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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
EXCHANGE ACT OF 1934.
For the quarterly period ended September 27, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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
incorporation or organization) Identification No.)
14312 Franklin Avenue, Tustin, California 92781-2085
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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)
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. Yes X 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 - 6,341,509 shares as of NOVEMBER 3, 1997
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Page 1 of 19
Exhibit Index on Page 19
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SMARTFLEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996 3
Consolidated Statements of Operations (unaudited) for the three and nine months
ended September 30, 1997 and September 30, 1996 4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1997 and September 30, 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX TO EXHIBITS 19
</TABLE>
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
SMARTFLEX SYSTEMS, INC.
Consolidated Balance Sheets
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,270 $ 1,164
Short-term investments 21,644 24,796
Accounts receivable, net of allowance for doubtful accounts
of $707 at September 30, 1997 and $920 at December 31, 1996 15,055 18,837
Inventories:
Raw materials 9,454 7,722
Work-in-process 2,177 2,968
Finished goods 1,280 400
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Total inventories 12,911 11,090
Deferred tax asset 1,702 1,634
Prepaid expenses and other current assets 2,244 1,944
Income tax receivable 2,263 --
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Total current assets 58,089 59,465
Property and equipment, at cost:
Machinery and equipment 20,157 13,415
Office furniture and equipment 3,260 2,622
Leasehold improvements 4,510 2,581
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27,927 18,618
Less accumulated depreciation and amortization (9,738) (6,492)
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Total property and equipment 18,189 12,126
Other assets 80 541
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$76,358 $72,132
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to related parties $ 343 $ 2,041
Accounts payable 8,367 11,457
Accrued compensation and related costs 1,446 1,452
Restructuring liabilities 6,500 --
Other accrued liabilities 2,485 2,215
Current portion of notes payable 1,005 587
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Total current liabilities 20,146 17,752
Deferred tax liability 909 909
Long-term debt less current portion 6,966 722
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000 Issued and outstanding -- none -- --
Common stock, $.0025 par value:
Authorized shares -- 25,000,000 Issued and outstanding shares
-- 6,337,040 at September 30, 1997 and 6,301,313 at
December 31, 1996, respectively 16 16
Additional paid-in capital 35,880 35,649
Retained earnings 12,441 17,084
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Total stockholders' equity 48,337 52,749
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$76,358 $72,132
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</TABLE>
See accompanying notes.
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SMARTFLEX SYSTEMS, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net revenues $28,010 $35,581 $95,285 $109,896
Cost of revenues 26,670 30,874 88,401 95,823
------- ------- ------- --------
Gross margin 1,340 4,707 6,884 14,073
Costs and expenses:
Marketing and sales expense 812 795 2,632 2,075
General and administrative expense 1,932 1,348 5,038 4,180
Restructuring expense 6,500 -- 6,500 --
------- ------- ------- --------
Operating (loss) income (7,904) 2,564 (7,286) 7,818
Interest income 233 246 760 732
Interest expense (129) (64) (389) (161)
Other (expense) income (67) 3 (159) (2)
------- ------- ------- --------
(Loss) income before income taxes (7,867) 2,749 (7,074) 8,387
Income tax (benefit) provision (2,431) 1,047 (2,430) 3,129
------- ------- ------- --------
Net (loss) income $(5,436) $ 1,702 $(4,644) $ 5,258
======= ======= ======= ========
Net (loss) income per common and
common equivalent share:
Primary $ (0.85) $ 0.27 $ (0.72) $ 0.82
======= ======= ======= ========
Fully diluted $ (0.85) $ 0.27 $ (0.72) $ 0.82
======= ======= ======= ========
Common and common equivalent shares used
in computing per share amounts:
Primary 6,424 6,374 6,436 6,390
======= ======= ======= ========
Fully diluted 6,424 6,387 6,436 6,390
======= ======= ======= ========
</TABLE>
See accompanying notes.
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SMARTFLEX SYSTEMS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
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1997 1996
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<S> <C> <C>
Net cash flow from operating activities:
Net income $ (4,644) $ 5,258
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,104 2,068
Loss on sale of property and equipment 150 40
Provision for doubtful accounts (189) --
Provision for inventory obsolescence 564 (116)
Deferred income taxes (68) --
Other changes in operating assets and liabilities:
Accounts receivable 3,971 (4,119)
Inventories (2,385) 6,679
Prepaid expenses and other assets 161 (1,564)
Accounts payable to related parties (1,698) (775)
Accounts payable and accrued expenses 1,412 (1,826)
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Net cash provided by operating activities 378 5,645
Cash flow from investing activities:
Capital expenditures (9,309) (3,807)
Purchase of short-term investments (12,036) (16,157)
Proceeds from the sale of short-term investments 15,180 13,332
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Net cash used in investing activities (6,165) (6,632)
Cash flow from financing activities:
Net proceeds from sale of common stock 231 427
Net borrowings on revolving line of credit 4,939 695
Borrowings (repayments) on term loan 1,723 (616)
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Net cash provided by financing activities 6,893 506
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Net increase (decrease) in cash 1,106 (481)
Cash at beginning of period 1,164 1,398
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Cash at end of period $ 2,270 $ 917
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 310 $ 151
Taxes paid $ 101 $ 2,700
</TABLE>
See accompanying notes.
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SMARTFLEX SYSTEMS, INC.
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited)
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, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. 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, 1996.
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
On September 26, 1997, the Company amended its bank credit facility
("facility"), which now provides for aggregate borrowings of up to $25.0 million
(up from $15.0 million) under a revolving line of credit ("credit line").
Borrowings under the credit line include a sublimit for the issuance of up to
$2.0 million in commercial or standby letters of credit. Outstanding balances on
the credit line bear interest at the bank's reference rate or, at the Company's
option, LIBOR plus 1.5%, and unused portions of the credit line bear interest at
0.125% per annum. Interest is payable monthly and principal is payable at
maturity on September 30, 1999. At September 30, 1997, borrowings under the
revolving loan totaled $4.9 million; there were no letters of credit outstanding
as of that date. The facility additionally provides for an unsecured term loan
totaling $2.2 million, all of which the Company had borrowed as of September 30,
1997. The expiration date of such unsecured term loan is September 30, 2001.
Note (E) -- Net income (loss) per share
For the three and nine months ended September 30, 1997, net loss per
share was calculated using the weighted average common shares outstanding during
the said periods. For the three and nine months ended September 30, 1996, net
income per share was calculated using the weighted average common and common
equivalent shares outstanding during the said periods.
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Note (F) -- Impact of newly issued pronouncement by the Financial Accounting
Standards Board
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in no change in primary earnings per share for the nine months ended
September 30, 1997, and an increase of $0.02 in primary earnings per share for
the nine months ended September 30, 1996, respectively. The Company has not yet
determined what the impact of Statement 128 will be on the calculation of fully
diluted earnings per share.
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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 precision
interconnect assemblies to manufacturers of compact, high-performance electronic
products. The Company specializes in precision surface mount ("SMT") and direct
chip attach technologies on multiple substrates. Smartflex's customer base
includes hard disk drive ("HDD") and non-HDD manufacturers. To date, HDD
revenues have represented the Company's predominant market. For the nine months
ended September, 1997, HDD revenues comprised 78.4% of total revenues, compared
to 60.3% for the same period last year.
