an
aggregate purchase price of $10,000,000) in February 1998 and another 931,507
shares of Series A Preferred Stock to HarbourVest Partners V-- Direct Fund, L.P.
for a purchase price of $3.65 per share (an aggregate purchase price of
$3,400,000.50) in December 1998. Every one share of series A preferred stock
will convert into one share of common stock upon consummation of this offering.
These shares were issued pursuant to Section 4(2) under the Securities Act.
In August 1998 we issued a promissory note in the principal amount of
$400,000 at an interest rate of 10% due September 30, 1998 to HarbourVest
Venture Partners V--Direct Fund, L.P. In November, 1998, we issued to
HarbourVest Venture Partners V--Direct Fund, L.P. a promissory note in the
principal amount of $1,000,000 at an interest rate of 10% due November 1, 1999
or earlier and a warrant to purchase 27,397 shares of Series A Convertible
Preferred Stock at an exercise price of $3.65 per share. These notes and this
warrant were issued pursuant to Section 4(2) under the Securities Act.
In July and September 1999 we issued an aggregate of 2,236,266 shares of our
common stock and notes in the aggregate principal amount of $7,219,000 to the
following individuals as part of the purchase price in connection with the
purchase of all of the outstanding stock of Amitek Corporation:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF AMOUNT OF
OUR NOTES
STOCKHOLDER COMMON STOCK RECEIVED RECEIVED
- ------------------------------------------------------ ---------------------- -------------
<S> <C> <C>
Myung Ho Park......................................... 656,012 $ 2,117,701
Yoon Jung Park........................................ 1,140,495 $ 3,681,690
Sung Woo Kwon......................................... 439,759 $ 1,419,609
</TABLE>
These notes and shares were issued pursuant to Section 4(2) under the
Securities Act.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 under
the Securities Act. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is a list of exhibits filed as a part of this registration
statement.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
**1.1 Proposed Form of Underwriting Agreement
+2.1 Agreement and Plan of Merger, dated July 30, 1999 by and among the Registrant and the other parties
thereto
*2.2 Side letter, dated July 30, 1999 by and among the Registrant and the former Amitek stockholders.
+3.1 Form of Amended and Restated Certificate of Incorporation of Registrant
+3.2 Form of Amended and Restated By-Laws of the Registrant
**4.1 Specimen Certificate for shares of the Registrant's Common Stock.
**5.1 Opinion of Ropes and Gray, counsel to the Registrant, regarding the legality of the shares of common
stock
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
+10.1 1996 Stock Option Plan
+10.2 Preferred Stock Purchase Agreement dated February 4, 1998 by and between Registrant and Centennial
Technologies, Inc.
+10.3 Preferred Stock Purchase Agreement dated February 4, 1998 by and between Registrant and HarbourVest
Partners V--Direct Fund L.P.
+10.4 Preferred Stock Purchase Agreement dated December 1, 1998 by and between Registrant and HarbourVest
Partners V--Direct Fund L.P.
+10.5 Waiver of Rights and Amendment under Purchase Agreements dated July 30, 1999 by and between Registrant
and HarbourVest Partners V--Direct Fund L.P.
+10.6 Waiver of Rights and Amendment under Purchase Agreement dated July 30, 1999 by and between Registrant
and Centennial Technologies, Inc.
+10.7 Registration Rights Agreement dated June 30, 1997 by and among the Registrant and the parties listed on
the signature page thereto.
+10.8 Registration Rights Agreement dated July 30, 1999 by and among the Registrant, and Myung Ho Park, Yoon
Jung Park and Sung Woo Kwon.
+10.9 Employment Agreement, dated November 5, 1997, by and between the Registrant and Les Sainsbury
+10.10 Employment Agreement, dated July 1999, by and between the Registrant and Mark Lombardo
+10.11 Warrant to purchase shares of Registrant's Common Stock issued to CTN Thailand Holdings Ltd dated
November, 1997.
+10.12 Warrant to purchase shares of the Registrant's Series A Preferred Stock, issued to HarbourVest
PartnersV--Direct Fund L.P. dated November 1998
+10.13 Warrant to purchase shares of the Registrant's Common Stock, issued to Guaranty Business Credit
Corporation dated July 30, 1999.
