<PAGE>
SCHEDULE 14C
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[X]Preliminary Information Statement
[_]Confidential, for Use of the Commission Only (as permitted by Rule 14c-
5(d)(2))
[_]Definitive Information Statement
ADFLEX SOLUTIONS, INC.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[X]Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(2) Aggregate number of securities to which transaction applies:
9,017,416 SHARES OF COMMON STOCK AND
OPTIONS TO PURCHASE 1,093,821 SHARES OF COMMON STOCK
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$3.80 PER SHARE OF COMMON STOCK
(4) Proposed maximum aggregate value of transaction:
$38,422,700.60
(5) Total fee paid:
$7,684.54
[_]Fee paid previously with preliminary materials.
[X]Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$7,684.54
(2) Form, Schedule or Registration Statement No.:
SCHEDULE 14D-1 TENDER OFFER STATEMENT AND
AMENDMENT NO. 1 THERETO
(3) Filing Party:
INNOVEX ACQUISITION CORP. AND INNOVEX, INC.
(4) Date Filed:
JULY 7, 1999
AND AUGUST 2, 1999
<PAGE>
ADFLEX SOLUTIONS, INC.
2001 WEST CHANDLER BOULEVARD
CHANDLER, ARIZONA 85224
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 1999
To the Stockholders of ADFlex Solutions, Inc.:
A Special Meeting of Stockholders of ADFlex Solutions, Inc. ("ADFlex"), a
Delaware corporation, will be held on , September , 1999 at 10:00 a.m.,
Central Time, at the executive offices of Innovex, Inc., which are located at
530 Eleventh Avenue South, Hopkins, Minnesota, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger (the "Merger Agreement") by and among ADFlex,
Innovex, Inc. ("Innovex") and Innovex Acquisition Corp. (the
"Purchaser"), a Delaware corporation and wholly-owned subsidiary of
Innovex, pursuant to which the Purchaser will be merged with and into
ADFlex (the "Merger") and each then outstanding share of common stock,
$0.01 par value, including the associated rights (together with the
common stock, the "Shares"), of ADFlex (other than Shares held by ADFlex
or by any subsidiary of ADFlex, or owned by Innovex, Purchaser or any
other subsidiary of Innovex, which shall be canceled, and other than
Shares, if any (collectively, "Dissenting Shares"), held by stockholders
who have properly exercised appraisal rights under Section 262 of the
Delaware General Corporation Law (the "DGCL")) will be converted into
the right to receive $3.80 per share net in cash (subject to reduction
for any applicable federal backup withholding or stock transfer taxes
payable by the seller), without interest thereon; and
2. To transact such other business as may properly come before the Special
Meeting.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
The Merger is the second step of a two-step transaction pursuant to which
Innovex, as the owner of all of the capital stock of the Purchaser, will
acquire the entire equity interest in ADFlex. The first step was a tender
offer by the Purchaser for the Shares at $3.80 per Share net to the seller in
cash (subject to reduction for any applicable federal backup withholding or
stock transfer taxes payable by the seller), without interest thereon (the
"Offer"). The Purchaser purchased 6,804,284 Shares upon the expiration of the
Offer on August 4, 1999, representing approximately 75.5% of the issued and
outstanding Shares.
As a result of the Offer, the Purchaser has the right to vote at the Special
Meeting a sufficient number of the Shares to approve and adopt the Merger
Agreement without the affirmative vote of any other stockholder, thereby
assuring such approval and adoption. Pursuant to the Merger Agreement, the
Purchaser is obligated to vote the Shares owned by it in favor of approving
and adopting the Merger Agreement. ADFlex currently anticipates that the
Merger will be effected on September , 1999, or as promptly as possible
thereafter.
On June 30, 1999, the Board of Directors of ADFlex unanimously determined
that the Merger Agreement and the transactions contemplated thereby, including
the Offer and the Merger, are fair to and in the best interests of the
stockholders of ADFlex, and approved the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger.
By Order of the Board of Directors,
Donald E. Frederick
Secretary
Chandler, Arizona
August , 1999
<PAGE>
ADFLEX SOLUTIONS, INC.
2001 WEST CHANDLER BOULEVARD
CHANDLER, ARIZONA 85224
INFORMATION STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 1999
This Information Statement is being furnished by the Board of Directors (the
"Board") of ADFlex Solutions, Inc. ("ADFlex"), a Delaware corporation, to the
holders of the outstanding shares of common stock, $0.01 par value, including
the associated rights (together with the common stock, the "Shares") of
ADFlex, in connection with the proposed merger (the "Merger") of Innovex
Acquisition Corp. (the "Purchaser"), a Delaware corporation and a wholly-owned
subsidiary of Innovex, Inc. ("Innovex"), a Minnesota corporation, with and
into ADFlex pursuant to an Agreement and Plan of Merger, dated July 1, 1999
(the "Merger Agreement"), by and among ADFlex, Innovex and the Purchaser, a
copy of which is attached hereto as Annex D. As a result of the Merger, ADFlex
will become a wholly-owned subsidiary of Innovex and each then outstanding
Share (other than Shares held by ADFlex or by any subsidiary of ADFlex, or
owned by Innovex, the Purchaser or any other subsidiary of Innovex, which
shall be canceled, and other than Shares, if any (collectively, "Dissenting
Shares") held by stockholders who have properly exercised appraisal rights
under Section 262 of the Delaware General Corporation Law (the "DGCL")) will
be converted into the right to receive $3.80 per Share net to the seller in
cash (subject to reduction for any applicable federal backup withholding or
stock transfer taxes payable by the seller), without interest thereon (the
"Per Share Amount").
The Merger is the second step of a two-step transaction pursuant to which
Innovex, as the owner of all of the capital stock of the Purchaser, will
acquire the entire equity interest in ADFlex. The first step was a tender
offer by the Purchaser for the outstanding Shares at $3.80 per Share net to
the seller in cash (subject to reduction for any applicable federal backup
withholding or stock transfer taxes payable by the seller), without interest
thereon (the "Offer"). The Purchaser purchased 6,804,284 Shares upon the
expiration of the Offer on August 4, 1999, representing approximately 75.5% of
the issued and outstanding Shares.
This Information Statement accompanies a Notice of Special Meeting of
Stockholders of ADFlex to be held on , September , 1999, at which time
the stockholders of ADFlex will be asked to consider and vote upon a proposal
to approve and adopt the Merger Agreement and such other business as may
properly come before the Special Meeting.
As a result of the Offer, the Purchaser has the right to vote a sufficient
number of the outstanding Shares at the Special Meeting to approve and adopt
the Merger Agreement without the affirmative vote of any other stockholder,
thereby assuring such approval and adoption. Pursuant to the Merger Agreement,
the Purchaser is obligated to vote the Shares owned by it in favor of
approving and adopting the Merger Agreement. ADFlex currently anticipates that
the Merger will be effected on September , 1999, or as promptly as possible
thereafter.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
This Information Statement is dated August , 1999 and is first being mailed
to the stockholders of ADFlex on or about August , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................................................... 1
The Parties to the Merger Agreement....................................... 1
The Merger Agreement...................................................... 1
Special Meeting of Stockholders; Vote Required to Approve and Adopt the
Merger Agreement......................................................... 1
Payment for Shares...................................................... 2
Dissenters' Rights of Appraisal......................................... 2
Rights Agreement........................................................ 2
The Merger.............................................................. 2
Selected Financial Information of ADFlex................................ 5
Historical Price and Dividend Information on the Shares................. 5
SPECIAL MEETING OF STOCKHOLDERS........................................... 6
The Offer and the Merger................................................ 6
Time and Location of the Special Meeting................................ 6
Vote Required to Approve and Adopt the Merger Agreement................. 6
PAYMENT FOR SHARES........................................................ 7
Letter of Transmittal................................................... 7
Valid Surrender of Shares............................................... 7
Book Entry Transfer..................................................... 7
Signature Guarantees.................................................... 8
Backup Federal Income Tax Withholding................................... 8
DISSENTERS' RIGHTS OF APPRAISAL........................................... 8
HISTORICAL PRICE AND DIVIDEND INFORMATION ON THE SHARES................... 9
THE MERGER................................................................ 9
Background of the Offer and the Merger.................................. 9
Opinion of Financial Advisor............................................ 13
Federal Income Tax Consequences of the Merger........................... 14
Regulatory Matters...................................................... 15
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................ 15
Employee and Director Stock Options..................................... 15
Employee Benefit Plans; Salary Continuation Agreements.................. 16
THE MERGER AGREEMENT...................................................... 16
The Tender Offer........................................................ 16
Board Designees......................................................... 17
The Merger.............................................................. 17
Stock Option and Other Plans............................................ 18
Representations and Warranties.......................................... 18
Interim Operations of ADFlex............................................ 18
Filings; Reasonable Efforts............................................. 19
Information Statement; ADFlex Stockholders Meeting...................... 20
Directors' and Officers' Insurance and Indemnification.................. 20
Employee Matters........................................................ 21
Retirement of Bank Debt................................................. 21
Costs and Expenses...................................................... 22
Waiver; Remedies Cumulative............................................. 22
RIGHTS AGREEMENT.......................................................... 22
CHANGE IN CONTROL AGREEMENTS.............................................. 22
INDEMNITY AND LIMITATION OF LIABILITY..................................... 23
LIABILITY INSURANCE....................................................... 24
DIRECTOR BONUSES.......................................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
FINANCIAL ARRANGEMENTS OF INNOVEX......................................... 24
BUSINESS OF ADFLEX........................................................ 24
SELECTED FINANCIAL INFORMATION OF ADFLEX.................................. 25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 27
AVAILABLE INFORMATION..................................................... 28
FINANCIAL STATEMENTS AND OTHER INFORMATION; INFORMATION INCORPORATED BY
REFERENCE................................................................ 29
ANNEXES
Annual Report on Form 10-K of ADFlex for the Fiscal Year Ended December
27, 1998................................................................. A-1
Current Report on Form 8-K of ADFlex filed on July 8, 1999................ B-1
Quarterly Report on Form 10-Q of ADFlex for the Quarterly Period Ended
June 27, 1999............................................................ C-1
Agreement and Plan of Merger.............................................. D-1
Opinion of BancBoston Robertson Stephens Inc.............................. E-1
Section 262 of the Delaware General Corporation Law....................... F-1
</TABLE>
ii
<PAGE>
SUMMARY
The following summary highlights selected information contained in this
Information Statement. This summary may not contain all of the information
that is important to you. You are urged to read this Information Statement and
the annexes hereto in their entirety. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
The Parties to the Merger Agreement
ADFlex
ADFlex is a leading worldwide provider of flexible circuit interconnect
solutions to original equipment manufacturers in the electronics industry.
ADFlex 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. ADFlex targets high-volume markets where
miniaturization, form and weight are driving factors and flexible circuits are
an enabling technology. ADFlex is a Delaware corporation with its principal
executive offices located at 2001 West Chandler Boulevard, Chandler, Arizona
85224, and its telephone number is (602) 963-4584.
The Purchaser
The Purchaser is a newly incorporated Delaware corporation and a wholly-
owned subsidiary of Innovex. To date, the Purchaser has not conducted any
business other than in connection with the Offer and the Merger. The principal
executive offices of the Purchaser are located at 530 Eleventh Avenue South,
Hopkins, Minnesota 55343, and its telephone number is (612) 938-4155.
Innovex
Innovex develops, engineers and manufactures specialty precision products
for original equipment manufacturers and designs and manufactures highly
complex circuitry and chemically machined components. Innovex is a Minnesota
corporation with its principal executive offices located at 530 Eleventh
Avenue South, Hopkins, Minnesota 55343, and its telephone number is (612) 938-
4155.
The Merger Agreement
This Information Statement is being delivered to the stockholders of ADFlex
in connection with the Merger of the Purchaser with and into ADFlex pursuant
to the Merger Agreement. As a result of the Merger, ADFlex will become a
wholly-owned subsidiary of Innovex, each issued and outstanding Share (other
than Shares held by ADFlex or by any subsidiary of ADFlex, or owned by
Innovex, the Purchaser or any other subsidiary of Innovex, which shall be
canceled, and other than Dissenting Shares) will be converted into the right
to receive the Per Share Amount, and the equity interests of all pre-Merger
stockholders in ADFlex will be terminated.
The Merger is the second step of a two-step transaction pursuant to which
Innovex, as the owner of all of the capital stock of the Purchaser, will
acquire the entire equity interest in ADFlex. The first step was the Offer.
The Purchaser purchased 6,804,284 Shares upon the completion of the Offer on
August 3, 1999, representing approximately 75.5% of the issued and outstanding
Shares.
Pursuant to the Merger Agreement, on August 10, 1999, one of the four
members of the Board resigned as a director, the Board was increased to seven
members, and four persons designated by the Purchaser were subsequently
appointed as members of the Board. The persons designated by the Purchaser are
all directors or employees of Innovex.
Special Meeting of Stockholders; Vote Required to Approve and Adopt the Merger
Agreement
The Special Meeting of Stockholders will be held on Monday, September ,
1999, at 10:00 a.m., Central Time, at the executive offices of Innovex, Inc.,
which are located at 530 Eleventh Avenue South, Hopkins,
1
<PAGE>
Minnesota. At the Special Meeting, stockholders will be asked to consider and
vote upon a proposal to approve and adopt the Merger Agreement and such other
proposals as may properly come before the Special Meeting.
Pursuant to the DGCL, the affirmative vote of a majority of the issued and
outstanding Shares is required to approve and adopt the Merger Agreement at
the Special Meeting. Only holders of record of Shares at the close of business
on August 20, 1999 (the "Record Date") are entitled to notice of and to vote
at the Special Meeting. At such date there were 9,017,416 Shares issued and
outstanding, each of which will be entitled to one vote on each matter to be
acted upon or which may properly come before the Special Meeting.
As a result of the Offer, the Purchaser was the holder of record of
6,804,284 Shares on the Record Date, representing approximately 75.5% of the
Shares issued and outstanding on the Record Date. Pursuant to the terms of the
Merger Agreement, the Purchaser is obligated to vote all of the Shares held by
it in favor of approving and adopting the Merger Agreement, which under the
DGCL, will be a sufficient number of Shares to approve and adopt the Merger
Agreement without the affirmative vote of any other stockholder, thereby
assuring such approval and adoption.
Payment for Shares
Immediately after the effective time of the Merger (the "Effective Time")
(in any event within two business days following the Effective Time), Innovex
will cause the Surviving Corporation to furnish to Boston EquiServe, as the
paying agent (the "Paying Agent") for the holders of record of Shares, the
amount of cash to be paid in respect of the Shares converted into the right to
receive the Per Share Amount pursuant to the Merger. In addition, a Letter of
Transmittal will be sent to all stockholders of ADFlex under separate cover
immediately after the Effective Time (in any event within two business days
following the Effective Time). The Letter of Transmittal will advise each
stockholder of the procedures for surrendering to the Paying Agent
certificates evidencing Shares in exchange for the Per Share Amount. All
certificates so surrendered will be canceled. After the completion of the
Merger and upon the surrender of certificates evidencing Shares, together with
a duly executed Letter of Transmittal, the holder of record thereof will
receive in exchange for each Share surrendered the Per Share Amount. Any cash
held by the Paying Agent that remains unclaimed by stockholders for six months
after the Effective Time will be returned to ADFlex, as the Surviving
Corporation in the Merger, and thereafter all former stockholders shall be
entitled to look to the Surviving Corporation (subject to applicable abandoned
property, escheat and other similar laws) as general creditors thereof with
respect to the cash payable upon surrender of their certificates. See "Payment
for Shares."
Dissenters' Rights of Appraisal
Pursuant to Delaware law, stockholders of ADFlex have dissenters' rights of
appraisal in connection with the Merger. See "Dissenters' Rights of
Appraisal."
Rights Agreement
ADFlex and BankBoston N.A. (formerly First National Bank of Boston, NA) are
parties to a Preferred Shares Rights Agreement, pursuant to which the Board
declared a dividend of one one-hundredth of a share of Series A Participating
Preferred Stock (subject to adjustment, the "Rights") for each Share
outstanding at the close of business on July 22, 1996. The Rights may be
triggered by certain events. In connection with the negotiation of the Merger
Agreement, the Board amended the Rights Agreement so that Board-approved
tender offers such as the Offer would not trigger the Rights. See "Rights
Agreement."
The Merger
Background of the Merger
For a description of the events leading up to the approval of the Merger
Agreement by the Board, see "The Merger--Background of the Offer and the
Merger."
2
<PAGE>
Approval of the Board
The Board, on June 30, 1999, unanimously determined that the Merger
Agreement, the Offer and the Merger, are fair to and in the best interests of
the stockholders of ADFlex, approved the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger, and recommended that
ADFlex's stockholders accept the Offer and adopt the Merger Agreement. See
"The Merger--Background of the Offer and the Merger."
Interests of Certain Persons in the Merger
Pursuant to the Merger Agreement, at the Effective Time each holder of a
then-outstanding option to purchase Shares under ADFlex's 1993 Equity
Incentive Plan, 1994 Stock Incentive Plan and Employee Stock Purchase Plan
(the "Stock Option Plans"), whether or not then exercisable (the "Options"),
will, in settlement thereof, receive from ADFlex for each share subject to
such Option an amount (subject to any applicable withholding tax) in cash
equal to the difference between $3.80 and the per Share exercise price of such
Option to the extent such difference is a positive number. In addition,
Innovex has agreed to provide, or cause the Surviving Corporation to provide,
for the benefit of employees of the Surviving Corporation or its subsidiaries
who were employees of ADFlex immediately prior to the Effective Time, at the
election of Innovex, employee benefit plans that are either (a) in the
aggregate substantially comparable to the employee benefit plans provided to
such individuals by ADFlex on the date of the Merger Agreement or (b) in the
aggregate substantially comparable to the employee benefit plans provided to
similarly situated employees of Innovex or its subsidiaries who were not
employees of ADFlex immediately prior to the Effective Time. Innovex has also
agreed to cause the Surviving Corporation to honor (subject to any
withholdings under applicable Law) all employment, consulting and severance
agreements or arrangements to which ADFlex or any of its subsidiaries was a
party on the date of signing of the Merger Agreement, which are specifically
disclosed in the disclosure letter delivered by ADFlex to Innovex in
connection with the Merger Agreement (the "ADFlex Disclosure Letter"). See
"Interests of Certain Persons in the Merger" and "The Merger Agreement."
Opinion of Financial Advisor
BancBoston Robertson Stephens Inc. ("BancBoston Robertson Stephens"),
ADFlex's financial advisor, has delivered an oral opinion to the Board of
ADFlex (confirmed in writing on July 1, 1999) that, as of the date of such
opinion, and based on the assumptions made, matters considered and limits of
review described therein, the consideration to be received by the holders of
the Shares (other than Innovex, the Purchaser, affiliates of Innovex or the
Purchaser and holders of shares for which dissenters' rights have been
properly exercised) in the Offer and the Merger was fair from a financial
point of view to such holders. The complete opinion of BancBoston Robertson
Stephens, which sets forth the assumptions made, the matters considered and
the limits of BancBoston Robertson Stephens' review, is attached to this
Information Statement as Annex E and should be read in its entirety. See "The
Merger--Opinion of Financial Advisor."
BancBoston Robertson Stephens is affiliated with BankBoston N.A., ADFlex's
primary lender. ADFlex is currently in default under its loans and has been in
such covenant default since the first quarter of 1999. The lenders have
elected not to enter into any forbearance agreement with ADFlex. The financing
commitments have been terminated, and pursuant to the terms of the loan
documents the lenders have the right currently to accelerate and demand
payment of the loans. Although BankBoston N.A. has not accelerated or demanded
payment of the outstanding principal balance of the loans, BankBoston N.A. has
reserved its rights to take any actions and to seek any remedies available to
it under the loan documents. As a result of the Merger, ADFlex's indebtedness
to its lenders, which approximated $33.8 million at June 25, 1999, will be
paid in full. The Board understands that BankBoston N.A. will benefit from the
consummation of the Offer and the Merger and the repayment of ADFlex's
indebtedness. See "Retirement of Bank Debt."
Purpose of the Merger
The purpose of the Merger is to enable Innovex, as the owner of all of the
capital stock of the Purchaser, to acquire the remaining equity interest in
ADFlex not currently owned by the Purchaser.
3
<PAGE>
Conditions to the Merger
The Merger is subject to the satisfaction of certain conditions. See "The
Merger Agreement--Certain Conditions of the Offer." Assuming the satisfaction
of such conditions, it is expected that the Merger will be effected on
September , 1999, or as promptly as possible thereafter.
Regulatory Matters
The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, expired on July 27, 1999 without such waiting period being
extended by the Federal Trade Commission or the Antitrust Division of the
Department of Justice. ADFlex is not aware of any federal, state or foreign
regulatory requirements that remain to be complied with in order to complete
the Merger. See "The Merger--Regulatory Matters."
Federal Income Tax Consequences of the Merger
The receipt of cash pursuant to the Merger Agreement will be a taxable
transaction to stockholders for federal income tax purposes. See "The Merger--
Federal Income Tax Consequences of the Merger." Stockholders are urged to
consult their own tax advisors as to the particular tax consequences of the
Merger to them, including the applicability and the effect of federal, state,
local, foreign and other tax laws.
4
<PAGE>
Selected Financial Information of ADFlex
The following table sets forth certain summary consolidated financial
information with respect to ADFlex and its consolidated subsidiaries derived
from the audited financial statements contained in ADFlex's 1998 Annual Report
on Form 10-K and the unaudited financial statements contained in ADFlex's
Quarterly Report on Form 10-Q for the quarter ended June 27, 1999. The
selected financial information of ADFlex should be read in conjunction with
the audited financial statements and other financial information of ADFlex in
this Information Statement or incorporated herein by reference.
ADFLEX SOLUTIONS, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
------------------ --------------------------------------
June 27, June 30, December 27, December 31, December 31,
1999 1998 1998 1997 1996
-------- -------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Net sales............. $34,187 $44,304 $170,097 $213,878 $156,836
Gross profit (loss)... 4,627 1,153 17,121 38,052 18,563
Operating expenses.... 5,512 5,247 20,659 23,472 52,254
Operating income
(loss)............... (885) (4,094) (3,538) 14,580 (33,691)
Net income (loss)..... 2,402 (3,574) (4,753) 8,596 (25,024)
Net income (loss) per
basic share: (0.27) (0.40) (0.54) 0.99 (2.92)
Common shares used in
the calculation of
net income (loss) per
basic share.......... 8,983 8,835 8,867 8,712 8,580
</TABLE>
<TABLE>
<CAPTION>
At Fiscal Year Ended
At --------------------------------------
June 27, December 27, December 31, December 31,
1999 1998 1997 1996
----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.............. $85,328 $108,304 $114,200 $93,181
Total current
liabilities.............. 59,559 60,786 40,063 42,212
Long-term debt and
capitalized lease
obligations.............. 1,311 24,682 25,189 10,340
Total stockholders'
equity................... 24,458 47,449 50,907 40,289
</TABLE>
Historical Price and Dividend Information on the Shares
The Shares are listed on the Nasdaq National Market under the symbol "AFLX".
The following table sets forth, for the periods indicated, the high and low
sales prices per Share as reported on the Nasdaq National Market according to
published sources.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Quarter Ended:
June 27, 1999................................................... $ 4.20 $ 1.56
March 28, 1999.................................................. $ 7.75 $ 2.94
December 27, 1998............................................... $ 9.50 $ 2.38
September 30, 1998.............................................. $ 9.13 $ 2.75
June 30, 1998................................................... $22.38 $ 8.38
March 31, 1998.................................................. $19.50 $14.88
December 31, 1997............................................... $28.13 $14.63
September 30, 1997.............................................. $28.50 $14.75
June 30, 1997................................................... $19.00 $11.75
March 31, 1997.................................................. $16.13 $10.75
</TABLE>
5
<PAGE>
The Rights trade together with the Shares. See "Rights Agreement." On July
1, 1999, the last full trading day prior to the public announcement of the
execution of the Merger Agreement, according to published sources, the last
reported sale price of the Shares on the Nasdaq National Market was $4.28125
per Share. On July 6, 1999, the last full trading day before the commencement
of the Offer, according to published sources, the last reported sale price of
the Shares on the Nasdaq National Market was $3.5625 per Share. On August 20,
1999, the last full trading day prior to the commencement of mailing of this
Information Statement, the last reported sale price of the Shares was $ per
Share. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
SHARES.
SPECIAL MEETING OF STOCKHOLDERS
The Offer and the Merger
This Information Statement is being delivered to the stockholders of ADFlex
in connection with the Merger of the Purchaser with and into ADFlex pursuant
to the Merger Agreement. As a result of the Merger, ADFlex will become a
wholly-owned subsidiary of Innovex, each issued and outstanding Share (other
than Shares held by ADFlex or by any subsidiary of ADFlex, or owned by
Innovex, the Purchaser or any other subsidiary of Innovex, which shall be
canceled, and other than Dissenting Shares) will be converted into the right
to receive $3.80 per Share net in cash (subject to reduction for any
applicable federal backup withholding or stock transfer taxes payable by the
seller), without interest thereon, and the equity interest of all stockholders
in ADFlex will be terminated.
The Merger is the second step of a two-step transaction pursuant to which
Innovex, as the owner of all of the capital stock of the Purchaser, will
acquire the entire equity interest in ADFlex. The first step was the Offer.
The Purchaser purchased 6,804,284 Shares upon the completion of the Offer on
August 4, 1999, representing approximately 75.5% of the issued and outstanding
Shares.
Pursuant to the Merger Agreement, on August 10, 1999, William Kennedy Wilkie
resigned as a member the Board, and four persons designated by the Purchaser
(William P. Murnane, Timothy S. McIntee, Douglas W. Keller and Allan J. Chan)
were subsequently elected as members of the Board. Steve Sanghi, Richard P.
Clark and Wade Meyercord continue to serve as directors of ADFlex. All of the
persons designated by the Purchaser are directors or employees of Innovex.
Time and Location of the Special Meeting
The Special Meeting will be held on , September , 1999 at 10:00 a.m.,
Central Time, at the executive offices of Innovex, which are located at 530
Eleventh Avenue South, Hopkins, Minnesota. At the Special Meeting,
stockholders will be asked to consider and vote upon a proposal to approve and
adopt the Merger Agreement and such other proposals as may properly come
before the Special Meeting.
Vote Required to Approve and Adopt the Merger Agreement
Pursuant to the DGCL, the affirmative vote of a majority of the issued and
outstanding Shares is required to approve and adopt the Merger Agreement at
the Special Meeting. Only holders of record of Shares at the close of business
on the Record Date (August 20, 1999) are entitled to notice of and to vote at
the Special Meeting. At such date there were 9,017,416 Shares outstanding,
each of which will be entitled to one vote on each matter to be acted upon or
which may properly come before the Special Meeting.
As a result of the Offer, the Purchaser was the holder of record of
6,804,284 Shares on the Record Date, representing approximately 75.5% of the
Shares outstanding on the Record Date. Pursuant to the terms of the Merger
Agreement, the Purchaser is obligated to vote all of the Shares held by it in
favor of approving and
6
<PAGE>
adopting the Merger Agreement, which under the DGCL will be a sufficient
number of Shares to approve and adopt the Merger Agreement without the
affirmative vote of any other stockholder, thereby assuring such approval and
adoption.
ADFlex currently anticipates that the Merger will be effected on September
, 1999, or as promptly as possible thereafter. To effect the Merger, a
certificate of merger will be filed with the Secretary of State of the State
of Delaware in accordance with the DGCL.
PAYMENT FOR SHARES
Surrender of Shares to the Paying Agent
Immediately after the Effective Time (in any event within two business days
following the Effective Time), (a) Innovex will cause the Surviving
Corporation to furnish to the Paying Agent a corpus (the "Payment Fund")
consisting of cash sufficient in the aggregate for the Paying Agent to make
full payment of the Per Share Amount to the holders of all of the outstanding
Shares (other than Shares held by ADFlex or by any subsidiary of ADFlex, or
owned by Innovex, the Purchaser or any other subsidiary of Innovex, which
shall be canceled, and other than Dissenting Shares), and (b) Innovex will
cause the Paying Agent to mail a Letter of Transmittal to each record holder
of outstanding Shares for the holder to use in surrendering the certificates
which represented his, her or its Shares against payment of the Per Share
Amount. No interest will accrue or be paid to the holder of any outstanding
Shares.
Holders of record should use the Letter of Transmittal to effect the
surrender of certificates evidencing Shares in exchange for the Per Share
Amount. All certificates so surrendered will be canceled. After the completion
of the Merger and upon the surrender of certificates evidencing Shares,
together with a duly executed Letter of Transmittal, the holder of record
thereof will receive the Per Share Amount in exchange for each Share
surrendered. Any cash held by the Paying Agent that remains unclaimed by
stockholders for six months after the Effective Time will be returned to
ADFlex, as the Surviving Corporation in the Merger, and thereafter all former
stockholders shall be entitled to look to the Surviving Corporation (subject
to applicable abandoned property, escheat and other similar laws) as general
creditors thereof with respect to the cash payable upon surrender of their
certificates.
Letter of Transmittal
A Letter of Transmittal (with instructions for its use) will be sent to each
record holder of outstanding Shares immediately after the Effective Time, and
in any event within two business days following the Effective Time. The Letter
of Transmittal will advise each stockholder of the procedures for surrendering
to the Paying Agent certificates evidencing Shares in exchange for the Per
Share Amount.
Valid Surrender of Shares
For Shares to be validly surrendered pursuant to the Merger, a Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
duly executed, with any required signature guarantees, must be received by the
Paying Agent, at one of its addresses set forth in the Letter of Transmittal,
and either (a) certificates representing Shares must be received by the Paying
Agent or (b) Shares must be delivered by book-entry transfer.
Book Entry Transfer
The Paying Agent will establish an account with respect to the Shares at The
Depository Trust Company ("DTC") for purposes of the Merger. Any financial
institution that is a participant in DTC's systems may make book-entry
delivery of Shares by causing DTC to transfer such Shares into the Paying
Agent's account at DTC in accordance with the procedures for such transfer.
7
<PAGE>
Signature Guarantees
All signatures on a Letter of Transmittal must be guaranteed by a firm which
is a member of a registered national securities exchange or the National
Association of Securities Dealers, Inc. or by a financial institution
(including most commercial banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Guarantee Program or
the Stock Exchange Medallion Program (an "Eligible Institution"), unless (a)
the Letter of Transmittal is signed by the registered holder of the Shares
(which term, for the purposes of this section, includes any participant in the
Book-Entry Transfer Facility system whose name appears on a security position
listing as the owner of the Shares) tendered therewith and such registered
holder has not completed either the box entitled "Special Delivery
Instructions" or the box entitled "Special Payment Instructions" on the Letter
of Transmittal or (b) the Shares are tendered for the account of an Eligible
Institution. If the certificates representing Shares are registered in the
name of a person other than the signer of the Letter of Transmittal or if
payment is to be made to, or certificates for Shares not validly tendered, not
accepted for payment or not purchased are to be issued or returned to, a
person other than the registered holder of the certificate for the Shares,
then the tendered certificates must be endorsed in blank or accompanied by
appropriate stock powers, in each case signed exactly as the name(s) of the
registered holder(s) appear on the certificates, with the signatures on such
certificates or stock powers guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF TRANSMITTAL
AND ANY OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE SURRENDERING
STOCKHOLDER. IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
Backup Federal Income Tax Withholding
To prevent backup federal income tax withholding of 31% of the aggregate Per
Share Amount payable to a stockholder, a stockholder must provide the Paying
Agent with his or her correct taxpayer identification number and certify under
penalties of perjury that such number is correct and that he or she is not
subject to backup withholding of federal income tax by completing the
substitute Form W-9 included in the Letter of Transmittal.
DISSENTERS' RIGHTS OF APPRAISAL
Holders of the Shares do not have appraisal rights as a result of the Offer.
However, if the Merger is consummated, holders of Shares whose Shares were not
accepted for payment and paid for by the Purchaser in the Offer will have
certain rights pursuant to the provisions of Section 262 of the DGCL to
dissent and demand appraisal of their Shares. Under Section 262 of the DGCL,
dissenting stockholders who comply with the applicable statutory procedures
will be entitled to receive a judicial determination of the fair value of
their Shares (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) and to receive payment of such
fair value in cash, together with a fair rate of interest, if any. Any such
judicial determination of the fair value of the Shares could be based upon
factors other than, or in addition to, the price per share to be paid in the
Merger or the market value of the Shares. The value so determined could be
more or less than the price per share to be paid in the Merger.
8
<PAGE>
HISTORICAL PRICE AND DIVIDEND INFORMATION ON THE SHARES
The Shares are listed on the Nasdaq National Market under the symbol "AFLX".
The following table sets forth, for the periods indicated, the high and low
sales prices per Share as reported on the Nasdaq National Market according to
published sources.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Quarter Ended:
June 27, 1999................................................ $ 4.20 $ 1.56
March 28, 1999............................................... $ 7.75 $ 2.94
December 27, 1998............................................ $ 9.50 $ 2.38
September 30, 1998........................................... $ 9.13 $ 2.75
June 30, 1998................................................ $22.38 $ 8.38
March 31, 1998............................................... $19.50 $14.88
December 31, 1997............................................ $28.13 $14.63
September 30, 1997........................................... $28.50 $14.75
June 30, 1997................................................ $19.00 $11.75
March 31, 1997............................................... $16.13 $10.75
</TABLE>
The Rights trade together with the Shares. See "Rights Agreement." On July
1, 1999, the last full trading day prior to the public announcement of the
execution of the Merger Agreement, according to published sources, the last
reported sale price of the Shares on the Nasdaq National Market was $4.28125
per Share. On July 6, 1999, the last full trading day before the commencement
of the Offer, according to published sources, the last reported sale price of
the Shares on the Nasdaq National Market was $3.5625 per Share. On August 20,
1999, the last full trading day prior to the commencement of mailing of this
Information Statement, the last reported sale price of the Shares was $ per
Share. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
SHARES.
THE MERGER
Background of the Offer and the Merger
ADFlex faced many operating challenges during 1998. Overall net sales were
substantially below net sales from the prior year, due to weak demand from
certain customers, in particular those supplying the personal computer, hard
disk drive and communications markets, and intense price competition of Asian
suppliers as they inherited the benefits from currency devaluation and tried
to mitigate the demand void caused by the Asian financial crisis. The
combination of weak demand coupled with intense price competition adversely
affected ADFlex's operating results, causing ADFlex to default under certain
of the financial covenants in its credit facilities, and straining cash
resources. In the fall of 1998, in response to pressure from its lenders,
ADFlex contacted BancBoston Robertson Stephens and requested that such firm
assist ADFlex in securing additional capital.
In October 1998, ADFlex began the marketing process for a $20,000,000
private placement of Senior Subordinated Notes with warrants. More than 30
potential investors were approached, but no serious interest in the offering
was expressed.
In December 1998, the market size of the offering was reduced to $15,000,000
and the number of shares of common stock of ADFlex issuable in exchange for
the warrants was increased. No serious interest in the offering was expressed.
In February 1999, ADFlex began discussions with investors regarding a
$5,000,000 to $10,000,000 private placement of resettable convertible
securities. Representatives of ADFlex began negotiations with several parties
regarding their possible interest in the private placement, but no agreement
on terms could be reached. At the
9
<PAGE>
same time, ADFlex pursued a $5,000,000 to $10,000,000 private placement of
equity securities, but no serious interest was expressed by any of the more
than a dozen potential investors that were approached. Also in February 1999,
ADFlex began discussions with three financial buyers that ADFlex had
approached in connection with its financing efforts regarding a possible
merger or acquisition. The discussions with two buyers broke down after
several weeks of due diligence, while the third buyer concluded it would put
discussions on hold after conducting due diligence on the results of
operations of the first quarter. On March 5, 1999, the Board held a special
meeting to discuss the abandonment of discussions with these three buyers and
possible other financing alternatives.
For the quarter ended March 28, 1999, ADFlex reported significantly reduced
sales and an operating loss. The Board approved a reorganization plan which
included closing the United Kingdom facility, downsizing the Mexican facility
and transferring programs from Mexico to the new Thailand facility. ADFlex
ended the quarter in default under its credit facilities and began extensive
negotiations with its lenders with a view to restructuring the covenants to
allow ADFlex to work through its operational difficulties.
ADFlex's President and Chief Executive Officer, Rolando C. Esteverena,
resigned effective April 5, 1999. The Board appointed Neil Dial as President
and Chief Operating Officer.
On April 13, 1999, the Board held a special meeting to discuss the filing of
bankruptcy for the United Kingdom subsidiary and various banking and financing
issues. Mr. Dial and Steve Sanghi, the Chairman of ADFlex, reported on their
discussions with the lenders to date, and advised the Board that the lenders
were not willing to restructure the credit facilities in a way that they
believed would permit ADFlex to meet its reorganization plan. Rather, the
lenders indicated their strong desire that the loans be paid in full, and
advised ADFlex that they would like ADFlex to consider strategic alternatives,
including a sale. Mr. Sanghi further reported on the lack of success with
respect to management's capital raising efforts, and noted that potential
investors were insisting ADFlex return to and sustain profitability before
they would consider an investment. BancBoston Robertson Stephens discussed a
number of financing alternatives with the Board, including public and private
equity offerings and a recapitalization of ADFlex. Mr. Sanghi said that he
would continue to work on possible financing scenarios and with the lenders
while management focused on implementing the reorganization plan and attaining
break-even operations.
In April, May and June 1999, representatives of ADFlex began discussions
with five parties, including Innovex, which expressed an interest in acquiring
or merging with ADFlex. On or about April 16, 1999, William P. Murnane,
President and Chief Operating Officer of Innovex, had a telephone conversation
with Mr. Sanghi, regarding ADFlex's interest in seeking a strategic partner.
Mr. Sanghi indicated that ADFlex's senior executive team was considering this
strategy and had identified a limited number of candidates they believed would
best suit the future needs of all of the current constituencies of ADFlex. Mr.
Sanghi also indicated that Innovex was one of ADFlex's primary candidates for
a strategic partner. As a result of that conversation, a meeting was scheduled
in Chandler, Arizona on April 23, 1999.
On April 23, 1999, representatives of Innovex and ADFlex, including Mr.
Murnane and Mr. Sanghi, met to discuss the possible acquisition of ADFlex.
During the same time, ADFlex engaged in discussions with another interested
party, which was a competitor of ADFlex, regarding its interest in acquiring
ADFlex and another flexible circuit company in a three-way merger transaction
for stock in the surviving corporation of the merger.
On April 28, 1999, the Board held a regularly-scheduled meeting. Among other
normal agenda items, the Board discussed ADFlex's bank default and the
lenders' insistence that ADFlex engage the services of a crisis management
consultant. The Board discussed the possible actions ADFlex could take if the
lenders elected to call the loans, including the filing of a petition for
reorganization under the bankruptcy laws. On April 29, 1999, management met
with the lenders and presented a proposal for restructuring the credit
facilities.
On or about April 30, 1999, Innovex and ADFlex entered into a non-disclosure
agreement, following which ADFlex presented to Innovex detailed documentation
concerning ADFlex.
10
<PAGE>
On May 28, 1999, Innovex proposed a $3.00 per share cash tender offer. In
further negotiations between Messrs. Murnane and Sanghi, the price was
increased to $3.50 per share.
On June 2, 1999, the Board held a special meeting to discuss banking and
financing issues and possible acquisition opportunities. The Board discussed
and rejected the proposed three-way merger because the competitor making the
offer was not financially strong, had significant debt and was adversely
affected by the same market factors that had been negatively impacting
ADFlex's financial performance. At this meeting the Board also discussed with
BancBoston Robertson Stephens the strategic and financing alternatives
available to ADFlex. The Board discussed the fact that a quarterly
amortization payment of $750,000 was due on the bank loan at the end of June,
and that the lenders had not agreed to restructure this payment or grant any
forbearance. The Board concluded that it was unlikely ADFlex would have enough
cash to meet its obligations during the third quarter without further
financing. In light of ADFlex's liquidity concerns, the Board preliminarily
directed management of ADFlex to pursue a transaction with Innovex and one
other potential buyer.
On June 2 and June 3, 1999, Mr. Murnane and Mr. Sanghi held numerous
telephonic negotiations. Also on June 3, the lenders notified ADFlex in
writing that the financing commitments under the existing credit facilities
had terminated and that the lenders were no longer obligated to lend funds to
ADFlex pursuant to the Credit Agreement. In addition, on June 3, the other
potential buyer indicated that it could not proceed with an acquisition
transaction on ADFlex's time-frame. On June 7, 1999, ADFlex and Innovex
entered into an exclusivity agreement (the "Exclusivity Agreement"), whereby
ADFlex granted Innovex the exclusive right to negotiate an agreement for a
cash tender offer for ADFlex at $3.80 per share. Over the course of the
succeeding weeks, Innovex's representatives conducted further due diligence,
and the parties negotiated the terms of the Merger Agreement.
On June 28, 1999, the Board met telephonically to review the proposed terms
of the cash tender offer and received presentations by ADFlex's management and
by BancBoston Robertson Stephens. The Board directed management of ADFlex to
pursue a transaction with Innovex.
On June 28, 29 and 30, 1999, management and counsel for ADFlex and
BancBoston Robertson Stephens negotiated the Merger Agreement and the terms of
the Offer with Innovex.
On June 30, 1999, the Board met and, after presentations by ADFlex's
management and ADFlex's legal and financial advisors, approved the Merger
Agreement and the transactions contemplated thereby. Also on June 30, 1999,
the exclusivity provision of the Exclusivity Agreement, which was scheduled to
terminate on June 30, 1999, was extended until July 1, 1999.
The Merger Agreement and related agreements were finalized and executed and
delivered on July 1, 1999, and the transaction was announced as soon as
possible thereafter.
In approving the Merger Agreement and the transactions contemplated thereby
and recommending that all holders tender their Shares pursuant to the Offer,
the Board considered a number of factors, including the following:
(a) the Board's familiarity with, and information provided by ADFlex's
management as to, the business, financial condition, results of operations,
current business strategy and future prospects of ADFlex, the volatile
nature of the markets in which ADFlex operates, ADFlex's position in such
markets, current market dynamics, including increased price competition and
reduced demand, the historical and current market prices for the Shares,
and ADFlex's strategic and other alternatives;
(b) the terms of the Merger Agreement, including (i) the proposed
structure of the Offer and the Merger involving an immediate cash tender
offer followed by a merger for the same consideration, and (ii) the fact
that financing is not a condition to the Offer and the Merger, and the
Board's view that Innovex would be able to finance the transaction;
11
<PAGE>
(c) that the $3.80 per Share price contemplated by the Merger Agreement,
approximated recent trading prices of the Shares and substantially exceeded
trading prices of the Shares at the time that discussions regarding a
possible acquisition of ADFlex by the Purchaser commenced;
(d) the oral opinion of BancBoston Robertson Stephens (confirmed in
writing on July 1, 1999) to the effect that, as of the date of such
opinion, and based on the assumptions made, matters considered and limits
of review described therein, the consideration to be received by the
holders of the Shares (other than Innovex, the Purchaser, affiliates of
Innovex or the Purchaser and holders of shares for which dissenters' rights
have been properly exercised) in the Offer and the Merger was fair from a
financial point of view to such holders. The opinion addresses only the
fairness from a financial point of view of the consideration to be received
by such holders in the Offer and the Merger and does not constitute a
recommendation to any holder as to whether to tender Shares in the Offer or
to vote in favor of the approval of the Merger Agreement. The Company has
obtained the necessary consents to reproduce BancBoston Robertson Stephens'
opinion as an annex to this Information Statement and to summarize,
describe and refer to the opinion herein. (A COPY OF THE BANCBOSTON
ROBERTSON STEPHENS OPINION IS ATTACHED AS ANNEX E HERETO AND IS
INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ SUCH
OPINION CAREFULLY IN ITS ENTIRETY);
(e) probable adverse effects on the business and operations of ADFlex
resulting from a prolonged sale process, particularly in light of the
existing situation under the credit facilities and the results obtained by
ADFlex in its financing efforts;
(f) that the Merger Agreement permits ADFlex to furnish nonpublic
information to, and to participate in negotiations with, any third party
that has submitted a Superior Proposal as defined in the Merger Agreement,
if the Board determines in its good faith judgment, after taking into
account the advice of its legal counsel, that it is necessary to do so in
order to comply with its fiduciary duties to its stockholders, and that the
Merger Agreement permits the Board to terminate the Merger Agreement upon
two business days' prior notice to Innovex, in order to accept a proposal
which the Board has determined is a Superior Proposal after the Board has
concluded in good faith, after taking into account the advice of its legal
counsel, that it is necessary to accept such Superior Proposal in order to
comply with its fiduciary duties to its stockholders;
(g) the termination provisions of the Merger Agreement, which under
certain circumstances could obligate ADFlex to pay a $1.5 million
termination fee to Innovex plus reimbursement to Innovex of expenses up to
$600,000, and the Board's belief that such fees and damages provisions are
reasonable in the circumstances and would not deter a higher offer;
(h) strategic considerations, such as ADFlex's competitive position and
the need for additional capital to support operations of ADFlex and further
growth;
(i) alternatives to the proposed sale of ADFlex, including seeking
additional proposals from other parties and accepting the uncertainties
associated therewith (including with respect to timing, valuation and the
likelihood of completion of any such proposals that might be received) and
continuing to maintain ADFlex as an independent public corporation and not
engaging in any extraordinary transaction; and
(j) the process undertaken by ADFlex to pursue strategic alternatives,
including possible business combinations.
The foregoing discussion addresses the material information and factors
considered by the Board in its deliberations regarding and approval of the
Offer and the Merger. In view of the variety of factors and the amount of
information considered, the Board did not find it practicable to provide
specific assessments of, quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination that any factor was
of particular importance. The determination to recommend that stockholders
tender their shares in the Offer was made after consideration of all of the
factors taken as a whole. In addition, individual members of the Board may
have given different weights to different factors. The Board did not assign
weights to the individual factors and viewed their position and recommendation
as being based on the totality of the information presented to and considered
by them.
12
<PAGE>
On July 7, 1999, the Purchaser commenced the Offer. The Offer expired at
Midnight, New York City time, on August 3, 1999. As of the expiration of the
Offer, the Purchaser accepted for payment 6,804,284 Shares (representing
approximately 75.5% of the issued and outstanding Shares) validly tendered and
not withdrawn pursuant to the Offer, which number gives effect to the failure
of a number of Shares to be delivered in accordance with guaranteed delivery
procedures.
Pursuant to the Merger Agreement, on August 10, 1999, William Kennedy Wilkie
resigned as a member of the Board, and four persons designated by the
Purchaser (William P. Murnane, Timothy S. McIntee, Douglas W. Keller and Allan
J. Chan) were subsequently elected as members of the Board. Steve Sanghi,
Richard P. Clark and Wade Meyercord continue to serve as directors of ADFlex.
All of the persons designated by the Purchaser are directors or employees of
Innovex.
Opinion of Financial Advisor
BancBoston Robertson Stephens was retained by ADFlex to act as its financial
advisor with respect to the Offer, the Merger and matters arising in
connection therewith. Pursuant to the engagement letter between BancBoston
Robertson Stephens and ADFlex dated June 7, 1999 (the "Engagement Letter"),
ADFlex agreed to pay BancBoston Robertson Stephens as follows: (a) a
"Transaction Fee" in the amount of $800,000 payable in the event the
transaction is completed, (b) if less than 50% of ADFlex's voting stock or
assets is sold in a transaction (or series of related transactions), a
"Minority Investment Transaction Fee" equal to 6% of that portion of the
Aggregate Transaction Value (as defined in the Engagement Letter) that is
related to minority investments by parties that have been identified to ADFlex
by BancBoston Robertson Stephens or contacted by BancBoston Robertson Stephens
concerning the possibility of entering into a minority investment transaction,
subject to a minimum fee of $500,000 and a maximum fee equal to $800,000, and
(c) an opinion fee of $250,000, which is earned at the time of issuance and
credited against the Transaction Fee and paid on the earlier of the completion
of the transaction or six months following delivery of the opinion. The full
Transaction Fee becomes payable by ADFlex when control of 50% of the Shares
changes hands.
ADFlex also agreed to indemnify BancBoston Robertson Stephens and its
directors, officers, agents, employees and controlling persons against certain
liabilities in connection with its engagement. In the ordinary course of its
business, BancBoston Robertson Stephens may effect transactions for its own
account or the account of its customers and therefore, at any time may hold
long or short positions in debt or equity securities of the companies which
may be the subject of the transactions contemplated by the Merger Agreement.
