<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): SEPTEMBER 15, 2000
FLEXTRONICS INTERNATIONAL LTD.
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(Exact Name of Registrant as Specified in Its Charter)
SINGAPORE
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(State or Other Jurisdiction of Incorporation)
0-23354 NOT APPLICABLE
---------------------------- --------------------------
(Commission (IRS Employer
File Number) Identification No.)
11 UBI ROAD 1, #07-01/02, MEIBAN INDUSTRIAL BUILDING, SINGAPORE 408723
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(Address of Principal Executive Offices) (Zip Code)
(65) 844-3366
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
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(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
On September 15, 2000, Flextronics International Ltd. ("Flextronics")
filed a Form 8-K to report its acquisition of Chatham Technologies, Inc. (the
"Company"). Pursuant to Item 7 of Form 8-K, Flextronics indicated that it would
file certain financial information no later than the date required by Item 7 of
Form 8-K. This Amendment No. 1 is filed to provide the required financial
information.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The following financial statements of the Company and its subsidiaries
are filed herewith:
Report of Independent Auditors
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Mandatory Redeemable
Stock and Warrants and Other Capital (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE> 3
Report of Independent Auditors
Board of Directors
Chatham Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Chatham
Technologies, Inc. and subsidiaries as of October 2, 1999 and September 26,
1998, and the related consolidated statements of operations, changes in
mandatory redeemable stock and warrants and other capital, and cash flows for
the fiscal years ended October 2, 1999 and September 26, 1998, and the period
from August 18, 1997 (inception) through September 27, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Chatham
Technologies, Inc. and subsidiaries at October 2, 1999 and September 26, 1998,
and the consolidated results of their operations and their cash flows for the
fiscal years ended October 2, 1999 and September 26, 1998, and for the period
from August 18, 1997 (inception) through September 27, 1997, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Dallas, Texas
April 28, 2000
<PAGE> 4
Chatham Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 2, September 26,
1999 1998
--------- -------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,947 $ 5,343
Accounts receivable 71,592 47,564
Inventories 44,313 30,610
Prepaid expenses and other current assets 6,040 8,167
--------- ---------
Total current assets 132,892 91,684
Property, plant, and equipment, net 70,462 65,182
Goodwill and other intangible assets 177,376 190,381
Other 9,779 12,692
--------- ---------
Total assets $ 390,509 $ 359,939
========= =========
LIABILITIES
Current liabilities:
Accounts payable and customer advance deposits $ 54,393 $ 30,345
Accrued expenses 40,897 25,195
Short-term line of credit 6,612 5,949
Current portion of long-term debt 18,888 7,365
--------- ---------
Total current liabilities 120,790 68,854
Deferred income taxes 7,088 11,441
Long-term debt, less current portion 219,804 203,538
Commitments and contingencies
MANDATORY REDEEMABLE STOCK AND WARRANTS
Series B convertible preferred stock, par value $.01 per share:
Authorized shares - 30,000; issued and outstanding shares - 12,000 12,692 11,758
Series D convertible preferred stock, par value $.01 per share:
Authorized, issued and outstanding shares - 18,000 19,039 17,638
Series E preferred stock, par value $.01 per share:
Authorized, issued and outstanding shares - 8,000 at October 2, 1999 8,534 --
Class B common stock, par value $.01 per share:
Authorized, issued and outstanding shares - 195,000 195 195
Warrants with put feature to purchase Class A and Class C common stock 5,500 6,762
--------- ---------
Total mandatory redeemable stock and warrants 45,960 36,353
OTHER CAPITAL (DEFICIT)
Series A convertible preferred stock, par value $.01 per share:
Authorized shares - 100,000; issued and outstanding shares - 37,508 -- --
Series C preferred stock, par value $.01 per share:
Authorized, issued and outstanding shares - 4,680 -- --
Class A common stock, par value $.01 per share:
Authorized shares - 33,805,000; issued and outstanding shares - 6,488,880
at October 2, 1999, and 5,878,300 at September 26, 1998 65 59
Class C common stock, par value $.01 per share:
Authorized shares - 3,000,000; none issued -- --
Additional capital 69,377 63,084
Accumulated deficit (71,187) (23,687)
Accumulated other comprehensive income (loss) (1,388) 297
--------- ---------
Total other capital (deficit) (3,133) 39,753
--------- ---------
Total liabilities, mandatory redeemable stock and
warrants, and other capital (deficit) $ 390,509 $ 359,939
========= =========
</TABLE>
See accompanying notes.
<PAGE> 5
Chatham Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
Fiscal Fiscal August 18, 1997
Year Ended Year Ended (inception) through
October 2, September 26, September 27,
1999 1998 1997
---------- ------------ -----------------
<S> <C> <C> <C>
Net sales $ 376,997 $ 206,736 $ 21,868
Cost of sales 319,379 164,533 19,101
--------- --------- ---------
Gross profit 57,618 42,203 2,767
Selling, general, and administrative expense 43,915 26,005 3,575
Amortization of goodwill and intangibles 27,800 19,991 2,016
--------- --------- ---------
Operating loss (14,097) (3,793) (2,824)
Organization costs -- -- 5,084
Restructuring and other costs 7,519 1,131 --
Interest expense, net 22,419 14,290 1,473
Other (income) expense, net 309 592 (91)
--------- --------- ---------
Loss before income taxes (44,344) (19,806) (9,290)
Income tax benefit (2,633) (4,485) (3,369)
--------- --------- ---------
Net loss (41,711) (15,321) (5,921)
Preferred stock dividends and accretion 8,319 4,715 503
--------- --------- ---------
Net loss attributed to common stockholders $ (50,030) $ (20,036) $ (6,424)
========= ========= =========
Weighted average Class A common shares outstanding - basic 6,030 4,900 4,453
========= ========= =========
Weighted average Class A common shares outstanding - diluted 6,030 5,231 4,453
========= ========= =========
Net loss per share attributed to common stockholders - basic $ (8.30) $ (4.09) $ (1.44)
========= ========= =========
Net loss per share attributed to common stockholders - diluted $ (8.30) $ (4.15) $ (1.44)
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 6
Chatham Technologies, Inc. and Subsidiaries
Consolidated Statements of Changes in Mandatory Redeemable Stock
and Warrants and Other Capital (Deficit)
Fiscal years ended October 2, 1999 and September 26,
1998, and the period from August 18, 1997 (inception)
through September 27, 1997
(In thousands)
<TABLE>
<CAPTION>
MANDATORY REDEEMABLE
STOCK AND WARRANTS
--------------------------------------------------------------------------------
SERIES B SERIES D
CONVERTIBLE CONVERTIBLE SERIES E CLASS B
PREFERRED PREFERRED PREFERRED COMMON
STOCK STOCK STOCK STOCK WARRANTS TOTAL
----------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Series A preferred stock issued for
acquired businesses $ - $ - $ - $ - $ - $ -
Private placement of Series B and D
preferred stock and Class B common
stock for cash, net of offering costs 10,780 16,171 -- 195 -- 27,146
Private placement of Series C
preferred and Class A common
stock for cash -- -- -- -- -- --
Other - sale of Series A preferred stock -- -- -- -- -- --
Accretion of mandatory redeemable
preferred stock 12 19 -- -- -- 31
Accrued dividends on mandatory
redeemable convertible preferred stock 81 121 -- -- -- 202
Compensation expense on stock options -- -- -- -- -- --
Net loss and comprehensive loss for
the period -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at September 27, 1997 10,873 16,311 -- 195 -- 27,379
Net loss for the year -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss
Accretion of mandatory redeemable
preferred stock 150 225 -- -- -- 375
Accrued dividends on mandatory
redeemable preferred stock 735 1,102 -- -- -- 1,837
Sale of Series A preferred stock -- -- -- -- -- --
Class A common stock issued for
acquired businesses -- -- -- -- -- --
Issuance of warrants with put feature
to purchase Class A and Class C
common stock -- -- -- -- 8,618 8,618
</TABLE>
<TABLE>
<CAPTION>
OTHER CAPITAL (DEFICIT)
-----------------------------------------------------------------------------------------
SERIES A ACCUMULATED
CONVERTIBLE SERIES C CLASS A OTHER
PREFERRED PREFERRED COMMON ADDITIONAL ACCUMULATED COMPREHENSIVE
STOCK STOCK STOCK CAPITAL DEFICIT INCOME (LOSS) TOTAL
----------- --------- -------- ----------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A preferred stock issued for
acquired businesses $ - $ - $ - $ 36,090 $ - $ - $ 36,090
Private placement of Series B and D
preferred stock and Class B common
stock for cash, net of offering costs -- -- -- 1,735 -- -- 1,735
Private placement of Series C
preferred and Class A common
stock for cash -- -- 40 5,085 -- -- 5,125
Other - sale of Series A preferred stock -- -- -- 250 -- -- 250
Accretion of mandatory redeemable
preferred stock -- -- -- -- (31) -- (31)
Accrued dividends on mandatory
redeemable convertible preferred stock -- -- -- -- (202) -- (202)
Compensation expense on stock options -- -- -- 15 -- -- 15
Net loss and comprehensive loss for
the period -- -- -- -- (5,921) -- (5,921)
-------- -------- -------- -------- -------- -------- --------
Balance at September 27, 1997 -- -- 40 43,175 (6,154) -- 37,061
Net loss for the year -- -- -- -- (15,321) -- (15,321)
Foreign currency translation adjustment -- -- -- -- -- 297 297
--------
Comprehensive loss (15,024)
--------
Accretion of mandatory redeemable
preferred stock -- -- -- -- (375) -- (375)
Accrued dividends on mandatory
redeemable preferred stock -- -- -- -- (1,837) -- (1,837)
Sale of Series A preferred stock -- -- -- 1,168 -- -- 1,168
Class A common stock issued for
acquired businesses -- -- 19 18,507 -- -- 18,526
Issuance of warrants with put feature
to purchase Class A and Class C
common stock -- -- -- -- -- -- --
</TABLE>
<PAGE> 7
Chatham Technologies, Inc. and Subsidiaries
Consolidated Statements of Changes in Mandatory Redeemable Stock
