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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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
Name of exchange on which registered:
NASDAQ NATIONAL MARKET
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 $120,169,592, based on the closing sale price
as reported by the Nasdaq National Market on March 13, 1998.
The number of outstanding shares of the registrant's $0.01 par value Common
Stock as of March 13,1998 was 8,821,263.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the ADFlex Solutions, Inc. 1997 Annual Report to Shareholders
for the year ended December 31, 1997 are incorporated by reference into
Part I and II.
(2) Portions of the Proxy Statement dated March 26, 1998 in connection with the
Annual Meeting of Stockholders to be held on April 28, 1998 are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
ADFlex Solutions, Inc. ("ADFlex" or the "Company") is a leading
worldwide provider of flexible circuit interconnect solutions to original
equipment manufacturers ("OEMs") in the electronics industry. The Company offers
a full range of customized flexible circuit applications and services from
initial design, development and prototype to fabrication, assembly and test on a
global basis. The Company targets high-volume markets where miniaturization,
form and weight are driving factors and flexible circuits are an enabling
technology. Applications for flexible circuits currently addressed by the
Company include notebook computers, portable communication devices such as
cellular telephones and pagers, data storage devices such as hard disk drives
("HDDs"), tape drives and arrays, and high-end consumer electronics products
such as compact disk players. The Company's principal customers include Compaq,
Digital Equipment, IBM, Iomega, Motorola, Nokia, Philips, Seagate, Storage
Technology and other leading electronic OEMs.
Flexible circuits consist of copper conductive patterns on flexible
substrate materials, such as polyimide, and provide electrical connection
between components in electronic systems. Flexible circuit interconnects
frequently incorporate components such as integrated circuits ("ICs"),
connectors, stiffeners, resistors and capacitors mounted directly on a flexible
circuit. With the proliferation of electronic applications, electronic products
have become smaller, lighter and more portable. To meet the challenges
represented by the increased complexity of miniaturization, form and weight
requirements, OEMs have increasingly turned to flexible circuit interconnect
solutions because they minimize the weight and expense of connectors and other
packaging components, conform to contoured, ergonomic shapes or small spaces and
provide mechanical flexure.
At the same time that the trend toward miniaturization and portability
increases product complexity, electronic OEMs face escalating time-to-market
requirements. In response, the Company acquired ADFlex U.K. in December 1995, as
discussed below, to accelerate its strategy of providing a "one-stop-shop"
solution to enable customers to meet time-to-market challenges. Time-to-market
and cost issues have also led OEMs to focus on global sourcing from a limited
number of qualified suppliers. As a result, the Company continues to migrate its
flexible circuit production and assembly operations to lower cost regions, such
as Mexico and Thailand, that have proximity to the Company's OEM customer base.
The Company believes its unique "one-stop-shop" offerings of flexible circuits
and assemblies will be a competitive advantage that will allow it to increase
its market share with existing customers and will create opportunities to
attract new customers. The Company believes it is a preferred supplier for the
majority of its customers' high-end and high-volume flexible circuit
interconnect requirements.
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. In December 1995, the Company
purchased ADFlex U.K., an advanced flexible circuit assembly company located in
Havant, England. The acquisition enabled the Company to offer its customers a
single source solution for their interconnect requirements that would shorten
their time to market and lower their costs. This acquisition also changed the
financial metrics of the Company because assembly businesses typically have
significantly lower gross margins than fabrication businesses.
In an effort to increase its global sourcing opportunities and to
decrease its operating costs, the Company expanded its worldwide manufacturing
operations with the establishment of a joint venture located in Lamphun,
Thailand with Hana Microelectronics (Hana) in August 1996. The joint venture,
ADFlex Thailand Limited ("ATL"), targets the production and testing of advanced
chip-on-flex and other surface mount technologies for flexible circuit
assemblies. At inception, ATL was 80% owned by the Company and 20% owned by
Hana. The Company purchased the remaining 20% equity interest in ATL from Hana
in September 1997.
INDUSTRY OVERVIEW AND TRENDS
Flexible circuit interconnects provide electrical connection between
components in electronic systems and are
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increasingly used as a platform to support the attachment of electronic devices.
Flexible circuits offer several advantages over rigid printed circuit boards
("PCBs") and ceramic hybrid circuits, particularly for small, complex electronic
systems. Flexible circuits, due to their mechanical flexure and
three-dimensional shape, accommodate packaging contours and motion in a manner
that traditional two-dimensional rigid PCBs cannot. Flexible circuits also
provide improved thermal dissipation and signal propagation as compared to PCBs.
In addition, flexible circuits can reduce the size, weight and expense of: (i)
the primary substrate for component attachment when flexible circuits are used
in place of a PCB; (ii) connectors, cables and other interconnection schemes
when flexible circuits provide the connection to other substrates or subsystems
within the system; and (iii) individual IC die packages by bonding an IC
directly to a flexible chip carrier rather than a ceramic or plastic package.
These capabilities enable flexible circuits to solve many of the
challenges faced by electronic OEMs who currently use traditional
interconnection devices. Products which currently use polyimide flexible circuit
interconnect assemblies include notebook computers, portable communication
devices such as cellular telephones, pagers and PDAs, printers, scanners and
data storage devices such as HDDs, tape drives and arrays, and high-end consumer
electronic products such as compact disk players, cameras and camcorders.
Possible new applications for polyimide flexible circuit interconnect assemblies
include high density interposers and other chip carrier packaging applications.
The Company considers the following trends important in understanding
the electronic flexible circuit interconnect industry:
MINIATURIZATION, PORTABILITY AND COMPLEXITY OF ELECTRONIC PRODUCTS.
Electronic OEMs continue to design and introduce more compact and portable
high-performance products with greater functionality. The complexity of these
new products requires smaller size, lighter weight, greater circuit and
component density, better thermal dissipation properties, higher frequencies and
increased reliability. These requirements necessitate greater sophistication in
flexible circuit interconnect manufacturing and process technologies. The trend
toward increasingly sophisticated products also requires greater engineering
expertise and investment in manufacturing and process technology for suppliers
to produce high-quality electronic interconnect products on-time, in volume, and
at acceptable cost.
SHORTER PRODUCT LIFE CYCLES AND TIME TO MARKET. Rapid advances in
technology have significantly shortened the life cycle of complex electronic
products and placed increased pressure on OEMs to quickly develop and introduce
new products. These time-to-market challenges have in turn increased OEMs'
emphasis on the development, design engineering, prototype development and
ramp-to-volume capabilities of their suppliers. In addition, the importance of
being first to market with new products has heightened the emphasis on
shortening supply channels, reducing the number of suppliers and finding turnkey
sourcing capabilities that are supported by technologically advanced
manufacturing infrastructure.
GLOBALIZATION AND REDUCTION OF MANUFACTURING COSTS. At the same time
that shorter product life cycles increase time-to-market pressures, users
continue to demand increased electronic performance at lower prices. Notable
product examples of this trend are notebook computers, desktop computers,
peripherals, portable communications and consumer electronics. Leading OEMs who
often manufacture products in multiple geographic regions are relying more on
suppliers with global sourcing capabilities who can help to shorten the OEMs'
supply chain and provide regionally competitive pricing. As part of global
sourcing, OEMs increasingly seek their suppliers to establish local
infrastructure to provide proximity to engineering, manufacturing and sales
support.
OUTSOURCING AND "ONE-STOP-SHOP" SUPPLIERS. To avoid delays in new
product introductions, reduce manufacturing costs and avoid logistical
complexities, OEMs are increasingly turning to fewer suppliers which are capable
of producing electronic interconnect products from development, design,
quick-turn prototype and pre-production through volume production and assembly.
Many OEMs have accelerated this process by outsourcing their captive component,
subsystem and even system manufacturing to focus on their core competencies. The
accelerated time-to-market and time-to-volume needs of OEMs have resulted in
increased collaboration with qualified suppliers capable of providing a broad
and integrated offering. To meet their rapidly changing electronic interconnect
requirements, many OEMs have moved to limit their vendor base to a smaller
number of technically qualified, strategically located suppliers capable of
providing both quick-turn prototype and pre-production quantities as well as
cost-competitive volume production quantities.
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PROLIFERATION OF ELECTRONICS AND CREATION OF NEW MARKETS. The markets
for electronic products are growing as a result of technological change,
increasing demands for a wider variety of electronic product features and more
powerful and less expensive electronic components. Due to this growth, new
markets have emerged in computing, data communications, telecommunications and
multimedia. Moreover, existing markets, such as computer networking and
peripherals, digital and mobile communications, video-on-demand, the Internet,
instrumentation and industrial controls, have significantly expanded product
applications.
STRATEGY
The Company's objective is to become the preferred supplier of
flexible circuit interconnect solutions for electronics OEMs in targeted
markets. The Company's strategy to meet this objective includes the following
key elements:
PROVIDE "ONE-STOP-SHOP" FOR FABRICATION AND ASSEMBLY. The Company
provides customers with complete, fully tested flexible circuit interconnects
from custom design through fabrication, assembly and complete functional
testing. Historically, the capital intensive nature of flexible circuit
production compelled companies to specialize in one of two major segments of the
flexible circuit production process, either design and fabrication or assembly
and testing. Prior to the ADFlex U.K. acquisition, a flexible circuit fabricated
by the Company often was sent elsewhere for assembly and testing before being
shipped to the end customer. The integration of expertise in state-of-the-art
assembly technology and processes with the Company's pre-existing fabrication
technology and high-volume production capabilities enables the Company to offer
significantly shorter cycle times, lower total costs and better quality for
customers. In addition, the Company believes that the integration of assembly
technology with manufacturing technology and high-volume production capabilities
will, over time, provide improvements in the Company's production costs through
higher product yields, faster production ramps, reduced inventories, shortened
production cycle times, improved account control and increased leverage over
expenses.
PROVIDE DESIGN EXPERTISE AND PACKAGING TECHNOLOGY. The Company's
flexible circuit interconnects are designed specifically for each application,
requiring significant joint design activities between the Company and its
customer at the start of a new program. The Company encourages its customers to
outsource much of the flexible circuit design to ADFlex, which creates an
opportunity for the Company to function as an extension of its customers'
product development efforts. The Company assumes the responsibility, and invests
in support thereof, to maintain and advance flexible circuit technology at the
materials, fabrication and assembly levels. The Company believes that its
extensive involvement with customers at the design stage, coupled with its use
of technology designed to meet the evolving requirements of its customers, has
been a key competitive advantage.
EXPAND SERVICE AND MANUFACTURING INFRASTRUCTURE. As OEMs increasingly
require suppliers to support their global operations, the Company is devoting
significant resources to enhance its worldwide service and support organization.
The Company has expanded worldwide by strategically locating manufacturing
facilities in the United States, Mexico and Thailand. In addition, the Company
maintains a technology and pilot production facility in the U.K. to support its
European customers. The Company believes that substantial growth opportunities
exist for sales of its products and services to both U.S. and foreign-based
customers for use in their production operations in Singapore, Korea, Taiwan and
Japan. In order to increase sales to customers with foreign manufacturing
operations, the Company has design centers in North America and Europe and has
initiated the establishment of design support capabilities with the Company's
own engineers and with third party independent contractors in Singapore, Korea,
Taiwan, and Japan. By increasing the scale and scope of the services offered in
each region, the Company believes that it can better address the needs of
leading OEMs and contract manufacturers that are increasingly seeking global
partners and lower costs in the high-volume production of advanced products.
INCREASE SHARE WITH EXISTING CUSTOMERS. Once established as a supplier
for an application, the Company seeks to gain an increasing share of the
customer's interconnection requirements in two principal ways:
- INCREASE SHARE OF TOTAL REQUIREMENTS. The Company's strategy
is to become the preferred supplier on as many programs as
possible by outperforming its direct competition on the
critical factors of quality, cost, delivery, design,
responsiveness and overall customer service. The Company's
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objective is to obtain at least a 60% share of each of its
customer's high-end and high-volume flexible circuit
interconnect requirements, a position it believes that it
currently holds with a majority of its largest customers.
- LEVERAGE FABRICATION FOR ASSEMBLY OPPORTUNITIES. The Company
offers integrated flexible circuit fabrication and assembly
services. The Company seeks to capitalize on the growing trend
among electronics OEMs to reduce time to market as well as the
number of suppliers. By providing flexible circuit assembly as
an extension to existing fabrication services, the Company can
deliver savings on both time-to-market and cost for its
customers.
TARGET HIGH VOLUME APPLICATIONS IN HIGH GROWTH MARKETS. The Company
targets applications for flexible circuit interconnects that have experienced
large volumes, high growth and rapid change such as notebook computers, cellular
telephones and pagers. In these markets, the Company can apply its superior
design skills, manufacturing efficiencies and ability to rapidly ramp to volume
production. Likewise, the Company believes it can leverage technology from its
existing markets into new and emerging markets and applications. Within its
selected markets, the Company targets OEMs (i) that have a market leadership
position; (ii) that need rapid response and value-added assembly; and (iii) who
will reward initiative with a preferred supplier position
THE "ONE-STOP-SHOP" ADFLEX APPROACH
The Company provides its customers with an integrated, "one-stop-shop"
fabrication and assembly approach, incorporating superior engineering and
design, low cost/high volume circuit fabrication, flexible circuit assembly and
test along with dedicated customer support.
SUPERIOR ENGINEERING AND DESIGN TECHNOLOGY. The flexible circuit
interconnects manufactured by the Company are designed specifically for each
application, requiring significant joint design activities between the Company
and the customer at the start of a project. The Company has developed design
methodologies that solve difficult interconnection problems that save the
customer time and money. The Company also designs and produces in volume
flexible circuits that range from high density, single-sided circuits to more
complex double-sided and multi-layer circuits. The Company is continually
investing in and improving its computer-based design tools to more quickly
design new flexible circuit interconnects, to enhance cooperative design and
communication with its customers and to more closely link designs to the
manufacturing process. The Company is recognized as a technology leader in
fine-line, single-sided flexible circuit technology and flexible circuit
assembly technology, including advanced chip on flex, flip-chip on flex and
high-density polyimide assembly technologies.
CIRCUIT FABRICATION TECHNOLOGY. The Company has extensive experience 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 volume in photoresist. Circuit conductors are then formed by
chemically etching the underlying copper foil. Coverfilm materials with
pre-punched windows are laminated to the circuitry to provide an insulative
coating and to expose contact pads for surface metalization. The exposed
surfaces are then coated with solder for surface mount or bondable gold for
chip-on-flex applications. Laser processing is then used to create various
openings, to drill vias and cut contoured peripheries in substrate materials.
The Company's key flexible circuit fabrication technologies include:
- FINE FEATURE ROLL-TO-ROLL IMAGING AND ETCHING. Allows the
fabrication of circuits with very fine line widths and spaces.
This is critical to meeting complex, space constrained,
interconnection needs. Processing wide web (24 inches) in a
continuous roll-to-roll format (as opposed to discrete panels)
allows fabrication of high circuit volumes with improved
material utilization, resulting in lower cost.
- LASER PROCESSING. Laser technology is used to produce low
cost, very fine openings, small vias and contoured shapes
which solve density problems while avoiding more expensive
traditional alternatives. Also, using a laser to cut the
periphery of parts allows prototypes and low volume
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production parts to be built faster and without the cost of
a blanking die.
- BONDABLE GOLD PLATING. Prepare flexible circuits for
chip-on-flex bonding, a process which saves space and improves
electrical performance (access time) by wire bonding an IC die
directly to the flexible circuit.
- COVERFILM, LAY-UP AND LAMINATION. A process where
polyimide/adhesive based coverfilm materials are pre-punched,
then aligned with and laminated to an underlying circuit
pattern. This process allows accurate positioning of solder
plated pads to support fine pitch surface mount assembly to
the finished circuits.
ASSEMBLY AND TEST TECHNOLOGY. The Company applies advanced assembly and
test technology to provide flexible circuit interconnect assemblies to its
customers. For many years, the Company has assembled passive electrical and
various mechanical components, including connectors, stiffeners, diodes, formed
metal parts and other devices, to its flexible circuits using primarily manual
processes in its plants in Mexico. With the U.K. acquisition, the Company
expanded its capability to include advanced direct die attach and assembly of
integrated circuit devices as well as the functional testing of these flexible
circuit assemblies. Assembling these components directly onto the flexible
circuit increases performance and reduces space, weight and cost.
CUSTOMER SATISFACTION. A critical component of the Company's growth has
been dedicated customer support. The Company has achieved and maintained high
levels of customer satisfaction by focusing on continuous quality improvement,
reducing total manufacturing cycles, shortening its design and prototype cycles,
reducing its general costs of manufacturing through capacity utilization and
process improvement, and being responsive and working closely with its customers
on a day-to-day basis to quickly address their changing needs. The
responsibility for achieving and maintaining high levels of customer
satisfaction rests with specific business units, each of which consists of a
team of sales personnel; design, quality and manufacturing engineers; and
customer service representatives who are dedicated to a single customer or small
group of customers with similar requirements.
CURRENT PRODUCT APPLICATIONS
The Company provides flexible circuit interconnect products to a
diverse group of markets. Historically, the HDD market has represented the
largest component of the Company's sales at 51%, 62% and 43% of total sales for
1995, 1996 and 1997, respectively. Through new market expansion efforts, the
Company is continuing its efforts to reduce the impact of the cyclicality of the
HDD industry on its business. However, net sales attributable to this market are
expected to continue to represent the largest component of total sales for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry would likely have a material adverse effect on the
Company's operating results
Current applications addressed by the Company include:
HARD DISK DRIVES. The HDD market uses flexible circuits as the
interconnect between the read/write head and disk drive electronics. In HDD
applications, circuits need to mechanically flex hundreds of millions of times
through the life of the drive. Mounting an unpackaged die directly onto the
flexible circuit substrate, or chip on flex, is becoming the predominant
interconnect technology for these applications.