The third quarter results were significantly impacted by the continued
soft demand in the high-end HDD business. The Company had experienced strong
demand for its products and services during the fourth quarter of 1996 and early
1997, including demand for its Chip-On-Ceramic ("COC") process used in some
high-end HDD products. To meet this demand, the Company qualified three
component suppliers, established a new manufacturing facility in the
Philippines, moved to a larger facility in Mexico, and doubled its worldwide
production capacity. But during the later part of the second quarter of 1997,
some of the Company's high-end HDD customers reduced demand for the second half
of the year. The Company believes this reduction in demand is attributable to
competition and increased inventories of such customers, and the Company cannot
predict when, if ever, demand from such customers may improve.
In order to address the imbalance between demand and capacity, as well
as to position the Company's operations for future competitive cost advantages,
the Company initiated a plan to streamline its worldwide operations during the
third quarter. As part of this restructuring, volume manufacturing is intended
to be moved from Singapore to the Company's new lower-cost manufacturing
facility in Cebu, the Philippines. The Singapore operations are intended to
become the focal point of Smartflex customer support in Asia as the Company's
Far East Regional Services and Technology Center. The restructuring includes a
reduction of approximately 165 employees in Singapore and 30 employees from the
Company's Tustin, California operation. A one-time pre-tax restructuring charge
of $6.5 million was taken during the third quarter to provide for severance and
other employee-related charges associated with the reduction in force, the
write-off of equipment and leasehold improvements (primarily at the Singapore
facility), and the write-down of various intangible assets and other related
expenses. This realignment is intended to allow the Company to focus its
customer interface functions in Singapore while taking advantage of the cost
structure and volume manufacturing efficiencies available within the Cebu
operations. See "Risk Factors."
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RESULTS OF OPERATIONS
Net Revenues
Net revenues for the quarter ended September 30, 1997 were $28.0
million, a decrease of 24.3% compared to the second quarter of 1997 and a
decrease of 21.3% compared to the same period in the prior year, primarily due
to softness in the HDD business. Total overall unit shipments increased 2.6%
quarter to quarter on a sequential basis and 37.9% during the current third
quarter compared to the same period a year ago.
Net revenues for the nine months ended September 30, 1997 decreased
13.3% to $95.3 million compared to net revenues for the nine months ended
September 30, 1996. Total unit shipments during the nine months ended September
30, 1997 increased 24.6% from the unit levels achieved during the nine months
ended September 30, 1996. Even though unit shipments increased, revenues
declined, primarily due to changes in product mix. In addition, some decrease in
per unit revenue is attributable to lower average selling prices (ASP's). The
decline in ASP's was due to decreases in component costs, generally passed
through to customers in the form of lower prices and competitive pressures.
Net HDD revenues were 27.5% lower than those in the second quarter of
1997, and 8.4% lower than the same period last year. Net revenues from the
non-HDD segment of the business decreased 14.1% compared to the second quarter
of 1997. The decrease in net revenues was due to decreases in scanner programs
and array product shipments, which were partially offset by increases in tape
products. Net revenues attributable to non-HDD programs decreased 43.1% during
the third quarter of 1997 compared to the same period in 1996, and 52.7% during
the first nine months of 1997 compared to the same period in 1996. This was
primarily due to reduced demand from a key customer which experienced
competitive pressures for its products.
The Company's export sales arise primarily from shipments to
international head stack assemblers of the Company's customers, as well as to
the offshore facilities of the Company's US-based OEM customers. Total export
sales as a percent of net sales were 77.5% in the third quarter of 1997 compared
to 76.5% during the same period in 1996, and were 83.4% in the nine months ended
September 30, 1997 compared to 69.5% during the same period in the prior year.
Gross Margins
Gross margins, as a percentage of net revenues, declined during the
three and nine months ended September 30, 1997 as compared to the comparable
periods in the prior year. Gross margins were 4.8% and 13.2% for the three
months ended September 30, 1997 and 1996, respectively, and 7.2% and 12.8% for
the nine months ended September 30, 1997 and 1996, respectively. The addition of
fixed costs to expand capacity in the various manufacturing facilities impacted
gross margins negatively. Gross margins also declined due to a lower rate of
absorption of these increased manufacturing costs resulting from component
shortages in the first quarter and demand slow-down for the high-end disk drives
in the second and third quarter.
Marketing and Sales Expense
Marketing and sales expenses consist primarily of salaries, facility
costs, advertising expenses, and travel costs for marketing, sales and customer
service personnel, and sales commissions paid to direct sales personnel and
sales representative organizations. Marketing and sales expenses increased 26.8%
to $2.6 million for the nine months ended September 30, 1997 from $2.1 million
during the same period in the prior year, primarily due to new advertising
expense, as well as headcount and overhead increases. As a percentage of net
revenues, these expenses increased to 2.8% for the nine months ended September
30, 1997 from 1.9% for the same period in fiscal 1996.
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General and Administrative Expenses
General and administrative ("G & A") expenses increased both as a
percentage of net revenues, and in absolute dollars, for the nine months ended
September 30, 1997, compared to the same period in the prior year. As a
percentage of net revenues, G & A expenses were 5.3% for the nine months ended
September 30, 1997, compared to 3.8% for the nine months ended September 30,
1996. The increase in G & A expenses is primarily due to additions to
administrative staff at the Company's international facilities.
Restructuring Charges
As mentioned in "Overview" above, the Company announced plans to
streamline its worldwide operations during the third quarter of 1997, in order
to address the imbalance between demand and capacity, as well as to position the
Company's operations for competitive cost advantages in the future. As part of
this restructuring, volume manufacturing is intended to be moved from Singapore
to the Company's new lower-cost manufacturing facility in Cebu, the Philippines.
The Singapore operations are intended to become the focal point of Smartflex
customer support in Asia as the Company's Far East Regional Services and
Technology Center. The restructuring includes a reduction of approximately 165
employees in Singapore and 30 employees from the Tustin, California operation.
As a result of this restructuring, the Company incurred a one-time pre-tax
charge consisting of approximately $4.9 million for the write-off of inventory
and assets, and other expenses, approximately $1.1 million in severance and
other employee-related costs associated with the reduction in force, and
approximately $500,000 towards potential Singapore tax liability, for a total of
$6.5 million. This realignment is intended to allow the Company to focus its
customer interface functions in Singapore while taking advantage of the cost
structure and volume manufacturing efficiencies available within the Cebu
operations. See "Risk Factors."
Interest Income
Interest income increased to $760,000 during the nine months ended
September 30, 1997 compared to $732,000 during the same period in the prior
year.
Income Taxes
The effective income tax rates for the quarters ended September 30,
1997 and 1996 were a benefit of 30.9% and a provision of 38.1%, respectively.
For the nine months ended September 30, 1997 and 1996, the effective income tax
rates were a benefit of 34.3% and a provision of 37.3%, respectively.