and Warrants and Other Capital (Deficit) (continued)
Fiscal years ended October 2, 1999 and September 26,
1998, and the period from August 18, 1997 (inception)
through September 27, 1997
(In thousands)
<TABLE>
<CAPTION>
MANDATORY REDEEMABLE
STOCK AND WARRANTS
----------------------------------------------------------------------------------
SERIES B SERIES D
CONVERTIBLE CONVERTIBLE SERIES E CLASS B
PREFERRED PREFERRED PREFERRED COMMON
STOCK STOCK STOCK STOCK WARRANTS TOTAL
----------- ------------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Change in estimated redemption amount
of put warrant $ -- $ -- $ -- $ -- $ (1,856) $ (1,856)
Compensation expense on stock options -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at September 26, 1998 11,758 17,638 -- 195 6,762 36,353
Net loss for the year -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss
Issuance of Series E preferred stock
and warrants to purchase Class A
common stock -- -- 5,080 -- -- 5,080
Accretion of mandatory redeemable
preferred stock 152 228 2,448 -- -- 2,828
Accrued dividends on mandatory
redeemable preferred stock 782 1,173 1,006 -- -- 2,961
Class A common stock issued in
connection with acquisition of Goeland -- -- -- -- -- --
Class A common stock issued upon
exercise of warrants -- -- -- -- -- --
Sale of Class A Common Stock -- -- -- -- -- --
Issuance of additional warrants with
put feature resulting from
anti-dilution provisions -- -- -- -- 329 329
Change in estimated redemption amount
of put warrant -- -- -- -- (1,591) (1,591)
Compensation expense on stock options -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at October 2, 1999 $ 12,692 $ 19,039 $ 8,534 $ 195 $ 5,500 $ 45,960
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
OTHER CAPITAL (DEFICIT)
---------------------------------------------------------------------------------------
SERIES A
CONVERTIBLE SERIES C CLASS A OTHER
PREFERRED PREFERRED COMMON ADDITIONAL ACCUMULATED COMPREHENSIVE
STOCK STOCK STOCK CAPITAL DEFICIT INCOME (LOSS) TOTAL
----------- --------- ---------- ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in estimated redemption amount
of put warrant $ -- $ -- $ -- $ -- $ -- $ -- $ --
Compensation expense on stock options -- -- -- 234 -- -- 234
------ ------ -------- -------- -------- -------- --------
Balance at September 26, 1998 -- -- 59 63,084 (23,687) 297 39,753
Net loss for the year -- -- -- -- (41,711) -- (41,711)
Foreign currency translation adjustment -- -- -- -- -- (1,685) (1,685)
--------
Comprehensive loss (43,396)
--------
Issuance of Series E preferred stock
and warrants to purchase Class A
common stock -- -- -- 2,920 -- -- 2,920
Accretion of mandatory redeemable
preferred stock -- -- -- -- (2,828) -- (2,828)
Accrued dividends on mandatory
redeemable preferred stock -- -- -- -- (2,961) -- (2,961)
Class A common stock issued in
connection with acquisition of Goeland -- -- 1 718 -- -- 719
Class A common stock issued upon
exercise of warrants -- -- 2 (2) -- -- --
Sale of Class A Common Stock -- -- 3 2,297 -- -- 2,300
Issuance of additional warrants with
put feature resulting from
anti-dilution provisions -- -- -- -- -- -- --
Change in estimated redemption amount
of put warrant -- -- -- -- -- -- --
Compensation expense on stock options -- -- -- 360 -- -- 360
------ ------ -------- -------- -------- -------- --------
Balance at October 2, 1999 $ -- $ -- $ 65 $ 69,377 $(71,187) $ (1,388) $ (3,133)
====== ====== ======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 8
CHATHAM TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FISCAL FISCAL PERIOD FROM AUGUST 18,
YEAR ENDED YEAR ENDED 1997 (INCEPTION) TO
OCTOBER 2, 1999 SEPTEMBER 26, 1998 SEPTEMBER 27, 1997
--------------- ------------------ ----------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (41,711) $ (15,321) $ (5,921)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 41,202 24,796 2,491
Change in estimated redemption amount of put warrant (1,591) (1,856) --
Deferred income taxes (6,535) (6,338) (3,145)
Changes in operating assets and liabilities, net of effect of
businesses acquired:
Accounts receivable (18,967) (10,431) (1,494)
Inventories (9,117) (5,458) 1,563
Prepaid expenses and other current assets 2,964 5,701 267
Accounts payable and accrued expenses 35,993 13,026 2,810
Other 2,611 (2,105) --
--------- --------- ---------
Net cash provided by (used in) operating activities 4,849 2,014 (3,429)
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (16,125) (58,096) (130,261)
Other additions to plant and equipment, net (13,871) (13,094) (558)
--------- --------- ---------
Net cash used in investing activities (29,996) (71,190) (130,819)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net of financing costs 31,862 113,438 114,023
Payments of long-term debt (9,726) (45,778) (8,637)
Proceeds from sale of Series E preferred stock and warrants 8,000 -- --
Proceeds from sale of Series B and D preferred and Class B common
stock, net of offering costs -- -- 28,881
Proceeds from sale of Series A and Series C preferred and Class A
common stock, net of offering costs 2,300 1,168 5,375
--------- --------- ---------
Net cash provided by financing activities 32,436 68,828 139,642
Effect of exchange rate changes on cash (1,685) 297 --
---------
Increase (decrease) in cash and cash equivalents 5,604 (51) 5,394
Cash and cash equivalents at beginning of period 5,343 5,394 --
--------- --------- ---------
Cash and cash equivalents at end of period $ 10,947 $ 5,343 $ 5,394
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 19,006 $ 10,677 $ 1,160
========= ========= =========
Cash paid for income taxes $ 1,491 $ 4,240 $ --
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 9
Fiscal years ended October 2, 1999 and September 26,
1998, and the period from August 18, 1997 (inception)
through September 27, 1997
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Chatham Technologies, Inc. (the Parent), and its wholly owned subsidiary,
Chatham Enterprises Inc. (Enterprises), were formed as Delaware corporations
effective August 18, 1997, concurrent with the acquisition of several companies
as described in Note 3.
The Company designs, manufactures, and assembles custom integrated electronic
packaging systems primarily for communications industry original equipment
manufacturers on a worldwide basis. The Company's operations and customer base
are predominantly located in North America and Europe.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
FISCAL YEAR-END
The Company's fiscal year ends on the Saturday closest to September 30. For the
fiscal year ended October 2, 1999, the financial statements include 53 weeks.
CASH EQUIVALENTS
Cash equivalents include money market mutual funds and other highly liquid
investments purchased with maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost, using the FIFO (first-in,
first-out) method, or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets. Amortization of capital leases and leasehold improvements is
provided on a straight-line basis over the lives of the related assets or the
life of the lease, whichever is shorter, and is included with depreciation
expense.
<PAGE> 10
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
The cost in excess of the fair value of tangible and identified intangible
assets of the businesses acquired (goodwill) is being amortized on a
straight-line basis over 20 years. Identified intangible assets acquired in
connection with the acquisition of businesses consist mainly of employment
contracts and covenants not to compete and customer lists, amortized over two to
three years; and the value of the acquired work force, amortized over three to
five years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets, including goodwill and other intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If the estimated future
cash flows (undiscounted and without interest charges) from the use of an asset
are less than the carrying amount, a write-down would be recorded to reduce the
related asset to the amount of estimated future cash flows, for assets in use,
or to estimated fair value for assets held for sale.
DEBT ISSUANCE COSTS
Debt issuance costs ($7.5 million at October 2, 1999 and $9.2 million at
September 26, 1998, net of accumulated amortization) are amortized over the term
of the related debt and are included in other long-term assets.
ORGANIZATION AND START-UP COSTS
Organization and start-up costs are expensed as incurred.
DEFERRED INCOME TAXES
Deferred income taxes are determined using the liability method, which gives
consideration to the future tax consequences associated with differences between
the financial accounting and tax bases of assets and liabilities. This method
also gives immediate effect to changes in income tax laws. Valuation allowances
are provided for deferred tax assets when their realization is not reasonably
assured.
MANDATORY REDEEMABLE SECURITIES
Mandatory redeemable preferred stocks are recorded at their fair value at date
of issuance. The recorded amount is accreted to the redemption amount over the
period from date of issuance to the mandatory redemption date.
Mandatory redeemable common stock is stated at the $1 per share redemption price
with the excess of fair value over the redemption amount at date of issuance
recorded as additional capital.
Common stock purchase warrants with put features which permit the holder to
require the Company to redeem the warrants for cash at a future date, at amounts
determinable at that date, are stated at the estimated redemption amount as of
the balance sheet date based on the estimated fair value of the underlying
shares of common stock at that date. Changes in the estimated redemption amount
are charged or credited to interest expense in the period of change.
<PAGE> 11
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREFERRED STOCK DIVIDENDS
The Company accrues dividends on mandatory redeemable preferred stock. Dividends
on other preferred stocks are not accrued until declared by the Board of
Directors.
REVENUE RECOGNITION
The Company recognizes revenue at the time products are shipped. Net sales
represent the sales price to the customer, net of returns and allowances.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in its primary financial statements
and to provide supplemental disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) (see Note 12).
