<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24416
ADFLEX SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3186513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 W. CHANDLER BLVD., CHANDLER, AZ 85224
(602) 963-4584
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the issuer's common stock, as of March 31,
1996:
COMMON STOCK, $.01 PAR VALUE: 8,575,592 SHARES
<PAGE> 2
ADFLEX SOLUTIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995..............................3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995........................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995........................5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................10
SIGNATURES.......................................................................11
EXHIBITS
(11.1) Computation of Net Income per Share
(27) Financial Data Schedule
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ADFlex Solutions, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 1,147 $ 15,699
Accounts receivable, net 27,626 15,592
Receivable for taxes 6,349 6,269
VAT receivable 1,534 --
Inventories 16,681 16,824
Other current assets 1,473 1,294
-------- --------
Total current assets 54,810 55,678
Property, plant & equipment, net 40,480 35,289
Purchased intangibles, net 15,114 15,937
Other assets 14 14
-------- --------
$110,418 $106,918
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 7,600 $ --
Acquisition payable -- 12,375
Accounts payable 14,524 7,257
Accrued liabilities 3,755 5,996
Liability for taxes 6,349 6,269
Accrued taxes 2,235 513
Current portion of long-term debt
and capitalized leases 2,637 2,632
-------- --------
Total current liabilities 37,100 35,042
Deferred tax liabilities 446 471
Long-term debt and capitalized leases 7,805 7,851
Stockholders' equity 65,067 63,554
-------- --------
$110,418 $106,918
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
ADFlex Solutions, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales $ 38,082 $ 21,980
Cost of sales 30,884 15,788
-------- --------
Gross profit 7,198 6,192
Operating expenses:
Engineering, research & development 1,666 1,068
Selling, general & administrative 3,189 1,903
Amortization of intangible assets 795 --
-------- --------
Total operating expenses 5,650 2,971
-------- --------
Operating income 1,548 3,221
Other income (expense), net (197) 285
-------- --------
Income before income taxes 1,351 3,506
Income taxes 511 1,300
-------- --------
Net income $ 840 $ 2,206
======== ========
Net income per share $ 0.10 $ 0.31
======== ========
Common and common equivalent shares used in
the calculation of net income per share 8,612 7,068
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
ADFlex Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
-------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 840 $ 2,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,118 422
Deferred taxes 171 142
Changes in operating assets and liabilities:
Accounts receivable (12,034) (2,537)
VAT receivable (1,534) --
Inventories 143 62
Other current assets (375) (85)
Accounts payable and accrued liabilities 6,749 2,080
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING (3,922) 2,290
ACTIVITIES
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Capital expenditures (6,514) (1,285)
Decrease in other assets 27 --
Decrease in acquisition payable (12,375) --
Sales of available-for-sale securities -- 23,949
Purchases of available-for-sale securities -- (23,141)
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (18,862) (477)
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Net activity on line of credit 7,600 --
Payments on capitalized lease obligations (41) (31)
Issuance of common stock, net of expenses 673 262
-------- --------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 8,232 231
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH (14,552) 2,044
EQUIVALENTS
Cash and cash equivalents at beginning of period 15,699 4,025
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,147 $ 6,069
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
ADFLEX SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
Effective December 31, 1995, the Company and Havant International
Holdings Limited (HIHL) entered into an agreement whereby the Company purchased
all outstanding capital shares of Havant International Limited, an HIHL
subsidiary containing the flexible interconnect division and certain net assets,
including inventory, fixed assets, certain receivables and liabilities and
purchased intangibles. The division was involved in the design, manufacture,
assembly and sale of flexible interconnects. In exchange for the capital shares,
the Company paid consideration consisting of $12.4 million in cash, a $10.0
million subordinated debenture and 1,242,347 shares of restricted Common Stock.
Upon completion of the acquisition the business was renamed and now operates as
ADFlex Solutions Limited (ADFlex U.K.). The acquisition was accounted for using
the purchase method of accounting; therefore, the accompanying unaudited
condensed consolidated financial statements include the accounts of ADFlex U.K.
since the date of acquisition.