The income tax benefit in the three and nine month periods ended
September 30, 1997 is primarily the result of domestic net operating losses for
which no state tax benefit was provided and foreign losses in tax holiday
countries for which no tax benefit was provided. The successful conclusion of an
Internal Revenue Service examination also contributed to the income tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
On September 26, 1997, the Company amended its bank credit facility
("facility"), which now provides for aggregate borrowings of up to $25.0 million
(up from $15.0 million) under a revolving line of credit ("credit line").
Borrowings under the credit line include a sublimit for the issuance of up to
$2.0 million in commercial or standby letters of credit. Outstanding balances on
the credit line bear interest at the bank's reference rate or, at the Company's
option, LIBOR plus 1.5%, and unused portions of the credit line bear interest at
0.125% per annum. Interest is payable monthly and principal is payable at
maturity on September 30, 1999. At September 30, 1997, borrowings under the
revolving loan totaled $4.9 million; there were no letters of credit outstanding
as of that date. The facility additionally provides for an unsecured term loan
totaling $2.2 million, all of which the Company had borrowed as of September 30,
1997. The expiration date of such unsecured term loan is September 30, 2001.
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Short-term investments at September 30, 1997 totaled $21.6 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, decreased $3.1 million
during the nine months ended September 30, 1997, primarily due to investments in
plant and equipment in the Company's manufacturing facilities. For all
short-term investments at September 30, 1997, cost approximated fair market
value.
During the nine months ended September 30, 1997, net inventories
increased $1.8 million, from $11.1 million at the end of the prior year to $12.9
million. Inventory levels fluctuate directly with the volume of the Company's
manufacturing. Changes or significant fluctuations in market demands for
products can cause fluctuations in inventory levels, which may result in changes
in levels of inventory turns and liquidity. See "Risk Factors."
During the nine months ended September 30, 1997, the Company invested
$9.3 million in capital equipment and leasehold improvements, primarily for
expansion of its international manufacturing facilities. In Monterrey, Mexico,
the Company completed its new plant and moved its operations. With double the
floor space of its previous facility in Monterrey, the Company's new
manufacturing facility is intended to give additional capacity to support both
precision SMT and Chip-on-Flex ("COF") technologies. See "Risk Factors." In
Cebu, the Philippines, an additional SMT line was added, more than doubling that
plant's SMT capacity, and the COF capability was expanded.
The Company believes that existing cash and investment 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."
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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, the transition of volume manufacturing operations from
Singapore to the Philippines, efficient utilization of manufacturing facilities,
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 ("COC") process, timely customer
qualification of, and commencement of volume production at, the Company's new
facilities in Cebu and Monterrey, 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 relied upon as an indicator of
future performance, and investors should not overly rely upon 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,
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<PAGE> 13
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.
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 by a sufficient amount or
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. In the first nine
months of 1997 and 1996, the Company's five largest customers (which include, in
some cases, multiple divisions) accounted for approximately 90.6% and 86.3% 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 Solectron Corporation, CTS Corporation, and ADFlex Solutions,
Inc. ("ADFlex"). 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 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.
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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 continuing trend of shorter product 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 technologically
advanced manufacturing services, assure 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 that 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 (which is also a competitor, as
mentioned in "Competition" above), Mektec Corporation, Silicon Systems
Inc.("SSI"), Toshiba America, Inc., and VTC, Inc. During the first nine months
of 1997 and the year ended 1996, 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. The Company has experienced shortages of components in
the recent past. For example, in the first quarter of 1997, the Company
experienced a shortage of ceramic substrates for its COC program. During the
second quarter of 1997 this issue was resolved since all three of the Company's
ceramic substrate suppliers were able to reach their planned production goals.
However, there can be no assurance that such shortages will not recur in the
future. Any such shortages could have a material adverse effect on the Company's
operating results.
International Operations
Throughout the first nine months of 1997, the Company maintained
international manufacturing operations in Singapore, Mexico, and the
Philippines. In September 1997, the Company announced a restructuring plan to
streamline worldwide operations. As part of this restructuring, the Company
intends to move its volume manufacturing from Singapore to its lower-cost
manufacturing facility in Cebu, the Philippines. The Singapore operations are
intended to become the focal point of Smartflex customer support in Asia as the
Company's Far East Regional Services and Technology Center. 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
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<PAGE> 15
increase its presence overseas. Manufacturing and sales operations outside the
United States are accompanied by a number of risks inherent in international
operations, including, but not limited to, 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 production employees at the Mexico facility are represented by a labor
union and covered by a collective bargaining agreement that is subject to
revision annually under Mexican law. The current agreement is subject to
revision in February 1998. 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 certain periods 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 expects
that continued growth would 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.
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<PAGE> 16
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.
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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits --- See Exhibit Index.
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1997.
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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 10, 1997 By: /s/ John W. Hohener
- - ------------------- --------------------------------------------
Date John W. Hohener
Vice President, Chief Financial Officer, and
Duly Authorized Officer
(Principal financial and accounting officer)
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<PAGE> 19
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------- -----------
10.33 Restated Loan Agreement, dated September 26, 1997, amending and
restating the Loan Agreement dated September 29, 1995 between the
Registrant and Union Bank of California, N.A.
10.34 Promissory note dated September 18, 1997, made by the Registrant in
favor of Union Bank of California, N.A.
11.1 Computation of Earnings per Share
27 Financial Data Schedule (filed electronically)
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<PAGE> 1
EXHIBIT 10.33
[UNION BANK OF CALIFORNIA LOGO]
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and entered
into as of September 26, 1997 by and between Smartflex Systems, Inc., a Delaware
corporation ("Borrower") and UNION BANK OF CALIFORNIA, N.A., ("Bank"). This
Agreement amends and restates in its entirety that certain loan agreement dated
September 29, 1995 between Bank and Borrower.
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount
not to exceed TWENTY FIVE MILLION DOLLARS ($25,000,000) outstanding in the
aggregate at any one time (the "Revolving Loan"). Borrower may borrow, repay and
reborrow all or part of the Revolving Loan in amounts of not less than Ten
Thousand Dollars ($10,000) in accordance with the terms of the Revolving Note.
All borrowings of the Revolving Loan must be made before September 30, 1999 at
which time all unpaid principal and interest of the Revolving Loan shall be due
and payable. The Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") on the standard form used by Bank for commercial loans. Bank
shall enter each amount borrowed and repaid in Bank's records and such entries
shall be deemed to be the amount of the Revolving Loan outstanding. Omission of
Bank to make any such entries shall not discharge Borrower of its obligation to
repay in full with interest all amounts borrowed.
1.1.1.1 THE LETTER OF CREDIT SUBLIMIT. As a sublimit to the
Revolving Loan, Bank shall issue, for the account of Borrower, one or more
irrevocable, commercial or standby letters of credit (individually, an "L/C" and
collectively, the "L/Cs"). All such L/Cs shall be drawn on such terms and
conditions as are acceptable to Bank. The aggregate amount available to be drawn
under all outstanding L/Cs and the aggregate amount of unpaid reimbursement
obligations under drawn L/Cs shall not exceed Two Million Dollars ($2,000,000)
and shall reduce, dollar for dollar, the maximum amount available under the
Revolving Loan. No L/C shall have an expiry date more than one (1) year from its
date of issuance and each L/C shall be governed by the terms of (and Borrower
agrees to execute) Bank's standard form of L/C application and reimbursement
agreement. No L/C shall expire after September 30, 1999.
