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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from _______________ to _______________
Commission file number 0-24416
ADFLEX SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3186513
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2001 WEST CHANDLER BOULEVARD, CHANDLER, ARIZONA 85224
(Address of Principal Executive Offices, Zip Code)
(602) 963-4584
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b)
of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $58,283,876, based on the closing sale
price as reported by the Nasdaq National Market on March 17, 1997.
The number of outstanding shares of the registrant's $0.01 par value
Common Stock as of March 17, 1997 was 8,680,952.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the ADFlex Solutions, Inc. 1996 Annual Report to
Shareholders for the year ended December 31, 1996 are incorporated by
reference into Part II.
(2) Portions of the Proxy Statement dated March 19, 1997 in connection with
the Annual Meeting of Stockholders to be held on April 22, 1997 are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
ADFlex Solutions, Inc. ("ADFlex" or the "Company") is a leading U.S.
supplier of flexible circuit-based interconnect solutions. Flexible circuits
consist of copper conductive patterns on flexible substrate materials, such as
polyimide, that are used to interconnect electronic devices. Flexible
circuit-based interconnects ("flex-based interconnects" or "flex") may
incorporate any number of components such as integrated circuits ("ICs"),
connectors, stiffeners, resistors and capacitors mounted directly on a flex
circuit. The Company provides its customers with a total interconnect solution
from initial design through fabrication, assembly and functional testing. The
Company's principal target customers provide products to segments of the
computer, computer peripheral, communications and high-end consumer industries
where miniaturization is a driving factor and flex-based interconnects are an
enabling technology. Applications for flex-based interconnects include computer
storage devices, such as hard disk drives, tape drives and arrays, notebook
computers, portable communication devices such as cellular telephones and
pagers, and high-end consumer products such as compact disk players. Users are
demanding that these products be smaller, lighter and more affordable. To meet
these demands, systems manufacturers are increasingly relying on flex-based
interconnect solutions because they eliminate the weight and expense of
connectors and other packaging components, conform to contoured, ergonomic
shapes or small spaces and provide mechanical flexure.
The Company was organized under Delaware law in February 1993 to
acquire certain assets and assume certain liabilities of the flexible
interconnections division of Rogers Corporation ("Rogers"). The Rogers
acquisition was consummated on June 28, 1993.
Prior to 1996, the Company was engaged primarily in the fabrication
of flexible circuits, capitalizing on its advanced manufacturing technology and
high-volume production capabilities. Effective December 31, 1995, in a strategic
move towards vertical integration, the Company acquired the flexible
interconnect division and certain net assets of Xyratex, now operating as ADFlex
Solutions Limited ("ADFlex U.K."), located in Havant, England. The division is
engaged in advanced assembly technology and assembly processes, including the
attachment of ICs and surface mounted components onto flexible circuits. The
acquisition enables the Company to provide its customers with a single source
solution to their interconnect requirements.
The hard disk drive ("HDD") market represents the Company's
predominant market, accounting for 55%, 51% and 62% of net sales in 1994, 1995
and 1996, respectively. During early 1996, certain of the Company's HDD
customers experienced structural and strategic changes that negatively impacted
the Company's results for 1996. Quantum Corporation ("Quantum") announced an
exclusive manufacturing agreement to purchase all of its HDD products from a
Japanese company. This relationship redirected all of Quantum's flex
requirements to a local Japanese supplier. Further, Hewlett-Packard Company
announced its complete withdrawal from the HDD business, resulting in unexpected
and significant order cancellations in the year. 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, thus reducing anticipated orders for the year.
In August 1996, the Company expanded its worldwide manufacturing
operations, announcing the establishment of a joint venture 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"), is 80% owned by the Company. Initial shipments from
Thailand began in the fourth quarter of 1996.
At the close of the third quarter of 1996, in response to lower than
expected revenues at the ADFlex U.K. facility, the Company announced that it
intended to restructure its assembly operations in the U.K. and transfer
production to Thailand. The shifting of labor intensive production from the U.K.
to Thailand is expected to reduce manufacturing costs and produce efficiencies
derived from the Thailand facility's proximity to a number of existing and
prospective customers in Southeast Asia. The transition is expected to take
place throughout the first half of 1997. The Company anticipates that the
benefits associated with the restructuring will not be fully realized until
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the second half of 1997. Following the restructuring, the Company plans on
maintaining a technology development center and a sales and service organization
in the U.K. to support its European customers.
As a result of the 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
had 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.
THE ADFLEX SOLUTION
The Company provides flex-based interconnect solutions to meet the
needs of systems manufacturers in selected, growing segments of the computer,
computer peripheral, communications and high-end consumer markets. The Company
combines superior design, low-cost/high volume circuit fabrication, flex
assembly and functional testing as an integrated source for flexible
interconnect solutions.
DESIGN EXPERTISE. The flex-based interconnects manufactured by the
Company are designed specifically for each application and customer product,
requiring significant joint design activities between the Company and the
customer at the start of a project. The Company has assembled a team of
experienced systems packaging and flex-based interconnect design engineers.
These engineers, acting as consultants, assist customers in designing and
manufacturing cost-effective flex-based interconnect solutions for their most
demanding packaging and interconnect problems. By working closely with a systems
manufacturer from the beginning of the design process, the Company delivers
competitively-priced flex-based interconnects that meet the manufacturer's
feature and performance requirements. The Company is recognized as a flex
technology leader, particularly with respect to fine-line, single- sided circuit
technology and flex-based assembly technology, and continues to invest in
technology to respond to the needs of its customers.
SERVICE EXCELLENCE. In 1993, the Company implemented an
organization-wide program to achieve excellence in customer service. Company
management has positioned the customer service program as a high priority at all
levels of the organization, and the Company believes that excellent customer
service is an integral part of its culture. As part of the customer service
program, Company personnel are organized into customer-focused business units
comprising design engineering, customer service, field support, manufacturing
and quality personnel. These business units support the customer's requirements
from initial design and prototyping, through volume manufacturing to the end of
a product's life.
COMPETITIVE PRICING. 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 production costs through
higher product yields, faster production ramps, reduced inventories, shortened
production cycle times, improved account control and increased leverage over
expenses. The Company also believes that its cost advantages have enabled
competitive pricing of flex-based interconnect solutions by the Company to its
customers. There can be no assurance, however, that the Company's existing cost
advantage will be sustained or that integration of assembly technology will
result in further cost advantages.
INTEGRATION OF FABRICATION AND ASSEMBLY. Historically, the
specialized and capital intensive nature of flex production compelled companies
in the Company's industry to specialize in one or two major segments of the flex
production process, typically either design and fabrication, or assembly and
testing. In the past, a circuit fabricated by the Company often was sent
elsewhere for assembly and testing before being shipped to the end customer. The
ADFlex U.K. acquisition allows the Company to provide its customers with
complete, fully-tested flex-based interconnects from custom design through
fabrication, assembly and complete functional testing. The Company believes that
the integration of expertise in state-of-the-art assembly technology and
processes obtained in the U.K. acquisition with the Company's fabrication
technology and high-volume production capabilities will
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enable the Company to deliver significantly shorter cycle times to its
customers. By helping its customers reduce their time to market, the Company
believes that it will contribute to their success and, in so doing, gain a
competitive advantage over other suppliers which are engaged in only one part of
the process. There can be no assurance that the Company's competitors will not
seek to duplicate the integration the Company has attained through the U.K.
acquisition.
STRATEGY
The Company's objective is to become the leading supplier of
interconnect solutions for systems manufacturers in its targeted end-user
markets. The Company's strategy to achieve this objective is to: (i) target
growing end-user markets that utilize polyimide flex-based interconnects; (ii)
target customers within these growing markets that have a market leadership
position, a need for value-added assembly, and with whom the Company believes it
can become a preferred supplier; (iii) achieve and maintain high customer
satisfaction through continuous quality improvement, shorter manufacturing
cycles, quicker design cycles and lower costs; (iv) leverage established
customer relationships to increase the Company's share of total requirements and
expand its value-added assembly; (v) diversify applications for the Company's
flex; (vi) diversify the geographic scope of the Company's sales; and (vii)
focus research and development efforts on technologies that offer the Company a
competitive advantage. The Company believes that its strategy has been the
principal determinant of its success to date.
CURRENT PRODUCT APPLICATIONS
In the past, most of the Company's sales were derived from customers
supplying the HDD market. The Company has been successful in expanding its
product diversity in an effort to reduce its dependency on the HDD market, as
evidenced by a decrease in HDD sales concentration from 70% in 1993 to 51% by
the end of 1995. Immediately following the acquisition of ADFlex U.K. on
December 31, 1995, the Company's concentration of HDD sales increased to 70%.
Through ongoing diversification and new market expansion efforts, the Company
was able to reduce this concentration to 62% by the end of 1996. Though the
Company is continuing its efforts to reduce its dependence on the HDD industry,
net sales attributable to this market are expected to increase and to continue
to represent the majority of net sales for the foreseeable future. Accordingly,
the occurrence of significant slowdowns or changes in this industry would have a
material adverse effect on the Company's operating results.
The following describes the primary product applications for which
the Company is shipping volume production as of March 1, 1997:
- HARD DISK DRIVES. The HDD market uses flex as head
interconnects to read and write information to and from the
disk. 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 ("chip-on-flex") is becoming the predominant
interconnect technology for these applications.
- NOTEBOOK COMPUTERS. Early applications for flex in notebooks
were mainly as interconnects from the motherboard to the
liquid crystal display ("LCD") and occasionally as shielded
jumpers. The number of flex-based interconnects per notebook
is increasing. More recently, systems have used as many as 10
flex interconnects per notebook, including PCMCIA
connector/flex jumpers, LED/speaker flex assemblies, track
ball/mouse button flex-based assemblies and various other
shielded jumpers.
- ARRAYS. 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. In
addition to the flex-based interconnects inside each of the
individual drives, controlled impedance flex interconnects are
used to connect the back of the drives to standard interface
boards.
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- TAPE DRIVES. The use of tape drives for storage and back-up is
growing significantly. These devices use flex as head
interconnects to read and write information to and from the
tape.
- OTHER COMPUTER/PERIPHERALS. Computer workstations, document
scanners and printers also make use of flex-based
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.
- PORTABLE COMMUNICATIONS. The use of polyimide flex in portable
communications devices such as cellular telephones has
increased significantly over the last few years as the space,
weight and functionality challenges are becoming more
difficult. In some cellular telephones, flex substrates
replace rigid circuit boards, connectors and cables and
thereby reduce space, weight and cost. Combining the portable
system unit growth with expanded applications of flex should
accelerate the growth of this application.
- CD-ROMS. CD-ROMs are growing in consumer applications where
higher capacity and quicker access time, compared to tape
drives, are needed. These devices use flex as head
interconnects to read information from the compact disk.
SALES AND SUPPORT
The Company has organized its sales and support effort into business
units, dedicating each unit to a small group of customers having similar
requirements. Each business unit is headed by a business unit manager, and is
composed of sales, design, quality and manufacturing engineers, customer service
representatives, purchasing agents and material and production control planners.
When a target customer submits a request for prototypes to the Company, it is
assigned to a specific business unit. From that point forward, the business unit
is responsible for developing and expanding the Company's relationship with the
customer to the point where the Company becomes a preferred supplier. By
organizing on the basis of its customers rather than by function, the Company
believes that it has developed a competitive advantage because it can respond
more quickly to the needs of its customers.
The business unit design and manufacturing engineers work
cooperatively with a customer's design engineers to arrive at cost-effective
flex solutions that meet the performance and quality specifications of each
product provided to the customer. The business unit then works with the
Company's manufacturing operations personnel to coordinate a timely and
effective integration of the product into the manufacturing process from
prototype through the production ramp, assembly (if required) and functional
testing. If the program includes component assembly, the engineers, working with
the Mexico, U.K. or Thailand assembly operations, the customer service
representatives, and planning and purchasing, 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.
In Southeast Asia, the Company is represented by agents located in
Singapore, Thailand, Korea, Malaysia, Taiwan and Hong Kong who provide on-site
manufacturing support to customers with final assembly plants located in those
regions. In Europe, the Company is represented by ADFlex U.K and by agents in
other European countries for the same purpose. The individual agents dedicated
to the Company are trained on the specifics of the Company's design rules,
application philosophies and process technology. Currently, substantially all of
the customer design activity is based in the United States, the United Kingdom
and Taiwan.
The Company custom manufactures its flex-based interconnects after
design efforts are coordinated and prices negotiated directly with the systems
manufacturers. Specific products are then delivered to the systems manufacturer
or, in some circumstances, sold at the request of the systems manufacturer to a
contract assembler for further assembly. The destination of the Company's
products has no significant effect on its results of operations because the
Company's principal relationship is with the systems manufacturer.
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Sales to three end customers accounted for approximately 48% of net
sales in 1994, 53% of net sales in 1995 and 55% of net sales in 1996. In
particular, net sales to Seagate Technology, Inc. accounted for approximately
19%, 21% and 35% of net sales during these periods.
In 1994, 1995 and 1996, shipments to contract assemblers were 30%,
33% and 14% of net sales, respectively. In these periods, 19%, 19% and 8% of net
sales, respectively, were made to Smartflex Systems, Inc. ("Smartflex"). All of
the shipments to Smartflex were for customers supplying the HDD market segment.
A director of the Company who resigned in January 1996 was also a director of
Smartflex at that time.
The Company expects that sales to relatively few customers 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 and results of operations.
FOREIGN SALES AND OPERATIONS
During 1994, 1995 and 1996, international sales accounted for
approximately 35%, 43% and 48% of net sales, respectively, most of which went to
Asian manufacturing facilities of United States-based customers. All of the
Company's sales in 1996 were made in United States Dollars.
The Company's primary finishing and assembly facilities are located
in Agua Prieta, Mexico, Havant, United Kingdom 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 labor force and the local governments, the spread of the
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, changes in political
climate, difficulties in coordinating and managing foreign operations, 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 and results of operations.
On August 27, 1996, the Company announced the establishment of ATL to
produce and test advanced chip-on-flex and surface mount technology assemblies.
The Company is in the process of transferring equipment and technical expertise
from its existing operations to Thailand. Initial shipments from Thailand began
in the fourth quarter of 1996.
The Company's U.K. operation performs assembly of components on
flexible circuits primarily for high capacity HDDs. During 1996, the U.K.
operation experienced a reduction in sales levels of nearly 40% from levels
maintained in the latter part of 1995. The reduction is sales was primarily
related to delays in the introduction of MR drives by certain customers of the
Company, the decision by one customer to exit the disk drive business, and the
decision by an HDD manufacturer to cease manufacturing operations and shift all
production responsibility to Japan. The reduction in revenues 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 revenues 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 operation in the U.K and transfer assembly operations from the U.K
to Mexico and Thailand. During this transfer, the U.K. operation will continue
to fulfill the requirements of the Company's customers. 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.
The Company expects that the shifting of labor-intensive production from the
U.K. to Thailand will reduce manufacturing costs and produce gains through
efficiencies derived from the Thailand facility's proximity to a number of
existing and prospective customers in Asia, although no assurance can be given
that such will be the case. The Company anticipates that the benefits, if any,
associated with the transfer to Thailand and Mexico will not be realized until
the middle of 1997.
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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
most 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 had the effect
of reducing Mexican labor costs by nearly 40%. Since that time, however, these
savings have been partially offset by a series of three wage increases each
ranging from 7-10% in response to Mexican government-mandated increases in
minimum wages. Further, the Mexican government mandated 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. The Company does
not expect that future wage increases will exceed the benefit of the
devaluation. However, there can be no assurance that future currency
fluctuations and government-mandated wage increases will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
TECHNOLOGY
DESIGN TECHNOLOGY. The Company has developed design methodologies
that solve interconnection problems using high density single-sided circuits
with lower cost than double-sided and multi-layer solutions. The Company also
designs and produces complex double-sided and multi-layer flex for applications
that cannot be implemented with single-sided circuits. The Company will continue
to improve its computer-based design tools to more quickly design new flex-based
interconnects, to enhance cooperative design and communication with its
customers and to more closely link designs to the manufacturing process.
CIRCUIT FABRICATION. The Company specializes in fine line polyimide
flex 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 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 used to
create various openings in polyimide and adhesive materials.
ASSEMBLY AND TEST TECHNOLOGY. The Company applies advanced assembly
technology to provide flexible circuit interconnect assemblies to its customers.
For many years, the Company (including the former Rogers flex division) has
assembled passive electrical and various mechanical components, including
connectors, speakers, stiffeners, resistors, capacitors and brackets, to its
flex using primarily manual processes in its plants in Mexico. With the U.K.
acquisition, the Company expanded its capability to include the assembly of
integrated circuit devices and functional testing of these flex-based
assemblies.
MANUFACTURING
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 manufacturing organization is structured by process to optimize
the utilization of equipment and technical resources. With respect to the
Company's North American operations, labor intensive circuit-finishing
operations, such as coverfilm lay-up, lamination, solder application and
excision, as well as assembly and final inspection are done at four integrated
locations in Agua Prieta, Mexico with an aggregate of approximately 245,000
square feet of space. The Company, including the former Rogers flex division,
has been operating in Mexico since 1972 and believes it has established a
dependable, well-trained hourly work force. However, an increase in
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employee turnover could have a material adverse effect on the Company's
business, financial condition and results of operations.
The U.K. acquisition provided the Company with enhanced manufacturing
capabilities in the areas of fabrication capacity and high-level assembly,
including chip-on-flex and surface mount assemblies. The Company is in the
process of transferring its U.K. assembly operations to Mexico and Thailand. See
"Business -- Foreign Sales and Operations."
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 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.
The Company has attempted to mitigate these risks by identifying stable
companies with leading technology and delivery positions.
The Company entered into a supply agreement with Rogers, acting
through Rogers' Circuit Materials Unit, for the supply of certain materials,
including laminates, films, bondply, copper foil and heat treated polyimide,
used in the Company's flex-based interconnects. In the United States, these
products are available only from a limited number of suppliers. The agreement
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 for a certain period of time, assuming that Rogers is able to meet the
materials specifications, performance requirements and delivery as required by
the Company and its customers. To date, Rogers has met all of the conditions of
the supply agreement.
While viable alternate suppliers for the components, process
chemicals and materials currently being acquired from Company suppliers,
including Rogers, exist, because of the Company's limited inventory of raw
materials and tight manufacturing cycles, any unanticipated interruption of
supply would have a short term material adverse effect on the Company.
ADFlex purchases connectors from multiple sources including AMP, a
stockholder of the Company. ADFlex payments for purchases from AMP totaled
approximately $670,000 in 1994, $1,559,000 in 1995 and $2,582,000 in 1996. The
Company has no purchase contract or other product-related agreements with AMP
for the supply of connectors. On March 31, 1994, AMP acquired a minority equity
interest in the Company, and on June 2, 1994, AMP's nominee to the Company's
Board of Directors, Richard P. Clark, was elected by the Company's stockholders.
The right of AMP to nominate a member of the Board was terminated effective
September 27, 1994 upon the Company's initial public stock offering. Mr. Clark
is President and Chief Executive Officer of an AMP subsidiary, and continues to
serve on the Company's Board of Directors.
COMPETITION
The flex-based interconnect market is differentiated by customers,
markets and geography, with each niche having its own combination of complex
packaging and interconnection requirements. The Company believes that it
competes principally on the bases of design capabilities, price, quality and
responsiveness, including the ability to ramp rapidly up to and down from volume
production. The Company believes that once a systems manufacturer has selected a
particular vendor to design and manufacture a flex-based interconnect product,
the systems manufacturer 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 flex-based interconnect
used in that application. While this market paradigm may provide a barrier
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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.
Historically, the specialized and capital intensive nature of flex
production compelled companies in the Company's industry to specialize in one or
two major segments of the flex production process, typically either design and
fabrication, or assembly and testing. In the past, a circuit fabricated by the
Company often was sent elsewhere for assembly and testing before being shipped
to the end customer. Through the Company's U.K. acquisition, these processes
have been integrated.
The Company experiences competition worldwide from a number of
leading foreign and domestic flex providers, such as Nippon Mektron ("NOK"),
Fujikura Ltd. ("Fujikura"), Multi-Fineline Electronix ("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 flex than the Company and have historically targeted
suppliers of computers, communications and automotive services, and the
military, respectively. The Company believes that it currently competes
favorably with its flex competitors in the end-user markets it serves because of
its design expertise, service and competitive pricing. The Company believes that
it currently provides many assembly services to its customers that its key
flex-interconnect competitors do not offer.
The Company now competes in assembly matters with leading assembly
providers such as Smartflex Systems, Inc. and Solectron Corp. 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 flex solution including design, fabrication, assembly and
testing.
There can be no assurance that existing or future competitors will
not be able to duplicate the Company's strategies or that the Company will be
able to compete successfully in the future.
INTELLECTUAL PROPERTY
The Company believes that, due to its customers' demands for rapid
technological change and the resulting limited product life-cycles, the success
of its business depends more on the technical and engineering expertise,
creativity and marketing abilities of its employees than on patents, trademarks
and copyrights. Nevertheless, the Company 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 22 United States patents and one foreign patent that expire
through 2010, and has seven foreign patent applications pending. 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.
The Company also has registered 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.
9
<PAGE> 10
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.
ENVIRONMENTAL CONTROLS
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. 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.
The Company has conducted environmental studies of its facility in
Chandler, Arizona, which discovered a limited amount of soil contamination that
may require remediation. While the investigation of the extent of this
contamination has not been completed, the Company believes that the costs
associated with the investigation and remediation of this situation will not
have a material adverse effect on its operations or financial condition.
However, given the uncertainties associated with environmental contamination,
until a full investigation is completed there can be no assurance that such
costs will not have a material adverse impact on the Company. Pursuant to the
agreements governing the Rogers acquisition, Rogers has retained all
environmental liabilities existing prior to the date of that transaction. While
Rogers currently has sufficient assets to fulfill its obligations under the
acquisition agreements, if pre-closing environmental liabilities requiring
remediation are discovered and the Company were 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 and results of operations.
In mid 1995, the Company acquired a manufacturing facility located in
Agua Prieta, Mexico. In connection with this acquisition, the Company conducted
an environmental study of the facility which indicated there is contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the seller pursued and received verbal approval of a remediation plan
from the appropriate Mexican authorities whereby the seller's obligation for the
costs of remediation is limited to $2,500,000. The seller will commence
remediation activities once written approval is obtained from the Mexican
authorities. A total of $975,000 is being held in escrow pending the seller's
performance of its environmental obligations under the agreement.
At this time, the Company does not anticipate any material amount of
environmental-related capital expenditures for 1997 or 1998.
BACKLOG
The Company has reduced its work-in-process cycle time, while
maintaining low inventories, to be responsive to the production requirements of
its customers and, therefore, its backlog at any particular time is generally
low as orders are converted to work-in-process quickly. The Company's backlog at
December 31, 1994, December 31, 1995 and December 31, 1996 was approximately
$18.3 million, $16.7 million and $55.9 million, respectively. The Company
includes in its backlog only those customer orders for which it has an accepted
purchase order and assigned shipment date. Because of the Company's quick turn
of orders to work-in-process, the timing of orders, delivery intervals, customer
and product mix and the possibility of customer changes in delivery schedules,
the Company's backlog at any particular date may not be representative of actual
sales for any succeeding period. Cancellation and postponement charges generally
vary depending upon the time of cancellation or postponement and, therefore, a
certain portion of the Company's backlog may be subject to cancellation or
postponement without significant penalty.
10
<PAGE> 11
EMPLOYEES
As of March 1, 1997, the Company had a total of 4,812 employees, of
which 4,417 were regular employees and 395 were temporary employees. Of the
regular employees, 680 were based at the Company's facilities in Chandler,
Arizona, 3,349 were based in Agua Prieta, Mexico, 176 were based in the United
Kingdom and 212 were based in Thailand.
The Company's future operating results depend in significant part
upon the continued contribution of its officers 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, manufacturing, 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 and
results of operations.
SEASONALITY
All of the Company's sales are derived from custom-designed products
to a limited number of customers in a concentrated number of markets. Typically,
a substantial portion of sales in a given quarter depends on obtaining orders
for products to be manufactured and shipped in the same quarter in which those
orders are received. The Company has relatively little visibility with respect
to future orders and typically has a small backlog relative to total sales. As a
result, the timing of sales may be affected by the ramping up to volume
production, fluctuations in customer demand, introduction of replacement
products or balancing of customer inventory. A significant decrease in the
number or size of orders in any given quarter would have a material adverse
impact on operating results. Because it is difficult for the Company to readily
reduce spending in areas such as fixed manufacturing costs, research and
development and ongoing customer service, a reduction in sales in any quarter
could have a material adverse impact on near-term profit margins. Results of
operations in any one quarter should not be considered indicative of results to
be expected for any future period, and fluctuations in operating results may
also cause fluctuations in the market price of the Company's Common Stock.
RISK FACTORS
The Company's business, financial condition and results of operations
are subject to numerous risks and uncertainties, including but not limited to,
the Company's ability to sustain its cost advantage over existing and future
competitors; the risks that the Company's competitors may seek to duplicate the
integration the Company has achieved; the risk that the Company's strategy may
not continue to succeed; the concentration of the Company's sales in markets and
customers and the risk of a downturn in those markets or loss of or reduction in
orders by those customers; the risks inherent in foreign operations; the risk of
turnover in manufacturing employees, officers, key management and technical
personnel; the risk of unanticipated interruptions of supplies; barriers to the
Company entering other markets; the risk that the Company's intellectual
property protections may not provide a competitive advantage and may not
preclude others from offering similar products; the risk that third parties may
assert proprietary rights infringement claims against the Company; environmental
risks; seasonality of operations; the risk of fluctuations in operating results
and the price of the Company's Common Stock; and the risk that the Company may
not be able to obtain additional capital when needed and on reasonable terms.
See "Business--The ADFlex Solution--Competitive Pricing," "--The ADFlex
Solution--Integration of Fabrication and Assembly," "--Strategy," "--Current
Product Applications," "--Sales and Support," "--Foreign Sales and Operations,"
"--Manufacturing," "-- Suppliers," "--Competition," "--Intellectual Property,"
"--Environmental Controls," "--Employees," and "-- Seasonality."
11
<PAGE> 12
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements that involve risks
and uncertainties, including but not limited to, the risks of concentration of
sales in customers and markets, and in particular the HDD market, which has
caused and in the future could cause materially adverse fluctuations in
operating results; the risks of being a supplier to the electronics industry in
general, which is characterized by rapid technological change, product
obsolescence and price competition, which could materially adversely affect
operating results; the risk that growth in demand for products that use flex,
and corresponding demand for flex, will not continue to increase as anticipated;
the risk that the Company's transition of manufacturing to Thailand will be
delayed or disrupted, or that such transfer will not result in increased
efficiencies, cost savings or improved margins as anticipated or at the time
anticipated; the risk that margins will continue to be negatively impacted by
higher material content of flex products; general risks inherent in
international operations, including currency fluctuations and
government-mandated wage increases; general manufacturing risks, including
environmental risks related to manufacturing operations and clean up of the
Mexican manufacturing facility; the risk that all of the foregoing factors or
other factors could cause fluctuations in the price of the Company's Common
Stock, and other risks detailed herein and from time to time in the Company's
other Securities and Exchange Commission filings.
ITEM 2. PROPERTIES.
The Company's U.S.-based executive offices and its research and
development, administrative and circuit fabrication manufacturing facilities are
located in a single leased facility in Chandler, Arizona consisting of
approximately 150,000 square feet. The lease for this facility expires on June
30, 1997, subject to the right of the Company to extend the term of the lease
for a period of an additional five years upon written notice to the lessor. The
lessor of the facility is an affiliate of Rogers. In connection with the Rogers
acquisition, the Company and its Mexican subsidiary guaranteed the performance
of the Company's obligations under the lease. The Company is currently in the
process of negotiating a renewal of the lease. Although no assurances can be
given that the Company and Rogers can reach mutually agreed upon terms for the
renewal, management believes, based on discussions to date, that an agreement
will be reached.
The Company's Mexico-based circuit finishing and circuit assembly
facilities are located in three leased facilities and one owned facility in Agua
Prieta, Mexico containing an aggregate of approximately 245,000 square feet. The
lease for the ADMex 1 facility expires in April 1997, subject to three, two-year
renewal options held by the Company. The leases for the ADMex 2 and 3 facilities
expire in June 1997, subject to a one-year renewal option held by the Company.
The Company's U.K.-based executive offices and research and
development, administrative and circuit fabrication, finishing, assembly and
testing facilities are located in one leased facility in Havant, United Kingdom
containing approximately 50,000 square feet. The ten-year lease was executed by
the Company with an affiliate of Havant International Holdings Limited as part
of the U.K. acquisition. In connection with the transfer of the Company's U.K.
manufacturing operations to Thailand, the Company and the lessor have amended
the lease to provide for its termination during 1997 and payment by the Company
of certain termination charges.
The Company's circuit finishing and circuit assembly facility in
Thailand is located in one leased facility comprising 20,000 square feet. The
lease is with Hana, the Company's joint venture partner in ATL, and expires in
August 1999, subject to automatic, one-year renewal terms.
The Company believes that its existing facilities in Arizona, Mexico,
the U.K. and Thailand are adequate to meet its current requirements, and that
suitable additional space or substitute space is readily available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal
proceedings other than ordinary routine litigation incidental to the business.
12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 1996 to a vote
of the Company's securities' holders.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is contained in the section
captioned "Securities Information," on page 30 of the ADFlex Solutions, Inc.
1996 Annual Report to Shareholders, and is incorporated herein by this
reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is contained in the section
captioned "Selected Financial Data," on page 29 of the ADFlex Solutions, Inc.
1996 Annual Report to Shareholders, and is incorporated herein by this
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is contained in the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations," on pages 9-13 of the ADFlex Solutions, Inc. 1996 Annual
Report to Shareholders, and is incorporated herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained on pages 14-28 of
the ADFlex Solutions, Inc. 1996 Annual Report to Shareholders, and is
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
14
<PAGE> 15
PART III
Certain information required by Part III is omitted from this Report
by virtue of the fact that the Company has filed with the Securities and
Exchange Commission (the "SEC"), pursuant to Regulation 14A, within 120 days
after the end of the fiscal year covered by this Report, a definitive proxy
statement (the "Proxy Statement") relating to the Company's Annual Stockholders'
Meeting to be held April 22, 1997. Certain information included in the Proxy
Statement is incorporated herein by reference. The Company disseminated the
Proxy Statement to stockholders on or about March 24, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors and executive
officers and compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), required by this item is contained in the
sections captioned "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" at pages 2-3 and page 20, respectively, of the
Proxy Statement, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is contained in the sections
captioned "Executive Compensation," "Compensation Committee Report on Executive
Compensation" and "Comparison of Stock Performance" at pages 8-14 of the Proxy
Statement and, except as noted below, is incorporated herein by reference.
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act of 1933, as amended, or the
Exchange Act that might incorporate future filings, including this Report on
Form 10-K, the "Compensation Committee Report on Executive Compensation" and
"Comparison of Stock Performance" graph in the Proxy Statement shall not be
incorporated by reference into any such filings, and such information shall be
entitled to the benefits provided in Item 402(a)(9) of SEC Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained in the section
captioned "Security Ownership of Certain Beneficial Owners and Management," at
pages 5-7 of the Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained in the section
captioned "Certain Relationships and Related Transactions," at pages 18-20 of
the Proxy Statement, and is incorporated herein by reference.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The following financial statements are incorporated by reference into
this Report:
(i) Consolidated Balance Sheets - December 31, 1996 and 1995
(ii) Consolidated Statements of Operations - years ended December
31, 1996, 1995 and 1994
(iii) Consolidated Statements of Equity - years ended December 31,
1996, 1995 and 1994
(iv) Consolidated Statements of Cash Flows - years ended December
31, 1996, 1995 and 1994
(v) Notes to Consolidated Financial Statements
(vi) Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule of ADFlex Solutions, Inc.
for the years ended December 31, 1996, 1995 and 1994 is filed as part
of this Report and should be read in conjunction with the
Consolidated Financial Statements.
Independent Auditor's Report on Schedule (included in Consent of
Ernst & Young LLP). See Exhibit 23.1
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule II - Valuation and Qualifying Accounts and Reserves.......................S-1
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or because the information required to
be set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. EXHIBITS.
<TABLE>
<CAPTION>
Number Description
--------------- ----------------------------------------------------------------------
<S> <C> <C>
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(6) Amendment to Bylaws Adopted January 31, 1996
4.1(1) Specimen Common Stock Certificate
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C> <C>
4.2(7) 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.
*10.1(1) 1993 Equity Incentive Plan
*10.2(1) 1994 Stock Incentive Plan
*10.3(3) Amendment No. 1 to 1994 Stock Incentive
Plan, effective as of April 18, 1995
*10.4 Amendment No. 2 to 1994 Stock Incentive
Plan, effective August 26, 1996
*10.5(1) 401(k) Profit Sharing Plan
*10.6(1) 1994 Employee Stock Purchase Plan
*10.7(1) Form of Indemnification Agreement entered
into between the Registrant and its
Directors
10.8(1) Equipment Lease Agreement, dated February
23, 1994, between the Registrant and Ally
Capital Corporation
10.9(1) Registration Rights Agreement, dated March
31, 1994, among the Registrant, AMP
Incorporated, Ampersand and Ampersand II
10.10(1) Letter, dated June 15, 1994, between the
Registrant and Rogers Corporation
10.11(1) Registration Rights Agreement, dated March
31, 1994, among the Registrant, Sachio
Semmoto and Sachiko Semmoto
*10.12(1) Stock Option Agreement, dated June 2, 1994,
between the Registrant and Steve Sanghi
+10.13(1) Supply Agreement, dated June 28, 1993,
between the Registrant and Rogers
Corporation
+10.14(4) Supply Agreement, dated June 29, 1995,
between the Registrant and Rogers
Corporation
10.15(1) Lease, dated June 28, 1993, between the
Registrant and TL Properties, Inc.
10.16(1) Noncompetition and Nondisclosure Agreement,
dated June 28, 1993, between the Registrant
and Rogers Corporation
10.17(1) FID Intellectual Property Assignment and
License Agreement, dated June 28, 1993,
between the Registrant and Rogers
Corporation
10.18(1) Joint and Several Guaranty, among the
Registrant, ADFlex Mexico S.A. de C.V.,
Rogers Corporation and TL Properties, Inc.
10.19(1) Agreement, dated April 14, 1993, between
ADMex and Manual Flores
10.20(1) Agreement, dated January 15, 1993, between
ADMex and Inmobiliaria Pericles, S.A. de
C.V.
10.21(1) Agreement, dated January 15, 1993, between
ADMex and Inmobiliaria Pericles, S.A. de
C.V.
*10.22(1) ADFlex Solutions, Inc. Profit Sharing Bonus
Plan
*10.23(1) ADFlex Solutions, Inc. Management Bonus
Plan
10.24(1) Collective Bargaining Contract dated
December 15, 1993 (Translation)
10.25(1) First Amendment to Lease, dated June 1994,
between the Registrant and TL Properties,
Inc.
