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 September 28, 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 33-0581151
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14312 Franklin Avenue, Tustin, California 92780-7028
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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
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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 - 6,279,611 shares as of October 25, 1996
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Page 1 of 26
Exhibit Index on Page 17
<PAGE>
Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 3
and December 31, 1995
Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7-15
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
INDEX TO EXHIBITS 17
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.
(2)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SMARTFLEX SYSTEMS, INC.
Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1996 1995
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 917 $ 1,398
Short-term investments 24,642 21,846
Accounts receivable, net of allowance for
doubtful accounts of $925 in 1996 and 1995 21,515 17,396
Inventories:
Raw materials 6,547 9,138
Work-in-process 2,992 3,457
Finished goods 1,223 4,730
-------- --------
Total inventories 10,762 17,325
Deferred tax asset 1,915 1,915
Prepaid expenses and other current assets 1,593 678
-------- --------
Total current assets 61,344 60,558
Property and equipment, at cost:
Machinery and equipment 11,594 9,177
Office furniture and equipment 2,394 1,888
Leasehold improvements 2,158 1,353
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16,146 12,418
Less accumulated depreciation and amortization (5,754) (3,753)
-------- --------
Total property and equipment 10,392 8,665
Deposits 840 191
-------- --------
$ 72,576 $ 69,414
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to related parties $ 2,642 3,417
Accounts payable 9,099 12,397
Accrued compensation and related costs 1,644 1,528
Other accrued liabilities 3,431 2,076
Current portion of notes payable 412 621
-------- --------
Total current liabilities 17,228 20,039
Deferred tax liability 504 504
Long-term portion of notes payable 4,236 3,948
Stockholders' equity:
Preferred stock - -
Common stock 16 16
Additional paid-in capital 35,407 34,980
Retained earnings 15,185 9,927
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Total stockholders' equity 50,608 44,923
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$ 72,576 $ 69,414
======== ========
See accompanying notes.
(3)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net revenues $ 35,581 $ 33,026 $109,896 $ 85,249
Cost of revenues 30,874 28,401 95,823 73,172
-------- -------- -------- --------
Gross margin 4,707 4,625 14,073 12,077
Costs and expenses:
Marketing and sales expense 795 688 2,075 1,924
General and administrative expense 1,348 1,408 4,180 4,345
-------- -------- -------- --------
Operating income 2,564 2,529 7,818 5,808
Interest income 246 180 732 277
Interest expense (64) (71) (161) (281)
Other income (expense) 3 19 (2) (33)
-------- -------- -------- --------
Income before income taxes 2,749 2,657 8,387 5,771
Income tax provision 1,047 1,007 3,129 2,162
-------- -------- -------- --------
Net income
$ 1,702 $ 1,650 $ 5,258 $ 3,609
======== ======== ======== ========
Net income per common and common
equivalent share:
Primary $ 0.27 $ 0.29 $ 0.82 $ 0.75
======== ======== ======== ========
Fully diluted $ 0.27 $ 0.29 $ 0.82 $ 0.75
======== ======== ======== ========
Common and common equivalent
shares used in computing per
share amounts:
Primary 6,374 5,712 6,390 4,798
======== ======== ======== ========
Fully diluted 6,387 5,729 6,390 4,835
======== ======== ======== ========
See accompanying notes.
(4)
<PAGE>
SMARTFLEX SYSTEMS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30
-------------------
1996 1995
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Net cash flow from operating activities:
Net income $ 5,258 $ 3,609
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 2,068 1,429
Loss on sale of property and equipment 40 -
Provision for doubtful accounts - 720
Provision for inventory obsolescence (116) 431
Other changes in operating assets and liabilities:
Receivables (4,119) (3,278)
Inventories 6,679 (6,536)
Prepaid expenses and other assets (1,564) (422)
Accounts payable to related parties (775) 2,442
Accounts payable and accrued expenses (2,255) 7,935
Income taxes payable/receivable 429 249
-------- --------
Net cash provided by operating activities 5,645 6,579
Cash flow from investing activities:
Capital expenditures (3,807) (4,337)
Purchase of short-term investments (16,157) (46,235)
Proceeds from the sale of short-term investments 13,332 26,449
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Net cash used in investing activities (6,632) (24,123)
Cash flow from financing activities:
Net proceeds from sale of common stock 427 21,517
Net borrowings (repayments) on revolving loan 695 (3,750)
Repayments on term loan (616) (202)
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Net cash provided by financing activities 506 17,565
-------- --------
Net increase (decrease) in cash (481) 21
Cash at beginning of period 1,398 351
======== ========
Cash at end of period $ 917 $ 372
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 151 $ 281
Taxes paid 2,700 1,885
Noncash transactions:
Conversion of preferred stock to common stock - (9)
See accompanying notes.
(5)
<PAGE>
Smartflex Systems, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 1996
Note (A) --- Basis of Presentation
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 nine-month periods ended September 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.