BancBoston Robertson Stephens is an internationally recognized investment
banking firm engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions, negotiated primary and secondary
underwritings, private placements and valuations for corporate and other
purposes. ADFlex selected BancBoston Robertson Stephens as its financial
advisor based upon its experience, ability and reputation with respect to
mergers and acquisitions.
BancBoston Robertson Stephens is affiliated with BankBoston N.A., ADFlex's
primary lender. ADFlex is currently in default under its loans and has been in
such covenant default since the first quarter of 1999. The lenders have
elected not to enter into any forbearance agreement with ADFlex. The financing
commitments have been terminated, and pursuant to the terms of the loan
documents the lenders have the right currently to accelerate and demand
payment of the loans. Although BankBoston N.A. has not accelerated or demanded
payment of the outstanding principal balance of the loans, BankBoston N.A. has
reserved its rights to take any actions and to seek any remedies available to
it under the loan documents. As a result of the Merger, ADFlex's indebtedness
to its lenders, which approximated $33.8 million at June 25, 1999, will be
paid in full. The Board understands that BankBoston N.A. will benefit from the
consummation of the Offer and the Merger and the repayment of ADFlex's
indebtedness.
Except as described above, neither ADFlex, nor any person acting on its
behalf, currently intends to employ, retain or compensate any other person to
make solicitations or recommendations to stockholders on its behalf concerning
the Offer or the Merger.
13
<PAGE>
BancBoston Robertson Stephens provided its oral opinion, confirmed to ADFlex
in writing on July 1, 1999, that, as of the date of such opinion, and based on
the assumptions made, matters considered and limits of review described
therein, the consideration to be received by the holders of the Shares (other
than Innovex, the Purchaser, affiliates of Innovex or the Purchaser and
holders of shares for which dissenters' rights have been properly exercised)
in the Offer and the Merger was fair from a financial point of view to such
holders. BancBoston Robertson Stephens was not requested to update, and has
not updated, its opinion.
THE FULL TEXT OF THE BANCBOSTON ROBERTSON STEPHENS OPINION IS INCLUDED AS
ANNEX E TO THIS INFORMATION STATEMENT. THE FULL TEXT OF THE OPINION CONTAINS A
DESCRIPTION OF THE FACTORS CONSIDERED, THE ASSUMPTIONS MADE AND THE SCOPE OF
REVIEW UNDERTAKEN BY BANCBOSTON ROBERTSON STEPHENS IN RENDERING ITS OPINION.
THE COMPANY HAS OBTAINED THE NECESSARY CONSENTS TO REPRODUCE BANCBOSTON
ROBERTSON STEPHENS' OPINION AS AN ANNEX TO THIS INFORMATION STATEMENT AND TO
SUMMARIZE, DESCRIBE AND REFER TO THE OPINION HEREIN. YOU ARE URGED TO READ THE
BANCBOSTON ROBERTSON STEPHENS OPINION CAREFULLY AND IN ITS ENTIRETY. THE
BANCBOSTON ROBERTSON STEPHENS OPINION ADDRESSES ONLY THE FAIRNESS TO THE
HOLDERS OF THE SHARES (OTHER THAN INNOVEX, THE PURCHASER, AFFILIATES OF
INNOVEX OR THE PURCHASER AND HOLDERS OF SHARES FOR WHICH DISSENTERS' RIGHTS
HAVE BEEN PROPERLY EXERCISED), AS OF THE DATE OF THE OPINION, OF THE
CONSIDERATION TO BE RECEIVED BY SUCH STOCKHOLDERS, FROM A FINANCIAL POINT OF
VIEW, IN THE OFFER AND THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
THE STOCKHOLDERS OF ADFLEX AS TO WHETHER TO TENDER SHARES IN THE OFFER OR TO
VOTE IN FAVOR OF THE APPROVAL OF THE MERGER AGREEMENT. THE SUMMARY OF THE
BANCBOSTON ROBERTSON STEPHENS OPINION SET FORTH HEREIN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION SET FORTH AS ANNEX E.
Federal Income Tax Consequences of the Merger
The following is a summary of the material federal income tax consequences
of the Merger to stockholders of ADFlex whose Shares are converted in the
Merger into the right to receive the Per Share Amount. The discussion applies
only to stockholders of ADFlex holding Shares as capital assets and may not
apply to stockholders who received their Shares pursuant to the exercise of
employee stock options or otherwise as compensation, or who are not citizens
or residents of the United States.
The summary of federal income tax consequences set forth below is included
for general informational purposes only and is based on ADFlex's understanding
of the law as currently in effect. ALL STOCKHOLDERS SHOULD CONSULT WITH THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE OFFER AND THE
MERGER TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF THE ALTERNATIVE
MINIMUM TAX AND ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS AND OF
CHANGES IN SUCH TAX LAWS.
Receipt of the Per Share Amount
The receipt of cash for Shares pursuant to the Merger will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. Generally, for
federal tax purposes, a stockholder who receives cash for Shares pursuant to
the Merger will recognize gain or loss for federal income tax purposes equal
to the difference between the amount of cash received in exchange for the
Shares sold and such stockholder's adjusted tax basis in such Shares. Provided
that the Shares constitute capital assets in the hands of the stockholder,
such gain or loss will be capital gain or loss, and will be long term capital
gain or loss if the holder has held the Shares for more than one year at the
time of sale. Gain or loss will be calculated separately for each block of
Shares (i.e., a group of Shares with the same tax basis and holding period)
converted in the Merger.
14
<PAGE>
In the case of non-corporate taxpayers, long-term capital gain will be
subject to a maximum federal income tax rate of 20%. In the case of corporate
taxpayers, long-term capital gain generally will be subject to a maximum
federal income tax rate of 35%. Generally, the deductibility of capital losses
for non-corporate taxpayers for a taxable year is limited to the amount of
capital gains for the taxable year plus $3,000. The deductibility of capital
losses for corporate taxpayers for a taxable year is limited to the amount of
capital gains for the taxable year.
Backup Withholding
A stockholder (other than certain exempt stockholders including, among
others, all corporations and certain foreign individuals and entities) whose
Shares are converted in the Merger may be subject to 31% backup withholding
unless the stockholder provides its TIN and certifies that such number is
correct or properly certifies that it is awaiting a TIN, or unless an
exemption applies. A stockholder who does not furnish its TIN may be subject
to a penalty imposed by the Internal Revenue Service.
If backup withholding applies to a stockholder, the Paying Agent is required
to withhold 31% from payments to such stockholder. Backup withholding is not
an additional tax. Rather, the amount of the backup withholding can be
credited against the federal income tax liability of the person subject to the
backup withholding, provided that the required information is given to the
Internal Revenue Service. If backup withholding results in an overpayment of
tax, a refund can be obtained by the stockholder upon filing an appropriate
income tax return.
Regulatory Matters
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), certain acquisition transactions may not be completed unless
certain information has been furnished to the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and certain waiting period requirements have been satisfied.
Innovex filed a Notification and Report Form with respect to the Offer and the
Merger on July 12, 1999, and ADFlex filed a Notification and Report Form with
respect to the Offer and the Merger on July 17, 1999. The applicable waiting
period under the HSR Act with respect to the Offer and the Merger expired at
3:20 p.m., Eastern Standard Time, on July 27, 1999, without such waiting
period being extended by the FTC or the Antitrust Division. ADFlex is not
aware of any federal, state or foreign regulatory requirement that remains to
be complied with in order to complete the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employee and Director Stock Options
Pursuant to the Merger Agreement, at the Effective Time each holder of an
Option will, in settlement thereof, receive from ADFlex for each share subject
to such Option an amount (subject to any applicable withholding tax) in cash
equal to the difference between $3.80 and the per Share exercise price of such
Option to the extent such difference is a positive number. From and after the
Effective Time, ADFlex, as the Surviving Corporation, will have sole
discretion over the hiring, promotion, retention, firing and other terms and
conditions of the employment of employees of the Surviving Corporation.
Subject to the immediately preceding sentence, Innovex will provide, or will
cause the Surviving Corporation to provide, for the benefit of employees of
the Surviving Corporation or its subsidiaries who were employees of ADFlex
immediately prior to the Effective Time, at the election of Innovex, employee
benefit plans that are either (a) in the aggregate substantially comparable to
the employee benefit plans provided to such individuals by ADFlex on the date
of the Merger Agreement or (b) in the aggregate substantially comparable to
the employee benefit plans provided to similarly situated employees of Innovex
or its subsidiaries who were not employees of ADFlex immediately prior to the
Effective Time; provided, however, that notwithstanding the foregoing (i)
nothing above will be deemed to require Innovex to modify the benefit formulas
under any pension plan of ADFlex in a manner that increases the aggregate
expenses thereof as of the date of the Merger Agreement in order to comply
with the requirements of ERISA, the Code or the Tax Reform Act of 1986, (ii)
employee stock ownership, stock option and similar equity-based plans,
programs and arrangements of ADFlex or any of its subsidiaries are not
encompassed within the
15
<PAGE>
meaning of the term employee benefit plans hereunder, (iii) nothing herein
will obligate Innovex or the Surviving Corporation to continue any particular
employee benefit plan for any period after the Effective Time and (iv) Innovex
may substitute any benefit available to employees whom it determines are
similarly situated in other parts of its business for any employee benefit
under any such plan.
The pre-Offer non-employee directors of ADFlex currently hold the following
number of options with the indicated weighted average exercise prices: Steve
Sanghi (10,000 at $1.56); Richard P. Clark (3,000 at $1.56); and Wade
Meyercord (8,000 at $1.56).
The pre-Offer executive officers of ADFlex currently hold the following
number of options with the indicated weighted average exercise prices: Neil
Dial (60,000 at $1.56); David M. Rzasa (35,000 at $1.56); Donald E. Frederick
(35,000 at $1.56); R. Charles Furniss (35,000 at $1.56); Eric H. Bert (10,000
at $1.56); and Todd E. Patanella (15,000 at $1.56). The pre-Offer executive
officers and all other employees of ADFlex together currently hold 311,500
options with a weighted average exercise price of $1.56.
Employee Benefit Plans; Salary Continuation Agreements
Innovex has agreed in the Merger Agreement to cause the Surviving
Corporation to honor (subject to any withholdings under applicable law) all
employment, consulting and severance agreements or arrangements to which
ADFlex or any of its subsidiaries was a party on the date of signing of the
Merger Agreement, which are specifically disclosed in the ADFlex Disclosure
Letter. See "Interests of Certain Persons in the Merger" and "The Merger
Agreement."
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
The summary is qualified in its entirety by reference to the Merger Agreement,
a copy of which is attached to this Information Statement as Annex D.
The Tender Offer
Pursuant to the terms of the Merger Agreement and subject to a number of
conditions to the Offer (the "Offer Conditions"), the Purchaser agreed to
commence the Offer as promptly as practicable but no later than three business
days after the announcement of the Merger Agreement. The obligation of the
Purchaser to complete the Offer and to accept for payment and promptly to pay
for the Shares tendered in the Offer was subject only to the Offer Conditions,
which included, among other things, there being validly tendered and not
withdrawn that number of Shares which constitute a majority of the total
number of then outstanding Shares (including for purposes of such calculation
all Shares issuable upon exercise of all vested options and all options that
will vest on or before December 31, 1999, and conversion of all convertible
securities or other rights to purchase or acquire the Shares). In accordance
with these terms, the Purchaser commenced the Offer on July 7, 1999, and, when
the Offer expired on August 3, 1999, purchased all of the Shares validly
tendered and not withdrawn.
In the Merger Agreement, ADFlex consented to the Offer and the Merger and
represented that (a) its Board (at a meeting duly called and held) (i)
determined that the Merger Agreement, the Offer and the Merger are fair to and
in the best interests of ADFlex and its stockholders, (ii) approved the Merger
Agreement and the transactions contemplated thereby, including the Offer and
the Merger, and (iii) resolved to recommend acceptance of the Offer and
adoption of the Merger Agreement by the stockholders of ADFlex; and (b)
BancBoston Robertson Stephens delivered to the Board its opinion that the
consideration to be received by the holders of the Shares in the Offer and the
Merger was fair from a financial point of view to such holders, subject to
usual and customary assumptions and qualifications contained in such opinion.
16
<PAGE>
Board Designees
The Merger Agreement provides that, promptly upon the purchase of Shares by
the Purchaser pursuant to the offer in accordance with the terms of the Merger
Agreement, and from time to time thereafter, (a) Innovex will be entitled to
designate such number of directors ("Innovex's Designees"), rounded up to the
next whole number, as will give Innovex, subject to compliance with Section
14(f) of the Exchange Act, representation on the Board equal to the product of
(i) the number of directors on the Board (giving effect to any increase in the
number of directors pursuant to the provisions below) and (ii) the percentage
that such number of Shares so purchased bears to the aggregate number of
Shares outstanding (such number being the "Board Percentage"); provided,
however, that if the number of Shares purchased pursuant to the Offer equals
or exceeds a majority of the outstanding Shares, the Board Percentage will in
all events be at least a majority of the members of the Board, and (b) ADFlex
will, upon request by Innovex, promptly satisfy the Board Percentage by (i)
increasing the size of the Board or (ii) using reasonable efforts to secure
the resignations of such number of directors as is necessary to enable
Innovex's Designees promptly to be so elected, subject in all instances to
compliance with Section 14(f) of the Exchange Act and Rule 14f-1 promulgated
thereunder.
In accordance with these provisions, on August 10, 1999, one member of the
four members of the Board resigned as a director, and four persons designated
by the Purchaser were appointed as members of the Board.
Innovex, the Purchaser and ADFlex agreed that, notwithstanding the
foregoing, the Board will include at least three directors who were directors
of ADFlex as of the date of the Merger Agreement. In addition, notwithstanding
any other provision of the Merger Agreement, of the certificate of
incorporation or bylaws of ADFlex or of applicable law to the contrary,
following the election or appointment of Innovex's Designees, and prior to the
Effective Time, the affirmative vote of a majority of the directors of ADFlex
who were directors of ADFlex as of the date of the Merger Agreement (who will
act as an independent committee of the Board for this purpose) will be
required in addition to the approval of the Board, to (a) amend or terminate
the Merger Agreement, (b) extend the time for performance or waiver of
Innovex's and the Purchaser's respective obligations or other acts of Innovex
or the Purchaser under the Merger Agreement, or (c) waive any of ADFlex's
rights under the Merger Agreement.
The Merger
Pursuant to the Merger Agreement, upon the terms and subject to the
conditions of the Merger Agreement, and in accordance with the DGCL, at the
Effective Time, Purchaser will be merged with and into ADFlex. The Merger
Agreement provides that as a result of the Merger, the separate corporate
existence of Purchaser will cease and ADFlex will continue as the Surviving
Corporation. The terms of the Merger Agreement provide that at the Effective
Time, the Certificate of Incorporation of the Surviving Corporation will be
amended and restated to be identical to the Certificate of Incorporation of
Purchaser as in effect immediately prior to the Effective Time. The name of
the Surviving Corporation will be Innovex Southwest, Inc. The Merger Agreement
further provides that at the Effective Time and without any further action on
the part of ADFlex or Purchaser, the Bylaws of the Surviving Corporation shall
be amended and restated to be identical to the Bylaws of Purchaser as in
effect immediately prior to the Effective Time. Pursuant to the terms of the
Merger Agreement, the directors of Purchaser immediately prior to the
Effective Time will be the initial directors of the Surviving Corporation, and
the officers of ADFlex immediately prior to the Effective Time will be the
initial officers of the Surviving Corporation, in each case retaining their
respective positions and terms of office.
The terms of the Merger Agreement provide that at the Effective Time, by
virtue of the Merger and without any action on the part of Purchaser, ADFlex
or the holders of any of the following securities: (a) each Share (other than
any Shares to be canceled pursuant to clause (b) below and any Dissenting
Shares) will be canceled and retired and will be automatically converted into
the right to receive the Per Share Amount payable to the holder thereof,
without interest, upon surrender of the certificate that prior to the Merger
represented such Share, less any required withholding or stock transfer taxes;
(b) each Share held in the treasury of ADFlex or any subsidiary and each Share
owned by Innovex, the Purchaser or any other direct or indirect wholly-owned
17
<PAGE>
subsidiary of Innovex immediately prior to the Effective Time, other than
shares in trust accounts, managed
accounts, custodial accounts and the like that are beneficially owned by third
parties, will be automatically canceled and retired without any conversion
thereof and will cease to exist, and no payment or other consideration will be
made with respect thereto; and (c) each share of Common Stock, $0.01 par value
per share, of Purchaser issued and outstanding immediately prior to the
Effective Time will be converted into one share of Common Stock, $0.01 par
value per share, of the Surviving Corporation.
Stock Option and Other Plans
The Merger Agreement provides that, upon the consummation of the Offer, each
holder of an Option will, in settlement thereof, receive from ADFlex for each
Share subject to such Option an amount (subject to any applicable withholding
tax) in cash equal to the difference between the Per Share Amount and the per
Share exercise price of such Option to the extent such difference is a
positive number (the "Option Consideration"); provided, however, that with
respect to any person subject to Section 16(a) of the Exchange Act, any such
amount will be paid as soon as practicable after the first date payment can be
made without any liability to such person under Section 16(b) of the Exchange
Act. ADFlex, in accordance with the terms of the Merger Agreement, has
obtained all necessary consents and releases from each holder of an Option, to
provide that (a) the Stock Option Plans shall terminate as of the Effective
Time and the provisions in any other plan, program or arrangement providing
for the issuance or grant of any other interest in respect of the capital
stock of ADFlex will be canceled as of the Effective Time, and (b) following
the Effective Time ADFlex will use all reasonable efforts to assure that
following the Effective Time, no participant in the Stock Option Plans or
other plans, programs or arrangements shall have any right thereunder to
acquire any equity securities of ADFlex, the Surviving Corporation or any
subsidiary thereof.
Representations and Warranties
The Merger Agreement contains various customary representations and
warranties of the parties thereto including, without limitation,
representations and warranties by ADFlex as to ADFlex's organization, standing
and corporate power, subsidiaries, capital structure, authorization,
recommendation and required stockholder vote for the Merger Agreement,
noncontravention of any governing instruments, laws or other agreements,
filings with the Securities and Exchange Commission (the "Commission"),
financial statements and undisclosed liabilities, information provided in the
Offer documents and ADFlex's Schedule 14D-9 Solicitation/Recommendation
Statement, as amended and restated by that certain First Amended and Restated
Schedule 14D-9 Solicitation/Recommendation Statement, and that certain
Amendment No. 2 to the Solicitation/Recommendation Statement (the "Schedule
14D-9"), absence of certain changes or events, litigation, compliance with
laws, employee benefit plans, taxes, environmental matters, contracts,
amendment of rights agreement, intellectual property, millennium compliance,
ownership of assets, brokers, and the opinion of ADFlex's financial advisor.
In addition, the Merger Agreement contains representations and warranties of
Innovex and the Purchaser concerning their organization and standing,
authorization, recommendation and required stockholder vote for the Merger
Agreement, noncontravention of any governing instruments, laws or other
agreements, information provided in the Offer documents and the Information
Statement, financing, brokers, Commission documents and financial statements.
Interim Operations of ADFlex
Pursuant to the Merger Agreement, ADFlex has covenanted and agreed that,
except (a) as expressly provided in the Merger Agreement, or (b) as expressly
and specifically described in Section 5.1 of the ADFlex Disclosure Letter,
during the period from the date of the Merger Agreement and prior to the
Effective Time, ADFlex will not, and will not permit any of its subsidiaries
to:
(i) amend its certificate of incorporation or bylaws or similar
organizational documents;
(ii) other than dividends or distributions (including liquidating
dividends) by ADFlex's direct or indirect wholly-owned subsidiaries, or by
a subsidiary that is partially owned by ADFlex or any of its subsidiaries,
provided that ADFlex or any such subsidiary receives its proportionate
share thereof, (A)
18
<PAGE>
declare, set aside or pay any dividends on, or make any other distributions
in respect of, any of its capital stock, (B) split, combine or reclassify
any of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (C) purchase, redeem or otherwise acquire any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(iii) except upon exercise of the Options or with respect to the July 31,
1999 purchase under the Employee Stock Purchase Plan, issue, deliver, sell,
pledge or otherwise encumber any shares of its capital stock, any other
voting securities or any securities convertible into, or any rights,
warrants or options, to acquire, any such Shares, voting securities or
convertible securities;
(iv) acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business
or any corporation, limited liability company, partnership, joint venture,
association or other business organization or division thereof;
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any lien or otherwise dispose of any of its properties or assets, other
than in the ordinary course of business consistent with past practice;
(vi) (A) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities or warrants or
other rights to acquire any debt securities of ADFlex or any of its
subsidiaries, guarantee any debt securities of another person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, except for short-term borrowings
incurred in the ordinary course of business consistent with past practice,
or (B) make any loans, advances or capital contributions to, or investments
in, any other person, other than to ADFlex or any subsidiaries of ADFlex or
to officers and employees of ADFlex or any of its subsidiaries for travel,
business or relocation expenses in the ordinary course of business;
(vii) make or agree to make any capital expenditure or capital
expenditures other than capital expenditures set forth in the capital
budget of ADFlex;
(viii) make any changes to its accounting methods, principles or
practices, except as may be required by generally accepted accounting
principles;
(ix) except as required by law or contemplated by the Merger Agreement,
enter into, adopt or amend in any material respect or terminate any Stock
Option Plan or any other agreement, plan or policy involving ADFlex or any
of its subsidiaries and one or more of their directors, officers or
employees, or materially change any actuarial or other assumption used to
calculate funding obligations with respect to any pension plans of ADFlex,
or change the manner in which contributions to any pension plans of ADFlex
are made or the basis on which such contributions are determined;
(x) increase the compensation of any director or executive officer of
ADFlex or pay any benefit or amount not required by a plan or arrangement
as in effect on the date of the Merger Agreement to any such person;
(xi) hire any new domestic employees, or enter into consulting or similar
agreements, other than employees providing direct labor; or
(xii) authorize, or commit or agree to take, any of the foregoing action.
Filings; Reasonable Efforts
The Merger Agreement provides that, subject to the terms and conditions
therein provided, each of the parties thereto agrees to use all reasonable
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable, to consummate and make effective, in the most
expeditious manner practicable, the Offer, the Merger and the other
transactions contemplated by the Merger Agreement, which actions will include,
without limitation, (a) seeking to obtain all necessary actions or nonactions,
waivers, consents and approvals from Governmental Entities and making all
necessary registrations and filings (including filings with Governmental
Entities) and the taking of all
19
<PAGE>
reasonable steps as may be necessary to obtain an approval or waiver from, or
to avoid an action or proceeding by, any Governmental Entity, (b) seeking to
obtain all necessary consents, approvals or waivers from third parties, (c)
defending any lawsuits or other legal proceedings, whether judicial or
administrative, challenging the Merger Agreement or the consummation of the
transaction contemplated thereby, including seeking to have any adverse order
entered by any court or other Governmental Entity vacated or reversed and (d)
execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purpose of, the
Merger Agreement.
Pursuant to the Merger Agreement, in case at any time after the Effective
Time any further action becomes necessary or desirable to carry out the
purposes of the Merger Agreement, each party thereto will use all reasonable
efforts to take, or cause to be taken, all such necessary actions.
Information Statement; ADFlex Stockholders Meeting
ADFlex and Innovex have agreed, under the terms of the Merger Agreement,
that they will cooperate and promptly prepare, and ADFlex will file with the
Commission as soon as practicable, a proxy or information statement with
respect to the required ADFlex stockholder approval of the Merger Agreement
(the "Information Statement"), and promptly thereafter will mail the
Information Statement to its stockholders. The Information Statement will
contain the recommendation of the Board that stockholders of ADFlex approve
and adopt the Merger Agreement and approve the Merger and the other
transactions contemplated thereby. ADFlex has agreed, pursuant to the terms of
the Merger Agreement, that if at any time prior to the ADFlex Stockholders'
Meeting any event or circumstance relating to ADFlex or any of its
subsidiaries or affiliates, or its or their respective officers or directors,
should be discovered by ADFlex that is required to be set forth in a
supplement to any Information Statement, ADFlex shall promptly inform Innovex
and the Purchaser to supplement such Information Statement and mail such
supplement to its stockholders.
The Merger Agreement provides that ADFlex will take all action necessary
pursuant to applicable law and its certificate of incorporation and bylaws to
convene a meeting of its stockholders as promptly as practicable to consider
and vote upon the adoption of the Merger Agreement. The Merger Agreement
further provides that the Board will recommend adoption of the Merger
Agreement by the stockholders of ADFlex, and ADFlex will take all lawful
action to solicit such approval, including without limitation timely mailing
any Information Statement or Proxy Statement. Finally, the Merger Agreement
provides that the Purchaser shall vote all shares owned by it for the Merger.
Directors' and Officers' Insurance and Indemnification
The Merger Agreement provides that all rights to indemnification and
exculpation from liabilities for acts or omissions occurring at or prior to
the Effective Time existing in favor of the current or former directors or
officers of ADFlex or each of its subsidiaries as provided in their respective
certificates of incorporation or bylaws (or comparable organizational
documents) will be assumed by Innovex and Innovex will be directly responsible
for such indemnification, without further action, as of the Effective Time and
such rights will continue in force and effect in accordance with their
respective terms. In addition, from and after the Effective Time, directors
and officers of ADFlex who become or remain directors or officers of Innovex
or the Surviving Corporation will be entitled to the same indemnity rights and
protections (including those provided by directors' and officers' liability
insurance) of Innovex.
Pursuant to the terms of the Merger Agreement, Innovex has agreed that it
will, and will cause the Surviving Corporation to, maintain in effect for not
less than three years after the Effective Time policies of directors' and
officers' liability insurance equivalent in all material respects to those
maintained by or on behalf of ADFlex and its subsidiaries on the date of the
Merger Agreement (and having at least the same coverage and containing terms
and conditions which are no less advantageous to the persons currently covered
by such policies as insureds), with respect to matters existing or occurring
at or prior to the Effective Time; provided, however, that if the aggregate
annual premiums for such insurance at any time during such period exceed per
annum the rate of
20
<PAGE>
premium currently paid by ADFlex and its subsidiaries for such insurance on
the date of the Merger Agreement, then Innovex will cause the Surviving
Corporation to, and the Surviving Corporation will, provide the maximum
coverage that shall then be available at an annual premium equal to such rate.
Employee Matters
The Merger Agreement provides that from and after the Effective Time, the
Surviving Corporation will have sole discretion over the hiring, promotion,
retention, firing and other terms and conditions of employment of employees of
the Surviving Corporation. Subject to the immediately preceding sentence,
Innovex will provide, or will cause the Surviving Corporation to provide, for
the benefit of employees of the Surviving Corporation or its subsidiaries who
were employees of ADFlex immediately prior to the Effective Time, at the
election of Innovex, employee benefit plans that are either (a) in the
aggregate substantially comparable to the employee benefit plans provided to
such individuals by ADFlex on the date of the Merger Agreement, or (b) in the
aggregate substantially comparable to the employee benefit plans provided to
similarly situated employees of Innovex or its subsidiaries who were not
employees of ADFlex immediately prior to the Effective Time; provided,
however, that notwithstanding the foregoing, (i) nothing in the Merger
Agreement will be deemed to require Innovex to modify the benefit formulas
under any pension plan of ADFlex in a manner that increases the aggregate
expenses thereof as of the date of the Merger Agreement in order to comply
with the requirements of ERISA, the Code or the Tax Reform Act of 1986, (ii)
employee stock ownership, stock option and similar equity-based plans,
programs and arrangements of ADFlex or any of its subsidiaries are not
encompassed within the meaning of the term "employee benefit plans" under the
Merger Agreement, (iii) nothing in the Merger Agreement will obligate Innovex
or the Surviving Corporation to continue any particular employee benefit plan
for any period after the Effective Time, and (iv) Innovex may substitute any
benefit available to employees whom it determines are similarly situated in
other parts of its business for any employee benefit under any such plan.
Under the terms of the Merger Agreement, Innovex will cause the Surviving
Corporation to honor (subject to any withholdings under applicable law) all
employment, consulting and severance agreements or arrangements to which
ADFlex or any of its subsidiaries is presently a party.
Retirement of Bank Debt
ADFlex is a party to a credit agreement, as amended (the "Credit
Agreement"), among ADFlex, certain lenders and BankBoston N.A. as agent for
the lenders. BankBoston N.A. is affiliated with BancBoston Robertson Stephens.
Prior to October 30, 1998, the credit facility consisted of a $35,000,000 term
loan and a $25,000,000 revolving line of credit, secured by ADFlex's assets
and 66 2/3% of the stock of its subsidiaries. On October 30, 1998, ADFlex and
the lenders amended the Credit Agreement to reduce the term loan to
$30,000,000, change the amortization schedule of the term loan, reduce the
revolver to $20,000,000, and change the financial covenants.
As of March 28, 1999, ADFlex was in default under certain financial
covenants of the Credit Agreement, giving the lenders certain remedies,
including acceleration of maturity of the entire principal balance of the
loans. ADFlex is currently in default under its loans. At March 28, 1999,
$18,267,905 was outstanding under the term loan (less warrant discounts of
$232,095) and ADFlex had $12,700,000 available under the revolving line of
credit. Subsequent to March 28, 1999, ADFlex and the lenders engaged in
extensive negotiations concerning a forbearance arrangement with respect to
the existing defaults, although no such arrangement was reached. On June 3,
1999, the lenders notified ADFlex in writing that the financing commitments
were terminated, and that the lenders were no longer obligated to lend funds
to ADFlex pursuant to the Credit Agreement. Although the lenders have not
accelerated or demanded payment of the outstanding principal balance of the
loans, BankBoston N.A., as agent for the lenders, has reserved its right to
take any actions and seek any remedies available to it under the Credit
Agreement. As a result of the Merger, ADFlex's indebtedness to its lenders,
which approximated $33.8 million at June 25, 1999, will be paid in full.
21
<PAGE>
Costs and Expenses
The Merger Agreement provides that, except as expressly otherwise provided
in the Merger Agreement, all fees and expenses incurred in connection with the
Merger Agreement and the consummation of the transactions contemplated thereby
will be paid by the party incurring such fees or expenses.
Waiver; Remedies Cumulative
The Merger Agreement provides that the waiver by any party thereto of a
breach of any provision thereunder will not operate or be construed as a
waiver of any prior or subsequent breach of the same or any other provision.
RIGHTS AGREEMENT
ADFlex and BankBoston N.A. (formerly First National Bank of Boston, NA) (the
"Rights Agent") are parties to a Preferred Shares Rights Agreement, dated as
of July 10, 1996. In connection with the Rights Agreement, the Board declared
a dividend of one Right for each Share outstanding at the close of business on
July 22, 1996, which Rights may be triggered by certain events. In connection
with the negotiation of the Merger Agreement, the Board amended the Rights
Agreement so that Board-approved tender offers such as the Offer would not
trigger the Rights. Accordingly, the transactions contemplated by the Merger
Agreement will not trigger the Rights.
CHANGE IN CONTROL AGREEMENTS
ADFlex has entered into agreements (the "Change In Control Agreements")
outlining certain arrangements applicable to Neil Dial, Donald E. Frederick,
R. Charles Furniss and David M. Rzasa (each an "Executive" and, collectively,
the "Executives"), each of whom is an executive officer of ADFlex, that would
be effective upon a change in control of ADFlex. The term of each agreement is
for three years and will be automatically extended for successive one year
periods thereafter. Under each Executive's agreement, such Executive is
entitled to receive the following benefits if, within one year following a
change in control of ADFlex, he resigns for good reason or is terminated by
ADFlex:
(a) ADFlex would pay to the Executive a lump sum amount (no later than
the thirtieth day following the date of termination) equal to his full base
salary through the date of termination at the greater of either the rate in
effect at the time of termination or the rate in effect immediately prior
to the change in control (collectively, the "Base Rate"). In addition,
ADFlex will pay an amount equal to 1.1 multiplied by the sum of (i) one
year's base salary at the Base Rate plus (ii) the greater of either his
target bonus in effect under ADFlex's management bonus plan at the time of
termination or the target bonus in effect under ADFlex's management bonus
plan immediately prior to the change in control.
(b) ADFlex would maintain for the Executive and eligible beneficiaries
the benefits pursuant to ADFlex-sponsored benefit plans, programs or other
arrangements in which he is entitled to participate immediately prior to
the change in control until either (i) his attainment of comparable
benefits upon alternate employment or (ii) one year following the date of
termination, whichever occurs first.
(c) ADFlex would use reasonable efforts to continue insurance coverage or
other provisions for indemnification and defense of officers or directors
of ADFlex which are in effect on the date of the change in control.
(d) Subject to Section 16 of the Exchange Act, all stock options and
other stock incentive awards which are not vested at the date of
termination shall vest as of the date of termination and may be exercised
in accordance with the terms of the plans and agreements pursuant to which
such options and other awards were issued.
22
<PAGE>
(e) To the extent necessary to avoid the disallowance of the
deductibility of the payments to be made as described above, such payments
would be limited by Section 280G of the Internal Revenue Code of 1986.
With respect to the aforementioned, "good reason" means certain reductions
in base salary, certain relocations, the assignment of duties materially
inconsistent with the duties prior to the change in control, or a significant
reduction in the Executive's position as described in the next paragraph, all
of which occurred without the Executive's express prior written consent. A
"change in control" includes the acquisition of beneficial ownership by
certain persons of securities possessing more than 50% of the total combined
voting power of ADFlex's outstanding securities, a change in composition of
the Board over a period of 36 consecutive months or less such that the current
Board members of ADFlex cease to constitute a majority thereof (except that
any new Board member approved by at least a majority of the current Board is
considered to be a member of the current Board), or certain events relating to
reorganizations, mergers, consolidations, liquidations or sales of all or
substantially all of ADFlex's assets.
A "Change of Control" under the Change in Control Agreements occurred when
the Purchaser purchased in excess of 50% of the Company's issued and
outstanding shares following the expiration of the Offer. If any Executive
terminates his employment for good reason, which includes a material change in
his functions, duties or responsibilities that would cause his position to
become of less dignity and importance than that associated with his functions,
duties or responsibilities at the time of his Change in Control Agreement, or
his employment is terminated, he will be entitled to payment from the Company
of the lump sum amount within thirty days of termination. The lump sum amounts
are as follows:
<TABLE>
<S> <C>
Neil Dial........................................................ $319,000
Donald E. Frederick.............................................. $259,875
R. Charles Furniss............................................... $193,050
David M. Rzasa................................................... $259,875
</TABLE>
INDEMNITY AND LIMITATION OF LIABILITY
ADFlex has entered into indemnification agreements with each of its
directors by which ADFlex provides such persons with the maximum
indemnification allowed under applicable law, with regard to all judgments,
penalties, fines, amounts paid in settlement and expenses (including
attorneys' fees) whatsoever arising out of any event or occurrence related to
the fact that such person is or was a director of ADFlex, with certain
limitations and exceptions.
To the extent that ADFlex maintains an insurance policy or policies
providing liability insurance for directors, officers, employees or agents of
ADFlex or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise that such person serves at the
request of ADFlex, the indemnified person shall be covered by such policy or
policies in accordance with its or their terms to the maximum extent of the
coverage available for such director, officer, employee or agent under such
policy or policies. The agreements are binding upon any successor to ADFlex.
The agreements continue in effect regardless of whether the indemnified person
continues to serve as a director or officer of ADFlex.
Article V of the By-laws of ADFlex also provides that ADFlex will, to the
full extent permitted by the DGCL and its Certificate of Incorporation,
indemnify each person whom it may indemnify pursuant thereto.
Delaware law obligates ADFlex, as the Surviving Corporation in the Merger,
to fulfill and honor after the consummation of the Offer its current
obligations under the indemnification agreements and By-laws.
To the full extent permitted by Delaware law, Article Eighth of the
Certificate of Incorporation of ADFlex eliminates the personal liability of a
director or officer against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement or actually or reasonably incurred by him
or on his behalf in connection with such action, suit or proceeding and any
appeal therefrom.
23
<PAGE>
The Merger Agreement obligates Innovex, as of the Effective Time, to
indemnify the present and former directors and officers of ADFlex in respect
of certain actions taken prior to the Effective Time and to continue in effect
liability insurance for a period of at least three years.
LIABILITY INSURANCE
Each of ADFlex's directors and executive officers is insured against
liabilities incurred by them in connection with their service in such
capacities. The insurance policy provides aggregate coverage of $7,000,000
(including defense costs) for claims made during the effective period of the
policy.
The Merger Agreement provides that Innovex will, and will cause the
Surviving Corporation to, maintain in effect directors' and officers'
liability insurance with respect to matters existing or occurring at or prior
to the Effective Time of the Merger, on terms and conditions no less favorable
to such persons than those in effect under ADFlex's directors' and officers'
liability insurance as was in effect on the date of the Merger Agreement;
provided, however, that if the aggregate annual premiums for such insurance at
any time during such period exceed the per annum rate of premium paid by
ADFlex and its subsidiaries on the date of the Merger Agreement, then Innovex
will cause the Surviving Corporation to, and the Surviving Corporation will,
provide the maximum coverage that is then available at an annual premium equal
to such rate.
DIRECTOR BONUSES
On June 4, 1999, ADFlex granted a bonus to Steve Sanghi of $100,000 and to
Wade Meyercord of $25,000, for services provided in connection with the
management and operation of ADFlex following the resignation of Rolando
Esteverena, ADFlex's former chief executive officer. Such bonuses are payable
in full only on the successful completion of a financing or strategic
transaction involving ADFlex the effect of which results in payment in full of
the existing credit facilities. The closing of the Merger would trigger
payment of the bonuses.
FINANCIAL ARRANGEMENTS OF INNOVEX
The total amount of funds required by the Purchaser to purchase the
6,804,284 Shares tendered pursuant to the Offer was approximately $26 million.
The Purchaser obtained all of the funds needed to purchase such tendered
Shares through a capital contribution from Innovex. Innovex used its available
cash on hand to make the capital contribution. The Merger is not conditioned
on obtaining financing.
BUSINESS OF ADFLEX
ADFlex is a Delaware corporation with its principal executive offices
located at 2001 West Chandler Boulevard, Chandler, Arizona 85224. ADFlex is a
leading worldwide provider of flexible circuit interconnect solutions to
original equipment manufacturers ("OEMs") in the electronics industry. ADFlex
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. ADFlex 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 ADFlex 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. ADFlex's principal customers include Acer, Compaq,
Digital Equipment, IBM, Iomega, Maxtor, Motorola, Nokia, Philips, Seagate,
Storage Technology and other leading electronic OEMs. Recent new customers
include Dell, Qualcomm, Samsung, and Xerox Corporation.
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, connectors,
stiffeners, resistors and capacitors
24
<PAGE>
mounted directly on a flexible circuit. With 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 decrease the weight
and expense of connectors and other packaging components, conform to
contoured, ergonomic shapes or small spaces and provide mechanical flexure.
While the trend toward miniaturization and portability increases product
complexity, electronic OEMs face escalating time to market requirements.
In response, ADFlex acquired ADFlex U.K. in December 1995, to advance its
strategy to provide 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, ADFlex has established manufacturing facilities in Mexico and Thailand
that have lower cost structures and closer proximity to ADFlex's OEM customer
base. ADFlex believes its unique "one-stop shop" offerings of flexible
circuits and assemblies will be a competitive advantage and thereby allow it
to increase its market share with existing customers and create opportunities
to attract new customers. ADFlex believes it is a preferred supplier for the
majority of its customers' high-end and high-volume flexible circuit
interconnect requirements.
SELECTED FINANCIAL INFORMATION OF ADFLEX
The following table sets forth certain summary consolidated financial
information with respect to ADFlex and its consolidated subsidiaries derived
from the audited financial statements contained in ADFlex's 1998 Annual Report
on Form 10-K and the unaudited financial statements contained in ADFlex's
Quarterly Report on Form 10-Q for the quarter ended June 27, 1999. The
selected financial information of ADFlex should be read in conjunction with
the audited financial statements and other financial information of ADFlex
included later in this Information Statement or incorporated herein by
reference.
25
<PAGE>
ADFLEX SOLUTIONS, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
------------------ --------------------------------------
June 27, June 30, December 27, December 31, December 31,
1999 1998 1998 1997 1996
-------- -------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Net sales............. $34,187 $44,304 $170,097 $213,878 $156,836
Gross profit (loss)... 4,627 1,153 17,121 38,052 18,563
Operating expenses.... 5,512 5,247 20,659 23,472 52,254
Operating income
(loss)............... (885) (4,094) (3,538) 14,580 (33,691)
Net income (loss)..... 62,402 (3,574) (4,753) 8,596 (25,024)
Net income (loss) per
basic share: (0.27) (0.40) (0.54) 0.99 (2.92)
Common shares used in
the calculation of
net income (loss) per
basic share.......... 8,983 8,835 8,867 8,712 8,580
</TABLE>
<TABLE>
<CAPTION>
At Fiscal Year Ended
--------------------------------------
At December 27, December 31, December 31,
June 27, 1999 1998 1997 1996
------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $85,328 $108,304 $114,200 $93,181
Total current
liabilities............ 59,559 60,786 40,063 42,212
Long-term debt and
capitalized lease
obligations............ 1,311 24,613 25,189 10,340
Total stockholders'
equity................. 24,458 47,449 50,907 40,289
</TABLE>
26
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT/1/
The following table sets forth the number of Shares beneficially owned as of
August 20, 1999 by (a) each stockholder known by ADFlex to be a beneficial
owner of more than 5% of the Shares; (b) each person who was a director of
ADFlex prior to the completion of the Offer; (c) the Chief Executive Officer
of ADFlex and the other four most highly compensated executed officers of
ADFlex as of December 27, 1998; (d) the directors and executive officers of
ADFlex appointed after the completion of the Offer; and (e) all of the
foregoing directors and executive officers as a group. Unless otherwise
indicated, the address of all such persons is c/o ADFlex Solutions, Inc., 2001
West Chandler Boulevard, Chandler, Arizona 85224. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned, except to the extent that authority is shared
by spouses under applicable law. ADFlex's Common Stock is the only outstanding
class of equity securities of ADFlex. As of August 20, 1999, there were
record holders of Common Stock.
<TABLE>
<CAPTION>
Percentage
Number of of
Beneficial Owner Shares Class(1)
- ---------------- ---------- ----------
<S> <C> <C>
Innovex Acquisition Corp.(2)........................... 6,804,284 75.5
c/o Innovex, Inc.
530 Eleventh Avenue South
Hopkins, MN 53343
Rolando C. Esteverena.................................. [164,719] [1.8%]
Neil Dial(3)........................................... [27,377] *
R. Charles Furniss(4).................................. [23,538] *
Eric H. Bert(5)........................................ [13,084] *
Todd E. Pantanella(6).................................. [8,089] *
Steve Sanghi(7)........................................ [54,000] *
Richard P. Clark(8).................................... [16,500] *
William Kennedy Wilkie(9).............................. [1,393,347] [15.5%]
P.O. Box 6
Langstone Road
Havant, Hampshire P09 1SA
Wade Meyercord(10)..................................... [10,000] *
William P. Murnane(11)................................. 0 --
Timothy S. McIntee(11)................................. 0 --
Douglas W. Keller(11).................................. 0 --
Allan J. Chan(11)...................................... 0 --
J. & W. Seligman & Co. Incorporated(12)................ [1,041,100] [11.6%]
100 Park Avenue
New York, NY 10017
Dimensional Fund Advisors, Inc.(13).................... [635,600] [7.1%]
1299 Ocean Avenue,
11th Floor
Santa Monica, CA 90401
Havant International Holdings Limited(9)............... [1,392,347] [15.5%]
P.O. Box 6
Langstone Road
Havant, Hampshire P09 1SA
Executive officers and directors as a group including [1,726,348] [18.9%]
those named above ([fourteen] persons)(14)............
</TABLE>
27
<PAGE>
/1 /The information in this section is preliminary and shall be updated prior
to the filing of the definitive Information Statement with the Securities
and Exchange Commission.
- --------
* Less than 1% of the outstanding Common Stock.
(1) Shares of Common Stock subject to options which are currently exercisable
or exercisable within 60 days of August 20, 1999 are deemed outstanding
for computing the percentage of the person holding such options but are
not deemed outstanding for computing the percentage of any other person.
Percentage of ownership is based upon 9,017,416 shares of Common Stock
outstanding on August 20, 1999.
(2) Innovex Acquisition Corp., which is referred to throughout this
Information Statement as the "Purchaser," is a wholly-owned subsidiary of
Innovex. See "Summary--The Parties to the Merger Agreement." Accordingly,
Innovex is deemed to beneficially own the Shares purchased by the
Purchaser.
(3) Includes options to acquire [24,374] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(4) Includes options to acquire [23,538] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(5) Includes options to acquire [10,455] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(6) Includes options to acquire [7,186] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(7) Includes options to acquire [37,000] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(8) Includes options to acquire [13,000] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(9) Includes [1,392,347] shares of Common Stock owned by HIHL which were
transferred to Purchaser following the expiration of the Offer. Mr.
Wilkie is the Chief Executive and a Director of HIHL. He disclaims
beneficial ownership of all shares held by HIHL.
(10) Includes options to acquire [9,000] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999.
(11) Until the completion of the Offer, the Board consisted of the following
four members: Steve Sanghi, Richard P. Clark, Wade Meyercord and William
Kennedy Wilkie. Pursuant to the Merger Agreement and upon the purchase of
a majority of the outstanding Shares by Purchaser following the
expiration of the Offer, one of the four members of the Board (William
Kennedy Wilkie) resigned as a director and four persons designated by
Innovex (William P. Murnane, Timothy S. McIntee, Douglas W. Keller and
Allan J. Chan) were subsequently elected as directors.
(12) According to its Schedule 13G dated February 10, 1999, of the [1,041,100]
shares, [1,000,000] shares are owned by Seligman Communications and
Information Fund, Inc., a registered investment company which is managed
by J&W Seligman Company Incorporated ("JWS"), a registered investment
advisor. Accordingly, JWS and Mr. Morris may be deemed to beneficially
own and have shared voting power and shared dispositive power of such
shares. Of the remaining [41,000] shares, JWS and Mr. Morris beneficially
own and have shared voting power and shared dispositive power of such
shares.
(13) According to its Schedule 13G dated February 11, 1999, Dimensional Fund
Advisors, Inc., an investment advisor, has sole voting power and the sole
power to dispose of all shares reported.
(14) Includes options to acquire [146,218] shares of Common Stock currently
exercisable or exercisable within 60 days following August 20, 1999. Also
includes [1,392,347] shares of Common Stock previously held by HIHL of
which Mr. Wilkie disclaims beneficial ownership and subsequently
transferred to Purchaser following the expiration of the Offer. See note
(9) above.
AVAILABLE INFORMATION
ADFlex is subject to the information filing requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy and information statements and other information with the Commission.
The Schedule 14D-1 Tender Offer Statement filed by the Purchaser and Innovex
and the
28
<PAGE>
Schedule 14D-9 filed by ADFlex, each in connection with the Offer, and the
respective exhibits thereto, as well as such reports, proxy and information
statements and other information filed by ADFlex with the Commission, may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following regional offices of the SEC: Midwest Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such information should be obtainable by mail, upon
payment of the Commission's customary charges, by writing to the Commission's
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549. Such material should also be available on-line through EDGAR, which is
located on the Commission's public access site at http://www.sec.gov.
Statements contained in this Information Statement or in any document
incorporated in this Information Statement by reference as to the contents of
any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an annex to this Information
Statement or such other document, each such statement being qualified in all
respects by such reference.
FINANCIAL STATEMENTS AND OTHER INFORMATION; INFORMATION INCORPORATED BY
REFERENCE
The Annual Report on Form 10-K of ADFlex for the fiscal year ended December
27, 1998 is included in this Information Statement as Annex A, and is hereby
incorporated by reference. Also annexed hereto and incorporated by reference
into this Information Statement are the following reports filed by ADFlex with
the Commission since the end of the calendar year ended December 31, 1998: (a)
the Current Report on Form 8-K of ADFlex filed on July 8, 1999 (included in
this Information Statement as Annex B) and (b) the Quarterly Report on Form
10-Q of ADFlex for the quarterly period ended June 27, 1999 (included in this
Information Statement as Annex C).
Representatives of Ernst & Young LLP, ADFlex's auditors for the fiscal year
ended December 27, 1998, are not expected to be present at the Special
Meeting.
Stockholders may obtain a copy of any report filed by ADFlex with the
Commission that is incorporated by reference into this Information Statement
free of charge upon oral or written request to the Secretary of ADFlex, 2001
West Chandler Boulevard, Chandler, Arizona 85224, Telephone Number (602) 786-
8280. ADFlex will provide to the requesting stockholder by first class mail or
other equally prompt means a copy of any and all requested information (except
for exhibits to the report that are incorporated by reference unless such
exhibits are specifically incorporated by reference into the report).