10.26(2) Deed of Tax Covenant, dated January 7,
1996, between the Registrant and Havant
International Holdings Limited
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
10.27(2) Subordinated Debenture, dated January 7,
1996, by Registrant in favor of Havant
International Holdings Limited
10.28(2) Registration Rights and Standstill
Agreement, dated January 7, 1996, between
the Registrant and Havant International
Holdings Limited
10.29(2) License Agreement, dated January 8, 1996,
between Havant International Limited and
Polene Limited
10.30(2) Supply Agreement, dated January 7, 1996
++10.31(2) Services Agreement, dated January 3, 1996,
between Polene Limited and Havant
International Limited
10.32(2) Assignment of Intellectual Property, dated
January 8, 1996, between Polene Limited and
Havant International Limited
10.33(2) Agreement for the Sale and Purchase of the
Businesses and Assets of Havant
International Limited, dated January 3,
1996, between Havant International Limited
and Polene Limited
10.34(2) Agreement for the Sale of the Debtors and
the Assumption of Certain of the
Liabilities of Havant International
Limited, dated January 4, 1996, between
Havant International Limited and Polene
Limited
10.35(2) Form of Lease between Polene Limited and
Havant International Limited
10.36 Agreement to Surrender a Lease, dated
February 7, 1997, among the Registrant,
ADFlex Solutions Limited, Havant
International Holdings Limited and Havant
International Limited, and letter relating
thereto dated February 20, 1997
10.37(2) Corporate Guarantee, dated January 7, 1996,
by the Registrant in favor of IBM United
Kingdom Limited and International Business
Machines Corporation
10.38(2) Operating Confidentiality Agreement, dated
January 3, 1996, between Havant
International Limited and Polene Limited
10.39(2) Deed of Assignment of UK Patent
Applications, dated January 8, 1996,
between Polene Limited and Havant
International Limited
10.40(2) Deed of Assignment of Non-UK Patent
Applications, dated January 8, 198, between
Polene Limited and Havant International
Limited
10.41(5) Bilateral Purchase and Sale Agreement,
dated August 31, 1995, among Telson, S.A.
de C.V., Zenith Electronics Corporation,
ADFlex Mexico S.A. de C.V. and the
Registrant
10.42(5) Credit Agreement, dated October 31, 1995,
among the Registrant, The First National
Bank of Boston and First Interstate Bank of
Arizona, N.A.
10.43(5) Promissory Note, dated October 31, 1995,
between the Registrant and The First
National Bank of Boston
10.44(6) First Amendment to Credit Agreement, dated
December 29, 1995, among the Registrant,
The First National Bank of Boston and First
Interstate Bank of Arizona, N.A.
10.45(8) Second Amendment to Credit Agreement, dated
June 18, 1996, among the Registrant, The
First National Bank of Boston and First
Interstate Bank of Arizona, N.A.
10.46 Master Agreement, dated April 16, 1996,
between the Registrant and Hana
Microelectronics Public Co., Ltd. ("Hana")
10.47 Third Amendment to Credit Agreement, dated
February 18, 1997, among the Registrant,
the First National Bank of Boston and Wells
Fargo Bank
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C>
10.48 Security Agreement, dated February 18,
1997, by the Registrant in favor of The
First National Bank of Boston
11.1 Statement Regarding Computation of Earnings
Per Share
13.1 Certain provisions of ADFlex Solutions,
Inc. 1996 Annual Report to Stockholders
16.1(1) Letter from KPMG Peat Marwick
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
</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
(3) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30, 1995
(4) Incorporated by reference from the Company's Form 10-Q for the
quarter ended June 30, 1995
(5) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30, 1995
(6) Incorporated by reference from the Company's Form 10-K for the fiscal
year ended December 31, 1995
(7) Incorporated by reference from the Company's Form 8-K dated July 10,
1996.
(8) Incorporated by reference from the Company's Form 10-Q for the
quarter ended June 30, 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.
(B) REPORTS ON FORM 8-K.
None.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADFLEX SOLUTIONS, INC.
(Registrant)
Date: March 19, 1997 By /s/ Rolando C. Esteverena
-------------------------
Rolando C. Esteverena
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- - ---- ----- ----
<S> <C> <C>
/s/ Rolando C. Esteverena March 19, 1997
- - ----------------------------------
Rolando C. Esteverena President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Margaret M. Sleeper
- - ----------------------------------
Margaret M. Sleeper Vice President Finance, Secretary, March 19, 1997
Acting Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Steve Sanghi
- - ----------------------------------
Steve Sanghi Director March 19, 1997
/s/ Richard P. Clark
- - ----------------------------------
Richard P. Clark Director March 19, 1997
/s/ William Kennedy Wilkie
- - ----------------------------------
William Kennedy Wilkie Director March 19, 1997
/s/ Wade Meyercord
- - ----------------------------------
Wade Meyercord Director March 19, 1997
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
10.36 Agreement to Surrender a Lease, dated February 7, 1997,
among the Registrant, ADFlex Solutions Limited, Havant
International Holdings Limited and Havant International
Limited, and letter relating thereto dated February 20, 1997
10.46 Master Agreement, dated April 16, 1996, between the
Registrant and Hana Microelectronics Public Co., Ltd.
("Hana")
10.47 Third Amendment to Credit Agreement, dated February 18,
1997, among the Registrant, the First National Bank of
Boston and Wells Fargo Bank
10.48 Security Agreement, dated February 18, 1997, by the
Registrant in favor of The First National Bank of Boston
11.1 Statement Regarding Computation of Earnings per Share
13.1 Certain provisions of the ADFlex Solutions, Inc. 1996
Annual Report to Stockholders
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 22
SCHEDULE II
ADFLEX SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Beginning Charges to Ending
Allowance for Returns and Doubtful Balance Costs and Deductions Balance
Accounts Expenses
- - ---------------------------------- --------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1994 $360 $ 281 $ -- $641
Year ended December 31, 1995 641 154 153 642
Year ended December 31, 1996 642 1,292 1,323 611
</TABLE>
<PAGE> 1
Exhibit 10.36
-----------------------------------------------------
DATED 7TH FEBRUARY 1997
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HAVANT INTERNATIONAL HOLDINGS LIMITED (1)
AND
HAVANT INTERNATIONAL LIMITED (2)
AND
ADFLEX SOLUTIONS, INC. (3)
AND
ADFLEX SOLUTIONS LIMITED (4)
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AGREEMENT TO SURRENDER A LEASE AND TO
RELEASE HAVANT INTERNATIONAL HOLDINGS
LIMITED, HAVANT INTERNATIONAL LIMITED,
ADFLEX SOLUTIONS LIMITED AND ADFLEX
SOLUTIONS, INC. FROM THEIR RESPECTIVE
OBLIGATIONS UNDER CERTAIN AGREEMENTS
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DIBB LUPTON ALSOP
6 DOWGATE HILL
LONDON EC4R 2SS
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THIS DEED IS MADE THE 7TH DAY OF FEBRUARY 1997
BETWEEN:-
(1) HAVANT INTERNATIONAL HOLDINGS LIMITED (COMPANY NUMBER 2986793) WHOSE
REGISTERED OFFICE IS AT LANGSTONE ROAD, HAVANT, HAMPSHIRE PO9 1SA ("HIHL");
(2) HAVANT INTERNATIONAL LIMITED (COMPANY NUMBER 3134912) (FORMERLY KNOWN AS
POLENE LIMITED) WHOSE REGISTERED OFFICE IS AT LANGSTONE ROAD, HAVANT,
HAMPSHIRE PO9 1SA ("HIL");
(3) ADFLEX SOLUTIONS, INC., A DELAWARE CORPORATION WITH ITS PRINCIPAL OFFICE AT
2001 WEST CHANDLER BOULEVARD, CHANDLER, ARIZONA 85224, USA ("ASI");
(4) ADFLEX SOLUTIONS LIMITED (COMPANY NUMBER 2987114) (FORMERLY KNOWN AS HAVANT
INTERNATIONAL LIMITED) WHOSE REGISTERED OFFICE IS AT VERITAS HOUSE, 125
FINSBURY PAVEMENT, LONDON EC2A 1NQ ("ASL").
WHEREAS:-
(A) ASL is a wholly owned subsidiary of ASI.
(B) HIHL is the ultimate parent company of HIL.
(C) Pursuant to the Asset Sale and Purchase Agreement, ASL sold and HIL
purchased all the trade, business and assets of ASL which were not related
exclusively to the flex and flexible circuits business then carried on by
ASL.
(D) Pursuant to the Lease, HIL granted a lease to ASL in respect of certain
premises at Langstone Road Havant Hampshire.
(E) Pursuant to the Share Sale and Purchase Agreement, HIHL sold and ASI
purchased the entire issued share capital of ASL.
(F) Pursuant to the Deed of Tax Covenant, HIHL covenanted with ASI in relation
to certain tax liabilities of ASL.
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(G) Pursuant to the Services Agreement, HIL agreed to supply or perform (as
the case may be) certain goods or services for the benefit of ASL.
(H) ASI and ASL are desirous that the terms of the Lease be varied upon the
terms and subject to the conditions set out herein.
(I) In consideration of each of the parties entering into this Deed subject
to hereinafter provided:-
(i) ASI and ASL have each agreed to release and forever discharge
HIHL and HIL from all liability arising prior to the date
hereof under or in connection with, inter alia, the Asset Sale
and Purchase Agreement, the Share Sale and Purchase Agreement
and the Deed of Tax Convenant;
(ii) HIHL and HIL have agreed to release and forever discharge ASI
and ASL from all liability arising prior to the date hereof
under or arising in connection with the Asset Sale and
Purchase Agreement, the Share Sale and Purchase Agreement, the
Deed of Tax Covenant and the Lease;
(iii) ASL and HIL have agreed to vary the terms of the Services
Agreement
upon the terms and subject to the conditions set out herein.
NOW THIS DEED WITNESSES as follows:
1 DEFINITIONS
1.1 The Asset Sale and The Agreement dated 3rd January
Purchase Agreement: 1996 and made between (1) ASL
and (2) HIL for the sale and
purchase of the business and
assets of ASL not related
exclusively to ASL's flex and
flexible circuits business
1.2 The Completion Date: 90 days after the Vacancy Date
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1.3 The Confidentiality An operating confidentiality
Agreement: agreement dated 3rd January 1996
made between (1) Adflex Solutions
Limited and (2) Havant International
Limited
1.4 The Debenture: The subordinated debenture dated
7th January 1996 and made between
(1) ASI and (2) HIHL for US$10,000,000
(ten million US dollars)
1.5 Deed of Surrender and A deed in the form of the draft annexed
Release: hereto
1.6 The Deed of Tax The Deed dated 7th January 1996 and made
Convenant: between (1) ASI and (2) HIHL relating,
inter alia, to certain tax liabilities
of ASL
1.7 The Equipment: All fixed line equipment in the Premises
which belongs to ASL
1.8 The Intellectual includes all patents, patent
Property: applications, patent rights, utility
models, trademarks, trademark
registrations, trademark applications,
licences, service mark registrations,
business marks, trade names, brand
names, all other names and slogans
embodying business or product goodwill
(or both) copyright registrations mask
works, copyrights (including those in
computer programs, software, including
all source code and object codes,
programming tools, drawings,
specifications and data) design rights
(whether registered
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or unregistered) trade secrets,
technology, inventions, discoveries
and improvements, know-how
proprietary rights formulae,
processes, technical information,
confidential and proprietary
information and all other
intellectual property rights
whether or not subject to statutory
registration or protection and all
rights against third parties in
respect of any of the aforesaid
items including rights in the
nature of any of the aforesaid
items in any country rights in the
nature of unfair competition rights
and rights to sue for passing off
1.9 The Intellectual an intellectual property assignment
Property Assignment: dated 8th January 1996 and made
between (1) Adflex Solutions
Limited and (2) Havant
International Limited
1.10 The Lease: A lease of premises at Langstone
Road Havant Hampshire dated 12th
January 1996 made between HIL and ASL
1.11 The Licence Agreement: A licence agreement dated 8th
January 1996 and made between (1)
Adflex Solutions Limited and (2)
Havant International Limited
1.12 The Premises: The premises comprised in the Lease
1.13 The Restoration (Pound Sterling)449,400 together with
Payment: Value Added Tax on such sum
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1.14 The Restoration The Covenants on the part of the
Obligations: part of ASL contained in clauses
4.8, 4.9 and 4.10 of the Lease
1.15 The Services: As such term is defined in the
Services Agreement
1.16 The Services Agreement: The agreement for the supply be of
performance of goods or services
dated 7th January 1996 and made
between (1) HIHL and (2) ASL
1.17 The Share Sale and The agreement dated 7th January
Purchase Agreement: 1996 and made between (1) ASI and
(2) HIHL for the sale and purchase
of the entire issued share capital
of ASL
1.18 The Vacancy Date: means such date between 1st May
1997 and 31st December 1997 as may
be determined in accordance with
the provisions of this agreement
1.19 Vacant Property Charge: Subject to Clause 3.3 the sum of
pounds sterling 1,471.50 per day
(together with Value Added Tax on
such sum) being pounds sterling 8.20
per square foot per annum with ASL
occupying 65,500 square feet
2 AGREEMENT FOR SURRENDER OF LEASE
2.1 HIL and ASL each releases and forever discharges the other party
from all and any liability arising prior to the date hereof (and
all proceedings and actions relating thereto) under or in
connection with the Lease.
2.2 ASL will vacate the Premises by the Vacancy Date.
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2.3 ASL shall confirm in writing to HIL which date between 1st May
1997 and 31st December 1997 (both dates inclusive) ASL has
selected as the Vacancy Date provided always that ASL shall give
HIL not less than 90 days' notice in writing of such date.
2.4 Subject to the provisions of Clause 2.1 until the Vacancy Date
the terms of the Lease shall remain in full force and effect.
2.5 On or before the Vacancy Date ASL shall remove from the
Premises all chattels and equipment other than the Equipment
and shall where necessary cap off and leave safe all services.
2.6 On the Completion Date ASL will pay the Restoration Payment to
HIL and will execute and deliver the Deed of Surrender and
Release to HIL.
2.7 2.7.1 As soon as practicable after the Vacancy Date HIL will
pack the Equipment at its own cost and using reasonable
care ready for collection by ASL.
2.7.2 ASL will pay all reasonable costs incurred in storing
and transporting the Equipment from the Premises.
2.8 HIL will accept the Restoration Payment in full satisfaction of
the Restoration Obligations and on payment of the Restoration
Payment HIL will execute and deliver a counterpart of the Deed
of Surrender and Release to ASL.
3 CONTINUING OBLIGATIONS
3.1 From and after the Vacancy Date ASL shall pay the Vacant
Property Charge in respect of the Premises beginning on the
first day of the month following the Vacancy Date and thereafter
on the first day of each month thereafter for a period of 12
months.
3.2 The obligation to pay the Vacant Property Charge shall continue
notwithstanding the completion of the Deed of Surrender and
Release.
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3.3 No Vacant Property Charge shall be payable in respect of any part
of the Premises so long as that part is occupied by HIHL or one of
its subsidiaries for the purpose of carrying on its own business or
is let to, or occupied by, a third party but the Vacant Property
Charge shall again be payable in respect of such part if it shall
cease to be so occupied or let.
4. DECLARATION
Subject to the provisions of Clause 2.8 hereof, it ASL fails to make
the Restoration Payment to HIL, HIL shall not be required to execute the
Deed of Surrender and Release and the provisions contained in the Lease
including the Restoration Obligations shall continue in full force and
effect.
5. RELEASE OF OBLIGATIONS
In consideration of the respective rights and obligations of the
parties under this Agreement:-
5.1 subject to Clauses 5.3 and 6 HIL and HIHL hereby release and
forever discharge ASL and ASI and ASL and ASI hereby release and
forever discharge HIL and HIHL from in each case:-
5.1.1 all and any liability arising prior to the date hereof (and
all proceedings and actions relating thereto) under or in
connection with:
5.1.1.1 the Asset Sale and Purchase Agreement; and
5.1.1.2 any document or agreement entered into by HIL or HIHL
or (as the case my be) ASL or ASI in relation to the
Asset Sale and Purchase Agreement;
5.1.2 all and any undertakings, indemnities, agreements, covenants
and obligations of or on the part of HIL or HIHL or (as the
case may be) ASL or ASI that HIL or HIHL or (as the case may
be) ASL or ASI has arising under or in connection with:
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5.1.2.1 the Asset Sale and Purchase Agreement; and
5.1.2.2 any document or agreement entered into by HIL or HIHL
or (as the case may be) ASL or ASI in relation to the
Asset Sale and Purchase Agreement;
5.1.3 all and any liability arising in respect of any representations
made in writing or orally by HIL or HIHL or ASL or ASI or by any
of their respective directors, officers, employees, agents or
advisers before or after the execution of the Asset Sale and
Purchase Agreement in relation to the subject matter of the Asset
Sale and Purchase Agreement
other than in the case of any liability, proceedings and actions,
undertakings, indemnities, agreements, covenants or obligations arising as
a result of any act or representation of HIL or HIHL or (as the case may
be) ASL or ASI or any of their respective directors, officers, employees,
agents or advisers performed or made with fraudulent intent.
5.2 Subject to Clauses 5.3 and 6 HIHL and HIL hereby release and forever
discharge ASI and ASL and ASI and ASL hereby release and forever discharge
HIHL and HIL from in each case:-
5.2.1 all and any liability arising prior to the date hereof (and any
proceedings and actions relating thereto) under or in connection
with:
5.2.1.1 the Share Sale and Purchase Agreement;
5.2.1.2 the Deed of Tax Covenant; and
5.2.1.3 any document or agreement entered into by HIHL or HIL or (as
the case may be) ASL or ASI in relation to the Share Sale and
Purchase Agreement and/or the Deed of Tax Covenant;
5.2.2 all and any undertakings, indemnities, agreements,
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covenants and obligations of or on the part of HIHL or HIL or
(as the case may be) ASI or ASL that HIHL or HIL or (as the case
may be) ASL or ASI has arising under or in connection with:
5.2.2.1 the Share Sale and Purchase Agreement;
5.2.2.2 the Deed of Tax Covenant; and
5.2.2.3 any document or agreement entered into by HIHL or HIL
or (as the case may be) ASL or ASI in relation to the
Share Sale and Purchase Agreement and/or the Deed of
Tax Covenant;
5.2.3 all and any liability arising in respect of any representations
made in writing or orally by HIHL or HIL or (as the case may be)
ASL or ASI or by any of their respective directors, officers,
employees, agents or advisers before or after the execution of
the Share Sale and Purchase Agreement and/or the Deed of Tax
Covenant in relation to the subject matter of the Share Sale
and/or Purchase Agreement or the Deed of Tax Covenant
other than in the case of any liability, proceedings and actions,
undertakings, indemnities, agreements, covenants or obligations arising
as a result of any act or representation of HIHL or HIL or (as the case
may be) ASL or ASI or any of their respective directors, officers,
employees, agents or advisers performed or made with fraudulent intent.
5.3 Nothing in this Agreement shall release:-
5.3.1 HIHL from its undertakings to and covenants with ASI pursuant to
Clauses 11.2(a), 11.3, 11.7 and 11.14 of the Share Sale and
Purchase Agreement or from any of HIHL's obligations under such
clauses;
5.3.2 ASI from its undertakings to and covenants with HIHL pursuant to
the Debenture or from any of ASI's obligations
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thereunder;
5.3.3 ASI from its undertakings to and covenants with HIHL
pursuant to Clauses 11.1, 11.4, 11.5, 11.6, 11.8, 11.9
and 13 of the Share Sale and Purchase Agreement or from
any of ASI's obligations under the such clauses of the
Share Sale and Purchase Agreement provided always that
the guarantee obligations of ASI pursuant to Clause 13
of the Share Sale and Purchase Agreement shall only
apply to those obligations of ASL which have been
identified in Clauses 5.3.4, 5.3.5 and 5.3.6 hereof;
5.3.4 ASL from its undertakings to and covenants with HIL
pursuant to the Confidentiality Agreement and the
Licence Agreement or from any of ASL's obligations
thereunder;
5.3.5 ASL from its undertakings to and covenants with HIL of
further assurance pursuant to any and all assignments of
Intellectual Property from ASL to HIL entered into in
January 1996;
5.3.6 ASL from its undertakings to and covenants with HIL
pursuant to the Intellectual Property Assignment or
from any of ASL's obligations thereunder.
6. SERVICES
ASL and HIL hereby agree and confirm that on and with effect from the
Vacancy Date the Services Agreement shall terminate and be of no further
effect to the intent and effect that HIL shall not be under any
obligation to perform or continue to perform or supply or continue to
supply (as appropriate) any Services to ASL on or after the Vacancy Date
and ASL shall not be under any obligation to pay or continue to pay for
any Services on or after the Vacancy Date.
7. ASI'S GUARANTEE AND INDEMNITY
7.1 In consideration of HIL executing this Deed ASI hereby
unconditionally and irrevocably guarantees to HIL the due and
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punctual performance and observance by ASL of all its obligations,
commitments, undertakings, warranties and covenants under or pursuant
to this Deed and/or the Deed of Surrender and Release and agrees to
indemnify HIL against all losses, damages, costs and expenses
(including reasonable legal costs and expenses) which HIL may suffer
through or arising from any breach by ASL of such obligations,
commitments, warranties, undertakings or covenants. The liability of
ASI as aforesaid shall not be released or diminished by any
rearrangement or alteration of terms (whether of this deed or (as the
case may be) the Deed of Surrender and Release or otherwise) or any
forbearance, neglect or delay in seeking performance of the obligations
hereby imposed or any granting of time for such performance.
7.2 If and whenever ASL defaults for any reason whatsoever in the
performance of any obligation or liability undertaken or expressed to
be undertaken by it under or pursuant to this Deed or (as the case may
be) the Deed of Surrender and Release, ASI shall forthwith upon demand
unconditionally perform (or procure performance of) and satisfy (or
procure the satisfaction of) the obligation or liability in regard to
which such default has been made in the manner prescribed by this Deed
or (as the case may be) the Deed of Surrender and Release and so that
the same benefits shall be conferred on HIL as it would have received
if such obligation or liability had been duly performed and satisfied
by ASL. ASI hereby waives any rights which it may have to require HIL
to proceed first against or claim payment from ASL to the intent that
as between HIL and ASI the latter shall be liable as principal debtor
as if it has entered all undertakings, agreements and other obligations
jointly and severally with ASL.
7.3 This guarantee and indemnity is to be a continuing security to HIL for
all obligations, commitments, warranties, undertakings and covenants on
the part of ASL under or pursuant to this Deed or (as the case may be)
the Deed of Surrender and Release notwithstanding any settlement of
account or other matter or thing whatsoever.
7.4 This guarantee and indemnity is in addition to and without prejudice to
and not in substitution for any rights or security
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which HIL may now or hereafter have or hold for the performance and
observance of the obligations, commitments, undertakings, covenants and
warranties of ASL under or in connection with this Deed or with the
Deed of Surrender and Release.
7.5 In the event of ASI having taken or taking any security from ASL in
connection with this guarantee and indemnity, ASI hereby undertakes to
hold the same in trust for HIL pending discharge in full of all ASI's
obligations under this Deed and under the Deed of Surrender and
Release. ASI shall not, after any claim has been made pursuant to this
Clause 7, claim from ASL any sums which may be owing to it from ASL or
have the benefit of any set-off or counterclaim or proof of debt
against ASL or any composition or arrangement entered into by ASL with
its creditors or any other payment by ASL to ASI until all sums owing
to HIL in respect hereof shall have been paid in full.
7.6 As a separate and independent stipulation, ASI agrees that any
obligation expressed to be undertaken by ASL under this Deed or under
the Deed of Surrender and Release (including, without limitation, any
monies expressed to be payable under this Deed or under the Deed of
Surrender and Release) which may not be enforceable against or
recoverable from ASL by reason of any legal limitation, disability or
incapacity or any other fact or circumstance shall nevertheless be
enforceable against or recoverable from ASI as though the same has
been incurred by ASI and ASI were sole or principal obligor in respect
thereof and shall be performed or paid by ASI on demand.
8. HIHL'S GUARANTEE AND INDEMNITY
8.1 In consideration of ASL executing this Deed HIHL hereby unconditionally
and irrevocably guarantees to ASL the due and punctual performance and
observance by HIL of all its obligations, commitments, undertakings,
warranties and covenants under or pursuant to this Deed and/or the Deed
of Surrender and Release and agrees to indemnify ASL against all
losses, damages, costs and expenses (including reasonable legal costs
and expenses) which ASL may suffer through or arising from any breach
by HIL of such
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obligations, commitments, warranties, undertakings or covenants. The
liability of HIHL as aforesaid shall not be released or diminished by any
rearrangement or alteration of terms (whether of this Deed or (as the case
may be) the Deed of Surrender and Release or otherwise) or any forbearance,
neglect or delay in seeking performance of the obligations hereby imposed
or any granting of time for such performance.
8.2 If and whenever HIL defaults for any reason whatsoever in the performance
of any obligation or liability undertaken or expressed to be undertaken by
it under or pursuant to this Deed or (as the case may be) the Deed of
Surrender and Release, HIHL shall forthwith upon demand unconditionally
perform (or procure performance of) and satisfy (or procure the
satisfaction of) the obligation or liability in regard to which such
default has been made in the manner prescribed by this Deed or (as the
case be) the Deed of Surrender and Release and so that the same benefits
shall be conferred on ASL as it would have received if such obligation or
liability had been duly performed and satisfied by HIL. HIHL hereby waives
any rights which it may have to require ASL to proceed first against or
claim payment from HIL to the intent that as between ASL and HIHL the
latter shall be liable as principal debtor as if it has entered all
undertakings, agreements and other obligations jointly and severally with
HIL.
8.3 This guarantee and indemnity is to be a continuing security to ASL for all
obligations, commitments, warranties, undertakings and covenants on the
part of HIL under or pursuant to this Deed or (as the case may be) the Deed
of Surrender and Release notwithstanding any settlement of account or other
matter or thing whatsoever.
8.4 This guarantee and indemnity is in addition to and without prejudice to and
not in substitution for any rights or security which ASL may now or
hereafter have or hold for the performance and observance of the
obligations, commitments, undertakings, covenants and warranties of HIL
under or in connection with this Deed or with the Deed of Surrender and
Release.
8.5 In the event of HIHL having taken or taking any security from HIL
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in connection with this guarantee and indemnity, HIHL hereby
undertakes to hold the same in trust for ASL pending discharge
in full of all HIHL's obligations under this Deed and under the
Deed of Surrender and Release. HIL shall not, after any claim
has been made pursuant to this Clause 8, claim from HIL any sums
which may be owing to it from HIL or have the benefit of any
set-off or counterclaim or proof of debt against HIL or any
composition or arrangement entered into by HIL with its
creditors or any other payment by HIL to HIHL until all sums
owing to ASL in respect hereof shall have been paid in full.
8.6 As a separate and independent stipulation, HIHL agrees that any
obligation expressed to be undertaken by HIL under this Deed or
the Deed of Surrender and Release (including, without
limitation, any monies expressed to be payable under this Deed
or under the Deed of Surrender and Release) which may not be
enforceable against or recoverable from HIL by reason of any
legal limitation, disability or incapacity or any other fact or
circumstance shall nevertheless be enforceable against or
recoverable from HIHL as though the same has been incurred by
HIHL and HIHL were sole or principal obligor in respect thereof
and shall be performed or paid by HIHL on demand.
9 SAVING
Save as expressly provided by this Deed, the Asset Sale and Purchase
Agreement, the Share Sale and Purchase Agreement, the Deed of Tax
Covenant and each of the other aforementioned documents shall remain in
full force and effect.
10 NOTICES
Any notice to be given pursuant to the terms of this Agreement must be
given in writing to the party due to receive such notice in the case of
HIHL, HIL and ASL at their respective registered offices from time to
time and in the case of ASI at its address set out in this Agreement or
such other address as may have been notified for the purpose to the
other parties in accordance with this clause. Notice shall be delivered
personally or sent by first class pre-paid recorded delivery or
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registered post (air mail if overseas) or by facsimile transmission and
shall be deemed to be given in the case of delivery on delivery and in
the case of posting (in the absence of evidence of earlier receipt)
within 48 hours after posting (6 days if sent by air mail) and in the
case of facsimile transmission on completion of the transmission.
11 COUNTERPARTS
This Agreement may be executed in any number of counterparts each of
which when executed by one or more of the parties hereto shall
constitute an original but all of which shall constitute one and the
same instrument.
12 GOVERNING LAW
12.1 This Agreement shall be governed by and construed in accordance
with the laws of England.
12.2 The parties hereby submit to the exclusive jurisdiction and venue
of the High Court of Justice in England in relation to any claim
dispute or difference which may arise hereunder and hereby agree
for the purpose of Order 10 Rule 3 of the Rules of The Supreme
Court of England (or any modification or re-enactment thereof) and
any legal proceedings in any other jurisdiction that any process
may be served on any of them by leaving a copy thereof or by
posting a copy thereof in the case of HIHL, HIL and ASL addressed
to their respective offices as provided for in Clause 10, 5 and in
the case of ASI to the address provided for in Clause 12.3, 7.3.
12.3 ASI's address for service of English High Court Proceedings shall
be Veritas House, 125 Finsbury Pavement, London EC2A 1NQ or such
other address within London England as ASI may have notified to
the other parties in accordance with the provisions of Clause 9.
IN WITNESS WHEREOF THIS DEED HAS BEEN EXECUTED THE DAY AND YEAR FIRST ABOVE
WRITTEN.
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ANNEXURE
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DATED 1996
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HAVANT INTERNATIONAL HOLDINGS LIMITED (1)
AND
HAVANT INTERNATIONAL LIMITED (2)
AND
ADFLEX SOLUTIONS, INC. (3)
AND
ADFLEX SOLUTIONS LIMITED (4)
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DEED OF SURRENDER AND RELEASE
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DIBB LUPTON ALSOP
6 DOWGATE HILL
LONDON EC4F 2SS
Ref: 00-876I.718/WPD/16.12.96
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THIS DEED IS made the day of 1996
BETWEEN:-
(1) HAVANT INTERNATIONAL HOLDINGS LIMITED (company number 2986793) whose
registered office is at Langstone Road, Havant, Hampshire PO9 1SA ("HIHL");
(2) HAVANT INTERNATIONAL LIMITED (company number 3134912) (formerly known as
Polene Limited) whose registered office is at Langstone Road, Havant,
Hampshire PO9 1SA ("HIL");
(3) ADFLEX SOLUTIONS, INC., a Delaware corporation with its principal office at
2001 West Chandler Boulevard, Chandler, Arizona 85224, USA ("ASI");
(4) ADFLEX SOLUTIONS LIMITED (company number 2987114) (formerly known as Havant
International Limited) whose registered office is at Veritas House, 125
Finsbury Pavement, London EC2A 1NQ ("ASL").
WHEREAS:-
(A) ASL is a wholly owned subsidiary of ASI.
(B) HIHL is the ultimate parent company of HIL.
(C) Pursuant to the Asset Sale and Purchase Agreement, ASL sold and HIL
purchased all the trade, business and assets of ASL which were not related
exclusively to the flex and flexible circuits business then carried on by
ASL.
(D) Pursuant to the Lease, HIL granted a lease to ASL in respect of certain
premises at Langstone Road Havant Hampshire.
(E) The reversion immediately expectant on the term of years granted by the
Lease remains vested in HIL and the residue of the term of years granted by
the Lease remains vested in ASL.
(F) Pursuant to the Share Sale and Purchase Agreement, HIHL sold and ASI
purchased the entire issued share capital of ASL.
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(G) Pursuant to the Deed of Tax Covenant, HIHL covenanted with ASI in relation
to certain tax liabilities of ASL.
(H) ASL and HIL have agreed to terminate the Lease and ASL has agreed to
surrender its estate and interest in the Premises to HIL upon the terms and
subject to the conditions set out herein.
(I) Each of the parties hereto have agreed to release and forever discharge the
other parties from their respective obligations under or in connection
with, inter alia, the Asset Sale and Purchase Agreement, the Share Sale and
Purchase Agreement and the Deed of Tax Covenant upon the terms and subject
to the conditions set out herein.
1.1 The Agreement to The Agreement dated November
Surrender and Release 1996 made between (1) HIHL (2) HIL
(3) ASI and (4) ASL
1.2 The Asset Sale and The Agreement dated 3rd January 1996
Purchase Agreement: and made between (1) ASL and (2) HIL
for the sale and purchase of the
business and assets of ASL not related
exclusively to ASL's flex and flexible
circuits business.
1.3 The Confidentiality An operating confidentiality
Agreement: agreement dated 3rd January 1996 and
made between (1) Adlfex Solutions
Limited and (2) Havant International
Limited
1.4 The Deed of Tax The Deed dated 7th January 1996 and
Covenant: made between (1) ASI and (2) HIHL
relating, inter alia, to certain tax
liabilities of ASL
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<PAGE> 20
1.5 The Intellectual includes all patents, patent applications,
Property: patent rights, utility models, trademarks,
trademark registrations, trademark applications,
licences, service mark registrations, business
marks, trade names, brand names, all other names
and slogans embodying business or product
goodwill (or both) copyright registrations mask
works, copyrights (including those in computer
programs, software, including all source code
and object codes, programming tools, drawings,
specifications and data) design rights (whether
registered or unregistered) trade secrets,
technology, inventions, discoveries and
improvements, know-how proprietary rights
formulae, processes, technical information,
confidential and proprietary information and all
other intellectual property rights whether or
not subject to statutory registration or
protection and all rights against third parties
in respect of any of the aforesaid items
including rights in the nature of any of the
aforesaid items in any country rights in the
nature of unfair competition rights and rights
to sue for passing off
1.6 The Lease: A lease of premises at Langstone Road Havant
Hampshire dated 12th January 1996 made between
HIL and ASL
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<PAGE> 21
1.7 The License Agreement: A license agreement dated 8th January 1996 and
made between (1) Adflex Solutions Limited and
(2) Havant International Limited
1.8 The Premises: The premises comprised in the Lease
1.9 The Share Sale and The agreement dated 7th January 1996 and made
Purchase Agreement: between (1) ASI and (2) HIHL for the sale and
purchase of the entire issued share capital of
ASL
2 SURRENDER AND ACCEPTANCE
2.1 ASL with full title guarantee surrenders and yields up and releases to
HIL all its estate interest and right in the Premises to the intent
that the residue of the term of years granted by the Lease and all
other right estate or interest of ASL in the Premises shall merge and
be extinguished in the reversion immediately expectant on the term of
years granted by the Lease.
2.2 In consideration of the release hereinafter contained HIL accepts the
surrender.
3 RELEASE OF OBLIGATIONS
3.1 Without prejudice to any antecedent breach of the Lease occurring
after the date of the Agreement to Surrender and Release but prior to
the date hereof HIL and ASL each releases the other party from all
obligations contained in and all present or future liabilities
whatever under the Lease and all damages actions proceedings costs
claims demands and expenses arising from such obligations and
liabilities.
3.2 Subject to Clause 3.4 HIL and HIHL hereby release and discharge ASL
and ASI and ASL and ASI hereby release and forever discharge HIL and
HIHL from in each case:-
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<PAGE> 22
3.2.1 all and any liability, proceedings and actions (in each case actual
or contingent) arising under or in connection with:
3.2.1.1 the Asset Sale and Purchase Agreement; and
3.2.1.2 any document or agreement entered into by HIL or HIHL or (as
the case may be) ASL or ASI in relation to the Asset Sale
and Purchase Agreement;
3.2.2 all and any undertakings, indemnities, agreements, covenants and
obligations of or on the part of HIL or HIHL or (as the case may be)
ASL or ASI that HIL or HIHL or (as the case may be) ASL or ASI has
now or may at any time hereafter have arising under or in connection
with:
3.2.2.1 the Asset Sale and Purchase Agreement; and
3.2.2.2 any document or agreement entered into by HIL or HIHL or
(as the case may be) ASL or ASI in relation to the Asset
Sale and Purchase Agreement;
3.2.3 all and any liability arising in respect of any representations made
in writing or orally by HIL or HIHL or (as the case may be) ASL or
ASI or by any of their respective directors, officers, employees,
agents or advisers before or after the execution of the Asset Sale
and Purchase Agreement in relation to the subject matter of the
Asset Sale and Purchase Agreement
other than in the case of any liability, proceedings and actions,
undertakings, indemnities, agreements, covenants or obligations arising as
a result of any act or representation of HIL or HIL or (as the case may be)
ASI or ASL or any of their respective directors, officers, employees,
agents or advisers performed or made with fraudulent intent.