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. At October 2, 1999 and
September 26, 1998, one customer represented approximately 25% and 44%,
respectively, of total accounts receivable. Another customer represented
approximately 20% and 7% of total accounts receivable at October 2, 1999 and
September 26, 1998, respectively. The Company performs ongoing credit
evaluations of its customers, does not generally require collateral or other
security, and maintains an allowance for potential credit losses. Credit losses
have been minimal for all periods presented.
SIGNIFICANT CUSTOMERS
For fiscal years 1999 and 1998, two customers represented approximately 46% and
14% and 29% and 19%, respectively, of total sales. For the period from August 18
through September 27, 1997, four customers represented approximately 24%, 15%,
14%, and 12% of total sales.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash equivalents,
accounts receivable, accounts payable, and debt instruments. The carrying amount
of financial instruments, other than debt instruments, are representative of
their fair values due to their short maturities. The Company's principal
long-term debt bears interest at market rates and, thus, management believes
their carrying amounts approximate fair value. Management believes the carrying
amount of the remaining bonds and loans is not materially different from
estimated fair value.
<PAGE> 12
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Basic net loss per share attributed to common stockholders for each period is
calculated by dividing the net loss attributed to common stockholders, as shown
on the Consolidated Statement of Operations, by the weighted average number of
shares of Class A common stock outstanding during each period. Diluted net loss
per share attributed to common stockholders is calculated by increasing the net
loss for the period by the dividend requirements on the Series C and Series E
preferred stock. The resulting net loss attributable to common stockholders is
divided by the weighted average number of shares of Class A common stock plus
the dilutive effect of the assumed exercise of options and warrants and the
assumed conversion of convertible securities outstanding for the period. For
fiscal 1999 and 1998, and the period from August 18, 1997 through September 27,
1997, all shares related to the assumed exercise or conversion of options,
warrants, and convertible securities totaling 9,101,190, 7,556,270, and
6,544,580, respectively, were excluded because their effect was anti-dilutive,
except for fiscal 1998 in which the assumed exercise of the put warrant had a
dilutive effect. The assumed exercise of the put warrant in fiscal 1998
increased the net loss attributed to common stockholders by $1.7 million,
reflecting the reversal of the benefit related to the reduction in the put
warrant liability and increased the weighted average shares outstanding by an
additional 331,000 shares.
FOREIGN CURRENCY TRANSLATION
The local currencies of the Company's foreign operations are considered to be
their functional currency. For operations in non-hyperinflationary economies,
assets and liabilities are translated using year-end exchange rates and revenues
and expenses are translated using the average rates in effect during the year,
with the resulting translation adjustments included in other capital. For
operations in hyperinflationary economies, monetary assets and liabilities are
translated using year-end exchange rates, non-monetary assets and liabilities
are translated using historic exchange rates, and revenues and expenses are
translated using the average rates in effect during the year, with the
translation adjustment included in other income/expense. Translation adjustments
included in other capital are considered to be a component of other
comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company will be required to adopt SFAS
133 at the beginning of fiscal 2001. The Company has not determined the impact
this pronouncement will have on its financial statements.
USE OF ESTIMATES
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 these estimates.
<PAGE> 13
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
The financial statements for the period from August 18, 1997 (inception) through
September 27, 1997, and for the fiscal year ended September 26, 1998, contain
reclassifications to conform to the 1999 presentation.
3. ACQUISITIONS
On August 18, 1997, the Company completed the following acquisitions of
electronics enclosure manufacturing businesses:
B&M Machinery and Fabrication, Incorporated and its sister companies,
Electrical Concepts & Assemblies, Incorporated and Advanced Fabrication
Technologies, Inc., with operations in North Carolina, were acquired in
a stock purchase transaction. The purchase price included $33.2 million
cash, $6.2 million in debt assumed or retired, and 11,090 shares of the
Company's Series A Convertible Preferred Stock.
Hennessy Products Incorporated, with operations in Pennsylvania, was
acquired in a stock purchase transaction for $18 million cash, $3.3
million in debt assumed or retired, and 6,000 shares of the Company's
Series A Convertible Preferred Stock.
Kingston Metal Specialties Co., with operations in Pennsylvania and
South Carolina, was acquired in a stock purchase transaction for $33
million cash, $3.1 million in debt assumed or retired, and 15,000 shares
of the Company's Series A Convertible Preferred Stock.
Logic Design Metals, Inc. and Precision Techniques, Inc., operating as a
division of Electric & Gas Technology, Inc., with operations in Texas,
was acquired in an asset purchase transaction for $18.9 million cash and
$2.3 million debt assumed.
Pilot Technologies Corporation, with operations in New Jersey, was
acquired in a stock purchase transaction for $26 million cash, $2.1
million in debt assumed or retired, and 4,000 shares of the Company's
Series A Convertible Preferred Stock.
The Series A Convertible Preferred Stock issued in connection with the
acquisitions was valued at $1,000 per share based upon an independent appraisal.
Costs incurred in connection with the acquisitions totaled approximately $6.8
million.
<PAGE> 14
3. ACQUISITIONS (CONTINUED)
A summary of the combined purchase price allocation is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible assets acquired, net of liabilities assumed $ 35,188
Identified intangible assets representing employment
contracts/covenants not to compete, customer lists, and
the acquired workforces, net of $15,190 of deferred tax
liabilities 14,186
Goodwill 122,596
--------
$171,970
========
</TABLE>
The fair value of tangible assets acquired on August 18, 1997, includes $2.5
million relating to the excess of the fair value of inventories over their
historical cost on the acquired company's financial statements. This excess of
fair value over historical cost was charged to cost of sales when the
inventories were sold during the period from August 18, 1997 through September
27, 1997.
On May 4, 1998, the Company acquired all of the outstanding capital stock of
Innovation, Inc. (Innovation), with operations in Bothell, Washington. The
purchase price consisted of the issuance of 150,000 shares of Class A common
stock valued at $2.0 million, cash payments to extinguish debt of $0.7 million,
and other transaction related costs of $0.6 million. The acquisition was
accounted for using the purchase method and resulted in recording approximately
$3.3 million of goodwill and identified intangible assets. Innovation's results
of operations have been included in the consolidated results of operations from
the date of acquisition.
Effective May 31, 1998, the Company acquired all of the outstanding capital
stock of Swedform AB (Swedform), based in Skillingaryd, Sweden. The initial
purchase price was comprised of $44.9 million in cash and 850,000 shares of
Class A common stock valued at $11.1 million based on an independent,
third-party appraisal, with transaction-related costs totaling $5.5 million. In
July 1998, pursuant to earn out provisions related to sales of Swedform, an
additional $6.3 million in cash was paid and an additional 425,000 shares of
Class A common stock valued at $5.5 million were issued to the sellers. The
purchase agreement provided for additional contingent consideration (in cash and
Class A common stock) based on Swedform's earnings before interest, taxes,
depreciation, and amortization for the year ended December 31, 1998, exceeding
predetermined levels. The acquisition was accounted for using the purchase
method and resulted in recording approximately $55.1 million of goodwill and
identified intangible assets, net of related deferred tax liabilities in fiscal
1998. In October 1999, the Company made the final determinations on the
contingent consideration provisions in the purchase agreement and issued 300,000
shares of Class A common stock and recorded $2.3 million of additional goodwill
in fiscal 2000. Swedform's results of operations have been included in the
consolidated results of operations from the date of acquisition.
<PAGE> 15
3. ACQUISITIONS (CONTINUED)
A summary of the combined purchase price allocation for fiscal 1998 acquisitions
is as follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets acquired, net of liabilities assumed $18,104
Identified intangible assets representing employment
contracts/covenants not to compete, customer lists, and the
acquired workforce, net of $2,853 of related deferred tax liabilities 6,174
Goodwill 52,268
-------
Total $76,546
=======
</TABLE>
The fair value of tangible assets acquired in fiscal 1998 acquisitions includes
$0.7 million relating to the excess of the fair value of inventories over their
historical cost on the acquired company's financial statements. This excess of
fair value over historical cost was charged to costs of sales in fiscal 1998
when the inventories were sold.
Effective December 3, 1998, the Company acquired all the outstanding capital
stock of Goeland Industries S.A. (Goeland) in Montilliers, France. The purchase
price consisted of cash of $15.3 million, the issuance of 81,330 shares of Class
A common stock valued at $0.6 million based upon an independent, third-party
valuation, and transaction related costs of $0.9 million. The cash portion of
the purchase price was financed through the Company's acquisition loan facility
and from the sale of 8,000 shares of Series E Preferred Stock (see Note 12).
A summary of the purchase price allocation for the Goeland acquisition is as
follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets acquired, net of liabilities assumed $ 2,414
Goodwill and other identified intangibles, net of $ 518 of related
deferred tax liabilities 14,463
-------
Total $16,877
=======
</TABLE>
The fair value of tangible assets acquired in the fiscal 1999 acquisition
includes $0.3 million relating to the excess of the fair value of inventories
over their historical cost on the acquired company's financial statements. This
excess of fair value over historical cost was charged to costs of sales in
fiscal 1999 when the inventories were sold.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
October 2, September 26,
1999 1998
--------- -------------
<S> <C> <C>
Raw materials $23,644 $16,249
Work in progress 12,763 10,029
Finished goods 7,906 4,332
------- -------
Total $44,313 $30,610
======= =======
</TABLE>
<PAGE> 16
4. INVENTORIES (CONTINUED)
Effective October 14, 1998, the Company purchased $1.3 million of inventory from
an Ericsson Telecom AB subsidiary located in Spain. Effective July 31, 1998, the
Company purchased $2.7 million of inventory from subsidiaries of Ericsson
Telecom AB located in Croatia and Mexico.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, at cost, consists of the following (in
thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives October 2, September 26,
(Years) 1999 1998
------------ ---------- -------------
<S> <C> <C> <C>
Land $ 827 $ 827
Buildings and land improvements 25 5,034 4,815
Leasehold improvements 12 to 15 2,166 1,696
Machinery and equipment 10 to 12 55,971 56,080
Furniture and fixtures 5 to 7 7,442 2,206
Computers and software 3 to 5 3,621 1,956
Construction in progress 640 1,569
-------- --------
Total 75,701 69,149
Less accumulated depreciation and amortization (5,239) (3,967)
-------- --------
Net property, plant, and equipment $ 70,462 $ 65,182
======== ========
</TABLE>
Included in the above totals for machinery and equipment is approximately $11.1
million at October 2, 1999, and $10.6 million at September 26, 1998, relating to
capital leases.