By Order of the Board of Directors,
DONALD E. FREDERICK
Secretary
Chandler, Arizona
August , 1999
29
<PAGE>
ANNEX A
Annual Report
On
Form 10-K
Of
ADFlex
For The Fiscal Year Ended December 27, 1998
<PAGE>
ANNEX A
================================================================================
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 27, 1998
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 whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that be
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 $ 21,376,759 based on the closing sale price as
reported by the Nasdaq National Market on March 31, 1999.
The number of outstanding shares of the registrant's $0.01 par value Common
Stock as of March 31, 1999 was 8,983,018.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement in connection with the Annual Meeting are
incorporated by reference into Part III.
================================================================================
<PAGE>
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 Acer, Compaq, Digital
Equipment, IBM, Iomega, Maxtor, Motorola, Nokia, Philips, Seagate, Storage
Technology and other leading electronic OEMs. Recent new customers include Dell,
Qualcomm, Samsung, and Xerox Corporation.
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 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
decrease the weight and expense of connectors and other packaging components,
conform to contoured, ergonomic shapes or small spaces and provide mechanical
flexure.
While 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 advance its strategy to provide 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 has established manufacturing
facilities in Mexico and Thailand that have lower cost structures and closer
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 and thereby allow it to increase its market share with
existing customers and 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"), targeted 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.
2
<PAGE>
Industry Overview and Trends
Flexible circuit interconnects provide electrical connection between
components in electronic systems and are increasingly used as a platform to
support the attachment of electronic devices. Flexible circuits offer several
advantages over rigid printed circuit boards ("PCBs") and ceramic hybrid
circuits, particularly for small, complex electronic systems. Flexible
circuits, due to their mechanical flexure and three-dimensional shape,
accommodate packaging contours and motion in a manner that traditional two-
dimensional rigid PCBs 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 and IC directly to a flexible chip
carrier rather than a ceramic or plastic package.
These capabilities enable 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 personal digital assistants ("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.
Electronics OEMs continue to design and introduce more compact and portable
high-performance products with greater functionality. The complexity of these
new products requires smaller size, lighter weight, greater circuit and
component density, better thermal dissipation properties, higher frequencies and
increased reliability as compared to conventional rigid board assemblies. 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 which can help to shorten the OEMs'
supply chain and provide regionally competitive pricing. As part of global
sourcing, OEMs increasingly require 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-
3
<PAGE>
production through volume production and assembly. Many OEMs have accelerated
this process by outsourcing their captive component, subsystem and even system
manufacturing to focus on their core competencies. The accelerated time to
market and time to volume needs of OEMs have resulted in increased collaboration
with qualified suppliers capable of providing a broad and integrated offering.
To meet their rapidly changing electronic interconnect requirements, many OEMs
have moved to limit their vendor base to a smaller number of technically
qualified, strategically located suppliers capable of providing both quick-turn
prototype and pre-production quantities as well as cost-competitive volume
production quantities.
Proliferation of Electronics and Creation of New Markets. The markets for
electronic products are growing as a result of technological change, increasing
demands for a wider variety of electronic product features and more powerful and
less expensive electronic components. Due to this growth, new markets have
emerged in computing, data communications, telecommunications and multimedia.
Moreover, existing markets, such as computer networking and peripherals, digital
and mobile communications, video-on-demand, the Internet, instrumentation and
industrial controls have significantly expanded product applications.
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
provide 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 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 Southeast Asia. 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, Japan and China. By
increasing the scale and scope of the services offered in each region, the
Company believes it
4
<PAGE>
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 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) that
will reward initiative with a preferred supplier position.
The ADFlex "One-Stop Shop" 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 and 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.
5
<PAGE>
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 that solve density
problems while avoiding more expensive traditional alternatives. Also,
using a laser to cut the periphery of parts allows prototypes and low
volume production parts to be built faster and without the cost of
blanking die.
. Bondable Gold Plating. Prepares flexible circuits for chip-on-flex
bonding, a process which saves space and improves electrical
performance (access time) by wire bonding an IC die directly to the
flexible circuit.
. Coverfilm, Lay-up and Lamination. A process where polyimide/adhesive
based coverfilm materials are 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 ADFlex 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.
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 62%, 43%, and 36% of total sales for 1996,
1997 and 1998, respectively. Through new market expansion efforts, the Company
is continuing its efforts to reduce the impact of cyclicality of the HDD
industry on its business. However, net sales attributable to this market are
expected to continue to represent a large component of total sales for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry has had and may continue to 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 flip chip, is becoming the predominant interconnect technology for
these applications.
6
<PAGE>
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 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.
Notebook Computers. 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.
Consumer and Other Applications. CD/DVD-ROMS are growing in consumer
applications where higher capacity and quicker access time, compared to tape
drives, are needed. These devices use flexible circuits as the interconnect
between the read/write head and CD/DVD-ROM drive electronics.
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
Historically, the Company has sold a substantial portion of its flexible
circuit interconnects to a limited number of customers. In 1996, 1997 and 1998,
combined sales to Seagate and IBM accounted for 47%, 33%, and 28% of the
Company's net sales, respectively. These sales were substantially in support of
the HDD and notebook computer markets. To facilitate their manufacturing
processes, the Company's customers often require that the Company sell finished
interconnects to contract assemblers for further assembly. In 1996, 1997 and
1998, shipments to contract assemblers were 14%, 24% and 29% of net sales,
respectively.
Even though the Company's customer mix will likely change from period to
period in the future, the Company expects that sales to relatively few
customers, including contract assemblers, will continue to account for a high
percentage of its net sales in the foreseeable future. The loss of a
significant customer or a substantial reduction in orders by any significant
customer, including reductions due to market, economic or competitive conditions
in the computer, computer peripheral, communications and high-end consumer
markets, has had and may continue to 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. The Company also maintains a technology
and pilot production facility in Havant, England. While the Company believes it
has established good relationships with its local labor forces and the local
governments, the spread of the manufacturing process over multiple countries
subjects the Company to risks inherent in international operations. Those risks
include currency fluctuations, inflationary pressures, unexpected changes in
regulatory requirements, tariffs and barriers, potentially limited intellectual
property protection, potential cross border shipment delays, changes in
political climate, difficulties in coordinating and managing foreign operations,
foreign labor union issues, increases in employee turnover and potentially
adverse tax
7
<PAGE>
consequences. Any of the foregoing could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
While ADFlex transacts business predominantly in U.S. Dollars and the
majority of its net sales are collected in U.S. Dollars, a portion of its sales
and expenses are denominated in foreign currencies. Changes in the relation of
foreign currencies to the U.S. Dollar will affect the Company's cost of good
sold and operating margins and could result in exchange losses. 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. 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 and
remeasurement 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 as incurred. 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 and 1998, the Thai Baht experienced significant fluctuations 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 fluctuations did not
have a significant impact on the Company's results of operations for the years
ended December 31, 1997 and December 27, 1998. However, there can be no
assurance that future currency fluctuations will not have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.
The Company's results of operations during 1998 were adversely impacted by
the Asian financial crisis. Among other things, there was increased competition,
including price competition, from Japanese flex manufacturers, and cancellations
of orders by the Company's customers who were impacted by the Asian economic
crisis.
During 1996, 1997 and 1998, international sales accounted for approximately
49%, 56% and 61% of net sales, respectively, most of which went to Asian
manufacturing facilities of United States-based customers.
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 was re-certified to ISO Standards in 1998.
The Company believes 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. The Company
also believes that integrating 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. In addition, the Company is expanding its
Thailand manufacturing operation. The Company anticipates that the new Thailand
facility will enable it to attain significant cost reductions that are crucial
to mitigating competitive price pressures in Asia and help sustain the Company's
implementation of a complete flexible circuit interconnect solution including
design, fabrication, assembly and testing.
Suppliers
8
<PAGE>
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.
The Company currently purchases a number of its components, process
chemicals and other materials from a single source. For example, the Company
purchases certain materials, including laminates, films, bondply, copper foil
and heat-treated polyimide, used in the Company's flexible circuit interconnects
from Rogers. In the United States, these products are available only from a
limited number of suppliers. There can be no assurance that Rogers will continue
to supply the Company with the materials needed at competitive prices.
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,
markets and geography, with each niche having its own combination of complex
packaging and interconnection requirements. The Company believes it competes
principally on the basis of design capability, price, quality, flexibility and
technological advancements in underlying applications, and the ability to offer
a total flexible circuit interconnect solution. During periods of economic
slowdown in the electronics industry and other periods when excess capacity
exists, electronic OEMs become more price sensitive. During the year ended
December 27, 1998, there was a worldwide slowdown in the electronics industry
and to maintain market share, many of the Company's primary foreign competitors
with lower cost structures decreased their prices to unprecedented levels. This
had a material adverse effect on the Company's pricing during the year. The
Company believes that once a customer has selected a particular vendor to design
and manufacture a flexible circuit interconnect, the customer 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 flexible circuit interconnect market is highly competitive. The Company
experiences competition worldwide from a number of leading foreign and domestic
providers such as Nippon Mektron ("NOK"), Fujikura Ltd. ("Fujikura"), 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. 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
9
<PAGE>
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.
The Company also competes in assembly matters with leading flexible circuit
assembly providers such as Smartflex Systems, Inc. ("Smartflex") and Solectron
Corp. ("Solectron"). The Company believes that competition in assembly is
primarily driven by availability of assembly technology, price and cycle time.
The Company believes it competes favorably with these competitors because it
offers its customers a complete flexible circuit interconnect solution including
design, fabrication, assembly and testing (referred to as the "one-stop shop
strategy").
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 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. 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.
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 has 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 the
remediation of this situation will not have a material adverse effect on its
operations or financial condition. However, given the uncertainties associated
with environmental contamination, there can be no assurance that such costs will
not have a material adverse impact on the Company. Pursuant to the agreements
governing the Rogers acquisition, Rogers has retained all environmental
liabilities relating to the purchased assets prior to the closing date of the
acquisition. While Rogers currently has sufficient assets to fulfill its
obligations under the acquisition agreements, if environmental liabilities
requiring remediation are discovered and the Company were unable to enforce the
acquisition agreement against Rogers, the Company could become subject to costs
and damages relating to such environmental liabilities. Any such costs
10
<PAGE>
and damages imposed on the Company could materially adversely affect the
Company's business, financial condition, results of operation 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 seller is awaiting acknowledgment that the
remediation plan has been approved and no further action is required by the
Mexican authorities. The seller's obligation for the cost of remediation is
limited to $2.5 million. A total of $1.0 million originally was held in escrow
pending the seller's performance of its 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 upon closure of the issue by the Mexican
authorities with certification that no further action is required.
The Company believes it has been operating its facilities in substantial
compliance in all material respects with existing environmental laws and
regulations. However, the Company cannot predict the nature, scope or effect of
legislation or regulatory requirements that could be imposed or how existing or
future laws or regulations will be administered or interpreted with respect to
products or activities to which they have not previously been applied. For this
reason, the Company implemented environmental management systems in 1998 geared
toward minimizing the negative impacts and reducing potential financial risks
arising from environmental issues. Compliance with more stringent laws or
regulations, or more vigorous enforcement policies of regulatory agencies could
require substantial expenditures by the Company and could adversely affect the
results of operations of the Company.
The Company does not anticipate any material amount of environmental-
related capital expenditures in 1999.
Backlog
The Company's backlog at December 31, 1996 and 1997, and December 27, 1998
was approximately $55.9 million, $44.8 million and $20.9 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.
Employees
As of December 27, 1998, the Company had a total of 4,553 employees, of
which 4,527 were regular employees and 26 were temporary employees. Of the
regular employees, 655 were based at the Company's facilities in Chandler,
Arizona; 2,656 were based in Agua Prieta, Mexico; 22 were based in the United
Kingdom; and 1,194 were based in Thailand.
In response to reduced sales, the Company implemented workforce reductions
during the second, third and fourth quarters of 1998 and required certain
remaining employees to take unpaid time off during the third quarter of 1998.
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 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.
11
<PAGE>
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 contact with the Company. The loss of any of these officers or
key personnel could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows. In addition, the
Company's future operating results depend in part upon its ability to attract
and retain other qualified management, technical, manufacturing, sales and
support personnel for its operations. Competition for such personnel is intense
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons
could materially adversely affect the Company's business, financial condition,
results of operations and cash flows.
12
<PAGE>
Item 2. Properties.
In total, at December 27, 1998, the Company leased or owned approximately
478,000 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
Circuit Finishing and Circuit Agua Prieta, Mexico (one) 161,000 Owned N/A
Assembly
Circuit Finishing and Lamphun Thailand (two) 15,000 Owned N/A
Assembly; Sales and Support
140,000 Owned N/A
Technology and Pilot Portsmouth, United Kingdom (one) 12,000 Leased September 2007
Production; Sales and Support
</TABLE>
The Company believes its existing facilities in Arizona, Mexico, Thailand
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 and, in April 1998, the Company commenced expansion of its Thailand
operations with the construction of a new plant. The expansion initially will
provide 100,000 square feet of manufacturing space - 65,000 feet for flex
finishing and 35,000 feet for assembly - bringing the total size of the facility
to 140,000 square feet. The expanded facility, which will increase the total
assembly area by nearly 50%, includes state-of-the-art clean rooms and the
production capability to process up to 750,000 circuit assemblies per week. The
new flex finishing area will feature advanced surface finishing, laser
processing and automated optical profiling technologies. The total estimated
cost of the expansion is approximately $9.0 million (of which approximately $3.0
million has been spent as of December 27, 1998). In February 1999, the
qualification process was completed and production began. The new facility is
expected to be fully operational by the second quarter of 1999, including
customer qualification and ramp to volume production. The Company anticipates
that the new Thailand facility will enable it to obtain significant cost
reductions that are crucial to mitigating competitive price pressures in Asia
and help sustain the Company's implementation of a complete flexible circuit
interconnect solution including design, fabrication, assembly and testing.
Item 3. Legal Proceedings
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 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 and the IRS have reached a tentative
agreement to settle all outstanding issues relating to this audit. The terms of
the agreement require a payment of approximately $0.6 million, excluding
interest, most of which will be recoverable by amending subsequent years' tax
returns. The Company believes that the current tax provision is adequate to
cover the estimated liability and 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.
The Company is not currently a party to any other material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 1998 to a vote of
the Company's securities holders.
13
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Securities Information
- --------------------------------------------------------------------------------
ADFlex Solutions, Inc. common stock trades on the Nasdaq National Market (Symbol
AFLX). The high and low sales prices for the common stock as reported by Nasdaq
are set forth in the following table:
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
High $17.25 $ 9.13 $ 3.06 $ 7.00
Low 16.38 8.75 2.91 6.25
1997
High $16.13 $19.00 $28.50 $28.13
Low 10.75 11.75 14.75 14.63
1996
High $27.00 $18.00 $11.75 $14.00
Low 10.50 9.88 14.00 7.38
</TABLE>
There were approximately 89 stockholders of record as of February 12, 1999. 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.
14
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998/3/ 1997 1996/2/ 1995/1/ 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net sales $ 170,097 $ 213,878 $ 156,836 $ 101,163 $ 77,733
Gross profit 17,121 38,052 18,563 28,055 23,921
Gross profit as a percent of net sales 10.1% 17.8% 11.8% 27.7% 30.8%
Operating expenses 20,659 23,472 52,254 27,587 11,804
Operating expenses as a percent of net sales 12.2% 11.0% 33.3% 27.3% 15.2%
Operating income (loss) (3,538) 14,580 (33,691) 468 12,117
Operating income (loss) as a percent of net sales (2.1%) 6.8% (21.5%) 0.5% 15.6%
Net income (loss) (4,753) 8,596 (25,024) (3,723) 7,046
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flow Data
Net cash provided by operating activities $ 13,158 $ 4,577 $ 4,439 $ 19,230 $ 3,993
Acquisition of property, plant and equipment 21,510 14,462 3,763 20,636 5,450
Depreciation and amortization of property, plant and equipment 8,520 6,493 5,794 2,288 930
- ----------------------------------------------------------------------------------------------------------------------------------
Share Data
Common shares used in the calculation of net income
(loss) per basic share 8,867 8,712 8,580 6,855 5,028
Net income (loss) per basic share $ (0.54) $ .99 $ (2.92) $ (0.54) $ 1.40
Common and common equivalent shares used
in the calculation of net income (loss) per dilutive share 8,867 8,894 8,580 6,855 5,578
Net income (loss) per dilutive share $ (0.54) $ .97 $ (2.92) $ (0.54) $ 1.26
Book value per share 5.31 5.81 4.67 7.67 5.75
- ----------------------------------------------------------------------------------------------------------------------------------
Year End Position
Total assets $ 108,304 $ 114,200 $ 93,181 $ 106,918 $ 47,703
Working capital (deficiency (16,132) 24,944 9,102 20,636 32,443
Long-term debt and capitalized lease obligations 24,682 25,189 10,340 10,483 592
Stockholders' equity 47,449 50,907 40,289 63,554 37,764
Return on average stockholders' equity (9.7%) 18.9% (48.2%) (7.3%) 34.3%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Effective December 31, 1995, the Company wrote off $13.9 million of in-
process technology in conjunction with the ADFlex U.K. acquisition.
/2/ 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.
/3/ For the year ended Dercember 27, 1998, the Company recorded a charge of
$1.6 million related to work force reduction and the closing of two plants
in Mexico in an effort to address current adverse industry trends. See Note
4 to the Consolidated Financial Statements.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
ADFlex is a leading worldwide provider of flexible circuit interconnect
solutions to OEMs in the electronics industry. The Company offers a full range
of customized flexible circuit applications and services from initial design,
development and prototype to fabrication, assembly and test on a global basis.
The Company targets high-volume markets where miniaturization, form and weight
are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by the Company include
notebook computers, portable communication devices such as cellular telephones
and pagers, data storage devices such as HDDs, tape drives and arrays, and high-
end consumer electronics products such as compact disk players. The Company's
principal customers include Acer, Compaq, Digital Equipment, IBM, Iomega,
Maxtor, Motorola, Nokia, Philips, Seagate, Storage Technology and other leading
electronic OEMs. Recent new customers include Dell, Qualcomm, Samsung, and Xerox
Corporation.
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 35.7%, 43.0%, and 61.8% of total sales for
1998, 1997 and 1996, 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 has had and may continue to have a material adverse
effect on the Company's operating results.
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
in August 1996. The joint venture, ATL, targeted the production and testing of
advanced chip-on-flex and other surface mount technologies for flexible circuit
assemblies. At inception, ATL was owned 80% by the Company and 20% by Hana. The
Company purchased the remaining 20% equity interest in ATL from Hana in
September 1997.
During 1996, the Company's U.K. operations experienced a substantial
reduction in net sales 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. During
the year ended December 27, 1998, the Company paid and charged to the liability
$0.2 million related to termination costs for 3 employees. The remaining accrual
for employee termination costs is approximately $0.1 million and the Company
believes it 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
16
<PAGE>
benefits anticipated due to the lower cost structure of the Thailand operations.
The Company maintains a technology and pilot production facility and a sales and
service organization in the U.K. to support its European customers.
During the year ended December 27, 1998, the Company implemented new cost
and productivity improvement measures designed to address current adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the markets the Company serves,
in particular the HDD and communications segments. These actions included the
consolidation of administrative functions, an aggregate 27% reduction in
staffing, the closing of two manufacturing plants in Mexico and the transfer of
selected manufacturing programs from Mexico to Thailand. As a result, the
Company incurred a special charge of approximately $1.6 million for the year
ended December 27, 1998, $1.0 million related to the workforce reduction and
$0.6 million related to employee and termination costs associated with the
closing of the two plants in Mexico. During the year ended December 27, 1998,
the Company paid and charged to the liability $0.6 million related to employee
severance and lease termination costs and $0.5 million related to workforce
reduction involving 97 employees at its Chandler facility, 5 employees at its
U.K. facility and 77 employees at its Mexico facility. The remaining accrual
related to workforce reduction is approximately $0.5 million and the Company
believes it is adequate to cover the remaining liabilities.
Results of Operations
The following table sets forth certain Consolidated Statements of
Operations data and other data as a percentage of net sales. The table and the
discussion below should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Year ended
December 31, Years ended December 27,
-----------------------------------------------
1998(2)(3) 1997 1996(1)
---------- ---- -------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 89.9 82.2 88.2
-----------------------------------------------
Gross profit 10.1 17.8 11.8
Engineering, research & development 4.4 3.7 4.7
Selling, general & administrative 7.5 7.2 8.5
Amortization of intangible assets 0.3 0.1 1.5
Restructuring charges -- -- 18.6
-----------------------------------------------
Total operating expenses 12.2 11.0 33.3
-----------------------------------------------
Operating income (loss) (2.1) 6.8 (21.5)
Interest income (expense), net (1.6) (0.9) (0.7)
Other income, net (0.2) -- --
Minority interest in earnings of
consolidated joint venture -- (0.1) --
-----------------------------------------------
Income (loss) before income taxes (3.9) 5.8 (22.2)
Income taxes (1.1) 1.8 (6.2)
-----------------------------------------------
Net income (loss) (2.8)% 4.0% (16.0)%
-----------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
/(1)/ For the year ended December 31, 1996, the Company recorded a charge of
$29.2 million (pre-tax) related to the restructuring of the Company's U.K.
operations.
/(2)/ For the year ended December 27, 1998, the Company recorded a charge of
$1.6 million (pre-tax) related to work force reduction and the closing of
two plants in Mexico in an effort to address current adverse industry
trends. See Note 4 of the Notes to Consolidated Financial Statements.
/(3)/ The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday
closest to the last day of December each year. Fiscal year 1998 contained
52 weeks and ended December 27, 1998. Fiscal years 1997 and 1996 contained
52 weeks each and ended on December 28 and December 29, respectively.
Activity from the end of the reporting period to December 31 is immaterial
for 1997 and 1996.
Net Sales. Net sales for the year ended December 27, 1998 decreased
$43.8 million or 20.5% as compared to the comparable period in 1997. During the
year ended December 27, 1998, the Company experienced weak demand by certain
customers, in particular those supplying the personal computer, HDD and
communications segments. Sales to one major customer, Seagate Technology,
decreased approximately 55%
17
<PAGE>
during the year ended December 27, 1998 compared to the same period in 1997
primarily due to reduced demand and Seagate's decision to insource a majority of
its manufacturing requirements. In addition, sales were negatively impacted by
intense price competition of Asian suppliers as they inherited benefits from
currency devaluation and tried to mitigate the demand void that was created by
the Asian financial crisis. Net sales for the year ended December 31, 1997
increased $57.0 million or 36.4% over the same period in 1996. For the year
ended 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 year 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
advance 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.
Gross Profit. Gross profit as a percentage of net sales (gross margin) for
the year ended December 27, 1998 was 10.1% as compared to 17.8% and 11.8% for
the comparable periods in 1997 and 1996, respectively. The Company's decrease
in gross margin during the year ended December 27, 1998 was attributable to
several factors: underutilization of factories caused by reduced demand, low
yields on new product ramps as customers accelerated new programs to bolster
demand, intense price competition from Asian suppliers and special charges of
approximately $1.6 million, of which $1.0 million related to workforce reduction
and $0.6 million related to employee severance and termination costs associated
with the closing of the two plants in Mexico.
For the year ended December 31, 1997, the Company's gross profit was
positively impacted by high levels of sales from increased demand for flex
products and the benefits associated with the transfer of production from the
U.K. to Thailand which provided 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 significantly higher than 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 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
$7.4 million, $8.0 million and $7.4 million for 1998, 1997 and 1996,
respectively, representing 4.4%, 3.7% and 4.7% of net sales for those same
years. Sales, general and administrative ("SG&A") expenses were $12.7 million,
$15.4 million and $13.3 million for 1998, 1997 and 1996, respectively,
representing 7.5%, 7.2% and 8.5% of net sales for those same years. The results
for 1998 reflect the Company's reduction in workforce, general reductions in
discretionary spending and elimination of management bonus and profit sharing
expenses for the year ended December 27, 1998. In 1997, the increase in sales
volume during the year outpaced the Company's growth in such expenses, as a
significant portion of the Company's SG&A expenses are fixed in nature. The
level of SG&A expenses was reduced in 1997 by the transfer of production from
the U.K. to Thailand, where such costs generally are lower. These benefits were
18
<PAGE>
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.
In 1996, engineering, research and development expenses and SG&A expenses
were 4.7% and 8.5%, respectively, as a percentage of sales. These expenses are
similar to 1998 as they also reflect elimination of management bonuses and
profit sharing and include special charges such as employee severance and
termination charges.
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 $0.5 million, or 0.3% of net sales, for the year ended
December 27, 1998.
Interest and Other Income (Expense). For the year ended December 27, 1998,
interest expense includes $2.9 million of interest expense related to borrowings
under the line of credit, the term loan and capital lease obligations and $0.1
million of interest expense related to the outstanding loan with Hana
Microelectronics. For the year ended December 31, 1997, interest expense
includes $0.3 million of interest expense on the subordinated debenture and $1.8
million of interest expense related to borrowings under the line of credit, the
term loan and capital lease obligations. For the year ended December 31, 1996,
interest expense represents $0.8 million of interest expense on the subordinated
debenture and $0.7 million on interest expense related to borrowings under the
line of credit, the term loan and capital lease obligations. Other income
(expense) for all years 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 also are included in other
income (expense) in 1998 and 1997.
Income Taxes. The Company's effective tax benefit rate for 1998 was 28%.
As the actual rate for each of the Company's entities 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 net deferred tax assets of $8.4 million at
December 27, 1998 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 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. The effective tax
benefit rate for 1996 was 28%. 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 related 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 and the IRS have reached a
tentative agreement to settle all outstanding issues relating to this audit.
The terms of the agreement would require a payment of approximately $0.6
million, excluding interest, most of which will be recoverable by amending
subsequent years' tax returns. The Company believes that the current tax
provision is adequate to cover the estimated liability and 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.
Special Charges. During the year ended December 27, 1998, the Company
implemented new cost and productivity improvement measures designed to address
current adverse industry trends such as intense price
19
<PAGE>
competition from Asian suppliers and decreased demand by certain customers
supplying the computer, HDD and communications segments. These actions included
the consolidation of administrative functions, a 27% reduction in staffing, the
closing of two manufacturing plants in Mexico and the transfer of selected
manufacturing programs from Mexico to Thailand. As a result, the Company
incurred a special charge of approximately $1.6 million: $1.0 million related to
the workforce reduction and $0.6 million related to employee severance and
termination costs associated with the closing of the two plants in Mexico.
During the year ended December 27, 1998, the Company paid and charged to the
liability $0.6 million related to employee severance and lease termination costs
and $0.5 million related to workforce reduction involving 97 employees at its
Chandler facility, 5 employees at its U.K. facility and 77 employees at its
Mexico facility. The remaining accrual related to workforce reduction is
approximately $0.5 million and the Company believes it is adequate to cover the
remaining liabilities.
Fluctuations in Operating Results. The Company has experienced substantial
fluctuations in its quarterly and annual operating results in the past, and the
Company's future operating results could vary substantially from quarter to
quarter. The Company's operating results for a particular quarter or longer
periods can be materially and adversely affected by numerous factors, such as
the receipt and shipment of large orders, or conversely the cancellation or
delay of 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. Variations in orders and in
the mix of products sold by the Company, together with increased price
competition, have significantly negatively impacted net sales and gross profit.
Many of these factors are outside the control of the Company.
Liquidity and Capital Resources
Summary. The Company has financed its operations to date primarily through
cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working capital, funding of capital expenditures, expansion of ATL
and funding operating losses. At December 27, 1998, cash and cash equivalents
totaled $5.3 million. At December 31, 1997 and 1996, cash and cash equivalents
totaled $9.1 million and $6.1 million, respectively.
Bank Financing. On June 5, 1997, the Company entered into a new credit
facility arranged by BancBoston Securities, Inc., which included a number of
banks as lenders. The credit facility consisted of a $20.0 million, three-year
revolving line of credit and a $25.0 million, five-year term loan. 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. 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%.
In February 1998, the Company amended its existing credit facility to more
adequately meet its working capital requirements by increasing the existing
revolving line of credit from $20.0 million to $25.0 million. In addition, the
existing $25.0 million term loan was replaced with a $35.0 million term loan.
In July 1998, the Company reevaluated its financial needs and determined that
credit facility commitments of a $20.0 million revolving line of credit and a
$30.0 million term loan sufficient to meet its liquidity requirements.
Accordingly, the Company canceled $10.0 million of existing credit facility
commitments, $5.0 million relating to the revolving line of credit and $5.0
million relating to the term loan.
On October 30, 1998, the Company amended its existing credit facility to
revise certain financial covenants, reduce the term loan by $10.0 million and
revise the debt amortization schedule. Upon closing of the third amendment, the
$30.0 million term loan was reduced by $5.0 million to $25.0 million from
borrowings from the Company's revolving line of credit. The amendment required
a $5.0 million principal payment no later than January 20, 1999 (which was
timely remitted), plus four equal principal payments of $0.8 million each
quarter beginning with the quarter ending December 31, 1998 through the quarter
ending September 30, 1999, increasing to twelve equal principal payments of $1.3
million each quarter thereafter with the last payment due December 31,
20
<PAGE>
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 a Base Rate which is defined
as BankBoston N.A.'s prime rate plus 0.50% or LIBOR plus an applicable margin
ranging from 1.50% to 2.25%, based on the Company achieving certain financial
objectives at the end of each quarter. The credit facility is secured by all
assets of the Company and a pledge by the Company of 66 2/3% of the stock of its
subsidiaries. Under the third amendment to the credit agreement, the Company is
required to meet certain minimum profitability covenants, maintain certain
financial ratios and meet certain net worth and indebtedness tests for which the
Company was in compliance at December 27, 1998. The amended credit facility
prohibits the payment of dividends. In connection with the third amendment, the
Company issued to its lenders a warrant to purchase an aggregate of 50,000
shares of Common Stock at an exercise price of $5.00 per share. The warrant
vested on March 14, 1999 (subject to certain conditions) and terminates (if not
sooner exercised) on December 29, 2002. The Company also granted to the lenders
certain customary demand and piggyback registration rights in connection with
the warrant. At December 27, 1998, $24.6 million was outstanding under the term
loan and $13.0 million was outstanding under the revolving line of credit. The
weighted average interest rate at December 27, 1998 for the revolving line of
credit was 8.6%.
During February 1999, the Company failed to meet certain financial
covenants of the credit agreement discussed above and expects to fail to meet
another covenant at March 31, 1999. The lenders have rights to exercise certain
remedies under the agreement but have not chosen to do so to date. In accordance
with Statement of Financial Accounting Standards No. 78, Classification of
Obligations That Are Callable by the Creditor, the Company has classified all of
the outstanding balance under the credit agreement as a current liability.
Management of the Company meets regularly with the lenders in an attempt to
restructure the credit facility, or otherwise satisfactorily resolve the non-
monetary defaults. While management believes that the best interests of the
lenders and the Company would be served through a restructured credit facility
that allows the Company to work through the current market dynamics for flex
products, there can be no assurance that the lenders will ultimately agree or
that such a restructured credit facility will ultimately be consummated. In the
meantime, the Company has been aggressively seeking other sources of debt and
equity financing and until a resolution of these financing matters can be
adequately addressed, the Company continues to take steps necessary to conserve
and manage cash flow to allow operations to continue. No assurance can be given
that the outcome of the Company's negotiating efforts with the lenders will not
adversely affect the Company's business, financial condition, results of
operations and cash flows.
Cash Flow. During 1998, the Company generated $13.2 million of cash from
operations, compared to $4.6 million and $4.4 million for the same periods in
1997 and 1996, respectively. Net income (loss) was ($4.8) million, $8.6 million
and ($25.0) million for the same periods, respectively, with depreciation and
amortization expense of $9.0 million, $6.6 million and $8.2 million,
respectively. Decreased sales levels for the year ended December 27, 1998
resulted in the Company maintaining a low level of working capital, primarily a
decreased level of accounts receivable and inventory which was offset by an
increase in current liabilities. During the year ended December 31, 1997,
working capital increased 175% to $25.0 million from $9.1 million in 1996
primarily as a result of increased business activity, the payment of $5.8
million of the accrued restructuring charges for employee and lease terminations
and the start-up of a new manufacturing facility in Thailand. In 1996, the
Company experienced a net loss of $25.0 million for the year 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 equipment as well as the recognition of future
obligations for employee and lease termination charges.
The 1998 and 1997 results reflect $0.5 million and $0.1 million of
amortization expense, respectively, 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.
Cash totaling $21.5 million was used in 1998 for investing activities
compared with $15.0 million and $25.7 million for the same periods in 1997 and
1996, respectively. Capital expenditures for the twelve months
21
<PAGE>
ended December 27, 1998 were $21.5 compared with $14.5 million and $13.8 million
for 1997 and 1996, respectively as the Company continued to invest in property,
plant and equipment for its North America and Thailand operations. During the
year ended December 27, 1998, the Company invested a total of $5.4 million
related to the implementation of the SAP R/3 software manufacturing/cost control
system, including software, implementation, hardware and training. The cost of
acquiring and implementing the new system is recorded as an asset by the Company
and is being amortized over its estimated benefit period of five years. In
addition, capital expenditures during the year ended December 27, 1998 included
$3.0 million related to the Thailand operations expansion and $13.1 million
related to machinery and equipment additions. Capital expenditures during these
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 1998 provided the Company with $4.6 million
compared with $13.4 million and $11.6 million in 1997 and 1996, respectively.
During year ended December 27, 1998, the Company borrowed an additional $5.0
million on its term loan which was used to pay down the Company's bank line of
credit and also remitted approximately $5.8 million in principal in late 1998
for payment on the term loan. Funding for this payment came from the Company's
line of credit. Net borrowings on the Company's bank line of credit totaled $6.0
million during the year ended December 27, 1998. Net repayments on the Company's
bank line of credit totaled $3.0 million during the year ended December 31, 1997
compared to net borrowings of $10.0 million for the same period in 1996. Under
the original credit agreement as discussed above, the Company borrowed $25.0
million under the term loan during the year ended December 31, 1997. 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. The Company generated $1.3 million, $2.0
million and $1.8 million in 1998, 1997 and 1996, 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 $1.0 million and
agreed to pay $1.3 million at various dates through December 31, 1998 in
connection with the acquisition of Hana's 20% interest in ATL. The Company
remitted $2.2 million during the year ended December 27, 1998. Funding for this
payment came from the Company's line of credit. As of December 27, 1998, $0.1
million was outstanding under the note and was paid in January 1999.
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.
As discussed above, the Company is aggressively seeking to restructure its
existing credit facility while at the same time pursuing alternate sources of
debt and equity capital. No assurances can be given that such financing or
capital will be available on terms acceptable to the Company. The current stock
price is adversely affecting the Company's ability to procure equity financing.
If the Company is unable to restructure its existing debt or obtain new
financing, its ability to continue operations will be jeopardized and the
Company may be forced to seek protection from its creditors.
Impact of Recently Issued 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 of $5.4 million are being amortized on a straight-line
basis over a period of five years after completion of the project in October
1998.
22
<PAGE>
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 it has
established good relationships with its local labor forces and the local
governments, the spread of the manufacturing process over multiple countries
subjects the Company to risks inherent in international operations. Those risks
include currency fluctuations, inflationary pressures, unexpected changes in
regulatory requirements, tariffs and barriers, potentially limited intellectual
property protection, potential cross border shipment delays, changes in
political climate, difficulties in coordinating and managing foreign operations,
foreign labor union issues, increases in employee turnover and potentially
adverse tax consequences. Any of the foregoing could have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.
While 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 foreign currencies. Changes in the relation of
foreign 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. 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.
Expansion of Thailand Operations
In April 1998, the Company commenced expansion of its Thailand operations
with the construction of a new plant. The expansion will initially provide
100,000 square feet of manufacturing space - 65,000 feet for flex finishing and
35,000 feet for assembly - bringing the total size of the facility to 140,000
square feet. The expanded facility, which will increase the total assembly area
by nearly 50%, includes state-of-the-art clean rooms and the production
capability to process up to 750,000 circuit assemblies per week. The new flex
finishing area will feature advanced surface finishing, laser processing and
automated optical profiling technologies. The total estimated cost of the
expansion is approximately $9.0 million. In February 1999, the qualification
process was completed and production began. The new facility is expected to be
operational by the second quarter of 1999, including customer qualification and
ramp into volume production. The Company anticipates that the new Thailand
facility will enable it to attain significant cost reductions that are crucial
to mitigating competitive price pressures in Asia and help sustain the Company's
implementation of a complete flexible circuit interconnect solution including
design, fabrication, assembly and testing. No assurance can be given that the
Thailand expansion will be completed at the time anticipated or that the
Company's expansion strategies will not have a material, adverse effect on the
Company's business, financial condition, results of operations and cash flows.
Environmental Regulations
The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has conducted
environmental studies of its facility in Chandler, Arizona, which revealed 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. However, given the uncertainties associated with environmental
contamination, there can be no assurance that such costs will not have a
material adverse impact on the Company. Pursuant to the agreements governing
the Rogers acquisition, Rogers has retained all environmental liabilities
relating to the purchased assets prior to the closing date of the acquisition.
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
23
<PAGE>
and damages imposed on the Company could materially adversely affect the
Company's business, financial condition, results of operations and cash flows.
In mid 1995, the Company acquired a manufacturing facility located in Agua
Prieta, Mexico. In connection with this acquisition, the Company conducted an
environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the 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
the seller's performance of its 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 no further action is required.
The Company believes it has been operating its facilities in substantial
compliance in all material respects with existing environmental laws. However,
the Company cannot predict the nature, scope or effect of legislation or
regulatory requirements that could be imposed or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not previously been applied. Compliance with more
stringent laws or regulations, or more vigorous enforcement policies of
regulatory agencies, could require substantial expenditures by the Company and
could adversely affect the Company's business, financial condition, results of
operations and cash flows.
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 of products 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, results of operations and cash
flows. Further, various sectors of the electronics industry are subject to
economic cycles and have in the past experienced, and are likely in the future
to experience, periods of slowdown. A slowdown or any other event leading to
excess capacity or a downturn in the electronics industry has resulted and may
continue to result in intensified price competition, reduced gross margins and a
decrease in unit volume, all of which have had and would continue to 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 36%, 43% and 60% of net sales for the years ended
December 27, 1998 and December 31, 1997 and 1996, 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
reductions due to market, competitive or economic conditions, have had and would
continue to have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
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. During periods of economic slowdown in the electronics industry and
other periods when
24
<PAGE>
excess capacity exists, electronic OEMs become more price sensitive. During the
year ended December 27, 1998, there was a worldwide slowdown in the electronics
industry and to maintain market share, many of the Company's primary foreign
competitors with lower cost structures decreased their prices to unprecedented
levels. This had a material adverse effect on the Company's pricing during those
periods. The Company believes that once a customer has selected a particular
vendor to design and manufacture a flexible circuit interconnect, the customer
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 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"), Parlex Corporation ("Parlex"). NOK and Fujikura are Japan-based
suppliers substantially larger than the Company with greater financial and other
resources. 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.
The Company also competes in assembly matters with leading flexible
circuit assembly providers such as Smartflex Systems, Inc. and Solectron. The
Company believes that competition in assembly matters is primarily driven by
availability of assembly technology, price and cycle time. The Company believes
that it will compete favorably with these competitors because it offers its
customers a complete flexible circuit interconnect solution including design,
fabrication, assembly and testing (referred to as the one-stop-shop strategy).
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.
Volatility of Stock Price
The trading price of the Company's Common Stock is expected to continue to
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company's customers, general conditions in the disk drive and computer
industries, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's Common Stock has
experienced volatility not necessarily related to announcements of
25
<PAGE>
Company performance. Broad market fluctuations may adversely affect the market
price of the Company's Common Stock.
Cancellation and Regrant of Stock Option Grants
On June 22, 1998, the Compensation Committee of the Company's Board of
Directors approved the cancellation of all outstanding options granted on June
3, 1997, October 1, 1997 and April 7, 1998 (with an original exercise price of
$15.50, $22.063 and $17.063 per share, respectively) and the regrant and
replacement of these options with new options at an exercise price per share of
$8.50, the fair market value of the Company's Common Stock on the date of the
Committee's determination. Each optionee who was offered the right to
participate elected to accept a new option with an exercise price of $8.50 per
share. Each new option has a term of ten years and becomes exerciseable for 25%
of the option share on June 22, 1999 and for the balance of the shares in a
series of equal monthly installments over the 36-month period thereafter,
assuming continued employment with the Company or one of its subsidiaries. The
Compensation Committee elected not to reprice any other outstanding options at
that time. 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.
The Compensation Committee approved the cancellation-regrant program
because it believes that equity interests are a significant factor in the
Company's ability to attract and retain key employees who are critical to the
Company's long-range success. During the years ended December 27, 1998 and
December 31, 1997, the market value of the Common Stock had fallen, in part, as
a result of market factors that affected many stocks in the industry in which
the Company engaged including the stock of the Company's customers. As a result
of the decrease in the fair market value of the Common Stock, the Committee
believed that the Company's ability to retain existing employees was adversely
affected and to attract talented individuals in the future would be impaired.
Accordingly, the Committee approved the cancellation-regrant program as a means
to ensuring that optionees have a meaningful equity interest in the Company.
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. With the complete implementation of the SAP R/3
software system in October 1998, the Company's manufacturing and cost control
system functions properly with respect to dates in the year 2000 and beyond.
The software replaced the Company's previous manufacturing and cost control
system and its implementation took place for a variety of reasons, not
separately identified as a Year 2000 remediation. Therefore, the Company does
not consider the implementation of the SAP R/3 system a direct Year 2000
remediation cost and the direct costs associated with addressing the Company's
Year 2000 issues have been immaterial to date. In addition, the Company is in
the process of implementing a formal remediation plan to ensure the Company is
compliant with respect to Year 2000 issues. The plan includes five phases
representing a major Year 2000 activity or segment - awareness, assessment,
renovation, validation and implementation.
Awareness. All Year 2000 projects with regard to internal systems are
---------
approved at the Board of Directors level and evaluated and reviewed by a Senior
Management Steering Committee on a monthly basis. The Company's plan of action
applies to all geographic locations where products and services are provided to
customers and project managers have been assigned to each location to coordinate
Year 2000 projects worldwide.
Assessment and Renovation. The Company has completed a detailed inventory
-------------------------
of processes, applications, hardware, operating systems and databases where Year
2000 issues may exist. To date, an assessment of all information technology
(IT)-related systems (e.g. hardware and software systems) has been fully carried
out. With the complete implementation of SAP finalized in October 1998, all
worldwide application-driven processes for the Company are Year 2000 compliant.
For example, processes required to support production and fulfillment of
customer orders (order entry, receiving/warehousing, procurement/materials,
manufacturing, product test, distribution/shipping and invoicing) are in
compliance with the Year 2000 issue after complete implementation of SAP in
October 1998. In addition, 97% of internal network hardware and software
systems are Year 2000 compliant to date. The scope of the Company's full
assessment also includes non-IT areas such as all
26
<PAGE>
facilities/plant equipment, manufacturing process and testing equipment, lab
equipment and telephone communications systems which are in the process of being
analyzed and, if necessary, a plan for renovation will be approved by the
Steering Committee in March 1999. In addition, the Company has implemented
programs with outside suppliers to ensure their readiness with respect to Year
2000 issues. The Company is currently tracking and managing this through
periodic questionnaires to suppliers. To date, the Company has received and
analyzed questionnaires related to 100% of the critical suppliers of the Company
and 85% of non-critical suppliers. Based on the information provided, all
critical suppliers are in compliance with the Year 2000 issue.
Validation. Upon completion of the SAP software implementation, the
----------
Company began its validation phase by testing, verifying and validating the
performance, functionality, and integration of the SAP manufacturing and cost
control software system in an operational environment. The Company anticipates
this phase of IT-related systems to continue throughout 1999.
Implementation. Upon completion of the validation phase of all IT as well
--------------
as non-IT areas for Year 2000 compliance, the Company plans to identify and
implement any necessary contingency plans and modify existing disaster recovery
plans throughout 1999.
In addition, the Company has evaluated software and hardware systems
associated with IT areas and concluded that there are no identified risks that
would have a material exposure to contingencies related to the Year 2000 issue.
With respect to non-IT areas, it is uncertain what risks are associated with the
Year 2000 issue and any identified risks could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flows. The Company plans to implement a full analysis and any necessary
renovation plan of this area of uncertainty by March 1999. There can be no
assurances that the systems of customer, suppliers and other companies on which
the Company relies will be timely converted and will not have an adverse effect
on the Company' systems or operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates. 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 foreign
currencies. Changes in the relation of foreign 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. 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 risk exposure only-not as speculative instruments. Typically, these
contracts have maturities of 1 month or less. 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.
Each month, the Company's chief financial officer approves the outlook for
expected currency exchange rate movements as well as the policy on desired
future foreign currency cash flow positions (long, short, balanced) for those
currencies in which the Company has significant activity. The Company's chief
financial officer also receives a daily report on currency exchange rates, cash
flow exposure and open foreign currency hedges. Expected future cash flow
positions and strategies are continuously monitored. At December 27, 1998,
there were no open forward exchange contracts. At December 31, 1997, there
were no material open forward exchange contracts. 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.
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
27
<PAGE>
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 have and could materially adversely
affect operating results; the risk of loss of market share through competition
and pricing pressures from competitors and/or customers; 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 not 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 outcome of the
Company's negotiating efforts with the lenders and other sources of debt and
equity capital will not adversely affect the Company's business, financial
condition, results of operations and cash flows; the risk that the Company's
expansion of manufacturing facilities in Thailand will not result in
sustainable, increased efficiencies, cost savings or improved margins as
anticipated or at the time anticipated; general risks inherent in international
operations, including currency fluctuations and government-mandated wage
increases; general manufacturing risks, including environmental risks related to
manufacturing operations and clean-up of the Mexican manufacturing facility; the
risk that other computer 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 from time to time in the Company's Securities and Exchange Commission
filings. Actual results in the future could differ materially from those
described in forward-looking statements as a result of such risks and
uncertainties. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Consolidated Balance Sheet Years ended
- --------------------------------------------------------------------------------------------------
December 27, December 31,
(in thousands, except share data) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,325 $ 9,092
Accounts receivable, net 24,747 31,581
Other receivables 1,161 1,167
Inventories 9,397 19,297
Deferred tax assets 2,072 1,823
Prepaid taxes - 647
Prepaid expenses and other current assets 1,952 1,400
- --------------------------------------------------------------------------------------------------
Total current assets 44,654 65,007
Property, plant and equipment, net 55,351 42,257
Intangible assets 1,933 2,449
Deferred tax assets 6,326 4,463
Other assets 40 24
$ 108,304 $ 114,200
- --------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 63 $ 2,250
Line of credit 13,000 7,000
Accounts payable 15,927 22,692
Accrued liabilities 7,183 6,162
Current portion of long-term debt and capitalized leases 24,613 1,959
- --------------------------------------------------------------------------------------------------
Total current liabilities 60,786 40,063
Long-term debt 69 23,230
Commitments and contingent liabilities
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;
8,928,249 and 8,768,472 shares issued and outstanding at
December 27, 1998 and December 31, 1997, respectively 89 88
Additional paid-in capital 63,856 62,562
Retained earnings (deficit) (16,496) (11,743)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 47,449 50,907
- --------------------------------------------------------------------------------------------------
$ 108,304 $ 114,200
- --------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended
December 27, December 31,
(in thousands, except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 170,097 $ 213,878 $ 156,836
Cost of sales 152,976 175,826 138,273
- ----------------------------------------------------------------------------------------------------------------
Gross profit 17,121 38,052 18,563
Operating expenses:
Engineering, research & development 7,437 7,990 7,366
Amortization of intangible assets 516 129 2,386
Selling, general & administrative 12,706 15,353 13,254
Restructuring charges - - 29,248
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 20,659 23,472 52,254
Operating income (loss) (3,538) 14,580 (33,691)
Interest income 287 218 223
Interest expense (2,972) (2,102) (1,511)
Other income (loss), net (379) (101) 92
Minority interest in earnings of consolidated joint venture - (181) 109
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,602) 12,414 (34,778)
Income tax expense (benefit) (1,849) 3,818 (9,754)
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,753) $ 8,596 $ (25,024)
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ (0.54) $ 0.99 $ (2.92)
Diluted $ (0.54) $ 0.97 $ (2.92)
- ----------------------------------------------------------------------------------------------------------------
Common and common equivalent shares used
in the calculation of net income (loss) per share:
Basic 8,867 8,712 8,580
Diluted 8,867 8,894 8,580
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
Consolidated Statements of Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained
Paid-In Earnings Total
(in thousands, except share data) Shares Amount Capital (Deficit) Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
stock purchase plan and exercise of stock
options, including tax benefit of $125 159,777 1 1,294 - 1,295
Net loss - - - (4,753) (4,753)
- ---------------------------------------------------------------------------------------------------------
Balance at December 27, 1998 8,928,249 $ 89 $ 63,856 $ (16,496) $ 47,449
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows Years ended
December 27, December 31,
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (4,753) $ 8,596 $ (25,024)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,035 6,622 8,208
Restructuring charges - - 29,248
(Gain) loss on disposal of assets (103) - 184
Minority interest - 181 -
Deferred taxes (2,112) 5,683 (9,772)
Changes in operating assets and liabilities:
Accounts receivable 6,834 (6,432) (9,557)
Inventories 9,900 (4,307) 1,834
Prepaid expenses and other current assets 101 (2,945) (2,029)
Payables and accrued liabilities (5,744) (2,821) 11,347
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,158 4,577 4,439
Investing activities:
Capital expenditures (21,510) (14,462) (13,763)
(Increase) in other assets (16) - (10)
Decrease in acquisition payable - - (12,375)
Investment in joint venture - (491) 491
- --------------------------------------------------------------------------------------------------
Net cash provided investing activities (21,526) (14,953) (25,657)
Financing activities:
Issuance of common stock, net of expenses 1,295 2,022 1,759
Net activity on line of credit 6,000 (3,000) 10,000
Payments on capitalized lease obligations (160) (151) (143)
Payments on current notes payable (2,187) (500) -
payments on long-term debt (5,749) (10,000) -
Issuance of debt 5,402 25,000 -
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,601 13,371 11,616
Net increase (decrease) in cash and cash equivalents (3,767) 2,995 (9,602)
Cash and cash equivalents at beginning of year 9,092 6,097 15,699
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,325 $ 9,092 $ 6,097
- ---------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest: $ 2,326 $ 2,714 $ 665
Income taxes 212 520 1,409
- ---------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing activities:
Equipment acquired under capital lease obligations $ 102 $ - $ -
Debt Issuance costs valued at $0.3 million payable
in March 1999 300 - -
Issuance of note payable in connection with
acquisition of Hana
Interest in ATL - 2,750 -
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
32
<PAGE>
_______________________________________________________________________________
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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has failed
to meet certain provisions of its credit agreement in February 1999 and expects
to fail to meet another covenant at March 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 1998 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Management is currently negotiating with funding sources to provide additional
capital to the Company. In addition, management of the Company has met with the
lenders in an attempt to restructure the credit facility, or otherwise
satisfactorily resolve the existing defaults. It is not possible, however, to
predict at this time the success of management's efforts. No assurance can be
given that the outcome of the Company's negotiating efforts with the lenders
will not adversely affect the Company's business, financial condition, results
of operations and cash flows.