3.3 Subject to Clause 3.4 HIHL and HIL hereby release and forever discharge ASI
and ASL and ASI and ASL hereby release and forever discharge HIHL and HIL
from in each case:-
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<PAGE> 23
3.3.1 all and any liability, proceedings and actions (in each case
actual or contingent) under or in connection with:
3.3.1.1 the Share Sale and Purchase Agreement;
3.3.1.2 the Deed of Tax Covenant; and
3.3.1.3 any document or agreement entered into by HIHL or HIL
or (as the case may be) ASL or ASI in relation to the
Share Sale and Purchase Agreement and/or the Deed of
Tax Covenant;
3.3.2 all and any undertakings, indemnities, agreements, covenants and
obligations of or on the part of HIHL or HIL or (as the case may
be) ASL or ASI that HIHL or HIL or (as the case may be) ASI or
ASL has now or may at any time hereafter have arising under or in
connection with:
3.3.2.1 the Share Sale and Purchase Agreement;
3.3.2.2 the Deed of Tax Covenant; and
3.3.2.3 any document or agreement entered into by HIHL or HIL
or (as the case may be) ASI or ASL in relation to the
Share Sale and Purchase Agreement and/or the Deed of
Tax Covenant;
3.3.3 all and any liability arising in respect of any representations
made in writing or orally by HIHL or HIL or (as the case may be)
ASL or ASI or by any of their respective directors, officers,
employees, agents or advisers before or after the execution of
the Share Sale and Purchase Agreement and/or the Deed of Tax
Covenant in relation to the subject matter of the Share Sale
and/or Purchase Agreement or the Deed of Tax Covenant
other than in the case of any liability, proceedings and actions,
undertakings, indemnities, agreements, covenants or obligations arising
as a result of any act or representation of HIHL or HIL or
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<PAGE> 24
(as the case may be) ASI or ASL or any of their respective directors,
officers, employees, agents or advisers performed or made with
fraudulent intent.
3.4 Nothing herein shall release:
3.4.1 HIHL from its undertakings to and covenants with ASI pursuant to
Clauses 11.2(a), 11.3, 11.7 and 11.14 of the Share Sale and
Purchase Agreement or from any of HIHL's obligation under such
clauses of the Share Sale and Purchase Agreement:
3.4.2 release ASI from its undertakings to and covenants with HIHL
pursuant to the Debenture or from any of ASI's obligations
thereunder
3.4.3 release ASI from its undertakings to or covenants with HIHL
pursuant to Clauses 11.1, 11.4, 11.5, 11.6, 11.8, 11.9 and 13 of
the Share Sale and Purchase Agreement or from any of ASI's
obligations under such clauses of the Share Sale and Purchase
Agreement provided always that the guarantee obligations of ASI
pursuant to Clause 13 of the Share Sale and Purchase Agreement
shall only apply to those obligations of ASL which have been
identified in Clauses 3.4.4, 3.4.5 and 3.4.6 hereof;
3.4.4 ASL from its undertakings to and covenants with HIL pursuant to
the Confidentiality Agreement and the Licence Agreement or from
any of ASL's obligations thereunder;
3.4.5 ASL from its undertakings to and covenants with HIL of further
assurance pursuant to any and all assignments of Intellectual
Property from ASL to HIL entered into in January 1996;
3.4.6 ASL from its undertakings to and covenants with HIL pursuant to
the Intellectual Property Assignment or from any of ASL's
obligations thereunder.
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<PAGE> 25
4 SAVING
Save as expressly provided by this Deed, the Asset Sale and Purchase
Agreement, the Share Sale and Purchase Agreement, the Deed of Tax Covenant
and each of the other aforementioned documents shall remain in full force and
effect.
5 NOTICES
Any notice to be given pursuant to the terms of this Agreement must be given
in writing to the party due to receive such notice in the case of HIHL, HIL
and ASL at their respective registered offices from time to time and in the
case of ASI at its address set out in this Agreement for such other address
as may have been notified for the purpose to the other parties in accordance
with this clause. Notice shall be delivered personally or sent by first class
pre-paid recorded delivery or registered post (air mail if overseas) or by
facsimile transmission and shall be deemed to be given in the case of
delivery on delivery and in the case of posting (in the absence of evidence
of earlier receipt) within 48 hours after posting (6 days if sent by air
mail) and in the case of facsimile transmission on completion of the
transmission.
6 COUNTERPARTS
This Agreement may be exercised in any number of counterparts each of which
when executed by one or more of the parties hereto shall constitute an
original but all of which shall constitute one and the same instrument.
7 GOVERNING LAW
7.1 This Agreement shall be governed by and construed in accordance with
the laws of England.
7.2 The parties hereby submit to the exclusive jurisdiction and venue of
the High Court of Justice in England in relation to any claim dispute or
difference which may arise hereunder and hereby agree for the purpose of
Order 10 Rule 3 of the Rules of The Supreme Court of England (or any
modification or re-enactment thereof) and any legal proceedings in any
other jurisdiction that any process
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<PAGE> 26
may be served on any of them by leaving a copy thereof or by posting
a copy thereof in the case of HIHL, HIL and ASL addressed to their
respective offices as provided for in Clause 10, 5 and in the case
of ASI to the address provided for in Clause 12.3, 7.3.
7.3 ASI's address for service of English High Court Proceedings shall
be Veritas House, 125 Finsbury Pavement, London EC2A 1NQ or such
other address within London England as ASI may have notified to the
other parties in accordance with the provisions of Clause 9.
IN WITNESS whereof, this Deed has been executed the day and year first above
written.
EXECUTED (but not delivered )
until the date hereof) as a )
deed by HAVANT INTERNATIONAL )
HOLDINGS LIMITED in the )
presence of:-
Director
Director/Secretary
EXECUTED (but not delivered )
until the date hereof) as a )
deed by HAVANT INTERNATIONAL )
LIMITED in the presence of:- )
Director
Director/Secretary
EXECUTED (but not delivered )
until the date hereof) as a )
deed by ADFLEX SOLUTIONS, )
INC. in the presence of:- )
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<PAGE> 27
EXECUTED (but not delivered )
until the date hereof) as a )
deed by ADFLEX SOLUTIONS )
LIMITED in the presence of:- )
Director
Director/Secretary
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<PAGE> 28
EXECUTED (but not delivered )
until the date hereof) as a )
deed by HAVANT INTERNATIONAL )
HOLDINGS LIMITED in the )
presence of:- )
Director
Director/Secretary
EXECUTED (but not delivered )
until the date hereof) as a )
deed by HAVANT INTERNATIONAL )
LIMITED in the presence of:- )
Director
Director/Secretary
EXECUTED (but not delivered )
until the date hereof) as a )
deed by ADFLEX SOLUTIONS ) /s/ Rolando C. Esteverena
INC. in the presence of:- )
EXECUTED (but not delivered )
until the date hereof) as a )
deed by ADFLEX SOLUTIONS )
INC. in the presence of:- )
/s/ Rolando C. Esteverena
Director
/s/ Donald J. Guiney
Director/Secretary
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<PAGE> 29
EXECUTED (but not delivered )
until the date hereof) as a )
deed by HAVANT INTERNATIONAL )
HOLDINGS LIMITED in the )
presence of:- )
Director /s/ William K. Wilkie
Director/Secretary /s/ Derek Holt
EXECUTED (but not delivered )
until the date hereof) as a )
deed by HAVANT INTERNATIONAL )
LIMITED in the presence of:- )
Director /s/ William K. Wilkie
Director/Secretary /s/ Derek Holt
EXECUTED (but not delivered )
until the date hereof) as a )
deed by ADFLEX SOLUTIONS, )
INC. in the presence of:- )
EXECUTED (but not delivered )
until the date hereof) as a )
deed by ADFLEX SOLUTIONS, )
LIMITED in the presence of:- )
Director
Director/Secretary
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<PAGE> 30
[XYRATEX LETTERHEAD]
20th February 1997.
ADFlex Solutions Inc.,
2001 West Chandler Boulevard
Chandler
Arizona 85224
U.S.A.
DEED OF INDEMNITY
We refer to the Agreement dated 3rd January 1996 between Havant International
Limited (now renamed ADFlex Solutions Limited) ("ADFlex") and Polene Limited
(now renamed Havant International Limited ("HIL") relating to the sale of part
of the business and assets of ADFlex ("the Assets Sale Agreement") and the
obligation of HIL to discharge the Corporation Tax liability of ADFlex in
respect of the year ended 30th November 1995.
To secure the performance by HIL of the aforesaid obligation, Midland Bank
provided a guarantee to ADFlex Solutions, Inc. dated 7th January 1996 which
expired on the 31st December 1996.
Notwithstanding:-
(i) the terms of the Agreement to Surrender and Release between Havant
International Holdings Limited ("HIHL"), HIL, ADFlex Solutions, Inc.
("ASI") and ADFlex dated 7th February 1997 ("the Agreement to
Surrender");
(ii) the terms of the Deed of Surrender and Release to be made between HIHL,
HIL, ASI and ADFlex included as an agreed form document within the
Agreement to Surrender; and
(iii) the expiry of such bank guarantee,
HIL hereby confirms that it remains liable to discharge the Corporation Tax
liability of ADFlex in respect of the year ended 30th November 1995 to the
extent that the same has not been discharged and hereby agrees to indemnify and
hold ADFlex harmless against all losses, costs, expenses, liabilities, actions,
claims, demands and proceedings suffered or incurred by ADFlex as a result of
the failure by HIL to fully comply with such obligations.
All the provisions of the Asset Sale Agreement and the Deed of Tax Covenant
dated 7th January 1996 between ASI and HIHL relevant to the enforcement of such
liability shall remain in force and shall apply to this Deed of Indemnity
mutatis mutandis as if the same were repeated and set out herein.
<PAGE> 31
[XYRATEX LETTERHEAD]
IN WITNESS whereof this document which is intended to take effect as a Deed has
been duly executed the day and year first above written.
THE CORPORATE SEAL of HAVANT )
INTERNATIONAL LIMITED was )
hereunto affixed in the presence of:- )
Director /s/ William K. Wilkie
----------------------
Director/Secretary /s/ Derek Holt
----------------------
<PAGE> 1
Exhibit 10.46
================================================================================
MASTER AGREEMENT
BY AND BETWEEN
ADFLEX SOLUTIONS, INC.
A DELAWARE CORPORATION,
OR ITS NOMINEE,
AND
HANA MICROELECTRONICS PUBLIC CO., LTD.,
A THAILAND PUBLIC LIMITED COMPANY,
OR ITS NOMINEE
================================================================================
<PAGE> 2
MASTER AGREEMENT
MASTER AGREEMENT (the "Agreement") made this 16th day of
April, 1996, by and between ADFlex Solutions, Inc., a Delaware corporation or
its nominee ("ADFlex"), and Hana Microelectronics Public Co., Ltd., a Thailand
public limited company or its nominee ("Hana").
WITNESSETH:
WHEREAS, ADFlex engages in the business of the design and
manufacture of flexible circuits, and desires to engage in flexible circuit
finishing and assembly in Thailand; and
WHEREAS, Hana owns a facility in the Zone 3 region of Thailand
suitable or capable of being made suitable for the finishing and assembly of
flexible circuits; and
WHEREAS, ADFlex and Hana desire to form a private limited
company under Thai law (the "Company") to engage in the finishing and assembly
of flexible circuits and all other activities related thereto in Thailand; and
WHEREAS, Hana desires to provide certain facilities and
administrative services to the Company on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants of the parties hereinafter set forth, ADFlex and Hana agree as
follows:
1. DEFINITIONS.
1.1 "Administrative Agreement" shall mean the Administrative Agreement
among the Company, Hana and ADFlex described in Section 7 hereof.
1.2 "Affiliate" shall mean a person that directly or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with the person specified. For purposes of this definition, "control"
means the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities, by contract or otherwise.
1.3 "Agreement" shall mean this Master Agreement.
1.4 "Bring Down Certificate" shall mean a certificate delivered at the
Closing in which a party reiterates the truth and accuracy in all material
respects of the representations and warranties of the party as of the date of
the certificate and the Closing.
1.5 "Business Day" shall mean any day other than a Saturday, Sunday or
national holiday in the United States or Thailand or a day on which either state
or national banks in the State of Arizona or in Thailand are not open for (or
are permitted to close) the conduct of normal banking business.
<PAGE> 3
1.6 "Closing" shall mean the closing of this Agreement.
1.7 "Closing Date" shall mean the date on which the Closing shall
occur.
1.8 "Facilities Agreement" shall mean the Facilities Agreement among
the Company, Hana and ADFlex described in Section 6 hereof.
1.9 "License Agreements" shall mean the License Agreement and the
Trademark License Agreement to be dated as of the Closing Date among the
Company, ADFlex and Hana described in Section 8 hereof.
1.10 "Operative Agreements" shall mean collectively this Agreement, the
Facilities Agreement, the Administrative Agreement and the License Agreements.
1.11 "Territory" shall mean Thailand.
2. REGISTRATION OF THE COMPANY.
2.1 Hana shall initiate arrangements for the registration of the
Company in accordance with the terms of this Agreement and pursuant to the
Memorandum and Articles of Association in the form attached to this Agreement as
Exhibit A. All direct expenses in connection therewith shall be reimbursed to
Hana by the Company when formed.
2.2 The name of the Company shall be "ADFlex Thailand Limited."
2.3 The purpose of the Company shall be to perform flexible circuit
finishing and assembly and all other activities necessary or incidental thereto.
2.4 The Company shall have an initial registered capital of Baht 75
million represented by 7,500,000 common shares of Baht 10 par value each.
2.5 The auditors of the Company shall be Ernst & Young, L.L.P.
3. MANAGEMENT STRUCTURE OF THE COMPANY.
3.1 The Company shall be managed by a Board of Directors consisting of
five members. ADFlex shall nominate three of the Board members, Hana shall
nominate one Board member and the final Board member shall be the General
Manager of the Company. The initial directors of the Company shall be Rolando C.
Esteverena, Michael L. Pierce and Greg H. Nelson, as the ADFlex nominees,
______________ as the Hana nominee and ______________ as the General Manager.
The powers of the authorized directors shall be any three directors signing
jointly. ADFlex and Hana agree to vote their shares of the Company as described
in Section 4 hereof in favor of the election of the foregoing members to the
Board of Directors at
2
<PAGE> 4
each annual ordinary general meeting and any extraordinary general meeting at
which Directors are to be elected.
4. SHARE OWNERSHIP.
4.1 The Company shall be authorized to issue 7,500,000 shares of the
Company with a par value of Baht 10. At the Closing, one share shall be issued
to each of the Directors and the remaining shares of the Company shall be issued
80% to ADFlex and 20% to Hana. In consideration of the issuance of such shares,
ADFlex shall contribute the Baht equivalent of $2.4 million (U.S.) to the
capital of the Company, Hana shall contribute the Baht equivalent of $.6 million
(U.S.) to the capital of the Company and the Directors shall each contribute the
Baht equivalent of $1.00 (U.S.) to the capital of the Company. ADFlex, Hana and
the Directors shall each pay in to the Company 25% of their respective capital
contributions for their shares set forth in this Section 4.1 at the Closing and
the remaining balance of such contributions in accordance with Section 12.5.
4.2 Should the Board of Directors determine that the Company requires
additional capital after its formation for future expansion or to otherwise
operate its business, ADFlex and Hana shall each have the right to acquire
additional shares at the price and on the terms determined by the shareholders
so as to preserve their percentage ownership in the Company. Neither ADFlex nor
Hana shall be obligated to contribute such additional capital to purchase
additional shares.
4.3 Cash payments for shares shall be made by wire transfer of
immediately available funds to the bank account of the Company established at
Standard Chartered bank in Bangkok, Thailand.
5. COMPANY DISTRIBUTIONS.
5.1 The Company shall retain its operating profits to meet ongoing
capital needs and to fund anticipated growth until such time or times as the
Board of Directors or shareholders determine to make dividends or other
distributions to ADFlex and Hana on account of their share ownership in the
Company.
5.2 Dividends or other distributions, if any, shall be paid equally on
each share.
6. FACILITIES AGREEMENT.
6.1 At the Closing, each party shall take all appropriate action to
cause the Board of Directors of the Company to enter into a Facilities Agreement
(the "Facilities Agreement") with Hana (and to which ADFlex also is a party) in
the form attached to this Agreement as Exhibit B.
3
<PAGE> 5
7. ADMINISTRATIVE AGREEMENT.
7.1 At the Closing, each party shall take all appropriate action to
cause the Board of Directors of the Company to enter into an Administrative
Agreement (the "Administrative Agreement") with Hana (and to which ADFlex also
is a party) in the form attached to this Agreement as Exhibit C.
8. LICENSE AGREEMENTS.
8.1 ADFlex will provide to the Company all technology transfer for
flexible circuit finishing and assembly pursuant to a License Agreement in the
form attached to this Agreement as Exhibit D and shall provide the Company with
a nonexclusive, royalty-free license from ADFlex to use the name "ADFlex" and
the corporate trademark of ADFlex in the conduct of the Company's business
pursuant to a Trademark License Agreement in the form attached to this Agreement
as Exhibit E (collectively, the "License Agreements"). At the Closing, each
party shall take all appropriate action to cause the Board of Directors of the
Company to enter into the License Agreements with ADFlex (and to which Hana also
is a party).
9. RIGHT OF FIRST REFUSAL.
9.1 Hana may not transfer, sell or otherwise dispose of any shares of
the Company without the prior written consent of ADFlex. In the event that Hana
desires to sell any shares and solicit a purchaser therefor, Hana shall give
ADFlex written notice of such fact at least six months prior to seeking a
purchaser for its shares. In the event of a proposed sale of shares, Hana shall
first offer to ADFlex the shares that Hana desires to sell to each proposed
buyer as provided in this Section 9.
9.2 Hana shall notify ADFlex in writing of its desire to sell shares of
the Company, with the notice setting forth (i) the number of shares Hana
proposes to sell, (ii) a statement that Hana has received a bona fide offer to
purchase the shares, and that Hana is willing to accept the offer, (iii) the
name and address of the offeror and the terms of the offer, and (iv) an offer
("Offer") to sell the shares to ADFlex at the same price and on the same terms
as have been offered to Hana. At the request of ADFlex, Hana shall provide a
copy of the offer received by it, in addition to such financial information or
other evidence as may be reasonably requested evidencing the ability and intent
of the bona fide offeror to complete the proposed purchase transaction.
9.3 ADFlex shall have 30 days after the receipt of the notice within
which to accept the Offer. ADFlex may not elect to purchase less than all of the
shares offered. If ADFlex accepts the Offer, ADFlex shall have 20 days after it
delivers notice of such acceptance within which to purchase the shares on the
terms and subject to the conditions set forth in the Offer.
9.4 If written consent to a transfer pursuant to this Section is
granted, or if the option to purchase is not exercised by ADFlex, Hana shall be
free for a period of 60 days after
4
<PAGE> 6
the consent, the failure to exercise the purchase option, or the written
notification by ADFlex of its rejection of the Offer, or until the expiration of
the original offer, whichever first occurs, to sell, transfer, or otherwise
dispose of the shares; provided that in the event of a sale, such sale shall be
made only for consideration not less than, and on terms no more favorable to the
buyer than, those specified in Hana's notice; and provided further that in all
cases the shares so transferred shall remain subject to the restrictions in this
Agreement and the transferee thereof shall be bound by the terms and conditions
of this Agreement. Any sale or transfer not made in accordance with the terms of
this Section shall automatically be deemed null and void.
10. OPTION TO PURCHASE.
10.1 ADFlex shall have the right in its sole and absolute discretion to
purchase all of the shares then owned by Hana at any time from and after the
Closing. To exercise such right, ADFlex shall give written notice to Hana, which
notice shall set forth in reasonable detail a computation of the purchase price
of the shares.
10.2 The purchase price for the shares to be acquired by ADFlex from
Hana shall be the net income of the Company for the most recent fiscal year as
certified by the Company's independent auditors multiplied by 6.5 and further
multiplied by a fraction, the numerator of which is the number of shares then
owned by Hana and the denominator of which is the total number of shares then
outstanding (the "Formula Purchase Price"). Notwithstanding the foregoing: (i)
if ADFlex elects pursuant to this Section 10 to purchase Hana's shares in the
first year after the Closing Date, the purchase price shall be the greater of
the Formula Purchase Price or $2 million (U.S.), including as part of such $2
million all prior dividends and other distributions received by Hana on account
of its shares in the Company (the "Prior Distributions"); and (ii) if ADFlex
elects pursuant to this Section 10 to purchase Hana's shares in the second year
after the Closing Date, the purchase price shall be the greater of the Formula
Purchase Price or $4 million (U.S.), including as part of such $4 million the
Prior Distributions. Such purchase price shall be paid on the closing date
specified in ADFlex's notice of election of the option to purchase described in
this Section 10, which shall be not later than 60 days after the date of such
notice, at the sole option of ADFlex (i) in full in immediately available funds,
or (ii) 25% in immediately available funds at the closing, an additional 25% in
immediately available funds not later than three months following the closing
date, and the balance pursuant to a promissory note bearing interest at the
applicable federal rate published by the Internal Revenue Service payable not
later than twelve months following the closing date. To illustrate the
foregoing, if the Company's net income for its first year of operations is
$500,000, the Company has paid dividends of $100,000 from inception to Hana, and
ADFlex elects to purchase the shares from Hana during the 18th month following
the closing, the purchase price for the shares shall be $4 million, of which
$100,000 was paid through distributions from the Company and of which the
remaining $3.9 million shall be paid by ADFlex as provided in this Section 10.2.
10.3 At the closing, Hana shall deliver to ADFlex certificates
representing all of the shares then owned by Hana, free and clear of any and all
pledges, liens, claims and
5
<PAGE> 7
encumbrances whatsoever, against payment of the purchase price for such shares
by ADFlex; provided, however, that if ADFlex elects to pay a portion of the
purchase price for such shares by the promissory note described in Section 10.2,
the shares so purchased shall be deemed pledged by ADFlex to Hana to secure
payment of the note. ADFlex and Hana each agree to deliver to the other at the
closing a full and complete release.
10.4 Whenever in this Agreement ADFlex elects to purchase the shares of
Hana, the Director appointed by Hana and the General Manager shall also tender
their shares to ADFlex for purchase at the price of $1.00 per share.
11. REPRESENTATIONS AND WARRANTIES.
11.1 ADFlex represents and warrants to Hana as follows:
11.1.1 ADFlex is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, United
States of America, and has all requisite corporate power and authority to own
its properties, to carry on its business as it is now being conducted and to
execute and deliver this Agreement and the other Operative Agreements to which
it is a party and perform its obligations hereunder and thereunder.
11.1.2 The execution, delivery and performance of this
Agreement has been, and the execution, delivery and performance of the other
Operative Agreements will be, duly authorized by all requisite corporate action
on the part of ADFlex.
11.1.3 The execution, delivery and performance of this
Agreement and the other Operative Agreements to which ADFlex is a party will not
(i) violate any provision of the Certificate of Incorporation or Bylaws of
ADFlex, (ii) violate any provision of applicable law or regulation or any writ,
judgment, order or decree of any court or governmental authority applicable to
ADFlex, or (iii) violate or cause a default under any mortgage, loan agreement,
indenture or other contract, agreement, license or commitment to which ADFlex is
a party or by which ADFlex is bound which would have a material adverse effect
on the ability of ADFlex to consummate the transactions contemplated by the
Operative Agreements.
11.1.4 This Agreement and the other Operative Agreements to
which ADFlex is a party have been or at the Closing will be duly executed and
delivered by ADFlex and constitute, or at the Closing will constitute, legal,
valid and binding obligations of ADFlex, enforceable against ADFlex in
accordance with their respective terms, except that: (i) enforceability thereof
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, arrangement, or laws or court decisions affecting the enforcement of
creditors' rights generally; and (ii) enforceability of certain rights and
remedies may be restricted by the doctrines of waiver, estoppel, election of
remedies, commercial reasonableness or by the application of other equitable
principles, whether remedies are sought in equity or at law.
6
<PAGE> 8
If ADFlex nominates a wholly-owned subsidiary to hold the shares of the Company
as permitted by Section 17.1 hereof, the above representations and warranties
shall be deemed to also be made by such nominee.
11.2 Hana represents and warrants to ADFlex as follows:
11.2.1 Hana is a public limited company duly organized,
validly existing and in good standing under the laws of Thailand, and has all
requisite corporate power and authority to own its properties, to carry on its
business as it is now being conducted and to execute and deliver this Agreement
and the other Operative Agreements to which it is a party and perform its
obligations hereunder and thereunder.
11.2.2 The execution, delivery and performance of this
Agreement has been, and the execution, delivery and performance of the other
Operative Agreements to which it is a party will be, duly authorized by all
requisite corporate action on the part of Hana.
11.2.3 The execution, delivery and performance of this
Agreement and the other Operative Agreements to which Hana is a party will not
(i) violate any provision of the Memorandum or Articles of Association of Hana,
(ii) violate any provision of applicable law or regulation or any writ,
judgment, order or decree of any court or governmental authority applicable to
Hana, or (iii) violate or cause a default under any mortgage, loan agreement,
indenture or other contract, agreement or commitment to which Hana is a party or
by which Hana is bound which would have a material adverse effect on the ability
of Hana to consummate the transactions contemplated by the Operative Agreements.
11.2.4 This Agreement and the other Operative Agreements to
which Hana is a party have been or at the Closing will be duly executed and
delivered by Hana and constitute, or at the Closing will constitute, legal,
valid and binding obligations of Hana, enforceable against Hana in accordance
with their respective terms, except that: (i) enforceability thereof may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, arrangement, or laws or court decisions affecting the enforcement of
creditors' rights generally; and (ii) enforceability of certain rights and
remedies may be restricted by the doctrines of waiver, estoppel, election of
remedies, commercial reasonableness or by the application of other equitable
principles, whether remedies are sought in equity or at law.
11.2.5 Hana has all requisite licenses, permits and
approvals necessary to operate the facility as described in the Facilities
Agreement (the "Facility") and to provide the services described in the
Administrative Agreement for the purposes described herein and therein.
If Hana nominates a wholly-owned subsidiary to hold the shares of the Company as
permitted by Section 17.1 hereof, the above representations and warranties shall
be deemed to also be made by such nominee.
7
<PAGE> 9
12. CONDITIONS TO CLOSING; THE CLOSING; TERMINATION OF THIS
AGREEMENT; POST CLOSING COVENANT.
12.1 The Closing of the transactions contemplated by this Agreement
shall take place at the offices of the Company to be established at the Facility
on the fifth Business Day following the satisfaction of the conditions described
in this Section 12.
12.2 The obligations of ADFlex and Hana to execute and deliver the
Operative Agreements (other than this Agreement) to which they are parties, are
subject to the satisfaction or waiver, as of the Closing Date, of the following
conditions:
12.2.1 No injunction restraining or preventing the
consummation and performance of this Agreement and the other Operative
Agreements shall be in effect, and no litigation shall be pending or threatened
by or before any governmental authority that would restrain or prevent the
execution or performance of this Agreement and the other Operative Agreements.
12.2.2 The parties to each Operative Agreement (other than
this Agreement) shall have executed and delivered all such other Operative
Agreements, each of which shall be in full force and effect.
12.2.3 The Board of Investment shall have granted promotion
to the Company's project on terms and conditions satisfactory to ADFlex. ADFlex
acknowledges that it is aware of the present Zone 3 privileges and that such
privileges are satisfactory to ADFlex.
12.3 The obligations of ADFlex to execute and deliver the Operative
Agreements (other than this Agreement) to which it is to be a party are subject
to the satisfaction or waiver, as of the Closing Date, of the following
conditions:
12.3.1 Hana shall have delivered to ADFlex a Bring Down
Certificate dated the Closing Date as to the continuing accuracy of Hana's
representations and warranties made herein.
12.3.2 Hana shall have delivered to ADFlex a certificate to
the effect that Hana is in compliance with all of its covenants set forth in
this Agreement.
12.3.3 ADFlex shall be satisfied in its sole and absolute
judgment as to any due diligence investigation it conducts concerning Hana or
the business of the Company.
12.4 The obligations of Hana to execute and deliver the Operative
Agreements (other than this Agreement) to which it is to be a party are subject
to the satisfaction or waiver, as of the Closing Date, of the following
conditions:
8
<PAGE> 10
12.4.1 ADFlex shall have delivered to Hana a Bring Down
Certificate dated the Closing Date as to the continuing accuracy at the Closing
of the representations and warranties made by ADFlex herein.
12.4.2 ADFlex shall have delivered to Hana a certificate to
the effect that ADFlex is in compliance with all of its covenants set forth in
this Agreement.
12.5 Promptly following the Closing, Hana shall use its best efforts to
obtain all requisite licenses, permits and governmental approvals necessary for
compliance with the terms and conditions of this Agreement and the other
Operative Agreements and for the conduct of the business by the Company in
Thailand, and ADFlex shall reasonably cooperate in connection with the same. At
such time as such licenses, permits and approvals have been obtained, ADFlex,
Hana and the Directors shall pay in the remaining 75% of their respective
capital contributions to the Company in the amounts set forth in Section 4.1.
12.6 This Agreement may be terminated at any time prior to the Closing
Date (i) by the mutual consent of ADFlex and Hana, (ii) by either ADFlex or Hana
if the Closing shall not have taken place by October 1, 1996, or (iii) by either
ADFlex or Hana if the other party hereto shall, contrary to the terms of this
Agreement, intentionally fail or refuse to consummate the transactions
contemplated hereby, after affording such defaulting party a ten day period
after notice in which to cure. After the Closing, either ADFlex or Hana may
terminate this Agreement upon 30 days' written notice if the necessary licenses,
permits and governmental approvals in Section 12.5 have not been obtained by
July 1, 1996. In the event of termination of this Agreement, this Agreement
shall forthwith become wholly void and of no further force and effect and, other
than in the event of termination pursuant to clause (iii), there shall be no
liability on the part of ADFlex, Hana or their respective officers, directors or
Affiliates.
13. CONFIDENTIALITY; NO PUBLIC ANNOUNCEMENTS.
13.1 Neither ADFlex nor Hana nor their respective officers, directors,
employees or agents shall divulge to any third person (other than those whose
province it is to know it or with proper authority) or use for any purpose any
of the trade secrets, know-how or confidential or proprietary information
relating to the other except pursuant to the License Agreements in furtherance
of the business of the Company; provided, however, that either party may divulge
any such information (i) in a proceeding to enforce its rights under this
Agreement, or (ii) as required by applicable law or the rules and regulations of
a securities exchange or automated quotation system. This restriction shall
continue to apply after the expiration or termination of this Agreement and the
other Operative Agreements without limit in point of time but shall cease to
apply to secrets or information which come into the public domain through no
fault of the party concerned.
13.2 ADFlex and Hana will consult with each other before issuing any
press release or other public statements with respect to the transactions
contemplated by this Agreement, and shall not issue any such press release or
make any such public statement prior to such
9
<PAGE> 11
consultation except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange or automated quotation system upon which ADFlex or Hana, as the case
may be, has a class of registered equity securities.
14. NON-COMPETITION AND RELATED RESTRICTIONS.
14.1 Except as provided in Sections 14.2 and 14.3, neither ADFlex nor
Hana shall, while this Agreement and the other Operative Agreements shall remain
in effect, and ADFlex and Hana shall not, for a period of two years following
the termination of this Agreement, do or permit any of the following without the
prior written consent of the other:
14.1.1 Either individually or on behalf of any other person
or entity directly or indirectly carry on or be interested (except as the
holder, for investment, of securities dealt on a recognized stock exchange not
exceeding 3% of the total outstanding amount thereof) in any business competing
in the Territory with the other party;
14.1.2 Solicit or endeavor to solicit in the Territory a
customer of the other or any of its Affiliates for the purpose of offering to
that customer goods or services similar to or competing with those of the other
party or its Affiliates;
14.1.3 Solicit or entice away, or endeavor to solicit or
entice away, any director, officer or employee of the other or of any Affiliate
of such other party or the Company; or
14.1.4 Cause or permit any person or entity directly or
indirectly under its control to do any of the acts or things specified above.
Notwithstanding the foregoing, the restrictions in Section 14.1.1 shall not
apply to ADFlex following the termination of this Agreement with respect to flex
and flex-related assembly businesses and operations in the Territory, but shall
apply with respect to all other businesses competing in the Territory with Hana.
14.2 If ADFlex acquires the shares owned by Hana pursuant to Section 10
hereof and vacates the Facility at any time within the two-year period following
the Closing Date, then the restrictions set forth in Section 14.1 shall cease to
apply to Hana at such time.
14.3 The restrictions set forth in Section 14.1.3 shall not apply
following the termination of this Agreement with respect to any current
director, officer or employee of Hana who is assigned or transferred to the
Company.
14.4 ADFlex shall provide the Company with flexible circuit assembly
business from time to time as selected by ADFlex in its discretion. Hana hereby
grants to the Company a right of first refusal on all assemblies involving
flexible circuits obtained by Hana on and after the
10
<PAGE> 12
Closing Date. The Company shall either exercise or decline to exercise such
right from time to time within 14 days after receiving written notice from Hana
describing the proposed assembly contract in reasonable detail. If the Company
does not affirmatively respond to a proposed assembly contract within such
14-day period, the Company shall be deemed to have rejected the assembly
contract and Hana shall be free to engage in the same for its own account.
14.5 Each undertaking in this Section 14 shall be treated as
independent of the other undertakings so that, if one or more is held to be
invalid as an unreasonable restraint of trade or for any other reason, the
remaining undertakings shall be valid to the extent that they are not affected.
14.6 While the undertakings in this Section 14 are considered by the
parties to be reasonable under all the circumstances, if one or more is held
invalid as an unreasonable restraint of trade or for any other reason, but would
have been held valid if part of the wording had been deleted, the period reduced
or the range of activities or territory dealt with reduced in scope, the
undertaking shall apply with such modification as may be necessary to make it
valid.
14.7 This Section 14 shall not apply if this Agreement is terminated
under Section 12.6.
15. MEDIATION AND ARBITRATION.
15.1 If a dispute, controversy or claim arises out of or relates to
this Agreement or the breach, termination or validity hereof, and if such
dispute, controversy or claim cannot be settled through direct good faith
discussions between the parties, the parties shall first endeavor to settle the
dispute in an amicable manner by mediation under the Commercial Mediation Rules
of the American Arbitration Association ("AAA") before having recourse to
arbitration. If either party believes, for any reason whatsoever, after the
mediation process has begun that it will not lead to a satisfactory resolution
of the matter, it may give written notice of that belief to the other party, and
proceed to arbitration pursuant to the following provisions of this Section 15.