Effective October 14, 1998, the Company purchased $2.0 million of equipment of
components of the mechanical, cable, and product integration operations of an
Ericsson Telecom AB subsidiary located in Spain.
Effective July 31, 1998, the Company purchased $2.9 million of equipment of
components of the mechanical, cable, and product integration operations of
Ericsson Telecom AB subsidiaries located in Croatia and Mexico.
<PAGE> 17
6. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Goodwill and other intangible assets resulting from acquisitions of businesses
and the formation of the Company consist of the following (in thousands):
<TABLE>
<CAPTION>
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Goodwill $ 188,158 $ 174,863
Customer lists 20,238 18,738
Employment contracts/covenants not to compete 14,623 14,623
Acquired workforce 4,365 4,365
--------- ---------
227,384 212,589
Less accumulated amortization (50,008) (22,208)
--------- ---------
$ 177,376 $ 190,381
========= =========
</TABLE>
7. SHORT-TERM DEBT
Short-term debt represents a Secured Line of Credit facility (the Facility),
with foreign financial institutions held by a foreign subsidiary. The line of
credit is reviewed annually and the terms of the agreement call for either the
outstanding amount to be fully repaid or for the facility to be extended for
another 12-month period. The Facility is collateralized by the subsidiary's
inventory and equipment. Interest accrues quarterly at the Stockholm Interbank
Offer Rate (STIBOR) plus 0.75%. At October 2, 1999, the interest rate on the
facility was 3.8%.
8. LONG-TERM DEBT
The Company's Credit Agreement dated August 18, 1997, was amended and restated
as of May 29, 1998 and November 27, 1998 (the Amended Credit Agreement). The
Amended Credit Agreement provides for senior collateralized financing
aggregating up to $260.4 million, consisting of: (i) a term loan facility with
an aggregate principal amount of $120.5 million, comprised of two facilities,
the first of which (Tranche A) has a principal amount of $55.5 million and the
second of which (Tranche B) has a principal amount of $65.0 million; (ii) a
revolving loan facility (the Revolving Loan) in an aggregate principal amount of
$28.0 million; and (iii) an acquisition loan facility (the Acquisition Loan) in
an aggregate principal amount of $112.0 million.
Tranche A of the term loan, the Revolving Loan, and the Acquisition Loan bear
interest, at the Company's option, at the offered quotation to first-class banks
in the New York interbank Eurodollar market (adjusted for maximum reserves) plus
2.75% or the higher of (i) the Federal Funds Rate plus 1/2 of 1% or (ii) the
Prime Commercial Lending Rate of The Chase Manhattan Bank, N.A (the Base Rate)
plus 1.75%. Tranche B of the term loan bears interest, at the Company's option,
at the offered quotation to first-class banks in the New York interbank
Eurodollar market plus 3.25% or the Base Rate plus 2.25%. Additionally, the
Company must pay a commitment fee equal to 1/2 of 1% per annum on the unused
portion of the commitments related to Tranche A of the term loan, the Revolving
Loan Facility, and the Acquisition Loan facility. The interest rates at October
2, 1999, for Tranche A and Tranche B of the term loan ranged from 8.13% to 8.44%
and 8.63% to 8.94%, respectively. The interest rates at October 2, 1999, for the
Acquisition Loan ranged from 8.00% to 10.25%, and the interest rates on the
Revolving Loan ranged from 8.00% to 10.25%.
<PAGE> 18
8. LONG-TERM DEBT (CONTINUED)
Concurrent with the acquisition of Goeland and the issuance of the Series E
preferred (see Note 12), the Company and its lenders agreed to further amend the
Amended Credit Agreement and the Senior Subordinated Notes (defined later). The
amendment: (i) allowed the Company to acquire Goeland; (ii) allowed the
elimination of $2.2 million of expense for the quarter ended September 26, 1998,
from the computation of EBITDA, as defined, for covenant calculation purposes;
(iii) prohibited the payment of management, closing, or similar fees by the
Company or any of its subsidiaries to Kidd & Company, LLC (KCO) in accordance
with the Management Services Agreement (MSA), however, the Company continues to
accrue the management fees under the MSA; (iv) made the financial covenants
contained in the Amended Credit Agreement less restrictive; and (v) modified the
interest rates as follows: Tranche A of the term loan, the Revolving Loan, and
the Acquisition Loan bear interest, at the Company's option, at the offered
quotation to first-class banks in the New York interbank Eurodollar market
(adjusted for maximum reserves) plus 3.00% or the higher of (a) the Federal
Funds Rate plus 1/2 of 1% or (b) the Prime Commercial Lending Rate of The Chase
Manhattan Bank, N.A (the Base Rate) plus 2.00%. Tranche B of the term loan bears
interest, at the Company's option, at the offered quotation to first-class banks
in the New York interbank Eurodollar market plus 3.50% or the Base Rate plus
2.50%.
The Amended Credit Agreement requires the Company to establish a fixed or
maximum interest rate for an aggregate notional amount of at least 50% of the
Company's outstanding principal amount of Tranche B of the term loan.
Additionally, within 60 days following a borrowing under the Acquisition Loan,
the Company must establish a fixed or maximum interest rate for an aggregate
notional amount of at least 50% of the outstanding principal amount of Tranche A
of the term loan and/or Acquisition Loan.
Accordingly, the Company entered into agreements with a commercial bank as
follows:
(a) Effective October 17, 1997, the Company executed an interest
rate collar agreement related to Tranche B of the term loan that
establishes the maximum and minimum Base Rate of 8.75% and
5.18%, respectively. The agreement expires September 30, 2000,
and has notional amounts that decrease during the period of the
agreement from $60.7 million to $55.5 million. The fair value of
the interest rate collar was nominal at October 2, 1999.
(b) On September 8, 1998, the Company executed an interest rate
collar agreement related to the Acquisition Loan with an
effective date of September 30, 1998, that establishes the
maximum and minimum Base Rate of 6.5% and 4.8%, respectively.
The agreement expires September 30, 2001, and has notional
amounts that decrease during the period of the agreement from
$13.4 million to $9.3 million. The fair value of the interest
rate collar was nominal at October 2, 1999.
(c) On June 4, 1999, the Company executed an interest rate cap
agreement related to the Acquisition Loan with an effective date
of June 8, 1999, that establishes a maximum Base Rate of 8.75%.
The agreement expires March 31, 2002, and has notional amounts
that decrease during the period of the agreement from $9.4
million to $5.0 million. The fair value of the interest rate cap
was nominal at October 2, 1999.
<PAGE> 19
8. LONG-TERM DEBT (CONTINUED)
The Company's obligations under the Amended Credit Agreement are collateralized
by: (i) a first priority perfected pledge of all capital stock, notes, and
securities owned by the Company and each of its U.S. subsidiaries; (ii) first
priority liens on and security interests in all other tangible and intangible
assets owned by the Company and its U.S. subsidiaries; and (iii) all of the
stock of Swedform and other equity ownership interests of the Company's other
non-U.S. subsidiaries.
The Amended Credit Agreement contains negative and affirmative covenants
including, but not limited to, prohibitions on liquidation, dissolution, and the
payment of dividends and restrictions on capital expenditures, lease payments,
debt and guarantees, liens and encumbrances on any property, mergers,
consolidations, acquisitions of assets, investments, advances, change of
business, distributions, repurchases or redemptions of outstanding stock
(including options or warrants), the voluntary prepayment, repurchase,
redemption, or defeasance of debt, and the sale, transfer, or lease of assets.
On May 29, 1998, the Company entered into a senior subordinated debt agreement
(the Senior Subordinated Notes) with commercial lenders totaling $40 million.
The Senior Subordinated Notes bear interest at the Company's option at LIBOR
plus 4% or Base Rate plus 3% and mature on August 18, 2006. The interest rate at
October 2, 1999, was 9.44%. The notes are subordinated to the senior credit
facilities and have a subordinate collateral position.
Concurrent with issuing the Senior Subordinated Notes, the Company issued to the
lenders 165,740 warrants to purchase an equivalent number of shares of Class A
common stock and 497,250 warrants to purchase an equivalent number of shares of
Class C common stock. The warrants to purchase shares of Class A and Class C
common stock have an exercise price of $.001 per share and expire after ten
years. Additional warrants could also be issued pursuant to anti-dilution
provisions.
