<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24416
ADFLEX SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3186513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 W. CHANDLER BLVD., CHANDLER, AZ 85224
(602) 963-4584
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes X No___
The number of shares outstanding of the issuer's common stock, as of September
30, 1997:
COMMON STOCK, $.01 PAR VALUE: 8,765,529 SHARES
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ADFLEX SOLUTIONS, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996........................ 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1997 and 1996......... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 13
SIGNATURES................................................................. 14
EXHIBITS
(10.50) Equity Purchase Agreement dated September 30, 1997 between the
Registrant and Hana Microelectronics Public Co., Ltd.
(10.51) Promissory Note dated September 30, 1997 between the Registrant
and Hana Microelectronics Public Co., Ltd.
(11.1) Computation of Net Income per Share
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ADFlex Solutions, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 4,644 $ 6,097
Accounts receivable, net 31,478 25,149
Other receivables 1,160 1,475
Inventories 19,778 14,990
Deferred tax assets 2,405 2,505
Prepaid taxes 913 795
Prepaid expenses 648 229
Other current assets 381 74
-------- --------
Total current assets 61,407 51,314
Property, plant & equipment, net 37,047 34,297
Deferred tax assets 5,424 7,546
Intangible assets 2,578 --
Other assets 26 24
======== ========
$106,482 $ 93,181
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Line of credit $ 1,000 $ 10,000
Notes payable 2,750 --
Accounts payable 18,289 19,882
Accrued liabilities 10,814 9,679
Current portion of long-term
debt and capitalized leases 168 2,651
-------- --------
Total current liabilities 33,021 42,212
Accrued restructuring charges, -- 2,500
non-current
Deferred tax liabilities 1,220 --
Long-term debt and capitalized 25,061 7,689
leases
Minority interest in -- 491
consolidated joint venture
Stockholders' equity 47,180 40,289
======== ========
$106,482 $ 93,181
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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ADFlex Solutions, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 55,058 36,898 $ 159,524 $ 110,011
Cost of sales 44,913 37,193 132,857 97,864
--------- --------- --------- ---------
Gross profit (loss) 10,145 (295) 26,667 12,147
Operating expenses:
Engineering, research & development 1,798 1,983 5,987 5,376
Selling, general & administrative 3,854 3,500 11,283 10,135
Amortization of intangible assets -- 795 -- 2,386
Restructuring charges -- 29,248 -- 29,248
--------- --------- --------- ---------
Total operating expenses 5,652 35,526 17,270 47,145
Operating income (loss) 4,493 (35,821) 9,397 (34,998)
Interest income 58 37 135 196
Interest expense (590) (384) (1,535) (1,072)
Other income (expense), net (10) 118 (175) 142
Minority interest in earnings
of consolidated joint venture (132) -- (181) --
--------- --------- --------- ---------
Income (loss) before income taxes 3,819 (36,050) 7,641 (35,732)
Income taxes 1,222 (10,387) 2,292 (10,248)
--------- --------- --------- ---------
Net income (loss) $ 2,597 $ (25,663) $ 5,349 $ (25,484)
========= ========= ========= =========
Net income (loss) per share $ 0.29 $ (2.98) $ 0.60 $ (2.97)
========= ========= ========= =========
Number of shares used in
computing net income (loss) per share 9,022 8,617 8,863 8,576
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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ADFlex Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net income (loss) $ 5,349 $(25,484)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization 4,888 6,570
Write-off of intangible assets -- 13,523
Write-down of property, plant and equipment -- 8,775
Cost reduction charge -- 6,950
Minority interest 181 --
Deferred taxes 3,441 (10,159)
Changes in operating assets and liabilities:
Accounts receivable (6,329) (10,943)
Other receivables 315 (934)
Inventories (4,787) 1,039
Other current assets (844) (1,069)
Accounts payable and accrued liabilities (2,956) 9,087
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (742) (2,645)
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Capital expenditures (7,641) (10,620)
Increase in other assets -- (29)
Investment in joint venture (500) 571
Decrease in acquisition payable -- (12,375)
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (8,141) (22,453)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net activity on line of credit (9,000) 10,200
Proceeds from issuance of long-term debt 25,000 --
Payments on long-term debt (10,000) --
Payments on capitalized lease obligations (111) (108)
Issuance of common stock, net of expenses 1,541 1,760
-------- --------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 7,430 11,852
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,453) (13,246)
Cash and cash equivalents at beginning of period 6,097 15,699
======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,644 $ 2,453
======== ========
</TABLE>
5
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ADFLEX SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair
presentation have been included. Preparing financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Operating results for the nine month period ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1996.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128), which is required to be adopted on December 31, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact is expected to result in an immaterial increase in
primary earnings per share for the three and nine months ended September 30,
1997 and 1996. The impact of SFAS No. 128 on the calculation of fully diluted
earnings per share for these quarters also is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130), which is required to be adopted in the first quarter of 1998. SFAS No. 130
established standards for the reporting and display of comprehensive income and
its components. Comprehensive income includes certain non-owner changes in
equity which are currently excluded from net income. Because the Company
historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS No. 130 is not expected to have a
material effect on the financial position, results of operations or cash flows
of the Company.
