<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ADFLEX SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3679 04-3186513
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2001 WEST CHANDLER BOULEVARD
CHANDLER, ARIZONA 85224
(602) 963-4584
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROLANDO C. ESTEVERENA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ADFLEX SOLUTIONS, INC.
2001 WEST CHANDLER BOULEVARD
CHANDLER, ARIZONA 85224
(602) 963-4584
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
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KAREN C. MCCONNELL, ESQ. THOMAS W. KELLERMAN, ESQ.
W. T. EGGLESTON, JR., ESQ. GREG T. WILLIAMS, ESQ.
FENNEMORE CRAIG, P.C. BROBECK, PHLEGER & HARRISON LLP
3003 NORTH CENTRAL, SUITE 2600 TWO EMBARCADERO PLACE
PHOENIX, ARIZONA 85213-2912 2200 GENG ROAD
(602) 916-5000 PALO ALTO, CALIFORNIA 94303
(415) 424-0160
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value........... 3,105,000 $22.625 $70,250,625 $21,288.07
========================================================================================================================
</TABLE>
(1) Includes shares of Common Stock subject to the Underwriters' over-allotment
option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the high and low sales prices reported
by the Nasdaq National Market on October 15, 1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1997
[ADFLEX LOGO]
2,700,000 SHARES
COMMON STOCK
Of the 2,700,000 shares of Common Stock offered hereby, 1,307,653 shares
are being offered by ADFlex Solutions, Inc. ("ADFlex" or the "Company") and
1,392,347 shares are being offered by a Selling Stockholder. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of the shares by the Selling Stockholder. On October 20, 1997, the last
sale price of the Company's Common Stock, as reported on the Nasdaq National
Market, was $27.1875 per share. See "Price Range of Common Stock." The Common
Stock is traded on the Nasdaq National Market under the symbol "AFLX."
-------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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==================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDER
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
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Total(2)...................... $ $ $ $
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</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $400,000.
(2) The Company and other Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 405,000 shares of Common Stock
solely to cover over-allotments, if any. See "Underwriting." If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to all Selling Stockholders
will be $ , $ , $ and $ , respectively.
-------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco, California
on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
PAINEWEBBER INCORPORATED
The date of this Prospectus is , 1997
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Summary............................................................................... 3
Risk Factors.......................................................................... 5
Use of Proceeds....................................................................... 16
Price Range of Common Stock........................................................... 16
Dividend Policy....................................................................... 16
Capitalization........................................................................ 17
Selected Consolidated Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 20
Business.............................................................................. 29
Management............................................................................ 42
Principal and Selling Stockholders.................................................... 44
Underwriting.......................................................................... 46
Legal Matters......................................................................... 47
Experts............................................................................... 48
Available Information................................................................. 48
Incorporation of Certain Documents by Reference....................................... 48
Consolidated Financial Statements..................................................... F-1
</TABLE>
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The logo of ADFlex is a trademark of the Company. This Prospectus also
includes trademarks of other companies. All trademarks or tradenames of other
companies referred to in this Prospectus are the property of their respective
owners. The principal executive offices of the Company are located at 2001 West
Chandler Boulevard, Chandler, Arizona 85224, telephone (602) 963-4584.
2
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. This Prospectus may contain forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in any forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
ADFlex Solutions, Inc. ("ADFlex" or the "Company") is a leading worldwide
provider of flexible circuit interconnect solutions to original equipment
manufacturers ("OEMs") in the electronics industry. The Company offers a full
range of customized flexible circuit applications and services from initial
design, development and prototype to fabrication, assembly and test on a global
basis. The Company targets high-volume markets where miniaturization, form and
weight are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by the Company include
notebook computers, portable communication devices such as cellular telephones
and pagers, data storage devices such as hard disk drives ("HDDs"), tape drives
and arrays, and high-end consumer electronics products such as compact disk
players. The Company's principal customers include Compaq, Digital Equipment,
IBM, Iomega, Motorola, Nokia, Philips, Seagate, Storage Technology and other
leading electronics OEMs.
Flexible circuits consist of copper conductive patterns on flexible
substrate materials, such as polyimide, and provide electrical connection
between components in electronic systems. Flexible circuit interconnects
frequently incorporate components such as integrated circuits ("ICs"),
connectors, stiffeners, resistors and capacitors mounted directly on a flexible
circuit. With the proliferation of electronic applications, electronic products
have become smaller, lighter and more portable. To meet the challenges
represented by the increased complexity of miniaturization, form and weight
requirements, OEMs have increasingly turned to flexible circuit interconnect
solutions because they minimize the weight and expense of connectors and other
packaging components, conform to contoured, ergonomic shapes or small spaces and
provide mechanical flexure. BPA (Technology and Management) Ltd. ("BPA") and
other leading industry sources estimate that the worldwide market for flexible
circuits grew by a compound annual rate of 14% per year from 1990 through 1995
and reached $2.4 billion in sales in 1996 (excluding flexible circuit
interconnect assemblies). BPA and these other sources also estimate that sales
of flexible circuits will grow at a compound annual rate of approximately 21%
per year from 1995 through 2000. Based on this and other data, the Company
believes the flexible circuit assembly market is more than two times the size of
the fabricated flexible circuit market.
At the same time that the trend toward miniaturization and portability
increases product complexity, electronics OEMs face escalating time-to-market
requirements. In response, the Company acquired the advanced flexible circuit
assembly operations of Havant International Holdings Limited ("Xyratex"), now
operating as ADFlex Solutions Limited ("ADFlex U.K."), in December 1995 to
accelerate its strategy of providing a "one-stop-shop" solution to enable
customers to meet time-to-market challenges. Time-to-market and cost issues have
also led OEMs to focus on global sourcing from a limited number of qualified
suppliers. As a result, the Company continues to migrate its flexible circuit
production and assembly operations to lower cost regions, such as Mexico and
Thailand, that have proximity to the Company's OEM customer base. The Company
believes its "one-stop-shop" offerings of flexible circuits and assemblies are a
competitive advantage that will allow it to increase its market share with
existing customers and will create opportunities to attract new customers. The
Company believes it is a preferred supplier for the majority of its customers'
high-end and high-volume flexible circuit interconnect requirements.
3
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THE OFFERING
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<S> <C>
Common Stock Offered by the Company.............. 1,307,653 shares
Common Stock Offered by the Selling
Stockholder.................................... 1,392,347 shares
Common Stock Outstanding after the Offering...... 10,073,182 shares(1)
Use of Proceeds.................................. Repay certain indebtedness and for general
corporate purposes, including expanding
the Company's manufacturing operations in
Thailand, other capital expenditures and
working capital.
Nasdaq National Market Symbol.................... AFLX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................ $77,733 $101,163 $156,836 $110,011 $159,524
Gross profit............................. 23,921 28,055 18,563 12,147 26,667
Operating income(loss)(2)................ 12,117 468 (33,691) (34,998) 9,397
Net income (loss)(2)..................... 7,046 (3,723) (25,024) (25,484) 5,349
Net income (loss) per share(2)........... $ 1.26 $ (0.54) $ (2.92) $ (2.97) $ 0.60
Number of shares used in computing net
income (loss) per share................ 5,578 6,855 8,580 8,576 8,863
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................................ $ 28,386 $ 36,510
Total assets........................................................... 106,482 114,606
Long-term debt and capitalized leases.................................. 25,061 61
Total equity........................................................... 47,180 80,554
</TABLE>
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(1) Based upon 8,765,529 shares outstanding as of September 30, 1997. Excludes
options outstanding as of September 30, 1997 to acquire 674,636 shares of
Common Stock at a weighted average exercise price of $13.41 per share and an
additional 478,120 shares of Common Stock reserved for issuance under the
Company's stock incentive and stock purchase plans.
(2) For the year ended December 31, 1995, the Company recorded a charge of $13.9
million related to the write-off of in-process technology in conjunction
with the ADFlex U.K. acquisition. For the year ended December 31, 1996, the
Company recorded a charge of $29.2 million (pre-tax) related to the
restructuring of the Company's U.K. operations. See Note 2 of Notes to
Consolidated Financial Statements.
(3) Adjusted to give effect to the sale of 1,307,653 shares of Common Stock
offered by the Company hereby, at an assumed public offering price of
$27.1875 per share, after deducting the underwriting discounts and
commissions and estimated related offering expenses. See "Use of Proceeds"
and "Capitalization."
4
<PAGE> 7
RISK FACTORS
In addition to the other information included or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing shares of the Common
Stock offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied in the past and may
continue to fluctuate significantly in the future. At times in the past, the
Company's net sales and net income have remained consistent with or decreased
from the prior quarter. There can be no assurance that the Company's net sales
or net income will increase from quarter to quarter. The Company experienced
losses in 1995 and 1996 and could do so again in the future. Operating results
are affected by a number of factors, including: the size and timing of orders
from and shipments to major customers; the timing of introductions of new
products and product enhancements by the Company or its competitors; the level
of price and product competition; the Company's ability to develop, introduce
and market new, technologically advanced products; the cyclicality of the data
storage industry; trends in the electronics industry; the rescheduling or
cancellation of orders by the Company's customers; variations in the Company's
customer base and product mix; the availability and cost of key production
materials and components; the Company's ability to effectively manage its
inventory and to control costs; the financial stability of major customers; the
Company's success in expanding its foreign operations; personnel changes;
expenses associated with acquisitions; fluctuations in amortization and
write-downs of intangible assets; exchange rate fluctuations; the number of
working days in a particular quarter; and general economic factors. In recent
years, the Company's gross margins have varied primarily as a result of capacity
utilization, product mix, lead times, volume levels and complexity of customer
orders. There can be no assurance that the Company will be able to manage the
utilization of manufacturing capacity or product mix in a manner that would
maintain or improve gross margins or the Company's business, financial
condition, results of operations and cash flows. An interruption in
manufacturing resulting from shortages of equipment, raw materials or
components, fire or other natural disaster, equipment failure or otherwise would
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows. The Company's expense levels are
relatively fixed and are based, in part, on expectations of future revenues.
Consequently, if revenue levels are even slightly below expectations, this is
likely to materially adversely affect the Company's net income. Results of
operations in any period are not necessarily indicative of the results to be
expected for any future period. Due to all of the foregoing factors as well as
other factors, it is possible that in some future quarter or quarters the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event could have a material adverse effect on
the price of the Company's Common Stock. See "-- Market and Customer
Concentration," "-- Volatility of Stock Price," "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
VARIABILITY OF ORDERS
The level and timing of orders placed by the Company's customers vary due
to a number of factors, including customer attempts to manage inventory, changes
in the customers' manufacturing strategies and variation in demand for customer
products due to, among other things, technological change, new product
introductions, product life cycles, competitive conditions and general economic
conditions. All of the Company's sales are derived from custom-designed products
to a limited number of customers in limited markets. In general, the Company's
customers do not enter into long-term purchase agreements with the Company.
Typically, a substantial portion of sales in a given quarter depends on
obtaining orders for products to be manufactured and shipped in that same
quarter. The Company relies on its estimate of anticipated future volumes when
making commitments regarding the level of business that it will seek and accept,
the mix of products that it intends to manufacture, the timing of production
schedules and the levels and utilization of personnel and other resources. A
5
<PAGE> 8
variety of conditions, both specific to an individual customer and generally
affecting a customer's industry, may cause a customer to cancel, reduce or delay
orders that were previously made or anticipated. A significant portion of the
Company's backlog at any time may be subject to cancellation or postponement
without penalty. The Company expects order delays and reschedulings to occur in
the future. The Company cannot assure the timely replacement of canceled,
delayed or reduced orders. Significant or numerous cancellations, reductions or
delays in orders by a customer or group of customers could materially adversely
affect the Company's business, financial condition, results of operations and
cash flows. Flexible circuit interconnects are manufactured using several
process steps, each employing different types of capital equipment and human and
other resources. Each flexible circuit interconnect requires a unique
combination of those process steps. As a result, the Company may not be able to
respond to an increase in demand caused by a substantial change in the mix of
products in any given quarter. The failure to so respond could have a material
adverse impact on the Company's business, financial condition, results of
operations and cash flows. See "-- Market and Customer Concentration,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Backlog."
DEPENDENCE ON ELECTRONICS INDUSTRY
The Company's principal customers are electronics OEMs and contract
manufacturers. The electronics industry as a whole is characterized by intense
competition, relatively short product life-cycles and significant fluctuations
in product demand. In addition, the electronics industry is generally subject to
rapid technological change and product obsolescence. Discontinuance or
modifications developed in connection with next generation products containing
flexible circuit interconnects manufactured by the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, the electronics industry is subject to economic cycles and
has in the past experienced, and is likely in the future to experience,
recessionary periods. A recession or any other event leading to excess capacity
or a downturn in the electronics industry would likely result in intensified
price competition, reduced gross margins and a decrease in unit volume, all of
which would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
MARKET AND CUSTOMER CONCENTRATION
The percentage of the Company's net sales to customers in the HDD market
decreased from 70% in 1993 to 51% by the end of 1995. Immediately following the
acquisition of ADFlex U.K. on December 31, 1995, however, the concentration of
the Company's net sales to HDD customers returned to 70%. During early 1996,
certain of the Company's HDD customers experienced structural and strategic
changes that negatively impacted the Company's results of operations for 1996.
Quantum Corporation ("Quantum"), which accounted for approximately 8% of the
Company's net sales in 1995, announced an exclusive manufacturing agreement to
purchase all of its HDD components from a Japanese company. This relationship
redirected all of Quantum's flexible circuit requirements to a local Japanese
supplier. Further, Hewlett-Packard Company, which accounted for approximately 6%
of the Company's net sales in 1995, announced its complete withdrawal from the
HDD business, resulting in unexpected and significant order cancellations in
1996. Also, during the first half of 1996, several key HDD customers experienced
product delays in high-end, high capacity drive programs relating to the
integration of new magneto-resistive ("MR") recording head technology, which
reduced anticipated orders for that year.
Through ongoing diversification and new market expansion efforts, primarily
directed toward the communications market, the Company has been able to reduce
HDD sales concentration to 42% for the quarter ended September 30, 1997. Though
the Company is continuing its efforts to reduce its dependence on the HDD
industry, net sales attributable to this market are expected to continue to
represent the largest portion of net sales for the foreseeable future and could
return to a majority of the Company's net sales. The data storage industry is
cyclical and historically has experienced periods
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<PAGE> 9
of oversupply and reduced HDD production levels, resulting in significantly
reduced demand for and pricing pressures on components used in HDDs. In this
regard, several major manufacturers of disk drives and disk drive components
have recently announced earnings that fell below expectations. These earnings
announcements have been accompanied by reduced earnings expectations for future
periods. There can be no assurance that these announcements do not indicate the
beginning of a significant slowdown in the growth of the data storage industry.
The Company's business, financial condition, results of operations and cash
flows have been adversely affected by previous downturns in the data storage
industry. No assurance can be given that the Company's net sales and operating
results will not continue to be adversely affected by periodic downturns in
worldwide expenditures by data storage companies. Any such slowdown would have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Company has expanded its revenue base to customers in the following
additional markets: notebook computers, arrays, tape drives, other computer
peripherals, portable communication devices and CD-ROMs. The success of the
Company will continue to depend in part on its ability to diversify its revenue
base. There can be no assurance that the Company will be successful in its
diversification efforts. A reduction in consumer demand for the products that
utilize the Company's flexible circuit interconnects would adversely affect the
Company's business, financial condition, results of operations and cash flows.
See "Business -- Industry Overview and Trends."
Historically, the Company has sold a substantial portion of its flexible
circuit interconnects to a limited number of customers. In 1994, 1995, 1996 and
the first nine months of 1997, combined sales to Seagate Technology, Inc.
("Seagate") and IBM Corporation ("IBM") accounted for 37%, 40%, 47% and 38% of
the Company's net sales, respectively. These sales were substantially in support
of the HDD and notebook computer markets. In order to facilitate their
manufacturing processes, the Company's customers often require that the Company
sell finished interconnects to contract assemblers for further assembly. In
1994, 1995, 1996 and the first nine months of 1997, shipments to contract
assemblers were 30%, 33%, 14% and 27% of net sales, respectively. Sales to a
single contract assembler, Smartflex Systems, Inc. ("Smartflex"), were 19%, 19%,
8% and 6% of net sales in 1994, 1995, 1996 and the first nine months of 1997,
respectively. Even though the Company's customer mix will likely change from
period to period in the future, the Company expects that sales to relatively few
customers, including contract assemblers, will continue to account for a high
percentage of its net sales in the foreseeable future. The loss of a significant
customer or a substantial reduction in orders by any significant customer,
including reductions due to market, economic or competitive conditions in the
computer, computer peripheral, communications and high-end consumer markets,
would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows. See "Business -- Current
Product Applications" and "Business -- Markets and Customers."
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
The Company's primary finishing and assembly facilities are located in Aqua
Prieta, Mexico and Lamphun, Thailand. In Mexico, the Company's employees are
represented by a labor union and covered by a collective bargaining agreement
that is subject to revision annually under Mexican labor laws. While the Company
believes that it has established good relationships with its local labor forces
and local governments, the dispersion of its manufacturing process over multiple
countries subjects the Company to risks inherent in international operations.
Those risks include potential border crossing difficulties, currency
fluctuations, inflationary pressures, unexpected changes in regulatory
requirements, tariffs and barriers, potentially limited intellectual property
protection, changes in political climate, difficulties in coordinating and
managing foreign operations, foreign labor union issues, increases in employee
turnover and potentially adverse tax consequences. Any of the foregoing could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
While ADFlex transacts business predominantly in U.S. Dollars and most of
its net sales are collected in U.S. Dollars, a portion of its costs are
denominated in other currencies. Changes in the
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<PAGE> 10
relation of other currencies to the U.S. Dollar will affect the Company's cost
of goods sold and operating margins and could result in exchange losses. The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted.
The Mexican Peso experienced significant devaluation relative to the U.S.
Dollar in December 1994 and early 1995. The Company maintains all significant
Mexico-related assets, including inventory, accounts receivable and capital
equipment, on the Company's books in U.S. Dollars and only converts enough U.S.
Dollars into Pesos to fund Peso-based operating costs for one to six weeks.
Peso-based operating costs are primarily wages and benefits for the Company's
Mexican hourly union employees. The initial devaluation reduced Mexican labor
costs by nearly 40%. Since that time, however, these savings have been partially
offset by a series of four wage increases each ranging from 7-10% in response to
Mexican government-mandated increases in minimum wages. Further, the Peso
experienced further devaluation in the later part of 1996, prompting the Mexican
government to mandate a 17% increase in the minimum wage effective December 1,
1996. It is expected that the Company will continue to respond proportionately
to minimum wage increases. During the nine month period ended September 30,
1997, the Thai Baht experienced significant devaluation in relation to the U.S.
Dollar. As all sales and the majority of the expenses for the Thailand operation
are denominated in U.S. Dollars, the devaluation is expected to have little or
no impact on the Company's business, financial condition and results of
operations. However, there can be no assurance that future currency fluctuations
or government-mandated wage increases in Mexico, Thailand or elsewhere will not
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
During 1994, 1995, 1996 and the first nine months of 1997, international
sales accounted for approximately 35%, 43%, 49% and 53% of net sales,
respectively, most of which went to Asian manufacturing facilities of United
States-based customers. All of the Company's net sales in 1996 and the majority
of the Company's net sales in the first nine months of 1997 were made in U.S.
Dollars.
MANAGEMENT OF GROWTH
Since early 1994, the Company has experienced a period of significant
growth and has increased the scale of its operations by hiring additional
personnel and expanding the Company's production facilities. The Company is
continuing to expand its manufacturing capacity. To manage growth effectively,
the Company must add manufacturing capacity while maintaining a high level of
quality and manufacturing efficiency, and must continue to enhance its
operational, financial and management systems and successfully expand, train and
manage its employee base. There can be no assurance that the Company will be
able to effectively manage this expansion, including maintenance of high levels
of product quality, customer service and satisfaction under the stresses exerted
by continued growth. In the short-term, the increase in capacity can be expected
to result in decreased utilization, which will likely have an adverse effect on
gross margins. Any failure to manage growth effectively or any delay in adding
capacity would have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company will be implementing over the next 12 to 24 months a new
manufacturing control/cost accounting system. Until then, the Company is
utilizing the different hardware, software and support services of Rogers
Corporation ("Rogers") and the Company's former joint venture partner in
Thailand to provide manufacturing control/cost accounting services in its
various geographic regions. There can be no assurance that the Company will
successfully implement the new system or that the implementation of the new
system will occur as scheduled or that these other parties will continue to
provide such services as needed.
8
<PAGE> 11
COMPETITION
The flexible circuit interconnect market is differentiated by customers,
applications and geography, with each niche having its own combination of
complex packaging and interconnection requirements. The Company believes that it
competes principally on the basis of design capability, price, quality, response
time to design changes and technological advancements in underlying applications
and the ability to offer a total flexible circuit interconnect solution,
including the ability to ramp rapidly up to and down from volume production and
to provide assembly and test services. In addition, during periods of recession
or economic slowdown in the electronics industry and other periods when excess
capacity exists, electronics OEMs become more price sensitive, which could have
a material adverse effect on flexible circuit interconnect pricing. The Company
believes that once an OEM has selected a particular vendor to design and
manufacture a flexible circuit interconnect, the OEM generally relies upon that
vendor's design for the life of that specific application and, to the extent
possible, subsequent generations of similar applications. Accordingly, it is
difficult to achieve significant sales to a particular customer with respect to
any application once another vendor has been selected to design and manufacture
the flexible circuit interconnect used in that application. While this market
paradigm may provide a barrier to the Company's competitors in the markets
served by the Company, it also may present an obstacle to the Company's entry
into other markets. The Company has targeted several markets as areas for its
growth, but there can be no assurance that the Company will be able to achieve
significant sales in any of these new, targeted markets.
The flexible circuit interconnect market is highly competitive. The Company
experiences competition worldwide from a number of leading foreign and domestic
providers such as Nippon Mektron ("NOK"), Fujikura Ltd. ("Fujikura"), Nitto
Denko ("Nitto"), Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl, Inc.
("Sheldahl") and Parlex Corporation ("Parlex"). NOK and Fujikura are Japan-based
suppliers substantially larger than the Company with greater financial and other
resources. Although the Company believes that a significant portion of the sales
of these companies are in direct competition with the Company, the Company also
believes that both of these competitors derive a majority of their revenues from
Japan-based system manufacturers in the consumer goods market segment. M-Flex,
Sheldahl and Parlex are U.S.-based flexible circuit manufacturers that have
lower sales of polyimide flexible circuits than the Company and have
historically targeted suppliers of computers, communication and automotive
services and the military, respectively. Expansion of the Company's existing
products or services could expose the Company to new competition. Moreover, new
developments in the electronics industry could render existing technology
obsolete or less competitive and could potentially introduce new competition
into the market. There can be no assurance that the Company's competitors will
not develop enhancements to, or future generations of, competitive products or
services that will offer superior price or performance features to those of the
Company or that new competitors will not enter the Company's markets. Finally,
as many of the Company's competitors are based in foreign countries, they have
cost structures and prices based on foreign currencies. Accordingly, currency
fluctuations could cause the Company's dollar-priced products to be less
competitive than its competitors' products priced in other currencies.
Since its December 1996 acquisition of ADFlex U.K., the Company competes in
assembly with leading flexible circuit assembly providers such as Smartflex and
Solectron Corp. ("Solectron"). The Company believes that competition in assembly
is primarily driven by availability of assembly technology, price and cycle
time. The Company believes that it will compete favorably with these competitors
because it offers its customers a complete flexible circuit interconnect
solution including design, fabrication, assembly and testing.
The Company's competitors can be expected to continue to improve the design
and performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures often necessitate price
reductions which can adversely affect operating results. The Company will be
required to make a continued high level of investment in product development and
research, sales and marketing and ongoing customer service and support to remain
competitive.
9
<PAGE> 12
There can be no assurance that the Company will have sufficient resources to
continue to make such investments or that the Company will be able to make the
technological advances necessary to maintain its competitive position in the
flexible circuit interconnect market. There can be no assurance that existing or
future competitors will not be able to duplicate the Company's strategies, that
the Company will be able to compete successfully in the future, or that
competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows. See "Business -- Competition."
TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION
The market for the Company's products and services is characterized by
rapidly changing technology, evolving industry standards and continuing process
development. The Company's customers strive to introduce new products and
enhancements frequently, with relatively short product life cycles. New product
introductions by the Company's customers typically result in new technological
challenges for the Company. As a result, the Company must continue to enhance
its products and services and develop and manufacture improved products and
services. This has and will continue to require substantial investments by the
Company in research and development. The Company is highly dependent on its
close working relationships with certain of its key customers to advance its
technologies. The termination of any one of these key relationships for any
reason could have a material adverse effect on the Company's ability to
anticipate and develop necessary technological changes to its products and
services. The future success of the Company will depend in large part upon its
ability to maintain and enhance its technological capabilities, develop and
market products and services that meet changing customer needs and successfully
anticipate or respond to technological changes, on a cost-effective and timely
basis. Moreover, the Company's success will depend to a significant extent on
the success achieved by its customers in developing and marketing their
products, some of which are new and untested. In addition, the electronics
interconnect industry could in the future encounter competition from new
technologies that render existing flexible circuit interconnect technologies
less competitive or obsolete, including technologies that may reduce the number
of flexible circuit interconnects required in electronic components. There can
be no assurance that the Company will effectively respond to the technological
requirements of the changing market. To the extent the Company determines that
new technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and equipment
are likely to continue to require significant capital investment by the Company.
There can be no assurance that capital will be available for this purpose in the
future or that investments in new technologies will result in commercially
viable technological processes or that there will be commercial applications for
these technologies. Moreover, there can be no assurance that failures or
disruptions will not occur in the Company's highly complex manufacturing
processes. Process failures or disruptions can result in delays in certain
product shipments. The loss of revenue and earnings to the Company from such a
technological change, process development or process disruption could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
MANUFACTURING CAPACITY AND OTHER MANUFACTURING RISKS
The Company believes its long-term competitive position may depend in part
on its ability to increase manufacturing capacity, and a significant portion of
the proceeds of this offering will be used for this purpose. The Company
currently occupies 25,000 square feet in Thailand pursuant to a lease agreement
that expires December 31, 1998. The Company is actively pursuing its options for
expanded, long-term space in Thailand, including through acquisitions, expansion
of its current facilities, or development of new facilities. Certain of these
avenues could require substantial additional capital, and there can be no
assurance that such capital would be available when needed. Further, there can
be no assurance that the Company will be able to acquire sufficient capacity or
successfully integrate and manage such additional facilities. In addition, any
expansion of the Company's manufacturing capacity would significantly increase
its fixed costs, and the future profitability of the Company will depend in part
upon its ability to use its manufacturing capacity in an effective manner. Any
failure to obtain
10
<PAGE> 13
sufficient capacity or to successfully integrate and manage additional
manufacturing facilities could adversely impact the Company's relationships with
its customers and could materially adversely affect the Company's business,
financial condition, results of operations and cash flows. In addition, any
natural disaster such as a fire, flood or earthquake that results in an
interruption of manufacturing at one of the Company's facilities would have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Company's products are highly complex. The Company has experienced and
may in the future experience manufacturing delays due to technical difficulties.
In addition, all of the Company's products must be customized to meet individual
product specification requirements. The customization of a customer order may
require new technical capabilities not previously incorporated successfully into
the Company's products. Because of limitations on manufacturing capacity, the
Company may be unable to complete the customized development or technical
specifications of its customers in a timely manner. Any significant failure in
this regard could adversely impact the Company's relationships with its
customers and could materially adversely affect the Company's business,
financial condition, results of operations and cash flows. In addition, due to
the customized nature of the Company's products, the Company has in the past and
may in the future incur substantial unanticipated costs in a product's
development and production, such as increased cost of components due to
expediting charges, other purchasing inefficiencies and greater than expected
engineering and quality control costs which cannot be passed on to the customer.
The occurrence of any of such events in the future could materially adversely
affect the Company's business, financial condition, results of operations and
cash flows.
LIMITED SOURCES OF SUPPLY
The Company purchases raw circuit materials, process chemicals and various
components from multiple outside sources. For components, the Company typically
makes short-term purchasing commitments to key suppliers for specific customer
programs. These commitments are usually made for three to six month periods.
These suppliers commit to provide cooperative engineering, as required, and in
some cases to maintain a local inventory in order to provide shorter lead times
and reduced inventory levels for ADFlex. In most cases, suppliers are approved,
and are often dictated, by the Company's customers. For process chemicals, the
Company relies on a limited number of key suppliers. Alternate chemical products
are available from other sources, but process chemical changes would often
require qualification of the processes, which could take weeks or months to
complete.
The Company currently purchases a number of its components, process
chemicals and other materials from a single source. For example, the Company has
a supply agreement with Rogers for the supply of certain materials used in the
Company's flexible circuit interconnects. In the United States, these products
are available only from a limited number of suppliers. The Company's agreement
with Rogers expires on December 31, 1998 and can be terminated prior to
expiration by mutual consent or for material breach upon 30 days' notice. Under
the supply agreement, ADFlex has agreed to purchase a percentage of its circuit
materials needs from Rogers, assuming that Rogers is able to meet the materials
specifications, performance requirements and delivery as required by the Company
and it customers.
While viable alternate suppliers exist, because of the Company's limited
inventory of raw materials, tight manufacturing cycles and the significant
amount of time required to qualify new suppliers, single sourcing is expected to
continue. Consequently, any unanticipated interruption of material supplies or
components would have at least a short-term material adverse effect on the
Company and could damage its customer relationships.
INTELLECTUAL PROPERTY
The Company believes that, due to its customers' demands for rapid
technological advances and the resulting limited product life-cycles, the
success of its business depends more on the technical and
11
<PAGE> 14
engineering expertise, creativity, marketing and service abilities of its
employees than on patents, trademarks and copyrights. Nevertheless, the Company
owns patents and has a policy of seeking patents when appropriate on inventions
concerning new products and improvements as part of its ongoing research,
development and manufacturing activities. There can be no assurance that any
patents issued to the Company will provide a competitive advantage or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar products,
duplicate the Company's products or design around the patents issued to the
Company. In addition, there can be no assurance that foreign intellectual
property laws or the Company's agreements will protect the Company's
intellectual property rights in any foreign country. Any failure to protect the
Company's intellectual property rights could have a material adverse effect upon
the Company's business, financial condition, results of operations and cash
flows.