The warrants contain provisions that, when exercisable, permit the warrant
holder to require the Company to repurchase the warrants, or shares received
from the exercise of the warrants, at a purchase price equal to the then fair
value of the underlying common stock (the Put Feature). The Put Feature can be
exercised upon the occurrence of specified events, including a change in control
of the Company, as defined, the refinancing of the loans made pursuant to the
Amended Credit Agreement, the fifth anniversary of the issuance of the warrants,
or the notification of the filing of a registration statement for a qualified
initial public offering, as defined. The proceeds from the issuance of the
Senior Subordinated Notes were allocated between the debt and the warrants,
based upon the relative fair value resulting in the recording of $8.6 million of
debt discount and a component of mandatory redeemable convertible stock and
warrants for the potential redemption of the warrants in the same amount. The
debt discount will be amortized as additional interest expense, with no related
tax benefit, over the life of the Senior Subordinated Notes. As more fully
discussed in Note 12, the issuance of the Series E preferred in December 1998
triggered the anti-dilution provisions resulting in the issuance of an
additional 9,300 warrants to purchase an equivalent number of shares of Class A
common stock and 27,900 warrants to purchase and equivalent number of shares of
Class C common stock. The impact of these additional warrants has resulted in an
additional $0.3 million of debt discount to be amortized as additional interest
expense, with no related tax benefit, over the remaining life of the Senior
Subordinated Notes. The amount of debt discount and the liability for the
potential redemption of the warrants will be increased if the contingent
warrants are required to be issued. The warrant component of mandatory
redeemable convertible stock and warrants will be adjusted as of each financial
statement date to reflect the fair value of the potential obligation under the
put feature as of that date based on the then fair value of the underlying
common stock, with the offset being charged or credited to interest expense.
<PAGE> 20
8. LONG-TERM DEBT (CONTINUED)
At October 2, 1999, the potential redemption amount of the warrants had
decreased to $5.2 million from $6.8 million at September 26, 1998, net of the
additional warrants noted above, due to a decrease in the fair value of the
underlying common stock, based on an independent valuation of the common stock.
The $1.6 million decrease was credited to interest expense in the Statement of
Operations. At September 26, 1998, the potential redemption amount of the
warrants had decreased to $6.8 million from $8.6 million at May 31, 1998, due to
a decrease in the fair value of the underlying common stock, based on an
independent valuation of the common stock. The $1.9 million decrease was
credited to interest expense in the Statement of Operations.
On December 10, 1999, the Amended Credit Agreement was further amended. In
connection with the amendment, the Revolving Loan commitment was reduced by $2
million to a maximum of $26 million, consent was obtained for specific
transactions, past covenant violations were waived, and future financial
covenants were reset. In consideration for the amendment, the participating
financial institutions were granted warrants to purchase 1,772,487 shares of
Class C common stock with an exercise price of $7.80 per share. Half of the
warrants (the Cancelable Warrants) are cancelable if, before April 1, 2000, the
Company receives net proceeds from the issuance of junior securities, as
defined, of at least $47.7 million, or if all of the loans under the Amended
Credit Agreement have been paid. If these warrants are canceled, the exercise
price of the remaining warrants (the Redeemable Warrants) is adjusted to the
fair value of the underlying Class A common stock, as defined, as of the
cancellation date. The Redeemable Warrants can be redeemed for an aggregate of
$0.5 million if the loans under the Amended Credit Agreement have been paid by
October 1, 2000. The exercise price of any warrants outstanding on October 1,
2000, is adjusted to $.01 per share. The cancelable and redeemable warrants are
not exercisable until after March 31, 2000 and September 30, 2000, respectively,
and have 10-year terms.
On December 10, 1999, the Senior Subordinated Notes were amended to obtain
consents and waivers. In consideration for the amendment, the holders of the
Senior Subordinated Notes were granted warrants to purchase 493,373 shares of
Class C common stock at $7.80 per share. Half of the warrants are cancelable
under terms similar to the cancelable warrants issued with the Amended Credit
Agreement amendment described above. The remaining warrants are redeemable
warrants with terms similar to the Redeemable Warrants issued with the Credit
Agreement amendment except that the aggregate redemption price is $.001 million
and the warrants can be redeemed if the Company has consolidated EBITDA, as
defined, of at least $23.5 million for the nine-month period ended June 30,
2000.
As more fully discussed in Note 18, the Cancelable Warrants issued under both
December 10, 1999 amendments were cancelled in connection with the Flextronics
transaction.
On December 10, 1999, the Company entered into Term Loan agreements totaling $10
million with BHC Interim Funding, L.P., a Delaware limited partnership and a
limited partnership controlled by the Company's Chief Executive Officer. The
proceeds were used to repay $2.5 million of principal, accrued interest and fees
owed pursuant to the Amended Credit Agreement and $3.1 million of interest and
fees on the Senior Subordinated Notes and the reminder to provide working
capital, and pay legal and closing fees related to the transaction. The Term
Loans have a stated maturity of December 10, 2000, and bear interest at an
initial rate of 13.5% with increasing interest rates if not repaid by maturity.
The Term Loan agreements also provide for a $350,000 closing fee, and
transaction fees due periodically during the maturity period. The transaction
fees vary in amounts from $150,000 if the Term Loans are repaid by March 9,
2000, to $500,000 if repaid before December 10, 2000. Additional fees are
charged if the Term Loans are not repaid by the maturity date. These transaction
fees will be accrued and recorded as additional debt discount and amortized as
additional interest expense over the period the principal is outstanding. As
more fully discussed in Note 18, transaction fees of $150,000 were paid in
conjunction with the repayment of the Term Loan principal. Additionally, as part
of the Term Loans, the Company granted warrants to the lenders to purchase
300,000 shares of Class A common stock at $7.80 per share. The estimated fair
value of these warrants of
<PAGE> 21
8. LONG-TERM DEBT (CONTINUED)
$1.6 million will be treated as additional debt discount and amortized as
additional interest expense over the period the principal is outstanding.
As more fully discussed in Note 18, the Term Loans were fully repaid with the
proceeds from the Flextronics transaction in February 2000. No additional
warrants were issued. In addition, $30 million of the proceeds of the
Flextronics transaction were used to reduce principal on the Revolving Loan,
Tranche A and B, and the Acquisition Loan on a pro rata basis.
The Company's outstanding long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Tranche A Term Loan $ 51,681 $ 54,950
Tranche B Term Loan 64,650 64,850
Acquisition Loan 45,518 32,193
Senior Subordinated Notes, net of $7,599 and $8,415 of debt
discount in 1999 and 1998, respectively 32,400 31,585
Revolving Loan 26,000 9,800
Other, including obligations under capital leases 18,443 17,525
-------- --------
238,692 210,903
Less current maturities 18,888 7,365
-------- --------
Long-term debt, less current maturities $219,804 $203,538
======== ========
</TABLE>
Maturities of long-term debt at October 2, 1999, by fiscal year, are as follows
(in thousands):
<TABLE>
<S> <C>
2000 $ 18,888
2001 26,251
2002 33,824
2003 60,638
2004 29,402
Thereafter 77,288
--------
Total 246,291
Less discount on Senior Subordinated Debt 7,599
--------
Total $238,692
========
</TABLE>
The above table of long-term debt maturities does not reflect the $30 million
prepayment of principal or the adjusted principal payment terms described above
and in Note 18.
9. RELATED PARTY TRANSACTIONS
GENERAL
William J. Kidd (Kidd) either directly or through affiliated companies is the
Company's founder. Kidd and related family trusts hold a controlling interest in
KC Enclosures, LLC, which, in turn, holds 4.5 million shares of Class A common
stock and all the Series C preferred stock of the Company.
<PAGE> 22
9. RELATED PARTY TRANSACTIONS (CONTINUED)
MANAGEMENT SERVICES AGREEMENT AND CLOSING FEE AGREEMENT
The MSA provides that KCO will perform ongoing management services including,
but not limited to, preparation of business plans and budgets, financial
planning, implementation of business plans, personnel recruiting and
compensation, and acquisitions and other business combinations. Under the
agreement, KCO is to receive from the Company an annual management fee of $1.3
million plus .75% of the purchase price paid for any Company acquisitions and
reasonable out-of-pocket expenses. Fees paid or accrued for fiscal 1999 and
1998, and for the period from August 18, 1997 through September 27, 1997, were
$2.2 million, $3.0 million, and $0.2 million, respectively.
The CFA provides that KCO will perform acquisition-related services including,
but not limited to, preparation and analysis of documents relating to
acquisitions, financing arrangements, due diligence, organizational materials,
employment agreements, and other ancillary documents. The Company, pursuant to
the CFA for fiscal 1999 and 1998 and the period from August 18, 1997 through
September 27, 1997, incurred $0.4 million, $1.3 million, and $2.6 million in
fees and $0.2 million, $0.1 million, and $1.1 million, respectively, in expense
reimbursements related to the closing of the acquisitions referred to in Note 3.
The CFA requires that the Company pay KCO 1.5% of the purchase price, as
defined, of any future acquisitions.
Combined fees under the agreements shall not exceed $3 million in any one year,
subject to certain exceptions. The MSA and CFA agreements are for a seven-year
term or expire earlier based on specified contingent events. See Note 8,
"Long-Term Debt" for limitations on payment of fees to KCO.
SUBSIDIARY REAL ESTATE LEASES
Some of the Company's subsidiaries lease real property from the previous owners
of businesses acquired who are shareholders of the Company. The lease expense
related to such properties for fiscal 1999 and 1998, and the period from August
18, 1997 through September 27, 1997, was approximately $5.7 million, $3.2
million, and $0.3 million, respectively.
Additionally, one of the Company's subsidiaries leases machinery and equipment
from the previous owner of the business who is a shareholder of the Company. The
lease expense related to such equipment for fiscal 1999 and 1998, and the period
from August 18, 1997 through September 27, 1997, was approximately $0.5 million,
$0.5 million, and $0.1 million, respectively.
CUSTOMER CONTRACT
Revenues of $17.0 and $1.4 million have been recognized during fiscal 1999 and
1998, respectively, related to a customer whose former president serves on the
Company's Board of Directors.