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's earnings
through September 26, 1997 have been reflected as "Minority interest in earnings
of consolidated joint venture" on the Company's Consolidated Statements of
Operations.
Fiscal Year The Company's fiscal year consists of 52 or 53 weeks ending on the
Sunday closest to the last day of December each year. Fiscal year 1998
contained 52 weeks and ended December 27, 1998. Fiscal years 1997 and 1996
contained 52 weeks each and ended on December 28 and December 29, respectively.
Activity from the end of the reporting period to December 31 is immaterial for
1997 and 1996.
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 The Company enters into short-term forward foreign
currency exchange contracts in the regular course of business to manage its
exposure against foreign currency fluctuations, primarily
33
<PAGE>
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. At December 27,
1998, there were no open forward foreign currency exchange contracts.
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).
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 25
years. The Company uses accelerated methods for computing depreciation for tax
purposes.
Intangible Assets 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 27, 1998.
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 Cash and cash equivalents, accounts
receivable, borrowings under the Company's line of credit, notes payable,
accounts payable, accrued liabilities and capitalized leases 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 The Company reviews long-lived assets and
certain identifiable intangibles to be held and used or disposed of 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 in 1996 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.
34
<PAGE>
Research and Development Research and development costs are expensed as
incurred.
Income Taxes Income taxes are provided using the liability method based upon
the provisions of Statement of Financial Accounting Standards (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 employee stock option grants in
accordance with APB 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 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 of $5.4 million are being
amortized on a straight-line basis over a period of five years after completion
of the project in October 1998.
Net Income (Loss) Per Share In February, 1997, the Financial Accounting
Standards Board (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.
Comprehensive Income In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income components in a full set of general-purpose financial
statements. Comprehensive income includes certain non-owner changes in equity
that are currently excluded from net income for certain companies. Because the
Company historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS 130 did not have a material effect on the
consolidated financial position or results of operations or cash flows of the
Company.
Segment Reporting In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which revises disclosure
requirements about operating segments and establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 requires that public business enterprises report financial and
descriptive information about their reportable operating segments. The Company
operates in one business segment which is the manufacture and sale of flexible
circuit interconnect solutions. Financial information is summarized by
geographic area (see Note 15).
Prior Period Reclassification Certain prior period amounts have been
reclassified to conform to the current presentation.
Note 2 ADFlex U.K.
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 year 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
35
<PAGE>
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. During the year ended December 27, 1998, the Company paid and
charged to the liability $0.2 million related to termination costs for 3
employees. The remaining accrual for employee termination costs is approximately
$0.1 million and the Company believes it is adequate to cover the remaining
liabilities. Total revenue and total operating loss related to this operation
for the year ended December 27, 1998 was $2.5 million and $2.0 million,
respectively. Total revenue and operating loss related to this operation for the
year ended December 31, 1997 was $38.4 million and $0.5 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 $1.0 million and agreed to pay $1.3 million at various dates through December
31, 1998 in connection with the acquisition of Hana's 20% interest in ATL. The
Company remitted $2.2 million during the year ended December 27, 1998. Funding
for this payment came from the Company's line of credit. At December 27, 1998,
$0.1 million was outstanding under the note. Goodwill related to the excess
purchase price over fair value of the net tangible assets acquired of $1.9
million, net of accumulated amortization of $0.5 million at December 27, 1998,
is being amortized on a straight-line basis over five years.
Note 4 Special Charges
During the year ended December 27, 1998, the Company implemented new cost
and productivity improvement measures designed to address current adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the personal computer markets -
in particular the hard disk drive (HDD) segment. These actions included the
consolidation of administrative functions, a 27% reduction in staffing, the
closing of two manufacturing plants in Mexico and the transfer of selected
manufacturing programs from Mexico to Thailand. As a result, the Company
incurred a special charge of approximately $1.6 million: $1.0 million related to
the workforce reduction and $0.6 million related to employee severance and
termination costs associated with the closing of the two plants in Mexico.
During the year ended December 27, 1998, the Company paid and charged to the
liability $0.6 million related to employee severance and lease termination costs
and $0.5 million related to workforce reduction involving 97 employees at its
Chandler facility, 5 employees at its U.K. facility and 77 employees at its
Mexico facility. The remaining accrual related to workforce reduction is
approximately $0.5 million and the Company believes it is adequate to cover the
remaining liabilities.
Note 5 Accounts Receivable
Accounts receivable consist of the following (in thousands):
December 27, December 31,
1998 1997
- -------------------------------------------------------------------------------
Accounts receivable trade $ 25,748 $ 33,331
Allowance for returns and doubtful accounts (1,001) (1,750)
- -------------------------------------------------------------------------------
$ 24,747 $ 31,581
- -------------------------------------------------------------------------------
36
<PAGE>
Note 6 Inventories
Inventories consist of the following (in thousands):
December 27, December 31,
- -------------------------------------------------------------------------------
1998 1997
Raw material $ 7,437 $ 12,688
Work-in-process 3,743 8,849
Finished goods 1,105 595
- -------------------------------------------------------------------------------
12,285 22,132
Allowance for obsolescence and excess inventory (2,888) (2,835)
- -------------------------------------------------------------------------------
$ 9,397 $ 19,297
- -------------------------------------------------------------------------------
Note 7 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 27, December 31,
1998 1997
- -------------------------------------------------------------------------
Land $ 2,740 $ 2,740
Buildings 11,923 10,845
Leasehold improvements 4,772 4,312
Manufacturing equipment 47,335 34,279
Computer and office equipment 9,628 2,608
- -------------------------------------------------------------------------
76,398 54,784
Accumulated depreciation and amortization
of capitalized lease obligations (21,047) (12,527)
$ 55,351 $ 42,257
- -------------------------------------------------------------------------
Depreciation expense, including the amortization of capitalized lease
obligations, was $8.5 million, $6.5 million and $5.8 million for the years ended
December 27, 1998 and December 31, 1997 and 1996, respectively.
Note 8 Line of Credit and Long-term Debt
On June 5, 1997, the Company entered into a new credit facility arranged by
BancBoston Securities, Inc., which included a number of banks as lenders. The
credit facility consisted of a $20.0 million, three-year revolving line of
credit and a $25.0 million, five-year term loan. 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. 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%.
In February 1998, the Company amended its existing credit facility to more
adequately meet its working capital requirements by increasing the existing
revolving line of credit from $20.0 million to $25.0 million. In addition, the
existing $25.0 million term loan was replaced with a $35.0 million term loan. In
July 1998, the Company reevaluated its financial needs and determined that
credit facility commitments of a $20.0 million revolving line of credit and a
$30.0 million term loan were sufficient to meet its liquidity requirements.
Accordingly, the Company canceled $10.0 million of existing credit facility
commitments, $5.0 million relating to the revolving line of credit and $5.0
million relating to the term loan.
On October 30, 1998, the Company amended its existing credit facility to
revise certain financial covenants, reduce the term loan by $10.0 million and
revise the debt amortization schedule. Upon closing of the third amendment, the
$30.0 million term loan was reduced by $5.0 million to $25.0 million from
borrowings from the Company's revolving line of credit. The amendment required a
$5.0 million principal payment no later than January 20, 1999 (which was timely
remitted), plus four equal principal payments of $0.8 million each quarter
beginning with the quarter ending December 31, 1998 through the quarter ending
September 30, 1999, increasing to twelve equal principal payments of $1.3
million each quarter thereafter with the last payment due December 31,
37
<PAGE>
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 a Base Rate which is defined
as BankBoston N.A.'s prime rate plus 0.50% or LIBOR plus an applicable margin
ranging from 1.50% to 2.25%, based on the Company achieving certain financial
objectives at the end of each quarter. The credit facility is secured by all
assets of the Company and a pledge by the Company of 66 2/3% of the stock of its
subsidiaries. Under the third amendment to the credit agreement, the Company is
required to meet certain minimum revenue and profitability covenants, maintain
certain financial ratios and meet certain net worth and indebtedness tests for
which the Company was in compliance at December 27, 1998. The amended credit
facility prohibits the payment of dividends. In connection with the third
amendment, the Company issued to its lenders a warrant to purchase an aggregate
of 50,000 shares of Common Stock at an exercise price of $5.00 per share. The
warrant vested on March 14, 1999 (subject to certain conditions) and terminates
(if not sooner exercised) on December 29, 2002. The Company also granted to the
lenders certain customary demand and piggyback registration rights in connection
with the warrant. At December 27, 1998, $24.6 million was outstanding under the
term loan and $13.0 million was outstanding under the revolving line of credit.
The weighted average interest rate at December 27, 1998 for the revolving line
of credit was 8.6%.
During February 1999, the Company failed to meet certain financial
covenants of the credit agreement discussed above and expects to fail to meet
another covenant at March 31, 1999. The lenders have rights to exercise certain
remedies under the agreement but have not chosen to do so to date. In accordance
with Statement of Financial Accounting Standards No. 78, Classification of
Obligations That Are Callable by the Creditor, the Company has classified all of
the outstanding balance under the credit agreement as a current liability.
Management of the Company has met with the lenders in an attempt to restructure
the credit facility, or otherwise satisfactorily resolve the defaults. It is not
possible, however, to predict at this time the success of management's efforts.
No assurance can be given that the outcome of the Company's negotiating efforts
with the lenders will not adversely affect the Company's business, financial
condition, results of operations and cash flows.
Long-term debt consists of the following (in thousands):
December 27, December 31,
1998 1997
- -----------------------------------------------------------------
Term loan agreement; interest at
LIBOR + margin ranging from 1.50%
to 2.25% (8.25% at
December 27, 1998) $ 24,550 $ 25,000
Capitalized lease obligations 132 189
- -----------------------------------------------------------------
24,682 25,189
Less current maturities (24,613) (1,959)
- -----------------------------------------------------------------
$ 69 $ 23,230
- -----------------------------------------------------------------
Note 9 Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 27, December 31,
1998 1997
- -----------------------------------------------------------------
Salaries and benefits $ 1,987 $ 3,259
Accrued interest 769 138
Accrued restructuring charges, current 172 339
Accrued severance costs 500 -
Accrued relocation 92 429
Accrued commissions 304 346
Accrued SAP expenses 917 -
Other 2,442 1,651
- -----------------------------------------------------------------
$ 7,183 $ 6,162
- -----------------------------------------------------------------
38
<PAGE>
Note 10 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 27, 1998, no shares of preferred stock have been issued.
COMMON STOCK The number of shares of Common Stock reserved for future issuance
at December 27, 1998, was as follows:
- ---------------------------------------------------------------------------
Employee and director stock options outstanding 896,122
Reserved for future grants under the 1994 Stock Incentive plan 7,615
1994 director stock options outstanding 36,000
Reserved for issuance under the Employee Stock Purchase Plan 172,982
1998 outstanding warrants, exercisable March 14, 1999 50,000
- ---------------------------------------------------------------------------
Total reserved for future issuance 1,162,719
- ---------------------------------------------------------------------------
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.
In October 1998, in connection with the third amendment to the credit facility
(see Note 8), the Company issued to its lenders a warrant to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.00 per
share. The warrant vested on March 14, 1999 (subject to certain conditions) and
terminates (if not sooner exercised) on December 29, 2002. The Company also
granted to the lenders certain customary demand and piggyback registration
rights in connection with the warrant.
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
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.
Under the 1994 Stock Incentive Plan (1994 Plan), qualified employees may receive
options to purchase the Company's common stock. The number of shares of Common
Stock available for issuance in any year under the Plan is equal to 3% of the
outstanding shares of Common Stock each January 1 during the term of the Plan.
In 1998, 263,054 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. On June 22, 1998, the Company canceled
336,500 outstanding options granted on June 3, 1997, October 1, 1997 and April
7, 1998 (with an original exercise price of $15.50, $22.063 and $17.063 per
share, respectively)
39
<PAGE>
and approved the regrant and replacement of these options with new options at an
exercise price per share of $8.50, the fair market value of the Company's Common
Stock on the date of the Company's determination. The new options vest over a
four-year period from the new date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
pricing model with the following weighted-average assumptions for 1998: risk-
free interest rates of 4.42%, dividend yields of 0%, volatility factor of the
expected market price of the Company's Common Stock of .871 and a weighted-
average expected life of the option of 5 years. The assumptions used in 1997
were: 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
1996 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-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share amounts):
Years ended
December 27, December 31,
1998 1997 1996
- -------------------------------------------------------------------------------
Pro forma net income (loss) $ (6,420) $7,262 $ (25,962)
Pro forma net income (loss) per basic share (0.72) 0.83 (3.03)
Pro forma net income (loss) per diluted share (0.72) 0.82 (3.03)
- -------------------------------------------------------------------------------
The effects of applying SFAS No. 123 for the years ended December 27, 1998 and
December 31, 1997 and 1996 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
follows:
<TABLE>
<CAPTION>
Year ended December 27, Year ended December 31, Year ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------- ---------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 684,761 $ 14.08 555,162 $ 14.52 634,363 $ 12.18
Granted 798,751 12.59 400,750 15.78 317,725 10.55
Exercised (43,873) 6.49 (67,150) 10.74 (260,612) 0.77
Forfeitures/Expirations (543,517) 16.28 (204,001) 19.74 (136,314) 19.74
--------------------------- ---------------------- ------------------------
Outstanding - end of year 896,122 11.86 684,761 14.08 555,162 14.52
--------------------------- ---------------------- ------------------------
Exerciseable at year end 186,750 $ 13.62 136,460 $ 11.92 149,608 $ 15.31
--------------------------- ---------------------- ------------------------
Weighted-average fair value of
options granted during the year:
Incentive Stock Options granted
under the 1994 Plan $ 8.88 $ 8.93 $ 6.87
Non-qualified Stock Options
granted under the 1994 Plan $ 8.53 $ 10.00 $ 5.93
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Exercise prices for options outstanding as of December 27, 1998 ranged from
$0.50 to $27.25. The weighted-average remaining contractual life of those
options is 8.7 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. On April
28, 1998, the Company granted three outside directors an option to purchase
3,000 shares of Common Stock each at an exercise price of $20.00. The options
vest over a three-year period. All of the above options to directors were
granted under the 1994 Plan.
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 115,904, 67,814 and 90,584 shares
issued under the Purchase Plan during 1998, 1997 and 1996, respectively.
Note 11 Employee Benefit Plans
The Company has 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 ($10,000 for 1998). 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 27, 1998 and 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 year ended December 31, 1997 were $0.7
million. No expenses were recorded pursuant to this plan for the years ended
December 27, 1998 and December 31, 1996.
The Company has adopted a management bonus plan to provide an additional
financial incentive for management. No expenses were recorded pursuant to this
plan for the year ended December 27, 1998. Total expenses pursuant to this plan
for the years ended December 31, 1997 and 1996 were $1.3 million and $0.1
million, respectively.
Note 12 Shareholder Rights Plan
On July 10, 1996, the Board of Directors adopted a Shareholder Rights Plan (the
Plan). Under the terms of the Plan, each shareholder of record at the close of
business on July 22, 1996, received as a dividend one Preferred Share purchase
right (Right) for each share of Common Stock of the Company. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Participating Preferred Stock of the Company at a price of $100.00
per share, subject to adjustment. The Rights will separate from the Common Stock
and become exerciseable following the twentieth day after a person or group
acquires beneficial ownership of more than 20.5% of the Company's Common Stock
or announces a tender or exchange offer, the consummation of which would result
in ownership by a person or group of more than 20.5% of the Company's Common
Stock. Upon such events, the Company's Board of Directors may exchange the
Rights for one share of Common Stock per Right. Any unexercised Rights not
exchanged will have the right to receive Common Stock having a value of two
41
<PAGE>
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.
42
<PAGE>
Note 13 Income Taxes
<TABLE>
<CAPTION>
Income taxes include the following (in thousands): Years ended
December 27, December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ - $ (305) $ (77)
Deferred (2,079) 3,452 (9,623)
- ---------------------------------------------------------------------------------------------------------------------------------
(2,079) 3,147 (9,700)
State:
Current - - 54
Deferred (33) 313 (149)
- ---------------------------------------------------------------------------------------------------------------------------------
(33) 313 (95)
Foreign, current 263 358 41
- ---------------------------------------------------------------------------------------------------------------------------------
$ (1,849) $ 3,818 $ (9,754)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax benefits associated with certain stock options reduced taxes currently
payable by $0.1 million, $0.4 million and $0.7 million for 1998, 1997 and 1996,
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 27, 1998 and December 31,
1997 and 1996, respectively, as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 27, December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense (benefit) calculated at the statutory rate $ (2,245) $ 4,219 $ (12,172)
State income tax (benefit), net of federal effect (218) 409 (62)
Foreign losses (income) with no tax benefit (charge) (416) (648) 2,438
In-process technology (346) (346) (54)
Research and development credit - - (100)
Other, net 1,376 184 196
- -------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $ (1,849) $ 3,818 $ (9,754)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of deferred tax
assets and liabilities as of December 27, 1998 and December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax benefits related to restructuring $ 3,327 $ 5,279
Inventory valuation 1,148 1,118
Accrued liabilities 781 519
Allowance for returns and doubtful accounts 254 358
State tax NOL carryforward 131 14
Federal tax NOL carryforward 3,243 -
Alternative minimum tax credit 443 443
Other state credits 29 29
- --------------------------------------------------------------------------------------
9,356 7,760
Deferred tax liabilities:
Tax versus financial reporting depreciation 847 1,302
Prepaid expenses and other 111 172
- --------------------------------------------------------------------------------------
958 1,474
- --------------------------------------------------------------------------------------
Net deferred tax asset 8,398 6,286
Plus (minus) deferred tax liability (asset) - current (2,072) (1,823)
- --------------------------------------------------------------------------------------
Deferred tax asset, non-current $ 6,326 $ 4,463
- --------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Management has concluded that no valuation allowance is required based on its
assessment that future levels of taxable income will, more likely than not, be
sufficient to realize the tax benefits.
At December 27, 1998, the Company has a federal and state net operating loss of
$9.5 million and $4.0 million, respectively, which are available for carryover
to future periods. The federal net operating loss begins expiring in the year
2019 while the state net operating loss begins expiring in 2003. In addition,
the Company has $0.4 million of alternative minimum tax credit carryovers at
December 27, 1998 which do not expire.
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 and the IRS have
reached a tentative agreement to settle all outstanding issues relating to this
audit. The terms of the agreement would require a payment of approximately $0.6
million, excluding interest, most of which will be recoverable by amending
subsequent years' tax returns. The Company believes that the current tax
provision is adequate to cover the estimated liability and 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 $1.8 million, $3.2 million and
($38.8) million for the years ended December 27, 1998 and December 31, 1997 and
1996, respectively. The residual United States tax liability for unremitted
foreign earnings is immaterial.
Note 14 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 27, 1998, the future minimum lease commitments under these leases
are payable as follows (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
<S> <C> <C>
1999 $ 74 $ 1,451
2000 40 1,198
2001 36 1,175
2002 - 1,105
2003 - 624
2004 and thereafter 526
- -----------------------------------------------------------------------------
Total minimum lease payments 150 $ 6,079
--------
Less amounts representing interest (18)
- -----------------------------------------------------------------
Present value of future net minimum lease payments $ 132
- -----------------------------------------------------------------
</TABLE>
Rent expense for all operating leases for the years ended December 27, 1998 and
December 31, 1997 and 1996 was $2.3 million, $3.9 million and $4.2 million,
respectively. At December 27, 1998 and December 31, 1997, the Company had
capitalized $0.8 million and $0.7 million, respectively, related to assets
acquired under capitalized lease agreements in the accompanying balance sheet.
ENVIRONMENTAL REMEDIATION CONTINGENCY The nature of the Company's business
exposes the Company to potential environmental remediation liabilities arising
from the manufacture, use and disposal of hazardous materials used to
manufacture flex interconnect products. Management believes that any cost
associated with maintaining the Company's compliance with current environmental
remediation laws will not have a material adverse effect on the Company's
financial statements.
MEXICAN UNION RELATIONS At December 27, 1998, 1,990 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-
44
<PAGE>
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 15 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 27, 1998 and December 31, 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 27, December 31,
1998 1997
- -----------------------------------------------------------
<S> <C> <C>
Revenue:
North America $ 135,000 $ 157,743
Europe 2,509 38,410
Southeast Asia 47,350 28,430
Eliminations (14,762) (10,705)
- -----------------------------------------------------------
Total 170,097 213,878
Operating Income (loss):
North America $ (5,096) $ 11,292
Europe (1,974) 392
Southeast Asia 3,364 2,927
Eliminations 168 (31)
- -----------------------------------------------------------
Total (3,538) 14,580
Total Assets:
North America $ 139,354 $ 141,473
Europe 12,570 13,721
Southeast Asia 9,582 9,672
Eliminations (53,202) (50,666)
Total 108,304 114,200
- -----------------------------------------------------------
</TABLE>
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 27, December 31,
- -----------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
IBM 16.0% 11.5% 11.7%
Seagate 12.4% 21.9% 34.9%
- -----------------------------------------------------------
</TABLE>
Export sales during the years ended December 27, 1998 and December 31, 1997 and
1996 were $56.2 million, $66.6 million and $26.6 million, respectively.
Note 16 Related Party Transactions
ACQUISITION AGREEMENTS WITH ROGERS CORPORATION Pursuant to the asset purchase
agreements entered into on June 28, 1993 between the Company and Rogers
Corporation (Rogers) whereby the Company purchased the Flexible Interconnect
Division (the Predecessor) of Rogers, Rogers retained certain existing and
potential liabilities. In particular, Rogers retained all liabilities resulting
from, among other things, the creation, storage, discharge, use or handling of
hazardous or toxic substances by the Predecessor that may exist on or about the
Company's facilities in Arizona and Mexico prior to the acquisition.
In connection with the acquisition, the Company 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
45
<PAGE>
the lease expiration date. The renewed lease provides for fixed payments of $0.8
million per annum 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 $0.8 million for the year ended December 27, 1998 and
$0.6 million and $0.5 million for each of the years ended December 31, 1997 and
1996, respectively.
AFFILIATION WITH XYRATEX The Company derived 0.1% and 1.1% of its net sales in
1998 and 1997, 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 totaled $1.5 million.
In addition, $0.5 million was paid to Xyratex in 1997 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 entered
into a building lease with Hana on October 1, 1996 to lease the Thailand
manufacturing facility. The lease term expired on March 31, 1999. Total lease
payments made to Hana in 1998 and 1997 totaled $0.6 million and $0.4 million,
respectively. In addition, $0.3 million was paid to Hana in 1997 for
administrative services. No administrative service payments were made in 1998.
Note 17 Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales
1998 $ 50,023 $ 44,304 $ 36,142 $ 39,628 $ 170,097
1997 48,221 56,244 55,058 54,355 213,878
1996 38,082 35,031 36,898 46,825 156,836
Gross profit
1998 10,518 1,153 1,586 3,864 17,121
1997 7,432 9,090 10,145 11,385 38,052
1996 7,198 5,244 (295) 6,416 18,563
Net income (loss)
1998 2,631 (3,574)/2/ (2,610) (1,200)/2/ (4,753)/2/
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
1998 .30 (.40) ( .29) (.13) (.54)
1997 .10 .22 .30 .37 . 99
1996 .10 (.08) (2.98) .05 (2.92)
Net income (loss) per diluted share
1998 .30 (.40) (.29) (.13) (.54)
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.
2 During the quarter ended June 30, 1998, $1.1 million charges were incurred
related to work force reduction and the closing of two plants in Mexico in an
effort to address current adverse industry trends and during the quarter ended
December 27, 1998, charges of $0.5 million were incurred related to work force
reduction. See Note 4.
46
<PAGE>
Report of Ernst & Young LLP, 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 27, 1998 and December 31, 1997, and
the related consolidated statements of operations, equity and cash flows for
each of the three years in the period ended December 27, 1998. 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 27, 1998 and December 31, 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 27, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has failed
to meet certain provisions of its credit agreement in February 1999 and expects
to fail to meet another covenant at March 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 1998 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Phoenix, Arizona
January 25, 1999, except as to
basis of presentation in Note 1
to the consolidated financial statements
as to which the date is April 2, 1999.
47
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
48
<PAGE>
PART III
Certain information required by Part III is omitted from this Report by
virtue of the fact that the Company will file 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.
Certain information to be included in the Proxy Statement is incorporated herein
by reference.
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 will be contained in the
sections captioned "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement, and is incorporated
herein by reference.
Item 11. Executive Compensation.
The information required by this item will be contained in the sections
captioned "Executive Compensation," "Compensation Committee Report on Executive
Compensation" and "Comparison of Stock Performance" 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 will be contained in the section
captioned "Security Ownership of Certain Beneficial Owners and Management" of
the Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will be contained in the section
captioned "Certain Relationships and Related Transactions" of the Proxy
Statement, and is incorporated herein by reference.
49
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets - December 27, 1998 and
December 31, 1997
(iii) Consolidated Statements of Operations - Years ended
December 27, 1998 and December 31, 1997 and 1996
(iv) Consolidated Statements of Equity - Years ended
December 27, 1998 and December 31, 1997 and 1996
(v) Consolidated Statements of Cash Flows - Years ended
December 27, 1998 and December 31, 1997 and 1996
(vi) Notes to Consolidated Financial Statements
2. Financial Statement Schedule.
The following financial statement schedule of ADFlex Solutions, Inc. for
the years ended December 27, 1998 and December 31, 1997 and 1996 is filed as
part of this Report and should be read in conjunction with the Consolidated
Financial Statements.
Independent Auditor's Report on Schedule S-1
Schedule II - Valuation and Qualifying Accounts and Reserves S-2
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.
2. Exhibits.
<TABLE>
<CAPTION>
Number Description
------------ -------------------------------------------------------------------
<S> <C>
2.1(1) Asset Purchase Agreement between the Registrant and Rogers
Corporation dated June 28, 1993
2.2(1) Asset Purchase Agreement between ADFlex Mexico S.A. de C.V.
("ADMex") and Rogers Mexicana, S.A. de C.V. dated June 28, 1993
2.3(2) Share Sale and Purchase Agreement, dated January 7, 1996,
between the Registrant and Havant International Holdings Limited
2.4(2) Letter, dated January 7, 1996, constituting the Disclosure
Letter under the Share Sale and Purchase Agreement included as
Exhibit 2.3
3.1(1) Restated Certificate of Incorporation
3.2(1) Bylaws
3.3(5) Amendment to Bylaws Adopted January 31, 1996
4.1(1) Specimen Common Stock Certificate
4.2(6) Rights Agreement, dated as of July 10, 1996, between the
Registrant and First National Bank of Boston, NA, including the
Certificate of Designation of Rights, Preferences and Privileges
of Series A Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibits A, B and C, respectively.
*10.1(1) 1993 Equity Incentive Plan
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
*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
10.15(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.
*10.22(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
10.32(2) Assignment of Intellectual Property, dated January 8, 1996,
between Polene Limited and Havant International Limited
10.33(2) Agreement for the Sale and Purchase of the Businesses and Assets
of Havant International Limited, dated January 3, 1996, between
Havant International Limited and Polene Limited
10.34(2) Agreement for the Sale of the Debtors and the Assumption of
Certain of the Liabilities of Havant International Limited,
dated January 4, 1996, between Havant International Limited and
Polene Limited
10.37(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(4) 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
10.50(7) Equity Purchase Agreement dated September 26,1997 between the
Registrant and Hana Microelectronics Public Co., Ltd.
10.51(7) Promissory Note dated September 30, 1997 between the Registrant
and Hana Microelectronics Public Co., Ltd.
10.53 (8) Collective Bargaining Contract dated December 10, 1997
(Translation)
10.54 (8) Compensatory Control Agreement dated January 22, 1997 between
the Registrant and Rolando C. Esteverena.
10.56 (9) Third Amendment to Credit Agreement, dated October 30, 1998,
among the
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
Registrant, BankBoston, N.A. and BankBoston, N.A. as
agent for Lenders
10.57 Fourth Amendment to Credit Agreement, dated January 15, 1999,
among the Registrant, BankBoston, N.A. and BankBoston, N.A. as
agent for Lenders
10.58 Fifth Amendment to Credit Agreement, dated February 19, 1999,
among the Registrant, BankBoston, N.A. and BankBoston, N.A. as
agent for Lenders
16.1(1) Letter from KPMG Peat Marwick
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
- ---------------------
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 33-80324) or amendments thereto, filed with the Securities and Exchange
Commission on June 16, 1994.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 7, 1996.
(3) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 1995.
(4) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 1995.
(5) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1995.
(6) Incorporated by reference from the Company's Form 8-K dated July 10, 1996.
(7) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 1997.
(8) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1997.
(9) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 1998.
* Constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
52
<PAGE>
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: April 5, 1999 By /s/ Rolando 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 April 5, 1999
and Director (Principal Executive
Officer)
/s/ Donald E. Frederick
Donald E. Frederick Vice President, Chief Financial April 5, 1999
Officer, Secretary (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Steve Sanghi
Steve Sanghi Director April 5, 1999
/s/ Richard P. Clark
Richard P. Clark Director April 5, 1999
/s/ William Kennedy Wilkie
William Kennedy Wilkie Director April 5, 1999
/s/ Wade Meyercord
Wade Meyercord Director April 5, 1999
</TABLE>
53
<PAGE>
Report of Ernst & Young LLP, 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 27, 1998 and December 31, 1997, and
the related consolidated statements of operations, equity and cash flows for
each of the three years in the period ended December 27, 1998, and have issued
our report thereon dated January 25 ,1999, except as to basis of presentation in
Note 1 to the consolidated financial statements as to which the date is April 2,
1999. 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 on these financial statements based on
our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, the Company has
failed to meet certain provisions of its credit agreement in February 1999 and
expects to fail to meet another covenant at March 31, 1999. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans as to those matters are also described in Note 1 to
the consolidated financial statements. The 1998 consolidated financial
statements and the accompanying schedule do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Phoenix, Arizona
January 25, 1999, except as to
basis of presentation in Note 1
to the consolidated financial statements
as to which the date is April 2, 1999.
54
<PAGE>
ANNEX B
Current Report
On
Form 8-K
Of
ADFlex
Filed on July 8, 1999
<PAGE>
Annex B
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 7,1999
-----------
ADFlex Solutions, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-24416 04-3186513
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission File) (I.R.S. Employer
of incorporation) Number) Identification No.)
2001 West Chandler Boulevard, Chandler, Arizona 85224
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 963-4584
--------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Total Number of Pages - 4
Index to Exhibits at Page - 4
<PAGE>
Item 5. Other Events.
ADFlex Solutions, Inc. (the "Company") hereby incorporates by reference the
description of the proposed transaction between the Company, Innovex, Inc.
("Parent") and Innovex Acquisition Corp., a Delaware corporation and wholly-
owned subsidiary of Parent ("Purchaser"), which is described in (1) the
Agreement and Plan of Merger among the Company, Parent and Purchaser, dated as
of July 1, 1999 (such agreement being Exhibit 2.1 attached hereto) and (2) the
joint press release of the Company and Purchaser, dated July 1, 1999 announcing
the proposed transaction (such press release being Exhibit 99.1 attached
hereto).
Item 7. Financial Statements and Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of July 1, 1999, among
ADFlex Solutions, Inc., Innovex, Inc. and Innovex Acquisition
Corp.
99.1 Joint press release of ADFlex Solutions, Inc. and Innovex,
Inc., dated July 1, 1999.
<PAGE>
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 hereunto duly authorized.
Date: July 7, 1999.
ADFLEX SOLUTIONS, INC.
By:________________________
<PAGE>
ADFLEX SOLUTIONS, INC.
CURRENT REPORT ON FORM 8-K
EXHIBIT INDEX
Exhibit No. Exhibit Sequential Page Number
- ----------- ------- ----------------------
2.1 Agreement and Plan of Merger, dated July 1, Page __
1999, among ADFlex Solutions, Inc., Innovex,
Inc. and Innovex Acquisition Corp.
99.1 Joint press release of ADFlex Solutions, Page __
Inc. and Innovex, Inc., dated July 1, 1999.
<PAGE>
ANNEX C
Quarterly Report
On
Form 10-Q
Of
ADFlex
For The Quarterly Period Ended June 27, 1999
<PAGE>
ANNEX C
UNITED STATES
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 June 27, 1999
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 ______ No X
------
The number of shares outstanding of the issuer's common stock, as of June 30,
1999:
Common Stock, $.01 Par Value: 8,984,518 shares
1
<PAGE>
ADFlex Solutions, Inc.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
June 27, 1999 and December 27, 1998.......................... 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 27, 1999 and June 30, 1998.. 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 27, 1999 and June 30, 1998............ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 9
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.... 17
Item 6. Exhibits and Reports on Form 8-K....................... 17
SIGNATURES............................................................ 18
</TABLE>
EXHIBITS
(27.1) Financial Data Schedule (filed only electronically with the SEC)
2
<PAGE>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
ADFlex Solutions, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
---------------------- ---------------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 2,641 $ 5,325
Accounts receivable, net 22,704 24,747
Other receivables 795 1,161
Inventories 9,021 9,397
Deferred tax assets - 2,072
Other current assets 675 1,952
---------------------- ---------------------
Total current assets 35,836 44,654
Property, plant & equipment, net 47,736 55,351
Intangible Assets 1,710 1,933
Deferred tax assets - 6,326
Other assets 46 40
---------------------- ---------------------
$85,328 $108,304
====================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $16,400 $ 13,000
Notes payable - 63
Accounts payable 16,422 15,927
Accrued liabilities 9,872 7,183
Current portion of long-term debt and
capitalized leases 16,865 24,613
---------------------- ---------------------
Total current liabilities 59,559 60,786
Long-term debt and capitalized leases 1,311 69
Stockholders' equity 24,458 47,449
---------------------- ---------------------
$85,328 $108,304
====================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
ADFlex Solutions, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 27, June 30, June 27, June 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $34,187 $44,304 $ 62,825 $94,327
Cost of sales 29,560 43,151 58,576 82,656
--------------- --------------- --------------- ---------------
Gross profit 4,627 1,153 4,249 11,671
Operating expenses:
Engineering, research & development 1,079 1,979 2,443 4,100
Selling, general & administrative 3,401 3,139 5,994 7,037
Restructuring charges 903 - 7,806 -
Amortization of intangible assets 129 129 258 258
--------------- --------------- --------------- ---------------
Total operating expenses 5,512 5,247 16,501 11,395
Operating income (loss) (885) (4,094) (12,252) 276
Interest income 22 142 58 197
Interest expense (947) (838) (1,826) (1,424)
Other income (expense), net (592) (174) (658) (360)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes (2,402) (4,964) (14,678) (1,311)
Income taxes - (1,390) 8,874 (368)
--------------- --------------- --------------- ---------------
Net income (loss) $(2,402) $(3,574) $(23,552) $ (943)
===========================================================================
Net income (loss) per share:
Basic $ (0.27) $ (0.40) $ (2.62) $ (0.11)
===========================================================================
Diluted $ (0.27) $ (0.40) $ (2.62) $ (0.11)
===========================================================================
Number of shares used in computing
net income (loss) per share:
Basic 8,983 8,835 8,975 8,820
=========================================================================
Diluted 8,983 8,835 8,975 8,820
=========================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
ADFlex Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 27, June 30,
-----------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities
Net income (loss) $(23,552) $ (943)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,412 4,339
Deferred taxes 8,398 391
Restructuring charges 7,806 -
Net gain/loss on disposal of assets 35 (103)
Changes in operating assets and liabilities:
Accounts receivable 2,043 7,691
Other receivables 366 219
Inventories 376 2,931
Other current assets 1,277 (236)
Accounts payable and accrued liabilities 3,184 (6,366)
--------------------- --------------------
Net cash provided by (used in) operating activities 5,345 7,923
Cash flows provided by (used in) investing activities
Capital expenditures (5,415) (13,733)
(Increase)/decrease in other assets (6) 2
--------------------- --------------------
Net cash (used in) investing activities (5,421) (13,731)
Cash flows provided by (used in) financing activities
Net activity on line of credit 3,400 (3,500)
Proceeds from issuance of long-term debt 1,600 5,000
Payments on long-term debt (7,985) -
Payments on note payable (63) (875)
Payments on capitalized lease obligations (121) (85)
Issuance of common stock, net of expenses 561 703
--------------------- --------------------
Net cash flows provided by (used in) financing activities (2,608) 1,243
--------------------- --------------------
Net decrease in cash and cash equivalents (2,684) (4,565)
Cash and cash equivalents at beginning of period 5,325 9,092
--------------------- --------------------
Cash and cash equivalents at end of period $ 2,641 $ 4,527
===================== ====================
</TABLE>
5
<PAGE>
ADFlex Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Preparing financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results may differ from these estimates. Operating results
for the six month period ended June 27, 1999 are not necessarily indicative of
the results that may be expected for the year ending January 2, 2000. 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 27, 1998.
The accompanying consolidated financial statements have been prepared on
the basis that the Company will continue as a going concern. The Company has
failed to meet certain provisions of its credit agreement during the six months
ended June 27, 1999 and in June 1999, the lenders notified the Company that the
financing commitments under the existing credit facility had been terminated and
the lenders were no longer obligated to loan funds to the Company pursuant to
the credit agreement. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements for the period ended June 27, 1999 do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
On July 1, 1999, the Company announced that it had entered into a
definitive merger agreement with Innovex, Inc. whereby Innovex's acquisition
subsidiary would commence a cash tender offer to purchase outstanding shares of
Company common stock for $3.80 per share. As of August 3, 1999, the tender offer
was successfully completed. Following the expiration of the tender offer,
Innovex's acquisition subsidiary purchased 6,804,284 shares of the Company's
issued and outstanding common stock, representing approximately 75.5% of such
shares. One member of the four members of the Company's Board of Directors,
under the provisions of the merger agreement, resigned and four persons
designated by such Innovex subsidiary were appointed as members of the Company's
Board of Directors. As a result, Innovex has voting control of the Company. At
the effective time of the merger that is subject to shareholder approval, the
Company will become a wholly-owned subsidiary of Innovex.
The tender offer and the merger are described in detail in the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated July 7, 1999 and
filed with the Securities and Exchange Commission ("SEC") July 8, 1999, as
amended by the Company's First Amended and Restated Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on July 27, 1999 and as further
amended by the Company's Amendment No. 2 to its Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on August 9, 1999.
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.
6
<PAGE>
(2) Accounts Receivable, Net
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
----------------------- ---------------------
<S> <C> <C>
Accounts receivable trade $23,944 $25,748
Allowance for doubtful accounts and returns (1,240) (1,001)
----------------------- ---------------------
$22,704 $24,747
======================= =====================
</TABLE>
(3) Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
---------------------- ---------------------
<S> <C> <C>
Raw materials $ 6,416 $ 7,437
Work-in-process 4,934 3,743
Finished goods 1,147 1,105
Allowance for obsolescence (3,476) (2,888)
---------------------- ---------------------
9,021 $ 9,397
====================== =====================
</TABLE>
(4) Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
-------------------- ----------------------
<S> <C> <C>
Salaries and benefits $2,187 $1,987
Accrued interest 1,003 769
Accrued severance costs 383 500
Accrued professional fees 800 -
Accrued SAP costs 408 917
Other 5,091 3,010
--------------------- ----------------------
$9,872 $7,183
==================== ======================
</TABLE>
(5) Line of Credit and Long-term Debt
Prior to October 30, 1998, the Company's credit facility consisted of a
$35.0 million term loan and a $25.0 million revolving line of credit arranged by
BankBoston N.A. and a group of other lenders, secured by the
7
<PAGE>
Company's assets and 66-2/3% of the stock of its subsidiaries. On October 30,
1998, the Company and the banks amended the credit facility to reduce the term
loan to $30.0 million, change the amortization schedule of the term loan, reduce
the revolver to $20.0 million, and change the financial covenants. In addition,
a required $5.0 million principal reduction on the term loan was paid from the
revolver, as was a required $5.0 million principal payment due January 20, 1999
and a required $0.8 million principal payment due March 31, 1999. An additional
principal payment of $0.8 million was paid during the three month period ended
June 27, 1999 and an additional payment of $0.8 million is due next quarter
ending September 30, 1999, followed by quarterly principal payments of 1.3
million through maturity at December 31, 2002. Borrowing under the revolver is
limited to 80% of the aggregate value of eligible domestic accounts receivable
and 70% of the aggregate value of eligible foreign accounts receivable.
Outstanding balances bear interest at prime plus 0.5% 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. In order to obtain the
amendment, the Company granted the lenders a warrant to purchase an aggregate of
50,000 shares of common stock at an exercise price of $5.00 per share. The
warrant is now fully vested and expires on December 29, 2002. The lenders have
customary demand and piggyback registration rights in connection with the
warrant. At June 27, 1999, $16.6 million was outstanding under the term loan
(less warrant discount of $0.2 million) and the Company had $12.9 million
available for borrowing based on collateral requirements under the revolving
line of credit, subject to the discussion in the next paragraph regarding the
lenders notification that the financing commitments under the existing credit
facility had been terminated, with an outstanding balance of $16.4 million. In
addition, the Company is in default under its amended credit agreement by
failing to comply with its obligation to make a mandatory prepayment of such
excess amount of revolver borrowings over the borrowing base amount.
As of June 27, 1999, the Company was in default under certain financial
covenants of the credit facility and in June 1999, the lenders notified the
Company that the financing commitments under the existing credit facility had
been terminated and the lenders were no longer obligated to loan funds to the
Company pursuant to the credit agreement. Therefore, the Company has classified
the entire outstanding balance of the facility as a current liability. Further,
the audit of the Company's consolidated financial statements for the year ended
December 27, 1998 included a going-concern qualification from the Company's
independent auditors.
On July 1, 1999, the Company announced that it had entered into a
definitive merger agreement with Innovex, Inc. whereby Innovex's acquisition
subsidiary would commence a cash tender offer to purchase outstanding shares of
Company common stock for $3.80 per share. As of August 3, 1999, the tender offer
was successfully completed. Following the expiration of the tender offer,
Innovex's acquisition subsidiary purchased 6,804,284 shares of the Company's
issued and outstanding common stock, representing approximately 75.5% of such
shares. One member of the four members of the Company's Board of Directors,
under the provisions of the merger agreement, resigned and four persons
designated by such Innovex subsidiary were appointed as members of the Company's
Board of Directors. As a result, Innovex has voting control of the Company. At
the effective time of the merger that is subject to shareholder approval, the
Company will become a wholly-owned subsidiary of Innovex. As outlined in the
definitive merger agreement, Innovex has agreed to pay in full the Company's
indebtedness to its lenders at the effective time of the merger.
The tender offer and the merger are described in detail in the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated July 7, 1999 and
filed with the Securities and Exchange Commission ("SEC") July 8, 1999, as
amended by the Company's First Amended and Restated Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on July 27, 1999 and as further
amended by the Company's Amendment No. 2 to its Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on August 9, 1999.
(6) Restructuring and Special Charges
During 1998 and through the second quarter of 1999, the Company experienced
a substantial decline in sales levels which decreased capacity utilization. In
April 1999, the Company's Board approved a reorganization plan which includes
closing the Company's U.K. facility, downsizing the Company's Mexico facility
and transferring programs from Mexico to the Company's new Thailand facility.
Because of this impairment event, the Company evaluated the ongoing value of the
plant and equipment associated with its Chandler and Mexico
8
<PAGE>
facilities as required by Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Based on this evaluation, the Company determined that assets
with a carrying amount of $10.9 million were impaired and wrote them down to
their fair value, as determined by an appraisal of the plant and equipment
completed in March 1999. During the three month period ended March 28, 1999, the
Company recorded restructuring charges of $6.9 million related to the write-down
of property, plant and equipment as discussed above. In addition, the Company
recorded restructuring charges of $0.9 million and special charges totaling $1.7
million during the three month period ending June 27, 1999 in connection with
the reorganization plan and certain merger-related expenses:, $0.2 million for
the U.K. facility shut down costs, $0.7 million related to the write-off of
certain obsolete property, plant and equipment, $0.5 million related to employee
termination costs, $0.4 million related to write-off of unamortized bank fees
and $0.8 million related to professional fees. As of June 27, 1999, the Company
paid and charged $0.2 million to the employee termination liability. The
remaining accrual for employee termination costs is approximately $0.3 million,
which the Company believes is adequate to cover the remaining liabilities.
(7) Income Taxes
During the six month period ended June 27, 1999, the Company revised its
projection of future levels of income, and the anticipated jurisdictions in
which this income would be earned caused a reevaluation of the criteria of
future tax benefits. In the determination of management, it was no longer more
likely than not that the deferred tax assets could be fully utilized during the
carryforward period. Accordingly, the Company established a valuation reserve
for all its existing deferred tax assets which totaled $8.9 million and the
Company did not record an income tax benefit for the three and six month period
ended June 27, 1999. The effective tax rate for the three and six month period
ended June 27, 1998 was 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 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 and the IRS have
reached an agreement to settle all outstanding issues relating to this audit.
The terms of the agreement will require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax accrual is
adequate to cover this liability and 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 and six month periods ended June 27, 1999
decreased $10.1 million or 22.8% and $31.5 million or 33.4%, respectively, over
the same periods in 1998. The significant reduction in sales was primarily
attributable to soft demand and continued competitive pricing driven by
worldwide factory overcapacity in the flex industry. In addition, revenues were
negatively impacted due to internal technical difficulties experienced by two
customers and an inventory adjustment by a third customer during the first three
months of the six month period ended June 27, 1999.