The Company also has applied for certain United States and foreign
trademarks. In addition, the Company relies upon trade secret protections for
its confidential and proprietary information. The Company routinely enters into
confidentiality agreements with its customers, vendors, consultants and
employees. There can be no assurance, however, that others will not
independently gain information and techniques or otherwise gain access to the
Company's trade secrets or that the Company can meaningfully protect its trade
secrets.
No claims have been asserted against the Company for infringement of the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims against the Company in the
future. Any such claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. If infringement were established, the Company could be
required to pay damages or be enjoined from making, using or selling the
infringing product. Likewise, there can be no assurance that a third party's
product, if infringing on the Company's proprietary rights, may be prevented
from doing so without litigation. Any of the foregoing could have a material
adverse effect upon the Company's business, financial condition, results of
operations and cash flows. See "Business -- Intellectual Property."
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has conducted
environmental studies of its facility in Chandler, Arizona, which revealed soil
contamination that may require remediation. Further studies including a site
specific risk analysis were conducted and a number of remediation options have
been proposed. Based on these studies, 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, in
the future there can be no assurance that such costs will not have a material
adverse impact on the Company. Pursuant to the agreements governing the
acquisition of the flexible circuit fabrication operations of Rogers, Rogers has
retained all environmental liabilities relating to the purchased assets prior to
the closing date. While Rogers currently has sufficient assets to fulfill its
obligations under the acquisition agreements, if environmental liabilities
requiring remediation are discovered and the Company was unable to enforce 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, results of operations and cash flows.
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
12
<PAGE> 15
indicated there is contamination by hazardous materials in the soil and
groundwater. Pursuant to the purchase agreement, the sellers submitted a
remediation plan to the appropriate Mexican authorities, and the plan was
approved in May 1997. Subsequent remediation is proceeding and expected to be
complete by the end of 1997. The sellers' obligation for the cost of remediation
is limited to $2.5 million. A total of $1.0 million is being held in escrow
pending the sellers' performance of their environmental obligations under the
agreement. It is expected that the escrow balance will be adequate to complete
the required remediation according to the approved plan. While the Mexican
government has approved the existing remediation plan and U.S. standards
generally do not apply in Mexico, it is possible that additional remedial work
could be required in the future since the approved plan will not remove all
contaminated soil and will not address groundwater. Given the uncertainties
associated with environmental contamination, including possible claims by third
parties, there can be no assurance that future remedial costs or liabilities
will not have a material adverse impact on the Company.
The Company believes that it has been operating its facilities in
substantial compliance in all material respects with existing environmental laws
and regulations. 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. For
this reason, the Company has decided to implement environmental management
systems geared toward minimizing the negative impacts and reducing potential
financial risks arising from environmental issues. Compliance with more
stringent laws or regulations, or 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. See
"Business -- Environmental Controls."
DEPENDENCE ON KEY PERSONNEL AND MEXICAN UNION RELATIONS
The Company's future operating results depend in significant part upon the
continued contribution of its Chief Executive Officer and other key management
and technical personnel, many of whom would be difficult to replace. None of
such persons has an employment contract with the Company. The loss of any of
these officers or key personnel could have a material adverse effect on the
business, financial condition and results of operations of the Company. In
addition, the Company's future operating results depend in part upon its ability
to attract and retain other qualified management, technical, sales and support
personnel for its operations. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. The failure to attract or retain such persons could
materially adversely affect the Company's business, financial condition, results
of operations and cash flows. Certain of the Company's employees located in
Mexico are represented by a labor union and covered by a collective bargaining
agreement that is subject to revision annually under Mexican labor laws. The
Company has not experienced an employee-related work stoppage. The Company
believes that its relationship with its union and other employees is good, but
there can be no assurance that the Company will be able to successfully
negotiate with the labor union in Mexico in the future. See
"Business -- Employees."
FUTURE CAPITAL NEEDS
The development and manufacture of flexible circuit interconnects is highly
capital intensive. In order to remain competitive, the Company must continue to
make significant expenditures for capital equipment, expansion of operations and
research and development. The Company expects that the proceeds from this
offering, together with its existing cash balances, funds generated from
operations and borrowings under its line of credit, will be sufficient to
finance its operations for at least the next twelve months. The Company expects
that substantial capital will be required to expand its manufacturing capacity
and fund working capital for anticipated growth. To the extent the foregoing
financial resources are insufficient to fund these activities, the Company will
need to raise additional funds either through borrowings or further equity
financings. There can be no assurance that additional
13
<PAGE> 16
capital will be available on reasonable terms or at all. The inability of the
Company to obtain adequate additional financing on reasonable terms when needed
would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH ACQUISITIONS AND JOINT VENTURES
On December 31, 1995, the Company purchased the flexible interconnect
division and certain net assets of Xyratex, now operating as ADFlex U.K.,
located in England. As a result of the acquisition, the Company wrote off $13.9
million of in-process technology. The Company's U.K. operations included
advanced assembly technology and assembly processes entailing the attachment of
ICs and surface mounted components onto flexible circuits. In August 1996, the
Company announced the establishment of a joint venture located in Lamphun,
Thailand with Hana Microelectronics ("Hana") to produce and test advanced
chip-on-flex and surface mount technology assemblies. The joint venture, ADFlex
Thailand Limited ("ATL"), initially was 80% owned by the Company. Initial
shipments from Thailand through this joint venture began in the fourth quarter
of 1996. The Company purchased the remaining 20% equity interest in ATL from
Hana in September 1997.
During 1996, the Company's U.K. operations experienced a substantial
reduction in net sales levels from levels maintained in the latter part of 1995.
The reduction in net sales resulted in decreased capacity utilization.
Additionally, manufacturing yields on certain new parts were substantially lower
than anticipated by the Company in the third quarter of 1996. As a result of
lower net sales and decreased utilization and the resulting negative impact on
the Company's financial position, the Company announced at the close of the
third quarter of 1996 that it would restructure its assembly operations in the
U.K. and transfer production to Thailand. As part of this restructuring, the
Company recorded the following in the third quarter of 1996: $13.5 million
write-off of intangible assets, $8.8 million write-down of property, plant and
equipment and $6.9 million in employee and lease termination charges. Through
September 30, 1997, the Company had paid $3.2 million in employee and lease
termination costs. The remaining accrual for employee and lease terminations is
approximately $3.7 million, which the Company believes is adequate to cover
remaining liabilities. There can be no assurance that the Company will not incur
similar write-offs in the future in connection with future acquisitions, if any.
The Company has limited experience in integrating acquired companies or
technologies into its operations. Although it has no present plans to do so, the
Company may from time to time in the future pursue other joint ventures or the
acquisition of other companies, assets, products or technologies. Joint ventures
and acquisitions involve numerous risks, including: difficulties in assimilating
the operations, products, personnel and cultures of the acquired companies; the
ability to manage geographically remote units effectively; the diversion of
management attention from other day-to-day business concerns; difficulties
entering markets in which the Company has limited or no direct experience; and
the potential loss of key employees of the acquired companies. In addition,
acquisitions may result in dilutive issuances of equity securities, incurrence
of additional debt, reduction of existing cash balances, amortization expenses
related to goodwill and other intangible assets and other charges to operations
that may have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows. Moreover, there can be no
assurance that any equity or debt financings proposed in connection with any
acquisition would be available to the Company on acceptable terms, or at all, if
suitable strategic acquisition opportunities were to arise. Although the Company
expects to analyze any opportunity before committing its resources, there can be
no assurance that any joint venture or acquisition will result in short-term or
long-term benefits to the Company or that it will be able to manage any
resulting business effectively and profitably.
14
<PAGE> 17
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Preferred Shares Rights Agreement, certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, By-laws and
Delaware law may discourage certain transactions involving a change in control
of the Company. In addition to the foregoing, the ability of the Company's Board
of Directors to issue "blank check" preferred stock without further stockholder
approval could have the effect of delaying, deferring or preventing a change in
control of the Company.
VOLATILITY OF STOCK PRICE
The Company's Common Stock has experienced significant price volatility
historically, and such volatility may continue to occur in the future.
Historically, the Company's Common Stock has had a relatively limited trading
volume and as a result, trading of relatively small blocks of stock can have a
significant impact on the price at which the Common Stock is traded. The Company
believes that factors such as announcements of developments related to the
Company's business, fluctuations in the Company's operating results, general
conditions in the flexible circuit interconnect market and the markets served by
the Company or the worldwide economy, an outbreak of hostilities, a shortfall in
revenue or earnings from securities analysts' expectations, announcements of
technological innovations or new interconnect products or enhancements by the
Company or its competitors, developments in patents or other intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
FORWARD-LOOKING STATEMENTS
This Prospectus may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Any such statements are subject to a number of risks and
uncertainties. Actual results in the future could differ materially from those
described in any forward-looking statements as a result of the Risk Factors set
forth above and the matters set forth elsewhere in this Prospectus. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
15
<PAGE> 18
USE OF PROCEEDS
The proceeds to the Company from the sale of the 1,307,653 shares of Common
Stock offered by the Company hereby, after deducting underwriting discounts and
offering expenses, are estimated to be approximately $33.4 million ($43.0
million if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $27.1875 per share. The proceeds of this
offering will be used to pre-pay the Company's existing term loan ($25.3
million) and for general corporate purposes, including expanding the Company's
manufacturing operations in Thailand, other capital expenditures and working
capital. Pending such uses, the Company intends to invest the net proceeds in
short-term, interest-bearing, investment-grade securities. The Company will not
receive any proceeds from the sale of Common Stock offered by the Selling
Stockholder hereby.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on September 27, 1994 and is traded under the symbol "AFLX." The following table
sets forth for the calendar periods indicated the high and low closing prices
per share of Common Stock as reported on the Nasdaq National Market.
<TABLE>
<S> <C> <C>
1995 HIGH
----- LOW
First Quarter............................................................... $221/4 $16
Second Quarter.............................................................. 281/2 191/2
Third Quarter............................................................... 291/4 193/4
Fourth Quarter.............................................................. 311/4 193/4
1996
First Quarter............................................................... 27 101/2
Second Quarter.............................................................. 18 97/8
Third Quarter............................................................... 14 113/4
Fourth Quarter.............................................................. 14 73/8
1997
First Quarter............................................................... 161/8 103/4
Second Quarter.............................................................. 19 113/4
Third Quarter............................................................... 28 1/2 143/4
Fourth Quarter (through October 20)......................................... 273/16 22 /16
---- ----
- -
</TABLE>
On October 20, 1997, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $27.1875 per share. As of September 30, 1997,
there were approximately 57 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock,
but has twice issued stock dividends in connection with stock splits. The
Company currently intends to retain future earnings, if any, to fund the
operation and expansion of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. The Company's current bank
line of credit limits the payment of cash dividends on the Company's Common
Stock.
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<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, and as adjusted to reflect the sale of 1,307,653 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $27.1875 per share. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(In thousands)
<S> <C> <C>
Long-term debt and capitalized leases(1)............................. $ 25,061 $ 61
Stockholders' equity:
Preferred Stock, $.01 par value per share, 10,000,000 shares
authorized, none issued or outstanding.......................... -- --
Common Stock, $.01 par value per share, 40,000,000 shares
authorized, 8,765,529 shares issued and outstanding and
10,073,182 shares issued outstanding as adjusted(2)............. 88 101
Additional paid-in capital......................................... 62,082 95,443
Retained earnings (deficit)........................................ (14,990) (14,990)
-------- --------
Stockholders' equity............................................ 47,180 80,554
-------- --------
Total capitalization....................................... $ 72,241 $ 80,615
======== ========
</TABLE>
- ---------------
(1) See Note 7 of Notes to Consolidated Financial Statements for information
concerning the Company's long-term line of credit and Note 13 of Notes to
Consolidated Financial Statements for information concerning the Company's
capitalized leases at September 30, 1997.
(2) Based upon 8,765,529 shares outstanding as of September 30, 1997. Excludes
options outstanding as of September 30, 1997 to acquire 674,636 shares of
Common Stock at a weighted average exercise price of $13.41 per share and an
additional 478,120 shares of Common Stock reserved for issuance under the
Company's stock incentive and stock purchase plans.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for ADFlex and the
flexible interconnect division of Rogers (the "Predecessor") should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The selected
consolidated statements of operations data for the years ended December 31,
1994, 1995 and 1996 and the selected consolidated balance sheets data at
December 31, 1995 and 1996 have been derived from the consolidated financial
statements of the Company included elsewhere in this Prospectus, which have been
audited by Ernst & Young LLP, independent auditors, whose report thereon is
included elsewhere in this Prospectus. The selected consolidated statement of
operations data for the year ended December 31, 1992 for the Predecessor and the
pro forma combined selected consolidated statement of operations data for the
year ended December 31, 1993, and the selected consolidated balance sheets data
at December 31, 1992, 1993 and 1994 have been derived from the audited
consolidated financial statements of the Company and the Predecessor not
included in this Prospectus. The selected consolidated statements of operations
data for the nine months ended September 30, 1996 and 1997 have been derived
from the unaudited consolidated financial statements of the Company, which
include all adjustments the Company considers necessary for a fair presentation
of the financial information set forth therein. The results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of
results that may be expected for the Company's year ending December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------
PRO FORMA
PREDECESSOR COMBINED(2) COMPANY COMPANY
----------- ----------- ----------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA(1):
Net sales.................................. $ 46,714 $48,892 $77,733 $101,163 $156,836 $110,011 $159,524
Cost of sales.............................. 44,227 37,651 53,812 73,108 138,273 97,864 132,857
-------- -------- -------- --------- --------- --------- ---------
Gross profit........................... 2,487 11,241 23,921 28,055 18,563 12,147 26,667
Engineering, research & development........ 1,045 2,011 3,697 4,548 7,366 5,376 5,987
Selling, general & administrative.......... 8,586 5,256 8,107 9,119 13,254 10,135 11,283
Write-off of in-process technology(3)...... -- -- -- 13,920 -- -- --
Amortization of intangible assets.......... -- -- -- -- 2,386 2,386 --
Restructuring charges(3)................... -- -- -- -- 29,248 29,248 --
Cost reduction charge...................... 18,716 -- -- -- -- -- --
-------- -------- -------- --------- --------- --------- ---------
Total operating expenses............... 28,347 7,267 11,804 27,587 52,254 47,145 17,270
-------- -------- -------- --------- --------- --------- ---------
Operating income (loss)(2)................. (25,860) 3,974 12,117 468 (33,691) (34,998) 9,397
Interest income (expense), net............. -- (314) (48) 872 (1,288) (876) (1,400)
Other income (expense), net................ 792 -- 107 64 92 142 (175)
Minority interest in consolidated joint
venture.................................. -- -- -- -- 109 -- (181)
-------- -------- -------- --------- --------- --------- ---------
Income (loss) before income taxes.......... (25,068) 3,660 12,176 1,404 (34,778) (35,732) 7,641
Income taxes (benefit)..................... -- 1,469 5,130 5,127 (9,754) (10,248) 2,292
Cumulative effect of change in accounting
for allocation of costs for post
retirement benefits...................... 994 -- -- -- -- -- --
-------- -------- -------- --------- --------- --------- ---------
Net income (loss)(2)....................... $ (26,062) $ 2,191 $ 7,046 $ (3,723) $(25,024) $(25,484) $ 5,349
======== ======== ======== ========= ========= ========= =========
Net income (loss) per share(2)............. $ 0.48 $ 1.26 $ (0.54) $ (2.92) $ (2.97) $ 0.60
======== ======== ========= ========= ========= =========
Number of shares used in computing net
income (loss) per share.................. 4,578 5,578 6,855 8,580 8,576 8,863
======== ======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
COMPANY
PREDECESSOR COMPANY -------------
----------- -------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
----------- ------- ------- -------- ------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Working capital............................. $ 8,534 $ 2,557 $32,443 $ 20,636 $ 9,102 $ 28,386
Total assets................................ 15,453 10,470 47,703 106,918 93,181 106,482
Long-term debt and capitalized leases....... -- -- 471 7,851 7,689 25,061
Total stockholders' equity.................. 8,534 3,362 37,764 63,554 40,289 47,180
</TABLE>
18
<PAGE> 21
- ---------------
(1) The Company was formed in February 1993 and acquired certain assets and
assumed certain liabilities of the Predecessor on June 28, 1993. The
Predecessor reported on a 52-week fiscal year ending nearest December 31.
The Company has adopted calendar year reporting. For purposes of
presentation of the Consolidated Financial Statements, all annual periods
are assumed to end on December 31.
(2) Pro forma combined financial data for the year ended December 31, 1993
includes the combined results of operations for: (i) the Predecessor for the
period from January 1, 1993 to June 27, 1993; and (ii) the Company for the
period from June 28, 1993 to December 31, 1993, as if the acquisition from
Rogers had been consummated on January 1, 1993. The following table presents
selected historical financial data and pro forma adjustments for the
Predecessor and the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-----------------------------------------------------
PRO FORMA PRO FORMA
PREDECESSOR COMPANY ADJUSTMENTS COMBINED
----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................................. $23,348 $25,544 $ -- $48,892
Cost of sales......................................... 18,783 18,623 245 37,651
------- ------- ------- -------
Gross profit........................................ 4,565 6,921 (245) 11,241
Engineering, research & development................... 5 1,108 898 2,011
Selling, general & administrative..................... 3,183 3,343 (1,270) 5,256
------- ------- ------- -------
Total operating expenses............................ 3,188 4,451 (372) 7,267
------- ------- ------- -------
Operating income...................................... 1,377 2,470 127 3,974
Interest income (expense), net........................ -- (193) (121) (314)
Other income (expense), net........................... 446 -- (446) --
------- ------- ------- -------
Income (loss) before income taxes..................... 1,823 2,277 (440) 3,660
Income taxes.......................................... -- 915 554 1,469
------- ------- ------- -------
Net income (loss)..................................... $ 1,823 $1,362 $ (994) $ 2,191
======= ======= ======= =======
</TABLE>
(3) For the year ended December 31, 1995, the Company recorded a charge of $13.9
million related to the write-off of in-process technology in conjunction
with the ADFlex U.K. acquisition. For the year ended December 31, 1996, the
Company recorded a charge of $29.2 million (pre-tax) related to the
restructuring of the Company's U.K. operations. See Note 2 of Notes to
Consolidated Financial Statements.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ADFlex is a leading worldwide provider of flexible circuit interconnect
solutions to OEMs in the electronics industry. The Company offers a full range
of customized flexible circuit applications and services from initial design,
development and prototype to fabrication, assembly and test on a global basis.
The Company targets high-volume markets where miniaturization, form and weight
are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by the Company include
notebook computers, portable communication devices such as cellular telephones
and pagers, data storage devices such as HDDs, tape drives and arrays, and high-
end consumer electronics products such as compact disk players. The Company's
principal customers include Compaq, Digital Equipment, IBM, Iomega, Motorola,
Nokia, Philips, Seagate, Storage Technology and other leading electronics OEMs.
The Company was organized under Delaware law in February 1993 to acquire
the flexible circuit fabrication operations of Rogers. The Rogers acquisition
was consummated in June 1993. In December 1995, the Company purchased ADFlex
U.K., an advanced flexible circuit assembly company located in England. The
acquisition enabled the Company to offer its customers a single source solution
for their interconnect requirements that can shorten their time to market and
lower their costs. This acquisition also changed the financial metrics of the
Company because assembly businesses typically have significantly lower gross
margins than fabrication businesses. In connection with the acquisition of
ADFlex U.K., the Company had a one-time write-off of $13.9 million for
in-process technology during 1995.
In an effort to increase its global sourcing opportunities and to decrease
its operating costs, the Company expanded its worldwide manufacturing operations
with the establishment of a joint venture located in Lamphun, Thailand with Hana
in August 1996. The joint venture, ATL, which was 80% owned by the Company,
targets the production and testing of advanced chip-on-flex and other surface
mount technologies for flexible circuit assemblies. Initial shipments from
Thailand began in the fourth quarter of 1996, and volume production was attained
in the third quarter of 1997. The Company purchased the remaining 20% equity
interest in ATL from Hana in September 1997 for $0.5 million at the closing and
a promissory note in the principal amount of $2.8 million payable by September
30, 1998.
The Company provides flexible circuit interconnect products to a diverse
group of markets. Historically, the HDD market has represented the majority of
the Company's sales for 1994, 1995 and 1996 at 55%, 51% and 62% of total sales,
respectively. During the third quarter of 1997, the percentage of sales to the
HDD market declined to 42%. Through new market expansion efforts, the Company is
continuing its efforts to reduce the impact of the cyclicality of the HDD
industry on its business. However, net sales attributable to this market are
expected to continue to represent the largest industry segment for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry would likely have a material adverse effect on the
Company's operating results. See "Risk Factors -- Market and Customer
Concentration."
During 1996, the Company's U.K. operations experienced a substantial
reduction in net sales levels from levels maintained in the latter part of 1995,
primarily related to a decrease in its HDD business. The reduction in net sales
resulted in decreased capacity utilization. Additionally, manufacturing yields
on certain new parts in the third quarter were substantially lower than
anticipated by the Company. As a result of lower net sales, under-utilized
capacity and the resulting negative financial performance, the Company began
restructuring its volume assembly operations in the U.K. and transferring these
operations to Thailand during the third quarter of 1996. As part of this
restructuring, the Company recorded the following in the third quarter of 1996:
$13.5 million write-off of intangible assets, $8.8 million write-down of
property, plant and equipment and $6.9 million in employee and
20
<PAGE> 23
lease termination charges. Through September 30, 1997, the Company had paid out
$3.2 million in employee and lease termination costs. The remaining accrual for
employee and lease terminations is approximately $3.7 million, which the Company
believes is adequate to cover remaining liabilities.
The transfer of the Company's U.K. assembly operations to Thailand was
completed during the third quarter of 1997. Initial shipments from Thailand
began in the fourth quarter of 1996 and the Company reached volume production in
the third quarter of 1997. During the first nine months of 1997, net sales from
the Company's Thailand operations were approximately $17.0 million, $10.1
million of which were during the third quarter. No assurances can be given that
the Company will sustain the benefits anticipated due to the lower cost
structure of the Thailand operations. The Company maintains a technology and
pilot production facility and a sales and service organization in the U.K. to
support its European customers.
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statements of
Operations data as a percentage of net sales. The table and the discussion below
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1994 1995(1) 1996(1) 1996(1) 1997
----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 69.2 72.3 88.2 89.0 83.3
----- ----- ----- ----- -----
Gross profit...................... 30.8 27.7 11.8 11.0 16.7
Engineering, research & development......... 4.8 4.5 4.7 4.9 3.7
Selling, general & administrative........... 10.4 9.0 8.5 9.2 7.1
Write-off of in-process technology.......... -- 13.7 -- -- --
Amortization of intangible assets........... -- -- 1.5 2.1 --
Restructuring charges....................... -- -- 18.6 26.6 --
----- ----- ----- ----- -----
Total operating expenses.......... 15.2 27.2 33.3 42.8 10.8
----- ----- ----- ----- -----
Operating income (loss)..................... 15.6 0.5 (21.5) (31.8) 5.9
Interest income (expense), net.............. -- 0.9 (0.7) (0.8) (0.9)
Other income, net........................... 0.1 -- -- 0.1 (0.1)
Minority interest in earnings of
consolidated joint venture................ -- -- -- -- (0.1)
----- ----- ----- ----- -----
Income (loss) before income taxes........... 15.7 1.4 (22.2) (32.5) 4.8
----- ----- ----- ----- -----
Income taxes (benefit)...................... 6.6 5.1 (6.2) (9.3) 1.4
----- ----- ----- ----- -----
Net income (loss)........................... 9.1% (3.7)% (16.0)% (23.2)% 3.4%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) For the year ended December 31, 1995, the Company recorded a charge of $13.9
million related to the write-off of in-process technology in conjunction
with the ADFlex U.K. acquisition. For the year ended December 31, 1996, the
Company recorded a charge of $29.2 million (pre-tax) related to the
restructuring of the Company's U.K. operations. See Note 2 of Notes to
Consolidated Financial Statements.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Net Sales. Net sales for the nine months ended September 30, 1997
increased $45.9 million, or 45.0%, over the same period in 1996. For the nine
months ended September 30, 1997, the Company
21
<PAGE> 24
experienced strong demand for its products, especially in flexible circuits
provided to the communications and storage array markets as a result of the
Company's focus on high-growth and high-volume markets. In addition, the Company
reached volume production at its Thailand operations during the three months
ended September 30, 1997 with sales of $17.0 million from Thailand for the nine
months ended September 30, 1997. Net sales for the nine months ended September
30, 1996 were negatively impacted by program delays among customers in the HDD
market involving new MR recording technology, a slowdown for mature products and
order cancellations from certain major customers.
Gross Profit. Gross profit as a percentage of net sales (gross margin) for
the nine months ended September 30, 1997 was 16.7% compared to 11.0% for the
same period in 1996. For the nine months ended September 30, 1997, the Company's
gross profit was positively impacted by the benefits associated with the
transfer of the Company's U.K. assembly operations to Thailand which provides a
lower cost structure, which benefits were partially offset by the decreased
utilization of capacity in the U.K. assembly operations. The transfer was
completed in the third quarter of 1997.
Operating Expenses. Engineering, research and development expenses were
$6.0 million and $5.4 million for the nine months ended September 30, 1997 and
1996, respectively. Selling, general and administrative expenses were $11.3
million and $10.1 million for the nine months ended September 30, 1997 and 1996,
respectively. For the nine months ended September 30, 1997, engineering,
research and development expenses and selling, general and administrative
expenses as a percentage of net sales were 3.7% and 7.1%, respectively, compared
to 4.9% and 9.2%, respectively, for the same period in 1996. The increase in
sales volume during the 1997 period outpaced the Company's growth in such
expenses, reflecting the Company's strategy of seeking sales growth while
maintaining or reducing operating expenses as a percentage of net sales.
Restructuring Charge. At the close of the third quarter of 1996, the
Company's Board of Directors approved a plan to restructure its assembly
operations in the U.K. and transfer those operations from the U.K. to the
Company's manufacturing facility in Lamphun, Thailand. As part of this
restructuring, the Company recorded the following charges: $13.5 million
write-off in intangible assets, $8.8 million write-down of property, plant and
equipment and $6.9 million in employee and lease termination charges. As of
September 30, 1997, the Company has paid out $3.2 million in employee and lease
termination costs. The remaining accrual for employee and lease terminations is
approximately $3.7 million, which the Company believes is adequate to cover
remaining liabilities.
Interest and Other Income (Expense). For the nine months ended September
30, 1997, interest expense includes $0.3 million of interest expense on the
subordinated debenture and $1.2 million of interest expense related to
borrowings under the Company's current line of credit, term loan and capital
lease obligations. Interest expense for the same period in 1996 represents $0.6
million of interest expense on the subordinated debenture and $0.6 million of
interest expense related to borrowings on the then existing line of credit and
capital lease obligations. Other income (expense) for both periods represents
the net impact of bank fees and exchange gains and losses realized on the
settlement of transactions associated with the Company's foreign subsidiaries.
Income Taxes. The Company's effective tax rate increased from 28% to 32%
for the third quarter of 1997 in order to reach an estimated annual rate of 30%
based upon projected profit levels at each of the Company's entities. As the
actual tax rate for each entity varies in accordance with the taxing authority
in whose jurisdiction it resides, a significant change in operating income at
any one location can result in a change in the overall effective tax rate for
the Company. The Company monitors the effective tax rate on a continuous basis
and makes adjustments as conditions warrant.
The Internal Revenue Service ("IRS") has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS has proposed adjustments to the Company's income and tax credits
for that year, which would result in additional tax of approximately $1.6
million including interest and penalties. The major proposed adjustment, which
relates to the allocation of the purchase price of assets obtained from Rogers
pursuant to acquisition agreements between the Company and Rogers, would extend
the period over which the tax benefit for the
22
<PAGE> 25
purchase price would be recovered. The Company disagrees with the proposed
adjustments and is contesting them. In the opinion of the Company's management,
the final disposition of these matters will not have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows.
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 31, 1994
Net Sales. The Company experienced an increase in net sales of $55.7
million, or 55%, in 1996 compared to 1995. This was due primarily to the
inclusion of sales from ADFlex U.K. Excluding the additive effect of ADFlex U.K.
net sales for the year decreased by 1%. Net sales for 1996 were negatively
impacted (in both the flex circuit fabrication and flex assembly areas) by
customer strategic changes and a general slow down for mature products. Further,
the difficulties encountered throughout the HDD industry resulting in the
delayed implementation of MR technology had a significant negative effect on
anticipated net sales for 1996, primarily at the Company's U.K. facility, as
high-end, high-capacity drives utilize advanced assembly technology,
specifically chip on flex ("COF"), the primary specialty of ADFlex U.K. Customer
structural changes and the delay in MR technology resulted in net sales at
ADFlex U.K. substantially below levels experienced in the latter part of 1995.
The Company experienced sales growth in 1995 of 30.0% as compared to 1994.
This growth reflects the Company's ability to meet short lead times and steep
production ramp schedules as a result of its capacity expansion implemented in
early 1995.
Gross Profit. Gross profit as a percentage of net sales (gross margin) was
11.8%, 27.7% and 30.8%, respectively, for 1996, 1995 and 1994. The Company's
gross margin is affected by several factors including product mix, process
yields, labor efficiency and overhead and capacity utilization.
The integration of ADFlex U.K. operations resulted in significantly lower
gross margins during 1996. 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 flex
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 flex circuits. The U.K. operations also experienced initial
difficulties achieving expected manufacturing yields on certain new parts
involving MR technology. Although the majority of the processing problems were
resolved by the end of the third quarter, the delayed attainment of expected
yields adversely affected gross margins for the year. Lastly, and most
significantly, the lower than anticipated net sales levels caused by order
delays and program cancellations resulted in reduced efficiencies and capacity
utilization, further eroding gross margins for the year.
The Company's flexible circuit fabrication operations located in the U.S.
and Mexico also experienced a decline in gross margins during 1996. In early
1995, in response to increasing sales demand, the Company began implementation
of an aggressive capacity expansion plan which continued into 1996. As part of
this plan, the Company spent $13.8 million on purchases of capital equipment and
expansion of facilities in 1996, after spending $20.6 million and $5.5 million
in 1995 and 1994, respectively. These purchases have resulted in depreciation
expense as a percentage of net sales of 3.7%, 2.3% and 1.2% for 1996, 1995 and
1994, respectively. The lower than anticipated net sales resulting from customer
structural changes and the slow down for mature products from the Company's U.S.
and Mexico operations resulted in operating inefficiencies, decreased capacity
utilization and the write-offs of inventories adversely impacting related gross
margins in 1996.
