SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934.
For the quarterly period ended June 29, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number: 0-26472
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SMARTFLEX SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-581151
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14312 Franklin Avenue, Tustin, California 92680-7028
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(Address of principal executive offices) (Zip Code)
(714)838-8737
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.0025 par value - 6,278,261 shares as of July 26, 1996
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Page 1 of 40
Exhibit Index on Page 17
<PAGE>
SMARTFLEX SYSTEMS, INC.
Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the
three and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-14
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
(2)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SMARTFLEX SYSTEMS, INC.
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1996 1995
--------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,773 $ 1,398
Short-term investments 24,321 21,846
Accounts receivable, net of allowance for
doubtful accounts of $925 in 1996 and 1995 13,159 17,396
Inventories:
Raw materials 6,171 9,138
Work-in-process 2,908 3,457
Finished goods 2,327 4,730
-------- --------
Total inventories 11,406 17,325
Deferred tax asset 1,915 1,915
Prepaid expenses and other current assets 565 678
-------- --------
Total current assets 54,139 60,558
Property and equipment, at cost:
Machinery and equipment 11,327 9,177
Office furniture and equipment 2,090 1,888
Leasehold improvements 1,739 1,353
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15,156 12,418
Less accumulated depreciation and amortization (5,032) (3,753)
-------- --------
Total property and equipment 10,124 8,665
Deposits 546 191
-------- --------
$64,809 $69,414
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to related parties $ 2,143 $ 3,417
Accounts payable 7,853 12,397
Accrued compensation and related costs 1,445 1,528
Other accrued liabilities 2,177 2,076
Current portion of notes payable 503 621
-------- --------
Total current liabilities 14,121 20,039
Deferred tax liability 504 504
Long-term portion of notes payable 1,280 3,948
Stockholders' equity:
Preferred stock - -
Common stock 16 16
Additional paid-in capital 35,405 34,980
Retained earnings 13,483 9,927
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Total stockholders' equity 48,904 44,923
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$64,809 $69,414
======== ========
See accompanying notes.
(3)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
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1996 1995 1996 1995
------- ------- ------- -------
Net revenues $34,290 $28,348 $74,315 $52,223
Cost of revenues 29,936 24,280 64,949 44,771
------- ------- ------- -------
Gross margin 4,354 4,068 9,366 7,452
Costs and expenses:
Marketing and sales expense 635 663 1,280 1,236
General and administrative expense 1,318 1,562 2,832 2,937
------- ------- ------- -------
Operating income 2,401 1,843 5,254 3,279
Interest income 255 52 486 97
Interest expense (33) (111) (97) (210)
Other expense (2) (22) (5) (52)
------- ------- ------- -------
Income before income taxes 2,621 1,762 5,638 3,114
Income tax provision 977 655 2,082 1,155
------- ------- ------- -------
Net income $ 1,644 $ 1,107 $ 3,556 $ 1,959
======= ======= ======= =======
Net income per common and common
equivalent share:
Primary $ 0.26 $ 0.26 $ 0.56 $ 0.45
======= ======= ======= =======
Fully diluted $ 0.26 $ 0.26 $ 0.56 $ 0.45
======= ======= ======= =======
Common and common equivalent
shares used in computing per
share amounts:
Primary 6,420 4,333 6,397 4,333
======= ======= ======= =======
Fully diluted 6,420 4,333 6,397 4,333
======= ======= ======= =======
See accompanying notes.
(4)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30
------------------------
1996 1995
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Net cash flow from operating activities:
Net income $ 3,556 $ 1,959
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,337 848
Loss on sale of property and equipment 40 -
Provision for doubtful accounts - 456
Provision for inventory obsolescence 120 230
Other changes in operating assets and liabilities:
Receivables 4,237 (396)
Inventories 5,799 (4,692)
Prepaid expenses and other assets (242) (536)
Accounts payable to related parties (1,274) 2,120
Accounts payable and accrued expenses (4,567) 3,491
Income taxes payable/receivable 41 (16)
-------- --------
Net cash provided by operating activities 9,047 3,464
Cash flow from investing activities:
Capital expenditures (2,817) (2,586)
Purchase of short-term investments (9,860) (6,735)
Proceeds from the sale of short-term investments 7,366 6,645
-------- --------
Net cash used in investing activities (5,311) (2,676)
Cash flow from financing activities:
Net proceeds from sale of common stock
425 3
Net borrowings (repayments) on revolving line of credit (2,505) (630)
Repayments on term loan (281) (150)
-------- --------
Net cash used in financing activities (2,361) (777)
-------- --------
Net increase in cash 1,375 11
Cash at beginning of period 1,398 351
-------- --------
Cash at end of period $ 2,773 $ 362
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 124 $ 173
Taxes paid 2,040 1,175
See accompanying notes.
(5)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 1996
Note (A) --- Basis of Presentation
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The accompanying unaudited consolidated financial statements include the
accounts of Smartflex Systems, Inc. and its wholly owned subsidiaries
("Smartflex" or "the Company"), and have been prepared in accordance with
generally accepted accounting principles for interim financial information, and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and six-months periods ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report to Stockholders for the year ended December 31, 1995.
Note (B) --- Fiscal Year
- ------------------------
The Company's fiscal year is 52 or 53 weeks, ending on the Saturday nearest
December 31 each year, and follows a four-four-five week quarterly cycle. For
clarity of presentation, the Company has presented its fiscal years as ending
December 31, and its fiscal quarters as ending on March 31, June 30, September
30 and December 31.
Note (C) --- 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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
(6)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed in
"Risk Factors," below.
OVERVIEW
Smartflex provides custom design and turnkey manufacturing of flexible
interconnect assemblies to customers who are manufacturers of compact,
high-performance electronic products. Smartflex specializes in precision surface
mount ("SMT") and direct chip attach technologies on flexible circuit
substrates. The Company's customer base includes hard disk drive ("HDD") and
non-HDD manufacturers. To date, HDD revenues have represented the Company's
predominant market; non-HDD revenues, however, have risen in recent years. For
the six months ended June 30, 1996, non-HDD revenues comprised 40.9% of total
revenues, compared to 16.2% for the same period last year. This growth has
cushioned the Company somewhat against the effects of a sluggish first half
experienced by some HDD manufacturers in 1996.
During the second quarter of 1996, the Company experienced a downturn
in net revenues, compared to the first quarter of 1996, due primarily to late
bookings by certain customers. The Company was unable to procure components
necessary to fulfill these bookings, which resulted in reduced net revenues.
Unit shipments, however, reached an all-time Company high; 3.5 million units
were shipped in the second quarter of 1996, a 29.6% increase over the 2.7
million units shipped in the first quarter of 1996. Revenue growth did not match
this unit growth largely due to component cost savings on certain programs that
were passed through to the customers, reducing average selling prices ("ASP"s),
and also to a shift in the product mix toward lower-ASP products.
Capital improvements continued in the second quarter of 1996.
Domestically, Smartflex completed the expansion of its Tustin, California
headquarters facility, consolidating all local manufacturing operations.
Additionally, the Company's first Flip-Chip-On-Flex line began to produce
samples and prototypes. Internationally, the Monterrey, Mexico and Singapore
facilities achieved volume production records during the second quarter of 1996,
benefited by equipment upgrades. Equipment installation and leasehold
improvements are currently underway in the Company's newest facility in Cebu,
the Philippines.
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the three and six months ended June 30, 1996 increased
21.0% and 42.3%, respectively, over the comparable periods in 1995. The
increases in net revenues were primarily due to the net effect of sales volume
changes from existing customers, and increased production capacity to meet this
demand. Specifically, the Company commenced volume production of scanner
products in the third quarter of 1995, which continued throughout the first half
of 1996, and experienced significant increases in shipments of certain disk
array and HDD products. Revenues generated by increases in unit shipments were
partially offset by decreases in component costs, generally passed through to
customers in the form of lower prices as described above, and price decreases as
a result of competitive pressures.
Net revenues attributable to non-HDD programs rose to 37.9% from 19.1%
for the second quarter of 1996 compared to the same period in 1995, and to 40.9%
from 16.2% for the six months ended June 30, 1996 compared to the first half of
1995. This growth was due primarily to ongoing efforts to diversify the
Company's markets, and also to growth in a certain non-HDD program wherein the
Company assumed the responsibility, in the third quarter of 1995, to add a
particular high-cost component on a turnkey basis. The growth in the Company's
non-HDD business flattened somewhat in the second quarter of 1996, compared
(7)
<PAGE>
to the first quarter of 1996, however, largely because savings achieved on the
costliest component of the non-HDD program described above were passed through
to the customer, reducing the average selling price.
In July 1996, Hewlett-Packard Company ("H-P") announced the
discontinuance of its disk-drive manufacturing business. Because H-P's current
business with Smartflex is primarily in the non-HDD portion of the market,
management believes that this event will not have a material adverse effect on
the Company's results of operations.
Total export sales, which arise primarily from the shipment of
assembled products to international operations of U.S.-based companies, rose to
78.5% from 50.1% for the second quarter of 1996 compared to the same period in
1995, and to 65.9% from 51.2% for the six months ended June 30, 1996 compared to
the first half of 1995. The increase was due primarily to growth in the volumes
of SMT products shipped directly to international head stack assemblers of the
Company's customers.
Gross Margins
Gross margins as a percentage of net revenues were 12.7% and 14.4% for
the three months ended June 30, 1996 and 1995, respectively, and 12.6% and 14.3%
for the six months ended June 30, 1996 and 1995, respectively. The current-year
decreases were primarily due to the growth of a particular non-HDD program
described in Net Revenues, above, and to increased sales of lower-ASP products.