15.2 To the extent not settled as provided in Section 15.1, any
dispute, controversy or claim arising out of or relating to this Agreement or
the breach, termination, or validity hereof, shall be settled by arbitration in
accordance with the International Arbitration Rules of the AAA in effect on the
date of this Agreement. The arbitration shall be the sole and exclusive forum
for resolution of the dispute, controversy or claim and the award shall be final
and binding to the extent permitted by law.
15.3 There shall be three arbitrators, each of whom shall be
disinterested in the dispute, controversy or claim and shall have no connection
with either party. ADFlex and Hana shall each name an arbitrator and shall
promptly, but no later than 30 days after delivery of the arbitration demand,
file with the AAA a notice of appointment as provided in the International
Arbitration Rules specified above. The two arbitrators so chosen shall select a
third arbitrator
11
<PAGE> 13
who shall act as chairperson of the arbitration. If either party entitled to
name an arbitrator should abstain from doing so, or should the two arbitrators
named as provided above fail to select a third arbitrator, then at the request
of either party, the President of the AAA shall select an arbitrator to fill the
vacant position within ten days of such request.
15.4 The place of arbitration shall be Chandler, Arizona. The
arbitration shall be conducted in the English language and any foreign language
documents presented at such arbitration shall be accompanied by an English
translation thereof. The arbitrators shall apply the law of Arizona. The parties
consent that the United States District Court for the District of Arizona in
Phoenix, Arizona and courts in Thailand shall each have non-exclusive
jurisdiction with respect to all aspects of the enforcement of the arbitration
provisions of this Agreement. Judgment upon the award rendered may be entered
into any court having jurisdiction, or application may be made to such court for
judicial recognition of the award or an order of enforcement thereof, as the
case may be.
15.5 Arbitration awards rendered pursuant to this Section 15 shall be
paid in United States dollars.
16. GOVERNING LAW.
16.1 This Agreement shall be construed, enforced and governed by the
laws of the State of Arizona without regard to principles of conflicts of law.
17. ASSIGNMENT.
17.1 No party shall assign or transfer, or purport to assign or
transfer, any of its rights or obligations under this Agreement or any other
Operative Agreement without the prior written consent of the other party;
provided, however, that ADFlex and Hana shall each have the right to nominate a
wholly-owned subsidiary entity to hold their respective shares of the Company
described herein.
17.2 Except as set forth in this Section 17, this Agreement shall be
binding upon and shall inure to the benefit of the successors and permitted
assigns of the respective parties hereto.
18. WAIVER, FORBEARANCE AND VARIATION.
18.1 The rights of the parties under this Agreement shall not be
prejudiced or restricted by any indulgence or forbearance extended by one party
to the other party. No waiver by either party in respect of a breach shall
operate as a waiver in respect of any subsequent breach.
18.2 This Agreement shall not be varied, cancelled or modified unless
the variation, cancellation or modification is expressly agreed to in writing by
a duly authorized representative of each party.
12
<PAGE> 14
19. SEVERABILITY.
19.1 If any provision of this Agreement is found by a court or other
competent authority to be void or unenforceable, it shall be deemed to be
deleted from this Agreement and the remaining provisions shall continue to
apply. The parties shall negotiate in good faith in order to agree to the terms
of a mutually satisfactory provision to be substituted for the provision found
to be void or unenforceable.
20. MISCELLANEOUS PROVISIONS.
20.1 This Agreement and the other Operative Agreements constitute the
entire agreement between the parties hereto with respect to the subject matter
hereof and thereof and supersede all prior oral and written discussions and
understandings.
20.2 Any notice, advice, election, request, or order, demand or other
direction required or permitted to be given under this Agreement shall be in
writing and in the English language, and (unless some other notice giving the
same is specified or accepted in writing by the recipient) shall be effective
(i) when personally delivered during normal business hours to the addressee at
the address designated for such delivery, (ii) on the date of receipt specified
on any return receipt if it shall have been deposited in the mails, certified or
registered with return receipt requested and postage thereon fully prepaid,
addressed to such address, or (iii) on the day it shall have been given by
facsimile transmission (with written confirmation of receipt) to such address,
whichever the foregoing shall first occur. Until otherwise specified by notice,
the addresses for any such notice, advise, election, request, order, demand or
other direction shall be:
If to ADFlex:
ADFlex Solutions, Inc.
Attention: Michael L. Pierce
2001 West Chandler Boulevard
Chandler, Arizona 85224, U.S.A.
Telephone: (602) 786-8206
Facsimile: (602) 786-8280
If to Hana:
Hana Microelectronics Public Co. Ltd.
c/o Richard Han
101//2 Moo 4, EPZ
Northern Region Industrial Estate
T. Ban Klang, A. Muang,
Lamphun 51000, Thailand
Telephone: 66 2/551-1297, 521-4935/9
Facsimile: 66 2/552-4906, 551-1299
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<PAGE> 15
20.3 The headings in this Agreement are inserted for convenience only
and do not affect its construction.
20.4 In the event of any ambiguity or conflict arising between the
terms of this Agreement and the terms of any other Operative Agreement, the
terms of this Agreement shall prevail as between the parties.
20.5 In the event of any ambiguity or conflict arising between the
terms of this Agreement and the Articles of Association, the terms of this
Agreement shall prevail as between the parties, and the parties shall amend the
Articles of Association accordingly.
20.6 Time is of the essence of this Agreement.
20.7 ADFlex and Hana represent to each other that neither has incurred
any obligation or liability, contingent or otherwise, for brokerage or finder's
fees or agent's commissions or other like payment in connection with this
Agreement, the other Operative Agreements or the transactions contemplated
hereby or thereby.
21. COSTS.
21.1 Except as provided in Section 2.1 hereof, ADFlex and Hana shall
each bear their own costs in connection with the negotiation, preparation,
execution, delivery and performance of this Agreement.
22. NOT A PARTNERSHIP.
22.1 None of the provisions of this Agreement shall be deemed to
constitute or create a partnership between ADFlex and Hana and neither ADFlex
nor Hana has the authority to bind the other in any way except as expressly
contemplated herein.
22.2 ADFlex and Hana hereby expressly agree and acknowledge that each
of them (either directly, or through Affiliates) is involved in transactions,
investments and business ventures and undertakings of every nature, which
include, without limitation, activities which are associated with flexible
circuit manufacture and assembly (all such investments and activities being
referred to hereinafter as the "Independent Activities").
22.3 Except as expressly provided in Section 14 hereof, nothing in this
Agreement shall be construed to: (i) prohibit any party or its Affiliates from
continuing, acquiring, owning or otherwise participating in any Independent
Activity that is not owned or operated by the Company, even if such Independent
Activity is or may be in competition with the Company; or (ii) require any party
to allow the Company or the other party to participate in the ownership or
profits of any such Independent Activity. To the extent any party would have any
rights or claims against the other party as a result of the Independent
Activities of such party or its
14
<PAGE> 16
Affiliates, whether arising by statute, common law or in equity, the same are
hereby waived with respect to the operation and business of the Company.
22.4 ADFlex and Hana hereby expressly acknowledge, represent and
warrant that they are sophisticated businesses and investors, they understand
the terms, conditions and waivers set forth in this Agreement (including without
limitation Sections 14 and 22 hereof), and that the provisions of this Agreement
are reasonable, taking into account the relative sophistication and bargaining
position of the parties.
23. THIRD PARTY BENEFICIARIES.
23.1 Nothing in this Agreement, express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
persons other than the parties to it, nor is anything in this Agreement intended
to relieve or discharge the obligation or liability of any third person to
either party to this Agreement.
IN WITNESS WHEREOF, parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
ADFlex Solutions, Inc., a Delaware corporation
By: /s/ Rolando C. Esteverena
-------------------------
Title: Chairman, President & CEO
-------------------------
Hana Microelectronics Public Co., Ltd., a
Thailand public limited company
By: /s/ Richard Hahn
-------------------------
Title: Executive Vice Chairman,
President, Chief Executive
Officer & C.O.O.
-------------------------
15
<PAGE> 17
EXHIBIT A
ARTICLES OF ASSOCIATION
OF
ADFlex (Thailand) Limited
***************
CHAPTER I
General
1. These regulations shall be called the Articles of ADFlex (Thailand) Limited.
2. Unless otherwise specified, the "Company" shall mean ADFlex (Thailand)
Limited.
3. Unless otherwise stipulated, the provisions in the Civil and Commercial
Code regarding limited companies shall apply.
4. Any addition to or amendment of these Articles or the provisions in the
Memorandum of Association must be approved by a special resolution of the
general meeting.
CHAPTER II
Shares and Shareholders
5. The Company's shares shall consist of Ordinary Shares entered in a named
certificate and shall be fully paid-up in money.
6. The shares of the Company shall be divided as follows:
(1) Class A shares, i.e., shares numbered 1 to 6,000,000 inclusive
(ADflex).
(2) Class B shares, i.e., shares numbered 6,000,001 to 7,500,000
inclusive (Hana).
Unless otherwise provided by these Articles, all shares shall have the same
rights and status.
7. Transfers of shares, assignments, pledges, or other dispositions of shares
require prior consent by the Board of Directors of the Company. Transfers
of shares shall be effected by amending the register of shareholders.
8. In the case when a shareholder dies or is adjudged bankrupt, the recipient
of his estate or administrator of his estate, or person who is entitled to
the shares must produce legitimate evidence before the Company, and when
the Board of Directors is satisfied
<PAGE> 18
with the validity of such evidence and that it is not contrary to the
Articles of Association of the Company, the person upon whom the shares
devolved shall be registered as a shareholder of the Company.
*[9. (1) Class B Shareholder may not transfer, sell or otherwise dispose of
any shares of the Company without the prior consent of Class A
Shareholder. In the event that Class B Shareholder desires to sell any
shares, Class B Shareholder shall give Class A Shareholder written
notice of such fact at least 6 months in advance. In the event of a
proposed sale of shares, Class B Shareholder shall first offer to
Class A Shareholder the shares that desired to sell to any third person.
(2) Class B Shareholder shall notify Class A Shareholder in writing of
its desire to sell shares of the Company, with the notice setting forth
(i) the number of shares Class B Shareholder proposes to sell, (ii) a
statement that Class B Shareholder has received a bona fide offer to
purchase the shares, and the Class B Shareholder is willing to accept
the offer, (iii) the name and address of the offeror and the terms of
the offer, and (iv) an offer ("Offer") to sell the shares to Class A
Shareholder at the same price and on the same terms as have been
offered to Class B Shareholder. At the request of Class A Shareholder,
Class B Shareholder shall provide a copy of the Offer received by it, in
addition to such financial information or other evidence as may be
reasonably requested evidencing the ability and intent of the bona fide
offeror to complete the proposed purchase transaction.
(3) Class A Shareholder shall have thirty (30) days after the receipt of
the notice within which to accept the Offer. Class A Shareholder may
not elect to purchase less than all of the shares offered. If Class A
Shareholder accepts the Offer, Class A Shareholder shall have twenty
(20) days after its delivers notice of such acceptance within which to
purchase the shares on the terms and subject to the conditions set forth
in the Offer.
(4) If written consent to a transfer pursuant to this Article is
granted, or if the option to purchase is not exercised by Class A
Shareholder, Class B Shareholder shall be free for a period of sixty
(60) days after the consent, the failure exercise the purchase option,
or written notification by Class A Shareholder of its rejection of the
Offer, or until the expiration of the original offer, whichever first
occurs, to sell, transfer, or otherwise dispose of the shares: provided
that in the event of a sale, such sale shall be made only for
consideration not less than, and on terms no more favorable to the buyer
than, those specified in Class B Shareholder's notice. Any sale or
transfer not made in accordance with the terms of this Article shall
automatically be deemed null and void.]
CHAPTER III
General Meetings
10. A general meeting of Shareholders shall be held within six months after
registrations and shall subsequently be held at least once every twelve
months. Such meeting is called an "Ordinary Meeting". All other
general meetings are called "Extraordinary
<PAGE> 19
General Meetings". The Board of Directors may summon Extraordinary
General Meetings, whenever they think fit.
11. Seven (7) days notice of every general meeting shall be given to all
shareholders whose names appear in the register of shareholders. Notice
to shareholders in Thailand shall be given by registered post, and
notice to shareholders abroad shall be sent by telefax and confirmed by
airmail at least ______( ) days prior to the date of the meeting. The
notice shall specify the place, the day and the hour of the meeting, and
the nature of business to be transacted.
12. Ordinary Meetings shall be summoned for the purpose of:
(1) Reviewing the report of the Board of Directors covering work done
during the previous period and suggestions as to future courses
of action.
(2) Considering the Balance Sheet and the Profit and Loss Account of
the preceding fiscal year and approving the same.
(3) Approving payment of dividends and remunerations to directors and
the apportionment of amounts as reserve capital.
(4) Election of new directors in place of those who must retire on
the expiration of their terms.
(5) Appointment of an auditor and the fixing of his/her remuneration.
(6) Other business.
13. Shareholders or their authorized representatives representing at least
___________ per cent (%) of the Company's shares shall constitute a
quorum for all general meetings.
14. In casting votes at a general meeting, each shareholder of ordinary
shares shall have one vote for each share of which he is the holder.
All voting shall be conducted by poll. All ordinary resolutions shall
require a _______per cent (%) of the votes except as provided below.
Decisions on the following matters shall be made by special resolution
only, which requires approval by 75% of the votes at a general meeting,
and 66-2/3% of the votes at a subsequent general meeting according to
procedures prescribed in the Civil and Commercial Code:
(1) To amend the Memorandum or Articles of Association.
(2) To increase registered capital.
(3) To reduce registered capital.
(4) To dissolve the Company.
<PAGE> 20
(5) To amalgamate with another company.
15. Any shareholder may vote by proxy, provided the power given to such proxy
is in writing. The instrument appointing a proxy shall be dated and signed
by the shareholder and shall contain the following particulars:
(1) The number of shares held by the shareholders.
(2) The name of the proxy.
(3) The meeting or meetings or the period for which the proxy is
appointed.
A Shareholder being a juristic person registered outside of Thailand may
appoint a proxy by telex and he same shall be accepted if it purports to
be sent by an officer of that juristic person. The appointment of proxy by
telex shall be confirmed in due course by an instrument under seal or
under the hand of an officer of the juristic person duly authorized.
Subject to the foregoing, instruments appointing proxies shall be in such
form and be executed in such manner as the Board of Directors may from
time to time determine or in particular cases accept.
If a proxy proposes to vote at a meeting, the instrument of appointment of
the proxy must be deposited with the Chairman at or before the beginning
of that meeting.
16. The Chairman of the Board of Directors shall preside at every general
meeting. If there is no such Chairman or if he is not present within
fifteen (15) minutes after the time appointed for holding the meeting, the
shareholders present may elect one of the other directors to be Chairman.
17. The Chairman may postpone a general meeting with the consent of the
shareholders. But in the succeeding meeting no other business may be
discussed except that pending from the previous meeting.
CHAPTER IV
Directors and Auditors
18. A Board of Directors shall be elected by the general meeting to carry out
the Company business under the control of the general meeting of
Shareholders and subject to these Articles.
A director need not be a shareholder in the Company.
A director can be removed for any reason by the general meeting.
A director shall not be personally liable for any acts or omissions except
those involving fraud or willful wrongdoing.
<PAGE> 21
19. The Company's directors shall be five (5) in number.
At all times, the directors shall include three (3) directors who have been
nominated by a simple majority (based on voting rights) of the Class A
Shareholder, and two (2) directors who have been nominated by a simple
majority (based on voting rights) of Class B Shareholder.
20. The Board of Directors may elect one of the directors as Chairman.
21. At the first Ordinary Meeting after the registration of the Company and at
the first Ordinary Meeting in every subsequent year, one-third of the
directors, or, if their number is not a multiple of three, then the number
nearest to one-third must retire from office. A retiring director is
eligible for re-election.
22. Any vacancy among the members of the Board of Directors occurring
otherwise than under Article 18 or 21 may be filled by the Board of
Directors upon nomination by the shareholders which nominated the director
whose office is vacated. Any person so appointed shall retain office only
during such time as the director whom he replaces would have been entitled
to retain the same.
23. Any director may vote by proxy, provided the power given to such proxy is
in writing. An instrument appointing a proxy shall specify the meeting or
meetings or the period for which the proxy is appointed and shall be in
such form and be executed in such manner as the Board of Directors may from
time to time determine.
24. Regular meetings of the Board of Directors shall be held at such times and
places as the Board may determine. In addition, special meetings of the
Board may be called by the Chairman or by the Managing Director at the
registered office of the company or such other place as a majority of the
directors may agree. Not less than seven (7) days notice of a special
meeting shall be given to each director by letter, telefax or telex as
appropriate. Such notice to any director may be waived or shortened by that
director and shall be deemed waived by his presence at the meeting.
25. Whenever any notice whatsoever is required to be given to any director or
whenever a matter is submitted at any meeting of directors and such matters
were omitted from the proposed agenda for such meeting in the notice
therefore, a written waiver of such notice or of such omission, signed by
the person or persons entitled to any such notice whether before or after
the time of the meeting stated herein, shall be deemed the equivalent to
the timely giving of such notice or the including of such matter in the
proposed agenda, as the case may be.
26. At all meetings of the Board of Directors, a quorum shall consist of a
majority of directors. A proxy appointed under Article 23 shall be counted
in determining the presence of a quorum.
27. All actions, appointments and decisions of the Board of Directors shall be
decided by a simple majority vote.
<PAGE> 22
The Board of Directors may adopt a resolution without holding a meeting
if all directors approve the action by placing their signatures on the
original copy of the resolution. Any such resolution shall be binding
on the Company only after all of the directors have signed the
resolution. The duly signed resolution shall be delivered to the
Chairman and placed in the Minutes Book of the Company. Such resolution
may consist of several documents in the like form each signed by one or
more of the directors.
28. An auditor shall be elected and his remuneration fixed every year at an
Ordinary Meeting. A retiring auditor is eligible of a re-election. No
Company's director, representative nor employee may be elected as
auditor during the period of his office.
CHAPTER V
Books and Accounts
29. The annual accounting year of the Company shall commence and terminate
on the 1st January and 31st of December respectively.
30. The Company's books and accounts shall be maintained according to
international accounting practice and procedures generally acceptable
in Thailand.
31. The directors shall cause true and complete accounts to be kept:
(1) of the sums received and expended by the Company and of the
matters in respect of which each receipt or expenditure takes
place;
(2) of the assets and liabilities of the Company, and
(3) of the shareholder's equity and capital reserves.
32. The directors shall make a balance sheet at least once in every twelve
months, at the end of such twelve months as constitute the accounting
year of the Company. It must contain a summary of the assets and
liabilities of the Company and a profit and loss account.
33. The directors shall have the balance sheet examined by the company's
auditor and submitted to a general meeting for adoption within four
months after the end of the accounting year. A copy of the balance
sheet must be sent to every person entered in the register of
shareholders at least three (3) days before the general meeting.
34. The directors must cause minutes of all proceedings and resolutions of
meeting of shareholders and directors to be duly entered in the books
which shall be kept at the registered office of the Company. Any such
minutes signed by the Chairman of the meeting at which such resolutions
were passed or proceedings held, or by the Chairman of the next
succeeding meeting, are presumed correct evidence of the matters therein
contained, and all resolutions and proceedings of the meeting so
recorded in the minutes are presumed to have been duly passed.
<PAGE> 23
CHAPTER VI
Dividends and Reserves
35. Except for interim dividends, as provided in Article 41, no dividend may be
declared except by a resolution passed in a general meeting.
Notice of any dividend that may have been declared shall be published at
least twice in a local paper or given by letter to each shareholder whose
name appears in the register of shareholders.
36. The Company must appropriate to a reserve fund at each distribution of
dividends, at least one-twentieth of the profits, until the reserve fund
reaches one-tenth of the capital of the Company. Notwithstanding the
foregoing, the director may submit to the general meeting a resolution to
appropriate amounts to other reserve funds as may seem desirable in
executing the Company's business.
37. The Board of Directors may from time to time pay to the shareholders such
interim dividends as are recommended by the Board of Directors to be
justified by the profit of the Company.
CHAPTER VII
Increases in Registered Capital
38. All new shares issues by the Company, must be offered to the shareholders
in proportion to the shares held by them.
Such offer must be made by notice specifying the number of shares to which
the shareholder is entitled, and fixing a date after which the offer, if
not accepted shall be deemed to be declined.
After such date or on the receipt of an intimation from the shareholder
that he declines to accept the shares offered, the director may offer
such shares for subscription to the other shareholder or subscribe for
such shares himself.
**************
<PAGE> 24
(Draft)
MEMORANDUM OF ASSOCIATION
OF
ADFLEX (THAILAND) LIMITED
****************
The contents of the Memorandum of Association of the Company are as follows:
Clause 1. The name of the Company is "ADFLEX (THAILAND) LIMITED".
Clause 2. The registered office of the Company will be situated in
[insert locations, e.g., Bangkok].
Clause 3. The objects for which the Company is to be established total 12
in number, as set forth on the attached form.
Clause 4. The liability of each shareholder is limited to the amount, if
any, unpaid on the shares held by him.
Clause 5. The capital of the Company shall be Baht 75,000,000 (Seventy-
Five Million), divided into 7,500,000 (Seven Million Five
Hundred Thousand) shares of Baht 10 (Ten) each.
Clause 6. The name, address, occupation, signature and number of shares
subscribed by each of the 7 promoters are as follows:
(1) I, Mr. Niwes Phancharoenworakul; Occupation: Lawyer; Age: 45;
Residing at: 1/70 Moo 14, Pinklao-Nakornchaisri Road,
Kwaeng Talingchan, Khet Talingchan, Bangkok.
Subscribed: 1 share. (Signed) _______________________________
(2) I, Mrs. Ratana Poonsombudlert; Occupation: Lawyer; Age: 33;
Residing at: No. 24/4 Moo 3 Suksawat 70 (Soi Krunai) Suksawar Road,
Tambol Krunai; Amphur Prapadaeng, Changwad Samutprakarn.
Subscribed: 1 share. (Signed) _______________________________
(Signed) _________________ Promoter who applied
( ) for the Registration
- - --------------------------------------------------------------------------------
Page 1 of the total 3 pages (Signed) Registra
Document attached to the ---------------------
( )
<PAGE> 25
Memorandum of Association of ADFlex (Thailand) Limited Page 2
- - --------------------------------------------------------------------------------
(3) I, Mr. Prakasit Itharat; Occupation: Lawyer; Age 29;
Residing at: No. 345/1 Soi Samsen 28, Samsen Road, Kwaeng
Tanonnakornchaisri, Khet Dusit, Bangkok
Subscribed: 1 share. (Signed)________________________
(4) I, Miss Chadaporn Ruangtoowagoon; Occupation: Lawyer; Age 30;
Residing at: No. 25/5 Soi 2 Rajchiengseng Road, Tambol Haiya, Amphur
Muang, Changwad Chiengmai
Subscribed: 1 share. (Signed)________________________
(5) I, Miss Prisna Suangwanna; Occupation: Lawyer; Age 31;
Residing at: 126/4 Moo 7, Ramintra Km. 4 Road, Kwaeng Thalang, Khet
Bangkhen, Bangkok
Subscribed: 1 share. (Signed)________________________
(6) I, Mr. Veerapoj Visessinlapanond; Occupation: Lawyer; Age 28;
Residing at: No. 1242 Soi Saenavilla Village, Happy Land Road, Kwaeng
Klongjun, Khet Bangkapi, Bangkok.
Subscribed: 1 share. (Signed)________________________
(7) I, Mr. Kulchai Chungsathaporn; Occupation: Lawyer; Age 22;
Residing at: No. 35/2 Moo 3 Phaholyothin Road, Kwaeng Anusawaree, Khet
Bangkhen, Bangkok.
Subscribed: 1 share. (Signed)________________________
(Signed)____________________________ Promoter who applied
() for the Registration
- - --------------------------------------------------------------------
Page 2 of the total 4 pages (Signed)________________Registrant
Document attached to the ( )
application No. ___/___
<PAGE> 26
ATTESTATION
I, Mr. Panom Jaisaen; Age: 27 years;
Residing at: 1669/651 Moobaan Pincharoen 2, Songprapa Road, Kwaeng Srigan,
Khet Donmuang, Bangkok.
I, Mr. Yutthapong Posuwan Age: 28 years;
Residing at: 1669/651 Moobaan Pincharoen 2, Songprapa Road, Kwaeng Srigan,
Khet Donmuang, Bangkok.
Do hereby certify that the above-mentioned promoters have given their hands in
our presence.
(Signed) ________________________ Witness
(Mr. Panom Jaisaen)
(Signed) ________________________ Witness
(Mr. Yutthapong Poosuwan
This Memorandum of Association is made on
Stamp Duty
Original: 200 Baht
Copy: 5 Baht
(Signed) ________________________ Promoter who applied
() for the Registration
_______________________________________________________________________________
Page 4 of the total 4 pages (Signed) _____________Registrant
Document attached to the ( )
application No. ..../....
<PAGE> 27
DETAILS OF OBJECTS
OF
ADFlex (Thailand) Limited
The objectives for which the Company is established are:
1. To design, fabricate and manufacture flexible circuits and related
products, including finishing and assembly of flexible circuits.
2. To render services in finishing and assembly of flexible circuits and
related products.
3. To lease, construct, occupy and operate warehouses, factories, workshops,
laboratories and other facilities relating to the activities described in
(1) and (2) above; and to import, store, sell by wholesale or retail and
export the materials, supplies and products of the Company.
4. To import, buy, hire, hire-purchase, register, sell, sell with right of
redemption, exchange, mortgage, pledge, accept pledge, or otherwise
acquire and dispose of machinery, equipment, parts and tools for the
Company's business.
5. To lease land and other immovable property and to build and own any
construction thereon for use in the Company's business. [to be amended if
BOI grants permission to own land]
6. To apply for, acquire, hold, license, transfer and dispose of patents,
trademarks, copyrights, know-how, tradenames and other intellectual
property rights which are necessary or useful to the Company's business.
7. To contact public bodies, municipalities, localities, and other official
offices in order to acquire rights, permits, concessions and privileges
which are necessary or desirable for the Company's business and to
administer and observe such rights, permits, concessions or privileges.
8. For the Company's business, to borrow and lend money, with or without
interest and with or without security, except in such a way as to
constitute finance or securities company activity, to guarantee the
payment of loans by any natural or juristic person, and accept and give
pledges and other security.
9. To have an interest in any other limited companies or partnerships whose
objectives are similar to or different from those of the Company, and
establish agents, brokers, commission agents and branch offices of the
Company anywhere in the world.
10. To bring and defend actions before any court, submit any dispute to
mediation or arbitration and enter into any agreement or settlement in
carrying out the objectives of the Company.
11. To issue guarantees for the purposes of the Company and its employees to
the Immigration, Customs, Revenue and Police authorities of Thailand, and
to provide bail and security in criminal or civil cases.
12. The Company is empowered to issue shares at or above par value.
<PAGE> 28
EXHIBIT B
FACILITIES AGREEMENT
FACILITIES AGREEMENT (the "Agreement") made this ___ day of __________,
1996, by and between ADFlex Thailand Limited, a Thailand private limited company
(the "Company"), Hana Microelectronics Public Co., Ltd., a Thailand public
limited company ("Hana"), and ADFlex Solutions, Inc., a Delaware corporation
("ADFlex").
WITNESSETH:
WHEREAS, Hana and ADFlex have formed the Company pursuant to the Master
Agreement between Hana and ADFlex dated _____________, 1996 (the "Master
Agreement"); and
WHEREAS, the Company engages in the business of finishing and assembly
of flexible circuits and all other activities related thereto in Thailand; and
WHEREAS, Hana owns certain facilities in the Zone 3 region of Thailand
suitable or capable of being made suitable for the finishing and assembly of
flexible circuits; and
WHEREAS, Hana desires to provide the facilities to the Company and the
Company desires to use such facilities on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants of the parties hereinafter set forth, it is agreed as follows:
1. DEFINITIONS.
1.1 "Agreement" shall mean this Facilities Agreement.
1.2 "Facilities" shall mean the existing manufacturing area of
approximately 10,000 square feet, common parking, playground and cafeteria, and
such other facilities necessary to support the manufacturing area to be
constructed by Hana in accordance with the provisions of Section 2.1.1, all
owned by Hana and located in the Zone 3 region of Thailand.
1.3 "Lease" shall mean the form of lease between Hana and the Company
attached hereto as Exhibit A.
2. FACILITIES
2.1 Hana covenants to the Company and ADFlex that it shall provide the
Facilities in accordance with the following terms and conditions:
2.1.1 Hana shall lease the Facilities to the Company in
accordance with the terms of this Agreement and the Lease, which Lease shall be
executed by the Parties simultaneously with this Agreement and shall be
effective upon delivery of the Facilities to the Company in accordance with
Section 2.1.2. Hana represents and warrants that the Facilities are or will be,
upon delivery to the Company, comparable in quality to other electronic
<PAGE> 29
manufacturing facilities in the Zone 3 region of Thailand. Hana shall be
responsible for preparing the Facilities for occupancy by the Company, including
the construction of additions to the Facilities support structure as necessary
to support the Company's business. Hana shall permit the Company to install
signage on the building to display the Company's name. The Company shall be
responsible for the cost of any additional environmental systems determined to
be necessary for operation of the Company's specific manufacturing processes and
the cost of signage to display the Company's name. All other costs of preparing
the Facilities for occupancy and manufacturing shall be borne by Hana.
2.1.2 Hana shall deliver the Facilities ready for occupancy
and in compliance with Section 2.1.1 and Section 4 not later than October 1,
1996. The Company will notify Hana in writing at least three months prior to the
date the Facilities are required of such start date (the "Start Date").
2.1.3 The Company shall have the option to expand the
Facilities' manufacturing space up to 20,000 square feet. Upon notice from the
Company exercising this option, Hana shall on a best efforts basis endeavor to
expand the Facilities and shall deliver the expanded Facilities ready for
occupancy within four months of receipt of such notice. The Company shall be
responsible for the cost of any additional environmental systems determined to
be necessary for operation of the Company's specific manufacturing processes in
connection with the expansion. All other costs of the expanding the Facilities
shall be borne by Hana.
2.1.4 Hana shall be responsible for the cost of all routine
maintenance and repairs to the Facilities, including the buildings and the
building support equipment. The Company shall report all maintenance and repair
problems in writing to Hana. If Hana does not correct the problem within 30 days
of receipt of written notice from the Company (or such longer time as agreed to
by the Company), the Company may take necessary action to correct the problem
and submit a statement for such services to Hana for payment.
2.2 The Company shall be responsible for the payment of all utilities
required for the Facilities from and after delivery of the Facilities for
occupancy in accordance with Section 2.1.2.
3. PAYMENT.
3.1 Commencing on the Start Date, the Company shall pay Hana $2.00 U.S.
per square foot of manufacturing space per month, which amount shall be paid
monthly to Hana at the address set forth in Section 12.2 or such other address
designated by Hana. ADFlex shall guarantee the payment to Hana by the Company in
accordance with this Section 3.
2
<PAGE> 30
4. COMPLIANCE.
4.1 Hana shall ensure that the Facilities, including any additional
construction or expansion, comply with all government codes, rules and
regulations governing land use, zoning, and manufacturing and shall be
responsible for making any required modifications to the Facilities to meet such
codes, rules and regulations. Prior to occupancy by the Company, Hana shall
certify to the Company that the Facilities comply with all applicable government
codes, rules, and regulations for facilities of this kind and for their intended
use.
5. TERM.
5.1 This Agreement will become effective as of the date hereof and will
remain in effect for a period of two years. This Agreement will automatically
renew for additional one year terms unless either party provides notice to the
other of its intent to terminate the Agreement not less than 180 days prior to
the expiration of the initial or any renewal term; provided that for each
renewal term the parties shall negotiate in good faith the payment to made by
the Company pursuant to Section 3.1 hereof, taking into consideration the
effects of inflation and current market conditions.
6. MEDIATION AND ARBITRATION.
6.1 If a dispute, controversy or claim arises out of or relates to this
Agreement or the breach, termination or validity hereof, and if such dispute,
controversy or claim cannot be settled through direct good faith discussions
between the parties, the parties shall first endeavor to settle the dispute in
an amicable manner by mediation under the Commercial Mediation Rules of the
American Arbitration Association ("AAA") before having recourse to arbitration.
If either party believes, for any reason whatsoever, after the mediation process
has begun that it will not lead to a satisfactory resolution of the matter, it
may give written notice of that belief to the other party, and proceed to
arbitration pursuant to the following provisions of this Section 6.
6.2 To the extent not settled as provided in Section 6.1, any dispute,
controversy or claim arising out of or relating to this Agreement or the breach,
termination, or validity hereof, shall be settled by arbitration in accordance
with the International Arbitration Rules of the AAA in effect on the date of
this Agreement. The arbitration shall be the sole and exclusive forum for
resolution of the dispute, controversy or claim and the award shall be final and
binding to the extent permitted by law.
6.3 There shall be three arbitrators, each of whom shall be
disinterested in the dispute, controversy or claim and shall have no connection
with either party. ADFlex and Hana shall each name an arbitrator and shall
promptly, but no later than 30 days after delivery of the arbitration demand,
file with the AAA a notice of appointment as provided in the International
Arbitration Rules specified above. The two arbitrators so chosen shall select a
third arbitrator who shall act as chairperson of the arbitration. If either
party entitled to name an arbitrator should abstain from doing so, or should the
two arbitrators named as provided above fail to select a third arbitrator, then
at the request of either party, the President of the AAA shall select an
arbitrator to fill the vacant position within ten days of such request.
3
<PAGE> 31
6.4 The place of arbitration shall be Chandler, Arizona. The
arbitration shall be conducted in the English language and any foreign language
documents presented at such arbitration shall be accompanied by an English
translation thereof. The arbitrators shall apply the law of Arizona. The parties
consent that the United States District Court for the District of Arizona in
Phoenix, Arizona and courts in Thailand shall each have non-exclusive
jurisdiction with respect to all aspects of the enforcement of the arbitration
provisions of this Agreement. Judgment upon the award rendered may be entered
into any court having jurisdiction, or application may be made to such court for
judicial recognition of the award or an order of enforcement thereof, as the
case may be.
6.5 Arbitration awards rendered pursuant to this Section 6 shall be
paid in United States dollars.
7. GOVERNING LAW.
7.1 This Agreement shall be construed, enforced and governed by the
laws of the State of Arizona without regard to principles of conflicts of law.
8. ASSIGNMENT.
8.1 No party shall assign or transfer, or purport to assign or
transfer, any of its rights or obligations under this Agreement without the
prior written consent of the other party.
8.2 Except as set forth in this Section 8, this Agreement shall be
binding upon and shall inure to the benefit of the successors and permitted
assigns of the respective parties hereto.
9. WAIVER, FORBEARANCE AND VARIATION.
9.1 The rights of the parties under this Agreement shall not be
prejudiced or restricted by any indulgence or forbearance extended by one party
to the other party. No waiver by either party in respect of a breach shall
operate as a waiver in respect of any subsequent breach.
9.2 This Agreement shall not be varied, cancelled or modified unless
the variation, cancellation or modification is expressly agreed to in writing by
a duly authorized representative of each party.
10. SEVERABILITY.
10.1 If any provision of this Agreement is found by a court or other
competent authority to be void or unenforceable, it shall be deemed to be
deleted from this Agreement and the remaining provisions shall continue to
apply. The parties shall negotiate in good faith in order to agree to the terms
of a mutually satisfactory provision to be substituted for the provision found
to be void or unenforceable.