+10.14 Amended and Restated Loan Agreement dated July 30, 1999 by and between Amitek Corporation and National
Bank of Canada
+10.15 Absolute Unconditional and Continuing Guaranty dated as of July 30, 1999 executed by Registrant in
favor of National Bank of Canada
+10.16 Loan and Security Agreement dated December 22, 1998 by and among Century Electronics Manufacturing
(NE), Inc., YMC Manufacturing Company, Quality Manufacturing Services, Inc. and Fidelity Funding,
Inc.
+10.17 First Amendment to Loan and Security Agreement entered into effective July 30, 1999 by and among
Century Electronics Manufacturing (NE), Inc., YMC Manufacturing Company, Quality Manufacturing
Services, Inc. and Guaranty Business Credit Corporation
+10.18 General Continuing Guaranty dated December 22, 1998 executed by Registrant
+10.19 Term Note in amount of $3,500,000 dated July 16, 1999 issued by Suntrust Bank, Atlanta.
+10.20 Amended and Restated Security Agreement dated July 30, 1999 between Amitek Corporation and National
Bank of Canada.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
+10.21 Assumption and Modification Master Revolving Promissory Note in the Amount of $14,000,000 dated July
30, 1999 issued by Amitek Corporation.
+10.22 Assumption Capex Line/Term Promissory Note in the amount of $576,306.54 dated July 30, 1999 issued by
Amitek Corporation.
+10.23 Secured Promissory Note dated July 30, 1999 in the amount of $1,419,609 issued by Registrant.
+10.24 Secured Promissory Note dated July 30, 1999 in the amount of $2,117,701 issued by Registrant.
+10.25 Secured Promissory Note dated July 30, 1999 in the amount of $3,681,690 issued by Registrant.
**10.26 1999 Employee Stock Purchase Plan
+21.1 Subsidiaries of the Registrant
*23.1 Consent of KPMG LLP
*23.2 Consent of Lawrence N. Legg
*23.3 Consent of PricewaterhouseCoopers, LLP
**23.4 Consent of Ropes & Gray, counsel to the Registrant (included in Exhibit 5.1)
*23.5 Consent of C. Michael Jacobi
+24.1 Power of Attorney
+27.1 Financial Data Schedule (6/30/98) and (6/30/99)
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
+ Previously Filed
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes to those
statements.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominators and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts on this 21st day of September, 1999.
<TABLE>
<CAPTION>
CENTURY ELECTRONICS MANUFACTURING, INC.
<S> <C> <C>
By: /s/ JAMES M. ROLLER
----------------------------------------
James M. Roller
Vice President of Finance (Principal
Financial Officer and Principal
Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1993, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------------- ----------------------------------------------
<C> <S> <C>
* Chairman of the Board, Chief Executive Officer
------------------------------------ and President (Principal Executive Officer);
Leslie J. Sainsbury Director
* Vice President of Finance (Principal Financial
------------------------------------ Officer and Principal Accounting Officer)
James M. Roller
* Director
------------------------------------
Walter J. Conroy
* Director
------------------------------------
Ian McEwan
* Director
------------------------------------
Ofer Nemirovsky
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ James M. Roller
-------------------------------
James M. Roller
Attorney-in-fact
Dated: September 21, 1999
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
**1.1 Proposed Form of Underwriting Agreement
+2.1 Agreement and Plan of Merger, dated July 30, 1999 by and among the Registrant and
the other parties thereto
*2.2 Side letter dated July 30, 1999 by and among the Registrant and the former Amitek
stockholders.
+3.1 Form of Amended and Restated Certificate of Incorporation of Registrant
+3.2 Form of Amended and Restated By-Laws of the Registrant
**4.1 Specimen Certificate for shares of the Registrant's Common Stock.
**5.1 Opinion of Ropes and Gray, counsel to the Registrant, regarding the legality of the
shares of common stock
+10.1 1996 Stock Option Plan
+10.2 Preferred Stock Purchase Agreement dated February 4, 1998 by and between Registrant
and Centennial Technologies, Inc.
+10.3 Preferred Stock Purchase Agreement dated February 4, 1998 by and between Registrant
and HarbourVest Partners V--Direct Fund L.P.