1.1.2 THE TERM LOAN. Bank will loan to Borrower the sum of Two
Million Two Hundred 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. September 30, 1997 in accordance with the terms
of the Term Note. In the event of a prepayment of principal and payment of any
resulting fees, any prepaid amounts shall be applied to the scheduled principal
payments in the reverse order of their maturity. The Term Loan shall be
evidenced by a promissory note (the "Term Loan") on the standard form used by
Bank for commercial loans.
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<PAGE> 2
1.2 TERMINOLOGY.
As used herein the word "Loans" shall mean, collectively,
all the credit facilities described above.
As used herein the word "Notes" shall mean, collectively,
all the promissory notes described above.
As used herein, the words "Loan Documents" shall mean all
documents executed in connection with this Agreement.
1.3 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be
used for general working capital purposes and the proceeds of the Term Loan
shall be used for capital additions and tenant improvements.
1.4 INTEREST. The unpaid principal balance of the Revolving Loan
shall bear interest at the rate as more specifically provided in the Revolving
Note and the principal balance of the Term Loan shall bear interest at the rate
as more specifically provided in the Term Note.
1.5 UNUSED COMMITMENT FEE. On the last calendar day of the third
month following the execution of this Agreement and on the last calendar day of
each three-month period thereafter until September 30, 1999, or the earlier
termination of the Loan, Borrower shall pay to Bank a fee of one eighth of one
percent (.125%) per year on the average unused portion of the Loan for the
preceding quarter computed on the basis of actual days elapsed of a year of 360
days.
1.5.1 TERM LOAN COMMITMENT FEE. Borrower has paid in advance a
commitment fee of Five Thousand Five Hundred Dollars ($5,500). A one quarter of
one percent (.25%) fee shall be paid upon the funding on the amount of each
advance on the Term Loan. No portion of these fees shall be reimbursable.
1.6 BALANCES. Borrower shall maintain its major depository
accounts with Bank until the Note and all sums payable pursuant to this
Agreement have been paid in full.
1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.8 CONTROLLING DOCUMENT. In the event of any inconsistency
between the terms of this Agreement and any Note or any of the other Loan
Documents, the terms of such Note or other Loan Documents will prevail over the
terms of this Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan unless at or prior to the time for the making of such
disbursement, the following conditions have been fulfilled to Bank's
satisfaction:
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<PAGE> 3
2.1 COMPLIANCE. Borrower shall have performed and complied with
all terms and conditions required by this Agreement to be performed or complied
with by it prior to or at the date of the making of such disbursement and shall
have executed and delivered to Bank the Notes and other documents deemed
necessary by Bank.
2.2 BORROWING RESOLUTION. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 CONTINUING COMPLIANCE. At the time any disbursement is to be
made, there shall not exist any event, condition or act which constitutes an
event of default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such event of default; nor
shall there be any such event, condition, or act immediately after the
disbursement were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is the
design and manufacture of flexible electronic circuit devices.
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and
subsidiaries (those entities in which Borrower has either a controlling interest
or at least a 25% ownership interest) and their addresses, and the names of
Borrower's principal shareholders, are as provided on a schedule delivered to
Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and performance
of this Agreement, the Note and all other agreements and instruments required by
Bank in connection with the Loan are not in contravention of any of the terms of
any indenture, agreement or undertaking to which Borrower is a party or by which
it or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of Borrower,
including both a balance sheet at December 31, 1996, together with supporting
schedules, and an income statement for the six (6) months ended June 28, 1997,
have heretofore been furnished to Bank, and are true and complete and fairly
represent the financial condition of Borrower during the period covered thereby.
Since June 28, 1997, there has been no material adverse change in the financial
condition or operations of Borrower.
3.5 TITLE. Except for assets which may have been disposed of in
the ordinary course of business, Borrower has good and marketable title to all
of the property reflected in its financial statements delivered to Bank and to
all property acquired by Borrower since the date of said financial statements,
free and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
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<PAGE> 4
3.6 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's insurance
coverage.
3.7 DEFAULT. Borrower is not now in default in the payment of any
of its material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.8 ORGANIZATION. Borrower is duly organized and existing under
the laws of the state of its organization, and has the power and authority to
carry on the business in which it is engaged and/or proposes to engage.
3.9 POWER. Borrower has the power and authority to enter into
this Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 AUTHORIZATION. This Agreement and all things required by
this Agreement have been duly authorized by all requisite action of Borrower.
3.11 QUALIFICATION. Borrower is duly qualified and in good
standing in any jurisdiction where such qualification is required.
3.12 COMPLIANCE WITH LAWS. Borrower is not in violation with
respect to any applicable laws, rules, ordinances or regulations which
materially affect the operations or financial condition of Borrower.
3.13 ERISA. Any defined benefit pension plans as defined in
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in
ERISA has occurred with respect to any such plan.
3.14 REGULATION U. No action has been taken or is currently
planned by Borrower, or any agent acting on its behalf, which would cause this
Agreement or the Note to violate Regulation U or any other regulation of the
Board of Governors of the Federal Reserve System or to violate the Securities
and Exchange Act of 1934, in each case as in effect now or as the same may
hereafter be in effect. Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock as one of its
important activities and none of the proceeds of the Loan will be used directly
or indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These representations shall be
considered to have been made again at and as of the date of each disbursement of
the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loans
only as provided in subsection 1.3 above.
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<PAGE> 5
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge
promptly all taxes, assessments and other governmental charges and claims levied
or imposed upon it or its property, or any part thereof, provided, however, that
Borrower shall have the right in good faith to contest any such taxes,
assessments, charges or claims and, pending the outcome of such contest, to
delay or refuse payment thereof provided that adequately funded reserves are
established by it to pay and discharge any such taxes, assessments, charges and
claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve
its existence and assets and all rights, franchises, licenses and other
authority necessary for the conduct of its business and will maintain and
preserve its property, equipment and facilities in good order, condition and
repair. Bank may, at reasonable times, visit and inspect any of the properties
of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have access thereto, to make
examination and photocopies thereof, and to make audits during regular business
hours. Costs for such audits shall be paid by Borrower.