(2) ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Accounts receivable trade $ 33,121 $ 25,760
Allowance for doubtful (1,643) (611)
accounts and returns
-------- --------
$ 31,478 $ 25,149
======== ========
</TABLE>
6
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(4) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Raw materials $ 12,610 $ 8,152
Work-in-process 6,249 6,690
Finished goods 919 148
============== =============
$ 19,778 $ 14,990
============== =============
</TABLE>
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Salaries and benefits $ 3,823 $ 2,830
Income taxes payable (673) 170
Accrued interest 164 864
Accrued commissions 503 278
Accrued relocation 500 --
Accrued restructuring 3,723 4,187
charges, current
Other 2,774 1,350
============== =============
$ 10,814 $ 9,679
============== =============
</TABLE>
(6) LINE OF CREDIT AND LONG-TERM DEBT
Prior to June 5, 1997, the Company had a $20.0 million revolving line of
credit with The First National Bank of Boston and First Interstate Bank of
Arizona (the FNBB line). On June 5, 1997, the Company entered into a new credit
agreement (the credit facility) arranged by BancBoston Securities, Inc., which
includes a number of banks as lenders. The credit facility consists of a $20.0
million three-year revolving line of credit and a $25.0 million five-year term
loan with equal principal payments due each quarter beginning with the quarter
ending December 31, 1998 and continuing through the quarter ending March 31,
2002. Borrowing under the line of credit is limited to 80% of the aggregate
value of all eligible domestic accounts receivable plus 70% of the aggregate
value of all eligible foreign accounts receivable. Under the terms of the
agreement, any outstanding balance bears interest at BankBoston, N.A.'s prime
interest rate or LIBOR plus an applicable margin ranging from 1.5% to 2.25%
based on the Company achieving certain financial objectives at the end of each
quarter. The credit facility is secured by all assets of the Company and a
pledge by the Company of 66 2/3% of the stock of its subsidiaries. The Company
is required, under the credit agreement, to maintain certain financial ratios
and meet certain net worth and indebtedness tests for which the Company is in
compliance at September 30, 1997. At September 30, 1997, $25.0 million was
outstanding under the term loan and $1.0 million was outstanding under the
revolving line of credit. Of the proceeds from the $25.0 million term loan
discussed above, approximately $7.5 million in principal plus $0.3 million in
accrued interest was used to retire, ahead of schedule, the subordinated
debenture issued in the acquisition of the Company's U.K. operation. In
addition, the Company remitted $2.5 million in principal plus $0.8 million in
accrued interest in January 1997 in payment of the subordinated debenture.
(7) RESTRUCTURING CHARGES
At the close of the third quarter of 1996, the Company's Board of
Directors approved a plan to restructure its assembly operation in the U.K. and
transfer production from the U.K. to the Company's manufacturing facility in
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Lamphun, Thailand. As part of this restructuring, the Company recorded the
following charges: $13.5 million write-off in intangible assets, $8.8 million
write-down of property, plant and equipment and $6.9 million in employee and
lease termination charges. As of September 30, 1997, the Company had paid out
$3.2 million in employee and lease termination costs. The remaining accrual
for employee and lease terminations is approximately $3.7 million, which the
Company believes is adequate to cover remaining liabilities.