+10.4 Preferred Stock Purchase Agreement dated December 1, 1998 by and between Registrant
and HarbourVest Partners V--Direct Fund L.P.
+10.5 Waiver of Rights and Amendment under Purchase Agreements dated July 30, 1999 by and
between Registrant and HarbourVest Partners V--Direct Fund L.P.
+10.6 Waiver of Rights and Amendment under Purchase Agreement dated July 30, 1999 by and
between Registrant and Centennial Technologies, Inc.
+10.7 Registration Rights Agreement dated June 30, 1997 by and among the Registrant and
the parties listed on the signature page thereto.
+10.8 Registration Rights Agreement dated July 30, 1999 by and among the Registrant, and
Myung Ho Park, Yoon Jung Park and Sung Woo Kwon.
+10.9 Employment Agreement, dated November 5, 1997, by and between the Registrant and Les
Sainsbury
+10.10 Employment Agreement, dated July 1999, by and between the Registrant and Mark
Lombardo
+10.11 Warrant to purchase shares of Registrant's Common Stock issued to CTN Thailand
Holdings Ltd dated November, 1997.
+10.12 Warrant to purchase shares of the Registrant's Series A Preferred Stock, issued to
HarbourVest PartnersV--Direct Fund L.P. dated November 1998
+10.13 Warrant to purchase shares of the Registrant's Common Stock, issued to Guaranty
Business Credit Corporation dated July 30, 1999.
+10.14 Amended and Restated Loan Agreement dated July 30, 1999 by and between Amitek
Corporation and National Bank of Canada
+10.15 Absolute Unconditional and Continuing Guaranty dated as of July 30, 1999 executed
by Registrant in favor of National Bank of Canada
</TABLE>
<PAGE>
<TABLE>
<C> <S>
+10.16 Loan and Security Agreement dated December 22, 1998 by and among Century
Electronics Manufacturing (NE), Inc., YMC Manufacturing Company, Quality
Manufacturing Services, Inc. and Fidelity Funding, Inc.
+10.17 First Amendment to Loan and Security Agreement entered into effective July 30, 1999
by and among Century Electronics Manufacturing (NE), Inc., YMC Manufacturing
Company, Quality Manufacturing Services, Inc. and Guaranty Business Credit
Corporation
+10.18 General Continuing Guaranty dated December 22, 1998 executed by Registrant
+10.19 Term Note in amount of $3,500,000 dated July 16, 1999 issued by Suntrust Bank,
Atlanta.
+10.20 Amended and Restated Security Agreement dated July 30, 1999 between Amitek
Corporation and National Bank of Canada.
+10.21 Assumption and Modification Master Revolving Promissory Note in the Amount of
$14,000,000 dated July 30, 1999 issued by Amitek Corporation.
+10.22 Assumption Capex Line/Term Promissory Note in the amount of $576,306.54 dated July
30, 1999 issued by Amitek Corporation.
+10.23 Secured Promissory Note dated July 30, 1999 in the amount of $1,419,609 issued by
Registrant.
+10.24 Secured Promissory Note dated July 30, 1999 in the amount of $2,117,701 issued by
Registrant.
+10.25 Secured Promissory Note dated July 30, 1999 in the amount of $3,681,690 issued by
Registrant.
**10.26 1999 Employee Stock Purchase Plan
+21.1 Subsidiaries of the Registrant
*23.1 Consent of KPMG LLP
*23.2 Consent of Lawrence N. Legg
*23.3 Consent of PriceWaterhouse Coopers, LLP
**23.4 Consent of Ropes & Gray, counsel to the Registrant (included in Exhibit 5.1)
*23.5 Consent of C. Michael Jacobi
+24.1 Power of Attorney
+27.1 Financial Data Schedule (6/30/98) and (6/30/99)
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
+ Previously filed
<PAGE>
Exhibit 2.2
Century Electronics Manufacturing, Inc.