(2) SHORT-TERM INVESTMENTS
The Company held no short term investments at March 31, 1996 or
December 31, 1995. Included in cash and cash equivalents at March 31, 1996 and
December 31, 1995 are available-for- sale securities totaling $263,000 and
$15,699,000, respectively, at cost and fair value. For the three month periods
ending March 31, 1996 and March 31, 1995, there were no gross realized gains or
losses on sales of available-for-sale securities. There was no net adjustment to
unrealized holding gains (losses) on available-for-sale securities during the
same periods.
(3) ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Accounts receivable trade $ 28,115 $ 16,234
Allowance for doubtful accounts and returns
(489) (642)
-------- --------
$ 27,626 $ 15,592
======== ========
(4) INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
1996 1995
-------- ------------
Raw materials $ 7,502 $ 7,309
Work-in-process 8,394 9,153
Finished goods 785 362
-------- --------
$ 16,681 $ 16,824
======== ========
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales for the three month period ended March 31, 1996 increased 73%
over the same period in 1995 due to the inclusion of sales from the Company's
recently acquired ADFlex U.K. operation. Excluding the effect of ADFlex U.K.,
sales for the three months ended March 31, 1996 were negatively impacted by
order delays and cancellations from three major customers due to internal
problems they experienced resulting in a 7% decrease in net sales for the period
as compared with the same period in 1995.
Gross Profit
Gross profit as a percentage of net sales (gross margin) was 19% for
the three months ended March 31, 1996 as compared to 28% for the same period in
1995. The Company's gross margin for 1996, as compared to 1995, was impacted by
the integration of the ADFlex U.K. assembly operation, lower efficiencies and
capacity utilization resulting from order delays and cancellations and increased
depreciation expense.
The acquisition of ADFlex U.K. was completed effective December 31,
1995. The results for the three month period ended March 31, 1996 include the
accounts of ADFlex U.K. for the entire three month period. ADFlex U.K.
manufactures high end circuit assemblies whereas ADFlex's U.S. operations have
historically focused on the manufacture and fabrication of circuits. Due to the
additional components and high dollar value of integrated circuits added in the
assembly process, full assemblies contain a material content which, on average,
is nearly twice that of the circuit. As the Company is not able to obtain a
comparable margin on this additional material content, the overall gross margins
on assemblies are lower than those of circuits. Overall gross margins in the
near term have been adversely affected by the integration of the ADFlex U.K.
operations. However, the Company believes that over time the consolidation of
the two operations will provide improvements in production costs through higher
product yields, faster production ramps, reduced inventories, shorter production
cycle times, improved account control and increased leverage over expenses,
resulting in improved margins.
As discussed above, during the three month period ended March 31, 1996
the Company's net sales were negatively impacted by order delays and
cancellations from three major customers. As it is difficult for the Company to
readily reduce spending in areas such as fixed costs, research and development,
and on-going customer service, this reduction in sales resulted in reduced
efficiencies and capacity utilization thus adversely impacting the gross margin
for the period.
Late in the first quarter of 1995, in response to increasing sales
levels, the Company began a capacity expansion plan. This expansion plan
resulted in increased capital expenditures and increased depreciation expense
during 1995 and throughout the first quarter of 1996. For the quarter ended
March 31, 1996, depreciation expense as a percentage of net sales was 3.5%
compared with 1.9% for the same period in 1995.
Operating Expenses
Engineering, research, & development expenses and selling, general &
administrative expenses as a percentage of net sales for the three month period
ended March 31, 1996 were 4.4% and 8.4% compared with 4.8% and 8.7% for the same
period in 1995, respectively. The decrease is due to the increased leverage of
such expenses through the integration of ADFlex U.K. operations. Amortization of
intangibles purchased in the acquisition of ADFlex U.K. was $0.8 million, or
2.1% of net sales, for the three month period ended March 31, 1996.