DATA STORAGE. Large individual drive storage systems are being replaced
by arrays of less expensive disk drives or tape drives. The growth of personal
computer networks has generated a growth in small arrays for local area network
storage. In addition to the flexible circuit interconnects inside each of the
individual drives, controlled impedance flex interconnects are used to connect
the back of the drives to standard interface boards.
PORTABLE COMMUNICATIONS. The use of polyimide flexible circuits in
portable communications devices is rapidly growing as the space, weight and
functionality challenges are becoming more difficult. In some cellular
telephones, flexible circuits replace rigid PCBs, connectors and cables and can
thereby reduce space, weight and cost. Combining the portable system unit growth
with expanded applications of flexible circuits should accelerate the growth of
this application.
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NOTEBOOK COMPUTERS The number of flexible circuit interconnects per
notebook also is increasing. Early applications for flexible circuits in
notebooks were mainly as interconnects from the motherboard to the LCD and as
shielded jumpers. More recently, systems have used as many as ten flexible
circuit interconnects per notebook, including PCMCIA connector/flex jumpers,
LED/speaker flexible circuit assemblies, track ball/mouse button flexible
circuit assemblies and various other shielded jumpers. The combination of
growing notebook unit volumes and the increasing use of flexible circuits in
these applications should accelerate the sales growth of flexible circuits to
this segment.
CONSUMER AND OTHER APPLICATIONS CD/DVD-ROMS are growing in consumer
applications where higher capacity and quicker access time, compared to tape
drives, are needed. These devices use flexible circuits as the interconnect
between the read/write had and CD/DVD-ROM drive electronics.
Computer workstations, document scanners and printers also make use
of flexible circuit interconnects. Certain products and applications have
similar packaging and interconnection requirements and growth opportunities when
compared to the primary end-user markets served by the Company.
EMERGING PRODUCT APPLICATIONS. Flexible circuit substrates are a
leading candidate for use in semiconductor packaging and as interposers for
high-density interconnect applications.
SALES AND SUPPORT
The Company has organized its sales and support effort into five
business units based on the Company's end markets. Each unit is composed of
sales personnel; design, quality and manufacturing engineers; and customer
service representatives. From the time a customer submits a request for
prototype, the applicable business unit is responsible for developing and
expanding the Company's relationship with the customer with the goal of becoming
a preferred supplier. The design and manufacturing engineers of each business
unit work cooperatively with a customer's design engineers to arrive at
cost-effective flexible circuit interconnect solutions that meet the performance
and quality specifications of each product. The business unit then works with
the Company's manufacturing operations personnel to coordinate a timely and
effective integration of the product into the Company's production process from
prototype through the production ramp, assembly (if required) and functional
testing. If the program includes component assembly, the engineers and the
customer service representatives work with planning and purchasing to ensure
that all of the component specification, assembly and test standards and
delivery requirements are understood and properly integrated into the
manufacturing process.
The Company's customer service representatives work with the
customer's purchasing or project representatives on an ongoing basis to
implement changes to the schedule or product specification. Each business unit
also directs research and development efforts that target existing customer
needs. Research currently includes various methods and applications of
screened-materials, direct attachment methods, laser processing, thinner and
lower cost substrate materials and improved processes that yield smaller lines
and spaces on circuitry. By organizing by end market rather than by function,
the Company believes that it can respond more quickly than the competition to
the needs of its customers.
Historically, the Company has sold a substantial portion of its
flexible circuit interconnects to a limited number of customers. In 1995, 1996
and 1997, combined sales to Seagate Technology, Inc. ("Seagate") and IBM
Corporation ("IBM") accounted for 34%, 47% and 33% of the Company's net sales,
respectively. These sales were substantially in support of the HDD and notebook
computer markets.
In order to facilitate their manufacturing processes, the Company's
customers often require that the Company sell finished interconnects to contract
assemblers for further assembly. In 1995, 1996 and 1997, shipments to contract
assemblers were 33%, 14% and 24% of net sales, respectively. Sales to a single
contract assembler, Smartflex Systems, Inc. ("Smartflex"), were 19%, 8% and 7%
of net sales in 1995, 1996 and 1997, respectively.
Even though the Company's customer mix will likely change from period
to period in the future, the
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Company expects that sales to relatively few customers, including contract
assemblers, will continue to account for a high percentage of its net sales in
the foreseeable future. The loss of a significant customer or a substantial
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the computer, computer peripheral,
communications and high-end consumer markets, would have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.
FOREIGN SALES AND OPERATIONS
The Company's primary finishing and assembly facilities are located in
Agua Prieta, Mexico and Lamphun, Thailand and the Company maintains a technology
and pilot production facility in Portsmouth, England. 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.
While the Company transacts business predominately in U.S. Dollars and
most of its net sales are collected in U.S. Dollars, a portion of its sales and
expenses are denominated in other currencies. Changes in the relation of other
currencies to the U.S. Dollar will affect the Company's cost of goods sold and
operating margins and could result in exchange losses. In order to reduce the
impact of certain foreign currency fluctuations, the Company began entering into
short-term forward foreign currency exchange contracts (hedges) in December 1997
in the regular course of business to manage its exposure. To date, the Company's
hedging activity has been immaterial. No assurance can be given that the
Company's hedging strategies will prevent future currency fluctuations from
adversely affecting the Company's business, financial condition, results of
operations and cash flows.
During 1997, the Thai Baht experienced significant devaluation in
relation to the U.S. Dollar. As the majority of the sales and expenses for the
Thailand operation are denominated in U.S. Dollars, the devaluation did not have
a significant impact on the results of operations of the Company for the year
ended December 31, 1997. No assurance can be given that future currency
fluctuations will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
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 received ISO 9002 certification of its Thailand
operations in late 1997.
The Company believes that it enjoys a cost advantage based on a
manufacturing process designed to optimize the utilization of labor and capital,
the close proximity (approximately 200 miles) of its two North American
manufacturing locations, and a manufacturing process and technology with better
yield, material utilization and throughput relative to its competitors. In
addition, the Company believes that the integration of assembly technology with
manufacturing technology and high-volume production capabilities will over time
provide improvements in its production costs through higher product yields,
faster production ramps, reduced inventories, shortened production cycle times,
improved account control and increased leverage over expenses.
SUPPLIERS
The Company purchases raw circuit materials, process chemicals and
various components from multiple outside sources. For components, the Company
typically makes short-term purchasing commitments to key suppliers for specific
customer programs. These commitments are usually made for three to six month
periods. These suppliers commit to providing cooperative engineering, as
required, and in some cases maintain a local inventory to provide shorter lead
times and reduced inventory levels for ADFlex. In most cases, suppliers are
approved, and are often dictated, by the Company's customers. For process
chemicals, the Company relies on a limited number of key suppliers. Alternate
chemical products are available from other sources, but process chemical changes
would often require requalification of the processes, which could take weeks or
months to complete. The Company has attempted to mitigate these risks by
identifying stable companies with leading technology and delivery positions.
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The Company currently purchases a number of its components, process
chemicals and other materials from a single source. For example, the Company has
a supply agreement with Rogers for the supply of certain materials, including
laminates, films, bondply, copper foil and heat treated polyimide, used in the
Company's flexible circuit interconnects. In the United States, these products
are available only from a limited number of suppliers. The Company's agreement
with Rogers expires on December 31, 1998 and can be terminated prior to
expiration by mutual consent or for material breach upon 30 days' notice. Under
the supply agreement, ADFlex has agreed to purchase a percentage of its circuit
materials needs from Rogers, assuming that Rogers is able to meet the materials
specifications, performance requirements and delivery as required by the Company
and its customers.
While viable alternate suppliers exist, because of the Company's
limited inventory of raw materials, tight manufacturing cycles and the
significant amount of time required to qualify new suppliers, single sourcing is
expected to continue. Consequently, any unanticipated interruption of material
supplies or components would have a short- term material adverse effect on the
Company.
COMPETITION
The flexible circuit interconnect market is differentiated by
customers, applications and geography, with each niche having its own
combination of complex packaging and interconnection requirements. The Company
believes that it competes principally on the basis of design capability, price,
quality and response time to design changes and technological advancements in
underlying applications and the ability to offer a total flexible circuit
interconnect solution, including the ability to ramp rapidly up to and down from
volume production and to provide assembly and test services. In addition, during
periods of recession or economic slowdown in the electronics industry and other
periods when excess capacity exists, electronic OEMs become more price
sensitive, which could have a material adverse effect on interconnect pricing.
The Company believes that once an OEM has selected a particular vendor to design
and manufacture a flexible circuit interconnect, the OEM generally relies upon
that vendor's design for the life of that specific application and, to the
extent possible, subsequent generations of similar applications. Accordingly, it
is difficult to achieve significant sales to a particular customer with respect
to any application once another vendor has been selected to design and
manufacture the flexible circuit interconnect used in that application. While
this market paradigm may provide a barrier to the Company's competitors in the
markets served by the Company, it also may present an obstacle to the Company's
entry into other markets. The Company has targeted several markets as areas for
its growth, but there can be no assurance that the Company will be able to
achieve significant sales in any of these new, targeted markets.
The Company experiences competition worldwide from a number of leading
foreign and domestic providers, such as Nippon Mektron ("NOK"), Fujikura Ltd.
("Fujikura") , Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl, Inc.
("Sheldahl") and Parlex Corporation ("Parlex"). NOK and Fujikura are Japan-based
suppliers substantially larger than the Company with greater financial and other
resources. Although the Company believes that a significant portion of the sales
of these companies are in direct competition with the Company, the Company also
believes that both of these competitors derive a majority of their revenues from
Japan-based system manufacturers in the consumer goods market segment. M-Flex,
Sheldahl and Parlex are U.S.-based flexible circuit manufacturers that have
lower sales of polyimide flexible circuits than the Company and have
historically targeted suppliers of computers, communication and automotive
services, and the military, respectively. Expansion of the Company's existing
products or services could expose the Company to new competition. Moreover, new
developments in the electronics industry could render existing technology
obsolete or less competitive and could potentially introduce new competition
into the market. There can be no assurance that the Company's competitors will
not develop enhancements to, or future generations of, competitive products or
services that will offer superior price or performance features to those of the
Company or that new competitors will not enter the Company's markets. Finally,
as many of the Company's competitors are based in foreign countries, they have
cost structures and prices based on foreign currencies. Accordingly, currency
fluctuations could cause the Company's dollar-priced products to be less
competitive than its competitors' products priced in other currencies.
Since its December 1995 acquisition of ADFlex U.K., the Company
competes in assembly matters with leading flexible circuit 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
9
<PAGE> 10
cycle time. The Company believes that it will compete favorably with these
competitors because it offers its customers a complete flexible circuit
interconnect solution including design, fabrication, assembly and testing.
The Company's competitors can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions which can adversely affect operating results. The
Company will be required to make a continued high level of investment in product
development and research, sales and marketing and ongoing customer service and
support to remain competitive. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be able to make the technological advances necessary to maintain
its competitive position in the flexible circuit interconnect market. There can
be no assurance that existing or future competitors will not be able to
duplicate the Company's strategies, that the Company will be able to compete
successfully in the future, or that competitive pressures faced by the Company
will not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
INTELLECTUAL PROPERTY
The Company believes that, due to its customers' demands for rapid
technological advances and the resulting limited product life-cycles, the
success of its business depends more on the technical and engineering expertise,
creativity and marketing and service abilities of its employees than on patents,
trademarks and copyrights. Nevertheless, the Company owns patents and has a
policy of seeking patents when appropriate on inventions concerning new products
and improvements as part of its ongoing research, development and manufacturing
activities. The Company currently owns a number of United States patents. The
Company also owns a royalty-free license to use four IBM patents in exchange for
a cross license of certain Company patents. There can be no assurance that any
patents issued to the Company will provide a competitive advantage or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar products,
duplicate the Company's products or design around the patents issued to the
Company. In addition, there can be no assurance that foreign intellectual
property laws or the Company's agreements will protect the Company's
intellectual property rights in any foreign country. Any failure to protect the
Company's intellectual property rights could have a material adverse effect upon
the Company's business, financial condition, results of operations and cash
flows.
The Company also has applied for United States and foreign
trademarks. In addition, Rogers and Xyratex have each granted to the Company a
nonexclusive, royalty-free license with respect to other intellectual property
used in the Company's business. The Company also relies upon trade secret
protections for its confidential and proprietary information. The Company
routinely enters into confidentiality agreements with its customers, vendors,
consultants and employees. There can be no assurance, however, that others will
not independently gain information and techniques or otherwise gain access to
the Company's trade secrets or that the Company can meaningfully protect its
trade secrets.
No claims have been asserted against the Company for infringement of
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims against the Company in
the future. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. If infringement were established, the Company could be
required to pay damages or be enjoined from making, using or selling the
infringing product. Likewise, there can be no assurance that a third party's
product, if infringing on the Company's proprietary rights, may be prevented
from doing so without litigation. Any of the foregoing could have a material
adverse effect upon the Company's business, financial condition, results of
operations and cash flows.
ENVIRONMENTAL CONTROLS
Flexible circuit interconnect manufacturing requires the use of
chemicals. As a result, the Company is subject to a variety of environmental
laws relating to the storage, discharge, handling, emission, generation,
manufacture, use and disposal of chemicals, solid and hazardous waste, and other
toxic and hazardous materials used to manufacture the Company's products. The
Company believes that it has been operating its facilities in substantial
compliance in all
10
<PAGE> 11
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.
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 the
Company. Pursuant to the agreements governing the acquisition of the flexible
circuit fabrication operations of Rogers, Rogers has retained all environmental
liabilities existing prior to the date of that transaction. While Rogers
currently has sufficient assets to fulfill its obligations under the acquisition
agreements, if environmental liabilities requiring remediation are discovered
and the Company was unable to enforce the acquisition agreement against Rogers,
the Company could become subject to costs and damages relating to such
environmental liabilities. Any such costs and damages imposed on the Company
could materially adversely affect the Company's business, financial condition,
results of operations and cash flows.
During 1995, the Company acquired a manufacturing facility located in
Agua Prieta, Mexico. In connection with this acquisition, the Company conducted
an environmental study of the facility which indicated there is contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the seller submitted a remediation plan to the appropriate Mexican
authorities, which was approved in May 1997. Subsequent remediation was
completed in December 1997. The Company is now awaiting final closure of the
issue by the Mexican government. The seller's obligation for the costs of
remediation is limited to $2.5 million. A total of $1.0 million is being held in
escrow pending the seller's performance of their environmental obligations under
the agreement. The escrow balance will be refunded to the seller upon closure of
the issue by the Mexican authorities with certification that no future action is
required Given the uncertainties associated with environmental contamination,
including possible claims by third parties in the U.S., there can be no
assurance that future remedial costs or liabilities will not have a material
adverse impact on the Company.
At this time, the Company does not anticipate any material amount of
environmental-related capital expenditures for 1998 or 1999.
BACKLOG AND SEASONALITY
The Company's backlog at December 31, 1995, 1996 and 1997 was
approximately $16.7 million, $55.9 million and $44.8 million, respectively. The
Company includes in its backlog only those customer orders for which it has
accepted purchase orders and assigned shipment dates within six months. Because
the Company's sales are made pursuant to purchase orders rather than long term
contracts and are generally subject to cancellation or modification on short
notice and with little or no penalty, the Company does not believe that its
backlog at any particular date is indicative of sales or operating results for
any future periods.
Since commencement of independent operations in June 1993, the Company
has experienced seasonal sequential net sales decreases in the fourth quarter of
each year except 1996, where the inclusion of net sales from its U.K. operations
masked the trend. During those same periods, the Company also experienced
reduced operating margins when compared to prior quarters. Variations in orders
and in the mix of products sold by the Company have significantly impacted net
sales and gross profit. Operating results generally also may be affected by
other factors, including the receipt and shipment of large orders, plant
utilization, product mix, manufacturing process yields, the timing of
expenditures in anticipation of future sales, raw material availability, product
and price competition, the length of sales cycles and economic conditions in the
electronics industry. Many of these factors are outside the control of the
Company. Historically, the Company has encountered operating constraints in the
fourth quarter as typical product life cycles lead to volume production peak in
demand in the second and third quarters.
EMPLOYEES
As of December 31, 1997, the Company had a total of 5,511 employees,
of which 5,409 were regular employees and 102 were temporary employees. Of the
regular employees, 882 were based at the Company's facilities
11
<PAGE> 12
in Chandler, Arizona; 3,903 were based in Agua Prieta, Mexico; 42 were based in
the United Kingdom; and 582 were based in Thailand.
Certain of the Company's employees located in Mexico are represented
by a labor union and covered by a collective bargaining agreement that is
subject to revision annually under Mexican labor laws. The Company has not
experienced an employee-related work stoppage. The Company believes that its
relationship with its union and other employees is good, but there can be no
assurance that the Company will be able to successfully negotiate with the labor
union in Mexico in the future.
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 if intense
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons could
materially adversely affect the Company's business, financial condition, results
of operations and cash flows.
