<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24416
ADFLEX SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3186513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 W. CHANDLER BLVD., CHANDLER, AZ 85224
(602) 963-4584
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, as of March 31,
1998:
COMMON STOCK, $.01 PAR VALUE: 8,825,991 SHARES
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ADFLEX SOLUTIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997.........................................................3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997...................................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997...................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................13
SIGNATURES ...................................................................................................14
</TABLE>
EXHIBITS
(10.55) Second Amendment to Credit Agreement, dated May 11, 1998,
among the Registrant, BankBoston, N.A. and BankBoston,
N.A., as agent for Lenders
(11.1) Computation of Net Income per Share
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ADFlex Solutions, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash & cash equivalents $ 2,220 $ 9,092
Accounts receivable, net 33,561 31,581
Other receivables 936 1,167
Inventories 17,781 19,297
Prepaid taxes 3,014 2,951
Other current assets 1,534 1,400
-------- --------
Total current assets 59,046 65,488
Property, plant & equipment, net 49,287 42,257
Intangible assets 2,320 2,449
Deferred tax assets 5,296 5,481
Other assets 23 24
-------- --------
$115,972 $115,699
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,000 $ 7,000
Notes payable 1,563 2,250
Accounts payable 19,176 22,692
Accrued liabilities 6,837 6,548
Current portion of long-term debt and
capitalized leases 3,719 1,959
-------- --------
Total current liabilities 34,295 40,449
Deferred tax liabilities 1,162 1,113
Long-term debt and capitalized leases 26,428 23,230
Stockholders' equity 54,087 50,907
-------- --------
$115,972 $115,699
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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ADFlex Solutions, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 50,023 $ 48,221
Cost of sales 39,505 40,789
-------- --------
Gross profit 10,518 7,432
Operating expenses:
Engineering, research & development 2,121 2,218
Selling, general & administrative 3,898 3,367
Amortization of intangible assets 129 --
-------- --------
Total operating expenses 6,148 5,585
-------- --------
Operating income 4,370 1,847
Interest income 55 28
Interest expense (586) (433)
Other income (expense), net (186) (212)
Minority interest in earnings of
consolidated joint venture -- (18)
-------- --------
Income before income taxes 3,653 1,212
Income taxes 1,022 339
-------- --------
Net income $ 2,631 $ 873
======== ========
Net income per share:
Basic $ 0.30 $ 0.10
Diluted $ 0.30 $ 0.10
======== ========
Number of shares used in computing net income per share:
Basic 8,805 8,666
======== ========
Diluted 8,923 8,767
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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ADFlex Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 2,631 $ 873
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,025 1,490
Deferred taxes 235 335
Changes in operating assets and liabilities:
Accounts receivable (1,980) (4,980)
Other receivables 231 347
Inventories 1,516 979
Other current assets (197) (1,485)
Accounts payable and accrued liabilities (3,227) 2,211
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,234 (230)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (8,926) (1,528)
Decrease in other assets 1 (1)
Investment in joint venture -- 18
------- -------
NET CASH USED IN INVESTING ACTIVITIES (8,925) (1,511)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net activity on line of credit (4,000) 900
Payments on capitalized lease obligations (42) (35)
Payments on note payable (687) --
Net activity on long-term debt 5,000 (2,500)
Issuance of common stock, net of expenses 548 474
------- -------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 819 (1,161)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,872) (2,902)
Cash and cash equivalents at beginning of period 9,092 6,097
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,220 $ 3,195
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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ADFLEX SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Preparing financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Operating results for the three month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed for or Obtained for Internal-Use, which requires the
capitalization of certain costs incurred in connection with developing or
obtaining computer software. The Company elected to adopt SOP 98-1 effective
January 1, 1998 in connection with the purchase of a manufacturing cost control
system. Capitalized costs are amortized on a straight-line basis over a period
of three years upon completion of the project.