4
<PAGE> 32
11. FORCE MAJEURE.
11.1 The parties understand and agree that, in the event that an act of
the national or local government (including without limitation currency
restrictions), or war conditions, or fire, flood or labor trouble or any other
circumstance beyond the parties' control, should prevent, curtail or delay the
performance by the parties of the provisions of this Agreement, then such
non-performance or delay shall not be considered a breach of this Agreement and
shall be excused, provided that the party so excused shall, promptly after
cessation of the force majeure circumstance, resume performance of its duties
under the Agreement and, to the extent reasonably practicable, perform the
duties previously prevented. Any force majeure circumstance that persists for
more than 180 days will be ground for termination.
12. MISCELLANEOUS PROVISIONS.
12.1 This Agreement and the Master Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersede all prior oral and written discussions and understandings. In the
event of any conflict between the terms of this Agreement and the terms of the
Master Agreement, the terms of the Master Agreement shall control.
12.2 Any notice, advice, election, request, or order, demand or other
direction required or permitted to be given under this Agreement shall be in
writing and in the English language, and (unless some other notice giving the
same is specified or accepted in writing by the recipient) shall be effective
(i) when personally delivered during normal business hours to the addressee at
the address designated for such delivery, (ii) on the date of receipt specified
on any return receipt if it shall have been deposited in the mails, certified or
registered with return receipt requested and postage thereon fully prepaid,
addressed to such address, or (iii) on the day it shall have been given by
facsimile transmission (with written confirmation of receipt) to such address,
whichever the foregoing shall first occur. Until otherwise specified by notice,
the addresses for any such notice, advise, election, request, order, demand or
other direction shall be:
If to the Company:
ADFlex Thailand Limited
Attention:
Telephone:
Facsimile:
If to ADFlex:
ADFlex Solutions, Inc.
Attention: Michael L. Pierce
2001 West Chandler Boulevard
Chandler, Arizona 85224, U.S.A.
Telephone: (602) 786-8206
5
<PAGE> 33
Facsimile: (602) 786-8280
If to Hana:
Hana Microelectronics Public Co. Ltd.
c/o Richard Han
101//2 Moo 4, EPZ
Northern Region Industrial Estate
T. Ban Klang, A. Muang,
Lamphun 51000, Thailand
Telephone: 66 2/551-1297, 521-4935/9
Facsimile: 66 2/552-4906, 551-1299
12.3 The headings in this Agreement are inserted for convenience only
and do not affect its construction.
12.4 Time is of the essence of this Agreement.
13. ADFLEX PURCHASE OF EQUITY INTEREST.
13.1 If ADFlex exercises its option to purchase Hana's equity interest
in the Company, as provided in the Master Agreement, and if Hana so requests,
the parties agree to renegotiate this Agreement in good faith. Any changes to
the terms and conditions set forth herein shall not be effective for six months
from the date upon which such changes are mutually agreed to in writing by the
parties.
IN WITNESS WHEREOF, parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
ADFlex Thailand Limited,
a Thailand private limited company
By___________________________________________
Title________________________________________
Hana Microelectronics Public Co., Ltd.,
a Thailand public limited company
By___________________________________________
Title________________________________________
6
<PAGE> 34
ADFlex Solutions, Inc., a Delaware corporation
By___________________________________________
Title________________________________________
7
<PAGE> 35
FINAL LEASE ARRANGEMENTS
LEASE BETWEEN HANA AND ATL:
- - - Premises of 14655 sq. ft. (Original agreement calls for up to 20,000)
- - - Term: Two years, renewable for a three year term.
- - - Rent: 185,386 Baht per month ($7,242 at 25.6 Baht, or $7,415 at 25 Baht to
the dollar).
- - - Deposit of two months' rent.
- - - Lessee to pay its portion of the insurance.
LEASE BETWEEN HIREL AND ADFLEX SOLUTIONS
- - - Premises of 14655 sq. ft.
- - - Term: Two years, renewable for three year term.
- - - Rent: $21,982.50 per month. With ATL payment this approximates $2 per foot.
- - - Deposit of two months' rent.
<PAGE> 36
LEASE AGREEMENT
THE LEASE AGREEMENT is made this 16th day of April, 1996 at Hana
Microelectronics Public Co., Ltd. Lamphun, Thailand BETWEEN
HANA MICROELECTRONICS PUBLIC COMPANY LIMITED, represented by Mr. Richard David
Han and Mr. Voraphoj Thepvanaprasiddhi, its authorized directors, having
registered office at 10/4 Moo 7, Vibhavadi-Rangsit Rd., Kwang Talad Bangkhen,
Khet Donmuang, Bangkok Metropolis, Thailand (hereinafter referred to the
"Lessor") of one part and
ADFLEX (THAILAND) LTD., represented by Mr. Rolando Esteverena, its authorized
director, having registered office at 101/2 Moo 4, Tambol Ban Klang, A. Muang
Lamphun, Lamphun Province (hereinafter referred to as the "Lessee") of another
part.
NOW THEREFORE, the parties agree as follows:
1. LEASED PREMISES
The Lessor hereby grants to the Lessee and the Lessee does hereby accept
from the Lessor a lease of a facilities, manufacturing area of
approximately 14655 square feet located at 101/2 Moo 4, Tambol Ban
Klang, Amphur Muang Lamphun, Lamphun Province, the detailed list of
property is attached herewith (hereinafter referred to as the "Leased
Premises")
2. PURPOSE
2.1 The purpose of the lease is for the manufacturing and assembling
of flexible circuits by the Lessee and other related trade
activities. The Lessee agrees not to possess the Leased Premises
for any purpose which is against or contradictory to any law and
not to use said Leased Premises for purposes other than those
specified above, without a prior written consent from the Lessor
2.2 Upon termination of this lease and/or the expiration of the
lease term, the right to possess the Leased Premises shall be
immediately returned to the Lessor.
3. LEASE TERM
Subject to the provisions hereof, the term of this Agreement shall be 2
years, commencing on the 1st day of June, 1996 and expiring on 31st day
of May, 1998. Upon the expiration of this lease term, should the Lessee
wish to renew the lease, the Lessor agrees to renew this lease as
stipulated under Clause 4.
4. RENEWAL OF THE LEASE TERM
Except for Clause 5 below the Lessor grants to the Lessee the option to
renew this lease for a further 3 year term upon the same terms and
conditions prescribed hereunder. In exercising this option, the Lessee
shall provide to the Lessor not less than 30-day written notice prior to
the expiration of the lease term.
<PAGE> 37
5. THE RENT
The Lessor agrees to lease to the Lessee and the Lessee
agrees to take the lease from the Lessor of the Leased Premises at an
initial rental rate of Baht 185,386 (One Hundred Eighty Five Thousand
and Three Hundred Eighty Six Baht Only) per month payable in advance
on the 1st day of every month at the Lessor's office commencing on....
1st June...., 1996. In the event that the Lessee shall vacate the Leased
Premised prior to the expiry of the lease term, the Lessee shall remain
liable to pay the rent until expiry of the said term. The Lessor shall
issue to the Lessee a receipt of such payment.
6. THE DEPOSIT
The Lessee shall pay to the Lessor on the execution of this Agreement a
deposit in the sum of 370,772 (2 months) to secure the due performance
of this Agreement. The said deposit shall be retained by the Lessor
throughout the lease term free of any interest and shall not be deemed
to be or treated as payment of the rental. The said deposit shall be
refunded to the Lessee or subsequent to the termination of this
Agreement, when the Lessee has settled all water, electricity, telephone
bills and other expenses and has produced the receipts thereof to the
Lessor and settled any and all outstanding debts owed to the Lessor
including any payment for damages incurred to the Leased Premises and
when the Lessee has yielded up the Leased Premises in good condition,
normal wear and tear excepted.
7. THE LESSOR'S COVENANTS
The Lessor covenants to the Lessee as follows:
7.1 The Lessor owns the Leased Premises and has the right to lease
the Leased Premises to the Lessor evidenced.
7.2 The Lessor agrees that the Lessee duly observing and performing
the covenants herein contained may possess and peaceably enjoy
the Leased Premises without any intervention from the Lessor or
any third person acting on behalf of the Lessor, throughout the
lease term and the renewal thereof.
7.3 Throughout the lease term, if the Lessor defaults on its
obligations with any relevant lenders or mortgagors or any
person who may or has rights or encumbrances against the Leased
Premises in respect of the Leased Premises, the Lessor hereby
agrees to indemnify the Lessee against forfeiture of the
premises resulting from such default and shall compensate the
Lessee for any loss or damage directly resulting from such
forfeiture.
7.4 To facilitate the moving of the Lessee's property after the
termination or expiration of the lease term, the Lessor grants
to the Lessee the access to said Leased Premises within
reasonable specified period without any written consent from
the Lessor.
<PAGE> 38
8. THE LESSEE'S COVENANTS
The Lessee covenants to the Lessor as follows:
8.1 Throughout the Lease term and including the renewal hereof, the
Lessee agrees to be responsible for payment of the signboard tax,
if any, and any expenses concerning the Lessee's business
operation.
8.2 The Lessee shall be responsible to pay the water, electricity,
telephone charges and any other fees incurred from the use of
said Leased Premises.
8.3 The Lessee agrees to let the Lessor or its authorized
representatives to enter and inspect the Leased Premises during
normal office hours, upon reasonable prior notice and within one
month after the Lessor shall have given written notice to the
Lessee of any defects, decays or want of reparation, to repair
and make good the same.
8.4 The Lessee agrees not to erect any structure, nor to make or
suffer to be made any alteration or improvement in or additions
to or upon the Leased Premises nor to commit or permit or suffer
any waste spoilage or destruction in or upon the Leased Premises
without the written consent of the Lessor.
During the lease period the Lessee shall have the right to
install, operate and remove, regardless of how attached or fixed
to the Leased Premises, all machinery, equipment, fixtures,
materials, and things as are required for its business, subject
to any necessary prior governmental approvals.
8.5 Upon termination hereof and/or upon expiration of the lease term
or renewal hereof (if any), it shall be deemed that the immovable
properties obtained after this lease is executed e.g. any
building constructed thereon, including permanent fixtures such
as air pipes, electrical wires and other similar kind of property
shall all become the Lessor. Subject to Clause 8.7 hereof, all
movable properties brought and installed within the Leased
Premises after this lease is in force e.g. machinery and
accessories installed thereon, irrespective of whether permanent
or temporary shall be deemed as belonging to the Lessee and the
Lessee is entitled to move those properties whether before or
after the termination hereof within reasonable time, without
obtaining written consent from the Lessor.
8.6 The parties agreed that the Lessor shall keep insure the Leased
Premises to its full value throughout the lease term by
specifying the Lessor as beneficiary and the Lessor shall have
the duty to pay the premium. The Lessee will be charged in
proportion of the leased space and will pay the Lessor the
premium as calculated.
<PAGE> 39
In additional, the Lessee shall be entitled to insure the
machineries and equipment brought onto or installed by the
Lessee throughout the Lease term, and the Lessee shall be named
as the sole beneficiary and the Lessee shall have the duty to
pay the premiums directly to its appointed insurance company.
8.7 The parties agree that in the event that the Lessee's property
is attached by the Court's judgment or order or becomes
bankrupt, or the property is subject to any temporary
receivership, the Lessee agrees that the Lessor may immediately
terminate this Agreement without giving to the Lessee any prior
notice.
8.8 The Lessee shall not overload the concrete floors of the
Leased Premises in excess of its designed capacity nor use the
roof structure steel trusser and supporting columns for
excessive weight lifting or weight supporting purpose.
8.9 The Lessee shall not assign, sublet or otherwise part with or
share possession of the whole or any part of the Leased
Premises at any time during the term of the lease without the
written consent of the Lessor.
9. TERMINATION
9.1 If all or part of the Leased Premises are seized or expropriated
under any law or regulations which results in the Lessee's
inability to utilize the Leased Premises according to its
purpose as specified under Clause 2 hereof, the Lessee is
entitled to terminate the lease by providing the Lessor with
written notice within thirty (30) days following the date such
incident occurs and all the Lessee's obligations shall be deemed
to cease from the date such notice becomes effective. In the
event that compensation is granted by any government agency or
organization concerning such seizure or expropriation and the
compensation is granted directly for the Leased Premises, such
compensation amount shall become the Lessor's.
9.2 If a party (the "Default Party") hereto commits or fails to
commit any act which is deemed a breach to the provisions
hereof, the other party (the "Affected Party") must notify the
Default Party in writing to comply with provision of the
Agreement within fifteen (15) days. If the Default Party fails
to take any remedial action within the prescribed period without
giving due notice of the cause thereof to the Affected Party,
the Affected Party is entitled to terminate the agreement by
giving fifteen (15) days prior written notice, unless otherwise
mutually agreed.
10. NOTICE
Unless any one party shall change the address by written notice to the
other party, all notices or communications to or upon the respective
parties hereto shall be deemed to have been duly given or made by
registered mail at such
<PAGE> 40
addresses of the parties specified herein.
A notice period of 180 days required to terminate this agreement,
failing which this agreement will automatically renew after mutual
agreement on terms.
11. TERMS
The term "Lessor" and "Lessee" in this Agreement shall include their
successors and assigns. This Agreement shall be binding upon and inure
to the benefit of said persons.
12. FORCE MAJEURE
Neither party shall be responsible to the other for any loss or damage,
resulting from force majeure.
13. WAIVER
The failure of either party to enforce or to exercise at any time any
term of or right arising pursuant to this Agreement does not constitute
and shall not be construed as a waiver of such term or right and shall
in no way affect the party's right late to enforce or exercise it.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the Kingdom of Thailand.
This Agreement is made in duplicate with identical text. Each party retains one
copy of the Agreement. Both parties have thoroughly read and understood the
provisions hereof and have set their hands hereunder.
LESSOR:
HANA MICROELECTRONICS PUBLIC CO.,LTD.
[LOGO] BY: /s/ Richard David Han
------------------------------------
(MR. RICHARD DAVID HAN)
DIRECTOR
/s/ Voraphoj Thepvanaprasiddhi
------------------------------------
(MR. VORAPHOJ THEPVANAPRASIDDHI)
DIRECTOR
IN THE PRESENCE OF:
/s/ Kanyarat Jarawiwat WITNESS /s/ Warintorn Busapun WITNESS
- - ---------------------- ----------------------
(Miss. Kanyarat Jarawiwat) (Miss. Warintorn Busapun)
<PAGE> 41
Lessee:
ADFlex (Thailand) Ltd.
[ADFlex (Thailand) LOGO]
By: /s/ Rolando Esteverena
-------------------------------
(Mr. Rolando Esteverena)
Director
In the presence of:
/s/ Cheryl F. Byrne Witness /s/ Lydia B. Dalrymple Witness
- - ------------------- ----------------------
(Cheryl F. Byrne) (Lydia B. Dalrymple)
<PAGE> 42
EXHIBIT C
ADMINISTRATIVE AGREEMENT
ADMINISTRATIVE AGREEMENT (the "Agreement") made this ___ day of
__________, 1996, by and among ADFlex Thailand Limited, a Thailand private
limited company (the "Company"), Hana Microelectronics Public Co., Ltd., a
Thailand public limited company ("Hana"), and ADFlex Solutions, Inc., a Delaware
corporation ("ADFlex").
WITNESSETH:
WHEREAS, Hana and ADFlex have formed the Company pursuant to the Master
Agreement between Hana and ADFlex dated ___________, 1996 (the "Master
Agreement"); and
WHEREAS, the Company engages in the business of finishing and assembly of
flexible circuits and all other activities related thereto in Thailand; and
WHEREAS, Hana owns certain facilities in the Zone 3 region of Thailand
suitable or capable of being made suitable for the finishing and assembly of
flexible circuits and wishes to provide administrative services in connection
with the facilities and to assist the Company's business; and
WHEREAS, the Company desires to retain Hana's services on the terms and
subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
of the parties hereinafter set forth, it is agreed as follows:
1. DEFINITIONS.
1.1 "Agreement" shall mean this Administrative Agreement.
1.2 "Dormitory Complex" shall mean the housing facility operated and
leased by Hana and located in the Zone 3 region of Thailand.
1.3 "Facilities" shall mean the existing manufacturing area of
approximately 10,000 square feet, common parking, playground and cafeteria, and
such other facilities necessary to support the manufacturing area to be
constructed by Hana in accordance with the provisions of Section 2.1.1, all
owned by Hana and located in the Zone 3 region of Thailand.
1.4 "License Agreements" shall mean the License Agreement and the
Trademark License Agreement among the Company, ADFlex and Hana dated __________,
1996.
2. SERVICES. Hana covenants to the Company and ADFlex that it shall provide
administrative support services to the Company in connection with operation of
the Company's business at the Facilities as follows:
2.1 Hana shall be responsible for recruiting employees for the Company in
accordance with personnel qualifications and guidelines provided by the Company
and shall
<PAGE> 43
maintain all employee files. Hana shall assist the Company in obtaining any
documents necessary for the Company to employ personnel at the Facilities. Hana
shall maintain a personnel administrator on site during normal working hours,
who will be responsible for handling routine personnel issues.
2.2 Hana shall provide not less than one week of training in basic
employment skills to each employee of the Company within ten days after the
employee is hired by the Company. Hana shall not be responsible for any
technical training of the Company's employees but agrees to assist the Company
as necessary in connection with technical or any other training of the Company's
employees.
2.3 Hana shall assist the Company in obtaining all necessary customs or
other regulatory approvals for the Company to transact business in Thailand and
to transport the Company's products and materials into and out of Thailand.
2.4 Hana shall assist the Company in its relations with the Board of
Investment, including preparation of any application, reports, or other
documents required by the Board.
2.5 Hana shall make available to the Company's employees housing for not
less than 450 individuals in Hana's Dormitory Complex. Individual employees will
be responsible for arranging for housing directly with Hana and paying all
associated costs, including rent. Hana shall operate and manage the Dormitory
Complex.
2.6 Hana shall be responsible for processing and distributing the payroll
for all of the Company's employees and for all reporting requirements. Hana
shall maintain all books and records relating to payroll on behalf of the
Company.
2.7 The parties agree that the compensation package for the Company's
employees shall be similar to that currently prevailing at Hana Lamphun, and the
Company and Hana shall reasonably cooperate at all times during the term of this
Agreement to ensure such similarity.
3. PAYMENT.
3.1 The Company shall pay Hana $200,000 U.S. per year for the services
described in Section 2, which amount shall be paid in equal monthly payments to
Hana at the address set forth in Section 11.2 or such other address designated
by Hana. ADFlex shall guarantee the payment to Hana by the Company in accordance
with this Section 3.
4. TERM.
4.1 This Agreement will become effective as of the date hereof and will
remain in effect for a period of two years. This Agreement will automatically
renew for additional one year terms unless either party provides notice to the
other of its intent to terminate the Agreement not less than 180 prior to the
expiration of the initial or any renewal term.
2
<PAGE> 44
5. CONFIDENTIALITY.
5.1 Neither ADFlex, Hana nor the Company nor their respective employees or
agents shall divulge to any third person (other than those whose province it is
to know it or with proper authority) or use for any purpose any of the trade
secrets, know-how or confidential or proprietary information relating to the
others except pursuant to the License Agreements in furtherance of the business
of the Company; provided, however, that a party may divulge any such information
(i) in a proceeding to enforce its rights under this Agreement, or (ii) as
required by applicable law or the rules and regulations of a securities exchange
or automated quotation system. This restriction shall continue to apply after
the expiration or termination of this Agreement without limit in point of time
but shall cease to apply to secrets or information which come into the public
domain through no fault of the party concerned.
6. MEDIATION AND ARBITRATION.
6.1 If a dispute, controversy or claim arises out of or relates to this
Agreement or the breach, termination or validity hereof, and if such dispute,
controversy or claim cannot be settled through direct good faith discussions
between the parties, the parties shall first endeavor to settle the dispute in
an amicable manner by mediation under the Commercial Mediation Rules of the
American Arbitration Association ("AAA") before having recourse to arbitration.
If either party believes, for any reason whatsoever, after the mediation process
has begun that it will not lead to a satisfactory resolution of the matter, it
may give written notice of that belief to the other party, and proceed to
arbitration pursuant to the following provisions of this Section 6.
6.2 To the extent not settled as provided in Section 6.1, any dispute,
controversy or claim arising out of or relating to this Agreement or the breach,
termination, or validity hereof, shall be settled by arbitration in accordance
with the International Arbitration Rules of the AAA in effect on the date of
this Agreement. The arbitration shall be the sole and exclusive forum for
resolution of the dispute, controversy or claim and the award shall be final and
binding to the extent permitted by law.
6.3 There shall be three arbitrators, each of whom shall be disinterested
in the dispute, controversy or claim and shall have no connection with either
party. ADFlex and Hana shall each name an arbitrator and shall promptly, but no
later than 30 days after delivery of the arbitration demand, file with the AAA a
notice of appointment as provided in the International Arbitration Rules
specified above. The two arbitrators so chosen shall select a third arbitrator
who shall act as chairperson of the arbitration. If either party entitled to
name an arbitrator should abstain from doing so, or should the two arbitrators
named as provided above fail to select a third arbitrator, then at the request
of either party, the President of the AAA shall select an arbitrator to fill the
vacant position within ten days of such request.
6.4 The place of arbitration shall be Chandler, Arizona. The arbitration
shall be conducted in the English language and any foreign language documents
presented at such arbitration shall be accompanied by an English translation
thereof. The arbitrators shall apply the law of Arizona. The parties consent
that the United States District Court for the District of Arizona in Phoenix,
Arizona and courts in Thailand shall each have non-exclusive jurisdiction with
respect to all aspects of the enforcement of the arbitration provisions of this
Agreement.
3
<PAGE> 45
Judgment upon the award rendered may be entered into any court having
jurisdiction, or application may be made to such court for judicial recognition
of the award or an order of enforcement thereof, as the case may be.
6.5 Arbitration awards rendered pursuant to this Section 6 shall be paid
in United States dollars.
7. GOVERNING LAW.
7.1 This Agreement shall be construed, enforced and governed by the laws
of the State of Arizona without regard to principles of conflicts of law.
8. ASSIGNMENT.
8.1 No party shall assign or transfer, or purport to assign or transfer,
any of its rights or obligations under this Agreement without the prior written
consent of the other party.
8.2 Except as set forth in this Section 8, this Agreement shall be binding
upon and shall inure to the benefit of the successors and permitted assigns of
the respective parties hereto.
9. WAIVER, FORBEARANCE AND VARIATION.
9.1 The rights of the parties under this Agreement shall not be prejudiced
or restricted by any indulgence or forbearance extended by one party to the
other party. No waiver by either party in respect of a breach shall operate as a
waiver in respect of any subsequent breach.
9.2 This Agreement shall not be varied, cancelled or modified unless the
variation, cancellation or modification is expressly agreed to in writing by a
duly authorized representative of each party.
10. SEVERABILITY.
10.1 If any provision of this Agreement is found by a court or other
competent authority to be void or unenforceable, it shall be deemed to be
deleted from this Agreement and the remaining provisions shall continue to
apply. The parties shall negotiate in good faith in order to agree to the terms
of a mutually satisfactory provision to be substituted for the provision found
to be void or unenforceable.
11. FORCE MAJEURE.
11.1 The parties understand and agree that, in the event that an act of
the national or local government (including without limitation currency
restrictions), or war conditions, or fire, flood or labor trouble or any other
circumstance beyond the parties' control, should prevent, curtail or delay the
performance by the parties of the provisions of this Agreement, then such
non-performance or delay shall not be considered a breach of this Agreement and
shall be excused, provided that the party so excused shall, promptly after
cessation of the force majeure circumstance, resume performance of its duties
under the Agreement and, to the extent
4
<PAGE> 46
reasonably practicable, perform the duties previously prevented. Any force
majeure circumstance that persists for more than 180 days will be ground for
termination.
12. MISCELLANEOUS PROVISIONS.
12.1 This Agreement and the Master Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersede all prior oral and written discussions and understandings. In the
event of any conflict between the terms of this Agreement and the terms of the
Master Agreement, the terms of the Master Agreement shall control.
12.2 Any notice, advice, election, request, or order, demand or other
direction required or permitted to be given under this Agreement shall be in
writing and in the English language, and (unless some other notice giving the
same is specified or accepted in writing by the recipient) shall be effective
(i) when personally delivered during normal business hours to the addressee at
the address designated for such delivery, (ii) on the date of receipt specified
on any return receipt if it shall have been deposited in the mails, certified or
registered with return receipt requested and postage thereon fully prepaid,
addressed to such address, or (iii) on the day it shall have been given by
facsimile transmission (with written confirmation of receipt) to such address,
whichever the foregoing shall first occur. Until otherwise specified by notice,
the addresses for any such notice, advise, election, request, order, demand or
other direction shall be:
If to the Company:
ADFlex Thailand Limited
Attention:
Telephone:
Facsimile:
If to ADFlex:
ADFlex Solutions, Inc.
Attention: Michael L. Pierce
2001 West Chandler Boulevard
Chandler, Arizona 85224, U.S.A.
Telephone: (602) 786-8206
Facsimile: (602) 786-8280
If to Hana:
Hana Microelectronics Public Co. Ltd.
c/o Richard Han
101//2 Moo 4, EPZ
Northern Region Industrial Estate
T. Ban Klang, A. Muang,
5
<PAGE> 47
Lamphun 51000, Thailand
Telephone: 66 2/551-1297, 521-4935/9
Facsimile: 66 2/552-4906, 551-1299
12.3 The headings in this Agreement are inserted for convenience only and
do not affect its construction.
12.4 Time is of the essence of this Agreement.
13. ADFLEX PURCHASE OF EQUITY INTEREST.
13.1 If ADFlex exercises its option to purchase Hana's equity interest in
the Company, as provided in the Master Agreement, and if Hana so requests, the
parties agree to renegotiate this Agreement in good faith. Any changes to the
terms and conditions set forth herein shall not be effective for six months from
the date upon which such changes are mutually agreed to in writing by the
parties.
IN WITNESS WHEREOF, parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
ADFlex Thailand Limited,
a Thailand private limited company
By ____________________________________
Title _________________________________
Hana Microelectronics Public Co., Ltd.,
a Thailand public limited company
By ____________________________________
Title _________________________________
ADFlex Solutions, Inc., a Delaware corporation
By ____________________________________
Title _________________________________
6
<PAGE> 48
EXHIBIT D
LICENSE AGREEMENT
LICENSE AGREEMENT (the "Agreement") made this ___ day of __________, 1996,
by and among ADFlex Thailand Limited (the "Company"), a Thailand private limited
company and ADFlex Solutions, Inc., a Delaware corporation ("ADFlex"), and Hana
Microelectronics Public Co., Ltd., a Thailand public limited company ("Hana").
WITNESSETH:
WHEREAS, ADFlex engages in the business of the design and manufacture of
flexible circuits and owns certain technology for flexible circuit finishing and
assembly (the "ADFlex Technology"); and
WHEREAS, ADFlex and Hana have formed the Company to engage in the
finishing and assembly of flexible circuits and all other activities related
thereto in Thailand; and
WHEREAS, the Company desires to license the ADFlex Technology on the terms
and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
of the parties hereinafter set forth, the parties agree as follows:
1. DEFINITIONS.
1.1 "ADFlex Technology" shall mean the technology for flexible circuit
finishing and assembly owned by ADFlex including all patents, trade secrets,
know-how, processes, formulae, techniques, procedures, and other technical
information relating to the technology.
1.2 "Agreement" shall mean this License Agreement.
2. LICENSE.
2.1 ADFlex hereby grants to the Company a royalty-free, nontransferable,
nonexclusive license to use the ADFlex Technology and any improvements thereto
in its business. ADFlex shall provide the Company with the ADFlex Technology and
all documentation necessary for use of the ADFlex Technology. For a period of 90
days following delivery of the ADFlex Technology, ADFlex shall provide the
Company with training and otherwise assist the Company in implementing the
ADFlex Technology. The Company shall pay any out-of-pocket costs incurred by
ADFlex in connection with the training, including reasonable travel expenses.
ADFlex shall be responsible for personnel or any other costs associated with the
training. Thereafter, ADFlex shall provide additional support in the use of the
ADFlex Technology at its then current hourly rates, or if ADFlex has no current
rate, at a reasonable rate for the support.
<PAGE> 49
2.2 ADFlex shall provide to the Company, at no additional cost, any
improvements to its Technology and shall provide additional training to the
Company as necessary for the Company to implement the improvements.
3. OWNERSHIP.
3.1 The ADFlex Technology and any improvements thereto embody trade
secrets and confidential know-how and other confidential information of ADFlex,
which shall remain the exclusive property of ADFlex, subject only to rights
granted to the Company under this Agreement. It is expressly understood that no
title to or ownership of the ADFlex Technology, or any part thereof, is hereby
transferred to the Company.
4. CONFIDENTIALITY.
4.1 Neither ADFlex, Hana or the Company nor their respective employees or
agents shall divulge to any third person (other than those whose province it is
to know it or with proper authority) or use for any purpose any of the trade
secrets, know-how or confidential or proprietary information relating to the
other or contained in the ADFlex Technology except pursuant to this Agreement in
furtherance of the business of the Company. This restriction shall continue to
apply after the expiration or termination of this Agreement without limit in
point of time.
4.2 Notwithstanding Section 4.1, the ADFlex Technology will not be deemed
confidential if the Technology is (i) in the public domain at the time of
disclosure; (ii) published or otherwise becomes part of the public domain
through no fault of the receiving party after disclosure; or (iii) was received
from a third party who did not acquire it, directly or indirectly, from the
disclosing party under an obligation of confidence except where required by law.
5. TERM AND TERMINATION.
5.1 This Agreement and the license granted hereunder shall terminate upon
dissolution of the Company or if the Company ceases to use the ADFlex
Technology. Upon termination of this Agreement, the Company shall return to
ADFlex all materials relating to the ADFlex Technology provided to it and shall
cease use of the ADFlex Technology.
6. MEDIATION AND ARBITRATION.
6.1 If a dispute, controversy or claim arises out of or relates to this
Agreement or the breach, termination or validity hereof, and if such dispute,
controversy or claim cannot be settled through direct good faith discussions
between the parties, the parties shall first endeavor to settle the dispute in
an amicable manner by mediation under the Commercial Mediation Rules of the
American Arbitration Association ("AAA") before having recourse to arbitration.
If either party believes, for any reason whatsoever, after the mediation process
has begun that it will not lead to a satisfactory resolution of the matter, it
may give written notice of that belief to the other party, and proceed to
arbitration pursuant to the following provisions of this Section 6.
2
<PAGE> 50
6.2 To the extent not settled as provided in Section 6, any dispute,
controversy or claim arising out of or relating to this Agreement or the breach,
termination, or validity hereof, shall be settled by arbitration in accordance
with the International Arbitration Rules of the AAA in effect on the date of
this Agreement. The arbitration shall be the sole and exclusive forum for
resolution of the dispute, controversy or claim and the award shall be final and
binding to the extent permitted by law.
6.3 There shall be three arbitrators, each of whom shall be disinterested
in the dispute, controversy or claim and shall have no connection with either
party. ADFlex and Hana shall each name an arbitrator and shall promptly, but no
later than 30 days after delivery of the arbitration demand, file with the AAA a
notice of appointment as provided in the International Arbitration Rules
specified above. The two arbitrators so chosen shall select a third arbitrator
who shall act as chairperson of the arbitration. If either party entitled to
name an arbitrator should abstain from doing so, or should the two arbitrators
named as provided above fail to select a third arbitrator, then at the request
of either party, the President of the AAA shall select an arbitrator to fill the
vacant position within ten days of such request.
6.4 The place of arbitration shall be Chandler, Arizona. The arbitration
shall be conducted in the English language and any foreign language documents
presented at such arbitration shall be accompanied by an English translation
thereof. The arbitrators shall apply the law of Arizona. The parties consent
that the United States District Court for the District of Arizona in Phoenix,
Arizona and courts in Thailand shall each have non-exclusive jurisdiction with
respect to all aspects of the enforcement of the arbitration provisions of this
Agreement. Judgment upon the award rendered may be entered into any court having
jurisdiction, or application may be made to such court for judicial recognition
of the award or an order of enforcement thereof, as the case may be.
6.5 Arbitration awards rendered pursuant to this Section 6 shall be paid
in United States dollars.
7. GOVERNING LAW.
7.1 This Agreement shall be construed, enforced and governed by the laws
of State of Arizona without regard to principles of conflicts of law.
8. ASSIGNMENT.
8.1 No party shall assign or transfer, or purport to assign or transfer,
any of its rights or obligations under this Agreement without the prior written
consent of the other party.
8.2 Except as set forth in this Section 8, this Agreement shall be binding
upon and shall inure to the benefit of the successors and permitted assigns of
the respective parties hereto.
3
<PAGE> 51
9. WAIVER, FORBEARANCE AND VARIATION.
9.1 The rights of the parties under this Agreement shall not be prejudiced
or restricted by any indulgence or forbearance extended by one party to the
other party. No waiver by either party in respect of a breach shall operate as a
waiver in respect of any subsequent breach.
9.2 This Agreement shall not be varied, cancelled or modified unless the
variation, cancellation or modification is expressly agreed to in writing by a
duly authorized representative of each party.
10. SEVERABILITY.
10.1 If any provision of this Agreement is found by a court or other
competent authority to be void or unenforceable, it shall be deemed to be
deleted from this Agreement and the remaining provisions shall continue to
apply. The parties shall negotiate in good faith in order to agree to the terms
of a mutually satisfactory provision to be substituted for the provision found
to be void or unenforceable.
11. MISCELLANEOUS PROVISIONS.
11.1 This Agreement and the Master Agreement constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and thereof and supersede all prior oral and written discussions and
understandings.
11.2 Any notice, advice, election, request, or order, demand or other
direction required or permitted to be given under this Agreement shall be in
writing and in the English language, and (unless some other notice giving the
same is specified or accepted in writing by the recipient) shall be effective
(i) when personally delivered during normal business hours to the addressee at
the address designated for such delivery, (ii) on the date of receipt specified
on any return receipt if it shall have been deposited in the mails, certified or
registered with return receipt requested and postage thereon fully prepaid,
addressed to such address, or (iii) on the day it shall have been given by
facsimile transmission (with written confirmation of receipt) to such address,
whichever the foregoing shall first occur. Until otherwise specified by notice,
the addresses for any such notice, advise, election, request, order, demand or
other direction shall be:
If to the Company:
ADFlex Thailand Limited
Attention:
4
<PAGE> 52
Telephone:
Facsimile:
If to ADFlex:
ADFlex Solutions, Inc.
Attention: Michael L. Pierce
2001 West Chandler Boulevard
Chandler, Arizona 85224, U.S.A.
Telephone: (602) 786-8206
Facsimile: (602) 786-8280
If to Hana:
Hana Microelectronics Public Co. Ltd.
c/o Richard Han
101//2 Moo 4, EPZ
Northern Region Industrial Estate
T. Ban Klang, A. Muang,
Lamphun 51000, Thailand
Telephone: 66 2/551-1297, 521-4935/9
Facsimile: 66 2/552-4906, 551-1299
11.3 The headings in this Agreement are inserted for convenience only and
do not affect its construction.
11.4 In the event of any ambiguity or conflict arising between the terms
of this Agreement and the terms of the Master Agreement, the terms of the Master
Agreement shall prevail as between the parties.