12
<PAGE> 13
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 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 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 fully integrated one-stop-shop strategy will
continue to be accepted by customers, and the risk that competitors may seek to
duplicate this strategy, which could materially adversely affect operating
results; the risk that the Company's transition of manufacturing to Thailand
will not result in sustainable, 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 of turnover in
manufacturing employees, officers, key management and technical personnel; 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 that all of the foregoing factors or other factors could cause fluctuations
in the price of the Company's Common Stock; the risk that the Company may not be
able to obtain additional capital when needed and on reasonable terms; and other
risks detailed herein and from time to time in the Company's other Securities
and Exchange Commission filings.
ITEM 2. PROPERTIES.
In total, the Company leases or owns approximately 412,000 square feet
of manufacturing and other space. The Company's significant facilities are as
follows:
<TABLE>
<CAPTION>
Functions Location (number of facilities) Square Feet Owned/Leased Expiration
- --------- ------------------------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Executive Offices;
Research and Development;
Sales and Support; Circuit Chandler, Arizona (one) 150,000 Leased June 2003
Fabrication (1)
Circuit Finishing and Circuit Agua Prieta, Mexico (three) 161,000 One owned N/A
Assembly 64,000 Two Leased January 2008
Circuit Finishing and Assembly; Lamphun Thailand (one) 25,000 Leased December 1998
Sales and Support
Technology and Pilot Production; Portsmouth, United Kingdom 12,000 Leased September 2007
Sales and Support (one)
</TABLE>
- ----------
(1) 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. As provided for in the
lease agreement, the Company exercised its option to renew the lease for an
additional five years in June 1997, twelve months prior to the lease expiration
date.
The Company believes that its existing facilities in Arizona, Mexico,
and the U.K. are adequate to meet its current requirements, and that suitable
additional space or substitute space is readily available as needed.
During 1997, the Company paid $2.5 million for the purchase of land
in Thailand to be used for future expansion scheduled for 1998 and 1999.
13
<PAGE> 14
ITEM 3.LEGAL PROCEEDINGS
The Company is not currently a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 1997 to a vote
of the Company's securities' holders.
14
<PAGE> 15
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 33 of the ADFlex Solutions, Inc.
1997 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 31 of the ADFlex Solutions, Inc.
1997 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 10-15 of the ADFlex Solutions, Inc. 1997 Annual
Report to Shareholders, and is incorporated herein by this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained on pages 16-30 of
the ADFlex Solutions, Inc. 1997 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.
15
<PAGE> 16
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 28, 1998 Certain information included in the Proxy
Statement is incorporated herein by reference. The Company will disseminated the
Proxy Statement to stockholders on or about March 26,1998.
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 19, 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 7-16 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 4-6 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 17-18 of
the Proxy Statement, and is incorporated herein by reference.
16
<PAGE> 17
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, 1997 and 1996
(ii) Consolidated Statements of Operations - years ended
December 31, 1997, 1996 and 1995
(iii) Consolidated Statements of Equity - years ended December
31, 1997, 1996 and 1995
(iv) Consolidated Statements of Cash Flows - years ended
December 31, 1997, 1996 and 1995
(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, 1997, 1996 and 1995 is filed as part
of this Report and should be read in conjunction with the
Consolidated Financial Statements.
Independent Auditor's Report on Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves....S-1
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.
Number Description
--------- -----------------------------------------------
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
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
17
<PAGE> 18
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 *10.12(1)
Stock Option Agreement, dated June 2, 1994,
between the Registrant and Steve Sanghi
10.12(1) Stock Option Agreement, dated June 29,
1995, between the Registrant and Steve
Sanghi
/ / 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
10.25(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
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
10.32(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
18
<PAGE> 19
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
10.37(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
10.46(8) Master Agreement, dated April 16, 1996,
between the Registrant and Hana
Microelectronics Public Co., Ltd. ("Hana")
10.49(9) Credit Agreement dated June 5, 1997 among
the Registrant, BankBoston, N.A. and
BankBoston, N.A. as agent for Lenders
10.50(10) Equity Purchase Agreement dated September
26, 1997 between the Registrant and Hana
Microelectronics Public Co., Ltd.
10.51(10) Promissory Note dated September 30, 1997
between the Registrant and Hana
Microelectronics Public Co., Ltd.
10.52 First Amendment to Credit Agreement, dated
February 9, 1998, among the Registrant,
BankBoston, N.A. and BankBoston, N.A. as
agent for Lenders
10.53 Collective Bargaining Contract dated
December 10, 1997 (Translation)
*10.54 Compensatory Control Agreement dated January
22, 1997 between ADFlex Solutions Inc. and
Rolando C. Esteverena.
11.1 Statement Regarding Computation of Earnings
Per Share
13.1 Certain provisions of ADFlex Solutions, Inc.
1997 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
(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.
19
<PAGE> 20
(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-K for the fiscal
year ended December 31, 1996.
(9) Incorporated by reference from the Company's Form 10-Q for the
quarter ended June 30, 1997.
(10) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30, 1997.
/ / Confidential treatment granted for portions of the exhibit.
* Constitutes a management contract or compensatory plan or
arrangement.
(b) REPORTS ON FORM 8-K.
None.
20
<PAGE> 21
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 26, 1998 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
- ---------------------------------------
Rolando C. Esteverena President, Chief Executive Officer and March 26,1998
Director (Principal Executive Officer)
/s/ Donald E. Frederick Vice President, Chief Financial Officer, March 26, 1998
- --------------------------------------- Secretary (Principal Financial Officer
Donald E. Frederick and Principal Accounting Officer)
/s/ Steve Sanghi
- ---------------------------------------
Steve Sanghi Director March 26,1998
/s/ Richard P. Clark Director March 26, 1998
- ---------------------------------------
Richard P. Clark
/s/ Wade Meyercord Director March 26,1998
- ---------------------------------------
Wade Meyercord
</TABLE>
21
<PAGE> 22
Report of Ernst & Young LLP, Independent Auditors
We have audited the consolidated financial statements of ADFlex Solutions, Inc.
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated January 19,
1998. 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 19, 1998
<PAGE> 23
SCHEDULE II
ADFLEX SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THREE YEARS ENDED DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Beginning Charges to Ending
Balance Costs and Deductions Balance
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Allowance for Returns and Doubtful Accounts $ 641 $ 154 $ 153 $ 642
1996
Allowance for Returns and Doubtful Accounts 642 1,292 1,323 611
1997
Allowance for Returns and Doubtful Accounts 611 1,817 678 1,750
Allowance for Obsolescence and Excess 1,401 1,956 522 2,835
Inventory (1)
</TABLE>
(1) 1995 and 1996 Allowance for Obsolescence and Excess Inventory balances are
not presented due to immateriality.
<PAGE> 24
EXHIBIT INDEX
10.4 Amendment No. 2 to 1994 Stock Incentive Plan, effective
August 26, 1996.
10.52 First Amendment to Credit Agreement, dated February 9, 1998, among
the Registrant, BankBoston, N.A. and BankBoston, N.A. as agent for
Lenders
10.53 Collective Bargaining Contract dated December 10, 1997 (Translation)
10.54 Compensatory Control Agreement dated January 22, 1997 between ADFlex
Solutions Inc. and Rolando C. Esteverena.
11.1 Statement Regarding Computation of Earnings per Share
13.1 Certain provisions of the ADFlex Solutions, Inc. 1997 Annual
Report to Stockholders
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule for the years ended December 31, 1997 and
1996
27.2 Financial Data Schedule for the interim period included in the year
ended December 31, 1997
27.3 Financial Data Schedule for the interim period included in the year
ended December 31, 1996
<PAGE> 1
Exhibit 10.4
AMENDMENT NO.2
TO
ADFLEX SOLUTIONS, INC.
1994 STOCK INCENTIVE PLAN
1. EFFECTIVE DATE.
The Board of Directors of the ADFlex Solutions, Inc. (the "Corporation")
adopted this Amendment No. 2 (the "Amendment") to the 1994 Stock Incentive Plan,
as amended by that certain Amendment No. 1, dated as of February 28, 1995 (the
"1994 Plan"), pursuant to unanimous consent resolutions as of August__, 1996.
2. TRANSFERABILITY.
Section 10(a) of the 1994 Plan hereby is deleted.
3. ADMINISTRATION OF THE PLAN.
Section 15(a) of the 1994 Plan hereby is amended in its entirety to read
as follow:
(a) This Plan shall be administered by the Board or by the
Compensation Committee of the Board, which shall be composed of not
less than two members of the Board, each of whom shall be a
"non-employee director" within the meaning of Rule 16b-3. For purposes
of grants and awards pursuant to, and administration of, this Plan,
the terms "Committee" and "Board" are used interchangeably.
Section 15(d) of the 1994 Plan hereby is deleted.
4. AMENDMENTS AND OTHER MATTERS.
Section 17(d)(ii) and Section 17(e) of the 1994 Plan hereby are deleted.
5. NON-EMPLOYEE DIRECTORS AUTOMATIC STOCK OPTION GRANTS.
Section 21(b) and Section 21(i) of the 1994 Plan hereby are deleted.
6. EFFECT OF AMENDMENT.
Except as otherwise expressly set forth in this Amendment, all of the
terms and conditions of the 1994 Plan shall remain in full force and effect.
1
<PAGE> 1
EXHIBIT 10.52
FIRST AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT
AND CERTAIN LOAN DOCUMENTS
This FIRST AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT AND
CERTAIN LOAN DOCUMENTS (this "First Amendment") is entered into as of February
9, 1998 by and among ADFlex Solutions, Inc., a Delaware corporation (the
"Borrower"), and the banks and other financial institutions that either now or
in the future are parties thereto as lenders (collectively the "Lenders" and
each individually a "Lender"), BankBoston, N.A. in its capacity as the L/C
Issuer (in such capacity, together with any successors thereto in such capacity,
the "L/C Issuer"), and BankBoston N.A., as agent and representative for the
Lenders (in such capacity BankBoston N.A. or any successor in such capacity is
referred to herein as the "Agent"). The Lenders, the L/C Issuer, and the Agent
are collectively referred to herein as the "Lender Parties" and each
individually as a "Lender Party".
RECITALS
A. Borrower and Lender Parties are parties to that certain
Senior Secured Credit Agreement dated as of June 5, 1997 (the "Credit
Agreement"), pursuant to which the Lenders agreed to make available to Borrower
certain credit facilities, and certain related loan documents (the "Loan
Documents").
B. Borrower and the Lender Parties have agreed to make certain
amendments to the Credit Agreement and to certain of the Loan Documents, subject
to the conditions and in reliance on the representations and warranties set
forth below.
NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, each Lender Party and
Borrower hereby agree as follows:
AGREEMENT
1. DEFINED TERMS; SECTION REFERENCES. Initially capitalized
terms used but not defined in this First Amendment shall have the meanings
assigned to such terms in the Credit Agreement. All "Section" references herein
are to sections of the Credit Agreement unless otherwise specified.
2. AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT.
(a) A new definition of "Term Commitment" shall be added to
Section 1.1 of the Credit Agreement, and shall provide in its entirety as
follows:
""TERM COMMITMENT" means, with respect to each Lender, the
amount set forth for such Lender as its "Term Commitment" on Schedule 1.1A, as
reduced or terminated from time to time pursuant to the terms hereof."
(b) The definition of "Term Loan Maturity Date" shall be
amended to provide in its entirety as follows:
""TERM LOAN MATURITY DATE" means December 31, 2002."
Credit Agreement
1
<PAGE> 2
3. AMENDMENTS TO SECTION 2.1.1. OF THE CREDIT AGREEMENT.
Section 2.1.1. of the Credit Agreement shall be amended to
provide in its entirety as follows:
"2.1.1. TERM LOANS. Each Lender severally agrees, upon the
terms and subject to the conditions set forth in this Agreement, to make Term
Loans to the Borrower as follows: (a) a single borrowing of Term Loans
aggregating $25,000,000 will be made on the Closing Date; (b) a single borrowing
of Term Loans aggregating $5,000,000 will be made on the date of this First
Amendment; and (c) a single borrowing of Term Loans aggregating $5,000,000 will
be made on a date to be specified by Borrower during the period beginning on the
date of this First Amendment and ending on August 31, 1998; provided, however,
that no Lender shall be required to extend Term Loans in a principal amount
exceeding such Lender's Term Commitment as of the date of the requested
borrowing of Term Loans."
4. AMENDMENTS TO SECTION 2.7.1. OF THE CREDIT AGREEMENT.
Section 2.7.1. of the Credit Agreement shall be amended to
provide in its entirety as follows:
"2.7.1. Each Lender's Revolving Commitment shall terminate
without further action on the part of such Lender on the earlier to occur of (a)
December 31, 2000 (or if that date is not a Business Day, the next preceding
LIBOR Business Day) (the "Stated Termination Date"), and (b) the date of
termination of the Revolving Commitment pursuant to Section 2.7.2. or 7.2. (such
earlier date being referred to herein as the "Termination Date")."
5. AMENDMENTS TO SECTION 2.8.1.1. OF THE CREDIT AGREEMENT.
Section 2.8.1.1. shall be amended such that it will provide,
in its entirety, as follows:
"2.8.1.1. The Borrower shall make principal payments as
follows: (i) a principal payment in the amount of $1,785,714.28 will be paid on
the last Business Day of each of the five quarters beginning with the quarter
that ends on December 31, 1998, and (ii) a principal payment in the amount of
one-twelfth of the outstanding balance as of January 1, 2000 will be paid on the
last Business Day of each of the twelve quarters beginning with the quarter that
ends on March 31, 2000 (each such payment date being referred to hereinafter as
a "Term Loan Payment Date"). The Term Loans in any event shall be paid in full
on the Term Loan Maturity Date. The principal amount of the Term Loans prepaid
or repaid by the Borrower may not be reborrowed."
6. AMENDMENTS TO SECTION 2.8.3. OF THE CREDIT AGREEMENT.
Section 2.8.3. of the Credit Agreement shall be amended by
deleting Section 2.8.3.3. in its entirety.
7. AMENDMENTS TO SECTION 6.2.6. OF THE CREDIT AGREEMENT.
Section 6.2.6. of the Credit Agreement shall be amended to provide in its
entirety as follows:
"6.2.6. Other Debt of the Borrower that is (i) unsecured or
(ii) secured only by a valid and perfected purchase money security interest, in
an aggregate amount incurred during the term of this Agreement not exceeding
$15,000,000;".
Credit Agreement
2
<PAGE> 3
8. AMENDMENTS TO SECTION 6.5.3. OF THE CREDIT AGREEMENT.
Section 6.5.3. of the Credit Agreement shall be amended to provide in its
entirety as follows:
"6.5.3. INTEREST COVERAGE RATIO. As of the last day of each
Fiscal Quarter, Borrower's Interest Coverage Ratio for the two consecutive
Fiscal Quarters then ended shall not be less than 3:00 to 1:00."
9. AMENDMENTS TO SCHEDULES TO THE CREDIT AGREEMENT.
(a) Schedule 1.1A to the Credit Agreement shall be amended to
provide in its entirety as set forth on the Amended Schedule 1.1A attached
hereto.
(b) Schedule 1.1E to the Credit Agreement shall be amended to
provide in its entirety as set forth on the Amended Schedule 1.1.E attached
hereto.
10. AMENDMENT TO SECURITY AGREEMENT. Section 4.8 of the
Security Agreement entered into in connection with the Credit Agreement shall be
amended to provide in its entirety as follows:
"SECTION 4.8. DELIVERY OF PLEDGED COLLATERAL. The Grantor
shall deliver to the Agent, together with appropriate endorsements or
documentation of assignment thereof acceptable to the Agent, any and all Notes
Receivable or Chattel Paper having a face amount, negotiable Documents
evidencing title to any Collateral having a fair market value, and all
certificated Securities having a fair market value, individually or in the
aggregate, that is Material (collectively the "Pledged Collateral"). All
Collateral of such types that is not required to be so delivered to the Agent
shall bear a legend showing the interest of the Agent therein."
11. AGREEMENT RE INCURRENCE OF SECURED DEBT. Borrower has
informed the Agent that following the Closing Date, Borrower's subsidiary ADFlex
Cayman Limited ("ADFlex Cayman") incurred secured Debt in connection with its
purchase of twenty percent (20%) of the stock of ADFlex Thailand Ltd. ("ADFlex
Thailand") (ADFlex Cayman already owned the other eighty percent (80%) of the
stock of ADFlex Thailand). Although Borrower does not concede that such
transaction resulted in a Default or an Event of Default, Agent and the Lenders
hereby waive the existence of any Default or Event of Default that may have
existed as a result of the incurrence of such Debt and the granting of a Lien in
connection therewith, provided that such waiver shall be effective only to the
extent that ADFlex Cayman repays such Debt in full, in accordance with its terms
and not later than the stated maturity date therefor, and does not enter into
any agreement varying the terms or extending the maturity date of, or replacing
or refinancing, such secured Debt.
12. AMENDMENT FEE. On the date hereof, Borrower shall pay to
Agent, for the ratable benefit of the Lenders, an amendment fee (the "Amendment
Fee") of one tenth of one percent (.10%) of the sum of the Lenders' Term
Commitments and Revolving Commitments on such date.
13. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS FIRST
AMENDMENT. Lender Parties' obligations under this First Amendment are
conditioned upon, and this First Amendment shall not be effective until,
satisfaction in full of each of the following:
(a) Agent shall have received this First Amendment, duly
executed by each appropriate Person and in form and substance satisfactory to
Agent and its counsel;
Credit Agreement
3
<PAGE> 4
(b) Borrower shall have paid to Agent (i) the Amendment Fee;
and (ii) all amounts then due and payable pursuant to Section 9.1 of the Credit
Agreement which shall have been presented for payment;
(c) All of the representations and warranties of Borrower
contained herein, in the Credit Agreement and in each other Loan Document shall
be true and correct in all material respects on and as of the effective date of
this First Amendment, as though made on and as of that date (except to the
extent that such representations and warranties expressly relate to an earlier
date or reflect changes brought about by this First Amendment);
(d) Borrower shall have delivered to Agent certified copies of
resolutions of its Board of Directors authorizing Borrower to execute and
deliver this First Amendment, in form and substance satisfactory to Agent in its
sole and absolute discretion;
(e) No Default or Event of Default shall have occurred and be
continuing or would result from the consummation of the transactions
contemplated in this First Amendment; and
(f) All other documents, certificates, consents and opinions
required by Agent in connection with the transactions contemplated by this First
Amendment shall have been executed and delivered in form and substance
satisfactory to Agent in its sole and absolute discretion.
14. REPRESENTATIONS AND WARRANTIES. In order to induce Lender
Parties to enter into this First Amendment, Borrower makes the following
representations and warranties:
(a) The representations and warranties contained in the Credit
Agreement (and in the Schedules thereto) and each of the other Loan Documents
(and in the Schedules thereto) are true, correct and complete in all material
respects at and as of the effective date of this First Amendment (except to the
extent that such representations and warranties expressly relate to an earlier
date or reflect changes brought about by this First Amendment); and
(b) This First Amendment and all other agreements and
documents executed by Borrower in connection herewith have been duly executed
and delivered by Borrower and constitute the legal, valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to the enforcement of the
rights of creditors generally, or the exercise of judicial discretion with
respect to equitable remedies.
15. REFERENCES. All references in the Credit Agreement to
"this Agreement", "hereof", "herein", "hereto", or words of similar import, and
all references in all other Loan Documents to "the Credit Agreement" shall be,
and shall be deemed to be for all purposes, references to the Credit Agreement
as amended.
16. CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS OTHERWISE NOT
AFFECTED. Except as expressly amended pursuant to this First Amendment, the
Credit Agreement and each of the other Loan Documents shall remain unchanged and
in full force and effect and are hereby ratified and confirmed in all respects.
Each Lender Party continues to reserve any and all rights and remedies under the
Credit Agreement and each of the other Loan Documents, and no failure, delay or
discontinuance on the part of any Lender Party in exercising any right, power or
remedy thereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
This First Amendment and the Credit Agreement shall be read together, as one
document.
Credit Agreement
4
<PAGE> 5
17. BINDING EFFECT. This First Amendment shall be binding
upon, inure to the benefit of and be enforceable by Borrower and each Lender
Party and their respective successors and assigns, as permitted pursuant to the
Credit Agreement.
18. TIME OF THE ESSENCE. Time and exactitude of each of the
terms, obligations, covenants and conditions of this First Amendment are hereby
declared to be of the essence.
19. GOVERNING LAW. THIS FIRST AMENDMENT IS A CONTRACT UNDER
THE LAWS OF THE STATE OF CALIFORNIA AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY SUCH LAWS (EXCLUDING THE LAWS APPLICABLE TO
CONFLICTS OR CHOICE OF LAW).
20. COUNTERPARTS. This First Amendment may be executed in
several counterparts and by each party on a separate counterpart, each of which
when executed and delivered shall be an original, and all of which together
shall constitute one instrument. In proving any matter with respect to this
First Amendment it shall not be necessary to produce or account for more than
one such counterpart signed by the party against whom enforcement is sought.
Credit Agreement
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have duly executed this
First Amendment, as of the date first above written.
AGENT:
BANKBOSTON, N.A.,
A NATIONAL BANKING ASSOCIATION,
as Agent, L/C Issuer and a Lender
By: \s\ Kevin T. Malone
-------------------------------------
Name: Kevin T. Malone
Title: Division Executive
LENDERS:
BANK ONE, ARIZONA, N.A.,
A NATIONAL BANKING ASSOCIATION
By: \s\ Steven P. Reinhart
-------------------------------------
Name: Steven P. Reinhart
Title: Vice President
IMPERIAL BANK,
A CALIFORNIA BANKING CORPORATION
By: \s\ Kevin C. Holloran
-------------------------------------
Name: Kevin C. Holloran
Title: Senior Vice President
THE UNION BANK OF CALIFORNIA,
A NATIONAL BANKING ASSOCIATION
By: \s\ Scott Lane
-------------------------------------
Name: Scott Lane
Title: Vice President
Credit Agreement
6
<PAGE> 7
BORROWER:
ADFLEX SOLUTIONS, INC.,
A DELAWARE CORPORATION
By: \s\ Donald E. Frederick
-------------------------------------
Name: Donald E. Frederick
Title: Vice President, Chief Financial
Officer
Credit Agreement
7
<PAGE> 8
SCHEDULE 1.1A
COMMITMENTS
<TABLE>
<CAPTION>
Lender Committment Revolving Commitment Term Commitment
- ------ ----------- -------------------- ---------------
<S> <C> <C> <C>
BankBoston, N.A. $17,500,000 $ 7,291,666.667 $10,208,333.333
Bank One, Arizona, N.A. 15,000,000 6,250,000.000 8,750,000.000
The Union Bank of California 15,000,000 6,250,000.000 8,750,000.000
Imperial Bank 12,500,000 5,208,333.333 7,291,666.667
Total $60,000,000 $25,000,000.000 $35,000,000.000
</TABLE>
Credit Agreement
Schedule 1.1A
<PAGE> 9
SCHEDULE 1.1E
APPLICABLE MARGIN & FEE RATE
The "APPLICABLE MARGIN" in respect of LIBOR Rate Loans and the "FEE
RATE" for any day are the respective rates per annum set forth below in the
applicable row under the column corresponding to the Pricing Level that applies
on such day:
<TABLE>
<CAPTION>
L L L L L
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
PRICING LEVEL PRICING PRICING PRICING PRICING PRICING
- ------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Applicable Margin 1 1 1 1
(LIBOR Rate Loans) 1.25 1.50 1.75 2.00 2.25 2
0 0 0 .
Fee Rate .20 .20 .20 .25 .30 0
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings:
"LEVEL I PRICING" applies during any Pricing Period if, at the end of
the Fiscal Quarter most recently ended prior to the first day of such Pricing
Period, the Interest Coverage Ratio for the two consecutive Fiscal Quarters then
ended was greater than 7.50 to 1.00.
"LEVEL II PRICING" applies during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 7.50 to
1.00, but greater than 5.00 to 1.00.
"LEVEL III PRICING" applies during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 5.00 to
1.00, but greater than 4.00 to 1.00.
"LEVEL IV PRICING" applies during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 4.00 to
1.00, but greater than 3.00 to 1.00.
"LEVEL V PRICING" applies during (i) the period beginning on the
Closing Date and ending on the day on which the Compliance Certificate required
in respect of the Fiscal Quarter ending September 30, 1997, is delivered, and
(ii) any Pricing Period if (i) at the end of the Fiscal Quarter most recently
ended prior to the first day of such Pricing Period, the Interest Coverage Ratio
for the two consecutive Fiscal Quarters then ended was less than or equal to
3.00 to 1.00, or (ii) on the first day of such Pricing Period the financial
statements required by Section 5.1.2 of the Credit Agreement shall not have been
delivered with respect to such Fiscal Quarter.
"PRICING PERIOD" means a period beginning on (and including) the day on
which a Compliance Certificate required pursuant to Section 5.1.2 of the Credit
Agreement is delivered,
Credit Agreement
Schedule 1.1E
<PAGE> 10
and ending on (and excluding) the day on which the next such Compliance
Certificate is delivered. The first Pricing Period shall begin on the day on
which the Compliance Certificate required in respect of the Fiscal Quarter
ending September 30, 1997 is delivered.
"PRICING LEVEL" refers to such of Level I Pricing, Level II Pricing,
Level III Pricing, Level IV Pricing or Level V Pricing as applies during any
particular day. The numbering of Pricing Levels is in ascending order (e.g.,
Level II Pricing is referred to as a "higher" Pricing Level than Level I
Pricing).
Credit Agreement
Schedule 1.1E
<PAGE> 1
EXHIBIT 10.53
UNION CONTRACT MEXICO-EFFECTIVE JANUARY 1, 1998 - DEC. 31, 1999
COLLECTIVE LABOR CONTRACT UNDER WHICH THE TWO PARTIES -- MR. JUSTO TIRADO MERAZ,
AS SECRETARY GENERAL OF THE WORKERS' UNION AND COMPANY, OF THE MUNICIPALITY OF
AGUA PRIETA, SONORA, AND MR. FRANCISCO FELIPE ABRIL NORIEGA
REPRESENTING ADFLEX MEXICO S.A. DE C.V. -- AGREE, IS GOVERNED
BY THE FOLLOWING:
C L A U S E S
FIRST: The parties both recognize the legal capacity that is
manifested in this document.
SECOND: For the purposes of the parties involved, in interpreting and
applying this contract, the following terminology will be used: UNION, COMPANY,
CONTRACT AND LAW in regards to this document and the Labor Code.
THIRD: The Union represents the following: Senior Superintendents,
Superintendents, Supervisors, Secretaries, Drivers, Laboratory Technicians, the
Engineering Department, Assistants, Guards, Administrative Personnel and all
those who, by the nature of their job description, are considered represented by
the Union.
FOURTH: The Secretary General is to apply and interpret labor norms.
Without the Secretary General, the Delegate will reach agreement through dialog
and conciliatory means. When a conflict arises in the Company in which the
Secretary General requires the participation of the Delegate, a written request
must be used which specifies the nature of the conflict and approximate time
constraints.
FIFTH: The company is obligated to employ Union workers in all
contracted positions. The Union is also obligated to provide the necessary
personnel within 48 hours of a request. If the deadline elapses, and the Union
doesn't provide the requested personnel, the Company can freely contract
personnel, with the stipulation that they join the Union.
SIXTH: When there is a vacancy in the plant, the employee with most
seniority will fill that position, provided that s/he has the necessary aptitude
and capacity to perform the work of that vacant position.
<PAGE> 2
SEVENTH: All promoted workers will be on probation during their first 30 days,
during which they must prove to be capable to carry out the corresponding work
and, if so, will receive an appropriate salary in relation to the new position.
EIGHTH: If, during the period described in the previous clause, the
worker is deemed not to have the necessary ability to perform his/her job, s/he
will be reinstated in their previous job with the salary that corresponds to
that position.
NINTH: It is the authority of the Company to assign the
employees tasks and shifts according to the individual requirements of the job.
TENTH: When, because of the Company's needs, a worker is transferred to
a task that s/he does not usually perform, s/he will receive the salary that
corresponds with that task. In these cases, an employee will be chosen who has a
comparable status in hierarchy to the position being filled.
ELEVENTH: The Company gives authority to the Secretary General when s/he
needs to handle some matter relating to the interpretation and application of
the Collective Labor Contract; in turn, the Secretary General promises not to
deal with political and religious subjects, nor to obstruct the work of the
Company.
TWELFTH: The Company and Workers, account for their workdays
weekly, specifying over-time put in, as well as that which is foreseen in
Article 59 of the Law.
THIRTEENTH: The Company promises to follow through with the
social security system in the terms under which the Labor Code provides.
FOURTEENTH: The Company is obliged to deduct the amount from the workers
for regular or special amounts that the Union determines. The Union must
communicate this in writing to the Company at the time of the previous
collection. The Company will turn over the retained amounts to the person
authorized by the Union, on Mondays of each week.
FIFTEENTH: The Company is obliged to maintain the bathrooms in
good condition for the personal use of the workers. In turn, the workers are
obliged to use them appropriately, keeping them tidy.
<PAGE> 3
SIXTEENTH: The Company promises to maintain the ovens in good
condition, so that the workers can heat their food. In turn, the workers promise
to take care of the said appliances and to use them appropriately.
SEVENTEENTH: It is the obligation of the worker to utilize their time
card, at the entrance and exit. If without a card, the attendance book or list
must be signed for proof of having been present at work.
EIGHTEENTH: The Union and Company recognize the possibility in the
future of the opening of other plants or divisions in this city. Other plants or
divisions will be considered as a single economic unit for the purposes of this
contract and the distribution of work. Consequently, if, because of a lack of
materials or whatever other circumstances the amount of work is reduced, the
following measures will be taken:
A. Relocation in another plant or division without affecting either the rank
salary of the transposed worker. If, upon the discretion of the Company this is
not possible, the following will occur:
B. Cuts can be carried out by work area, in each division or plant, in an
independent manner.
C. Workers are given preference according to their ability and training in their
specialty area.
D. If the Company resorts to lay-offs, the Company will pay 50% of the salary of
the worker, provided that s/he has been working with the Company for more than
30 days.
The Company is obliged to reinstate the laid-off workers once the cause of the
lay-offs has been corrected, provided that s/he hasn't resigned from the company
nor Union, nor is working at another Company.
NINETEENTH: The Company and Union agree that bonuses can be
established independently in each department in accordance with productivity.
TWENTIETH: The Company promises to encourage recreational
activities between its workers and will provide the apparatus necessary to do
so.
TWENTY-FIRST: Besides the obligatory days off established by
<PAGE> 4
Article 74 of the Law, the Company recognizes the holidays Good Friday and May
10 of each year. Furthermore, the Company will pay double salary to workers who
work September 10th and Holy Thursday of each year.
TWENTY-SECOND: The Union recognizes that in the case of a division or
separation of the Company, it acknowledges placement of one hundred and fifty
permanent workers, whereas the rest are contingent workers.
TWENTY-THIRD: The Company commits to give unionized workers who work
until the 20th of December of each year, 20 days salary for a completed year of
service -- or the proportional amount -- which corresponds to the concept of
Christmas bonus, in accordance with the Law.
TWENTY-FOURTH: The Company promises to pay each one of the unionized
workers a yearly bonus for their services in accordance with the following: from
5 to 7 years of uninterrupted service N$ 45.00, from 8 to 10 years of
uninterrupted service N$ 70.00, from 11 or more years of uninterrupted service
N$ 100.00. The payments will be given in the first thirty days of each year.
TWENTY-FIFTH: The Company will plan the annual vacation time of its
employees in accordance with the following:
09 days for the first complete year of uninterrupted service
11 days for the second complete year of uninterrupted service
13 days for the third complete year of uninterrupted service
15 days for the fourth complete year of uninterrupted service
From the fifth to tenth year of service, 16 days will be given. After
the tenth complete year of service, vacation will increase by two days for each
five years of uninterrupted service.
TWENTY-SIXTH: The Company promises to hold an event for the working
mothers at the Company for Mother's Day.
TWENTY-SEVENTH: The Company promises to provide workers with equipment
and protection items that the Commission of Safety and Hygiene relegate.
TWENTY-EIGHTH: The Company will cover the seniority bonus within the
terms and conditions referred to in Article 162 of the Federal Labor Law, to all
unionized workers who wish to voluntarily retire from his/her work, provided
that they have completed five years of cont. service.
TWENTY-NINTH: The Company promises that when a holiday outlined by the
Law, like the days considered as [can't see print here] by contractual
<PAGE> 5
right fall on a Sunday, the Company will switch it a working day -- as a holiday
with pay.
THIRTIETH: If a unionized worker dies, the Company will pay the
beneficiaries six thousand new pesos for a natural death and seven thousand new
pesos for an accidental death, provided it be used toward the burial costs. This
benefit is allotted only if the worker, at the moment of his death, was working
for the Company. For Company payment, the Union acts as intermediary and is
provided the death certificate, and receipts of costs incurred for the funeral.
THIRTY-FIRST: Upon the request of the Union, the Company promises to
address the unionized workers twice a year, in January and July.
THIRTY-SECOND: The Company promises to give workers what is appropriate
to each, by participation in profits in accordance with the Law.
THIRTY-THIRD: The Company accepts the clause of exclusion in its double
aspect - in both hiring and firing. The Company is obligated, therefore, to take
away the job from any unionized worker at the mere request of the Union, the
situation having been a temporary disciplinary action or a permanent action. An
official letter will be remitted to the Company, with the understanding that the
Company will have no obligations.
THIRTY-FOURTH: The Company will authorize permission for up to 10 paid
days for one of the delegates when they go outside of the city to national or
state congresses of the C.R.O.M. The Secretary will notify the Company one week
ahead of time, with the day which the congresses are to take place and the
delegate who will attend. The Company will authorize in writing that permission.
THIRTY-FIFTH: If the worker becomes incapacitated at the beginning of his/her
vacation time, the said period will be postponed for the Company until his/her
recovery. In the same way, if, while on vacation the employee were to suffer a
sickness or accident that the I.M.S.S. would classify incapacitated, his/her
vacation is suspended, resuming vacation
after the treating doctor determines that his/her state of health is such a
state to continue enjoying their vacation. To receive the benefits of this
clause, it is absolutely necessary that hospitalization be implied. The workers
must notify the Company, providing documentation to prove it [can't see the
print] the facts at the latest at the end of his/her vacation.
THIRTY-SIXTH: The Company promises continue authorizing the services and
<PAGE> 6
benefits that are being received and that aren't stipulated in the Labor
Contract that are established with this Union.
THIRTY-SEVENTH: The Company promises to pay the Union once a year a contribution
of two thousand new pesos to support the Union's efforts to promote recreation
between its members.
THIRTY-EIGHTH: The company promises to authorize paid leave of up to three days
in case of a death of an immediate family member of our employees: father,
mother, wife, husband, child, brother or sister.