(2) ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Accounts receivable trade $ 35,066 33,331
Allowance for doubtful accounts and returns (1,505) (1,750)
-------- --------
$ 33,561 $ 31,581
======== ========
</TABLE>
(3) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 9,406 $ 12,688
Work-in-process 8,638 8,849
Finished goods 583 595
Allowance for obsolescence and
excess inventory (846) (2,835)
-------- --------
$ 17,781 $ 19,297
======== ========
</TABLE>
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(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Salaries and benefits $3,043 $3,259
Accrued restructuring charges,
current 222 339
Accrued relocation 398 429
Accrued commissions 370 346
Deferred tax liability 1,371 385
Other 1,433 1,790
------ ------
$6,837 $6,548
====== ======
</TABLE>
(5) LINE OF CREDIT AND LONG-TERM DEBT
In February 1998, the Company amended its existing credit facility to
more adequately meet its working capital requirements. The amended credit
facility increased 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 66 2/3% of
the stock of its subsidiaries. The Company is required, under the credit
agreement, to maintain certain financial ratios and meet certain net worth and
indebtedness tests. As of March 31, 1998, the Company was in technical default
of certain financial convenants due to the amount of capital expenditures
incurred during the quarter. The technical default has been waived by the
lenders through December 31, 1998. In addition, the existing credit facility was
amended in May 1998 to limit capital expenditures to $23.0 million during the
fiscal year ending December 31, 1998. The amended credit facility prohibits the
payment of dividends. At March 31, 1998, the Company had $24.0 million available
for borrowing based on collateral requirements under the revolving line of
credit with an outstanding balance of $3.0 million and $30.0 million was
outstanding under the term loan. As required under the credit agreement, the
Company will borrow an additional $5.0 million against the term loan in a single
draw no later than August 31, 1998.
(6) RESTRUCTURING CHARGES
At the close of the third quarter of 1996, the Company's Board of
Directors approved a plan to restructure its assembly operation in the U.K. and
transfer production from the U.K. to the Company's manufacturing facility in
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. To date, the Company has paid and charged to the
liability $5.9 million in employee and lease termination charges. 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
$0.2 million, which the Company believes is adequate to cover the remaining
liabilities.
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(7) INCOME TAXES
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS issued a 90-day letter in January of 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 has timely filed a petition in the United States
Tax Court for a judicial determination of these issues. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net Sales
Net sales for the three month period ended March 31, 1998 increased to
$50.0 million from $48.2 million over the same period in 1997 which was an
increase of $1.8 million or 3.7%. The Company mitigated some of the softness in
demand experienced by the hard disk drive (HDD) market in the first quarter of
1998. This reduced impact is attributable to the Company's successful revenue
diversification efforts in the growing computer, communications and consumer
markets.
Gross Profit
Gross profit as a percentage of net sales (gross margin) for the three
months ended March 31, 1998 was 21.0% as compared to 15.4% for the same period
in 1997. The Company's gross margin for the three month period ended March 31,
1998 was positively impacted by improved operating efficiencies, primarily due
to ADFlex's low cost manufacturing facilities located in Mexico and Thailand.
Operating Expenses
Engineering, research & development expenses were essentially unchanged
at $2.1 million and $2.2 million for the three month period ended March 31, 1998
and 1997, respectively, representing 4.2% and 4.6% of net sales for those same
periods. Selling, general & administrative expenses were $3.9 million and $3.4
million for the three month period ended March 31, 1998 and 1997, respectively,
representing 7.8% and 7.0% for those same periods. The growth in selling,
general & administrative expenses is due to a combination of factors including
the ramp-up of the Company's new Thailand manufacturing facility and
strengthening of the Company's information systems infrastructure. In connection
with the acquisition of Hana's 20% interest in ADFlex Thailand Limited (ATL) in
September 1997, the Company recorded goodwill which is being amortized over its
estimated useful life of five years. Amortization of intangible assets was $0.1
million, or 0.3% of net sales, for the three month period ended March 31, 1998.