11.5 Time is of the essence of this Agreement.
IN WITNESS WHEREOF, parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
ADFlex Thailand Limited,
a private limited company
By _____________________________________
Title __________________________________
5
<PAGE> 53
ADFlex Solutions, Inc., a Delaware corporation
By _____________________________________
Title __________________________________
Hana Microelectronics Public Co., Ltd., a
Thailand public limited company
By _____________________________________
Title __________________________________
6
<PAGE> 54
EXHIBIT E
TRADEMARK LICENSE AGREEMENT
TRADEMARK LICENSE AGREEMENT (the "Agreement") made this ___ day of
__________, 1996, by and among ADFlex Thailand Limited (the "Company"), a
Thailand private limited company, and ADFlex Solutions, Inc., a Delaware
corporation ("ADFlex"), and Hana Microelectronics Public Co., Ltd., a Thailand
public limited company ("Hana").
WITNESSETH:
WHEREAS, ADFlex and Hana have formed the Company to engage in the
finishing and assembly of flexible circuits and all other activities related
thereto in Thailand; and
WHEREAS, the Company desires to use the ADFlex name and its corporate logo
in connection with its business on the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
of the parties hereinafter set forth, the parties agree as follows:
1. DEFINITIONS.
1.1 "ADFlex Trademark" shall mean the ADFlex corporate logo in the form
attached hereto as Exhibit A.
1.2 "Agreement" shall mean this Trademark License Agreement.
2. LICENSE.
2.1 ADFlex grants to the Company a royalty-free, nontransferable,
nonexclusive license to use the name "ADFlex" and the ADFlex Trademark in the
conduct of the Company's business.
3. OWNERSHIP.
3.1 The ADFlex name and the ADFlex Trademark shall remain the exclusive
property of ADFlex, subject only to rights granted to the Company under this
Agreement. It is expressly understood that no title to or ownership of the
ADFlex name or the ADFlex Trademark is hereby transferred to the Company.
4. TERM AND TERMINATION.
4.1 This Agreement and the license granted hereunder shall terminate upon
dissolution of the Company or if the Company ceases to use the ADFlex name and
ADFlex Trademark. Upon termination of this Agreement for any reason, the Company
shall cease use of the ADFlex name and ADFlex Trademark.
<PAGE> 55
5. MEDIATION AND ARBITRATION.
5.1 If a dispute, controversy or claim arises out of or relates to this
Agreement or the breach, termination or validity hereof, and if such dispute,
controversy or claim cannot be settled through direct good faith discussions
between the parties, the parties shall first endeavor to settle the dispute in
an amicable manner by mediation under the Commercial Mediation Rules of the
American Arbitration Association ("AAA") before having recourse to arbitration.
If either party believes, for any reason whatsoever, after the mediation process
has begun that it will not lead to a satisfactory resolution of the matter, it
may give written notice of that belief to the other party, and proceed to
arbitration pursuant to the following provisions of this Section 5.
5.2 To the extent not settled as provided in Section 5, any dispute,
controversy or claim arising out of or relating to this Agreement or the breach,
termination, or validity hereof, shall be settled by arbitration in accordance
with the International Arbitration Rules of the AAA in effect on the date of
this Agreement. The arbitration shall be the sole and exclusive forum for
resolution of the dispute, controversy or claim and the award shall be final and
binding to the extent permitted by law.
5.3 There shall be three arbitrators, each of whom shall be disinterested
in the dispute, controversy or claim and shall have no connection with either
party. ADFlex and Hana shall each name an arbitrator and shall promptly, but no
later than 30 days after delivery of the arbitration demand, file with the AAA a
notice of appointment as provided in the International Arbitration Rules
specified above. The two arbitrators so chosen shall select a third arbitrator
who shall act as chairperson of the arbitration. If either party entitled to
name an arbitrator should abstain from doing so, or should the two arbitrators
named as provided above fail to select a third arbitrator, then at the request
of either party, the President of the AAA shall select an arbitrator to fill the
vacant position within ten days of such request.
5.4 The place of arbitration shall be Chandler, Arizona. The arbitration
shall be conducted in the English language and any foreign language documents
presented at such arbitration shall be accompanied by an English translation
thereof. The arbitrators shall apply the law of Arizona. The parties consent
that the United States District Court for the District of Arizona in Phoenix,
Arizona and courts in Thailand shall each have non-exclusive jurisdiction with
respect to all aspects of the enforcement of the arbitration provisions of this
Agreement. Judgment upon the award rendered may be entered into any court having
jurisdiction, or application may be made to such court for judicial recognition
of the award or an order of enforcement thereof, as the case may be.
5.5 Arbitration awards rendered pursuant to this Section 5 shall be paid
in United States dollars.
6. GOVERNING LAW.
6.1 This Agreement shall be construed, enforced and governed by the laws
of the State of Arizona without regard to principles of conflicts of law.
2
<PAGE> 56
7. ASSIGNMENT.
7.1 No party shall assign or transfer, or purport to assign or transfer,
any of its rights or obligations under this Agreement without the prior written
consent of the other party.
7.2 Except as set forth in this Section 7, this Agreement shall be binding
upon and shall inure to the benefit of the successors and permitted assigns of
the respective parties hereto.
8. WAIVER, FORBEARANCE AND VARIATION.
8.1 The rights of the parties under this Agreement shall not be prejudiced
or restricted by any indulgence or forbearance extended by one party to the
other party. No waiver by either party in respect of a breach shall operate as a
waiver in respect of any subsequent breach.
8.2 This Agreement shall not be varied, cancelled or modified unless the
variation, cancellation or modification is expressly agreed to in writing by a
duly authorized representative of each party.
9. SEVERABILITY.
9.1 If any provision of this Agreement is found by a court or other
competent authority to be void or unenforceable, it shall be deemed to be
deleted from this Agreement and the remaining provisions shall continue to
apply. The parties shall negotiate in good faith in order to agree to the terms
of a mutually satisfactory provision to be substituted for the provision found
to be void or unenforceable.
10. MISCELLANEOUS PROVISIONS.
10.1 This Agreement and the Master Agreement constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and thereof and supersede all prior oral and written discussions and
understandings.
10.2 Any notice, advice, election, request, or order, demand or other
direction required or permitted to be given under this Agreement shall be in
writing and in the English language, and (unless some other notice giving the
same is specified or accepted in writing by the recipient) shall be effective
(i) when personally delivered during normal business hours to the addressee at
the address designated for such delivery, (ii) on the date of receipt specified
on any return receipt if it shall have been deposited in the mails, certified or
registered with return receipt requested and postage thereon fully prepaid,
addressed to such address, or (iii) on the day it shall have been given by telex
(with appropriate answer back received), or facsimile transmission (with written
confirmation of receipt) to such address, whichever the foregoing shall
3
<PAGE> 57
first occur. Until otherwise specified by notice, the addresses for any such
notice, advise, election, request, order, demand or other direction shall be:
If to the Company:
ADFlex Thailand Limited
Attention:
Telephone:
Facsimile:
If to ADFlex:
ADFlex Solutions, Inc.
Attention: Michael L. Pierce
2001 West Chandler Boulevard
Chandler, Arizona 85224, U.S.A.
Telephone: (602) 786-8206
Facsimile: (602) 786-8280
If to Hana:
Hana Microelectronics Public Co. Ltd.
c/o Richard Han
101//2 Moo 4, EPZ
Northern Region Industrial Estate
T. Ban Klang, A. Muang,
Lamphun 51000, Thailand
Telephone: 66 2/551-1297, 521-4935/9
Facsimile: 66 2/552-4906, 551-1299
10.3 The headings in this Agreement are inserted for convenience only and
do not affect its construction.
10.4 In the event of any ambiguity or conflict arising between the terms
of this Agreement and the terms of the Master Agreement, the terms of the Master
Agreement shall prevail as between the parties.
10.5 Time is of the essence of this Agreement.
4
<PAGE> 58
IN WITNESS WHEREOF, parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
ADFlex Thailand Limited,
a Thailand private limited company
By ________________________________________
Title _____________________________________
ADFlex Solutions, Inc., a Delaware corporation
By ________________________________________
Title _____________________________________
Hana Microelectronics Public Co., Ltd.,
a Thailand public limited company
By ________________________________________
Title _____________________________________
5
<PAGE> 1
Exhibit 10.47
THIRD AMENDMENT TO CREDIT AGREEMENT
AND LIMITED WAIVER
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is executed as
of February 18, 1997, by and among ADFLEX SOLUTIONS, INC., a Delaware
corporation ("BORROWER"), certain Banks party to the Credit Agreement (as
defined below), and THE FIRST NATIONAL BANK OF BOSTON, as Agent.
RECITALS
A. Borrower, Banks and Agent have entered into that certain Credit
Agreement dated as of October 31, 1995, as amended by that certain First
Amendment to Credit Agreement dated as of December 29, 1995 and that certain
Second Amendment to Credit Agreement dated as of June 18, 1996 (as amended, and
as such may be further amended, modified, supplemented or restated, the "CREDIT
AGREEMENT"), pursuant to which Banks have made certain credit facilities
available to Borrower. Capitalized terms used but not defined in this Amendment
have the meanings given them in the Credit Agreement.
B. Borrower has informed Agent and Banks that it has taken a Twenty-Nine
Million Two Hundred Forty-Eight Thousand Dollar ($29,248,000) resizing and
restructuring charge against its earnings and that it is not in compliance with
the following financial covenants: (i) SECTION 5.7(B)(I) (minimum consolidated
quarterly operating profit and net profit); (ii) SECTION 5.7(B)(II) (lack of an
operating loss or a net loss for any two consecutive fiscal quarters); and (iii)
SECTION 5.7(D) (minimum Consolidated Tangible Net Worth). Noncompliance with
each of such financial covenants by Borrower constitutes an Event of Default
under SECTION 7.1(B) of the Credit Agreement. Borrower has requested that
Requisite Banks provide a limited waiver of such Events of Default and consent
to the amendment of certain financial covenants set forth in the Credit
Agreement as set forth herein.
C. Banks party hereto, constituting Requisite Banks, and Agent are willing
to provide such limited waiver and amendments, but only on the terms, subject to
the conditions and in reliance on the representations and warranties set forth
in this Amendment.
NOW, THEREFORE, in consideration of the foregoing Recitals and intending
to be legally bound, the parties hereto represent, warrant and agree as follows:
1. WAIVERS. Agent and Banks hereby waive compliance with the financial covenants
set forth in each of SECTIONS 5.7(B)(I), 5.7(B)(II) and 5.7(D) of the Credit
Agreement for the fiscal quarter ending September 30, 1996, and waive the Event
of Default under SECTION 7.1(B) of the Credit Agreement caused by such failure
to comply.
1.
<PAGE> 2
2. AMENDMENTS TO CREDIT AGREEMENT.
2.1 DEFINITIONS. A new definition of "Applicable Spread" is added to
SECTION 1.1 of the Credit Agreement.
APPLICABLE SPREAD. See SECTION 2.8(B).
2.2 DEFINITIONS. The definition of "Collateral" in SECTION 1.1 of the
Credit Agreement is deleted in its entirety and replaced with the following:
COLLATERAL. All now existing or hereafter acquired property or
interests in property, and proceeds thereof, of Borrower pursuant to the
Security Agreement, and any other property, now existing or hereafter
acquired, that may at any time be or become subject to an Encumbrance
granted or created in favor of Agent, on behalf of Banks, to secure the
full and complete payment and performance of the Obligations.
2.3 DEFINITIONS. The definition of "Security Agreement" in SECTION 1.1 of
the Credit Agreement is deleted in its entirety and replaced with the following:
SECURITY AGREEMENT. The Amended and Restated Security Agreement
dated as of the date hereof attached hereto as the EXHIBIT, by and among
Borrower, as Grantor, Banks and Agent, on behalf of Banks (including,
without limitation, the Collateral Information Certificate attached
thereto as the EXHIBIT).
2.4 DEFINITIONS. The definition of "Security Documents" in SECTION 1.1 of
the Credit Agreement is deleted in its entirety and replaced with the following:
SECURITY DOCUMENTS. The Security Agreement, the Financing
Statements delivered pursuant hereto and any and all other related
documents.
2.5 DEFINITIONS. A new definition of "Third Amendment Effective Date" is
added to SECTION 1.1 of the Credit Agreement.
THIRD AMENDMENT EFFECTIVE DATE. December 31, 1996.
2.6 THE LOANS. SECTION 2.8(B) of the Credit Agreement is deleted in its
entirety and replaced with the following:
(b) Each LIBOR Loan shall bear interest on the outstanding
principal amount thereof, for each Interest Period applicable thereto, at
a rate per annum equal to the Adjusted LIBOR Rate plus a spread the amount
of which shall be determined as follows (the "APPLICABLE SPREAD"):
(i) one and one-half percent (1.50%) if Borrower's ratio
of Consolidated Total Liabilities (including the undrawn amount of all
outstanding
2.
<PAGE> 3
Letters of Credit) to Consolidated Tangible Net Worth (calculated as of
the last day of the preceding fiscal quarter of Borrower) is less than or
equal to .75:1.00;
(ii) one and three-quarters percent (1.75%) if Borrower's
ratio of Consolidated Total Liabilities (including the undrawn amount of
all outstanding Letters of Credit) to Consolidated Tangible Net Worth
(calculated as of the last day of the preceding fiscal quarter of
Borrower) is equal to or greater than .76:1.00 but less than .90:1.00; or
(iii) two percent (2.00%) if Borrower's ratio of
Consolidated Total Liabilities (including the undrawn amount of all
outstanding Letters of Credit) to Consolidated Tangible Net Worth
(calculated as of the last day of the preceding fiscal quarter of
Borrower) is equal to or greater than .90:1.00.
Such interest shall be payable for such Interest Period on the last day
thereof and when such LIBOR Loan is due (whether at maturity, by reason of
acceleration or otherwise) and, if such Interest Period is longer than
three (3) months, at intervals of three (3) months after the first day
thereof. Any change from time to time in the Applicable Spread above the
Adjusted LIBOR Rate shall be based on the Report of Chief Financial
Officer delivered by Borrower pursuant to SECTION 5.1(D), and such change
shall be effective retroactively commencing the Business Day next
succeeding the end of the period as to which such Report of Chief
Financial Officer relates.
2.7 FINANCIAL STATEMENTS AND OTHER REPORTING REQUIREMENTS. SECTION 5.1(C)
of the Credit Agreement is deleted in its entirety and replaced with the
following:
(c) as soon as available, but in any event within thirty (30)
days after the end of each month, a consolidated and consolidating balance
sheet as of the end of, and related consolidated and consolidating
statement of income and cash flow for, the period then ended, certified by
the chief financial officer of Borrower but subject, however, to normal,
recurring year-end adjustments that shall not in the aggregate be material
in amount;
2.8 FINANCIAL COVENANTS. SECTION 5.7(C) of the Credit Agreement is deleted
in its entirety and replaced with the following:
(c) LEVERAGE RATIO. Borrower shall maintain a ratio of
Consolidated Total Liabilities (including the undrawn amount of all
outstanding Letters of Credit) to Consolidated Tangible Net Worth not to
exceed 1.40:1.00 for the fiscal quarter ending December 31, 1996 and each
fiscal quarter thereafter.
2.9 FINANCIAL COVENANTS. SECTION 5.7(D) of the Credit Agreement is deleted
in its entirety and replaced with the following:
3.
<PAGE> 4
(d) CONSOLIDATED TANGIBLE NET WORTH. Consolidated Tangible Net
Worth shall at no time be less than an amount equal to the sum of (i)
$38,000,000 plus (ii) an amount equal to seventy-five percent (75.0%) of
Consolidated Net Income commencing with the period beginning on July 1,
1997 and during each fiscal quarter thereafter, in each case, for which
period Consolidated Net Income is positive (with no deduction on account
of negative Consolidated Net Income), plus (iii) one hundred percent
(100.0%) of the aggregate increase in Consolidated Tangible Net Worth
attributable to the issuance and sale of any capital stock of Borrower
after the Third Amendment Effective Date (other than the proceeds of any
issuance and sale of capital stock of a Subsidiary of Borrower in
connection with the conversion or exchange of any Indebtedness of Borrower
into capital stock after the date hereof).
2.10 FINANCIAL COVENANTS. A new SECTION 5.7(F) is added to the Credit
Agreement as follows:
(f) MONTHLY PROFITABILITY. Commencing with the month ending
October 31, 1996 and each month thereafter until and including September
30, 1997, Borrower's operating profit (exclusive, however, (without
duplication) of an amount equal to Twenty-Nine Million Two Hundred
Forty-Eight Thousand Dollars ($29,248,000)) taken as a charge against
Borrower's earnings during the fiscal quarter ended September 30, 1996)
for such month and the two months immediately preceding such month, shall
not be less than One Dollar ($1).
3. LIMITATION OF WAIVERS AND AMENDMENTS; FULL FORCE AND EFFECT.
3.1 The limited waiver set forth in SECTION 1 of this Amendment and the
amendments set forth in SECTION 2 of this Amendment are effective solely for the
purposes set forth herein and shall be limited precisely as written and shall
not be deemed to (i) be a consent to any amendment, waiver or modification of
any other term or condition of any Loan Document; or (ii) otherwise prejudice
any right or remedy which Agent or Banks may now have or may have in the future
under or in connection with any Loan Document.
3.2 This Amendment shall be construed in connection with and as part of
the Loan Documents and all terms, conditions, representations, warranties,
covenants and agreements set forth in the Loan Documents, except as amended
herein, are hereby ratified and confirmed and shall remain in full force and
effect.
4. REPRESENTATIONS AND WARRANTIES. In order to induce Agent and Banks to enter
into this Amendment and to amend the Credit Agreement (a) each Borrower
represents and warrants to each of Agent and Banks that after giving effect to
this Amendment (i) the representations and warranties contained in the Loan
Documents (other than representations and warranties which expressly relate to
another date or as specifically described therein and expressly approved by
Requisite Banks) are true and correct in all material respects as of the date
hereof and (ii) no Event of Default has occurred and is continuing.
4.
<PAGE> 5
5. NO EXISTING CLAIMS.
5.1 Borrower hereby acknowledges and agrees that: (i) it has no claim or
cause of action against Agent or any Bank or any parent, subsidiary or affiliate
of Agent or any Bank, or any of their officers, directors, employees, attorneys
or other representatives or agents (all of which parties being, collectively,
the "BANKS' AGENTS") in connection with the Loan Documents, the loans thereunder
or the transactions contemplated therein and herein; (ii) it has no offset or
defense against any of its respective obligations, indebtedness or contracts in
favor of Agent and Banks; and (iii) it recognizes that each of Agent and Banks
has heretofore properly performed and satisfied in a timely manner all of its
obligations to and contracts with Borrower.
6. EFFECTIVENESS. This Amendment shall be deemed to be effective as of the Third
Amendment Effective Date; provided, however, that such effectiveness is subject
to the condition precedent that Banks shall have received, in form and substance
satisfactory to Banks and their respective counsel, the following:
6.1 This Amendment and the Security Documents, duly executed by the
parties to such agreements, instruments or documents;
6.2 Agent or any agents or representatives of Agent shall have completed a
credit finance examination with respect to the business and assets of Borrower,
at the expense of Borrower, with results satisfactory to Banks.
6.3 A certificate of the Secretary or an Assistant Secretary of Borrower
with respect to resolutions of its board of directors authorizing the execution
and delivery of this Amendment, the Security Agreement and the amendments to the
Financing Statements (to reflect the additional Collateral granted by Borrower
to Banks and to Agent, on behalf of Banks, pursuant to this Amendment and the
Security Agreement) and identifying the officer(s) authorized to execute,
deliver and take all other actions required under this Amendment, the Security
Agreement, such amendments to the Financing Statements and the other Loan
Documents, and providing specimen signatures of such officers;
6.4 Certified copies, dated close to the date hereof, of requests for
copies or information (Form UCC-3 or equivalent), or certificates, dated close
to the date hereof, satisfactory to Banks, of a UCC reporter service, listing
all effective financing statements which name Borrower as debtor and which are
filed in the appropriate offices in the State of Arizona or other applicable
jurisdictions, together with copies of such financing statements, and
accompanied by written evidence (including UCC termination statements or similar
documents) satisfactory to Banks that the Encumbrances indicated in any such
financing statements are either permitted hereunder or have been terminated or
released;
6.5 Payment from Borrower of an amendment fee of Forty Thousand Dollars
($40,000) payable to Banks to be split between Banks based upon each Bank's pro
rata share of the Commitment;
5.
<PAGE> 6
6.6 Payment from Borrower in immediately available funds, an amount equal
to the aggregate of the fees (including reasonable attorneys' fees), costs,
expenses and other disbursements incurred by Agent in connection with this
Amendment and the transactions contemplated hereunder, including, without
limitation, the negotiation and preparation of this Amendment and the other Loan
Documents and the cost of any and all credit finance examinations;
6.7 Agent on behalf of Banks shall have received evidence of insurance
with respect to the Collateral satisfactory to Banks and all policies of
insurance required to be maintained shall provide that the proceeds of such
policies shall be payable solely to Agent pursuant to a standard first mortgage
endorsement substantially equivalent to the Lenders Loss Payable Endorsement
438BFU or ISO endorsement CP12181091, without contribution; and
6.8 Such other documents, and completion of such other matters, as counsel
for Banks may reasonably deem necessary or appropriate.
7. CONDITION SUBSEQUENT. The effectiveness of this Amendment is subject to the
satisfaction or waiver of the condition subsequent that Banks shall have
received, within thirty (30) days of the date hereof, in form and substance
satisfactory to Banks and their respective counsel a landlord waiver from the
record owner of the real property at Borrower's facilities located at each of
2001 W. Chandler Boulevard, Chandler, Arizona and 402 First Street, Douglas,
Arizona.
8. ENTIRE AGREEMENT. Except to the extent expressly provided in this Amendment,
the terms and conditions of the Credit Agreement shall remain in full force and
effect. This Amendment and the other Loan Documents constitute and contain the
entire agreement of the parties hereto and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
between the parties, whether written or oral, respecting the extension of credit
by Banks to Borrower.
9. MISCELLANEOUS.
9.1 REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS. On and after the date of this Amendment, each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import referring to the Credit Agreement and each reference in the Loan
Documents to the "Credit Agreement," "thereunder," "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Credit Agreement, as amended by this Amendment.
9.2 FEES AND EXPENSES. Borrower acknowledges that all costs, fees and
expenses as described in SECTION 9.2 of the Credit Agreement incurred by Agent
and its counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Borrower.
6.
<PAGE> 7
9.3 HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
9.4 APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
9.5 COUNTERPARTS. This Amendment may be executed in counterparts, each of
which when so executed shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
7.
<PAGE> 8
WITNESS the due execution hereof by the respective duly authorized officer
of the undersigned as of the date first written above.
BORROWERS: ADFLEX SOLUTIONS, INC.
By: /s/ Rolando Esteverena
-----------------------------
Rolando Esteverena,
Chairman and CEO
AGENT: THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Teresa Heller
-----------------------------
Teresa Heller,
Director
BANKS: THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Teresa Heller
-----------------------------
Teresa Heller,
Director
WELLS FARGO BANK, N.A. (as successor to First
Interstate Bank of Arizona, N.A.)
By: /s/ Mae Delabarre
-----------------------------
Mae Delabarre,
Assistant Vice President
100 West Washington Street, 25th Floor
Phoenix, Arizona 85003
Phone: (602) 229-4564
Facsimile: (602) 229-4409
8.
<PAGE> 1
Exhibit 10.48
AMENDED AND RESTATED SECURITY AGREEMENT
THIS AMENDED AND RESTATED SECURITY AGREEMENT is made as of February 18,
1997, by ADFLEX SOLUTIONS, INC., a Delaware corporation, ("Grantor"), THE FIRST
NATIONAL BANK OF BOSTON, a national banking association ("FNBB") and each other
lender whose name is set forth on the signature pages of that certain Credit
Agreement (as defined below) or which may hereafter execute and deliver an
instrument of assignment with respect to the Credit Agreement (each a "Bank" and
collectively, "Banks"), and FNBB as agent for Banks under the Credit Agreement
("Secured Party").
RECITALS
A. Grantor, Banks and Agent desire to amend and restate in its entirety
that certain Security Agreement dated as of June 18, 1996 (the "Original
Security Agreement"), by and among Grantor, Banks and Agent. Pursuant to that
certain Credit Agreement dated as of October 31, 1995 (as amended by that
certain First Amendment to Credit Agreement dated as of December 29, 1995, that
certain Second Amendment to Credit Agreement dated as of June 18, 1996 and that
certain Third Amendment to Credit Agreement (the "Third Amendment") dated as of
the date hereof, and as the same may be further amended, modified or
supplemented or restated from time to time, the "Credit Agreement"), by and
among Grantor, Agent and Banks named therein, Banks have agreed to make certain
advances of money and to extend certain financial accommodations to Grantor in
the amounts and manner set forth in the Credit Agreement (collectively, the
"Loans").
B. Grantor has requested that Secured Party and the Banks agree to amend
certain provisions of the Credit Agreement pursuant to the Third Amendment.
C. It is a condition precedent to the effectiveness of the Third Amendment
that Grantor shall have executed and delivered to Agent and Banks this Amended
and Restated Security Agreement whereby Grantor shall have granted to Agent on
behalf of Banks a security interest in the Collateral (as hereinafter defined)
securing Grantor's obligations under the Credit Agreement.
AGREEMENT
NOW, THEREFORE, in order to induce Banks to make the Loans and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, Grantor hereby represents,
warrants, covenants and agrees as follows:
1. DEFINED TERMS. Unless otherwise defined herein, (i) the terms defined
in the Credit Agreement are used herein as therein defined and (ii) the
following terms shall have the following meanings (such meanings being equally
applicable to both the singular and plural forms of the terms defined):
1.
<PAGE> 2
"Account Debtor" means any "account debtor," as such term is defined in
section 9105(1)(a) of the UCC.
"Accounts" means any "account," as such term is defined in section 9106 of
the UCC, now owned or hereafter acquired by Grantor or in which Grantor now
holds or hereafter acquires any interest and, in any event, shall include,
without limitation, all accounts receivable, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper,
Documents or Instruments) now owned or hereafter received or acquired by or
belonging or owing to Grantor (including, without limitation, under any trade
name, style or division thereof) whether arising out of goods sold or services
rendered by Grantor or from any other transaction, whether or not the same
involves the sale of goods or services by Grantor (including, without
limitation, any such obligation which may be characterized as an account or
contract right under the UCC) and all of Grantor's rights in, to and under all
purchase orders or receipts now owned or hereafter acquired by it for goods or
services, and all of Grantor's rights to any goods represented by any of the
foregoing (including, without limitation, unpaid seller's rights of rescission,
replevin, reclamation and stoppage in transit and rights to returned, reclaimed
or repossessed goods), and all monies due or to become due to Grantor under all
purchase orders and contracts for the sale of goods or the performance of
services or both by Grantor (whether or not yet earned by performance on the
part of Grantor or in connection with any other transaction), now in existence
or hereafter occurring, including, without limitation, the right to receive the
proceeds of said purchase orders and contracts, and all collateral security and
guarantees of any kind given by any Person with respect to any of the foregoing.
"Chattel Paper" means any "chattel paper," as such term is defined in
section 9105(1)(b) of the UCC, now owned or hereafter acquired by Grantor or in
which Grantor now holds or hereafter acquires an interest.
"Collateral" shall have the meaning assigned to such term in SECTION 2 of
this Security Agreement.
"Contracts" means all contracts, undertakings, franchise agreements or
other agreements (other than rights evidenced by Chattel Paper, Documents or
Instruments) in or under which Grantor may now or hereafter have any right,
title or interest, including, without limitation, any and all right, title and
interest of Grantor under any customer agreements, supply agreements,
distribution agreements, rebate agreements, processing agreements, warehousing
agreements or royalty agreements and shall include, without limitation, with
respect to an Account, any agreement relating to the terms of payment or the
terms of performance thereof.
"Copyright License" means any written agreement granting any right to use
any Copyright or Copyright registration now owned or hereafter acquired by
Grantor or in which Grantor now holds or hereafter acquires any interest.
"Copyrights" means all of the following now owned or hereafter acquired by
Grantor or in which Grantor now holds or hereafter acquires any interest: (i)
all copyrights, whether registered or unregistered, held pursuant to the laws of
the United States, any State thereof or
2.
<PAGE> 3
of any other country; (ii) registrations, applications and recordings in the
United States Copyright Office or in any similar office or agency of the United
States, any state thereof or any other country; (iii) any continuations,
renewals or extensions thereof; and (iv) any registrations to be issued in any
pending applications.
"Documents" means any "documents," as such term is defined in section
9105(1)(f) of the UCC, now owned or hereafter acquired by Grantor or in which
Grantor now holds or hereafter acquires an interest.
"Equipment" means any "equipment," as such term is defined in section
9109(2) of the UCC, now or hereafter owned or acquired by Grantor or in which
Grantor now holds or hereafter acquires an interest, and, in any event, shall
include, without limitation, all machinery, equipment, furnishings, vehicles and
computers and other electronic data-processing and other office equipment, any
and all additions, substitutions and replacements of any of the foregoing,
wherever located, together with all attachments, components, parts, equipment
and accessories installed thereon or affixed thereto.
"Fixtures" means "fixtures," as such term is defined in section 9313(1)(a)
of the UCC, now or hereafter owned or acquired by Grantor or in which Grantor
now holds or hereafter acquires any interest and, in any event, shall include,
without limitation, regardless of where located, all of the fixtures, systems,
machinery, apparatus, equipment and fittings of every kind and nature whatsoever
and all appurtenances and additions thereto and substitutions or replacements
thereof, now or hereafter attached or affixed to or constituting a part of, or
located in or upon, real property wherever located, including, without
limitation, all heating, electrical, mechanical, lighting, lifting, plumbing,
ventilating, air-conditioning and air cooling, refrigerating, food preparation,
incinerating and power, loading and unloading, communication, sprinkler and
other fire prevention and extinguishing, fixtures, systems, machinery, apparatus
and equipment, any signs, escalators, elevators, boilers or switchboards, and
all engines, motors, dynamos, machinery, pipes, pumps, tanks, conduits and ducts
constituting a part of any of the foregoing, together with all right, title, and
interest of Grantor in and to all extensions, improvements, betterments,
renewals, substitutes, and replacements of, and all additions and appurtenances
to any of the foregoing property, and all conversions of the security
constituted thereby, immediately upon any acquisition or release thereof or any
such conversion, as the case may be.
"General Intangibles" means any "general intangibles," as such term is
defined in section 9106 of the UCC, now owned or hereafter acquired by Grantor
or in which Grantor now holds or hereafter acquires an interest, and, in any
event, shall include, without limitation, all right, title and interest which
Grantor may now or hereafter have in or under any Contract, all customer lists,
Copyrights, Trademarks, Patents, rights in Intellectual Property, interests in
partnerships, joint ventures and other business associations, licenses, permits,
copyrights, trade secrets, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, software, data bases, data, skill, expertise,
recipes, experience, processes, models, drawings, materials and records,
goodwill (including, without limitation, the goodwill associated with any
Trademark,
3.
<PAGE> 4
Trademark registration or Trademark licensed under any Trademark License),
claims in or under insurance policies, including unearned premiums,
uncertificated securities, deposit accounts (including as defined in Section
9105(e) of the UCC), rights to receive tax refunds and other payments and rights
of indemnification.
"Instruments" means any "instrument," as such term is defined in section
9105(1)(i) of the UCC now owned or hereafter acquired by Grantor or in which
Grantor now holds or hereafter acquires any interest, including, without
limitation, all notes, certificated securities, and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
"Intellectual Property" means all intellectual property of any kind or
nature, including, without limitation, all Copyrights, Trademarks, Patents,
trade secrets, customer lists, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, software, data bases, data, skill,
expertise, recipes, experience, processes, models, drawings, materials and
records.
"Inventory" means any "inventory," as such term is defined in section
9109(4) of the UCC, wherever located, now or hereafter owned or acquired by
Grantor or in which Grantor now holds or hereafter acquires any interest and, in
any event, shall include, without limitation, all inventory, merchandise, goods
and other personal property which are held by or on behalf of Grantor for sale
or lease or are furnished or are to be furnished under a contract of service or
which constitute raw materials, work in process or materials used or consumed or
to be used or consumed in Grantor's business, or the processing, packaging,
promotion, delivery or shipping of the same, and all finished goods, whether or
not such inventory is listed on any schedules, assignments or reports furnished
to Agent and Banks from time to time and whether or not the same is in transit
or in the constructive, actual or exclusive occupancy or possession of Grantor
or is held by Grantor or by others for Grantor's account, including, without
limitation, all goods covered by purchase orders and contracts with suppliers
and all goods billed and held by suppliers and all inventory which may be
located on premises of Grantor or of any carriers, forwarding agents, truckers,
warehousemen, vendors, selling agents or other Persons.
"License" means any Copyright License, Patent License, Trademark License
or other license of rights or interests now held or hereafter acquired by
Grantor or in which Grantor now holds or hereafter acquires an interest, and any
renewals or extensions thereof.
"Lien" means any mortgage, pledge, security interest, lien or other charge
or encumbrance, including the lien or retained security title of a conditional
vendor, upon or with respect to any property or assets.
"Patent License" means any written agreement granting any right with
respect to any invention on which a Patent is in existence, now owned or
hereafter acquired by Grantor or in which Grantor now holds or hereafter
acquires an interest.
4.
<PAGE> 5
"Patents" means all of the following now owned or hereafter acquired by
Grantor or in which Grantor now holds or hereafter acquires any interest: (i)
all letters patent of the United States or any other country, all registrations
and recordings thereof, and all applications for letters patent of the United
States or any other country, including, without limitation, registrations,
recordings and applications in the United States Patent and Trademark Office or
in any similar office or agency of the United States, any State thereof or any
other country; (ii) all reissues, continuations, continuations-in-part or
extensions thereof; (iii) all petty patents, divisionals, and patents of
addition; and (iv) all patents to issue in such applications.
"Permitted Liens" means Liens or encumbrances permitted by SECTION 6.4 of
the Credit Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, firm, joint stock
company, estate, entity or governmental agency.
"Proceeds" means "proceeds," as such term is defined in section 9306(1) of
the UCC, and, in any event, shall include, without limitation, (i) any and all
Accounts, Chattel Paper, Instruments, cash or other forms of money or currency
or other proceeds, payable to Grantor from time to time in respect of the
Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or
guaranty payable to Grantor from time to time with respect to any of the
Collateral, (iii) any and all payments (in any form whatsoever) made or due and
payable to Grantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental body, authority, bureau or agency (or any person
acting under color of governmental authority), (iv) any claim of Grantor against
third parties (a) for past, present or future infringement of any Patent or
Patent License, (b) for past, present or future infringement of any Copyright,
or (c) for past, present or future infringement or dilution of any Trademark or
Trademark License or for injury to the goodwill associated with any Trademark,
Trademark registration or Trademark licensed under any Trademark License, and
(v) any and all other amounts from time to time paid or payable under or in
connection with any of the Collateral or any Contract.
"Secured Obligations" means all loans, advances, debts, liabilities and
Obligations, for monetary amounts owed by Grantor to Agent or Banks, or to Agent
on behalf of Banks, whether due or to become due, matured or unmatured,
liquidated or unliquidated, contingent or noncontingent, and all covenants and
duties regarding such amounts, of any kind or nature, present or future,
evidenced by the Loan Documents. This term includes, without limitation, all
principal, interest (including interest that accrues after the commencement of a
case against Grantor or any affiliate of Grantor under the Bankruptcy Code),
fees, including, without limitation, any and all closing fees, prepayment fees,
commitment fees, loan fees, agent fees and attorneys' fees and any and all other
fees, expenses, costs or other sums chargeable to Grantor under any of the Loan
Documents.