Gross Profit
Gross profit as a percentage of net sales (gross margin) for the three and
six months ended June 27, 1999 was 13.5% and 6.8% as compared to 2.6% and 12.4%,
respectively, for the same periods in 1998. The Company's increase in gross
margin during the three month period ended June 27, 1999 was primarily
attributable
9
<PAGE>
to cost reductions, productivity improvements and other benefits associated with
the reorganization plan. In addition, special charges of $0.5 million related to
employee termination costs were incurred during the three month period ended
June 27, 1999 as compared to $1.4 million during the same period in 1998, which
related to workforce reductions and employee termination costs associated with
the closing of the two plants in Mexico. The decrease in gross margin during the
six month period ended June 27, 1999 when compared to the same period in 1998
primarily represents the Company's ability to attain significant leverage in
periods of higher sales volume.
Operating Expenses
Engineering, research & development expenses were $1.1 million and $2.4
million for the three and six month period ended June 27, 1999, respectively,
compared with $2.0 million and $4.1 million for the same periods in 1998,
respectively. The decrease in engineering, research & development expenses
primarily stem from the decrease in sales volume for those same periods as well
as cost-containment efforts and work force reduction. Sales, general &
administrative expenses were $3.4 million and $6.0 million for the three and six
month period ended June 27, 1999, respectively, compared with $3.1 million and
$7.0 million for the same periods in 1998, respectively. The Company's benefits
from workforce reductions, cost-containment efforts and general reductions in
discretionary spending during the three and six month period ending June 27,
1999 were primarily offset by charges of $0.8 million for professional fees
incurred which relate to the definitive merger agreement with Innovex, Inc.
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 0.4% of net sales, for the three month
period ended June 27, 1999.
Interest and Other Income (Expense)
For the three month periods ended June 27, 1999 and June 30, 1998, interest
expense includes $0.9 million and $0.8 million of interest expense,
respectively, related to borrowings under the line of credit, the term loan and
capital lease obligations. Outstanding balances on the line of credit and term
loan bear interest at prime plus 0.5% 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. During the six month period ended June 27, 1999,
the weighted average interest rate increased from 8.25% to 10.25% reflecting a
higher rate incurred due to the Company's default status. 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 are also included in
other income (expense) for the three month period ended June 27, 1999. No
foreign currency exchange contracts were entered into during the three month
period ended June 30, 1998.
For the six month periods ended June 27, 1999 and June 30, 1998, interest
expense includes $1.8 million and $1.4 million, respectively, related to
borrowings under the line of credit, term loan 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 are also
included in other income (expense) for the six month periods ended June 27, 1999
and June 30, 1998.
Restructuring and Special Charges
During 1998 and through the second quarter of 1999, the Company experienced
a substantial decline in sales levels which decreased capacity utilization. In
April 1999, the Company's Board approved a reorganization plan which includes
closing the Company's U.K. facility, downsizing the Company's Mexico facility
and transferring programs from Mexico to the Company's new Thailand facility.
Because of this impairment event, the Company evaluated the ongoing value of the
plant and equipment associated with its Chandler and Mexico facilities as
required by Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Based on this evaluation, the Company determined that assets with a carrying
amount of $10.9 million were impaired and wrote them down to their fair value,
as determined by an appraisal of the plant and equipment completed in March
1999. During the three
10
<PAGE>
month period ended March 28, 1999, the Company recorded restructuring charges of
$6.9 million related to the write-down of property, plant and equipment as
discussed above. In addition, the Company recorded restructuring charges of $0.9
million and special charges totaling $1.7 million during the three month period
ending June 27, 1999 in connection with the reorganization plan and certain
merger-related expenses:, $0.2 million for the U.K. facility shut down costs,
$0.7 million related to the write-off of certain obsolete property, plant and
equipment, $0.5 million related to employee termination costs, $0.4 million
related to write-off of unamortized bank fees and $0.8 million related to
professional fees. As of June 27, 1999, the Company paid and charged $0.2
million to the employee termination liability. The remaining accrual for
employee termination costs is approximately $0.3 million, which the Company
believes is adequate to cover the remaining liabilities.
Fluctuations in Operating Results
The Company has experienced substantial fluctuations in its quarterly and
annual operating results in the past, and the Company's future operating results
could vary substantially from quarter to quarter. The Company's operating
results for a particular quarter or longer periods can be materially and
adversely affected by numerous factors, such as the receipt and shipment of
large orders, or conversely the cancellation or delay of 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. Variations in orders and in the mix of products sold by
the Company, together with increased price competition, overall reduced demand
and resulting factory overcapacity have significantly negatively impacted net
sales and gross profit. No assurances can be given that the reorganization
plan recently adopted by the Company will allow the Company to return to
profitability.
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, expansion of ATL and
funding operating losses. At June 27, 1999, cash and cash equivalents totaled
$2.6 million, compared with $4.5 million as of June 30 , 1998.
Prior to October 30, 1998, the Company's credit facility consisted of a
$35.0 million term loan and a $25.0 million revolving line of credit arranged by
BankBoston N.A. and a group of other lenders, secured by the Company's assets
and 66-2/3% of the stock of its subsidiaries. On October 30, 1998, the Company
and the banks amended the credit facility to reduce the term loan to $30.0
million, change the amortization schedule of the term loan, reduce the revolver
to $20.0 million, and change the financial covenants. In addition, a required
$5.0 million principal reduction on the term loan was paid from the revolver, as
was a required $5.0 million principal payment due January 20, 1999 and a
required $0.8 million principal payment due March 31, 1999. An additional
principal payment of $0.8 million was paid during the three month period ended
June 27, 1999 and an additional payment of $0.8 million is due next quarter
ending September 30, 1999 followed by quarterly principal payments of $1.3
million through maturity at December 31, 2002. Borrowing under the revolver is
limited to 80% of the aggregate value of eligible domestic accounts receivable
and 70% of the aggregate value of eligible foreign accounts receivable.
Outstanding balances bear interest at prime plus 0.5% 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. In order to obtain the
amendment, the Company granted the lenders a warrant to purchase an aggregate of
50,000 shares of common stock at an exercise price of $5.00 per share. The
warrant is now fully vested and expires on December 29, 2002. The lenders have
customary demand and piggyback registration rights in connection with the
warrant. At June 27, 1999, $16.6 million was outstanding under the term loan
(less warrant discount of $0.2 million) and the Company had $12.9 million
available for borrowing based on collateral requirements under the revolving
line of credit, subject to the discussion in the next paragraph regarding the
lenders notification that the financing commitments under the existing credit
facility had been terminated, with an outstanding balance of $16.4 million. In
addition, the Company is in default under its amended credit agreement by
failing to comply with its obligation to make a mandatory prepayment of such
excess amount of revolver borrowings over the borrowing base amount.
11
<PAGE>
As of June 27, 1999, the Company was in default under certain financial
covenants of the credit facility and in June 1999, the lenders notified the
Company that the financing commitments under the existing credit facility had
been terminated and the lenders were no longer obligated to loan funds to the
Company pursuant to the credit agreement. Therefore, the Company has
classified the entire outstanding balance of the facility as a current
liability. Further, the audit of the Company's financial statements for the
year ended December 27, 1998 included a going-concern qualification from the
Company's independent auditors.
On July 1, 1999, the Company announced that it had entered into a
definitive merger agreement with Innovex, Inc. whereby Innovex's acquisition
subsidiary would commence a cash tender offer to purchase outstanding shares of
Company common stock for $3.80 per share. As of August 3, 1999, the tender
offer was successfully completed. Following the expiration of the tender offer,
Innovex's acquisition subsidiary purchased 6,804,284 shares of the Company's
issued and outstanding common stock, representing approximately 75.5% of such
shares. One member of the four members of the Company's Board of Directors,
under the provisions of the merger agreement, resigned and four persons
designated by such Innovex subsidiary were appointed as members of the Company's
Board of Directors. As a result, Innovex has voting control of the Company. At
the effective time of the merger that is subject to shareholder approval, the
Company will become a wholly-owned subsidiary of Innovex. As outlined in the
definitive merger agreement, Innovex has agreed to pay in full the Company's
indebtedness to its lenders at the effective time of the merger.
The tender offer and the merger are described in detail in the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated July 7, 1999 and
filed with the Securities and Exchange Commission ("SEC") July 8, 1999, as
amended by the Company's First Amended and Restated Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on July 27, 1999 and as further
amended by the Company's Amendment No. 2 to its Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on August 9, 1999.
Net cash provided by operating activities for the six month period ended
June 27, 1999 was $5.3 million compared with $7.9 million for the same period in
1998. During these same periods net loss was $23.6 million and $0.9 million,
respectively. Decreased sales levels for the six month period ended June 27,
1999 resulted in the Company incurring a negative working capital, primarily
attributable to a decreased level of accounts receivable and inventory coupled
with an increase in accounts payable, accrued liabilities and current portion of
long-term debt.
Net cash used in investing activities was $5.4 million for the six month
period ended June 27, 1999 compared with $13.7 million for the same period in
1998. During the six month period ended June 27, 1999, the Company invested a
total of $4.0 million to complete construction of the new Thailand facility. As
of June 27, 1999, related capital expenditures total $7.0 million and the total
estimated cost of the Thailand facility is approximately $9.5 million. In
addition, capital expenditures during the six month period ended June 27, 1999
included $1.4 million related to machinery and equipment additions. 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 $4.6 million on capital expenditures in 1999 to
support expansion of worldwide manufacturing operations, primarily for
machinery, systems and equipment, and expansion of operations in Thailand.
Net cash used in financing activities for the six month period ended June
27, 1999 was $2.6 million compared with net cash provided by financing
activities of $1.2 million during the same period in 1998. The Company remitted
$7.5 million of principal payments on its term loan during the six month period
ended June 27, 1999. During the same period in 1999, the Company entered into a
sale-leaseback agreement with Copelco Capital, Inc. which generated $1.5 million
in proceeds and was used to paydown the Company's term loan and bank line of
credit. The Company borrowed an additional $5.0 million on its term loan during
the six months ended June 30, 1998, which was used to pay down the Company's
bank line of credit. Net borrowings on the Company's bank line of credit
totaled $3.4 million during the six months ended June 27, 1999 compared to net
repayments of $3.5 million for the same period in 1998. The Company generated
$0.6 million and $0.7 million in the six months ended June 27, 1999 and June 30,
1998, 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
12
<PAGE>
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 $0.9 million during the six months
ended June 30, 1998 and the note was paid in full in January 1999. Funding for
these payments came from the Company's bank line of credit. For the six months
ended June 27, 1999, non-cash financing activities included the following: $0.1
million of equipment acquired under capital lease obligations, $0.3 million
reversal of debt issuance costs and $0.2 million term loan discount which was
recorded in connection with warrants vested March 14, 1999 under the third
amendment to the credit agreement.
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.
As discussed above, the Company entered into a definitive merger agreement with
Innovex, Inc. pursuant to which Innovex has agreed to pay in full the Company's
indebtedness to its lenders at the effective time of the merger.
Other Matters
Foreign Operations
The Company's primary finishing and assembly facilities are located in Agua
Prieta, Mexico and Lamphun, Thailand. While the Company believes that it has
established good relationships with its 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.
Expansion of Thailand Operations
In February 1999, the qualification process was completed and production
began at the new Thailand facility. The facility provides 100,000 square feet
of manufacturing space - 65,000 feet for flex finishing and 35,000 feet for
assembly. The facility, which increased the total assembly area by nearly 50%,
includes state-of-the-art clean rooms and the production capability to process
up to 750,000 circuit assemblies per week. The new flex finishing area features
advanced surface finishing, laser processing and automated optical profiling
technologies. The total estimated cost of the facility is approximately $9.5
million. The Company anticipates that the new Thailand facility will enable it
to attain increased efficiencies, improved margins and significant cost
reductions that are crucial to mitigating competitive price pressures in Asia
and help sustain the Company's implementation of a complete flexible circuit
interconnect solution including design, fabrication, assembly and testing. No
assurance can be given that the Company's expansion strategies will result in
the improvements and cost reductions as anticipated.
Environmental Regulations
The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has
conducted environmental studies of its facility in Chandler, Arizona, which
revealed 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. However, given the uncertainties associated with
environmental contamination, there can be no assurance that such costs will not
have a material adverse impact on the Company. Pursuant to the agreements
governing the Rogers Corporation (Rogers) acquisition,
13
<PAGE>
Rogers has retained all environmental liabilities relating to the purchased
assets prior to the closing date of the acquisition. While Rogers currently has
sufficient assets to fulfill its obligations under the acquisition agreements,
if environmental liabilities requiring remediation are discovered and the
Company was unable to enforce the acquisition agreement against Rogers, the
Company could become subject to costs and damages relating to such environmental
liabilities. Any such costs and damages imposed on the Company could materially
adversely affect the Company's business, financial condition, results of
operations and cash flows.
In mid 1995, the Company acquired a manufacturing facility located in Agua
Prieta, Mexico. In connection with this acquisition, the Company conducted an
environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the 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
the seller's performance of its 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 no further action is required.
The Company believes it has been operating its facilities in substantial
compliance in all material respects with existing environmental laws. However,
the Company cannot predict the nature, scope or effect of legislation or
regulatory requirements that could be imposed or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not previously been applied. Compliance with more
stringent laws or regulations, or more vigorous enforcement policies of
regulatory agencies, could require substantial expenditures by the Company and
could adversely affect the Company's business, financial condition, results of
operations and cash flows.
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 of products or modifications developed in
connection with next generation products containing flexible circuit
interconnects manufactured by the Company has had and could continue to have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows. Further, various sectors of the electronics
industry are subject to economic cycles and have in the past experienced, and
are likely in the future to experience, periods of slowdown. A slowdown or any
other event leading to excess capacity or a downturn in the electronics industry
has resulted and may continue to result in intensified price competition,
reduced gross margins and a decrease in unit volume, all of which have had and
would continue to 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 hard disk drive (HDD)
market. Sales to the HDD market accounted for 28% of net sales compared to 35%
of net sales for the six month periods ended June 27, 1999 and June 30, 1998,
respectively. This decrease was due to the Company's continued diversification
efforts. 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 reductions due to market, competitive or economic
conditions, have had and would continue to have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
14
<PAGE>
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. During periods of economic slowdown in the electronics industry and
other periods when excess capacity exists, electronic OEMs become more price
sensitive. During the year ended December 27, 1998 and the six month period
ended June 27, 1999, there was a worldwide slowdown in the electronics industry
and to maintain market share, many of the Company's primary foreign competitors
with lower cost structures decreased their prices to unprecedented levels. This
had a material adverse effect on the Company's pricing during those periods.
The Company believes that once a customer has selected a particular vendor to
design and manufacture a flexible circuit interconnect, the customer 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 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. 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.
The Company also competes in assembly matters with leading flexible circuit
assembly providers such as Smartflex Systems, Inc. and Solectron. The Company
believes that competition in assembly matters is primarily driven by
availability of assembly technology, price and cycle time. The Company believes
that it will compete favorably with these competitors because it offers its
customers a complete flexible circuit interconnect solution including design,
fabrication, assembly and testing (referred to as the one-stop shop strategy).
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.
Volatility of Stock Price
15
<PAGE>
During the six month period ended June 27, 1999, the trading price of the
Company's Common Stock has been subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company's customers, general
conditions in the disk drive and computer industries, and other events or
factors. In addition, stock markets have experienced extreme price volatility
in recent years. This volatility has had a substantial effect on the market
price of securities issued by many high technology companies, in many cases for
reasons unrelated to the operating performance of the specific companies, and
the Company's Common Stock has experienced volatility not necessarily related to
announcements of Company performance. Broad market fluctuations also have
adversely affected the market price of the Company's Common Stock. At the
effective time of the merger with Innovex, Inc., the Company will become a
wholly-owned subsidiary of Innovex and its stock will no longer be publicly
traded.
Income Taxes
During the six month period ended June 27, 1999, the Company revised its
projection of future levels of income, and the anticipated jurisdictions in
which this income would be earned caused a reevaluation of the criteria of
future tax benefits. In the determination of management, it was no longer more
likely than not that the deferred tax assets could be fully utilized during the
carryforward period. Accordingly, the Company established a valuation reserve
for all its existing deferred tax assets which totaled $8.9 million and the
Company did not record an income tax benefit for the three and six month period
ended June 27, 1999. The effective tax rate for the three and six month period
ended June 27, 1998 was 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 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 and the IRS have
reached an agreement to settle all outstanding issues relating to this audit.
The terms of the agreement will require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax accrual is
adequate to cover this liability and 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. With the complete implementation of the SAP R/3
software system in October 1998, the Company's manufacturing and cost control
system functions properly with respect to dates in the year 2000 and beyond.
The software replaced the Company's previous manufacturing and cost control
system and its implementation took place for a variety of reasons, not
separately identified as a Year 2000 remediation. Therefore, the Company does
not consider the implementation of the SAP R/3 system a direct Year 2000
remediation cost and the direct costs associated with addressing the Company's
Year 2000 issues have been immaterial to date. In addition, the Company has
implemented a formal remediation plan to ensure the Company is compliant with
respect to Year 2000 issues. The plan includes five phases representing a major
Year 2000 activity or segment - awareness, assessment, renovation, validation
and implementation.
Awareness. All Year 2000 projects with regard to internal systems are
---------
approved at the Board of Directors level and evaluated and reviewed by a Senior
Management Steering Committee on a monthly basis. The Company's plan of action
applies to all geographic locations where products and services are provided to
customers and project managers have been assigned to each location to coordinate
Year 2000 projects worldwide.
Assessment and Renovation. The Company has completed a detailed inventory
-------------------------
of processes, applications, hardware, operating systems and databases where Year
2000 issues may exist. To date, an assessment of all information technology
(IT)-related systems (e.g. hardware and software systems) has been fully carried
out. Since the complete implementation of SAP finalized in October 1998, all
worldwide application-driven processes for the
16
<PAGE>
Company are Year 2000 compliant. For example, processes required to support
production and fulfillment of customer orders (order entry,
receiving/warehousing, procurement/materials, manufacturing, product test,
distribution/shipping and invoicing) are in compliance with the Year 2000 issue
since the complete implementation of SAP in October 1998. In addition, 100% of
internal network hardware and software systems are Year 2000 compliant to date.
The scope of the Company's full assessment also includes non-IT areas such as
all facilities/plant equipment, manufacturing process and testing equipment, lab
equipment and telephone communications systems which all have been assessed. The
majority of the non-IT areas were in compliance with the Year 2000 issue and
items that were not in compliance required only minor modifications with
insignificant costs incurred. In addition, the Company has implemented programs
with outside suppliers to ensure their readiness with respect to Year 2000
issues. The Company is currently tracking and managing this through periodic
questionnaires to suppliers. To date, the Company has received and analyzed
questionnaires related to 100% of the critical suppliers of the Company and 85%
of non-critical suppliers. Based on the information provided, all critical
suppliers are in compliance with the Year 2000 issue.
Validation. Upon completion of the SAP software implementation, the
----------
Company began its validation phase by testing, verifying and validating the
performance, functionality, and integration of the SAP manufacturing and cost
control software system in an operational environment. The Company anticipates
this phase of IT-related systems to continue throughout 1999. During the six
month period ended June 27, 1999, the Company also began its validation phase of
all non-IT areas that will continue throughout 1999.
Implementation. Upon completion of the validation phase of all IT as well
--------------
as non-IT areas for Year 2000 compliance, the Company plans to identify and
implement any necessary contingency plans and modify existing disaster recovery
plans throughout 1999.
In addition, the Company has evaluated software and hardware systems
associated with IT areas as well as all equipment related to non-IT areas and
concluded that there are no identified risks that would have a material exposure
to contingencies related to the Year 2000 issue. There can be no assurances that
the systems of customer, suppliers and other companies on which the Company
relies will be timely converted and will not have an adverse effect on the
Company' 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 have and could materially adversely affect operating
results; the risk of loss of market share through competition and pricing
pressures from competitors and/or customers; 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 not continue to be accepted by customers, and the risk
that competitors may seek to duplicate this strategy, which could materially
adversely affect operating results; risks associated with the Innovex merger,
including customary closing conditions and the risk that the merger will not
address the Company's capital and liquidity needs; the risk that the Company's
expansion of manufacturing facilities in Thailand will not result in
sustainable, increased efficiencies, cost savings or improved margins as
anticipated or at the time anticipated; general risks inherent in international
operations, including currency fluctuations and government-mandated wage
increases; general manufacturing risks, including environmental risks related to
manufacturing operations and clean-up of the Mexican manufacturing facility; the
risk that other computer 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 27, 1998 and Quarterly Report on Form 10-Q for the quarter ended
March 28, 1999 and other Securities and Exchange Commission filings. Actual
results in the future could differ materially from those described in forward-
looking statements as a result of such
17
<PAGE>
risks and uncertainties. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect any future events or circumstances.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 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.
(27.1) Financial Data Schedule (filed only electronically with the
SEC)
(b) Reports on Form 8-K
On July 8, 1999, the registrant filed Form 8-K relating to the
Agreement and Plan of Merger, dated as of July 7, 1999, among ADFlex
Solutions, Inc., Innovex, Inc. and Innovex Acquisition Corp.
18
<PAGE>
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: August 11, 1999 By /s/ Donald E. Frederick
-------------------- --------------------------------
Donald E. Frederick
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
19
<PAGE>
ANNEX D
Agreement And Plan Of Merger
By And Among
ADFLEX Solutions, Inc.
And
Innovex Acquisition Corp.
July 1, 1999
<PAGE>
Table of Contents
<TABLE>
<S> <C>
RECITALS.............................................................................. 1
ARTICLE I. THE TENDER OFFER........................................................... 1
1.1 The Offer................................................................ 1
1.2 Offer, Documents......................................................... 2
1.3 Company Actions.......................................................... 3
1.4 Directors................................................................ 4
ARTICLE II. THE MERGER................................................................ 5
2.1 The Merger............................................................... 5
2.2 The Closing.............................................................. 5
2.3 Actions at the Closing................................................... 5
2.4 Effect of Merger......................................................... 5
2.5 Procedure for Payment.................................................... 6
2.6 Closing of Transfer Records.............................................. 7
2.7 Stock Plans.............................................................. 7
ARTICLE III. REPRESENTATIONS OF THE COMPANY........................................... 8
3.1 Existence; Good Standing; Corporate Authority............................ 8
3.2 Authorization, Validity and Effect of Agreement.......................... 8
3.3 Capitalization........................................................... 8
3.4 Subsidiaries............................................................. 9
3.5 Other Interests.......................................................... 9
3.6 No Conflict; Required Filings and Consents............................... 9
3.7 Compliance with Laws and Investments..................................... 10
3.8 SEC Documents............................................................ 10
3.9 No Material Undisclosed Liabilities...................................... 11
3.10 Litigation............................................................... 11
3.11 Absence of Certain Changes............................................... 11
3.12 Taxes.................................................................... 11
3.13 Property................................................................. 12
3.14 Millennium Compliance.................................................... 12
3.15 Environmental Matters.................................................... 13
3.16 Employee Benefit Plans................................................... 13
3.17 State Takeover Statutes; Poison Pill..................................... 14
3.18 Voting Requirements...................................................... 14
3.19 No Brokers............................................................... 14
3.20 Opinion of Financial Advisor............................................. 15
3.21 Offer Documents; Proxy Statement......................................... 15
ARTICLE IV. REPRESENTATIONS OF THE PARENT AND THE PURCHASER........................... 15
4.1 Existence; Good Standing; Corporate Authority............................ 15
4.2 Authorization, Validity and Effect of Agreement.......................... 16
4.3 No Conflict; Required Filings and Consents............................... 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.4 No Brokers.............................................................. 16
4.5 Offer Documents; Proxy Statement........................................ 17
4.6 Financing............................................................... 17
4.7 Litigation.............................................................. 17
4.8 SEC Documents........................................................... 17
ARTICLE V. COVENANTS................................................................. 18
5.1 Conduct of Business..................................................... 18
5.2 No Solicitation......................................................... 20
5.3 Filings, Reasonable Efforts............................................. 22
5.4 Inspection of Records................................................... 22
5.5 Publicity............................................................... 23
5.6 Proxy Statement......................................................... 23
5.7 Further Actions......................................................... 23
5.8 Insurance; Indemnity.................................................... 24
5.9 Employee Benefits....................................................... 24
5.10. Credit Agreement........................................................ 25
VI. CONDITIONS PRECEDENT............................................................. 25
6.1 Conditions to Each Party's Obligation To Effect the Merger.............. 25
6.2 Conditions to Obligation of Parent and Purchaser to Effect the Merger... 25
ARTICLE VII. TERMINATION............................................................. 26
7.1 Termination by Mutual Consent........................................... 26
7.2 Termination by Either Parent or Company................................. 26
7.3 Termination by Company.................................................. 26
7.4 Termination by Parent................................................... 26
7.5 Effect of Termination and Abandonment; Termination Fee.................. 27
VIII. GENERAL PROVISIONS............................................................. 28
8.1 Nonsurvival of Representations, Warranties and Agreements............... 28
8.2 Notices................................................................. 28
8.3 Assignment; Binding Effect.............................................. 29
8.4 Entire Agreement........................................................ 29
8.5 Amendment............................................................... 29
8.6 Governing Law........................................................... 29
8.7 Counterparts............................................................ 29
8.8 Headings................................................................ 30
8.9 Certain Definitions/Interpretations..................................... 30
8.10 Waivers................................................................. 30
8.11 Incorporation of Annex A................................................ 31
8.12 Severability............................................................ 31
8.13 Enforcement of Agreement................................................ 31
8.14 Expenses................................................................ 31
SIGNATURES........................................................................... 32
ANNEX A.............................................................................. A-1
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of July 1, 1999,
by and among ADFlex Solutions, Inc., a Delaware corporation (the "Company"),
Innovex, Inc., a Minnesota corporation ("Parent"), and Innovex Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of Parent
("Purchaser" and with the Company and Parent, "Parties").
RECITALS
Each of the Boards of Directors of the Company, Parent and Purchaser has
determined that it is in the best interests of its respective stockholders for
Purchaser to acquire the Company on the terms and subject to the conditions set
forth herein (the "Acquisition");
As a first step in the Acquisition, the Company, the Parent and the
Purchaser each desire that Parent cause Purchaser to commence a cash tender
offer (the "Offer") to purchase all of the Company's issued and outstanding
shares, par value $0.01 per share (the "Shares"), for $3.80 per share, or such
higher price as may be paid in the Offer (the "Per Share Amount"), on the terms
and subject to the conditions set forth in this Agreement;
To complete the Acquisition, each of the Boards of Directors of the
Company, the Parent and the Purchaser has approved the merger of the Purchaser
with and into the Company (the "Merger"), wherein any issued and outstanding
Shares other than Shares tendered and purchased by the Purchaser pursuant to the
Offer or owned directly or indirectly by the Company or any Dissenting Shares
(as hereinafter defined) will be converted into the right to receive the Per
Share Amount, on the terms and subject to the conditions of this Agreement and
in accordance with the Delaware General Corporation Law (the "DGCL");
The Board of Directors of the Company (the "Company Board") has unanimously
resolved to recommend that the holders of the Shares accept the Offer and adopt
this Agreement and has determined that the consideration to be paid for each
Share in the Offer and the Merger is fair to the holders of such Shares;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and covenants herein contained, the Parties agree as follows.
ARTICLE I. THE TENDER OFFER
1.1 The Offer.
---------
(a) As promptly as practicable (but in any event not later than three
business days after the public announcement of the execution and delivery of
this Agreement), Parent will cause the Purchaser to commence (within the meaning
of Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), the Offer for all of the Shares at the Per Share Amount, net
to the seller in cash (subject to reduction for any applicable federal back-up
withholding or stock transfer taxes payable by the seller). Notwithstanding the
foregoing, if between the date of this Agreement and the Purchase Date (as
hereinafter defined) the outstanding Shares shall have been changed into a
different number of shares or a different class,
<PAGE>
by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Per Share Amount
will be correspondingly adjusted on a per-share basis to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of Shares. The obligation of Parent to cause the Purchaser to commence
the Offer and to accept for payment and to pay for Shares validly tendered in
the Offer and not withdrawn in accordance therewith will be subject only to
those conditions set forth in Annex A hereto (the "Offer Conditions").
(b) Without the prior written consent of the Company, the Purchaser will
not, and Parent will cause the Purchaser not to, (i) decrease or change the form
of the Per Share Amount, (ii) decrease the number of Shares subject to the
Offer, (iii) amend or waive the Minimum Condition (as defined in Annex A hereto)
or impose conditions other than the Offer Conditions on the Offer, (iv) except
as provided in this Section 1.1(b), extend the expiration date of the Offer or
(v) amend any term of the Offer in any manner materially adverse to holders of
Shares. The Purchaser may, without the consent of the Company, (i) extend the
Offer from time to time if at the initial expiration date of the Offer (which
initial expiration date shall be 20 business days following commencement of the
Offer) or any extension thereof any of the Offer Conditions shall not have been
satisfied or waived, until such time as such conditions are satisfied or waived
but not beyond December 31, 1999, and (ii) extend the Offer for any period
required by any rule, regulation, interpretation or positions of the Securities
and Exchange Commission, (the "SEC") or the staff thereof applicable to the
Offer but not beyond December 31, 1999. The Purchaser will, from time to time,
at the request of the Company, extend the Offer if at any scheduled expiration
date of the Offer any of the Offer Conditions has not been satisfied or waived
until such time as such conditions are satisfied or waived; provided, however,
that the Purchaser shall not be required to extend the Offer beyond December 31,
1999. Assuming the satisfaction or waiver of the Offer Conditions, Parent will
cause the Purchaser to accept for payment and pay for, in accordance with the
terms of the Offer, all Shares validly tendered and not withdrawn pursuant to
the Offer as soon as practicable after expiration of the Offer. The date on
which the Purchaser shall purchase and pay for Shares tendered pursuant to the
Offer shall hereinafter be referred to as the "Purchase Date."
1.2 Offer, Documents.
----------------
(a) As soon as practicable an the date of commencement of the Offer,
Parent and the Purchaser will file or cause to be filed with the SEC a Tender
Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") which will contain an
offer to purchase and related letter of transmittal and other ancillary offer
documents and instruments pursuant to which the Offer will be made (collectively
with any supplements or amendments thereto, the "Offer Documents") and which
Parent and Purchaser represent, warrant and covenant will comply in all material
respects with the Exchange Act and other applicable Laws and will contain (or
will be amended in a timely manner so as to contain) all information which is
required to be included therein in accordance with the Exchange Act and the
rules and regulations thereunder and other applicable Laws; provided, however,
that (i) no agreement or representation hereby is made or will be made by Parent
or the Purchaser with respect to information supplied by the Company in writing
expressly for inclusion in, or information derived from the Company's public SEC
filings (as amended by any subsequent SEC filings) which is incorporated by
reference or included in, the Offer Documents and (ii) no representation,
warranty or covenant is made or will be made herein by
2
<PAGE>
the Company with respect to information contained in the Offer Documents other
than information supplied by the Company in writing expressly for inclusion in,
or information derived from the certain SEC documents filed by the Company (as
amended by any SEC documents subsequently filed by the Company) which is
incorporated by reference or included in, the Offer Documents.
(b) Parent, the Purchaser and the Company will each promptly correct any
information provided by them for use in the Offer Documents if and to the extent
that it becomes false or misleading in any material respect and Parent and the
Purchaser will jointly and severally take all lawful action necessary to cause
the Offer Documents as so corrected to be filed promptly with the SEC and to be
disseminated to holders of Shares, in each case as and to the extent required by
applicable Law. In conducting the Offer, Parent and Purchaser will comply in
all material respects with the provisions of the Exchange Act and other
applicable Laws. Parent and the Purchaser will afford the Company and its
counsel a reasonable opportunity to review and comment on the Offer Documents
and any amendments thereto prior to the filing thereof with the SEC.
1.3 Company Actions. The Company hereby consents to the Offer and
---------------
represents that (a) the Company Board (at a meeting duly called and held) has
(i) determined that this Agreement, the Offer and the Merger are fair to and in
the best interests of the Company and its stockholders, (ii) approved this
Agreement and the transactions contemplated hereby, including the Offer and the
Merger, and (iii) resolved to recommend acceptance of the Offer and adoption of
this Agreement by the holders of Shares and (b) BancBoston Robertson Stephens,
Inc. has delivered to the Company Board the Fairness Opinion described in
Section 3.20. The Company hereby consents to the inclusion in the Offer
Documents of the recommendation of the Board of Directors referred to in this
Section 1.3; provided however, that the Company Board may withdraw, modify or
amend such recommendation in accordance with Section 5.2(b). The Company will
file with the SEC simultaneously with the filing by Parent and the Purchaser of
the Schedule 14D-1 a Solicitation/Recommendation Statement on Schedule 14D-9
(together with all amendments and supplements thereto, "Schedule 14D-9")
containing such recommendations of the Company Board in favor of the Offer and
the Merger. The Company represents, warrants and covenants that Schedule 14D-9
will comply in all material respects with the Exchange Act and any other
applicable Laws and will contain (or will be amended in a timely manner so as to
contain) all information which is required to be included therein in accordance
with the Exchange Act and the rules and regulations thereunder and other
applicable Laws. The Company will include in the Schedule 14D-9 information
furnished by Parent in writing concerning Parent's Designees (as hereinafter
defined) as required by Section 14(f) of the Exchange Act and Rule 14f-1
thereunder and will use its reasonable efforts to have the Schedule 14D-9
available for inclusion to the initial mailing (and any subsequent mailing) of
the Offer Documents to holders of Shares. Each of the Company and Parent will
promptly correct any information provided by them for use in Schedule 14D-9 if
and to the extent that it becomes false or misleading in any material respect
and the Company will further take all lawful action necessary to cause Schedule
14D-9 as so corrected to be filed promptly with the SEC and disseminated to the
holders of Shares, in each case as and to the extent required by applicable Law.
Parent and its counsel will be given a reasonable opportunity to review the
Schedule 14D-9 and any amendments thereto prior to the filing thereof with the
SEC. In connection with the Offer, the Company will promptly furnish Parent
with mailing labels, security position listings and all
3
<PAGE>
available listings or computer files containing the names and addresses of the
record holders of Shares as of the latest practicable date and will furnish
Parent such information and assistance (including updated lists of stockholders,
mailing labels and lists of security positions) as Parent or its agents may
reasonably request in communicating the Offer to the record and beneficial
holders of Shares. Subject to the requirements of applicable Law, and except for
such actions as are necessary to disseminate the Offer Documents and any other
documents necessary to consummate the Offer and the Merger, Parent and the
Purchaser will, and will instruct each of their respective Affiliates,
associates, partners, employees, agents and advisors to, hold in confidence the
information contained in such labels, lists and files, will use such information
only in connection with the Offer and the Merger, and, if this Agreement is
terminated in accordance with its terms, will deliver promptly to the Company
(or destroy and certify to the Company the destruction of) all copies of such
information (and any copies, compilations or extracts thereof or based thereon)
then in their possession or under their control.
1.4 Directors.
---------
(a) Promptly upon the purchase of Shares by Purchaser pursuant to the
Offer, and from time to time thereafter, (i) Parent will be entitled to
designate such number of directors ("Parent's Designees"), rounded up to the
next whole number, as will give Parent, subject to compliance with Section 14(f)
of the Exchange Act, representation on the Company Board equal to the product of
(A) the number of directors on the Company Board (giving effect to any increase
in the number of directors pursuant to this Section 1.4) and (B) the percentage
that such number of Shares so purchased bears to the aggregate number of Shares
outstanding (such number being, the "Board Percentage"); provided, however, that
if the number of Shares purchased pursuant to the Offer equals or exceeds a
majority of the outstanding Shares, the Board Percentage will in all events be
at least a majority of the members of the Company Board and (ii) the Company
will, upon request by Parent, promptly satisfy the Board Percentage by (A)
increasing the size of the Company Board or (B) using reasonable efforts to
secure the resignations of such number of directors as is necessary to enable
Parent's Designees to be elected to the Company Board and will use its
reasonable efforts to cause Parent's Designees promptly to be so elected,
subject in all instances to compliance with Section 14(f) of the Exchange Act
and Rule 14f-1 promulgated thereunder. At the request of Parent, the Company
will take all lawful action necessary to effect any such election. Parent will
supply to the Company in writing and be solely responsible for any information
with respect to itself, the Parent's Designees and Parent's officers, directors
and Affiliates required by Section 14(f) of the Exchange Act and Rule 14f-1
promulgated thereunder to be included in the Schedule 14D-9. Notwithstanding the
foregoing, at all times prior to the Effective Time, the Company Board will
include at least three Continuing Directors. For purposes of this Agreement,
the term "Continuing Directors" means those directors of the Company who were
directors of the Company as of the date of this Agreement.
(b) Notwithstanding any other provision hereof, of the certificate of
incorporation or bylaws of the Company or of applicable Law to the contrary,
following the election or appointment of Parent's Designees pursuant to this
Section 1.4 and prior to the Effective Time, any amendment or termination of
this Agreement by the Company, extension by the Company for the performance or
waiver of the obligations or other acts of Parent or Purchaser hereunder or
waiver by the Company of the Company's rights hereunder will, in addition to the
approval of
4
<PAGE>
the Company Board, require the affirmative vote of the majority of members of a
committee comprised of those members of the Company Board who are Continuing
Directors.
ARTICLE II. THE MERGER
2.1 The Merger. On and subject to the terms and conditions of this
----------
Agreement, the Purchaser will merge with and into the Company (the "Merger") at
the Effective Time. The Company shall be the corporation surviving the Merger
(the "Surviving Corporation").
2.2 The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall take place at the offices of Fennemore Craig in
Phoenix, Arizona, commencing at 9:00 a.m. local time on the second business day
following the satisfaction or waiver of all conditions to the obligations of the
Parties to consummate the transactions contemplated hereby (other than
conditions with respect to actions the respective Parties will take at the
Closing itself) or such other date as the Parties may mutually determine (the
"Closing Date"); provided, however, that the Closing Date shall be no earlier
than August 3, 1999.
2.3 Actions at the Closing. At the Closing, (i) the Company and the
----------------------
Purchaser will file with the Secretary of State of the State of Delaware a
certificate of merger (the "Certificate of Merger") and (ii) the Parent will
cause the Surviving Corporation to deliver the Payment Fund to the Paying Agent
in the manner provided in Section 2.5.
2.4 Effect of Merger.
----------------
(a) The Merger shall become effective at the time (the "Effective Time")
the Company and the Purchaser file the Certificate of Merger with the Secretary
of State of the State of Delaware. The Merger shall have the effect set forth
in the DGCL. The Surviving Corporation may, at any time after the Effective
Time, take any action (including executing and delivering any document) in the
name and on behalf of either the Company or the Purchaser in order to carry out
and effectuate the transactions contemplated by this Agreement.
(b) The Certificate of Incorporation of the Surviving Corporation shall be
amended and restated at and as of the Effective Time to read as did the
Certificate of Incorporation of the Purchaser immediately prior to the Effective
Time (except that the name of the Surviving Corporation will remain unchanged).
(c) The Bylaws of the Surviving Corporation shall be amended and restated
at and as of the Effective Time to read as did the Bylaws of the Purchaser
immediately prior to the Effective Time (except that the name of the Surviving
Corporation will remain unchanged).
(d) The directors of the Purchaser shall become the directors, and the
officers of the Company shall become the officers, of the Surviving Corporation
at and as of the Effective Time (retaining their respective positions and terms
of office).
(e) At and as of the Effective Time,
5
<PAGE>
(i) each share of Common Stock, $0.01 par value per share, of the
Purchaser shall be converted into one share of Common Stock, $0.01 par
value per share, of the Surviving Corporation;
(ii) each Share held in the treasury of the Company or any Subsidiary
(a "Treasury Share") and each Share owned by Parent, Purchaser or any other
direct or indirect wholly owned subsidiary of the Parent immediately before
the Effective Time other than shares in trust accounts, managed accounts,
custodial accounts and the like that are beneficially owned by third
parties (a "Parent-Owned Share") will be automatically canceled and retired
and will cease to exist and no payment or other consideration will be made
with respect thereto;
(iii) each Share (other than any Dissenting Share, Treasury Share or
Parent-Owned Share) shall be converted into the right to receive the Per
Share Amount. All such Shares, when so converted, will no longer be
outstanding and will automatically be canceled and retired and will cease
to exist, and each holder of a certificate formerly representing any such
Share will cease to have any rights with respect thereto, except the right
to receive the Merger Consideration therefor upon the surrender of such
certificate in accordance with Section 2.5; and
(iv) each Dissenting Share shall be converted into the right to
receive payment from the Surviving Corporation with respect thereto in
accordance with the provisions of the DGCL.
Any payment made pursuant to this Section 2.4 and Section 2.5 will be made
net of applicable withholding taxes to the extent such withholding is required
by law. Notwithstanding the foregoing, if between the date of this Agreement
and the Effective Time the outstanding Shares shall have been changed into a
different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, split, combination or exchange of
shares, the Per Share Amount will be correspondingly adjusted on a per-share
basis to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares. No Share shall be
deemed to be outstanding or to have any rights other than those set forth above
in this Section 3.4(e) after the Effective Time.
2.5 Procedure for Payment.
---------------------
(a) Immediately after the Effective Time (in any event, within two
business days following the Effective Time), (A) the Parent will cause the
Surviving Corporation to furnish to Boston EquiServe (the "Paying Agent") a
corpus (the "Payment Fund") consisting of cash sufficient in the aggregate for
the Paying Agent to make full payment of the Merger Consideration to the holders
of all of the outstanding Shares (other than any Dissenting Shares, Treasury
Shares and Parent-Owned Shares) and (B) the Parent will cause the Paying Agent
to mail a letter of transmittal (with instructions for its use) to each record
holder of outstanding Company Shares for the holder to use in surrendering the
certificates which represented his, her or its Shares against payment of the
Merger Consideration. No interest will accrue or be paid to the holder of any
outstanding Company Shares.
6
<PAGE>
(b) The Parent may cause the Paying Agent to invest the cash included in
the Payment Fund in one or more of the investments; provided, however, that the
terms and conditions of the investments shall be such as to permit the Paying
Agent to make prompt payment of the Merger Consideration as necessary. The
Parent may cause the Paying Agent to pay over to the Surviving Corporation any
net earnings with respect to the investments, and the Parent will cause the
Surviving Corporation to replace promptly any portion of the Payment Fund which
the Paying Agent loses through investment.
(c) The Parent may cause the Paying Agent to pay over to the Surviving
Corporation any portion of the Payment Fund (including any earnings thereon)
remaining 180 days after the Effective Time, and thereafter all former
stockholders shall be entitled to look to the Surviving Corporation (subject to
abandoned property, escheat and other similar laws) as general creditors thereof
with respect to the cash payable upon surrender of their certificates.
(d) The Parent shall cause the Surviving Corporation to pay all charges
and expenses of the Paying Agent.
2.6 Closing of Transfer Records After the close of business on the
---------------------------
Closing Date, transfers of Shares outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation.
2.7 Stock Plans.
-----------
(a) At the Effective Time, each holder of a then-outstanding option to
purchase Shares under Company's 1993 Equity Incentive Plan, 1994 Stock Incentive
Plan and Employee Stock Purchase Plan (collectively, the "Stock Option Plans"),
whether or not then exercisable (the "Options"), will, in settlement thereof,
receive from the Company for each Share subject to such Option an amount
(subject to any applicable withholding tax) in cash equal to the difference
between the Per Share Amount and the per Share exercise price of such Option to
the extent such difference is a positive number (such amount being hereinafter
referred to as, the "Option Consideration"); provided, however, that with
respect to any person subject to Section 16(a) of the Exchange Act, any such
amount will be paid as soon as practicable after the first date payment can be
made without liability to such person under Section 16(b) of the Exchange Act.
At the Effective Time, each Option will be canceled, and any and all rights the
holder had or may have had in respect to such Option shall be released.
(b) Prior to the Effective Time, Company will use reasonable efforts to
obtain all necessary consents or releases from holders of Options under the
Stock Option Plans and take all such other lawful action as may be necessary to
give effect to the transactions contemplated by this Section 2.7. Except as
otherwise agreed to by the parties, (i) the Stock Option Plans shall terminate
as of the Effective Time and the provisions in any other plan, program or
arrangement providing for the issuance or grant of any other interest in respect
of the capital stock of Company or any Subsidiary thereof shall be canceled as
of the Effective Time and (ii) Company shall use reasonable efforts to assure
that following the Effective Time no participant in the Stock Option Plans or
other plans, programs or arrangements shall have any right thereunder to acquire
any equity securities of Company, the Surviving Corporation or any Subsidiary
thereof.
7
<PAGE>
ARTICLE III. REPRESENTATIONS OF THE COMPANY
The Company hereby represents and warrants to each of Parent and Purchaser
that, except as set forth in the letter, dated the date hereof, from the Company
to Parent initialed by those parties (the "Company Disclosure Letter") as
follows:
3.1 Existence; Good Standing; Corporate Authority. The Company is a
---------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware. The Company is duly licensed or qualified to do business as a
foreign corporation and is in good standing under the laws of each other state
of the United States in which the character of the properties owned or leased by
it or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified or to be in good standing
would not have a Company Material Adverse Effect. The Company has all requisite
corporate power and authority to own, operate and lease its properties and carry
on its business as now conducted. Each of the Company's Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has the corporate power
and authority to own its properties and to carry on its business as it is now
being conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not have a Company
Material Adverse Effect. As used in this Agreement, (i) "Company Material
Adverse Effect" means any change, effect, event or condition (other than an
action or suit challenging the transactions contemplated by this Agreement) that
would (A) have a material adverse effect on the business, properties, results of
operations, financial condition or prospects of the Company and its
Subsidiaries, taken as a whole, (B) prevent or materially delay consummation of
any of the transactions contemplated hereby or (C) prevent or materially delay
the Company's ability to consummate the transactions contemplated hereby and
(ii) the term "Subsidiary" when used with respect to any party means any
corporation or other organization, whether incorporated or unincorporated, of
which such party directly or indirectly owns or controls at least a majority of
the securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors or others performing similar
functions.
3.2 Authorization, Validity and Effect of Agreement. The Company has the
-----------------------------------------------
requisite corporate power and authority to execute and deliver this Agreement,
and all agreements and documents contemplated hereby to be executed and
delivered by it. Subject only to the approval of the Merger by the holders of a
majority of the outstanding Shares, this Agreement, the Offer, the Merger and
the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all requisite corporate action. This Agreement
constitutes, and all agreements and documents contemplated hereby to be executed
and delivered by the Company will constitute (when executed and delivered
pursuant hereto), the valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
3.3 Capitalization. The authorized capital stock of the Company consists
--------------
of 40,000,000 Shares and 10,000,000 shares of preferred stock. As of the date
hereof, there were (a) 8,984,518 Shares issued and outstanding, each of which
was duly authorized, validly issued, duly paid and nonassessable, (b) no shares
of preferred stock of the Company had been designated or issued, (c) no Shares
were held in treasury of the Company, (d) 181,746 Shares
8
<PAGE>
were reserved for issuance under the Stock Option Plans and (e) Options to
purchase 1,093,821 Shares had been granted under the Stock Option Plans. Since
the date hereof, no additional shares of capital stock of the Company have been
issued except pursuant to the exercise of Options or the ESPP (as hereinafter
defined) and no other options, warrants or other rights to acquire shares of the
Company's capital stock (collectively, the "Company Rights") have been granted.
Except as described in the preceding sentence, the Company has no outstanding
bonds, debentures, notes or other securities or obligations the holders of which
have the right to vote or which are convertible into or exercisable for
securities having the right to vote on any matter on which any stockholder of
the Company has a right to vote. All issued and outstanding Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. There are not any existing options, warrants, calls, subscriptions,
convertible securities or other Company Rights that obligate the Company or any
of its Subsidiaries to issue, transfer or sell any shares of capital stock of
the Company or any of its Subsidiaries other than the Options. There are no
outstanding contractual obligations of the Company or any of its Subsidiaries to
repurchase, redeem, exchange or otherwise acquire any shares of capital stock of
the Company or any of its Subsidiaries. There are no outstanding contractual
obligations of the Company to vote or to dispose of any shares of the capital
stock of any of its Subsidiaries.
3.4 Subsidiaries. Exhibit 21 to the Company's Annual Report on Form 10-K
------------
for the fiscal year ended December 27, 1998, lists all of the Subsidiaries of
the Company. The Company owns, directly or indirectly, all of the outstanding
shares of capital stock (or other ownership interests having by their terms
ordinary voting power to elect a majority of directors or others performing
similar functions with respect to such Subsidiary) of each of the Company's
Subsidiaries free and clear of all liens, pledges, security interests, claims or
other encumbrances (collectively, "Liens"). Each of the outstanding shares of
capital stock (or such other ownership interests) of each of the Company's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable.
3.5 Other Interests. Except for interests in the Company's Subsidiaries,
---------------
neither the Company nor any of the Company's Subsidiaries owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or entity (other than
(a) non-controlling investments in the ordinary course of business and corporate
partnering, development, cooperative marketing and similar undertakings and
arrangements entered into in the ordinary course of business and (b) other
investments of less than $1.0 million in the aggregate).