(8) ADFLEX THAILAND ACQUISITION
In an effort to increase its global sourcing opportunities and to decrease
its operating costs, the Company established a joint venture, ADFlex Thailand
Limited ("ATL"), located in Lamphun, Thailand with Hana Microelectronics
("Hana") in August 1996. On September 30, 1997 the Company increased its
ownership interest in ATL from 80% to 100% through the purchase of Hana's 20%
equity interest. Under the terms of the Equity Purchase Agreement, the Company
paid $0.5 million at closing and agreed to pay an additional $2.8 million at
various dates through January 1, 1999. The excess purchase price over fair value
of the net tangible assets acquired of $2.8 million has been recorded as
goodwill which will be amortized on a straight line basis over five years. The
Company anticipates an additional $1.0 million will be invested in ATL in 1997,
primarily for the purchase of manufacturing equipment.
(9) INCOME TAXES
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS has proposed adjustments to the Company's income and tax credits
for that year, which would result in additional tax of approximately $1.6
million including penalties and interest. The major proposed adjustment, which
relates to the allocation of the purchase price of assets obtained from Rogers
Corporation (Rogers) pursuant to acquisition agreements between the Company and
Rogers, would extend the period over which the tax benefit for the purchase
price would be recovered. The Company disagrees with the proposed adjustments
and is contesting them. The Company does not believe based on currently
available information that the final disposition of these matters will have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Net Sales
Net sales for the three and nine months ended September 30, 1997
increased $18.2 million, or 49.2%, and $49.5 million, or 45.0%, respectively,
over the same periods in 1996. For the three and nine months ended September 30,
1997, the Company experienced strong demand for its products, especially in
flexible circuits provided to the communications and storage array markets, as a
result of the Company's focus on high-growth and high-volume markets.
In addition, the Company reached volume production at its Thailand operations
during the three months ended September 30, 1997 with sales of $10.1 million,
and $17.0 million for the nine months ended September 30, 1997. Net sales for
the three and nine months ended September 30, 1996 were negatively impacted by
program delays among customers in the hard disk drive (HDD) market involving new
magneto-resistive (MR) recording technology, a slowdown for mature products and
order cancellations from certain major customers.
Gross Profit
Gross profit as a percentage of net sales (gross margin) for the three and
nine months ended September 30, 1997 was 18.4% and 16.7% compared to (0.8%) and
11.0%, respectively, for the same periods in 1996. For the three and nine months
ended September 30, 1997, the Company's gross profit was positively impacted by
the benefits associated with the transfer of the Company's U.K. assembly
operations to Thailand which provides a lower cost structure, which benefits
were partially offset by the decreased utilization of capacity in the U.K.
assembly operations. The transfer was completed in the third quarter of 1997.
8
<PAGE> 9
Operating Expenses
Engineering, research and development expenses were $1.8 million and $2.0
million for the three months ended September 30, 1997 and 1996, respectively,
and were $6.0 million and $5.4 million for the nine months ended September 30,
1997 and 1996, respectively. Selling, general and administrative expenses were
$3.9 million and $3.5 million for the three months ended September 30, 1997 and
1996, respectively, and were $11.3 million and $10.1 million for the nine months
ended September 30, 1997 and 1996, respectively. Engineering, research and
development expenses and selling, general and administrative expenses as a
percentage of net sales for the three months ended September 30, 1997 were 3.3%
and 7.0%, respectively, compared with 5.4% and 9.5% for the same period in 1996.
For the nine month period ended September 30, 1997, engineering, research and
development expenses and selling, general and administrative expenses as a
percentage of net sales were 3.8% and 7.1%, respectively, compared to 4.9% and
9.2% for the same period in 1996. The increase in sales volume during the 1997
periods outpaced the Company's growth in such expenses, reflecting the Company's
strategy of seeking sales growth while maintaining or reducing operating
expenses as a percentage of net sales. Amortization of intangible assets
purchased in the acquisition of ADFlex U.K. was $0.8 million, or 2% of net
sales, for the three month period ended September 30, 1996. The remaining
intangible assets were written off in the third quarter of 1996 as part of the
U.K. restructuring.