5.
<PAGE> 6
"Trademark License" means any written agreement granting any right to use
any Trademark or Trademark registration now owned or hereafter acquired by
Grantor or in which Grantor now holds or hereafter acquires an interest.
"Trademarks" means all of the following now owned or hereafter acquired by
Grantor or in which Grantor now holds or hereafter acquires an interest: (i) any
and all trademarks, trade names, corporate names, business names, trade styles,
service marks, logos, other source or business identifiers, prints and labels on
which any of the foregoing have appeared or appear, designs and general
intangibles of like nature, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith, including, without limitation, registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof or any other country or
any political subdivision thereof and (ii) any and all reissues, extensions or
renewals thereof.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of California; provided, however, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Agent's security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of California, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
2. GRANT OF SECURITY INTEREST. As collateral security for the prompt and
complete payment and performance when due (whether at stated maturity, by
acceleration or otherwise) of all the Secured Obligations and in order to induce
Agent and Banks to enter into the Third Amendment and to make the Loans in
accordance with the terms and conditions of the Credit Agreement as amended by
the Third Amendment, Grantor hereby assigns and transfers (for the purposes of
the creation of a security interest therein), conveys, mortgages, pledges and
hypothecates to Agent, on behalf of Banks, and hereby grants to Agent, on behalf
of Banks, a security interest in and to all of Grantor's right, title and
interest in, to and under the following (all of which being hereinafter
collectively called the "Collateral"):
(a) All Accounts of Grantor;
(b) All Chattel Paper of Grantor;
(c) All Contracts of Grantor;
(d) All Documents of Grantor;
(e) All Equipment of Grantor;
(f) All Fixtures of Grantor;
6.
<PAGE> 7
(g) All General Intangibles of Grantor;
(h) All Instruments of Grantor;
(i) All Inventory of Grantor;
(j) All Licenses of Grantor;
(k) All property of Grantor held by Agent, or any other party for
whom Agent is acting as agent hereunder, including, without limitation, all
property of every description now or hereafter in the possession or custody of
or in transit to Agent or such other party for any purpose, including, without
limitation, safekeeping, collection or pledge, for the account of Grantor, or as
to which Grantor may have any right or power;
(l) All other goods and personal property of Grantor, whether
tangible or intangible and whether now or hereafter owned or existing, leased,
consigned by or to, or acquired by, Grantor and wherever located; and
(m) To the extent not otherwise included, all Proceeds of each of
the foregoing and all accessions to, substitutions and replacements for, and
rents, profits and products of each of the foregoing.
Notwithstanding the foregoing, the term "Collateral" shall not include any
property or rights which are now or hereafter held by Grantor to the extent, and
solely to the extent, that such rights are not assignable or capable of being
encumbered as a matter of law or under written terms of any license or other
agreement applicable thereto (but solely to the extent that such restriction
shall be enforceable or give rise to damages under law) and, provided, further,
that, upon the elimination of any such restriction, such grant of a security
interest shall automatically extend to such Collateral.
3. RIGHTS OF AGENT AND BANKS; COLLECTION OF ACCOUNTS.
(a) Notwithstanding anything contained in this Security Agreement to
the contrary, Grantor expressly agrees that it shall remain liable under each of
its Contracts and each of its Licenses to observe and perform all the conditions
and obligations to be observed and performed by it thereunder and that it shall
perform all of its duties and obligations thereunder, all in accordance with and
pursuant to the terms and provisions of each such Contract or License. Neither
Agent nor Banks shall have any obligation or liability under any Contract or
License by reason of or arising out of this Security Agreement or the granting
to Agent of a Lien therein or the receipt by Agent or Banks of any payment
relating to any Contract or License pursuant hereto, nor shall Agent or Banks be
required or obligated in any manner to perform or fulfill any of the obligations
of Grantor under or pursuant to any Contract or License, or to make any payment,
or to make any inquiry as to the nature or the sufficiency of any payment
received by it or the sufficiency of any performance by any party under any
Contract or License, or to present or file any claim, or to take any action to
collect or enforce any performance or
7.
<PAGE> 8
the payment of any amounts which may have been assigned to it, for security
purposes, or to which it may be entitled at any time or times.
(b) Agent authorizes Grantor to collect its Accounts in a prudent
and businesslike manner, and Agent may, upon the occurrence and during the
continuation of any Event of Default and without notice, limit or terminate such
authority at any time. If required by Agent at any time during the continuation
of any Event of Default, any Proceeds, when first collected by Grantor, received
in payment of any such Account or in payment for any of its Inventory or on
account of any of its Contracts or Licenses shall be promptly deposited by
Grantor in precisely the form received (with all necessary endorsements) in a
special bank account maintained by Agent subject to withdrawal by Agent only, as
hereinafter provided, and until so turned over shall be deemed to be held in
trust by Grantor for and as Agent's property and shall not be commingled with
Grantor's other funds or properties. Such Proceeds, when deposited, shall
continue to be collateral security for all of the Secured Obligations and shall
not constitute payment thereof until applied as hereinafter provided. Agent may,
in its sole discretion, apply, as received, all or a part of the funds on
deposit in said special account to the principal of or interest on, or both, in
respect of any of the Secured Obligations in accordance with the provisions of
SECTION 7(G) hereof, and any part of such funds which Agent elects not so to
apply, or fails to promptly elect to apply, shall be promptly paid over by Agent
to Grantor. If an Event of Default has occurred and is continuing, at the
request of Agent, Grantor shall deliver to Agent all original and other
documents evidencing, and relating to, the sale and delivery of its Inventory
and all original and other documents evidencing and relating to, the performance
of labor or service which created such Accounts, including, without limitation,
all original orders, invoices and shipping receipts.
(c) The Agent may at any time, upon the occurrence and during the
continuation of any Event of Default, after first notifying Grantor of its
intention to do so, notify Account Debtors of Grantor, parties to the Contracts
of Grantor, obligors in respect of Instruments of Grantor and obligors in
respect of Chattel Paper of Grantor that the Accounts and the right, title and
interest of Grantor in and under such Contracts, Instruments, and Chattel Paper
have been assigned as collateral security to the Agent, on behalf and for the
benefit of Banks, and that payments shall be made directly to Agent. Upon the
occurrence and during the continuation of any Event of Default and upon the
request of Agent, Grantor shall so notify such Account Debtors, parties to such
Contracts, obligors in respect of such Instruments and obligors in respect of
such Chattel Paper. Upon the occurrence and during the continuation of an Event
of Default, Agent may, in its name, or in the name of others communicate with
such Account Debtors, parties to such Contracts, obligors in respect of such
Instruments and obligors in respect of such Chattel Paper to verify with such
parties, to Agent's satisfaction, the existence, amount and terms of any such
Accounts, Contracts, Instruments or Chattel Paper.
4. REPRESENTATIONS AND WARRANTIES. Grantor hereby represents and warrants
to Agent and Banks that:
(a) Except for the security interest granted to Agent under this
Security Agreement and other Permitted Liens, Grantor is the sole legal and
equitable owner of each item
8.
<PAGE> 9
of the Collateral in which it purports to grant a security interest hereunder,
having good and marketable title thereto, free and clear of any and all Liens.
(b) No effective security agreement, financing statement, equivalent
security or lien instrument or continuation statement covering all or any part
of the Collateral exists, except such as may have been filed by Grantor in favor
of Agent pursuant to this Security Agreement or such as relate to other
Permitted Liens.
(c) This Security Agreement creates and grants to Agent on behalf of
Banks a legal and valid security interest in and to all of the Collateral in
which Grantor now has rights and will create a legal and valid security interest
in the Collateral in which Grantor later acquires rights, when Grantor acquires
those rights.
(d) Grantor's chief executive office, principal place of business,
and the place where Grantor maintains its records concerning the Collateral are
presently located at the addresses set forth on the Collateral Information
Certificate attached hereto as the Exhibit and incorporated herein by this
reference (the "Collateral Information Certificate"). The Collateral, other than
deposit accounts, is presently located at the addresses set forth on the
Collateral Information Certificate. Grantor shall not, during the continuance of
this Security Agreement, change such chief executive office or principal place
of business or remove or cause to be removed, except in the ordinary course of
Grantor's business, the Collateral or the records concerning the Collateral from
those premises without prior written notice to Agent.
(e) All material Collateral of Grantor with respect to which a
security interest must be perfected by the secured party's taking possession
thereof, including, without limitation, Instruments, and all Chattel Paper are
described on the Collateral Information Certificate. All action necessary or
desirable to protect and perfect such security interest in each item set forth
on the Collateral Information Certificate, including, without limitation, the
delivery of all originals thereof to Agent, has been duly taken. The security
interest of Agent in the Collateral listed on the Collateral Information
Certificate is prior in right and interest to all other Liens on such Collateral
and is enforceable as such against creditors of and purchasers from Grantor.
(f) The amount represented by Grantor to Agent from time to time as
owing by each Account Debtor or by all Account Debtors in respect of the
Accounts of Grantor shall at such time be the correct amount, in all material
respects, actually and unconditionally owing by such Account Debtors thereunder.
(g) All Copyrights, material Copyright Licenses, Patents, Patent
Licenses, Trademarks and Trademark Licenses owned, held or in which Grantor
otherwise has any rights are listed on the Collateral Information Certificate.
(h) None of the Patents, Trademarks or Copyrights has been licensed
to any third party, except for Licenses issued in the ordinary course of
business to enable Grantor to conduct its business.
9.
<PAGE> 10
(i) To the best of Grantor's knowledge, each issued Patent,
Trademark and Copyright is valid, subsisting, unexpired and enforceable, and
Grantor has (i) as soon as practicable after the issuance of each Patent been
using appropriate statutory patent marking practices in connection with its use
of issued Patents; (ii) as soon as practicable after the issuance of each
Trademark registration been using appropriate statutory notice of such
registration in connection with its use of registered Trademarks; and (iii)
placed an appropriate statutory copyright notice on all publicly distributed
copies of copyrighted materials which are material to Grantor's business.
(j) No holding, decision, or judgment has been rendered in any
action or proceeding limiting, canceling or questioning the validity of or
Grantor's rights in any Patent, Trademark or Copyright and no such action or
proceeding is pending or, to the best of Grantor's knowledge, threatened. To the
best of Grantor's knowledge, there is no existing breach or default under any
License.
(k) To the best of Grantor's knowledge, the conduct of Grantor's
business does not infringe upon any Patent or similar intellectual property
right owned or controlled by a third party.
(l) The information contained in the Collateral Information
Certificate attached hereto as the EXHIBIT is true and correct.
5. COVENANTS. Grantor covenants and agrees with Agent and Banks that from
and after the date of this Security Agreement and until the Secured Obligations
have been performed and paid in full:
5.1 FURTHER ASSURANCES; PLEDGE OF INSTRUMENTS. At any time and from
time to time, upon the written request of Agent, and at the sole expense of
Grantor, Grantor shall promptly and duly execute and deliver any and all such
further instruments and documents and take such further action as Agent may
reasonably deem desirable to obtain the full benefits of this Security Agreement
and of the rights and powers herein granted, including, without limitation, (a)
using its best efforts to secure all consents and approvals necessary or
appropriate for the assignment to Agent of any Contract or License held by
Grantor or in which Grantor has any rights not heretofore assigned, (b) filing
or cooperating with Agent in filing any financing or continuation statements
under the UCC or assignments with respect to the security interests granted
hereby, (c) filing or cooperating with Agent in filing any forms or other
documents required to be filed with the United States Patent and Trademark
Office, United States Copyright Office, or any filings in any foreign
jurisdiction or under any international treaty, required to secure or protect
Agent's interest in the Collateral, (d) transferring material Collateral to
Agent's possession (if a security interest in such Collateral can only be
perfected by possession), (e) placing the interest of Agent as lienholder on the
certificate of title (or other evidence of ownership) of any vehicle owned by
Grantor or in or with respect to which Grantor holds a beneficial interest, and
(f) using its best efforts to obtain waivers of liens from landlords and
mortgagees. Grantor also hereby authorizes Agent to file any such financing or
continuation statement without the signature of Grantor. If any amount payable
under or in connection with
10.
<PAGE> 11
any of the Collateral is or shall become evidenced by any Instrument, such
Instrument, other than checks and notes received in the ordinary course of
business, shall be duly endorsed in a manner satisfactory to Agent and delivered
to Agent immediately upon Grantor's receipt thereof.
5.2 MAINTENANCE OF RECORDS. Grantor shall keep and maintain at its
own cost and expense reasonably satisfactory and complete records of the
Collateral, including, without limitation, a record of all payments received and
all credits granted with respect to the Collateral and all other dealings with
the Collateral. Upon the request of Agent, Grantor shall mark its books and
records pertaining to the Collateral to evidence this Security Agreement and the
security interests granted hereby. All Chattel Paper shall be marked with the
following legend: "THIS WRITING AND THE OBLIGATIONS EVIDENCED OR SECURED HEREBY
ARE SUBJECT TO THE SECURITY INTEREST OF THE FIRST NATIONAL BANK OF BOSTON, AS
AGENT, UNDER THAT CERTAIN AMENDED AND RESTATED SECURITY AGREEMENT IN ITS FAVOR
DATED AS OF FEBRUARY 18, 1997, AS AMENDED."
5.3 INDEMNIFICATION.
(a) GENERAL INDEMNITY. Borrower shall pay, indemnify, and hold each
Bank, Agent and each of their respective officers, directors, employees,
counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, charges, expenses or disbursements
(including reasonable attorneys' fees and costs) of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and
administration of this Security Agreement or the transactions contemplated
hereby, and with respect to any investigation, litigation or proceeding
(including any proceeding in bankruptcy or appellate proceeding) related to this
Security Agreement, whether or not any Indemnified Person is a party hereto (all
the foregoing, collectively, the "Indemnified Liabilities"); provided, that
Grantor shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities arising from the gross negligence or willful
misconduct of such Indemnified Person.
(b) SURVIVAL; DEFENSE. The obligations in this SECTION 5.3 shall
survive payment of all Secured Obligations. At the election of any Indemnified
Person, Grantor shall defend such Indemnified Person using legal counsel
satisfactory to such Indemnified Person in such person's sole discretion, at the
sole cost and expense of Grantor. All amounts owing under this SECTION 5.3 shall
be paid within thirty (30) days after demand.
5.4 COMPLIANCE WITH TERMS OF ACCOUNTS, ETC. In all material
respects, Grantor shall perform and comply with all obligations in respect of
Accounts, Chattel Paper, Contracts, Documents, Instruments and Licenses and all
other agreements relating to the Collateral to which it is a party or by which
it is bound.
5.5 LIMITATION ON LIENS ON COLLATERAL. Grantor shall not create,
permit or suffer to exist, and shall defend the Collateral against and take such
other action as is necessary to remove, any Lien on the Collateral, except (a)
Permitted Liens and (b) the Lien granted to Agent under this Security Agreement.
Grantor shall further defend the right, title and interest
11.
<PAGE> 12
of Agent in and to any of Grantor's rights under the Chattel Paper, Contracts,
Documents and Instruments and to the Equipment, Fixtures and Inventory and in
and to the Proceeds thereof against the claims and demands of all Persons
whomsoever.
5.6 LIMITATIONS ON MODIFICATIONS OF ACCOUNTS, ETC. Upon the
occurrence and during the continuation of any Event of Default, Grantor shall
not, without Agent's prior written consent, grant any extension of the time of
payment of any of the Accounts, Chattel Paper, Instruments or amounts due under
any Contract or Document, compromise, compound or settle the same for less than
the full amount thereof, release, wholly or partly, any Person liable for the
payment thereof, or allow any credit or discount whatsoever thereon other than
trade discounts granted in the ordinary course of business of Grantor.
5.7 MAINTENANCE OF INSURANCE. Grantor shall maintain, with
financially sound and reputable companies, insurance policies insuring (a) its
Equipment, Fixtures and Inventory against loss by fire, explosion, theft and
such other casualties as are usually insured against by companies engaged in the
same or similar businesses and (b) Grantor and Agent against liability for
personal injury and property damage relating to such Equipment, Fixtures and
Inventory. Such policies are to be in such amounts and against at least such
risk as are usually insured against in the same general area by companies of the
same or a similar size engaged in the same or a similar business as Grantor.
Grantor, at its expense, shall obtain a standard first mortgage endorsement
(Lenders Loss Payable Endorsement 438BFU, ISO endorsement CP12181091 or
equivalent) to each such policy for the benefit of Agent. Grantor shall, if so
requested by Agent, deliver to Agent, as often as Agent may reasonably request,
a report of a reputable insurance broker satisfactory to Agent with respect to
the insurance on its Equipment, Fixtures and Inventory. All insurance with
respect to the Equipment, Fixtures and Inventory shall provide that no
cancellation, reduction in amount or change in coverage thereof shall be
effective until at least twenty (20) days after receipt by Agent of written
notice thereof.
5.8 TAXES, ASSESSMENTS, ETC. Grantor shall pay promptly when due all
property and other taxes, assessments and government charges or levies imposed
upon, and all claims (including claims for labor, materials and supplies)
against, the Equipment, Fixtures or Inventory, except to the extent the validity
thereof is being contested in good faith and adequate reserves are being
maintained in connection therewith.
5.9 LIMITATIONS ON DISPOSITION. Grantor shall not sell, lease,
transfer or otherwise dispose of any of the Collateral, or attempt or contract
to do so in violation of SECTIONS 6.3 or 6.5 of the Credit Agreement except for
the licensing of Grantor's Intellectual Property rights in the ordinary course
of business.
5.10 FURTHER IDENTIFICATION OF COLLATERAL. Grantor shall, if so
requested by Agent, furnish to Agent, as often as Agent shall reasonably
request, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Agent may
reasonably request, all in reasonable detail.
12.
<PAGE> 13
5.11 NOTICES. Grantor shall advise Agent promptly, in reasonable
detail, of (a) any material Lien, other than Permitted Liens, attaching to or
asserted against any of the Collateral, and (b) the occurrence of any other
event which would have a Material Adverse Effect.
5.12 RIGHT OF INSPECTION AND AUDIT. Upon reasonable notice to
Grantor (unless an Event of Default has occurred and is continuing, in which
case no notice is necessary), Agent or any agents or representatives of Agent
shall at all times have full and free access during normal business hours to all
the books and records and correspondence of Grantor relating to the Collateral,
and Agent or any agents or representatives of Agent may examine the same, take
extracts therefrom and make photocopies thereof, and Grantor agrees to render to
Agent, at Grantor's cost and expense, such clerical and other assistance as may
be reasonably requested with regard thereto. Upon reasonable notice to Grantor
(unless an Event of Default has occurred and is continuing, in which case no
notice is necessary), Agent and its agents and representatives shall also have
the right to enter into and upon any premises where any of the Equipment,
Fixtures or Inventory is located for the purpose of conducting audits and making
physical verifications of such Equipment, Fixtures and Inventory and test
verifications of the Accounts in any manner and through any medium that it
considers advisable, and Grantor agrees to furnish all such assistance and
information as Agent may reasonably require in connection therewith. The cost
and expense of such audits shall be borne by Grantor. Grantor, at its own
expense, shall cause certified independent public accountants, reasonably
satisfactory to Agent, to prepare and deliver to Agent the results of any
physical verification of all or any portion of Grantor's Equipment, Fixtures or
Inventory and any test verification of Grantor's Accounts made or observed by
such accountants when and if such verification is conducted.
5.13 MAINTENANCE AND PRESERVATION OF PROPERTIES AND FACILITIES.
Grantor shall maintain and protect its properties, assets and facilities,
including, without limitation, its Equipment and Fixtures, material to the
operation of its business, in good order and working repair and condition
(taking into consideration ordinary wear and tear) and from time to time make or
cause to be made all necessary and proper repairs, renewals and replacements
thereto and shall competently manage and care for its properties material to the
operation of its business, all portions and interests therein, including the
Collateral, in accordance with prudent industry practices applicable to the
particular property, portion or interest therein, involved.
5.14 CONTINUOUS PERFECTION. Grantor shall not change its name,
identity or corporate structure in any manner which might make any financing or
continuation statement filed in connection herewith seriously misleading within
the meaning of section 9402(7) of the UCC (or any other then applicable
provision of the UCC) unless Grantor shall have given Agent prior written notice
thereof and shall have taken all action (or made arrangements to take such
action substantially simultaneously with such change if it is impossible to take
such action in advance) necessary or reasonably requested by Agent to amend such
financing statement or continuation statement so that it is not seriously
misleading.
13.
<PAGE> 14
5.15 COVENANTS REGARDING INTELLECTUAL PROPERTY.
(a) Grantor shall notify Agent promptly if it knows or has
reason to know that any application or registration relating to any Copyright,
Patent or Trademark which is material to the conduct of Grantor's business may
become abandoned, or of any adverse determination or development (including,
without limitation, the institution of, or any such determination or development
in, any proceeding in the United States Copyright Office, United States Patent
and Trademark Office or any court) regarding Grantor's ownership of any
Copyright, Patent or Trademark which is material to the conduct of Grantor's
business, its right to register the same, or to keep and maintain the same.
(b) Grantor shall take all commercially reasonable steps
necessary to prevent any misuse, infringement, misappropriation, unauthorized
use or abandonment of its Copyrights, Patents, Trademarks, or other Intellectual
Property where a lack of such protection would have a Material Adverse Effect.
Grantor's efforts pursuant to this section shall include, but not be limited to:
(i) establishing prudent security measures and procedures governing access to,
and use of, property protected by Copyrights, Trademarks or Patents or of
Intellectual Property owned or licensed by Grantor or developed by any Person on
behalf of Grantor; (ii) establishing and maintaining in force any agreements
with employees and consultants, or any written terms of employment, as are
customarily used in Grantor's industry for the protection of Intellectual
Property; and (iii) vigorous enforcement of Grantor's rights in any Intellectual
Property.
(c) In no event shall Grantor, either itself or through any
agent, employee, licensee or designee, file an application for the registration
of any Copyright with the United States Copyright Office or Patent or Trademark
with the United States Patent and Trademark Office or any similar office or
agency in any other country or any political subdivision thereof unless it
promptly informs Agent and, upon request of Agent, executes and delivers any and
all agreements, instruments, documents, and papers as Agent reasonably may
request to evidence Agent's security interest in such Copyright, Patent or
Trademark, including, without limitation, with respect to Trademarks, the
goodwill of Grantor, relating thereto or represented thereby.
(d) Grantor shall (i) promptly make application to register
any copyrightable or patentable property or trade name or Trademark of Grantor
which is material to Grantor's business, including the most recent version of
Grantor's existing Copyrights, if not so already registered; and (ii) take all
necessary action to maintain and pursue each such application (and to obtain the
relevant registration) and to maintain the registration of each of the
Copyrights, Patents and Trademarks which is material to the conduct of Grantor's
business, including, without limitation, the filing of applications for renewal,
affidavits of use, affidavits of noncontestability and opposition and
interference and cancellation proceedings.
(e) In the event that any Copyright, Patent or Trademark is
infringed, misappropriated or diluted by a third party, Grantor shall notify the
Agent promptly after Grantor learns thereof and shall, unless Grantor shall
reasonably determine that such Copyright,
14.
<PAGE> 15
Patent or Trademark is not material to the conduct of Grantor's business,
promptly sue for infringement, misappropriation or dilution and to recover any
and all damages for such infringement, misappropriation or dilution and take
such other actions as Grantor shall reasonably deem appropriate under the
circumstances to protect such Copyright, Patent or Trademark.
6. AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Grantor hereby irrevocably constitutes and appoints Agent, and
any officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of Grantor and in the name of Grantor or in its own name, from time to
time at Agent's discretion, for the purpose of carrying out the terms of this
Security Agreement, to take any and all appropriate action and to execute and
deliver any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security Agreement and, without
limiting the generality of the foregoing, hereby gives Agent the power and
right, on behalf of Grantor, without notice to or assent by Grantor, to do the
following:
(i) to ask, demand, collect, receive and give acquittances and
receipts for any and all monies due or to become due under any Collateral and,
in the name of Grantor, in its own name, or otherwise, to take possession of,
endorse and collect any checks, drafts, note, acceptances or other Instruments
for the payment of monies due under any Collateral and to file any claim or to
take or commence any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by Agent for the purpose of collecting any and all
such monies due under any Collateral whenever payable;
(ii) to pay or discharge any Lien or Liens, including, without
limitation, any tax lien, levied or placed on or threatened against the
Collateral, to effect any repairs or any insurance called for by the terms of
this Security Agreement and to pay all or any part of the premiums therefor and
the costs thereof; and
(iii) to (1) direct any person liable for any payment under or
in respect of any of the Collateral to make payment of any and all monies due or
to become due thereunder directly to Agent or as Agent shall direct, (2) receive
payment of any and all monies, claims and other amounts due or to become due at
any time arising out of or in respect of any Collateral, (3) sign and endorse
any invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications and notices in
connection with Accounts and other Instruments and Documents constituting or
relating to the Collateral, (4) commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any part thereof and to enforce any other right in
respect of any Collateral, (5) defend any suit, action or proceeding brought
against Grantor with respect to any Collateral, (6) settle, compromise or adjust
any suit, action or proceeding described above and, in connection therewith,
give such discharges or releases as Agent may deem appropriate, (7) license or,
to the extent permitted by an applicable license, sublicense, whether general,
special or otherwise, and whether on an exclusive or non-exclusive
15.
<PAGE> 16
basis, any Patent or Trademark throughout the world for such term or terms, on
such conditions and in such manner as the Agent shall in its discretion
determine, and (8) sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though
Agent were the absolute owner thereof for all purposes, and to do, at Agent's
option and Grantor's expense, at any time, or from time to time, all acts and
things which Agent may reasonably deem necessary to protect, preserve or realize
upon the Collateral and Agent's Lien thereon in order to effect the intent of
this Security Agreement, all as fully and effectively as Grantor might do.
(b) Agent agrees that, except upon the occurrence and during the
continuation of an Event of Default, it shall not exercise the power of attorney
or any rights granted to Agent pursuant to this SECTION 6. Grantor hereby
ratifies, to the extent permitted by law, all that said attorney shall lawfully
do or cause to be done by virtue hereof. The power of attorney granted pursuant
to this SECTION 6 is a power coupled with an interest and shall be irrevocable
until the Secured Obligations are paid and performed in full.
(c) The powers conferred on Agent hereunder are solely to protect
Agent's and Banks' interests in the Collateral and shall not impose any duty
upon it to exercise any such powers. Agent shall be accountable only for amounts
that it actually receives as a result of the exercise of such powers and neither
it nor any of its officers, directors, employees, agents or representatives
shall be responsible to Grantor for any act or failure to act pursuant to this
SECTION 6, except for its own gross negligence or willful misconduct.
(d) Grantor also authorizes Agent, at any time and from time to time
upon the occurrence and during the continuation of any Event of Default, to (i)
communicate in its own name with any party to any Contract with regard to the
assignment for security purposes of the right, title and interest of Grantor in
and under the Contracts hereunder and other matters relating thereto and (ii)
execute, in connection with the sale of Collateral provided for in SECTION 7
hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(e) If Grantor fails to perform or comply with any of its agreements
contained herein and Agent or any Bank, as provided for by the terms of this
Security Agreement, shall perform or comply, or otherwise cause performance or
compliance, with such agreement, the reasonable expenses, including reasonable
attorneys' fees, of Agent or such Bank incurred in connection with such
performance or compliance, together with interest thereon at the rate then in
effect in respect of the Loans, shall be payable by Grantor to Agent or such
Bank on demand and shall constitute Secured Obligations secured hereby.
7. RIGHTS AND REMEDIES UPON DEFAULT.
(a) If any Event of Default shall occur and be continuing, Agent may
exercise in addition to all other rights and remedies granted to it under this
Security Agreement, the Credit Agreement, the other Loan Documents and under any
other instrument or agreement securing, evidencing or relating to the Secured
Obligations, all rights and remedies of a secured
16.
<PAGE> 17
party under the UCC. Without limiting the generality of the foregoing, Grantor
expressly agrees that in any such event Agent, without demand of performance or
other demand, advertisement or notice of any kind (except the notice specified
below of time and place of public or private sale) to or upon Grantor or any
other person (all and each of which demands, advertisements and notices are
hereby expressly waived to the maximum extent permitted by the UCC and other
applicable law), may (i) reclaim, take possession, recover, store, maintain,
finish, repair, prepare for sale or lease, ship, advertise for sale or lease and
sell or lease (in the manner provided for herein) the Collateral, and in
connection with liquidation of the Collateral and collection of the accounts
receivable pledged as Collateral, use any Trademark, trade name, trade style,
Copyright, or process used or owned by Grantor; and (ii) forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof, and
may forthwith sell, lease, assign, give an option or options to purchase or sell
or otherwise dispose of and deliver said Collateral (or contract to do so), or
any part thereof, in one or more parcels at public or private sale or sales, at
any exchange or broker's board or at any of Agent's offices or elsewhere at such
prices as it may deem best, for cash or on credit or for future delivery without
assumption of any credit risk.
(b) If an Event of Default shall occur and be continuing, to the
extent Grantor has the right, Grantor authorizes Agent, on the terms set forth
in this SECTION 7, to enter the premises where the Collateral is located, to
take possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge or lien which, in the opinion of
Agent, appears to be prior or superior to its security interest in the
Collateral.
(c) If an Event of Default shall occur and be continuing, Agent or
any Bank shall have the right upon any public sale or sales permitted under this
SECTION 7, and, to the extent permitted by law, upon any such private sale or
sales permitted under this SECTION 7, to purchase the whole or any part of said
Collateral so sold, free of any right or equity of redemption, which equity of
redemption Grantor hereby releases. Grantor further agrees, at Agent's request,
to assemble the Collateral and make it available to Agent at places which Agent
shall reasonably select, whether at Grantor's premises or elsewhere. Agent and
Banks shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale as provided in SECTION 7(G) hereof, Grantor
remaining liable for any deficiency remaining unpaid after such application, and
only after so paying over such net proceeds and after the payment by Agent of
any other amount required by any provision of law, including section 9504(1)(c)
of the UCC, need Agent account for the surplus, if any, to Grantor. To the
maximum extent permitted by applicable law, Grantor waives all claims, damages,
and demands against Agent arising out of the repossession, retention or sale of
the Collateral except such as arise out of the gross negligence or willful
misconduct of Agent or Agent's breach of any of its obligations hereunder.
Grantor agrees that Agent need not give more than ten (10) days' notice (which
notification shall be deemed given in accordance with the Credit Agreement) of
the time and place of any public sale or of the time after which a private sale
may take place and that such notice is reasonable notification of such matters.
Grantor shall remain liable for any deficiency if the proceeds of any sale or
disposition of the Collateral are insufficient to pay all amounts to which Agent
is entitled, Grantor also being liable for the reasonable fees of any attorneys
employed by Agent to collect such deficiency.
17.
<PAGE> 18
(d) Grantor also agrees to pay all reasonable fees, costs and
expenses of Agent and Banks, including, without limitation, reasonable
attorneys' fees, incurred in connection with the enforcement of any of its
rights and remedies hereunder.
(e) If an Event of Default shall occur and be continuing, upon
Agent's request, Grantor agrees to promptly execute assignments of Grantor's
entire right, title and interest in and to each of the Patents, Trademarks,
Copyrights and Licenses. Such assignments shall be in form and content which is
recordable in the United States Patent and Trademark Office or Copyright Office,
as applicable, and otherwise reasonably acceptable to the Agent.
(f) Grantor hereby waives presentment, demand, protest or any notice
(to the maximum extent permitted by applicable law) of any kind in connection
with this Security Agreement or any Collateral.
(g) The Proceeds of any sale, disposition or other realization upon
all or any part of the Collateral shall be distributed by Agent in the following
order of priorities:
First, to Agent and Banks in an amount sufficient to pay in
full the reasonable costs of Agent and Banks in connection with such
sale, disposition or other realization, including all reasonable
fees, costs, expenses, liabilities and advances incurred or made by
Agent and Banks in connection therewith, including, without
limitation, reasonable attorneys' fees;
Second, to Agent for the account of Banks in an amount equal
to the then unpaid principal of and accrued interest and prepayment
premiums, if any, on the Secured Obligations;
Third, to Agent and Banks in an amount equal to any other
Secured Obligations which are then unpaid; and
Finally, upon payment in full of all of the Secured
Obligations, to Grantor or its representatives or as a court of
competent jurisdiction may direct.
8. GRANT OF LICENSE TO INTELLECTUAL PROPERTY. For the sole purpose of
enabling Agent to exercise its rights and remedies under SECTION 7 hereof at
such time as Agent shall be lawfully entitled to exercise such rights and
remedies, Grantor hereby grants to Agent an irrevocable (for so long as it has
the right to exercise such rights and remedies), non-exclusive license
(exercisable without payment of royalty or other compensation to Grantor) to
use, license or sublicense any Copyright, Patent or Trademark, and to exercise
any rights held by Grantor under any Copyright, Patent or Trademark license or
sublicense, now owned or hereafter acquired, by license or otherwise, by
Grantor, and wherever the same may be located, and including, without
limitation, with respect to such license, reasonable access to all media in
which any of the licensed items may be recorded or stored and to all computer
and automatic machinery software and programs used for the compilation or
printout thereof.
18.
<PAGE> 19
9. LIMITATION ON AGENT'S DUTY IN RESPECT OF COLLATERAL. Agent shall be
deemed to have acted reasonably in the custody, preservation and disposition of
any of the Collateral if it complies with the obligations of a secured party
under section 9207 of the UCC.
10. REINSTATEMENT. This Security Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Grantor for liquidation or reorganization, should Grantor become insolvent or
make an assignment for the benefit of creditors or should a receiver or trustee
be appointed for all or any significant part of Grantor's property and assets,
and shall continue to be effective or be reinstated, as the case may be, if at
any time payment and performance of the Secured Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must
otherwise be restored or returned by any obligee of the Secured Obligations,
whether as a "voidable preference," "fraudulent conveyance," or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Secured Obligations shall be reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or returned.
11. MISCELLANEOUS.
11.1 NOTICES. Any notice or other communication hereunder to any
party shall be addressed and delivered (and shall be deemed given) in accordance
with the Credit Agreement.
11.2 SEVERABILITY. Any provision of this Security Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.3 HEADINGS. The various headings in this Security Agreement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Security Agreement or any provisions hereof.
11.4 NO WAIVER; CUMULATIVE REMEDIES.
(a) Agent shall not by any act, delay, omission or otherwise
be deemed to have waived any of its respective rights or remedies hereunder, nor
shall any single or partial exercise of any right or remedy hereunder on any one
occasion preclude the further exercise thereof or the exercise of any other
right or remedy.
(b) The rights and remedies hereunder provided are cumulative
and may be exercised singly or concurrently, and are not exclusive of any rights
and remedies provided by law.
19.
<PAGE> 20
(c) None of the terms or provisions of this Security Agreement
may be waived, altered, modified or amended except by an instrument in writing,
duly executed by Grantor and Agent and Banks.
11.5 TIME IS OF THE ESSENCE. Time is of the essence for the
performance of each of the terms and provisions of this Security Agreement.
11.6 TERMINATION OF THIS SECURITY AGREEMENT. Subject to SECTION 10
hereof, this Security Agreement shall terminate upon the payment and performance
in full of the Secured Obligations other than inchoate indemnity obligations.