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within forty five (45) days after the close of each
fiscal quarter, except for the final quarter of each fiscal year, its unaudited
balance sheet as of the close of such fiscal quarter, its unaudited income and
expense statement with supportive schedules and statement of retained earnings
for that fiscal quarter, prepared in accordance with generally accepted
accounting principles and a copy of its 10-Q report as soon as it becomes
available;
(b) Within ninety (90) days after the close of each fiscal
year, a copy of its consolidated and consolidating statement of financial
condition including at least its balance sheet as of the close of such fiscal
year, its income and expense statement and retained earnings statement for such
fiscal year, examined and prepared on an audited basis by independent certified
public accountants selected by Borrower and reasonably satisfactory to Bank, in
accordance with generally accepted accounting principles applied on a basis
consistent with that of the previous year and a copy of its 10-K report and
annual report as they become available;
(c) Such other financial statements and information as Bank
may reasonably request from time to time;
(d) In connection with each financial statement provided
hereunder, a statement executed by the president or chief financial officer or
controller of Borrower, certifying that no default has occurred and no event
exists which with notice or the lapse of time, or both, would result in a
default hereunder;
(e) In connection with each fiscal year-end statement
required hereunder, any management letter of Borrower's certified public
accountants;
(f) Prompt written notice to Bank of all events of default
under any of the terms or provisions of this Agreement or of any other
agreement, contract, document or instrument entered, or to be entered into with
Bank; and of any litigation which, if decided adversely to Borrower, would have
a material adverse effect on Borrower's financial condition; and of any other
matter which has resulted in, or is likely to result in, a material adverse
change in its financial condition or operations;
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<PAGE> 6
(g) Prior written notice to Bank of any changes in Borrower's
officers and other senior management; Borrower's name; and location of
Borrower's assets, principal place of business or chief executive office.
4.6 TANGIBLE NET WORTH. From December 31, 1995, Borrower will at
all times maintain Tangible Net Worth of not less than Forty Million Dollars
($40,000,000). Thereafter, Borrower will at all times maintain a minimum
Tangible Net Worth that increases from said amount as of the end of each of
Borrower's fiscal years by Seventy-Five percent (75%) of Borrower's net profit
after taxes plus 100% of any new equity capital additions or Forty Million
Dollars ($40,000,000), whichever is greater. "Tangible Net Worth" shall mean net
worth increased by indebtedness of Borrower subordinated to Bank and decreased
by patents, licenses, trademarks, trade names, goodwill and other similar
intangible assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors).
4.7 DEBT TO TANGIBLE NET WORTH. Borrower will at all times
maintain a ratio of total liabilities to tangible net worth of not greater than
1.0:1.0.
4.8 PROFIT FROM OPERATIONS. Borrower will maintain a net profit
from operations, as defined by generally accepted accounting principles, of any
positive amount for each fiscal year.
4.9 CASH FLOW. Borrower will maintain a ratio of Cash Flow to
Debt Service of not less than 2.0:1.0. Compliance with this subsection shall be
measured as of the end of each fiscal year. "Cash Flow" shall mean net profit
after taxes to which depreciation, amortization and other noncash expenses are
added for the twelve (12) month period immediately preceding the date of
calculation. "Debt Service" shall mean that portion of long-term liabilities and
capital leases coming due within twelve (12) months of the date of calculation.
4.10 QUICK RATIO. Borrower shall maintain at all times a ratio of
cash, accounts receivable and marketable securities to current liabilities
(including any balances outstanding on the Revolving Loan) of not less than
1.25:1.0. Current liabilities will exclude current restructure charge related
accruals for Quick Ratio calculation purposes through 6/30/98.
4.11 INSURANCE. Borrower will keep all of its insurable property,
real, personal or mixed, insured by good and responsible companies against fire
and such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damages to persons and property.
4.12 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand
by Bank, take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
4.13 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly
to Bank upon demand, reasonable attorneys' fees (including but not limited to
the reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
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<PAGE> 7
4.14 BANK EXPENSES. Borrower will pay or reimburse Bank for all
costs, expenses and fees incurred by Bank in preparing and documenting this
Agreement and the Loan, and all amendments and modifications thereof, including
but not limited to all filing and recording fees, costs of appraisals, insurance
and attorneys' fees, including the reasonable estimate of the allocated costs
and expenses of in-house legal counsel and legal staff.
4.15 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank,
as soon as possible and in any event within 15 days after Borrower knows or has
reason to know that any event or condition with respect to any defined benefit
pension plans of Borrower described in Section 3 above has occurred, a statement
of an authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower will not create, assume or
suffer to exist any mortgage, pledge, security interest, encumbrance, or lien
(other than for taxes not delinquent and for taxes and other items being
contested in good faith) on property of any kind, whether real, personal or
mixed, now owned or hereafter acquired, or upon the income or profits thereof,
except to Bank and except for minor encumbrances and easements on real property
which do not affect its market value, and except for existing liens on
Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased.
5.2 BORROWINGS. Borrower will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to Bank or except to a financial institution at face value
for deposit or collection purposes only and without any fee other than fees
normally charged by the financial institution for deposit or collection
services. Borrower will not borrow any money, become contingently liable to
borrow money, except for certain equipment held by its wholly-owned subsidiary,
Smartflex Systems-Singapore, in an amount not to exceed One Million Three
Hundred Thousand Dollars ($1,300,000) and agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will neither
liquidate nor dissolve nor enter into any consolidation, merger, partnership or
other combination, nor convey, nor sell, nor lease all or the greater part of
its assets or business, nor purchase or lease all or the greater part of the
assets or business of another.
5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except in
the ordinary course of business as currently conducted, make any loans or
advances, become a guarantor or surety, pledge its credit or properties in any
manner or extend credit except for guarantees for loans to the wholly owned
Smartflex Systems-Singapore, in an amount not to exceed One Million Three
Hundred Thousand Dollars ($1,300,000).
5.5 INVESTMENTS. Borrower will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of deposit
of Bank, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, provided all
such permitted investments shall mature within two year of purchase.
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<PAGE> 8
5.6 LOSSES. Borrower will not incur 2 or more consecutive
quarterly net losses in any fiscal year.
5.7 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any
dividends other than a dividend payable in its own common stock, or authorize or
make any other distribution with respect to any of its stock now or hereafter
outstanding which exceeds in the aggregate for any fiscal year twenty-five
percent (25%) of Borrower's net profit after taxes.
5.8 RETIREMENT OF STOCK. Borrower will not acquire or retire any
share of its capital stock for value.
5.9 PARENT AND SUBSIDIARY PROPERTY. Borrower will not transfer
any property to its parent or any affiliate of its parent, except for value
received in the normal course of business as business would be conducted with an
unrelated or unaffiliated entity. In no event shall management fees or fees for
services be paid by Borrower to any such direct or indirect affiliate without
Bank's prior written approval.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default")
shall terminate any obligation on the part of Bank to make or continue the Loan
and automatically, unless otherwise provided under the Note, shall make all sums
of interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance
of any covenant or condition of the Loan Documents; or
6.4 Any guaranty or subordination agreement required hereunder is
breached or becomes ineffective, or any Guarantor or subordinating creditor
dies, disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
6.5 There is a change in ownership or control of ten percent
(10%) or more of the issued and outstanding stock of Borrower or any Guarantor,
or (if Borrower is a partnership) there is a change in ownership or control of
any general partner's interest.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given to
Bank hereunder shall be cumulative and not alternative and shall be in addition
to all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of set off or banker's
lien.