The conversion of the high-cost component of the non-HDD program from
consignment to turnkey resulted generally in a pass-through of costs, effecting
a net decrease in the program's gross margin percentage, and lowering combined
gross margins overall. The downward effect of this program on gross margins was
offset somewhat during the current quarter by the reversal of certain
inventory-related reserves, which, due to the implementation of improved
inventory controls, were no longer deemed necessary.
Marketing and Sales Expense
Marketing and sales expenses consist primarily of salaries, facility
and travel costs for marketing, sales and customer service personnel, and sales
commissions paid to direct sales personnel and sales representative
organizations. As a percentage of net revenues, these expenses declined
slightly, to 1.9% and 1.7% for the three and six months ended June 30, 1996,
respectively, compared to 2.3% and 2.4%, respectively, for the same periods in
1995. This decline was attributable generally to the accommodation of revenue
growth, without appreciable increases in staff and other administrative costs,
by marketing, sales and customer service personnel. Also, sales commissions
declined due to changes in the product mix.
General and Administrative Expenses
General and administrative ("G & A") expenses decreased both as a
percentage of net revenues, and in absolute dollars, for the three and six
months ended June 30, 1996, compared to the same periods in 1995. As a
percentage of net revenues, G & A expenses were 3.8% for the current-year
periods, compared to 5.5% and 5.6% for the three and six months ended June 30,
1995. These declines were primarily due, in both current-year periods, to
decreased bad debt expenses, offset slightly by additions to administrative
staff and increased public company expenses. Additionally, in the current
quarter, management imposed spending controls in response to the decline in net
revenues described in Overview, above. In the first quarter of 1995, the Company
incurred one-time expenses associated with the then-proposed acquisition of the
Company by Group Technologies Corporation. The proposed acquisition was
subsequently abandoned
Interest Income
Interest income increased $203,000 and $389,000 for the three and six
months ended June 30, 1996, respectively, compared to the same prior-year
periods. Higher short-term investments balances, primarily due to proceeds
received in the Company's initial public offering in the third quarter of 1995,
generated these increases.
(8)
<PAGE>
Income Taxes
The effective income tax rate has remained consistent at approximately
37.0% for the three and six months ended June 30, 1996 and 1995; thus income tax
expense for the same current-year periods has increased proportionally to the
increases in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's principal sources of liquidity included
$27.1 million in cash and short-term investments, and $17.2 million in available
borrowings under its bank credit facility ("facility"). The facility includes a
revolving line of credit for borrowings up to $15.0 million, and expires in
September 1997. The facility also provides for an unsecured term loan totaling
$2.2 million for the purchase of manufacturing equipment, which will expire in
October 1996. At June 30, 1996, there were no borrowings outstanding under the
revolving line of credit or term loan.
Short-term investments at June 30, 1996 totaled $24.3 million, and
consisted primarily of holdings in municipal bonds and money market instruments
in accordance with the Company's investment policy, which is designed to
maintain a highly liquid portfolio with minimal risk. The Company's short-term
investments, which are classified as available-for-sale, increased $1.3 million
and $2.5 million for the three and six months ended June 30, 1996, respectively,
primarily due to the investment of cash flows generated from operations in both
periods. For all short-term investments at June 30, 1996, cost approximated fair
market value.
Over the six months ended June 30, 1996, inventory levels have declined
$5.9 million. Inventory levels fluctuate directly with the volume of the
Company's manufacturing; changes or significant fluctuations in product market
demands can cause fluctuations in inventory levels which may result in changes
in levels of inventory turns and liquidity. Historically, the Company has
managed its inventory levels with regard to these fluctuations. See "Risk
Factors."
As of June 30, 1996, the Company has purchased $2.8 million in capital
equipment and leasehold improvements, primarily for expansion of its
headquarters and manufacturing facilities. The Company presently plans to spend
approximately $2.5 million over the balance of 1996, primarily to equip its new
manufacturing facility in Cebu, the Philippines, improve its manufacturing
facility in Mexico and upgrade information systems at its headquarters in
California.
In April 1995, the Company entered into a facilities and services
agreement with Silicon Systems, Inc. ("SSI"), then a wholly owned subsidiary of
TDK U.S.A. Corporation ("TDK"). Under the agreement, which was in effect until
July 1996, SSI provided certain administrative services and facilities to the
Company for agreed-upon fees. SSI is also one of the Company's leading
integrated circuit suppliers. In June 1996, Texas Instruments Incorporated
("TI") announced its intention to acquire a division of SSI, with the remaining
divisions of SSI to remain with TDK. As a result of this transaction, SSI
transferred its equity interest in Smartflex, totaling 1.2 million shares, to
TDK. On July 18, 1996, the Company entered into a facilities and services
agreement with SSI, now a wholly owned subsidiary of TI, whereby SSI provides
certain administrative services and facilities to the Company for agreed-upon
fees, totaling approximately $35,000 per month. This agreement is in effect
until June 1997, at which time it may be automatically renewed for additional
twelve-month periods unless terminated by either party with proper notice.
Management believes that these events will not adversely affect the Company's
financial or operating results. See "Risk Factors."
The Company believes that existing cash and investments balances, funds
generated from operations and funds available under its current bank credit
facility will be sufficient to meet the Company's cash requirements during the
next twelve months. See "Risk Factors."
(9)
<PAGE>
RISK FACTORS
Important Factors Related to Forward-Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q contains forward-looking statements
that are based on current expectations and involve a number of risks and
uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the impact of competitive
products and pricing, interruption of the flow of components from a limited
number of suppliers, subsequent changes in business strategy or plan, continued
timely customer qualification of the Company's new assembly line in Monterrey,
Mexico, timely customer qualification of, and commencement of volume production
at, the Company's new facility in Cebu, the Philippines, and structural and
strategic changes affecting certain of the Company's existing customers,
suppliers and competitors.
The forward-looking statements included herein are based on current
assumptions that the Company will continue to develop, market, manufacture and
ship new products on a timely basis, that competitive conditions within the
Company's market will not change materially or adversely, that demand for the
Company's products and services will remain strong, that the market will accept
the Company's new products and services, that the Company will retain existing
key management personnel, that inventory risks due to shifts in market demand
will be minimized, that the Company's forecasts will accurately anticipate
market demand, and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments that are difficult to predict accurately and are subject to many
factors that can materially affect results. Budgeting and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure, or other budgets, which may in turn affect the Company's
results. In light of the factors that can materially affect the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. The following factors also may materially
affect results and therefore should be considered.
Substantial Fluctuations in Future Operating Results
The Company has experienced substantial fluctuations in its annual and
quarterly operating results, and such fluctuations are expected to continue in
future periods. The Company's operating results are affected by a number of
factors, many of which are beyond the Company's control. All products
manufactured by the Company are custom designed and assembled for a specific
customer's requirement in anticipation of the receipt of volume production
orders from that customer, which may not always materialize. The Company
typically incurs significant start-up costs in the production of a particular
product, which costs are expensed as incurred. Accordingly, the Company's level
of experience in manufacturing a particular product and its efficiency in
minimizing start-up costs will affect the Company's operating results during the
periods in which production begins and ramp-up occurs. The efficiencies of the
Company in managing inventories and fixed assets, shortages of components or
labor, the degree of automation used in the assembly process, fluctuations in
material costs and the mix of materials, labor, manufacturing and overhead costs
are also significant factors affecting annual and quarterly operating results.
Other factors contributing to fluctuations in the Company's operating results
include price competition, the inability to pass on cost overruns, the timing of
expenditures in anticipation of increased sales, customer product delivery
requirements and the range of services provided. In addition, the amount and
timing of orders placed by a customer may vary due to a number of factors,
including inventory balancing, changes in manufacturing strategy and variation
in product demand attributable to, among other things, product life cycles,
competitive factors and general economic conditions. Any one of these factors,
or a combination thereof, could adversely affect the Company's annual and
quarterly results of operations.
(10)
<PAGE>
The Company's customers generally require short delivery cycles, and a
substantial portion of the Company's backlog is typically scheduled for delivery
within 90 days. Quarterly sales and operating results therefore depend in large
part on the volume and timing of bookings received during the quarter, which are
difficult to forecast. The short lead time for the Company's backlog also
affects its ability to accurately plan production and inventory levels. In
addition, a significant portion of the Company's operating expenses are
relatively fixed in nature and planned expenditures are based in part on
anticipated orders. Any inability to adjust spending quickly enough to
compensate for any revenue shortfall may magnify the adverse impact of such
revenue shortfall on the Company's results of operations.
Dependence on Hard Disk Drive Industry
The Company's principal market is the HDD industry, which is
characterized by intense competition, relatively short product life cycles,
rapid technological change, significant fluctuations in product demand and
significant pressure on vendors to reduce or minimize costs. The HDD industry is
also highly cyclical and has experienced periods of increased demand and rapid
growth followed by periods of oversupply and contraction. The impact of cyclical
trends on suppliers to this industry has been exacerbated by the tendency of HDD
manufacturers to order components in excess of their needs during growth
periods, followed by a sharp reduction in demand for components during periods
of contraction. The Company's operating results have been adversely affected
from time to time during HDD industry slowdowns and could be materially
adversely affected in the event of significant slowdowns in this industry in the
future. Although the Company is attempting to reduce its dependence on the HDD
industry, the Company expects revenues attributable to this market to continue
to represent the majority of its revenues for the foreseeable future.
Customer Concentration
The Company's customer base is highly concentrated. For the first six
months of fiscal 1996 and 1995, the Company's four largest customers accounted
for approximately 80% and 77% of net revenues, respectively. Although the
Company is attempting to reduce its dependence on a limited number of customers,
the Company expects that sales to a relatively small number of original
equipment manufacturers ("OEMs") will continue to account for a substantial
portion of net revenues for the foreseeable future, and the loss of, or a
decline in orders from, one of the Company's key customers would have a material
adverse effect on the Company's financial and operating results.