As a result of the Company's product diversification and growth strategies,
the product mix between HDD and non-HDD products, as well as individual products
within these groups, is constantly shifting. The material content of products
varies significantly due to the complexity of the design, plating requirements,
component content and a variety of other factors. During 1996, the Company
experienced considerable growth in communications products. The communications
market is subject to intense price competition. As such, the material and labor
content relative to the selling price tends to run higher than that of the
Company's HDD products.
23
<PAGE> 26
The decrease in gross margins in 1995 as compared to 1994 resulted from
increased depreciation expense, higher costs due to capacity constraints and
additional costs associated with bringing up new processes, expanding existing
processes and changes in product mix. During mid 1995, the Company periodically
encountered situations where demand outpaced capacity in certain production
processes. In order to meet production plans, the Company purchased additional
services from outside sources at higher costs thus negatively impacting gross
margins. To meet these requirements, the Company expanded and enhanced several
production processes including laser and plating. The Company was able to bring
these processes on-line and stabilize process yields in shorter than expected
time; nevertheless, the front-end costs associated with process change
implementation resulted in a reduction of gross margins.
Operating Expenses. Engineering, research and development expenses include
efforts to support customers' designs, programs related to the improvement of
manufacturing processes and yields on specific parts and development of new
materials and processes. Engineering, research and development expenses were
$7.4 million, $4.5 million and $3.7 million for 1996, 1995 and 1994,
respectively, representing 4.7%, 4.5% and 4.8% of net sales for those same
years. The increase in expense in 1996 is due to the addition of ADFlex U.K.,
whose advanced assembly technology requires a high level of engineering and
research and development resources. The increase in these expenses as a
percentage of net sales reflects the decreased leverage resulting from the lower
than anticipated assembly-related net sales. In 1995, engineering, research and
development expenses as a percentage of net sales decreased due to increased
utilization of these expenses from higher levels of net sales on existing
products.
As a result of the ADFlex U.K. acquisition, the Company wrote-off $13.9
million of in-process technology at December 31, 1995. Through the date of
restructuring of ADFlex U.K. operations, the Company incurred $2.4 million in
expenses relating to the amortization of intangible assets purchased in the
acquisition of ADFlex U.K.
Selling, general and administrative expenses as a percentage of net sales
were 8.5%, 9.0% and 10.4% for 1996, 1995 and 1994, respectively. The decreases
in both 1996 and 1995 reflect the Company's ability to obtain increased leverage
of such expenses in periods of increasing sales. Expenses for 1994 included
compensation expense of $675,000, or 0.9% of sales, representing the difference
between the option exercise price and the subsequently deemed fair value of
certain employee stock options granted in the last two quarters of 1993 and the
first quarter of 1994.
Restructuring Charge. At the close of the third quarter of 1996, the
Company's Board of Directors approved a plan to restructure its assembly
operation in the U.K. and transfer production from the U.K. to the Company's
manufacturing facility in Lamphun, Thailand. As part of this restructuring, the
Company recorded the following in the third quarter of 1996: $13.5 million
write-off of intangible assets, $8.8 million write-down of property, plant and
equipment and $6.9 million in employee and lease termination charges. Through
December 31, 1996, the Company paid out $0.3 million in employee termination
costs. The Company expects to pay out $4.1 million of the employee and lease
termination costs in 1997 and an additional $2.5 million in 1998.
Interest And Other Income (Expense). The decrease in interest income in
1996 reflects the decrease in cash and cash equivalent balances available for
investment subsequent to the settlement of the $12.4 million payable related to
the acquisition of ADFlex U.K. The increase in interest income in 1995 reflects
interest earned on the cash proceeds of the initial public offering in
September, 1994 and on the proceeds of the secondary stock offering by the
Company in May, 1995. The increase in interest expense in 1996 reflects $0.8
million in interest expense on the $10.0 million subordinated debenture issued
in conjunction with the ADFlex U.K. acquisition and $0.7 million in interest
expense related to borrowings under the line of credit and capital lease
obligations.
Other income for all years represents the net effect of bank charges and
exchange gains and losses realized on the settlement of transactions associated
with the Company's Mexico and U.K. subsidiaries.
24
<PAGE> 27
Income Taxes. The effective tax benefit rate for 1996 was 28% versus an
effective tax rate for 1995, excluding the write-off of in-process technology,
of 33% and 42% in 1994. The lower tax benefit rate for 1996 reflects the
nondeductibility of certain losses incurred in relation to the Company's U.K.
operations. The lower rate in 1995 as compared to 1994 reflects the recognition
of state tax refunds received during 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited consolidated financial
information and other data for each of ADFlex's last seven quarters, as well as
certain of such information expressed as a percentage of net sales for the same
periods. This information has been prepared on the same basis as the audited
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information
when read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere herein. The Company's operating results have been
subject to substantial fluctuation, and thus results for any quarter are not
necessarily indicative of the results for any future period or for the entire
year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------
SEPT. SEPT.
MAR. 31, JUNE 30, 30, DEC. 31, MAR. 31, JUNE 30, 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- --------
(In thousands, except percentages and per share and other data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATION DATA:
Net sales..................... $38,082 $35,031 $ 36,898 $46,825 $48,221 $56,244 $55,058
Gross profit (loss)........... 7,198 5,244 (295) 6,416 7,432 9,090 10,145
Net income (loss)............. 840 (660) (1) (25,663)(2) 459 873 1,880 2,597
Net income (loss) per share... $ 0.10 $ (0.08) $ (2.98) $ 0.05 $ 0.10 $ 0.21 $ 0.29
AS A PERCENTAGE OF NET SALES:
Gross profit (loss)........... 18.9 % 15.0 % (0.8)% 13.7 % 15.4 % 16.2 % 18.4 %
Non-HDD sales................. 30 38 40 44 48 50 58
HDD sales..................... 70 62 60 56 52 50 42
OTHER DATA (IN MILLIONS):
Capital expenditures.......... $ 6.5 $ 2.4 $ 1.7 $ 3.2 $ 1.5 $ 2.9 $ 3.2
Net sales from Thailand....... -- -- -- 0.5 2.0 4.9 10.1
Backlog(3).................... N/A 40.4 51.5 55.9 59.3 56.3 53.3
</TABLE>
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(1) Net loss for the three months ended June 30, 1996 was attributable to
customer strategic changes and reduced net sales of certain mature products.
(2) Net loss for the three months ended September 30, 1996 includes a charge of
$29.2 million (pre-tax) related to restructuring of the Company's U.K.
operations.
(3) The Company began tracking quarterly backlog levels in the June 30, 1996
quarter. Prior to that time the Company did not track quarterly backlog.
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<PAGE> 28
The Company's general increase in net sales from the three months ended
June 30, 1996 through the three months ended September 30, 1997 reflects the
overall strength in the electronics industry, increased assembly sales and the
growth of certain non-HDD markets such as cellular telephones and tape drives.
Gross profit has sequentially improved since the quarter ended December 31,
1996, because of the transfer of the Company's U.K. assembly operations to
Thailand and the successful volume ramp in Thailand.
The Company's results of operations have fluctuated in the past and may
continue to fluctuate from period to period in the future, including on a
quarterly basis. Variations in orders and in the mix of products sold by the
Company have significantly impacted net sales and gross profit. Operating
results generally also may be affected by other factors, including the receipt
and shipment of large orders, plant utilization, product mix, manufacturing
process yields, the timing of expenditures in anticipation of future sales, raw
material availability, product and price competition, the length of sales cycles
and economic conditions in the electronics industry. Many of these factors are
outside the control of the Company. Historically the Company has encountered
operating constraints in the fourth quarter as typical product life cycles lead
to volume production peak in demand in the second and third quarters. The
Company anticipates that current capacity restraints and continuing weakness in
the HDD market will result in net sales for the fourth quarter of 1997
approximating net sales for the third quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Summary. The Company has financed its growth and operations to date
primarily through cash generated from operations, the use of bank credit lines
and through proceeds from the sale of its Common Stock. The primary uses of cash
have been for increased working capital, funding of capital expenditures and
investments in ADFlex U.K. and ATL. At September 30, 1997, cash and cash
equivalents totaled $4.6 million and working capital was $28.4 million. At
December 31, 1996, cash and cash equivalents totaled $6.1 million and working
capital was $9.1 million.
Bank Financing. In June 1997, the Company entered into a new credit
facility. The credit facility consists of a $20 million three-year revolving
line of credit and a $25 million five-year term loan with equal principal
payments due each quarter beginning with the quarter ending December 31, 1998
and continuing through the quarter ending March 31, 2002. Borrowings under the
line of credit are limited to 80% of the aggregate value of all eligible
domestic accounts receivable plus 70% of the aggregate value of all eligible
foreign accounts receivable. Under the terms of the agreement, any outstanding
balances bear interest at BancBoston, N.A.'s prime interest rate or LIBOR plus
an applicable margin ranging from 1.5% to 2.25% based on the Company achieving
certain financial objectives at the end of each quarter. The credit facility is
secured by all assets of the Company and a pledge by the Company of 66 2/3% of
the stock of its subsidiaries. The Company is required, under the credit
agreement, to maintain certain financial ratios and meet certain net worth and
indebtedness tests for which the Company was in compliance at September 30,
1997. At September 30, 1997, $25.0 million was outstanding under the term loan
and $1.0 million was outstanding under the revolving line of credit. The Company
intends to use approximately $25.3 million (including $0.3 million in prepayment
premiums) from its net proceeds of this offering to retire the term loan. See
"Use of Proceeds."
Cash Flow. Net cash used by operating activities for the nine month period
ended September 30, 1997 was $0.7 million compared to $2.6 million for the same
period in 1996. Net income (loss) was $5.3 million and ($25.5) million for the
same periods, respectively. The Company experienced a net loss of ($25.5)
million for the nine months ended September 30, 1996 principally due to a $29.2
million (pre-tax) charge related to the restructuring of its U.K. operations.
This charge consisted of write-downs in intangible assets and plant and
equipment as well as the recognition of future obligations for employee and
lease termination charges. During the nine month period ended September 30,
1997, the Company paid $2.7 million of the accrued restructuring charges for
employee and lease terminations. Working capital increased from $9.1 million at
December 31, 1996 to $28.4 million at September 30, 1997 primarily as a result
of increased business activity, the start-up of a new manufacturing facility in
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<PAGE> 29
Thailand and rescheduling of some product deliveries beyond the third quarter of
1997 causing a temporary increase in inventories due to a general softening in
the high-end HDD market. During the nine month period ended September 30, 1996,
the Company experienced increased working capital requirements primarily for
funding of accounts receivable associated with its U.K. operations as
receivables were not purchased in the acquisition. These working capital
requirements were funded in part through the generation of accounts payable and
accrued liability balances with the remainder financed from borrowings under the
Company's then existing bank line of credit. The 1996 results reflect $2.4
million of amortization expense for intangible assets related to the ADFlex U.K.
acquisition. The remaining intangible assets were written off in the third
quarter of 1996 as part of the restructuring of the U.K. operations.
Net cash used in investing activities was $8.1 million for the nine months
ended September 30, 1997 compared with $22.5 million for the same period in
1996. Capital expenditures for the nine months ended September 30, 1997 were
$7.6 million compared with $10.6 million for the same period in 1996. Late in
the first quarter of 1995, the Company began a capacity expansion plan in
response to increasing sales levels which was complete in 1996. Capital
expenditures during the periods were financed from existing cash balances and
from borrowings under the Company's bank line of credit. The Company presently
expects capital expenditures to total approximately $13.6 million in 1997. In
January, 1996 the Company paid $12.4 million in connection with its acquisition
of the ADFlex U.K. operations. This payment was financed from existing cash and
cash equivalent balances.
Net cash provided by financing activities for the nine months ended
September 30, 1997 was $7.4 million compared with $11.9 million for the same
period in 1996. Of the proceeds from the $25.0 million term loan discussed
above, approximately $7.5 million in principal plus $0.3 million in accrued
interest were used to retire, ahead of schedule, the subordinated debenture
issued in the acquisition of ADFlex U.K., approximately $15.0 million was used
to repay borrowings under the Company's existing line of credit and the
remainder was used to finance working capital of the Company. In addition, the
Company remitted $2.5 million in principal plus $0.8 million in accrued interest
in January 1997 in payment of the subordinated debenture. Funding for this
payment came from the Company's then existing line of credit. The Company
generated $1.5 million and $1.8 million in the nine months ended September 30,
1997 and 1996, respectively, through sales of its Common Stock. Net repayments
on the Company's bank line of credit totaled $9.0 million during the nine months
ended September 30, 1997 compared to net borrowings of $10.2 million for the
same period in 1996. Borrowings on the line were used to finance working capital
requirements and capital expenditures as discussed above.
During the nine months ended September 30, 1997, the Company paid $0.5
million to purchase Hana's interest in ATL and delivered a promissory note in
the principal amount of $2.8 million payable by September 30, 1998.
Total cash provided by operations decreased $14.8 million in 1996, as
compared to 1995, due largely to working capital required to fund the accounts
receivable associated with the U.K. operations as receivables were not purchased
in the acquisition. These working capital requirements were funded in part
through the generation of accounts payable and accrued liability balances with
the remainder financed from borrowings under the then existing bank line of
credit. The Company experienced a net loss of ($25.0) million in 1996 primarily
the result of a $29.2 million charge (pre-tax) related to the restructuring of
its U.K. operations. The charge consisted of write-downs of intangible assets
and property, plant and equipment, as well as the recognition of future
obligations for employee and lease termination charges. The charge, therefore,
did not significantly impact 1996 operating cash flows.
Cash totaling $25.7 million was used in 1996 investing activities, which
included the settlement of a $12.4 million payable related to the ADFlex U.K.
acquisition and the purchase of buildings and capital equipment totaling $13.8
million. Financing activities in 1996 provided the Company with $11.6 million,
including $10.0 million in net borrowings under the Company's existing line of
credit and $1.8 million from the sale of Common Stock.
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<PAGE> 30
Cash provided by operating activities totaled $19.2 and $4.0 million in
1995 and 1994, respectively. In 1995, the Company generated $10.2 million in net
income prior to the write-off of $13.9 million of in-process technology. During
1995, accounts receivable and inventory increased by $3.5 million and $4.4
million, respectively, in support of the increased sales volumes and a change in
the product mix towards parts with a higher material content. Payables and
accrued liabilities increased $14.9 million due primarily to the recognition of
a $12.4 million payable in conjunction with the ADFlex U.K. acquisition. In
1994, net income of $7.0 million was used in part to fund increased working
capital requirements resulting from the 59% sales growth experienced in that
year.
Cash totaling $14.0 million was used for 1995 investing activities
including $20.6 million on the purchase of buildings and capital equipment,
including the acquisition and improvement of a 160,000 square foot manufacturing
facility adjacent to its existing facilities in Agua Prieta, Mexico, and $18.9
million in net sales of short-term investments. Cash totaling $24.2 million was
used for 1994 investing activities including $5.5 million on the purchase of
buildings and capital equipment and $18.9 million in net purchases of short-term
investments. Financing activities in 1995 and 1994 provided the Company with
$6.4 and $23.8 million, respectively, primarily from the sale of Common Stock.
The Company presently expects to spend approximately $6.0 million on
capital expenditures in the fourth quarter of 1997, primarily for machinery and
equipment and expansion of operations in Thailand, and approximately $37.0
million in 1998, primarily for machinery, systems and equipment, and expansion
of operations in North America and Thailand.
The Company may require additional capital to finance enhancement to, or
expansion of, its manufacturing capacity in accordance with its business
strategy. Management believes that the level of working capital should continue
to grow at a rate generally consistent with the growth of the Company's
operations. Although no assurance can be given that future financing will be
available on terms acceptable to the Company, the Company may seek additional
funds from time to time through public or private debt or equity offerings or
through bank borrowings. Management believes, however, that existing cash
balances, proceeds of this offering, funds generated from operations and
borrowings under its existing line of credit will be sufficient to permit the
Company to meet its liquidity and expansion requirements for the next twelve
months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an immaterial increase in primary earnings per
share for the nine months ended September 30, 1997 and 1996. The impact of SFAS
No. 128 on the calculations of fully diluted earnings per share for these
periods is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is required to be adopted in the first quarter of 1998. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income includes certain non-owner changes in
equity which are currently excluded from net income. Because the Company
historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS No. 130 is not expected to have a
material effect on the consolidated financial position, results of operations or
cash flows of the Company.
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<PAGE> 31
BUSINESS
OVERVIEW
ADFlex is a leading worldwide provider of flexible circuit interconnect
solutions to OEMs in the electronics industry. The Company offers a full range
of customized flexible circuit applications and services from initial design,
development and prototype to fabrication, assembly and test on a global basis.
The Company targets high-volume markets where miniaturization, form and weight
are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by the Company include
notebook computers, portable communication devices such as cellular telephones
and pagers, data storage devices such as HDDs, tape drives and arrays, and high-
end consumer electronics products such as compact disk players. The Company's
principal customers include Compaq, Digital Equipment, IBM, Iomega, Motorola,
Nokia, Philips, Seagate, Storage Technology, and other leading electronics OEMs.
Flexible circuits consist of copper conductive patterns on flexible
substrate materials, such as polyimide, and provide electrical connection
between components in electronic systems. Flexible circuit interconnects
frequently incorporate components such as integrated circuits ("ICs"),
connectors, stiffeners, resistors and capacitors mounted directly on a flexible
circuit. With the proliferation of electronic applications, electronic products
have become smaller, lighter and more portable. To meet the challenges
represented by the increased complexity of miniaturization, form and weight
requirements, OEMs have increasingly turned to flexible circuit interconnect
solutions because they minimize the weight and expense of connectors and other
packaging components, conform to contoured, ergonomic shapes or small spaces and
provide mechanical flexure. BPA and other leading industry sources estimate that
the worldwide market for flexible circuits grew by a compound annual rate of 14%
per year from 1990 through 1995 and reached $2.4 billion in sales in 1996
(excluding flexible circuit interconnect assemblies). BPA and these other
sources also estimate that sales of flexible circuits will grow at a compound
annual rate of approximately 21% per year from 1995 through 2000. Based on this
and other data, the Company believes the flexible circuit assembly market is
more than two times the size of the fabricated flexible circuit market.
At the same time that the trend toward miniaturization and portability
increases product complexity, electronics OEMs face escalating time-to-market
requirements. In response, the Company acquired ADFlex U.K. in December 1995 to
accelerate its strategy of providing a "one-stop-shop" solution to enable
customers to meet time-to-market challenges. Time-to-market and cost issues have
also led OEMs to focus on global sourcing from a limited number of qualified
suppliers. As a result, the Company continues to migrate its flexible circuit
production and assembly operations to lower cost regions, such as Mexico and
Thailand, that have proximity to the Company's OEM customer base. The Company
believes its "one-stop-shop" offerings of flexible circuits and assemblies are a
competitive advantage that will allow it to increase its market share with
existing customers and will create opportunities to attract new customers. The
Company believes it is a preferred supplier for the majority of its customers'
high-end and high-volume flexible circuit interconnect requirements.
INDUSTRY OVERVIEW AND TRENDS
Flexible circuit interconnects provide electrical connection between
components in electronic systems and are increasingly used as a platform to
support the attachment of electronic devices. Flexible circuits offer several
advantages over rigid printed circuit boards ("PCBs") and ceramic hybrid
circuits, particularly for small, complex electronic systems. Flexible circuits,
due to their mechanical flexure and three-dimensional shape, accommodate
packaging contours and motion in a manner that traditional two-dimensional rigid
PCBs are not able. Flexible circuits also provide improved thermal dissipation
and signal propagation as compared to PCBs. In addition, flexible circuits can
reduce the size, weight and expense of (i) the primary substrate for component
attachment when a flexible circuit is used in place of a PCB; (ii) connectors,
cables and other interconnection schemes
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<PAGE> 32
when flexible circuits provide the connection to other substrates or subsystems
within the system; and (iii) individual IC die packages by bonding an IC
directly to a flexible chip carrier rather than a ceramic or plastic package.
These capabilities enable flexible circuits to solve many of the challenges
faced by electronics OEMs who currently use traditional interconnection devices.
Possible new applications for polyimide flexible circuit interconnect assemblies
include high density interposers and other chip carrier packaging applications.
The growth in the interconnect market is closely tied to the overall growth
of the global electronics market which Henderson Ventures estimates will grow at
a compound annual rate of 9% per year through 1999. BPA and other leading
industry sources estimate that the worldwide flexible circuit market reached
$2.4 billion in sales in 1996, and has grown at a compound annual rate of 14%
per year from 1990 through 1995. BPA and these other sources also project a
compound annual growth rate of 21% per year for the flexible circuit market
through 2000. Polyimide-based flexible circuits, which are used in the more
demanding applications in the communications, computer, computer peripheral,
consumer, industrial, medical and military market segments, comprise
approximately 84% of the flexible circuit market in the U.S. according to the
Institute for Interconnecting and Packaging Electronics Circuits. The remainder
of the flexible circuit market is composed of polyester-based products used in
less demanding applications in the consumer and automotive market segments.
Products which currently use polyimide flexible circuit interconnect assemblies
include notebook computers, portable communication devices such as cellular
telephones, pagers and PDAs, printers, scanners and data storage devices such as
HDDs, tape drives and arrays, and high-end consumer electronic products such as
compact disk players, cameras and camcorders.
Related to the electronics interconnect market, contract manufacturing
companies provide OEMs outsource solutions for assembly and placement of
electronic components onto interconnect substrates. Technology Forecasters, Inc.
estimates that the worldwide electronics contract manufacturing market was $45.6
billion in 1995 and is expected to grow to $117.0 billion by 1999. Based on this
and other data, the Company believes that the market opportunity for flexible
circuit assemblies is more than two times the size of the overall flexible
circuit market.
The Company considers the following trends important in understanding the
electronic flexible circuit interconnect industry:
Miniaturization, Portability and Complexity of Electronic
Products. Electronics OEMs continue to design and introduce more compact and
portable high-performance products with greater functionality. The complexity of
these new products requires smaller size, lighter weight, greater circuit and
component density, better thermal dissipation properties, higher frequencies and
increased reliability. These requirements necessitate greater sophistication in
flexible circuit interconnect manufacturing and process technologies, including
narrower line widths and spacing, thinner substrate materials, smaller vias to
connect internal circuitry, and more precise positioning of traces and pads to
accommodate a greater density of surface mount components. The trend toward
increasingly sophisticated products also requires greater engineering expertise
and investment in manufacturing and process technology for suppliers to produce
high-quality electronic interconnect products on time, in volume and at
acceptable cost.
Shorter Product Life Cycles and Time To Market. Rapid advances in
technology have significantly shortened the life cycle of complex electronic
products and placed increased pressure on OEMs to quickly develop and introduce
new products. These time-to-market challenges have in turn increased OEMs'
emphasis on the development, design engineering, prototype development and
ramp-to-volume capabilities of their suppliers. In addition, the importance of
being first to market with new products has heightened the emphasis on
shortening supply channels, reducing the number of suppliers and finding turnkey
sourcing capabilities that are supported by technologically advanced
manufacturing infrastructure.
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<PAGE> 33
Globalization and Reduction of Manufacturing Costs. At the same time that
shorter product life cycles increase time-to-market pressures, users continue to
demand increased electronic performance at lower prices. Notable product
examples of this trend are notebook computers, desktop computers, peripherals,
portable communications and consumer electronics. Leading OEMs who often
manufacture products in multiple geographic regions are relying more on
suppliers with global sourcing capabilities who can help to shorten the OEMs'
supply chain and provide regionally competitive pricing. As part of global
sourcing, OEMs increasingly look to their suppliers to establish local
infrastructure to provide proximity to engineering, manufacturing and sales
support.
Outsourcing and "One-Stop-Shop" Suppliers. To avoid delays in new product
introductions, reduce manufacturing costs and avoid logistical complexities,
OEMs are increasingly turning to fewer suppliers which are capable of producing
electronic interconnect products from development, design, quick-turn prototype
and pre-production through volume production and assembly. Many OEMs have
accelerated this process by outsourcing their captive component, subsystem and
even system manufacturing to focus on their core competencies. The accelerated
time-to-market and time-to-volume needs of OEMs have resulted in increased
collaboration with qualified suppliers capable of providing a broad and
integrated offering. To meet their rapidly changing electronic interconnect
requirements, many OEMs have moved to limit their vendor base to a smaller
number of technically qualified, strategically located suppliers capable of
providing both quick-turn prototype and pre-production quantities as well as
cost-competitive volume production quantities.
Proliferation of Electronics and Creation of New Markets. The markets for
electronic products are growing as a result of technological change, increasing
demands for a wider variety of electronic product features and more powerful and
less expensive electronic components. Due to this growth, new markets have
emerged in computing, data communications, telecommunications and multimedia.
Moreover, existing markets, such as computer networking and peripherals, digital
and mobile communications, video-on-demand, the Internet, instrumentation and
industrial controls, have significantly expanded product applications. The
Company believes these new and emerging electronic product markets and
applications will continue to drive the growth of the electronics interconnect
industry.
STRATEGY
The Company's objective is to become the preferred supplier of flexible
circuit interconnect solutions for electronics OEMs in targeted markets. The
Company's strategy to meet this objective includes the following key elements:
Provide "One-Stop-Shop" for Fabrication and Assembly. The Company provides
customers with complete, fully tested flexible circuit interconnects from custom
design through fabrication, assembly and complete functional testing.
Historically, the capital intensive nature of flexible circuit production
compelled companies to specialize in one or two major segments of the flexible
circuit production process, either design and fabrication or assembly and
testing. Prior to the ADFlex U.K. acquisition, a flexible circuit fabricated by
the Company often was sent elsewhere for assembly and testing before being
shipped to the end customer. The integration of expertise in state-of-the-art
assembly technology and processes with the Company's pre-existing fabrication
technology and high-volume production capabilities enables the Company to offer
significantly shorter cycle times, lower total costs and better quality for
customers. In addition, the Company believes that the integration of assembly
technology with manufacturing technology and high-volume production capabilities
will, over time, provide improvements in the Company's production costs through
higher product yields, faster production ramps, reduced inventories, shortened
production cycle times, improved account control and increased leverage over
expenses.
Provide Design Expertise and Packaging Technology. The Company's flexible
circuit interconnects are designed specifically for each application, requiring
significant joint design activities between the Company and its customer at the
start of a new program. The Company encourages its customers to outsource much
of the flexible circuit design to ADFlex, which creates an opportunity for the
31
<PAGE> 34
Company to function as an extension of its customers' product development
efforts. The Company assumes the responsibility, and invests in support thereof,
to maintain and advance flexible circuit technology at the materials,
fabrication and assembly levels. The technology employed provides customers with
thin substrate materials, narrow spaces and line widths (.003"), and
laser-drilled vias of .001". The Company believes that its extensive involvement
with customers at the design stage, coupled with its use of technology designed
to meet the evolving requirements of its customers, has been a key competitive
advantage. The Company also is working on new technologies, such as high-density
interposers and direct chip attach ("DCA"), to remain a technology leader in the
industry.
Expand Service and Manufacturing Infrastructure. As OEMs increasingly
require suppliers to support their global operations, the Company is devoting
significant resources to enhance its worldwide service and support organization.
The Company has expanded worldwide by strategically locating manufacturing
facilities in the United States, Mexico and Thailand. In addition, the Company
maintains a technology and pilot production facility in the U.K. to support its
European customers. The Company believes that substantial growth opportunities
exist for sales of its products and services to both U.S. and foreign-based
customers for use in their production operations in Singapore, Korea, Taiwan and
Japan. In order to increase sales to customers with foreign manufacturing
operations, the Company has design centers in North America and Europe and has
initiated the establishment of design support capabilities with the Company's
own engineers and with third party independent contractors in Singapore, Korea,
Taiwan, and Japan. By increasing the scale and scope of the services offered in
each region, the Company believes that it can better address the needs of
leading OEMs and contract manufacturers that are increasingly seeking global
partners and lower costs in the high-volume production of advanced products.
During 1998, the Company expects to expand its manufacturing operations in
Thailand to leverage the cost structure of the existing Thailand facility and
the facility's proximity to a number of existing and prospective customers in
Southeast Asia.
Increase Share with Existing Customers. Once established as a supplier for
an application, the Company seeks to gain an increasing share of the customer's
interconnection requirements in two principal ways:
- Increase Share of Total Requirements. The Company's strategy is to
become the preferred supplier on as many programs as possible by
outperforming its direct competition on the critical factors of quality,
cost, delivery, design, responsiveness and overall customer service. The
Company's objective is to obtain at least a 60% share of each of its
customer's high-end and high-volume flexible circuit interconnect
requirements, a position it believes that it currently holds with a
majority of its largest customers.
- Leverage Fabrication for Assembly Opportunities. The Company offers
integrated flexible circuit fabrication and assembly services. The Company
seeks to capitalize on the growing trend among electronics OEMs to reduce
time to market as well as the number of suppliers. By providing flexible
circuit assembly as an extension to existing fabrication services, the
Company can deliver savings on both time to market and cost for its
customers.
Target High-Volume Applications in High-Growth Markets. The Company
targets applications for flexible circuit interconnects that have experienced
large volumes, high growth and rapid change such as notebook computers, cellular
telephones and pagers. In these markets, the Company can apply its superior
design skills, manufacturing efficiencies and ability to quickly ramp to volume
production. Likewise, the Company believes it can leverage technology from its
existing markets into new and emerging markets and applications. Within its
selected markets, the Company targets OEMs (i) that have a market leadership
position; (ii) that need rapid response and value-added assembly; and (iii) who
will reward initiative with a preferred supplier position. From the Company's
view, a preferred supplier relationship provides the opportunity to influence
the design of future products and to offer visibility with respect to future
product requirements, leading to the opportunity to provide a majority of the
customer's flexible circuit interconnect requirements.
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<PAGE> 35
THE "ONE-STOP-SHOP" ADFLEX APPROACH
The Company provides its customers with an integrated, "one-stop-shop"
solution of fabrication and assembly, incorporating superior engineering and
design, low-cost/high-volume circuit fabrication, flexible circuit assembly and
test along with dedicated customer support.