Interest and Other Income (Expense)
For the three month period ended March 31, 1998, interest expense of
$0.6 million related to borrowings under the line of credit, term loan and
capital lease obligations. Interest expense for the same period in 1997
represents $0.2 million of interest expense on the subordinated debenture and
$0.2 million of interest expense related to borrowing under the line of credit
and capital lease obligations. Other income (expense) for both periods
represents the net impact of bank fees and exchange gains and losses realized on
the settlement of transactions associated with the Company's foreign
subsidiaries. Exchange gains and losses associated with short-term forward
foreign currency exchange contracts, which the Company began entering into in
December 1997 to manage its exposure, are also included in other income
(expense) for the three month period ended March 31, 1998.
8
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its liquidity needs to date primarily through
cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working capital, funding of capital expenditures and expansion of
ATL. At March 31, 1998, cash and cash equivalents totaled $2.2 million, compared
with $3.2 million as of March 31, 1997.
In February 1998, the Company amended its existing credit facility to
more adequately meet its working capital requirements. The amended credit
facility increased 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 66 2/3% of
the stock of its subsidiaries. The Company is required, under the credit
agreement, to maintain certain financial ratios and meet certain net worth and
indebtedness tests. As of March 31, 1998, the Company was in technical default
of certain financial convenants due to the amount of capital expenditures
incurred during the quarter. The technical default has been waived by the
lenders through December 31, 1998. In addition, the existing credit facility was
amended in May 1998 to limit capital expenditures to $23.0 million during the
fiscal year ending December 31, 1998. The amended credit facility prohibits the
payment of dividends. At March 31, 1998, the Company had $24.0 million available
for borrowing based on collateral requirements under the revolving line of
credit with an outstanding balance of $3.0 million and $30.0 million was
outstanding under the term loan. As required under the credit agreement, the
Company will borrow an additional $5.0 million against the term loan in a single
draw no later than August 31, 1998.
Net cash provided by operating activities for the three month period
ended March 31, 1998 was $1.2 million compared with net cash used in operating
activities of $0.2 million for the same period in 1997. During these same
periods net income was $2.6 million and $0.9 million, respectively. The increase
in 1998 is largely due to improved operating results during the three month
period ending March 31, 1998 coupled with increased business activity.
Net cash used in investing activities was $8.9 million for the three
months ended March 31, 1998 compared with $1.5 million for the same period in
1997, which primarily stemmed from capital expenditures for the three months
ended March 31, 1998 of $8.9 million compared with $1.5 million for the same
period in 1997. Capital expenditures during the periods were financed from
existing cash balances and from borrowings under the Company's bank line of
credit. The Company currently expects to spend an additional $11.0 million on
capital expenditures in 1998 to support expansion of worldwide manufacturing
operations, primarily for machinery, systems and equipment, and expansion of
operations in North America and Thailand.
Net cash provided by financing activities for the three months ended
March 31, 1998 was $0.8 million compared with cash used in financing operations
of $1.2 million for the same period in 1997. The Company borrowed an additional
$5.0 million on its term loan during the three months ended March 31, 1998 of
which $4.0 million was used to pay down the Company's bank line of credit. Net
repayments on the Company's bank line of credit totaled $4.0 million during the
three months ended March 31, 1998 compared to net borrowings of $0.9 million for
the same period in 1997. The Company generated $0.6 million and $0.5 million in
the three months ended March 31, 1998 and 1997, 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. As required by the terms of the note,
the Company remitted $0.7 million during the three months ended March 31, 1998.
Funding for this payment came from the Company's line of credit. As of March 31,
1998,
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$1.6 million was outstanding under the note. During the three months ended March
31, 1997, the Company remitted $2.5 million in principal plus $0.8 million in
accrued interest as required by the terms of the subordinated debenture issued
in the ADFlex U.K. acquisition. Funding for this payment came from the Company's
line of credit.
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.
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 gains or losses. In order to reduce the
impact of certain foreign currency fluctuations, the Company enters into
short-term forward foreign currency exchange contracts (hedges) 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. 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.
