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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM N/A TO N/A
COMMISSION FILE NUMBER: 0-26472
SMARTFLEX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0581151
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14312 FRANKLIN AVENUE, P.O. BOX 2085, TUSTIN, CALIFORNIA 92781-2085
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714)838-8737
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
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COMMON STOCK, $.0025 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 19, 1997 (based on the last reported price of the
Common Stock on the Nasdaq Stock Market on such date) was $49,391,975.
The number of shares outstanding of the registrant's Common Stock as of March
19, 1997 was 6,315,689.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual Report to Stockholders for the fiscal year ended
December 31, 1996, is incorporated by reference in this Form 10-K to the extent
stated herein. The Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 14, 1997, and to be filed with the
Commission not later than April 25, 1997, is incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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SMARTFLEX SYSTEMS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
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PAGE
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<S> <C> <C>
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
ITEM 11. EXECUTIVE COMPENSATION 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 20
</TABLE>
The Company operates and reports financial results on a 52- or 53-week
year, 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 described all periods presented as if the fiscal year ended December 31.
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PART I
ITEM 1. BUSINESS
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
below under "Risk Factors -- Important Factors Related to Forward-Looking
Statements and Associated Risks."
DESCRIPTION OF THE COMPANY
Smartflex Systems, Inc. ("Smartflex" or the "Company") provides custom
design and turnkey manufacturing of flexible interconnect assemblies to
customers who are driven by market demands to design and manufacture compact,
high-performance electronic products. The Company's flexible assemblies enable
its customers to respond to these demands by providing advanced performance and
the physical flexibility to accommodate motion, contour and size constraints.
The Company is an electronics manufacturing services provider of sophisticated
electronic assemblies and sub-assemblies, providing comprehensive interconnect
solutions, specializing in precision surface mount and direct chip attach
("DCA") technologies on flexible circuit substrates. The Company believes it
is a leading supplier of advanced surface mount technology ("SMT"),
Chip-On-Flex ("COF"), and Flip-Chip-On-Flex ("FCOF") assemblies to the hard
disk drive ("HDD") and non-HDD markets. The Company's principal HDD customers
include International Business Machines Corporation ("IBM"), Iomega Corporation
("Iomega"), Maxtor Corporation ("Maxtor"), Seagate Technology, Inc. ("Seagate")
and Western Digital Corporation ("WD"). The Company's principal non-HDD
customers include Hewlett-Packard Company ("H-P"), Quantum Corporation
("Quantum") and Symbol Technologies, Inc. ("Symbol"). The Company also
provides subassemblies to Digital Equipment Corporation ("DEC") for certain
disk array systems and to H-P for certain scanner products. The Company's net
revenues have grown from $31 million in fiscal 1991 to $146 million in fiscal
1996.
The Company's manufacturing services consist of design consultation
and prototyping, materials procurement and management, high-volume automated
assembly and subassembly test. Smartflex utilizes complex assembly techniques
and believes it was one of the first to commercialize COF process technology
for the computer industry. COF technology, in which a bare silicon die
(without the standard lead frame package) is mounted directly on substrate
material, enables improved performance, a greater density of components and
reduced size when compared with traditional assembly technologies. Smartflex
currently serves its customers from four locations, one in each of California,
Singapore, Mexico, and the Philippines.
INDUSTRY BACKGROUND
Manufacturers of electronic products, including computers,
communication devices and consumer electronics, are continually innovating and
redesigning these products to make them smaller and lighter, at lower cost and
with higher performance. Facilitating this process has required advances in
integrated circuits, increased use of miniaturized components and new packaging
methods. These trends have been particularly pronounced in the HDD industry,
where rapid technological advances and intense competition have contributed to
the proliferation of smaller form factor, higher capacity, higher performance
drives. Development of new products in the HDD market has been enabled in part
by advances in flexible interconnect assemblies ("flex assemblies"), which
provide an intelligent interface between the read/write heads and the
electronics in the disk drive. Also see "Risk Factors."
An electronic interconnect is used to provide electrical connections
between components in electronic systems. Substrates used for interconnects
include primarily rigid printed circuit boards and flexible circuits. Advances
in technology have enabled the placement of integrated circuits and other
components on a flexible substrate to create a flex assembly. IPC, Inc., a
leading industry source, estimated the worldwide market for flexible circuits,
the substrate material used for flex assemblies, to be approximately $2.03
billion in 1996 and $1.78 billion in 1995. Although only a small percentage of
the flexible circuits produced today are incorporated into flexible assemblies,
the Company believes that the forces which have driven the use of flex
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assemblies in the HDD market, including the need for rapid product development,
miniaturization and increased performance, will create additional opportunities
for flex assemblies in other markets.
Flex assemblies provide the physical flexibility to accommodate
motion, contour and size constraints. In HDD applications, for example,
flexible interconnect assemblies must flex hundreds of millions of times
throughout the life of the drive. Flex assemblies also enhance performance in
HDDs by allowing components to be positioned closer to the read/write heads,
thereby improving signal-to-noise ratios, allowing increased transfer rates and
reducing the number of interconnections.
In recent years, COF technology has been used to produce flex
assemblies for high-performance, high-capacity (greater than 2 gigabyte) HDDs
where performance and size constraints are especially critical. Eliminating
the standard package from the integrated circuit enables improved performance,
reduced size and a greater density of components on the flex assembly. These
characteristics are expected to become increasingly important as
magneto-resistive ("MR") read/write heads, which require twice the number of
interconnections as do other head technologies, become more prevalent. MR head
technology is now being used in very high end disk drives and is expected to
become more widely utilized as new HDD products come to market.
The outsourcing of flex assemblies is part of a larger trend in the
electronics industry toward the outsourcing of manufacturing services.
Electronics original equipment manufacturers ("OEMs") increasingly choose to
access leading manufacturing processes from third parties and focus on their
core competencies, such as product development and marketing. Also see "Risk
Factors." This allows the OEM to reduce capital investment and product costs,
while reducing time to market. The complex process of assembling integrated
circuits on flexible substrates requires special processes and skills due to
the flexibility and thinness of the substrate material and, in the case of COF,
the delicate nature of the bare silicon die. These processes and skills
include advanced automation and tooling for surface mount assembly,
semiconductor assembly for COF attachment, and semiconductor test capabilities.
The know-how required to master these assembly processes has helped to
establish companies, such as Smartflex, which specialize in providing contract
manufacturing services in this area.
STRATEGY
The Company's objective is to combine leading flex assembly technology
with high-volume manufacturing expertise to serve its target markets. Also see
"Risk Factors." The key elements of the Company's strategy are as follows:
Focus on High-Volume, Precision Manufacturing Services
The Company focuses on providing precision manufacturing of
high-volume flex assemblies on a turnkey basis. This process involves the
exact placement of miniaturized components on flex circuits and requires the
design and effective implementation of fine tooling, extensive automation and
advanced vision systems capable of reliable, high-volume throughput, and
sophisticated semiconductor test capabilities. The Company believes that
focusing on precision, high-volume requirements allows it to maximize value to
the customer while achieving optimum utilization of its equipment and
facilities. Also see "Patents."
Extend Technology Leadership in Flexible Assemblies
Smartflex focuses on flex assemblies that are based on advanced,
complex assembly techniques. To date, these techniques have generally been
based on automated fine-pitch SMT. In 1993, the Company shifted its focus to
the more advanced COF process and has recently positioned itself to transition
toward Flip-Chip-on-Flex ("FCOF"), which is presently in pre-production with
several customers. Smartflex believes that its focus on advanced assembly
processes is critical to maintaining and building market share and to preserving
its profitability. Also see "Patents."
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Target Leading Customers
Smartflex directs its efforts toward OEMs which have established
leading market share in the Company's target markets and with which the Company
can work closely in the design and development of future products. In
particular, Smartflex intends to become the leading supplier to OEM customers
who hold a significant share of the high-end HDD market. These customers
presently include IBM, Iomega, Maxtor, Seagate, and Western Digital.
Smartflex seeks to establish long-term partnering relationships with its major
OEM customers.
Expand in Growing Market Segments
Smartflex believes that the technology and processes it has developed
for the HDD industry are applicable to other storage devices, such as disk
array storage systems, tape drives and optical drives, other computer
peripherals, scanners, portable computers and communications products. The
Company expects that the technological characteristics of its flex assemblies
will help accommodate the trend toward smaller, lighter and more powerful
electronics products. The Company plans to increase revenues from these
non-HDD products by following its traditional strategy of affiliating with
leading OEMs in its target markets.
Exploit Global Manufacturing Presence
The Company intends to establish additional production facilities to
either support key customers or achieve manufacturing efficiencies. The
Company currently has operations in California, Singapore, Mexico, and the
Philippines. The Company believes that its facilities in these diverse
geographic locations enable it to better address its customers' objectives
regarding cost, shipping location and frequency of interaction with
manufacturing specialists, as well as local content requirements of end-market
countries.
MANUFACTURING SERVICES
The Company's manufacturing services consist of design, procurement,
assembly and test.
Design--Working interactively with the OEM customer and the substrate
fabricator, the Company designs a specific packaging configuration to satisfy
the customer's requirements for functionality, manufacturability and
reliability. In the selection of substrate materials, the Company advises its
customers with respect to a number of factors, including cost, mechanical
strength, electrical performance and thermal characteristics. In the selection
of integrated circuits, the Company provides assistance to its customers with
respect to critical issues such as size, power requirements and package type.
The Company believes that its understanding of the interaction of flex
substrates and integrated circuits is crucial to success at the design stage.
Procurement--Early involvement in the design process allows the
Company to assist in the selection of suppliers and components in order to
enhance manufacturability and logistical support of volume programs. As part
of the procurement process, the Company offers its customers materials planning
and procurement, and inventory management and handling services. From time to
time, the Company's suppliers allocate components among their customers in
response to supply shortages. By assuming responsibility for procurement, the
Company may be required to bear the risks of fluctuations in component price
and availability. In certain cases, the Company can leverage its position as a
manufacturing partner to large OEMs to receive more favorable price and volume
allocations from its key suppliers.
Assembly--Precision flex assembly involves the exact placement of
miniaturized components on flexible substrates. The Company's current assembly
techniques are highly automated and based almost exclusively on advanced SMT
and DCA. SMT is a method of affixing electronic components, including
integrated circuits, onto the surface of the flex substrate. Components
mounted in SMT assemblies can be of relatively small size due to the use of
fine lead-to-lead spacings ("pitch"), which currently can be as small as 12
mils. The Company's SMT assembly process has become increasingly complex
because of these smaller
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dimensions and tighter tolerances, and accordingly requires the use of
expensive automated assembly equipment and engineering expertise.
Following a multi-year development program, the Company expanded COF
production during the second quarter of 1993. COF involves mounting a
semiconductor die (which lacks the standard lead frame package) directly onto
the flex substrate. This is accomplished by wire bonding directly from the
silicon die onto conductors in the flex. This elimination of the semiconductor
package enables improved performance and a greater density of components, thus
reducing size.
High-performance, high-capacity (greater than 2 gigabyte) HDDs were
the first products to benefit from the use of COF assemblies. COF enables
improved product performance while simultaneously producing a much smaller
design. This is particularly beneficial for MR head technology, which requires
twice as many leads to the head as do competitive head technologies.
COF has enjoyed rapid customer acceptance. The Company has increased
its shipments of assemblies which include COF to more than 100,000 units, on
average, per week. COF assemblies are now being manufactured in volume for
certain of the Company's customers, including IBM, Seagate, and Western
Digital. Assemblies incorporating COF technology accounted for approximately
44%, 51% and 54% of net revenues in fiscal 1996, 1995 and 1994, respectively.
As electronic designs require increasingly smaller circuitry, the
attachment of integrated circuits to flex substrates is expected to require
greater precision. The Company has invested in the development of advanced
integrated circuit assembly technologies which offer higher precision and thus
greater component densities. These technologies include Tape Automated Bonding
("TAB"), both on the flex ("TAB-on-Flex") and within the flex structure
("TAB-in-Flex") and FCOF. TAB technology utilizes a very thin gold lead frame
attached directly to the flex, which replaces the need for wire bonding.
Flip-Chip mounting eliminates wire bonding as well, but does not require an
indirect tape attachment, permitting a smaller semiconductor "footprint." Both
TAB-in-Flex and FCOF use the flex circuit as part of the integrated circuit
leadframe structure, thereby greatly reducing the surface area required on the
flex. This can also result in thinner cross section profiles of the flex
assemblies, which permits further reduction in package size.
Test--Using sophisticated integrated circuit test systems, the Company
tests complex assemblies in order to assure that each assembly performs to
customer specifications. This is especially important in DCA technologies,
because the Company is essentially performing the final test of integrated
circuits, a process that is normally performed by the integrated circuit
component supplier. Also, the Company's investment in manufacturing defect
analyzers enables customers to specify a range of test options to meet their
needs.
INTERNATIONAL MANUFACTURING CAPABILITY
The Company presently serves its major markets from four manufacturing
facilities strategically located to support both U.S. and international
markets. Since most customer design activity is located within the United
States, the Company utilizes its Tustin, California facility as its principal
technology center where most development, engineering and quick-turn
manufacturing take place. As soon as a customer's product is established in
the marketplace and volume production begins, the Company will transfer
manufacturing from Tustin to one of its three international facilities, located
in Singapore, Mexico, and the Philippines.
The Company's facility in Monterrey, Mexico serves as a high-volume,
low-cost manufacturing center which primarily supports domestic and European
customer locations. The Singapore facility serves as the technology,
manufacturing and distribution center to support Asian-based customer
facilities. A fourth location in Manila, the Philippines, was brought into
production in the fourth quarter of 1994 to provide additional support for
high-volume, low-cost manufacturing needs in Asia. The Company's Far East
manufacturing capabilities were expanded in fiscal 1996 with the addition of a
new facility in Cebu, the Philippines which has been customer-qualified and
placed in volume production in the fourth quarter of fiscal 1996. Production
from the Manila facility has been transferred to the Cebu facility. Also see
"Risk Factors."
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The chart below outlines the services of these facilities.
<TABLE>
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SUPPORTS
NORTH AMERICA
AND EUROPE SUPPORTS FAR EAST
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TUSTIN MONTERREY SINGAPORE CEBU
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<S> <C> <C> <C> <C>
Design Services O +
Prototyping O O
New Technologies/Processes O + + +
Procurement O O
Volume SMT O O O
COF Capable O O O +
FCOF Capable O
Test Services O O O O
Distribution O O O +
ISO 9002 Registered O O O +
Customer Service O O
</TABLE>
O--Currently available
+--Planned within 6-18 months
MARKETS
HDD Market
To date, the rapid advance of technology in HDDs has driven the market
for flex assemblies. High-performance flex assemblies have found the most
significant application in the small form factor (3.5" and smaller),
high-capacity (2 gigabyte and greater) portion of the HDD market. The Company
believes that COF technology is becoming the predominant interconnect
technology in this portion of the HDD market. Also see "Risk Factors."
The HDD market in the recent past has been characterized by intense
competition, relatively short product life cycles and rapid technological
change. As a result, HDD manufacturers have been forced to aggressively pursue
technologies which improve performance and cost. The Company has focused its
efforts on flex assemblies to meet the needs of this demanding market. The
Company is a leading supplier of automated fine-pitch SMT flex assemblies and
was one of the first to commercialize the COF process as an enabling technology
for high-end drives. The Company is able to manufacture advanced flex
assemblies at low cost due to high manufacturing yields and the Company's
ability to spread the high capital costs necessary to perform high-volume,
precision manufacturing of these assemblies across a large number of units.
The Company is therefore able to capitalize on the competitive pressures
affecting the HDD market.
A substantial portion of the Company's net revenues are derived from
the HDD market, which represented 61%, 71% and 87% of net revenues in fiscal
1996, 1995 and 1994, respectively. In addition, sales to the HDD market have
generally been concentrated among a few large customers, including IBM, Iomega,
Maxtor, Seagate and Western Digital.
The Company primarily manufactures advanced flexible assemblies for
products with high-storage (currently greater than 2 gigabyte) capacities. The
Company's flex assemblies incorporate SMT techniques, and also utilize COF
processes for the highest capacity markets, particularly in drives
incorporating emerging MR head technology.
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The following diagram depicts the key components of a typical HDD,
including a COF assembly. The head stack assembly travels across the spinning
disk storage media to read and write information. The flex assembly
accommodates this motion and incorporates preamp circuitry as close as possible
to the read/write heads, thereby improving signal-to-noise ratios, allowing
increased transfer rates and reducing the number of interconnections.
The following table lists the markets currently served by the Company,
describes the function of the flex assembly supplied by the Company to each
market and lists representative customers for each market.
<TABLE>
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APPLICATION SEGMENT FLEXIBLE ASSEMBLY FUNCTION REPRESENTATIVE CUSTOMERS
- - ------------------- -------------------------- ------------------------
Hard Disk Drives Read/write head assemblies IBM, Iomega, Maxtor,
Seagate, Western Digital
Disk Arrays SCSI interface assemblies DEC, H-P,
Sequent Computer
Optical Drives RF/Laser optics and carriage H-P, Most Manufacturing
assemblies
Tape Drives Head preamp assemblies Quantum
Scanners Charge-coupled device (CCD) H-P, Symbol
control assemblies Motorola, Plantronics
Communications Headset interconnect assemblies,
cellular battery and control panel
assemblies
</TABLE>
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Emerging Markets
The Company believes that the forces that have driven the HDD market,
including rapid product development, miniaturization and increased performance,
will increasingly affect other markets, creating additional opportunities for
providers of advanced SMT and COF services. Also see "Risk Factors." The
Company is in various stages of developing prototype assemblies for
applications in the following markets:
Communications--Demand for communications products such as cellular
phones, paging systems and other mobile communications devices has increased
significantly in recent years. Increasingly, flex substrates are replacing
rigid printed circuit boards, connectors and cables in these products in order
to reduce space, weight and cost. For example, the Company anticipates that
flex assemblies will be used in smart batteries in order to increase battery
life and reduce weight.
Computers--Portable computers, such as notebooks and personal digital
assistants, are another application where the Company anticipates strong growth
in demand for flex assemblies. In addition to growth in the number and types
of portable computers, the Company believes that the number of flex-based
interconnects per notebook is increasing.
PCMCIA Peripherals--Communications and computer peripheral devices
that adhere to the PCMCIA (Personal Computer Memory Card Industry Association)
format can take advantage of advanced assembly techniques such as COF to
increase package densities and conform to difficult size constraints. The
Company anticipates that demand for portable computers utilizing the PCMCIA
format will continue to experience significant growth.
Other Emerging Markets--Significant opportunities for flex assemblies
may also exist in other computer products, such as CD-ROMs and virtual reality
headsets; in medical electronics, such as inter-dermal blood gas analyzers and
drug dispensers, and inter-uterine fetal monitors; and in automotive
electronics.
RISK FACTORS
Important Factors Related to Forward-Looking Statements and Associated Risks
This Annual Report on Form 10-K and the Company's Annual Report to
Stockholders contain forward-looking statements that are based on current
expectations and involve a number of risks and uncertainties. Factors that may
materially affect revenues, expenses and operating results include, without
limitation, the impact of competitive products and pricing, interruption of the
flow of components from a limited number of suppliers, subsequent changes in
business strategy or plan, timely customer qualification of the Company's new
assembly line in Monterrey, Mexico, timely customer qualification of the
Company's new facility in Cebu, the Philippines, and structural and strategic
changes affecting certain of the Company's existing customers 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
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representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to
anticipate results or trends in future periods.
The following factors also may materially affect results and therefore
should be considered. Also see "Backlog," "Patents" and "Competition."
Limited Independent Operating History
The Company was incorporated in September 1993 to acquire all of the
assets and business of Smartflex Systems, which was founded in November 1985 as
a general partnership (the "Smartflex Partnership") jointly owned by Silicon
Systems, Inc. ("Silicon Systems"), a supplier of mixed signal integrated
circuits to the HDD market, and Rogers Corporation ("Rogers"), a supplier of
flex circuits to the HDD market. Until its acquisition by the Company, the
Smartflex Partnership was provided with financial assistance and significant
support in sales and personnel functions by Silicon Systems and Rogers.
Although the business of the Company has been in existence since November 1985,
the Company has only a limited history as an independent operating company, and
there can be no assurance that the Company will not experience problems
associated with young, growing companies. Moreover, while the Company has
operated profitably since 1990, there can be no assurance that the Company will
be able to sustain or increase its profitability in future periods. Also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18 through 22 of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
Substantial Fluctuations in Future Operating Results
The Company has experienced substantial fluctuations in its annual and
quarterly operating results, and such fluctuations are expected to continue in
future periods. The Company's operating results are affected by a number of
factors, many of which are beyond the Company's control. All products
manufactured by the Company are custom designed and assembled for a specific
customer's requirement in anticipation of the receipt of volume production
orders from that customer, which may not always materialize. The Company
typically incurs significant start- up costs in the production of a particular
product, which costs are expensed as incurred. Accordingly, the Company's
level of experience in manufacturing a particular product and its efficiency in
minimizing start-up costs will affect the Company's operating results during
the periods in which production begins and ramp-up occurs. The efficiencies of
the Company in managing inventories and fixed assets, shortages of components
or labor, the degree of automation used in the assembly process, fluctuations
in material costs and the mix of materials, labor, manufacturing and overhead
costs are also significant factors affecting annual and quarterly operating
results. Other factors contributing to fluctuations in the Company's operating
results include price competition, the inability to pass on cost overruns, the
timing of expenditures in anticipation of increased sales, customer product
delivery requirements and the range of services provided. In addition, the
amount and timing of orders placed by a customer may vary due to a number of
factors, including inventory balancing, changes in manufacturing strategy and
variation in product demand attributable to, among other things, product life
cycles, competitive factors and general economic conditions. Any one of these
factors, or a combination thereof, could adversely affect the Company's annual
and quarterly results of operations. Also see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 18 through
22 of the Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1996.
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
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relatively fixed in nature and planned expenditures are based in part on
anticipated orders. Any inability to adjust spending quickly enough to
compensate for any revenue shortfall may magnify the adverse impact of such
revenue shortfall on the Company's results of operations.
Dependence on Hard Disk Drive Industry
The Company's principal market is the HDD industry, which is
characterized by intense competition, relatively short product life cycles,
rapid technological change, significant fluctuations in product demand and
significant pressure on vendors to reduce or minimize costs. The HDD industry
is also highly cyclical and has experienced periods of increased demand and
rapid growth followed by periods of oversupply and contraction. The impact of
cyclical trends on suppliers to this industry has been exacerbated by the
tendency of HDD manufacturers to order components in excess of their needs
during growth periods, followed by a sharp reduction in demand for components
during periods of contraction. The Company's operating results have been
adversely affected from time to time during HDD industry slowdowns and could be
materially adversely affected in the event of significant slowdowns in this
industry in the future. Although the Company is attempting to reduce its
dependence on the HDD industry, the Company expects revenues attributable to
this market to continue to represent the substantial majority of its revenues
for the foreseeable future. Also see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 18 through 22 of the
Company's Annual Report to Stockholders for the fiscal year ended December 31,
1996 and "Markets."