Competition
The Company operates in a highly competitive industry and competes
against several domestic and foreign providers of electronics manufacturing
services. The principal competitors in the high-end segment of the flex assembly
market include ADFlex Solutions, Inc. ("ADFlex") and Solectron Corporation. The
Company also faces competition from the manufacturing operations of its current
and potential OEM customers, which the Company believes continue to evaluate the
merits of manufacturing flex assemblies internally, and from offshore contract
manufacturers, which, because of their lower labor rates, enjoy a comparative
advantage over the Company with respect to labor-intensive, high-volume
production. The Company has also experienced competition from head stack
assemblers in the past; however, most competition from such manufacturers has
been in the lower-end SMT segment of the market in which the Company currently
does not direct a significant amount of resources. The Company expects to
encounter future competition from other large electronics manufacturers that
currently provide or may begin to provide contract manufacturing services. A
number of the Company's competitors have substantially greater manufacturing,
financial, technical, marketing and other resources, and offer a broader line of
services, than does the Company. In addition, many of the Company's competitors
have a broader scope and presence of operations on a worldwide basis.
Significant competitive factors in the high-end flexible assembly market
include quality, price, responsiveness, the ability to manufacture fine-pitch
assemblies in volume, and test capabilities. While the Company believes that it
currently competes favorably with respect to these factors, there can be no
assurance that the Company will be able to continue to do so in the future. The
trend toward increasingly shorter product
(11)
<PAGE>
life cycles, particularly in the HDD industry, is expected to result in more
intense competition as each new customer program is generally open to bidding by
the Company and its competitors. Furthermore, the Company is often only one of
two or more contract manufacturers supplying a particular customer requirement
and is therefore subject to continuing competition on existing programs. In
order to remain competitive, the Company must continually provide timely and
technologically advanced manufacturing services, ensure the quality of its
products and compete favorably with respect to price. If the Company were to
fail to compete favorably with respect to the principal competitive factors in
its industry, the Company's business and operating results would be adversely
affected.
Component Supply and Sources
Substantially all of the Company's manufacturing services are provided
on a turnkey basis in which the Company, in addition to providing design,
assembly and testing services, is responsible for the procurement of the
components which are assembled by the Company for the customer. In certain
circumstances, the Company is required to bear the risk of component price
fluctuations, which could adversely affect the Company's gross margins. In
addition, in order to assure an adequate supply of certain key components which
have long procurement lead times, such as integrated circuits, the Company often
must order such components prior to receiving customer purchase orders for the
assemblies which require such components. Failure to accurately anticipate the
volume or timing of customer orders can result in component shortages or excess
component inventory, which in either case could adversely affect the Company's
financial and operating results.
Some of the assemblies manufactured by the Company require one or more
components that are ordered from, or which may be available from, only one
source or a limited number of sources. In particular, the Company relies on the
timely supply of components from ADFlex, Mektec Corporation, Silicon Systems,
Inc. ("SSI") and VTC, Inc. During the first half of 1996 and the year ended
1995, the Company purchased flex components primarily from ADFlex and Mektec
Corporation, and integrated circuits primarily from SSI and VTC, Inc. Delivery
problems relating to components purchased from any one of these or the Company's
other key suppliers could have a material adverse impact on the financial
performance of the Company. From time to time, the Company's suppliers allocate
components among their customers in response to supply shortages. In some cases,
supply shortages will substantially curtail production of all assemblies using a
particular component. In addition, at various times there have been
industry-wide shortages of electronic components, such as servo or read/write
circuits. While the Company has not experienced sustained periods of shortages
of components in the recent past, there can be no assurance that substantial
component shortages will not occur in the future. Any such shortages could have
a material adverse effect on the Company's operating results.
Dependence on Relationship with Silicon Systems, Inc.
The Company purchases a substantial portion of its integrated circuits
supply and certain administrative services and facilities from SSI. SSI was sold
by TDK U.S.A. Corporation ("TDK") to Texas Instruments Incorporated ("TI") on
July 9, 1996. SSI transferred its equity interest in the Company to TDK. The
Company may depend on the manufacturing, technical and other resources of SSI.
Subject to the contractual relationship between SSI and the Company concerning
administrative support and facilities that continues until June 1997, SSI may in
the future choose to limit or discontinue its strategic relationships with the
Company, develop or market competing technologies or products, or establish
relationships with the Company's competitors.
International Operations
The Company maintains international manufacturing operations in Mexico,
Singapore and the Philippines. In light of the continued growth of offshore
facilities on the part of the Company's customers, Smartflex anticipates that it
will be required to increase its presence overseas through internal growth,
acquisitions, or a combination of both. Manufacturing and sales operations
outside the United States are accompanied by a number of risks inherent in
international operations, including imposition of governmental controls,
compliance with a wide variety of foreign and United States export laws,
currency fluctuations,
(12)
<PAGE>
unexpected changes in trade restrictions, tariffs and barriers, political and
economic instability, longer payment cycles typically associated with foreign
sales, difficulties in administering business overseas, labor union issues and
potentially adverse tax consequences. The Company historically has denominated
all export sales in United States dollars. The Company's employees at its
facility in Mexico are represented by a labor union and covered by a collective
bargaining agreement that is subject to revision annually under Mexican law.
While the Company believes that it has established good relationships with its
labor force in Mexico, there can be no assurance that such relationships will
continue in the future.
Variability of Customer Requirements and Customer Financing
The level and timing of orders placed by customers vary due to the
customers' attempts to balance their inventory, changes in customers'
manufacturing strategies and variations in demand for the customers' products.
Due in part to these factors, most of the Company's customers do not commit to
firm production schedules for more than three months in advance of requirements.
The Company's inability to forecast the level of customer orders with certainty
makes it difficult to schedule production and optimize utilization of
manufacturing capacity. In the past, the Company has been required to increase
staffing and incur other expenses in order to meet the anticipated demand of its
customers. From time to time, anticipated orders from some of the Company's
customers have failed to materialize and delivery schedules have been deferred
as a result of changes in a customer's business needs, both of which have
adversely affected the Company's operating results. On other occasions,
customers have required rapid increases in production which have placed an
excessive burden on the Company's resources. Such customers' order fluctuations
and deferrals have had an adverse effect on the Company's operating results in
the past, and there can be no assurance that the Company will not experience
such effects in the future. In addition, the Company incurs significant accounts
receivable in connection with providing manufacturing services to its customers.
If one or more of the Company's principal customers were to become insolvent, or
otherwise were to fail to pay for the services and materials provided by the
Company, the Company's operating results and financial condition would be
adversely affected.
Rapid Technological Change
The Company's customer base competes in markets that are characterized
by rapid technological change and short product life cycles. In particular, the
HDD, computer and communications markets are prone to rapid product obsolescence
by new technologies. The flexible interconnect industry could experience future
competition from new or emerging technologies that render existing technology
less competitive or obsolete. The inability of the Company to develop
technologies to meet the evolving market requirements of its customer base could
have a material adverse effect on the Company's business, financial condition
and results of operations, including the Company's ability to maintain its
revenue base.
Management of Growth
The Company has experienced a period of rapid growth which has placed,
and is expected to continue to place, a significant strain on the Company's
management, operational and financial resources. The Company's growth is
expected to require the addition of new management personnel and the development
of additional expertise by existing management personnel. The Company's ability
to manage growth effectively, particularly given the increasingly international
scope of its operations, will require it to continue to implement and improve
its operational, financial and management information systems as well as to
develop the management skills of its managers and supervisors and to train,
motivate and manage its employees. The Company's failure to effectively manage
growth could have a material adverse effect on the Company's results of
operations.
Dependence on Key Employees
The Company is highly dependent on its Chief Executive Officer, William
L. Healey, and other principal members of its management team, the loss of whose
services could have a material adverse effect upon the business and financial
condition of the Company, as well as the ability of the Company to achieve its
(13)
<PAGE>
development objectives. None of such persons has an employment contract with the
Company. The Company is also dependent on other key personnel, and on its
ability to continue to attract, retain and motivate highly skilled personnel.
The competition for such employees is intense, and there can be no assurance
that the Company will be successful in attracting, retaining or motivating key
personnel.
Environmental Compliance
The Company is subject to a variety of environmental regulations
relating to the use, storage, discharge and disposal of hazardous chemicals and
substances used in its manufacturing process. While the Company believes that it
is in material compliance with all existing applicable environmental statutes
and regulations, any failure by the Company to comply with statutes and
regulations presently existing or enacted in the future could subject it to
liabilities or the suspension of production. In addition, compliance with such
statutes and regulations could restrict the Company's ability to expand its
facilities or require the Company to acquire costly equipment or to incur other
significant expenses.
Factors Inhibiting Change of Control
The Company's Certificate of Incorporation includes a provision that
allows the Board of Directors to issue up to 5,000,000 shares of Preferred Stock
and to determine the rights, preferences, privileges and restrictions of those
shares without stockholder approval. Preferred Stock could be issued with
voting, liquidation and dividend rights superior to those of holders of Common
Stock. An issuance of Preferred Stock also could have the effect of delaying or
preventing a change of control of the Company.
In addition, Section 203 of the Delaware General Corporation Law
restricts certain business combinations with any "interested stockholder" as
defined by such statute.
The Company's Shareholder Rights Plan provides for holders of Common
Stock (other than certain acquirors) to have the right to purchase stock of the
Company or an acquiring person at 50% of its fair market value following certain
events. The Shareholder Rights Plan could have the effect of delaying or
preventing a change of control of the Company.
Such provisions may reduce the price that certain investors may be
willing to pay in the future for shares of the Company's Common Stock, and may
reduce the possibility of any acquisition of the Company at a premium price,
unless such acquisition meets with approval by the Company's Board of Directors.