THIRTY-NINTH: A worker who feels that a decision of the Company was unjustified
may consult with the Union Delegate to clarify any situation.
FORTIETH: The Union and Company agree to review this Contract as outlined in
Articles 399 and 399 bis of the Federal Work Law and agree it will be in effect
for two years as far as the clauses are concerned and will be effective the
first day of January of 1998.
Unforeseen circumstances not addressed in this contract will be governed by the
Law, customs and general principles of Law.
The parties are informed of the content and extent of each one of the clauses
that make up this contract. It is signed as a record in the city of Agua Prieta,
Sonora, on the tenth of December of 1997.
This contract has been revised, and will be put into effect the first day of the
month of January of 1998. The parties agree to remit it to the Local
Conciliation and Arbitration Meeting.
FOR THE UNION FOR THE COMPANY
/s/Justo Tirado Meraz /s/ Francisco Felipe Abril Noriega
- ---------------------------- ------------------------------------
MR. JUSTO TIRADO MERAZ FRANCISCO FELIPE ABRIL NORIEGA
SECRETARY GENERAL DIRECTOR GENERAL
<PAGE> 1
EXHIBIT 10.54
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement") is entered into
effective January 22, 1997, between ADFlex Solutions, Inc., a Delaware
corporation (the "Company"), and Rolando C. Esteverena (the "Executive").
RECITALS
A. The Company is engaged in the business of designing, manufacturing
and assembling flexible interconnects for the computer, computer peripherals and
high-end consumer markets.
B. The Executive currently serves as the Chairman of the Board,
President and Chief Executive Officer of the Company.
C. The Company and the Executive desire to embody the terms and
conditions relating to compensation to the Executive upon his actual or
constructive termination following a Change in Control (as hereinafter defined)
in a written agreement, which will supersede the provisions of any and all prior
agreements relating to the subject matter hereof, whether written or oral,
pursuant to the terms and conditions hereinafter set forth.
TERMS AND CONDITIONS
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Effective Date; Term. The Effective Date of this Agreement shall be
the date first written above. The term of this Agreement shall commence on the
Effective Date and shall continue, unless sooner terminated, for three years
(the "Initial Term"). Thereafter, the term of this Agreement shall automatically
be extended for successive one year periods ("Renewal Terms") unless either the
Company's Board of Directors (the "Board") or the Executive gives written notice
to the other at least 90 days prior to the end of the Initial Term or any
Renewal Term, as the case may be, of its or his intention not to renew the term
of this Agreement. The Initial Term and any Renewal Terms of this Agreement
shall be collectively referred to as the "Term." This Agreement will terminate
upon the first to occur of (a) the expiration of its Term, or (b) payment of all
sums due by the Company to the Executive hereunder in the event of a Change in
Control.
2. Definitions.
(a) Change in Control. A "Change in Control" shall mean a change in
ownership or control of the Company effected through any of the following
transactions:
(i) the direct or indirect acquisition by any person or related
group of persons (other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company) of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) of securities possessing more than 50% of the total
combined voting power of the
<PAGE> 2
Company's outstanding securities pursuant to a tender or exchange offer made
directly to the Company's stockholders or any other transaction, in any case
regardless of whether or not the Board recommends that the Company's
stockholders accept;
(ii) a change in the composition of the Board over a period of 36
consecutive months or less such that a majority of the Board members (rounded up
to the next whole number) ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such period by at
least a majority of the Board members described in clause (A) who were still in
office at the time such election or nomination was approved by the Board;
(iii) a merger or consolidation approved by the stockholders of
the Company, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 80% of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; or
(iv) the sale, transfer or other disposition (in one transaction
or a series of transactions) of all or substantially all of the assets of the
Company approved by the stockholders or the complete liquidation or dissolution
of the Company approved by the stockholders.
(b) Good Reason. "Good Reason" shall mean any of the
following if the same shall occur without the Executive's express prior written
consent:
(i) a material change by the Company in the Executive's function,
duties or responsibilities (including any requirement that the Executive report
to any person other than the Board) which would cause the Executive's position
with the Company to become of less dignity, responsibility and importance than
that associated with his functions, duties or responsibilities as of the date of
this Agreement;
(ii) the Executive's Base Salary is reduced by the Company;
(iii) relocation of the Executive's principal place of employment
to a place located outside of Maricopa County, Arizona; or
(iv) the failure by the Company to obtain the assumption by
operation of law or otherwise of this Agreement by any entity which is the
surviving entity in any merger or other form of corporate reorganization
involving the Company or by any entity which acquires all or substantially all
of the Company's assets.
3. Compensation Upon Termination Following Change in Control.
(a) The Executive shall be entitled to the following benefits upon a
termination of his employment (x) by the Company within one year following a
Change in Control or (y) by the Executive for Good Reason within one year
following a Change in Control:
(i) The Company shall pay to the Executive his full base salary
(the "Base Salary") through the date of termination at the greater of the rate
in effect at the time of
<PAGE> 3
termination or the rate in effect immediately prior to
the Change in Control (collectively, the "Base Rate"). In addition, the Company
shall pay to the Executive an amount (the "Severance Amount") equal to 1.1
multiplied by the sum of (A) one year's base salary at the Base Rate plus (B)
the greater of the Executive's target bonus in effect under the Company's
management bonus plan at the time of termination or the target bonus in effect
under the Company's management bonus plan immediately prior to the Change in
Control. The Company shall pay the Base Salary and the Severance Amount to the
Executive in cash in a lump sum no later than the thirtieth day following the
date of termination;
(ii) The Company shall maintain in full force and effect, for the
continued benefit of the Executive and his eligible beneficiaries, until the
first to occur of (A) his attainment of comparable benefits upon alternate
employment or (B) one year following the date of termination, the benefits
pursuant to Company-sponsored benefit plans, programs or other arrangements in
which the Executive was entitled to participate immediately prior to the Change
in Control, but only to the extent that the Executive's continued participation
is permitted under the general terms and provisions of such plans, programs and
arrangements;
(iii) The Company shall use reasonable efforts to continue in
effect for the benefit of the Executive all insurance or other provisions for
indemnification and defense of officers or directors of the Company which are in
effect on the date of the Change in Control with respect to all of his acts and
omissions while an officer or director as fully and completely as if such Change
in Control had not occurred, and until the final expiration or running of all
periods of limitation against actions which may be applicable to such acts or
omissions; and
(iv) Subject to Section 16 of the 1934 Act, all stock options and
other stock incentive awards which are not vested at the date of termination
shall vest in the Executive as of the date of termination and may be exercised
by the Executive in accordance with the terms of the plans and agreements
pursuant to which such options and other awards were issued.
(b) Notwithstanding anything herein to the contrary, if the
deductibility by the Company of any payments to be made to the Executive under
this Agreement would be limited by Section 280G (or any successor provision
thereto) of the Internal Revenue Code of 1986, as amended (the "Code"), the
payments to be made to the Executive hereunder shall automatically be limited to
an amount equal to the maximum amount that would otherwise be deductible by the
Company under Section 280G of the Code; provided, however, that if pursuant to a
final determination of a court of competent jurisdiction or an Internal Revenue
Service proceeding that, notwithstanding the good faith of the Executive and the
Company in applying the terms of this Agreement, any portion of the aggregate
payments made hereunder would not be deductible by the Company under Code
Section 280G, the Executive agrees to pay to the Company, upon demand, an amount
equal to the sum of (i) the portion of such amount that would not be deductible
by reason of Section 280G of the Code, and (ii) interest on the amount set forth
in clause (i) of this sentence at the Applicable Federal Rate (as defined in
Section 1274(d) of the Code) from the date of receipt of such excess payment
through the date of repayment.
4. No Assignments. This Agreement is personal to each of the parties
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party hereto, except
that this Agreement shall be binding upon and inure to the benefit of any
successor corporation to the Company.
(a) The Company shall use reasonable efforts to require any
successor (whether
<PAGE> 4
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
defined herein and any successor to its business and/or assets which assumes
this Agreement by operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable
by the Executive and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amount would still be payable to him hereunder
had he continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
5. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
6. No Employment Contract. This Agreement shall not constitute an
agreement or promise of employment by the Company.
7. Notices. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered personally or mailed by United
States certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other
addresses as either party may have furnished to the other in writing in
accordance herewith, except that notice of a change of address shall be
effective only upon actual receipt:
To the Company: ADFlex Solutions, Inc.
2001 West Chandler Boulevard
Chandler, Arizona 85224
Attention: V.P. Human Resources
To the Executive: Rolando C. Esteverena
11774 E. Terra Drive
Scottsdale, AZ 85259
8. Amendments or Additions. No amendments or additions to this
Agreement shall be binding unless in writing and signed by each of the parties
hereto.
9. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement, including without limitation any dispute over
whether a Good Reason has occurred, shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Phoenix, Arizona in accordance
with the rules of the American Arbitration Association then in effect. The
decision of the arbitrators shall be final and binding on the parties, and
judgment may be entered on the arbitrators' award in any court having
jurisdiction. The costs and expenses of such arbitration shall be borne in
accordance with the determination of the arbitrators. Notwithstanding any other
provision of this Agreement, if any dispute regarding the occurrence of a Good
Reason becomes subject to arbitration, the Company shall not be required to pay
any amounts to the Executive (except those amounts required by law) until the
completion of the arbitration and the rendering of
<PAGE> 5
the arbitrators' decision. The amounts, if any, determined by the arbitrators to
be owed by the Company to the Executive shall be paid within five days after the
decision by the arbitrators is rendered.
10. Miscellaneous. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. Any payments
provided for hereunder shall be paid net of any applicable withholding or other
employment taxes required under federal, state or local law.
11. Governing Law. The validity interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Arizona without regard to its conflicts of laws principles.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement on the date first indicated above.
THE COMPANY: EXECUTIVE:
ADFlex Solutions, Inc.,
a Delaware corporation
By: \s\ Charles Furniss \s\ Rolando C. Esteverena
---------------------------- ---------------------------------
Its: V. P. Human Resources Rolando C. Esteverena
<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,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (3,723) $(25,024) $ 8,596
Computation of shares used in net income
(loss) per share:
Weighted average common shares
outstanding 6,855 8,580 8,712
Incremental common equivalent
shares representing shares issuable
upon exercise of stock options
and warrants (1) -- -- 182
-------- -------- --------
Total weighted average shares - diluted 6,855 8,580 8,894
======== ======== ========
Total weighted average shares - basic 6,855 8,580 8,712
======== ======== ========
Net income (loss) per diluted common and
common equivalent share $ (.54) $ (2.92) $ 0.97
======== ======== ========
Net income (loss) per basic common and
common equivalent share $ (.54) $ (2.92) $ 0.99
======== ======== ========
</TABLE>
- --------
(1) Amount calculated using the treasury stock method and fair market values for
stock.
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ADFlex is a leading worldwide provider of flexible circuit interconnect
solutions to original equipment manufacturers (OEMs) in the electronics
industry. The Company offers a full range of customized flexible circuit
applications and services from initial design, development and prototype to
fabrication, assembly and test on a global basis. The Company targets
high-volume markets where miniaturization, form and weight are driving factors
and flexible circuits are an enabling technology. Applications for flexible
circuits currently addressed by the Company include notebook computers, portable
communication devices such as cellular telephones and pagers, data storage
devices such as hard disk drives (HDDs), tape drives and arrays, and high-end
consumer electronics products such as compact disk players. The Company's
principal customers include Compaq, Digital Equipment, IBM, Iomega, Motorola,
Nokia, Philips, Seagate, Storage Technology and other leading electronics OEMs.
The Company was organized under Delaware law in February 1993 to acquire the
flexible circuit fabrication operations of Rogers Corporation (Rogers). The
Rogers acquisition was consummated in June 1993. In December 1995, the Company
purchased ADFlex U.K., an advanced flexible circuit assembly company located in
Havant, England. The acquisition enabled the Company to offer its customers a
single source solution for their interconnect requirements that would shorten
their time to market and lower their costs. This acquisition also changed the
financial metrics of the Company because assembly businesses typically have
significantly lower gross margins than fabrication businesses. In connection
with the acquisition of ADFlex U.K., the Company had a one-time write-off of
$13.9 million for in-process technology during 1995.
In an effort to increase its global sourcing opportunities and to decrease its
operating costs, the Company expanded its worldwide manufacturing operations
with the establishment of a joint venture located in Lamphun, Thailand with Hana
Microelectronics (Hana) in August 1996. The joint venture, ADFlex Thailand
Limited (ATL), targets the production and testing of advanced chip-on-flex and
other surface mount technologies for flexible circuit assemblies. At inception,
ATL was 80% owned by the Company and 20% owned by Hana. The Company purchased
the remaining 20% equity interest in ATL from Hana in September 1997 for $0.5
million at closing and a promissory note in the principal amount of $2.8 million
payable by September 30, 1998. The Company has pledged the 20% interest in ATL
to Hana as security for payment of the Company's obligations under the note.
The Company provides flexible circuit interconnect products to a diverse group
of markets. Historically, the HDD market has represented the largest component
of the Company's sales at 43.0%, 61.8% and 50.7% of total sales for 1997, 1996
and 1995, respectively. Through new market expansion efforts, the Company is
continuing its efforts to reduce the impact of the cyclicality of the HDD
industry on its business. However, net sales attributable to this market are
expected to continue to represent the largest component of total sales for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry would likely have a material adverse effect on the
Company's operating results.
During 1996, the Company's U.K. operations experienced a substantial reduction
in net sales from levels maintained in the latter part of 1995, primarily
related to a decrease in its HDD business. The reduction in net sales resulted
in decreased capacity utilization. Additionally, manufacturing yields on certain
new parts related to magneto-resistive (MR) recording technology in the third
quarter of 1996 were substantially lower than anticipated by the Company. As a
result of lower revenues, under-utilized capacity and the resulting negative
financial performance, the Company began restructuring its volume assembly
operations in the U.K. and transferring these operations to Thailand during the
third quarter of 1996. As part of this restructuring, the Company recorded the
following in the third quarter of 1996: $13.5 million write-off of intangible
assets, $8.8 million write-down of property, plant and equipment and $6.9
million in employee and lease termination charges. Through December 31, 1997,
the Company paid and charged to the liability $5.8 million related to employee
and lease termination costs. In addition, the Company reallocated $0.8 million
of the reserve for employee and lease termination costs to be used for
additional write-down of property, plant and equipment. The remaining accrual
for employee termination costs is approximately $0.3 million which the Company
believes is adequate to cover the remaining liabilities.
The transfer of the Company's U.K. assembly operations to Thailand was completed
during the third quarter of 1997. Initial shipments from Thailand began in the
fourth quarter of 1996 and the Company reached volume production in the third
quarter of 1997. No assurances can be given that the Company will sustain the
benefits anticipated due to the lower cost structure of the Thailand operations.
The Company maintains a technology and pilot production facility and a sales and
<PAGE> 2
service organization in the U.K. to support its European customers.
RESULTS OF OPERATIONS
NET SALES
Net sales for the year ended December 31, 1997 increased $57.0 million or 36.4%
over the same period in 1996. For the twelve month period ending December 31,
1997, the Company experienced a 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 facility during
the year ended December 31, 1997 with sales for the year of $28.5 million. Net
sales for the twelve months ended December 31, 1996 were negatively impacted by
program delays involving new MR recording technology among customers in the HDD
market. As high-end, high-capacity drives utilize advanced assembly technology,
specifically chip-on-flex (the primary specialty of ADFlex U.K.), the decrease
in sales primarily impacted the Company's U.K. facility. In addition, the
Company experienced a slow down for mature products and order cancellations from
certain major customers in 1996. The Company experienced an increase in net
sales of $55.7 million, or 55.0%, 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 1996 decreased by 1.0% as compared to 1995.
Customer structural and strategic changes and the delay in MR technology
resulted in net sales in 1996 at ADFlex U.K. substantially below levels
experienced in the latter part of 1995.
GROSS PROFIT
Gross profit as a percentage of net sales (gross margin) for the year ended
December 31, 1997 was 17.8% as compared to 11.8% and 27.7% for the same periods
in 1996 and 1995, respectively. For the year ended December 31, 1997, the
Company's gross profit was positively impacted by the benefits associated with
the transfer of production from the U.K. to Thailand which provides a lower cost
structure. These benefits were partially offset by decreased utilization of
capacity in the U.K. operations. The transfer was complete in the third quarter
of 1997.
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 in 1996. 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 1996. 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 1996.
The Company's flexible circuit fabrication operations located in the U.S. and
Mexico also experienced a decline in gross margins during 1996. The lower than
anticipated net sales resulting from customer structural and strategic 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.
OPERATING EXPENSES
Engineering, research and development expenses were $8.0 million, $7.4 million
and $4.5 million for 1997, 1996 and 1995, respectively, representing 3.7%, 4.7%
and 4.5% of net sales for those same years. Selling, general and administrative
expenses were $15.4 million, $13.3 million and $9.1 million for 1997, 1996 and
1995 respectively representing 7.2%, 8.5% and 9.0% of net sales for those same
years. The increase in sales volume during the 1997 period outpaced the
Company's growth in such expenses, reflecting the Company's strategy of seeking
sales growth while maintaining or reducing operating expenses as a percentage of
net sales. In addition, selling, general and administrative expenses were
positively impacted by the transfer of production from the U.K. to Thailand
which affords a lower cost for this type of expense. These benefits were
partially offset by a $0.3 million write-off in the fourth quarter of 1997 for
costs incurred in connection with a proposed public offering of Common Stock
which was withdrawn due to unfavorable market conditions.