Note (D) --- Credit Facility
The Company's bank credit facility ("facility") was amended on October 4,
1996, such that the expiration date of the $15.0 million revolving loan, which
includes a sublimit for the issuance of up to $2.0 million in commercial or
standby letters of credit, was extended to September 30, 1998. At September 30,
1996, borrowings under the revolving loan totaled $3.2 million; there were no
letters of credit outstanding as of that date. The facility additionally allows
for borrowings up to $2.2 million, for the purchase of manufacturing equipment,
under an unsecured term loan. Funds under this loan are available to the Company
in one or more disbursements of not less than $500,000. The expiration date of
the unsecured term loan has been extended to March 31, 1997.
(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 nine months ended September 30, 1996, non-HDD revenues comprised 39.7% of
total revenues, compared to 22.4% for the same period last year. During the
current year, non-HDD revenue growth has cushioned the Company somewhat from the
effects of program transitions or delayed demand from certain of the Company's
customers who are HDD manufacturers.
During the third quarter of 1996, the Company continued to experience
program transitions and component availability difficulties. Net revenues
increased 3.8%, however, from the second to the third quarter of 1996. Total
units shipped during the current third quarter, compared to the second quarter
of 1996, were relatively constant at just over 3 million units, but average
selling prices ("ASP"s) overall increased slightly during this period, resulting
in improved revenues and net income. The improvement in ASPs during the current
quarter was attributable primarily to increased sales from the Company's
higher-end HDD business which utilizes Chip-On-Flex technology.
Continuing the Company's strategy to expand and improve its manufacturing
capabilities, construction of the new Cebu, Philippines facility was completed,
and process capability was customer-qualified during the third quarter of 1996.
As a result, all production programs were transferred from the Company's
subcontractor site in Manila, and operations at the subcontractor site were,
consequently, discontinued. Additionally during the quarter, new all-time weekly
high-volume levels were achieved for surface mount production in Monterrey,
Mexico, and record high-volume levels for Chip-On-Flex were achieved in both
Monterrey and Singapore. Finally, the Company completed development of the
Chip-On-Ceramic process, which involves direct die attachment of integrated
circuits to ceramic substrates, and expects to commence production using this
new process in the fourth quarter of 1996. See "Risk Factors."
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the quarter and nine months ended September 30, 1996
increased 7.7% and 28.9%, respectively, over the comparable periods in 1995. The
increases in net revenues were primarily due to increased sales volumes from
existing customers. Specifically, the Company commenced volume production of
non-HDD scanner products in the third quarter of 1995, which continued
throughout the first nine months of 1996. Increased revenues from this source
were offset in the current third quarter, compared to the third quarter of last
year, by declines in revenues from HDD programs with a certain customer.
Revenues generated by increases in unit shipments during the current year have
been partially offset by decreases in component costs, generally passed through
to customers in the form of lower prices, and price decreases as a result of
competitive pressures.
Net revenues attributable to non-HDD programs rose to 37.1% from 31.9% for
the third quarter of 1996 compared to the same period in 1995, and to 39.7% from
22.4% for the nine months ended September 30, 1996 versus the same 1995 period.
This growth was due primarily to ongoing efforts to diversify the Company's
markets, and also to growth in a certain non-HDD scanner program wherein the
(7)
<PAGE>
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 within the current year, however, largely
because savings achieved on the costliest component of the non-HDD program
described above were passed through to the customer, reducing its ASP.
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, and due to growth
in HDD programs with other customers, management believes that this event will
not have a material adverse effect on the Company's results of operations.
Export sales, which arise primarily from the shipment of assembled products
to international operations of U.S.-based companies, rose to 76.5% from 50.0%
for the third quarter of 1996 compared to the same period in 1995, and to 69.3%
from 47.4% for the nine months ended September 30, 1996, compared to the same
period in 1995. These increases were due primarily to growth in the volumes of
SMT products shipped directly to international head stack assemblers of the
Company's customers, and also to increased shipment levels of high-end
Chip-On-Flex products to offshore facilities of certain U.S.-based customers.
Gross Margins
Gross margins as a percentage of net revenues were 13.2% and 14.0% for the
quarters ended September 30, 1996 and 1995, respectively, and 12.8% and 14.2%
for the nine months ended September 30, 1996 and 1995, respectively. The
current-year declines were primarily due to increased sales of HDD products with
lower ASPs, compared to the prior year, and the growth of a particular non-HDD
program described in Net Revenues, above. The conversion of the high-cost
component of this 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 effect of these
circumstances on gross margins was offset somewhat for the current nine-month
period by the reversal, in the second quarter of 1996, 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 increased
slightly to 2.2%, from 2.1%, for the quarter ended September 30, 1996 compared
to the same period in 1995. These expenses declined to 1.9% of net revenues for
the first nine months of 1996, compared to 2.3% for the same period in 1995. The
slight current quarter percentage increase was a result of increased advertising
expenses, and increased sales commission expenses. The percentage decline for
the first nine months of 1996 was due primarily to accommodation of revenue
growth, without appreciable increases in staff and other administrative costs,
by marketing, sales and customer service personnel.