(14)
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
On July 17, 1996, the Board of Directors of the Company unanimously
adopted a Shareholder Rights Plan ("the Rights Plan"), pursuant to which it
declared a dividend distribution of one preferred stock purchase right (a
"Right") for each outstanding share of the Common Stock. The Rights dividend
will be payable on August 16, 1996 to the holders of record of shares of Common
Stock on that date. Each Right entitles the registered holder, on certain
events, to purchase from the Company 1/100th of a share of the Company's Series
A Junior Participating Preferred Stock, par value $.001 per share, 200,000
shares authorized and no shares issued or outstanding at July 26, 1996 (the
"Series A Preferred Stock"), at a price of $70.00 per 1/100th of a share,
subject to adjustment. Adoption and implementation of the Rights Plan could have
the effect of discouraging a change of control of the Company.
On July 25, 1996, the Company filed a Registration Statement on Form
8-A to register the Rights under the Securities Exchange Act of 1934, as
amended. Such Registration Statement and the exhibits thereto are incorporated
herein by this reference.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May 15, 1996.
The following is a brief description of each matter voted upon at the meeting
and a statement of the number of votes cast for, withheld or against, and the
number of abstentions with respect to each matter. Both proposals were approved
by the stockholders.
(a) The stockholders approved the election of the Company's board of
directors.
DIRECTOR FOR WITHHELD ABSTAINED
-------- --- -------- ---------
William L. Healey 5,956,730 1,880 ---
William E. Bendush 5,955,880 2,730 ---
Alan V. King 5,956,330 2,280 ---
William A. Klein 5,956,460 2,150 ---
Gary E. Liebl 5,956,460 2,150 ---
(b) The stockholders approved the appointment of Ernst & Young LLP as the
auditors of the Company.
FOR AGAINST ABSTAINED
--- ------- ---------
5,955,338 700 2,572
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits --- the following exhibits are included herein:
10.17 Facilities and Services Agreement entered into on
July 18, 1996 between the Registrant and Silicon Systems, Inc.
10.26 Contract of Lease dated May 24, 1996, between Smartflex
Systems Philippines, Inc. ("Smartflex Philippines") and
Joe & Larry Active Wears Co., Inc.
10.27 Registration Agreement dated May 25, 1996 between Smartflex
Philippines and Philippine Economic Zone Authority.
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule (filed electronically).
(b) No reports on Form 8-K were filed during the three months ended
June 30, 1996.
(15)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SMARTFLEX SYSTEMS, INC.
(Registrant)
August 8, 1996 By: /s/ Alfred B. Castleman
- ----------------------------- --------------------------------------------
Date Alfred B. Castleman
Vice President, Chief Financial Officer, and
Duly Authorized Officer
(Principal financial and accounting officer)
(16)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- -------- ------------------------------------------------- -------------
10.17 Facilities and Services Agreement entered into on
July 18, 1996 between the Registrant and Silicon
Systems, Inc. 18
10.26 Contract of Lease dated May 24, 1996, between
Smartflex Systems Philippines, Inc. ("Smartflex
Philippines") and Joe & Larry Active Wears Co., Inc. 23
10.27 Registration Agreement dated May 25, 1996 between
Smartflex Philippines and Philippine Economic Zone
Authority. 29
11.1 Computation of Earnings per Share. 39
27.1 Financial Data Schedule (filed electronically). 40
(17)
<PAGE>
FACILITIES AND SERVICES AGREEMENT
THIS AGREEMENT is entered into on July 18, 1996 between Silicon Systems, Inc.
("SSi"), having its principal offices at 14351 Myford Road, Tustin, CA 92680 and
Smartflex Systems, Inc. ("SfS"), having its principal offices at 14312 Franklin
Ave., Tustin, CA 92680.
WHEREAS, SfS, prior to the date of this Agreement, has been occupying office
space leased to and/or owned by SSi and SSi has been providing administrative
support and other services to SfS under a Facilities and Services Agreement
dated April 5, 1995; and
WHEREAS, SfS and SSi are desirous of entering into a new Facilities and Services
Agreement which more accurately reflects the anticipated dealings of the parties
effective June 1, 1996;
NOW, THEREFORE, in consideration of the mutual undertakings and covenants
contained herein, the parties agree as follows:
1. FACILITIES
1.1 Ssi shall provide for SfS's use approximately 6,655 sq. feet in SSi's
premises commonly referred to as "Building E" located at 14352 Franklin Ave.,
Tustin, CA (the "Building"). SfS agrees to be bound by all reasonable provisions
imposed by SSi with regard to SfS's use of the Building.
1.2 SfS shall be charged its prorated share of occupancy and utility expenses
associated with its use of the Building to include, without limitation,
electricity, heat, water and sewage, and all real estate property taxes.
1.3 SSi shall use its best efforts to accommodate additional space requirements
of SfS which may arise during the term of this Agreement. As appropriate, by
mutual agreement of the parties, an adjustment (upward or downward) will be made
to the facilities charge(s) assessed SfS dependent upon the actual space
occupied.
1.4 SfS shall be responsible, upon terminating its occupancy of any or all
portions of the Building, for the cost of restoring same to their original
condition at the time SfS commenced utilizing said space, ordinary wear and tear
excepted.
1.5 Until December 31, 1996, SfS shall have use of the parking lot ("Parking
Lot") leased by SSi located between the building leased by SSi located at 14321
Myford Road, Tustin, CA, commonly referred to as "Building B", and the building
leased by SfS located at 14312 Franklin Ave., Tustin, CA, commonly referred to
1
(18)
<PAGE>
as "Building D". SfS shall bear fifty-percent of the lease cost as reflected on
the attached Exhibit A. SfS agrees to abide by all terms of the lease for said
parking lot with regard to SfS's use thereof.
2. ADMINISTRATIVE AND OTHER SERVICES
2.1 SSi will provide SfS with administrative services in the areas of Human
Resources, Finance, Facilities and Management Information Systems, as are more
fully described in the attached Exhibit A and for which SfS shall be charged a
fixed monthly amount in accordance with Section 3.1 below.
2.2 SSi will provide SfS with nitrogen for its manufacturing operation. SfS will
reimburse SSi for the cost of the nitrogen utilized by SfS.
3. COMPENSATION
3.1 The attached Exhibit A sets forth the monthly financial allocation
("Allocation Charges") to be charged SfS and agreed upon by the parties to
represent fair compensation to SSi for SfS's use of the Building (including
those items specified in Section 1.2 above), Parking Lot and for SSi providing
administrative and other services to SfS as described in Sections 2.1, and 2.2
above. It is acknowledged that the Allocation Charges are predicated upon SSi's
historical experience in providing the related services to SfS. Exhibit A shall
be amended from time to time, upon mutual agreement of the parties hereto, to
revise the Allocation Charges, if necessary, to reflect SSi's then current or
anticipated costs of providing such services. If the parties are unable to agree
upon revised Allocation Charges, then SSi may cease providing any or all of the
services upon ninety (90) days' prior written notice to SfS.
3.2 In addition to the Allocation Charges as provided for in Section 3.1 above,
SfS shall be responsible for any other charges outside the scope of the services
addressed herein as may be incurred on SfS's behalf at SfS's request or upon
prior notice from SSi (collectively referred to as "Pass Through Charges").
3.3 SSi will invoice SfS monthly for the then applicable Allocation and Pass
Through Charges due hereunder. SfS will pay said invoices within thirty (30)
days from receipt thereof.
4. TERM AND TERMINATION
4.1 Unless sooner terminated as hereinafter provided, this Agreement shall
continue in full force and effect for a period of twelve months commencing June
1, 1996 and shall thereafter be automatically renewed for additional twelve
month periods unless terminated by either party upon six month's prior written
notice, provided that this Agreement may be terminated by SSi on ninety (90)
days' prior written notice in the event the parties cannot
2
(19)
<PAGE>
reach agreement on revised Allocation Charges in accordance with Section 3.1
above.
5. MISCELLANEOUS
5.1 Each party agrees to indemnify and hold the other harmless from and against
any and all damages arising from the other party's performance of, or failure to
perform, its obligations hereunder, unless resulting from the other party's
gross negligence or willful misconduct.
5.2 SfS shall have the right, upon reasonable notice, to inspect the financial
records of SSi which relate to charges incurred hereunder by SfS.
5.3 Neither party may assign, in whole or in part, without the other party's
consent, its rights or obligations hereunder.
5.4 The failure of either party to enforce, at any time or for any period of
time, any term or provision of this Agreement shall not be construed to be a
waiver of such term or provision and shall in no way affect the right of such
party thereafter to enforce such term or provision.
5.5 If disagreements arise under this Agreement, the senior management of both
parties shall meet to attempt to resolve any differences which exist between the
parties.
5.6 This Agreement contains the entire understanding of the parties hereto and
supersedes all prior written and oral agreements, understandings or commitments
made by the parties with respect to the subject matter hereof and supersedes the
Facilities and Services Agreement dated April 5, 1995 entered into by the
parties hereto. Any amendments, additions or deletions to this Agreement shall
be mutually agreed upon by the parties hereto and shall be of no effect unless
reduced to writing and signed by both parties hereto.
5.7 Any notices given relative to this Agreement shall be provided to the party
at the address contained in the preamble of this Agreement, or to such other
address as the party may advise in writing. All notices shall be effective upon
receipt.
5.8 This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of California and any legal action
instituted on the basis of or in relation to this Agreement shall be filed in
Orange County, CA.
5.9 Sections 5.1, 5.5 and 5.8 shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
3
(20)
<PAGE>
executed same as of the date first written above.
SMARTFLEX SYSTEMS, INC. SILICON SYSTEMS, INC.