Customer Concentration
The Company's customer base is highly concentrated. During fiscal
1996 and 1995, the Company's four largest customers accounted for approximately
82% and 80% of net revenue, 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 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.
Component Supply and Sources
Substantially all of the Company's manufacturing services are provided
on a turnkey basis in which the Company, in addition to providing design,
assembly and testing services, is responsible for the procurement of the
components which are assembled by the Company for the customer. In certain
circumstances, the Company is required to bear the risk of component price
fluctuations, which could adversely affect the Company's gross margins. In
addition, in order to assure an adequate supply of certain key components which
have long procurement lead times, such as integrated circuits, the Company
often must order such components prior to receiving customer purchase orders
for the assemblies which require such components. Failure to accurately
anticipate the volume or timing of customer orders can result in component
shortages or excess component inventory, which in either case could adversely
affect the Company's financial and operating results.
Some of the assemblies manufactured by the Company require one or more
components that are ordered from, or which may be available from, only one
source or a limited number of sources. In particular, the Company relies on
the timely supply of components from ADFlex Solutions, Inc. ("ADFlex"), Mektec
Corporation ("Mektec"), Silicon Systems, Inc., Toshiba America, Inc., and VTC,
Inc. During fiscal 1996, 1995 and 1994, the Company purchased a majority of
its flex components from either ADFlex or Mektec, a majority of its integrated
circuits from VTC, Inc. and a substantial portion of its integrated circuits
from Silicon Systems. Delivery problems relating to components purchased from
any one of these or the Company's other key suppliers could have a material
adverse impact on the financial performance of the Company. From time to time,
the Company's suppliers allocate components among their customers in response
to supply shortages. In some cases, supply shortages will substantially
curtail production of all assemblies using a particular component. In
addition, at various times there have been industry-wide shortages of
electronic components, such as servo or read/write circuits. While the Company
has not experienced sustained periods of shortages of
11
<PAGE> 12
components in the recent past, there can be no assurance that substantial
component shortages will not occur in the future. Any such shortages could
have a material adverse effect on the Company's operating results. Also see
"Manufacturing Services" and "Competition."
International Operations
The Company maintains international manufacturing operations in
Singapore, Mexico, and the Philippines. In light of the continued growth of
offshore facilities on the part of the Company's customers, Smartflex
anticipates that it will be required to increase its presence overseas through
internal growth, acquisitions, or a combination of both. Manufacturing and
sales operations outside the United States are accompanied by a number of risks
inherent in international operations, including imposition of governmental
controls, compliance with a wide variety of foreign and United States export
laws, currency fluctuations, unexpected changes in trade restrictions, tariffs
and barriers, political and economic instability, longer payment cycles
typically associated with foreign sales, difficulties in administering business
overseas, labor union issues and potentially adverse tax consequences. The
Company historically has denominated all export sales in United States dollars.
The Company's 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. Also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18 through 22 of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
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. Also see "Industry Background," "Manufacturing
Services" and "Markets."
12
<PAGE> 13
Management of Growth
The Company has experienced a period of rapid growth which has placed,
and is expected to continue to place, a significant strain on the Company's
management, operational and financial resources. The Company's growth is
expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. The
Company's ability to manage growth effectively, particularly given the
increasingly international scope of its operations, will require it to continue
to implement and improve its operational, financial and management information
systems as well as to develop the management skills of its managers and
supervisors and to train, motivate and manage its employees. The Company's
failure to effectively manage growth could have a material adverse effect on
the Company's results of operations. Also see "Management."
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. Also see "Management."
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 expense. Also see "Environmental Concerns."
Control by Existing Stockholders
The Company's officers, directors and existing holders of more than 5%
of the Company's Common Stock, in the aggregate, own beneficially approximately
45% of the outstanding Common Stock. As a result, any substantial portion of
these stockholders, acting together, are able to effectively control most
matters requiring approval by the stockholders of the Company. Approximately
18% of the Company's Common Stock is held by TDK U.S.A. Corporation ("TDK"),
approximately 3% is held by Ampersand Specialty Materials and Chemicals II
Limited Partnership ("Ampersand Chemicals") and approximately 1% is held by
Ampersand Specialty Materials Ventures Limited Partnership ("Ampersand
Materials"). Ampersand Materials and Ampersand Chemicals together hold
approximately 9% of the Common Stock of ADFlex. ADFlex supplies a significant
quantity of components to the Company. Also see "Risk Factors--Component
Supply and Sources."
Anti-Takeover Provisions
On July 17, 1996, the Board of Directors approved the adoption of a
Shareholder Rights Plan for the Company, which is intended to protect
stockholder interests in the event of an unsolicited attempt to acquire the
Company on terms that are not in the best interests of the stockholders. The
Plan provides for a dividend of one Right for each share of outstanding common
stock. Each Right entitles the holder, on the occurrence of certain events, to
purchase shares of a newly created class of the Company's preferred stock. The
Company may redeem each Right, on terms spelled out in the Plan, if approved by
the Board of Directors.
13
<PAGE> 14
The Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any future vote
or action by the stockholders. The rights of the holders of the Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights senior to the Common
Stock, which could have a material adverse effect on the market value of the
Common Stock. The Company has no present plans to issue shares of Preferred
Stock. In addition, Section 203 of the General Corporation Law of Delaware
restricts the Company from engaging in certain business combinations with
interested stockholders, as defined by statute. These provisions may have the
effect of delaying or preventing a change in control of the Company without
action by the stockholders, and therefore could adversely affect the price of
the Company's Common Stock.
SALES AND CUSTOMER SUPPORT
The Company uses both field sales personnel and internal customer
service and marketing support personnel to facilitate its sales efforts. As of
December 31, 1996, the Company employed 24 sales, support and marketing
personnel. In addition, the Company has agreements with 19 sales
representatives who are assigned geographic territories within North America.
The sales activities of these representatives are managed by the Company's
regional sales managers, who also have some key direct account
responsibilities. The Company also uses sales representatives in Japan,
Singapore, Malaysia, Thailand, Hong Kong and Korea, whose activities are
managed from the Company's Tustin headquarters. The Company presently has no
sales personnel in Europe.
The Company's customer support function consists of both customer
service and program management. Employees in these functions form the nucleus
of customer account teams that deal with specific customer technical and order
activities. The customer account teams are multi- functional teams from
program management, customer service, materials planning, manufacturing
engineering and quality engineering, which provide focused attention to the key
activities concerning the customer's account. These teams are responsible for
addressing all customer issues to ensure continuity from program development
through distribution. This focused attention is designed to enable the Company
to respond rapidly and efficiently to each customer's specialized precision
manufacturing needs. Also see "Risk Factors."
BACKLOG
The Company's backlog was approximately $52 million and $48 million at
December 31, 1996 and 1995, respectively. The Company does not have any
long-term agreements with its customers which require the customers to purchase
products. Backlog consists of purchase orders received by the Company for
shipment within up to 180 days. Because customer orders generally require
shipment within the following 90 days and may be rescheduled or canceled by the
customer, the Company does not believe that backlog is a meaningful predictor
of future revenue performance.
PATENTS
The Company does not have, nor does it generally intend to apply for,
patent protection on any aspect of its technology. The Company believes that
patent or trademark protection is not an important competitive factor in its
market, and that patents require public disclosure of information which may
otherwise be subject to trade secret protection. The Company's reliance upon
protection of some of its technology as "trade secrets" will not necessarily
protect the Company from the use by other persons of its technology. No
assurances can be made that the Company will be able to maintain the
confidentiality of its technology, dissemination of which could have a
materially adverse effect on the Company's business. Also see "Risk Factors."
14
<PAGE> 15
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. 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.
Significant competitive factors in the high-end flexible assembly
market include quality, price, responsiveness, the ability to manufacture
fine-pitch assemblies in volume, and test capabilities. While the Company
believes that it currently competes favorably with respect to these factors,
there can be no assurance that the Company will be able to continue to do so in
the future. The trend toward increasingly shorter product life cycles,
particularly in the HDD 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, ensure the quality of its
products and compete favorably with respect to price. If the Company were to
fail to compete favorably with respect to the principal competitive factors in
its industry, the Company's business and operating results would be adversely
affected.
ENVIRONMENTAL CONCERNS
In the past, electronic assembly specialists have typically used
chlorofluorocarbon ("CFC") cleaners, which are believed to contribute to
depletion of the ozone layer in the atmosphere. In 1992 the Company developed
an internal aqueous cleaning process which has completely eliminated the use of
CFC-based chemicals in its facilities worldwide.
The Company uses various hazardous chemicals and substances in its
manufacturing processes. Although the amounts of these materials used by the
Company are not substantial, procedures have nevertheless been implemented to
facilitate compliance with all environmental laws and regulations relating to
the use, storage, discharge and disposal of these materials. The Company
believes that it is in material compliance with all environmental laws and
regulations to which it is subject. Also see "Risk Factors--Environmental
Compliance."
PERSONNEL
As of December 31, 1996 the Company had a total of 1,006 employees,
including 897 in manufacturing and operations support, 44 in engineering, 24 in
marketing, sales and program management and 41 in administration. The Company
considers its relations with employees to be good. The Company's employees at
its Monterrey facility are represented by a labor union and are covered by a
collective bargaining agreement that is subject to annual revision under
Mexican law.
15
<PAGE> 16
MANAGEMENT
The executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
William L. Healey 52 President, Chief Executive Officer and
Chairman of the Board of Directors
Richard D. Bell 52 Vice President of Marketing and Sales
Alfred B. Castleman 58 Vice President and Chief Financial Officer
Christopher J. Rollison 38 Vice President of Operations
John W. Hohener 41 Corporate Controller and Treasurer
KEY EMPLOYEES
Marilyn A. Gosz 48 Director of Strategic Marketing and
Business Development
Merle J. Ihrman 50 Director of Quality Assurance
Joe L. Pendergrass 42 Director of Materials
Sherrie L. Suski 36 Director of Human Resources
</TABLE>
EXECUTIVE OFFICERS
William L. Healey has served as President and Chief Executive Officer
of the Company since July 1989, as a director since its incorporation in
September 1993 and was elected Chairman in January 1996. Prior to joining
Smartflex, Mr. Healey worked at Silicon Systems, where he was responsible for
all manufacturing operations in California and Singapore, and held several
senior executive positions, including Senior Vice President of Operations, Vice
President of Manufacturing and Director of Wafer Fabrication Operations. Mr.
Healey also sits on the Board of privately held Bell Technologies, Inc., a
leading provider of electronics products and services to the high technology
segment of the electronics industry, and publicly held Praegitzer Industries, a
leading provider of printed circuit boards.
Richard D. Bell joined Smartflex in 1987, and has served as Vice
President of Marketing and Sales of the Company since 1993. Prior to joining
Smartflex, Mr. Bell spent nine years in senior technical marketing and sales
management positions with Scientific-Atlanta, Inc., a manufacturer of
communications and electronics equipment, and Rogers Corporation. Mr. Bell
served as a member of the Board of Directors during September and October 1993.
Alfred B. Castleman has served as the Vice President and Chief
Financial Officer of the Company since March 1994. Mr. Castleman served as
Chief Financial Officer of MCI/Quantel Corporation, an electronic equipment
manufacturing and service company, from January 1982 to February 1984, of Micro
Linear Corporation, an integrated circuit manufacturer, from February 1984 to
March 1992, and of Sherpa Corporation, a commercial software development
company, from March 1992 to September 1993.
Christopher J. Rollison has served as Vice President of Operations
since July 1995 and until then served as Director of Operations of the Company
since October 1992. Mr. Rollison joined Smartflex at its inception in August
1985 as a senior process engineer. Subsequently, he held a series of positions
of increasing responsibility culminating in his current role as Vice President
of Operations.
John W. Hohener has served as Corporate Controller and Treasurer of
the Company since May 1988. Prior to joining Smartflex, Mr. Hohener spent
eight years with Silicon Systems where he held numerous financial management
positions, including Director of Corporate Accounting. Mr. Hohener served as a
member of the Board of Directors during September and October 1993.
16
<PAGE> 17
KEY EMPLOYEES
Marilyn A. Gosz joined Smartflex as Director of Strategic Marketing
and Business Development in June 1996. Prior to joining the Company, Ms. Gosz
performed technology management and business planning projects on a contract
basis for technology clients for six years. From 1982 to 1989, Ms. Gosz held
various management positions in product marketing, program management and new
business development with Unisys Corporation, Burroughs Corporation and Fujitsu
Corporation.
Merle J. Ihrman has served as Director of Quality Assurance of the
Company since August 1992. Prior to joining the Company, Mr. Ihrman served for
six years as Manager of Product Assurance with Western Digital Corporation, a
manufacturer of hard disk drives.
Joe L. Pendergrass joined Smartflex as Director of Materials in May
1995. From October 1993 until May 1995, Mr. Pendergrass was self employed as a
materials logistics consultant. From January 1992 until October 1993, he was
Director of Materials at International Rectifier Corporation, a semiconductor
manufacturer. Prior to January 1992, Mr. Pendergrass held a variety of
materials management positions at Rockwell International Corporation for over
twelve years.
Sherrie L. Suski has served as Director of Human Resources of the
Company since October 1993. Prior to joining Smartflex, Ms. Suski spent ten
years with Silicon Systems where she held numerous human resources management
positions, including Director of Compensation and Benefits.
ITEM 2. PROPERTIES
The Company's Tustin, California facility comprises approximately
44,000 square feet, and is held under operating lease arrangements extending
through 2002. The Company's Singapore facility comprises 21,000 square feet.
The Mexico facility comprises approximately 25,000 square feet that are
currently in use. This Mexico facility will be replaced by a facility
comprising 65,000 square feet which is currently under construction. The
Singapore and Mexico facilities are held under lease arrangements extending
through 1997 and 2003, respectively. The Company's manufacturing line in Cebu,
the Philippines, comprises approximately 35,000 square feet and is held under a
lease agreement extending through 1999.
The description under "Business - International Manufacturing
Capability" is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information required by Item 5 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Common
Stock Data" on the inside back cover of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Financial
Highlights" on page 1 of the Company's Annual Report to Stockholders for the
fiscal year ended December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18 through 22 of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is incorporated herein
by reference to the Company's consolidated financial statements and related
notes thereto, and the report of the independent auditors, presented on pages
23 through 36 of the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the "Information Concerning Nominees"
section of the Company's Proxy Statement prepared in connection with the Annual
Meeting of Stockholders to be held on May 14, 1997, is hereby incorporated by
reference. Information concerning the current executive officers of the
Company is contained in Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the "Executive Compensation," "Summary
Compensation Table," "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," "Option Grants in Last Fiscal Year,"
"Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values," sections of the Company's Proxy Statement prepared in connection with
the Annual Meeting of Stockholders to be held on May 14, 1997, is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the "Security Ownership of Management and
Certain Beneficial Owners" section of the Company's Proxy Statement prepared in
connection with the Annual Meeting of Stockholders to be held on May 14, 1997,
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the "Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions" sections of the Company's
Proxy Statement prepared in connection with the Annual Meeting of Stockholders
to be held on May 14, 1997, is hereby incorporated by reference.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
The financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES.
The financial statement schedules listed in the accompanying
Index to Consolidated Financial Statement Schedules are filed
as part of this Annual Report on Form 10-K.
3. EXHIBITS.
The exhibits listed in the accompanying Index to Exhibits are
filed as part of this Annual Report on Form 10-K.
(b) CURRENT REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Tustin, State of California, on the 26th day of March, 1997.
SMARTFLEX SYSTEMS, INC.
(Registrant)
By: /s/ William L. Healey
---------------------------------------
William L. Healey
President, Chief Executive Officer
and Chairman of the Board
POWER OF ATTORNEY
We, the undersigned directors and officers of Smartflex Systems, Inc.
do hereby constitute and appoint William L. Healey and Alfred B. Castleman, or
either of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, and any rules, regulations, and requirements
of the Securities and Exchange Commission, in connection with this Report,
including specifically, but without limitation, power and authority to sign any
and all amendments hereto; and we do hereby ratify and confirm all that the
said attorneys and agents, or either of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William L. Healey President, Chief Executive March 26, 1997
- - ----------------------------- Officer and Chairman of the Board
William Healey (Principal Executive Officer)
/s/ Alfred B. Castleman Vice President, Chief Financial March 26, 1997
- - ----------------------------- Officer (Principal Financial and
Alfred B. Castleman Accounting Officer)
/s/ William E. Bendush Director March 26, 1997
- - -----------------------------
William E. Bendush
/s/ Alan V. King Director March 26, 1997
- - -----------------------------
Alan V. King
/s/ William A. Klein Director March 26, 1997
- - -----------------------------
William A. Klein
/s/ Gary E. Liebl Director March 26, 1997
- - -----------------------------
Gary E. Liebl
</TABLE>
21
<PAGE> 22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Smartflex Systems,
Inc., included in the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1996, are incorporated by reference:
<TABLE>
<CAPTION>
Annual Report
Description Page Reference
----------- --------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1996 and 1995 24
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 23
Consolidated Statements of Partners' and Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 27-35
Report of Independent Auditors 36
</TABLE>
The following consolidated financial statement schedule of Smartflex
Systems, Inc. and the Consent of Independent Auditors are included herein:
<TABLE>
<CAPTION>
Description Page Reference
----------- --------------
<S> <C>
Schedule II - Valuation and Qualifying Accounts 25
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<TABLE>
<S> <C>
Consent of Independent Auditors Exhibit 23.2
</TABLE>
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
3.3 Restated Certificate of Incorporation of the Registrant. (1)
3.4 Bylaws of the Registrant. (1)
4.1 Form of Founders Restricted Stock Purchase Agreement dated as of September 28, 1993, entered
into between the Registrant and each of William L. Healey, John W. Hohener, Richard D. Bell,
Christopher J. Rollison and Merle J. Ihrman. (1)
4.2 Stock Purchase Agreement dated as of March 30, 1994, between the Registrant and AMP
Incorporated. (1)
4.3 Registration Rights Agreement dated as of March 30, 1994 among the Registrant, J.V.
Acquisition Corporation, Silicon Systems, Inc. and AMP Incorporated. (1)
10.1+ Smartflex Systems, Inc. 1993 Equity Incentive Plan, as amended. (1)
10.2+ Smartflex Systems, Inc. 1994 Equity Incentive Plan for Officers, Directors and Consultants. (1)
10.3+ Smartflex Systems, Inc. 1995 Equity Incentive Plan. (1)
10.4+ Smartflex Systems, Inc. 1995 Employee Stock Purchase Plan. (1)
10.5+ Smartflex Systems, Inc. Amended and Restated Profit Sharing Bonus Plan. (2)
10.6 Loan Agreement dated September 29, 1995, between the Registrant and Union Bank, as amended
by the First Amendment thereto, dated January 11, 1996, and the Second Amendment thereto,
dated February 13, 1996. (2)
10.7 Promissory Note dated October 11, 1996, from the Registrant in favor of Union Bank of
California, N.A. (revolving line of credit). (4)
10.9 Master Lease Agreement dated as of March 9, 1994 between the Registrant and General Electric
Capital Corporation, and Addendum No. 1 thereto dated as of March 9, 1994. (1)
10.10 Volume Purchase Agreement dated August 16, 1989 between Registrant and Silicon Systems, Inc. (1)
10.12 Lease and Administrative Services Agreement dated as of January 17, 1994, among the
Registrant, Circuit Components, Inc. and Inoac Polytec de Mexico. (1)
10.13 Facilities and Services Agreement dated October 1, 1995, between Smartflex Systems Singapore
Pte, Ltd. ("Smartflex Singapore") and Silicon Systems Singapore Pte, Ltd. (2)
10.14 Tenancy of Flatted Factory Unit made November 29, 1994, between Smartflex Singapore and
Jurong Town Corporation. (1)
10.15 Standard Industrial Lease - Net, and addendum thereto, dated February 1, 1996 between the
Registrant and Roy G.G. Harris and Patricia S. Harris, as co-trustees of the Harris Family
Trust dated November 2, 1979 and Glyn P. Harris and Ginger M. Harris, Husband and Wife
(14312 Franklin). (2)
10.16 Standard Industrial Lease - Net, and addendum thereto, dated February 1, 1996 between the
Registrant and Roy G.G. Harris and Patricia S. Harris, as co-trustees of the Harris Family
Trust dated November 2, 1979 and Glyn P. Harris and Ginger M. Harris, Husband and Wife
(14312 Franklin - parking lot). (2)
</TABLE>
23
<PAGE> 24
INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
10.17 Facilities and Services Agreement entered into on April 5, 1995 between the Registrant and
Silicon Systems, Inc. (1)
10.18 Reorganization Agreement dated July 31, 1995 between the Registrant and J.V. Acquisition
Corporation. (1)
10.19+ Form of Indemnification Agreement for Officers and Directors of the Registrant. (1)
10.20 Loan Agreement dated December 29, 1995 between Smartflex Singapore and GE Capital Services
Pte. Ltd. (2)
10.21 Promissory Note dated October 11, 1996, from the Registrant in favor of Union Bank of
California, N.A. (term loan). (4)
10.22 Debenture dated March 13, 1996 between Smartflex Singapore and GE Capital Services Pte. Ltd.
(2)
10.23+ First Amendment to Smartflex Systems, Inc. 1995 Employee Stock Purchase Plan (2)
10.24+ Executive Involuntary Termination Policy of the Registrant. (2)
10.25 Corporate Guaranty dated December 29, 1995 between the Registrant and GE Capital Services
Pte. Ltd. (2)
10.26 Contract of Lease dated May 24, 1996, between Smartflex Systems Philippines, Inc.
("Smartflex Philippines") and Joe & Larry Active Wears Co., Inc. (3)
10.27 Registration Agreement dated May 25, 1996 between Smartflex Philippines and Philippine
Economic Zone Authority. (3)
10.28 Third Amendment, dated October 4, 1996, to the Loan Agreement dated September 29, 1995,
between the Registrant and Union Bank of California, N.A. (4)
10.29 Lease Agreement entered into on November 17, 1996 between Inmobiliaria Nuevo Aeropuerto,
S.A. de C.V. and Smartflex Systems de Mexico, S.A. de C.V. (5)
10.30 Amendment to the Facilities and Services Agreement dated February 28, 1997, between the
Registrant and Silicon Systems, Inc. (5)
11.1 Computation of net income per share. (5)
13 Portions of the Company's Annual Report to Stockholders for the year
ended December 31, 1996. (5)
21.1 Subsidiaries of the Registrant. (5)
23.2 Consent of Ernst & Young LLP. (5)
27 Financial Data Schedule. (Filed electronically)
</TABLE>
________________
+ A management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
(1) Incorporated herein by reference to the referenced exhibit number to the
Registrant's Form S-1 Registration Statement Number 33-93426, dated July
27, 1995.
(2) Incorporated herein by reference to the referenced exhibit number to the
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1995.
(3) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended June 29, 1996
(4) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 28, 1996
(5) Filed with this Form 10-K.