General and Administrative Expenses
General and administrative ("G & A") expenses declined both as a percentage
of net revenues, and in absolute dollars, for the quarter and nine months ended
September 30, 1996, compared to the same periods in 1995. As a percentage of net
revenues, G & A expenses were 3.8% for both current-year periods, compared to
4.3% and 5.1%, respectively, for the quarter and nine months ended September 30,
1995. These declines were due, in both current-year periods, to decreased bad
debt expenses which were offset by additions to administrative staff and
increased public company expenses. Additionally, in the second quarter of 1996,
management imposed spending controls in response to declines in net revenues at
that time; spending controls were continued in the third quarter of 1996. 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.
(8)
<PAGE>
Interest Income
Interest income increased $67,000 and $456,000 for the quarter and nine
months ended September 30, 1996, respectively, compared to the same prior-year
periods. Greater balances in short-term investments, primarily due to proceeds
received in the Company's initial public offering in the third quarter of 1995,
in addition to cash generated from operations, generated these increases.
Income Taxes
The effective income tax rates were relatively constant at 38.1% and 37.9%
for the quarters ended September 30, 1996 and 1995, respectively. For the nine
months ended September 30, 1996 and 1995, the rates were 37.3 and 37.5%,
respectively. Changes in the effective tax rate reflected changes in incremental
volume contributions from the Company's offshore manufacturing facilities.
Income tax expense for the periods described increased proportionally to the
increases in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's principal sources of liquidity
included $25.6 million in cash and short-term investments, and $14.0 million in
available borrowings under its bank credit facility ("facility"), net of
borrowings under the revolving loan. The facility was amended on October 4,
1996, such that the expiration date of the $15.0 million revolving loan, which
includes a sublimit for the issuance of up to $2.0 million in commercial or
standby letters of credit, was extended to September 30, 1998. At September 30,
1996, borrowings under the revolving loan totaled $3.2 million; there were no
letters of credit outstanding as of that date. The facility additionally allows
for borrowings up to $2.2 million, for the purchase of manufacturing equipment,
under an unsecured term loan. Funds under this loan are available to the Company
in one or more disbursements of not less than $500,000. The expiration date of
the unsecured term loan has been extended to March 31, 1997.
Short-term investments at September 30, 1996 totaled $24.6 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 $321,000 and
$2.8 million for the quarter and nine months ended September 30, 1996,
respectively, primarily due to the investment of cash flows generated from
operations in both periods. For all short-term investments at September 30,
1996, cost approximated fair market value.
Over the nine months ended September 30, 1996, inventory levels declined by
$6.7 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."
During the nine months ended September 30, 1996, the Company has acquired
$3.8 million in capital equipment and leasehold improvements, primarily for the
expansion of its headquarters and manufacturing facilities. The Company
presently plans to spend approximately $2.5 million during the fourth quarter of
1996, primarily to continue equipping its new manufacturing facility in Cebu,
Philippines, upgrade automation in Mexico and Singapore, 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 TDK Semiconductor Corporation. As a result of this
(9)
<PAGE>
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.
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."
(10)
<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, timely
customer qualification of the Company's new Chip-On-Ceramic process, timely
customer qualification of, and commencement of volume production at, the
Company's new facility in Cebu, 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.
(11)
<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 nine
months of 1996 and 1995, the Company's four largest customers (which include, in
some cases, multiple divisions) accounted for approximately 81% and 78% 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 life cycles, particularly in the HDD
(12)
<PAGE>
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 nine months 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.
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, 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.
(13)
<PAGE>
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
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.
(14)
<PAGE>
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 acquirers) 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.
(15)
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits --- the following exhibits are included herein:
10.7 Promissory Note dated October 11, 1996, from the Registrant in
favor of Union Bank of California, N.A. (revolving loan).
10.21 Promissory Note dated October 11, 1996, from the Registrant in
favor of Union Bank of California, N.A. (term loan).
10.28 Third Amendment, dated October 4, 1996, to the Loan Agreement
dated September 29, 1995, between the Registrant and Union
Bank of California, N.A.
11.1 Computation of net income per share.
27.1 Financial Data Schedule (filed electronically).
(b) A report on Form 8-K was filed on July 23, 1996 describing the
adoption, by the Board of Directors, of a Shareholder Rights Plan.
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)
November 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
- --------- ---------------------------------------------------- ------------
10.7 Promissory Note dated October 11, 1996, from the
Registrant in favor of Union Bank of California, N.A.
(revolving loan). 18
10.21 Promissory Note dated October 11, 1996, from the
Registrant in favor of Union Bank of California, N.A.