By: /s/ William L. Healey By: /s/ William E. Bendush
------------------------ -----------------------------
Name: William L. Healey Name: William E. Bendush
------------------------ -----------------------------
Title: President Title: Sr. V.P. & CFO
------------------------ -----------------------------
4
(21)
<PAGE>
Exhibit A
Summary
Service Amount
- ------- ------
Nitrogen Usage To be calculated based on actual usage
Human Resources 3,254
Finance 225
MIS - PC Support and Communications-Phone 4,452
Facilities 27,147
------
Total Allocation per Month 35,168
======
(22)
<PAGE>
C O N T R A C T O F L E A S E
--------------- --- ---------
KNOW ALL MEN BY THESE PRESENTS:
THIS CONTRACT OF LEASE, made and entered into by and between:
JOE & LARRY ACTIVE WEARS CO., INC. (formerly Hanover Manufacturing Corp.) a
corporation duly organised and existing under the laws of the Philippines with
principal office and place of business at Mactan Export Processing Zone,
Lapu-Lapu City, Cebu, Philippines and represented in this act by its President,
Mr. Jose T. Ng, of legal age, Filipino, married and a resident of Mandaue City,
Cebu, Philippines, hereinafter known as the Lessor;
- a n d -
SMARTFLEX SYSTMES ( PHILS. ) INC., a corporation duly organised and
existing under the laws of the Philippines, represented in this act by Mr.
WILLIAM L. HEALEY , in his capacity as the President of the Smartflex Systems (
Phils. ) Inc., legal age, Amercian Citizen, with principal office at 5th street,
Mactan Export Processing Zone, Lapu-Lapu City, Cebu, Philippines, hereinafter
known as the LESSEE.
W I T N E S S E T H
Whereas, the LESSOR being an Ecozone Enterprise, is the owner of a factory
building situated at Gate 1, 5th Street, Mactan Export Processing Zone,
Lapu-Lapu City, Cebu, Philippines, constructed on a land owned, administered or
operated by the Philippine Economic Zone Authority;
Whereas, the LESSEE is desirous, and the LESSOR is agreeable, to lease the
above mentioned building together with its right to the use of the land on which
its stand, including all facilities, utilities therein, subject to the following
TERMS AND CONDITIONS:
1.0 LEASED PREMISES- Factory building No. 2 and 3 of Joe & Larry Active Wears
Co., Inc., situated at Gate 1, 5th Street, Mactan Export Processing Zone,
Lapu-Lapu City, Cebu, Philippines, with an area of 1,400 square meters per
unit or a total of 2,800 square metes, plus a 400 square meters mezzanine.
2.0 DURATION OF CONTRACT- The term of Lease shall be for Three ( 3 ) Years,
renewable thereafter with escalation of not exceeding 15% on the rental.
The Lease may be renewed by the LESSEE, at its discretion, for a period of
Three ( 3 ) Years, provided the LESSEE notifies the LESSOR IN writing not
later than One Hundred Eighty ( 180 ) days prior to the end of original
lease period subject to the stated escalation of rent.
2.1 UNDERTAKING OF LESSEE UPON EXPIRY OF TERM- After expiration of the said
lease period, and the LESSEE have decided not to renew the Contract but
nevertheless continue to temporarily occupy the Leased premises, before
LESSOS'S exercise of its rights under provision on BREACH AND DAMAGES and
without prejudice to such exercise, said occupancy shall be deemed
automatically renewed for One ( 1 ) Year, under the same Terms and
Conditions with a minimum of Twenty (20%) Percent increase on the agreed
rental for the new term.
2.2 SURRENDER & DELIVER OF PREMISES- LESSEE agrees to surrender and deliver
said premises peacefully to LESSOR upon termination of said extended
period. If LESSEE remain in possession of the said Premises shall be
considered as having com- mitted an act of forcible detention of said
Premises and shall then be subjected to forcible removal without resort to
court processes, and LESSOR may then exercise its rights under the
provisions on Breach & Damages hereinafter provided. Furthermore, if said
Premises be not surrendered at the end of the said period, LESSEE shall
responsible to LESSOR for all damages, which LESSOR may suffer by reason
thereof and will indemnify LESSOR against all claims made by any succeding
tenants, or other prejudiced parties so far as such delay is occasioned by
the failure of LESSEE to surrender the Premises.
(23)
<PAGE>
3.0 PRE - TERMINATION OF CONTRACT - The LESSEE may terminate the lease before
the expiration of its term, provided that the LESSEE shall notify the
LESSOR at least six ( 6 ) Months before the date intended for termination,
and that the LESSEE shall continue to pay monthly rentals for the remaining
Six ( 6 ) Months. Furthermore, the Three ( 3 ) Month Commitment Fee paid by
the LESSEE shall be deemed forfeited.
4.0 AMOUNT OF RENT - The monthly rental shall be US$ 5.80 per square meter for
the ground floor and US$ 3.40 per square meter for the mezzanine floor,
fixed for Three ( 3 ) Years.
4.1 PAYMENT OF RENTAL - LESSEE shall pay LESSOR the rental amount in full
within the first Ten ( 10 ) days of each calendar month at LESSOR OFFICE,
without need of notice or demand. Two ( 2 ) Percent surcharge per month
shall be added for payment made after said due date. However, in case the
delay in payment is due to clerical errors, no surcharge shall be imposed,
provided that such clerical error shall only be for the first time.
4.2 INCREASE OF RENTAL - LESSEE shall pay a proportionate increase in the
rental, not exceeding Ten ( 10% ) percent of the rent provided herein, when
so required by the LESSOR in the event that the Government shall increase
the assessed value of, or the realty taxes on the leased premises.
5.0 DEPOSITS AND ADVANCES - A Three ( 3 ) Month Commitment Fee and Three ( 3 )
Month Advance Security Deposit will be required upon signing of LEASE
CONTRACT and prior to move-in.
5.1 COMMITMENT FEE - The Three ( 3 ) Month Commitment Fee shall be
con-sidered as Advanced Rental for the last Three ( 3 ) Months of the Lease
period;
5.2 SECURITY DEPOSIT - The Security Deposit shall be refunded, interest
free at the end of the lease period, less any obligations for utilities
rent, repair of the buildings, and after the LESSEE shall have vacated the
premises and cleared the same of any debris. This said deposit can be
refunded to the LESSEE upon the renewal of the Lease Agreement for a Second
Term provided the LESSEE shall undertake a guarantee/assurance in the form
of Surety Bond by any reputable Surety Company to guarantee the
obligations.
6.0 BREACH AND DAMAGES - Upon the happening of any of the following events:
6.1 Failure of LESSEE to pay any single monthly rent within the first Ten
(10) days of each month, consistent with Paragraph 4.1; or
6.2 Premature Termination of the Lease Period agreed upon; or
6.3 Default or Breach in any of the Terms and Conditions of this Lease
Contract by LESSEE; or
6.4 If LESSEE shall become bankrupt or being a corporation shall go into
liquidation, or if LESSEE shall otherwise become insolvent or shall suffer
any execution to be levied on his/its leasehold interest on the leased
premises or otherwise on LESSEE'S goods; or
6.5 Upon expiration of lease period, then and in either or any such event
it shall be lawful for the LESSOR to exercise any of the following
cummulative rights and remedies reserved to the LESSOR, without need of
demand or notice or resort to court processes;
0.1 To declare this lease terminated and to consider the rents for the
unexpire period due and demandable;
0.2 To proceed against the security deposit and apply the same to the
purpose for which it was constituted;
(24)
<PAGE>
0.3 Time being the essence in the performance of this contract, LESSEE hereby
constitute LESSOR as his/its leased premises to be opened in the presence of a
peace officer/authorized persons from the Zone Authority to take inventories of
LESSEE'S merchandise, equipments, furnitures, and fixtures, etc., and place the
same in LESSOR'S factory so that LESSOR can recover full possession and
enjoyment of said lease premises, with the LESSEE undertaking to pay all
reasonable expenses incurred by the LESSOR in connection with said removal and
transfer of said property including storage charges;
0.4 Upon failure of LESSEE to claim said property from storage within Ninety (
90 ) days from the date of transfer, LESSOR is hereby given under said
Power-of-Attorney authority to dispose of said property in private sale and to
apply the proceeds thereof to whatever indebtedness or liabilities arising out
of said default/breach by the LESSEE, and the balance, if any, shall be turned
over to LESSEE;
0.5 For and in the performance by LESSOR its rights of re-entry and repossession
under this said authority, LESSOR may so exercise the same without resort to
judicial processes and may use such reasonable force as may be necessary to
reposses and enjoy to lease premises; and the LESSOR shall not incur civil
and/or criminal liabilities whatsoever as a result thereof;
0.6 To demand from LESSEE, and the LESSEE to pay the LESSOR TWENTY FIVE (25%)
PERCENT of the total amount due under the contract upon its breach of default by
LESSEE, but in no case less than TEN THOUSAND ( P 10,000.00 ) PESOS, in concept
of Attorney's Fees for the enforcement of LESSOR'S rights/remedies provided
herein, judicially or extrajudicially, in addition to expenses of litigation.
Further, parties agree to submit to jurisdiction of the Regional Trial Court of
Lapu-Lapu City, Cebu.
7.0 OTHER UNDERTAKINGS OF LESSEE:
7.1 USE OF PREMISES - The LESSEE hereby expressly agrees and warrants that
the leased premises shall be used exclusively for the manufacturing of
electronic products and/or any other production activity predominantly
export oriented;
7.2 SUB-LEASING - The LESSEE shall not directly or indirectly sub-lease,
assign, transfer, convey, mortgage, or in any manner incumber its rights of
lease over the leased premises or any portion thereof without the KNOWLEDGE
of the LESSOR. The LESSOR will allow a sub-lease provided the same is
reasonable.