10. RESTRUCTURING AND OTHER CHARGES
In 1999 the Company implemented cost reduction initiatives at its corporate
office and at its business units resulting in estimated severance and other
costs related to executives and employees of approximately $4.4 million, and
other estimated exit costs, primarily related to facilities, of approximately
$1.7 million. Included in accrued expenses at October 2, 1999, are accrued
restructuring costs of $5.0 million. There were no accrued restructuring costs
at September 26, 1998.
In addition, included in fiscal 1999 and 1998 restructuring and other charges
are $1.4 million and $1.1 million, respectively, in costs previously capitalized
for acquisitions or financing transactions which were not completed by the
Company.
<PAGE> 23
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Deferred tax assets:
Non-deductible reserves $ 1,729 $ 1,950
Accrued expenses not deductible until paid 1,504 8
Organization costs 622 941
Net operating loss carryforwards 12,643 4,656
-------- --------
Total deferred tax assets 16,498 7,555
Less valuation allowance (6,807) (1,252)
-------- --------
Net deferred tax assets 9,691 6,303
Deferred tax liabilities:
Identified intangible assets (7,307) (10,267)
Property, plant, and equipment (5,853) (5,486)
Inventory (507) (760)
Other (1,284) (52)
-------- --------
Total deferred tax liabilities (14,951) (16,565)
-------- --------
Net deferred tax liabilities $ (5,260) $(10,262)
======== ========
</TABLE>
In 1999, a valuation allowance has been provided for the excess of deferred tax
assets of U.S. operations over deferred tax liabilities of U.S. operations. In
1998, the valuation allowance relates to the net operating loss carryforward of
an acquired U.S. corporation.
Net current deferred tax assets of $1.8 million and $1.2 million are included in
other current assets as of October 2, 1999 and September 26, 1998, respectively.
The Company has U.S. net operating loss carryforwards of approximately $41
million, $500,000 of which expires in 2012. The remaining net operating loss
will begin expiring in 2018. The Company has foreign net operating loss
carryforwards of approximately $4.5 million that begin expiring in 2003.
Statement of Financial Accounting Standard No. 109 requires that deferred tax
assets be reduced by a valuation allowance if their realization is not
reasonably assured. Realization of the future benefits related to the deferred
tax assets is dependent on many factors, including the Company's ability to
generate U.S. taxable income within the net operating loss carryforward period.
Management has considered these factors, in conjunction with historical results,
in determining the valuation allowance recorded in fiscal 1999.
<PAGE> 24
11. INCOME TAXES (CONTINUED)
The income tax expense/(benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
Period from
Fiscal Fiscal August 18, 1997
Year Ended Year Ended (inception) through
October 2, 1999 September 26, 1998 September 27, 1997
--------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ (439)
State 380 1,407 215
Foreign 3,522 446 --
------- ------- -------
3,902 1,853 (224)
Deferred:
Federal (4,170) (5,304) (2,433)
State (491) (618) (712)
Foreign (1,874) (416) --
------- ------- -------
(6,535) (6,338) (3,145)
------- ------- -------
Total $(2,633) $(4,485) $(3,369)
======= ======= =======
</TABLE>
A reconciliation between the income tax benefit computed at the federal
statutory rate and the recorded income tax benefit is as follows (in thousands):
<TABLE>
<CAPTION>
Period from August 18,
Fiscal Year Ended Fiscal Year Ended 1997 (inception) through
October 2, 1999 September 26, 1998 September 27, 1997
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax benefit
computed at the federal
statutory rate $(15,077) (34)% $ (6,734) (34)% $ (3,158) (34)%
State income taxes, net
of federal benefit (240) (1) 520 3 (330) (3)
Amortization of goodwill,
not deductible for tax
purposes 2,987 7 2,408 12 119 1
Foreign tax rate
differential 136 -- -- -- -- --
Foreign losses not
benefited 976 2 -- -- -- --
Foreign taxes net of
federal benefit 1,273 3 (201) (1) -- --
Repatriation of foreign
earnings 2,053 5
Non-taxable change in
amount recorded for
warrants with put
feature (350) (1) (631) (4) -- --
Valuation allowance 5,555 13 -- -- -- --
Other 54 -- 153 1 -- --
-------- -------- -------- -------- -------- --------
Income tax benefit $ (2,633) (6)% $ (4,485) (23)% $ (3,369) (36)%
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 25
11. INCOME TAXES (CONTINUED)
The effective rate for state income taxes is different from the expected benefit
rate due to Parent company expenses, principally interest and amortization of
goodwill, which are not deductible in some instances for state income tax
purposes.
12. STOCKHOLDERS' EQUITY
MANDATORY REDEEMABLE STOCK AND WARRANTS
On August 18, 1997, the Company issued $30 million face amount (12,000 and
18,000 shares, respectively) of Series B and Series D mandatory redeemable
convertible preferred stock, $.01 par value (the Series B preferred and Series D
preferred), and 195,000 shares of Class B mandatory redeemable convertible
common stock, par value $.01 (the Class B common) in a private placement to
investors for $30.2 million cash. The relative fair values of the Series B and
Series D preferred ($932 per share) and the Class B common ($1.20 per share)
were determined based upon an independent appraisal.
The Series D preferred is identical to the Series B preferred except that the
Series D preferred is not entitled to vote on one issue - the election of the
Board of Directors of the Company. On all other matters, the holders of the
Series B preferred and the Series D preferred are entitled to vote with the
holders of common stock as a single class, with the number of votes based upon
the number of shares of common stock that would be held by the holders of the
Series B preferred and the Series D preferred after conversion.
Cumulative dividends accrue daily and compound quarterly at a rate of 6% per
annum whether or not declared. Each share of the Series B preferred can
initially be converted into fifty shares of Class A common stock (the Class A
common). The conversion rate increases pursuant to a formula based on
accumulated but unpaid dividends. Upon conversion, all accrued and unpaid
dividends are extinguished. Each share of Series D preferred can be converted
into one share of the Series B preferred. Conversion of the Series B preferred
and the Series D preferred may occur at any time at the option of the holder.
Each share of Class B common is convertible at any time at the option of the
holder into ten shares of Class A common subject to anti-dilution provisions.
The Class B common is entitled to one vote for each share of Class A common into
which it is convertible.
To the extent not previously converted, on October 17, 2005, mandatory
redemption is required of the outstanding shares of Series B preferred and
Series D preferred, and any shares of Class B common held by the holders of
shares of Series B and Series D preferred being redeemed, at the liquidation
preference of $1,000 per share plus accrued dividends for the Series B preferred
and the Series D preferred, and $1 per share for the Class B common.
The Company may, at its option, subject to certain conditions, redeem all or a
portion of the redeemable convertible preferred shares at any time after the
closing of an initial public offering (IPO), as defined, of Class A common of
not less than $25 million, net of offering costs (as defined). The Company's
option to redeem is contingent upon the purchasers of the Class B common, the
Series B preferred, and the Series D preferred receiving an annualized internal
rate of return on their investment of 25%, based on the value of the underlying
Class A common on an as if converted basis. Further, if less than all of the
Series B preferred and the Series D preferred is redeemed, the Company is
required to ensure that the liquidation value (defined as $1,000 per share plus
accrued unpaid dividends) of the remaining Series B preferred and Series D
preferred, is not less than $15 million.
Future issuances of Class A common at a price less than the higher of (i) the
fair market value of the Class A common on the date of issuance or (ii) $8.90
per share (except for certain exempted employee stock options with lower
thresholds) will result in anti-dilution adjustments to the Series B preferred,
the Series D preferred and the Class B common.
<PAGE> 26
12. STOCKHOLDERS' EQUITY (CONTINUED)
On December 2, 1998 the Company sold 8,000 shares of Series E preferred to
existing shareholders for $8 million in connection with the Goeland acquisition.
The Series E preferred accrues dividends at 15% annually which are payable only
upon redemption of the Series E preferred or upon liquidation of the Company, or
as otherwise determined by the Board of Directors. If the Series E preferred is
not redeemed within two years, the dividend rate is adjusted to 35% retroactive
to the date of issuance. The Series E preferred requires mandatory redemption
upon the issuance of more than $25 million of equity securities by Chatham,
subject to approval by holders of the Series B and Series D preferred and the
Company's lenders. As discussed in Note 18, the Series E preferred was redeemed
in February 2000.
The purchasers of the Series E preferred were also granted warrants to purchase
750,000 shares of Class A common for $0.001 per share. Warrants to purchase
234,380 shares of Class A common were exercised by holders in 1999. Warrants to
purchase 515,620 of shares of Class A common remain outstanding at October 2,
1999. The issuance of Series E preferred and related warrants triggered
anti-dilution provisions related to the Class B common, the Series B and D
preferred and the Senior Subordinated Notes, the effect of which was to adjust
the conversion rates of the Class B common from 10 to 11.13 shares of Class A
common and the conversion rates of the Series B and Series D preferred from 5 to
5.85 shares of Class B common.
The terms of the Series E preferred prohibit the declaration or payment of
dividends on all of the Company's common and preferred stock, except for the
Series B and Series D preferred.
OTHER PREFERRED AND COMMON STOCK
On August 18, 1997, the Company issued 36,340 shares of Series A convertible
preferred stock, par value $.01 (the Series A preferred), with a face amount of
$36.3 million. The fair value of the Series A preferred ($1,000 per share) was
determined based on an independent appraisal. Of that amount, $250,000 was
received in cash for 250 shares, with the balance issued as a portion of the
purchase price of the companies purchased on August 18, 1997 (see Note 3).