Interest and Other Income (Expense)
For the three month period ended March 31, 1996 other income (expense)
includes $0.2 million of interest expense on the $10 million subordinated
debenture issued in connection with the purchase of ADFlex U.K., the impact of
bank fees, and translation gains or (losses). Other income (expense) for the
same period in 1995 represents the net interest income generated on the
investment of the proceeds of the Company's initial and secondary public
offerings, after retiring $1.1 million in debt, the impact of bank fees and
translation gains or (losses).
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
For the three month period ended March 31, 1996 the Company has funded
its needs from cash generated by operations and $7.6 million in proceeds from an
available line of credit. For the comparable period in 1995, the Company funded
its cash needs from cash generated by operations and from proceeds generated
through sales of short-term investments and common stock.
Net cash used by operating activities for the three month period ended
March 31, 1996 was $3.9 million compared with net cash provided of $2.3 million
for the same period in 1995. The Company experienced a $1.4 million reduction in
net income for the 1996 period as compared with 1995 due in part to a $0.9
million increase in depreciation expense and $0.8 million in amortization of
intangible assets. During the period the Company required an additional $12.0
million in working capital for funding of accounts receivable associated with
its U.K. operations as receivables were not purchased in the acquisition. This
working capital requirement was funded through the generation of accounts
payable and accrued liability balances and from borrowings on the Company's
existing line of credit.
Net cash used in investing activities was $18.9 million for the three
months ended March 31, 1996 compared with $0.5 million for the same period in
1995. Late in the first quarter of 1995, the Company began a capacity expansion
plan in response in increasing sales levels. This expansion continued into the
three month period ending March 31, 1996, during which the Company spent $6.5
million on capital expenditures. In January, 1996 the Company paid $12.4 million
in connection with its acquisition of the ADFlex U.K. operations. This payment
and the majority of the capital expenditures were financed from existing cash
and cash equivalent balances.
Net cash provided by financing activities for the three months ended
March 31, 1996 was $8.2 million compared with $0.2 million for the same period
in 1995. The Company generated $0.7 million and $0.3 million in the three months
ended March 31, 1996 and 1995, respectively, through sales of its common stock.
Additionally, in 1996 the Company borrowed $7.6 million on its bank line of
credit.
At March 31, 1996 the Company's quick ratio of .99 fell below the quick
ratio covenant of 1.00 established in its existing line of credit. The lenders
have waived compliance with this financial covenant for the quarter ending March
31, 1996, and the Company is currently negotiating with its lenders for
amendments to the existing line of credit covenants to provide additional
flexibility with respect to certain covenants which would allow the Company to
more adequately meet its future working capital requirements. No assurances can
be given that the Company will be able to obtain such amendments to the credit
facility.
OTHER MATTERS
Foreign Operations
The Company's primary finishing and assembly facilities are located in
Agua Prieta, Mexico and Havant, United Kingdom. While the Company believes that
it has established good relationships with its labor force and the local
governments, the spread of the manufacturing process over multiple countries
subjects the Company to risks inherent in international operations. In light of
the Company's increased international presence, the Company is in the process of
developing and implementing a foreign exchange policy to mitigate against the
risk of foreign currently fluctuations in its operations. All of the Company's
sales for the three months ended March 31, 1996 were in United States dollars.
Future Operations
The Company has been conducting environmental studies of its facility
in Chandler, Arizona. In connection with these studies, the Company has
discovered a limited amount of soil contamination that may require remediation.
While the investigation of the extent of this contamination is not yet complete,
based on the preliminary information currently available to it, the Company
believes that the costs associated with the investigation and remediation of
this situation will not have a material adverse effect on its operations or
financial condition; however, given the uncertainties associated with
environmental contamination, until a full investigation has been completed there
can be no assurance that such costs will not have a material adverse impact on
the Company. Pursuant to the agreements governing the Rogers Acquisition, Rogers
has retained all environmental liabilities existing prior to the date of the
transaction. While Rogers currently has sufficient assets to fulfill its
obligations under the acquisition agreements, if pre-closing environmental
liabilities requiring remediation are discovered and the Company was unable to
enforce
8
<PAGE> 9
the acquisition agreement against Rogers, the Company could become subject to
costs and damages relating to such environmental liabilities. Any such costs and
damages imposed on the Company could materially adversely affect the Company's
business, financial condition and results of operations.