11.7 SUCCESSOR AND ASSIGNS. This Security Agreement and all
obligations of Grantor hereunder shall be binding upon the successors and
assigns of Grantor, and shall, together with the rights and remedies of Agent
and Banks, inure to the benefit of Agent and Banks, any future holder of any
Note and their respective successors and assigns permitted under the Credit
Agreement. No sales of participations in, or other sales, assignments, transfers
or other dispositions of any agreement governing or instrument evidencing, the
Secured Obligations or any portion thereof or interest therein shall in any
manner affect the Lien granted to Agent hereunder.
11.8 FURTHER INDEMNIFICATION. Grantor agrees to pay, and to keep
Agent and each Bank harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all excise, sales or other similar
taxes which may be payable or determined to be payable with respect to any of
the Collateral or in connection with any of the transactions contemplated by
this Security Agreement.
11.9 GOVERNING LAW. In all respects, including all matters of
construction, validity and performance, this Security Agreement and the Secured
Obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in such state, without regard to the principles thereof
regarding conflict of laws.
11.10 COUNTERPARTS. This Security Agreement may be executed in any
number of counterparts, each of which when so delivered shall be deemed an
original, but all such counterparts shall constitute but one and the same
instrument. Each such agreement shall become effective upon the execution of a
counterpart hereof or thereof by each of the parties hereto and telephonic
notification that such executed counterpart has been received by Grantor, Agent
and Banks.
11.11 NO NOVATION. This Amended and Restated Loan Agreement is not
intended to be, and shall not be construed to create, a novation or accord and
satisfaction, and, except as otherwise provided herein, the Original Security
Agreement, as executed and delivered on June 18, 1996, shall remain in full
force and effect. Without limiting the generality of the foregoing, SECTION 5.3
of the Original Security Agreement shall survive the effectiveness of this
Amended and Restated Security Agreement and shall remain enforceable against
Grantor.
20.
<PAGE> 21
IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be executed and delivered by its duly authorized officer on the
date first set forth above.
GRANTOR ADFLEX SYSTEMS, INC.
By: /s/ Rolando Esteverena
----------------------
Rolando Esteverena,
Chairman and CEO
Accepted and acknowledged by:
AGENT:
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Teresa Heller
-----------------------------
Teresa Heller,
Director
BANKS:
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Teresa Heller
-----------------------------
Teresa Heller,
Director
WELLS FARGO BANK, N.A.
(as successor to First Interstate Bank of Arizona, N.A.)
By: /s/ Mae Delabarre
-----------------------------
Mae Delabarre,
Assistant Vice President
21.
<PAGE> 22
EXHIBIT
COLLATERAL INFORMATION CERTIFICATE
22.
<PAGE> 1
EXHIBIT 11.1
ADFLEX SOLUTIONS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
------ ------- --------
<S> <C> <C> <C>
Net income (loss) $7,046 $(3,723) $(25,024)
Computation of shares used in net
income (loss) per share:
Weighted average common
shares outstanding 5,028 6,855 8,580
Incremental common equivalent
shares
representing shares issuable
upon exercise of stock options 550 -- --
and warrants (1)
------ ------- --------
Total weighted average shares - 5,578 6,855 8,580
primary
====== ======= ========
Total weighted average shares -
fully diluted 5,578 6,855 8,580
====== ======= ========
Primary net income (loss) per common
and $ 1.26 $ (.54) $ (2.92)
common equivalent share
====== ======= ========
Fully diluted net income (loss) per
common and common equivalentent
share $ 1.26 $ (.54) $ (2.92)
====== ======= ========
</TABLE>
- - --------
(1) Amount calculated using the treasury stock method and fair market values for
stock.
<PAGE> 1
Exhibit 13.1
"Certain Provisions of the ADFlex Solutions, Inc.
1996 Annual Report to Stockholders".
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Overview
ADFlex Solutions, Inc. is a major supplier of high-volume flexible
interconnects. Prior to 1996, the Company was engaged primarily in the
fabrication of flexible circuits, capitalizing on its advanced manufacturing
technology and high-volume production capabilities.
On December 31, 1995, in a strategic move towards vertical integration, the
Company purchased the flexible interconnect division and certain net assets of
Xyratex, now operating as ADFlex Solutions Limited (ADFlex U.K.), located in
Havant, England. This division was, and continues to be, engaged in advanced
assembly technology and assembly processes entailing the attachment of
integrated circuits and surface mounted components onto flexible circuits. The
acquisition enables the Company to provide its customers with a single source
solution to their interconnect requirements.
The Company's market includes hard disk drive (HDD) and non-HDD customers. The
HDD industry represents the Company's predominant market, accounting for 62%,
51% and 55% of net sales in 1996, 1995 and 1994, respectively. The Company has
been successful in expanding its product diversity in an effort to reduce its
dependency on the HDD market, as evidenced by a decrease in HDD sales
concentration from 70% in 1993 to 51% by the end of 1995. Immediately following
the acquisition of ADFlex U.K. on December 31, 1995, the Company's concentration
of HDD sales increased to 70%. Through ongoing diversification and new market
expansion efforts, the Company was able to reduce this concentration to 62% by
the end of 1996. Though the Company is continuing in its efforts to reduce its
dependence on the HDD industry, net sales attributable to this market are
expected to increase and to continue to represent the majority of net sales for
the foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry could have a material adverse effect on the Company's
operating results.
During early 1996, certain of the Company's HDD customers experienced structural
and strategic changes that negatively impacted the Company's results for 1996.
Quantum Corporation (Quantum) announced an exclusive manufacturing agreement to
purchase all of its HDD products from a Japanese company. This relationship
redirected all of Quantum's flex requirements to a local Japanese supplier.
Hewlett-Packard Company announced its complete withdrawal from the HDD business
resulting in unexpected and significant order cancellations in the year. 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 thus reducing anticipated
orders for the year.
In August 1996, the Company expanded its worldwide manufacturing operations,
announcing 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), is 80% owned by the Company. Initial shipments from Thailand began in the
fourth quarter of 1996.
At the close of the third quarter, in response to lower than expected revenues
at its ADFlex U.K. facility, the Company announced that it intended to
restructure its assembly operations at ADFlex U.K. and transfer production to
ATL. The shifting of labor intensive production from the U.K. to Thailand is
expected to reduce manufacturing costs and produce efficiencies derived from the
Thailand facility's proximity to a number of existing and prospective customers
in Southeast Asia. The transition is expected to take place throughout the first
half of 1997 during which time the Company expects minimal gross margins from
its assembly operations. The Company anticipates that the benefits associated
with the restructuring will not be fully realized until the second half of 1997.
Following the restructuring, the Company plans on maintaining a technology
development center and a sales and service organization in the U.K. to support
its European customers.
The Company currently serves the electronics industry, which is subject to rapid
technological change, product obsolescence and price competition. These and
other factors affecting the electronics industry, or any of the Company's major
customers in particular, could have a material adverse effect on the Company's
results of operations.
Results of Operations
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
<PAGE> 2
the 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 advance
assembly technology, specifically chip-on-flex, the primary specialty of ADFlex
U.K. Customer structural changes and the delay in MR technology resulted in net
sales at ADFlex U.K. of nearly 40% below levels experienced in the latter part
of 1995.
The Company experienced sales growth in 1995 of 30% 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 12%,
28% and 31%, 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 flex 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.
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.
<PAGE> 3
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, 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 has 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.
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 non-deductibility
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.
Liquidity and Capital Resources
SUMMARY The Company has financed its liquidity needs 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 investment in
ADFlex U.K. and ATL. At December 31, 1996, cash and cash equivalents totaled
$6.1 million, compared with $15.7 million as of December 31, 1995. Working
capital at December 31, 1996 was $9.1 million versus $20.6 million at December
31, 1995.
BANK FINANCING On October 31, 1995, the Company replaced its existing line of
credit with a two-year, $20.0 million revolving line of credit with The First
National Bank of Boston and First Interstate Bank of Arizona (the FNBB line)
which was later amended on June 18, 1996 and February 18, 1997. Under the
amended FNBB line, all Company assets 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%. In addition to leverage and profitability covenants, the FNBB
line prohibits the payment of dividends and certain types of merger transactions
without the prior approval of the banks. The February amendment is effective as
of December 31, 1996 and the Company was in compliance with all covenants of the
amended FNBB line at December 31, 1996. 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.
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.
CASH FLOW At December 31, 1996, the Company's principal sources of liquidity
included $6.1 million in cash and cash equivalents and $17.1 million in
available borrowings under its $20.0 million bank line of credit with an
outstanding balance of $10.0 million.
<PAGE> 4
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 existing bank line of credit. The Company
experienced a net loss of $25.0 million in 1996 primarily the result of a $21.1
million after-tax charge 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. The Company expects to pay $4.1 million and $2.5
million of the accrued employee and lease termination costs in 1997 and 1998,
respectively.
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.
<PAGE> 5
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. Additionally, the
Company purchased $6.5 million of inventory in connection with the ADFlex U.K.
acquisition. 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, of which $6.8
million was used to acquire and improve 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 purchase approximately $7.2 million of capital
equipment in 1997, primarily for the following: (i) $2.5 million in expansion of
assembly capabilities at ATL; (ii) $0.7 million for manufacturing enhancements
and new technology; (iii) $1.0 million for the completion of the Mexico
facilities expansion and (iv) $3.0 million for replacement and general
improvement of existing machinery and facilities.
Under the terms of the subordinated debenture issued in the ADFlex U.K.
acquisition, the Company remitted $2.5 million in principal plus $0.8 million in
accrued interest on January 6, 1997. Funding for this payment came from the
Company's existing line of credit. The Company is committed to pay $2.5 million
in January of each year through the year 2000.
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, 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 in 1997.
Other Matters
FOREIGN OPERATIONS The Company's primary finishing and assembly facilities are
located in Agua Prieta, Mexico; Havant, England; and Lamphun, Thailand. While
the Company believes that it has established good relationships with its labor
force and the local governments, the spread of the manufacturing process over
multiple countries subjects the Company to risks inherent in international
operations.
MEXICAN OPERATIONS The Mexican Peso experienced significant devaluation relative
to the U.S. Dollar in December 1994 and early 1995. Peso-based operating costs
are primarily wages and benefits for the Company's Mexican hourly union
employees. The initial devaluation had the effect of reducing Mexican labor
costs by nearly 40%. Since that time, however, these savings have been partially
offset by a series of three wage increases ranging from 7-10% in response to
Mexican government-mandated increases in minimum wages. The Peso has experienced
further devaluation in 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. The
Company does not believe that future wage increases will exceed the benefit of
the devaluation; however, there can be no assurance that future currency
fluctuations and government-mandated wage increases will not have a material
effect on the Company's business, financial condition and results of operations.
The Company maintains all significant assets, including inventory, accounts
receivable and most 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.
U.K. OPERATIONS Effective December 31, 1995, the Company completed its
acquisition of the flexible interconnect division of Xyratex (subsequently
renamed ADFlex Solutions Limited). In connection with the acquisition, the
Company delivered cash, a subordinated debenture and Common Stock with a
combined value of approximately $45 million. The cash portion was funded from
cash and cash equivalent balances.
<PAGE> 6
Prior to the acquisition, the Company supplied flexible circuits to Xyratex's
flexible interconnect division. The Company's sales to this division represented
roughly 5% of the Company's 1995 net sales and 25% of the division's flexible
circuit requirements. Xyratex's flex expertise has historically focused on
state-of-the-art assembly technology and processes. The integration of this
expertise with the Company's manufacturing technology and high-volume production
capabilities has allowed the Company to offer customers a single source for
complete flex interconnect solutions.
The division and the Company also supplied to many of the same customers. The
acquisition increased the concentration of sales to two HDD customers increasing
their percentage of net sales by 8.9% of total net sales. The loss of either
customer, or a substantial reduction in orders by any significant customer,
including reductions due to market, competitive or economic conditions, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
THAILAND OPERATIONS During 1996, the Company invested $2.4 million in its
Thailand joint venture with Hana Microelectronics. The Company is in the process
of transferring equipment and technical expertise from its existing operations
to Thailand. Initial shipments from Thailand began in the fourth quarter of
1996; however, the Company does not expect to reach volume production until the
second half of 1997. The Company anticipates an additional $2.5 million will be
invested in the joint venture in 1997, primarily for the purchase of
manufacturing equipment. No assurances can be given that the transition of
operations to Thailand will occur as scheduled or that the Company will realize
the benefits anticipated due to the lower cost structure of the Thailand
operations.
CHANDLER LEASE The Company leases its facility in Chandler, Arizona from an
affiliate of Rogers Corporation (Rogers). The Company is currently in the
process of negotiating the terms of a renewal of the lease which currently
expires on June 30, 1997. Although no assurances can be given that an agreement
regarding the terms of the renewal can be reached, management believes, based on
discussion to date, that an agreement will be reached.
ENVIRONMENTAL MATTERS The Company conducted environmental studies of its
facility in Chandler, Arizona in early 1995. In connection with these studies,
the Company has discovered a limited amount of soil contamination that may
require remediation. While the investigation of the extent of this contamination
is not yet complete, based on the preliminary information currently available,
the Company believes that the costs associated with the investigation and
remediation of this situation will not have a material adverse effect on its
operations or financial condition; however, given the uncertainties associated
with environmental contamination, until a full investigation has been completed,
there can be no assurance that such costs will not have a material adverse
impact on the Company. Pursuant to the acquisition agreements pertaining to the
initial formation of the Company, Rogers retained all environmental liabilities
existing prior to the acquisition. While Rogers currently has sufficient assets
to fulfill its obligations under such acquisition agreements, if pre-closing
environmental liabilities requiring remediation are discovered and the Company
was unable to enforce the acquisition agreements 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 have a
material adverse effect on the Company's business, financial condition and
results of operations.
In mid 1995, the Company acquired a manufacturing facility located in Agua
Prieta, Mexico. In connection with this acquisition, the Company conducted an
environmental study of the facility which indicated contamination by hazardous
materials in the soil and groundwater. Pursuant to the purchase agreement, the
seller pursued and received verbal approval of a remediation plan from the
appropriate Mexican authorities whereby the seller's obligation for cost of
remediation is limited to $2.5 million. The seller will commence remediation
activities once written approval is obtained from the Mexican authorities. A
total of $1.0 million is being held in escrow pending the seller's performance
of its environmental obligations under the agreement.
The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of hazardous material used to manufacture the Company's flex
interconnect products. The Company believes that it has been operating its
facilities in substantial compliance in all material respects with existing
environmental laws. However, the Company cannot predict the nature, scope or
effect of legislation or regulatory requirements that could be imposed or how
existing or future laws or regulations will be administered or interpreted with
respect to products or activities to which they have not previously been
applied. Compliance with more stringent environmental laws, as well as more
vigorous enforcement policies of regulatory agencies, could require substantial
expenditures by the Company and could adversely affect the results of operations
of the Company.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 This report contains forward-looking statements that involve risks and
uncertainties, including but not limited to, the risks of concentration of sales
in markets, and in particular the HDD market, and customers, which has caused
and in the future could cause materially adverse fluctuations in operating
results; the risks of being a supplier to the electronics industry in general,
which is characterized by rapid technological change, product obsolescence and
price competition, which could materially
<PAGE> 7
adversely affect operating results; the risk that growth in demand for products
that use flex, and corresponding demand for flex, will not continue to increase
as anticipated; the risk that the Company's transition of manufacturing to
Thailand will be delayed or disrupted, or that such transfer will not result in
increased efficiencies, cost savings or improved margins as anticipated or at
the time anticipated; the risk that margins will continue to be negatively
impacted by higher material content of flex products; general risks inherent in
international operations, including currency fluctuations and
government-mandated wage increases; general manufacturing risks, including
environmental risks related to manufacturing operations and clean-up of the
Mexican manufacturing facility; the risk that all of the foregoing factors or
other facters could cause fluctuations in the price of the Company's Common
Stock and other risks detailed from time to time in the Company's Securities and
Exchange Commission filings.
<PAGE> 8
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands, except share data) 1996 1995
- - ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,097 $ 15,699
Accounts receivable, net 23,612 13,123
Accounts receivable from Smartflex Systems, Inc 1,537 2,469
Other receivables 1,475 --
Receivable for taxes -- 6,269
Inventories 14,990 16,824
Deferred tax assets 2,505 750
Prepaid taxes 795 --
Prepaid expenses and other current assets 303 544
- - ----------------------------------------------------------------------------------------
Total current assets 51,314 55,678
Property, plant and equipment, net 34,297 35,289
Purchased intangibles, net -- 15,937
Deferred tax assets 7,546 --
Other assets 24 14
$ 93,181 $ 106,918
- - ----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 10,000 $ --
Acquisition amount payable -- 12,375
Accounts payable 19,882 7,257
Accrued liabilities 9,679 12,778
Current portion of long-term debt and capitalized leases 2,651 2,632
- - ----------------------------------------------------------------------------------------
Total current liabilities 42,212 35,042
Accrued restructuring charges, non-current 2,500 --
Deferred tax liabilities -- 471
Long-term debt and capitalized leases 7,689 7,851
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;
8,633,508 and 8,282,312 issued and outstanding at
December 31, 1996 and 1995, respectively 86 83
Additional paid-in capital 60,542 58,786
Retained earnings (deficit) (20,339) 4,685
Total stockholders' equity 40,289 63,554
$ 93,181 $ 106,918
- - ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 9
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 156,836 $ 101,163 $ 77,733
Cost of sales 138,273 73,108 53,812
Gross profit 18,563 28,055 23,921
Operating expenses:
Engineering, research & development 7,366 4,548 3,697
Write-off of in-process technology -- 13,920 --
Amortization of intangible assets 2,386 -- --
Selling, general & administrative 13,254 9,119 8,107
Restructuring charges 29,248 -- --
- - -------------------------------------------------------------------------------------------------
Total operating expenses 52,254 27,587 11,804
Operating income (loss) (33,691) 468 12,117
Interest income 223 973 274
Interest expense (1,511) (101) (322)
Other income, net 92 64 107
Minority interest in earnings of consolidated joint venture 109 -- --
- - -------------------------------------------------------------------------------------------------
Income (loss) before income taxes (34,778) 1,404 12,176
Income taxes (9,754) 5,127 5,130
- - -------------------------------------------------------------------------------------------------
Net income (loss) $ (25,024) $ (3,723) $ 7,046
- - -------------------------------------------------------------------------------------------------
Net income (loss) per share $ (2.92) $ (0.54) $ 1.26
- - -------------------------------------------------------------------------------------------------
Common and common equivalent shares used
in the calculation of net income (loss) per share 8,580 6,855 5,578
- - -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 10
Consolidated Statements Of Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained
Paid-In Earnings Total
(in thousands, except share amounts) 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
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 11
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands) 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities
Net income (loss) $ (25,024) $ (3,723) $ 7,046
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,208 2,288 930
Write-off of in-process technology -- 13,920 --
Restructuring charges 29,248
Loss on disposal of assets 184 -- --
Compensation expense on stock options -- -- 675
Deferred taxes (9,772) 656 (334)
Changes in operating assets and liabilities:
Accounts receivable (10,489) (3,455) (5,182)
Accounts receivable from Smartflex Systems, Inc. 932 (376) (714)
Inventories 1,834 (4,406) (3,306)
Prepaid expenses and other current assets (2,029) (587) (14)
Payables and accrued liabilities 11,347 14,913 4,892
- - ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,439 19,230 3,993
Cash flows provided by (used in) investing activities
Capital expenditures (13,763) (20,636) (5,450)
Purchase of net assets in ADFlex U.K. acquisition -- (12,375) --
Decrease (increase) in other assets (10) 83 157
Decrease in acquisition payable (12,375) -- --
Investment in joint venture 491 -- --
Sales of available-for-sale investment securities -- 396,074 63,214
Purchases of available-for-sale investment securities -- (377,156) (82,132)
- - ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,657) (14,010) (24,211)
Cash flows provided by (used in) financing activities
Issuance of common stock, net of expenses 1,759 6,563 26,681
Net activity on line of credit 10,000 -- (2,805)
Payments on capitalized lease obligations (143) (109) (104)
- - ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,616 6,454 23,772
Net increase (decrease) in cash and cash equivalents (9,602) 11,674 3,554
Cash and cash equivalents at beginning of year 15,699 4,025 471
- - ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,097 $ 15,699 $ 4,025
- - ------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 665 $ 68 $ 280
Income taxes 1,409 4,849 5,104
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 --
Acquisition of assets under capitalized leases -- -- 696
- - ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 12
Notes to Consolidated Financial Statements
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 earnings of consolidated joint venture" on the Company's
Consolidated Balance Sheets and Consolidated Statements of Operations,
respectively.
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.
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 intangible assets acquired in
the acquisition were written off. These assets were being amortized over their
estimated useful lives of five years prior to the write-off.
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
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, accounts payable, accrued liabilities, capitalized leases and accrued
restructuring charges are carried at amounts that reasonably approximate their
fair
<PAGE> 13
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
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS No. 121). 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).
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 Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.
NET INCOME (LOSS) PER SHARE Net loss per share for the years ended December 31,
1996 and 1995 is calculated using the weighted average number of common shares
outstanding during the period. Net income per share for the year ended December
31, 1994 is calculated using the weighted average number of common and common
equivalent shares outstanding during the periods. Dilutive common equivalent
shares are computed using the treasury stock method.
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 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 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.
<PAGE> 14
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. 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. 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. 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.
Note 3 Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
Accounts receivable trade $ 24,223 $ 13,765
Allowance for returns and doubtful accounts (611) (642)
$ 23,612 $ 13,123
- - -----------------------------------------------------------------
</TABLE>
Note 4 Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
- - ---------------------------------
<S> <C> <C>
Raw material $ 8,152 $ 7,309
Work-in-process 6,690 9,153
Finished goods 148 362
$14,990 $16,824
- - ---------------------------------
</TABLE>
Note 5 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
Land $ 423 $ -
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C>
Building 9,800 6,763
Leasehold improvements 3,999 3,210
- - ---------------------- -------------------
Manufacturing equipment 26,439 26,750
Computer and office equipment 1,777 1,878
- - -----------------------------------------------------------------------------------------------
42,438 38,601
Accumulated depreciation and amortization of capitalized lease obligations (8,141) (3,312)
$ 34,297 $ 35,289
- - -----------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense, including the amortization of capitalized lease
obligations, was $5,794,000, $2,288,000 and $930,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Note 6 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%. On October 31, 1995, the Company
replaced the FIB Line with a two-year, $20 million revolving line of 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 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.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Subordinated debenture issued in connection with the ADFlex U.K. acquisition,
payable beginning January, 1997 in four equal annual installments (LIBOR +
2.5%; 7.3% and 8.0% at December 31, 1996 and 1995, respectively) $ 10,000 $10,000
Capitalized lease obligations 340 483
- - ---------------------------------------------------------------------------------------------------
10,340 10,483
Less current maturities (2,651) (2,632)
$ 7,689 $ 7,851
- - ---------------------------------------------------------------------------------------------------
</TABLE>
The Company was also contingently liable at December 31, 1996 for $240,000
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 7 Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31,
1996 1995
- - ---------------------------------------------------------------------------
<PAGE> 16
<TABLE>
<S> <C> <C>
Salaries and benefits $ 2,830 $ 3,138
Income taxes payable 170 6,782
Accrued interest 864 33
Accrued restructuring charges, current 4,187 --
Other 1,628 2,825
$ 9,679 $12,778
- - --------------------------------------------------------
</TABLE>
Note 8 Common Stock and Equity
PREFERRED STOCK The Company's certificate of incorporation authorizes the
issuance of 10 million shares of preferred stock, at $.01 par value,
undesignated as to powers, preferences, rights, limitations or restrictions. As
of December 31, 1996, no shares of preferred stock have been issued.
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 Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under Statement of Financial Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation (SFAS No. 123), 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.
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 1995:
risk-free interest rates of 6.28%, dividend yields of 0%, volatility factor of
the expected market price of the Company's Common Stock of .684, and a
weighted-average expected life of the option of 5 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
<PAGE> 17
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 per share amounts):
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
- - ------------------------------------------------------
<S> <C> <C>
Pro forma net loss $(25,962) $(3,970)
Pro forma net loss per share (3.03) (0.58)
- - ------------------------------------------------------
</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.
<PAGE> 18
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 Aggregate
For Options Shares Price per 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>
There were 149,608 and 335,534 options exerciseable with a weighted-average
price of $15.31 and $2.03 at December 31, 1996 and 1995, respectively. The
weighted-average remaining contractual life of the outstanding options at
December 31, 1996 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:
Incentive Stock Options granted in 1996 under the 1994 Plan $ 6.87
Incentive Stock Options granted in 1995 under the 1994 Plan $ 16.86
Non-qualified Stock Options granted in 1996 under the 1994 Plan $ 5.93
Non-qualified Stock Options granted in 1995 under the 1994 Plan $ 16.55
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 $675,000 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 fair
value annual purchase of $25,000. There were 90,584 and 52,716 shares issued
under the Purchase Plan during 1996 and 1995, respectively. There were no shares
issued under the Purchase Plan during 1994.
Note 9 Employee Benefit Plans
<PAGE> 19
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. Total Company contributions during the years
ended December 31, 1996, 1995 and 1994 were $56,000, $59,000 and $48,000,
respectively.
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 for
the year ended December 31, 1996 were $237,000.
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
expense pursuant to this plan for the years ended December 31, 1995 and 1994
were $807,000 and $641,000, respectively.
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 $85,000 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 expense pursuant to this plan for the
years ended December 31, 1996, 1995 and 1994 were $136,000, $901,000 and
$944,000, respectively.
Note 10 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 exerciseable 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.
Note 11 Income Taxes
Income taxes include the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
- - ------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ (77) $ 4,091 $4,256
Deferred (9,623) 520 (284)
- - ------------------------------------------
(9,700) 4,611 3,972
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
State:
Current 54 70 1,174
Deferred (149) 137 (50)
- - ---------------------------------------------------------
(95) 207 1,124
Foreign, current 41 309 34
$ (9,754) $ 5,127 $ 5,130
- - ---------------------------------------------------------
</TABLE>
The tax benefits associated with certain stock options reduced taxes currently
payable by $98,000 and $876,000 for 1996 and 1995, respectively. Such benefits
are credited to additional paid-in capital when realized.
<PAGE> 21
Income tax expense (benefit) differs from the amount computed by applying the
federal statutory rate for the years ended December 31, 1996, 1995 and 1994,
respectively, as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense (benefit) calculated at the statutory rate $(12,172) $ 491 $ 4,275
State income tax (benefit), net of federal effect (62) 135 731
Foreign losses with no tax benefit 2,438 -- --
Tax exempt income -- (249) --
In-process technology (54) 4,872 --
Research and development credit (100) (100) (300)
Other, net 196 (22) 424
Income tax expense (benefit) $ (9,754) $ 5,127 $ 5,130
- - -----------------------------------------------------------------------------------------------------
</TABLE>
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, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Tax benefits related to restructuring $10,601 $ --
Inventory valuation 438 39
Accrued liabilities 352 460
Allowance for returns and doubtful accounts 188 251
- - ----------------------------------------------------------------
11,579 750
Deferred tax liabilities:
Tax versus financial reporting depreciation 974 428
Prepaid expenses and other 554 43
1,528 471
- - ----------------------------------------------------------------
Net deferred tax asset 10,051 279
Less deferred tax asset, current 2,505 750
- - ----------------------------------------------------------------
Deferred tax asset (liability), non-current $ 7,546 $ (471)
- - ----------------------------------------------------------------
</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.
Pre-tax income (loss) from foreign operations was ($38,749,000), $910,000 and
$28,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The
residual United States tax liability for unremitted foreign earnings is
immaterial.
Note 12 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
</TABLE>
<PAGE> 22
<TABLE>
<S> <C> <C>
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 is in the process of negotiating the terms of a renewal of the lease
related to its Chandler, Arizona facility, which currently expires on June 30,
1997.
Rent expense for all operating leases for the years ended December 31, 1996,
1995 and 1994 was $4,246,000, $1,147,000 and $856,000, respectively. At December
31, 1996 and 1995, the Company had capitalized $696,000 of assets acquired under
capitalized lease agreements in the accompanying 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
financial statements.
Note 13 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 35%, 21% and 19% of net sales for the years ended December 31, 1996, 1995
and 1994, respectively. Sales to two additional customers accounted for 12% and
8%, 19% and 13%, and 18% and 11% of net sales in 1996, 1995 and 1994,
respectively.
Export sales during the years ended December 31, 1996, 1995 and 1994 were $26.6
million, $43.2 million and $27.4 million, respectively.
Note 14 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
<PAGE> 23
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 and provides for fixed payments of
$450,000 per annum for the first three years and mutually agreed market rates
for the remaining two years. Total rent expense paid to Rogers was $450,000 for
each of the years ended December 31, 1996, 1995 and 1994.
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, 1996, 1995 and
1994 were $2,582,000, $1,559,000 and $670,000, 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
8%, 19% and 19% of its net sales in 1996, 1995 and 1994 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 $2,586,000. In addition, $1,924,000 was paid to Xyratex in 1996 for
administrative services.
Note 15 Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter Year
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales
1996 $ 38,082 $35,031 $ 36,898 $ 46,825 $156,836
1995 21,980 24,423 28,461 26,299 101,163
Gross profit
1996 7,198 5,244 (295) 6,416 18,563
1995 6,192 7,076 7,684 7,103 28,055
Net income (loss)
1996 840 (660) (25,663)(1) 459 (25,024)(1)
1995 2,206 2,526 2,814 (11,269) (3,723)
Net income (loss) per share
1996 .10 (.08) (2.98) .05 (2.92)
1995 .31 .35 .38 (1.60) (.54)
- - --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes charges of $29.2 million related to restructuring of the Company's
U.K. operations, see note 2 to the consolidated financial statements.
<PAGE> 24
Report of Independent Auditors
The Stockholders and Board of Directors of 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
<PAGE> 25
Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share amounts) year end position 1996(4) 1995(3) 1994 1993(2) 1992(1)
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
summary of operations
Net sales $ 156,836 $ 101,163 $ 77,733 $ 48,892 $ 46,714
Gross profit 18,563 28,055 23,921 11,241 2,487
Gross profit as a percent of net sales 11.8% 27.7% 30.8% 23.0% 5.3%
Operating expenses 52,254 27,587 11,804 7,267 28,347
- - ----------------------------------------------------------------------------------------------------------------------
Operating expenses as a percent of net sales 33.3% 27.3% 15.2% 14.9% 60.7%
Operating income (loss) (33,691) 468 12,117 3,974 (25,860)
Operating income (loss) as a percent of net sales (21.5%) 0.5% 15.6% 8.1% (55.4%)
Net income (loss) (25,024) (3,723) 7,046 2,191 (26,062)
- - ----------------------------------------------------------------------------------------------------------------------
cash flow data
Net cash provided by (used in) operating activities $ 4,439 $ 19,230 $ 3,993 $ 8,382 $ (5,705)
Acquisition of property, plant and equipment 13,763 20,636 5,450 586 3,189
Depreciation and amortization of property, plant and equipment 5,794 2,288 930 78 2,710
- - ----------------------------------------------------------------------------------------------------------------------
\
share data
Common and common equivalent shares used
in the calculation of net income (loss) per share 8,580 6,855 5,578 4,578 n/a
Net income (loss) per share $ (2.92) $ (0.54) $ 1.26 $ 0.48 n/a
Book value per share 4.67 7.67 5.75 0.84 n/a
- - ----------------------------------------------------------------------------------------------------------------------
year end position
Total assets $ 93,181 $ 106,918 $ 47,703 $ 10,470 $ 15,453
Working capital 9,102 20,636 32,443 2,557 8,534
Long-term debt and capitalized lease obligations 10,340 10,483 592 - -
Stockholders' equity 40,289 63,554 37,764 3,362 n/a
Return on average stockholders' equity (48.2%) (7.3%) 34.3% 36.8% n/a
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1992 financial data represents the results of Rogers Corporation
(Rogers). The Company was created on February 23, 1993 for the purpose
of acquiring the Flexible Interconnect Division of Rogers.
(2) 1993 financial data represents the results of Rogers for the period
January 1, 1993 to June 27, 1993 and the results of the Company for the
period June 28, 1993 to December 31, 1993. Transactions of the Company
from inception to June 27, 1993 were not significant and are included
in the results of Rogers.
(3) Effective December 31, 1995, the Company wrote off $13.9 million of
in-process technology in conjunction with the ADFlex U.K. acquisition,
see note 2 to the consolidated financial statements.
<PAGE> 26
(4) 1996 financial data includes $29.2 million related to restructuring of
the Company's U.K. operations, see note 2 to the consolidated financial
statements.
<PAGE> 27
Securities Information
ADFlex Solutions, Inc. common stock trades on the Nasdaq National Market (Symbol
AFLX). The high and low sales prices for the common stock as reported by Nasdaq
are set forth in the following table.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- - ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
High $27.00 $18.00 $11.75 $14.00
Low 10.50 9.88 14.00 7.38
1995
High 22.25 28.50 29.25 31.25
Low 16.00 19.50 19.75 19.75
</TABLE>
There were approximately 106 stockholders of record as of February 14, 1997. The
Company does not currently pay cash dividends on its common stock and intends to
retain earnings for use in the operation and expansion of its business. In
addition, the Company's bank line of credit limits the payment of cash dividends
on its common stock.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
ADFlex Mexico, S.A. de C.V., organized under the laws of Mexico
ADFlex Solutions Limited, organized under the laws of the United Kingdom
ADFlex Solutions FSC Inc., organized under the laws of Barbados
ADFlex Cayman Limited, organized under the laws of the Cayman Islands
ADFlex (Thailand) Limited, organized under the laws of the Kingdom of Thailand
[80% ownership]
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of ADFlex Solutions, Inc. of our report dated January 20, 1997, included in the
1996 Annual Report to Shareholders of ADFlex Solutions, Inc.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-85560, 33-85562, 33-88866, 33-902160, 33-92162, 33-95864, and
33-98394) pertaining to the 1993 Equity Incentive Plan, the 1994 Employee Stock
Purchase Plan, the 1994 Outside Director Stock Option Plan, and the 1994 Stock
Incentive Plan, as amended, of our report dated January 20, 1997, with respect
to the consolidated financial statements incorporated by reference, and of our
report dated January 20, 1997, with respect to the schedule included, in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Phoenix, Arizona
March 18, 1997
<PAGE> 2
Report of Ernst & Young LLP, Independent Auditors
We have audited the consolidated financial statements of ADFlex Solutions, Inc.
as of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, and have issued our report thereon dated January 20,
1997. Our audits also included the financial statement schedule listed in Item
14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Phoenix, Arizona
January 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,097
<SECURITIES> 0
<RECEIVABLES> 27,235
<ALLOWANCES> 611
<INVENTORY> 14,990
<CURRENT-ASSETS> 51,314
<PP&E> 42,438
<DEPRECIATION> 8,141
<TOTAL-ASSETS> 93,181
<CURRENT-LIABILITIES> 42,212
<BONDS> 7,689
0
0
<COMMON> 86
<OTHER-SE> 40,203
<TOTAL-LIABILITY-AND-EQUITY> 93,181
<SALES> 156,836
<TOTAL-REVENUES> 156,836
<CGS> 138,273
<TOTAL-COSTS> 138,273
<OTHER-EXPENSES> 52,254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,511
<INCOME-PRETAX> (34,778)
<INCOME-TAX> 9,754
<INCOME-CONTINUING> (25,024)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,024)
<EPS-PRIMARY> (2.92)
<EPS-DILUTED> (2.92)
</TABLE>