Future Operations
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 conducted
environmental studies of its facility in Chandler, Arizona which revealed a
limited amount of soil contamination that may require remediation. Based on
these studies, the Company believes that the costs associated with remediation
will not have a material adverse effect on its operations or financial
condition. Pursuant to the acquisition agreements pertaining to the initial
formation of the Company, Rogers Corporation (Rogers) retained all environmental
liabilities existing prior to the acquisition. While Rogers currently has
sufficient assets to fulfill its obligations under the acquisition agreements,
if additional pre-closing 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.
In mid 1995, the Company acquired a manufacturing facility located in
Agua Prieta, Mexico. In connection with this acquisition, the Company conducted
an environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the seller submitted a remediation plan to the appropriate Mexican
authorities, which was approved in May 1997. Subsequent remediation was
completed in December 1997. The seller is awaiting acknowledgement that the
remediation plan has been approved and no further action is required by the
Mexican authorities. The seller's obligation for cost of remediation is limited
to $2.5 million. A total of $1.0 million was originally held in escrow pending
seller's performance of their environmental obligations under the agreement. One
third of the escrow balance was used to conduct the remediation, one third was
released to the seller according to the agreement and one third remains in
escrow and will be released to the seller upon closure of the issue by the
Mexican authorities with certification that
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<PAGE> 11
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. 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.
Dependence on Electronics Industry
The Company's principal customers are electronics original equipment
manufacturers and contract manufacturers. The electronics industry as a whole is
characterized by intense competition, relatively short product life-cycles and
significant fluctuations in product demand. In addition, the electronics
industry is generally subject to rapid technological change and product
obsolescence. Discontinuance or modifications developed in connection with next
generation products containing flexible circuit interconnects manufactured by
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the electronics industry
is subject to economic cycles and has in the past experienced, and is likely to
experience, recessionary periods. A recession or any other event leading to
excess capacity or a downturn in the electronics industry would likely result in
intensified price competition, reduced gross margins and a decrease in unit
volume, all of which would have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
Concentration Risk
The Company provides flexible interconnect products to a diverse group
of markets. Through ongoing diversification and new market expansion efforts,
primarily directed toward the communications and consumer markets, the Company
is continuing its efforts to reduce its dependence on the HDD market. Sales to
the HDD market accounted for 34% of net sales compared to 52% of net sales for
the three month period ended March 31, 1998 and 1997, respectively. Though the
Company is continuing its efforts to reduce its dependence on the HDD industry,
net sales attributable to this market are expected to continue to represent the
largest portion of net sales for the foreseeable future and could return to a
majority of the Company's net sales. The loss of any HDD 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.
New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98- 1, Accounting for the Costs of Computer
Software Developed for or Obtained for Internal-Use, which requires the
capitalization of certain costs incurred in connection with developing or
obtaining computer software. The Company elected to adopt SOP 98-1 effective
January 1, 1998 in connection with the purchase of a manufacturing cost control
system. Capitalized costs are amortized on a straight-line basis over a period
of three years upon completion of the project.
Income Taxes
The Company's effective tax rate of 28% for the three month period
ended March 31, 1998 is an estimated annual rate based upon projected profit
levels at each of the Company's entities. As the actual tax rate for each entity
varies in accordance with the taxing authority in whose jurisdiction they
reside, 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 effective tax rate for the three month period ended
March 31, 1997 was also 28%.
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 of 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 has timely filed a petition in the United
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<PAGE> 12
States Tax Court for a judicial determination of these issues. 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.
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. Since the Company's current manufacturing/cost
control system does not function properly with respect to dates from the year
2000, the Company entered into an agreement with SAP America, Inc. (SAP) to
license the rights to SAP's proprietary R/3 software, which will function
properly with respect to dates in the year 2000 and beyond. 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.
In addition, the Company has evaluated the software associated with its
manufacturing equipment and has concluded that there is no 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.