7.3 REPAIRS, ALTERATIONS & IMPROVEMENTS - The LESSEE shall not commence or
proceed with any repair work nor in any case introduce improvements or make
any alterations without prior knowledge of the LESSOR; Provided however,
that all improvements or alterations which can not be removed without
causing damage to the premises shall form an integral part of the leased
premises, and shall not be removed therefrom but shall belong and become
the exclusive property of the LESSOR upon the termination of the lease
without need for reimbursement for the costs thereof. However, ITEMS THAT
MAY BE REMOVED IF THE AREA WHERE THE ITEMS ARE RE-MOVED IS RESTORED TO
THEIR ORIGINAL STATUS.
7.4 TAXES - LESSEE shall pay whatever Value Added Tax that may be imposed
by the government throughout the period of lease. Taxes due upon
improvements introduced in the premises by the LESSEE shall be for the
account of the LESSEE for so long as LESSEE is enjoying the beneficial use
of the premises.
7.5 PUBLIC UTILITIES - The LESSEE shall pay for electricity, telephone,
water bills, as well as government annual inspection fees on public
utilities or services enjoyed in the leased premises.
7.6 COMPLIANCE WITH LAWS, ORDINANCE & REGULATIONS - The LESSEE shall comply
with any and all laws, ordinance, regulations or orders of the National or
City government authorities, arising from or regarding the use, occupation
and sanitation of the leased premises. Failure to comply the said laws,
ordinances, regulations or orders shall be at the exclusive risk and
expense of the LESSEE.
(25)
<PAGE>
7.7 INJURY TO PERSONS WITHIN THE PREMISES - The LESSEE shall be responsible
for all acts done by its agents or employees and other persons entering the
leased premises insofar as the enforcement of this contract is concerned.
Any damage to the leased premises due to the fault of the LESSEE, its
agents, employees and/or servants or other third persons who may have
gained access to the leased premises shall be promptly repaired by the
LESSEE at its exclusive expense; LESSEE, as a material part of the
consideration to be rendered to LESSOR, hereby waives all claims against
LESSOR for damages to goods, wares and merchandise in, upon, or about said
premises, from any cause arising at any time, and the LESSEE will hold
LESSOR exempt from any damage or injury to any person or to the goods,
wares, and merchandise of any persons arising from the use of the premises
by the LESSEE or from failure of LESSEE to keep the premises in good
condition and repair, as herein provided.
The LESSOR shall be responsible for all acts done by its agents or emplyee
and other persons entering the common areas ( not leased premises ) insofar
as the enforcement of this contract is concerned. Any damage to the common
areas due to that fault of the LESSOR, its agents, employees and/or
servants or other third persons who may gained access to the common areas
shall be repaired promptly by the LESSOR at its exclusive expenses; LESSOR
as a material part of the consideration to be rendered to LESSEE, hereby
waives all claims against LESSEE for damages to goods, wares and
mercchandise in , upon, or about said common areas, from any cause arising
at any time, and LESSOR will hold LESSEE exempt from any damage or injury
to any person or to the wares, goods and merchandise of any person arising
from the use of the common areas by the LESSOR or from failure of LESSOR to
keep the common areas in good condition and repair, as herein provided.
7.8 PARTIAL OR TOTAL DESTRUCTION - In case of damage to leased premises or
its appurtenances by fire, earthquake or other unforseen causes or for any
cause independent of the will of the LESSOR, the LESSOR shall immediately
notify the LESSEE of such fact; if the leased premises would only be
partially destroyed without fault or negligence of the LESSEE or its ag
nts, employ es, or visitors, the damage shall be immediately repaired at
the expense of the LESSOR. In the event that the LESSEE undertake the
repair to return the building to its leased condition, then the costs of
repair shall be deducted from the monthly rental.
In the event that the building or the leased premises are damaged to the
extend of being uninhabitable and untenantable without fault or negligence
of the LESSEE, its ag nts, employees or visitors, the rental shall be paid
for what was used. If the building becomes uninhabitable then all deposit
and security fees will be refunded to the LESSEE.
7.9 INSURANCE - The LESSOR will carry insurance on the building structure
itself against fire, earthquake, typhoon and other natural disasters, etc.
and must show p oof of insurance to LESSEE.
8.0 NOT TO INCREASE INSURANCE RATES - No use shall be made or permitted to
be made of said premises; nor acts done, which will increase the existing
rate of insurance upon the building, or any part thereof nor shall LESSEE
sell, or p rmit to be kept, used or sold, in or about said premises any
articles which may be prohibited by the standard form of fire insurance.
8.1 TO COMP Y WITH INSURANCE REQUIREMENTS - LESSEE shall, at his/its sole
cost and exp nse, comply with any and all requirements pertaining to said p
emises, or of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance, covering
said building and appurtenances.
8.2 IN CASE OF EMERG NCY - In case of emergency, upon the happening of the
insured risk, LESSOR is authorized to break padlock and/or doors of the
leased premises without further notice; and no losses or damage will be
claimed against LESSOR for such action.
8.3 VACATE OR BANDON - LESSEE shall not vacate or abandon the premises at
any time during the term. Absence or non-operation of the business, or
closure for a continous period of Thirty ( 30 ) days shall be considered
abandonement, unless notice is given by LESSEE to LESSOR. If LESSEE shall
abandon, vacate or surrender said premises, or be dispossessed by process
of law, or otherwise, any personal property belonging to LESSEE and left
(26)
<PAGE>
on the premises shall be deemed abandoned and at the option of LESSOR,
excep such p op rty as may be mortgaged or pleadged to LESSOR.
8.4 FREE FROM LIENS AND COMPLIANCE WITH REQUIREMENTS OF LAW - LESSEE shall
keep the leased premises and the property in which the said premises are
situated, free from any liens arising out of any work performed, materials
furnished, or obligations incurred by the LESSEE.
LESSEE shall at his/ ts sole cost and expense comply with all the
requirements of all city and national authorities now in force, or which
may here after be in force, p rtaining to the said premises, and shall
faithfully observe in the use of the premises all ordinances and statutes
now in force or which may hereafter be in force.
The judgement of any court of competent jurisdiction, or the admission of
LESSEE, whether LESSOR be a party thereto or not, the LESSEE has violeted
any such ordinance or statutes in the use of the premises, shall be
conclusive of that fact as between LESSOR and LESSEE.
8.5 PROJECTING SIGNS - LESSEE shall not place or permit to be placed any
projecting sign, marques or awning on the front of said premises without
written consent of LESSOR. LESSOR acknowledges LESSEE'S intent to place a
sig in the front of the premises and concurs with its placement.
8.6 LESSOR'S RIGHT TO INSPECT & KEYS - During the lease period, the LESSOR
or their representatives shall be allowed to enter the premises for purpose
of inspecting the area, provided a written approval letter from the LESSEE
is obtain Fourteen ( 14 ) days prior to the inspection date. However,
during the last Six ( 6 ) months of the lease, the LESSEE shall allow the
LESSOR or their representatives to enter the premises for purpose of
showing the area/premises to the new prospective LESSEE. Written approval
letter from the LESSEE is needed at least Two ( 2 ) days prior to the
visiting date.
LESSEE shall turn over to LESSOR all keys of the leased premises including
duplicAtes, at the expiration or the early termination of the lease period
as provided herein.
8.7 KEEP ING PETS - LESSEE shall obligates itself not to keep or raise
within the leased premises any pets, such as dogs, cats, birds, and other
animals.
8.8 MAINTENANCE - LESSEE shall contribute to maintenance of the area
surrounding the leased premises, such as janitorial, landscaping,
gardening, security guards and the like, services, at the rate to be
determined from the actual expenses, and prorated among the LESSEES based
on mutually agreed to formulas.
8.9 WELDING & ACY TELENE & OTHER FIRE HAZARDOUS EQUIPMENTS - Welding &
Acytelene and other fire hazardous equipments are strictly prohibited
within the premises on a routine basis. LESSOR acknowledged that during the
construction phase, equipment placment phase, or during equipment repair,
these fire hazardous equipments may be used. LESSEE shall give LESSOR prior
notice.
9.0 IMMOBILE VEHICLES - All immobile vehicles such as cars, Jeeps, vans,
trailers, p sh carts, etc. that are stationary junked must be removed
immediately. Continous parking of these types of vehicles are not allow.
LESSEE shall keep the Drive Way free from obstructions.
10.0 DAMAGES, ATTORNEY'S FEES AND LITIGATION COSTS - Should any of the
parties violate or fail to comply with any of its obligations herein
stipulated, the party at fault shall pay the innocent one liquidated
damages in the amount of TEN THOUSAND ( P 10,000.00 ) PESOS, Philippine
Currency, in addition to any and all damages, actual and consequintial
resulting f om such violation or violations aside from Attorney's Fees in
the amount of not less than TEN THOUSAND ( P 10,000.00 ) PESOS, Philippine
Currency and the costs of the litigation and other expenses by reason
thereof.
(27)
<PAGE>
11.0 QUIET POSSESSION - Upon LESSEE paying the rent for the premises and
observing all of the covenants, conditions and provisions on LESSEE'S part
to be observed and performed hereunder, LESSEE shall have quiet possession
of the premises for the entire term of hereof, subject to all the
provisions of this lease. The individuals executing this lease in behalf of
the LESSOR represent and warrant to LESSEE that they are fully authorized
and legally capable of executing this lease on behalf of LESSOR and that
such execution is binding upon all parties holding an ownership interest in
the Premises.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
this ___________________ of ____________________ 1996, in the City of
____________+____ , Cebu.
JOE & LARRY ACTIVE WEARS CO., INC. SMARTFLEX SYSTEMS (PHILS.) INC.