The increase in engineering, research and development expenses in 1996 is due to
the addition of ADFlex U.K., whose advanced assembly technology required 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 of
such expenses in periods of lower than
<PAGE> 3
anticipated, assembly-related net sales. In 1995, engineering, research and
development expenses as a percentage of sales decreased due to the Company's
ability to maintain expense levels in periods of increasing sales.
The decrease in selling, general and administrative expenses as a percentage of
net sales in both 1996 and 1995 reflects the Company's ability to obtain
increased leverage of such expenses in periods of increasing sales.
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.
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
those operations from the U.K. to the Company's manufacturing facility in
Lamphun, Thailand. As part of this restructuring, the Company recorded the
following charges: $13.5 million write-off in intangible assets, $8.8 million
write-down of property, plant and equipment and $6.9 million in employee and
lease termination charges. As of December 31, 1997, the Company has paid out
$5.8 million in employee and lease termination costs. Through December 31, 1997,
the Company paid and charged to the liability $5.8 million related to employee
and lease termination costs. In addition, the Company reallocated $0.8 million
of the reserve for employee and lease termination costs to be used for
additional write-down of property, plant and equipment. The remaining accrual
for employee termination costs is approximately $0.3 million, which the Company
believes is adequate to cover the remaining liabilities.
INTEREST AND OTHER INCOME/EXPENSE
The increase in interest expense for 1997 includes $0.3 million of interest
expense on the subordinated debenture and $1.7 million of interest expense
related to borrowings under the Company's line of credit, term loan and capital
lease obligations. The increase in interest expense for 1996 represents $0.8
million of interest expense on the subordinated debenture and $0.7 million of
interest expense related to borrowings on the line of credit and capital lease
obligations. 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.
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, Thailand and U.K. subsidiaries.
INCOME TAXES
The Company's effective tax rate increased from 28% to 32% for the second half
of 1997 in order to reach an estimated annual rate of 31% based upon projected
profit levels at each of the Company's entities. As the actual rate for each
entity varies in accordance with the taxing authority in whose jurisdiction it
resides, a significant change in operating income at any one location can result
in a change in the overall effective tax rate for the Company. The Company
monitors the effective tax rate on a continuous basis and makes adjustments as
conditions warrant.
The Company has recorded deferred tax assets of $4.4 million, for which no
valuation allowance has been established. The Company believes that future
levels of taxable income will, more likely than not, be sufficient to realize
the tax benefit.
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%. 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 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
issued a 90-day letter in January 1998 proposing adjustments to the Company's
income and tax credits for the year, which would result in an additional
assessment of $1.6 million, excluding interest. The major proposed adjustment
relates to the allocation of the purchase price of assets obtained from Rogers
and 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
currently contesting these adjustments. 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.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
The Company has financed its growth and operations to date primarily through
cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working
<PAGE> 4
capital, funding of capital expenditures and investment in ADFlex U.K. and ATL.
At December 31, 1997, cash and cash equivalents totaled $9.1 million and working
capital was $25.0 million. At December 31, 1996, cash and cash equivalents
totaled $6.1 million and working capital was $9.1 million.
BANK FINANCING
In June 1997, the Company entered into a new credit facility arranged by
BancBoston Securities, Inc. 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 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
662/3% 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 December
31, 1997. The credit facility prohibits the payment of dividends. At December
31, 1997, $25.0 million was outstanding under the term loan and $7.0 million was
outstanding under the revolving line of credit.
Subsequent to December 31, 1997, the Company amended its existing credit
facility to more adequately meet its working capital requirements. The amended
credit facility increases the existing revolving line of credit from $20.0
million to $25.0 million. In addition, the existing $25.0 million term loan is
replaced with a $35.0 million term loan. The $35.0 million term loan requires
equal principal payments of $1.8 million each quarter beginning with the quarter
ending December 31, 1998 through the quarter ending December 31, 1999,
increasing to equal principal payments of $2.2 million each quarter thereafter
with the last payment due December 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 credit facility, any outstanding balance
bears interest at BankBoston, N.A.'s prime interest rate or LIBOR plus an
applicable margin ranging from 1.25% 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 662/3% 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. The amended credit facility prohibits the payment of
dividends.
CASH FLOW
During 1997, the Company generated $4.6 million of cash from operations compared
to $4.4 million and $19.2 million for the same periods in 1996 and 1995,
respectively. Net income (loss) was $8.6 million, ($25.0) million and ($3.7)
million for the same periods, respectively. The Company experienced a net loss
of $25.0 million for the twelve months ended December 31, 1996 principally due
to a $29.2 million charge (pre-tax) 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 twelve month period ended December 31,
1997, the Company paid $5.8 million of the accrued restructuring charges for
employee and lease terminations. In 1997, working capital increased 175% to
$25.0 million from $9.1 million primarily as a result of increased business
activity and the start-up of a new manufacturing facility in Thailand. 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.
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 $3.8 million and $4.4 million,
respectively, in support of the increased sales volumes and a change in the
product mix towards parts with a higher material content. Payables and accrued
liabilities increased $14.9 million due primarily to the recognition of a $12.4
million payable in conjunction with the ADFlex U.K. acquisition.
The 1997 results reflect $0.1 million of amortization expense for intangible
assets related to the acquisition of Hana's 20% interest in ATL. The 1996
results reflect $2.4 million of amortization expense for intangible assets
related to the ADFlex U.K. acquisition. The remaining intangible assets acquired
in the U.K. acquisition were written off in the third quarter 1996 as part of
the U.K. restructuring.
<PAGE> 5
Cash totaling $15.0 million was used in 1997 for investing activities compared
with $25.7 million and $14.0 million for the same periods in 1996 and 1995,
respectively. Capital expenditures for the twelve months ended December 31, 1997
were $14.5 million compared with $13.8 million and $20.6 million for the same
periods in 1996 and 1995, respectively as the Company continued to invest in
property, plant and equipment for its North America and Thailand operations.
Capital expenditures during the periods were financed from existing cash
balances and from borrowings under the Company's bank line of credit. 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.
Financing activities in 1997 provided the Company with $13.4 million compared
with $11.6 million and $6.5 million in 1996 and 1995, respectively. From the
proceeds of the $25.0 million term loan arranged in 1997, discussed above,
approximately $7.5 million in principal plus $2.0 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 line of credit. Net repayments on the Company's bank
line of credit totaled $3.0 million during the twelve months ended December 31,
1997 compared to net borrowings of $10.0 million for the same period in 1996.
Borrowings on the line of credit were used to finance working capital
requirements and capital expenditures as discussed above. The Company generated
$2.0 million, $1.8 million and $6.6 million in the twelve months ended December
31, 1997, 1996 and 1995, respectively, through sales of its Common Stock.
During the year ended December 31, 1997, the Company paid $0.5 million at
closing and issued a note in the principal amount of $2.8 million payable at
various dates through September 30, 1998 in connection with the acquisition of
Hana's 20% interest in ATL. At December 31, 1997, $2.3 million was outstanding
under the note.
During 1997, the Company invested $2.5 million for the purchase of land in
Thailand. The Company currently expects to spend approximately $32.5 million on
capital expenditures to support expansion of worldwide manufacturing operations
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, funds generated from operations and borrowings under its existing line
of credit will be sufficient to permit the Company to meet its liquidity and
expansion requirements for the next twelve months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASO issued Statement of Financial Accounting Standards
(SAFES) No. 130, Reporting Comprehensive Income, which is required to be adopted
in the first quarter of 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes certain non-owner changes in equity which are currently excluded
from net income. Because the Company historically has not experienced
transactions which would be included in comprehensive income, adoption of SFAS
No. 130 is not expected to have a material effect on the consolidated financial
position, results of operations or cash flows of the Company.
OTHER MATTERS
FOREIGN OPERATIONS
The Company's primary finishing and assembly facilities are located in Agua
Prieta, Mexico and Lamphun, Thailand and the Company maintains a technology and
pilot production facility in Havant, England. 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.
While the Company transacts business predominately in U.S. Dollars and most of
its net sales are collected in U.S. Dollars, a portion of its sales and expenses
are denominated in other currencies. Changes in the relation of other currencies
to the U.S. Dollar will affect the Company's cost of goods sold and operating
margins and could result in exchange losses. In order to reduce the impact of
certain foreign currency fluctuations, the Company began entering into
short-term forward
<PAGE> 6
foreign currency exchange contracts (hedges) in December 1997 in the regular
course of business to manage its exposure. The forward exchange contracts
generally require the Company to exchange U.S. Dollars for foreign currencies at
maturity, at rates agreed to at inception of the contracts. The gains or losses
on hedges of transaction exposure are included in income in the period in which
the exchange rates change. The gains and losses on unhedged foreign currency
transactions are included in income. To date, the Company's hedging activity has
been immaterial. No assurance can be given that the Company's hedging strategies
will prevent future currency fluctuations from adversely affecting the Company's
business, financial condition, results of operations and cash flows.
During 1997, the Thai Baht experienced significant devaluation in relation to
the U.S. Dollar. As the majority of the sales and expenses for the Thailand
operation are denominated in U.S. Dollars, the devaluation did not have a
significant impact on the results of operations of the Company for the year
ended December 31, 1997. No assurance can be given that future currency
fluctuations will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
CONCENTRATION RISK
The Company's results of operations have fluctuated in the past and may continue
to fluctuate from period to period in the future, including on a quarterly
basis. Variations in orders and in the mix of products sold by the Company have
significantly impacted net sales and gross profit. Operating results generally
also may be affected by other factors, including the receipt and shipment of
large orders, plant utilization, product mix, manufacturing process yields, the
timing of expenditures in anticipation of future sales, raw material
availability, product and price competition, the length of sales cycles and
economic conditions in the electronics industry. Many of these factors are
outside the control of the Company. Historically, the Company has encountered
operating constraints in the fourth quarter as typical product life cycles lead
to volume production peak in demand in the second and third quarters.
The Company provides flexible interconnect products to a diverse group of
markets. Through new market expansion efforts, the Company is continuing its
efforts to reduce its dependence on the HDD market; however, net sales
attributable to this market are expected to continue to represent the largest
portion of net sales for the foreseeable future.
Sales to two HDD customers accounted for 33.4% of net sales for 1997. The loss
of either customer, or a substantial reduction in orders by any significant
customer, including restriction due to market, competitive or economic
conditions, could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
SOFTWARE LICENSE AGREEMENT
Subsequent to the end of the fiscal year, the Company entered into an agreement
with SAP America, Inc. (SAP) to license the rights to SAP's proprietary R/3
software. The software will replace the Company's current manufacturing/cost
control systems and the Company anticipates completing the conversion in late
1998. The total cost of implementing the new system, including software,
implementation, hardware and training, is expected to be $4.9 million. The cost
of acquiring and implementing the new system will be recorded as an asset by the
Company and amortized over its estimated benefit period.
IMPACT OF YEAR 2000
The Year 2000 Issue is a result of computer programs being written using two
digits rather than four to define the applicable year which, if left
uncorrected, could result in a system failure or miscalculations causing
disruptions of operations. Although the Company's current manufacturing/cost
control system does not function properly with respect to dates from the year
2000, the SAP R/3 software, which the Company plans to implement in 1998, will
function properly with respect to dates in the year 2000 and beyond. In
addition, the Company has evaluated the software associated with its
manufacturing equipment and has concluded that there is no material exposure to
contingencies related to the Year 2000 Issue. Therefore, the Company does not
believe that the Year 2000 Issue will have a material impact on the operations
of the Company. There can be no assurances that the systems of customers,
suppliers and other companies on which the Company relies will be timely
converted and will not have an adverse effect of the Company's systems or
operations.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has conducted
environmental studies of its facility in Chandler, Arizona, which discovered a
limited amount of 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
<PAGE> 7
have a material adverse impact on the Company. Pursuant to the agreements
governing the acquisition of the flexible circuit fabrication operations of
Rogers, Rogers has retained all environmental liabilities relating to the
purchased assets prior to the closing date. While Rogers currently has
sufficient assets to fulfill its obligations under the acquisition agreements,
if environmental liabilities requiring remediation are discovered and the
Company was unable to enforce the acquisition agreement against Rogers, the
Company could become subject to costs and damages relating to such environmental
liabilities. Any such costs and damages imposed on the Company could materially
adversely affect the Company's business, financial condition and 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 there is contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the sellers submitted a remediation plan to the appropriate Mexican
authorities, which was approved in May 1997. Subsequent remediation was
completed in December 1997.
The Company is now awaiting final closure of the issue by the Mexican
government. The seller's obligation for the cost of remediation is limited to
$2.5 million. A total of $1.0 million is held in escrow pending the seller's
performance of their environmental obligations under the agreement. The escrow
balance will be refunded to the seller upon closure of the issue by the Mexican
authorities with certification that no further action is required. Given the
uncertainties associated with environmental contamination, including possible
claims by third parties in the U.S., 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.
"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 adversely affect operating results;
the risk that growth in demand for products that use flex, and the corresponding
demand for flex, will not continue to increase as anticipated; the risk that the
Company's fully integrated one-stop-shop strategy will continue to be accepted
by customers, and the risk that competitors may seek to duplicate this strategy,
which could materially adversely affect operating results; the risk that the
Company's transition of manufacturing to Thailand will not result in
sustainable, 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; 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 the Company's implementation of a new
manufacturing/cost control system will not occur as scheduled or that such
implementation will not resolve the Company's Year 2000 Issue; the risk that
other systems on which the Company relies, such as suppliers and customers, will
not function properly with respect to dates in the year 2000 and thereafter; 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 from time
to time in the Company's Securities and Exchange Commission filings.
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- ----------------------- ---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,092 $ 6,097
Accounts receivable, net 31,581 25,149
Other receivables 1,167 1,475
Inventories 19,297 14,990
Deferred tax assets -- 2,505
Prepaid taxes 2,951 795
Prepaid expenses and other current assets 1,400 303
--------- ---------
Total current assets 65,488 51,314
Property, plant and equipment, net 42,257 34,297
Intangible assets 2,449 --
Deferred tax assets 5,481 7,546
Other assets 24 24
$ 115,699 $ 93,181
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 7,000 $ 10,000
Notes payable 2,250 --
Accounts payable 22,692 19,882
Accrued liabilities 6,548 9,679
Current portion of long-term debt and capitalized leases 1,959 2,651
--------- ---------
Total current liabilities 40,449 42,212
Accrued restructuring charges, non-current -- 2,500
Deferred tax liabilities 1,113 --
Long-term debt and capitalized leases 23,230 7,689
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;
8,768,472 and 8,633,508 issued and outstanding at
December 31, 1997 and 1996, respectively 88 86
Additional paid-in capital 62,562 60,542
Retained earnings (deficit) (11,743) (20,339)
Total stockholders' equity 50,907 40,289
$ 115,699 $ 93,181
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 9
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales $ 213,878 $ 156,836 $ 101,163
Cost of sales 175,826 138,273 73,108
--------- --------- ---------
Gross profit 38,052 18,563 28,055
Operating expenses:
Engineering, research & development 7,990 7,366 4,548
Write-off of in-process technology -- -- 13,920
Amortization of intangible assets 129 2,386 --
Selling, general & administrative 15,353 13,254 9,119
Restructuring charges -- 29,248 --
--------- --------- ---------
Total operating expenses 23,472 52,254 27,587
Operating income (loss) 14,580 (33,691) 468
Interest income 218 223 973
Interest expense (2,102) (1,511) (101)
Other income (loss), net (101) 92 64
Minority interest in earnings of consolidated joint venture (181) 109 --
--------- --------- ---------
Income (loss) before income taxes 12,414 (34,778) 1,404
Income taxes 3,818 (9,754) 5,127
--------- --------- ---------
Net income (loss) $ 8,596 $ (25,024) $ (3,723)
--------- --------- ---------
Net income (loss) per share:
Basic $ 0.99 $ (2.92) $(0.54)
Diluted $ 0.97 $ (2.92) $(0.54)
--------- --------- ---------
Common and common equivalent shares used
in the calculation of net income (loss) per share:
Basic 8,712 8,580 6,855
Diluted 8,894 8,580 6,855
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 10
CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings Total
(in thousands, except share amounts) Shares Amount Capital (Deficit) Equity
- ------------------------------------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 6,564,312 $ 65 $ 29,291 $ 8,408 $ 37,764
Issuance of common stock through employee
stock purchase plan and exercise of stock
options, including tax benefit of $340 238,153 3 1,104 -- 1,107
Issuance of common stock, net of
offering costs of $273 237,500 3 5,453 -- 5,456
Issuance of common stock in connection
with ADFlex U.K. acquisition 1,242,347 12 22,938 -- 22,950
Net loss -- -- -- (3,723) (3,723)
--------- --------- --------- --------- --------------
Balance at December 31, 1995 8,282,312 83 58,786 4,685 63,554
--------- --------- --------- --------- --------------
ISSUANCE OF COMMON STOCK THROUGH EMPLOYEE
STOCK PURCHASE PLAN AND EXERCISE OF STOCK
OPTIONS, INCLUDING TAX BENEFIT OF $665 351,196 3 1,756 -- 1,759
NET LOSS -- -- -- (25,024) (25,024)
--------- --------- --------- --------- --------------
BALANCE AT DECEMBER 31, 1996 8,633,508 86 60,542 (20,339) 40,289
--------- --------- --------- --------- --------------
ISSUANCE OF COMMON STOCK THROUGH EMPLOYEE
STOCK PURCHASE PLAN AND EXERCISE OF STOCK
OPTIONS, INCLUDING TAX BENEFIT OF $402 134,964 2 2,020 -- 2,022
NET INCOME -- -- -- 8,596 8,596
--------- --------- --------- --------- --------------
BALANCE AT DECEMBER 31, 1997 8,768,472 $ 88 $ 62,562 $ (11,743) $ 50,907
--------- --------- --------- --------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 8,596 $ (25,024) $ (3,723)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,622 8,208 2,288
Write-off of in-process technology -- -- 13,920
Restructuring charges -- 29,248 --
Loss on disposal of assets -- 184 --
Minority interest 181 -- --
Deferred taxes 5,683 (9,772) 656
Changes in operating assets and liabilities:
Accounts receivable (6,432) (9,557) (3,831)
Inventories (4,307) 1,834 (4,406)
Prepaid expenses and other current assets (2,945) (2,029) (587)
Payables and accrued liabilities (2,821) 11,347 14,913
--------- --------- ----------
Net cash provided by operating activities 4,577 4,439 19,230
INVESTING ACTIVITIES:
Capital expenditures (14,462) (13,763) (20,636)
Purchase of net assets in ADFlex U.K. acquisition -- -- (12,375)
Decrease (increase) in other assets -- (10) 83
Decrease in acquisition payable -- (12,375) --
Investment in joint venture (491) 491 --
Sales of available-for-sale investment securities -- -- 396,074
Purchases of available-for-sale investment securities -- -- (377,156)
--------- --------- ----------
Net cash used in investing activities (14,953) (25,657) (14,010)
FINANCING ACTIVITIES:
Issuance of common stock, net of expenses 2,022 1,759 6,563
Net activity on line of credit (3,000) 10,000 --
Payments on capitalized lease obligations (151) (143) (109)
Payments on current notes payable (500) -- --
Payments on long-term debt (10,000) -- --
Proceeds from issuance of long-term debt 25,000 -- --
--------- --------- ----------
Net cash provided by financing activities 13,371 11,616 6,454
Net increase (decrease) in cash and cash equivalents 2,995 (9,602) 11,674
Cash and cash equivalents at beginning of year 6,097 15,699 4,025
--------- --------- ----------
Cash and cash equivalents at end of year $ 9,092 $ 6,097 $ 15,699
--------- --------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 2,714 $ 665 $ 68
Income taxes 520 1,409 4,849
Issuance of common stock in connection with ADFlex
U.K. acquisition -- -- 22,950
Issuance of subordinated debenture in connection
with ADFlex U.K acquisition -- -- 10,000
Issuance of notes payable in connection with acquisition
of Hana interest in ATL 2,750 -- --
--------- --------- --------------
</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. (the Company) is a worldwide provider of flexible circuit
interconnect solutions to original equipment manufacturers in the electronics
industry. The Company offers customized flexible circuit applications and
services from initial design, development and prototype to fabrication, assembly
and test on a global basis. The Company targets high-volume markets where
miniaturization, form and weight are driving factors and flexible circuits are
an enabling technology. Applications for flexible circuits currently addressed
by the Company include notebook computers, portable communication devices such
as cellular telephones and pagers, data storage devices such as hard disk
drives, tape drives and arrays, and high-end consumer electronics products such
as compact disk players. 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), was 80%
owned by the Company. On September 26, 1997, the Company acquired the 20%
interest held by Hana (See Note 3). Hana's 20% interest in ATL and ATL's
earnings through September 26, 1997 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.