Restructuring Charges
At the close of the third quarter of 1996, the Company's Board of
Directors approved a plan to restructure its assembly operations in the U.K. and
transfer production from the U.K. to the Company's manufacturing facility in
Lamphun, Thailand. As part of this restructuring, the Company recorded the
following charges: $13.5 million write-off in intangible assets, $8.8 million
write-down of property, plant and equipment and $6.9 million in employee and
lease termination charges. As of September 30, 1997, the Company had paid out
$3.2 million in employee and lease termination costs. The remaining accrual
for employee and lease terminations is approximately $3.7 million, which the
Company believes is adequate to cover remaining liabilities.
Interest and Other Income (Expense)
For the three months ended September 30, 1997, interest expense includes
$0.6 million of interest expense related to borrowings under the Company's
current line of credit, term loan and capital lease obligations. Interest
expense for the same period in 1996 represents $0.2 million of interest expense
on the subordinated debenture and $0.2 million of interest expense related to
borrowings on the then existing line of credit and capital lease obligations.
Other income (expense) for both periods represents the net impact of bank fees
and exchange gains and losses realized on the settlement of transactions
associated with the Company's foreign subsidiaries.
For the nine months ended September 30, 1997, interest expense includes
$0.3 million of interest expense on the subordinated debenture and $1.2 million
of interest expense related to borrowings under the Company's current line of
credit, term loan and capital lease obligations. Interest expense for the same
period in 1996 represents $0.5 million of interest expense on the subordinated
debenture and $0.5 million of interest expense related to borrowing on the then
existing line of credit and capital lease obligations. Other income (expense)
for both periods represents the net impact of bank fees and exchange gains and
losses realized on the settlement of transactions associated with the Company's
foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and operations to date primarily
through cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working capital, funding of capital expenditures and investment in
ADFlex U.K. and ATL. At September 30, 1997, cash and cash equivalents totaled
$4.6 million and working capital was $28.4 million.
9
<PAGE> 10
In June 1997, the Company entered into a new credit facility. The credit
facility consists of a $20 million three-year revolving line of credit and a $25
million five-year term loan with equal principal payments due each quarter
beginning with the quarter ending December 31, 1998 and continuing through the
quarter ending March 31, 2002. Borrowings under the line of credit are limited
to 80% of the aggregate value of all eligible domestic accounts receivable plus
70% of the aggregate value of all eligible foreign accounts receivable. Under
the terms of the agreement, any outstanding balances bear interest at
BancBoston, N.A.'s prime interest rate or LIBOR plus an applicable margin
ranging from 1.5% to 2.25% based on the Company achieving certain financial
objectives at the end of each quarter. The credit facility is secured by all
assets of the Company and a pledge by the Company of 66 2/3% of the stock of its
subsidiaries. The Company is required, under the credit agreement, to maintain
certain financial ratios and meet certain net worth and indebtedness tests for
which the Company was in compliance at September 30, 1997. At September 30,
1997, $25.0 million was outstanding under the term loan and $1.0 million was
outstanding under the revolving line of credit.
Net cash used by operating activities for the nine month period ended
September 30, 1997 was $0.7 million compared to $2.6 million for the same period
in 1996. Net income (loss) was $5.3 and ($25.5) for the same periods,
respectively. The Company experienced a net loss of ($25.5) million for the nine
months ended September 30, 1996 principally due to a $29.2 million (pre-tax)
charge related to the restructuring of its U.K. operations. This charge
consisted of write-downs in intangible assets and plant and equipment as well as
the recognition of future obligations for employee and lease termination
charges. During the nine month period ended September 30, 1997, the Company paid
$2.9 million of the accrued restructuring charges for employee and lease
terminations. Working capital increased from $9.1 million at December 31, 1996
to $28.4 million at September 30, 1997 primarily as a result of increased
business activity, the start-up of a new manufacturing facility in Thailand and
some rescheduling of product deliveries beyond the third quarter of 1997 causing
a temporary increase in inventories due to a general softening in the high-end
HDD market. During the nine month period ended September 30, 1996, the Company
experienced increased working capital requirements primarily for funding of
accounts receivable associated with its U.K. operations as receivables were not
purchased in the acquisition. These working capital requirements were funded in
part through the generation of accounts payable and accrued liability balances
with the remainder financed from borrowings under the Company's then existing
bank line of credit. The 1996 results reflect $2.4 million of amortization
expense for intangible assets related to the ADFlex U.K. acquisition. The
remaining intangible assets were written off in the third quarter of 1996 as
part of the restructuring of the U.K. operations.