24
<PAGE> 25
SMARTFLEX SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
----------- ---------- ---------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts $ 268 $ - $26(1) $ 9(2) $ 285
Reserve for excess and obsolete inventory 1,144 343 - 817(3) 670
------ ------ --- ---- ------
Total $1,412 $ 343 $26 $826 $ 955
====== ====== === ==== ======
Year ended December 31, 1995:
Allowance for doubtful accounts $ 285 $ 721 $35(1) $116(2) $ 925
Reserve for excess and obsolete inventory 670 625 - 124(3) 1,171
------ ------ --- ---- ------
Total $ 955 $1,346 $35 $240 $2,096
====== ====== === ==== ======
Year ended December 31, 1996:
Allowance for doubtful accounts $ 925 $ - $ - $ 5(2) $ 920
Reserve for excess and obsolete inventory 1,171 - - 305(3) 866
------ ------ --- ---- ------
Total $2,096 $ - $ - $310 $1,786
====== ====== === ==== ======
- - ---------------------
</TABLE>
(1) Write off of credit balances in accounts receivable.
(2) Uncollectible accounts written off, net of recoveries.
(3) Obsolete inventory written off.
25
<PAGE> 1
EXHIBIT 10.29
LEASE AGREEMENT
Lease Agreement entered into this 17th day of November, 1996 by and between
Inmobiliaria Nuevo Aeropuerto, S.A. de C.V. ("Landlord") and Smartflex Systems
de Mexico, S.A. de C.V. ("Tenant"), according to the following recitals and
sections:
R E C I T A L S
I. Landlord through its legal representatives hereby states that:
(A) Landlord is a mercantile corporation incorporated
through Public Deed Number 19,502 dated 27th of January, 1983, issued
by Mr. Lic. Fernando Arechavaleta Palafox, Notary Public Number 27
for Monterrey, N.L., United Mexican States, and registered before the
Public Register of Monterrey, N.L. under No. 183, folio 141, Vol. 258,
Book No.3, Second Auxiliary, on the 9th. of March, 1983.
(B) Landlord owns, free and clear of any mortgages, liens
or encumbrances, the land and buildings comprising the Premises (as
defined in section 1.01 of this Agreement).
(C) Landlord wishes to lease and grant a call option
right over the Premises to Tenant under the terms and conditions of
this Agreement.
(D) Landlord and its legal representatives have the
necessary authority to enter into this Agreement, which authority has
not been limited or revoked in any manner whatsoever.
II. Tenant through its legal representative hereby states that:
(A) Tenant is a mercantile corporation incorporated
through Public Deed Number 2556 dated 26 of October 1993, issued by
Mr. Arnulfo Flores Rodriguez, Notary Public Number 44 for Monterrey,
N.L., United Mexican States registered before the Public Registry of
Monterrey under No. 2,272, Book 3, Vol. 405, Second Auxiliary on the
12th
<PAGE> 2
2
of December 1993.
(B) Tenant wishes to lease and acquire a call option
right over the Premises from the Landlord under the terms and
conditions of this Agreement.
(C) Tenant and its legal representative have the
necessary authority to execute this Agreement, which authority has not
been limited or revoked in any manner whatsoever.
S E C T I O N S
1. CERTAIN DEFINITIONS
1.01 Premises: The Premises leased pursuant to this
Agreement contain 123,347 sq. feet of land (the "Land"), to be improved with a
building ("Building") to be constructed thereon containing approximately 55,000
square feet of floor space, together with parking areas and landscaping, as
shown on the site plan ("Site Plan") attached hereto as Exhibit A. The address
of the Premises is: Avenida TLC no. 300, Parque Industrial Stiva-Aeropuerto,
Apodaca, N.L. CP 66600.
1.02. Lease Term: The Lease term shall commence upon the
date of Substantial Completion of Landlord's Work (as said phrase is defined
below) and delivery of possession of the Premises to Tenant ("Commencement
Date") and end seven (7) calendar years thereafter ("Lease Term") , unless
terminated sooner pursuant to any other provisions of this Agreement or unless
extended pursuant to this Section 1.02. The scheduled commencement date
("Scheduled Commencement Date") of the Lease Term is MARCH 15, 1997. If the
Landlord's Work is Substantially Completed before the Scheduled Commencement
Date, the Lease Term shall commence upon Substantial Completion and Landlord's
delivery to Tenant of possession thereof. Within five calendar days after the
Commencement Date, the parties shall each execute and deliver a commencement
date certificate ("Commencement Date Certificate") in the form attached as
EXHIBIT "B" of this Agreement. The term "Lease Term" as used in this
Agreement, includes any extension as defined in this Section 1.02, provided the
right to perform such extension is exercised.
Notwithstanding the above and provided Tenant is in compliance with
all of its obligations under this Agreement, Tenant shall have the right to
extend the Lease Term for an additional term of five (5) years, by means of
prior written notice to Landlord with at least ninety (90) days in advance of
the date of termination of the initial seven (7) year Lease Term. In such a
case the Lease Term
<PAGE> 3
3
shall include such five (5) year extension and all of the provisions of this
Agreement shall continue to be in full force and effect until the conclusion of
the extended Lease Term.
In addition to the foregoing, in the event one of the parties hereto
makes a transfer in fraud of its creditors, makes a transfer for the benefit of
its creditors, is subject to bankruptcy proceedings, is adjudged bankrupt or
insolvent in proceedings filed against it, a receiver, trustee or custodian is
appointed for all or substantially all of its assets, fails to pay its debts as
they become due, convenes a meeting of all or a portion of its creditors, or
performs any act of bankruptcy or insolvency, including the selling of its
assets to pay creditors, the other party hereto may terminate the Lease Term
and this Agreement by means of prior written notice without any liability to
either party (except for obligations accrued in favor of one party prior to the
date of termination).
1.03. Base Monthly Rent: The Base Monthly Rent shall result out of
the following calculation: Total value of the investment to perform Landlord's
Work ("Landlord's Investment") multiplied by 0.13 and divided by 12 (plus value
added tax) equals the Base Monthly Rent. An example of this calculation is
provided in paragraph I of EXHIBIT C attached hereto and forming a part hereof.
The approximate Base Monthly Rent determined as a result of the above
calculation for each month of the Lease Term is US$26,836.00 Dollars (twenty
six thousand eight hundred and thirty six U. S. Dollars) per month, plus the
corresponding Value Added Tax. Such rent corresponds to the Final Plans and
Final Specifications attached hereto as EXHIBIT D and forming a part hereof
("Final Plan and Final Specifications"), assuming a value of Landlord's
Investment of US$2,477,169.23 Dollars (two millions four hundred seventy seven
thousand one hundred and sixty nine U.S. Dollars 23/100).
The value of Landlord's Investment quoted above is divided into two
parts, a fixed part valued at US$1,787,749.23 dollars ("Fixed Value")
corresponding to the portion of Landlord's Work identified as "Fixed Value
Work" in EXHIBIT D and a variable part valued at approximately US$689,420.00
("Variable Value") corresponding to the portion of Landlord's Work identified
as "Variable Value Work" in EXHIBIT D.
Except for the provisions of the following paragraph, the parties
agree that the Fixed Value and the Fixed Value Work will not be modified as a
result of changes in the costs of raw materials, labor and prices quoted by
the suppliers or any other change in circumstances whatsoever. The Variable
Value shall be
<PAGE> 4
4
changed to reflect any difference between the actual cost of the Variable Value
Work and the approximate amount quoted above, in the understanding that Tenant
shall have the right to (i) join Landlord in all efforts to obtain low
quotations from the suppliers of materials, equipment or labor related to the
Variable Value Work, and the acceptance of any quotation relating to this
portion of Landlord's Work shall be subject to the previous approval of Tenant,
provided however, that any quotation furnished by Landlord to Tenant in writing
shall be accepted or rejected by Tenant in writing within seven (7) calendar
days, otherwise the same shall be considered as accepted, and (ii) Tenant shall
have the right to acquire or purchase on its own account any materials and
equipment comprised within the Variable Value Work, in which case the Value of
such materials and equipment shall not be computed as part of the Variable
Value, provided that if Landlord is requested to install any such equipment at
the Premises Tenant shall pay to Landlord as compensation for such installation
an amount equal to the actual cost of installation by Landlord plus 20%.
If the Final Plans and Final Specifications suffer any substraction by
any change requested by Tenant prior to the Commencement Date, Landlord's
Investment shall be reduced by subtracting the value of the portion of
Landlord's Work canceled or reduced to the amount of US$2,477,169.23 (as this
amount may be adjusted due to changes in the Variable Value) in order to adjust
the Base Monthly Rent by applying the calculation stated in the first paragraph
of this Section 1.03 to Landlord's Investment as reduced in accordance herewith
(an example of this calculation is provided in paragraph II of EXHIBIT C). If
Such Final Plans and Final Specifications suffer any additions by any change
requested by Tenant prior to the Commencement Date, Landlord's Investment shall
be increased as follows: (i) Landlord shall request five bids from construction
companies or suppliers previously approved by Tenant for the addition and the
highest and lowest bid shall be eliminated, then the parties shall agree on
which of the other three bids shall be accepted, (ii) the actual cost of the
addition as per the bid approved in accordance herewith shall be increased by
20%, and (iii) the result shall be added to the amount of US$2,477,169.23
Dollars (as this amount may be adjusted due to changes from time to time in the
Variable Value) in order to determine the new value of Landlord's Investment
which will be subject to the calculation stated in the first paragraph of this
Section 1.03 in order to obtain the new Base Monthly Rent (an example of this
calculation is provided in paragraph III of EXHIBIT C).
The parties agree that at the Commencement Date, the parties shall
make the calculations hereinabove stated in order to finally determine the
initial Base Monthly Rent, in the understanding however, that the Base Monthly
Rent to be determined in accordance
<PAGE> 5
5
herewith shall, except for increases to the Base Monthly Rent as expressly
provided in this Agreement (including increases due to changes to Landlord's
Investment as provided in this Agreement), not exceed the amount of
US$26,836.00 (twenty six thousand eight hundred and thirty six 00/100 U.S.
dollars), plus the corresponding value added tax.
Tenant will pay the Base Monthly Rent in U.S. Dollars at the
International Bank of Commerce of Laredo, Texas, located at 1200 San Bernardo
Avenue, P.O. Drawer 1359, Laredo, Texas, 78042-1359, at the account indicated
by the Landlord in writing at the appropriate time.
The Base Monthly Rent shall be adjusted every one year of the Lease
Term after the first year by the percentage increase in the U.S. Consumer
Price Index ("CPI") as published by the U.S. Federal Government corresponding
to the applicable one year period. This increase can not be lower than two per
cent (2%) or higher than four per cent (4%).
1.04. Delivery of Possession: Landlord shall deliver
possession of the Premises to Tenant in a Substantially Completed (as such term
is defined below) condition by the Scheduled Commencement Date, or on such
other date as may be determined as expressly provided in this Agreement.
1.05. Substantial Completion: Landlord shall deliver
possession of the Premises to Tenant ready for installation and operation of
manufacturing equipment, as well as for use of office space, including without
limitation readiness for installation of communication and computer systems
("Substantially Completed") in accordance with Final Plans and Final
Specifications including approved changes, and Tenant must approve said
completion in writing, upon the occurrence of all of the following:
1. Construction by Landlord of the Premises in accordance with
the Final Plans and Final Specifications ("Landlord's Work") and
delivery of a certificate to that effect to Tenant by Landlord's
engineer. Whenever the expression Final Plans and Final
Specifications is referred to herein it shall mean the Final Plans and
Final Specifications described in EXHIBIT D, plus any changes approved
by the parties.
2. Acceptance by Tenant that the utility services for the
Building specified in the Final Plans and Final Specifications
including storm and sanitary sewer, water and electricity, and
telecommunications lines (but expressly excluding any treatment of
residual water required prior to its disposal by Tenant into the
park's sewer system in accordance with the provisions of section 7.02
below) have been fully installed
<PAGE> 6
6
and are operational for use by Tenant. Tenant shall at its cost,
execute directly with the suppliers of such services their respective
contracts for the supplying of such services, provided however, that
any payment or contribution required by any utility company (i.e.
electricity, telephone or water) for the supply of the corresponding
utility service other than standard hook-up and consumption fees shall
be paid by Landlord in order for the Premises to be considered
Substantially Completed. The foregoing in the understanding that,
with respect to the water supply to the Premises for use by the
Tenant, the Landlord will at its own cost and expense drill and equip
a water well in accordance with the Final Plan and Final
Specifications, and the Landlord represents and warrants that it has
and it will maintain for the duration of this Agreement the required
concession or permit for the extraction of water from such well for
its use by the Tenant.
3. All proposed means of ingress, egress, parking, loading,
manufacturing and office areas are available for use by Tenant, as
specified in EXHIBITS A AND D.
4. All legally required permits or certificates have been issued
by all required governmental authorities and obtained by Landlord
(including without limitation the permits to be obtained by Landlord
referred to in section 7.02 below), except as to any permit to be
obtained from the Federal and State environmental authorities not
relating to the construction of the Premises or the development of the
industrial park where they are located, but related to the specific
operation of Tenant's Intended Uses as hereinafter defined.
5. Remaining work to be done to render the Premises fully
completed shall consist solely of minor details of construction,
mechanical adjustments, or decoration, which will not interfere with
Tenant's use and enjoyment of the Premises. When such remaining work
is finally completed by Landlord and accepted by Tenant Landlord's
Work and the Premises shall be considered as "Finally Completed". To
this effect whenever the Premises and Landlord's Work is finally
completed the parties hereto shall execute and deliver a Final
Completion Certificate in the form of EXHIBIT E attached hereto and
made a part hereof.
6. If there is any dispute during the performance of Landlord's
Work to be executed under this Agreement or at the time of Substantial
Completion, the parties herein agree to be subject to the procedure
described in EXHIBIT F attached hereto and forming a part hereof.
<PAGE> 7
7
1.06. Parking: Tenant shall have the exclusive right to
use all available vehicle parking spaces at the Premises.
1.07. Tenant's Work: Tenant's Work, as defined in the
Final Plans and Final Specifications attached hereto as Exhibit D shall be
performed by Tenant at Tenant's expense in a good and workmanlike manner in
accordance with the terms and provisions contained in the Final Plans and Final
Specifications and paid for as provided therein.
1.08. Landlord's Work: Landlord's work shall mean all
works and services to be performed by Landlord in accordance with this
Agreement (including the Final Plans and Final Specifications) , which shall be
performed by Landlord at Landlord's expense in a good and workmanlike manner.
Upon Substantial Completion of Landlord's Work, Landlord shall deliver to
Tenant a certificate of substantial completion ("Certificate of Substantial
Completion").
1.9 Days: Whenever the term "days" is used in this Agreement, it
shall mean calendar days, except as provided otherwise.
2. DEMISE AND POSSESSION
2.01. Landlord leases to Tenant, and Tenant leases from
Landlord, the Premises described in Section 1.01 of this Agreement. In
reliance on Landlord's representations and warranties contained in this
Agreement, Tenant agrees that it will accept the Premises, as of the date of
delivery by Landlord of the Certificate of Substantial Completion provided that
the Landlord has by then substantially Completed Landlord's Work, the
conditions set forth in section 1.05 above have been met and subject to
Landlord's Work being Finally Completed in accordance with this Agreement.
2.02. If for any reason Landlord has not Substantially
Completed Landlord's Work and delivered possession of the Premises to Tenant by
MARCH 15, 1997 ("Scheduled Commencement Date"), except for delays resulting
from changes to the Final Plans and Final Specifications requested by Tenant
after December 31, 1996 or changes resulting in an increase in the surface of
the Building or due to an event of Force Majeure (as such term is hereinafter
defined) (in which case the parties shall agree on an extension of the
Scheduled Commencement Date) , the validity of this Agreement shall not be
affected nor shall either party have the right to terminate this Agreement
except as expressly provided in this Section 2 and in Sections 13 and 15 herein
below; provided, however, that if the delay is not attributable to Tenant,
Tenant shall be entitled to a reduction of the Base Monthly Rent
<PAGE> 8
8
applicable to the first month of the Lease Term (and successive months if
necessary) in the amount of US$500 Dollars for each day that passes from the
Scheduled Commencement Date (except for delays resulting from changes to the
Final Plans and Final Specifications requested by Tenant after December 31,
1996 or changes resulting in an increase in the surface of the Building or due
to an event of Force Majeure) until Substantial Completion of Landlord's Work
and delivery of possession of the Premises to Tenant actually occur. Should
the delay be more than forty five (45) days (even as a result of a Force
Majeure as provided in Section 32.07 and without the cure period set forth in
section 15.01 below being applicable for this purpose if the delay is due to
Landlord's default), Tenant shall have the right, but not the obligation, to
terminate this Agreement without incurring in any liability. Each party hereto
shall not incur in any liability whatsoever towards the other party due to
termination of this Agreement by Tenant based on a delay caused by Force
Majeure.
2.03. Landlord represents and warrants that as of the date
of the execution of this Agreement, it holds good and marketable title to the
Land. Landlord will obtain releases of all tenancies, liens, claims,
easements, and other encumbrances on the Land and shall furnish evidence of its
title (including a certificate of no liens issued by the corresponding public
registry of property) satisfactory to Tenant within 30 (thirty) days after the
execution of this Agreement.
2.04 Notwithstanding the foregoing or anything in this
Agreement to the contrary, considering that the manufacturing area of the
Premises identified in EXHIBITS A AND D (the "Manufacturing Area") is scheduled
to be completed by Landlord (including availability of water and electricity
for use by Tenant in the Manufacturing Area) on January 31, 1997, Landlord
shall allow Tenant, at no charge, beneficial occupancy of the Manufacturing
Area for purposes of setting up the custom manufacturing areas, as long as such
occupancy does not interfere with Landlord's Work. In addition to the
foregoing, Tenant shall have the option, which may be exercised in its own
discretion, to receive possession of the Manufacturing Area for purposes of
running production prior to the Substantial Completion of Landlord's Work, as
long as such occupancy does not interfere with Landlord's Work, in which event
Tenant shall pay to Landlord a monthly rent for the occupation and use of such
area equivalent to 10% of the estimated Base Monthly Rent in accordance with
the second paragraph of section 1.03 above, for each month that passes between
the date of such partial occupation of the Premises until the date of
Substantial Completion of Landlord's Work and delivery of possession of the
Premises to Tenant. The election of Tenant to occupy and use the Premises
partially as set forth in this paragraph shall not affect or modify in any way
other terms and
<PAGE> 9
9
obligations of the parties pursuant to this Agreement, including the duration
of the Lease Term.
3. BASE MONTHLY RENT
3.01. Tenant shall pay the Base Monthly Rent as rent in the
amount to be determined as specified in Section 1.03 of this Agreement for the
Premises during the Lease Term in legal currency of the United States of
America.
3.02. The Base Monthly Rent shall be paid monthly, without
deduction or offset (except as provided in sections 2.02, 3.03, 5.01 and 21.03
of this Agreement), in advance within the first five calendar days of each
month to Landlord at the place indicated in Section 1.03, or to whomever
Landlord shall designate by notice to Tenant in writing, during the Lease Term.
3.03. Except as provided in Sections 2.02, 3.02, 5.01 and
21.03 of this Agreement, Tenant shall not for any reason whatsoever, withhold
the Base Monthly Rent to be paid to Landlord.
3.04. Landlord shall provide to Tenant the respective
rental receipt (including the Value Added Tax), upon the corresponding monthly
payments of the rent made by Tenant.
4. USE OF PREMISES
4.01. Tenant may use the Premises for any and all lawful
purposes; provided, however, any Use of the Premises by Tenant other than for
Tenant's Intended Uses (as defined below) shall be subject to the prior
approval in writing of Landlord which approval shall not be unreasonably
withheld or delayed. Landlord represents and warrants that: (i) as of the date
of execution of this Agreement the Premises are located in an area of the City
of Apodaca in which the Tenant may lawfully under applicable zoning, Stiva
Airport Industrial Park Bylaws attached hereto as EXHIBIT G and other laws,
regulations, and ordinances use the Premises for the manufacturing,
distribution, storage, warehousing and sale of electronic and other related
products, and for offices in connection with the foregoing (collectively,
"Tenant's Intended Uses") , and (ii) water (including one water well) and
utility services required by Tenant will, at Landlord's sole cost and expense,
be made available at the boundary limits (considering that such requirements
will be available to Tenant for use in the Manufacturing Areas) of the Premises
no later than January 31, 1997. For this purpose Tenant's utility requirements
are attached hereto as EXHIBIT H forming a part hereof.
<PAGE> 10
10
4.02. Tenant is authorized to place its names on the
Building and the grounds and in any other customary location in conformity with
applicable laws, regulations and Stiva Airport Industrial Park Bylaws.
5. TAXES AND UTILITIES
5.01. Tenant shall pay the value added tax due with respect
to the Base Monthly Rent. Landlord shall pay any other taxes related to the
land and buildings comprising the Premises (collectively, "Taxes") assessed
against the Premises during the Lease Term or assessed against Landlord with
respect to this Agreement. If under Mexican Law there is an obligation to
Tenant to withhold any income taxes out of the payment of the Base Monthly
Rent, Tenant shall be entitled to do so.
5.02. Landlord at its sole cost and expense, shall
prosecute any proceeding to contest any Tax with respect to the Premises. Each
party shall cooperate with the other with respect to such proceedings. The net
amount of any Taxes recovered (after payment of fees and costs incurred in
connection with such proceeding) will be payable or credited, as applicable, to
Landlord.
5.03. Subject to Section 4.01(ii) of this Agreement, Tenant
shall contract directly with, and pay all amounts for consumption by Tenant due
to utility companies for utility services which Tenant may require for its use
of the Premises, arising out of such contracts executed by Tenant. Landlord
acknowledges that prior to this date it received from Tenant the amount of
US$80,000.00 dollars for the hook-up fee charged by the Comision Federal de
Electricidad ("CFE"), and agrees to pay such amount to the CFE for the benefit
and on behalf of Tenant, and to obtain and deliver to Tenant the corresponding
receipt issued by the CFE in favor of Tenant, at any time Tenant instructs
Landlord to do so.
6. MAINTENANCE AND REPAIR
6.01. Except as otherwise provided herein and in Section
6.02 of this Agreement, Landlord shall, at its own cost and expense, make all
necessary repairs to the Premises, including without limitation any structural
(e.g., floor slab and steel structure) and roof repairs needed at the Premises
during the Lease Term, except for those repairs required as a result of
negligent or from inappropriate or misuse by Tenant of the Premises and its
composing parts. The parties agree that the monthly maintenance fee for air
conditioning shall be paid by Landlord and Tenant on a
<PAGE> 11
11
fifty per cent basis.
6.02. Neither party shall be obligated to repair damage to
the Premises caused by a Casualty Loss (as defined in Section 9 of the Lease)
except to the extent provided in Section 9 of this Lease and neither party
shall be obligated with respect to any cleanup or remediation of any Hazardous
Substances (as defined in Section 7 of this Lease) except to the extent
provided in Section 7 of this Lease.