In mid 1995, the Company acquired a manufacturing facility located in
Agua Prieta, Mexico. In connection with this acquisition, the Company conducted
an environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the sellers have agreed to diligently pursue in good faith an
approved remediation plan with the appropriate Mexican authorities; provided
that the sellers' obligation for cost of remediation is limited to $2,500,000. A
total of $975,000 is being held in escrow pending sellers' performance of their
environmental obligations under the agreement.
The Company is subject to a variety of environmental laws relating to
the storage, discharge, handling, emission, generation, manufacture, use and
disposal of hazardous material used to manufacture the Company's flex products.
The Company believes that it has been operating its facilities in substantial
compliance in all material respected with existing environmental laws. However,
the Company cannot predict the nature, scope or effect of legislation or
regulatory requirements that could be imposed or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not previously been applied. Compliance with more
stringent environmental laws, as well as more vigorous enforcement policies of
regulatory agencies, could require substantial expenditures by the Company and
could adversely affect the results of operations of the Company.
In fiscal 1993, 1994 and 1995 the Company experienced sequential
increases in net sales in each of the first three quarters of the year. In 1993,
1994 and 1995, fourth quarter net sales were less than third quarter net sales
as a result of cycles in the markets the Company serves, primarily the computer
and computer peripherals markets. The Company expects the pattern of a fourth
quarter decline in net sales to continue in 1996.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements that involve risks and
uncertainties, including but not limited to the Company's ability to achieve
improved production costs through integration of its U.K. operations, its
ability to obtain an amendment to its existing credit facility, risks of foreign
operations, risks of future order cancellations, environmental matters and other
risks detailed herein and in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and other Securities and Exchange Commission
filings.
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(11.1) Computation of Net Income Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K.
One report on Form 8-K was filed by the Company for the three
months ended March 31, 1996. The report dated January 7, 1996 concerns the
Company's completion of a Share Sale and Purchase Agreement for the purchase of
all outstanding capital shares of Havant International Limited. The report was
filed on January 22, 1996 and amended on March 22, 1996.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADFlex Solutions, Inc.
Date: May 3, 1996 By /s/ Michael L. Pierce
-------------------------------------------
Michael L. Pierce
Executive Vice President, Secretary and
Acting Chief Financial Officer
(Duly Authorized Officer, and
Principal Financial and Accounting Officer)
11
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EXHIBIT 11.1
ADFLEX SOLUTIONS, INC.
EXHIBIT (11.1) - COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
Net income $ 840 $2,206
====== ======
WEIGHTED AVERAGE SHARES:
Common shares outstanding 8,530 6,616
Common equivalent shares representing
shares issuable upon exercise of stock
options (1) 82 452
------ ------
Total weighted average shares -
primary 8,612 7,068
====== ======
Total weighted average shares -
fully diluted 8,612 7,068
====== ======
Primary net income per common and
common equivalent share $ .10 $ .31
====== ======
Fully diluted net income per common
and common equivalent share $ .10 $ .31
====== ======
</TABLE>
- - - --------
(1) Amount calculated using the treasury stock method and fair market values
for stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,147
<SECURITIES> 0
<RECEIVABLES> 35,998
<ALLOWANCES> 489
<INVENTORY> 16,681
<CURRENT-ASSETS> 54,810
<PP&E> 45,115
<DEPRECIATION> 4,635
<TOTAL-ASSETS> 110,418
<CURRENT-LIABILITIES> 37,100
<BONDS> 8,251
0
0
<COMMON> 85
<OTHER-SE> 64,982
<TOTAL-LIABILITY-AND-EQUITY> 110,418
<SALES> 38,082
<TOTAL-REVENUES> 38,082
<CGS> 30,884
<TOTAL-COSTS> 30,884
<OTHER-EXPENSES> 5,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 1,351
<INCOME-TAX> 511
<INCOME-CONTINUING> 840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 840
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