Net cash used in investing activities was $8.1 million for the nine months
ended September 30, 1997 compared with $22.5 million for the same period in
1996. Capital expenditures for the nine months ended September 30, 1997 were
$7.6 million compared with $10.6 million for the same period in 1996. Late in
the first quarter of 1995, the Company began a capacity expansion plan in
response to increasing sales levels which was complete in 1996. Capital
expenditures during the periods were financed from existing cash balances and
from borrowings under the Company's bank line of credit. The Company presently
expects capital expenditures to total approximately $13.6 million in 1997. In
January, 1996 the Company paid $12.4 million in connection with its acquisition
of the ADFlex U.K. operations. This payment was financed from existing cash and
cash equivalent balances.
Net cash provided by financing activities for the nine months ended
September 30, 1997 was $7.4 million compared with $11.9 million for the same
period in 1996. Of the proceeds from the $25.0 million term loan discussed
above, approximately $7.5 million in principal plus $0.3 million in accrued
interest were used to retire, ahead of schedule, the subordinated debenture
issued in the acquisition of ADFlex U.K., approximately $15.0 million was used
to repay borrowings under the Company's existing line of credit and the
remainder was used to finance working capital of the Company. In addition, the
Company remitted $2.5 million in principal plus $0.8 million in accrued interest
in January 1997 in payment of the subordinated debenture. Funding for this
payment came from the Company's then existing line of credit. The Company
generated $1.5 million and $1.8 million in the nine months ended September 30,
1997 and 1996, respectively, through sales of its Common Stock. Net repayments
on the Company's bank line of credit totaled $9.0 million during the nine months
ended September 30,
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<PAGE> 11
1997 compared to net borrowings of $10.2 million for the same period in 1996.
Borrowings on the line were used to finance working capital requirements and
capital expenditures as discussed above.
During the nine months ended September 30, 1997, the Company paid $0.5
million to purchase Hana's interest in ATL and delivered a promissory note in
the principal amount of $2.8 million payable by September 30, 1998.
The Company presently expects to spend approximately $6.0 million on
capital expenditures in the fourth quarter of 1997, primarily for machinery and
equipment and expansion of operations in Thailand, and approximately $37.0
million in 1998, primarily for machinery, systems and equipment, and expansion
of operations in North America and Thailand.
The Company may require additional capital to finance enhancement to, or
expansion of, its manufacturing capacity in accordance with its business
strategy. Management believes that the level of working capital should continue
to grow at a rate generally consistent with the growth of the Company's
operations. Although no assurance can be given that future financing will be
available on terms acceptable to the Company, the Company may seek additional
funds from time to time through public or private debt or equity offerings or
through bank borrowings. Management believes, however, that existing cash
balances, proceeds of this offering, funds generated from operations and
borrowings under its existing line of credit will be sufficient to permit the
Company to meet its liquidity and expansion requirements for the next twelve
months.
OTHER MATTERS
Mexico Operations
The Mexican Peso experienced significant devaluation relative to the U.S.
Dollar in December 1994 and early 1995. The Company maintains all significant
Mexico-related assets, including inventory, accounts receivable and capital
equipment, on the Company's books in U.S. Dollars and only converts enough U.S.
Dollars into Pesos to fund Peso-based operating costs for one to six weeks.
Peso-based operating costs are primarily wages and benefits for the Company's
Mexican hourly union employees. The initial devaluation reduced Mexican labor
cost by nearly 40%. Since that time, however, these savings have been partially
offset by a series of four wage increases each ranging from 7-10% in response to
Mexican government-mandated increases in minimum wages. Further, the Peso
experienced further devaluation in the later part of 1996, prompting the Mexican
government to mandate a 17% increase in the minimum wage effective December 1,
1996. It is expected that the Company will continue to respond proportionately
to minimum wage increases. There can be no assurance that future currency
fluctuations or government-mandated wage increases will not have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
Thailand Operations
In an effort to increase its global sourcing opportunities and to decrease
its operating costs, the Company established a joint venture, ADFlex Thailand
Limited ("ATL"), located in Lamphun, Thailand with Hana Microelectronics
("Hana") in August 1996. On September 30, 1997 the Company increased its
ownership interest in ATL from 80% to 100% through the purchase of Hana's 20%
equity interest. Under the terms of the Equity Purchase Agreement, the Company
paid $0.5 million at closing and agreed to pay an additional $2.8 million at
various dates through January 1, 1999. The excess purchase price over fair value
of the net tangible assets acquired of $2.8 million has been recorded as
goodwill which will be amortized on a straight line basis over five years.