6.03. Starting on the Commencement Date and for the rest of
the duration of the Lease Term, Tenant will be responsible for its pro rata
share of the maintenance fee as charged by Landlord which has been quoted by
Landlord at U.S. $0.025 per square foot of land area per year (plus value added
tax). Based on EXHIBIT A the total land area will be 123,347 square feet,
which will result in an annual park maintenance fee of U.S. $3,083 dollars
(three thousand and eighty three U.S. dollars 67/100). This fee will be paid
in monthly installments of US$257.00 (plus value added tax) each within the
first five days of each month during the Lease Term. The first park
maintenance fee charge will be paid by Tenant to Landlord on the Commencement
Date. The maintenance services to be rendered by Landlord (the Stiva's Airport
Industrial Park) will be the following: i) Private guards 24 hours a day; ii)
Maintenance and cleaning of streets all year long; iii) Maintenance of common
parks and gardens; iv) Street lighting maintenance; and, v) a representative of
Landlord (Stiva's Airport Industrial Park) will be available in order to appear
before the State and County's authorities for authorizations of common problems
to the owners and/or lessees of premises within the industrial park. The
maintenance fee may only be modified by means of the written consent of the
majority of the tenants and owners of facilities located in the Stiva's Airport
Industrial Park.
6.04. If Landlord does not perform any repairs or
maintenance required to be performed by Landlord under this Agreement within
twenty (20) days after written notice thereof from Tenant (or such longer
period as Tenant may deem reasonably required to complete such repairs provided
that Landlord has commenced such repairs during said twenty (20) day period and
is pursuing the completion thereof with diligence), then the same shall be a
default by Landlord under this Agreement. In such event, Tenant may, at its
own discretion, perform such maintenance or repairs and charge Landlord with
the cost of same which amount shall accrue interest at the Prime Rate
determined by City Bank, New York, multiplied by two. Such Rate shall be
updated every 180 days and shall apply until payment is effectively made, and
Landlord shall reimburse Tenant for such cost and interest within ten (10) days
after receiving a statement from Tenant for the amount due.
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6.05. If Tenant does not perform any repairs or maintenance
required to be performed by Tenant under this Agreement within thirty (30) days
after written notice thereof from Landlord (or such longer period as may be
reasonably required to complete such repairs provided that Tenant has commenced
such repairs during said thirty (30) day period and is pursuing the completion
thereof with reasonable diligence) , then the same shall be a default by Tenant
under this Agreement. In such event, Landlord may, at its option, perform such
maintenance or repairs and charge Tenant with the cost of same which amount
shall accrue interest at the Prime Rate determined by City Bank, New York,
multiplied by two. Such Prime Rate shall be updated every 180 days and shall
apply until payment is effectively made, and Tenant shall reimburse Landlord
for such cost and interest within ten (10) days after receiving a statement
from Landlord for the amount due. Except as otherwise provided exclusively in
Section 9 of this Agreement, it is expressly understood that Tenant shall have
no maintenance and repair obligations of any kind under this Agreement with
respect to the Premises.
7. ENVIRONMENTAL
7.01. Landlord represents and warrants that any handling,
transportation, storage, treatment or use of hazardous or toxic substances that
have occurred on the Land prior to commencement of construction have been in
compliance with all applicable federal, state and local laws, regulations and
ordinances, that no leak, spill, release, discharge, emission or disposal of
hazardous and toxic substances has occurred on the proposed sites to date, and
that the soil, ground water, and soil vapor on or under the Premises are free
of toxic or hazardous substances as of the date of execution of this Agreement.
7.02. In addition, the parties also agree to the following:
(i) Landlord represents and warrants that as of the Commencement
Date, the Premises will not contain any asbestos or PCB's, any
underground storage tanks and any other kind of contaminated
material as per the applicable environmental laws and
regulations. Within thirty (30) days after the date hereof,
Landlord shall contract a private testing laboratory
acceptable to Tenant to test the environmental quality of the
soil, water and air. This consultant will be paid by Landlord.
If the results of such test show that the Premises contain any
asbestos or PCB's or that the Premises contain any underground
storage tanks and in general any other contaminating material,
Landlord shall have a period of 60 calendar
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days (without the cure period set forth in section 15.01 below
been applicable for these purposes) to clean up the Premises.
If at the end of such term, Landlord shall not comply with
such obligation, Tenant shall have the right to terminate this
Agreement without incurring in any liability.
(ii) That the Parque Industrial Stiva-Aeropuerto (which is owned by
Landlord) where the Premises are located has an internal
sewerage system, into which residual water generated by
Tenant's manufacturing process will be discharged. In
connection herewith Tenant shall have the obligation to treat
such water (excluding water from sanitary services) in order
for the same not to contain metals, corrosive elements, or
radioactive or toxic wastes in excess of the applicable
Mexican Official Norm.
(iii) Landlord shall treat residual water discharged by Tenant to
the internal sewerage system (including water from sanitary
services) and will reuse the same for purposes of irrigating
green areas within the park, for which purpose it has and it
will maintain in effect the permit for discharge or residual
waters (permiso de descarga de acruas residuales) form the
National Water Commission (Comision Nacional del Agua).
Furthermore, the water treated by Landlord shall comply with
all applicable Mexican official norms and with the specific
conditions for discharge imposed by the National Water
Commission.
(iv) In order to evidence compliance with the provisions of items
(ii) and (iii) above, Tenant shall furnish to Landlord every
two months a copy of the results of the tests made to the
water discharged by it, and Landlord shall furnish to Tenant a
copy of the results of the tests made to the water used for
irrigation as filed before the National Water Commission in
compliance with the applicable Mexican official norms and the
corresponding discharge permit. In any event, Tenant shall be
entitled to instruct Landlord to analyze its water after
treated by Landlord in order to evidence compliance with such
provisions.
7.03. Tenant is obligated to use the Premises in compliance
with all applicable environmental laws and shall not use, generate, transport,
refine, produce, process, store or dispose of any hazardous substances on,
under or from the Premises, except in compliance with the applicable
environmental laws and regulations. If any claim is ever made against Landlord
by any person or entity relating to any pollution or contamination from toxic
or hazardous substances, asbestos, or any other chemicals or
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substances in amounts which exceed standards for public health or welfare as
established and regulated by any local, state, or federal governmental
authority (herein collectively referred to as "Hazardous Substances") present
at the Premises during the Lease Term or from non-compliance by Tenant of its
obligations under section 7.02 above, all costs of removal incurred by, all
liabilities imposed upon, and losses and damages suffered by Landlord because
of the same shall be borne by Tenant, provided that such environmental
contingencies herein referred result out of acts or omissions derived from
Tenant's occupancy of the Premises, and Tenant hereby agrees to indemnify,
defend, and hold Landlord harmless from and against all such costs,
liabilities, losses, and damages, including, without limitation, with respect
to all third-party and/or authorities claims for personal injury or property
damage and other claims, actions, administrative proceedings, judgments,
damages, lost profits, penalties, fines, costs, losses, attorneys' fees and
expenses (through all levels or proceedings), consultants or experts fees, and
all costs incurred in enforcing this indemnity.
Notwithstanding the foregoing and anything herein to the contrary, if
any claim is ever made against Tenant by any person or entity (including any
governmental authority) relating to any pollution or contamination from
Hazardous Substances present at the Premises due to no act or omission of
Tenant (i.e. Hazardous Substances which were present at the Premises prior to
the Commencement Date) or due to Landlord's failure to comply with its
obligations under items (i), (ii), (iii) and (iv) of section 7.02 above, all
costs of removal incurred by, all liabilities imposed upon, and losses and
damages suffered by Tenant because of the same shall be borne by Landlord, and
Landlord hereby agrees to indemnify, defend and hold Tenant harmless from and
against such costs, liabilities, losses and damages, including without
limitation, with respect to any third party and/or authority claim for personal
injury or property damage and other claims, actions, administrative
proceedings, judgments, damages, lost profits, penalties, fines, costs, losses,
attorney's fees and expenses (through all levels or proceedings), consultants
or experts fees, and all costs incurred in enforcing this indemnity.
7.04. Section 7 of this Lease and the indemnity obligations
contained in said section shall survive the termination of this Agreement.
Claims by either party against the other pursuant to Section 7 shall be made in
accordance with the requirements of Section 19.03.
7.05. Subject to Section 7.02 above, Tenant agrees that its
operations at the Premises shall be in compliance with all applicable laws,
regulations, and ordinances including, without limitation, laws, regulations,
ordinances and the Stiva Airport
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Industrial Park Bylaws relating to Hazardous Substances.
8. ALTERATION OF PREMISES
8.01. So long as no default by Tenant under this Agreement
exists, Tenant shall have the right to, at any time during the Lease Term (as
from the Commencement Date), make nonstructural alterations affixed to the
Building costing up to an amount of US$50,000.00 dollars (fifty thousand U.S.
Dollars 00/100) per year (for these purposes the first year shall be counted as
from the Commencement Date), without the written consent of Landlord. Any
other alterations to the Premises shall require the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Whenever
alterations requested by Tenant have been made by Landlord at Landlord's cost
and expense, the Base Monthly Rent under this Agreement shall be increased by
the amount resulting from the application of the formula set forth in the fifth
paragraph of Section 1.03 (an example of this calculation is provided in
paragraph V of EXHIBIT C).
8.02. No alterations of the Premises by Tenant (whether
structural or non-structural) shall reduce the value or structural integrity of
the Premises. All such alterations of the Premises by Tenant shall be at
Tenant's own cost and expense and shall be accomplished in compliance with all
applicable laws, regulations, and ordinances. Tenant shall be responsible to
pay all obligations necessary to keep the Premises free from any mechanics' and
materialmen's liens on account of alterations of the Premises by Tenant.
8.03. All machinery and equipment or other tangible
personal property of whatsoever nature installed at the Premises by Tenant
during the Lease Term, (excluding property affixed or other type of property
which removal may cause damage to the Premises), shall continue to be the
property of Tenant and shall be removed by Tenant at the expiration of the
Lease Term.
9. DESTRUCTION
9.01. If during the Lease Term the Premises or any
improvements thereof are damaged or destroyed by fire, earthquake, flood, or
other casualty insured against pursuant to Section 10 (collectively, "Casualty
Loss"), Tenant shall give Landlord prompt written notice thereof ("Notice of
Casualty").
9.02. Landlord shall, within fifteen (15) days of receiving
a Notice of Casualty, determine and notify to Tenant in
<PAGE> 16
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writing, the time (the "Repair Term") in which the Premises can reasonably be
repaired by Landlord to the condition they were in immediately prior to the
occurrence of a Casualty Loss. Within fifteen (15) days after Tenant receives
such notice, Tenant shall (i) instruct Landlord in writing to proceed with the
repairs ("Repair Notice") or (ii) notify to Landlord that this Agreement has
been terminated ("Notice of Termination"), in the understanding that Tenant
may only terminate this Agreement in accordance with this provision if the time
determined by Landlord to be necessary for the repairs is more than ninety (90)
days or if Landlord fails to notify Tenant on time of the time required to make
the repairs. Promptly after receiving a Repair Notice from Tenant, Landlord
shall diligently repair the Premises, in the understanding that if the Premises
are not repaired or rebuilt to the conditions they were in immediately prior to
the occurrence of the Casualty Loss, within the Repair Term, then Tenant may
terminate this Agreement by means of written notice to Landlord without
incurring in any liability.
9.03. If such notice of termination is delivered by Tenant
to Landlord, this Agreement shall terminate on the date of such notice of
termination and Landlord shall be entitled to payment of, or assignment of
rights with respect to, all insurance proceeds recoverable on account of loss
or damage to the Premises caused by such Casualty Loss (except any insurance
proceeds recoverable on account of loss or damage to Tenant's equipment,
machinery, inventory, and other Tenant's property at the Premises). So long as
Landlord does not receive a notice of termination from Tenant as provided
above, Landlord shall continue to repair or rebuild the Premises or any
improvements thereof, irrespective of the adequacy of the insurance proceeds to
cover fully the costs of such repair or rebuilding.
9.04. All insurance proceeds payable under any fire or
other casualty insurance policy maintained by Tenant and covering Tenant's
personal property at the Premises including, without limitation, Tenant's
inventory, furniture, trade fixtures, and equipment shall be payable solely to
Tenant, and Landlord shall have no interest therein. Except to the extent
provided for in this Section 9 or otherwise in this Agreement, the obligations
of Tenant (including rent payments) and Landlord under this Agreement shall not
be affected by the occurrence of any Casualty Loss.
10. INSURANCE
10.01. During the construction period of the Building and
until the Commencement Date, Landlord shall carry "Builder's Risk" insurance
which consist on risks inherent to the construction of the Premises, in amounts
and with companies satisfactory to Tenant.
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Certificates of such insurance shall be delivered to Tenant within 15 days
after execution of this Agreement.
10.02. Landlord shall, at its cost and expense, purchase and
maintain an insurance that covers any loss or damage to the Premises during the
Lease Term caused by earthquake, flood, and any other type of loss that may be
caused by any act of nature or of third parties (other than Tenant and Tenant's
employees and agents), in amounts sufficient to prevent the Landlord or the
Tenant from becoming a co-insurer, under the terms of the applicable policies,
but in any event and at all times in amounts not less than one hundred percent
(100%) of the full insurable value of the Building, which for purposes hereof
will be considered the full replacement cost of the Building. Landlord's
underwriter will provide a certificate of insurance at an initial amount of
US$2,000,000.00 dollars (hereinafter Initial Amount Coverage) for the Building
and Building upgrades and improvements. However, whenever those improvements
and upgrades happen to be made by Landlord or Tenant after the Commencement
Date, such Initial Amount Coverage shall be modified by adding the amount
resulting from the application of the method set forth under Section 8.01
hereof which was used to increase the Base Monthly Rent. The certificate of
insurance will be underwritten by an insurance company acceptable to Tenant,
and will provide for an inflation index based on the United States Consumer
Price Index (as published by the U.S. Federal Labor Department).
10.03. Tenant shall, at its cost and expense, purchase and
maintain an insurance that covers any loss or damage to the Premises during the
Lease Term caused by fire and any other type of loss resulting from any acts of
Tenant, its employees or agents, in amounts sufficient to prevent the Landlord
or the Tenant from becoming a co-insurer, under the terms of the applicable
policies, but in any event and at all times in amounts not less than one
hundred percent (100%) of the full insurable value of the Building, which for
purposes hereof will be considered the full replacement cost of the Building.
Tenant's underwriter will provide a certificate of insurance at an initial
amount of US$2,000,000.00 dollars (hereinafter Initial Amount Coverage) for the
Building and Building upgrades and improvements. However, whenever those
improvements and upgrades happen to be made by Landlord or Tenant after the
Commencement Date, such Initial Amount Coverage shall be modified by adding the
amount resulting from the application of the method set forth under Section
8.01 hereof which was used to increase the Base Monthly Rent. The certificate
of insurance will be underwritten by an insurance company acceptable to
Landlord, and will provide for an inflation index based on the U.S. Consumer
Price Index (as published by the U.S. Federal Labor Department).
10.04. Tenant shall, at its cost and expense, purchase and
<PAGE> 18
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maintain loss of rent insurance that covers any loss or interruption of rent
payable under this Agreement (for a period of up to one (1) year) during the
Lease Term resulting from loss or damage to the Premises caused by any risk
insured under the insurance policies to be maintained by the parties in
accordance herewith.
10.05. Tenant shall, at its cost and expense, also purchase
and maintain general public liability insurance to cover claims for bodily
injury or death or property damage (not including casualties covered by
insurance policies to be obtained under sections 10.02 and 10.03 above) up to a
maximum of US$2,000,000.00 Dollars legal currency of the United States of
America per occurrence and in the annual aggregate.
10.06. All the insurance to be maintained by each party
hereto pursuant to this section 10 shall be obtained and evidenced under valid
and enforceable insurance policies issued by any insurers approved in writing
by the other party.
10.07. Except as provided in Section 10.09, all policies of
insurance herein provided for shall be subject to the prior approval in writing
of Landlord and Tenant, which approval shall not be unreasonably withheld or
delayed, and shall designate Tenant and Landlord as insured and co-insured, as
their respective interests may appear. Tenant may comply with its obligations
to contract insurance policies under this section 10, by evidencing to Landlord
that the risks that should be covered by Tenant's insurance policies in
accordance herewith are covered by insurance policies contracted by Tenant's
holding company, Smartflex Systems Incorporated, as long as Landlord is
designated as co-insured therein with respect to the risks referred to in
sections 10.03, 10.04 and 10.05.
10.08. All such insurance policies shall provide that the
insurer may not cancel such policies without at least thirty (30) days prior
notice in writing to Landlord and Tenant.
10.09. Tenant shall be responsible for insuring all of
Tenant's tangible personal property located at the Premises.
10.10. To the extent that insurance proceeds are actually
received in satisfaction of a loss which is required to be covered by insurance
hereunder, each of Landlord and Tenant hereby waives any and all rights of
recovery against each other for any loss or damage including, without
limitation, loss or damage to the Premises or the contents contained therein,
loss of rent or income on account of fire or other casualty, or injury
sustained on the Premises. Each party's aforesaid policies of insurance shall
contain appropriate provisions recognizing this mutual release and
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waiving all rights of subrogation by the respective insurance carriers. The
deductible payable under any insurance policy shall be paid by the party who is
obligated to maintain such insurance policy in accordance with this Agreement.
11. Landlord's RIGHT TO PERFORM Tenant's OBLIGATIONS
11.01. If at any time during the Lease Term, Tenant fails to
perform one or more of its obligations under this Agreement, Landlord, after
twenty (20) days written notice to Tenant (or without notice in the case of
Emergency), and without waiving or releasing the Tenant from any of its
obligations under this Agreement, may, but shall be under no obligation to,
perform acts which Tenant is required to perform under this Agreement and may
enter the Premises for such purpose to perform all such actions as may be
necessary. Tenant shall reimburse to Landlord all sums reasonably paid by
Landlord and all reasonable costs and expenses incurred by Landlord in
connection with the performance of any such obligations of Tenant, together
with interest at the Prime Rate determined by City Bank, New York. Such Prime
Rate shall be up dated every 180 days and shall apply until payment is
effectively made, shall be payable by Tenant to Landlord within ten (10) days
after demand therefor.
For purposes of this Agreement an "Emergency" shall be considered to
be a situation in which if a repair or maintenance is not made immediately at
any given time other damages would be caused to the Premises or any part
thereof.
12. TENANT'S RIGHT TO PERFORM LANDLORD'S OBLIGATIONS
12.01 If at any time during the Lease Term Landlord fails
to perform one or more of its obligations under this Agreement, Tenant after
twenty (20) days written notice to Landlord (or without notice in the case of
an emergency), may, but shall be under no obligation to, perform any act which
Landlord is required to perform in accordance with this Lease and may take all
such actions thereon as may be necessary. Landlord shall reimburse to Tenant
all sums reasonably paid by Tenant and all reasonable costs and expenses
incurred by Tenant in connection with the performance of any such obligations
of Landlord, together with interest at the Prime Rate determined by City Bank,
New York, multiplied by two. Such Prime Rate shall be up dated every 180 days
and shall apply until payment is effectively made and shall be payable by
Landlord to Tenant within ten (10) days after demand therefor.
13. DEFAULT BY TENANT
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13.01. Tenant shall be in default of this Agreement if at
any time during the Lease Term (and regardless of the pendency of any
bankruptcy, reorganization, receivership, insolvency, or other proceedings in
law, or before any administrative tribunal which have or might have the effect
of preventing Tenant from complying with the terms of this Lease):
(i). Tenant fails to make payment of any installment of Base
Monthly Rent, or of any other sum herein specified to be paid by
Tenant, within ten (10) days of delivery of Landlord's written notice
to Tenant of such failure; provided, however, Landlord shall be
obligated to give Tenant only three (3) notices in any calendar year
during the Lease Term and thereafter during said calendar year Tenant
shall be in default if Tenant fails to make payment when due, it being
understood that whether or not notice is given, all payments of monies
shall accrue interest at the Prime Rate determined by City Bank, New
York, multiplied by two. Such Prime Rate shall be up dated every 180
days and shall apply until payment is effectively made; or
(ii). Tenant fails to observe or perform any of its other covenants,
agreements, or obligations hereunder, and such failure is not cured
within thirty (30) days after Landlord's written notice to Tenant of
such failure; provided, however, that if the nature of Tenant's
obligation is such that more than thirty (30) days are required for
performance, then Tenant will not be in default if Tenant commences
performance within such thirty (30) day period and thereafter
diligently prosecutes the same to completion within ninety (90) days
thereafter; or
(iii). Tenant has abandoned the Premises for thirty (30) days or more
and fails to pay the rent when due.
14. REMEDIES OF LANDLORD
14.01. In the event of default by Tenant, as described in
Section 13 of this Agreement, Landlord, at its sole option, shall have the
following rights:
(i). The right to declare the term of this Agreement ended and to
terminate all of the rights of Tenant in and to the Premises; or
(ii). The right to continue this Agreement in full force and effect,
without terminating Tenant's right to possession of the Premises, in
which event Landlord shall have the right to collect the Base Monthly
Rent and other charges when due,
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including any sums due for any option period for which an option to
extend has been exercised.
If Tenant defaults under this Agreement and abandons the Premises
before the end of the Lease Term, or if its right of possession is terminated
by Landlord because of Tenant's default under this Agreement, then this Lease
may be terminated by Landlord at its option by written notice to Tenant. On
such termination Landlord may recover from Tenant any obligation which has
accrued and not been paid prior to the time this Agreement is terminated, plus
reasonable attorneys fees relating to the enforcement of this provisions by
Landlord and an indemnification from Tenant in the amount of the unpaid rents
for the balance of the Lease Term from the date of such termination notice
payable upon demand;
14.03. The waiver by Landlord of any breach or default of
Tenant hereunder shall not be a waiver of any preceding or subsequent breach of
the same or any other term. Acceptance of any rent payment shall not be
construed to be a waiver by the Landlord of any preceding breach by Tenant.
14.04. All past due amounts owed by Tenant under the terms
of this Lease shall bear interest at the Prime Rate determined by City Bank,
New York, multiplied by two. Such Prime Rate shall be up dated every 180 days
and shall apply until payment is effectively made and shall be payable by
Landlord to Tenant within ten (10) days after demand therefor.
14.06. Notwithstanding anything contained herein to the
contrary, in the event Tenant defaults under any of the terms of this Agreement
and the Agreement is terminated by Landlord, in addition to Landlord's other
remedies, set forth herein, Landlord shall not be obligated to complete the
Landlord's Work as set forth in this Lease.
15. DEFAULT OF LANDLORD AND TENANT'S REMEDIES
15.01. In the event of any default by Landlord hereunder,
Tenant shall give Landlord notice of such default and Landlord shall have
thirty (30) days after such notice to cure such default; provided however that,
except for defaults occurring prior to the Commencement Date (including without
limitation the obligation of Landlord to deliver to Tenant the possession of
the Premises in a Substantially Completed condition in a timely manner in
accordance with this Agreement), if the nature of Landlord's obligation is such
that more than thirty (30) days are required for performance, then Landlord
will not be in default if Landlord commences performance within such thirty
(30) day period and thereafter diligently prosecutes the same to completion
within ninety (90) days thereafter. In the event of (i) a default by Landlord
under
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this Agreement and the expiration of the aforesaid period during which Landlord
may cure such default, or (ii) in the event of a breach of any of Landlord's
obligations under the Call Option Agreement refereed to in section 17.01 below
and the expiration of any cure period established in such Agreement, if any, in
addition to any other rights or remedies provided for herein or in the Call
option Agreement, as applicable, or at law, including any brokerage fees and
court costs and reasonable attorneys fees, Tenant, at its sole option, may
terminate this Agreement upon notice by Tenant to Landlord and all rental
obligations shall be thereby terminated.