3.6 No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement by the Company do not,
and the consummation by the Company of the transactions contemplated hereby will
not, (i) conflict with or violate the certificate of incorporation or bylaws or
equivalent organizational documents of the Company or any of its Subsidiaries,
(ii) subject to making the filings and obtaining the approvals identified in
Section 3.6(b), conflict with or violate any statute, rule, regulation or other
legal requirement ("Law") or order, judgment or decree ("Order") applicable to
the Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, result in the loss of a material
9
<PAGE>
benefit under or give to others any right of purchase or sale, or any right of
termination, amendment, acceleration, increased payments or cancellation of, or
result in the creation of a Lien or other encumbrance on any property or asset
of the Company or any of its Subsidiaries pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any property or
asset of the Company or any of its Subsidiaries is bound or affected.
(b) The execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement and the consummation by the Company of the
transactions contemplated hereby will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, domestic or foreign (each a "Governmental Entity"),
except (i) applicable requirements, if any, of the Exchange Act, (ii) the pre-
merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations thereunder (the "HSR
Act") and (iii) the filing of a certificate of merger pursuant to the DGCL.
3.7 Compliance with Laws and Investments. Neither the Company nor any of
------------------------------------
its Subsidiaries is in conflict with, or in default or violation of, (a) any
material Law or Order applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected or (b) any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries or any property or asset of the Company or
any of its Subsidiaries is bound or affected. The Company and its Subsidiaries
have obtained all material licenses, permits and other authorizations and have
taken all actions required by applicable Law or government regulations in
connection with their business as now conducted.
3.8 SEC Documents.
-------------
(a) The Company has filed all forms, reports and documents required to be
filed by it with the SEC since January 1, 1996 (collectively, the "Company
Reports"). As of their respective dates, the Company Reports and any such
reports, forms and other documents filed by the Company with the SEC after the
date of this Agreement (i) complied, or will comply, in all material respects
with the applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act and the rules and regulations thereunder and
(ii) did not, or will not, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. The representation in the preceding sentence does
not apply to any misstatement or omission in any Company Report filed prior to
the date of this Agreement which was superseded by a subsequent Company Report
filed prior to the date of this Agreement. No Subsidiary of the Company is
required to file any report, form or other document with the SEC.
(b) Each of the financial statements included in or incorporated by
reference into the Company Reports (including the related notes and schedules)
presents fairly, in all material respects, the consolidated financial position
of the Company and its Subsidiaries as of its date or,
10
<PAGE>
if applicable, the results of operations, retained earnings or cash flows, as
the case may be, of the Company and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein.
3.9 No Material Undisclosed Liabilities. Neither the Company nor any of
-----------------------------------
its Subsidiaries has any material liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would be required to
be reflected on, or reserved against in, a balance sheet of the Company or
described or referred to in the notes thereto prepared in accordance with
generally accepted accounting principles consistently applied, except for (i)
liabilities or obligations that were so reserved on, or reflected in (including
the notes to), the consolidated balance sheet of the Company as of December 27,
1998 and (ii) liabilities or obligations arising in the ordinary course of
business (including trade indebtedness) since December 27, 1998.
3.10 Litigation. There are no material actions, suits or proceedings
----------
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries and there are no Orders of any Governmental
Entity or arbitrator outstanding against the Company or any of its Subsidiaries.
3.11 Absence of Certain Changes. Except as described in the Company
--------------------------
Reports filed and publicly available prior to the date hereof (the "Company
Filed Reports") since December 27, 1998, there has not been (a) any Company
Material Adverse Effect, (b) any declaration, setting aside or payment of any
dividend of other distribution with respect to its capital stock, (c) any split,
combination or reclassification of any of the Company's capital stock or any
issuance or the authorization of any issuance of any other securities in respect
of, in lieu of or in substitution for any shares of the Company's capital stock,
(d) any granting by the Company or any of its Subsidiaries to any director or
executive officer of the Company of any increase in compensation, (e) any
granting by the Company or any of its Subsidiaries to any director or executive
officer of any increase in severance or termination pay, (f) any entry by the
Company or any of its Subsidiaries into any employment, severance or termination
agreement with any director or executive officer or (g) except insofar as may be
required by a change in generally accepted accounting principles, any change in
accounting methods, principles or practices by the Company.
3.12 Taxes.
-----
(a) (i) Each of the Company and its Subsidiaries has (A) duly and timely
filed (including applicable extensions) all material Tax Returns (as hereinafter
defined) required to be filed and (B) paid in full or established adequate
reserves (in accordance with GAAP) for all material Taxes (as hereinafter
defined) shown to be due on such Tax Returns; (ii) as of the date hereof,
neither the Company nor any of its Subsidiaries has requested any extension of
time within which to file any Tax Returns in respect of any fiscal year which
have not since been filed and no request for waivers of the time to assess any
Taxes are pending or outstanding; and (iii) no material (A) audit or examination
or (B) refund litigation with respect to any Tax Return is pending.
11
<PAGE>
(b) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Tax" or "Taxes" shall mean all taxes, charges, fees, duties,
levies, penalties or other assessments imposed by any federal, state, local
or foreign governmental authority, including, but not limited to, income,
gross receipts, excise, property, sales, gain, use, license, custom, duty,
unemployment, capital stock, transfer, franchise, payroll, withholding,
social security, minimum estimated, and other taxes, and shall include
interest, penalties or additions attributable thereto; and
(ii) "Tax Return" shall mean any return, declaration, report, claim
for refund, or information return or statement relating to Taxes, including
any schedule or attachment thereto, and including any amendment thereof.
3.13 Property.
--------
(a) The Company and its Subsidiaries own or have the right to use all
material intellectual property used by them in connection with their business,
including (A) trademarks and service marks (registered or unregistered) and
trade names, and all goodwill associated therewith, (B) patents, patentable
inventions, discoveries, improvements, ideas, know-how, processes and computer
programs, software and databases (including source code), (C) trade secrets and
the right to limit the use or disclosure thereof, (D) copyrights in all works,
including software programs and mask works, and (E) domain names (collectively,
"Intellectual Property").
(b) As of the date of this Agreement, there is no suit, action or
proceeding pending or, to the Company's Knowledge, threatened against or
affecting the Company or any of its Subsidiaries, which challenges the legality,
validity, enforceability of, or the Company's or any of its Subsidiaries' use or
ownership of, any Intellectual Property owned by the Company or any of its
Subsidiaries, or, to the Company's Knowledge, licensed to the Company or to any
of its Subsidiaries.
(c) The conduct of the Company's and its Subsidiaries' business, the
Intellectual Property owned or used by the Company and its Subsidiaries and the
products or services produced, sold or licensed by the Company and its
Subsidiaries do not infringe, violate or misappropriate any Intellectual
Property right or any other proprietary right of any person or give rise to any
obligations to any person as a result of co-authorship, co-inventorship, or any
express or implied contract for any use or transfer.
3.14 Millennium Compliance.
---------------------
(a) In the opinion of the Company, achieving Millennium Compliance for all
proprietary technology used or held for use in the business of the Company,
including without limitation all Intellectual Property so used or held
(collectively, "Technology"), would not, individually or in the aggregate, have
a Company Material Adverse Effect.
(b) For purposes of this Agreement, the Technology will be "Millennium
Compliant" if:
12
<PAGE>
(i) No value for a current date will cause any interruption in
operation;
(ii) Date-based functionality must behave consistently for dates
prior to, during and after the year 2000;
(iii) In all interfaces and data storage, the century in any date
must be specified either explicitly or by unambiguous algorithms or
inferencing rules; and
(iv) The year 2000 must be recognized as a leap year.
3.15 Environmental Matters.
---------------------
(a) Except as disclosed in the Company Filed Reports (i) neither the
Company nor any of its Subsidiaries has violated or is in violation of any
Environmental Law; (ii) none of the real property owned or leased by the Company
or any Subsidiary (including without limitation soils and surface and ground
waters) are contaminated with any Hazardous Substance in quantities which
require investigation or remediation under Environmental Laws; (iii) neither the
Company nor any of its Subsidiaries is liable for any off-site contamination;
(iv) neither the Company nor any of its Subsidiaries has any liability or
remediation obligation under any Environmental Law; (v) no assets of the Company
or any of its Subsidiaries are subject to pending or, to the Knowledge of the
Company, threatened Liens under any Environmental Law; (vi) the Company and its
Subsidiaries have all Permits required under any Environmental Law
("Environmental Permits"); and (vii) the Company and its Subsidiaries are in
compliance with their respective Environmental Permits.
(b) For purposes of this Agreement, the term (i) "Environmental Laws"
means any federal, state or local Law relating to: (A) releases or threatened
releases of Hazardous Substances or materials containing Hazardous Substances;
(B) the manufacture, handling, transport, use, treatment, storage or disposal of
Hazardous substances or materials containing Hazardous Substances; or (C)
otherwise relating to pollution of the environment or the protection of human
health, and (ii) "Hazardous Substances" means: (A) those materials, pollutants
and/or substances defined in or regulated under the following federal statutes
and their state counterparts, as each may be amended from time to time, and all
regulations thereunder: the Hazardous Materials Transportation Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water
Act, the Atomic Energy Act, the Federal Insecticide, Fungicide and Rodenticide
Act and the Clean Air Act; (B) petroleum and petroleum products including crude
oil and any fractions thereof; (C) natural gas, synthetic gas and any mixtures
thereof; (D) radon; and (E) any materials, pollutants and/or substance with
respect to which any Governmental Entity requires environmental investigation,
monitoring, reporting or remediation.
3.16 Employee Benefit Plans. Except as described in the Company Filed
----------------------
Reports, (a) all employee benefit plans or programs maintained for the benefit
of the current or former employees or directors of the Company or any of its
Subsidiaries that are sponsored, maintained or contributed to by the Company or
any of its Subsidiaries, or with respect to which the Company or any of its
Subsidiaries has any liability, including without limitation any such plan that
is an "employee benefit plan" as defined in Section 3(3) of the Employee
Retirement Income
13
<PAGE>
Security Act of 1974 ("ERISA"), are in compliance with all applicable
requirements of law, including ERISA and the Code, (b) neither the Company nor
any of its Subsidiaries has any liabilities or obligations with respect to any
such employee benefit plans or programs, whether accrued, contingent or
otherwise, nor to the Knowledge of the Company are any such liabilities or
obligations expected to be incurred and (c) neither the Company nor any of its
Subsidiaries is a party to any contract or other arrangement under which, after
giving effect to the Offer or the Merger, Parent or the Surviving Corporation
would be obligated to make any excess parachute payment within the meaning of
the Code. Except the Stock Option Plans, the execution of, and performance of
the transactions contemplated by, this Agreement will not (either alone or upon
the occurrence of any additional or subsequent events) constitute an event under
any benefit plan, program, policy, arrangement or agreement or any trust, loan
or funding arrangement that will or may result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any employee.
3.17 State Takeover Statutes; Poison Pill.
------------------------------------
(a) The Company Board has approved the Offer, the Merger, this Agreement
and the transactions contemplated hereby, and such approval is sufficient to
render inapplicable to the Offer, the Merger, this Agreement and the
transactions contemplated hereby, the provisions of Section 203 of the DGCL. No
other state "fair price," "merger moratorium," "control share acquisition" or
other state antitakeover or similar statute or state regulation applies or
purports to apply to the Merger, this Agreement, the Offer or any of the
transactions contemplated hereby.
(b) The Company and its Board of Directors have amended the Rights
Agreement between the Company and First National Bank of Boston, NA dated July
10, 1996 (the "Rights Agreement") (without redeeming the Rights issued
thereunder), which amendment has been provided to Parent, so that neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) cause any Rights issued pursuant to
the Rights Agreement to become exercisable, to be triggered or to separate from
the shares to which they are attached, (ii) cause the Parent or the Purchaser or
any of their affiliates to be an Acquiring Person (as defined in the Rights
Agreement) in connection with the transactions contemplated hereby or (iii)
trigger other provisions of the Rights Agreement, including giving rise to a
Distribution Date (as defined in the Rights Agreement) in connection with the
transactions contemplated hereby, and such amendment shall remain in full force
and effect from and after the date hereof.
3.18 Voting Requirements. The affirmative vote of the holders of a majority
-------------------
of the issued and outstanding Shares, voting as a single class, at the Company
Stockholders' Meeting (as hereinafter defined) to adopt this Agreement is the
only vote of the holders of any class or series of the Company's capital stock
necessary to approve and adopt this Agreement and the transactions contemplated
hereby.
3.19 No Brokers. With the exception of the Company's retention of
----------
BancBoston Robertson Stephens, Inc. the Company has not entered into any
contract, arrangement or understanding with any Person or firm which may result
in the obligation of the Company, Parent or Purchaser to pay any finder's fees,
brokerage or agent's commissions or other like payments in
14
<PAGE>
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
3.20 Opinion of Financial Advisor. The Company has received the opinion of
----------------------------
BancBoston Robertson Stephens, Inc. to the effect that, as of the date hereof,
the consideration to be received by the holders of Shares in the Offer and the
Merger is fair to such holders from a financial point of view.
3.21 Offer Documents; Proxy Statement. (a) The proxy statement to be sent
--------------------------------
to the stockholders of the Company in connection with a meeting of the Company's
stockholders to consider the Merger (the "Company Stockholders' Meeting") or the
information statement to be sent to such stockholders, as appropriate (such
proxy statement or information statement, as amended or supplemented, is herein
referred to as the "Proxy Statement"), at the date mailed to the stockholders of
the Company and at the time of the Company Stockholders' Meeting (i) will comply
in all material respects with the applicable requirements of the Exchange Act
and the rules and regulations thereunder and (ii) will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Schedule 14D-9
will comply in all material respects with the Exchange Act and the rules and
regulations thereunder. Neither the Schedule 14D-9 nor any of the information
relating to the Company or its Affiliates provided by or on behalf of the
Company specifically for inclusion in the Schedule 14D-1 or the Offer Documents
will, at the respective times the Schedule 14D-9, the Schedule 14D-1 and the
Offer Documents or any amendments or supplements thereto are filed with the SEC
and are first published, sent or given to stockholders of the Company, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. No representation or warranty is made by the Company with respect to
any information supplied or approved by the Parent or the Purchaser specifically
for inclusion in the Proxy Statement or the Schedule 14D-9.
ARTICLE IV. REPRESENTATIONS OF THE PARENT AND THE PURCHASER
Each of Parent and Purchaser represents and warrants to the Company as of
the date of this Agreement as follows:
4.1 Existence; Good Standing; Corporate Authority. Parent is a
---------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of Minnesota. Purchaser is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware. Parent is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it or in which the transaction of
its business makes such qualification necessary, except where the failure to be
so qualified or to be in good standing would not prevent or materially delay
Parent's or Purchaser's ability to consummate the transactions contemplated
hereby (a "Parent Material Adverse Effect"). Parent has all requisite corporate
power and authority to own, operate and lease its properties and carry on its
business as now conducted.
15
<PAGE>
4.2 Authorization, Validity and Effect of Agreement. Each of Parent and
-----------------------------------------------
the Purchaser has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby to
be executed respectively by it. This Agreement, the Offer, the Merger and the
consummation by Parent and Purchaser of the transactions contemplated hereby
have been duly and validly authorized by the respective Boards of Directors of
Parent and Purchaser and by Parent as sole stockholder of Purchaser, and no
other corporate action on the part of Parent and Purchaser is necessary to
authorize this Agreement, the Offer and the Merger or to consummate the
transactions contemplated hereby or thereby. This Agreement constitutes, and
all agreements and documents contemplated hereby and thereby to be executed and
delivered by Parent or Purchaser will constitute (when executed and delivered
pursuant hereto), the valid and binding obligations of Parent or the Purchaser,
as the case may be, enforceable respectively against them in accordance with
their respective terms.
4.3 No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement by Parent and the
Purchaser do not, and the consummation by Parent and Purchaser of the
transactions contemplated hereby will not, (i) conflict with or violate the
articles (certificate) of incorporation or bylaws of Parent or Purchaser, (ii)
subject to making the filings and obtaining the approvals identified in Section
4.3(b), conflict with or violate any Law or Order applicable to Parent or any of
its Subsidiaries or by which any property or asset of Parent or any of its
Subsidiaries is bound or affected or (iii) result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, result in the loss of a material benefit under or give to others
any right of termination, amendment, acceleration, increased payments or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of Parent or any of its Subsidiaries pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which Parent or any of its Subsidiaries or any
property or asset of Parent or any of its Subsidiaries is bound or affected,
except, in the case of clauses (ii) and (iii) only, for any such conflicts,
violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, to have a Parent Material Adverse Effect.
(b) The execution and delivery of this Agreement by Parent and Purchaser
do not, and the performance of this Agreement and the consummation of the
transactions contemplated hereby by either of them will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Entity, except for (i) applicable requirements, if any, of
the Exchange Act, (ii) the pre-merger notification requirements of the HSR Act
and (iii) the filing of a certificate of merger pursuant to the DGCL, and where
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not, individually or in the aggregate,
have a Parent Material Adverse Effect.
4.4 No Brokers. Neither Parent or the Purchaser has entered into any
----------
contract, arrangement or understanding with any Person or firm which may result
in the obligation of the Company to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
16
<PAGE>
4.5 Offer Documents; Proxy Statement. None of the information supplied by
--------------------------------
the Parent, the Purchaser, their respective officers, directors,
representatives, agents or employees, for inclusion in the Proxy Statement, or
in any amendments thereof or supplements thereto, will, on the date the Proxy
Statement is first mailed to stockholders of the Company or at the time of the
Company Stockholders' Meeting, contain any statement which, at such time and in
light of the circumstances under which it will be made, will be false or
misleading with respect to any material fact, or will omit to state any material
fact necessary in order to make the statements therein not false or misleading
or necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the Company Stockholders' Meeting which has
become false or misleading. The Schedule 14D-1 will comply in all material
respects with the Exchange Act and the rules and regulations thereunder.
Neither the Schedule 14D-1 nor any of the information relating to Parent or its
Affiliates provided by or on behalf of Parent specifically for inclusion in the
Schedule 14D-9 will, at the respective times the Schedule 14D-1, the Schedule
14D-9 and the Offer Documents or any amendments or supplements thereto are filed
with the SEC and are first published, sent or given to stockholders of the
Company, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. No representation or warranty is made by Parent with
respect to any information supplied or approved by the Company specifically for
inclusion in the Schedule 14D-1.
4.6 Financing. Parent has funds sufficient to consummate the Offer and
---------
the Merger on the terms contemplated by this Agreement, and at the expiration of
the Offer and the Effective Time, Parent and Purchaser shall have available
funds sufficient to perform their respective obligations under this Agreement,
including without limitation payment in full for all Shares validly tendered in
the Offer and all Shares (other than Dissenting Shares, Treasury Shares and
Parent Owned Shares) outstanding at the Effective Time and the pay off of all
outstanding balances under that certain Credit Agreement among the Company,
BankBoston N.A. and BankBoston N.A., as agent for Lenders, as amended ("Credit
Agreement").
4.7 Litigation. As of the date hereof, there is no suit, action,
----------
arbitration, proceeding, claim or investigation pending or threatened against
the Parent or Purchaser, nor is there any reasonable basis therefor, that
individually or in the aggregate could reasonably be expected to (i), except as
disclosed in the Parent SEC Documents, have a Parent Material Adverse Effect,
(ii) challenge or seek to enjoin or seek damages with respect to the Parent's or
Purchaser's entering into and performing this Agreement or impair the ability of
the Parent or Purchaser to perform their respective obligations under this
Agreement or (iii) prevent the consummation of any of the transactions
contemplated by this Agreement.
4.8 SEC Documents.
-------------
(a) Parent has filed all forms, reports and documents required to be filed
by it with the SEC since October 1, 1995 (collectively, the "Parent Reports").
As of their respective dates, the Parent Reports and any such reports, forms and
other documents filed by Parent with the SEC after the date of this Agreement
(i) complied, or will comply, in all material respects with the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations thereunder and (ii) did not, or will not, contain any untrue
statement of a material fact or omit to
17
<PAGE>
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. The representation in the preceding sentence does not
apply to any misstatement or omission in any Parent Report filed prior to the
date of this Agreement which was superseded by a subsequent Parent Report filed
prior to the date of this Agreement. No Subsidiary of Parent is required to file
any report, form or other document with the SEC.
(b) Each of the financial statements included in or incorporated by
reference into the Parent Reports (including the related notes and schedules)
presents fairly, in all material respects, the consolidated financial position
of Parent and its Subsidiaries as of its date or, if applicable, the results of
operations, retained earnings or cash flows, as the case may be, of Parent and
its Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein.
ARTICLE V. COVENANTS
5.1 Conduct of Business.
-------------------
(a) Conduct of Business By the Company. During the period from the date of
----------------------------------
this Agreement to the Effective Time, the Company will, and will cause its
Subsidiaries to, carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and in
compliance in all material respects with all applicable Laws and, to the extent
consistent therewith, use all reasonable efforts to preserve intact their
current business organizations, use reasonable efforts to keep available the
services of their current officers and other key employees and preserve their
relationships with those Persons having business dealings with them to the end
that their goodwill and ongoing businesses will be unimpaired at the Effective
Time. Without limiting the generality or effect of the foregoing, except
pursuant to the terms and conditions of this Agreement or as expressly and
specifically described in Section 5.1 of the Company Disclosure Letter, during
the period from the date of this Agreement to the Effective Time, the Company
will not, and will not permit any of its Subsidiaries to:
(i) other than dividends and distributions (including liquidating
distributions) by a direct or indirect wholly owned Subsidiary of the
Company to its parent, or by a Subsidiary that is partially owned by the
Company or any of its Subsidiaries, provided that the Company or any such
Subsidiary receives its proportionate share thereof, (A) declare, set aside
or pay any dividends on, or make any other distributions in respect of, any
of its capital stock, (B) split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or (C)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities;
18
<PAGE>
(ii) except upon exercise of the Options or with respect to the
July 31, 1999 purchase under the 1994 Employee Stock Purchase Plan, as
amended ("ESPP"), issue, deliver, sell, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities;
(iii) amend its certificate of incorporation, bylaws or other
comparable organizational documents;
(iv) acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business
or any corporation, limited liability company, partnership, joint venture,
association or other business organization or division thereof;
(v) sell, lease, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its properties or
assets, other than in the ordinary course of business consistent with past
practice;
(vi) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company or
any of its Subsidiaries, guarantee any debt securities of another Person,
enter into any "keep well" or other agreement to maintain any financial
statement condition of another Person or enter into any arrangement having
the economic effect of any of the foregoing, except for short-term
borrowings incurred in the ordinary course of business consistent with past
practice or (B) make any loans, advances or capital contributions to, or
investments in, any other Person, other than to the Company or any
Subsidiary of the Company or to officers and employees of the Company or
any of its Subsidiaries for travel, business or relocation expenses in the
ordinary course of business;
(vii) make or agree to make any capital expenditure or capital
expenditures other than capital expenditures set forth in the capital
budget of the Company;
(viii) make any change to its accounting methods, principles or
practices, except as may be required by generally accepted accounting
principles;
(ix) except as required by Law or contemplated hereby, enter into,
adopt or amend in any material respect or terminate any Stock Option Plan
or any other agreement, plan or policy involving the Company or any of its
Subsidiaries and one or more of their directors, officers or employees, or
materially change any actuarial or other assumption used to calculate
funding obligations with respect to any Company pension plans, or change
the manner in which contributions to any Company pension plans are made or
the basis on which such contributions are determined;
(x) increase the compensation of any director or executive officer
of the Company or pay any benefit or amount not required by a plan or
arrangement as in effect on the date of this Agreement to any such Person;
19
<PAGE>
(xi) hire any new domestic employees, or enter into consulting or
similar agreements, other than employees providing direct labor; or
(xii) authorize, or commit or agree to take, any of the foregoing
actions.
(b) Meeting of Stockholders. (i) The Company will take all action
-----------------------
necessary pursuant to applicable Law and its certificate of incorporation and
bylaws to convene a meeting of its Stockholders as promptly as practicable to
consider and vote upon the adoption of this Agreement. The Company Board will
recommend such adoption and the Company will each take all lawful action to
solicit such approval, including without limitation timely mailing any Proxy
Statement; provided, however, if the Company Board determines in good faith,
after taking into account the advice of its legal counsel, that it is necessary
in order to comply with its fiduciary duties to the Company's stockholders under
applicable Law, the Company Board may change such recommendation or solicitation
(but not such action to convene the Company Stockholders' Meeting), including
any withdrawal or change of its recommendation. Without limiting the generality
or effect, the Company's obligations pursuant to the first sentence of this
Section 5.1(b) will not be affected by the commencement, public proposal, public
disclosure or communication to the Company of any Company Takeover Proposal.
(ii) Notwithstanding Section 5.1(b)(i), in the event that Parent, the Purchaser
or any other Subsidiary of Parent acquires at least 90% of the outstanding
shares pursuant to the Offer or otherwise, the Parties agree to take all
necessary and appropriate action to cause the Merger to become effective in
accordance with the DGCL without a meeting of stockholders of the Company as
soon as practicable after the acceptance for payment and purchase of Shares by
the Purchaser pursuant to the Offer. (iii) Purchaser shall vote all shares
owned by it for the Merger.
(c) ESOP. The Company shall discontinue the ESOP effective on the date
----
hereof; provided that purchases for the current period under the ESOP may be
completed provided that the allowable contributions thereunder are not
increased.
5.2 No Solicitation.
---------------
(a) The Company, its Affiliates and their respective officers, directors,
employees, representatives and agents will immediately cease any discussions or
negotiations, if any, with any parties conducted heretofore with respect to any
Company Takeover Proposal. The Company will not, nor will it permit any of its
Subsidiaries, to, nor will it authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any of its Subsidiaries to, directly
or indirectly, (i) solicit, initiate or encourage (including without limitation
by way of furnishing information), or take any other action designed or
reasonably likely to facilitate, any inquiries or the making of any proposal
which constitutes or reasonably may give rise to any Company Takeover Proposal
or (ii) participate in any discussions or negotiations regarding any Company
Takeover Proposal; provided, however, that if, at any time prior to the Purchase
Date, the Company Board determines in good faith, after taking into account the
advice of its legal counsel, that it is necessary to do so in order to comply
with its fiduciary duties to the Company's stockholders under applicable Law,
the Company may, in response to a Company Takeover Proposal that was not
solicited by it and did not otherwise result from a breach of any provision of
this Agreement, (A) furnish information with respect to the Company and each of
its
20
<PAGE>
Subsidiaries to any Person pursuant to a customary confidentiality agreement not
more favorable to the recipient of such information than the Confidentiality
Agreement and (B) participate in negotiations regarding such Company Takeover
Proposal. For purposes of this Agreement, "Company Takeover Proposal" means any
inquiry, proposal or offer from any Person relating to any direct or indirect
acquisition or purchase of 25% more of the assets of the Company and its
Subsidiaries or 25% or more of any class of equity securities of the Company or
any of its Subsidiaries, any tender offer or exchange offer for Shares or any
class of equity securities of the Company or any of its Subsidiaries, or any
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company or any of its
Subsidiaries, other than the transactions contemplated by this Agreement, or any
other transaction that is intended or could reasonably be expected to prevent
the completion of the transactions contemplated hereby.
(b) Except as expressly permitted by this Section 5.2(b), neither the
Company Board nor any committee thereof may (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Parent or the Purchaser,
the approval or recommendation by the Company Board or such committee of the
Offer, the Merger or this Agreement, (ii) approve or recommend, or propose
publicly to approve or recommend, any Company Takeover Proposal or (iii) cause
the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any Company Takeover
Proposal (each, a "Company Acquisition Agreement"). Notwithstanding the
foregoing, in the event that prior to the Effective Time and not less than two
business days after notice of its intention to do so has been given Parent the
Company Board determines in good faith after receipt of a Superior Proposal and,
after taking into account the advice of its legal counsel, that it is necessary
to do so in order to comply with its fiduciary duties to the Company's
stockholders, the Company Board may withdraw or modify its approval or
recommendation of the Offer, the Merger or this Agreement, approve or recommend
a Company Takeover Proposal, or (iv) terminate this Agreement pursuant to
Section 7.3(c). For purposes of this Agreement, "Superior Proposal" means a
Company Takeover Proposal that (x) involves the direct or indirect acquisition
or purchase of 75% or more of the assets of the Company and its Subsidiaries or
75% or more of any class of equity securities of the Company or any of its
Subsidiaries and (y) which Company Takeover Proposal is otherwise on terms which
the Company Board determines in its good faith judgment (after consultation with
a financial advisor of nationally recognized reputation) to be reasonably
capable of being completed (taking into account all material legal, financial,
regulatory and other aspects of the proposal) and more favorable to the
Company's stockholders from a financial point of view than the Offer and the
Merger, and for which financing, to the extent required, is then committed or
which, in the good faith judgment of the Company Board, is capable of being
obtained by such third party.
(c) In addition to the obligations of the Company set forth in Section
5.2(a) and (b), the Company will (i) immediately advise Parent orally and in
writing of any request for information or of any Company Takeover Proposal, the
material terms and conditions of such request or Company Takeover Proposal and
the identity of the Person making such request or Company Takeover Proposal and
(ii) keep Parent reasonably informed of the status and details (including
amendments or proposed amendments) of any such request or Company Takeover
Proposal.
21
<PAGE>
(d) Nothing contained in this Section 5.2 will prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule 14e-
2(a) promulgated under the Exchange Act; provided, however, that neither the
Company nor the Company Board nor any committee thereof may, except as expressly
permitted by Section 5.2, withdraw or modify, or propose publicly to withdraw or
modify, its position with respect to the Offer, this Agreement or the Merger or
approve or recommend, or propose publicly to approve or recommend, a Company
Takeover Proposal.
5.3 Filings, Reasonable Efforts.
---------------------------
(a) Upon the terms and subject to the conditions set forth in this
Agreement, the Parties will use all reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other Parties in doing, all things, necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Offer, the Merger and the other transactions contemplated by this Agreement,
including without limitation, (i) seeking to obtain of all necessary actions or
nonactions, waivers, consents and approvals from Governmental Entities and
making of all necessary registrations and filings (including filings with
Governmental Entities) and taking of all reasonable steps as may be necessary to
obtain an approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (ii) seeking to obtain of all necessary consents, approvals
or waivers from third parties, (iii) defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any adverse order entered by any court or other Governmental Entity vacated
or reversed and (iv) execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by, and to fully carry out
the purposes of, this Agreement. Nothing set forth in this Section 5.3 will
limit or affect actions permitted to be taken pursuant to Section 5.2.
(b) In connection with and without limiting the foregoing, the Company and
Parent will, and Parent will cause the Purchaser to, (i) take all action
necessary to ensure that no state takeover statute or similar statute or
regulation is or becomes applicable to the Offer, the Merger or any of the other
transactions contemplated hereby, and (ii) if any state takeover statute or
similar statute or regulation becomes applicable thereto, take all action
necessary to ensure that the Offer and the Merger and such other transactions
may be consummated as promptly as practicable on the terms contemplated hereby
and otherwise to minimize the effect of such statute or regulation thereon.
5.4 Inspection of Records.
---------------------
(a) From the date hereof to the Effective Time, the Company will (i) allow
all designated officers, attorneys, accountants and other representatives of
Parent reasonable access at all reasonable times to the offices, records and
files, correspondence, audits and properties, as well as to all information
relating to commitments, contracts, titles and financial position, or otherwise
pertaining to the business and affairs, of the parties and their respective
Subsidiaries, as the case may be and (ii) furnish to Parent and its counsel,
financial advisors, auditors and other authorized representatives such financial
and operating data and other information as such Persons may reasonably request.
22
<PAGE>
(b) Subject to the requirements of applicable Law, and except for such
actions as are necessary to disseminate the Offer Documents and any other
documents necessary to consummate the Offer and the Merger, the Parties will,
and will instruct each of their respective Affiliates, associates, partners,
employees, agents and advisors to, hold in confidence all such information as is
confidential or proprietary, will use such information only in connection with
the Offer and the Merger and, if this Agreement is terminated in accordance with
its terms, will deliver promptly to the other (or destroy and certify to the
other the destruction of) all copies of such information (and any copies,
compilations or extracts thereof or based thereon) then in their possession or
under their control.
5.5 Publicity. The initial press release relating to this Agreement will
---------
be a joint press release and thereafter the Company and Parent will, subject to
their respective legal obligations (including requirements of stock exchanges
and other similar regulatory bodies), consult with each other, and use
reasonable efforts to agree upon the text of any press release, before issuing
any such press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any Governmental
Entity or with any national securities exchange with respect thereto.
5.6 Proxy Statement. Parent and the Company will cooperate and promptly
---------------
prepare, and Company will file with the SEC as soon as practicable the Proxy
Statement and promptly thereafter will mail the Proxy Statement to its
stockholders. The Proxy Statement will contain the recommendation of the
Company Board that stockholders of the Company approve and adopt this Agreement
and approve the Merger and the other transactions contemplated hereby. If at
any time prior to the Company Stockholders Meeting any event or circumstance
relating to the Company or any of its Subsidiaries or Affiliates, or its or
their respective officers or directors, should be discovered by the Company that
is required to be set forth in a supplement to any Proxy Statement, the Company
shall promptly inform Parent and Purchaser to supplement such Proxy Statement
and mail such supplement to its stockholders.
5.7 Further Actions.
---------------
(a) Each party hereto will, subject to the fulfillment at or before the
Effective Time of each of the conditions of performance set forth herein or the
waiver thereof, perform such further acts and execute such documents as may be
reasonably required to effect the Merger.
(b) If, at any time after the Effective Time, the Surviving Corporation
considers or is advised that any deeds, bills of sale, assignments, assurances
or any other actions or things are necessary or desirable to vest, perfect or
confirm of record or otherwise in the Surviving Corporation its right, title or
interest in, to or under any of the rights, properties or assets of Purchaser or
the Company or otherwise to carry out this Agreement, the officers and directors
of the Surviving Corporation will be authorized to execute and deliver, in the
name and on behalf of Purchaser or the Company, all such deeds, bills of sale,
assignments and assurances and to take and do, in the name and on behalf of
Purchaser or the Company, all such other actions and things as may be necessary
or desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in the Surviving Corporation
or otherwise to carry out this Agreement.
23
<PAGE>
5.8 Insurance; Indemnity.
--------------------
(a) All rights to indemnification and exculpation from liabilities for
acts or omissions occurring at or prior to the Effective Time existing in favor
of the current or former directors or officers of the Company or each of its
Subsidiaries as provided in their respective certificate of incorporation or
bylaws (or comparable organizational documents) will be assumed by Parent and
Parent will be directly responsible for such indemnification, without further
action, as of the Effective Time and will continue in full force and effect in
accordance with their respective terms. In addition, from and after the
Effective Time, directors and officers of the Company who become or remain
directors or officers of Parent or the Surviving Corporation will be entitled to
the same indemnity rights and protections (including those provided by
directors' and officers' liability insurance) of Parent. Notwithstanding any
other provision hereof, the provisions of this Section 5.8 (i) are intended to
be for the benefit of, and will be enforceable by, each indemnified party, his
or her heirs and his or her representatives and (ii) are in addition to, and not
in substitution for, any other rights to indemnification or contribution that
any such Person may have by contract or otherwise.
(b) Parent will, and will cause the Surviving Corporation to, maintain in
effect for not less than three years after the Effective Time policies of
directors' and officers' liability insurance equivalent in all material respects
to those maintained by or on behalf of the Company and its Subsidiaries on the
date hereof (and having at least the same coverage and containing terms and
conditions which are no less advantageous to the Persons currently covered by
such policies as insured) with respect to matters existing or occurring at or
prior to the Effective Time; provided, however, that if the aggregate annual
premiums for such insurance at any time during such period exceed per annum rate
of premium currently paid by the Company and its Subsidiaries for such insurance
on the date of this Agreement, then Parent will cause the Surviving Corporation
to, and the Surviving Corporation will, provide the maximum coverage that shall
then be available at an annual premium equal to such rate.
5.9 Employee Benefits. Employees of the Company or its Subsidiaries as of
-----------------
the Effective Time shall remain employees of the Company or its Subsidiaries, as
applicable, immediately following the Effective Time. From and after the
Effective Time, the Surviving Corporation will have sole discretion over the
hiring, promotion, retention, firing and other terms and conditions of the
employment of employees of the Surviving Corporation. Subject to the
immediately preceding sentence, Parent will provide, or will cause the Surviving
Corporation to provide, for the benefit of employees of the Surviving
Corporation or its Subsidiaries who were employees of the Company immediately
prior to the Effective Time, at the election of Parent, employee benefit plans
that are either (a) in the aggregate substantially comparable to the employee
benefit plans provided to such individuals by the Company on the date hereof or
(b) in the aggregate substantially comparable to the employee benefit plans
provided to similarly situated employees of Parent or its subsidiaries who were
not employees of the Company immediately prior to the Effective Time; provided,
however, that notwithstanding the foregoing (i) nothing herein will be deemed to
require Parent to modify the benefit formulas under any pension plan of the
Company in a manner that increases the aggregate expenses thereof as of the date
hereof in order to comply with the requirements of ERISA, the Code or the Tax
Reform Act of 1986, (ii) employee stock ownership, stock option and similar
equity-based plans, programs and arrangements of the Company or any of its
Subsidiaries are not encompassed within the
24
<PAGE>
meaning of the term employee benefit plans hereunder, (iii) nothing herein will
obligate Parent or the Surviving Corporation to continue any particular employee
benefit plan for any period after the Effective Time and (iv) Parent may
substitute any benefit available to employees whom it determines are similarly
situated in other parts of its business for any employee benefit under any such
plan. Parent will cause the Surviving Corporation to honor (subject to any
withholdings under applicable Law) all employment, consulting and severance
agreements or arrangements to which the Company or any of its Subsidiaries is
presently a party, which are specifically disclosed in the Company Disclosure
Letter.)
5.10 Credit Agreement. At and as of the Effective Time, Parent shall
----------------
provide all necessary funds and shall cause the Company to pay off all
outstanding balances under the Credit Agreement.
VI. CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation To Effect the Merger. The
----------------------------------------------------------
respective obligations of each Party to effect the Merger will be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) The Purchaser shall have made, or caused to be made, the Offer
and shall have purchased, or caused to be purchased, the Shares pursuant to
the Offer, provided, that this condition shall be deemed to have been
satisfied with respect to the obligation of the Parent and the Purchaser to
effect the Merger if the Purchaser fails to accept for payment or pay for
Shares pursuant to the Offer in violation of the terms of the Offer or of
this Agreement;
(b) This Agreement shall have been approved in the manner required by
applicable Law by the holders of the issued and outstanding shares of
capital stock of the Company; and
(c) No Order or Law enacted, entered, promulgated, enforced or issued
by any court of competent jurisdiction or other Governmental Entity or
other legal restraint or prohibition (collectively, "Restraints")
preventing the consummation of the Merger shall be in effect.
6.2 Conditions to Obligation of Parent and Purchaser to Effect the Merger.
----------------------------------------------------------------------
The obligation of Parent and Purchaser to effect the Merger will be subject to
the fulfillment at or prior to the Closing Date (or such other date as may be
specified below) of the additional condition that the Company shall have
performed in all material respects its agreements contained in this Agreement
required to be performed on or prior to the Closing Date.
25
<PAGE>
ARTICLE VII. TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be terminated and
-----------------------------
the transactions contemplated hereby may be abandoned at any time prior to the
Purchase Date, before or after the approval of this Agreement by the
stockholders of the Company, by the mutual consent of Parent and the Company.
7.2 Termination by Either Parent or Company. This Agreement may be
---------------------------------------
terminated and the transactions contemplated hereby may be abandoned at any time
prior to the Purchase Date by action of the Board of Directors of either Parent
or the Company if (a) the Merger shall not have been consummated by December 31,
1999; provided, that no party may terminate this Agreement pursuant to this
Section 7.2(a) if such party's failure to fulfill any of its obligations under
this Agreement shall have been the reason that the Effective Time shall not have
occurred on or before said date, (b) any Governmental Entity shall have issued a
Restraint or taken any other action permanently enjoining, restraining or
otherwise prohibiting the consummation of the Offer, the Merger (or any of the
other transactions contemplated by this Agreement) and such Restraint or other
action shall have become final and nonappealable or (c) the Offer expires or is
terminated or withdrawn pursuant to its terms without any Shares being purchased
thereunder by the Purchaser as a result of the occurrence of any of the events
set forth in Annex A.
7.3 Termination by Company. This Agreement may be terminated and the
----------------------
transactions contemplated hereby may be abandoned at any time prior to the
Purchase Date, before or after the approval of the Agreement by the stockholders
of the Company, by action of the Board of Directors of the Company, if (a) there
has been a material breach by Parent or the Purchaser of any representation or
warranty contained in this Agreement which is not curable or, if curable, is not
cured by December 31, 1999 and such breach would have a Parent Material Adverse
Effect, (b) there has been a material breach of any of the covenants set forth
in this Agreement on the part of Parent or the Purchaser, which breach is not
curable or, if curable, is not cured within 30 days after written notice of such
breach is given by the Company to Parent or (c) in accordance with Section
5.2(b).
7.4 Termination by Parent. This Agreement may be terminated and the
---------------------
transactions contemplated hereby may be abandoned at any time prior to the
Purchase Date, before or after the approval of the Agreement by the stockholders
of the Company, by Parent, if (a) the Board of Directors of the Company shall
have (i) withdrawn or modified in a manner adverse to Parent or Purchaser its
approval or recommendation of this Agreement, the Offer or the Merger or failed
to reconfirm its approval or recommendation within five business days after a
written request to do so, (ii) approved or recommended, or proposed publicly to
approve or recommend, a third-party Company Takeover Proposal to the Company's
stockholders, (iii) caused the Company to take any action referred to in Section
5.2 that would have constituted a breach thereof but for the exceptions
thereunder, including without limitation authorizing the Company to enter into a
Company Acquisition Agreement, (iv) approved the breach of the Company's
obligation under Section 5.2, or (v) resolved to take any of the foregoing
actions, (b) there has been a material breach by the Company of any
representation or warranty contained in this Agreement which is not curable or,
if curable, is not cured by December 31, 1999 and such breach had or would have
a Company Material Adverse Effect, (c) there has been a material breach of any
of the covenants set forth in this Agreement on the part of the Company, which
breach is not curable or, if curable,
26
<PAGE>
is not cured within five days after written notice of such breach is given by
Parent to the Company or (d) any Person or group (as defined in Section 13(d)(3)
of the Exchange Act) other than the Parent, Purchaser or any of their respective
Affiliates shall have become the beneficial owner of more than 10% of the
shares.
7.5 Effect of Termination and Abandonment; Termination Fee.
------------------------------------------------------
(a) In the event of termination of this Agreement pursuant to this
Article VII, all obligations of the parties hereto will terminate, except the
obligations of the parties pursuant to Sections 7.5 and 8.14. In the event of
termination of this Agreement, nothing herein will prejudice the ability of the
non-breaching party from seeking damages from any other party for any prior
breach of this Agreement, including without limitation attorneys' fees and the
right to pursue any remedy at law or in equity.
(b) (i) If this Agreement is terminated at such time that this Agreement
is terminable pursuant to Sections 7.2, 7.3(c) or 7.4, then (A) the Company will
not later than two business days after receipt of notice from Parent pay to
Purchaser an amount equal to Parent's documented Expenses, not to exceed
$600,000 and (B) in the event that (x) a Company Takeover Proposal is made known
to the Company or any of its Subsidiaries or has been made directly to
stockholders generally or any Person publicly announces an intention (whether or
not conditional) to make a Company Takeover Proposal and (y) thereafter this
Agreement is terminated (i) by either Parent or the Company pursuant to Section
7.2(a) or (c) or (2) by the Company pursuant to Section 7.3(c) or by Parent
pursuant to Section 7.4(a) or (d) the Company will pay to Purchaser a fee of
$1,500,000 cash; provided, however, that, if this Agreement is terminated by
Parent as a result of a breach by the Company, Parent may pursue any remedies
available to it at law or in equity and will, in addition to its expenses, be
entitled to recover such additional amounts as Purchaser may be entitled to
receive at law or in equity, in the event of termination by the Company
immediately prior to and as a condition of such termination and in the event of
a termination by Parent not later than two business days after termination.
(ii) This Section 7.5(b) will survive any termination of this Agreement.
The term "Expenses" means all out-of-pocket fees, costs and other expenses
incurred or assumed by Parent or Purchaser or incurred on their behalf in
connection with this Agreement or any of the transactions contemplated hereby,
including but not limited to in connection with the negotiation, preparation,
execution and performance of this Agreement, the structuring and financing of
the Merger and the other transactions contemplated hereby, or any commitment or
agreements relating to such financing, including, without limitation, fees and
expenses payable to all banks, investment banking firms, other financial
institutions and other Persons and their respective agents and counsel for
arranging, committing to provide or providing any financing for the Merger and
any other transactions contemplated hereby or structuring, negotiating or
advising with respect to such transactions or financing, and all fees and
expenses of counsel, accountants, experts and environmental, actuarial,
insurance and other consultants to Parent or Purchaser.
(iii) The Company acknowledges that the agreements contained in this
Section 7.5 (b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Parent and Purchaser would not
enter into this Agreement; accordingly, if the Company fails promptly to pay any
amount due pursuant to this Section 7.5(b), and, in order to
27
<PAGE>
obtain such payment, Parent or Purchaser commences a suit which results in a
judgment against the Company for the fee set forth in this Section 7.5(b) , the
Company will pay to Parent and Purchaser their costs and expenses (including
attorneys' fees and expenses) in connection with such suit, together with
interest on the amount of the fee at the prime rate of Wells Fargo Bank, N.A. in
effect on the date such payment was required to be made.
VIII. GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements. All
---------------------------------------------------------
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement will terminate at the Effective
Time, except that the covenants set forth in Sections 5.7, 5.8 and 5.9 will
survive the Effective Time indefinitely.
8.2 Notices. Any notice required to be given hereunder will be sufficient
--------
if in writing, and sent by facsimile transmission and by courier service (with
proof of service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
If to Parent or Purchaser:
Innovex, Inc.
530 11th Avenue South
Hopkins, Minnesota 55343
Attention: William P. Murnane
President and Chief Operating Officer
Fax: (612) 979-0424
With copies to:
Dorsey & Whitney LLP
220 South Sixth Street
Pillsbury Center South
Minneapolis, Minnesota 55402
Attention: William B. Payne
Fax: (612) 340-8738
If to the Company:
ADFlex Solutions, Inc.
2001 W. Chandler Blvd.
Chandler, Arizona 85224
Attention: Neil Dial
President and Chief Operating Officer
Fax: (602) 786-8280
28
<PAGE>
With copies to:
Fennemore Craig
3003 North Central Avenue
Suite 2600
Phoenix, Arizona 85012-2913
Attention: Karen C. McConnell
Fax: (602) 816-5507
or to such other address as any party will specify by written notice so given,
and such notice will be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
8.3 Assignment; Binding Effect. Neither this Agreement nor any of the
--------------------------
rights, interests or obligations hereunder will be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon and will inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Section 5.8, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
8.4 Entire Agreement. This Agreement, Annex A, any documents delivered by
----------------
the parties in connection herewith and the confidentiality agreement between
Parent and the Company (the "Confidentiality Agreement") , which will survive
the execution and delivery of this Agreement, constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement will be binding
upon any party hereto unless made in writing and signed by all parties hereto.
8.5 Amendment. This Agreement may be amended by the parties hereto, by
---------
action taken by their respective Board of Directors, at any time before or after
approval of matters presented in connection with the Merger by the stockholders
of the Company but after any such stockholder approval, no amendment will be
made which by law requires the further approval of such stockholders without
obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.6 Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
8.7 Counterparts. This Agreement may be executed by the parties hereto in
------------
separate counterparts, each of which when so executed and delivered will be an
original, but all such counterparts will together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
29
<PAGE>
8.8 Headings. Readings of the Articles and Sections of this Agreement are
--------
for the convenience of the parties only, and will be given no substantive or
interpretive effect whatsoever.
8.9 Certain Definitions/Interpretations.
-----------------------------------
(a) For purposes of this Agreement:
(i) An "Affiliate" of any Person means another Person that directly
---------
or indirectly, through one or more intermediaries, controls, is controlled
by, or is under common control with, such first Person;
(ii) "Person" means an individual, corporation, partnership, limited
------
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(iii) "Knowledge" of any Person which is not an individual means the
---------
knowledge of any of such Person's executive officers after reasonable
inquiry.