274 Cedar Hill Road
Marlborough, MA 01752
July 30, 1999
Amitek Corporation
1701 Clint Moore Road
Boca Raton, FL 33487
Attention: Mr. Myung Ho Park, President
Re: Agreement and Plan of Merger (the "Merger Agreement"), by and
among Century Electronics Manufacturing, Inc., a Delaware
corporation (the "Buyer"), Amitek Corporation, a Florida corporation
("Amitek"), and Myung Ho Park and Yoon Jung Park (the "Principal
Sellers"), dated as of the date hereof
--------------------------------------------------------------------
Ladies and Gentlemen:
Reference is made to the Merger Agreement pursuant to which Amitek will
merge with and into the Buyer on the terms and subject to the conditions of the
Merger Agreement. The parties hereto hereby agree as follows:
1. DEFINITIONS. Capitalized terms used but not otherwise defined in this
letter agreement are used herein as defined in the Merger Agreement.
2. CLOSING. Effective on and as of the date hereof, the parties have agreed on
the form and substance of the Merger Agreement and the agreements and
documents listed on the Closing Agenda attached hereto as Exhibit A
(collectively, the "Transaction Documents"), and all of the Transaction
Documents have been executed and delivered by the parties.
3. CENTENNIAL ADJUSTMENT. Buyer agrees to repurchase on or before September
30, 1999, all of the capital stock, and options, warrants or other
securities convertible into or exchangeable for capital stock, of the Buyer
owned by Centennial Technologies, Inc. ("Centennial") as of the date hereof
or hereafter acquired (the "Centennial Securities"); PROVIDED, HOWEVER,
that the grant to Centennial of warrants for up to 100,000 shares of Common
Stock of the Buyer, with an exercise price of at least $6.00 per share, in
connection with such repurchase shall be permitted and such warrants shall
not be considered Centennial Securities hereunder. In the event that the
Buyer shall fail to repurchase the Centennial Securities on or before
September 30, 1999, the Buyer shall, on or prior to October 2, 1999,
authorize, issue and deliver to the Sellers an amount of Century Common
Stock equal to 108,718 shares (such number of shares calculated as set
forth in Exhibit B hereto).
4. CLOSING DATE PURCHASE PRICE ADJUSTMENT. The Buyer hereby acknowledges the
receipt of the Estimated Closing Date Balance Sheet (attached as Exhibit C
hereto) and waives the requirement for three business days prior notice
under Section 2.10(a) of the Merger
<PAGE>
Amitek Corporation -2- July 30, 1999
AGREEMENT. Notwithstanding Section 2.10(b) of the Merger Agreement, no
adjustment to the Purchase Price shall be made on the Closing Date in
respect of the Estimated Closing Date Net Book Value; provided, however,
that if the Buyer fails to deliver to the Principal Sellers the Draft
Closing Date Balance Sheet within the 60-day period referred to in Section
2.11(a) of the Merger Agreement, any adjustment to the Purchase Price that
would have been made on the Closing Date pursuant to Section 2.10(b) but
for this letter agreement shall be made on the 70th day following the
Closing Date in the manner and subject to the limitations set forth in
Section 2.10(b). This letter shall in no way affect the provisions of
Section 2.11 of the Merger Agreement, provided that to the extent such
provisions are applicable, the Closing Date Upward Adjustment and the
Closing Date Downward Adjustment shall be zero.
5. MISCELLANEOUS. Except to the extent amended or modified by this letter
agreement, the provisions of the Merger Agreement shall remain unmodified
and the Merger Agreement as amended and modified hereby is confirmed as
being in full force and effect. No party may assign either this letter
agreement or any of its rights, interests, or obligations hereunder without
the prior written approval of the other parties; provided, however, that the
Buyer may (i) assign any and all of its rights and interests hereunder to
one or more of its Affiliates and (ii) designate one or more of its
Affiliates to perform its obligations hereunder. This letter agreement may
be executed in any number of counterparts, which together shall constitute
one instrument, shall be governed by and construed in accordance with the
laws (other than the conflict of laws rules) of The Commonwealth of
Massachusetts and shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns.