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<PAGE> 9
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy shall
not preclude the further exercise thereof. No waiver shall be effective unless
it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment by Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective. In the event of any conflict between the
provisions of this Agreement and the provisions of any note or reimbursement
agreement evidencing any indebtedness hereunder, the provisions of such note or
reimbursement agreement shall prevail.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing
signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more
counterparts to this Agreement, each of which shall be deemed an original, but
when together shall be one and the same instrument.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures at
the end of this Agreement and shall be considered to have been validly given:
(a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the next
business day, if sent by overnight courier service of recognized standing; and
(d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may
be changed from time to time by notice delivered as provided above.
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<PAGE> 10
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. SMARTFLEX SYSTEMS, INC.,
a Delaware Corporation
By: By:
------------------------------------ --------------------------------
Title: Title:
--------------------------------- ----------------------------
By: By:
----------------------------------- -------------------------------
Title: Title:
-------------------------------- ----------------------------
Address: 500 South Main Street Suite 201 Address: 14312 Franklin Avenue
Orange, California 92668 Tustin, California
92680-7028
Attention: Jack Lenhof, VP Attention: John W. Hohener, CFO
Telecopier: (714) 565-5770 Telecopier: (714) 573-6918
Telephone: (714) 565-5766 Telephone: (714) 838-8737
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<PAGE> 1
UNION
BANK OF
CALIFORNIA EXHIBIT 10.34
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, 1999 Amount $25,000,000.00
$25,000,000.00 Date SEPTEMBER 18, 1997
FOR VALUE RECEIVED, on SEPTEMBER 30, 1999, the undersigned ("Debtor") promises
to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated
below, the principal sum of TWENTY FIVE MILLION AND NO/100 Dollars
($25,000.000.00), 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
rate or rates and at the times set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 30TH day of each MONTH
(commencing OCTOBER 30, 1997). 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, based
on an index selected by Debtor, which is 1.50% per annum in excess of
Bank's LIBOR-Rate for the Interest Period selected by Debtor.
Any Base Interest Rate may not be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate 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 exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing, and
on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index, the
Interest Period and the Origination Date selected (which Origination
Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall
follow the date of such selection by no more than two (2) Business
Days).
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection 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 selection, the index 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
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<PAGE> 2
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.
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,
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 under this note bearing
interest at a Base Interest Rate 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 the present value of
the product of: (i) the difference (but not less than zero) 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) 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; and (iii) 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 an amount equal to the lesser of (A) the amount prepaid or
(B) 50% of the sum of (1) the amount prepaid and (2) 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).
Present value under this note is determined by discounting the above
product 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 any security
agreement or other agreement securing this note, at a foreclosure sale
held thereunder or through the tender of payment at 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 amount of such prepayment fee
shall be added to the principal. DEBTOR HEREBY ACKNOWLEDGES AND AGREES
THAT BANK WOULD NOT MAKE THE LOAN TO DEBTOR 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:
------
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 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.
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<PAGE> 3
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 and 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 said state's 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: "Base Interest Rate" shall mean a rate of interest
based on the 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 the state identified in paragraph 6, above,
and, with respect to the rate of interest based on the LIBOR Rate, 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 Rate"
shall mean a per annum rate of interest (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 the Interest Period selected by
Debtor and for an amount equal to the amount of principal covered by Debtor's
interest rate selection, plus Bank's costs, including the costs, if any, of
reserve requirements. "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 as 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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<PAGE> 4
UNION
BANK OF
CALIFORNIA
AUTHORIZATION
Borrower Name SMARTFLEX SYSTEMS, INC.
Borrower Address Office Loan Number
14312 FRANKLIN AVENUE 45061 8439907413 0080-00-0-000
TUSTIN, CA 92680 Maturity Date Amount
SEPTEMBER 30, 1999 $25,000,000.00
Union Bank of California, N.A. ("Bank") is hereby authorized and instructed to
disburse the proceeds of that certain Note referenced above in the following
manner:
Deposit the proceeds of my/our revolving note into my/our account #
4500144314 from time to time and in such amounts as may be requested
verbally or in writing.
INCREASE RENEWAL OF OBLIGATION #0080-00-0-000, $ 15,000,000.00
WHICH MATURES 9/30/98
Fees itemized below are payable as follows (check one):
[ ] Charge account #_____________________________ [ ] Check enclosed
TERMS AND CONDITIONS
1. Bank is authorized to charge account number 4500144314 in the name(s) of
SMARTFLEX SYSTEMS, INC. for payments of interest for principal/interest)
when due in connection with this Note and all renewals or extensions
thereof.
2. Bank shall disburse proceeds in the amounts stated above in accordance with
the foregoing authorization or when Bank receives verbal or written
authorization from Borrower(s) to do so, or any one of the Borrowers, if
there are joint Borrowers, but not later than SEPTEMBER 30, 1999. The Bank,
at its discretion, may elect to extend this date without notice to or
acknowledgement by the borrower(s). This Authorization and the above
mentioned Note will remain in full force and effect until the obligations in
connection with this Note have been fulfilled.
3. Unless dated by Bank prior to execution, the Note shall be dated by Bank as
of the date on which Bank disburses proceeds.
4. Notwithstanding anything to the contrary herein, Bank reserves the right to
decline to advance the proceeds of the above described Note if there is a
filing as to the Borrower(s), or any of them of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act or any other
insolvency law; the issuance of any attachment, garnishment, execution or
levy of any asset of the Borrower(s), or any endorser or guarantor which
results in Bank deeming itself, in good faith insecure.
5. The borrower(s) authorizes Bank to release information concerning the
borrower(s) financial condition to suppliers, other creditors, credit
bureaus and other credit reporters; and also authorizes Bank to obtain
such information from any third party at any time.
The Borrower(s) by their execution of this Authorization accept the foregoing
terms, conditions and instructions.
Executed on 9/26/97
SMARTFLEX SYSTEMS, INC.
By /s/ WILLIAM L. HEALEY
---------------------------------
WILLIAM L. HEALEY, PRESIDENT
<PAGE> 5
UNION
BANK OF
CALIFORNIA
AUTHORIZATION TO OBTAIN CREDIT, GRANT SECURITY,
GUARANTEE OR SUBORDINATE
RECITALS
A. SMARTFLEX SYSTEMS, INC. duly organized and existing under the laws of
CALIFORNIA with its principal place of business at 14312 FRANKLIN AVE., TUSTIN
CA (the "Business") desires to obtain present or future credit from, grant
security to, or give guaranties or subordinations to Union Bank of
California, N.A. ("Bank").
B. The Business desires that certain person(s) be authorized to act on its
behalf from time to time in obtaining, among other things, such credit from,
granting security to, or giving guaranties or subordinations to, Bank.