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 have 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; 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
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 herein and
in the Company's Annual Report on Form 10-K for the year ended December 31, 1997
and other Securities and Exchange Commission filings.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(10.55) Second Amendment to Credit Agreement, dated May 11, 1998,
among the Registrant, BankBoston, N.A. and BankBoston, N.A.
as agent for Lenders.
(11.1) Computation of Net Income Per Share
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended March 31, 1998.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADFlex Solutions, Inc.
Date: May 14, 1998 By /s/ Donald E. Frederick
------------------- --------------------------------------
Donald E. Frederick
Vice President Finance, Secretary and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
14
<PAGE> 15
EXHIBITS INDEX
(10.55) Second Amendment to Credit Agreement dated May 11, 1998 among the
Registrant, BankBoston, N.A. and BankBoston, N.A. as agent for Lenders.
(11.1) Computation of Net Income Per Share
(27) Financial Data Schedule
<PAGE> 1
EXHIBIT 10.55
SECOND AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT
AND CERTAIN LOAN DOCUMENTS; WAIVER OF EXISTING
DEFAULT
This SECOND AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT AND CERTAIN
LOAN DOCUMENTS; WAIVER OF EXISTING DEFAULT (this "Second Amendment") is entered
into as of May _11_, 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, as amended by that certain
First Amendment to Senior Secured Credit Agreement and Certain Loan Documents
dated February 9, 1998 (the "First Amendment")(as so amended, 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. By fax notification dated April 13, 1998, followed by a letter of
notification dated May 7, 1998, Borrower has notified Agent that it is in
default with respect to the debt service coverage ratio covenant contained in
Section 6.5.4 of the Credit Agreement. Borrower has requested, and the Lender
Parties have agreed, that the resulting Default shall be waived, that the
requirements imposed by Section 6.5.4 shall be waived for the four Fiscal
Quarters of 1998, and that Section 6.5.4 shall nevertheless be in full force and
effect from and after the first Fiscal Quarter of 1999.
C. In addition, Borrower and the Lender Parties have agreed to make
certain amendments to the Credit Agreement, 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 Second 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. WAIVER OF EXISTING DEFAULT; WAIVER OF EFFECT OF SECTION 6.5.4 OF THE
CREDIT AGREEMENT FOR FISCAL 1998.
Credit Agreement
1
<PAGE> 2
(a) On a one-time-only basis, by its signature below each Lender Party
hereby waives the Default that exists as of the end of the fiscal quarter that
ended in March, 1998 as a result of Borrower's failure to comply with Section
6.5.4 of the Credit Agreement for the two consecutive fiscal quarters then
ended.
(b) By its signature below, each Lender Party hereby agrees that
Borrower's failure to comply with the requirement imposed by Section 6.5.4 of
the Credit Agreement shall not create a Default or an Event of Default as of the
end of the fiscal quarter ending in June, 1998, the end of the fiscal quarter
ending in September, 1998, or the end of the fiscal quarter ending in December,
1998; provided, however, that Borrower agrees and acknowledges that Section
6.5.4 shall be in full force and effect, as if it had never been waived, with
respect to the period of two consecutive fiscal quarters ending in March, 1999,
and for each relevant period thereafter.
3. NEW SECTION 6.14 OF THE CREDIT AGREEMENT.
(a) A new Section 6.14 of the Credit Agreement shall be added, and
shall provide in its entirety as follows:
"SECTION 6.14. CAPITAL EXPENDITURES. The Borrower shall not, and shall
not permit any Subsidiary to, directly or indirectly make Capital Expenditures
in excess of $23,000,000, in the aggregate, during the Fiscal Year ending in
December, 1998."
4. WAIVER LIMITED. The waiver given herein is strictly limited to its
terms and shall not have any force and effect other than as expressly set forth
herein. No further waiver, either of additional terms or for any additional
period, shall be implied from the waiver provided herein. Without limiting the
foregoing, the waiver provided herein is subject to the limitations set forth in
Section 9.3.1.5 of the Credit Agreement.
5. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS SECOND AMENDMENT.