Should Landlord fail to perform in a timely manner in accordance
herewith its obligation to deliver possession of the Premises to Tenant in a
substantially Completed condition, and provided Tenant elects to terminate this
Agreement in accordance with the preceding paragraph, Landlord shall (i)
reimburse to Tenant the amounts of money delivered by Tenant to Landlord in
accordance with Sections 5.03 and 22.01 of this Agreement and (ii) pay as
penalty to Tenant the amount of US$200,000 (two hundred thousand U.S. dollars
00/100) upon demand.
16. CERTIFICATE
16.01. The parties will execute and deliver, within ten (10)
business days after written demand by any of them to the other therefor, a
statement in writing certifying, if true, that this Agreement is in full force
and effect, and that the Base Monthly Rent payable hereunder is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification), the date to which rent and other charges are paid, if any, and
acknowledging that there are not any uncured defaults hereunder (or specifying
such defaults if they are claimed).
17. OPTIONS OVER THE PREMISES AND ADJACENT LAND
17.01 Landlord shall grant a call option to Tenant to
purchase the Premises, in a separate agreement to be executed as of the date
hereof substantially in the form of EXHIBIT I attached hereto and made a part
hereof.
17.02 In addition to the foregoing, and provided no default
of any of Tenant's obligations under this Agreement exists, Tenant shall have
the option for a period of two (2) years from the Commencement Date to lease
the Adjacent Land (as such piece of land is described in EXHIBIT J attached
hereto and made a part hereof) from Landlord substantially in the same terms as
those contained in this agreement (including construction of a facility as per
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Tenant's specifications), and thereafter and for the duration of the Lease Term
hereof Tenant shall have a right of first refusal to be preferred over any
third party to lease the Adjacent Land in terms no less favorable than those
offered to such third party. Tenant shall also have the right, at no extra
cost and without paying any maintenance fee, to use the Adjacent Land for
recreation purposes only (i.e. to make a soccer field or something similar)
during the first two (2) years of the Lease Term. If the Adjacent Land is used
for any other purposes Tenant shall pay to Landlord a monthly rent to be
determined in accordance with this Agreement.
18. ACCESS OF LANDLORD TO THE PREMISES
18.01. Tenant shall permit Landlord and its authorized
representatives access to the Premises during reasonable hours with reasonable
prior notice to inspect the Premises and to perform repairs which are the
responsibility of Landlord under this Agreement. Landlord will have the right
to enter the Premises at any reasonable time with reasonable prior notice
during usual business hours at any time within six (6) months prior to the
termination of the Lease Term in order to show the Premises to prospective
future tenants. Notwithstanding the foregoing, Landlord, its employees, or
agents shall have the right to enter the Premises at all times without notice
to Tenant in the event of an Emergency.
19. INDEMNIFICATION
19.01. Except to the extent that there is a written waiver
of rights of recovery by Tenant against Landlord and except that Tenant's
rights against Landlord with respect to Hazardous Substances at the Premises
shall be exclusively governed by the provisions of Section 7 of this Lease,
Landlord shall indemnify and defend Tenant from and against any liabilities,
damages, judgments, expenses, and costs (including, without limitation, legal
fees) for which Tenant is held responsible, or which are incurred by Tenant, in
connection with third party claims against Tenant as a result of any act or
omission of Landlord, its agents, or employees or any breach by Landlord of
Landlord's obligations under this Agreement; provided, however, the foregoing
obligation of Landlord to indemnify and defend Tenant shall be inapplicable to
the extent that any liabilities, damages, judgments, expenses, and costs
(including, without limitation, legal fees) for which Tenant is held
responsible, or which are incurred by Tenant, result from the negligent or
unlawful acts of Tenant, its agents, or employees.
19.02. Except to the extent that there is a written waiver
of rights of recovery by Landlord against Tenant and except that
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Landlord's rights against Tenant with respect to Hazardous Substance at the
Premises shall be exclusively governed by the provisions of Section 7 of this
Lease, Tenant shall indemnify and defend Landlord from and against any
liabilities, damages, judgments, expenses, and costs (including, without
limitation, legal fees) for which Landlord is held responsible, or which are
incurred by Landlord, in connection with third party claims against Landlord as
a result of any act or omission of Tenant, its agents, employees or any breach
by Tenant of Tenant's obligations under this Agreement; provided, however, the
foregoing obligation of Tenant to indemnify and defend Landlord shall be
inapplicable to the extent that any liabilities, damages, judgments, expenses,
and costs (including, without limitation, legal fees) for which Landlord is
held responsible, or which are incurred by Landlord, result from the negligent
or unlawful acts of Landlord, its agents, or employees.
19.03. A party ("Indemnified Party") entitled to be
indemnified by the other party ("Indemnifying Party") pursuant to Section 19.01
or Section 19.02 of the Lease shall promptly and in writing notify the
Indemnifying Party of such claim for indemnification specifying in such notice
the nature of such claim. Also, in the event that any legal proceeding shall
be instituted or any claim or demand shall be asserted by a third party in
respect of which an Indemnifying Party is obligated pursuant to the provisions
of Section 19.01 or Section 19.02 of this Agreement or Section 7 of this
Agreement to indemnify and hold harmless an Indemnified Party, the Indemnified
Party shall with reasonable promptness after obtaining knowledge of such
proceeding, claim, or demand give written notice thereof to the Indemnifying
Party who shall then have the right at the Indemnifying Party's option and
expense to be represented by counsel of such party's choice in connection with
such matter to defend against, negotiate, settle, or otherwise deal with any
such proceeding, claim, or demand; provided, however, that without the prior
written consent of the Indemnified Party (whose consent shall not be
unreasonably withheld or delayed) the Indemnifying Party shall not consent to
the entry of any judgment in or agree to any settlement of any such matter; and
provided further that, in addition to legal counsel retained and paid for by
the Indemnifying Party, the Indemnified Party may retain separate counsel at
such party's own expense to represent such party in connection with any such
proceeding, claim, or demand. Failure by the Indemnifying Party to notify the
Indemnified Party of the former's election to defend any proceeding, claim, or
demand with respect to which indemnity is sought within thirty (30) days after
notice thereof shall have been given to the Indemnifying Party by the
Indemnified Party shall be deemed a waiver by the Indemnifying Party of such
party's right to defend against any such matter. If the Indemnifying Party
assumes the defense of any such proceeding, claim, or demand against the
<PAGE> 25
25
Indemnified Party, the Indemnifying Party shall take or cause to be taken all
steps necessary in connection with such defense, and the Indemnified Party
shall in all events be entitled to indemnity with respect to such matter as
provided in this Section 19. In the event that any legal proceeding shall be
instituted or any claim or demand shall be asserted by a third party in respect
of which an Indemnifying Party is obligated to indemnify and hold an
Indemnified Party harmless and in the event that the Indemnifying Party does
not elect to defend any such proceeding, claim, or demand, the Indemnified
Party may defend against, settle, or otherwise deal with any such proceeding,
claims, or demand in such manner as the Indemnified Party in good faith deems
appropriate, and the Indemnifying Party shall be liable for indemnification
with respect to such matter including, without limitation, the costs of such
defense except that the Indemnified Party shall not settle any such legal
proceeding without the Indemnifying Party's prior written consent, which
consent shall not be unreasonably withheld or delayed. In the event of any
proceeding, claims, or demand by a third party with respect to which a claim
for indemnification is made hereunder, the parties hereto agree that they will
cooperate fully with each other in connection with the defense or settlement of
such matter.
20. LABOR RESPONSIBILITIES
20.01. Tenant agrees that all obligations to Tenant's
employees under applicable Mexican laws and regulations arising out of use of
the Premises by Tenant during the Lease Term shall be the sole and exclusive
responsibility of Tenant, including, without limitation, such legal
obligations, if any, to all personnel employed by Tenant at the Premises,
whether unionized or not, confidential, temporary, or other (including any
subcontractors), and payment or fees to the Mexican Social Security Institute,
Sistema de Ahorro para el Retiro (SAR), INFONAVIT or any other applicable
taxes, fees or duties.
20.02. Landlord agrees that all obligations to Landlord's
employees under applicable Mexican laws and regulations arising out of
Landlord's Work and the performance of any of Landlord's obligations pursuant
to this Agreement, shall be the sole and exclusive responsibility of Landlord,
including, without limitation, such legal obligations, if any, to all personnel
employed by Landlord at the Premises, whether unionized or not, confidential,
temporary, or other (including any subcontractors), and payment or fees to the
Mexican Social Security Institute, Sistema de Ahorro para el Retiro (SAR),
INFONAVIT or any other applicable taxes, fees or duties.
<PAGE> 26
26
21. CONSTRUCTION OF THE BUILDING.
21.01. Landlord represents and warrants that the Building
will conform to the Final Plans and Final Specifications and shall be in
compliance with all applicable laws, regulations, ordinances, administrative
orders and Stiva's Airport Industrial Park Bylaws in existence and in force as
of the Commencement Date. Landlord represents and warrants that the Premises,
including the Building and the Building equipment supplied as described in the
Final Plans and Specifications, will be free from defects in design,
workmanship and materials for one (1) year commencing on the date of Final
completion of Landlord's Work and agrees to make, at its sole cost and expense
all repair and replacements required to remedy such defects should they occur
within the guaranty period.
21.02. All warranties to equipment and systems installed in
the Premises, other than equipment forming part of Tenant's personal property,
will be vested in Landlord.
21.03 In addition to the foregoing, Landlord represents and
warrants that Landlord's Work and the Premises will be Finally Completed,
conforming to the Final Plans and Final Specifications, within 90 days after
the Commencement Date. In the event Landlord's Work and the Premises are not
Finally Completed at Tenant's satisfaction by the date above mentioned, then
Tenant, in addition to any other remedies it may have in accordance with this
Agreement and any applicable law, shall be entitled to do by itself or through
the third party of its choice any works necessary to complete Landlord's Work
and to offset from the rents payable to Landlord the actual cost of such works.
22. RENT AND SECURITY DEPOSIT
22.01 Landlord acknowledges the receipt prior to the
execution of this Agreement of three (3) month's rent deposit in the aggregate
amount of US$80,508.00 Dollars.
22.02. The three (3) months deposit referred to in 22.01
above, shall be allocated as follows: (i) One (1) month shall be allocated as a
security deposit and returned to Tenant with no interest upon the expiration
date of the Lease Term; (ii) the other two (2) months of rent shall be applied
to the first and second month of the Base Monthly Rent. In case the Base
Monthly Rent is increased due to any increases to Landlord's Investment in
accordance with this Agreement, Tenant shall deliver to Landlord the balance in
order for the deposit established in section 22.01 to be equal to three month's
rent. In case the Base Monthly Rent is reduced due to any reductions to
Landlord's Investment in accordance with this Agreement, Landlord shall credit
the balance to the payment of the Base Monthly Rent payable for the third month
<PAGE> 27
27
of the Lease Term. Tenant shall pay the value added tax corresponding to the
rent for each of the first and second month of the Lease Term within the first
five (5) days of each of such months.
23. PERFORMANCE AND GUARANTEE
23.01. Landlord shall deliver to Tenant, within fifteen days
after the date hereof, at the sole cost of Landlord: (i) a performance bond in
an amount, form and substance, which encompasses the construction of the
Premises and the completion of the road, curb and gutter improvements in the
park and to the southwest entry point into the Stiva Airport Industrial Park as
per EXHIBITS A AND D, to insure Landlord's obligation to construct and perform
under this Agreement, and (ii) a bond in the amount of US$50,000.00 dollars to
guarantee that Landlord will make any repairs or replacements to the Premises
or any part thereof needed due to any hidden or latent defect. The terms and
conditions of such bonds are described in EXHIBITS K AND K-BIS attached hereto
and forming a part hereof.
23.02 Tenant shall deliver, within fifteen days after the
date hereof, a Bond to guarantee that Tenant will take possession of the
Premises in a timely manner in accordance with this Agreement. The specific
terms of such bond shall be as provided in EXHIBIT L attached hereto and made a
part hereof. Additionally, Tenant shall provide to Landlord a corporate
guarantee issued by its parent company in the form of EXHIBIT M attached hereto
and made a part hereof, to guarantee the compliance of Tenant's obligations
during the Lease Term.
24. ATTORNEYS' FEES/COLLECTION CHARGES
24.01. In the event of any legal action or proceeding
between the parties hereto, reasonable attorneys' fees and expenses of the
prevailing party in any such action or proceeding will be added to the judgment
thereon. All past due amounts owed by either party to the other under the
terms of this Agreement shall bear interest at the Prime Rate determined by
City Bank, New York, multiplied by two. Such Prime Rate shall be up dated
every 180 days and shall apply until payment is effectively made.
25. SEVERABILITY
25.01. If any provisions of this Agreement is found to be
unenforceable, all other provisions shall remain in full force and effect to
the extent permissible under applicable law.
<PAGE> 28
28
26. BROKERS
26.01. Each party hereto represents and warrants that it has
had no dealings with any broker or agent in connection with this Lease and
covenants to pay, hold harmless, and indemnify the other party from and against
any and all costs, expense, or liability for any compensation, commissions, and
charges or other loss, cost, damage, liability, or expense suffered by the
other party as a result of any claim by any broker or agent who claims to have
dealt with the indemnifying party with respect to this Lease or its
negotiation.
27. WAIVER
27.01. The failure of either party hereto to insist in any
one or more cases upon the strict performance of any term, covenant, or
condition of this Agreement by the other party hereto shall not be construed as
a waiver of a subsequent breach of the same or any other covenant, term, or
condition, and no delay or omission by either party to seek a remedy for any
breach of this Agreement by the other party shall be deemed a waiver by such
party of its remedies or rights with respect to such a breach by the other
party.
27.02. Tenant hereby expressly waives any rights provided in
Articles 2310, 2315, 2317, 2318, 2379, 2380 and 2381 of the civil Code for the
State of Nuevo Leon that may be in conflict (and only to that extent) with the
provisions of this Agreement.
28. AMENDMENT OF LEASE, RIGHT TO SUBLEASE, ASSIGNMENT
28.01. No amendment or modification of this Agreement shall
be valid or effective unless made pursuant to a written amendment of this
Agreement signed by duly authorized agents of both Landlord and Tenant.
28.02. Tenant shall have the right to sublease all or any
part of the Premises to any third party who, in Tenant's reasonable judgement,
shall be consistent with the standards of the industrial park, in the
understanding that in such event Tenant shall not be released from any of its
obligations towards Landlord under this Agreement.
28.03 Tenant may assign all of its rights and obligations
under this Agreement to a qualified tenant acceptable to Landlord, in which
case Tenant (and the guarantor under the corporate guarantee to be granted in
the form of EXHIBIT M attached hereto)
<PAGE> 29
29
shall not have any further obligation towards Landlord after the date such
assignment becomes effective.
29. NOTICES
29.01. All notices permitted or required by this Lease shall
be in writing, sent by recognized overnight courier or hand delivered or by
facsimile transmission provided that there is electronic confirmation of
receipt by the sender's telecopier, and shall be deemed duly given when
actually received by the party to whom it is sent, addressed as follows:
IF TO LANDLORD:
Av. Fe1ix u. Gomez 125 Sur
Monterrey, N.L. CP 64000
Mexico
Fax: (8) 343-0818
IF TO TENANT:
Prior to the Commencement Date:
Carretera a Miguel Aleman Km. 20.5
Apodaca, N.L. CP 66600
Fax: (8) 386-2316
After the Commencement Date:
at the Premises
Either party may change its address by means of prior written notice
to the other party as provided above.
30. CONFIDENTIALITY
30.01. Landlord shall not make any public announcement or
press release concerning this Agreement unless it has received Tenant's written
consent and shall maintain in confidence and not disclose to others any
information, data or material which Tenant furnishes to Landlord in confidence.
31. APPLICABLE LAW, COURTS AND ARBITRATION
<PAGE> 30
30
31.01. This Lease shall be bound by and subject to the laws
of the State of Nuevo Leon, Mexico.
31.02. Except to the extent that the parties have
specifically selected a specific procedure as provided in EXHIBIT F, the
parties hereto expressly submit any dispute, controversy or claim arising out
of or relating to or affecting any of the obligations of any party hereto to be
performed (or the breach, termination or invalidity thereof) prior to the
earliest of (i) the commencement Date as stated in the Commencement Date
Certificate issued by the parties, (ii) the date an arbitral award under the
provisions herein is issued declaring that Substantial Completion of Landlord's
Work has occurred and that the Premises are available for Tenant to occupy
them, or (iii) the date in which Tenant actually takes possession of the
Premises (not including occupancy of the manufacturing Areas prior to
Substantial Completion of Landlord's Work) to settlement by the binding
arbitration procedures set forth herein, in accordance with the Rules of
Arbitration of the International Chamber of Commerce ("ICC") , which
arbitration shall be conducted as provided in the following:
31.02.01. Request for Arbitration: A party hereto may serve
notice upon the other party in the event that there has been a breach of this
agreement which has not been cured as provided herein. Such notice shall
formally request arbitration and shall specify in detail the reasons therefor
(the "Request for Arbitration").
31.02.02. Place of Arbitration: Unless otherwise agreed by the
parties, all arbitrations shall be held in Mexico city, Federal District,
Mexico, and conducted in the English language.
31.02.03. Arbitration court: Three (3) arbitrators who shall be
members of the ICC, provided at least two (2) arbitrators shall be members of
the Mexican Chapter of the International Chamber of commerce shall be named as
follows:
31.02.03.01. one, by Landlord, and the second by Tenant,
with the understanding that said nomination must occur no later than seven (7)
calendar days following the receipt by one party of the other's Request for
Arbitration;
31.02.03.02. if, however, Landlord or Tenant failed to
appoint an arbitrator, either party may request ICC to appoint the necessary
arbitrator pursuant ICC rules;
31.02.03.03 the third arbitrator shall be selected by
mutual agreement of the two (2) arbitrators within a seven (7) calendar day
period following the appointment of the first two arbitrators. If those
arbitrators do not reach agreement on the
<PAGE> 31
31
third arbitrator within such seven calendar day period, then either Landlord or
Tenant may apply to ICC to have it appoint such third arbitrator pursuant to
the rules of such organization.
31.02.03.04. in any event, the third arbitrator shall
preside over the Court.
31.02.04. Arbitrators' Fees: Arbitrators shall be compensated
for their services at the standard rate charged by arbitrators appointed by
ICC.
31.02.05. Award: The Arbitration Court shall make its award in
strict conformity with this Agreement and shall have no power to depart from
or change any of the provisions of this agreement.
31.02.06. Performance of the parties' obligations: Landlord and
Tenant agree to continue performing their respective obligations under this
agreement while the dispute is being resolved, unless this Agreement has been
terminated in accordance with its terms.
31.02.07. General: Unless otherwise agreed by the parties or
provided in the Arbitration Award, the prevailing party at the Arbitration
settlement shall be entitled to recover from the nonprevailing party all fees
and expenses paid or incurred by the prevailing party in connection with the
Arbitration herein. A party who successfully brings a judicial action to
compel the Arbitration described herein, shall be entitled to recover its
reasonable attorneys' fees, court costs and expenses from the other party.
31.03 With regard to any dispute, claim or controversy
arising out of or in connection with this Agreement from the earliest of (i)
the Commencement Date as stated in the Commencement Date Certificate issued by
the parties, (ii) the date an arbitral award under the provisions herein is
issued declaring that substantial Completion of Landlord's Work has ocurred and
that the Premises are available for Tenant to occupy them, or (iii) the date in
which Tenant actually takes possession of the Premises (not including occupancy
of the Manufacturing Area prior to Substantial Completion of Landlord Is Work),
the parties hereto irrevocably submit it to the competent courts sitting in
Monterrey, N.L., Mexico, waiving any rights they may have to any other
jurisdiction by reason of their present or future domiciles.
32. MISCELLANEOUS PROVISIONS
32.01. Whenever the singular number is used in this Lease
and when required by the context, the same will include the plural, and the
masculine gender will include the feminine and neuter
<PAGE> 32
32
genders, and the word "person" will include any corporation, firm, partnership,
or association. All monetary payments due and paid hereunder shall be paid in
United States currency at Landlord's or Tenant Is address, as the case may be,
or at. such other address as may be designated in writing by Landlord or
Tenant, as the case may be, by written notice to the other party.
32.02. The headings or titles to sections of this Agreement
are not a part of this Agreement and will not affect the construction or
interpretation of any part of this Agreement.
32.03. Time is of the essence of each term and provision of
this Lease.
32.05. Subject to Section 10 of the Agreement, the terms and
provisions of this Agreement are binding upon and inure to the benefit of the
respective successors and assigns of Landlord and Tenant.
32.06. Except as otherwise expressly provided in this
Agreement, all covenants and agreements to be performed by either party under
any of the terms of this Agreement will be performed by such party at such
party's sole cost and expense.
32.07. In the event that Landlord or Tenant shall be delayed
or hindered in, or prevented from, the performance of any act required
hereunder by reason of strikes, lockouts, labor troubles, delay by the other
party, new or unexpected governmental regulations, delays by governmental
authorities, failure of power, riots, insurrection, war, or other reason of a
like nature not the fault of such party or not within its control, then
performance of such act shall be excused for the period of delay, and the
period for the performance of any such act shall be extended for a period
equivalent to the period of such delay (collectively, "Force Majeure").
Nothing contained herein shall excuse either party from performing payment
obligations due hereunder.
32.08. Tenant agrees that at the expiration of the Lease
Term (including any extension thereof), it will deliver to Landlord peaceable
possession of the Premises. Except as provided in Section 1.02 above, no
holding over by Tenant nor acceptance of the Base Monthly Rent or other charges
by Landlord shall operate as a renewal or extension of the Lease without the
written consent of Landlord and Tenant. Should Tenant hold over without the
consent of Landlord, this Lease shall continue in force from month to month,
subject to all of the provisions hereof and at a monthly rent equivalent to
120% of the last Base Monthly Rent applicable during the Lease Term.
32.09. Nothing contained in this Lease shall be deemed or
<PAGE> 33
33
construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venture, or any other
association between Landlord and Tenant other than the landlord-tenant
relationship described herein.
32.10. Whenever the term Premises is referred to in this
Lease, it shall mean the land, the Building and any improvements thereon.
32.11. Except as otherwise provided in section 2.04 Tenant
may prior to the Commencement Date, without incurring any liability for payment
for Base Monthly Rent, place and install Tenant's property in any part of the
Premises or award contracts to others to install at Tenant's risk and expense,
provided the foregoing does not cause undue interference or delay in Landlord
substantially completing Landlord's Work.
32.12 The parties agree that any monies due to one party by
the other under this Agreement shall be paid in U.S. Dollars. For this
purposes any costs and expenses incurred in Pesos Mx. Cy. that are to be
reimbursed by one party to the other shall be converted into U.S. Dollars at
the time such costs or expenses are incurred by applying the exchange rate
applicable to such precise date as determined and published by Banco de Mexico.