FISCAL YEAR
The Company has a fiscal year that ends the last Sunday in December. Fiscal
years 1997, 1996 and 1995 ended on December 28, December 29 and December 31,
respectively. Activity from the end of the reporting period to December 31 is
immaterial for all years reported.
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.
FOREIGN EXCHANGE INSTRUMENTS
In December 1997, the Company began entering into short-term forward foreign
currency exchange contracts in the regular course of business to manage its
exposure against foreign currency fluctuations, primarily relating to
nonfunctional currency monetary assets and liabilities. The forward exchange
contracts generally require the Company to exchange U.S. Dollars for foreign
currencies at maturity, at rates agreed to at inception of the contracts. The
gains or losses on hedges of transaction exposure are included in income in the
period in which the exchange rates change. The gains and losses on unhedged
foreign currency transactions are included in income. To date, the Company's
hedging activity 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 electronics industry.
The Company has adopted credit policies and standards to accommodate the
electronics 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).
<PAGE> 13
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets which range from three to 40 years. The Company uses
accelerated methods for computing depreciation for tax purposes.
INTANGIBLE ASSETS
Intangible assets including completed technology and work force in place were
acquired in connection with the acquisition of ADFlex U.K. At September 30,
1996, as part of a restructuring plan for the Company's assembly operations in
the U.K., all remaining intangible assets acquired in the ADFlex U.K.
acquisition were written off. The assets were being amortized over their
estimated useful lives of five years prior to the write-off.
In connection with the acquisition of Hana's 20% interest in ATL in September
1997, the Company recorded goodwill which is being amortized over its estimated
useful life of five years.
The recoverability of intangible assets attributable to the Company's
acquisitions is analyzed periodically based on actual and projected levels of
profitability and cash flows of the operations acquired on an undiscounted
basis. Based on its most recent analysis, the Company believes that no material
impairment of intangible assets exists at December 31, 1997.
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
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
that the Company disclose estimated fair values of financial instruments. Cash
and cash equivalents, accounts receivable, borrowings under the Company's line
of credit, notes payable, accounts payable, accrued liabilities, capitalized
leases and accrued restructuring charges are carried at amounts that reasonably
approximate their fair values. The Company's long-term debt bears interest at a
variable interest rate which approximates current market interest rates;
therefore, the Company believes that long-term debt approximates its fair value.
The fair value of short-term foreign exchange contracts is based on exchange
rates at the end of the fiscal year.
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of .
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company recognized a
charge under SFAS No. 121 in connection with the restructuring of its U.K.
operations (see Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
Income taxes are provided using the liability method based upon the provisions
of SFAS No. 109, Accounting for Income Taxes.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees,
and accordingly, recognizes no compensation expense for stock option grants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income, which is required to be adopted in the
first quarter of 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components. Comprehensive income
includes certain non-owner changes in equity which are currently excluded from
net income. Because the Company historically has not experienced transactions
which
<PAGE> 14
would be included in comprehensive income, adoption of SFAS 130 is not expected
to have a material effect on the consolidated financial position or results of
operations or cash flows of the Company.
NET INCOME (LOSS)
In February, 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No. 128 requirements. The difference in common equivalent
shares used in the computation of basic and diluted earnings per share is
primarily due to the inclusion of stock options in the dilutive computations,
unless they were anti-dilutive.
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 for a total purchase price of $45.3 million, together with the direct
costs of the transaction incurred for investment brokers, professional fees and
direct incremental transaction costs of $1.9 million. 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.
On September 29, 1996, the Company's Board of Directors approved a plan to
restructure, over the next twelve months, the Company's assembly operation in
the U.K., and during that time period, transfer production from the U.K. to the
Company's manufacturing facility in Thailand. Accordingly, the Company recorded
the following: $13.5 million write-off of intangible assets, $8.8 million
write-down of property, plant and equipment, $2.5 million in lease termination
charges and $4.4 million in employee termination costs for 507 direct labor,
technical and administrative employees. As of December 31, 1996, $0.3 million of
the employee termination charges related to 13 employees had been paid and
charged against the liability. As of December 31, 1997, production has ceased at
the U.K. facility. During the twelve months ended December 31, 1997, the Company
paid and charged to the liability $5.5 million related to termination costs for
124 employees and lease termination costs. In addition, the Company reallocated
$0.8 million of the reserve for employee and lease termination costs to be used
for additional write-down of property, plant and equipment. The remaining
accrual for employee termination costs is approximately $0.3 million and the
Company believes it is adequate to cover the remaining liabilities. Total
revenue and total operating income related to this operation for the year ended
December 31, 1997 was $38.4 million and $0.5 million, respectively. Total
revenue and operating loss related to this operation for the year ended December
31, 1996 was $62.8 million and $38.5 million, respectively. Subsequent to the
restructuring, the Company maintains a technology development center and a sales
and service organization in the U.K. to support its European customers.
NOTE 3 ADFLEX THAILAND
In an effort to increase its global sourcing opportunities and to decrease its
operating costs, the Company established a joint venture, ATL, located in
Lamphun, Thailand with Hana in August 1996. On September 26, 1997, the Company
increased its ownership 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 issued a note in the principal amount
of $2.8 million payable at various dates through September 30, 1998. The Company
has pledged the 20% interest in ATL to Hana as security for the payment of the
Company's obligations under the note. At December 31, 1997, $2.3 million was
outstanding under the note. Goodwill related to the excess purchase price over
fair value of the net tangible assets acquired of $2.5 million, net of
accumulated amortization of $0.1 million at December 31, 1997, is being
amortized on a straight-line basis over five years.
NOTE 4 ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C>
Accounts receivable trade $ 33,331 $ 25,760
Allowance for returns and doubtful accounts (1,750) (611)
$ 31,581 $ 25,149
--------- ---------
</TABLE>
NOTE 5 INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Raw material $ 12,688 $ 9,221
Work-in-process 8,849 7,022
Finished goods 595 148
21,132 16,391
Allowance for obsolescence and excess inventory (2,835) (1,401)
$ 19,297 $ 14,990
--------- ---------
</TABLE>
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Land $ 2,916 $ 423
Buildings 10,669 9,800
Leasehold improvements 4,312 3,999
Manufacturing equipment 34,279 26,439
Computer and office equipment 2,608 1,777
--------- ---------
54,784 42,438
Accumulated depreciation and amortization of capitalized lease obligations (12,527) (8,141)
$ 42,257 $ 34,297
--------- ---------
</TABLE>
Depreciation expense, including the amortization of capitalized lease
obligations, was $6.5 million, $5.8 million and $2.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
NOTE 7 LINE OF CREDIT AND LONG-TERM DEBT
Prior to February 18, 1997, the Company had 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). Any outstanding balance bore 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%.
On June 5, 1997, the Company entered into a new 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 credit facility, 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 662/3% 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 December 31, 1997.
The credit facility prohibits the payment of dividends. At December 31, 1997,
$25.0 million was outstanding under the term loan and $7.0 million was
outstanding under the revolving line of credit. The weighted average interest
rate at December 31, 1997 for the revolving line of credit was 8.5%. Of the
proceeds from the $25.0 million term loan, approximately $7.5 million in
principal plus $2.0 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.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C>
Term loan agreement payable beginning December, 1998 in fourteen equal quarterly installments;
interest at LIBOR + margin ranging from 1.50% to 2.25% (7.5% at December 31, 1997) $ 25,000
Subordinated debenture issued in connection with the ADFlex U.K. acquisition;
interest at LIBOR + 2.5%; (7.3% at December 31, 1996) -- 10,000
Capitalized lease obligations 189 340
-------- --------
25,189 10,340
Less current maturities (1,959) (2,651)
$ 23,230 $ 7,689
-------- --------
</TABLE>
The Company also was contingently liable at December 31, 1996 for $0.2 million
related to outstanding letters of credit guaranteeing the Company's performance
on certain contracts. The Company was not liable for any outstanding letters of
credit at December 31, 1997.
NOTE 8 ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Salaries and benefits $3,259 $2,830
Income taxes payable -- 170
Accrued interest 138 864
Accrued restructuring charges, current 339 4,187
Accrued relocation 429 --
Accrued commissions 346 278
Deferred tax liability, current 385 --
Other 1,652 1,350
$6,548 $9,679
------ ------
</TABLE>
NOTE 9 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, 1997, no
shares of preferred stock have been issued.
Common Stock
The number of shares of Common Stock reserved for future issuance at December
31, 1997, was as follows:
<TABLE>
<S> <C>
Employee and director stock options outstanding 686,254
Reserved for future grants under the 1994 Stock Incentive Plan
130,984
1994 director stock options outstanding 36,000
Reserved for issuance under the Employee Stock Purchase Plan
288,886
Total reserved for future issuance 1,142,124
---------
</TABLE>
In conjunction with the ADFlex U.K. acquisition, the Company issued 1,242,347
shares of restricted Common Stock. The holder agreed not to sell or otherwise
dispose of the shares for a two year period, which ended in January 1998.
STOCK OPTION PLANS
The Company has elected to follow APB No. 25, Accounting for Stock Issued to
Employees, in accounting for its employee stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
Accounting and Disclosure of Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Under the Company's 1993 Equity Incentive Plan (1993 Plan) adopted June 29,
1993, qualified employees received options to purchase 599,000 shares of Common
Stock. The options granted under this Plan were to vest over approximately four
<PAGE> 17
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 1997, 259,005 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 vest over a four year period from either the date of
grant or one year from the date of grant, and automatic options granted to
directors vest over a three year period from the date of grant.
On July 2, 1997, the Company canceled 92,250 options held by certain employees
issued under the 1994 Plan with an exercise price per share of $27.25 and
granted 92,250 options with an exercise price per share of $14.88 to the same
employees. The new options started a new vesting schedule over a four year
period from the new date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Schools
pricing model with the following weighted-average assumptions for 1997:
risk-free interest rates of 5.24%, dividend yields of 0%, volatility factor of
the expected market price of the Company's Common Stock of .644 and a
weighted-average expected life of the option of 5 years. The assumptions used in
both 1996 and 1995 were: 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-Schools option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $ 7,262 $ (25,962) $ (3,970)
Pro forma net income (loss) per basic share 0.83 (3.03) (0.58)
Pro forma net income (loss) per diluted share 0.82 (3.03) (0.58)
--------- --------- --------
</TABLE>
The effects of applying SFAS No. 123 for the years ended December 31, 1997, 1996
and 1995 are not likely to be representative of the effects on reported net
income for future years. A summary of the Company's stock option activity, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Year ended December 31, Options Price Options Price Options Price
- ----------------------- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 555,162 $ 14.52 634,363 $ 12.18 623,400 $ 4.20
Granted 400,750 15.78 317,725 10.55 198,250 27.00
Exercised (67,150) 10.74 (260,612) 0.77 (185,437) 0.85
Forfeitures/Expirations (204,001) 19.74 (136,314) 19.74 (1,850) 16.00
------- --------- ------- --------- ------- --------
Outstanding - end of year 684,761 14.08 555,162 14.52 634,363 12.18
Exerciseable at year end 136,460 $ 11.92 149,608 $ 15.31 335,534 $ 2.03
------- --------- ------- --------- ------- --------
</TABLE>
<PAGE> 18
<TABLE>
<S> <C> <C> <C>
Weighted-average fair value of
options granted during the year:
Incentive Stock Options granted
under the 1994 Plan $ 8.93 $ 6.87 $ 16.86
Non-qualified Stock Options granted
under the 1994 Plan $ 10.00 $ 5.93 $ 16.55
--------- -------- ---------
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.50 to $27.25. The weighted-average remaining contractual life of those
options is 8.9 years.
DIRECTOR STOCK OPTIONS
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. On November 20, 1996, the Company granted
an option to purchase 12,000 shares of Common Stock at an exercise price of
$8.00 per share to a newly appointed outside director. The option vests over a
four year period. On April 22, 1997, the Company granted two outside directors
an option to purchase 3,000 shares of Common Stock each at an exercise price of
$14.00. The options vest over a three year period.
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. On April 22, 1997, the
Company adopted and the stockholders approved an amendment to the Purchase Plan
and the Company reserved an additional 300,000 shares of Common Stock for sale
to employees. The Purchase Plan allows eligible employees of the Company to
purchase shares of Common Stock generally at 85% of the lower of the fair market
value per share of Common Stock on (i) the first day of the offering period or
(ii) the purchase date. Contributions are limited to 15% of an employee's
eligible compensation, subject to a maximum fair value annual purchase of
$25,000. There were 67,814, 90,584 and 52,716 shares issued under the Purchase
Plan during 1997, 1996 and 1995, respectively.
NOTE 10 EMPLOYEE BENEFIT PLANS
During July 1993, the Company established a 401(k) employee salary deferral plan
that allows voluntary contributions by all full-time employees of the Company's
United States and Mexico operations upon commencement of employment. Under the
plan, eligible employees may contribute up to 18% of their pre-tax earnings, not
to exceed the Internal Revenue Service annual contribution limit ($9,500 for
1997). The Company may make contributions each year up to a maximum of 4% of an
employee's total compensation. Total Company contributions were $0.1 million for
each of the years ended December 31, 1997, 1996 and 1995.
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 also may make contributions of their pre-tax
earnings up to age-related limits set by U. K. law. Company contributions were
$0.2 million for each of the years ended December 31, 1997 and 1996.
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. Total
expenses pursuant to this plan for the years ended December 31, 1997 and 1995
were $0.7 million and $0.8 million, respectively. No expenses were recorded
pursuant to this plan for the year ended December 31, 1996.
The Company has adopted a management bonus plan to provide an additional
financial incentive for management. Total expenses pursuant to this plan for the
years ended December 31, 1997, 1996 and 1995 were $1.3 million, $0.1 million and
$0.9 million, respectively.
NOTE 11 SHAREHOLDER RIGHTS PLAN
On July 10, 1996, the Board of Directors adopted a Shareholder Rights Plan (the
Plan). Under the terms of the Plan, each shareholder of record at the close of
business on July 22, 1996, received as a dividend one Preferred Share purchase
right (Right) for each share of Common Stock of the Company. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Participating Preferred Stock of the Company at a price of $100.00
per share, subject to adjustment. The Rights will separate from the Common Stock
and become exerciseable following the
<PAGE> 19
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
100 times the dividend declared per share of Common Stock. Preferred shares will
have 100 votes.