/s/ Jose T. Ng /s/ William L. Healey
------------------------------ --------------------------------
JOSE T. NG/ PRESIDENT AUTHORIZED SIGNATURE
RES. CERT. NO. 15702674 C PASSPORT NO. 035058666
ISSUED ON JAN. 9, 1996 ISSUED ON JUN 10, 1994
ISSUED AT CITY OF MANDAUE EXPIRATION DATE JUN 9, 2004
ISSUED AT LOS ANGELES, U.S.A.
THE SIGNATURE OF OUR WITNESSES:
/s/ Joelix S. Ng /s/ Eli Trinidad
1. JOELIX S. NG/VP - OPERATION 2. ELI TRINIDAD / HRD MANAGER
------------------------------- -------------------------------
JOE & LARRY ACTIVE WEARS CO., INC. SMARTFLEX SYSTEMS (PHIL.)
A C K N O W L E D G E M E N T
-----------------------------
REPUBLIC OF THE P ILIPPINES )
CITY OF CEBU ) S.S.
BEFORE ME, today MAY 24, 1996 , personally appeared above named
individauls, the date of whose residence tax certifcates and Passport Number
appear underneth their type written names above, known to me and to me lnown to
be the same individauls who-
1. Executed the foregoing lease contract duly signed by them and their
witnesses, and sealed with my notarial seal; and,
2. Each acknowledged to me that the same is their respective as well
as their respective principals' free and voluntary act and deed.
WITNESS MY HAND AND SEAL.
(28)
<PAGE>
REGISTRATION AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement made and entered into by and between -
PHILIPPINE ECONOMIC ZONE AUTHORITY, a government corporation
created and operating under Republic Act No. 7916, with office
address at corner San Luis St. and Roxas Boulevard, Pasay City,
represented herein by its Director General, MS. LILIA B. DE LIMA
who is duly authorized, hereinafter referred to as the "PEZA",
- and -
SMARTFLEX SYSTEMS PHILIPPINES INC., a corporation duly organized
and existing under Philippine laws, with office address at the
Mactan ECOZONE, Lapu-Lapu City, represented herein by its
President, MR. WILLIAM L. HEALEY, who is likewise duly
authorized, hereinafter referred to as the "REGISTRANT".
W I T N E S S E T H That:
WHEREAS, the REGISTRANT has filed an application with the PEZA for
registration as an ECOZONE Export Enterprise, particularly, to engage in the
manufacture of precision flexible circuits for hard disk drives, computer,
peripherals and precision devices at the Mactan ECOZONE;
WHEREAS, the PEZA finds that the project of the REGISTRANT is feasible
in its technical, financial, management and marketing aspects;
WHEREAS, the PEZA under Board Resolution No. 96-128, dated April 17,
1996 approved the application of the REGISTRANT.
NOW, THEREFORE, in view of the foregoing promises and mutual covenants
and undertakings hereinafter provided, the parties hereto have agreed as
follows:
1
(29)
<PAGE>
ARTICLE I
REGISTRANT'S RIGHT TO OPERATE
1. The registration of the REGISTRANT as an ECOZONE Export Enterprise shall
entitle it to conduct and operate its business inside the Mactan ECOZONE in
accordance with the representations, commitments and proposals set forth in its
application, including its project feasibility study and forming interal parts
hereof, subject to such terms and conditions hereinafter provided.
ARTICLE II
SCOPE OF REGISTRANT'S REGISTERED ACTIVITY
2. The scope of REGISTRANT'S registered activity shall be limited for the
manufacture of precision flexible circuits for hard disk drives, computer,
peripherals and precision devices for export and the importation of raw
materials, machineries, equipment, tools, goods, wares, articles or merchandise
directly used in its registered operations at the Mactan ECOZONE. In the event
the REGISTRANT decides to engage in a new or additional product line, directly
or indirectly related to its registered activity, it shall apply anew to the
PEZA for the latter's approval.
ARTICLE III
AREA OF OPERATIONS
3. The REGISTRANT shall maintain continuous possession of a factory space
at the Mactan ECOZONE under the terms and provisions of its lease agreement with
private developers or other registered enterprises with excess factory spaces
inside the Mactan ECOZONE. A duly notarized copy of the said lease agreement
shall be furnished to the PEZA by the REGISTRANT within seven (7) days from
execution thereof.
3.1 It is understood that the said factory building shall be devoted by the
REGISTRANT exclusively for the establishment, operation and maintenance of such
machineries, equipment and other improvements as may be necessary to carry on
its registered activity as an Ecozone Export Enterprise. Conformably thereto,
the Leased Premises may not be used for any other purpose without the written
consent of the PEZA.
ARTICLE IV
SALE, ASSIGNMENT AND MORTGAGE OF ASSETS
4. The REGISTRANT may assign, transfer, sell, mortgage or otherwise
encumber its machinery and equipment, leasehold right or this Registration
2
(30)
<PAGE>
Agreement or rights arising therefrom provided a prior written consent of the
PEZA is obtained by the REGISTRANT FIFTEEN (15) days prior to such assignment,
transfer, conveyance, sale, mortgage or encumbrance and subject to such
conditions as may be imposed by PEZA. Any and all rights and interests accruing
to the third parties in violation of this provision shall not be binding against
the PEZA.
ARTICLE V
PUBLIC SAFETY AND LABOR STANDARDS
5. The REGISTRANT shall see to it that its operations during the course of
manufacture or production will not endanger public safety or public health nor
violate the anti-pollution requirements of the government and shall comply with
the medical, dental, occupational health and safety laws, regulations and
standards of the Labor Code of the Philippines, as amended, as well as other
provisions therein and rules and regulations promulgated thereunder and other
labor laws and regulations governing labor relations, fixing of minimum wage,
terms and conditions of employment, etc.
For this purpose, the REGISTRANT shall comply with the Master Employment
Contract that shall be prescribed by PEZA and the policies and declarations
promulgated by a tripartite body under a social pact for the enhancement and
preservation of industrial peace within the Mactan ECOZONE pursuant to Sections
39 and 38 respectively, of R.A. No. 7916 and Rule XXIII of its implementing
Rules and Regulations.
ARTICLE VI
UTILITIES
6. The PEZA warrants and undertakes that not later than the delivery of
possession of the Leased Premises to the REGISTRANT, it shall provide the Leased
Premises with garbage collection services, potable water and electricity in a
manner that will enable the REGISTRANT to operate.
6.1 The REGISTRANT agrees to pay all the water, fuel, gas, oil, heat,
electricity, power, materials and other services which may be furnished by the
PEZA or by other authorized entities to the REGISTRANT in or about the Leased
Premises during the term of this lease.
6.2 In case of delinquency in the payment of utilities which may be
provided by the PEZA, such delinquent payment shall bear interest at the rate of
3
(31)
<PAGE>
two (2%) percent a month computed from the date of delinquency without prejudice
to the right of the PEZA to cut-off or to discontinue providing the utilities
and/or to imposition of other appropriate sanction(s) against the REGISTRANT.
ARTICLE VII
DEFAULT
7. Any violation or default in the performance of the covenant and
obligations set forth in this Agreement shall constitute ground for the
aggrieved party to revoke this Registration Agreement without the need of
judicial or extrajudicial demand/action if no corrective or remedial measures
satisfactory to the aggrieved party are instituted within thirty (30) days from
written notice of such violation or default. However, should the REGISTRANT be
prevented by the government authorities or by statute, rule, order or regulation
from carrying on its business or any aspect thereof, the REGISTRANT may at its
option terminate this lease or any extension thereof and neither party shall
have any claim against the other by reason of such termination, except for
rentals and other charges due and demandable. The REGISTRANT shall not exercise
the aforesaid option to terminate without the written consent of the assignee,
mortgagee, transferree or sublessee, if any there be. In the event of violation
or default by the PEZA, the corrective or remedial measures of which are within
the power and/or capability of the REGISTRANT to institute, the REGISTRANT may,
upon the expiration of the 30-day written notice to the PEZA, proceed to
institute such measures as it may deem necessary at the expense of the PEZA:
Provided that the program of work for such remedial or corrective measures shall
be approved by the PEZA and all works to be done shall be subject to inspection
and approval by the PEZA. All expenses incurred by the REGISTRANT shall, subject
to compliance with pertinent government accounting and auditing laws and
regulations, be offset against the rentals immediately due.
ARTICLE VIII
PEZA EXEMPT FROM LIABILITY
8. The REGISTRANT shall keep, save and hold the PEZA free and harmless from
all liabilities, penalties, losses, damages, costs, expenses, causes of action,
claims and/or judgments arising out of or by reason of any injury or liability
caused by any person or persons, from any cause or causes whatsoever relating to
the operation of the REGISTRANT'S business during the term of this Agreement by
obtaining appropriate insurance(s) with an insurance company as
4
(32)
<PAGE>
would amply protect both parties herein against any liability arising from its
registered operations, including insurance against losses from fire and
fortuitous events.
The REGISTRANT recognizes the right of the PEZA to conduct an inventory of
REGISTRANT'S machineries, equipments, stocks of finished or semi-finished
products, work-in-process, raw materials, supplies and other assets, at any hour
of the day or night upon a 24 hour notice given by the PEZA.
The REGISTRANT shall not prevent, obstruct, impede or otherwise frustrate
the exercise of this prerogative by the PEZA.
It is understood that in the exercise of this power to conduct an
inventory, the PEZA acting thru its duly authorized representative/s, may break
open any door, window, wall, floor or ceiling of any enclosure where such
equipments, stocks or machineries are kept without being liable for prosecution
or damages therefor when it is determined that the items/goods to be inventoried
are intentionally placed in the enclosure to prevent their examination, or when
despite the notice as required, the enclosures were locked, sealed or otherwise
closed in any other manner to prevent entry therein by the PEZA'S authorized
representative/s.