32.13. The Parties agree to execute and ratify before a
notary public a Spanish translation of this Agreement, in order for the same to
be registered at the corresponding Public Registry of Property and Commerce
within thirty days after the date hereof. Ratification and registration costs
shall be covered by Tenant and Landlord half and half.
IN WITNESS WHEREOF, duly authorized agents respectively of Landlord
and Tenant have executed this Lease in multiple original counterparts as of the
day and year first written above.
INMOBILIARIA NUEVO AEROPUERTO, S.A. DE
C.V.
(LANDLORD)
By: /s/ ADRIAN GONZALEZ LOZANO
-------------------------------
Adrian Gonzalez Lozano
Legal Representative
<PAGE> 34
34
By: /s/ SERGIO GONZALEZ LOZANO
------------------------------------
Sergio Gonzalez Lozano
Legal Representative
SMARTFLEX SYSTEMS DE MEXICO, S.A. DE C.V.
(TENANT)
By: /s/ WILLIAM L. HEALEY
------------------------------------
William L. Healey
Legal Representative
By: /s/ GILBERTO GAMBOA CHAIDEZ
------------------------------------
Gilberto Gamboa Chaidez
Legal Representative
<PAGE> 35
[INSERT EXHIBIT "A"]
<PAGE> 36
EXHIBIT B
COMMENCEMENT DATE CERTIFICATE
Tenant hereby agrees and accepts possession of the Premises, the Building and
any other improvements together with parking areas and landscaping as shown on
the Site Plan. Therefore Tenant acknowledges receipt hereof and recognizes
that the Substantial Completion of Landlord's Work has been fulfilled and
completed as agreed in the Final Plans and Final Specifications on 1997, the
Commencement Date.
The parties have executed this Commencement Date Certificate the ___________ of
____________, 1997.
INMOBILIARIA NUEVO AEROPUERTO, S.A. DE C.V.
By:
Legal Representative
SMARTFLEX SYSTEMS DE MEXICO, S.A. DE C.V.
By:
Legal Representative.
<PAGE> 37
EXHIBIT "C"
I. Example:
TOTAL VALUE OF INVESTMENT = US$2;477,169.23 Dlls.
multiplied by 0.13 = $322,032.00
divided by 12 = $26.836.00 (Base Monthly Rent)
II. Example:
TOTAL VALUE OF INVESTMENT = US$2;477,169.23 Dlls.
minus scope of the substraction = US$477,169.23 Dlls.
= $2;000,000.00 (New Total Value of Investment)
multiplied by 0.13 = $260,000.00
divided by 12 = $21,666.66 (Base Monthly Rent)
III. Example:
TOTAL VALUE OF INVESTMENT = US$2;477,169.23Dlls.
Bid No. 1 = 200,000.00
Bid No. 2 = 250,000.00
Bid No. 3 = 150,000.00
Bid No. 4 = 300,000.00
Bid No. 5 = 275,000.00
Bids Nos. 3 and 4 are eliminated.
Bid No. 2 was the one accepted.
250,000.00 + 20% of such amount (50,000.00) = 300,000.00
300,000.00 +2;477,169.23 = 2'777,169.23 (New Total Investment)
multiplied by 0.13 = 361,032
divided by 12 = US$30,086.00 (Base Monthly Rent)
<PAGE> 38
IV. Example:
TOTAL VALUE OF INVESTMENT = US$2;477,169.23Dlls.
Bid No. 1 = 200,000.00
Bid No. 2 = 150,000.00
Bid No. 3 = 150,000.00
Bid No. 4 = 300,000.00
Bid No. 5 = 275,000.00
Bids Nos. 3 and 4 are eliminated.
Bid No. 2 was the one accepted.
250,000.00 + 20% of such amount (50,000.00) = 300,000.00
300,000.00 + 2;477,169.23 = 2'777,169.23 (New Total Investment)
multiplied by 0.13 = 361,032
divided by 12 = US$30,086.00 (Base Monthly Rent)
<PAGE> 39
EXHIBIT D
SPECIFICATIONS FOR SMARTFLEX PROJECT
Content
<TABLE>
<S> <C>
1. Permits and Licenses.
2. Laboratory
3. Design Criteria
4. Preliminaries and Earthwork
5. Concrete
6. Floors and Slabs
7. Walls
8. Steel Structure
9. Roofing
10. Masonry and Finishes
11. Dock Levelers
12. Doors, Hardware and Windows
13. Civil Works
14. Fences
15. Landscaping
16. Plumbing
17. Sanitary Services and Fixtures
18. Heat Ventilation and Air Conditioning System
19. Hydropneumatic System
20. Electricity
21. Telephone Distribution System
22. Fire Protection System
23. Guard House
24. Clocks and Paging System
25. Process Equipment Installation
26. Others.
</TABLE>
<PAGE> 40
[STIVA LETTERHEAD]
1. PERMITS AND LICENSES.
o Permits and license related to the construction are included
in the contract and they are LANDLORD's responsibility.
o CFE and TELMEX payments are not included in the quotation.
o TENANT shall give the necessary assistance for the documents
development which their manufacturing process could be
involved.
2. LABORATORY.
o The cost of the soil analysis and concrete testing are
included in the proposal, but TENANT has the right to request
another kind of testing, if the result is negative, LANDLORD
will pay for the cost of the test and the corrections. If the
result is positive the charge will be to TENANT.
3. DESIGN CRITERIA.
o All drawings will be presented to TENANT for construction
authorization including the Design Criteria used for
engineering.
o The mentioned scope will be the base for the performance of
the drawings. Any change will be considered after the
approval and handled through a Change or Field Order.
o The approval will be carried out by Landlord and the
authorization by TENANT's representative.
o Mexican codes and Architectural American Standards will be
considered for the design.
o The drawing that does not have the sign "Approved for
Construction" and the signatures of the persons above
mentioned, will NOT be considered for its execution.
4. PRELIMINARIES AND EARTHWORK.
o This item includes clearing the property of bushes, etc.
Remove the top soil (black) from the area where the building
will be located, the depth of this cut will be 12" max.
o The fill material will be approved clay material without
rubbish, weeds, etc. The acceptable material will be placed
in layers (8" max.) to require sub-grade elevations.
o The compacted fill will be 95% Proctor for under slabs soil
and 90% for foundations.
<PAGE> 41
[STIVA LETTERHEAD]
5. CONCRETE.
o All structural concrete will be 2,850 psi (200 Kg/Cm2) except
for those elements that the design asks it. All concrete will
be ready mix and meet the Mexican Norm NOM C-155, Clase "A".
o Concrete for minor work might be mixed at the site in power
mixer.
o The concrete will be tested periodically according to the ACI
318'83 (Spanish version) section 4.7 "Evaluation and
Acceptance of the Concrete", part 4.71 "Testing Frequency"
(For English version see ACI 301-84, Chapter 16).
o The steel reinforcement will be 47,000 psi (4,200 Kg/Cm2).
o Special foundations for manufacturing equipments, cranes and
stamping press are NOT included. Everything under this
section will be performed according to the drawings and
calculations for this work.
6. FLOORS AND SLABS.
o For the Plant area, the floor slab will be 5" thickness with
welded wire mesh 66/10-10; design load capacity shall be
2,000 to 2,500 K/sm, diamonds 40 x 40 inches on every column
with all construction and expansion joints according to the
design and with a tolerance of 1/8" every 10'. The final
finish considered is polish-(The poliurethane sealer is not
considered)
o For the offices, the floor slab will be 4" thickness and
welded wire mesh 66&10-10 and rustic finish (NO sealer).
7. WALLS.
o Perimeter walls will be 4" precast concrete fc=2850 psi (200
kg/cm2) panels with steel reinforcing bar designed to support
a wind load of 70 miles/hour.
o For the offices, the interior walls are sheetrock panels, at
9' height as per approved shop drawings.
8. STEEL STRUCTURE.
o Steel trusses and joist, fabrication in accordance to AISC
Specifications and as indicated in the approved shop drawings.
<PAGE> 42
[STIVA LETTERHEAD]
o The Structural design load considered for the building is:
<TABLE>
<S> <C> <C> <C>
o Roof dead load o 2.5 PSF (root panels and joist)
o Collateral load o 8 PSF
o Live load o 20 PSF
o Wind load o 70 MPH
</TABLE>
o The clear minimum height will be 20' (6 m) to bottom of joist.
o All structural steel will have shop primer paint (gray).
o The fabrication, erection. welding, etc., will be according to
the normal standard practices procedures.
9. ROOFING.
o Roof system will consist of a 24 gauge galvanized, ribbed
(standing seam) roof (UL 90 wind uplift rating). Insulation
will be 3" fiberglass blanket fastened to deck by means of
wire mesh (R=10)
o Downspouts 6" PVC pipe.
o The roof shall have a ten (10) years factory guarantee,
o Storm water will be channeled to the streets and then by
gravity outside the property, The slope considered is 3%.
o Skylights and smoke vents are NOT included.
1O. MASONRY AND FINISHES.
o The perimeter walls will be latex paint.
o There will be no type o insulation considered on the interior
concrete block walls, The following are the main finishes
considered for the project.
<TABLE>
<CAPTION>
-------------------------------- -----------------------------------------
FINISH AREA
-------------------------------- -----------------------------------------
<S> <C>
FLOORS
Ceramic tile Daltile or similar. Bathrooms Cafeteria and offices.
Carpet: Terza model Trend or
similar Offices area
-------------------------------- -----------------------------------------
</TABLE>
<PAGE> 43
[STIVA LETTERHEAD]
<TABLE>
<S> <C>
Concrete polish finish Warehouse and production area
-----------------------------------------------------------------------
WALL BASE
4" Rubber base Johnsonite or
similar Offices & cafeteria
-----------------------------------------------------------------------
WALLS
Berel Latex Paint or similar. General Offices.
Berel Latex paint or similar Interior Manufacturing area
Sherwin Williams exterior latex Exterior walls
paint
-----------------------------------------------------------------------
CEILINGS
Armstrong model Minaboard Offices area and bathrooms.
Fissured 755B 2'x4' or
similar
(At 9' elevation)
-----------------------------------------------------------------------
</TABLE>
11. DOCK LEVELERS.
o 2 (two) Dock levelers 6'x6' 20,000 Lb capacity, Blue Giant
model A788 or equal approved. Operating range 12" above/below
dock level counter balance springs with solid steel
positioning roller & roller bearings, 55,000 PSI high yield
steel platform & structure, continuos piano type hinge with
front header plate boxed structure with "C" channels gusseted
at front and rear headers, and bumpers included.
12. DOORS, HARDWARE AND WINDOWS.
o 10 Hollow metal personnel doors, 3' x 7', for dock service and
fire exit, includes: 20 Ga. steel door, 16 Ga. steel frame,
MONARCH 19-R-BA exit only panic bar with 3 Hager hinges 4"x4"
model 700 in each door.
o 2 Roll-up doors, galvanized, manual operation, 8'x 10'.
o 33 Solid Wood doors with metallic frames in the interior
offices with 3 Hagger hinges 4"x4" model 700i in each door.
<PAGE> 44
[STIVA LETTERHEAD]
o 28Doorlock Schlage model Orbit A53PD/626.
o 1 (one) 3'x 7' door anodized bronze aluminium.
o Windows 4' tall x 16' wide standard 2"x 4" anodized bronze
aluminium framing storefront system bronze tinted glass.
o 16 Door closers 1460 P LCN closers
o Push plates Hagger stainless steel, Model 30 S. beveled
o Door pulls stainless steel round 3/4" dia., base / 2 1/4",
protection 1 1/2" clearence
13. CIVIL WORKS.
o Access roads an Parking lots will be compacted backfilling 95%
proctor, 6" gravel base compacted 95% proctor, asphalt coating
on top 1 lt/m2 asphalt concrete 2" as finish.
o For the pavements it is considered the
following criteria:
o Auto parking 2" (5 Cm) asphalt concrete plus
6" base.
o Dock area 6" concrete pavement, for trailers.
concrete 2,850 psi (200 K/Cm2), reinforcement
as per final design.
o The sidewalks will be 4'wide (1.20 M) 4" (10 Cm) thickness
concrete 2143 psi (150 K/Cm2). Curbs and painting are also
include.
o Grading will be done in accordance with the final approved
drawings.
14. FENCES.
o Chain link fence around the property 2.10 m (7") height and
barbed wire.
o Architectural fence in the front of the property with automatc
door gate at the principal entrance.
15. LANDSCAPING.
o For landscaping it has been considered San Agustin grass,
ornamental bushes and trees, as per shown in final design,
with irrigation system with automatic controller. Landscaping
areas will be as per final design.
<PAGE> 45
[STIVA LETTERHEAD]
16. PLUMBING.
o For sanitary work below the floor, it will be provided service
P.V.C. pipe and fittings schedule std.. For exterior work
concrete pipe will be used with the protection norms required.
o Copper piping type "M" with soldered fittings will be used for
the water system. This is below and above ground. Urrea or
equal will be used for gate and ball valves.
o Deep well and cistern is included in the cost,
o Hot water supply is not included.
17. SANITARY SERVICES AND FIXTURES.
o Sanitary fixtures will be Lamosa or equal. All toilets will
be white color and floor mounted, and the urinals, also white,
will be flush valve operated. All accessories will be Urrea
or equal,
o The toilet partitions will be plastic laminated ceiling hung
type in accordance to final design.
o The fixtures considered are :
<TABLE>
<CAPTION>
FIXTURE QUANTITY
----------------------------------------------------
<S> <C>
Waterclosets Lamosa model 15
Urinals Larnosa model Austral 3
Lavatories undermount Vermax Parchment 8
CE
Lavatories faucets MOEN LEGEND 4420 8
Coffe bar sink MOEN 22827 4
Cleaning sink 1
Soap dispenser Bobrick B 8
Paper towel dispenser Bobrick B-262 15
Toilet tissue dispenser Bobrick B-288 4
Mirrors BOBRICK B-165 15
</TABLE>
18. HEAT VENTILATION AND AIR CONDITIONING SYSTEM.
o Air package units system for all the area.
o Design temperatures as follows: 72 [degrees] F Office areas
78 [degrees] F Manufacturing area.
<PAGE> 46
[STIVA LETTERHEAD]
o Designed cooling capacity
o 160 total refrigeration tons are considered
o Fan system installed in walls to supply and exhaust air into
receiving and shipping areas with capacity to change the
bottom of 10' or air 5 times per hour automatically actived by
a thermostat is included.
o Offices and Cafeteria ductwork is galv. steel and insulated
with fiberglass 1" blanket.
o Exhaust air systems will be provided and installed by LANDLORD
as required in toilet rooms.
o All grills and diffusers will be aluminum, Sereli or similar,
thermostats and controls are included.
19. HYDROPNEUMATIC SYSTEM.
o It has been considered for giving presure to the piping water
of domestic usage, (not for process water) and the system
includes: Galvanized steel tank cap 109 gals., two pumps 5HP,
and a 7.5 HP motor.
o The work pressure is 40 PSI to 60 PSI.
o Electrical controls for automatic control of the system
including magnetic starter at full voltage combined with
thermomagnetic switch for control and protection of the motors
connected at 440 volts
20. ELECTRICITY.
o The main service will be 34,500 volts, as determined by CFE
with provision for CFE metering equipment. going underground
with 3-35kv-100% insulation XLP 1/0 XLPE cables from the CFE
connection at the property limit to the primary switchgear .
o The primary switchgear, Including lightning arrestors, cooper
bus work, connections to ground loop high voltage cable
terminations. Switchgear to have covers and doors and windows
for visual examination of switch position with external switch
operators.
o Two (2) 1000 KVA 480 /277 volts oil filled transformers close
coupled to switchgear and connected to the main low voltage
panels by conduit in pad.
o Transformers shall have oil level gauge, temperature gauge,
two 2 1/2% taps (full capacity) above and below rated rated
primary voltage and standar pipe connections for sampling
filterinf etc.connect each to ground loop.
o The transformers of the substation are going to be mounted in
a concrete pad just outside the building.
o Transformers brands will be PROLEC or equal approved.
o One of the two main low voltage panel will be Square D or
equal and shall be 480 volts, 3 phases, 4 wire and ground 60hz
NEMA-1 and will consist of:
o One main breaker of 3 x 1500 amperes and 42
poles for plant power connections.
o 1 termomagnetic branch breaker 3 x 400 amps
<PAGE> 47
[STIVA LETTERHEAD]
o 1 termomagnetic branch breaker 3 x 70 amps
o 1 termormagnetic branch breaker 3 x 40 amps
1 termomagnetic branch braker 3 x 15 amps.
o The other main low voltage panel will be Square D or equal and
shall be 480 volts, 3 phases, 4 wires and ground 60 hz NEMA-1
and will consist of:
o One main breaker of 3 x 1500 amperes and 42
poles for plant power connections
o The plant lighting panel shall be type "NHDP"
480/277 volts, 100 amps, 3 phases, 4 wire
and ground with 42 poles Federal Pacific
Trademark with the following termomagnetic
branch breakers:
- 12type "NEG" 1x20 amps.
- 5 type "NEG" 1x15 amps.
- 2 type "NEG" 3x15 amps.
o The office lighting panel shall be type "NALP" 220/127 volts,
100 amps, 3 phases, 4 wire and ground with 30 poles Federal
Pacific trademark with the following termomagnetic branch
breakers
- 23 type "NA" 1x20 amps.
- 2 type "NA" 2x3O amps.
o One M.C.C panel for HVAC units. Panel shall be 480/277 volts,
3 phases, 4 wire and ground 60 HZ NEMA-1, main breaker 3 x4OO
amps, and 4 termornagnetic branch breaker 3 x 125 amps.
o All wire shall to be THHN/THWcopper, all conduit exposed to
forklift damage to be rigid. Ground wire in all conduits runs
sized per table 250-95 of NEC. All conduits run except main
service to be overhead.
LIGHTING.
o The lighting levels will be as follows:
<TABLE>
<CAPTION>
AREA FOOT CANDLES
---------------------------------------
<S> <C>
Plant Area 50
Office Area 70
</TABLE>
o There will be 120 V. lay-in fluorescent fixtures in all
offices, to provide 100 FC at work surfaces, and for
manufacturing area illumination of 400 W metal halide.
o Fluorescent lamps manufacturers will be Lithonia, or equal
approved.
<PAGE> 48
o Metal Halide fixtures and lamps manufactured by Lumisistemas,
including flexible wiring. Labor and miscellaneous by
LANDLORD.
o Outside lighting on plant and parking lot 1.5 f.c. level with
high pressure sodium vapor. 175 W. "Wallpacks", fixtures and
lamps manufactured by Lithonia. Labor and miscellaneous by
LANDLORD.
o Exit lights above doors will be provided. Also installed one
4OW fluorescent emergency night light battery emergency
lighting for manufacturing and offices areas.
o Duplex receptacles for all offices, meeting, conference,
training and demo area walls, also dedicated split duplex
receptacles in all coffee stations will be as shown on final
design drawings.
OTHER APPROVED BRANDS.
<TABLE>
<S> <C> <C>
a. Cable: Conductores Monterrey, or equal approved.
b. Conduit piping: "Conduit de Mexico"
c. Cable Trays: Crouse Hinds.
</TABLE>
21. TELEPHONE DISTRIBUTION SYSTEM.
o Telephone distribution will be according to the final layout,
and includes all necessary conduit, boxes and registers with
pull-in wire to all desk and areas requiring the service as
indicated in the general layout approved by the Owner.
o The telephone wiring and the equipment are NOT included.
22. FIRE PROTECTION SYSTEM.
This includes:
o Manufacturing area density 0.10 GPM/1500 SQF (Light Hazard
o Offices area density 0.10 GPM/1500 SQF (Light Hazard
o 178 Sprinklers in roof manufacturing area
o 94 Sprinklers in offices area.
o 4 Interior hose stations.
o 1 Diesel Engine Fire pump 500 GPM 100 PSI & jockey
o 1 40,000 gallons bolted tank
<PAGE> 49
[STIVA LETTERHEAD]
23. GUARD HOUSE.
o One 10'x10' is included.
24. CLOCKS AND PAGING SYSTEM.
o For these systems were considered Conduit boxes, registers,
and pul-in wire, labor and materials. Clocks and Paging
equipment are NOT in the scope.
25. PROCESS EQUIPMENT INSTALLATION.
o Equipments and labor for Manufacturing area, Motor control
centers, Panel Boards for Main Power have NOT been included in
the scope
26. OTHERS
o Although these specifications are the base of the project
TENANT will have the right to change or make additions for the
hereof mentioned. For that case, LANDLORD shall provide the
extra cost or the saving, for approval, and proceed after
this.
o Previous to the starting date, LANDLORD and TENANT will
appoint the persons that will be in charge of the Construction
and Design, who will have the responsibility for the project
decisions.
<PAGE> 50
[STIVA LETTERHEAD]
QUOTATION
<TABLE>
<CAPTION>
QUANTITY UNIT U.P. AMOUNT
USD USD
<S> <C> <C> <C> <C>
FIXED VALUE WORK:
LAND 123,347 FT2 3.58 440,966
MANUFACTURING BUILDING 42,000 FT2 11.07 464,940
OFFICES 26,000 FT2 25.21 655,460
LOADING DOCKS 2 PC 16,570.28 33,141
PARKING LOT 57,856 FT2 1.41 81,461
EXTERIOR WORKS 1 LOT 100,746.36 100,746
CONSTRUCTION PERMIT 1 LOT 11,000.00 11,035
SUBTOTAL FIXED VALUE WORK 1,787,749
VAT 202,018
TOTAL FIXED VALUE WORK: 1,798,784
VARIABLE VALUE WORK:
ELECTRICAL SUBSTATION 2,000 KVA 110.46 220,924
ELECTRICAL INSTALLATION 1 LOT 78,818.52 78,819
PLUMBING 1 LOT 22,587.40 22,587
HVAC 160 TON 1,221.81 195,490
FIRE PROTECTION 1 LOT 171,600.00 171,600
SUBTOTAL VARIABLE VALUE WORK: 689,420
VAT 103,413
TOTAL VARIABLE VALUE WORK: 861,020
</TABLE>
<PAGE> 51
EXHIBIT E
FINAL COMPLETION CERTIFICATE
Tenant acknowledges that Final Completion of Landlord's Work has been fulfilled
and completed as agreed in the Final Plans and Final Specifications on _________
1997, the Commencement Date.
The parties have executed this Final Completion Certificate the ______ of _____,
1997.
INMOBILIARIA NUEVO AEROPUERTO, S.A. DE C.V.
<TABLE>
<S> <C>
By:
Legal Representative
SMARTFLEX SYSTEMS DE MEXICO, S.A. DE C.V.
By:
Legal Representative.