NOW, THEREFORE, IT IS RESOLVED THAT:
1. AUTHORIZATION. Any 1 of the following is/are authorized and directed, in the
name and on behalf of the Business, from time to time, with or without security,
to obtain credit and other financial accommodations from Bank, or to give
guaranties or subordinations to Bank, upon such terms as any such person(s)
shall approve:
PRESIDENT
2. SCOPE OF AUTHORITY. Without limiting the generality of the authority granted,
each person designated in paragraph 1 above is authorized, from time to time, in
the name and on behalf of the Business, to:
2.1 Incur Indebtedness To Bank. The word "Indebtedness" as used herein
means all debts, obligations and liabilities, including without limitation
obligations and liabilities under guaranties or subordinations, currently
existing or now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising or evidenced, whether direct or acquired by
assignment or succession, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether
liability is individual or joint with others, all renewals, extensions and
modifications thereof, and all attorneys' fees and costs incurred in
connection with the negotiation, preparation, workout, collection and
enforcement thereof;
2.2 Execute, deliver and endorse with respect to Indebtedness to Bank,
promissory notes, loan agreements, drafts, guaranties, subordinations,
applications and agreements for letters of credit, acceptance agreements,
foreign exchange documentation, applications and agreements pertaining to
the payment and collection of documents, indemnities, waivers, purchase
agreements and other financial undertakings, leases and other documents and
agreements in connection therewith, and all renewals, extensions or
modifications thereof;
2.3 Grant security interests in, pledge, assign, transfer, endorse,
mortgage or hypothecate, and execute security or pledge agreements,
financing statements and other security interest perfection documentation,
mortgages and deeds of trust on, and give trust receipts for, any or all
property of the Business as may be agreed upon by any officer as security
for any or all Indebtedness of the Business or any other individual or
entity ("Person"), and grant and execute renewals, extensions or
modifications thereof;
2.4 Sell to, or discount or rediscount with, Bank all negotiable
instruments, including without limitation promissory notes, commercial
paper, drafts, accounts, acceptances, leases, chattel paper, contracts,
documents, instruments or evidences of debt at any time owned, held or drawn
by the Business, and draw, endorse or transfer any of such instruments or
documents on behalf of the Business, guarantee payment or repurchase
thereof, and execute and deliver to Bank all documents and agreements in
connection therewith, and all renewals, extensions or modifications thereof;
2.5 Direct the disposition of the proceeds of any credit extended by
Bank, and deliver to Bank and accept from Bank delivery of any property of
the Business at any time held by Bank.
2.6 Specify in writing to Bank the individuals who are authorized, in
the name of and on behalf of the Business, to request advances under loans
or credit lines made available by Bank to the Business, subject to the terms
thereof.
3. WRITINGS. Any instruments, documents, agreements or other writings executed
under or pursuant to these resolutions (collectively, the "Authorization") may
be in such form and contain such terms and conditions as may be required by Bank
in its sole discretion, and execution thereof by any officer authorized under
the Authorization shall be conclusive evidence of such officer's and the
Business's approval of the terms and conditions thereof.
4. CERTIFICATION. The Secretary or any Assistant Secretary of the Business is
hereby authorized and directed from time to time to certify to Bank a copy of
this Authorization, the names and specimen signatures of the persons designated
in paragraph 1 above, and any modification thereof.
5. RATIFICATION/AMENDMENT. The authority given under this Authorization shall be
retroactive and any and all acts so authorized that are performed prior to the
formal adoption are hereby approved and ratified. In the event two or more
resolutions of this Business are concurrently in effect, the provisions of each
shall be cumulative, unless the latest shall specifically provide otherwise. The
authority given hereby shall remain in full force and effect, and Bank is
authorized and requested to rely and act thereon, until Bank shall have received
at its ORANGE COUNTY COMMERCIAL BANKING OFFICE a certified copy of a further
resolution of the Business amending, rescinding or revoking the Authorization.
<PAGE> 6
6. REQUESTS FOR CREDIT. Credit may be requested by the Business from Bank in
writing, by telephone, or by other telecommunication method acceptable to Bank.
The Business recognizes and agrees that Bank cannot effectively determine
whether a specific request purportedly made by or on behalf of the Business is
actually authorized or authentic. As it is in the Business's best interest that
Bank extend credit in response to these forms of request, the Business assumes
all risks regarding the validity, authenticity and due authorization of any
request purporting to be made by or on behalf of the Business. The Business is
hereby authorized and directed to repay any credit that is extended by Bank
pursuant to any request which Bank in good faith believes to be authorized, or
when the proceeds of any credit are deposited to the account of the Business
with Bank, regardless of whether any individual or entity other than the
Business may have authority to draw against such account.
7. BUSINESS AS PARTNER/JOINT VENTURER, LLC MEMBER OR MANAGER. Nothing in its
organizational documents limits or prohibits the Business from acting as a
general or limited partner of a partnership, a member or manager of a limited
liability company, or joint venturer of a joint venture, Any Person designated
in paragraph 1 of the Authorization is authorized, on behalf of the Business, in
its role as a general or limited partner, a member or manager, or a joint
venturer, to execute, deliver and endorse all certificates, authorizations and
agreements (i) to evidence the Business's role in and responsibilities to and
for such partnership, limited liability company or joint venture so that Bank
may rely thereon, and (ii) to evidence such partnership's, limited liability
company's or joint venture's obligations and liabilities to Bank.
8. NO LIMITATION BY THIS AUTHORIZATION. Nothing contained in this Authorization
shall limit or modify the authority of any person to act on behalf of the
Business as provided by law, any agreement or authorization relating to the
Business or otherwise.
9. ADDENDA. The Addendum - Letters of Credit attached hereto is incorporated
herein by this reference.
CERTIFICATE OF SECRETARY OF THE BUSINESS
I hereby certify to Union Bank of California, N.A., ("Bank") that the above
Authorization is a true copy of the resolution(s) of SMARTFLEX SYSTEMS, INC., a
corporation duly organized and existing under the laws of CALIFORNIA (the
"Business") duly adopted on 10/16/97 by the Board of Directors of the Business
and duly entered in the records of the Business, and that the Authorization is
in conformity with applicable law and regulation, the Articles of Incorporation
and the By-Laws of the Business and is now in full force and effect.
I also certify that the following are the names and genuine specimen signatures
of the officers of the Business authorized in paragraph 1 of the Authorization:
PRESIDENT WILLIAM L. HEALEY /s/ WILLIAM L. HEALEY
- - ----------------------- ----------------------- -----------------------
Corporate Title Name Signature
- - ----------------------- ----------------------- -----------------------
Corporate Title Name Signature
- - ----------------------- ----------------------- -----------------------
Corporate Title Name Signature
- - ----------------------- ----------------------- -----------------------
Corporate Title Name Signature
I agree to notify Bank in writing of any change in any aspect of the
Authorization or of any individual holding any office set forth in this
certificate immediately upon the occurrence of any such change, and to provide
Bank with a copy of the modified resolution(s) and the genuine specimen
signature of any such new officer.
The authority provided for in the Authorization shall remain in full force and
effect, and Bank is authorized and requested to rely and act thereon until Bank
shall receive at its ORANGE COUNTY COMMERCIAL BANKING OFFICE either a certified
copy of a further resolution of this Business's Board of Directors amending the
Authorization, or a certification of a change in the authorized officer(s).
Dated: 9/26/97
/s/ JOHN W. HOHENER
-------------------------------------------------
Assistant Secretary of SMARTFLEX SYSTEMS, INC.
SEAL
(if no seal,
so state)
/s/ WILLIAM L. HEALEY
--------------------------------------------------
*President of SMARTFLEX SYSTEMS, INC.