The PEZA may only employ such force and cause such damage as may be
necessary to cause entry into the premises.
ARTICLE IX
COST OF SUITS, VENUE OF ACTION
9. For all actions brought by either of the parties hereto against the
other, the party prevailing in said action shall be entitled to recover costs of
suits and reasonable attorney's fees which shall in no case be less than TEN
THOUSAND (P10,000) PESOS.
9.1 The parties hereto agree that any court action arising out of this
Agreement shall be filed in the proper court in the City of Lapu-Lapu.
ARTICLE X
NOTICE
10. Notice required hereunder or by law to be served upon either of the
parties shall be in writing and shall be delivered personally or sent by
registered mail to the other at its abovespecified
5
(33)
<PAGE>
address or to such address designated by such party in writing. Notice by
registered mail shall be deemed completed after (5) days from receipt of the
registry notice.
ARTICLE XI
ABANDONMENT OF LEASED PREMISES/SUSPENSION OF OPERATIONS
11. In case the Leased Premises is deserted, abandoned or vacated without
prior written notice and justifiable cause or in case of suspension of
operations by the REGISTRANT at any time during the term of the lease for a
continuous period of sixty (60) days unless this period is extended upon prior
application by the REGISTRANT and prior written approval of the PEZA on
meritorious grounds or in case of permanent withdrawal or cessation from its
registered operation in the ECOZONE, whether voluntary or involuntary, the PEZA
shall have the right to enter the Leased Premises as an agent of the REGISTRANT,
either with the use of reasonable force or otherwise, without being liable for
prosecution therefor, and the PEZA is hereby constituted irrevocably as an
attorney-in-fact of the REGISTRANT with the power to remove, store temporarily,
or sell, or dispose of any and all goods, machinery, equipment, merchandise, raw
materials, furniture and other assets located in the Leased Premises and to
apply the proceeds of such sale to any damages, interests, fees, unpaid rentals
or other outstanding obligations which the REGISTRANT may owe to the PEZA.
ARTICLE XII
CUMULATIVE REMEDIES, NON-WAIVER
12. The receipt by the PEZA of any payment with or without knowledge of the
breach of any covenant hereof, shall not be deemed a waiver of such breach, and
no waiver of any sum, or right hereunder shall be valid unless made in writing
and signed by the party waiving said sum or right. No delay or omission in the
exercise of any right or remedy accruing to any party hereto upon any breach of
obligation provided in this Agreement shall impair such right or remedy, or be
construed as a waiver of any such breach thereafter occurring.
ARTICLE XIII
LAWS ISSUANCES INCORPORATED
13. The following laws/issuances shall be deemed incorporated and/or
reproduced by reference to form integral parts of this Agreement:
6
(34)
<PAGE>
13.1 Book VI of the Omnibus Investment Code of 1987 and Republic Act No.
7916.
13.2 Rules and Regulations to implement Republic Act No. 7916.
13.3 Presidential Decree No. 1716-A vesting to the EPZA (now PEZA) the
administration and enforcement of Presidential Decree No. 1096, otherwise known
as the National Building Code of the Philippines, particularly but not limited
to the authority of the PEZA to issue the necessary permits, conduct periodic
mechanical and electrical inspections and collection of fees and charges.
13.4 Board Resolution No. 96-128 dated April 17, 1996 of the PEZA'S Board
of Directors.
13.5 Such other Board Resolutions, corresponding implementing circulars,
orders and memoranda which are now existing or which may hereinafter be
promulgated by the PEZA and other provisions of laws, rules and executive orders
applicable hereto.
ARTICLE XIV
SPECIAL CONDITIONS
14. The special conditions of this Agreement are:
14.1 The REGISTRANT shall set up an accounting system consistent with Item
R. No. 3 of its application with PEZA and compatible with PEZA reporting
requirements under Section 4, Rule XXI of the implementing Rules and Regulations
of R.A. 7916.
14.2 Within ninety (90) days from date of registration, REGISTRANT shall
secure and submit to PEZA a copy of its Environmental Clearance Certificate
issued by the Environmental Management Bureau.
14.3 The REGISTRANT shall furnish the PEZA (PERD) with copies of reports
which by law or regulation it is required to submit to the National Statistics
Office, Bangko Sentral ng Pilipinas, Department of Labor and Employment,
Securities and Exchange Commission, Bureau of Internal Revenue and Social
Security System concerning its operations, personnel, capital structure and like
matters affecting its business as a zone-registered export enterprise within
fifteen (15) days from filing thereof in the said Offices pursuant to Section 4,
Rule XXI of the implementing Rules and Regulations of R.A. No. 7916.
7
(35)
<PAGE>
14.4 The REGISTRANT agrees that a first lien shall automatically be
constituted upon any of its real or personal property found existing and/or
located inside the Mactan ECOZONE to answer for any and all outstanding
obligations or accounts owing, due and/or payable by the REGISTRANT to the PEZA.
14.5 During the period of its availment of income tax holiday under Book VI
of E.O. No. 226 (Omnibus Investments Code of 1989), the REGISTRANT, if entitled
thereto, shall pay all real property taxes, fees and charges under the
provisions of the Local Government Code of 1991 and pertinent municipal
ordinance(s) in respect to the premises leased by it.
14.6 The REGISTRANT agrees that the PEZA may disapprove or withhold any
application for permit to import, to export, to farm-out or to sell locally, or
to avail of any incentives being administered by the PEZA as the case may be, if
REGISTRANT is delinquent in payment of rentals and other fees/charges due or has
violated any provision of this Registration Agreement, R.A. 7916 and its
implementing Rules and Regulations, and other relevant PEZA memoranda and
circulars. Damages that may result due to the said disapproval/withholding shall
be solely borne by the REGISTRANT and the PEZA shall be wholly free from
liability for whatever damages that may result therefrom.
14.7 The REGISTRANT shall observe the following timetable:
Leasehold Improvements - May, 1996
Installation of Machineries - May, 1996
Start of Commercial Operations - July, 1996
14.8 The REGISTRANT shall submit to PEZA-PERD proof of paid-up capital
amounting to a minimum of P56.472 Million within the first year of its
operations.
14.9 The REGISTRANT shall observe the following Production and Sales
Schedules:
Volume of Sales VALUE
Year (In `000 Units) US$000
------ ----------------- --------
1 900 9,000
2 8,000 76,000
3 10,300 92,000
4 14,000 119,000
5 18,000 144,000
8
(36)
<PAGE>
14.10 The REGISTRANT shall notify PEZA in writing of the date or start of
its commercial operations within seven (7) days from said date.
14.11 In the event the REGISTRANT decides to expand its registered project,
it shall secure prior approval by the PEZA.
IN WITNESS WHEREOF, the parties hereto have signed these presents this 25th
day of May 1996 at Metro Manila, Philippines.
PHILIPPINE ECONOMIC ZONE SMARTFLEX SYSTEMS
AUTHORITY PHILIPPINES, INC.
(PEZA) (REGISTRANT)
By: By:
/s/ Lilia B. DeLima /s/ William L. Healey
LILIA B. DE LIMA WILLIAM L. HEALEY
Director General President
SIGNED IN THE PRESENCE OF:
------------------------ ------------------------
A C K N O W L E D G M E N T
REPUBLIC OF THE PHILIPPINES)
METRO MANILA )S.S.
BEFORE ME, this 25th day of May, 1996 personally appeared the following:
NAME CTC/PASSPORT NO.
---- ----------------
LILIA B. DE LIMA
WILLIAM L. HEALEY
both known to me and to me known to be the same persons who executed the
foregoing instrument and acknowledged before me that the same is their free and
voluntary act and deed as well as the entities represented.
Said instrument refers to a REGISTRATION
9
(37)
<PAGE>
AGREEMENT consisting of Ten (10) pages, signed by the parties and their
witnesses on each and every page thereof and sealed with my notarial seal.
Doc. No. 309 ;
Page No. 62 ;
Book No. I ;
Series of 1996.
10
(38)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Computation of Earnings per Share
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------- ----------------
1996 1995 1996 1995
------- ------- ------- -------
Net income $1,644 $1,107 $3,556 $1,959
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 6,270 4,209 6,256 4,209
Incremental common shares attributable
to exercise of outstanding options 150 124 141 124
------- ------- ------- -------
Total shares 6,420 4,333 6,397 4,333
======= ======= ======= =======
Primary earnings per share $ 0.26 $ 0.26 $ 0.56 $ 0.45
======= ======= ======= =======
Net income $1,644 $1,107 $3,556 $1,959
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 6,270 4,209 6,256 4,209
Incremental common shares attributable
to exercise of outstanding options 150 124 141 124
------- ------- ------- -------
Total shares 6,420 4,333 6,397 4,333
======= ======= ======= =======
Fully diluted earnings per share $ 0.26 $ 0.26 $ 0.56 $ 0.45
======= ======= ======= =======
(39)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Smartflex Systems, Inc. Consolidated Balance Sheets as of June 30, 1996,
and Consolidated Statement of Operations for the six months ended
June 30, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 2,773
<SECURITIES> 24,321
<RECEIVABLES> 14,084
<ALLOWANCES> 925
<INVENTORY> 11,406
<CURRENT-ASSETS> 54,139
<PP&E> 15,156
<DEPRECIATION> 5,032
<TOTAL-ASSETS> 64,809
<CURRENT-LIABILITIES> 14,121
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 48,888
<TOTAL-LIABILITY-AND-EQUITY> 64,809
<SALES> 74,315
<TOTAL-REVENUES> 74,315
<CGS> 64,949
<TOTAL-COSTS> 64,949
<OTHER-EXPENSES> 4,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 5,638
<INCOME-TAX> 2,082
<INCOME-CONTINUING> 3,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,556
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