Superior Engineering and Design Technology. The flexible circuit
interconnects manufactured by the Company are designed specifically for each
application, requiring significant joint design activities between the Company
and the customer at the start of a project. The Company has developed design
methodologies that solve difficult interconnection problems and can save the
customer time and money. The Company also designs and produces in volume
flexible circuits that range from high-density, single-sided circuits to more
complex double-sided and multi-layer circuits. The Company is continually
investing in and improving its computer-based design tools to more quickly
design new flexible circuit interconnects, to enhance cooperative design and
communication with its customers and to more closely link designs to the
manufacturing process. The Company is recognized as a technology leader in
fine-line, single-sided flexible circuit technology and flexible circuit
assembly technology, including advanced chip on flex ("COF"), flip-chip on flex
("FCOF") and high-density polyimide ("HDP") assembly technologies.
Circuit Fabrication Technology. The Company has extensive experience in
fine-line polyimide flexible circuits and has pioneered manufacturing processes
that deliver high unit volumes at cost-effective yields. At the core of the
process is roll-to-roll subtractive fine line circuit processing. The starting
materials are flexible laminates composed of a thin dielectric film which is
adhesive-bonded to treated copper foil. Very accurate images (down to 0.003")
are produced in volume in photoresist. Circuit conductors are then formed by
chemically etching the underlying copper foil. Coverfilm materials with
pre-punched windows are laminated to the circuitry to provide an insulative
coating and to expose contact pads for surface metalization. The exposed
surfaces are then coated with solder for surface mount or bondable gold for
chip-on-flex applications. Laser processing is then used to create various
openings, to drill vias and cut contoured peripheries in substrate materials.
The Company's key flexible circuit fabrication technologies include:
- Fine Feature Roll-to-Roll Imaging and Etching. Allows the fabrication of
circuits with very fine line widths and spaces. This is critical to
meeting complex, space constrained, interconnection needs. Processing
wide web (24 inches) in a continuous roll-to-roll format (as opposed to
discrete panels) allows fabrication of high circuit volumes with improved
material utilization, resulting in lower cost.
- Laser Processing. Laser technology is used to produce low cost, very
fine openings, small vias and contoured shapes which solve density
problems while avoiding more expensive traditional alternatives. Also,
using a laser to cut the periphery of parts allows prototypes and low
volume production parts to be built faster and without the cost of a
blanking die.
- Bondable Gold Plating. Prepares flexible circuits for chip-on-flex
bonding, a process which saves space and improves electrical performance
(access time) by wire bonding an IC die directly to the flexible circuit.
- Coverfilm, Lay-up and Lamination. A process where polyimide/adhesive
based coverfilm materials are prepunched, then aligned with and laminated
to an underlying circuit pattern. This process allows accurate
positioning of solder plated pads to support fine pitch surface mount
assembly to the finished circuits.
Assembly and Test Technology. The Company applies advanced assembly and
test technology to provide certified flexible circuit interconnect assemblies to
its customers. For many years, the Company assembled passive electrical and
various mechanical components, including connectors, stiffeners, diodes, formed
metal parts and other devices, to its flexible circuits using primarily manual
processes in its plants in Mexico. With its acquisition of ADFlex U.K., the
Company expanded its
33
<PAGE> 36
capability to include advanced direct die attach and assembly of integrated
circuit devices as well as the functional testing of these flexible circuit
assemblies. Assembling these components directly onto the flexible circuit
increases performance and reduces space, weight and cost.
Customer Satisfaction. A critical component of the Company's growth has
been dedicated customer support. The Company has achieved and maintained high
levels of customer satisfaction by focusing on continuous quality improvement,
reducing total manufacturing cycles, shortening its design and prototype cycles,
reducing its general costs of manufacturing through capacity utilization and
process improvement, and being responsive and working closely with its customers
on a day-to-day basis to quickly address their changing needs. The
responsibility for achieving and maintaining high levels of customer
satisfaction rests with specific business units, each of which consists of a
team of sales personnel; design, quality and manufacturing engineers; and
customer service representatives who are dedicated to a single customer or small
group of customers with similar requirements.
MARKETS AND CUSTOMERS
The following describes the primary product applications for which the
Company is shipping in volume. ADFlex is a leading worldwide provider of
flexible circuit interconnect solutions with respect to each of these
applications.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PERCENT OF SALES
FOR THE
NINE MONTHS ENDED
APPLICATIONS CUSTOMERS INTERCONNECT FUNCTIONS SEPTEMBER 30, 1997
- ---------------------------- ------------------- ------------------------ -------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hard Disk Drives IBM Read/write head 48%
Maxtor assemblies, motor
Micropolis assemblies, interposers
Seagate
Western Digital
Iomega
- ------------------------------------------------------------------------------------------------------
Data Storage:
Storage Arrays Digital Equipment SCSI cable, LED 14%
IBM assemblies
Storage Technology
Symbios
Tape Drives IBM Read/write head 7%
Quantum assemblies, tape back-up
Read-Rite units
Storage Technology
- ------------------------------------------------------------------------------------------------------
Portable Communications Motorola Cellular telephones, 14%
Nokia cellular telephone
TDI batteries, pagers
- ------------------------------------------------------------------------------------------------------
Notebook Computers Acer LCD assemblies, shielded 9%
Compaq jumpers, LED
Hewlett-Packard assemblies/speaker
assemblies
- ------------------------------------------------------------------------------------------------------
Consumer and Other Philips CD-ROMs, printer 8%
Applications Tektronix assemblies
- ------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
CURRENT PRODUCT APPLICATIONS
Hard Disk Drives. The HDD market uses flexible circuits as the
interconnect between the read/write head and disk drive electronics. In HDD
applications, circuits need to mechanically flex hundreds of millions of times
through the life of the drive. Mounting an unpackaged die directly onto the
flexible circuit substrate, or chip on flex, is becoming the predominant
interconnect technology for these applications. International Data Corporation
("IDC") estimates that approximately 110 million HDD units were shipped in 1996
and 230 million units will be shipped in 2000, representing a compound annual
growth rate of 21% per year.
Data Storage. Large individual drive storage systems are being replaced by
arrays of less expensive disk drives or tape drives. The growth of personal
computer networks has generated a growth in small arrays for local area network
storage. The 1996 DISK/TREND Report estimates that sales of disk drive array
systems exceeded $9.7 billion in 1995 and will grow to more than $18.6 billion
by 1999. In addition to the flexible circuit interconnects inside each of the
individual drives, controlled impedance flex interconnects are used to connect
the back of the drives to standard interface boards.
The use of tape drives for storage and back-up is growing significantly.
These devices use flexible circuits as the interconnect between the read/write
head and disk drive electronics. Peripheral Research Corporation estimates that
sales of digital tape drives will exceed $4.0 billion in 2000.
Portable Communications. The use of polyimide flexible circuits in
portable communications devices such as cellular telephones has increased
significantly over the last few years. IDC estimates that the cellular
subscriber base in the U.S. at the end of 1996 was 41.9 million users, an
increase of 34.1% over 1995, and that the U.S. cellular market will grow at a
compound annual rate of 13% per year through 2001. The use of polyimide flexible
circuits in portable communications devices is rapidly growing as the space,
weight and functionality challenges are becoming more difficult. In some
cellular telephones, flexible circuits replace rigid PCBs, connectors and cables
and can thereby reduce space, weight and cost. Combining the portable system
unit growth with expanded applications of flexible circuits should accelerate
the growth of this application.
Notebook Computers. IDC estimates that 11.8 million notebook computers
were shipped worldwide in 1996, with an estimated compound annual growth rate of
19.3% per year through 2000, reaching more than 23.9 million units. In addition,
the number of flexible circuit interconnects per notebook is increasing. Early
applications for flexible circuits in notebooks were mainly as interconnects
from the motherboard to the LCD and as shielded jumpers. More recently, systems
have used as many as ten flexible circuit interconnects per notebook, including
PCMCIA connector/flex jumpers, LED/speaker flexible circuit assemblies, track
ball/mouse button flexible circuit assemblies and various other shielded
jumpers. The combination of growing notebook unit volumes and the increasing use
of flexible circuits in these applications should accelerate the sales growth of
flexible circuits to this segment.
Consumer and Other Applications. CD/DVD-ROMs are growing in consumer
applications where higher capacity and quicker access time, compared to tape
drives, are needed. These devices use flexible circuits as the interconnect
between the read/write head and CD/DVD-ROM drive electronics. IDC estimates that
sales of CD/DVD-ROM drives reached $3.5 billion in 1996, with an estimated
compound annual growth rate of 24% per year through 2000.
Computer workstations, document scanners and printers also make use of
flexible circuit interconnects. Certain products and applications have similar
packaging and interconnection requirements and growth opportunities when
compared to the primary end-user markets served by the Company. An analysis of
the U.S. home office printer market published by IDC estimates that 3.8 million
ink jet and laser printers were shipped in 1996, a number which is projected to
grow to 6.8 million units by 2000.
Emerging Product Applications. Flexible circuit substrates are a leading
candidate for use in semiconductor packaging and as interposers for high-density
interconnect applications.
35
<PAGE> 38
SALES AND SUPPORT
The Company has organized its sales and support effort into five business
units based on the Company's end markets. Each business unit is composed of
sales personnel; design, quality and manufacturing engineers; and customer
service representatives. From the time a customer submits a request for
prototype, the applicable business unit is responsible for developing and
expanding the Company's relationship with the customer with the goal of becoming
a preferred supplier. The design and manufacturing engineers of each business
unit work cooperatively with a customer's design engineers to arrive at
cost-effective flexible circuit interconnect solutions that meet the performance
and quality specifications of each product. The business unit then works with
the Company's manufacturing operations personnel to coordinate a timely and
effective integration of the product into the Company's production process from
prototype through the production ramp, assembly (if required) and functional
testing. If the program includes component assembly, the engineers and the
customer service representatives work with planning and purchasing to ensure
that all of the component specification, assembly and test standards and
delivery requirements are understood and properly integrated into the
manufacturing process.
The Company's customer service representatives work with the customer's
purchasing or project representatives on an ongoing basis to implement changes
to the schedule or product specification. Each business unit also directs
research and development efforts that target existing customer needs. Research
currently includes various methods and applications of screened-materials,
direct attachment methods, laser processing, thinner and lower cost substrate
materials and improved processes that yield smaller lines and spaces on
circuitry. By organizing by end market rather than by function, the Company
believes that it can respond more quickly than the competition to the needs of
its customers.
MANUFACTURING AND FACILITIES
The Company has developed a manufacturing process that combines the use of
technology with the deployment of human resources in a geographic and
organizational manner that allows the Company to compete on a pure cost basis,
if necessary, with suppliers of similar products throughout the world. Quality
systems are in place that are certified to standards set by demanding customers
in the electronics industry. The Company received ISO 9001 certification of its
U.S. operations in 1996, received ISO 9002 certification of its Mexican
operations in early 1997, and expects to receive ISO 9002 certification of its
Thailand operations by the end of 1997.
The Company believes that it enjoys a cost advantage based on a
manufacturing process designed to optimize the utilization of labor and capital,
the close proximity (approximately 200 miles) of its two North American
manufacturing locations, and a manufacturing process and technology with better
yield, material utilization and throughput relative to its competitors. In
addition, the Company believes that the integration of assembly technology with
manufacturing technology and high-volume production capabilities will over time
provide improvements in its production costs through higher product yields,
faster production ramps, reduced inventories, shortened production cycle times,
improved account control and increased leverage over expenses.
36
<PAGE> 39
The manufacturing organization is structured by process to optimize the
utilization of equipment and technical resources as depicted by the following
graphic:
[Graphic of production capabilities at Company's three locations]
<TABLE>
<CAPTION>
FABRICATION FINISHING ASSEMBLY
- ----------- --------- --------
<S> <C> <C>
Chandler Mexico-1 Mexico-2&3
- ----------- -------- ----------
- - Coat/Expose/Develop - Coverfilm Layup - Passive Components
- - Etch/Strip - Lamination - Surface Mount Technology
- - Plating/Surface Treatment - Solder/Screening - Electrical Test
- - Laser - Pierce/Blank
Thailand-2 (1998) Thailand-1
----------------- --------------
- Coverfilm Layup - Passive Components
- Lamination - Surface Mount Technology
- Solder/Screening - Chip on Flex
- Pierce/Blank - Flip-Chip on Flex
- Electrical Test
</TABLE>
In total, the Company leases or owns approximately 412,000 square feet of
manufacturing and other space. The Company's significant facilities are as
follows:
<TABLE>
<CAPTION>
LOCATION (NUMBER OF
FUNCTIONS FACILITIES) SQUARE FEET OWNED/LEASED EXPIRATION
- ----------------------------- --------------------------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Executive Offices; Chandler, Arizona (one) 150,000 Leased June 2003
Research and Development;
Sales and Support; Circuit
Fabrication
Circuit Finishing and Agua Prieta, Mexico (three) 161,000 One owned N/A
Assembly 64,000 Two leased January 1998(1)
Circuit Assembly; Sales and Lamphun, Thailand (one) 25,000 Leased December 1998
Support
Technology and Pilot Portsmouth, United Kingdom 12,000 Leased September 2007
Production; Sales and (one)
Support
</TABLE>
- ---------------
(1) Includes four, one-year renewal options.
The Company believes that its existing facilities in Arizona, Mexico and
the U.K. are adequate to meet its current requirements in these locations, and
that suitable additional space or substitute space is readily available as
needed. The Company currently occupies 25,000 square feet in the Hana complex in
Thailand. The Company is currently evaluating various alternatives to
significantly expand its facilities in Thailand. See "Risk
Factors -- Manufacturing Capacity and Other Manufacturing Risks."
SUPPLIERS
The Company purchases raw circuit materials, process chemicals and various
components from multiple outside sources. For components, the Company typically
makes short-term purchasing commitments to key suppliers for specific customer
programs. These commitments are usually made for three to six month periods.
These suppliers commit to providing cooperative engineering, as required, and in
some cases maintain a local inventory to provide shorter lead times and reduced
inventory levels for ADFlex. In most cases, suppliers are approved, and are
often dictated, by the Company's customers. For process chemicals, the Company
relies on a limited number of key suppliers. Alternate chemical products are
available from other sources, but process chemical changes would often require
requalification of the processes, which could take weeks or months to complete.
37
<PAGE> 40
The Company has attempted to mitigate these risks by identifying stable
companies with leading technology and delivery positions.
The Company currently purchases a number of its components, process
chemicals and other materials from a single source. For example, the Company has
a supply agreement with Rogers for the supply of certain materials, including
laminates, films, bondply, copper foil and heat treated polyimide, used in the
Company's flexible circuit interconnects. In the United States, these products
are available only from a limited number of suppliers. The Company's agreement
with Rogers expires on December 31, 1998 and can be terminated prior to
expiration by mutual consent or for material breach upon 30 days' notice. Under
the supply agreement, ADFlex has agreed to purchase a percentage of its circuit
materials needs from Rogers, assuming that Rogers is able to meet the materials
specifications, performance requirements and delivery as required by the Company
and its customers.
While viable alternate suppliers exist, because of the Company's limited
inventory of raw materials, tight manufacturing cycles and the significant
amount of time required to qualify new suppliers, single sourcing is expected to
continue. Consequently, any unanticipated interruption of material supplies or
components would have a short-term material adverse effect on the Company. See
"Risk Factors -- Limited Sources of Supply."
COMPETITION
The flexible circuit interconnect market is differentiated by customers,
applications and geography, with each niche having its own combination of
complex packaging and interconnection requirements. The Company believes that it
competes principally on the basis of design capability, price, quality, response
time to design changes and technological advancements in underlying applications
and the ability to offer a total flexible circuit interconnect solution,
including the ability to ramp rapidly up to and down from volume production and
to provide assembly and test services. In addition, during periods of recession
or economic slowdown in the electronics industry and other periods when excess
capacity exists, electronics OEMs become more price sensitive, which could have
a material adverse effect on interconnect pricing. The Company believes that
once an OEM has selected a particular vendor to design and manufacture a
flexible circuit interconnect, the OEM generally relies upon that vendor's
design for the life of that specific application and, to the extent possible,
subsequent generations of similar applications. Accordingly, it is difficult to
achieve significant sales to a particular customer with respect to any
application once another vendor has been selected to design and manufacture the
flexible circuit interconnect used in that application. While this market
paradigm may provide a barrier to the Company's competitors in the markets
served by the Company, it also may present an obstacle to the Company's entry
into other markets. The Company has targeted several markets as areas for its
growth, but there can be no assurance that the Company will be able to achieve
significant sales in any of these new, targeted markets.
The Company experiences competition worldwide from a number of leading
foreign and domestic providers, such as NOK, Fujikura, Nitto, M-Flex, Sheldahl
and Parlex. NOK and Fujikura are Japan-based suppliers substantially larger than
the Company with greater financial and other resources. Although the Company
believes that a significant portion of the sales of these companies are in
direct competition with the Company, the Company also believes that both of
these competitors derive a majority of their revenues from Japan-based system
manufacturers in the consumer goods market segment. M-Flex, Sheldahl and Parlex
are U.S.-based flexible circuit manufacturers that have lower sales of polyimide
flexible circuits than the Company and have historically targeted suppliers of
computers, communication and automotive services and the military, respectively.
Expansion of the Company's existing products or services could expose the
Company to new competition. Moreover, new developments in the electronics
industry could render existing technology obsolete or less competitive and could
potentially introduce new competition into the market. There can be no assurance
that the Company's competitors will not develop enhancements to, or future
generations of, competitive products or services that will offer superior price
or performance features to those of the Company or that new competitors will not
enter the Company's markets. Finally, as many of the
38
<PAGE> 41
Company's competitors are based in foreign countries, they have cost structures
and prices based on foreign currencies. Accordingly, currency fluctuations could
cause the Company's dollar-priced products to be less competitive than its
competitors' products priced in other currencies.
Since its December 1996 acquisition of ADFlex U.K., the Company competes in
assembly matters with leading flexible circuit assembly providers such as
Smartflex and Solectron. The Company believes that competition in assembly
matters is primarily driven by availability of assembly technology, price and
cycle time. The Company believes that it will compete favorably with these
competitors because it offers its customers a complete flexible circuit
interconnect solution including design, fabrication, assembly and testing.
The Company's competitors can be expected to continue to improve the design
and performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures often necessitate price
reductions which can adversely affect operating results. The Company will be
required to make a continued high level of investment in product development and
research, sales and marketing and ongoing customer service and support to remain
competitive. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that the Company will be able
to make the technological advances necessary to maintain its competitive
position in the flexible circuit interconnect market. There can be no assurance
that existing or future competitors will not be able to duplicate the Company's
strategies, that the Company will be able to compete successfully in the future,
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows. See "Business -- Competition."
INTELLECTUAL PROPERTY
The Company believes that, due to its customers' demands for rapid
technological advances and the resulting limited product life-cycles, the
success of its business depends more on the technical and engineering expertise,
creativity, marketing and service abilities of its employees than on patents,
trademarks and copyrights. Nevertheless, the Company owns patents and has a
policy of seeking patents when appropriate on inventions concerning new products
and improvements as part of its ongoing research, development and manufacturing
activities. The Company currently owns a number of United States patents. The
Company also owns a royalty-free license to use four IBM patents in exchange for
a cross license of certain Company patents. There can be no assurance that any
patents issued to the Company will provide a competitive advantage or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar products,
duplicate the Company's products or design around the patents issued to the
Company. In addition, there can be no assurance that foreign intellectual
property laws or the Company's agreements will protect the Company's
intellectual property rights in any foreign country. Any failure to protect the
Company's intellectual property rights could have a material adverse effect upon
the Company's business, financial condition, results of operations and cash
flows.
The Company also has applied for United States and foreign trademarks. In
addition, Rogers and Xyratex have each granted to the Company a nonexclusive,
royalty-free license with respect to other intellectual property used in the
Company's business. The Company also relies upon trade secret protections for
its confidential and proprietary information. The Company routinely enters into
confidentiality agreements with its customers, vendors, consultants and
employees. There can be no assurance, however, that others will not
independently gain information and techniques or otherwise gain access to the
Company's trade secrets or that the Company can meaningfully protect its trade
secrets.
No claims have been asserted against the Company for infringement of the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims
39
<PAGE> 42
against the Company in the future. Any such claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, or at all. If infringement were established, the Company could
be required to pay damages or be enjoined from making, using or selling the
infringing product. Likewise, there can be no assurance that a third party's
product, if infringing on the Company's proprietary rights, may be prevented
from doing so without litigation. Any of the foregoing could have a material
adverse effect upon the Company's business, financial condition, results of
operations and cash flows. See "Risk Factors -- Intellectual Property."
ENVIRONMENTAL CONTROLS
Flexible circuit interconnect manufacturing requires the use of chemicals.
As a result, the Company is subject to a variety of environmental laws relating
to the storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste, and other toxic and hazardous
materials used to manufacture the Company's products. The Company believes that
it has been operating its facilities in substantial compliance in all material
respects with existing environmental laws and regulations. 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. For this reason, the Company has
decided to implement environmental management systems geared toward minimizing
the negative impacts and reducing potential financial risks arising from
environmental issues. Compliance with more stringent laws or regulations, or
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. See "Risk Factors -- Environmental Regulations."
The Company has conducted environmental studies of its facility in
Chandler, Arizona, which revealed soil contamination that may require
remediation. Further studies including a site specific risk analysis were
conducted and a number of remediation options have been proposed. Based on these
studies, 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, in the future there can be no assurance that
such costs will not have a material adverse impact on the Company. Pursuant to
the agreements governing the acquisition of the flexible circuit fabrication
operations of Rogers, Rogers has retained all environmental liabilities existing
prior to the date of that transaction. While Rogers currently has sufficient
assets to fulfill its obligations under the acquisition agreements, if
environmental liabilities requiring remediation are discovered and the Company
was unable to enforce 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, results of
operations and cash flows.
During 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 there is contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the sellers submitted a remediation plan to the appropriate Mexican
authorities, and the plan was approved in May 1997. Subsequent remediation is
proceeding and expected to be complete by the end of 1997. The sellers'
obligation for the costs of remediation is limited to $2.5 million. A total of
$1.0 million is being held in escrow pending the sellers' performance of their
environmental obligations under the agreement. It is expected that the escrow
balance will be adequate to complete the required remediation according to the
approved plan. While the Mexican government has approved the existing
remediation plan and U.S. standards generally do not apply in Mexico, it is
possible that additional remedial work could be required in the future since the
approved
40
<PAGE> 43
plan will not remove all contaminated soil and will not address groundwater.
Given the uncertainties associated with environmental contamination, including
possible claims by third parties, there can be no assurance that future remedial
costs or liabilities will not have a material adverse impact on the Company.
At this time, the Company does not anticipate any material amount of
environmental-related capital expenditures for 1997 or 1998.
BACKLOG AND SEASONALITY
The Company's backlog at September 30, 1997 was approximately $53.3 million
as compared to $51.5 million at September 30, 1996. The Company includes in its
backlog only those customer orders for which it has accepted purchase orders and
assigned shipment dates within six months. Because the Company's sales are made
pursuant to purchase orders rather than long-term contracts and are generally
subject to cancellation or modification on short notice and with little or no
penalty, the Company does not believe that its backlog at any particular date is
indicative of sales or operating results for any future periods.
Since commencement of independent operations in June 1993, the Company has
experienced seasonal sequential net sales decreases in the fourth quarter of
each year except 1996, where the inclusion of net sales from its U.K. operations
masked the trend. During those same periods, the Company also experienced
reduced operating margins when compared to prior quarters. The Company
attributes this trend to product life cycles that typically begin with design
activities in the fourth and first quarters leading to peak demand in the second
and third quarters of each year. The Company anticipates that current capacity
restraints and continuing weakness in the HDD market will result in net sales
for the fourth quarter of 1997 approximately equal to net sales for the third
quarter of 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EMPLOYEES
As of September 30, 1997, the Company had a total of 5,450 employees, of
which 5,235 were regular employees and 215 were temporary employees. Of the
regular employees, 753 were based at the Company's facilities in Chandler,
Arizona, 3,935 were based in Agua Prieta, Mexico, 47 were based in the United
Kingdom and 500 were based in Thailand. Of the total regular employees, 4,836
are in manufacturing and 399 are in non-manufacturing activities including
business units, manufacturing management and administration. Certain of the
Company's employees located in Mexico are represented by a labor union and
covered by a collective bargaining agreement that is subject to revision
annually under Mexican labor laws. The Company has not experienced an
employee-related work stoppage. The Company believes that its relationship with
its union and other employees is good, but there can be no assurance that the
Company will be able to successfully negotiate with the labor union in Mexico in
the future. See "Risk Factors -- Foreign Operations and Currency Fluctuations"
and "-- Dependence on Key Personnel."
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
41
<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors are elected by the stockholders of the Company for one-year terms
and hold office until the next annual meeting of stockholders or until their
successors are elected and qualified. The Company's officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
There are no family relationships among any of the directors or executive
officers of the Company. The Directors and executive officers of the Company are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Rolando C. Esteverena..................... 54 Director, Chairman, President and Chief
Executive Officer
Neil Dial................................. 46 Executive Vice President of Operations
Donald E. Frederick....................... 43 Vice President and Chief Financial Officer
R. Charles Furniss........................ 51 Vice President Human Resources
Francisco F. Abril........................ 50 Vice President and General Manager, Mexico
Operations
Vincent N. Poleo, Jr...................... 48 Vice President North American Operations,
ADFlex Solutions Limited
Steve Sanghi(1)(2)........................ 41 Director
Richard P. Clark(1)(2).................... 49 Director
William Kennedy Wilkie(1)(3).............. 48 Director
Wade Meyercord............................ 56 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee, of which Mr. Sanghi is Chairman.
(2) Member of the Audit Committee, of which Mr. Clark is Chairman.
(3) Mr. Wilkie was first nominated to the Board of Directors in 1996 pursuant to
an agreement with Xyratex, whereby the Company had agreed to nominate
Xyratex's nominee as a director and recommend to its stockholders that they
vote in favor of Xyratex's nominee for election to the Board of Directors as
long as Xyratex owns at least 500,000 shares of Common Stock. Xyratex is
offering all of its shares of Common Stock in this offering, and, as a
result, such agreement will terminate upon the consummation of this
offering.
Rolando C. Esteverena has served as President and Chief Executive Officer
and a Director since the founding of the Company in June 1993 and as the
Chairman of the Board of Directors since January 1996. From January 1990 until
March 1993, Mr. Esteverena was the President and Chief Executive Officer of
Digital F/X, Inc., a manufacturer of multi-media editing systems.
Neil Dial has served as the Executive Vice President of Operations of the
Company since October 1997. From May 1994 until joining the Company, he was
President of Alphatec's Bangkok operations. From 1991 to April 1994, Mr. Dial
was Assistant General Manager of Motorola's manufacturing facility in Kuala
Lumpur, Malaysia.
Donald E. Frederick has served as the Vice President and Chief Financial
Officer of the Company since June 1997. From May 1995 until joining the Company,
he served as Vice President of Finance for Flextronics International, based in
San Jose, California. From January 1992 until May 1995, he was Director of
Finance at Sony Electronics. Mr. Frederick's professional background includes
more than 15 years experience in executive positions associated with financial
management.
R. Charles Furniss has served as the Vice President Human Resources of the
Company since November 1994. From July 1987 through June 1994, Mr. Furniss was
the Vice President Human Resources of Calcomp Inc., a wholly-owned subsidiary of
Lockheed, Inc.
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<PAGE> 45
Francisco F. Abril has served as the Vice President and General Manager
Mexico Operations since January 1997. Mr. Abril has been with the Company or
Rogers since 1982, serving in various manufacturing and operations management
positions.
Vincent N. Poleo, Jr. has served as the Vice President of the Company since
January 1997. Mr. Poleo joined Rogers in 1980. From January 1996 to the present,
Mr. Poleo has been the Director of Operations of ADFlex Solutions Limited. From
January 1994 to January 1996, Mr. Poleo was the Director of Operations for the
Company's Chandler manufacturing facility. From October 1992 to January 1994, he
was a Business Unit Manager.
Steve Sanghi has been a Director of the Company since June 1994. Mr. Sanghi
is the President, Chief Executive Officer and Chairman of the Board of Microchip
Technology Incorporated ("Microchip"), a manufacturer of programmable
microcontrollers and related specialty memory products. He has been employed by
Microchip since February 1990.
Richard P. Clark has been a Director of the Company since June 1994. For
the past 27 years, Mr. Clark has been employed by AMP Incorporated ("AMP"), an
interconnect company. Since July 1995, Mr. Clark has been the President and
Chief Executive Officer of M/A-COM, an AMP division that manufactures radio
frequency and microwave components. From July 1989 through July 1995, Mr. Clark
was the Associate Director for Corporate Development of AMP. Mr. Clark is also a
director of BroadBand Technologies, Inc., a supplier of telecommunications
equipment.
William Kennedy Wilkie has been a Director of the Company since January
1996. Since November 1994, Mr. Wilkie has been the Chief Executive and a
director of Havant International Holdings Limited (Xyratex) and its related
subsidiaries. From June 1973 through November 1994, Mr. Wilkie was employed by
IBM United Kingdom Ltd. and held executive positions in the IBM United Kingdom
Manufacturing Division.
Wade Meyercord has been a Director of the Company since December 1996. Mr.
Meyercord has been the President of Meyercord & Associates, Inc., a management
consulting firm, since September 1987. Mr. Meyercord also is the Chairman and a
Director of California Micro Devices, a semiconductor manufacturer.
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<PAGE> 46
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of the Common Stock offered hereby, (i) by each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) by each of the Company's executive officers; (iii)
by each of the Company's directors; (iv) by the Selling Stockholder; and (v) by
all directors and officers of the Company as a group. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent that authority is shared by spouses under applicable law. This
information is based upon information received from or on behalf of the named
individuals. Unless otherwise indicated, the address for each stockholder is
2001 West Chandler Boulevard, Chandler, Arizona 85224.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES TO OWNED AFTER OFFERING
------------------------ BE SOLD IN ------------------------
BENEFICIAL OWNER NUMBER PERCENT(1) OFFERING(2) NUMBER PERCENT(1)
- ------------------------------ ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
William Kennedy Wilkie(3)..... 1,393,347 15.9% 1,392,347 1,000 *
P.O. Box 6
Langstone Road
Havant, Hampshire P09 1SA
Havant International Holdings
Limited (Xyratex)........... 1,392,347 15.9% 1,392,347 -- --
P.O. Box 6
Langstone Road
Havant, Hampshire P09 1SA
Kopp Investment Advisors,
Inc.(4)..................... 1,029,240 11.7% -- 1,029,240 10.1%
LeRoy C. Kopp
6600 France Avenue South,
Suite 672
Edina, MN 55435
The Prudential Insurance
Company of America(5)....... 989,400 11.3% -- 989,400 9.7%
Prudential Plaza
Newark, NJ 07102-3777
J. & W. Seligman & Co.
Incorporated(6)............. 900,000 10.3% -- 900,000 8.8%
100 Park Avenue
New York, NY 10017
FMR Corp(7)................... 846,700 9.7% -- 846,700 8.3%
Edward C. Johnson
Abigail P. Johnson
82 Devonshire Street
Boston, MA 02109
AMP Incorporated.............. 506,096 5.8% -- 506,096 5.0%
P.O. Box 3608
M.S. 176-48
Harrisburg, PA 17105
Rolando C. Esteverena(8)...... 133,332 1.5% 33,000 100,332 *
Steve Sanghi(9)............... 18,000 * -- 18,000 *
R. Charles Furniss(10)........ 2,603 * -- 2,603 *
Richard P. Clark(11).......... 6,000 * -- 6,000 *
Wade Meyercord(12)............ 5,000 * -- 5,000 *
Neil Dial..................... -- -- -- -- --
Donald E. Frederick........... -- -- -- -- --
Francisco F. Abril(13)........ 19,294 * -- 19,294 *
Vincent N. Poleo, Jr.(14)..... 833 * -- 833 *
Executive officers and
directors as a group
including those named above
(ten persons)(15)........... 1,578,409 17.8% 1,425,347 153,062 1.5%
</TABLE>
44
<PAGE> 47
- ---------------
* Less than 1%.