(term loan). 21
10.28 Third Amendment, dated October 4, 1996, to the
Loan Agreement dated September 29, 1995, between the
Registrant and Union Bank of California, N.A. 24
11.1 Computation of net income per share. 25
27.1 Financial Data Schedule (filed electronically). 26
(17)
UNION BANK OF CALIFORNIA
PROMISSORY NOTE
(BASE RATE)
Borrower Name SMARTFLEX SYSTEMS, INC.
Borrower Address Office 45061 Loan Number 8439907413 0080-00-0-001
14312 FRANKLIN AVENUE
TUSTIN, CA 92680-7028 Maturity Date SEPTEMBER 30, 1998 Amount $15,000,000.00
ORANGE, California $15,000,000.00 Date October 11, 1996
FOR VALUE RECEIVED, on SEPTEMBER 30, 1998, the undersigned ("Debtor") promises
to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated
below, the principal sum of FIFTEEN MILLION AND NO/100 Dollars ($15,000,000.00),
or so much thereof as is disbursed, together with interest on the balance of
such principal from time to time outstanding, at the per annum rates and at the
times set forth below; provided, however, Debtor shall pay total interest over
the term of this note of not less than $500.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 30TH day of each MONTH
(commencing OCTOBER 30, 1996). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in
increments of at least $500,000 shall bear interest at a rate to be
selected by Debtor which is 1.50% per annum in excess of Bank's Adjusted
LIBOR-Rate for the Interest Period so selected by Debtor.
Any Base Interest Rate selected by Debtor may not be changed, altered or
otherwise modified until the expiration of the Interest Period for which it
was selected. The exercise of interest options by Debtor shall be as
recorded in Bank's records, which records shall be prima facie evidence of
the amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in its
records shall not discharge Debtor from its obligations to repay in full
with interest all amounts borrowed. In no event shall any Interest Period
extend beyond the maturity date of this note.
To select a Base Interest Rate, Debtor may, from time to time with respect
to principal outstanding on which a Base Interest Rate has not been
selected, and on the expiration of any Interest Period with respect to
principal outstanding on which a Base Interest Rate has been selected,
select a Base Interest Rate by telephoning an authorized lending officer of
Bank located at the banking office identified below prior to 10:00 a.m.,
California time, on any Business Day and advising that officer of the Base
Interest Rate, the Interest Period and the Origination Date selected (which
Origination Date, for a Base Interest Rate Loan based on the Adjusted
LIBOR-Rate, shall follow the date of such election by no more than two (2)
Business Days).
Bank will confirm the terms of the election in writing by mail to Debtor
promptly after the election is made. Failure to send such confirmation
shall not affect Bank's rights to collect interest at the rate selected.
If, on the date of the election, the Base Interest Rate selected is
unavailable for any reason, the selection shall be void. Bank reserves the
right to fund the principal from any source of funds notwithstanding any
Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not
bearing interest at a Base Interest Rate shall bear interest at a rate per
annum equal to the Reference Rate, which rate shall vary as and when the
Reference Rate changes.
At any time prior to the maturity of this note, subject to the provisions
of paragraph 4. below, of this note, Debtor may borrow, repay and reborrow
hereon so long as the total outstanding at any one time does not exceed the
principal amount of this note. Debtor shall pay all amounts due under this
note in lawful money of the United States at Bank's 0RANGE COUNTY
COMMERCIAL BANKING Office, or such other office as may be designated by
Bank, from time to time.
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(18)
<PAGE>
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1 .b, above, of this
note, calculated from the date of default until all amounts payable under this
note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on
the Reference Rate may be prepaid in whole or in part at any time, without
penalty or premium. Amounts outstanding at a Base Interest Rate under this
note may only be prepaid, in whole or in part provided Bank has received
not less then five (5) Business Days prior written notice of an intention
to make such prepayment and Debtor pays a prepayment fee to Bank in an
amount equal to: (i) the difference between (a) the Base Interest Rate
applicable to the principal amount which Debtor intends to prepay, and (b)
the return which Bank could obtain if it used the amount of such prepayment
of principal to purchase at bid price regularly quoted securities issued by
the United States having a maturity date most closely coinciding with the
relevant Base Rate Maturity Date and such securities were held by Bank
until the relevant Base Rate Maturity Date ("Yield Rate"); (ii) the above
difference, if greater than zero, is multiplied by a fraction, the
numerator of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator of
which is 360 days; (iii) the above product is multiplied by the amount of
the principal so prepaid (except in the event that principal payments are
required and have been made as scheduled under the terms of the Base
Interest Rate Loan being prepaid, then the amount multiplied in this
Section shall be the lesser of the amount prepaid or 50% of the total of
the amount prepaid and the amount of principal scheduled under the terms of
the Base Interest Rate Loan being prepaid to be outstanding at the relevant
Base Rate Maturity Date); and (iv) the above product is then discounted to
present value using the Yield Rate as the annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim against
Bank, should the return which Bank could obtain under the above prepayment
formula exceed the interest that Bank would have received if no prepayment
had occurred. All prepayments shall include payment of accrued interest on
the principal amount so prepaid and shall be applied to payment of interest
before application to principal. A determination by Bank as to the
prepayment fee amount, if any, shall be conclusive.