[Remainder of this page intentionally left blank]
<PAGE>
EXHIBIT B
SPREADSHEETS RE: SHARE CALCULATION
<PAGE>
Advest Investment Banking Amitek/Century Merger CONFIDENTIAL
Consideration - Without Centennial Buyback
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Cash Note Sub Total Shares-C-
-------------------------------------------------------------------
Consideration 6,475,000 8,525,000 15,000,000 2,384,171
- -------------
<S> <C> <C> <C> <C>
AAA Distribution 0 N/A N/A
LOMBARDO(a) 350,000 308,000 658,000 113,773
SIMMONS 0 198,000 198,000 34,132
WINANS 0 400,000 400,000
DROPKIN 0 400,000 400,000
BONUS POOL(b) 471,000 0 471,000
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SUBTOTAL 821,000 1,306,000 2,127,000 147,905
- ---------------------------------------------------------------------------------------
Bal to Amitek Sh 5,654,000 7,219,000 12,873,000 2,236,266
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
KWON 19.66% 1,111,853 1,419,609 2,531,463 439,759
THE PARKS 4,542,147 5,799,391 10,341,537 1,796,507
- ---------------------------------------------------------------------------------------
5,654,000 7,219,000 12,873,000 2,236,266
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Mark will get $458K in quasi-note payments, but only $308K deducted from
Park note as Century will get $K @ exercise
(b) present value of bonus pool of $490K per schedule, paid at 12/17/99
(c) Lombardo and Simmons get options in Century for the number of shares shown
<PAGE>
Advest Investment Banking Amitek/Century Merger CONFIDENTIAL
Consideration - Without Centennial Buyback
<TABLE>
<CAPTION>
Centennial Not Bought Back
----------------------------
<S> <C> <C> <C> <C>
Century common and pref o/s now 10,687,174 10,687,174
Centennial repurchase 0 0
----------------------------
common outstanding 10,687,174 10,687,174
Century options o/s now 1,105,500
Century warrants o/s now 127,397
------------
equivalent common o/s 1,232,897
Park #shares = P = 16.9%[P + 10,687,174 + .8*(1,232,897)] 2,374,031
Century additional warrants
Centennial 0 at 6.00
Fidelity 60,000 at 6.00
Needham 0 at 80% IPO
------------
Park at 16.9% 60,000 10,140
------------
2,384,171
------------
rounded to whole shares 2,384,171
------------
less options to Mark and Larry (147,905)
------------
Outstanding shares to Amitek shareholders 2,236,266
Existing shares 10,687,174
------------
total outstanding 12,923,440 17.30% amitek %
Options and warrants overhang
1,232,897
60,000
147,905
-----------
1,440,802 1,440,802
------------
fully diluted 14,364,242 15.57% amitek %
</TABLE>
<PAGE>
Advest Investment Banking Amitek/Century Merger CONFIDENTIAL
Consideration - With Centennial Buyback
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Cash Note Sub Total Shares-C-
-------------------------------------------------------------------
Consideration 6,475,000 8,525,000 15,000,000 2,275,453
- -------------
<S> <C> <C> <C> <C>
AAA Distribution 0 N/A N/A
LOMBARDO(a) 350,000 308,000 658,000 113,773
SIMMONS 0 198,000 198,000 34,132
WINANS 0 400,000 400,000
DROPKIN 0 400,000 400,000
BONUS POOL(b) 471,000 0 471,000
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SUBTOTAL 821,000 1,306,000 2,127,000 147,905
- ---------------------------------------------------------------------------------------
Bal to Amitek Sh 5,654,000 7,219,000 12,873,000 2,127,548
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
KWON 19.66% 1,111,853 1,419,609 2,531,463 418,380
THE PARKS 4,542,147 5,799,391 10,341,537 1,709,168
- ---------------------------------------------------------------------------------------
5,654,000 7,219,000 12,873,000 2,127,548
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Mark will get $458K in quasi-note payments, but only $308K deducted from
Park note as Century will get $ @ exercise
(b) present value of bonus pool of $490K per schedule, paid at 12/17/99
(c) Lombardo and Simmons get options in Century for the number of shares shown
<PAGE>
Advest Investment Banking Amitek/Century Merger CONFIDENTIAL
Consideration - With Centennial Buyback
<TABLE>
<CAPTION>
Centennial Bought Back