</TABLE>
<PAGE> 52
EXHIBIT "F"
AMICABLE RESOLUTION PROCEDURES
1. Landlord and Tenant shall seek friendly resolution to any bona fide
disagreement arising out of the Landlord's Work, (hereinafter a
"Disagreement"), in accordance with this exhibit. Landlord and Tenant shall
try to accommodate the Disagreement to a friendly, fast track, business
oriented procedure (the "ARP"). To the extent possible and practicable,
Landlord shall continue with all Landlord's Work in accordance with the Final
Plans and Final Specifications during anv pending ARP. If the Disagreement
involves the performance of certain portion of the Landlord's Work that would
make the continuation of such portions of the Landlord's Work impracticable,
then Landlord shall continue with all Landlord's Work not affected by the
Disagreement. The ARP shall be carried out as provided hereunder and any
failure to reach resolution under the ARP shall entitle either Landlord and/or
Tenant to cause the dispute to be submitted to binding arbitration under the
terms of Clause Thirty-One of the Agreement.
2. Should any Disagreement arise, Landlord and Tenant shall commence the
ARP by notifying the other party in writing of the Disagreement and by
appointing their respective representatives (the "Management Representatives"),
who shall have authority to negotiate a settlement on behalf of Landlord and
Tenant, respectively. The Management Representatives shall be appointed within
three (3) calendar days of the original notice of the Disagreement.
3. No later than five (5) business days following their appointment the
Management Representatives will mutual select and appoint to act as a neutral
mediator, a mutually acceptable engineer or architect, duly licensed in Mexico,
who shall have the qualifications and who shall perform the functions stated in
this ARP (the Neutral Mediator"). If by the aforementioned date, the
Management Representatives have not agreed on who will act as Neutral Mediator,
then Landlord and Tenant shall submit the Disagreement to the Chamber of
Construction Industry located in Monterrey, N.L. who shall appoint such Neutral
Mediator within a period of five business days from the date a request is made
by either of the parties.
4. Within a ten (10) business day immediately following the appointment
of the Neutral Mediator, a formal meeting (the "Formal Meeting") will be held
before a panel consisting of the Neutral Mediator and the Management
Representatives. The Formal Meeting shall be held at the place and time
selected by mutual agreement of the Management Representatives within such ten
(10) business days of the appointment of the Neutral Mediator, and if the
Management Representatives cannot agree upon the place, then the place will be
selected by the Neutral Mediator, The Formal Meeting shall be supervised and
conducted by the Neutral Mediator, and shall have a duration of not more than
forty-eight (48) hours.
5. No later than five (5) business days prior to the Formal Meeting, the
Landlord and Tenant shall exchange, through their Management Representatives,
and shall submit to the Neutral Mediator, concise memoranda stating the issues
in disagreement and their position in such respect, as well as all documents
and exhibits on which the parties intend to rely during the Formal Meeting.
Such memoranda documents and exhibits shall be in English Language.
<PAGE> 53
6. During the Formal Meeting, each Management Representative will make an
oral presentation of its case, and each Management Representative shall be
entitled to a reply. The presentations and replies may be made in any form,
and by any individuals, other than the Management Representatives, as desired
by Landlord and/or Tenant, and may be supported by any of, but only, the
memoranda, documents and other exhibits submitted in accordance with Section 5.
hereof. The use of witnesses and experts shall be permitted. Presentations
may not be interrupted, except that the Neutral Mediator and the Management
Representatives may ask clarifying questions. The meeting shall not be
recorded, however, persons attending may take notes. Each Management
Representative may have not more than two (2) advisors (plus one interpreter,
if applicable) in attendance.
7. During the Formal Meeting, the Management Representatives shall make
all reasonable efforts in good faith to seek a resolution to the Disagreement,
to which effect they shall meet one or more times, as necessary, within the
forty-eight (48) hour period set forth hereinabove. By mutual agreement, other
representatives representing either side may be invited to attend the
negotiations. The Neutral Mediator will attend the negotiations and will give
an oral opinion as to the issues raised during the Formal Meeting.
8. Should the Management Representatives not reach a resolution on the
Disagreement, then within a term of forty-eight hours following the conclusion
of the Formal Meeting, the Neutral Mediator shall submit to the Management
Representatives a written proposal which shall contain an opinion on the issues
involved in the Disagreement and a bona fide, proposed, amicable resolution,
settlement and/or compromise of the Disagreement.
9. Should the Management Representatives finally reach a resolution to
the Disagreement, then the terms of any settlement thereof shall be set forth
in a written agreement (the Resolution Agreement), which shall be executed by
the Management Representatives not later than twenty- four hours after the
later to occur of (i) the conclusion of the Formal Meeting, or (ii) the
submitting of the Neutral Mediator's written proposal mentioned in Section 8
hereinabove (or if no written proposal is submitted by the Neutral Mediator
within 48 hours of the conclusion of the Formal Meeting, then upon the
expiration of such 48 hours period after the Formal Meeting). If the
Management Representatives fail to sign a Resolution Agreement within the time
period in this Section 9, then the Disagreement will be submitted to the
arbitration provisions of Clause Thirty-One of the Agreement. The Resolution
Agreement shall be final, and legally binding on Landlord and Tenant.
10. The ARP is not intended to last more than twenty (20) business days
from start to finish and any Disagreement that has not resulted in a Resolution
Agreement within twenty (20) business days, may be submitted by either party to
binding arbitration under Clause Thirty-One of the Agreement. Further, if three
(3) or more consecutive Disagreements fail to result in a Resolution Agreement,
then, in such event, either party can avoid the ARP and submit the Disagreement
directly to arbitration under Clause Thirty-One of the Agreement and
thereafter, no further ARP shall be conducted, unless by the mutual consent of
the parties.
11. If arbitration under Clause Thirty-One of the Agreement must follow
the ARP, the parties herein agree in good faith to shorten the periods of the
arbitration procedure in order that the arbitrators be able to render an award
not later than on the 15th of July of 1997.
<PAGE> 54
EXHIBIT G
PARK'S BY-LAWS
<PAGE> 55
[STIVA LETTERHEAD]
PROTECTIVE COVENANTS AND
RESTRICTION BYLAWS
With the only intention and purpose to create, develop and maintain a world
class industrial development, with a healthy, efficient labor atmosphere, an
orderly neat, clean work environment with an attractive image and appearance,
the following protective covenants and restriction bylaws are established same
that are binding and of strict observance for all present and future owners,
lessees or tenants of any property, land or building within the limits of the
"STIVA AIRPORT INDUSTRIAL PARK", (from here on, stated as "THE PARK") a
development authorized and officially recognized by the Secretary of Urban
Development of the State of Nuevo Leon, Mexico.
BYLAWS
FIRST:
All bylaws here stated are recognized and accepted of conformity by all owners
and tenants of "THE PARK" and form part of their legal documents of property or
lease. All modifications or changes made to the original Bylaws by this
document will substitute and take the place of the previous one.
SECOND:
The "owners, tenants and neighbors committee" (from hereon stated as "The
Committee") is constituted with the objective to supervise and assure the
strict compliance of "THE PARK" PROTECTIVE COVENANTS and restriction bylaws as
well as to cooperate and actively participate in creating and maintaining an
industrial environment suitable for world class operations for which "THE PARK"
was developed.
All actual or future owners and tenants of "THE PARK" have to become and form
part as active members of "THE COMMITTEE" and have the obligation to assist and
participate in all meetings that "The Committee" convenes to.
THIRD:
The subscribers of the present bylaws that have the status of owner in the
park, must subscribe to a Civil Association which main purpose is to manage and
to pay the maintenance of the common areas in the park, as well as the tax
payments required from the Federation, the State and the Municipality.
Renuncing to what is established in the Article 2573 and have the obligation to
form part and to participate in this association the longest they remain owners
of the real estate property in the park.
<PAGE> 56
[STIVA LETTERHEAD]
FOURTH:
The subscribers of the present bylaws are obligated to make known the bylaws,
and the obligation to form part of the Civil Association to the new owners in
the case of transferring the real estate properly by any mean or title.
FIFTH:
Under no conditions whatsoever must the industrial operations in the field of
basic chemical industry, heavy industry or similar be located within the
subdivision. Only the location of light and clean industrial operations which
are capable of carrying out their manufacturing, management, warehousing,
engineering, research, loading, unloading, handling and other functions with
the limits established by these protective convenants and Restrictions.
SIXTH:
No buildings or industrial installations shall be constructed at least (6.00)
meters from the street line where the property adjoins a street if the depth of
lot is less than (8.00) meters, and (10.00) meters if more than (80.00) meters
or five (1.00) meters from any other adjacent properly, on the boundary of the
lots with streets and avenues, sidewalks shall be built of concrete or an
equivalent material and in no case its width will be less than one meter.
Land utilization shall not be more than 80% of the total area of the property
land for actual or future buildings. The total constructed, under roof covered
areas of the buildings shall not be less than a 10% of the size of the lot.
SEVENTH.
The part of land left in front of the buildings, between the buildings itself
and the street, shall be developed and kept in such a way as necessary to
present a clean and attractive appearance. Such areas shall be covered
entirely by sidewalks, paved areas for the circulation of vehicles,
landscaping, decorative fillings of gravel or similar materials, or decorative
constructions compatible with the overall architectural style of the facade of
the building, provided that the design for such decorative construction is
previously approved by "THE PARK".
The land left behind or to the sides of the building shall be kept clean of any
litter, waste, weeds or any other articles, and/or materials and shall be
leveled free of ditches, excavations or mounds, unless they serve a decorative
purpose previously approved by "THE PARK".
<PAGE> 57
[STIVA LETTERHEAD]
EIGHT:
The parking of trucks, buses or industrial vehicles in front of buildings is
forbidden. Vehicles of this type shall be parked invariably to the rear or to
the sides of the buildings.
NINTH:
Open air storage of buildings is forbidden whether it be of merchandise,
products, machinery, parking material or any other items, unless such storage
is perfectly covered in all directions by panels, grills or screen of
appearance previously approved by "THE PARK".
TENTH:
It is forbidden to use the land or buildings located within "THE PARK" to
conducted activities that have as a result the following consequences, in
amounts or levels that can be detected at the limits of the lot used by that
industry and are in violation of the regulations of S.E.D.U.E. (The Secretariat
of Urban Development and Ecology) or any local municipal rule:
A.- The emission of dust and/or objectionable smoke.
B.- The generation of gases, vapors, and odors which either are
hazardous to health or create a public nuisance problem.
C.- The production of noises, vibrations and/or radiation that
create either hazards to health or public nuisances.
ELEVENTH:
It is forbidden to conduct within "THE PARK" any operations generating
luminosity of high intensity, unless they are insulated in such a way as to
avoid any discomfort to anybody who could see them from any point where such
operation is located.
<PAGE> 58
[STIVA LETTERHEAD]
TWELFTH:
It is forbidden to discharge to the sewage lines within "THE PARK" any
substances, wastes or effluents in amounts in excess of limits established by
regulations issued by S.E.D.U.E. (The Secretariat of Urban Development and
Ecology), or any other which may be issued by any local municipal sewer
authority.
THIRTEENTH:
If considered necessary by "THE PARK" to follow and comply with the regulations
above mentioned, a water treatment process should be installed before disposing
the wastes or effluents into the park's sewer lines by the company involved in
such situation, covering by the same all expenses and permits.
FOURTEENTH:
When judged necessary and to protect all the workers and personnel against the
spread of any infection or plague, "THE PARK" will urge any of its members to
disinfect and/or fumigate the insides and outsides of its land, building and
installations as determined by each case.
FIFTEENTH:
The placement of signs, displays or advertisements on the lots of land or
buildings, within "THE PARK" will be allowed only if such signs, displays or
advertisements have the exclusive purpose of identifying the corporation using
such lot or building, either through lease or ownership. Such signs, displays
and advertisements shall be only of the general specifications established by
"THE PARK" accepting also the emblems, logos, monograms or trademarks generally
used by the corporations located in "THE PARK" it is forbidden to paint any
signs of the roof of buildings, or to place signs which may exceed the height
of the main facade in a building.
SIXTEENTH:
In no case, the construction, expansion, or demolition of a building or any
other installation, shall be started if "THE PARK" has not previously granted
its authorization in writing to do so, however, such authorization shall not be
unreasonably withheld, nor may authorization be defined if the landowner is in
compliance with the other clauses herein.
SEVENTEENTH:
The overall external appearance of buildings shall be kept in a clean, orderly
condition. The exterior painted surfaces snail be repainted at least every
three (3) years.
<PAGE> 59
[STIVA LETTERHEAD]
EIGHTEENTH:
Absolutely all members of "THE PARK" and of "THE COMMITTEE" that have an
economical activity within the limits of "THE PARK", shall seriously commit
themselves to avoid to hire or contract any person that had previously worked
with any other company of "THE PARK" or member of "THE COMMITTEE" during the
past six months and to report the situation to the committee and/or to the
other company involved.
This bylaw shall be taken as an internal obligatory policy of the hiring
procedure with the objective to avoid as possible any situation that would
negatively affect the turnover rate of any or all of the members of "THE
COMMITTEE" of "THE PARK".
NINETEENTH:
The company or the property owner that has acquired a lot in this park and
specially those who are located in the perimetral area, will be obligated
through this document to not allow or authorize other land neighbors different
from the tenants of the "STIVA AIRPORT INDUSTRIAL PARK" to connect to its
infrastructure net and utilities service, under any reason or circumstance. If
the tenant fails to observe this clause, a penalty from THE COMMITTEE of owners
and neighbors of the STIVA AIRPORT INDUSTRIAL PARK will be imposed and,
independently of the procedure of legal action that will be executed against
that or those who allow such connections over the STIVA AIRPORT INDUSTRIAL PARK
OR THE COMMITTEE.
TWENTIETH:
An annual maintenance fee is established for all members of "THE COMMITTEE" the
quantity established is to be contributed per advance during the first two
weeks of January of the same year. These contributions are to be administrated
and managed by THE CIVIL ASSOCIATION the use of these contributions are
strictly for the maintenance of the public service infrastructure and the good
keeping of streets, lawns and sidewalks as well as to maintain and improve the
security, safety and good appearance of "THE PARK".
TWENTYFIRST:
The subscribers of the present bylaws that have the status of owners, lessee,
or other similar title, are obligated to pay to the Civil Association mentioned
in bylaw Third, by way of conventional penalties, the followings which amount
at the time to be charged will integrate to the maintenance fund of the park.
a) for delay, in case of failure to pay on time the annual maintenance
fee that is eferred in bylaw twentieth, interest on the due balance at
a rate of two times the CPP (Percentage Cost Average) published every
month by Banco de Mexico.
b) the nonobservance of any of the other dispositions or bylaws that
contains the obligation of do or not to do and not just ordinary
facultatives, will raise a fine that will be calculated at a rate of
$1.00 (one
<PAGE> 60
peso 00/100 M.N.) daily, for every square meter of land surface of a
lot owned or used by the infractor, during all the time that runs
without solving satisfactorily the nonfulfillment.
TWENTYSECOND:
The subscribers of the present bylaws that have the status of owners, in "THE
PARK", are obligated to the following: In case that the Federal Authorities,
the State of Nuevo Leon and the City, decree or enact any type of tax as
obligatory for the execution of development works in the nearby or adjacent
areas to "THE PARK" Or that by any title turn out obligatory for the property
owners situated in the territorial limits involving total or parcially the
location of "THE PARK"; are obliged to pay in proportion the respective tax in
correspondence to the land surface owned from the total extension of "THE
PARK".
"THE COMMITTEE" expressly reserves for itself the right to change these
protective convenants and restrictions at any time, in regards to the land that
"THE PARK" OWNS AT THE DATE, provided that such changes do not result in harm
or damage to the industries previously located within the park limits, if such
changes or modifications may in any form affect the operations of companies
previously located in "THE PARK" will be implemented only if the affected
companies grant their approval in writing to those changes.
In all cases in which (according to these protective convenants and
restrictions): "THE COMMITTE" reserves for itself the right to authorize,
approve and/or accept, it is specifically agreed that such authorizations,
approvals and/or acceptances will be valid only if they are granted in writing
by persons with specific power of attorney from the "THE COMMITTEE", such
authorizations, approvals and/or acceptances shall not be unreasonably defined.
In case "THE COMMITTEE" does not deliver a negative answer to the request for
authorization, approval or acceptance within 30 calendar days after receiving
such a request in writing, the request for authorization, approval or
acceptance shall be considered as granted. The application and interpretation
of these protective convenants and restrictions will be regulated by the laws
of the State of Nuevo Leon, supplemental to the different federal laws and
regulations as pertaining to specific aspects of industrial operations,
including but not limited to the laws and regulations of safety and industrial
health, pollution, public roads and similar provisions.
Pertaining to construction matters, it is specifically understood that these
protective convenants and restrictions surpass the requirements of the
constructions code for the city of Monterrey, but all requirements of such
construction code shall have to be complied with, in case of any controversy on
the content, interpretation and/or application of these protective convenants
and restrictions, the parties agree to submit to the jurisdiction of the courts
in the city Monterrey state of Nuevo Leon.
These protective convenants and restrictions will remain in effect indefinitely
and can only be canceled or modified by "THE PARK" or by a group of individuals
or entities owning at least seventy-five percent of the total area of "THE
PARK".
<PAGE> 61
EXHIBIT H. UTILITIES
*WATER. 8 Liters/Sec. Capacity
POWER. 2000 KVA
*TELEPHONE. 30 External lines
Fiber optics availables.
<PAGE> 62
EXHIBIT I
CALL OPTION AGREEMENT
THIS AGREEMENT, made and entered into this 17th day of November 1996, by and
between Inmobiliaria Nuevo Aeropuerto, S.A. de C.V. ("Grantor") and Smartflex
Systems de Mexico, S.A. de C.V. ("Grantee"), pursuant to the following.
STATEMENTS
Both parties state that:
I. They have executed in this same date a lease agreement (the "Lease
Agreement") providing for a lease over a piece of real property (land and
building) located in Avenida TLC no. 300, Parque Industrial Stiva-Aeropuerto,
Apodaca CP 66600, N.L., Mexico, identified as the "Property" in Exhibit "A"
attached hereto and made a part hereof (hereinafter referred to as the
"Property"). Grantor's title to the Property is evidenced by Public Deed number
19,735, granted on June 9, 1983 before Fernando Arechavaleta Palafox Notary
Public 27 in Monterrey, N.L., which was recorded at the Public Registry of
Property and Commerce of Monterrey, N.L., on August 19, 1983, under number 539,
volume 31, book 12, Section of Real Estate Property, Apodaca Unit.
II. As part of the bargain in connection with the Lease Agreement
they agreed to enter into this Agreement in order for Grantor to grant in favor
of Grantee a call option right to purchase the Property in accordance with the
terms set forth herein.
CLAUSES
1. Granting of Call-Option Right.
Notwithstanding anything to the contrary contained herein or in any
third party's offer, Grantor hereby grants to Grantee a call-option to purchase
the Property and any constructions and
<PAGE> 63
2
improvements that may be erected or made on or to it in the future (the
"Option") , which Option may be exercised at any time from this date and until
November 17, 1998 (the "Option Term"). The terms and conditions of the option
shall be:
(a) At any time within the Option Term, Grantee may elect to exercise
the Option to purchase the Property from Grantor.
(b) Should Grantee elect to exercise the Option, it shall give notice
in writing (the "Option Notice") to the Grantor no later than the last day of
the Option Term.
(c) The purchase price in case Grantee exercises the Option shall be
calculated pursuant to the provisions of Exhibit "B" attached hereto and made a
part hereof.
(d) Grantor shall execute the transfer and sale of the Property to
Grantee by making, executing and delivering a public deed containing full
covenants of warranty and conveying absolute, good and marketable title to the
Property, free and clear of any liens, charges, encumbrances, mortgages or
other similar limitations, not later than thirty (30) days after Grantor
receives notice from Grantee of its election to exercise the Option.
(e) During the term in which the Option may be exercised by Grantee,
Grantor undertakes to keep the Property free and clear of any mortgage, lien,
encumbrance or any other limitation of property rights, and not to transfer or
make any attempt to transfer title to or any possession or use rights to the
Property or any part thereof to any third party.
2. Terms and Conditions of Purchase.
(a) If the Option is exercised by Grantee, Grantor shall take any
actions needed for the obtention of any approvals and/or the preparation and
filing of the proper parcel maps or any other documentation that may be
required.
(b) The Grantor shall, at its own expense, provide Grantee with such
proof of title to the Property, as Grantee may reasonably require within
fifteen (15) days of Grantee's option Notice. The Grantee shall have the right
to examine the title to the Property and to accept the same if the title is
good and marketable. In the event the title to the Property is not good and
marketable as aforesaid, or if there is a defect to the title, the Grantee
shall notify the Grantor in writing of such objections, and the Grantor shall
have a reasonable time, but not in excess of fifteen (15) days, in which to
make title good and marketable and to remove such defects. The Grantee shall
have the right, but not the obligation,
<PAGE> 64
3
to grant Grantor additional time to correct objections to title, or to cancel
the Option in whole or in part, without prejudice of any remedies it may have
in accordance with this Agreement or any applicable law.
(c) Within fifteen (15) days of the date Grantee delivers the Option
Notice to Grantor, Grantee shall designate a place and a time to hold the
closing of the corresponding purchase and sale agreement under this Agreement;
provided, however, that in the event of objections to title under Paragraph 2
(b) herein, the closing shall take place within seven (7) days after the
removal of such objections.
(d) Upon closing, the Grantee shall deliver to the Grantor full
payment of the purchase price to be determined in the manner hereinbefore set
forth in cash, certified check or wire-transfer, and Grantor shall make,
execute and deliver to the Grantee a deed containing full covenants of warranty
and conveying absolute, good and marketable title to the Property or the
Adjacent Land or both, as the case may be, free and clear from all liens,
assessments, and encumbrances.
(e) Upon closing, all existing liens, mortgages, assessments and
encumbrances over the Property shall be discharged by payments from the
proceeds payable to the Grantor. Property taxes if any, shall be prorated to
the date of closing; all other taxes arising from Grantee's purchase of the
Property, shall be covered as provided by the applicable laws. Grantee shall
pay for the drafting of the corresponding purchase and sale deed(s) as well as
for its (their) recording.
(f) The Grantee shall not be liable for the payment of any real
estate commissions, fees or reimbursements.
3. Governing Law and Courts.
This Agreement shall be subject to the laws of the State of Nuevo
Leon, Mexico. Should any dispute arise or any action is to be instituted, the
parties hereto agree to submit it to the competent courts of Monterrey, N.L.,
Mexico, waiving any rights they may have to any other jurisdiction by reason of
their present or future domiciles.
4. Notices.
Any notices to be given hereunder shall be given in writing and
delivered personally or by registered or certified mail, postage prepaid and
sent to the following addresses:
<PAGE> 65
4
IF TO GRANTOR:
Av. Felix U. Gomez 125 Sur
Monterrey, N.L. CP 64000
Mexico
IF TO GRANTEE:
Prior to the Commencement Date (as defined in the Lease Agreement):
Carretera a Miguel Aleman Km. 20.5
Apodaca, N.L. CP 66600
Mexico
After the Commencement Date:
Avenida TLC no. 300
Parque Industrial Stiva-Aeropuerto
Apodaca, N.L. 66600
Mexico
or to such other address as a party shall, by like notice hereafter, direct
such notices be sent. Notices shall be deemed duly given when actually
received by the party to whom they are sent.