Results of operations for the three and nine months ended September 30, 1997
reflect a minority interest of $0.1 and $0.2 million, respectively. The Company
anticipates an additional $1.0 million will be invested in ATL in 1997,
primarily for the purchase of manufacturing equipment.
During the nine month period ended September 30, 1997, the Thai Baht
experienced significant devaluation in relation to the U.S. Dollar. As the
majority of sales and expenses for ATL are denominated in U.S. Dollars, the
devaluation is expected to have little or no impact on the Company's business,
financial condition, results of operations and cash flows. There can be no
assurance that future currency fluctuations will not have a material adverse
effect on the Company's business, financial condition, results of operations
and cash flows.
Foreign Operations
The Company's primary finishing and assembly facilities are located in
Agua Prieta, Mexico and Lamphun, Thailand. While the Company believes that it
has established good relationships with its local labor force and local
governments, the dispersion of the manufacturing process over multiple countries
subjects the Company to risks inherent in international operations. The majority
of the Company's sales for the nine months ended September 30, 1997 were in
United States Dollars.
Future Operations
The Company has conducted environmental studies of its facility in
Chandler, Arizona, which revealed soil contamination that may require
remediation. Further studies including a site specific risk analysis were
conducted and a number of remediation options have been proposed. Based on these
studies, the Company believes that the costs associated with the investigation
and remediation of this situation will not have a material adverse impact on its
operations or financial condition. However, given the uncertainties associated
with environmental contamination, in the future there can be no assurance that
such costs will not have a material adverse impact on the Company. Pursuant to
the agreements governing the acquisition of the flexible circuit fabrication
operations of Rogers Corporation ("Rogers"),
11
<PAGE> 12
Rogers has retained all environmental liabilities relating to the purchased
assets prior to the closing date. While Rogers currently has sufficient assets
to fulfill its obligations under the acquisition agreements, if environmental
liabilities requiring remediation are discovered and the Company was unable to
enforce the acquisition agreement against Rogers, the Company could become
subject to costs and damages relating to such environmental liabilities. Any
such costs and damages imposed on the Company could materially adversely affect
the Company's business, financial condition, results of operations and cash
flows.
In mid 1995, the Company acquired a manufacturing facility located in Agua
Prieta, Mexico. In connection with this acquisition, the Company conducted an
environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the sellers submitted a remediation plan to the appropriate Mexican
authorities and the plan was approved in May 1997. Subsequent remediation is
proceeding and expected to be complete by the end of 1997. The sellers'
obligation for the cost of remediation is limited to $2.5 million. A total of
$1.0 million is being held in escrow pending the sellers' performance of their
environmental obligations under the agreement. It is expected that the escrow
balance will be adequate to complete the required remediation according to the
approved plan. While the Mexican government has approved the existing
remediation plan and U.S. Standards generally do not apply in Mexico, it is
possible that additional remedial work could be required in the future since the
approved plan will not remove all contaminated soil and will not address
groundwater. Given the uncertainties associated with environmental
contamination, including possible claims by third parties, there can be no
assurance that future remedial costs or liabilities will not have a material
adverse impact on the Company.
The Company believes that it has been operating its facilities in
substantial compliance in all material respects with existing environmental laws
and regulations. However, the Company cannot predict the nature, scope or effect
of legislation or regulatory requirements that could be imposed or how existing
or future laws or regulations will be administered or interpreted with respect
to products or activities to which they have not previously been applied. For
this reason, the Company has decided to implement environmental management
systems geared toward minimizing the negative impacts and reducing potential
financial risks arising from environmental issues. Compliance with more
stringent 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.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact is expected to result in an immaterial increase in
primary earnings per share for the three and nine months ended September 30,
1997 and 1996. The impact of SFAS No. 128 on the calculation of fully diluted
earnings per share for these quarters is also not expected to be material.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which is required to be adopted in the first quarter of 1998. SFAS No.