c. Such prepayment fee, if any, shall also be payable if prepayment occurs
as the result of the acceleration of the principal of this note by Bank
because of any default hereunder. If, following such acceleration, all or
any portion of a Base Interest Rate Loan is satisfied, whether through sale
of property encumbered by a security agreement or other agreement securing
this note, if any, at a foreclosure sale held thereunder or through the
tender of payment any time following such acceleration, but prior to such a
foreclosure sale, then such satisfaction shall be deemed an evasion of the
prepayment conditions set forth above, and Bank shall, automatically and
without notice or demand, be entitled to receive, concurrently with such
satisfaction the prepayment fee set forth above, and the obligation to pay
such prepayment fee shall be added to the principal. DEBTOR HEREBY
ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT LEND TO DEBTOR THE LOAN
EVIDENCED BY THIS NOTE WITHOUT DEBTOR'S AGREEMENT, AS SET FORTH ABOVE, TO
PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY PORTION OF
THE PRINCIPAL BEARING INTEREST AT A BASE INTEREST RATE FOLLOWING THE
ACCELERATION OF THE MATURITY DATE HEREOF BY REASON OF A DEFAULT. DEBTOR HAS
CAUSED THOSE PERSONS SIGNING THIS NOTE ON ITS BEHALF TO SEPARATELY INITIAL
THE AGREEMENT CONTAINED IN THIS PARAGRAPH BY PLACING THEIR INITIALS BELOW:
INITIALS: /s/ WLH
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceeding for the
appointment of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (g) the commencement of any
proceeding for
PN-REV(LIBOR-RR) -2-
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(19)
<PAGE>
the dissolution or liquidation of any Obligor; (h) the termination of existence
or death of any Obligor; (i) the revocation of any guaranty or subordination
agreement given in connection with this note; (j) the failure of any Obligor to
comply with any order, judgement, injunction, decree, writ or demand of any
court or other public authority; (k) the filing or recording against any
Obligor, or the property of any Obligor, of any notice of levy, notice to
withhold, or other legal process for taxes other than property taxes; (l) the
default by any Obligor personally liable for amounts owed hereunder on any
obligation concerning the borrowing of money; (m) the issuance against any
Obligor, or the property of any Obligor, of any writ of attachment, execution,
or other judicial lien; or (n) the deterioration of the financial condition of
any Obligor which results in Bank deeming itself, in good faith, insecure. Upon
the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due end payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any Obligor, including
their successors or assigns, hereby consent to the jurisdiction of any competent
court within the State of California, as provided in any alternative dispute
resolution agreement executed between Debtor and Bank, and consent to service of
process by any means authorized by California law. The term "Bank" includes,
without limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This note
hereby incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Adjusted LIBOR-Rate" shall mean the LIBOR Base
Rate as adjusted for reserve requirements imposed on Bank from time to time.
"Base Interest Rate" shall mean a rate of interest based on the Adjusted
LIBOR-Rate. "Base Interest Rate Loan" shall mean amounts outstanding under this
note that bear interest at a Base Interest Rate. "Base Rate Maturity Date" shall
mean the last day of the Interest Period with respect to principal outstanding
on which a Base Interest Rate has been selected by Debtor. "Business Day" shall
mean a day which is not a Saturday or Sunday on which Bank is open for business
in California and on which dealings in U.S. dollar deposits outside of the
United States may be carried on by Bank. "Interest Period" shall mean any
calendar period of one, three, six, nine or twelve months. In determining an
Interest Period, a month means a period that starts on one Business Day in a
month and ends on and includes the day preceding the numerically corresponding
day in the next month. For any month in which there is no such numerically
corresponding day, then as to that month, such day shall be deemed to be the
last calendar day of such month. Any Interest Period which would otherwise end
on a non-Business Day shall end on the next succeeding Business Day unless that
is the first day of a month, in which event such Interest Period shall end on
the next preceding Business Day. "LIBOR Base Rate" shall mean for each Interest
Period the rate per annum (rounded upward, if necessary, to the nearest 1/100 of
1%) at which dollar deposits, in immediately available funds and in lawful money
of the United States would be offered to Bank, outside of the United States, for
a term coinciding with such Interest Period and for an amount equal to the
amount of principal covered by Debtor's interest rate election. "Origination
Date" shall mean the Business Day on which funds are made available to Debtor
relating to Debtor's selection of a Base Interest Rate. "Reference Rate" shall
mean the rate announced by Bank from time to time at its corporate headquarters
at its "Reference Rate." The Reference Rate is an index rate determined by Bank
from time to time as a means of pricing certain extensions of credit and is
neither directly tied to any external rate of interest or index nor necessarily
the lowest rate of interest charged by Bank at any given time.