(b) When a reference is made in this Agreement to an Article, Section or
Annex, such reference will be to an Article or section of, or an Annex to, this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and will not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they will be
deemed to be followed by the words "without limitation." The words "hereof,"
"herein" and "hereunder" and words of similar import when used in this Agreement
will refer to this Agreement as a whole and not to any particular provision of
this Agreement. All terms used herein with initial capital letters have the
meanings ascribed to them herein and all terms defined in this Agreement will
have such defined meanings when used in any certificate or other document made
or delivered pursuant hereto unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the plural
forms of such terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute defined or referred
to herein or in any agreement or instrument that is referred to herein means
such agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments incorporated
therein. References to a Person are also to its permitted successors and
assigns.
8.10 Waivers. Except as provided in this Agreement, no action taken
-------
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, will be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder will not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
30
<PAGE>
8.11 Incorporation of Annex A. Annex A attached hereto is hereby
------------------------
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
8.12 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction will, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision will be
interpreted to be only so broad as is enforceable.
8.13 Enforcement of Agreement. The parties hereto agree that irreparable
------------------------
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties will be entitled to seek an injunction
or injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware Court, this being in addition to
any other remedy to which they are entitled at law or in equity.
8.14 Expenses. All fees and expenses incurred in connection with the
--------
Offer, the Merger, this Agreement and the transactions contemplated thereby will
be paid by the party incurring such fees or expenses, whether or not the Merger
is consummated.
*****
31
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the
date first above written.
ADFLEX SOLUTIONS, INC.
By: /s/ Steve Sanghi
--------------------------------------
Title: Chairman
--------------------------------------
INNOVEX, INC.
By: /s/ Timothy S. McIntee
--------------------------------------
Timothy S. McIntee
Title: Senior Vice President - Corporate
--------------------------------------
INNOVEX ACQUISITION CORP.
By: /s/ Timothy S. McIntee
--------------------------------------
Timothy S. McIntee
Title: Senior Vice President
--------------------------------------
32
<PAGE>
ANNEX A
CONDITIONS TO COMPLETION OF THE OFFER
Notwithstanding any other provision of the Offer, the Purchaser will not be
required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating
to Purchaser's obligation to pay for or return tendered Shares promptly after
expiration or termination of the Offer), to pay for any Shares, and, subject to
any such rules or regulations, may postpone the acceptance for payment or
payment for any Shares tendered, and, subject to the terms of the Agreement, may
amend or terminate the Offer (whether or not any Shares have theretofore been
purchased or paid for pursuant to the Offer) (i) unless the following conditions
have been satisfied: (a) there have been validly tendered and not withdrawn
prior to the Purchase Date that number of Shares which constitutes a majority of
the total number of the then outstanding Shares (including for purposes of this
calculation all Shares issuable upon exercise of all vested options and all
options that will vest on or before December 31, 1999 and conversion of
convertible securities or other rights to purchase or acquire Shares) sufficient
to approve the Merger (the "Minimum Condition") and (b) any applicable waiting
periods under the HSR Act shall have expired or been terminated or (ii) if at
any time on or after the date of the Merger Agreement and before the Purchase
Date (whether or not any Shares have theretofore been accepted for payment or
paid for pursuant to the Offer), any of the following shall have occurred:
(i) any Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order which is in effect, or there shall be initiated,
instituted or pending any such action having any effect, and which (a)
restricts, prevents or prohibits consummation of the transactions
contemplated by this Agreement, including the Offer or the Merger, (b)
prohibits, limits or otherwise adversely affects the ownership or operation
by Parent or any of its Subsidiaries of all or any portion of the business
or assets of the Company and its Subsidiaries or compels the Company,
Parent or any of their Subsidiaries to dispose of or hold separate all or
any portion of the business or assets of the Company and its Subsidiaries,
or (c) imposes material limitations on the ability of the Purchaser to
exercise effectively full rights of ownership of any Shares, including the
right to vote any Shares acquired by the Purchaser pursuant to the Offer or
otherwise on all matters properly presented to the Company's stockholders;
(ii) the representations and warranties of the Company contained in
the Agreement shall not be true and correct in all material respects as of
the Purchase Date as though made anew as of such date;
(iii) the Company shall not have performed or complied in all
material respects with its covenants under the Agreement and such failure
continues until the later of (a) 15 calendar days after actual receipt by
it of written notice from Parent setting forth in detail the nature of such
failure or (b) the Purchase Date;
A-1
<PAGE>
(iv) there shall have occurred any change, effect, event or
condition constituting a Company Material Adverse Effect;
(v) the Agreement shall have been terminated in accordance with its
terms;
(vi) the Company Board shall have (a) withdrawn or materially
modified (including by amendment of Schedule 14D-9) in a manner adverse to
the Purchaser or Parent or taken a position inconsistent with its approval
or recommendation of the Offer, the Merger or this Agreement, (b) approved
or recommended any Company Takeover Proposal, (c) taken any action referred
to in Section 5.2 of the Agreement that is prohibited thereby or would be
so prohibited but for the exceptions thereto or (d) resolved or publicly
disclosed any intention to do any of the foregoing;
(vii) there shall have occurred (a) any general suspension of trading
in, or limitation on prices for, securities on the NYSE, (b) a decline of
at least 10% in either the Dow Jones Average of Industrial Stocks or the
Standard & Poor's 500 Index from the date of the Agreement, (c) the
declaration of a banking moratorium or any limitation or suspension of
payments in respect of the extension of credit by banks or other lending
institutions in the United States, (d) any commencement of war, armed
hostilities or other international or national calamity directly involving
the United States or having a significant adverse effect on the
functionality of financial markets in the United States, or (e) in the case
of any of the foregoing existing at the time of commencement of the Offer,
a material acceleration or worsening thereof; or
(viii) it shall have been publicly disclosed or Parent shall have
otherwise learned that (a) any Person or "group" (as defined in Section
13(d) (3) of the Exchange Act), other than Parent or its affiliates or any
group of which any of them is a member or any affiliates controlled by it,
shall have acquired beneficial ownership (determined pursuant to Rule 13d-3
promulgated under the Exchange Act) of more than 20% of the outstanding
Shares or (b) any Person or group shall have entered into a Company
Acquisition Agreement or an agreement in principle with respect thereto.
Notwithstanding the foregoing the institution of an action or suit that
challenges the transactions contemplated by this Agreement shall not be deemed
the failure of the foregoing conditions except in the circumstances described in
clause (i) above.
The foregoing conditions are for the sole benefit of the Purchaser and may
be waived by the Purchaser or Parent on behalf of Purchaser, in whole or in
part, from time to time in its sole discretion. The failure by the Purchaser at
any time to exercise any of the foregoing rights will not be deemed a waiver of
any such right and each such right will be deemed an ongoing right and may be
asserted at any time and from time to time.
A-2
<PAGE>
ANNEX E
Opinion
Of
BancBoston Robertson Stephens Inc
<PAGE>
[LETTERHEAD OF BANCBOSTON ROBERTSON STEPHENS APPEARS HERE]
July 1, 1999
Board of Directors
ADFlex Solutions, Inc.
2001 W. Chandler Boulevard
Chandler, Arizona
Members of the Board:
We understand that ADFlex Solutions, Inc. (the "Company"), Innovex, Inc.
("Acquiror") and Innovex Acquisition Corp, (a wholly owned subsidiary of
Acquiror, "Merger Sub") are proposing to enter into an Agreement and Plan of
Merger (the "Agreement") which will provide, among other things, for the Offer
and the Merger (as such terms are defined below). Under the terms, and subject
to the conditions, set forth in a draft of the Agreement dated June 30, 1999
(the "Draft Agreement"); (i) Merger Sub will commence a tender offer (the
"Offer") to purchase all of the outstanding shares of common stock of the
Company, par value $0.01 per share ("Company Common Stock") at a price of $3.80
per share, net to the seller in cash, and (ii) following the Offer, Merger Sub
will be merged with and into the Company (the "Merger"). Pursuant to the Merger,
the Company will become a wholly owned subsidiary of Acquiror and each share of
Company Common Stock (other than shares of Company Common Stock held in treasury
or owned by Acquiror or any of its subsidiaries or as to which dissenters'
rights have been properly exercised ("Dissenting Shares")) shall be converted
into the right to receive $3.80 in cash or any higher price paid for each Share
in the Offer, without interest. The terms and conditions of the Offer and the
Merger are set out more fully in the Agreement.
You have asked us whether, in our opinion, the cash consideration to be paid
in the Offer and the Merger is fair from a financial point of view and as of the
date hereof to the "Holders of Company Common Stock". The "Holders of Company
Common Stock" shall be defined as all holders of Company Common Stock other than
Acquiror, Merger Sub, any affiliates of Acquiror or Merger Sub or any holders of
Dissenting Shares.
For purposes of this opinion we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the Company's
management;
(iii) reviewed certain financial forecasts and other forward looking
financial information prepared by the Company's management;
(iv) reviewed with the Company's management the publicly available
consensus estimates of research analysis on the Company's future
financial performance;
(v) held discussions with the management of the Company concerning the
business, past and current operations, financing needs, financial
condition and future prospects of the Company;
(vi) reviewed the financial terms and conditions set forth in the Draft
Agreement;
<PAGE>
Board of Directors
ADFlex Solutions, Inc.
July 1, 1999
Page 2
(vii) reviewed the stock price and trading history of the Company.
(viii) compared the financial performance of the Company and the prices
and trading activity of Company Common Stock with that of certain
other publicly traded companies comparable with the Company;
(ix) compared the financial terms of the Offer and the Merger with the
financial terms, to the extent publicly available, of other
transactions that we deemed relevant;
(x) prepared a discounted cash flow analysis of the Company;
(xi) participated in discussions and negotiations among
representatives of the Company and Acquiror and their financial
and legal advisors; and
(xii) made such other studies and inquires, and took into account such
other matters as we deemed relevant, including our assessment of
general economic, market and monetary conditions .
In our review and analysis, and in arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of all of the financial and other
information provided to us (including information furnished to us orally or
otherwise discussed with us by Company management) or publicly available and
have neither attempted to verify, nor assumed responsibility for verifying, any
of such information. Except as set forth below, we have relied upon the
assurances of Company management that it is not aware of any facts that would
make such information inaccurate or misleading. Furthermore, we did not obtain
or make, or assume any responsibility for obtaining or making, any independent
evaluation or appraisal of the properties, assets or liabilities (contingent or
otherwise) of the Company, nor were we furnished with any such evaluation or
appraisal. With respect to the financial forecasts and projections (and the
assumptions and bases therefor) for the Company prepared by research analysts
that we have reviewed, upon the advice of the Company's management, we have
assumed that such forecasts and projections have been reasonably prepared in
good faith on the basis of reasonable assumptions and reflect the best currently
available estimates and judgments as to the future financial condition and
performance of the Company, and we have further assumed that such projections
and forecasts will be realized in the amounts and in the time periods currently
estimated. The Company's management has informed us that management's forecasts
and projections for the Company are currently out of date and that it would be
impractical to update the information. As a result, we have not relied on the
financial forecasts and projections of the Company's management for any of our
analyses. We have assumed that the Offer and the Merger will be consummated upon
the terms set forth in the Draft Agreement without material alteration thereof.
In addition, we have assumed that the historical financial statements of the
Company reviewed by us have been prepared and fairly presented in accordance
with U.S. generally accepted accounting principles consistently applied. We have
also assumed that the amount of the cash consideration to be paid in the Offer
and the Merger will not be reduced as a result of indemnification or other
provisions of the Draft Agreement. We have relied as to all legal matters
relevant to rendering our opinion on the advice of counsel.
This opinion is necessarily based upon market, economic and other conditions as
in effect on, and information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect the conclusion
expressed in this opinion and that we disclaim any undertaking or obligation to
advise any person of any change in any matter affecting this opinion which may
come or be brought to our attention after the date of this opinion. Our opinion
is limited to the fairness, from a financial point of view and as to the date
hereof, to the Holders of Company Common Stock of the cash consideration to be
paid in the Offer and the Merger. We do not express any opinion as to (i) the
value of any employee agreement or other arrangement entered into in connection
with the Offer and the Merger or (ii) any tax or other consequences that might
result from the Offer and the Merger. Our opinion does not address the
<PAGE>
Board of Directors
ADFlex Solutions, Inc.
July 1, 1999
Page 3
relative merits of the Offer and the Merger and the other business strategies
that the Company's Board of Directors has considered or may be considering, nor
does it address the decision of the Company's Board of Directors to proceed with
the Offer and the Merger.
We are acting as financial advisor to the Company in connection with the Offer
and the Merger and will receive (i) a fee contingent upon the delivery of this
opinion and (ii) an additional fee contingent upon the consummation of the Offer
and the Merger. In addition, the Company has agreed to indemnify us for certain
liabilities that may arise out of our engagement. In the past we acted as lead
manager in the Company's initial public offering as well as lead manager in the
secondary offering. We maintain a market in the shares of Company Common Stock.
In the ordinary course of business, we may trade in the Company's securities and
Acquiror's securities for our own account and the account of our customers and,
accordingly, may at any time hold a long or short position on the Company's
Securities or Acquiror's securities.
BankBoston N.A., an affiliate of BancBoston Robertson Stephens Inc., is the
Company's primary lender. As of June 25, 1999, the Company's principal amount of
indebtedness to BankBoston N.A. was approximately $33.8 million (the "BankBoston
Indebtedness"). The Company is in covenant default with respect to the
BankBoston Indebtedness and has been in such covenant default since the first
quarter of 1999. Pursuant to the terms of the agreements entered into in
connection with the BankBoston Indebtedness (the "Loan Documents"), BankBoston
N.A., on behalf of the lender group, has the ability to immediately accelerate
and demand payment of the BankBoston Indebtedness. In May 1999, the Company
requested that BankBoston N.A., on behalf of the lender group, enter into a
forbearance agreement with respect to the BankBoston Indebtedness. In June 1999,
BankBoston N.A. refused this request. Although BankBoston N.A. has not
accelerated or demanded payment of the BankBoston Indebtedness, BankBoston N.A.
has reserved its rights to take any actions and to seek any remedies available
to it under the Loan Documents. If the Offer and Merger are consummated as
contemplated in the Draft Agreement, we understand that Acquiror intends to
repay the BankBoston Indebtedness in its entirety and BankBoston N.A. may
receive certain additional fees related to the prepayment of the BankBoston
Indebtedness. The Board of Directors of the Company understands that BankBoston
N.A. will benefit from the consummation of the Offer and the Merger and the
repayment of the BankBoston Indebtedness.
Our opinion expressed herein is provided for the information of the Board of
Directors of the Company in connection with its evaluation of the Offer and the
Merger. Our opinion is not intended to be and does not constitute a
recommendation to any stockholder of the Company whether or not to tender
his/her shares of Company Common Stock in the Offer or, if required, how to
vote, or whether or not to take any other action, with respect to the Offer or
the Merger. This opinion may not be summarized, described or referred to or
furnished to any party except with our express prior written consent.
Based upon and subject to the foregoing considerations, it is our opinion that,
as of the date hereof, the cash consideration to be paid in the Offer and the
Merger is fair to the Holders of Company Common Stock from a financial point of
view.
Very truly yours,
BANCBOSTON ROBERTSON STEPHENS INC.
/s/ BancBoston Robertson Stephens Inc.
--------------------------------------
<PAGE>
ANNEX F
Section 262
Of The
Delaware General Corporation Law
<PAGE>
Annex F
DELAWARE CODE ANNOTATED
Copyright (c) 1975-1998 by The State of Delaware
All rights reserved.
*** THIS SECTION IS CURRENT THROUGH THE 1998 SUPPLEMENT ***
*** (1998 REGULAR SESSION OF THE 139TH GENERAL ASSEMBLY) ***
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 Del. C. (S) 262 (1998)
(S) 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to (S) 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to (S)(S) 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
1
<PAGE>
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under (S) 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to (S) 228 or (S) 253
of this title, each consitutent corporation, either before the effective date of
the merger or consolidation or within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constitutent corporation who
are entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in such
notice a copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be given by
the surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constitutent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be
2
<PAGE>
prima facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constitutent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
3
<PAGE>
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
HISTORY: 8 Del. C. 1953, (S) 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, (S)
24; 57 Del. Laws, c. 148, (S)(S) 27-29; 59 Del. Laws, c. 106, (S) 12; 60 Del.
Laws, c. 371, (S)(S) 3-12; 63 Del. Laws, c. 25, (S) 14; 63 Del. Laws, c. 152,
(S)(S) 1, 2; 64 Del. Laws, c. 112, (S)(S) 46-54; 66 Del. Laws, c. 136, (S)(S)
30-32; 66 Del. Laws, c. 352, (S) 9; 67 Del. Laws, c. 376, (S)(S) 19, 20; 68 Del.
Laws, c. 337, (S)(S) 3, 4; 69 Del. Laws, c. 61, (S) 10; 69 Del. Laws, c. 262,
(S)(S) 1-9; 70 Del. Laws, c. 79, (S) 16; 70 Del. Laws, c. 186, (S) 1; 70 Del.
Laws, c. 299, (S)(S) 2, 3; 70 Del. Laws, c. 349, (S) 22; 71 Del. Laws, c. 120,
(S) 15; 71 Del. Laws, c. 339, (S)(S) 49-52.
NOTES: REVISOR'S NOTE. --Section 30 of 67 Del. Laws, c. 376, provides: "This act
shall become effective on July 1, 1990." Chapter 376 was signed by the Governor
on July 17, 1990.
Section 5 of 68 Del. Laws, c. 337, provides: "This act shall become effective
on July 1, 1992, provided that (S)(S) 3 and 4 shall be effective only with
respect to mergers or consolidations consummated pursuant to an agreement of
merger or consolidation entered into after July 1, 1992."
Section 12 of 69 Del. Laws, c. 61, provides: "This bill shall become effective
on July 1, 1993."
Section 10 of 69 Del. Laws, c. 262, provides: "This act shall become effective
July 1, 1994, and shall apply only with respect to mergers or consolidations
consummated pursuant to an agreement of merger or consolidation entered into
after July 1, 1994."
Section 23 of 70 Del. Laws, c. 79, provides: "This act shall be effective on
July 1, 1995."
Section 24 of 70 Del. Laws, c. 349, provides: "This act shall be effective on
July 1, 1996."
Section 32 of 71 Del. Laws, c. 120, provides: "This act shall be effective on
July 1, 1997, except that (S) 5 of this act shall become effective with respect
to indemnification of expenses (including attorneys' fees) for acts or omissions
occurring on or after July 1, 1997."
Section 114 of 71 Del. Laws, c. 339, provides: "This act shall be effective on
July 1, 1998, except that (S)(S) 43 through 46, 48, 54 and 56 of this act shall
become effective with respect to agreements of merger or consolidation entered
into on or after July 1, 1998."
4
<PAGE>
EFFECT OF AMENDMENTS. --67 Del. Laws, c. 376, substituted "who was such on the
record ... subsection (b) or (c) hereof" for "entitled to such appraisal rights"
in the first sentence of (d)(1), and inserted "thereby" in the last sentence of
(d)(2).
68 Del. Laws, c. 337, inserted "or designated as a national market system
security ... Dealers, Inc." in (b)(1)(i) and (b)(2)b.
69 Del. Laws, c. 61, substituted "258, 263 or 264" for "258 or 263" in the
first sentence of (b); and substituted "258, 263 and 264" for "258 and 263" in
the introductory language of (b)(2).
69 Del. Laws, c. 262, added "and the words ... with the depository" to the end
of the second sentence in (a); in (b)(1), substituted "which stock, or
depository receipts in respect thereof" for "which" in the introductory language
and substituted "holders" for "stockholders" in clause (ii); added "or
depository receipts in respect thereof" in (b)(2)a.; in (b)(2)b., substituted
"or depository receipts in respect thereof, which shares of stock or depository
receipts" for "which" and substituted "holders" for "stockholders"; in (b)(2)c.,
substituted "or fractional depository receipts" for "of the corporations"; and
in (b)(2)d., inserted "depository receipts" and inserted "or fractional
depository receipts."
70 Del. Laws, c. 79, substituted "subsections (f) or (g)" for "subsection (f)"
near the end of (b)(1).
70 Del. Laws, c. 299, effective Feb. 1, 1996, inserted "(other than a merger
effected pursuant to (S) 251(g) of this title)" in the introductory language of
(b); and substituted "subsection (f)" for "subsections (f) or (g)" near the end
of (b)(1).
70 Del. Laws, c. 349, rewrote (d)(2).
71 Del. Laws, c. 120, inserted "(or depository receipts in respect thereof)"
in (b)(2)b.
71 Del. Laws, c. 339, made gender neutralization changes throughout (d)(1),
(e), (h) and (k).
PURPOSE. --The primary purpose of this section is to protect the contractual
rights of stockholders objecting to a corporate merger. Root v. York Corp., Del.
Ch., 39 A.2d 780 (1944).
The purpose of the appraisal statute is to replace the stockholder's veto
power with a means of withdrawing from the company at a judicially determined
price. Salomon Bros. v. Interstate Bakeries Corp., Del. Ch., 576 A.2d 650
(1989)Cede & Co. v. Technicolor, Inc., Del. Supr., 684 A.2d 289 (1996).
The purpose of an appraisal action is not to punish the respondent
corporation. The court must only award interest to fairly compensate dissenting
shareholders for their losses incurred during the pendency of an appraisal;
there is no punitive aspect of an appraisal proceeding. Rapid-American Corp. v.
Harris, Del. Supr., 603 A.2d 796 (1992).
LEGISLATIVE INTENT. --Clearly, there is a legislative intent to fully compensate
shareholders for whatever their loss may be, subject only to the narrow
limitation that one cannot take speculative effects of the merger into account.
Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701 (1983).
An appraisal proceeding is a limited legislative remedy intended to provide
shareholders dissenting from a merger on grounds of inadequacy of the offering
price with a judicial determination of the intrinsic worth (fair value) of their
shareholdings. Cede & Co. v. Technicolor, Inc., Del. Supr., 542 A.2d 1182
(1988).
The appraisal remedy is entirely a creature of statute; it is a limited
legislative remedy developed initially as a means to compensate shareholders of
Delaware corporations for the loss of their common law right to prevent a merger
or consolidation by refusal to consent to such transactions. Alabama By-Products
Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Del. Supr., 657 A.2d 254
(1995).
Appraisal remedy is intended to provide those shareholders who dissent from a
merger on the basis of inadequacy of offering price with an independent judicial
determination of the fair value of their shares. Alabama By-Products Corp. v.
Cede & Co. ex rel. Shearson Lehman Bros., Del. Supr., 657 A.2d 254 (1995).
LIBERAL CONSTRUCTION of the appraisal statute requires the avoidance of
complexities in proceedings under it, particularly where the corporation will
not be subjected to risks of liability. In re Northeastern Water Co., Del. Ch.,
38 A.2d 918 (1944).
This section is clearly for the protection of objecting shareholders, and it
should be liberally construed to that end. Schenck v. Salt Dome Oil Corp., Del.
Ch., 34 A.2d 249 (1943), rev'd on other grounds, Del. Supr., 41 A.2d 583 (1945),
overruled on other grounds, Raynor v. LTV Aerospace Corp., Del. Ch., 331 A.2d
393 (1975); In re Universal Pictures Co., Del. Ch., 37 A.2d 615 (1944).
While this section should be liberally construed for the protection of
objecting shareholders, a liberal construction does not call for an abandonment
of orderly procedure prescribed by the statute. In re Northeastern Water Co.,
Del. Ch., 38 A.2d 918 (1944).
5
<PAGE>
The design of this section requires the avoidance of complexities in
proceedings under it. Lichtman v. Recognition Equip., Inc., Del. Ch., 295 A.2d
771 (1972); Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
The requirements of this section are to be liberally construed for the
protection of objecting stockholders, within the boundaries of orderly corporate
procedures and the purpose of the requirement. Raab v. Villager Indus., Inc.,
Del. Supr., 355 A.2d 888, cert. denied, 429 U.S. 853, 97 S. Ct. 147, 50 L. Ed.
2d 129 (1976).
CONSTRUCTION OF SECTION WITH (S) 228 OF THIS TITLE. --Because of the general
applicability of (S) 228 of this title, the absence of specific language
regarding written consent in paragraph (b)(1) of this section does not compel
the conclusion that the market exception applies only to mergers approved at a
meeting of shareholders; (S) 228 allows approval by written consent for any
action which is required to be taken at a meeting of shareholders and thus
paragraph (b)(1) of this section need not separately mention written consent for
(S) 228 to apply. Klotz v. Warner Communications, Inc., Del. Supr., 674 A.2d 878
(1995).
CONSTRUCTION OF SECTION WITH (S) 253 OF THIS TITLE. --Despite similarities
between the short-form merger procedure and merger approval by written consent,
the lack of a paragraph granting appraisal in the latter circumstance is a
crucial difference. Klotz v. Warner Communications, Inc., Del. Supr., 674 A.2d
878 (1995).
STRICT COMPLIANCE REQUIRED. --Strict compliance with this section is necessary
for a shareholder to withdraw or be dismissed from an appraisal action. Alabama
By-Products Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Del. Supr., 657
A.2d 254 (1995).
SCOPE OF SECTION. --This section does not extend appraisal rights if a merger
was approved by written consents when the market exception would otherwise
apply. Klotz v. Warner Communications, Inc., Del. Supr., 674 A.2d 878 (1995).
APPLICABILITY OF EQUITABLE PRINCIPLES. --There is no basis for expanding the
limited remedy which is provided for in this section by the invocation of
equitable principles. In re Enstar Corp., Del. Supr., 604 A.2d 404 (1992).
PURPOSE OF NOTICE REQUIREMENT. --A Notice of Merger filed pursuant to this
section and (S) 262 of this title is primarily intended to notify the
stockholders of action being taken by the parent corporation and to apprise the
stockholders of their appraisal remedy. Zirn v. VLI Corp., Del. Supr., 681 A.2d
1050 (1996).
AUTHORITY TO REFORM SETTLEMENT AGREEMENT PREMISED UPON UNILATERAL MISTAKE. --The
provision in this section which gives the Court of Chancery authority to impose
"just terms" as a condition of its approval of a statutory appraisal proceeding,
does not give it authority to reform a settlement agreement that was premised
upon a unilateral mistake. In re Enstar Corp., Del. Supr., 604 A.2d 404 (1992).
CASES DECIDED UNDER THIS SECTION MUST BE CONSIDERED IN DETERMINING STOCKHOLDERS'
RIGHTS. In re Delaware Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del. Supr.,
213 A.2d 203 (1965).
THIS SECTION FURNISHES ORDERLY METHOD FOR WITHDRAWAL FROM CORPORATION by
shareholders who dissent from a merger or consolidation. Loeb v. Schenley
Indus., Inc., Del. Ch., 285 A.2d 829 (1971).
AVAILABILITY OF APPRAISAL RIGHTS SHOULD BE TAKEN INTO ACCOUNT AS FACTOR IN
ASSESSING WHETHER TRANSACTION IS ENTIRELY FAIR, even though its existence alone
is insufficient to establish that the transaction is fair. Tanzer v.
International Gen. Indus., Inc., Del. Ch., 402 A.2d 382 (1979).
RIGHT TO APPRAISAL IS GIVEN BY THIS SECTION. By this section, a stockholder is
required to comply with certain prescribed conditions precedent before his right
to an appraisal and payment can arise. These conditions must be satisfied before
the right to payment arises: If there is no right to payment, there can be no
right to an appraisal. Stephenson v. Commonwealth & S. Corp., Del. Ch., 156 A.
215 (1931), aff'd, Del. Supr., 168 A. 211 (1933).
6
<PAGE>
The appraisal right is given to the stockholder in compensation for his former
right at common law to prevent a merger. Heilbrunn v. Sun Chem. Corp., Del.
Supr., 150 A.2d 755 (1959).
A dissenting stockholder has an absolute right to an appraisal. Felder v.
Anderson, Clayton & Co., Del. Ch., 159 A.2d 278 (1960); Kaye v. Pantone, Inc.,
Del. Ch., 395 A.2d 369 (1978).
The right to an appraisal in a merger proceeding is entirely a creature of
statute. Loeb v. Schenley Indus., Inc., Del. Ch., 285 A.2d 829 (1971); Kaye v.
Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
The right to appraisal is purely statutory. It is limited to stockholders of
the merged corporation. Lichtman v. Recognition Equip., Inc., Del. Ch., 295 A.2d
771 (1972).
The right of a dissentient to appraisal is perfected by compliance with the
statutory requirements of written objection to the merger and demand for payment
of the value of his shares. Lichtman v. Recognition Equip., Inc., Del. Ch., 295
A.2d 771 (1972).
The statutory right of appraisal is given the shareholder as compensation for
the abrogation of the common-law rule that a single shareholder could block a
merger. Francis I. duPont & Co. v. Universal City Studios, Inc., Del. Ch., 343
A.2d 629 (1975); Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
Stockholders objecting to merger are entitled to preserve their statutory
rights to an appraisal of the intrinsic value of their shares. Weinberger v.
United Fin. Corp., Del. Ch., 405 A.2d 134 (1979).
The right to an appraisal is limited to stockholders of the merged
corporations. Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
AN APPRAISAL DECISION WILL BE OVERTURNED only if the trial court abused its
discretion. Rapid-American Corp. v. Harris, Del. Supr., 603 A.2d 796 (1992).
A court abuses its discretion in an appraisal proceeding when its factual
findings do not have record support, and its valuation is not the result of an
orderly and logical deductive process. Rapid-American Corp. v. Harris, Del.
Supr., 603 A.2d 796 (1992).
WHEN INADEQUATE CASH PRICE PER SHARE IS THE BASIS FOR OBJECTION TO A CORPORATE
MERGER, the remedy of the dissatisfied shareholders is to seek an appraisal of
the value of their shares pursuant to the procedures set forth under this
section. Singer v. Magnavox Co., Del. Ch., 367 A.2d 1349 (1976), aff'd in part
and rev'd in part, Del. Supr., 380 A.2d 969 (1977).
ANALOGY TO EMINENT DOMAIN. --The power of a stockholder majority to override
minority dissenters and remit to them the cash appraisal remedy is analogous to
the right of eminent domain. Francis I. duPont & Co. v. Universal City Studios,
Inc., Del. Ch., 343 A.2d 629 (1975).
An appraisal is a method of paying a shareholder for taking his property.
Francis I. duPont & Co. v. Universal City Studios, Inc., Del. Ch., 343 A.2d 629
(1975).
An appraisal under this section is a method for compensating a stockholder for
the involuntary taking of his property. Kaye v. Pantone, Inc., Del. Ch., 395
A.2d 369 (1978).
STOCKHOLDER'S STATUS IS EXPRESSLY DEFINED in an appraisal proceeding. He has
lost for the time being all the substantial rights of a stockholder -- the right
to vote, the right to receive dividends, and the right to receive any
distribution upon the shares. His status is primarily that of a monetary
claimant against the consolidated or surviving corporation, and is more nearly
analogous to that of a creditor than to that of a stockholder. Southern Prod.
Co. v. Sabath, Del. Supr., 87 A.2d 128 (1952).
The effect of an appraisal action is to convert the status of the plaintiffs
therein from that of stockholders of the corporation to that of creditors
thereof. Braasch v. Goldschmidt, Del. Ch., 199 A.2d 760 (1964); Kaye v. Pantone,
Inc., Del. Ch., 395 A.2d 369 (1978).
UNREGISTERED STOCKHOLDER MAY NOT DISSENT FROM MERGER AND DEMAND APPRAISAL OF HIS
STOCK. Salt Dome Oil Corp. v. Schenck, Del. Supr., 41 A.2d 583 (1945); American
Hdwe. Corp. v. Savage Arms Corp., Del. Supr., 136 A.2d 690 (1957); Coyne v.
Schenley Indus., Inc., Del. Supr., 155 A.2d 238 (1959); Olivetti Underwood Corp.
v. Jacques Coe & Co., Del. Supr., 217 A.2d 683 (1966); Carl M. Loeb, Rhoades &
Co. v. Hilton Hotels Corp., Del. Supr., 222 A.2d 789 (1966).
7
<PAGE>
REGISTERED HOLDER MUST BE PRESUMED TO BE "STOCKHOLDER." --Where there are no
facts indicating that a person was not within the statutory classification of
this section, unless such facts appear, he, as a registered holder, must be
presumed to be a "stockholder." In re Universal Pictures Co., Del. Ch., 37 A.2d
615 (1944), overruled on other grounds in Raynor v. LTV Aerospace Corp., Del.
Ch., 331 A.2d 393 (1975).
PURCHASE OF STOCK WITH NOTICE OF CONTESTED TRANSACTION. --The term "stockholder"
as used in this section should not be construed to exclude one who purchases
with notice of the contested transaction. Salomon Bros. v. Interstate Bakeries
Corp., Del. Ch., 576 A.2d 650 (1989).
The right to appraisal is not lost for the reason that the stockholder
purchased those shares after the terms of a merger had been announced. Salomon
Bros. v. Interstate Bakeries Corp., Del. Ch., 576 A.2d 650 (1989).
PERSONS WHOSE SHARES ARE HELD IN "STREET" OR NOMINEE NAMES ARE NOT "STOCKHOLDERS
OF RECORD." Enstar Corp. v. Senouf, Del. Supr., 535 A.2d 1351 (1987).
Where shares of publicly traded corporations are held in the name of brokers
or fiduciaries (commonly called "street name") for the account of the beneficial
owners, the brokers or fiduciaries are the stockholders of record. Berlin v.
Emerald Partners, Del. Supr., 552 A.2d 482 (1988).
OBLIGATION OF CORPORATION UNDER SECTION. --A corporation of this State, engaged
in proceedings under this section, shall have an obligation to issue specific
instructions to its stockholders as to the correct manner of executing and
filing a valid demand under this section. As a general rule in the future,
failure by the corporation to furnish such instructions will result in the
resolution in favor of the stockholder of all doubt as to the sufficiency, for
corporate purposes, of the demand. Raab v. Villager Indus., Inc., Del. Supr.,
355 A.2d 888, cert. denied, 429 U.S. 853, 97 S. Ct. 147, 50 L. Ed. 2d 129
(1976); Tabbi v. Pollution Control Indus., Inc., Del. Ch., 508 A.2d 867 (1986),
overruled on other grounds, Del. Supr., 535 A.2d 1351 (1987).
GENERAL ASSEMBLY HAS EXPRESSLY GRANTED APPRAISAL RIGHT ONLY UNDER THE MERGER
STATUTES and not under the sale of assets statutes. This difference in treatment
of the rights of dissenting stockholders may well have been deliberate in order
to allow even greater freedom of action to corporate majorities in arranging
combinations than is possible under the merger statutes. Hariton v. Arco Elecs.,
Inc., Del. Ch., 182 A.2d 22 (1962), aff'd, Del. Supr., 188 A.2d 123 (1963).
COURT OF CHANCERY IS GIVEN GENERAL CONTROL OVER APPRAISAL in a proceeding in the
nature of a class suit, to which the corporation and all dissenting stockholders
are made parties and in which they are subjected to the jurisdiction of the
Court. Southern Prod. Co. v. Sabath, Del. Supr., 87 A.2d 128 (1952); Raynor v.
LTV Aerospace Corp., Del. Ch., 317 A.2d 43 (1974).
POWERS GIVEN BY THIS SECTION ARE NOT WITHIN INHERENT JURISDICTION OF COURT OF
CHANCERY. --The rights and powers given by this section are in no sense
declaratory of the ancient equity jurisdiction of the English Court of Chancery,
and are not within the original inherent jurisdiction of this Court of Chancery;
they are additional powers given by the General Assembly, pursuant to Art. IV,
(S) 20, Del. Const. Schenck v. Salt Dome Oil Corp., Del. Ch., 34 A.2d 249
(1943), rev'd on other grounds, Del. Supr., 41 A.2d 583 (1945).
UNDER CERTAIN CIRCUMSTANCES CHANCELLOR'S POWER TO FASHION APPROPRIATE RELIEF IS
BROAD. --Under certain circumstances, particularly where fraud,
misrepresentation, self-dealing, deliberate waste of corporate assets or gross
and palpable overreaching are involved, the chancellor's powers are complete to
fashion any form of equitable and monetary relief as may be appropriate,
including rescissory damages. Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701
(1983).
CHANCELLOR'S DISCRETION IS NOT LIMITED TO SINGLE REMEDIAL FORMULA FOR MONETARY
DAMAGES IN CASH-OUT MERGER. Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701
(1983).
ISSUES, PARTIES, ETC., TO ACTION. --In an appraisal action, the only litigable
issue is the determination of the value of the appraisal petitioners' shares on
the date of the merger, the only party defendant is the surviving
8
<PAGE>
corporation and the only relief available is a judgment against the surviving
corporation for the fair value of the dissenters' shares. Cede & Co. v.
Technicolor, Inc., Del. Supr., 542 A.2d 1182 (1988).
CLAIMS OF WRONGDOING. --The court correctly denied the motion to amend and
enlarge the appraisal action to include a claim for rescissory relief for
conspiracy, illegality, fraud, and breach of fiduciary duty, as a determination
of fair value does not involve an inquiry into claims of wrongdoing in the
merger. Cede & Co. v. Technicolor, Inc., Del. Supr., 542 A.2d 1182 (1988).
A fraud action asserting fair dealing and fair price claims affords an
expansive remedy and is brought against the alleged wrongdoers to provide
whatever relief the facts of a particular case may require and the approach to
determining relief may be the same as that employed in determining fair value;
however, an appraisal action may not provide a complete remedy for unfair
dealing or fraud because a damage award in a fraud action may include
"rescissory damages if the [trier of fact] considers them susceptible of proof
and a remedy appropriate to all issues of fairness before him." Cede & Co. v.
Technicolor, Inc., Del. Supr., 542 A.2d 1182 (1988).
Where the wrongdoing alleged by minority stockholder in his stock appraisal
action under this section directly related to the fair value of his stock, and
not to the validity of the merger itself; the claim was more personal than
derivative, and the corporate opportunity claim was properly asserted in the (S)
262 proceeding. Cavalier Oil Corp. v. Harnett, Del. Supr., 564 A.2d 1137 (1989).
FORMALITY AND LEGAL TECHNICALITY REQUIRED OF DEMAND. --A demand under this
section requires the formality and legal technicality befitting a last step in
the final transaction between the corporation and its dissenting stockholder.
Raab v. Villager Indus., Inc., Del. Supr., 355 A.2d 888, cert. denied, 429 U.S.
853, 97 S. Ct. 147, 50 L. Ed. 2d 129 (1976).
CORPORATION, LIKE STOCKHOLDER, IS GIVEN RIGHT TO INITIATE PROCEEDING and bring
the stockholder into court for the purpose of appraising his stock. Southern
Prod. Co. v. Sabath, Del. Supr., 87 A.2d 128 (1952).
A determination of the value of corporate stock may be commenced by the
surviving corporation or any stockholder who timely demands an appraisal. Kaye
v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
THIS SECTION PROVIDES FOR PAYMENT OF CASH AS WELL AS SECURITIES to an objecting
stockholder. In re Delaware Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del.
Supr., 213 A.2d 203 (1965).
THIS SECTION PURPORTS TO FURNISH EXCLUSIVE REMEDY to a dissenting shareholder
and is to be distinguished from a stockholder's common-law right to seek to have
a merger enjoined. Loeb v. Schenley Indus., Inc., Del. Ch., 285 A.2d 829 (1971).
PROOF ESTABLISHING RIGHT TO APPRAISAL. --Since stockholders are given an
absolute right to proceed under this section, proof that they have complied with
its requirements is enough to establish their right to an appraisal. Kaye v.
Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
PARTIES ENTITLED TO PARTICIPATE. --Once an appraisal action is commenced, all
stockholders who have demanded an appraisal are entitled to participate in the
proceedings and awards. Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
DISSENTING SHAREHOLDERS ARE NOT ENTITLED TO PRELIMINARY DETERMINATION BY COURT.
- --Dissenting stockholders who elect to have their shares appraised are required
to await the outcome of the statutory scheme before receiving payment for their
shares with interest and are not entitled to have the court make a preliminary
determination (without benefit of an appraiser's report) fixing a minimum value
for their shares and ordering the payment of such value pending formal
appraisal. Loeb v. Schenley Indus., Inc., Del. Ch., 285 A.2d 829 (1971).
PERSONS NO LONGER RECORD STOCKHOLDERS AT MERGER DATE. --Persons who were record
stockholders as of the record date for the vote on the merger, and who filed a
timely demand for appraisal, but who
9
<PAGE>
were no longer stockholders of record as of the merger date were not entitled to
appraisal. Tabbi v. Pollution Control Indus., Inc., Del. Ch., 508 A.2d 867
(1986), overruled on other grounds, Del. Supr., 535 A.2d 1351 (1987).
A VALID DEMAND MUST BE EXECUTED BY OR ON BEHALF OF THE HOLDER OF RECORD, whether
that holder is the beneficial owner, a trustee, agent or nominee. Enstar Corp.
v. Senouf, Del. Supr., 535 A.2d 1351 (1987).
SIGNATURES REQUIRED FOR DEMAND. --A demand under this section must be properly
and formally signed by or for all stockholders of record. Raab v. Villager
Indus., Inc., Del. Supr., 355 A.2d 888, cert. denied, 429 U.S. 853, 97 S. Ct.
147, 50 L. Ed. 2d 129 (1976).
AS A GENERAL PROPOSITION DISSENTING STOCKHOLDERS ARE PUT TO ELECTION by this
section. Cole v. National Cash Credit Ass'n, Del. Ch., 156 A. 183 (1931).
A stockholder objecting to a merger or consolidation may withdraw from the
enterprise and obtain payment in money for the value of his stock by following
the procedure prescribed by the statute. As a general proposition dissenting
stockholders are thus put to an election by the statute. Porges v. Vadsco Sales
Corp., Del. Ch., 32 A.2d 148 (1943).
The objectant to a merger has an election of remedies. He may dissent and then
receive in the manner fixed by the statute the value of his stock, or, if no
dissent, then he is bound by the merger. Langfelder v. Universal Lab., Inc., 68
F. Supp. 209 (D. Del. 1946), aff'd, 163 F.2d 804 (3d Cir. 1947).
Upon the completion of the steps required to perfect the right to appraisal,
the stockholder has made an election to withdraw from the corporate enterprise
and take the value of his stock. Southern Prod. Co. v. Sabath, Del. Supr., 87
A.2d 128 (1952); Lichtman v. Recognition Equip., Inc., Del. Ch., 295 A.2d 771
(1972).
ESTOPPEL. --When an informed minority shareholder either votes in favor of the
merger, or accepts the benefits of the transaction, he or she cannot thereafter
attack its fairness. Bershad v. Curtiss-Wright Corp., Del. Supr., 535 A.2d 840
(1987).
CHOICE OF REMEDIES. --Stockholders should not have been required to elect
between the statutory right to an appraisal and the opportunity to litigate the
allegation of fraud in the merger although they may not recover duplicative
judgments. Cede & Co. v. Technicolor, Inc., Del. Supr., 542 A.2d 1182 (1988).
EXERCISE OF STATUTORY RIGHT OF MERGER IS ALWAYS SUBJECT TO NULLIFICATION FOR
FRAUD. Cole v. National Cash Credit Ass'n, Del. Ch., 156 A. 183 (1931).
There are exceptional circumstances under which a stockholder is not obliged
to make an election to accept the merger or to demand the value of his stock in
money, but may enlist the aid of a court of equity to restrain the consummation
of the merger. The exercise of the statutory right of merger is always subject
to nullification for fraud. Porges v. Vadsco Sales Corp., Del. Ch., 32 A.2d 148
(1943).
BUSINESS PURPOSE REQUIREMENT RULE ABROGATED. --In view of the fairness test
which has long been applicable to parent-subsidiary mergers, the expanded
appraisal remedy now available to shareholders, and the broad discretion of the
chancellor to fashion such relief as the facts of a given case may dictate, no
additional meaningful protection is afforded minority shareholders by the
business purpose requirement of the trilogy of Singer v. Magnavox Co., Del.
Supr., 380 A.2d 969 (1977); Tanzer v. International Gen. Indus., Inc., Del.
Supr., 379 A.2d 1121 (1977); Roland Int'l Corp. v. Najjar, Del. Supr., 407 A.2d
1032 (1979), and their progeny, accordingly, such requirement shall no longer be
of any force or effect. Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701
(1983).
THIS SECTION DOES NOT REQUIRE CORPORATION TO STATE ITS POSITION OR DEFENSES IN
PETITION or stockholder's list. In re Universal Pictures Co., Del. Ch., 37 A.2d
615 (1944), overruled on other grounds in Raynor v. LTV Aerospace Corp., Del.
Ch., 331 A.2d 393 (1975).
DISCLOSURE OF PERSONS CLAIMING APPRAISAL RIGHTS. --For the protection of
dissenting stockholders, a corporation should be expected to make full
disclosure of all persons who claim appraisal rights and of all documents
received which might possibly be deemed to constitute objections and demands,
but to ask for that kind of disclosure, and at the same time to lean toward a
construction of the disclosures as admissions of legal sufficiency of the acts
of
10
<PAGE>
the claimants would seem most inconsistent. In re Universal Pictures Co., Del.
Ch., 37 A.2d 615 (1944), overruled on other grounds in Raynor v. LTV Aerospace
Corp., Del. Ch., 331 A.2d 393 (1975).
REQUEST OF APPRAISAL RELINQUISHES OWNERSHIP RIGHTS. --A shareholder who elects
to seek an appraisal rather than accept the terms of the merger loses the
traditional benefits of stock ownership: the right to vote stock and to receive
payment of dividends or other distribution upon the shares. Alabama By-Products
Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Del. Supr., 657 A.2d 254
(1995).
STOCKHOLDER NEED NOT VOTE AGAINST THE PROPOSED MERGER in order to qualify for an
appraisal. Lewis v. Corroon & Reynolds Corp., Del. Ch., 57 A.2d 632 (1948).
BUT HE MUST NOT VOTE IN FAVOR OF MERGER if he intends to qualify for an
appraisal of his shares. Lewis v. Corroon & Reynolds Corp., Del. Ch., 57 A.2d
632 (1948).
APPRAISAL IS ORDINARY REMEDY. --Although a plaintiff's remedy in response to a
successful challenge to a merger transaction should ordinarily be confined to an
appraisal, in cases where fraud, misrepresentation, self-dealing, deliberate
waste of corporate assets, or gross and palpable overreaching exists, appraisal
might well be inadequate. Joseph v. Shell Oil Co., Del. Ch., 498 A.2d 1117
(1985).
STOCKHOLDER MAY SPLIT VOTE AND APPLY FOR APPRAISAL AS TO SOME OF HIS SHARES. --
With respect to the majority stockholders, no disadvantage is occasioned to them
if a stockholder is permitted to split his vote and apply for appraisal as to
some of his shares. Colonial Realty Corp. v. Reynolds Metals Co., Del. Ch., 185
A.2d 754 (1962), aff'd, Del. Supr., 190 A.2d 752 (1963).
It certainly cannot be said that the statute expressly, or by unavoidable
intendment, disqualifies a stockholder who has voted some of his shares in favor
of a merger from seeking an appraisal of other shares as to which he has fully
complied with the statutory requirements. Colonial Realty Corp. v. Reynolds
Metals Co., Del. Ch., 185 A.2d 754 (1962), aff'd, Del. Supr., 190 A.2d 752
(1963).
CLAIMANT CANNOT SUBSEQUENTLY SPLIT HOLDINGS TO SEEK APPRAISAL OF PORTION. --A
claimant who has demanded of the surviving corporation payment of the value of
his shares may not subsequently split his holdings to seek appraisal of a
portion only. Lichtman v. Recognition Equip., Inc., Del. Ch., 295 A.2d 771
(1972).
LATE FILING OF CLAIM. --If a "late" filing of a claim for appraisal of stock
will not unduly interfere with the orderly procedure of appraisal, the court
should permit the claim to be filed, unless there is evidence of bad faith.
Jacques Coe & Co. v. Minneapolis-Moline Co., Del. Ch., 84 A.2d 815 (1949).
BURDEN OF PROOF OF COMPLIANCE WITH STATUTORY REQUIREMENTS IS ON STOCKHOLDER
CLAIMING RIGHT TO APPRAISAL. In re Hilton Hotels Corp., Del. Ch., 210 A.2d 185,
aff'd, Del. Supr., 222 A.2d 789 (1965).