(1) Shares of Common Stock subject to options which are currently exercisable
or exercisable within 60 days of September 30, 1997, are deemed outstanding
for computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person.
Percentage of ownership is based on 8,765,529 shares of Common Stock
outstanding prior to this offering and 10,073,182 shares of Common Stock
outstanding after this offering.
(2) If the over-allotment option is exercised in full, the following
stockholders will sell the following numbers of shares of Common Stock:
Rolando C. Esteverena, 33,000 shares; .
(3) Includes 1,392,347 shares of Common Stock owned by Havant International
Holdings Limited ("Xyratex"). Mr. Wilkie is the Chief Executive Officer and
a director of Xyratex. He disclaims beneficial ownership of all shares held
by Xyratex.
(4) According to its Schedule 13G (Amendment No. 2) dated January 28, 1997,
Kopp Investment Advisors, Inc. ("KIA") is a registered investment adviser
and LeRoy C. Kopp is the sole owner of KIA. KIA and Mr. Kopp have the sole
power to vote 62,500 of such shares. They share the power to dispose of
1,024,240 of such shares and have the sole power to dispose of 5,000 of
such shares. As to the 1,024,240 shares, neither KIA nor Mr. Kopp vote the
vast majority of such shares and neither is the record owner of them. Such
shares are held in a fiduciary or representative capacity, and no person
individually has an interest that relates to more than 5% of the Common
Stock.
(5) According to its Schedule 13G dated February 9, 1996, The Prudential
Insurance Company of America ("Prudential"), a mutual insurance company,
registered broker-dealer and registered investment adviser, shares the
power to vote 886,000 of such shares and shares the power to dispose of
915,100 of such shares. Prudential holds all such shares for the benefit of
its clients by its separate accounts, registered investment companies,
subsidiaries and/or other affiliates. Pursuant to an amendment to its
Schedule 13D dated March 8, 1996, Prudential reported beneficial ownership
of 532,000 shares, with shared voting power of 487,100 of such shares and
shared dispositive power of 502,900 of such shares.
(6) According to its Schedule 13G/A dated February 13, 1997, J. & W. Seligman &
Co. Incorporated, a registered investment adviser, has sole voting power
and the sole power to dispose of all shares reported.
(7) According to its Schedule 13G dated February 14, 1996, FMR Corp. has sole
power to vote 53,400 of such shares and sole power to dispose of 846,700 of
such shares. Fidelity Management & Research Company ("Fidelity"), a
wholly-owned subsidiary of FMR Corp. and a registered investment adviser,
is the beneficial owner of 775,500 of such shares as a result of acting as
investment adviser to various registered investment companies. The
ownership of one investment company, Fidelity Contrafund, a registered
investment company, amounted to 509,300 shares. Edward C. Johnson 3d, FMR
Corp., through its control of Fidelity, and the Funds each has sole power
to dispose of the 775,000 shares. Neither FMR Corp. nor Edward C. Johnson
3d, Chairman of FMR Corp., has the sole power to vote the shares owned
directly by the Fidelity Funds, which power resides with the Funds' Boards
of Trustees. Fidelity Management Trust Company, a wholly-owned subsidiary
of FMR Corp. and a bank, is the beneficial owner of 71,200 shares. Edward
C. Johnson 3d and FMR Corp., through its control of Fidelity Management
Trust Company, have sole power to dispose of 71,200 shares, sole power to
vote 53,400 shares, and no power to vote 17,800 shares owned by the
institutional account(s) described above. Members of the Edward C. Johnson
3d family and trusts for their benefit, through the ownership of voting
common stock of FMR Corp. and a certain shareholder's voting agreement, may
be deemed, under the Investment Company Act of 1940, to form a controlling
group with respect to FMR Corp.
(8) Includes options to acquire 13,332 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(9) Includes options to acquire 18,000 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(10) Includes options to acquire 2,603 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(11) Includes options to acquire 5,000 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(12) Includes options to acquire 4,000 Shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(13) Includes options to acquire 18,708 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(14) Includes options to acquire 833 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997.
(15) Includes options to acquire 62,476 shares of Common Stock currently
exercisable or exercisable within 60 days of September 30, 1997. Also
includes 1,392,347 shares of Common Stock held by Xyratex of which Mr.
Wilkie disclaims beneficial ownership. See note (3) above.
45
<PAGE> 48
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives BancAmerica Robertson Stephens, Hambrecht & Quist LLC and
PaineWebber Incorporated (the "Representatives"), have severally agreed with the
Company and the Selling Stockholder, subject to the terms and conditions of the
Underwriting Agreement, to purchase the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens....................................................
Hambrecht & Quist LLC.............................................................
PaineWebber Incorporated..........................................................
---------
Total................................................................... 2,700,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholder
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession of not in excess of
$ per share, of which $ may be reallowed to other dealers.
After the public offering, the public offering price, concession and reallowance
to dealers may be reduced by the Representatives. No such reduction shall change
the amount of proceeds to be received by the Company and the Selling
Stockholders as set forth on the cover page of this Prospectus.
The Company and certain other Selling Stockholders have granted to the
Underwriters an option, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to 405,000 additional shares of Common Stock to
cover over-allotments, if any, at the same price per share as the Company and
the Selling Stockholder will receive for the 2,700,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise such option in
whole or in part, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above table
represents as a percentage of the 2,700,000 shares offered hereby. If purchased,
such additional shares will be sold by the Underwriters on the same terms as
those on which the 2,700,000 shares are being sold.
Pursuant to the terms of certain lock-up agreements, the holders of
approximately 123,586 shares of the Company's Common Stock have agreed, for a
period equal to the greater of 90 days after the date of this Prospectus or
three days after the Company publicly releases its earnings for the fiscal
period ending immediately after the date of this Prospectus, that they will not,
directly or indirectly, sell, contract to sell or otherwise dispose of any
shares of Common Stock, any options or warrants to purchase shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock, owned directly by such holders or with respect to which they have the
power of disposition, other than sales in this offering, without the prior
written consent of BancAmerica Robertson Stephens. In addition, for the same
period of time the Company has agreed that it will not offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock, any options or warrants
46
<PAGE> 49
to purchase Common Stock or any securities convertible into or exchangeable for
shares of Common Stock, without the prior written consent of BancAmerica
Robertson Stephens, other than the Company's sales of shares in this offering,
the issuance of shares of Common Stock upon the exercise of outstanding options,
the grant of awards or the issuance of shares of Common Stock under the
Company's 1994 Stock Incentive Plan and the sale of shares under the 1994
Employee Stock Purchase Plan. Xyratex acquired the shares of Common Stock that
it intends to sell in this offering as part of the consideration for ADFlex
U.K., all of which shares are currently subject to a lock-up agreement with the
Company which expires in January 1998. In connection with this offering, Xyratex
has extended the term of its existing lock-up through March 15, 1998.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liability
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
The offering price for the Common Stock will be determined by negotiations
among the Company and the Representatives, based largely upon the market price
for the Common Stock as reported on the Nasdaq National Market.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the Common Stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the Common Stock. A "syndicate covering
transaction" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with this offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representatives have advised the Company that such transactions may be effected
on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq Stock
Market in accordance with Rule 103 of Regulation M under the Exchange Act.
Passive market making consists of displaying bids on the Nasdaq National Market
limited by the bid prices of independent market makers and making purchases
limited by such prices and effected in response to order flow. Net purchases by
a passive market maker on each day are limited to a specific percentage of the
passive market maker's average daily trading volume in the Common Stock during a
specific period and must be discontinued when such limit is reached. Passive
market making may stabilize the market price of the Common Stock at a level
above that which might otherwise prevail and, if commenced, may be discontinued
at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fennemore Craig, P.C., Phoenix, Arizona. Certain legal
matters with respect to this offering will be passed upon for the Underwriters
by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
47
<PAGE> 50
EXPERTS
The consolidated financial statements of ADFlex Solutions, Inc. for the
years ended December 31, 1996, 1995 and 1994 appearing in this Prospectus and
Registration Statement and the related financial statement schedules
incorporated by reference in the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and incorporated by reference in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, NW, Room
1024, Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional
Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois and 7 World Trade Center, Suite 1300, New York, New York 10048, at
prescribed rates. In addition, such reports, proxy statements and other
information are available through the Commission's Electronic Data Gathering and
Retrieval System at http://www.sec.gov. The Company's Common Stock is listed on
the Nasdaq National Market, and reports, proxy statements and certain other
information concerning the Company can also be inspected at the offices of the
Nasdaq National Market, 1735 K Street NW, Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Common Stock being offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all the information set forth in such Registration Statement
and the exhibits and schedules thereto to which reference is hereby made. The
statements in this Prospectus as to the contents of such Registration Statement
are qualified in their entirety by such reference. The Registration Statement,
together with its exhibits and schedules, may be inspected without charge at the
Public Reference Section of the Commission in Washington, D.C. at the address
noted above, and copies of all or any part thereof may be obtained from the
Commission upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by the Company pursuant to the Exchange Act are hereby
incorporated by reference into this Prospectus: (i) the Company's Annual Report
on Form 10-K for the Fiscal Year Ended December 31, 1996; (ii) the Company's
Proxy Statement in connection with its 1997 Annual Meeting of Stockholders;
(iii) the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997; (iv) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997; (v) the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997; (vi) the description of the Company's Common Stock in
Item 1 of the Company's Registration Statement on Form 8-A filed with the
Commission on June 16, 1994 pursuant to Section 12 of the Exchange Act; and
(vii) the description of securities contained in the Company's Registration
Statement on Form 8-A filed with the Commission on July 12, 1996 pursuant to
Section 12 of the Exchange Act.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and shall be part hereof from the
date of the filing of such document. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document that
also is (or is deemed to be) incorporated by reference herein,
48
<PAGE> 51
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of the Registration Statement or this Prospectus. The Company will provide
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any of the documents referred to above (other than exhibits). Requests should be
directed to ADFlex Solutions, Inc., 2001 West Chandler Boulevard, Chandler,
Arizona 85224, telephone (602) 963-4584, Attention: Donald E. Frederick, Vice
President and Chief Financial Officer.
49
<PAGE> 52
ADFLEX SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996, and for the nine months ended September 30, 1996 and 1997 (unaudited)......... F-4
Consolidated Statements of Equity for the years ended December 31, 1994, 1995 and
1996, and for the nine months ended September 30, 1997 (unaudited).................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996, and for the nine months ended September 30, 1996 and 1997 (unaudited)......... F-6
Notes to Consolidated Financial Statements as of December 31, 1996, and September 30,
1997 (unaudited).................................................................... F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
ADFlex Solutions, Inc.
We have audited the accompanying consolidated balance sheets of ADFlex
Solutions, Inc. (the Company) at December 31, 1996 and 1995, and the related
consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of the Company
referred to above present fairly, in all material respects, the consolidated
financial position of ADFlex Solutions, Inc. at December 31, 1996 and 1995, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on January
1, 1996, the Company adopted Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
January 20, 1997
F-2
<PAGE> 54
ADFLEX SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 15,699 $ 6,097 $ 4,644
Accounts receivable, net............................. 13,123 23,612 29,210
Accounts receivable from Smartflex Systems, Inc...... 2,469 1,537 2,268
Other receivables.................................... -- 1,475 1,160
Receivable for taxes................................. 6,269 -- --
Inventories.......................................... 16,824 14,990 19,778
Deferred tax assets.................................. 750 2,505 2,405
Prepaid taxes........................................ -- 795 913
Prepaid expenses and other current assets............ 544 303 1,029
-------- -------- --------
Total current assets......................... 55,678 51,314 61,407
Property, plant and equipment, net..................... 35,289 34,297 37,047
Purchased intangibles, net............................. 15,937 -- 2,578
Deferred tax assets.................................... -- 7,546 5,424
Other assets........................................... 14 24 26
-------- -------- --------
$106,918 $ 93,181 $ 106,482
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit....................................... $ -- $ 10,000 $ 1,000
Notes payable........................................ -- -- 2,750
Acquisition amount payable........................... 12,375 -- --
Accounts payable..................................... 7,257 19,882 18,289
Accrued liabilities.................................. 12,778 9,679 10,814
Current portion of long-term debt and capitalized
leases............................................ 2,632 2,651 168
-------- -------- --------
Total current liabilities.................... 35,042 42,212 33,021
Accrued restructuring charges-non-current.............. -- 2,500 --
Deferred tax liabilities............................... 471 -- 1,220
Long-term debt and capitalized leases.................. 7,851 7,689 25,061
Minority interest in consolidated joint venture........ -- 491 --
Commitments and contingencies.......................... -- -- --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding........... -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 8,282,312 and 8,633,508 issued and
outstanding at December 31, 1995 and 1996,
respectively and 8,765,529 at September 30,
1997.............................................. 83 86 88
Additional paid-in capital........................... 58,786 60,542 62,082
Retained earnings (deficit).......................... 4,685 (20,339) (14,990)
-------- -------- --------
Total stockholders' equity................... 63,554 40,289 47,180
-------- -------- --------
$106,918 $ 93,181 $ 106,482
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 55
ADFLEX SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................... $77,733 $101,163 $156,836 $110,011 $159,524
Cost of sales............................... 53,812 73,108 138,273 97,864 132,857
-------- -------- -------- -------- -------
Gross profit................................ 23,921 28,055 18,563 12,147 26,667
Operating expenses:
Engineering, research & development....... 3,697 4,548 7,366 5,376 5,987
Selling, general & administrative......... 8,107 9,119 13,254 10,135 11,283
Write-off of in-process technology........ -- 13,920.. -- -- --
Amortization of intangible assets......... -- -- 2,386 2,386 --
Restructuring charges..................... -- -- 29,248 29,248 --
-------- -------- -------- -------- -------
Total operating expenses.................... 11,804 27,587 52,254 47,145 17,270
-------- -------- -------- -------- -------
Operating income (loss)..................... 12,117 468 (33,691) (34,998) 9,397
Interest income............................. 274 973 223 196 135
Interest expense............................ (322) (101) (1,511) (1,072) (1,535)
Other income (expense), net................. 107 64 92 142 (175)
Minority interest in consolidated joint
venture................................... -- -- 109 -- (181)
-------- -------- -------- -------- -------
Income (loss) before income taxes........... 12,176 1,404 (34,778) (35,732) 7,641
Income taxes................................ 5,130 5,127 (9,754) (10,248) 2,292
-------- -------- -------- -------- -------
Net income (loss)........................... $ 7,046 $ (3,723) $(25,024) $(25,484) $ 5,349
======== ======== ======== ======== =======
Net income (loss) per share................. $ 1.26 $ (0.54) $ (2.92) $ (2.97) $ 0.60
======== ======== ======== ======== =======
Common and common equivalent shares used in
the calculation of net income (loss) per
share..................................... 5,578 6,855 8,580 8,576 8,863
======== ======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 56
ADFLEX SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS TOTAL
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 4,000,000 $ 40 $ 1,960 $ 1,362 $ 3,362
Compensation expense on stock options... -- -- 675 -- 675
Issuance of common stock, net of
offering costs of $2,479.............. 2,418,096 24 26,394 -- 26,418
Issuance of common stock upon exercise
of stock warrant...................... 26,666 -- 200 -- 200
Issuance of common stock upon exercise
of stock options...................... 119,550 1 62 -- 63
Net income.............................. -- -- -- 7,046 7,046
--------- --- ------- -------- --------
Balance at December 31, 1994............ 6,564,312 65 29,291 8,408 37,764
Issuance of common stock through
employee stock purchase plan and
exercise of stock options, including
tax benefit of $340................... 238,153 3 1,104 -- 1,107
Issuance of common stock, net of
offering costs of $273................ 237,500 3 5,453 -- 5,456
Issuance of common stock in connection
with ADFlex U.K. acquisition.......... 1,242,347 12 22,938 -- 22,950
Net loss................................ -- -- -- (3,723) (3,723)
--------- --- ------- -------- --------
Balance at December 31, 1995............ 8,282,312 83 58,786 4,685 63,554
Issuance of common stock through
employee stock purchase plan and
exercise of stock options, including
tax benefit of $665................... 351,196 3 1,756 -- 1,759
Net loss................................ -- -- -- (25,024) (25,024)
--------- --- ------- -------- --------
Balance at December 31, 1996............ 8,633,508 86 60,542 (20,339) 40,289
Issuance of common stock through
employee stock purchase plan and
exercise of stock options
(unaudited)........................... 132,021 2 1,540 -- 1,542
Net income (unaudited).................. -- -- -- 5,349 5,349
--------- --- ------- -------- --------
Balance at September 30, 1997
(unaudited)........................... 8,765,529 $ 88 $ 62,082 $ (14,990) $ 47,180
========= === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 57
ADFLEX SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss)....................................... $ 7,046 $ (3,723) $(25,024) $(25,484) $ 5,349
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 930 2,288 8,208 6,570 4,888
Write-off of in-process technology...................... -- 13,920 -- -- --
Restructuring charges................................... -- -- 29,248 29,248
Loss on disposal of assets.............................. -- -- 184 -- --
Compensation expense on stock options................... 675 -- -- -- --
Deferred taxes.......................................... (334) 656 (9,772) (10,159) 3,441
Minority interest....................................... -- -- -- -- 181
Changes in operating assets and liabilities:
Accounts receivable................................... (5,182) (3,455) (10,489) (11,846) (5,598)
Accounts receivable from Smartflex Systems, Inc....... (714) (376) 932 903 (731)
Inventories........................................... (3,306) (4,406) 1,834 1,039 (4,787)
Prepaid expenses and other current assets............. (14) (587) (2,029) (2,003) (529)
Payables and accrued liabilities...................... 4,892 14,913 11,347 9,087 (2,956)
------- -------- -------- -------- -------
Net cash provided by (used in) operating activities..... 3,993 19,230 4,439 (2,645) (742)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures.................................... (5,450) (20,636) (13,763) (10,620) (7,641)
Purchase of net assets in ADFlex U.K. acquisition....... -- (12,375) -- -- --
Decrease (increase) in other assets..................... 157 83 (10) (29) --
Decrease in acquisition payable......................... -- -- (12,375) (12,375) --
Investment in joint venture............................. -- -- 491 571 (500)
Sales of available-for-sale investment securities....... 63,214 396,074 -- -- --
Purchases of available-for-sale investment securities... (82,132) (377,156) -- -- --
------- -------- -------- -------- -------
Net cash used in investing activities................... (24,211) (14,010) (25,657) (22,453) (8,141)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issuance of common stock, net of expenses............... 26,681 6,563 1,759 1,759 1,542
Net activity on line of credit.......................... (2,805) -- 10,000 10,200 (9,000)
Payments on capitalized lease obligations............... (104) (109) (143) (107) (112)
Proceeds from issuance of long-term debt................ -- -- -- -- 25,000
Payments on long-term debt.............................. -- -- -- -- (10,000)
------- -------- -------- -------- -------
Net cash flows provided by financing activities......... 23,772 6,454 11,616 11,852 7,430
------- -------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents.... 3,554 11,674 (9,602) (13,246) (1,453)
Cash and cash equivalents at beginning of period........ 471 4,025 15,699 15,699 6,097
------- -------- -------- -------- -------
Cash and cash equivalents at end of period.............. $ 4,025 $ 15,699 $ 6,097 $ 2,453 $ 4,644
======= ======== ======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest.............................................. $ 280 $ 68 $ 665 $ 421 $ 1,107
Income taxes.......................................... 5,104 4,849 1,409 1,409 501
Issuance of common stock in connection with ADFlex U.K.
acquisition........................................... -- 22,950 -- -- --
Issuance of subordinated debenture in connection with
ADFlex U.K. acquisition............................... -- 10,000 -- -- --
Issuance of note payable in connection with ADFlex
Thailand acquisition.................................. -- -- -- -- 2,750
Acquisition of assets under capitalized leases.......... 696 -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 58
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(Information as of September 30, 1997 and for the
nine months ended September 30, 1997 and 1996 is unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
ADFlex Solutions, Inc. is a high-volume flexible interconnect manufacturer.
The Company combines design, low-cost fabrication, state-of-the-art flex
assembly and functional testing, as a single-source provider of complete
flexible interconnect solutions. The Company supplies flexible interconnects to
leading manufacturers of storage systems, including hard disk drives, notebook
computers, cellular telephones, and high-end consumer products. The Company
serves customers located in North America, Europe, and Southeast Asia.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
On August 27, 1996, the Company announced the establishment of a joint
venture with Hana Microelectronics (Hana), a diversified electronics
manufacturer headquartered in Thailand, to produce and test advanced
chip-on-flex and surface mount technology assemblies. The venture, ADFlex
Thailand Limited (ATL), is 80% owned by the Company. The Company's Consolidated
Balance Sheets include 100% of the assets and liabilities of ATL. Hana's 20%
interest in ATL and ATL's earnings have been reflected as "Minority interest in
consolidated joint venture" and "Minority interest in consolidated joint
venture" on the Company's Consolidated Balance Sheets and Consolidated
Statements of Operations, respectively. On September 26, 1997, the Company
acquired the 20% interest held by Hana. (See Note 3.)
Foreign Currency Translation
The Company uses the United States Dollar as its functional currency for
its subsidiaries in Mexico, England, and Thailand. Remeasurement gains and
losses, resulting from the process of remeasuring the financial statements of
these foreign subsidiaries into U.S. dollars, are included in operations. To
date, the effect on income of remeasurement gains and losses has been
immaterial.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, money market accounts
and repurchase agreements since they represent highly liquid investments with
maturities of three months or less when purchased.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade receivables. A
majority of the Company's trade receivables are derived from sales in various
geographic areas to large companies within the computer and computer peripherals
industries.
The Company has adopted credit policies and standards to accommodate the
computer and computer peripherals industry's growth and inherent risk. The
Company performs ongoing credit evaluations of its customers' financial
condition but generally does not require collateral, such as letters of credit
or security agreements.
F-7
<PAGE> 59
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on
a currently adjusted standard basis (which approximates actual cost on a
first-in, first-out basis).
Property, Plant and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is computed for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets which range from 3 to 40 years. The Company uses
accelerated methods for computing depreciation for tax purposes.
Purchased Intangibles
Intangible assets were acquired in connection with the acquisition of
ADFlex U.K. Intangible assets included completed technology and work force in
place. At September 30, 1996, as part of a restructuring plan for the Company's
assembly operations in the U.K., all remaining intangible assets acquired in the
ADFlex U.K. acquisition were written off. The assets were being amortized over
their estimated useful lives of five years prior to the write-off.
In connection with the acquisition of Hana's 20% interest in September
1997, the Company recorded goodwill which will be amortized over its estimated
useful life of five years.
The recoverability of intangible assets attributable to the Company's
acquisitions is analyzed periodically based on actual and projected levels of
profitability and cash flows of the operations acquired on an undiscounted
basis.
Revenue Recognition
Sales are recognized upon shipment. The Company warrants its products to be
free of defects and repairs customer shipments as required. The Company records
a provision for the estimated cost of repairing returns at the time of shipment.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values of financial instruments. Cash and cash equivalents,
accounts receivable, borrowings under the Company's line of credit, notes
payable, accounts payable, accrued liabilities, capitalized leases and accrued
restructuring charges are carried at amounts that reasonably approximate their
fair values. The Company's long-term debt bears interest at a variable interest
rate which approximates current market interest rates; therefore, the Company
believes that long-term debt approximates its fair value.
Impairment of Long-Lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company recognized a
charge under SFAS No. 121 in connection with the restructuring of its U.K.
operations (see Note 2).
F-8
<PAGE> 60
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are provided using the liability method based upon the
provisions of SFAS No. 109, Accounting for Income Taxes.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion 25, Accounting Stock for Issued to Employees (APB 25), and accordingly,
recognizes no compensation expense for stock option grants.
Interim Financial Statements
The accompanying consolidated balance sheet at September 30, 1997 and the
consolidated statements of operations, equity and cash flows for the nine months
ended September 30, 1996 and 1997 are unaudited and have been prepared on the
same basis as the audited consolidated financial statements included herein. In
the opinion of management, such unaudited consolidated financial statements
include all adjustments necessary to present fairly the information set forth
therein, which consist solely of normal recurring adjustments. The results of
operations for such interim period are not necessarily indicative of results for
the full year.
Impact of Recently Issued Accounting Standards
In February, 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in no material change in earnings (loss) per share (before or after
extraordinary items) for the quarterly periods during 1997 and 1996.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is required to be adopted in the first quarter of 1998. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income includes certain non-owner changes in
equity which are currently excluded from net income. Because the Company
historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS 130 is not expected to have a material
effect on the consolidated financial position or results of operations or cash
flows of the Company.
F-9
<PAGE> 61
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Share
Net income (loss) per share is calculated using the weighted average number
of common and common equivalent shares outstanding during the period, unless
antidilutive. Dilutive common equivalent shares are computed using the treasury
stock method.
Supplementary pro forma net income per share, assuming the proceeds from
the issuance of common shares in connection with the offering at the assumed
public offering price of $27.19 ($33.4 million net of issuance costs) were used
to repay the term loan (Note 7) as of the date upon which the debt was created,
would have been $0.63 per share for the nine months ended September 30, 1997,
based upon 919,540 incremental shares issued.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the
current presentation.
NOTE 2 ADFLEX U.K.
Effective December 31, 1995, the Company acquired all outstanding capital
shares of Havant International Limited (formerly the flexible interconnect
division of Xyratex and now ADFlex Solutions Limited or ADFlex U.K.). Under the
terms of the agreement, the Company issued 1,242,347 shares of restricted Common
Stock valued at $22.9 million, issued a $10.0 million subordinated debenture and
paid $12.4 million in cash.
The acquisition was accounted for using the purchase method of accounting;
therefore, the accompanying financial statements include the accounts of ADFlex
U.K. since the date of acquisition.
The purchase price of $45.3 million, in addition to the direct costs of the
transaction incurred for investment brokers, professional fees and direct
incremental transaction costs of $1.9 million, is allocated as follows (in
millions):
<TABLE>
<S> <C>
Receivable for taxes................................................. $ 6.3
Inventories.......................................................... 6.5
Equipment............................................................ 11.1
Liability for taxes.................................................. (6.3)
Intangible assets.................................................... 15.9
In-process technology................................................ 13.9
Other assets/liabilities, net........................................ (0.2)
-----
$47.2
=====
</TABLE>
As part of the ADFlex U.K. acquisition, the Company legally assumed the
U.K. tax liability of the predecessor company originally estimated at $6.3
million. The seller agreed to reimburse the Company for any taxes payable
relating to the predecessor's operations and indemnified the Company for any
additional taxes that may be assessed in relation to the predecessor's
operations. Accordingly, the Company recorded a receivable for taxes due from
the predecessor in an amount equal to the estimated taxes payable. The actual
amount of taxes, which were determined to be $3.4 million, were paid by the
Company and reimbursed by the seller in 1996. The balance of the accrued taxes
were offset against the related receivable from the seller. Intangible assets
include completed technology
F-10
<PAGE> 62
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 ADFLEX U.K. (CONTINUED)
and work force in place with estimated lives of five years. The $13.9 million
allocated to in-process technology was expensed immediately as required under
generally accepted accounting principles.
The unaudited pro forma combined condensed results of operations of the
Company for the year ended December 31, 1995, had the acquisition occurred at
January 1, 1995 and which eliminates the non-recurring charge, are as follows
(in thousands, except per share amounts).
<TABLE>
<S> <C>
Revenues.......................................................... $169,491
Net income........................................................ 10,422
Net income per share.............................................. 1.23
</TABLE>
The unaudited pro forma results for the year ended December 31, 1995
exclude the effect of the charge for in-process technology as the charge is
non-recurring. The unaudited pro forma results for the year ended December 31,
1995 reflect intercompany sales elimination, intangible asset amortization and
interest expense on the new debt related to the acquisition.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred had the transaction been completed at the beginning of the period
indicated, nor is it necessarily indicative of future operating results.
On September 29, 1996, the Company's Board of Directors approved a plan to
restructure, over the next twelve months, the Company's assembly operation in
the U.K., and during that time period transfer production from the U.K. to the
Company's manufacturing facility in Thailand. Accordingly, the Company recorded
the following: $13.5 million write-off of intangible assets, $8.8 million write-
down of property, plant and equipment, $2.5 million in lease termination charges
and $4.4 million in employee termination costs for 507 direct labor, technical
and administrative employees. As of December 31, 1996, $0.3 million of the
employee termination charges related to 13 employees had been paid and charged
against the liability. As of September 30, 1997, production has ceased at the
U.K. facility. During the nine months ended September 30, 1997, the Company paid
and charged to the liability $2.9 million related to employee termination costs
for 132 employees and lease termination costs. The remaining liability for
employee and lease termination is approximately $3.7 million, which the Company
believes is adequate. Total revenue and total operating loss related to this
operation for the year ended December 31, 1996 was $62.8 million and $38.5
million, respectively, and for the nine months ended September 30, 1997 was
$36.4 million $0.2 million, respectively. Following the restructuring, the
Company will maintain a technology development center and a sales and service
organization in the U.K. to support its European customers.