During 1998, the Company sold 1,168 shares of Series A preferred stock for cash
at $1,000 per share to various key employees. Each share of the Series A
convertible preferred is convertible at any time at the option of the holder
into 50 shares of Class A common. Cumulative dividends accrue at a rate of $60
per share per annum whether or not declared. Except in connection with a
redemption of the Series A preferred or upon liquidation of the Company,
dividends are not paid in cash. The Company, at its option, has the right to
redeem all, but not less than all, of the Series A preferred at any time. The
Series A preferred holders are not entitled to vote on any matter except as
provided by law. The Series A preferred has a liquidation preference of $1,000
per share plus accrued but unpaid dividends. This liquidation preference is
junior to the Series B and the Series D preferred, but senior to the Series C
preferred stock, the Class B common, and the Class A common.
On August 18, 1997, the Company sold 4,680 shares of Series C preferred stock,
par value $.01 (the Series C preferred) and 4,453,300 shares of Class A common,
par value $.01 to KC Enclosures, LLC for $5.1 million cash. Cumulative dividends
accrue on the Series C preferred at an annual rate of 6% and are not payable in
cash, except in the case of a redemption of the Series C preferred, liquidation
of the Company, or as otherwise determined by the Board of Directors. Holders of
the Series C preferred do not have voting rights except for rights provided by
law. The Series C preferred has a liquidation preference of $1,000 per share
plus accumulated unpaid dividends. The Company may, at its option, redeem any or
all of the Series C preferred at any time after an IPO of the Company's
securities, providing that the Series A preferred and Series B preferred have
been converted or redeemed. The redemption price is $1,000 per share plus
accrued unpaid dividends.
In connection with the closing of the acquisitions and financing on August 18,
1997, KC Enclosures, LLC agreed to contribute all shares of the Series C
preferred to the capital of the Company upon the first to occur of: (i) an IPO;
(ii) sale or disposition, as defined, of all or substantially all of the capital
stock, businesses, or assets of the Company; or (iii) certain other events.
<PAGE> 27
12. STOCKHOLDERS' EQUITY (CONTINUED)
During fiscal 1999, the Company received gross proceeds of $1.3 million from
sales to existing shareholders of 166,660 shares of its Class A common. In 1999,
the Company also received $1 million from a limited partnership controlled by
the Company's Chief Executive Officer for the sale of 128,210 shares of Class A
common and warrants to purchase 750,000 shares of Class A common at an exercise
price of $7.80. As discussed in Note 18, the warrants were exercised in April
2000.
As of December 1999, the Company has authorized 3.0 million shares of Class C
common stock, par value $.01 per share (the Class C common), of which 514,020
shares may be issued pursuant to the warrants described in Note 8. The Class C
common is nonvoting and is convertible into Class A common on a one-for-one
basis.
The Company has 839,320 shares of authorized but undesignated preferred stock,
par value $.01.
ACCUMULATED UNPAID DIVIDENDS
Dividends accumulated and unpaid on all series of preferred stock through
October 2, 1999, are $10.3 million ($133.16 per share for Series B and D
preferred, $125.75 per share for Series E preferred, and $125.72 per share for
Series A and C preferred). Except for Series C and Series E preferred, which
have no conversion rights, upon conversion, all accumulated and unpaid dividends
are extinguished. Generally, upon redemption or liquidation, all accumulated and
unpaid dividends are paid to the extent of available assets based on liquidation
and redemption preferences. No dividends may be paid on the common stock until
accumulated unpaid dividends are paid on the preferred stock.
CONTINGENT SHARE AGREEMENT
In connection with the August 18, 1997 private placement of the Class B common,
the Series B preferred, and the Series D preferred, William J. Kidd, on behalf
of the Company and KC Enclosures, LLC executed a Contingent Share Agreement. The
agreement provides that the investors in the private placement will have the
option to purchase at an exercise price of $0.10 per share the 494,810 shares
reserved for the performance-based employee stock option of the Company's former
Chief Executive Officer to the extent that the option is terminated or expires
without being exercised. Additionally, the agreement provides that if the
investors obtain an annual internal rate of return of less than 30% on the
aggregate purchase price of the Company's securities, within a variable
measurement period, KC Enclosures, LLC will transfer to the investors 500,000
shares of Class A common owned by KC Enclosures, LLC. Under the agreement, the
annual rate of return is further defined as the rate of return that, when
applied to a future value over the measurement period, would result in a present
value of $20.1 million as of the closing of the Securities Purchase Agreement
for the Class A common into which the Series B preferred, the Series D
preferred, and the Class B common are convertible. The fair value of this
Contingent Share Agreement was approximately $1.0 million, based on the
intrinsic value of the underlying contingent Class A common shares at the
inception of the agreement, and was reflected as an additional discount to the
Series B and D preferred shares with the offsetting credit to additional
capital.
WARRANTS
The Company issued 228,300 warrants, and may issue an additional 11,156 shares
of Class A common under defined circumstances, to business brokers at W.E. Myers
& Company (WEMCO) as a portion of their brokers fee in connection with their
involvement in the acquisitions on August 18, 1997. Each warrant has a ten-year
term and provides for the purchase of one share of Class A common at an exercise
price of $0.10 per share.
<PAGE> 28
12. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
The Company has a stock option plan that provides for granting incentive stock
options (ISOs) and nonqualified stock options (NQSOs) to purchase shares of the
Company's Class A common stock to directors, officers, and other key employees.
Options may be subject to the fulfillment of restrictions or contingencies. All
options have a ten-year term.
On August 18, 1997, the Company granted a ten-year nonqualified option to its
former Chief Executive Officer to purchase 494,810 shares of Class A common at
$0.10 per share contingent upon the achievement of specified performance
criteria related to the future equity value, as defined, of the Class A common
into which the shares of Series A, Series B, and Series D preferred are
convertible. This option will result in compensation expense to the Company to
the extent of the intrinsic value of the option beginning on the date that
management determines that it is probable that the performance criteria will be
met (the initial measurement dates) with subsequent adjustments for changes in
the fair value of the option shares at interim measurement dates until the date
the option becomes exercisable or is forfeited. The amortization period will be
from the date of the option grant until the first date the option becomes
exercisable with a cumulative catch-up adjustment at the initial measurement
date and at subsequent interim measurement dates.
On August 18, 1997, the Company granted nonqualified stock options to other key
executives (the Other Key Executives' Options) to purchase 554,470 shares of
Class A common at $0.10 per share. During fiscal 1998, options to purchase an
additional 91,320 shares of Class A common were granted at $0.10 per share.
One-half of the shares under option vest ratably over a four-year period. The
other half of the options vest at the end of seven years unless the vesting is
accelerated based on performance criteria determined by the Board of Directors.
The Other Key Executives' Options were issued at an exercise price less than the
estimated fair value of the underlying Class A common at the date of grant. The
aggregate intrinsic value of the Other Key Executives' Options at the date of
grant ($1.9 million) is being amortized to compensation expense over the vesting
period of the options. Compensation expense related to these options totaled
approximately $0.4 million, $0.2 million, and $0.01 million for fiscal 1999 and
1998, and the period August 18, 1997 through September 27, 1997, respectively.
An additional 375,000 and 211,480 options were granted in fiscal 1999 and 1998
at an exercise price equal to or greater than the estimated fair market value of
the underlying Class A common at the date of grant. Of these options, 172,180
options were repriced on December 5, 1998, at an exercise price of $7.80 per
share.
Options outstanding to purchase 180,730 shares at a weighted average exercise
price of $2.27 are exercisable at October 2, 1999. Options to purchase 160,420
shares may be granted at $0.10 per share without triggering anti-dilution
adjustments, with the remaining grants to be at the greater of $6.40 per share
or fair value in order to avoid triggering anti-dilution adjustments.
In November 1999, the Board of Directors increased the total shares available
for grant under the Company's stock option plans to 3.5 million. Additional
options to purchase up to 838,500 shares of Class A were granted at the same
date.
<PAGE> 29
12. STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding the Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
---------- ----------------
<S> <C> <C>
Granted from August 18 through
September 27, 1997 1,049,280 $ 0.10
----------
Outstanding at September 27, 1997 1,049,280 0.10
Granted 302,800 21.66
----------
Outstanding at September 26, 1998 1,352,080 4.77
Granted 557,180 7.66
Canceled (338,630) 18.83
----------
Outstanding at October 2, 1999 1,570,630 2.96
==========
Available for grant in future periods 1,929,370
==========
</TABLE>
The following table summarizes information about stock options outstanding at
October 2, 1999:
<TABLE>
<CAPTION>
Weighted Average
Exercise Prices Number Outstanding Remaining Contractual Life
--------------- ------------------ --------------------------
<S> <C> <C>
$ 0.10 1,014,260 7.91 years
$ 7.80 544,680 9.29
$25.00 11,690 8.58
---------
$0.10 - $25.00 1,570,630 8.40
=========
</TABLE>
As permitted under SFAS No. 123, the Company has not recognized compensation
expense for the theoretical value of its options at the grant date (in excess of
the recognition of the intrinsic value in the Other Key Executives' Options at
that date). Had compensation cost for the Company's stock option plan been based
on the fair value of options at the grant date amortized over the vesting
period, the Company's pro forma net loss and net loss per share would be as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
Fiscal Fiscal August 18, 1997
Year Ended Year Ended (inception) through
October 2, September 26, September 27,
1999 1998 1997
------------- ------------ -------------------
<S> <C> <C> <C>
Net loss attributed to
common stockholders:
As reported $ (50,030) $ (20,036) $ (6,424)
Pro forma (50,184) (20,084) (6,440)
Net loss per share attributed
to common stockholders:
As reported - basic $ (8.30) $ (4.09) $ (1.44)
As reported - diluted (8.30) (4.15) (1.44)
Pro forma - basic (8.32) (4.10) (1.45)
Pro forma - diluted (8.32) (4.19) (1.45)
</TABLE>
<PAGE> 30
12. STOCKHOLDERS' EQUITY (CONTINUED)
In determining the fair value of options granted for purposes of the preceding
pro forma disclosures, the Company used the minimum value option-pricing model
with the following weighted average assumptions for fiscal 1999 and 1998, and
the period from August 18, 1997 through September 27, 1997, respectively:
risk-free interest rate of 5.2%, 5.6%, and 6.3%; dividend yield of zero; and an
expected option life of 5.0 years, 3.7 years, and 5.0 years. The options granted
during fiscal 1999 and 1998 had a weighted average fair value of $4.84 and
$2.46, respectively, per share, and those granted during the period from August
18 through September 27, 1997, had a weighted average fair value of $1.08 per
share.