130 established standards for the reporting and display of comprehensive income
and its components. Comprehensive income includes certain non-owner changes in
equity which are currently excluded from net income. Because the Company
historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS No. 130 is not expected to have a
material effect on the consolidated financial position, results of operations or
cash flows of the Company.
Income Taxes
The Company's effective tax rate increased from 28% to 32% for the third
quarter of 1997 in order to reach an estimated annual rate of 30% based upon
projected profit levels at each of the Company's entities. As the actual tax
rate for each entity varies in accordance with the taxing authority in whose
jurisdiction it resides, a significant change in operating income at any one
location can result in a change in the overall effective tax rate for the
Company. The Company monitors the effective tax rate on a continuous basis and
makes adjustments as conditions warrant.
12
<PAGE> 13
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS has proposed adjustments to the Company's income and tax credits
for that year, which would result in additional tax of approximately $1.6
million including penalties and interest. The major proposed adjustment, which
relates to the allocation of the purchase price of assets obtained from Rogers
Corporation (Rogers) pursuant to acquisition agreements between the Company and
Rogers, would extend the period over which the tax benefit for the purchase
price would be recovered. The Company disagrees with the proposed adjustments
and is contesting them. In the opinion of the Company's management, the final
disposition of these matters will not have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Any such statements are subject to
a number of risks and uncertainties, including but not limited to, fluctuating
net sales and margins and their effect on the Company's profitability; the risk
of customer concentration and dependence on the hard disk drive industry; the
risk that the Company's transition of manufacturing to Thailand will not result
in increased efficiencies, cost savings, or improved margins as anticipated or
at the time anticipated; 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 the clean-up of the Mexican manufacturing facility; uncertainty
with respect to the Internal Revenue Service report on the Company's 1993 tax
return and the ultimate financial impact, if any, thereof; 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 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and other
Securities and Exchange Commission filings. Actual results in the future could
differ materially from those described in any forward-looking statements as a
result of such factors. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(10.50) Equity Purchase Agreement dated September 26, 1997 between the
Registrant and Hana Microelectronics Public Co., Ltd.
(10.51) Promissory Note dated September 30, 1997 between the Registrant
and Hana Microelectronics Public Co., Ltd.
13
<PAGE> 14
(11.1) Computation of Net Income per Share
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended September 30, 1997.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADFlex Solutions, Inc.
Date: October 21, 1997 By /s/ Donald E. Frederick
------------------------ --------------------------
Donald E. Frederick
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
15
<PAGE> 1
EXHIBIT 10.50
ADFLEX ( THAILAND ) LTD. ( ATL ) EQUITY PURCHASE AGREEMENT
This agreement is made between ADFlex Cayman, Ltd., ( ACL ), P. O. Box 1034, One
Capital Place, Grand Cayman, British West Indies and Hana Microelectronics, PLC,
10/4 Moo 7, Vibhavadi-Rangsit Road, Kwang Talad Bangkhen, Khet Donmuang, Bangkok
Thailand, at ADFlex Solutions, Inc., 2001 West Chandler Blvd., Chandler, AZ
85224, U.S.A. Pursuant to section 10, page 5 of the Joint Venture " Master
Agreement", ACL has elected to purchase Hana's 20% equity in ADFlex (Thailand)
Limited (ATL). The purchase price for Hana's 20% equity in ATL is $ 2,750,000
US. The details of the agreement, and the conditions of payment are as follows:
1. PAYMENT: ACL will pay Hana for its 20% share of ATL as follows:
$ 500,000 US on the closing date ( September 30, 1997 )
$ 500,000 US three months after the closing date ( December 30, 1997 )
$1,000,000 US twelve months after the closing date ( September 30,
1998 ) pursuant to a promissory note bearing interest at the applicable
federal rate ( IRS ) on the closing date.
$ 750,000 US in twelve equal monthly installments, beginning ( January
15,1998 )
2. CLOSING: At the closing, Hana will endorse the stock certificates to ADFlex,
as provided in section 10 of the Master Agreement. Such certificates will be
pledged to, and held by Hana per the attached pledge agreement, to secure
payment of the of the above promissory note.