SMARTFLEX SYSTEMS, INC.
By /s/ William L. Healey
WILLIAM L. HEALEY, PRESIDENT
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(20)
UNION BANK OF CALIFORNIA
PROMISSORY NOTE
(BASE RATE)
Borrower Name SMARTFLEX SYSTEMS, INC.
Borrower Address Office 45061 Loan Number 8439907413 0081-00-0-001
14312 FRANKLIN AVENUE
TUSTIN, CA 92680-7028 Maturity Date MARCH 30, 2001 Amount $2,200,000.00
ORANGE, California $2,200,000 Date October 11, 1996
FOR VALUE RECEIVED, on MARCH 30, 2001, the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA N.A. ("Bank"), as indicated below,
the principal sum of TWO MILLION TWO HUNDRED THOUSAND AND NO/1OO Dollars
($2,200,000.00), or so much thereof as is disbursed, together with interest on
the balance of such principal from time to time outstanding; at the per annum
rates and at the times set forth below; provided, however, Debtor shall pay
total interest over the term of this note of not less than $500.
1. PAYMENTS.
PRINCIPAL PAYMENTS. Debtor shall pay principal in installments of FIFTY
FIVE THOUSAND AND NO/100 Dollars ($55,000.00) each on the 30TH day of each
MONTH, commencing APRIL 30, 1997. The availability under this Note shall be
reduced on the same day and in the same amount as each scheduled principal
payment.
INTEREST PAYMENTS. Debtor shall pay interest on the 30TH day of each MONTH
(commencing OCTOBER 30, 1996). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. After MARCH 31,1997, amounts outstanding hereunder
in increments of at least $500,000 shall bear interest at a rate to be
selected by Debtor which is 2.00% per annum in excess of Bank's Adjusted
LlBOR-Rate for the Interest Period so selected by Debtor.
Any Base Interest Rate selected by Debtor may not be changed, altered or
otherwise modified until the expiration of the Interest Period for which it
was selected. The exercise of interest options by Debtor shall be as
recorded in Bank's records, which records shall be prima facie evidence of
the amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in its
records shall not discharge Debtor from its obligations to repay in full
with interest all amounts borrowed. In no event shall any Interest Period
extend beyond the maturity date of this note.
To select a Base Interest Rate, Debtor may, from time to time with respect
to principal outstanding on which a Base Interest Rate has not been
selected and on the expiration of any Interest Period with respect to
principal outstanding on which a Base Interest Rate has been selected,
select a Base Interest Rate by telephoning an authorized lending officer of
Bank located at the banking office identified below prior to 10:00 a.m.,
California time, on any Business Day and advising that officer of the Base
Interest Rate, the Interest Period and the Origination Date selected (which
Origination Date, for a Base Interest Rate Loan based on the Adjusted
LIBOR-Rate, shall follow the date of such election by no more then two (2)
Business Days).
Bank will confirm the terms of the election in writing by mail to Debtor
promptly after the election is made, Failure to send such confirmation
shall not affect Bank's rights to collect interest at the rate selected.
If, on the date of the election, the Base Interest Rate selected is
unavailable for any reason, the selection shall be void. Bank reserves the
right to fund the principal from any source of funds notwithstanding any
Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not
bearing interest at a Base Interest Rate shall bear interest at a rate per
annum of 0.50% in excess of the Reference Rate, which rate shall vary as
and when the Reference Rate changes. Debtor shall pay all amounts due under
this note in lawful money of the United States at Bank's ORANGE COUNTY
COMMERCIAL BANKING Office, or such other office as may be designated by
Bank, from time to time.
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(21)
<PAGE>
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1 .b, above, of this
note, calculated from the date of default until all amounts payable under this
note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on
the Reference Rate may be prepaid in whole or in part at any time, without
penalty or premium. Amounts outstanding at a Base Interest Rate under this
note may only be prepaid, in whole or in part provided Bank has received
not less than five (5) Business Days prior written notice of an intention
to make such prepayment and Debtor pays a prepayment fee to Bank in an
amount equal to: (i) the difference between (a) the Base Interest Rate
applicable to the principal amount which Debtor intends to prepay, and (b)
the return which Bank could obtain if it used the amount of such prepayment
of principal to purchase at bid price regularly quoted securities issued by
the United States having a maturity date most closely coinciding with the
relevant Base Rate Maturity Date and such securities were held by Bank
until the relevant Base Rate Maturity Date ("Yield Rate"); (ii) the above
difference, if greater than zero, is multiplied by a fraction, the
numerator of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator of
which is 360 days; (iii) the above product is multiplied by the amount of
the principal so prepaid (except in the event that principal payments are
required and have been made as scheduled under the terms of the Base
Interest Rate Loan being prepaid, then the amount multiplied in this
section shall be the lesser of the amount prepaid or 50% of the total of
the amount prepaid and the amount of principal scheduled under the terms of
the Base Interest Rate Loan being prepaid to be outstanding at the relevant
Base Rate Maturity Date); and (iv) the above product is then discounted to
present value using the Yield Rate as the annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim against
Bank, should the return which Bank could obtain under the above prepayment
formula exceed the interest that Bank would have received if no prepayment
had occurred. All prepayments shall include payment of accrued interest on
the principal amount so prepaid and shall be applied to payment of interest
before application to principal. A determination by Bank as to the
prepayment fee amount, if any, shall be conclusive. In the event of partial
prepayment, such prepayments shall be applied to principal payments in the
inverse order of their maturity.