NOTE 3 ADFLEX THAILAND
In an effort to increase its global sourcing opportunities and to decrease
its operating costs, the Company established a joint venture, ATL, located in
Lamphun, Thailand with Hana in August 1996. On September 26, 1997 the Company
increased its ownership interest in ATL from 80% to 100% through the purchase of
Hana's 20% equity interest. Under the terms of the Equity Purchase Agreement,
the Company paid $0.5 million at closing and agreed to pay an additional $2.8
million at various dates through September 30, 1998. The excess purchase price
over fair value of the net tangible assets acquired of $2.6 million has been
recorded as goodwill which will be amortized on a straight line basis over five
years.
F-11
<PAGE> 63
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Accounts receivable trade...................................... $13,765 $24,223
Allowance for returns and doubtful accounts.................... (642) (611)
------- -------
$13,123 $23,612
======= =======
</TABLE>
NOTE 5 INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw material..................................... $ 7,309 $ 8,152 $12,610
Work-in-process.................................. 9,153 6,690 6,249
Finished goods................................... 362 148 919
------- ------- -------
$16,824 $14,990 $19,778
======= ======= =======
</TABLE>
NOTE 6 PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Land........................................................... $ -- $ 423
Building....................................................... 6,763 9,800
Leasehold improvements......................................... 3,210 3,999
Manufacturing equipment........................................ 26,750 26,439
Computer and office equipment.................................. 1,878 1,777
------- -------
38,601 42,438
Accumulated depreciation and amortization of capitalized lease
obligations.................................................. (3,312) (8,141)
------- -------
$35,289 $34,297
======= =======
</TABLE>
Depreciation expense, including the amortization of capitalized lease
obligations, was $0.9 million, $2.3 million and $5.8 million for the years ended
December 31, 1994, 1995, and 1996, respectively.
NOTE 7 LINE OF CREDIT AND LONG-TERM DEBT
Prior to October, 1995, the Company had a $7.5 million revolving line of
credit with First Interstate Bank of Arizona (the FIB Line). The FIB Line was
unsecured and any outstanding balance bore interest at the bank's prime interest
rate or, at the Company's option, LIBOR plus 2.0%. On October 31, 1995, the
Company replaced the FIB Line with a two-year, $20.0 million revolving line of
F-12
<PAGE> 64
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
credit with The First National Bank of Boston and First Interstate Bank of
Arizona (the FNBB line). On June 18, 1996, the Company amended the FNBB line.
Under the amended FNBB line, accounts receivable and inventory are pledged as
collateral and borrowing is limited to 80% of the aggregate value of all
eligible domestic accounts plus 70% of the aggregate value of all eligible
foreign accounts. Any outstanding balance bears interest at the bank's prime
interest rate, or at the Company's option, LIBOR plus 1.5%. At December 31,
1996, the weighted average interest rate was 7.3%. The FNBB line requires the
Company to maintain certain covenants based on leverage and profitability and
prohibits the payment of dividends and certain types of merger transactions
without the prior approval of the banks. At December 31, 1996, the Company had
$17.1 million available for borrowing under the FNBB line with an outstanding
balance of $10.0 million. At December 31, 1995, there were no amounts
outstanding under the line of credit.
On February 18, 1997 the Company amended to the FNBB line to provide
additional flexibility with respect to certain covenants to allow the Company to
more adequately meet its working capital requirements. This amendment requires
the Company to maintain certain covenants based on leverage and profitability on
a monthly basis through September 30, 1997 and quarterly thereafter and
prohibits the payment of dividends and certain types of merger transactions
without the prior approval of the banks. All assets of the Company are pledged
as collateral and borrowing is limited to 80% of the aggregate value of all
eligible domestic accounts plus 70% of the aggregate value of all eligible
foreign accounts. The amendment became effective as of December 31, 1996 and the
Company was in compliance with all covenants of the amended FNBB line at
December 31, 1996. Provisions made during the year for restructuring charges and
the results of operations rendered the Company unable to comply with the
financial covenants under the FNBB line for the quarter ended September 30,
1996. The lenders have waived compliance with the financial covenants for the
quarter ended September 30, 1996.
On June 5, 1997, the Company entered into a new credit agreement (the
credit facility) arranged by BancBoston Securities, Inc., which includes a
number of bank as lenders. The credit facility consists of a $20.0 million
three-year revolving line of credit and a $25.0 million five-year term loan with
equal principal payments due each quarter beginning with the quarter ending
December 31, 1998 and continuing through the quarter ending March 31, 2002.
Borrowing under the line of credit is limited to 80% of the aggregate value of
all eligible domestic accounts receivable plus 70% of the aggregate value of all
eligible foreign accounts receivable. Under the terms of the facility, any
outstanding balance bears interest at BankBoston, N.A.'s prime interest rate or
LIBOR plus an applicable margin ranging from 1.50% to 2.25% based on the Company
achieving certain financial objectives at the end of each quarter. The credit
facility is secured by all assets of the Company and a pledge by the Company of
66 2/3% of the stock of its subsidiaries. The Company is required, under the
credit agreement, to maintain certain financial ratios and meet certain net
worth and indebtedness tests for which the Company is in compliance at September
30, 1997. At September 30, 1997, $25.0 million was outstanding under the term
loan and $1.0 million was outstanding under the revolving line of credit. Of the
proceeds from the $25.0 million term loan, approximately $7.5 million in
principal plus $0.3 million in accrued interest was used to retire, ahead of
schedule, the subordinated debenture issued in the acquisition of the Company's
U.K. operation. In addition, the Company remitted $2.5 million in principal plus
$0.8 million in accrued interest in January 1997 in payment of the subordinated
debenture.
F-13
<PAGE> 65
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated debenture issued in connection with
the U.K. acquisition, payable beginning
January, 1997 in four equal annual installments
(LIBOR + 2.50%; 8.00% and 7.30% at December 31,
1995 and 1996, respectively)................... $10,000 $10,000 $ --
Term loan agreement payable beginning December
31, 1998 in fourteen equal annual installments
(LIBOR + margin ranging from 1.50% to 2.25%,
8.20% at September 30, 1997)................... -- -- 25,000
Capitalized lease obligations.................... 483 340 229
------- ------- -------
10,483 10,340 25,229
Less current maturities.......................... (2,632) (2,651) (168)
------- ------- -------
$ 7,851 $ 7,689 $25,061
======= ======= =======
</TABLE>
The Company was also contingently liable at December 31, 1996 and September
30, 1997 for $0.2 million related to outstanding letters of credit guaranteeing
the Company's performance on certain contracts. The amount of these letters of
credit is a reasonable estimate of their fair value as the value for each is
fixed over the life of the commitment.
NOTE 8 ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
-------- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Salaries and benefits............................. $3,138 $2,830 $ 3,823
Income taxes payable.............................. 6,782 170 (673)
Accrued interest.................................. 33 864 164
Accrued commissions............................... 217 278 503
Accrued relocation................................ -- -- 500
Accrued restructuring charges, current............ -- 4,187 3,723
Other............................................. 2,608 1,350 2,774
------- ------ -------
$12,778 $9,679 $10,814
======= ====== =======
</TABLE>
NOTE 9 COMMON STOCK AND EQUITY
Preferred Stock
The Company's certificate of incorporation authorizes the issuance of 10.0
million shares of preferred stock, at $0.01 par value, undesignated as to
powers, preferences, rights, limitations or restrictions. As of December 31,
1996 and September 30, 1997, no shares of preferred stock have been issued.
F-14
<PAGE> 66
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 COMMON STOCK AND EQUITY (CONTINUED)
Common Stock
The number of shares of Common Stock reserved for future issuance at
December 31, 1996, was as follows:
<TABLE>
<S> <C>
Employee and director stock options outstanding.................... 555,162
Reserved for future grants under the 1994 Stock Incentive Plan..... 67,058
1994 director stock options outstanding............................ 36,000
Reserved for issuance under the Employee Stock Purchase Plan....... 56,700
--------
Total reserved for future issuance................................. 714,920
=======
</TABLE>
In conjunction with the ADFlex U.K. acquisition, the Company issued
1,242,347 shares of restricted Common Stock. The holder has agreed not to sell
or otherwise dispose of the shares for a period of two years.
Stock Option Plans
The Company has elected to follow APB 25, Accounting for Stock Issued to
Employees, in accounting for its employee stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
Accounting and Disclosure of Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Under the Company's 1993 Equity Incentive Plan (1993 Plan) adopted June 29,
1993, qualified employees received options to purchase 599,000 shares of Common
Stock. The options granted under this Plan were to vest over approximately four
years, but automatically vested at the time of the Company's initial public
offering on September 27, 1994. The remaining shares available for grant under
the 1993 Plan have been eliminated.
On June 1, 1994, the Company adopted, and the stockholders approved, the
1994 Stock Incentive Plan (1994 Plan) as the successor to the 1993 Plan and
reserved 200,000 shares of its Common Stock for issuance under the Plan. On
April 18, 1995, the stockholders approved an amendment to the 1994 Plan that
increased the number of shares of Common Stock available for issuance in any
year to an amount equal to 3% of the outstanding shares of Common Stock each
January 1 during the term of the Plan. In 1996, 248,469 shares were reserved for
issuance. As part of the same amendment, the stockholders approved an automatic
grant to eligible non-employee directors of an option to acquire 12,000 shares
of Common Stock upon such directors' initial election to the Company's Board of
Directors and 3,000 shares of Common Stock each year thereafter. Options granted
to employees to date under the 1994 Plan either vest over a four year period
from the date of grant or one year from the date of grant and automatic options
granted to directors vest over a three year period from the date of grant.
On July 2, 1997 the Company canceled 92,250 options issued under the 1994
Plan with a price per share of $27.25 and granted 92,250 options with a price
per share of $14.88. The vesting schedule remained the same with the options
vesting over a four year period from the new date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes pricing model with the following weighted-average
assumptions for 1996 and
F-15
<PAGE> 67
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 COMMON STOCK AND EQUITY (CONTINUED)
1995: risk-free interest rates of 6.28%, dividend yields of 0.0%, volatility
factor of the expected market price of the Company's Common Stock of 0.68, and a
weighted-average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for per share information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
------- -------
<S> <C> <C>
Pro forma net loss................................. $(3,970) $(5,962)
Pro forma net loss per share....................... (0.58) (3.03)
</TABLE>
The effects of applying SFAS No. 123 for the years ended December 31, 1996
and 1995 are not likely to be representative of the effects on reported net
income for future years.
Activity in the Plans for the years ended December 31, 1994, 1995, and 1996
was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES --------------------------------------------
AVAILABLE NUMBER OF PRICE PER AGGREGATE
FOR OPTIONS SHARES SHARE PRICE
----------- --------- ----------------- ----------
<S> <C> <C> <C> <C>
December 31, 1993...................... 307,000 393,000 $0.50 $ 196,500
Authorized shares -- 1994 Plan....... 200,000 -- -- --
Grants............................... (349,950) 349,950 $ 0.50 - 16.00 2,483,200
Exercises............................ -- (119,550) $ 0.50 - 2.50 (61,775)
-------- --------
Cancellations........................ (101,000) -- -- --
December 31, 1994...................... 56,050 623,400 $ 0.50 - 16.00 2,617,925
Authorized shares -- 1994 Plan....... 196,929 -- -- --
Grants............................... (198,250) 198,250 $ 24.00 - 27.25 5,353,188
Exercises............................ -- (185,437) $ 0.50 - 16.00 (152,827)
Cancellations........................ (56,050) -- -- --
Forfeitures.......................... 1,850 (1,850) $16.00 (29,600)
-------- --------
December 31, 1995...................... 529 634,363 $ 0.50 - 27.25 7,788,686
Authorized shares -- 1994 Plan....... 248,469 -- -- --
Grants............................... (317,725) 317,725 $ 8.00 - 17.50 3,374,000
Exercises............................ -- (260,612) $ 0.50 - 16.00 (201,267)
Cancellations........................ (529) -- -- --
Forfeitures/Expirations.............. 136,314 (136,314) $ 9.375 - 27.25 (2,707,345)
-------- -------- --------------- ----------
December 31, 1996...................... 67,058 555,162 $ 0.50 - 27.25 $8,254,074
======== ======== =============== ==========
</TABLE>
F-16
<PAGE> 68
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 COMMON STOCK AND EQUITY (CONTINUED)
There were 335,534 and 149,608 options exercisable with a weighted-average
price of $2.03 and $15.31 at December 31, 1995 and 1996, respectively. The
weighted-average remaining contractual life of those options is 9.1 years. The
weighted average fair value of all grants made during the years ended December
31, 1996 and 1995 are as follows:
<TABLE>
<S> <C>
Incentive Stock Options granted in 1995 under the 1994 Plan................. $16.86
Incentive Stock Options granted in 1996 under the 1994 Plan................. $ 6.87
Non-qualified Stock Options granted in 1995 under the 1994 Plan............. $16.55
Non-qualified Stock Options granted in 1996 under the 1994 Plan............. $ 5.93
</TABLE>
Director Stock Options
On June 2, 1994, the Company granted an option to purchase 24,000 shares of
Common Stock at an exercise price of $10.00 per share to a newly appointed
outside director. The option vests over a four year period. On October 31, 1996,
the Company granted two outside directors an option to purchase 6,000 shares of
Common Stock each at an exercise price of $8.75. The options vest over a three
year period.
Deferred Compensation
The Company determined that certain stock options in the quarter ended
March 31, 1994, were granted at below the deemed fair value. The difference
between the deemed fair value of the options and the exercise prices at date of
grant of approximately $0.7 million was to be charged to operations over a
period beginning on the grant date of the options and ending on the expiration
of the vesting period or, if earlier, upon the completion of the Company's
initial public offering, at which time the options vested automatically.
Employee Stock Purchase Plan
On June 2, 1994, the Company adopted and the stockholders approved the 1994
Employee Stock Purchase Plan (the Purchase Plan) and the Company reserved
200,000 shares of Common Stock for sale to employees. The Purchase Plan became
effective upon the Company's initial public offering. The Purchase Plan allows
eligible employees of the Company to purchase shares of Common Stock at 85% of
the lesser of the fair value of such shares at the beginning of the offering
period or entry date (whichever is higher) and the end of each six-month
purchase period within such offering period. Contributions are limited to 15% of
an employee's eligible compensation, subject to a maximum annual purchase of
$25,000. There were 52,716 and 90,584 shares issued under the Purchase Plan
during 1995 and 1996, respectively. There were no shares issued under the
Purchase Plan during 1994.
NOTE 10 EMPLOYEE BENEFIT PLANS
During July 1993, the Company established a 401(k) employee salary deferral
plan that allows voluntary contributions by all full-time employees of the
Company's United States and Mexico operations upon commencement of employment.
Under the plan, eligible employees may contribute up to 18% of their pre-tax
earnings, not to exceed the Internal Revenue Service annual contribution limit
($9,500 for 1996). The Company may make contributions each year up to a maximum
of 4% of an employee's total compensation. The total Company contribution was
$0.1 million for each of the years ended December 31, 1994, 1995 and 1996 and
$0.1 million for each of the nine months ended September 30, 1996 and 1997.
F-17
<PAGE> 69
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 EMPLOYEE BENEFIT PLANS (CONTINUED)
Following the acquisition of ADFlex U.K., an insured money purchase
voluntary pension scheme was established for all full-time United Kingdom
employees upon commencement of employment. Under the plan, a contribution of 3%
or 6%, depending on the job grade, is made by the Company on behalf of employees
who elect to participate. The employees may also make contributions of their
pre-tax earnings up to age related limits set by U.K. law. Company contributions
were $0.2 million for the year ended December 31, 1996 and were $0.2 million for
the nine months ended September 30, 1997.
The Company has adopted a profit sharing plan for its United States and
Mexico employees to provide a financial incentive. The Company makes
contributions to the profit sharing plan in an amount equal to 5% of pre-tax
profits. No expenses were recorded pursuant to this plan for the year ended
December 31, 1996. Total expenses pursuant to this plan for the years ended
December 31, 1994 and 1995 were $0.6 million and $0.8 million, respectively, and
for the nine months ended September 30, 1997 were $0.4 million. No expenses were
recorded pursuant to this plan for the nine months ended September 30, 1996.
The Company also adopted a profit related pay scheme for its United Kingdom
employees to provide a financial incentive. Under the plan, all employees would
received 20% of their income tax exempt if the Company achieved minimum profit
levels approved by the U.K. government. The plan was canceled in July 1996 due
to the Company's failure to meet the profit level targets; however, the taxes
which were not withheld from the employees salary up to this point can not be
recovered from the employees. The Company has accrued a loss of $0.1 million for
the employees' tax liability. The liability will be paid by the Company when its
tax return for the United Kingdom is completed in 1997.
The Company has adopted a management bonus plan to provide an additional
financial incentive for management. Total expenses pursuant to this plan for the
years ended December 31, 1994, 1995 and 1996, were $0.9 million, $0.9 million,
and $0.1 million, respectively, and for the nine months ended September 30, 1996
and 1997 were $0.1 million and $1.0 million, respectively.
NOTE 11 SHAREHOLDER RIGHTS PLAN
On July 10, 1996, the Board of Directors adopted a Shareholder Rights Plan
(the Plan). Under the terms of the Plan, each shareholder of record at the close
of business on July 22, 1996, received as a dividend one Preferred Share
purchase right (Right) for each share of Common Stock of the Company. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Participating Preferred Stock of the Company at a price of
$100.00 per share, subject to adjustment. The Rights will separate from the
Common Stock and become exercisable following the twentieth day after a person
or group acquires beneficial ownership of more than 20.5% of the Company's
Common Stock or announces a tender or exchange offer, the consummation of which
would result in ownership by a person or group of more than 20.5% of the
Company's Common Stock. Upon such events, the Company's Board of Directors may
exchange the Rights for one share of Common Stock per right. Any unexercised
Rights not exchanged will have the right to receive Common Stock having a value
of two times the purchase price of the Right. The Rights expire on July 21,
2006, unless redeemed at the Company's option for $0.001 per Right at any time
on or prior to the twentieth day after public announcement that a person or
group has acquired beneficial ownership of more than 20.5% of the Common Stock.
Preferred shares purchasable upon exercise of the right will not be redeemable.
Each Preferred Share will be entitled to an aggregate dividend of one hundred
times the dividend declared per share of Common Stock. Preferred Shares will
have one hundred votes.
F-18
<PAGE> 70
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 INCOME TAXES
Income taxes include the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Federal:
Current....................................... $4,256 $4,091 $ (77)
Deferred...................................... (284) 520 (9,623)
------- ------ ------
3,972 4,611 (9,700)
State:
Current....................................... 1,174 70 54
Deferred...................................... (50) 137 (149)
------- ------ ------
1,124 207 (95)
Foreign, current................................ 34 309 41
------- ------ ------
$5,130 $5,127 $(9,754)
======= ====== ======
</TABLE>
The tax benefits associated with certain stock options reduced taxes
currently payable by $0.9 million and $0.1 million for 1995 and 1996,
respectively. Such benefits are credited to additional paid-in capital when
realized.
For interim periods, the provision for income taxes is based upon the
estimated income tax rate for the full fiscal year.
Income tax expense (benefit) differs from the amount computed by applying
the federal statutory rate, as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Federal income tax expense (benefit) calculated at
the statutory rate................................. $4,275 $ 491 $(12,172)
State income tax (benefit), net of federal benefit... 731 135 (62)
Foreign losses with no tax benefit................... -- -- 2,438
Tax exempt income.................................... -- (249) --
In-process technology................................ -- 4,872 (54)
Research and development credit...................... (300) (100) (100)
Other, net........................................... 424 (22) 196
------ ------ --------
Income tax expense (benefit)......................... $5,130 $5,127 $ (9,754)
====== ====== ========
</TABLE>
F-19
<PAGE> 71
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 INCOME TAXES (CONTINUED)
Deferred 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 as of December 31, 1995 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
----- -------
<S> <C> <C>
Deferred tax assets:
Tax benefits related to restructuring......................... $ -- $10,601
Inventory valuation........................................... 39 438
Accrued liabilities........................................... 460 352
Allowance for returns and doubtful accounts................... 251 188
----- ------
750 11,579
Deferred tax liabilities:
Tax versus financial reporting depreciation................... 428 974
Prepaid expenses and other.................................... 43 554
----- ------
471 1,528
----- ------
Net deferred tax asset.......................................... 279 10,051
Less deferred tax asset-current................................. 750 2,505
----- ------
Deferred tax asset (liability) long-term........................ $(471) $ 7,546
===== ======
</TABLE>
Management has concluded that no valuation allowance is required based on
its assessment that current and future levels of taxable income will, more
likely than not, be sufficient to realize the tax benefits.
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS has proposed adjustments to the Company's income and tax credits
for the year, which would result in additional tax of approximately $1.6 million
including interest and penalties. The major proposed adjustment, which relates
to the allocation of the purchase price of assets obtained from Rogers
Corporation (Rogers) pursuant to acquisition agreements between the Company and
Rogers, would extend the period over which the tax benefit for the purchase
price would be recovered. The Company disagrees with the proposed adjustments
and is contesting them. The Company does not believe based on currently
available consolidated information that the final disposition of these matters
will have a material adverse effect on the overall financial condition of the
Company.
Pre-tax income (loss) from foreign operations was $0.1 million, $0.9
million, and $(38.5 million) for the years ended December 31, 1994, 1995 and
1996, respectively, and for the nine months ended September 30, 1996 and 1997
was $(37.7) million and $0.5 million, respectively. The residual United States
tax liability for unremitted foreign earnings is immaterial.
F-20
<PAGE> 72
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its facilities and equipment under capital and operating
leases which expire at various dates through April 30, 2003. As of December 31,
1996 the future minimum lease commitments under these leases are payable as
follows, including lease payments to Xyratex related to the U.K. operation
through the date of termination (in thousands):
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
<S> <C> <C>
Year ended December 31,
1997................................................ $ 189 $ 4,089
1998................................................ 189 499
1999................................................ 16 379
2000................................................ -- 284
2001................................................ -- 247
2002 and thereafter................................. -- 215
------ ----
Total minimum lease payments.......................... $ 394 $ 5,713
====
Less amounts representing interest.................... (54)
------
Present value of future net minimum lease payments.... $ 340
======
</TABLE>
The Company recently renewed the lease related to its Chandler, Arizona
facility through June 2003. (See Note 15).
Rent expense for all operating leases for the years ended December 31,
1994, 1995 and 1996 was $0.9 million, $1.1 million, and $4.2 million,
respectively. At December 31, 1995 and 1996, the Company had capitalized $0.7
million of assets acquired under capitalized lease agreements in the
accompanying consolidated balance sheet.
Environmental Remediation Contingency
The nature of the Company's business exposes the Company to potential
environmental remediation liabilities arising from the manufacture, use and
disposal of hazardous materials used to manufacture flex interconnect products.
Management believes that any cost associated with maintaining the Company's
compliance with current environmental remediation laws will not have a material
adverse effect on the Company's consolidated business, financial condition,
results of operations and cash flows.
F-21
<PAGE> 73
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 GEOGRAPHIC SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company operates in one business segment, which is the manufacture and
sale of flexible circuit-based interconnect products. Financial information
summarized by geographic area for the year ended December 31, 1996, is as
follows (in thousands):
<TABLE>
<CAPTION>
NORTH SOUTHEAST
AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
-------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Customer revenue.............. $ 93,524 $ 62,767 $ 545 $ -- $156,836
Affiliate revenue............. 6,056 (6,056)
-------- -------- ------ -------- --------
Total revenue....... $ 99,580 $ 62,767 $ 545 $ (6,056) $156,836
Operating income (loss)....... $ 5,531 $(38,516) $ (570) $ (136) $(33,691)
Identifiable assets........... $114,655 $ 26,385 $ 3,162 $(51,021) $ 93,181
</TABLE>
At December 31, 1995, included in the Company's net assets were assets
totaling $47.2 million which were located in Europe.
At any given time, sales to certain customers may account for a significant
portion of the Company's business. Sales to Seagate Technology, Inc. accounted
for 19.0%, 21.0% and 35.0% of net sales for the years ended December 31, 1994,
1995 and 1996, respectively. Sales to two additional customers accounted for
8.0% and 12.0%, 13.0% and 19.0%, and 11.0% and 18.0% of net sales in 1994, 1995
and 1996, respectively.
Export sales during the years ended December 31, 1994, 1995 and 1996, were
$27.4 million, $43.2 million and $26.6 million, respectively.
The Company's Mexican manufacturing employees are covered by a collective
bargaining agreement, which covers 3,200 of approximately 4,000 Mexican
employees. This agreement expires on December 15, 1997. Management expects this
agreement will be renewed.
NOTE 15 RELATED PARTY TRANSACTIONS
Acquisition Agreements With Rogers Corporation
Pursuant to the asset purchase agreements entered into on June 28, 1993
between the Company and Rogers Corporation (Rogers) whereby the Company
purchased the Flexible Interconnect Division (the Predecessor) of Rogers, Rogers
retained certain existing and potential liabilities. In particular Rogers
retained all liabilities resulting from, among other things, the creation,
storage, discharge, use or handling of hazardous or toxic substances by the
Predecessor that may exist on or about the Company's facilities in Arizona and
Mexico prior to the acquisition. In addition, Rogers retained certain other
liabilities, including (i) all liabilities with respect to litigation of the
Predecessor pending on the consummation date of the acquisition; (ii) federal
income and certain state sales tax liabilities relating to periods prior to the
acquisition; (iii) certain liabilities related to employment matters of the
Predecessor; and (iv) any trade payables incurred prior to the closing.
In connection with the acquisition, the Company entered into a supply
agreement with Rogers for the supply to the Company of certain raw material
components used in the manufacture of the Company's products. The Company also
entered into a building lease with an affiliate of Rogers to lease the
Predecessor's corporate headquarters and U.S. manufacturing facility. The lease
agreement for the Company's U.S. facility is for five years with a five year
renewal option. As provided for in the lease agreement, the Company exercised
its option to renew the lease for an additional five years on June 3, 1997,
twelve months prior to the lease expiration date. The extended lease agreement
provides for fixed payments of $0.5 million per annum for the first three years,
mutually agreed upon market
F-22
<PAGE> 74
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 RELATED PARTY TRANSACTIONS (CONTINUED)
rates for years four through eight and mutually agreed upon market rates
adjusted for the Consumer Price Index for years nine and ten. Total rent expense
paid to Rogers was $0.5 million for each of the years ended December 31, 1994,
1995 and 1996, and was $0.4 million for each of the nine months ended September
30, 1996 and 1997.
AMP Component Purchases
The Company purchases certain components from AMP, Incorporated (AMP), a
stockholder of the Company that through the Company's initial public offering,
had a representative on the Company's Board of Directors. Purchases from AMP for
the years ended December 31, 1994, 1995 and 1996 were $0.7 million, $1.6
million, and $2.6 million, respectively, and for the nine months ended September
30, 1996 and 1997 were $2.5 million and $2.4 million, respectively.
Affiliation With Smartflex
In order to facilitate their manufacturing processes, the Company's
customers often require that the Company sell finished interconnects to contract
assemblers for further assembly. The Company derived 19.0%, 19.0% and 8.0% of
its net sales in 1994, 1995 and 1996, respectively, and 8.0% and 6.0% of its net
sales for the nine months ended September 30, 1996 and 1997, respectively, from
sales to Smartflex Systems, Inc. (Smartflex), which is a contract assembler that
was formerly the Joint Venture between Rogers and a third-party, and at December
31, 1995 was partially owned by a major stockholder of the Company. At December
31, 1995, a director of the Company was also a director of Smartflex.
Affiliation With Xyratex
The Company derived 2% of its net sales in 1996 from sales to Xyratex, a
major shareholder of the Company with a representative on the Company's Board of
Directors. The Company leases the ADFlex U.K. manufacturing facility from
Xyratex. Total lease payments made to Xyratex in 1996 totaled $2.6 million. In
addition, $1.9 million was paid to Xyratex in 1996 for administrative services.
F-23
<PAGE> 75
ADFLEX SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales
1995................................ $21,980 $24,423 $ 28,461 $ 26,299 $101,163
1996................................ 38,082 35,031 36,898 46,825 156,836
1997................................ 48,221 56,244 55,058 -- --
Gross profit (loss)
1995................................ $ 6,192 $ 7,076 $ 7,684 $ 7,103 $ 28,055
1996................................ 7,198 5,244 (295) 6,416 18,563
1997................................ 7,423 9,090 10,145 -- --
Net income (loss)
1995................................ $ 2,206 $ 2,526 $ 2,814 $(11,269)(2) $ (3,723)
1996................................ 840 (660) (25,663)(1) 459 (25,024)
1997................................ 873 1,880 2,597 -- --
Net income (loss) per share
1995................................ $ 0.31 $ 0.35 $ 0.38 $ (1.60) $ (0.54)
1996................................ 0.10 (0.08) (2.98) 0.05 (2.92)
1997................................ 0.10 0.21 0.29 -- --
</TABLE>
- ---------------
(1) Includes charges of $29.2 million (pre-tax) related to restructuring of the
Company's U.K operations, see Note 2.
(2) Includes charges of $13.9 million related to the write-off of in-process
technology in conjunction with the ADFlex U.K. acquisition, see Note 2.
F-24
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the offering described in the Registration Statement, all of which will be borne
by the Company.
<TABLE>
<S> <C>
Registration Fee.................................................. $ 21,288
NASD Filing Fee................................................... 7,525
Nasdaq Listing Fee................................................ 17,500
Blue Sky Fees and Expenses........................................ 5,000*
Legal Fees and Expenses........................................... 100,000*
Accounting Fees and Expenses...................................... 75,000*
Printing and Engraving Expenses................................... 150,000*
Transfer Agent Fee................................................ 5,000*
Miscellaneous..................................................... 18,687*
--------
Total................................................... 400,000*
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that a director of the Company shall not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, including grossly negligent business judgments made in good
faith, except for liability (i) for breach of the duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (governing distributions to stockholders), or (iv) for
any transaction for which a director derives an improper personal benefit. In
addition, Section 145 of the DGCL and the Company's Certificate of Incorporation
and By-laws, under certain circumstances, provide for the indemnification of the
Company's officers and directors against liabilities which they may incur in
such capacities. A summary of the circumstances in which such indemnification is
provided for is contained herein, but that description is qualified in its
entirety by reference to the Company's Certificate of Incorporation and By-laws.
In general, any officer, director, employee or agent may be indemnified
against expenses, including attorneys' fees, fines, settlements or judgments
which were actually and reasonably incurred in connection with a legal
proceeding, other than one brought by or on the behalf of the Company, to which
he was a party as a result of such relationship, if he acted in good faith, and
in the manner he believed to be in the Company's best interest and not unlawful.