RESERVED CAPITAL SHARES
The Company has reserved the following shares of Class A common as of October 2,
1999:
<TABLE>
<S> <C>
Conversion of Series B preferred and Series D preferred including the
impact of future dividends if held to mandatory redemption date 2,147,450
Conversion of Series A preferred 1,875,400
Conversion of Class B common 2,170,350
Stock Option Plan 1,570,630
Warrants 2,205,660
---------
Total 9,969,490
=========
</TABLE>
STOCK SPLIT
Effective October 3, 1999, the Company authorized a ten-for-one stock split of
the Company's Class A common in the form of a dividend of nine shares for each
outstanding share of Class A common. Each holder of outstanding shares of Class
A common shall have in the aggregate ten times the number of shares of Class A
common such holder had immediately prior to the stock split. These financial
statements and footnotes give retroactive effect to the stock split for all
periods presented, as well as conversion ratios for all convertible securities.
13. EMPLOYEE BENEFITS
As of September 1, 1998, the Company consolidated its five separate domestic
401(k) plans into one savings plan (the Plan). Participants may contribute
portions of their annual compensation to the Plan and matching contributions of
50% are to be made by the Company, subject to a 6% participant contribution
limit, based on criteria set forth in the Plan agreements. The Plan covers all
employees who have completed service requirements in excess of twelve
consecutive months and who have elected to participate.
Company contributions to the Plan totaled $0.9 million, $0.4 million, and $0.1
million for fiscal 1999 and 1998, and the period from August 18, 1997 through
September 27, 1997, respectively.
<PAGE> 31
14. COMMITMENTS
The Company has capital leases for machinery and equipment, and operating leases
relating principally to its buildings. Future minimum lease commitments at
October 2, 1999, for leases with initial or remaining terms of more than one
year, are summarized by fiscal year as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
2000 $ 4,305 $ 6,441
2001 3,744 5,777
2002 2,585 5,337
2003 1,203 4,044
2004 178 4,029
Thereafter 223 17,521
------- -------
12,238 $43,149
=======
Less amount representing interest 1,189
-------
Present value of minimum lease payments 11,049
Less current portion 2,617
-------
Long-term portion of obligations under capital leases $ 8,432
=======
</TABLE>
Obligations under capital lease are included in long-term debt (see Note 8).
Rental expense under operating leases was approximately $7.0 million, $3.6
million, and $0.5 million for fiscal 1999 and 1998, and for the period from
August 18, 1997 through September 27, 1997, respectively.
15. CONTINGENT LIABILITIES
On February 12, 1996, a lawsuit was filed by Robert Fritschi and Material
Resource Associates, Inc., against one of the Company's subsidiaries, Kingston
Metal Specialties Co. (Kingston) and its president. The plaintiffs alleged that
Kingston failed to pay commissions due on sales to one of Kingston's customers.
Compensatory damages of $10 million were sought for each of eight counts, and
punitive damages of $20 million were sought on one count. The case was settled
in February 2000, with the Company paying $1.2 million to the plaintiffs, of
which $0.5 million was refunded by the seller of Kingston in accordance with an
indemnification agreement between the Company and the seller.
Two lawsuits have been filed by several former employees of Electrical Concepts
& Assemblies, Incorporated (ECA), a subsidiary of the Company, claiming that
they owned shares in ECA prior to the sale date. Under the terms of the Purchase
Agreement between ECA and the Company, the Company will be indemnified by the
previous owners for any liability and related expenses.
The Company's subsidiaries are defendants from time to time in lawsuits
incidental to their businesses. The Company believes that resolution of all
known contingencies, including the litigation described above, is uncertain, and
there can be no assurance that future costs related to such litigation would not
be material to the Company's financial position or results of operations.
<PAGE> 32
16. INTERNATIONAL OPERATIONS
The Company operates in the telecommunications equipment industry segment.
A summary of the Company's operations by geographic area is presented below for
fiscal 1999 and 1998 (in thousands). All operations for the period from August
18, 1997 through September 27, 1997, were based in the United States.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
October 2, 1999 September 26, 1998
----------------- ------------------
<S> <C> <C>
Revenue from unaffiliated customers:
United States $ 196,013 $ 170,703
Europe 192,459 42,582
Other international 9,864 1,238
Eliminations (21,339) (7,787)
--------- ---------
Consolidated $ 376,997 $ 206,736
========= =========
Intercompany revenue between geographic areas:
United States $ 4,481 $ 7,724
Europe (5,918) 63
Other international 6,120 --
Eliminations (4,683) (7,787)
--------- ---------
Consolidated -- --
========= =========
Operating income (loss) before amortization
of goodwill and intangibles:
United States $ 4,817 $ 14,906
Europe 10,176 1,462
Other international (1,290) (170)
--------- ---------
Consolidated $ 13,703 $ 16,198
========= =========
Identifiable assets, excluding goodwill and
other intangible assets:
United States $ 134,457 $ 105,820
Europe 75,027 59,988
Other international 3,649 3,750
--------- ---------
Consolidated $ 213,133 $ 169,558
========= =========
</TABLE>
17. YEAR 2000 (UNAUDITED)
Chatham Technologies experienced no negative impact to systems or operations at
any of the Company's domestic or international sites during the transition to
Year 2000. Costs associated with Year 2000 remediation are not considered to be
material, and no additional Year 2000 related costs are expected to be incurred
by the Company. The Company does not anticipate any additional Year 2000
exposure with respect to future operations.
<PAGE> 33
18. SUBSEQUENT EVENTS (UNAUDITED)
In February 2000, the Company entered into a Subordinated Loan Agreement
totaling $125 million (the Subordinated Loan Agreement) with Flextronics
International Ltd (the Lender). The Lender funded the Company $75 million on the
closing date and the Company issued a promissory note (the Initial Note) to the
Lender for this amount. The lender has the option to fund the additional $50
million on or before August 31, 2000, subject to terms and conditions set forth
in the Subordinated Loan Agreement. The proceeds were used to fully repay the
$5.0 million Term Loans with BHC Interim Funding, L.P., fully redeem the $5.0
million Term Loans with Manire Limited Partnership, a partnership controlled by
the Company's Chief Executive Officer, redeem all outstanding Series E preferred
stock for $9.6 million, and repay $7.0 million on the Acquisition Facility, $8.1
million and $10.6 million on the Tranche A and Tranche B term loans,
respectively, and repay $4.3 million on the Revolving Loan. The remaining loan
proceeds of approximately $25 million were retained in cash and short-term
investments by the Company.
The Initial Note matures on February 18, 2007, and accrues interest at a rate of
13% per annum, with the rates increasing on each funding date up to a maximum
interest rate of 16%. The Subordinated Loan Agreement is unsecured and is junior
to the Credit Agreement, the Senior Subordinated Notes, and all capital lease
obligations. The Subordinated Loan Agreement contains negative and financial
covenants consistent with covenants contained in the Amended Credit Agreement
and Senior Subordinated Notes.
In connection with the Subordinated Loan Agreement, the Amended Credit Agreement
and Senior Subordinated Notes were further amended. Amendments to the Credit
Agreement included a reduction in maturities and the cancellation of the
Cancelable Warrants described in Note 8.
In April 2000, the limited partnership controlled by the Company's Chief
Executive Officer exercised its warrants to purchase 750,000 shares of Class A
common at an exercise price of $7.80 per share.
<PAGE> 34
(b) Pro Forma Financial Information.
The required unaudited consolidated pro forma condensed combined
consolidated financial statements and notes thereto of Flextronics are
incorporated by reference to Flextronics' current report on Form 8-K
filed with the Securities and Exchange Commission on September 20,
2000.
(c) Exhibits.
2.01 Agreement and Plan of Reorganization dated as of July 31, 2000
by and among Flextronics International Ltd., Chatham Acquisition
Corporation and Chatham Technologies, Inc. (Incorporated by
reference to Exhibit 2.01 to Flextronics' current report on Form
8-K, filed with the Commission on September 15, 2000.)
23.01 Consent of Ernst & Young LLP.
<PAGE> 35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Flextronics International Ltd. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FLEXTRONICS INTERNATIONAL LTD.
Date: November 14, 2000 By: /s/ Robert R.B. Dykes
--------------------------------------
Robert R. B. Dykes
President, Systems Group and
Chief Financial Officer
<PAGE> 36
EXHIBIT INDEX
2.01 Agreement and Plan of Reorganization dated as of July 31, 2000
by and among Flextronics International Ltd., Chatham Acquisition
Corporation and Chatham Technologies, Inc. (Incorporated by
reference to Exhibit 2.01 to Flextronics' current report on Form
8-K, filed with the Commission on September 15, 2000.)
23.01 Consent of Ernst & Young LLP.