c. Such prepayment fee, if any, shall also be payable if prepayment occurs
as the result of the acceleration of the principal of this note by Bank
because of any default hereunder. If, following such acceleration, all or
any portion of a Base Interest Rate Loan is satisfied, whether through sale
of property encumbered by a security agreement or other agreement securing
this note, if any, at a foreclosure sale held thereunder or through the
tender of payment any time following such acceleration, but prior to such a
foreclosure sale, then such satisfaction shall be deemed an evasion of the
prepayment conditions set forth above, and Bank shall, automatically and
without notice or demand, be entitled to receive, concurrently with such
satisfaction the prepayment fee set forth above, and the obligation to pay
such prepayment fee shall be added to the principal. DEBTOR HEREBY
ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT LEND TO DEBTOR THE LOAN
EVIDENCED BY THIS NOTE WITHOUT DEBTOR'S AGREEMENT, AS SET FORTH ABOVE, TO
PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY PORTION OF
THE PRINCIPAL BEARING INTEREST AT A BASE INTEREST RATE FOLLOWING THE
ACCELERATION OF THE MATURITY DATE HEREOF BY REASON OF A DEFAULT. DEBTOR HAS
CAUSED THOSE PERSONS SIGNING THIS NOTE ON ITS BEHALF TO SEPARATELY INITIAL
THE AGREEMENT CONTAINED IN THIS PARAGRAPH BY PLACING THEIR INITIALS BELOW:
INITIALS: /s/ RT /s/ WLH
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief;
PN-TERM(LIBOR-RR) -2-
9/2/96
(22)
<PAGE>
(e) the assignment by any Obligor for the benefit of such Obligor's creditors;
(f) the appointment, or commencement of any proceeding for the appointment of a
receiver, trustee, custodian or similar official for all or substantially all of
any Obligor's property; (g) the commencement of any proceeding for the
dissolution or liquidation of any Obligor; (h) the termination of existence or
death of any Obligor; (i) the revocation of any guaranty or subordination
agreement given in connection with this note; (j) the failure of any Obligor to
comply with any order, judgement, injunction, decree, writ or demand of any
court or other public authority; (k) the filing or recording against any
Obligor, or the property of any Obligor, of any notice of levy, notice to
withhold, or other legal process for taxes other than property taxes; (l) the
default by any Obligor personally liable for amounts owed hereunder on any
obligation concerning the borrowing of money; (m) the issuance against any
Obligor, or the property of any Obligor, of any writ of attachment, execution,
or other judicial lien; or (n) the deterioration of the financial condition of
any Obligor which results in Bank deeming itself, in good faith, insecure. Upon
the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any Obligor, including
their successors or assigns, hereby consent to the jurisdiction of any competent
court within the State of California, as provided in any alternative dispute
resolution agreement executed between Debtor and Bank, and consent to service of
process by any means authorized by California law. The term "Bank" includes,
without limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This note
hereby incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Adjusted LIBOR-Rate" shall mean the LIBOR Base
Rate as adjusted for reserve requirements imposed on Bank from time to time.
"Base Interest Rate" shall mean a rate of interest based on the Adjusted
LIBOR-Rate. "Base Interest Rate Loan" shall mean amounts outstanding under this
note that bear interest at a Base Interest Rate. "Base Rate Maturity Date" shall
mean the last day of the Interest Period with respect to principal outstanding
on which a Base Interest Rate has been selected by Debtor. "Business Day" shall
mean a day which is not a Saturday or Sunday on which Bank is open for business
in California and on which dealings in U.S. dollar deposits outside of the
United States may be carried on by Bank. "Interest Period" shall mean any
calendar period of one, three, six, nine or twelve months. In determining an
Interest Period, a month means a period that starts on one Business Day in a
month and ends on and includes the day preceding the numerically corresponding
day in the next month. For any month in which there is no such numerically
corresponding day, than as to that month, such day shall be deemed to be the
last calendar day of such month. Any Interest Period which would otherwise end
on a non-Business Day shall end on the next succeeding Business Day unless that
is the first day of a month, in which event such Interest Period shall end on
the next preceding Business Day. "LIBOR Base Rate" shall mean for each Interest
Period the rate per annum (rounded upward, if necessary, to the nearest 1/100 of
1%) at which dollar deposits, in immediately available funds and in lawful money
of the United States would be offered to Bank, outside of the United States. for
a term coinciding with such Interest Period and for an amount equal to the
amount of principal covered by Debtor's interest rate election. "Origination
Date" shall mean the Business Day on which funds are made available to Debtor
relating to Debtor's selection of a Base Interest Rate. "Reference Rate" shall
mean the rate announced by Bank from time to time at its corporate headquarters
at its "Reference Rate." The Reference Rate is an index rate determined by Bank
from time to time as a means of pricing certain extensions of credit and is
neither directly tied to any external rate of interest or index nor necessarily
the lowest rate of interest charged by Bank at any given time.