NOTE 12 INCOME TAXES
Income taxes include the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
FEDERAL:
Current $ (2,617) $ (77) $ 4,091
Deferred 5,764 (9,623) 520
3,147 (9,700) 4,611
--------- --------- ---------
STATE:
Current 8 54 70
Deferred 305 (149) 137
313 (95) 207
--------- --------- ---------
Foreign, current 358 41 309
$ 3,818 $ (9,754) $ 5,127
--------- --------- ---------
</TABLE>
The tax benefits associated with certain stock options reduced taxes currently
payable by $0.4 million, $0.1 million and $0.9 million for 1997, 1996 and 1995,
respectively. Such benefits are credited to additional paid-in capital when
realized.
Income tax expense (benefit) differs from the amount computed by applying the
federal statutory rate for the years ended December 31, 1997, 1996 and 1995,
respectively, as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax expense (benefit) calculated at the statutory rate $ 4,219 $(12,172) $ 491
State income tax (benefit), net of federal effect 409 (62) 135
Foreign losses (income) with no tax benefit (charge) (648) 2,438 --
Tax exempt income -- -- (249)
In-process technology (346) (54) 4,872
Research and development credit -- (100) (100)
Other, net 184 196 (22)
Income tax expense (benefit) $ 3,818 $ (9,754) $ 5,127
--------- --------- ---------
</TABLE>
<PAGE> 20
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, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Tax benefits related to restructuring $ 5,303 $ 10,601
Inventory valuation 1,169 438
Accrued liabilities 240 352
Allowance for returns and doubtful accounts 359 188
State tax NOL carryforward 253 --
--------- ---------
7,324 11,579
DEFERRED TAX LIABILITIES:
Tax versus financial reporting depreciation 1,065 974
Prepaid expenses and other 1,891 554
--------- ---------
2,956 1,528
Net deferred tax asset 4,368 10,051
Plus (minus) deferred tax liability (asset) 1,113 (2,505)
Deferred tax asset, non-current $ 5,481 $ 7,546
--------- ---------
</TABLE>
Management has concluded that no valuation allowance is required based on its
assessment that current and future levels of taxable income will, more likely
than not, be sufficient to realize the tax benefits.
The Company has a state net operating loss of $7.7 million which is available
for carryover to future periods. It expires beginning in the year 2003.
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
issued a 90-day letter in January 1998 proposing adjustments to the Company's
income and tax credits for the year, which would result in an additional
assessment of $1.6 million, excluding 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 currently contesting these adjustments. 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.
Pre-tax income (loss) from foreign operations was $3.2 million, ($38.8) million
and $0.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The residual United States tax liability for unremitted foreign
earnings is immaterial.
NOTE 13 COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its facilities and equipment under capital and operating
leases which expire at various dates through January 15, 2008. As of December
31, 1997, 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
Year ended December 31, Leases Leases
- ----------------------- ------ ------
<S> <C> <C>
1998 $ 189 $ 2,246
1999 16 1,439
2000 - 952
2001 - 545
2002 - 436
2003 and thereafter 2,276
Total minimum lease payments 205 $ 7,894
Less amounts representing interest (16)
Present value of future net minimum lease payments $ 189
--------- ---------
</TABLE>
<PAGE> 21
Rent expense for all operating leases for the years ended December 31, 1997,
1996 and 1995 was $3.9 million, $4.2 million and $1.1 million, respectively. At
December 31, 1997 and 1996, the Company had capitalized $0.7 million of assets
acquired under capitalized lease agreements in the accompanying balance sheet.
<PAGE> 22
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.
MEXICAN UNION RELATIONS
At December 31, 1997, 3,139 of the Company's employees located in Mexico were
represented by a labor union and covered by a collective bargaining agreement
expiring December 31, 1999 that is subject to revision annually under Mexican
labor laws. The Company has not experienced any employee-related work stoppage
and believes that its relationship with its union and other employees is good,
but there can be no assurance that the Company will be able to successfully
negotiate with the labor union in the future.
NOTE 14 GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company operates in one business segment which is the manufacture and sale
of flexible circuit interconnect solutions. Financial information summarized by
geographic area for the years ended December 31, 1997 and 1996, is as follows
(in thousands) :
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
REVENUE:
North America $ 157,743 $ 99,580
Europe 38,410 62,767
Southeast Asia 28,430 545
Eliminations (10,705) (6,056)
Total $ 213,878 156,836
--------- -------
OPERATING INCOME (LOSS):
North America $ 11,292 $ 5,531
Europe 392 (38,516)
Southeast Asia 2,927 (570)
Eliminations (31) (136)
Total $ 14,580 $ (33,691)
--------- ---------
TOTAL ASSETS:
North America $ 142,972 $ 115,124
Europe 13,721 26,498
Southeast Asia 9,672 2,580
Eliminations (50,666) (51,021)
Total $ 115,699 $ 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. All of the Company's income and
expenses for 1995 were from the North American operations.
At any given time, sales to certain customers may account for a significant
portion of the Company's business. Customers who individually represent 10% or
more of net sales for the respective year are as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Seagate 21.9% 34.9% 20.9%
IBM 11.5% 11.7% 13.1%
Smartflex * * 18.5%
</TABLE>
* Revenues were less than 10%
Export sales during the years ended December 31, 1997, 1996 and 1995 were $61.3
million, $26.6 million and $43.2 million, respectively.
NOTE 15 RELATED PARTY TRANSACTIONS
ACQUISITION AGREEMENTS WITH ROGERS CORPORATION
Pursuant to the asset purchase agreements entered into on June 28, 1993 between
the Company and Rogers Corporation (Rogers) whereby the Company purchased the
Flexible Interconnect Division (the Predecessor) of Rogers, Rogers retained
certain existing
<PAGE> 23
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 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 was for five years and provided for fixed payments
of $0.5 million per annum for the first three years and mutually agreed market
rates for the remaining two years. As provided for in the lease agreement, the
Company exercised its option to renew the lease for an additional five years in
June 1997, twelve months prior to the lease expiration date. The renewed lease
provides for mutually agreed-upon market rate payments for years four through
eight and mutually agreed-upon market rates adjusted for the Consumer Price
Index for years nine and ten. Total rent expense paid to Rogers was $0.6 million
for the year ended December 31, 1997 and $0.5 million for each of the years
ended December 31, 1996 and 1995.
AFFILIATION WITH XYRATEX
The Company derived 1.1% and 1.9% of its net sales in 1997 and 1996,
respectively from sales to Xyratex, a major shareholder of the Company with a
representative on the Company's Board of Directors. Through September 30, 1997,
the Company leased the ADFlex U.K. manufacturing facility from Xyratex. Total
lease payments made to Xyratex in 1997 and 1996 totaled $1.5 million and $2.6
million, respectively. In addition, $0.5 million and $1.9 million was paid to
Xyratex in 1997 and 1996, respectively, for administrative services.
AFFILIATION WITH HANA MICROELECTRONICS
In August 1996, the Company established a joint venture located in Lamphun,
Thailand with Hana. The joint venture was 80% owned by the Company and 20% owned
by Hana. The Company purchased the remaining 20% equity interest in ATL from
Hana in September 1997. The Company also entered into a building lease with Hana
on October 1, 1996 to lease the Thailand manufacturing facility. The lease term
expires on December 31, 1998 and can be renewed for an additional one year term
with the payment to be made for rent to be negotiated at the time of the
renewal. Total lease payments made to Hana in 1997 and 1996 totaled $0.4 million
and $0.1 million, respectively. In addition, $0.3 million was paid to Hana in
1997 for administrative services.
NOTE 16 SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company amended its existing credit
facility to more adequately meet its working capital requirements. The amended
credit facility increases the existing revolving line of credit from $20.0
million to $25.0 million. In addition, the existing $25.0 million term loan is
replaced with a $35.0 million term loan. The $35.0 million term loan requires
equal principal payments of $1.8 million each quarter beginning with the quarter
ending December 31, 1998 through the quarter ending December 31, 1999,
increasing to equal principal payments of $2.2 million each quarter thereafter
with the last payment due December 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 credit facility, any outstanding balance
bears interest at BankBoston, N.A.'s prime interest rate or LIBOR plus an
applicable margin ranging from 1.25% 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 662/3% 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. The amended credit facility prohibits the payment of
dividends.
Subsequent to the end of the fiscal year, the Company entered into an agreement
with SAP America, Inc. (SAP) to license the rights to SAP's proprietary R/3
software. The software will replace the Company's current manufacturing/cost
control systems and the Company anticipates completing the conversion in late
1998. The total cost of implementing the new system, including software,
implementation, hardware and training, is expected to be $4.9 million. The cost
of acquiring and implementing the new system will be recorded as an asset by the
Company and amortized over the estimated benefit period.
<PAGE> 24
NOTE 17 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
1997 $ 48,221 $ 56,244 $ 55,058 $ 54,355 $ 213,878
1996 38,082 35,031 36,898 46,825 156,836
Gross profit
1997 7,432 9,090 10,145 11,385 38,052
1996 7,198 5,244 (295) 6,416 18,563
Net income (loss)
1997 873 1,880 2,597 3,246 8,596
1996 840 (660) (25,663)(1) 459 (25,024)(1)
Net income (loss) per basic share
1997 .10 .22 .30 .37 .99
1996 .10 (.08) (2.98) .05 (2.92)
Net income (loss) per diluted share
1997 .10 .21 .29 .36 .97
1996 .10 (.08) (2.98) .05 (2.92)
--------- --------- --------- --------- ---------
</TABLE>
(1) Includes charges of $29.2 million related to restructuring of the
Company's U.K. operations, see note 2.
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, 1997 and 1996, and the related
consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Phoenix, Arizona
January 19, 1998
<PAGE> 25
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share amounts) year end position 1997 1996 1995 1994 1993
- ---------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 213,878 $ 156,836 $ 101,163 $ 77,733 $ 48,892
Gross profit 38,052 18,563 28,055 23,921 11,241
Gross profit as a percent of net sales 17.8% 11.8% 27.7% 30.8% 23.0%
Operating expenses 23,472 52,254 27,587 11,804 7,267
Operating expenses as a percent of net sales 11.0% 33.3% 27.3% 15.2% 14.9%
Operating income (loss) 14,580 (33,691) 468 12,117 3,974
Operating income (loss) as a percent of net sales 6.8% (21.5%) 0.5% 15.6% 8.1%
Net income (loss) 8,596 (25,024) (3,723) 7,046 2,191
--------- --------- --------- --------- ---------
CASH FLOW DATA
Net cash provided by (used in) operating activities $ 4,577 $ 4,439 $ 19,230 $ 3,993 $ 8,382
Acquisition of property, plant and equipment 14,462 13,763 20,636 5,450 586
Depreciation and amortization of property, plant and equipment 6,493 5,794 2,288 930 78
--------- --------- --------- --------- ---------
SHARE DATA
Common shares used in the calculation of net income
(loss) per basic share 8,712 8,580 6,855 5,028 4,000
Net income (loss) per basic share $ .99 $ (2.92) $ (0.54) $ 1.40 $ 0.55
Common and common equivalent shares used
in the calculation of net income (loss) per dilutive share 8,894 8,580 6,855 5,578 4,578
Net income (loss) per dilutive share $ .97 $ (2.92) $ (0.54) $ 1.26 $ 0.48
Book value per share 5.81 4.67 7.67 5.75 0.84
--------- --------- --------- --------- ---------
YEAR END POSITION
Total assets $ 115,699 $ 93,181 $ 106,918 $ 47,703 $ 10,470
Working capital 25,039 9,102 20,636 32,443 2,557
Long-term debt and capitalized lease obligations 25,189 10,340 10,483 592 --
Stockholders' equity 50,907 40,289 63,554 37,764 3,362
Return on average stockholders' equity 18.9% (48.2%) (7.3%) 34.3% 36.8%
--------- --------- --------- --------- ---------
</TABLE>
(1) 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.
(2) 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.
(3) 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> 26
SECURITIES INFORMATION
ADFlex Solutions, Inc. common stock has traded on the Nasdaq National Market
(Symbol AFLX) since its initial public offering on September 27, 1994. 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 High Low
- ------------- ---- ---
<S> <C> <C>
1996
March 31 $27.00 $10.50
June 30 18.00 9.88
September 30 14.00 11.75
December 31 14.00 7.38
1997
March 31 $16.13 $10.75
June 30 19.00 11.75
September 30 28.50 14.75
December 31 28.13 14.63
</TABLE>
These were approximately 57 stockholders of record as of February 13, 1998. The
Company has never paid cash dividends on its common stock and intends to retain
future earnings for use in the operation and expansion of its business. In
addition, the Company's bank line of credit restricts 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
<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 19, 1998, included in the
1997 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,
33-98394, 333-31261, and 333-39125) pertaining to the 1993 Equity Incentive
Plan, the 1994 Employee Stock Purchase Plan, the 1994 Outside Director Stock
Option Plan, the 1994 Stock Incentive Plan, as amended, the Employee Stock
Purchase Plan, and the 1996 Outside Director Stock Option Plan, of our report
dated January 19, 1998, with respect to the consolidated financial statements
incorporated by reference, and of our report dated January 19, 1998, with
respect to the schedule included, in the Annual Report (Form 10-K) for the year
ended December 31, 1997.
/s/ Ernst & Young LLP
Phoenix, Arizona
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 9,092 6,097
<SECURITIES> 0 0
<RECEIVABLES> 34,498 27,235
<ALLOWANCES> 1,750 611
<INVENTORY> 19,297 14,990
<CURRENT-ASSETS> 65,488 51,314
<PP&E> 54,784 42,438
<DEPRECIATION> 12,527 8,141
<TOTAL-ASSETS> 115,699 93,181
<CURRENT-LIABILITIES> 40,449 42,212
<BONDS> 23,230 7,689
0 86
0 0
<COMMON> 88 0
<OTHER-SE> 50,819 40,203
<TOTAL-LIABILITY-AND-EQUITY> 115,699 93,181
<SALES> 213,878 156,836
<TOTAL-REVENUES> 213,878 156,836
<CGS> 175,826 138,273
<TOTAL-COSTS> 175,826 138,273
<OTHER-EXPENSES> 23,472 52,254
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,102 1,511
<INCOME-PRETAX> 12,414 (34,778)
<INCOME-TAX> 3,818 9,754
<INCOME-CONTINUING> 8,596 (25,024)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,596 (25,024)
<EPS-PRIMARY> .99 (2.92)
<EPS-DILUTED> .97 (2.92)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 3,195 5,593 4,644
<SECURITIES> 0 0 0
<RECEIVABLES> 30,545 34,140 33,121
<ALLOWANCES> 416 926 1,643
<INVENTORY> 14,011 18,807 19,778
<CURRENT-ASSETS> 53,556 63,797 61,407
<PP&E> 43,993 46,886 61,113
<DEPRECIATION> 9,658 11,358 24,066
<TOTAL-ASSETS> 95,122 106,859 106,482
<CURRENT-LIABILITIES> 45,329 37,000 33,021
<BONDS> 5,148 25,106 25,061
0 0 0
0 0 0
<COMMON> 86 86 88
<OTHER-SE> 41,550 43,454 47,092
<TOTAL-LIABILITY-AND-EQUITY> 95,122 106,859 106,482
<SALES> 48,221 104,465 159,524
<TOTAL-REVENUES> 48,221 104,465 159,524
<CGS> 40,789 87,944 132,857
<TOTAL-COSTS> 40,789 87,944 132,857
<OTHER-EXPENSES> 5,585 11,618 17,270
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 433 945 1,535
<INCOME-PRETAX> 1,212 3,822 7,641
<INCOME-TAX> 339 1,070 2,292
<INCOME-CONTINUING> 873 2,752 5,349
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 873 2,752 5,349
<EPS-PRIMARY> .10 .32 .62
<EPS-DILUTED> .10 .31 .60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 1,147 3,555 2,453
<SECURITIES> 0 0 0
<RECEIVABLES> 35,998 22,561 27,323
<ALLOWANCES> 489 1,618 789
<INVENTORY> 16,681 18,488 15,786
<CURRENT-ASSETS> 54,810 52,800 49,712
<PP&E> 45,115 47,525 39,996
<DEPRECIATION> 4,635 6,074 7,047
<TOTAL-ASSETS> 110,418 108,630 90,779
<CURRENT-LIABILITIES> 37,100 35,160 38,949
<BONDS> 8,251 7,768 7,729
0 0 0
0 0 0
<COMMON> 85 86 86
<OTHER-SE> 64,982 65,006 39,744
<TOTAL-LIABILITY-AND-EQUITY> 110,418 108,630 90,779
<SALES> 38,082 73,113 110,011
<TOTAL-REVENUES> 38,082 73,113 110,011
<CGS> 30,884 60,671 97,864
<TOTAL-COSTS> 30,884 60,671 97,864
<OTHER-EXPENSES> 5,650 11,619 47,145
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 197 505 734
<INCOME-PRETAX> 1,351 318 (35,732)
<INCOME-TAX> 511 139 (10,248)
<INCOME-CONTINUING> 840 179 (25,484)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 840 179 (25,484)
<EPS-PRIMARY> .10 .02 (2.97)
<EPS-DILUTED> .10 .02 (2.97)
</TABLE>