PRIMARY PURPOSE OF REQUIRING WRITTEN COMMUNICATION BY STOCKHOLDER PRIOR TO
MEETING called to vote upon the proposed merger is to inform the corporation and
other stockholders of the number of possible dissenters and, as such, potential
demandants of cash for their shares. In re Zeeb, Del. Supr., 87 A.2d 123 (1952);
Colonial Realty Corp. v. Reynolds Metals Co., Del. Ch., 185 A.2d 754 (1962),
aff'd, Del. Supr., 190 A.2d 752 (1963).
NO PRESUMPTION AS TO THE TIME OF DELIVERY WILL BE RAISED. In re Hilton Hotels
Corp., Del. Ch., 210 A.2d 185, aff'd, Del. Supr., 222 A.2d 789 (1965).
ACTION BY STOCKHOLDER'S AGENT. --See In re Zeeb, Del. Supr., 87 A.2d 123 (1952).
STOCKHOLDER'S WRITTEN COMMUNICATION MUST HAVE BEEN MADE BEFORE VOTE on the
consolidation agreement had been taken. Stephenson v. Commonwealth & S. Corp.,
Del. Supr., 168 A. 211 (1933).
11
<PAGE>
AND IT NEED NOT BE ARTFULLY WORDED. In re Atlas Powder Co., Del. Ch., 78 A.2d 1
(1951), rev'd on other grounds, Del. Supr., 87 A.2d 123 (1952).
BUT IT MUST BE REASONABLY ABSOLUTE. In re Atlas Powder Co., Del. Ch., 78 A.2d 1
(1951), rev'd on other grounds, Del. Supr., 87 A.2d 123 (1952).
WHERE STOCK IS HELD BY HUSBAND AND WIFE as tenants by the entirety, rights must
be exercised jointly by the husband and wife, and the actions prescribed by this
section are defective where the wife did not join in them. In re Northeastern
Water Co., Del. Ch., 38 A.2d 918 (1944).
A demand signed by 1 spouse alone, who does not purport to act for the other
spouse therein, is inadequate to cover the stock held by them as joint owners
and is therefore invalid. Raab v. Villager Indus., Inc., Del. Supr., 355 A.2d
888, cert. denied, 429 U.S. 853, 97 S. Ct. 147, 50 L. Ed. 2d 129 (1976).
DEMAND LETTER WHICH WAS NOT DELIVERED UNTIL MORNING OF STOCKHOLDERS' MEETING WAS
UNTIMELY, and did not entitle the shareholders who sent it to an appraisal.
Tabbi v. Pollution Control Indus., Inc., Del. Ch., 508 A.2d 867 (1986),
overruled on other grounds, Del. Supr., 535 A.2d 1351 (1987).
BURDEN OF PROVING TIMELY DELIVERY OF DEMAND. --When controverted, the claimants
have the burden of proving timely delivery of their demand. Raab v. Villager
Indus., Inc., Del. Supr., 355 A.2d 888, cert. denied, 429 U.S. 853, 97 S. Ct.
147, 50 L. Ed. 2d 129 (1976).
MINORITY STOCKHOLDER'S REJECTION OF OFFER HELD TO BE DEMAND FOR APPRAISAL. --
Where a minority stockholder explicitly rejected a $150 per share offer from
majority stockholders perfecting a merger under (S) 253 of this title, this was
a demand for the only available alternative under this section. Bell v. Kirby
Lumber Corp., Del. Supr., 413 A.2d 137 (1980).
STATUTORY FORMALITIES FOR DISSENT HAVE BEEN STRICTLY ENFORCED. Lutz v. A.L.
Garber Co., Del. Ch., 340 A.2d 186 (1974), aff'd, Del. Supr., 340 A.2d 188
(1975).
RIGHT OF APPRAISAL GRANTED TO DISSENTING SHAREHOLDERS PREEMPTED BY SUBCHAPTER
III OF CHAPTER 113 OF INTERSTATE COMMERCE ACT (49 U.S.C. (S) 11341 ET SEQ.). --
See Bruno v. Western Pac. R.R., Del. Ch., 498 A.2d 171 (1985), aff'd, Del. Ch.,
508 A.2d 72 (1986), cert. denied, 482 U.S. 927, 107 S. Ct. 3209, 96 L. Ed. 2d
696 (1987).
SECTION CONTEMPLATES DETERMINATION OF STOCKHOLDERS ENTITLED TO APPRAISAL REMEDY.
- --Only after hearing shall the Court of Chancery determine the stockholders who
have complied with the provisions of this section and become entitled to the
valuation of and payment for their shares. Raynor v. LTV Aerospace Corp., Del.
Ch., 317 A.2d 43 (1974).
This section does not require the Court of Chancery to determine which
stockholders have perfected their right to the appraisal remedy until after a
hearing. Raynor v. LTV Aerospace Corp., Del. Ch., 317 A.2d 43 (1974).
ONLY 1 PETITION IS NECESSARY TO REQUIRE THE COURT OF CHANCERY TO HOLD A HEARING.
Raynor v. LTV Aerospace Corp., Del. Ch., 317 A.2d 43 (1974).
This section has been recognized as providing a single procedure in which all
the dissenting stockholders who have perfected their right to appraisal will
participate. Raynor v. LTV Aerospace Corp., Del. Ch., 317 A.2d 43 (1974).
To require each dissenting stockholder to file his own separate petition would
be unwieldy and unreasonable. Raynor v. LTV Aerospace Corp., Del. Ch., 317 A.2d
43 (1974).
Once a petition is filed, other dissenting stockholders had a right to rely on
the language of this section and believe that their stock would be valued in the
appraisal proceeding. Raynor v. LTV Aerospace Corp., Del. Ch., 317 A.2d 43
(1974).
THOSE DISSENTING STOCKHOLDERS WHO ARE NOT PETITIONERS WILL NOT BE DEPRIVED OF
THEIR RIGHTS under this section simply because they have apparently decided to
"go along for the ride." Raynor v. LTV Aerospace Corp., Del. Ch., 317 A.2d 43
(1974).
12
<PAGE>
FILING DATE NOT EXTENDED MERELY BECAUSE RESULTING CORPORATION NOT SHOWN
PREJUDICED. --It is neither the policy of this State nor the intention of the
General Assembly to extend the filing date merely because there is no showing of
prejudice to the resulting corporation. To so hold would defeat the orderly
procedure which this section sets forth. Schneyer v. Shenandoah Oil Corp., Del.
Ch., 316 A.2d 570 (1974).
The resulting or surviving corporation need not, as an element to its defense
of the statutory filing period, produce evidence that it has suffered prejudice.
Schneyer v. Shenandoah Oil Corp., Del. Ch., 316 A.2d 570 (1974).
KEY DATE FOR FIXING BOTH LIABILITY AND DAMAGES IS DATE OF MERGER. Francis I.
duPont & Co. v. Universal City Studios, Inc., Del. Ch., 343 A.2d 629 (1975).
While a certain amount of retrospective analysis and backdating are required,
the whole statutory scheme is keyed to the date of the merger because that is
the date on which the shareholder's property is taken. Francis I. duPont & Co.
v. Universal City Studios, Inc., Del. Ch., 343 A.2d 629 (1975).
SHAREHOLDERS HAVE BURDEN OF ESTABLISHING THEIR RIGHT TO APPRAISAL. Schneyer v.
Shenandoah Oil Corp., Del. Ch., 316 A.2d 570 (1974).
PERFECTED CLAIM FOR APPRAISAL NOT LOST. --Once a shareholder perfects the right
to appraisal, the shareholder's status is transformed from that of an equity
owner of the corporation to that of a quasi-creditor with a monetary claim
against the surviving corporation; this change of status can be reversed only if
the shareholder satisfies one of the express statutory conditions. Alabama By-
Products Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Del. Supr., 657 A.2d
254 (1995).
ORDERLINESS AND CERTAINTY OF APPRAISAL PROCEEDING ARE TO BE MAINTAINED even
though this section is construed liberally in favor of the shareholder. Schneyer
v. Shenandoah Oil Corp., Del. Ch., 316 A.2d 570 (1974).
There is nothing which would authorize the Court to depart from the general
rules developed to govern appraisal proceedings simply because of the nature of
the corporate enterprise. Bell v. Kirby Lumber Corp., Del. Ch., 395 A.2d 730
(1978), modified, Del. Supr., 413 A.2d 137 (1980).
WHERE PERIOD FOR DEMANDING APPRAISAL EXPIRES ON SUNDAY. --Where the period in
which a shareholder may petition the Court of Chancery for a determination of
the value of the stock of all such shareholders expires on a Sunday, the
statutory period for filing a petition does not toll until the following day.
Schneyer v. Shenandoah Oil Corp., Del. Ch., 316 A.2d 570 (1974).
VALUE OF STOCK. --It is the value of the stock that is considered the damage
principal for the purpose of the award. Francis I. duPont & Co. v. Universal
City Studios, Inc., Del. Ch., 343 A.2d 629 (1975).
It is stock that is the property subject to the taking and it is the value of
the stock which constitutes the measure of the statutory recovery by the
judgment. Francis I. duPont & Co. v. Universal City Studios, Inc., Del. Ch., 343
A.2d 629 (1975).
The sole issue raised by an action seeking an appraisal should be the value of
the dissenting stockholder's stock. Kaye v. Pantone, Inc., Del. Ch., 395 A.2d
369 (1978).
Fair value measures that which has been taken from the shareholder; a
proportionate interest in a going concern. In the appraisal process the
corporation is valued as an entity, not merely as a collection of assets, or by
the sum of the market price of each share of its stock. The corporation must be
viewed as an on-going enterprise, occupying a particular market position in the
light of future prospects. In re Shell Oil Co., Del. Supr., 607 A.2d 1213
(1992).
Evidence supported Court of Chancery's valuation conclusions. In re Shell Oil
Co., Del. Supr., 607 A.2d 1213 (1992).
MORE LIBERAL APPROACH TO STOCK VALUATION must include proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court, subject only to the court's
interpretation of subsection (h) of this section. Weinberger v. UOP, Inc., Del.
Supr., 457 A.2d 701 (1983).
13
<PAGE>
The scope of the Chancellor's inquiry into fair value is limited only by the
express exclusion of any element of value arising from the accomplishment or
expectation of the merger, and the Rules of Evidence. In re Shell Oil Co., Del.
Supr., 607 A.2d 1213 (1992).
APPROACH USED TO VALUE SHARES IN DETERMINING FAIRNESS OF MERGER IS NO DIFFERENT
than that employed in an appraisal proceeding under this section. Weinberger v.
UOP, Inc., Del. Ch., 426 A.2d 1333 (1981), rev'd on other grounds, Del. Supr.,
457 A.2d 701 (1983), aff'd, Del. Supr., 497 A.2d 792 (1985).
EVIDENCE OF POST-MERGER OFFERS FOR STOCK VALUATION. --Evidence of post-merger
offers were not admissible as valid indications of merger-date fair value
because they were not known or susceptible of proof as of the date of the
merger, but instead arose from the accomplishment or expectation of the merger.
Kahn v. Household Acquisition Corp., Del. Supr., 591 A.2d 166 (1991).
TERMS OF CERTIFICATE OF DESIGNATION. --Properly expressed terms of a certificate
of designation of preferred stock may establish the consideration to which
holders of the stock will be entitled in the event of a merger and, when the
documents creating the security do so, that the amount so fixed or determined
constitutes the "fair value" of the stock for the purposes of dissenters' rights
under this section. In re Ford Holdings, Inc. Preferred Stock, Del. Ch., 698
A.2d 973 (1997).
A PRIOR VERSION OF THIS SECTION GAVE APPRAISER GREAT LATITUDE IN SEEKING
EVIDENCE from which he could ascertain the value of the shares to be appraised.
In re General Realty & Utils. Corp., Del. Ch., 52 A.2d 6 (1947).
In a proceeding under this section the appraiser was free to ascertain
evidence of value apart from that supplied him by the parties. In re General
Realty & Utils. Corp., Del. Ch., 52 A.2d 6 (1947).
In an appraisal proceeding, because of its purpose of placing a true,
intrinsic value on the shares of corporate stock, the appraiser should not be
deprived by any party of the opportunity to consider materials which he feels to
be relevant. Bell v. Kirby Lumber Corp., Del. Ch., 395 A.2d 730 (1978),
modified, Del. Supr., 413 A.2d 137 (1980).
AND HE IS NOT BOUND TO ACCEPT APPRAISAL REPORT. --The appraiser, in carrying out
his duty to make a valuation of the stock, is not bound to accept the
conclusions of an appraisal report prepared at the request of the corporation,
regardless of what the parties might be bound by estoppel to accept. Bell v.
Kirby Lumber Corp., Del. Ch., 395 A.2d 730 (1978), modified, Del. Supr., 413
A.2d 137 (1980).
BUT CORPORATION HAS DUTY TO DISCLOSE REPORT. --Under the duty of complete candor
imposed on a majority stockholder, a corporation has a duty to disclose the
existence of an appraisal report prepared in preparation for a merger. Bell v.
Kirby Lumber Corp., Del. Ch., 395 A.2d 730 (1978), modified, Del. Supr., 413
A.2d 137 (1980).
CREDIBILITY OF EXPERT VALUATIONS. --The weight to be ascribed to expert
valuations necessarily depends on the validity of the assumptions underlying
them and where those assumptions are values supplied by others, the conduct of
such other persons is probative of their credibility and of the information
being supplied to the expert. Alabama By-Products Corp. v. Neal, Del. Supr., 588
A.2d 255 (1991).
EXPERT WITNESSES APPOINTED BY THE COURT OF CHANCERY. --If the Court is limited
to the biased presentation of the parties, it is often forced to pick and choose
from a limited record without the benefit of objective analysis and opinion. To
compensate for this handicap, the Court of Chancery should consider, in a proper
case, appointing its own expert witnesses. In re Shell Oil Co., Del. Supr., 607
A.2d 1213 (1992).
APPRAISER MUST ARRIVE AT DOLLAR AND CENTS APPRAISAL; consequently, the appraiser
should state the value of the elements given independent weight and the weight
given to each in arriving at the appraisal value. This procedure will render the
valuation process a little less arbitrary and will permit a review at least on a
degree basis. Jacques Coe & Co. v. Minneapolis-Moline Co., Del. Ch., 75 A.2d 244
(1950).
14
<PAGE>
WEIGHT TO BE GIVEN TO CONFLICTING APPRAISALS attributable to the same party, as
well as the motivations going into such appraisals, should be subjected to close
scrutiny by the appraiser. Bell v. Kirby Lumber Corp., Del. Ch., 395 A.2d 730
(1978), modified, Del. Supr., 413 A.2d 137 (1980).
ADOPTION OF VALUATION VIEWS OF EXPERT. --Although the Court of Chancery is
entitled to deference on the mixed fact/law issue of fair value under this
section, the question of whether the Court of Chancery may adopt an expert's
valuation views is a question of law. Gonsalves v. Straight Arrow Publishers,
Inc., Del. Supr., 701 A.2d 357 (1997).
The valuation process was fatally flawed, demanding reversal, where the Court
of Chancery's valuation determination in adopting the valuation of one expert as
definitive reflected an "either-or" approach, which was at variance with the
Court's statutory obligation to engage in an independent valuation exercise.
Gonsalves v. Straight Arrow Publishers, Inc., Del. Supr., 701 A.2d 357 (1997).
FACTORS IN ASCERTAINING STOCK VALUE. --A corporation's earnings, along with the
market value of its stock, asset value, dividend record, earning prospects and
other factors reflecting on a corporation's financial stability and prospects
for growth, are all relevant matters for inquiry in ascertaining the value of
stock held by dissenting stockholders. Universal City Studios, Inc. v. Francis
I. duPont & Co., Del. Supr., 334 A.2d 216 (1975).
VALUE OF STOCK OF INSOLVENT CORPORATION. --Where the company is not able to
refinance its debt, is insolvent and on the verge of bankruptcy, the appraisal
value of its stock, insofar as affected by its debts, is determined by reference
to the amount of its legal liability to pay its debt. In re Vision Hdwe. Group,
Inc., Del. Ch., 669 A.2d 671 (1995).
COMPILATION OF FACTORS MANDATORY. --A compilation of as many factors as are
pertinent to a given case has been held mandatory in arriving at the intrinsic
value of stock held by shareholders who wish to disassociate themselves from an
impending merger. Universal City Studios, Inc. v. Francis I. duPont & Co., Del.
Supr., 334 A.2d 216 (1975).
DISTINCTION BETWEEN TEST OF FAIR VALUE AND TEST OF JUST COMPENSATION IN
CONDEMNATION CASES. --The distinction between the constitutional test of just
compensation in condemnation cases and the statutory test of fair value in
appraisal proceedings is substantial. The condemnation cases do not involve
contract rights, while complainant's contract when he purchased the stock
contained as a term thereof the appraisal section. Meade v. Pacific Gamble
Robinson Co., Del. Ch., 51 A.2d 313 (1947), aff'd, Del. Supr., 58 A.2d 415
(1948).
CONCEPT OF FAIRNESS HAS 2 BASIC ASPECTS: Fair dealing and fair price. Weinberger
v. UOP, Inc., Del. Supr., 457 A.2d 701 (1983).
In parent-subsidiary merger transactions the issues are those of fairness --
fair price and fair dealing. Bershad v. Curtiss-Wright Corp., Del. Supr., 535
A.2d 840 (1987).
CONCEPT OF FAIR DEALING embraces questions of when the transaction was timed,
how it was initiated, structured, negotiated, disclosed to the directors, and
how the approvals of the directors and the stockholders were obtained.
Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701 (1983).
CONCEPT OF FAIR PRICE relates to the economic and financial considerations of
the proposed merger, including all relevant factors: Assets, market value,
earnings, future prospects, and any other elements that affect the intrinsic or
inherent value of a company's stock. Weinberger v. UOP, Inc., Del. Supr., 457
A.2d 701 (1983).
JOINDER OF APPRAISAL AND UNFAIR DEALING ACTIONS UNAUTHORIZED. --Court of
Chancery properly dismissed the claim for unfair dealing, noting that to
authorize the joinder of appraisal and unfair dealing actions would result in a
hybrid appraisal action, effectively broadening the legislative remedy afforded
under this section. Alabama By-Products Corp. v. Neal, Del. Supr., 588 A.2d 255
(1991).
THREE ELEMENTS OF VALUE ARE GENERALLY GIVEN MAJOR CONSIDERATION, namely market
value, asset value and earnings value. Levin v. Midland-Ross Corp., Del. Ch.,
194 A.2d 50 (1963).
15
<PAGE>
APPRAISER SHOULD STATE WEIGHT GIVEN EACH SUBSTANTIAL ELEMENT IN DETERMINING
VALUE. --An appraiser appointed under this section should state the monetary
value which he has ascribed to the more substantial elements of value considered
and the weight he has given each such element in arriving at his appraised
value. Jacques Coe & Co. v. Minneapolis-Moline Co., Del. Ch., 75 A.2d 244
(1950).
ASSETS MUST BE JUDGED ON "GOING CONCERN" BASIS. Sporborg v. City Specialty
Stores, Inc., Del. Ch., 123 A.2d 121 (1956).
The basic concept of value under the appraisal statute is that the stockholder
is entitled to be paid for that which has been taken from him, his proportionate
interest in a going concern. In re Tri-Continental Corp., Del. Supr., 74 A.2d 71
(1950).
The shares of stockholders dissenting to a merger must be valued on a going
concern basis. Heller v. Munsingwear, Inc., Del. Ch., 98 A.2d 774 (1953).
A dissenting stockholder is entitled to receive the intrinsic value of his
share in a going concern. This can mean only that he is entitled to receive that
sum which represents the amount he would have received as a stockholder in one
way or another as long as the company continued in business. In re Delaware
Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del. Supr., 213 A.2d 203 (1965).
EARNINGS HISTORY, STABILITY AND FUTURE PROSPECTS. --The Court must examine
historical earnings and peruse the corporation's stability and future prospects
as of the date of merger. Universal City Studios, Inc. v. Francis I. duPont &
Co., Del. Supr., 334 A.2d 216 (1975).
DETERMINATION OF EARNINGS MUST BE BASED UPON HISTORICAL EARNINGS rather than on
the basis of prospective earnings. Francis I. DuPont & Co. v. Universal City
Studios, Inc., Del. Ch., 312 A.2d 344 (1973), aff'd, Del. Supr., 334 A.2d 216
(1975).
EARNINGS DETERMINED BY AVERAGING OVER REASONABLE PERIOD OF TIME. --For appraisal
purposes earnings are to be determined by averaging the corporation's earnings
over a reasonable period of time. Francis I. DuPont & Co. v. Universal City
Studios, Inc., Del. Ch., 312 A.2d 344 (1973), aff'd, Del. Supr., 334 A.2d 216
(1975).
FIVE-YEAR PERIOD IMMEDIATELY PRECEDING MERGER IS ORDINARILY CONSIDERED TO BE
MOST REPRESENTATIVE and reasonable period of time over which to compute average
earnings. Francis I. DuPont & Co. v. Universal City Studios, Inc., Del. Ch., 312
A.2d 344 (1973), aff'd, Del. Supr., 334 A.2d 216 (1975).
IMPORTANT PURPOSE BEHIND PRACTICE OF AVERAGING OVER 5-YEAR PERIOD is to balance
extraordinary profits and/or losses which might distort the earnings data if a
period of only 1 or 2 years was used. Francis I. DuPont & Co. v. Universal City
Studios, Inc., Del. Ch., 312 A.2d 344 (1973), aff'd, Del. Supr., 334 A.2d 216
(1975).
PROSPECTIVE FINANCIAL CONDITION OF CORPORATION AND RISK FACTOR inherent in the
corporation and the industry within which it operates are vital factors to be
considered in arriving at a realistic present earnings value. Universal City
Studios, Inc. v. Francis I. duPont & Co., Del. Supr., 334 A.2d 216 (1975).
APPRAISER'S DETERMINATION OF MULTIPLIER for arriving at an earnings valuation
when determining the value of stock will not be disturbed as long as it is
within the range of reason. Bell v. Kirby Lumber Corp., Del. Ch., 395 A.2d 730
(1978), modified, Del. Supr., 413 A.2d 137 (1980).
Where the multiplier used by appraiser in arriving at an earnings valuation
when determining value of stock is within the range of reason, the Court of
Chancery will not alter it. Bell v. Kirby Lumber Corp., Del. Ch., 395 A.2d 730
(1978), modified, Del. Supr., 413 A.2d 137 (1980).
JUDGMENT IN APPLICATION OF MULTIPLIER. --The application of a multiplier to
average earnings in order to capitalize them lies within the realm of judgment
for which there is no hard and fast rule. Universal City Studios, Inc. v.
Francis I. duPont & Co., Del. Supr., 334 A.2d 216 (1975).
16
<PAGE>
MULTIPLIER OF 16.1 IN DETERMINING EARNINGS VALUE AT TIME OF MERGER APPROVED. --
See Francis I. DuPont & Co. v. Universal City Studios, Inc., Del. Ch., 312 A.2d
344 (1973), aff'd, Del. Supr., 334 A.2d 216 (1975).
DIVIDENDS LARGELY REFLECT SAME VALUE AS EARNINGS and so should not be separately
considered in valuing shares. Francis I. DuPont & Co. v. Universal City Studios,
Inc., Del. Ch., 312 A.2d 344 (1973), aff'd, Del. Supr., 334 A.2d 216 (1975).
IN ABSENCE OF RELIABLE MARKET FOR STOCK, a reconstructed market value must be
given consideration, if one can be made. Francis I. DuPont & Co. v. Universal
City Studios, Inc., Del. Ch., 312 A.2d 344 (1973), aff'd, Del. Supr., 334 A.2d
216 (1975).
USE OF PRICE-EARNINGS RATIOS OF COMPARABLE BUSINESSES on the date of merger as a
factor in evaluating another company, and as a vital first step in arriving at a
multiplier, is reasonable. Universal City Studios, Inc. v. Francis I. duPont &
Co., Del. Supr., 334 A.2d 216 (1975).
RATIOS OF COMPARABLE COMPANIES ON DAY OF MERGER. --The determination of value as
of the day of merger being the Court's endeavor, it is appropriate that the
price-earnings ratios of comparable companies, serving as barometers of risk
within the industry, be referred to solely on the day of merger in the absence
of extraordinary deviation from the past price-earnings record. Universal City
Studios, Inc. v. Francis I. duPont & Co., Del. Supr., 334 A.2d 216 (1975).
MULTIPLIER WILL BE LOW IF THE FINANCIAL OUTLOOK FOR CORPORATION IS POOR, or high
if prospects are encouraging. Universal City Studios, Inc. v. Francis I. duPont
& Co., Del. Supr., 334 A.2d 216 (1975).
LIQUIDATION VALUE of the stock may not be accepted as the sole measure of value,
since value is to be fixed on a going concern basis. In re Tri-Continental
Corp., Del. Supr., 74 A.2d 71 (1950); Bell v. Kirby Lumber Corp., Del. Ch., 395
A.2d 730 (1978), modified, Del. Supr., 413 A.2d 137 (1980).
Liquidation or sales value should not be used in arriving at asset value since
this would be contrary to the main purpose of finding the going concern value of
assets to the company whose shares are being appraised. Levin v. Midland-Ross
Corp., Del. Ch., 194 A.2d 50 (1963).
Stockholders are entitled to be paid the intrinsic value of their shares
determined on a going concern basis, which excludes a valuation based solely
upon the liquidating value, or an aliquot share in the value of the assets of
the merged corporation. In re Delaware Racing Ass'n, Del. Supr., 213 A.2d 203
(1965).
ASSET VALUE as the sole controlling factor in determining the value of stock,
where merger proceedings are objected to, is not the law of Delaware. Root v.
York Corp., Del. Ch., 50 A.2d 52 (1946).
The value per share of the preferred stock cannot be determined by dividing
the number of preferred shares into the asset value of the corporation. Neither
the net asset value nor any other single factor can be the controlling element
in an appraisal under this section. Root v. York Corp., Del. Ch., 50 A.2d 52
(1946).
Asset value, while a factor, must not be over-emphasized in arriving at a
determination of appraised value of stock, because other factors such as the
value based on prospective earnings are vitally important. In re General Realty
& Utils. Corp., Del. Ch., 52 A.2d 6 (1947).
Net asset value is entitled to weight, but it must be remembered that an
appraisal is not a liquidation, and that the stock must be appraised on a going
concern basis with the possibility in different cases that the value of the
stock may be substantially above or below net asset or break-up value. In re
General Realty & Utils. Corp., Del. Ch., 52 A.2d 6 (1947).
Net asset value is a theoretical liquidating value to which the share would be
entitled upon the company going out of business. Its very nature indicates that
it is not the value of stock in a going concern. In re Tri-Continental Corp.,
Del. Supr., 74 A.2d 71 (1950).
Discount may be applied to net asset value to determine on any day a
theoretical or constructed market value of the common stock of a closed-end
investment company with leverage. In re Tri-Continental Corp., Del. Supr., 74
A.2d 71 (1950).
17
<PAGE>
The asset value is to be determined by finding the going concern value of the
assets to the company whose shares are being appraised. Felder v. Anderson,
Clayton & Co., Del. Ch., 159 A.2d 278 (1960).
No rule of thumb is applicable to weighting of asset value in an appraisal
pursuant to this section; rather, the rule becomes one of entire fairness and
sound reasoning in the application of traditional standard and settled Delaware
law to the particular facts of each case. Bell v. Kirby Lumber Corp., Del.
Supr., 413 A.2d 137 (1980).
EARNINGS AND DIVIDENDS of a corporation are ordinarily of prime importance in
valuing common stock in appraisal proceedings. In re Tri-Continental Corp., Del.
Supr., 74 A.2d 71 (1950).
The existence of evidence showing actual earnings immediately subsequent to
the merger date to be in excess of the estimate future earnings calculated on
the basis of long-range considerations does not render erroneous the use of the
estimated earnings as a factor in ascertaining the value of the shares. In re
General Realty & Utils. Corp., Del. Ch., 52 A.2d 6 (1947).
Normally much greater weight is accorded the earnings value element, but the
asset value element must be given somewhat greater weight where for some time
the corporation was using more than an average amount of its assets to expand
and improve its business activities and much of this was not yet reflected in
earnings. Sporborg v. City Specialty Stores, Inc., Del. Ch., 123 A.2d 121
(1956).
Rather than immediate prospective income, the average income to be expected
over a reasonable period of time is the rule to be followed in making an
appraisal. Sporborg v. City Specialty Stores, Inc., Del. Ch., 123 A.2d 121
(1956).
Capitalized earnings value is not entitled to exclusive consideration under
this section in the absence of the most unusual circumstances. Felder v.
Anderson, Clayton & Co., Del. Ch., 159 A.2d 278 (1960).
Capitalized earnings are given independent and significant weight in arriving
at the appraised value of the shares. Asset value is not necessarily zero
because capitalized earnings amount to zero. Felder v. Anderson, Clayton & Co.,
Del. Ch., 159 A.2d 278 (1960).
The fair value of assets at a given date is not necessarily fully reflected in
capitalized earnings as of that date. Felder v. Anderson, Clayton & Co., Del.
Ch., 159 A.2d 278 (1960).
Annual earnings that have been influenced by an unusual factor should be
disregarded. In re Delaware Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del.
Supr., 213 A.2d 203 (1965).
The appraiser was basically right in accepting the corporation's own earnings
figures where the corporation accounts in question were kept in accordance with
accepted practices and that the methods of depreciation used by management were
acceptable. In re Delaware Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del.
Supr., 213 A.2d 203 (1965).
Where a race track cannot be actually classified as a public utility in the
light of its competitive position vis-a-vis both thoroughbred and trotting
racing in the area from which patrons must be attracted, high multiplier of
earnings used by the appraiser was clearly unwarranted. In re Delaware Racing
Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del. Supr., 213 A.2d 203 (1965).
A long and undisturbed history of no payment of dividends by a race track must
be given recognition and not merely ignored, even though there is little doubt
but that had there not been governmental obstacles to such course of action some
dividends could well have been paid out during the life of the track. In re
Delaware Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del. Supr., 213 A.2d 203
(1965).
The general rule that in determining the actual value of stock, consideration
should be given to the various relevant factors of value including earnings,
dividends, market price, assets and any other pertinent factors on a "going
concern" basis, is the rule in fraud cases and is also the approach to valuation
in stock appraisal proceedings under this section. Poole v. N.V. Deli
Maatschappij, Del. Supr., 224 A.2d 260 (1966).
MARKET VALUE is not the sole or exclusive criterion of value in appraisal
proceedings, and due weight under the circumstances must be accorded to other
relevant elements of value. In re Tri-Continental Corp., Del. Ch., 66 A.2d 910
(1949), rev'd on other grounds, Del. Supr., 74 A.2d 71 (1950).
"Value" as used in subsection (c) of this section is not synonymous with
market value. Chicago Corp. v. Munds, Del. Ch., 172 A. 452 (1934).
In determining value under subsection (c) of this section, the appraisers are
in a better position to gauge the fair value of the stock than the outside
public, and therefore the market prices need not control but are only 1 factor
in determining value. Chicago Corp. v. Munds, Del. Ch., 172 A. 452 (1934).
18
<PAGE>
If there is an actual market value uninfluenced by the merger in existence, it
would be error to disregard it in an appraisal of stock, but the absence of such
an element does not require the construction of a hypothetical market value to
be given effect in the final determination of value. In re Tri-Continental
Corp., Del. Supr., 74 A.2d 71 (1950).
Market value should not be given any independent weight where the evidence
shows that there was no dependable market value at or about the effective date
of the merger. Sporborg v. City Specialty Stores, Inc., Del. Ch., 123 A.2d 121
(1956).
Market value is 1 of the elements to be considered in an appraisal proceeding.
Sporborg v. City Specialty Stores, Inc., Del. Ch., 123 A.2d 121 (1956).
DELAWARE LAW COMPELS THE INCLUSION OF A "CONTROL PREMIUM" where a parent
company's 100% ownership interest in its subsidiaries is clearly a relevant
valuation factor and the rejection of the "control premium" implicitly places a
disproportionate emphasis on pure market value. Rapid-American Corp. v. Harris,
Del. Supr., 603 A.2d 796 (1992).
The trial court's decision to exclude the control premium at the corporate
level of a parent company with a 100% ownership interest in three valuable
subsidiaries practically discounted the parent's entire inherent value. The
exclusion of a "control premium" artificially and unrealistically treated the
parent as a minority shareholder. Rapid-American Corp. v. Harris, Del. Supr.,
603 A.2d 796 (1992).
FAIR VALUE MAY ALSO INCLUDE DAMAGES STOCKHOLDERS SUSTAIN AS CLASS. --When the
trial court deems it appropriate, fair value also includes any damages,
resulting from the taking, which the stockholders sustain as a class. Weinberger
v. UOP, Inc., Del. Supr., 457 A.2d 701 (1983).
ORIGINAL VALUE may be a convenient figure for certain purposes, but it hardly
reflects present asset value and that is what the stockholder is entitled to
have considered in arriving at the going concern value of his stock. Heller v.
Munsingwear, Inc., Del. Ch., 98 A.2d 774 (1953).
USE OF DEPRECIATED ORIGINAL COST to determine asset value would be almost
meaningless because of the lapse of time. Heller v. Munsingwear, Inc., Del. Ch.,
98 A.2d 774 (1953).
DEPRECIATED REPRODUCTION COST should be used, if at all, only as evidence of
asset value. Felder v. Anderson, Clayton & Co., Del. Ch., 159 A.2d 278 (1960).
If there is no better evidence of asset value, depreciated reproduction cost
(adjusted downward by weighting) is useful, particularly where the depreciation
is based upon the actual condition of the plant structures. Felder v. Anderson,
Clayton & Co., Del. Ch., 159 A.2d 278 (1960).
Depreciated reproduction cost is not the end-all in arriving at asset value.
The Delaware cases do not require that "net asset value" be determined on the
basis of depreciated reproduction cost. Felder v. Anderson, Clayton & Co., Del.
Ch., 159 A.2d 278 (1960).
OBSOLESCENCE FACTOR arising out of the unfavorable outlook for the industry can
be more appropriately considered when a determination is made as to the proper
multiplier to be applied in computing earnings value. Levin v. Midland-Ross
Corp., Del. Ch., 194 A.2d 50 (1963).
"SALES VALUE" OR "INVESTMENT VALUE," based on the hypothesis that all earnings
of a mercantile venture must come from its sales, and that management "can"
convert an ascertainable portion of the sales into earnings, need not be used as
an independent element of value. It is in effect but another and even more
theoretical method of determining earnings value. It thus duplicates that
element without purpose. Sporborg v. City Specialty Stores, Inc., Del. Ch., 123
A.2d 121 (1956).
CAPITALIZATION OF NET RENTAL VALUE of stores seems to be a well-recognized
approach and is a proper method of finding an asset value for such real
property. Sporborg v. City Specialty Stores, Inc., Del. Ch., 123 A.2d 121
(1956).
HIGHEST AND BEST USE OF LAND. --Where on the basis of nonspeculative expert
testimony the appraiser found that the land of the subsidiary and resulting
corporations had a particular value on the date of merger and from this
19
<PAGE>
figure he subtracted the cost of razing the existing plant, in order that the
highest and best use of the land might be realized, which, according to the
evidence, would be residential development, these findings were not disturbed
despite objectants' contention that as a speculation, use of the land for
industry would no doubt mean a greatly higher per acre valuation. In re Delaware
Racing Ass'n, Del. Ch., 206 A.2d 664, aff'd, Del. Supr., 213 A.2d 203 (1965).
INSURANCE APPRAISAL, while not conclusive, is admissible as reflecting the
current value of the fixed assets actually being used by defendant in its going
concern. Heller v. Munsingwear, Inc., Del. Ch., 98 A.2d 774 (1953).
AVERAGE OF PRICES ON LAST TRADING DAY PRECEDING ANNOUNCEMENT OF MERGER reflected
a fair market price and constituted compliance with the statute. Levin v.
Midland-Ross Corp., Del. Ch., 194 A.2d 50 (1963).
LEVERAGE, in the valuation of the common stock of closed-end investment
companies, must be considered and given effect if it is an operating element at
the time value is to be determined. In re Tri-Continental Corp., Del. Supr., 74
A.2d 71 (1950).
IT IS NOT APPROPRIATE TO INCLUDE CLAIM FOR THE VALUE OF STOCK OPTIONS lost by
the claimant as a result of the merger. Lichtman v. Recognition Equip., Inc.,
Del. Ch., 295 A.2d 771 (1972).
FULL VALUE OF CORPORATE ASSETS TO REGULATED CLOSED-END CORPORATION is not the
same as the value of those assets to the common stockholder because of the
factor of discount. To fail to recognize this conclusion in the valuing of
common stock of a regulated closed-end company with leverage is to fail to face
the economic facts and to commit error. Discount is an element of value which
must be given independent effect in the valuing of common stock of regulated
closed-end investment companies with leverage, and is not confined solely to the
construction of a hypothetical market value. In re Tri-Continental Corp., Del.
Supr., 74 A.2d 71 (1950).
WHERE CORPORATE PROPERTY HAS BEEN COMPLETELY AMORTIZED, yet has a value, that
value should be included in arriving at net asset value. In the absence of
evidence that the fully amortized items are of value it cannot be assumed that
such is the case. Jacques Coe & Co. v. Minneapolis-Moline Co., Del. Ch., 75 A.2d
244 (1950).
DETERMINATION OF VALUE OF ASSETS OF MOTION PICTURE CORPORATION. --See Francis I.
DuPont & Co. v. Universal City Studios, Inc., Del. Ch., 312 A.2d 344 (1973),
aff'd, Del. Supr., 334 A.2d 216 (1975).
EXCESSIVE COMPENSATION. --In the absence of a derivative claim attacking
excessive compensation, the underlying issue of whether such costs may be
adjusted may not be considered in an appraisal proceeding. Gonsalves v. Straight
Arrow Publishers, Inc., Del. Supr., 701 A.2d 357 (1997).
NO SPECIAL VALUE GIVEN FOR COMPANY'S LONG-PENDING BUT UNPRODUCTIVE ANTITRUST
CLAIM. --Where minority shareholders sought an appraisal under this section, no
special value was given to the shares by reason of the prior pendency of a
lawsuit in the form of a long-pending but so far unproductive antitrust claim
made by the company. Lebman v. National Union Elec. Corp., Del. Ch., 414 A.2d
824 (1980).
EFFECT OF PROPOSED ALTERNATIVE TO CASH-OUT MERGER. --If a corporation proposes
an alternative to a cash-out merger, the effect would be to deprive the minority
of any right to an appraisal under this section, since appraisal rights are not
available on a sale of assets, nor are they available for shares of stock which
are listed on a national securities exchange and which are exchanged upon a
merger for shares of stock listed on a national securities exchange. Tanzer v.
International Gen. Indus., Inc., Del. Ch., 402 A.2d 382 (1979).
CONSIDERATION OF "SYNERGISTIC EFFECT." --If, in a minority shareholder suit to
enjoin a merger, it is argued that a summary judgment must be granted because
the benefit by way of saving from the merger (called "the synergistic effect")
must be shared on some basis between all the entities and cannot be allocated
solely to 1 party, such an argument must be rejected for 2 reasons: (1) This
section presently precludes such a consideration; and (2) even if a possible
synergistic effect should be recognized and given value, there must be evidence
that the premium offered by
20
<PAGE>
the surviving corporation for the stock owned by the minority stockholders does
not adequately compensate the minority for such possible synergistic effect.
Tanzer v. International Gen. Indus., Inc., Del. Ch., 402 A.2d 382 (1979).
VALUE NOT ATTRIBUTABLE TO POSSIBILITY OF ALTERNATIVE POST-MERGER COST PATTERN. -
- -Where the corporation's going forward business plan is to retain the same
management, a dissenting shareholder seeking appraisal may not seek to attribute
value to an alternative cost pattern that may occur post-merger. Gonsalves v.
Straight Arrow Publishers, Inc., Del. Supr., 701 A.2d 357 (1997).
VALUATION IN "TWO-STEP" MERGERS. --In a two-step merger, where value is added to
the the going concern by the majority acquiror during the transient period of
the two-step merger, such value accrues to the benefit of all shareholders and
must be included in the appraisal process on the date of the merger. Cede & Co.
v. Technicolor, Inc., Del. Supr., 684 A.2d 289 (1996).
The accomplishment or expectation of the merger exception is very narrow and
does not encompass known elements of value, including those which exist on the
date of the merger because of a majority acquiror's interim action in a two-step
merger. Cede & Co. v. Technicolor, Inc., Del. Supr., 684 A.2d 289 (1996).
PERMISSIVE COUNTERCLAIM in appraisal actions should be looked upon with
disfavor. Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
Assertion of a permissive counterclaim by the surviving corporation in a
stockholder appraisal action would have a "chilling effect" upon the exercise of
statutory appraisal rights by dissenting stockholders and might cause others who
might seek an appraisal arising out of the merger not to participate in the
action. Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
REOPENING CASE. --When failure to present evidence of present worth factors was
not the result of "mistake, inadvertence, surprise or excusable neglect," and
the evidence is not "newly discovered," there is no justification for reopening
a stock appraisal case. Poole v. N.V. Deli Maatschappij, Del. Ch., 257 A.2d 241
(1969).
COSTS. --This section confides the apportionment of costs to the discretion of
the Court of Chancery. To justify a modification of the order for costs, the
Supreme Court would have to find an abuse of judicial discretion. Meade v.
Pacific Gamble Robinson Co., Del. Supr., 58 A.2d 415 (1948).
It is reasonable to construe this section as permitting the Court of Chancery
to tax all appraisal costs against the surviving corporation where there appears
no basis for concluding that the shareholder acted in bad faith, or occasioned
unnecessary expense, or made use of the procedure for the purpose of being
"bought off" by the corporation rather than for the purpose of obtaining a fair
value for his shares. Meade v. Pacific Gamble Robinson Co., Del. Supr., 58 A.2d
415 (1948).
In the absence of a showing of bad faith on the part of the dissenting
stockholders, or a showing that the statutory procedure was made use of for the
purpose of being "bought off," it is reasonable to tax all costs against the
surviving corporation. In re Tri-Continental Corp., Del. Supr., 74 A.2d 71
(1950).
Costs are generally assessed against the resulting corporation in an appraisal
proceeding, but this rule is altered if bad faith or other such factors appear.
Sporborg v. City Specialty Stores, Inc., Del. Ch., 123 A.2d 121 (1956).
Stockholders entitled to an appraisal in a valuation proceeding following a
merger but who have not either personally or by counsel taken any active part in
the actual proceedings may not be required to contribute proportionately to the
defraying of counsel and expert witness fees incurred by those stockholders who
through their attorneys and others have pulled the laboring oar not only before
the appraiser but before the court. Levin v. Midland-Ross Corp., Del. Ch., 194
A.2d 853 (1963).
This section leaves the appointment of costs to the discretion of the Court.
Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
The General Assembly had determined that even should bad faith ultimately be
found on the part of a stockholder, the only remedy for the corporation is the
apportionment of the costs of the proceeding. Kaye v. Pantone, Inc., Del. Ch.,
395 A.2d 369 (1978).
An apportionment of the costs of an appraisal proceeding is not done until
after the actual appraisal process has been concluded and the fair value of the
petitioner's shares has been determined. It is impossible for the Court to
determine if the proceedings have been brought in bad faith until the price
offered by the corporation can be compared with the value arrived at in the
appraisal proceedings. Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369 (1978).
21
<PAGE>
In the absence of an equitable exception, the plaintiff in an appraisal
proceeding should bear the burden of paying its own expert witnesses and
attorneys. Cede & Co. v. Technicolor, Inc., Del. Supr., 684 A.2d 289 (1996).
INTEREST. --The matter of allowing interest is left to the court's discretion.
Felder v. Anderson, Clayton & Co., Del. Ch., 159 A.2d 278 (1960); Bell v. Kirby
Lumber Corp., Del. Supr., 413 A.2d 137 (1980); Lebman v. National Union Elec.
Corp., Del. Ch., 414 A.2d 824 (1980).
Interest is not designed to increase the statutory recovery of the principal
award. Francis I. duPont & Co. v. Universal City Studios, Inc., Del. Ch., 343
A.2d 629 (1975).
Interest represents damages for the delay in payment and compensation for the
use of plaintiffs' money. Francis I. duPont & Co. v. Universal City Studios,
Inc., Del. Ch., 343 A.2d 629 (1975).
Interest should not itself carry additional interest solely due to the entry
of an order. Francis I. duPont & Co. v. Universal City Studios, Inc., Del. Ch.,
343 A.2d 629 (1975).
It is unlikely that the legislature intended that the statutory discretionary
award of interest, with the court balancing the equities, itself would be
subject to post-judgment interest as a normal judgment right under a general
appraisal case order fixing the value of stock. Francis I. duPont & Co. v.
Universal City Studios, Inc., Del. Ch., 343 A.2d 629 (1975).
There was not an abuse of discretion in a vice-chancellor's award of 7 percent
simple interest from the date of merger to date of payment. Bell v. Kirby Lumber
Corp., Del. Supr., 413 A.2d 137 (1980).
The trial court did not abuse its discretion in awarding only simple interest
where it did not state a rationale for its ruling. Rapid-American Corp. v.
Harris, Del. Supr., 603 A.2d 796 (1992).
Under subsection (i) of this section, the trial court is vested with the clear
discretion to award either simple or compound interest. It must take into
account all relevant factors in reaching its decision. While not exhaustive,
some of these factors can include the considerations enumerated in subsection
(h) of this section. Rapid-American Corp. v. Harris, Del. Supr., 603 A.2d 796
(1992).
Evidence supported award of simple interest. In re Shell Oil Co., Del. Supr.,
607 A.2d 1213 (1992).
The decision to award either pre-judgment or post-judgment interest is
entirely within the discretion of the Court of Chancery. Alabama By-Products
Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Del. Supr., 657 A.2d 254
(1995).
The Court of Chancery has broad discretion in both the fixing of the rate of
interest and the period of its application in an appraisal proceeding; its
determination will not be disturbed unless arbitrary or capricious. Gonsalves v.
Straight Arrow Publishers, Inc., Del. Supr., 701 A.2d 357 (1997).
COURT OF CHANCERY HAS ESTABLISHED RATE OF RETURN AVAILABLE TO ORDINARY PRUDENT
INVESTOR by averaging the return from a mixed portfolio of short-, medium-, and
long-term United States Treasury bills, savings deposits held in commercial
banks, savings deposits held in mutual savings banks, Moody's triple A corporate
bond average, and the values found in the Dow Jones industrial common stock
average. Lebman v. National Union Elec. Corp., Del. Ch., 414 A.2d 824 (1980).
COURT OF CHANCERY MAY PROPERLY FOCUS ON WHAT WOULD HAVE BEEN THE RATE OF
INTEREST AT WHICH A PRUDENT INVESTOR COULD HAVE INVESTED MONEY rather than on
how much it would have cost the corporation to borrow the money in determining
an award of interest pursuant to this section. Lebman v. National Union Elec.
Corp., Del. Ch., 414 A.2d 824 (1980).
COURT OF CHANCERY ENTITLED TO DEFERENCE. --The Court of Chancery's determination
under subsection (h) of this section has traditionally been granted a high level
of deference by the Delaware Supreme Court; this deference reflects a
recognition that appraisal cases tend to be factually intensive and often
involve competing valuation methodologies. Gonsalves v. Straight Arrow
Publishers, Inc., Del. Supr., 701 A.2d 357 (1997).
LIBERAL TEST FOR REVIEWING APPRAISAL PROCEEDINGS. --The innate impreciseness of
a chosen multiplier has necessitated the adoption of a liberal test for
reviewing decisions in appraisal proceedings. Universal City Studios, Inc. v.
Francis I. duPont & Co., Del. Supr., 334 A.2d 216 (1975).
LOWER TRIBUNAL'S CHOICE OF MULTIPLIER WILL BE UPHELD IF IT IS WITHIN RANGE OF
REASON. Universal City Studios, Inc. v. Francis I. duPont & Co., Del. Supr., 334
A.2d 216 (1975).
22
<PAGE>
AND IF THERE IS NO CLEAR ABUSE OF DISCRETION. --The "imponderables of the
valuation process" and the concomitant broad discretion traditionally granted to
evaluators of corporate shares of stock, compel an acceptance of the method of
determining a multiplier unless there is a clear abuse of discretion amounting
to an error at law, i.e., such as the use of only one value factor at the
expense of other factors. Universal City Studios, Inc. v. Francis I. duPont &
Co., Del. Supr., 334 A.2d 216 (1975).
FEDERAL SECURITY LAW. --For discussion of appraisal rights under federal
security law, see Valente v. PepsiCo., Inc., 454 F. Supp. 1228 (D. Del. 1978).
USER NOTE: For more generally applicable notes, see notes under the first
section of this heading, subchapter, chapter, part or title.
23
<PAGE>
1349-SPPS-99