SMARTFLEX SYSTEMS, INC.
By /s/ William L. Healey
William L. Healey, President
PN-TERM(LIBOR-RR) -3-
9/2/96
(23)
UNION BANK OF CALIFORNIA
Commercial Portfolio Administration
500 South Main Street
Orange, California 92868
October 4, 1996
William Healey, President
Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, California 92680
Re: Loan Agreement ("Agreement")
Dated: September 29, 1995
Dear Mr. Healey:
In reference to the Agreement between Union Bank of California, N.A.
("Bank") and Smartflex Systems, Inc. ("Borrower") dated September 29, 1995, the
Bank and Borrower desire to amend the Agreement. This amendment shall be called
the Third Amendment to the Agreement. Initially capitalized terms used herein
which are not otherwise defined shall have the meaning assigned thereto in the
Agreement.
Amendments to the Agreement:
(a) Section 1.1 The Revolving Loan the third sentence in this section shall
be amended to: "All borrowings of the Revolving Loan must be made before
September 30, 1998 at which time all unpaid principal and interest of the
Revolving Loan shall be due and payable".
(b) Section 1.1.1 The Letter of Credit Sublimit the date in the last
sentence shall be amended to: "September 30, 1998".
(c) Section 1.5 Unused Commitment Fee the date on the third line shall be
amended to: "September 30, 1998".
(d) Section 1.1.2 The Term Loan the first sentence in this section shall be
amended to: "Bank will loan to Borrower the sum of Two Million Two Hundred
Thousand Dollars ($2,200,000) (the "Term Loan") at Borrower's request, in one or
more disbursements of not less than Five Hundred Thousand Dollars ($500,000) on
or before March 31, 1997 in accordance with the terms of the Term Note".
This Third Amendment shall become effective on October 4, 1996. The
acknowledgment copy of this Third Amendment executed by the Borrower must
received by Bank before October 30, 1996.
Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed. This Third Amendment
shall not be a waiver of any existing default or breach of a condition to
covenant unless specified herein.
UNION BANK OF CALIFORNIA, N. A. Agreed and Accepted to this 11th day of
October, 1996.
By: /s/ Jack Lenhoff Smartflex Systems, Inc.,
Title: Vice President a Delaware Corporation
By: /s/ Robert Thomas By: /s/ William L. Healey
Title: Vice President Title: President
-1-
(24)
EXHIBIT 11.1
SMARTFLEX SYSTEMS, INC.
Computation of Net Income per Share
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net income $ 1,702 $ 1,650 $ 5,258 $ 3,609
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 6,279 5,560 6,264 4,666
Incremental common shares attributable
to exercise of outstanding options 95 152 126 132
-------- -------- -------- --------
Total shares 6,374 5,712 6,390 4,798
Primary earnings per share $ 0.27 $ 0.29 $ 0.82 $ 0.75
======== ======== ======== ========
Net income $ 1,702 $ 1,650 $ 5,258 $ 3,609
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 6,279 5,560 6,264 4,466
Incremental common shares attributable
to exercise of outstanding options 108 169 126 169
-------- -------- -------- --------
Total shares 6,387 5,729 6,390 4,835
======== ======== ======== ========
Fully diluted earnings per share $ 0.27 $ 0.29 $ 0.82 $ 0.75
======== ======== ======== ========
(25)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Smartflex Systems, Inc. Consolidated Balance Sheets as of September 30,
1996, and Consolidated Statements of Operations for the nine months ended
September 30, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 917
<SECURITIES> 24,642
<RECEIVABLES> 22,440
<ALLOWANCES> 925
<INVENTORY> 10,762
<CURRENT-ASSETS> 61,344
<PP&E> 16,146
<DEPRECIATION> 5,754
<TOTAL-ASSETS> 72,576
<CURRENT-LIABILITIES> 17,228
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 50,592
<TOTAL-LIABILITY-AND-EQUITY> 72,576
<SALES> 109,896
<TOTAL-REVENUES> 109,896
<CGS> 95,823
<TOTAL-COSTS> 95,823
<OTHER-EXPENSES> 6,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> 8,387
<INCOME-TAX> 3,129
<INCOME-CONTINUING> 5,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,258
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
</TABLE>