3. RELEASES: At the closing, ADFlex and Hana will deliver to each other a full
and complete release.
4. RESIGNATIONS: At the closing, Richard D. Han shall resign as a Director of
ATL, and shall transfer his stock certificate to ADFlex free and clear of any
and all pledges, liens, claims, and encumbrances, in exchange for $ 1.00 US.
5. DUTY STAMP: ADFlex agrees to pay the Thai government duty stamp fee for this
transaction.
/s/ Rolando Esteverena /s/ Richard D. Han
- ----------------------------- -----------------------------
Rolando Esteverena Richard D. Han
Chairman & CEO Exec. Vice Chairman & CEO
ADFlex Solutions, Inc. Hana Microelectronics PLC
Date: September 30, 1997 Date: September 30, 1997
<PAGE> 1
EXHIBIT 10.51
PROMISSORY NOTE
Non-Negotiable
Date of Issue: September 30, 1997
Place of Issue: Chandler, Arizona, USA
In accordence with execution of the ATL EQUITY PURCHASE AGREEMENT, on September
30, 1997, the undersigned:
ADFLEX SOLUTIONS, INC., A DELAWARE CORPORATION, OF 2001 W. CHANDLER BLVD.,
CHANDLER, ARIZONA, USA, hereby irrevocably and unconditionally promises to pay,
on September 30, 1998, to the order of HANA MICROELECTRONICS PUBLIC COMPANY
LIMITED, A REGISTERED COMPANY OF THAILAND, OF 10/4 MOO 7, SOI MAHANAKORN-NIVATE,
VIBHAVADI-RANGSIT ROAD, BANGKOK, THAILAND the principal sum of United States
Dollars One Million ( $ 1,000,000 ) and interest thereon from and including
September 30, 1997 to but not including September 30, 1998 at the rate of 5.81 %
per annum, being the applicable federal rate published by the Internal Revenue
Service, and computed on the basis of year of 365 days.
THE MAKER hereby waives any and all requirements of presentment for payment,
notice, protest, notice of non-payment or otherwise.
This Promissory Note shall be governed by and interpreted in the conformity of
the laws of the State of Arizona, USA.
For and on behalf of ADFlex Solutions, Inc.
/s/ Rolando C. Esteverena /s/ Donald E. Frederick
- --------------------------- ---------------------------
Rolando Esteverena Donald E. Frederick
Chairman and CEO Vice President and CFO
Date September 30, 1997 Date September 30, 1997
<PAGE> 1
EXHIBIT 11.1
ADFLEX SOLUTIONS, INC.
EXHIBIT (11.1) - COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,597 $(25,663) $ 5,349 $(25,484)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 8,732 8,617 8,693 8,576
Common equivalent shares representing
shares issuable upon exercise of stock
options (1) 290 -- 170 --
-------- -------- -------- --------
Total weighted average shares -
primary 9,022 8,617 8,863 8,576
======== ======== ======== ========
Total weighted average shares -
fully diluted 9,022 8,617 8,863 8,576
======== ======== ======== ========
Primary net income (loss) per common and
common equivalent share $ 0.29 $ (2.98) $ 0.60 $ (2.97)
======== ======== ======== ========
Fully diluted net income(loss) per common
and common equivalent share $ 0.29 $ (2.98) $ 0.60 $ (2.97)
======== ======== ======== ========
</TABLE>
- ----------
(1) Amount calculated using the treasury stock method and fair market values for
stock.
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 4,644
<SECURITIES> 0
<RECEIVABLES> 33,121
<ALLOWANCES> (1,643)
<INVENTORY> 19,778
<CURRENT-ASSETS> 61,407
<PP&E> 61,113
<DEPRECIATION> 24,066
<TOTAL-ASSETS> 106,482
<CURRENT-LIABILITIES> 33,021
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 47,092
<TOTAL-LIABILITY-AND-EQUITY> 106,482
<SALES> 159,524
<TOTAL-REVENUES> 159,524
<CGS> 132,857
<TOTAL-COSTS> 132,857
<OTHER-EXPENSES> 17,270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,535)
<INCOME-PRETAX> 0
<INCOME-TAX> 2,292
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,349
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