If the action is brought by or on behalf of the Company, the person to be
indemnified must have acted in good faith in a manner he believed to have been
in the Company's best interest and must not have been adjudged liable for
negligence or misconduct.
No person seeking indemnification may be denied indemnification unless the
Board of Directors or the stockholders of the Company determine in good faith,
or independent legal counsel for the Company opines in writing, that the
standards for indemnification have not been met. A successful defense is deemed
conclusive evidence of a person's right to be indemnified against expenses.
The Company may advance funds to pay the expenses of any person involved in
such action provided that the Company receives an undertaking that the person
will repay the advanced funds if it is ultimately determined that he is not
entitled to indemnification.
II-1
<PAGE> 77
The Company has entered into substantially identical indemnification
agreements with each of its directors. The Company has agreed, to the full
extent permitted by the DGCL, as amended from time to time, to indemnify each
indemnitee against all loss and expense incurred by, or as a result of any
threat of, his being named a party to any completed, pending or threatened
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason that he was a director, officer, employee or agent of
the Company or any of its affiliates, or because the Company has a right to
judgment in its favor because of his position with the Company. The indemnitee
will be indemnified so long as he acted in good faith and in a manner reasonably
believed by him to be in or not opposed to the Company's best interest. The
agreements provide that the indemnification thereunder is not exclusive of any
other rights the indemnitees may have under the Company's Certificate of
Incorporation, By-laws or any agreement or vote of stockholders, nor may the
Certificate of Incorporation or By-laws by amended to affect adversely the
rights of any indemnitee. The foregoing description is qualified in its entirety
by reference to the indemnification agreements.
The Company maintains a directors' and officers' liability insurance
policy.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement among the Registrant, BancAmerica Robertson
Stephens, Hambrecht & Quist LLC and PaineWebber Incorporated, and the Selling
Stockholders
2.1 (1) Asset Purchase Agreement between the Registrant and Rogers Corporation dated
June 28, 1993
2.2 (1) Asset Purchase Agreement between ADFlex Mexico S.A. de C.V. ("ADMex") and
Rogers Mexicana, S.A. de C.V. dated June 28, 1993
2.3 (2) Share Sale and Purchase Agreement, dated January 7, 1996, between the
Registrant and Havant International Holdings Limited
2.4 (2) Letter, dated January 7, 1996, constituting the Disclosure Letter under the
Share Sale and Purchase Agreement included as Exhibit 2.3
3.1 (1) Restated Certificate of Incorporation
3.2 (1) Bylaws
3.3 (3) Amendment to Bylaws Adopted January 31, 1996
4.1 (1) Specimen Common Stock Certificate
4.2 (4) Rights Agreement, dated as of July 10, 1996, between the Registrant and First
National Bank of Boston, NA, including the Certificate of Designation of
Rights, Preferences and Privileges of Series A Participating Preferred Stock,
the form of Rights Certificate and the Summary of Rights attached thereto as
Exhibits A, B
and C, respectively.
5.1 (5) Opinion of Fennemore Craig, P.C.
11.1 (6) Statement Regarding Computation of Earnings Per Share
16.1 (1) Letter from KPMG Peat Marwick
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 (5) Consent of Fennemore Craig, P.C. (contained in their opinion filed as Exhibit
5.1 to this Registration Statement)
24.1 Powers of Attorney (contained on page II-6)
24.2 Certified resolutions of the Board of Directors of the Registrant, dated
October 21, 1997, appointing the attorneys-in-fact
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 33-80324) or amendments thereto, filed with the Securities and
Exchange Commission on June 16, 1994
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 7, 1996
II-2
<PAGE> 78
(3) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1995
(4) Incorporated by reference from the Company's Form 8-K dated July 10, 1996
(5) To be filed by amendment.
(6) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1996.
+ Confidential treatment granted for portions of the exhibit.
++ Confidential treatment requested for portions of the exhibit.
* Constitutes a management contract or compensatory plan or arrangement.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chandler, State of Arizona on October 21, 1997.
ADFLEX SOLUTIONS, INC.
By /s/ ROLANDO C. ESTEVERENA
------------------------------------
Rolando C. Esteverena
President, Chief Executive
Officer, Chairman and Director
POWER OF ATTORNEY
Each person whose signature appears below on this Form S-3 Registration
Statement hereby constitutes and appoints Rolando C. Esteverena, Donald E.
Frederick and R. Charles Furniss, and each of them, with full power to act
without the other, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (unless revoked in writing) to sign any or all
amendments (including post-effective amendments thereto) to this Form S-3
Registration Statement to which this power of attorney is attached, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------- -------------------
<C> <S> <C>
/s/ ROLANDO C. ESTEVERENA President, Chief Executive October 21, 1997
- ------------------------------------------ Officer, Chairman and
Rolando C. Esteverena Director (Principal
Executive Officer)
/s/ DONALD E. FREDERICK Vice President and Chief October 21, 1997
- ------------------------------------------ Financial Officer
Donald E. Frederick (Principal Financial
Officer and Principal
Accounting Officer)
Director October 21, 1997
- ------------------------------------------
Steve Sanghi
/s/ RICHARD P. CLARK Director October 21, 1997
- ------------------------------------------
Richard P. Clark
/s/ WILLIAM KENNEDY WILKIE Director October 21, 1997
- ------------------------------------------
William Kennedy Wilkie
Director October 21, 1997
- ------------------------------------------
Wade Meyercord
</TABLE>
II-4
<PAGE> 80
APPENDIX A
[Description of graphical material for inside front cover]
<TABLE>
<S> <C> <C> <C> <C> <C>
Flexible circuits Look how far Integrated cir-
must flex more than we've come. cuits and other
25,000 times Cellular telephones components
through a note- now fit in a can be mounted on
book computer [Photo of person shirt pocket and [Photo of person flexible circuits [Photo of person
hinge without holding flexible some weigh less holding cellular to eliminate bulky holding flexible
breaking. circuit] than 4 ounces. telephones] circuit boards. circuit with
MECHANICAL SMALLER AND SYSTEM-LEVEL mounted components]
FLEXURE LIGHTER ASSEMBLIES
</TABLE>
Strategic locations
for optimum
cost-efficiency [Graphic of
and productivity World]
ADFlex Thailand
ADFlex U.K.
ADFlex Mexico
ADFlex
ADFlex Solutions, Inc. is a
Leading High-Volume Flexible Circuit
Interconnect Manufacturer
WHO IS ADFLEX?
As one of the world's leading high-volume flexible circuit interconnect
manufacturers, ADFlex Solutions, Inc. combines superior design, low-cost/
high-volume fabrication and advanced assembly and testing to provide a one-stop-
shop solution for electronics OEMs. Miniaturization, form and weight of
applications are driving factors of the markets targeted by the Company. ADFlex
is the preferred flexible circuit interconnect supplier to many of the world's
leading producers of hard disk drives, notebook computers, cellular telephones
and high-end consumer electronics products.
DESIGN
FABRICATION [Graphic and Photos of production stages]
ASSEMBLY
TEST
Single-Source Provider
ADFlex offers design, fabrication,
assembly and test to efficiently
and expeditiously meet the needs
of its customers.
[ADFLEX LOGO]
<PAGE> 81
APPENDIX A
[Description of graphical material for inside back cover]
<TABLE>
<S> <C> <C>
Growth trends Compact elec-
in data Flex is a key enabling tronic devices
storage will technology for are constant
provide ongoing [Photo of today's companions
demand for hard disk portable work [Photo of at home and [Photo of
flexible circuits. drive] place. notebook at play. portable
LEADER ALWAYS computer] ACTIVE CD player]
IN HDD IN TOUCH LIFESTYLES
Smart compo-
Growth opportu- nents mounted to
nities in optical flexible circuits extend
storage tech- cellular phone
nologies such [Photo of battery life. [Photo of cellular telephone]
as Digital Video digital SMART
Disks. video disk] COMPONENTS
NEW MARKETS
</TABLE>
Flexible circuits can be instrumental in enabling today's advanced electronics
applications to perform better while also being made smaller and lighter.
Switch
Microphone
Surface mount components
Flexible circuit substrate [Photo of cellular phone and flexible circuit]
Connector
Enabling
Technology
WHAT ARE FLEXIBLE CIRCUITS?
The growth in demand for smaller, lighter and higher performance
electronics products has stimulated the miniaturization of electronics devices.
A flexible circuit interconnect addresses some of the challenges of
miniaturization since it can bend. The essential property lies in its design--a
pliable substrate onto which conductive circuit pathways of copper are
fabricated. After fabrication, components such as integrated circuits, speakers,
microphones and switches are then added using advanced chip on flex or surface
mount assembly processes.
The ability of a flexible circuit interconnect to conform to sharp
packaging contours has made it a leading driver of the ongoing reductions in the
size of such popular products as cellular telephones. Its excellent electrical
performance and ability to bend millions of times over the course of its life
makes it a preferred interconnect solution in many applications, including hard
disk drives and connecting flip-up displays in today's powerful notebook
computers.
Providing Flexible Solutions
Components can be
mounted directly to the
flexible circuit
making this substrate more
conducive to today's
smaller form factors.
[ADFLEX LOGO]
[Picture of ADFlex logo and flexible circuit]
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement among the Registrant, BancAmerica Robertson,
Stephens, Hambrecht & Quist LLC and the Selling Stockholders.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Powers of Attorney (contained on page II-6)
24.2 Certified resolutions of the Board of Directors of the Registrant, dated October
21, 1997, appointing the attorneys-in-fact
</TABLE>
<PAGE> 1
EXHIBIT 1.1
DRAFT 10/16/97
2,700,000 Shares(1)
ADFlex Solutions, Inc.
Common Stock
UNDERWRITING AGREEMENT
November __, 1997
BancAmerica Robertson Stephens
PaineWebber Incorporated
Hambrecht & Quist
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
26th Floor
San Francisco, California 94104
Ladies and Gentlemen:
ADFlex Solutions, Inc., a Delaware corporation (the "Company"), and
Havant International Holdings Limited ("Havant") and Rolando C. Esteverena
("Esteverena") (individually a "Selling Stockholder" and collectively, the
"Selling Stockholders"), address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
1,307,653 shares of its authorized and unissued Common Stock to the several
Underwriters. Havant proposes to sell an aggregate of 1,392,347 shares of
authorized and outstanding shares of the Company's Common Stock to the several
Underwriters. The 1,307,653 shares of Common Stock of the Company to be sold by
the Company are hereinafter called the "Company Shares" and the 1,392,347 shares
of Common Stock to be sold by Havant are hereinafter called the "Selling
Stockholder Shares." The Company Shares and the Selling Stockholder Shares are
hereinafter collectively referred to as the "Firm Shares." The
- --------
(1) Plus an option to purchase up to 405,000 additional shares from the
Company and Esteverena to cover over-allotments, if any.
<PAGE> 2
Company and Esteverena, acting severally and not jointly, also propose to grant
to the Underwriters an option to purchase up to an aggregate of 405,000
additional shares of the Company's Common Stock (the "Option Shares"), as
provided in Section 7 hereof (100,000 of such Option Shares shall be offered by
Esteverena and 305,000 of such Option Shares shall be offered by the Company).
As used in this Agreement, the term "Shares" shall include the Firm Shares and
the Option Shares. All shares of Common Stock of the Company, including the
Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
Selling Stockholders.
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No.
333-_____) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the applicable Rules
and Regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement and such amended
prospectuses subject to completion, as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement and
such amended prospectuses subject to completion, as may hereafter be required.
Copies of such registration statement and amendments and of each related
prospectus subject to completion (the "Preliminary Prospectuses") have been
delivered to you.
If the registration statement has been declared effective under the Act
by the Commission, the Company will prepare and promptly file with the
Commission the information omitted from the registration statement pursuant to
Rule 430A(a) of the Rules and Regulations pursuant to subparagraph (1) or (4) of
Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to the registration statement (including a final form of prospectus).
If the registration statement has not been declared effective under the Act by
the Commission, the Company will prepare and promptly file a further amendment
to the registration statement, including a final form of prospectus. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits in the form in
which it became or becomes, as the case may be, effective (including, if the
Company omitted information from the registration statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of such registration statement, shall also mean (from and
after the effectiveness of such amendment) such registration statement as so
amended. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as
2.
<PAGE> 3
included in such registration statement at the time it becomes effective, except
that if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares that differs from
the Prospectus on file with the Commission at the time the registration
statement became or becomes, as the case may be, effective (whether or not such
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus, or instituted
proceedings for that purpose, and each such Preliminary Prospectus, has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein not misleading; and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) and on any later
date on which Option Shares are to be purchased, (i) the Registration Statement
and Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were made not
misleading; provided, however, that none of the representations and warranties
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon, and in conformity with, written information
furnished to the Company by any Underwriter through you specifically for
inclusion therein.
(c) The Company and its subsidiaries, ADFlex Mexico,
S.A. de C.V., ADFlex Solutions Limited, ADFlex Solutions FSC Inc., ADFlex Cayman
Limited and ADFlex (Thailand) Limited (each a "Subsidiary" and collectively, the
"Subsidiaries") have each been duly incorporated and each is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Registration Statement; other than qualifying shares in immaterial amounts
required by local law, the Company owns all of the outstanding capital stock of
each Subsidiary (other than the capital stock of ADFlex (Thailand) Limited which
is all owned by __________, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest except for the pledge in
favor of Hana Microelectronics and the pledge in favor of the Company's lenders
pursuant to the existing credit agreement) free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest except for the
pledge in favor of the Company's lenders pursuant to the existing credit
agreement; each of the Company and each Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership or leasing of properties or the conduct of its business
requires such qualification except where the failure
3.
<PAGE> 4
to be so qualified would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and the Subsidiaries considered as one enterprise; the Company
and each Subsidiary is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; the Company
and each Subsidiary is not in violation of its charter or bylaws or in default
in the performance or observance of any material obligation, agreement, covenant
or condition contained in any material bond, debenture, note or other evidence
of indebtedness or in any material contract, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to which the Company
or such Subsidiary, respectively, is a party or by which it or any of its
properties may be bound or in material violation of any law, order, rule,
regulation, writ, injunction or decree of any government, government
instrumentality or court, domestic or foreign, except violations and defaults
which individually would not be material to the Company and its Subsidiaries
considered as one enterprise. The Company does not own or control, directly or
indirectly, any corporation, association or other entity, other than the
Subsidiaries.
(d) The Company has full legal right, power and
authority to enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, or by general equitable principles; the performance of this Agreement
and the consummation of the transactions herein contemplated will not result in
a breach or violation of any of the terms and provisions of or constitute a
default under, (i) any material indenture, mortgage, deed of trust, loan
agreement, bond, debenture, note agreement or other evidence of indebtedness, or
any material lease, contract or other agreement or instrument to which the
Company or the Subsidiaries is a party or by which the property of the Company
or the Subsidiaries is bound, or (ii) the respective charter or bylaws of the
Company or the Subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or the Subsidiaries or over the properties
of the Company or the Subsidiaries; and no consent, approval, authorization or
order of any court or governmental agency or body is required for the
consummation by the Company of the transactions herein contemplated, except such
as may be required under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or under state or other securities or Blue Sky
laws.
(e) Except as disclosed in the Prospectus, there is
not any pending or, to the Company's knowledge, threatened action, suit, claim
or proceeding against the Company, the Subsidiaries, or any of their respective
officers or any of their properties, assets or rights before any court or
governmental agency or body or otherwise which
4.
<PAGE> 5
(i) might result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and the Subsidiaries considered as one enterprise, or might materially and
adversely affect their respective properties, assets or rights, or (ii) might
prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement; and there are no
contracts or documents of the Company or the Subsidiaries that are required to
be described in the Prospectus or be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which have not been
accurately described in all material respects in the Prospectus and filed as
exhibits to the Registration Statement. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and neither the
Company nor any Subsidiary, nor, to the Company's knowledge, any other party, is
in breach of or default under any of such contracts.
(f) All outstanding shares of capital stock of the
Company (including the Selling Stockholder Shares) have been duly authorized and
validly issued and are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Company Shares and the Option Shares to be purchased from the
Company hereunder have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any of the Company
Shares or Option Shares or the issuance and sale thereof except for that certain
Registration Rights Agreement between the Company and Havant and that certain
Registration Rights Agreement between the Company and AMP Incorporated. No
further approval or authorization of any stockholder, the Board of Directors or
others is required for the issuance and sale or transfer of the Shares except as
may be required under the Act, the Exchange Act or under state or other
securities or Blue Sky laws. All issued and outstanding shares of capital stock
of the Subsidiaries have been duly authorized and validly issued and are fully
paid and nonassessable. Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any Subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock purchase and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
5.
<PAGE> 6
(g) Ernst & Young, which has examined the
consolidated financial statements, together with the related schedules and
notes, of the Company and the Flexible Interconnections Division of Rogers
Corporation (the "Predecessor") as of December 31, 1992 and 1993 and for each of
the years in the three years ended December 31, 1996 filed with the Commission
as a part of the Registration Statement, which are included in the Prospectus,
are, to the Company's knowledge, independent accountants within the meaning of
the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements, together with the related schedules and notes, and the unaudited
consolidated financial information, filed with the Commission as part of the
Registration Statement have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as may be otherwise stated therein. The selected and summary financial
data and the tables set forth under "Results of Operations" and "Quarterly
Results of Operations" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section, included in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. The
description contained in the "Business-Backlog" section of the Registration
Statement and the other statistical data contained in the Registration Statement
present fairly the information shown therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(h) Except as otherwise described in the Registration
Statement and the Prospectus, subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the business, properties or assets
described or referred to in the Registration Statement, or the results of
operations, condition (financial or otherwise) earnings, operations, business or
business prospects, of the Company and the Subsidiaries considered as one
enterprise, (ii) any transaction that is material to the Company and the
Subsidiaries considered as one enterprise, except transactions in the ordinary
course of business, (iii) any obligation that is material to the Company and the
Subsidiaries considered as one enterprise, direct or contingent, incurred by the
Company or any Subsidiary, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company or any Subsidiary, which is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any Subsidiary which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company and the
Subsidiaries considered as one enterprise.
6.
<PAGE> 7
(i) Except as set forth in the Prospectus, (i) the
Company and the Subsidiaries have good and marketable title to all of their
respective properties and material assets described in the Prospectus as owned
by them, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest other than such as are not material to the business
of the Company and the Subsidiaries considered as one enterprise, (ii) the
agreements to which the Company or any Subsidiary is a party described in the
Prospectus are valid agreements, enforceable by the Company or such Subsidiary,
as the case may be, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally or by general equitable principles
and, to the knowledge of the Company, other contracting party or parties thereto
are not in material breach or material default under any of such agreements, and
(iii) the Company and each Subsidiary has valid and enforceable leases for the
respective properties described in the Prospectus as leased by them except as
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(j) The Company and the Subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the Company's knowledge, might be asserted against the Company or
any Subsidiary that might have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and the Subsidiaries considered as one entity, and all tax
liabilities of the Company and the Subsidiaries are adequately provided for on
the books of the Company.
(k) The Company and the Subsidiaries maintain
insurance of the types and in the amounts generally deemed adequate for their
respective businesses and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company and
the Subsidiaries against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full force
and effect.
(l) To the Company's knowledge, no labor disturbance
by the employees of the Company or the Subsidiaries exists or is imminent; and
the Company and the Subsidiaries are not aware of any existing labor disturbance
by the employees of any of its principal suppliers that might be expected to
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and the
Subsidiaries considered as one enterprise. Except as described in the Prospectus
(which description is a fair and accurate summary of the collective bargaining
arrangement), no collective bargaining agreement exists with any of the
Company's or any Subsidiary's employees and, to the Company's knowledge, no such
agreement is imminent.
7.
<PAGE> 8
(m) Except as disclosed in the Prospectus, the
Company and the Subsidiaries own or possess adequate rights to use all material
patents, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names and copyrights described or referred to in the Prospectus as
owned or used by them or which are necessary for the conduct of their respective
businesses as described in the Prospectus; neither the Company nor any of the
Subsidiaries has received any notice of, and the Company and the Subsidiaries
have no knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and the
Subsidiaries considered as one enterprise.
(n) The Company has not been advised, nor does the
Company have any reason to believe, that the Company or the Subsidiaries are not
conducting business in substantial compliance with all of the laws, rules and
regulations of the jurisdictions in which they are conducting business, except
where failure to be so in compliance would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and the Subsidiaries considered as one
enterprise.
(o) The Common Stock has been approved for quotation
on the Nasdaq National Market.
(p) The Company is familiar with the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not
distribute prior to the Closing Date or to any date on which Option Shares are
to be purchased, as the case may be, any offering material in connection with
the offering and sale of the Shares other than the Prospectus, the Registration
Statement and the other materials permitted by the Act.
(r) The Company and the Subsidiaries have not at any
time since the dates of their respective inceptions (i) made any unlawful
contribution to any candidate for foreign office, or failed to disclose fully
any contribution in violation of law, or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
(s) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in
8.
<PAGE> 9
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(t) The Company has obtained executed agreements
(collectively, the "Lock-Up Agreements") from each executive officer and
director of the Company, pursuant to which each of such persons have agreed that
such person will not, directly or indirectly, for a period equal to the later
of: (i) 90 days after the effective date of the Registration Statement, or (ii)
three days after the Company publicly releases its earnings for the fiscal
period ending immediately after the effective date of the Registration
Statement, offer to sell, contract to sell, or otherwise sell or dispose of or
grant any rights with respect to any shares of Common Stock of the Company, any
options or warrants to purchase any shares of Common Stock of the Company, or
any securities convertible into or exchangeable for shares of the Common Stock
owned directly by such person or with respect to which such person has the power
of disposition otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree to be bound by the Lock-Up Agreement, (ii) with
the prior written consent of BancAmerica Robertson Stephens ("Robertson"), or
(iii) pursuant to this Agreement.
(u) Without limiting the generality of the
representations set forth in subparagraph (n) above, except as set forth in the
Prospectus, (i) the Company and each Subsidiary is in compliance in all material
respects with all rules, laws and regulations in existence on the date hereof
relating to the use, treatment, storage and disposal of toxic substances and
protection of health or the environment ("Environmental Laws") which are
applicable to their respective businesses, (ii) neither the Company nor any
Subsidiary has received any notice from any governmental authority or third
party of an asserted claim under Environmental Laws, (iii) to the Company's
knowledge, neither the Company nor any Subsidiary is required to make future
material capital expenditures to comply with Environmental Laws, and (iv) no
property which is owned, leased or occupied by the Company or any Subsidiary has
been designated as a "Superfund" site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq.), or otherwise designated as a contaminated site under applicable state,
local or foreign law.
II. Each Selling Stockholders, severally and not jointly, represents
and warrants to and agrees with each Underwriter that:
(a) Such Selling Stockholder now has and on the
Closing Date, and on any later date on which Option Shares are purchased, will
have good and valid title to such of the Shares as are to be sold by such
Selling Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to this Agreement;
such Selling Stockholder has full right, power and authority to sell, assign,
transfer and deliver the Shares to be sold by such Selling Stockholder
hereunder; and upon delivery of such Shares hereunder and payment of the
purchase price as herein contemplated, each of the Underwriters will obtain good
and valid title to the Shares purchased by it from such Selling Stockholder
(assuming that the Underwriters are acquiring such Shares in good
9.
<PAGE> 10
faith, without actual knowledge of any adverse claims with respect thereto),
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, including any liability for estate or inheritance taxes, or
any liability to or claims of any creditor, devisee, legatee or beneficiary of
such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized,
executed and delivered, in the form heretofore furnished to the Representatives,
a Custodian Agreement and Power of Attorney (the "Custodian Agreement and Power
of Attorney") with ____________________________________, as custodian (the
"Custodian"), and appointing _____________________________ in the care of Havant
and _____________________________ in the care of Esteverena, as
attorney(s)-in-fact (collectively, the "Attorneys" and individually, an
"Attorney"). Each Custody Agreement and Power of Attorney constitutes a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles; and
each of such Selling Stockholder's Attorneys, acting alone, is authorized to
execute and deliver this Agreement and the certificate referred to in Section
6(i) hereof on behalf of such Selling Stockholder, to determine the purchase
price to be paid by the several Underwriters to such Selling Stockholder as
provided in Section 3 hereof, to authorize the delivery of the Selling
Stockholder Shares under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Shares or a stock
power or powers with respect thereto, to accept payment therefor, and otherwise
to act on behalf of such Selling Stockholder in connection with this Agreement.
(c) All authorizations, approvals, consents and
orders necessary for the execution and delivery by such Selling Stockholder of
the Custodian Agreement and Power of Attorney, the execution and delivery by or
on behalf of such Selling Stockholder of this Agreement and the sale and
delivery of the Selling Stockholder Shares under this Agreement (other than, at
the time of the execution hereof (if the Registration Statement has not yet been
declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; such Selling Stockholder, if other than a natural person, has been duly
organized and is validly existing and in good standing under the laws of the
jurisdiction of its organization as the type of entity that it purports to be;
and such Selling Stockholder has the full legal right, power and authority to
enter into and perform its obligations under this Agreement and such Custodian
Agreement and Power of Attorney, and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder under this Agreement.
(d) Certificates in negotiable form for all Shares to
be sold by such Selling Stockholder under this Agreement, together with a stock
power or powers duly
10.
<PAGE> 11
endorsed in blank by such Selling Stockholder, have been placed in custody with
the Custodian for the purpose of effecting delivery hereunder.
(e) This Agreement has been duly authorized by such
Selling Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as the indemnification and contribution provisions hereunder may be
limited by applicable law; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a breach
of or default under any material bond, debenture, note or other evidence of
indebtedness, or any material contract, indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder or any Selling
Stockholder Shares hereunder may be bound or, to the best of such Selling
Stockholder's knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body or, if such Selling Stockholder is other than a natural person, result in
any violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Stockholder.
(f) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(g) Other than as permitted under the Act (including,
but not limited to, the distribution of Preliminary Prospectuses or Prospectuses
previously or hereafter provided to the Selling Stockholders by the
Underwriters, or to employees of the Selling Stockholders or their affiliates),
such Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares without the prior written consent of Robertson.
(h) On the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, as it relates to such Selling Stockholder or the Shares to be sold by
such Selling Stockholder, will include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make such statements therein not misleading.
(i) Such Selling Stockholder will comply with all
agreements and satisfy all conditions on its part to be complied with or
satisfied pursuant to this Agreement on or prior to the Closing Date, or any
later date on which Option Shares are to be purchased, as the case may be, and
will advise one of its Attorneys prior to the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, if any statement to
be made on behalf of such Selling Stockholder in the certificate contemplated by
11.
<PAGE> 12
Section 6(i) would be inaccurate if made as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be.
(j) Such Selling Stockholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Shares that are to
be sold by the Company or any of the other Selling Stockholders to the
Underwriters pursuant to this Agreement; and such Selling Stockholder does not
own any warrants, options or similar rights to acquire, and does not have any
right or arrangement to acquire, any capital stock, rights, warrants, options or
other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and Havant, agree, severally
and not jointly, to sell to the Underwriters, and each Underwriter agrees,
severally and not jointly, to purchase from the Company and Havant,
respectively, at a purchase price of $_____ per share, the respective number of
Company Shares as hereinafter set forth and Selling Stockholder Shares set forth
opposite the names of the Company and Havant in Schedule B hereto. The
obligation of each Underwriter to the Company and Havant shall be to purchase
from the Company or Havant that number of full Company Shares or Selling
Stockholder Shares, as the case may be, which (as nearly as practicable, as
determined by you) is in the same proportion to the number of Company Shares or
Selling Stockholder Shares, as the case may be, set forth opposite the name of
the Company or Havant in Schedule B hereto as the number of Firm Shares which is
set forth opposite the name of such Underwriter in Schedule A hereto (subject to
adjustment as provided in Section 10) is to the total number of Firm Shares to
be purchased by all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling
Stockholder Shares have been placed in custody (for delivery under this
Agreement) under the Custodian Agreement and Power of Attorney. Each Selling
Stockholder agrees that the certificates for the Selling Stockholder Shares of
such Selling Stockholder so held in custody are subject to the interests of the
Underwriters hereunder, that the arrangements made by such Selling Stockholder
for such custody, including the Custodian Agreement and Power of Attorney is to
that extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated by the act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of such Selling Stockholder
or the occurrence of any other event, except as specifically provided herein or
in the Custodian Agreement and Power of Attorney. If any Selling Stockholder
should die or be incapacitated, or if any other such event should occur, before
the delivery of the certificates for the Selling Stockholder Shares hereunder,
the Selling Stockholder Shares to be sold by such Selling Stockholder shall,
except as specifically provided herein or in the Custodian Agreement and Power
of Attorney, be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death,
12.
<PAGE> 13
incapacity or other event had not occurred, regardless of whether the Custodian
shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check in next-day funds, payable to the order of the Company
with regard to the Shares being purchased from the Company, and to the order of
the Custodian for the respective accounts of the Selling Stockholders with
regard to the Shares being purchased from such Selling Stockholders (and the
Company and such Selling Stockholders agree not to deposit any such check in the
bank on which it is drawn until the day following the date of its delivery to
the Company or the Custodian, as the case may be) at the offices of Fennemore
Craig, P.C., 3003 North Central Avenue, Suite 2600, Phoenix, Arizona 85012-2913
(or at such other place as may be agreed upon among the Representatives, the
Company and the Selling Stockholders), at 7:00 a.m., San Francisco time, on the
third (or, if the Firm Shares are priced, as contemplated by Rule 15c6-1(c) of
the Exchange Act after 4:30 p.m. Washington D.C. time, the fourth) full business
day following the first day that Shares are traded or at such other time and
date not later than seven full business days thereafter as the Representatives,
the Company and the Selling Stockholders selling Selling Stockholder Shares may
determine, such time and date of payment and delivery being herein called the
"Closing Date." The certificates for the Firm Shares to be so delivered will be
made available to you at such office or at such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
full business days prior to the Closing Date. If the Representatives so elect,
delivery of the Shares may be made by credit through full fast transfer to the
accounts at Depository Trust Company designated by the Representatives.
It is understood that you, individually and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to offer the Firm Shares to the public as set forth
in the Prospectus.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters) and under
"Underwriting" in any Preliminary Prospectus and in the final form of Prospectus
filed pursuant to Rule 424(b) constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company and the Selling
13.
<PAGE> 14
Stockholders that the statements made therein are true and correct and do not
fail to state any material fact required to be stated therein in order to make
such statements in light of the circumstances in which made not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause
the Registration Statement and amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; it will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel of the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
an untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; in case any Underwriter is required to
deliver a prospectus nine months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations thereunder and the provisions of this
Agreement.