Lender Parties' obligations under this Second Amendment are conditioned upon,
and this Second Amendment shall not be effective until, satisfaction in full of
each of the following:
(a) Agent shall have received this Second Amendment, duly executed by
each appropriate Person and in form and substance satisfactory to Agent and its
counsel;
(b) 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
Second 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 Second Amendment);
(c) Borrower's Board of Directors shall have authorized Borrower to
execute and deliver this Second Amendment;
(d) No Default or Event of Default (other than the Default waived
herein) shall have occurred and be continuing or would result from the
consummation of the transactions contemplated in this Second Amendment; and
(e) All other documents, certificates, consents and opinions required
by Agent in connection with the transactions contemplated by this Second
Amendment shall have been executed and delivered in form and substance
satisfactory to Agent in its sole and absolute discretion.
Credit Agreement
2
<PAGE> 3
6. REPRESENTATIONS AND WARRANTIES. In order to induce Lender Parties to
enter into this Second 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 Second Amendment (except to the
extent that such representations and warranties expressly relate to an earlier
date or reflect changes brought about by this Second Amendment); and
(b) This Second 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.
7. 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.
8. CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS OTHERWISE NOT AFFECTED.
Except as expressly amended pursuant to this Second 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 Second Amendment and the Credit Agreement shall be read together, as one
document.
9. BINDING EFFECT. This Second 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.
10. TIME OF THE ESSENCE. Time and exactitude of each of the terms,
obligations, covenants and conditions of this Second Amendment are hereby
declared to be of the essence.
11. GOVERNING LAW. THIS SECOND 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).
12. COUNTERPARTS. This Second 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 Second
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
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have duly executed this Second
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/ Maia D. Heymann
Name: Maia D. Heymann
Title: Director
LENDERS:
BANK ONE, ARIZONA, N.A.,
A NATIONAL BANKING ASSOCIATION
By: /s/ Michael V. McCann
Name: Michael V. McCann
Title: Vice President
IMPERIAL BANK,
A CALIFORNIA BANKING CORPORATION
By: /s/ Kevin C. Halloran
Name: Kevin C. Halloran
Title: Senior Vice President
THE UNION BANK OF CALIFORNIA,
A NATIONAL BANKING ASSOCIATION
By:_____________________________
Name:___________________________
Title:__________________________
Credit Agreement
4
<PAGE> 5
BORROWER:
ADFLEX SOLUTIONS, INC.,
A DELAWARE CORPORATION
By: /s/ Donald E. Frederick
Name: Donald E. Frederick
Title: Chief Financial Officer
Credit Agreement
5
<PAGE> 1
EXHIBIT 11.1
ADFLEX SOLUTIONS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net income $2,631 $ 873
Computation of shares used in net income (loss) per share:
Weighted average common shares outstanding 8,805 8,666
Incremental common equivalent shares representing
shares issuable upon exercise of stock options (1) 118 101
----------------------
Total weighted average shares - diluted 8,923 8,767
======================
Total weighted average shares - basic
8,805 8,666
======================
Net income per diluted common and
common equivalent share $ .30 $ .10
======================
Net income per basic common and
common equivalent share $ .30 $ .10
======================
</TABLE>
- --------
(1) Amount calculated using the treasury stock method and fair market values for
stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,220
<SECURITIES> 0
<RECEIVABLES> 35,066
<ALLOWANCES> (1,505)
<INVENTORY> 17,781
<CURRENT-ASSETS> 59,046
<PP&E> 63,709
<DEPRECIATION> 14,422
<TOTAL-ASSETS> 115,972
<CURRENT-LIABILITIES> 34,295
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 53,999
<TOTAL-LIABILITY-AND-EQUITY> 115,972
<SALES> 50,023
<TOTAL-REVENUES> 50,023
<CGS> 39,505
<TOTAL-COSTS> 39,505
<OTHER-EXPENSES> 6,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (586)
<INCOME-PRETAX> 0
<INCOME-TAX> 1,022
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,631
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