----------------------------
<S> <C> <C> <C> <C>
Century common and pref o/s now 10,687,174 10,687,174
Centennial repurchase (666,667) (666,667)
----------------------------
common outstanding 10,020,507 10,020,507
Century options o/s now 1,105,500
Century warrants o/s now 127,397
------------
equivalent common o/s 1,232,897
Park #shares = P = 16.9%[P + 10,020,507 + .8*(1,232,897)] 2,238,452
Century additional warrants
Centennial 100,000 at 6.00
Fidelity 60,000 at 6.00
Needham 200,000 at 80% IPO
------------
Park at negotiated amount 360,000 37,001
------------
2,275,453
------------
rounded to whole shares 2,275,453
------------
less options to Mark and Larry (147,905)
------------
Outstanding shares to Amitek shareholders 2,127,548
Existing shares 10,020,507
------------
total outstanding 12,148,055 17.51% amitek %
Options and warrants overhang
1,232,897
360,000
147,904
-----------
1,740,801 1,740,801
------------
fully diluted 13,888,856 15.32% amitek %
</TABLE>
<PAGE>
EXHIBIT C
ESTIMATED CLOSING DATE BALANCE SHEET
<PAGE>
AMITEK CORPORATION
ESTIMATED CLOSING BALANCE SHEET
JULY 28, 1999
(000)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $50
Accounts Receivable 11,600
Less Allowance (64)
-------
Net Accounts Receivable 11,536
-------
Receivable From Affiliate
Inventories 10,687
Note Receivable
Loans and Advances From Affiliates
Prepaid Expenses
Other Assets 41
-------
Total Current Assets 22,494
PROPERTY AND EQUIPMENT
Furniture and Fixtures 343
Manufacturing Equipment 5,341
Leasehold Improvements 197
Office Equipment 519
-------
Subtotal 6,400
-------
Less Accumulated Depreciation (1,750)
Total Property and Equipment 4,650
OTHER ASSETS
Goodwill
Misc. Receivables 0
Refundable Deposits 0
Other 655
-------
TOTAL ASSETS $27,799
-------
-------
LIABILITIES & EQUITY
CURRENT LIABILITIES
Bank Line of Credit $12,500
Accounts Payable and Accrued Expenses 11,050
Account Payable to Affiliate
Current Portion of Lease Payable 800
Loan to Affiliate
-------
TOTAL CURRENT LIABILITIES 24,350
Lease Commitments Less Current Portion 1,249
Stockholder Loans Payable
Subordinated Liabilities
Stockholders' Equity
Commons Stock 1
Additional Paid In Capital 2,700
Accumulated Deficit (501)
-------
Total Equity 2,200
-------
TOTAL LIABILITIES AND EQUITY $27,799
-------
-------
</TABLE>
<PAGE>
Amitek Corporation -3- July 30, 1999
Very truly yours,
CENTURY ELECTRONICS MANUFACTURING, INC.
By: /s/ James Roller
-------------------------------------------
Name: James M. Roller
Title: Vice President - Finance
Accepted and Agreed:
AMITEK CORPORATION
By: /s/ Myung Ho Park
-----------------------------------------
Name: Myung Ho Park
Title: President
THE PRINCIPAL SELLERS
/s/ Myung Ho Park
- ----------------------------------------------
/s/ Yoon Jung Park
- -----------------------------------------------
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Century Electronics Manufacturing, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
September 17, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANT
I consent to the inclusion in this Registration Statement on Form S-1 of my
report dated March 20, 1997 and June 30, 1999, on my audit of Amitek
Corporation's financial statements for the year ended December 31, 1996. I also
consent to the reference to my name under the section entitled "Experts".
/s/ LAWRENCE N. LEGG
--------------------------------------
Lawrence N. Legg, CPA, PA
September 16, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated June 15, 1999, except as to the fifth paragraph of Note 5, which is
as of June 25, 1999, relating to the financial statements of Amitek Corporation,
which appear in such Registration Statement. We also consent to the reference to
us under the headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
September 17, 1999
<PAGE>
EXHIBIT 23.5
September 20, 1999
Ms. Annmarie Wixon
Ropes and Gray
One International Place
Boston, Massachusetts 02110-2624
Dear Annmarie:
This letter is to provide my consent to be included in the filing with the
SEC for Century Electronics as a nominee for a director of the company.
Sincerely,
/s/ C. Michael Jacobi
C. Michael Jacobi