14.
<PAGE> 15
(b) The Company will advise you, promptly after it
shall receive notice or obtain knowledge thereof of the issuance of any stop
order by the Commission suspending the effectiveness of the Registration
Statement or of the initiation or threat of any proceeding for that purpose; and
it will promptly use its best efforts to prevent the issuance of any stop order
or to obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(c) The Company will use its best efforts to qualify
the Shares for offering and sale under the securities laws of such jurisdictions
as you may designate and to continue such qualifications in effect for so long
as may be required for purposes of the distribution of the Shares, except that
the Company shall not be required in connection therewith or as a condition
thereof to qualify as a foreign corporation or to execute a general consent to
service of process in any jurisdiction or to make any undertaking with respect
to the conduct of its business. In each jurisdiction in which the Shares shall
have been qualified as above provided, the Company will make and file such
statements and reports in each year as are or may be reasonably required by the
laws of such jurisdiction.
(d) The Company will furnish to you, as soon as
available, copies of the Registration Statement (three of which will be signed
and which will include all exhibits), each Preliminary Prospectus, the
Prospectus and any amendments or supplements to such documents, including any
prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all
in such quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its
stockholders as soon as practicable, but in any event not later than the 45th
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve-month
period beginning after the effective date of the Registration Statement.
(f) During a period of five years after the date
hereof, the Company will furnish to its stockholders, as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three quarters in the form furnished to the Company's stockholders; (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flow of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants; (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders: (iv) as soon as they are
available, copies of all reports and financial statements furnished to
15.
<PAGE> 16
or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"); (v) every material press
release and every material news item or article in respect of the Company or the
Subsidiaries or their respective affairs which was released or prepared by the
Company or the Subsidiaries; and (vi) any additional information of a public
nature concerning the Company or the Subsidiaries, or their respective
businesses which you may reasonably request. During such five-year period, if
the Company shall have active subsidiaries, the foregoing financial statements
shall be on a consolidated basis to the extent that the accounts of the Company
and its subsidiaries are consolidated, and shall be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(g) The Company will apply the net proceeds from the
sale of the Shares being sold by it in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and,
if necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
[(i) The Company will file Form SR in conformity with
the requirements of the Act and the Rules and Regulations.]
(j) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company or any Selling Stockholder to perform any agreement on its part to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate the Agreement under Section 11(a)
or 11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel for the
several Underwriters) incurred by the Underwriters in investigating, preparing
to market or marketing the Shares.
(k) If at any time during the 90-day period after the
Registration Statement becomes effective, any publication or event relating to
or affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially affected
(regardless of whether such publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith prepare, consult
with you concerning the substance of, and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
(l) During a period equal to the later of (i) 180
days from the effective date of the Registration Statement, or (ii) three days
after the Company publicly releases its earnings for the fiscal period ending
immediately after the effective date of the
16.
<PAGE> 17
Registration Statement, the Company will not, without your prior written
consent, directly or indirectly, issue, sell, offer or agree to sell, or
otherwise dispose of, directly or indirectly, any Common Stock, any options,
rights or warrants with respect to any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for Common Stock other than
(A) the sale of the Company Shares hereunder, and (B) the Company's issuance of
options and other stock-based awards or Common Stock under the Company's
presently authorized 1993 Equity Incentive Plan, 1994 Stock Incentive Plan (the
"Option Plan") and the 1994 Employee Stock Purchase Plan (the "Employee Purchase
Plan").
(m) During a period of 90 days from the effective
date of the Registration Statement, the Company will not file a registration
statement registering shares under the Employee Purchase Plan, any Option Plan
or any other employee benefit plan of the Company or any Subsidiary.
(n) In connection with a claim for indemnification
pursuant to Section 8(a) of this Agreement, the Company will provide the
Underwriters and the Selling Stockholders with information regarding its most
recent available cash and cash equivalents position, its borrowing availability
under all then existing credit arrangements and any legal and contractual
restrictions or limitations on its ability to use such resources to satisfy its
obligations under Section 8(a) hereof.
5. Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, any
Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental
Blue Sky Survey, the Underwriters' Questionnaire and Custodian Agreement and
Power of Attorney, and any instruments related to any of the foregoing; the
issuance and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates representing the
Shares and Transfer Agents' and Registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's independent
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel solely in connection with such NASD
filings and Blue Sky qualifications); and all other expenses directly incurred
by the Company and the Selling Stockholders in connection with the performance
of their obligations hereunder (other than those expenses of the Selling
Stockholders that the Company and such Selling Stockholders
17.
<PAGE> 18
may agree are to be borne by the Selling Stockholders). The provisions of this
Section 5(a)(i) are intended to relieve the Underwriters from the payment of the
expenses and costs that the Company hereby agrees to pay, but shall not affect
any agreement that the Selling Stockholders and the Company may make, or may
have made, for the sharing of any of such expenses and costs. Such agreements
shall not impair the obligations of the Company hereunder to the several
Underwriters.
(ii) In addition to its other obligations under
Section 8(a), the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising out of
or based upon any statement or omission, or any alleged statement or omission,
described in Section 8(a), it will reimburse the Underwriters on a monthly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) listed
from time to time in the Wall Street Journal that represents the base rate on
corporate loans posted by the substantial majority of the nation's 30 largest
banks (the "Prime Rate"). Any such interim reimbursement payments which are not
made to the Underwriters within 30 days of a request for reimbursement, shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their obligations under Section
8(b), each Selling Stockholder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in Section 8(b), it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of such Selling Stockholder's obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Selling Stockholders together with interest, compounded daily, determined
on the basis of the Prime Rate. Any such interim reimbursement payments which
are not made to the Underwriters within 30 days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(d),
the Underwriters agree that, as an interim measure during the pendency of any
claim, action,
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investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
Section 8(d), they will reimburse the Company and each such Selling Stockholder
on a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly refund it
to the Underwriters together with interest, compounded daily, determined on the
basis of the Prime Rate. Any such interim reimbursement payments which are not
made to the Company and each such Selling Stockholder within 30 days of a
request for reimbursement, shall bear interest at the Prime Rate from the date
of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the indemnifying parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the National Association of Securities
Dealers, Inc. Any such arbitration must be commenced by service of a written
demand for arbitration or a written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party demanding arbitration
does not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to said demand or notice is authorized to do
so. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c).
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Company Shares and the Selling
Stockholder Shares as provided herein, shall be subject to the accuracy, as of
the date hereof and the Closing Date, and any later date on which Option Shares
are to be purchased, as the case may be, of the representations and warranties
of the Company and the Selling Stockholders herein, to the performance by the
Company and the Selling Stockholders of their respective obligations hereunder
and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 p.m., San Francisco Time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceeding for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the
19.
<PAGE> 20
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this subsection.
(c) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion of counsel for the Company, dated the Closing Date or such
later date addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(ii) The Company has the corporate power to own,
lease and operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure so to qualify would not
have a material adverse effect on the financial condition, earnings, operations,
business or business prospects of the Company. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any corporation,
association or other entity, other than the Subsidiaries;
(iv) To such counsel's knowledge, the Company owns
all of the shares of capital stock of the Subsidiaries (other than ADFlex
Thailand Limited) free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest except for the pledge in favor of the
Company's lenders pursuant to the existing credit agreement. The shares of the
capital stock of ADFlex (Thailand) Limited are all owned by ADFlex Cayman
Limited, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest except for the pledge in favor of Hana
Microelectronics and the pledge in favor of the Company's lenders pursuant to
the existing credit agreement. In rendering such opinions, counsel may rely on
the opinions of counsel for the subsidiaries described in Section 6(d).
(v) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the issued and outstanding
shares of capital stock of the Company have been duly and validly authorized and
issued, are fully paid and nonassessable, and have not been issued in violation
of any preemptive right, or of any co-sale right, registration right, right of
first refusal or other similar right known to us;
20.
<PAGE> 21
(vi) The Firm Shares to be issued by the Company
pursuant to the terms of this Agreement will be, upon issuance and delivery
against payment therefor in accordance with the terms hereof and the Shares to
be sold by the Selling Stockholders are, duly authorized and validly issued and
fully paid and nonassessable, and have not been issued in violation of any
preemptive right, registration right, co-sale right, right of first refusal or
other similar right and the stockholders of the Company have no preemptive or,
to such counsel's knowledge, other rights to purchase any of these Shares.
(vii) The Company has corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the Underwriters
the Firm Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, except insofar
as indemnification and contribution provisions may be limited by applicable law
or equitable principles, and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement have been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Act;
(x) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion) as of the effective date of the
Registration Statement, complied as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations;
(xi) The terms and provisions of the capital stock of
the Company conform in all material respects to the description thereof
contained in the Registration Statement and Prospectus;
(xii) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel and is
correct, and the forms of certificates evidencing the Common Stock comply with
Delaware law;
(xiii) The description in the Registration Statement
and the Prospectus of (A) the charter and bylaws of the Company, (B) statutes
and contracts and (C) environmental matters in so far as such description
relates to the Company, including, without limitation, the information in the
Prospectus under the captions "Risk Factors--
21.
<PAGE> 22
Environmental Regulations" and "Business--Environmental Controls" are accurate
and fairly present the information required to be presented by the Act or the
Rules and Regulations;
(xiv) To such counsel's knowledge, there are no
agreements, contracts, leases or documents of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which are not described or
referred to therein and filed as required;
(xv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification and contribution obligations hereunder, concerning
which no opinion need be expressed) will not, (a) result in any violation of the
Company's charter or bylaws, or (b) result in the material breach or violation
of any of the terms and provisions, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, or any lease, contract or other
agreement or instrument described in the Prospectus or filed as an Exhibit to
the Registration Statement to which the Company is a party or by which its
properties are bound, or any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ or decree of any
court or governmental agency or body having jurisdiction over the Company or
over any of its properties or operations; provided however, that no opinion need
be rendered concerning state securities or Blue Sky laws;
(xvi) No authorization, approval or consent of any
governmental authority or agency is necessary in connection with the
consummation of the transactions herein contemplated except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(xvii) To such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against the Company of a
character which are required to be disclosed in the Registration Statement or
the Prospectus, by the Act or the applicable Rules and Regulations, other than
those described therein; and
(xviii) To such counsel's knowledge, no holders of
Common Stock or other securities of the Company have registration rights with
respect to securities of the Company except Havant and AMP Incorporated.
In addition, such counsel shall state that although they have
not verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which caused them to believe that, at the time the Registration
Statement became effective the Registration Statement (other than the financial
statements including supporting schedules and financial data derived therefrom,
as to which such counsel need express no comment) contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or
22.
<PAGE> 23
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are to be purchased, as the case
may be, the Registration Statement or the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the States of
Arizona and Delaware upon opinions of local counsel, and as to questions of fact
upon representations or certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel. [With respect to the opinions set
forth in (c)(i), (ii), (iii), (iv) and (xv), counsel shall give such opinions
with respect to ADFlex Solutions Limited, ADFlex Solutions FSC Inc. and ADFlex
Cayman Limited; provided that in rendering such opinions counsel shall be
entitled to rely solely on opinions of local counsel.]
(d) You shall have received on the Closing Date, and on any
later date on which Option Shares are purchased, as the case may be, the
following opinions of counsels for ADFlex Mexico, S.A. de C.V. and ADFlex
(Thailand) Limited, which counsel shall be reasonably satisfactory to you, dated
the Closing Date or such later date addressed to the Underwriters with
reproduced copies or signed counterparts thereof for each of the Underwriters,
to the effect of paragraphs (c)(i), (ii), (iii) and (xv) above, as such matters
relate to such companies, and to the effect that all issued and outstanding
capital stock of such companies is owned by the Company, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest
except for the pledge in favor of the Company's lenders pursuant to the
existing credit agreement and except, in the case of ADFlex (Thailand) Limited,
the pledge in favor of Hana Microelectronics. In addition, with respect to the
opinion from counsel for ADFlex Mexico, S.A. de C.V., you shall receive an
opinion to the effect that the description in the Registration Statement and the
Prospectus of environmental matters, in so far as they relate to ADFlex Mexico,
S.A. de C.V., including, without limitation, the information in the Prospectus
under the caption "Risk Factors--Environmental Regulations" and
"Business--Environmental Controls" are accurate and fairly summarize the matters
disclosed therein.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion(s) of counsel for each of the Selling Stockholders, dated the
Closing Date or such later date addressed to the Underwriters with reproduced
copies or signed counterparts thereof for each of the Underwriters, to the
effect that:
(i) Each Selling Stockholder which is not a natural
person has full right, power and authority to enter into and to perform its
obligations under the Custodian Agreement and Power of Attorney to be executed
and delivered by it in connection with the
23.
<PAGE> 24
transactions contemplated herein; the Custodian Agreement and Power of Attorney
of each Selling Stockholder that is not a natural person has been duly
authorized by such Selling Stockholder; the Custodian Agreement and Power of
Attorney of each Selling Stockholder has been duly executed and delivered by or
on behalf of such Selling Stockholder, and the Custody Agreement and Power of
Attorney and Lock-Up Agreement of such Selling Stockholder constitutes the valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
(ii) Each of the Selling Stockholders has full right,
power and authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Shares to be sold by
such Selling Stockholder hereunder;
(iii) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder and, assuming due
authorization, execution and delivery by you, is a valid and binding agreement
of such Selling Stockholder, enforceable in accordance with its terms, except
insofar as the indemnification and contribution provisions hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and
(iv) To such counsel's knowledge, upon the delivery
of and payment for the Shares to be sold by such Selling Stockholder, as
contemplated in this Agreement, each of the Underwriters will receive good and
valid title to the Shares purchased by it from such Selling Stockholder, free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest. In rendering such opinion, such counsel may assume that the
Underwriters are acquiring such Shares in good faith, without actual knowledge
of any adverse claims with respect to such Shares.
Counsel rendering the foregoing opinion shall be entitled to rely, as to
questions of fact, solely upon representations and agreements of the Selling
Stockholders contained in this Agreement and in the Custodian Agreement and
Power of Attorney, and upon their review of the certificates representing the
Shares being sold by the Selling Stockholders. Counsel shall also be entitled to
assume, as appropriate, that the laws of jurisdictions governing agreements and
matters covered by the foregoing opinion are identical to the laws of the
jurisdiction in which such counsel is located.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the
24.
<PAGE> 25
Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Ernst & Young addressed to the Company and the Underwriters, dated
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than three business days prior to the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company which, in your sole judgment, makes it impracticable or inadvisable
to proceed with the public offering of the Shares as contemplated by the
Prospectus. Also you shall have received an Original Letter from Ernst & Young
addressed to or for the use of the Underwriters setting forth their opinion with
respect to their examination of the consolidated balance sheet of the Company
and the Predecessor as of December 31, 1996 and related consolidated statements
of operations, stockholders' equity, and cash flow for the twelve months ended
December 31, 1996, as well as other matters agreed upon by Ernst & Young and
you.
(h) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing Date
or any later date on which Option Shares are to be purchased, and the Company
has complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
25.
<PAGE> 26
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus and any amendments or
supplements thereto contained all statements and information required to be
included therein, and neither the Registration Statement nor the Prospectus nor
any amendment or supplement thereto included an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances in which
made, not misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth;
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been (A) any material adverse change in the properties or assets described
or referred to in the Registration Statement and the Prospectus or in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and the Subsidiaries considered as one enterprise, (B)
any transaction which is material to the Company and the Subsidiaries considered
as one enterprise, except transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, incurred by the Company or
any Subsidiary which is material to the Company and the Subsidiaries, considered
as one enterprise, except obligations incurred in the ordinary course of
business, (D) any change in the capital stock or outstanding indebtedness of the
Company or any Subsidiary which is material to the Company and the Subsidiaries
considered as one enterprise, or (E) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company.
(i) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares are to be
purchased, as the case may be; or
(ii) Such Selling Stockholder has not complied with
any obligation or satisfied any condition which is required to be performed or
satisfied on his or its part at or prior to the Closing Date or any later date
on which Option Shares are to be purchased, as the case may be.
(j) The Company shall have obtained and delivered to you all
of the LockUp Agreements. Each person signing a Lock-Up Agreement shall also
agree and consent to the entry of stop transfer instructions with the Company's
transfer agent against the transfer
26.
<PAGE> 27
of shares of Common Stock held by such person except in compliance with the
foregoing restrictions.
(k) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person)) as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company of its obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders
will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, each of the
Company and Esteverena, severally and not jointly, hereby grants to the several
Underwriters, for the purpose of covering over-allotments in connection with the
distribution and sale of the Firm Shares only, a non-transferable option to
purchase up to an aggregate of 405,000 Option Shares (100,000 of such Option
Shares from Esteverena and 305,000 of such Option Shares from the Company) at
the purchase price per share for the Firm Shares set forth in Section 3 hereof.
Such option may be exercised by the Representatives on behalf of the several
Underwriters on one occasion, in whole or in part, during the period of thirty
(30) days from and after the date on which the Firm Shares are initially offered
to the public, by giving written notice to the Company and Esteverena. [If the
option is exercised in part, the Option Shares shall be purchased hereunder as
follows: ________________] [The number of Option Shares to be purchased by each
Underwriter upon the exercise of such option shall be the same proportion of the
total number of Option Shares to be purchased by the several Underwriters from
each of the Company and Mr. Esteverena pursuant to the exercise of such option
as the number of Firm Shares purchased by such Underwriter (set forth in
Schedule A hereto) bears to the total number of Firm Shares purchased by the
several Underwriters (set forth in Schedule A hereto), adjusted by the
Representatives in such manner as to avoid fractional shares.]
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company and
Esteverena, as the case may be (and each of the Company and Esteverena agrees
not to deposit or have deposited any such check in the bank on which it is drawn
until the day following the date of its delivery). Such delivery and payment
shall take place at the
27.
<PAGE> 28
offices of Fennemore Craig, 3003 North Central Avenue, Suite 2600, Phoenix, AZ
85012-2913 or at such other place as may be agreed upon among the
Representatives and the Company (i) on the Closing Date, if written notice of
the exercise of such option is received by the Company not later than three full
business days prior to the Closing Date or (ii) on a later date, not later than
the third full business day following the date the Company receives written
notice of the exercise of such option, if such notice is not received by the
Company at least three full business days prior to the Closing Date.
The certificates for the Option Shares so to be delivered will
be made available to you at such office or other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one full business day prior to the date of payment and delivery and will
be in such names and denominations as you may request, such request to be made
at least two full days prior to such date of payment and delivery. If the
Representatives so elect, delivery of the Shares may be made by credit through
full fast transfer to the accounts at Depository Trust Company of the
Representatives.
It is understood that you, individually, and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price on behalf of any Underwriter or Underwriters whose
check or checks shall not have been received by you prior to the date of payment
and delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any Underwriter or
Underwriters of any of its or their obligations hereunder.
The several Underwriters intend to make an initial public
offering (as such term is described in Section 11 hereof) of the Option Shares
to be issued upon exercise of such option as set forth in the Prospectus, but
after the initial public offering the several Underwriters may in their
discretion vary the public offering price.
(b) Upon exercise of any option provided for in Section 7(a)
hereof the obligations of the Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment for such Option
Shares) to the accuracy of and compliance with the representations and
warranties of the Company and the Selling Stockholders, to the accuracy of the
statements of the Company, the Selling Stockholders and officers of the Company
made pursuant to the provisions hereof, to the performance by the Company and
the Selling Stockholders of their respective obligations hereunder, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of the
covenants of the Company and the Selling Stockholders or the compliance with any
of the conditions herein contained.
8. Indemnification and Contribution.
28.
<PAGE> 29
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act or otherwise, specifically including, without limitation, losses,
claims, damages or liabilities related to negligence on the part of any
Underwriter, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any breach of any
representation, warranty, agreement or covenant of the Company herein contained
or any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, charges, liabilities or litigation
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected has not been sent or
given to such person within the time required by the Act and the Rules and
Regulations thereunder, unless such failure is the result of noncompliance by
the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of each person,
if any, who controls any Underwriter within the meaning of the Act. This
indemnity agreement shall be in addition to any liabilities which the Company
may otherwise have.
(b) Each Selling Stockholder agrees, severally and
not jointly, to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject (including, without limitation, in its capacity as an Underwriter
or as a "qualified independent underwriter" within the meaning of Schedule E of
the Bylaws of the NASD), under the Act or otherwise, specifically including,
without limitation, losses, claims, damages or liabilities related to negligence
on the part of any Underwriter, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
breach of any
29.
<PAGE> 30
representation, warranty, agreement or covenant of such Selling Stockholder
herein contained or any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
and agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that (i) the
Selling Stockholder shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by any Underwriter, directly or
through you, specifically for use in the preparation thereof; (ii) the indemnity
agreement provided in this Section 8(b) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, charges, liabilities or litigation based
upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected has not been sent or
given to such person within the time required by the Act and the Rules and
Regulations thereunder, unless such failure is the result of noncompliance by
the Company with Section 4(d) hereof; and (iii) a Selling Stockholder shall not
be liable in any case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with information furnished to the
Company by any other Selling Stockholder.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of each person,
if any, who controls any Underwriter within the meaning of the Act. This
indemnity agreement shall be in addition to any liabilities which the Selling
Stockholders may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including but not limited to losses, claims, damages or liabilities
related to negligence on the part of the Company or such Selling Stockholder,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any breach of any representation,
warranty, agreement or covenant of such Underwriter herein contained or any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise
30.
<PAGE> 31
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for inclusion therein, and
will reimburse the Company and each such Selling Stockholder for any legal or
other expenses reasonably incurred by the Company and each such Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of each officer
and director of the Company, each Selling Stockholder and each officer or
director of each Selling Stockholder and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act. This indemnity
agreement shall be in addition to any liabilities which each Underwriter may
otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent that it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified parties and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel approved by the indemnifying party, representing all the
indemnified parties under Section 8(a) or 8(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable
31.
<PAGE> 32
time after notice of commencement of the action, or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. In no event shall any indemnifying party be
liable in respect of any amounts paid in settlement of any action unless the
indemnifying party shall have approved the terms of such settlement; provided
however that such consent shall not be unreasonably withheld.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters are responsible pro rata for the
portion represented by the percentage that the underwriting discount bears to
the initial public offering price, and the Company and the Selling Stockholders
are responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter,
and (ii) no person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to a contribution from any person
who is not guilty of such fraudulent misrepresentation. This subsection (f)
shall not be operative as to any Underwriter to the extent that the Company or
any Selling Stockholder has received indemnity under this Section 8. The
contribution agreement in this Section 8(e) shall extend upon the same terms and
conditions to, and shall inure to the benefit of, each person, if any, who
controls any Underwriter, the Company or any Selling Shareholder within the
meaning of the Act or the Exchange Act.
(f) The liability of each Selling Stockholder under this
Agreement shall be limited to an amount equal to the public offering price of
the Selling Stockholder Shares or Option Shares, as the case may be, sold by
such Selling Stockholder to the Underwriters minus the amount of the
underwriting discount paid thereon to the Underwriters by such Selling
Stockholder. The Company and such Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including without limitation the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act, as
32.
<PAGE> 33
amended. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 8, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 8 and further agree not to attempt to
assert any such defense.
9. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements of the Company and the
Selling Stockholders herein or in certificates delivered pursuant hereto, and
the indemnity and contribution agreements contained in Section 8 hereof shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any controlling person, or by or on
behalf of the Company or any Selling Stockholder, or any of their officers,
directors or controlling persons, and shall survive the delivery of the Shares
to the several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four hours (including non-business hours) to allow
the several Underwriters the privilege of substituting within twenty-four hours
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four hours, if necessary, to allow the Company the privilege of finding
another underwriter or underwriters, satisfactory to you, to purchase the Firm
Shares which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If it shall be arranged for the remaining Underwriters or substituted
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section, (i) the Company shall have the right
to postpone the time of delivery for a period of not more than seven full
business days, in order to effect whatever changes may thereby be made necessary
in the
33.
<PAGE> 34
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (ii) the respective number of Firm Shares to be purchased by
the remaining Underwriters and substituted underwriters shall be taken as the
basis of their underwriting obligation. If the remaining Underwriters shall not
take up and pay for all such Firm Shares so agreed to be purchased by the
defaulting Underwriter or Underwriters or substitute another underwriter or
underwriters as aforesaid and the Company shall not find or shall not elect to
seek another underwriter or underwriters for such Firm Shares as aforesaid, then
this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco Time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to dealers by letter or telegram or
telecopy, whichever shall first occur. By giving notice as set forth in Section
12 before the time this Agreement becomes effective, you, as Representatives of
the several Underwriters, or the Company, may prevent this Agreement from
becoming effective without liability of any party to any other party, except
that the Company and the Selling Stockholders shall remain obligated to pay
costs and expenses to the extent provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the Closing Date or on or prior to any
later date on which the Option Shares are to be purchased, as the case may be,
(i) if the Company or any Selling Stockholder shall have failed, refused or been
unable, at or prior to the Closing Date, or on or prior to any later
34.
<PAGE> 35
date on which the Option Shares are to be purchased, as the case may be, to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled by
the Company or any Selling Stockholder is not fulfilled, or (ii) if trading on
the New York Stock Exchange shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the New York Stock Exchange, by the New
York Stock Exchange or by order of the Commission or any other governmental
authority having jurisdiction, or if a banking moratorium shall have been
declared by federal or New York or California authorities, or (iii) if on or
prior to the Closing Date, or on or prior to any later date on which Option
Shares are to be purchased, as the case may be, the Company shall have sustained
a loss by strike, fire, flood, earthquake, accident or other calamity of such
character as to interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets in the United
States as in your reasonable judgment makes it inadvisable or impracticable to
proceed with the offering, sale and delivery of the Shares, or (v) if on or
prior to the Closing Date, or on or prior to any later date on which Option
Shares are to be purchased, as the case may be, there shall have been an
outbreak or escalation of hostilities between the United States and any foreign
power or of any other insurrection or armed conflict involving the United States
or the declaration by the United States of a national emergency which, in the
reasonable opinion of the Representatives, makes it impracticable or inadvisable
to offer or sell the Shares. Any such termination shall be without liability of
any party to any other party except as provided in Sections 5 and 8 hereof and
except that in the event of termination solely pursuant to Section 11(b)(i)
hereof, the Company shall remain obligated to pay costs and expenses pursuant to
Section 4(j) hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, 26th Floor, San Francisco, California 94111, telecopier number (415)
781-0278, Attention: Jeff Goettman; if sent to the Company, such notice shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to ADFlex Solutions, Inc., 2001 W. Chandler Blvd, Chandler,
AZ 85224, telecopier number (602) 786-8280, Attention: Rolando C. Esteverena,
Chief Executive Officer, if sent to one or more of the Selling Stockholders,
such notice shall be sent mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed
35.
<PAGE> 36
by letter) with respect to Esteverena, to Rolando C. Esteverena, c/o ADFlex
Solutions, Inc., 2001 W. Chandler Blvd, Chandler, AZ 85224, telecopier number
(602) 786-8280, or with respect to Havant, as Attorney-in-Fact.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company, the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto and their
respective executors, administrators, successors and assigns, and the
controlling persons, officers and directors referred to in Section 8 hereof, any
legal or equitable right, remedy or claim or in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or corporation. No purchaser of any of the Shares
from any Underwriter shall be construed a successor or assign by reason merely
of such purchase.
In all dealings with the Company and the Selling Stockholders
under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company and the Selling Stockholders shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by Robertson, Stephens & Company on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
36.
<PAGE> 37
If the foregoing correctly sets forth the understanding among
the Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
ADFLEX SOLUTIONS, INC.
By:
-------------------------------------------
Rolando C. Esteverena
SELLING STOCKHOLDERS
By:
-------------------------------------------
Rolando C. Esteverena
By:
-------------------------------------------
Attorney-in-Fact for Havant International
Holdings Limited
Accepted as of the date
first above written:
BancAmerica Robertson Stephens
PaineWebber Incorporated
Hambrecht & Quist
On their behalf and on behalf of
each of the several Underwriters
named in Schedule A hereto.
By BancAmerica Robertson Stephens
By:
----------------------------
----------------------------
37.
<PAGE> 38
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriters to be Purchased
------------ ---------------
<S> <C>
BancAmerica Robertson Stephens......................................
------------
PaineWebber Incorporated............................................
------------
Hambrecht & Quist...................................................
------------
------------
Total 2,700,000
============
</TABLE>
<PAGE> 39
SCHEDULE B
<TABLE>
<CAPTION>
Number of Company
Company Shares to be Sold
------- -----------------
<S> <C>
ADFlex Solutions, Inc........................... 1,307,653
============
Number of Selling
Stockholder Shares
Name of Selling Stockholder to be Sold
--------------------------- ------------------
Havant International Holdings, Inc ............. 1,392,347
Total...................................... 2,700,000
=============
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts"
and "Selected Consolidated Financial Data" in the Registration Statement (Form
S-3) and related Prospectus of ADFlex Solutions, Inc. for the registration of
3,105,000 shares of its common stock and to the inclusion therein of our report
dated January 20, 1997, with respect to the consolidated financial statements of
ADFlex Solutions, Inc. for the year ended December 31, 1996, and to the
incorporation by reference therein of our reports dated January 20, 1997, with
respect to the consolidated financial statements of ADFlex Solutions, Inc.
incorporated by reference in its Annual Report (Form 10-K) for the year ended
December 31, 1996 and the related financial statement schedule included therein,
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
October 20, 1997
<PAGE> 1
EXHIBIT 24.2
I, Donald E. Frederick, do hereby certify that the following resolution
was duly adopted by the Board of Directors of ADFlex Solutions, Inc. at a duly
convened meeting on October 21, 1997, and that such resolution is in full force
and effect and has not been amended or modified.
FURTHER RESOLVED, that each officer and director of the Corporation who
may be required to execute the S-3 Registration Statement is hereby authorized
and directed to execute a special power of attorney appointing Rolando C.
Esteverena, Donald E. Frederick and R. Charles Furniss each as the officer's or
director's true and lawful attorney and agent, with the limited authority to
sign as a director and/or officer the S-3 Registration Statement, and any and
all amendments thereto and all instruments necessary or incidental in connection
therewith, and to file the same with the SEC, the National Association of
Securities Dealers ("NASD") and such other governmental authorities or
self-regulatory organizations as they deem necessary or advisable.
Dated: October 21, 1997
/s/ Donald E. Frederick
-------------------------------
Donald E. Frederick, Secretary