*When the Secretary is among those authorized, the President should also sign
this Certificate.
PAGE 2 of 2
<PAGE> 7
ADDENDUM TO AUTHORIZATION
LETTER OF CREDIT SERVICES
This addendum ("Addendum") is attached to and made a part of that certain
Authorization to Obtain Credit, Grant Security, Guarantee or Subordinate
executed by SMARTFLEX SYSTEMS, INC. ("Business").
1. UNION BANK OF CALIFORNIA, N.A., UNION BANK OF CALIFORNIA INTERNATIONAL and
all of their subsidiary, parent and other affiliated entities (in this Addendum
referred to individually or collectively as "Bank") are each hereby irrevocably
authorized to issue, confirm, advise, amend letters of credit and waive or
approve discrepancies in presentations made under letters of credit, or
authorize payment (whether by debit to any of the Business's accounts at Bank or
otherwise to settle any documentary collection transactions) for the account of
the Business and otherwise provide letter of credit services to the Business,
based upon any application, instrument, agreement or other document submitted to
Bank on the Business's behalf by personal delivery, United States mail,
telecopy, rapidfax or other telecommunication method ("Writing") other than by
telephonic or oral advice, in each case, bearing or purporting to bear the
signature or facsimile signature of any ONE (1) of the following officers of the
Business:
/s/ WILLIAM L. HEALEY WILLIAM L. HEALEY PRESIDENT
- - ----------------------- ----------------------- -----------------------
Sample Signature Name Title
/s/ JOHN W. HOHENER JOHN W. HOHENER CFO
- - ----------------------- ----------------------- -----------------------
Sample Signature Name Title
- - ----------------------- ----------------------- -----------------------
Sample Signature Name Title
- - ----------------------- ----------------------- -----------------------
Sample Signature Name Title
2. Bank is authorized to provide these services, to charge the Business its fees
for such services and otherwise to act upon all such Writings to the same extent
as though such Writings were executed in original form by the applicable
person(s) of the Business authorized to do so pursuant to other resolutions
previously or hereafter furnished by the Business to Bank, regardless of by whom
or by what means the actual or purported signature(s) or facsimile signature(s)
have been applied, if such signature(s) or facsimile signature(s) resemble those
from time to time submitted to Bank by the Business; and since the Business
agrees that it is in the best interest of the Business that Bank act in response
thereto, the Business assumes all risks regarding the actual validity,
authenticity and due authorization of all such Writings submitted to Bank;
should in any instance Bank wish, in its sole and absolute discretion and
without ever any obligation to the Business to do so, to confirm the giving of a
Writing it may do so by telephonically contacting any one (including the person
who has evidently given such Writing on behalf of the Business) of the person(s)
identified herein as authorized signers for the Business irrespective of the
number of persons required to sign Writings of the Business. Bank may in its
sole and absolute discretion use any telephone number for such purpose either
from its existing records on the Business or from such Writing or other Writings
from the Business and takes no responsibility for the actual identity of the
person who purports to Bank that he or she is an authorized person named
hereunder. Additionally nothing said by Bank or such person in any such
telephone call shall be deemed to be itself a Writing or an amendment of a
Writing or any other basis for Bank taking, or not taking, any action; provided
however, in the event in any such confirmation telephone call it appears to Bank
that the Writing in question was not given by the Business, Bank shall suspend
initiating the activity requested in such Writing and seek the involvement of
other authorized signers of the Business for clarification and appropriate
explanatory Writing(s).
3. Any such Writing executed under this Addendum is to be in such form and
contain such terms and conditions as may be required by Bank, and the execution
or purported execution of such Writing by the required number of authorized
signatures specified above shall be conclusive evidence of the Business's
approval of its terms, and the Writing shall be binding upon and enforceable
against the Business;
4. In the event the Business sends Bank a manually-signed original or
confirmation of a previously given Writing, Bank shall have no duty to compare
it against the previous Writing received by Bank, nor shall Bank have any
responsibility should the contents of the manually-signed original or
confirmation differ from the Writing acted upon by Bank;
5. Notwithstanding anything contained in paragraph 5 of above-referenced
Authorization to the contrary, Bank is authorized and requested to rely and act
upon any prior resolutions given by the Business to Bank regarding the matters
discussed in this Addendum, and on this Addendum, until ten (10) days after Bank
has actually received, at its ORANGE COUNTY COMMERCIAL BANKING OFFICE
___________________, copies of resolution(s) that specifically modify, amend or
terminate any such previous resolutions Or this Addendum. Properly authorized
persons on behalf of the Business shall be authorized to give specific written
notice(s) to Bank that add to or delete from the list of authorized persons
contained in this Addendum with Bank being authorized and entitled to rely upon
such notice(s) immediately with respect to authorized persons added, and ten
(10) days after receipt with respect to authorized persons deleted; and
6. The Business unconditionally agrees to pay and protect, defend and indemnify
Bank and Bank's employees, officers, directors, shareholders, affiliates,
correspondents, agents and representatives against, and hold Bank and each such
other party harmless from, all claims, actions, proceedings, liabilities,
damages, losses, expenses (including without limitation attorneys' fees and
costs) and other amounts incurred by Bank and each such other party, arising
from the reliance by any such party on this Addendum.
<PAGE> 1
EXHIBIT 11.1
SMARTFLEX SYSTEMS, INC.
Computation of Earnings per Share
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income $(5,436) $1,702 $(4,644) $5,258
======= ====== ======= ======
Weighted average number of common
shares outstanding during the period 6,387 6,279 6,406 6,264
Incremental common shares attributable
to exercise of outstanding options 37 95 30 126
------- ------ ------- ------
Total shares 6,424 6,374 6,436 6,390
======= ====== ======= ======
Primary earnings per share $ (0.85) $ 0.27 $ (0.72) $ 0.82
======= ====== ======= ======
Net income $(5,436) $1,702 $(4,644) $5,258
======= ====== ======= ======
Weighted average number of common
shares outstanding during the period 6,387 6,279 6,406 6,264
Incremental common shares attributable
to exercise of outstanding options 37 108 30 126
------- ------ ------- ------
Total shares 6,424 6,387 6,436 6,390
======= ====== ======= ======
Fully diluted earnings per share $ (0.85) $ 0.27 $ (0.72) $ 0.82
======= ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,270
<SECURITIES> 21,644
<RECEIVABLES> 15,055
<ALLOWANCES> 707
<INVENTORY> 12,911
<CURRENT-ASSETS> 58,089
<PP&E> 27,927
<DEPRECIATION> 9,738
<TOTAL-ASSETS> 76,358
<CURRENT-LIABILITIES> 20,146
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 48,321
<TOTAL-LIABILITY-AND-EQUITY> 76,358
<SALES> 95,285
<TOTAL-REVENUES> 95,285
<CGS> 88,401
<TOTAL-COSTS> 88,401
<OTHER-EXPENSES> 14,170
<LOSS-PROVISION> (189)
<INTEREST-EXPENSE> 389
<INCOME-PRETAX> (7,074)
<INCOME-TAX> (2,430)
<INCOME-CONTINUING> (4,644)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,644)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