5. Miscellaneous.
This Agreement shall be binding upon and shall operate for the benefit
of the parties hereto and their respective successors and assigns. The failure
of one party to seek remedies upon the breach of another party shall not be
deemed a waiver of such breach. All representations and warranties contained
herein shall survive the commencement date hereof and, in the event Grantee
purchases the Property, shall survive the date of closing of said purchase.
6. Recording.
A Spanish translation of this Agreement shall be ratified by both
parties before a Notary Public of Grantee's choice and recorded at the Public
Registry of Property and Commerce of Monterrey, N.L. at Grantee's option with
the cost and expense shared equally by the Grantor and the Grantee.
<PAGE> 66
5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on the day, month and year first above written.
<TABLE>
<CAPTION>
Grantor Grantee
<S> <C>
INMOBILIARIA NUEVO AEROPUERTO, SMARTFLEX SYSTEMS DE MEXICO,
S.A. DE C.V. S.A. DE C.V.
/s/ ADRIAN GONZALEZ LOZANO /s/ WILLIAM L. HEALEY
- - ----------------------------- -------------------------------
By: Adrian Gonzalez Lozano By: William L. Healey
Its: Legal Representative Its: Legal Representative
/s/ SERGIO GONZALEZ LOZANO /s/ GILBERTO GAMBOA CHAIDEZ
- - ----------------------------- -------------------------------
By: Sergio Gonzalez Lozano By: Gilberto Gamboa Chaidez
Its: Legal Representative Its: Legal Representative
</TABLE>
<PAGE> 67
6
EXHIBIT "B"
OF THE CALL OPTION AGREEMENT
The purchase price of the Property shall be determined as follows:
a) Within two days of the delivery of the Option Notice by Grantee to
Grantor each party shall designate an appraiser. If one of the parties does
not designate its appraiser within such term then the other party may request
for such appointment to be made by _____________________.
b) Each of the appraisers nominated as indicated above shall prepare
an appraisal determining the market value of the Property within five days of
their appointment.
c) If the two appraisals rendered as indicated in item b) above are
not different by more than 5%, then the average of the two shall be the
purchase price.
d) If there is a difference of more than 5% between the two
appraisals, then the parties shall designate a third appraiser to determine the
market value of the Property, and such determination shall be final and shall
be used as purchase price. If the parties do not agree on the designation of
the third appraiser, then either party may request for such appointment to be
made by ___________________________.
e) In the event the parties agree on a specific purchase price for
the Property in writing at any time after the execution of this agreement, then
such purchase price shall binding upon the parties hereto in the event the
Option is exercised by Grantee and the procedure set forth above shall not be
applicable.
<PAGE> 68
[INSERT EXHIBIT J]
<PAGE> 69
EXHIBIT "K"
BASIC TERMS OF PERFORMANCE BOND
BONDING INSTITUTION: Mexican Bonding Institution acceptable to Tenant
TYPE: Irrevocable
AMOUNT: In Mexican Pesos equivalent to US$200,000.00 Dollars
EFFECTIVENESS: From the date of signing the Lease until Commencement Date
Certificate is issued or the 15th. of July 1997 (hereinafter "Expiration
Date"), which ever is earlier. In case that prior to the Expiration Date, an
award under the arbitral procedure provided in Section 31.02 of the Lease is
granted to Landlord, in the sense that Landlord has complied with all his
obligations under the Lease Agreement, then the performance bond shall cease
upon presentation by Landlord of such award to the Bonding Institution.
PAYMENT: Shall be made following the standard payment procedures applicable to
the Bonding Institution following the request in writing of Tenant.
<PAGE> 70
E X H I B I T "K" (BIS)
BASIC TERMS OF BOND
BONDING INSTITUTION: Mexican Bonding Institution acceptable to Tenant
TYPE: Irrevocable
AMOUNT: In Mexican Pesos equivalent to US$50,000.00 Dollars
EFFECTIVENESS: From the date the Commencement Date Certificate is issued until
ONE CALENDAR YEAR THEREAFTER (hereinafter "Expiration Date").
PAYMENT: Shall be made following the standard payment procedures applicable to
the Bonding Institution following the request in writing of Tenant.
<PAGE> 71
EXHIBIT "L"
BASIC TERMS OF BOND
BONDING INSTITUTION: Mexican Bonding Institution acceptable to Landlord
TYPE: Irrevocable
AMOUNT: In Mexican Pesos equivalent to US$200,000.00 Dollars
EFFECTIVENESS: From the date of signing the Lease until Commencement Date
Certificate is issued or the 15th. of July, 1997 (hereinafter "Expiration
Date"), which ever is earlier. In case that prior to the Expiration Date, an
award under the arbitral procedure provided in Section 31.02 of the Lease is
granted to Tenant, the bond shall cease upon presentation by Tenant of such
award to the Bonding Institution.
PAYMENT: Shall be made following the standard payment procedures applicable to
the Bonding institution following the request in writing of Landlord.
<PAGE> 72
EXHIBIT "M"
GUARANTEE OF LEASE
In order to Induce Inmobiliaria Nuevo Aeropuerto, S.A. de C. V. ("Landlord") to
execute that certain Lease Agreement (the "Lease") of even date herewith, by
and between Landlord and Smartflex Systems de Mexico. S.A. de C.V. (such
corporation, together with any assignees thereof, except as provided in Section
28.03 of the Lease, being herein collectivelly called the "Tenant"), the
undersigned, ("Guarantor"), having an address at 14312 Franklin Avenue, Tustin,
CA 92680-7028, U.S.A., hereby guarantees the payment and performance of all
liabilities, obligations and duties imposed upon Tenant under the terms of the
Lease throughout the Lease Term, but from the earliest of (i) the Commencement
Date stated in the Commencement Date Certificate issued by Landlord and Tenant,
(ii) the date an arbitral award under the provisions of the Lease is issued
declaring that Substantial Completion of Landlord's Work has ocurred and that
the Premises are available for Tenant to occupy them, or (iii) the date in
which Tenant actually takes possession of the Premises (not including occupancy
of the Manufacturing Area prior to Substantial Completion of Landlord's Work).
Guarantor hereby waives diligence, presentment and suit on the part of Landlord
in the enforcement of any liability, obligation or duty guaranteed hereby.
Upon the occurrence of any Event of Default under the Lease, Landlord shall
have the right to make demand upon Guarantor for the amounts owing but unpaid
under the Lease. Landlord shall not be first required to enforce against
Tenant or any other person any liability, obligation or duty guaranteed hereby
before seeking enforcement thereof against Guarantor, suit may be brought and
maintained against Guarantor by Landlord to enforce any liability, obligation
or duty guaranteed hereby without joinder of Tenant or any other person or
entity. Without in any way limiting the foregoing, it is expressly understood
and agreed that Landlord shall not be obligated to pursue any other guarantor
(if there are any other guarantors) prior to bringing suit against Guarantor
hereunder and that the obligations of Guarantor hereunder shall not be affected
in any manner by any discharge or release of any other guarantor of all or any
part of the obligations of Tenant under the Lease. The liability of Guarantor
shall be affected consequently by any indulgence, compromise, settlement or
variation of terms which may be extended to Tenant by Landlord or agreed upon
by Landlord and Tenant, and except as provided in Section 28.03 of the Lease,
shall not be affected by any assignment of the Lease or any release of the
assigning Tenant in connection with such assignment nor by any termination of
the Lease to the extent that Tenant thereafter continues to be liable
thereunder. Landlord and Tenant, without notice to or consent by Guarantor,
may at any time or times enter into such modifications, extensions, amendments
or other convenants regarding the Lease as they deem appropriate and Guarantor
shall be not consequently released thereby, but shall continue to be fully
liable for the payment and performance of all liabilities, obligations and
duties of Tenant under the Lease as so modified, extended or amended.
The liability of Guarantor hereunder shall in no way be affected by (a) the
release or
<PAGE> 73
discharge of Tenant in any suspention of payments or bankruptcy or other
similar proceedings (hereinafter "Insolvency Proceedings"), (b) the impairment,
limitation or modification of the liability of Tenant or the estate of Tenant
in bankruptcy or of any remedy for the enforcement of Tenant's liability under
the Lease, resulting from the operation of any present or future provisions of
the federal Bankruptcy Code or other statute or from the decision in any court
with respect to such Insolvency Proceedings, (c) the rejection or disaffirmance
of the Lease in any such Insolvency Proceedings, and (d) the assignment or
transfer Of the Lease by Tenant, except as provided in section 28.03 of the
Lease.
Guarantor shall subordinate any liability or indebtedness of Tenant now or
hereafter held by Guarantor to the obligations of Tenant to Landlord under the
Lease.
If Landlord employs an attorney to present, enforce, or defend any of
Landlord's rights or remedies under this Guarantee, Guarantor shall pay
Landlord's reasonable attorney's fees and court costs, so long as Guarantor is
condemned under the respective arbitration procedure.
This agreement shall be binding upon Guarantor and her heirs or assigns and
shall inure to the benefit of Landlord and its successors and assigns.
This guaranty shall be subject to the applicable law and Courts provided in the
Lease. Guarantor expressly waives to the "beneficios de orden y de excusion"
provided under articles 2706, 2707 of the Civil Code of the State of Nuevo Leon
as well as to any other rights provided under said Code which may be
inconsistent to the terms of this Guaranty, including but not limited to
articles 2738, 2740 and 2741 of the Civil Code of the State of Nuevo Leon.
Capitalized terms used and not otherwise defined herein shall have the meaning
ascribed to them in the Lease Agreement.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty of Lease
this 17th. day of November, 1996.
GUARANTOR
Smartflex Systems Incorporated
Represented hereby:
<TABLE>
<S> <C>
/s/ WILLIAM L. HEALEY
----------------------------
By: William L. Healey
Legal Representative
</TABLE>
<PAGE> 74
CALL OPTION AGREEMENT
THIS AGREEMENT, made and entered into this 17th day of November, 1996, by and
between Inmobiliaria Nuevo Aeropuerto, S.A. de C.V. ("Grantor") and Smartflex
Systems de Mexico, S.A. de C.V. ("Grantee"), pursuant to the following.
STATEMENTS
Both parties state that:
I. They have executed in this same date a lease agreement (the
"Lease Agreement") providing for a lease over a piece of real property (land
and building) located in Avenida TLC no. 300, Parque Industrial
Stiva-Aeropuerto, Apodaca CP 66600, N.L., Mexico, identified as the "Property"
in Exhibit "A" attached hereto and made a part hereof (hereinafter referred to
as the "Property"). Grantor's title to the Property is evidenced by Public
Deed number 19,735, granted on June 9, 1983 before Fernando Arechavaleta
Palafox, Notary Public 27 in Monterrey, N.L., which was recorded at the Public
Registry of Property and Commerce of Monterrey, N.L., on August 19, 1983, under
number 539, volume 31, book 12, Section of Real Estate Property, Apodaca Unit.
II. As part of the bargain in connection with the Lease Agreement
they agreed to enter into this Agreement in order for Grantor to grant in favor
of Grantee a call option right to purchase the Property in accordance with the
terms set forth herein.
CLAUSES
1. Granting of Call-Option Right.
Notwithstanding anything to the contrary contained herein or in any
third party's offer, Grantor hereby grants to Grantee a call-option to
purchase the Property and any constructions and
<PAGE> 75
2
improvements that may be erected or made on or to it in the future (the
"Option"), which Option may be exercised at any time from this date and until
November 17, 1998 (the "Option Term"). The terms and conditions of the Option
shall be:
(a) At any time within the Option Term, Grantee may elect to
exercise the option to purchase the Property from Grantor.
(b) Should Grantee elect to exercise the Option, it shall give
notice in writing (the "Option Notice") to the Grantor no later than the last
day of the Option Term.
(c) The purchase price in case Grantee exercises the option shall be
calculated pursuant to the provisions of Exhibit "B" attached hereto and made a
part hereof.
(d) Grantor shall execute the transfer and sale of the Property to
Grantee by making, executing and delivering a public deed containing full
covenants of warranty and conveying absolute, good and marketable title to the
Property, free and clear of any liens, charges, encumbrances, mortgages or
other similar limitations, not later than thirty (30) days after Grantor
receives notice from Grantee of its election to exercise the Option.
(e) During the term in which the Option may be exercised by Grantee,
Grantor undertakes to keep the Property free and clear of any mortgage, lien,
encumbrance or any other limitation of property rights, and not to transfer or
make any attempt to transfer title to or any possession or use rights to the
Property or any part thereof to any third party.
2. Terms and Conditions of Purchase.
(a) If the Option is exercised by Grantee, Grantor shall take any
actions needed for the obtention of any approvals and/or the preparation and
filing of the proper parcel maps or any other documentation that may be
required.
(b) The Grantor shall, at its own expense, provide Grantee with such
proof of title to the Property, as Grantee may reasonably require within
fifteen (15) days of Grantee's Option Notice. The Grantee shall have the right
to examine the title to the Property and to accept the same if the title is
good and marketable. In the event the title to the Property is not good and
marketable as aforesaid, or if there is a defect to the title, the Grantee
shall notify the Grantor in writing of such objections, and the Grantor shall
have a reasonable time, but not in excess of fifteen (15) days, in which to
make title good and marketable and to remove such defects. The Grantee shall
have the right, but not the obligation,
<PAGE> 76
3
to grant Grantor additional time to correct objections to title, or to cancel
the Option in whole or in part, without prejudice of any remedies it may have
in accordance with this Agreement or any applicable law.
(c) Within fifteen (15) days of the date Grantee delivers the Option
Notice to Grantor, Grantee shall designate a place and a time to hold the
closing of the corresponding purchase and sale agreement under this Agreement;
provided, however, that in the event of objections to title under Paragraph 2
(b) herein, the closing shall take place within seven (7) days after the
removal of such objections.
(d) Upon closing, the Grantee shall deliver to the Grantor full
payment of the purchase price to be determined in the manner hereinbefore set
forth in cash, certified check or wire-transfer, and Grantor shall make,
execute and deliver to the Grantee a deed containing full covenants of warranty
and conveying absolute, good and marketable title to the Property or the
Adjacent Land or both, as the case may be, free and clear from all liens,
assessments, and encumbrances.
(e) Upon closing, all existing liens, mortgages, assessments and
encumbrances over the Property shall be discharged by payments from the
proceeds payable to the Grantor. Property taxes if any, shall be prorated to
the date of closing; all other taxes arising from Grantee's purchase of the
Property, shall be covered as provided by the applicable laws. Grantee shall
pay for the drafting of the corresponding purchase and sale deed(s) as well as
for its (their) recording.
(f) The Grantee shall not be liable for the payment of any real
estate commissions, fees or reimbursements.
3. Governing Law and Courts.
This Agreement shall be subject to the laws of the State of Nuevo
Leon, Mexico. Should any dispute arise or any action is to be instituted, the
parties hereto agree to submit it to the competent courts of Monterrey, N. L. ,
Mexico, waiving any rights they may have to any other jurisdiction by reason of
their present or future domiciles.
4. Notices.
Any notices to be given hereunder shall be given in writing and
delivered personally or by registered or certified mail, postage prepaid and
sent to the following addresses:
<PAGE> 77
4
IF TO GRANTOR:
Av. Fe1ix U. Gomez 125 Sur
Monterrey, N.L. CP 64000
Mexico
IF TO GRANTEE:
Prior to the Commencement Date (as defined in the Lease Agreement):
Carretera a Miguel Aleman Km. 20.5
Apodaca, N.L. CP 66600
Mexico
After the Commencement Date:
Avenida TLC no. 300
Parque Industrial Stiva-Aeropuerto
Apodaca, N.L. 66600
Mexico
or to such other address as a party shall, by like notice hereafter, direct
such notices be sent. Notices shall be deemed duly given when actually
received by the party to whom they are sent.
5. Miscellaneous.
This Agreement shall be binding upon and shall operate for the
benefit of the parties hereto and their respective successors and assigns. The
failure of one party to seek remedies upon the breach of another party shall
not be deemed a waiver of such breach. All representations and warranties
contained herein shall survive the commencement date hereof and, in the event
Grantee purchases the Property, shall survive the date of closing of said
purchase.
6. Recording.
A Spanish translation of this Agreement shall be ratified by both
parties before a Notary Public of Grantee's choice and recorded at the Public
Registry of Property and Commerce of Monterrey, N.L. at Grantee's option with
the cost and expense shared equally by the Grantor and the Grantee.
<PAGE> 78
5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on the day, month and year first above written.
<TABLE>
<CAPTION>
Grantor Grantee
<S> <C>
INMOBILIARIA NUEVO AEROPUERTO, SMARTFLEX SYSTEMS DE MEXICO,
S.A. DE C.V. S.A. DE C.V.
/s/ ADRIAN GONZALEZ LOZANO /s/ WILLIAM L. HEALEY
- - ----------------------------- ---------------------------------
By: Adrian Gonzalez Lozano By: William L. Healey
Its: Legal Representative Its: Legal Representative
/s/ SERGIO GONZALEZ LOZANO /s/ GILBERTO GAMBOA CHAIDEZ
- - ----------------------------- ---------------------------------
By: Sergio Gonzalez Lozano By: Gilberto Gamboa Chaidez
Its: Legal Representative Its: Legal Representative
</TABLE>
<PAGE> 79
6
EXHIBIT "B"
OF THE CALL OPTION AGREEMENT
The purchase price of the Property shall be determined as follows:
a) Within two days of the delivery of the Option Notice by Grantee
to Grantor each party shall designate an appraiser. If one of the parties does
not designate its appraiser within such term then the other party may request
for such appointment to be made by ICC.
b) Each of the appraisers nominated as indicated above shall prepare
an appraisal determining the market value of the Property within five days of
their appointment.
c) If the two appraisals rendered as indicated in item b) above are
not different by more than 5%, then the average of the two shall be the
purchase price.
d) If there is a difference of more than 5% between the two
appraisals, then the parties shall designate a third appraiser to determine the
market value of the Property, and such determination shall be final and shall
be used as purchase price. If the parties do not agree on the designation of
the third appraiser, then either party may request for such appointment to be
made by ICC.
e) In the event the parties agree on a specific purchase price for
the Property in writing at any time after the execution of this agreement, then
such purchase price shall binding upon the parties hereto in the event the
Option is exercised by Grantee and the procedure set forth above shall not be
applicable.
<PAGE> 80
COMPLEMENTARY AGREEMENT
THIS COMPLEMENTARY AGREEMENT IS ENTERED INTO THIS 19th OF NOVEMBER OF 1996, BY
AND BETWEEN INMOBILIARIA NUEVO AEROPUERTO, S.A. DE C.V. ("GRANTOR") AND
SMARTFLEX SYSTEMS DE MEXICO, S.A. DE C.V. ("GRANTEE"), IN ACCORDANCE WITH THE
FOLLOWING:
STATEMENTS
Both parties state that:
A) They have entered into a Call Option Agreement (the "Call option
Agreement") dated November 17, 1996 in connection with a piece of
land of 123,347 square feet (and a building and improvements to be
constructed thereon) located in Avenida TLC no. 300, Parque
Industrial Stiva-Aeropuerto, N.L. CP 66600, Mexico, which is
currently owned by Grantor (the "Property", as defined in the Call
Option Agreement).
B) They wish to execute this Complementary Agreement, in order to agree
on a price at which Grantee, in the event it exercises the option
under the Call Option Agreement, would purchase the Property from
Grantor, in accordance with paragraph e) of Exhibit B of the Call
Option Agreement.
CLAUSES
FIRST.- The parties agree that, in accordance with item e) of Exhibit
B of the Call Option Agreement, in the event Grantee exercises the Option under
the Call Option Agreement, the purchase price for the Property payable by
Grantee to Grantor shall be an amount equal to the value of Landlord's
Investment (as such term is defined in the Lease Agreement entered into by the
parties hereto on November 17, 1996 and hereinafter referred to as the "Lease
Agreement") as such amount may be adjusted in accordance with the Lease
Agreement. The purchase price determined in accordance herewith shall be
adjusted in accordance with the U.S. Consumer Price Index as published by the
U.S. Federal Labor Department applicable to the period starting on the date
hereof and ending on the date the option is exercised.
SECOND.- As a consequence of clause first above, items a) through d)
of Exhibit B of the Call Option Agreement shall not be applicable.
THIRD.- Capitalized terms used and not otherwise defined herein shall
have the meaning ascribed to them in the Call option
<PAGE> 81
Agreement.
FOURTH.- A Spanish translation of this Complementary Agreement shall
be executed and ratified by the parties before the notary public of Grantee's
choice within 15 days after the date hereof, sharing the parties equally the
costs and expenses in connection therewith.
IN WITNESS WHEREOF, Grantor and Grantee have executed this
Complementary Agreement as of the date and year first above written.
<TABLE>
<S> <C>
"Grantor" "Grantee"
Inmobiliaria Nuevo Aeropuerto, Smartflex Systems
S.A. de C.V. de Mexico, S.A. de C.V.
/s/ ADRIAN GONZALEZ LOZANO /s/ WILLIAM H. HEALEY
- - -------------------------------- ---------------------------------
By: Adrian Gonzalez Lozano By: William H. Healey
Its: Legal Representative Its: Legal Representative
/s/ SERGIO GONZALEZ LOZANO /s/ GILBERTO GAMBOA CHAIDEZ
- - -------------------------------- ---------------------------------
By: Sergio Gonzalez Lozano By: Gilberto Gamboa Chaidez
Its: Legal Representative Its: Legal Representative
</TABLE>
<PAGE> 1
EXHIBIT 10.30
Amendment No. 1
Silicon Systems, Inc. ("SSi") and Smartflex Systems, Inc. ("SfS")) hereby agree
to amend the Facilities and Services Agreement, dated July 18, 1996 (the
"Agreement"), as hereinafter specified.
1. With effect from January 1, 1997, Exhibit A is revised to read per the
attachment hereto to reflect elimination of the pro rata charge associated with
the Parking Lot (as the term is defined in the Agreement) in accordance with
Section 1.5 of the Agreement.
Except as specifically set forth herein, the Agreement, as originally executed,
shall remain in full force and effect.
AGREED TO:
Silicon Systems, Inc. Smartflex Systems, Inc.
By: [SIG] By: [SIG]
------------------------- -----------------------
Title: Sr. V.P. & CFO Title: Corp. Controller
------------------------- -----------------------
Date: 2/28/97 Date: 2/27/97
------------------------- -----------------------
<PAGE> 2
Exhibit A
Summary
Service Amount
- - ------- ------
Nitrogen Usage To be calculated based on actual usage
Human Resources 3,254
Finance 225
MIS - PC Support and Communications-Phone 4,542
Facilities 22,147
------
Total Allocation per Month 30,168
======
<PAGE> 3
Exhibit A
Smartflex Charges
Human Resources 12/09/96
Current
Service Amount
- - ------- -------
Health & Safety
Monthly EH&S Support Services 2,500
Based on 20 hours/week
Training & Development
Hourly Labor Rate 40.44
Hours per month on SfS 8
Subtotal 324
Burden: 133.0% 430 754
-------
Subtotal HR 3,254
-----
Pg 2 of 4
<PAGE> 4
Exhibit A
Smartflex Charges
Finance, Communications, MIS 12/09/96
Current
Service Amount
- - ------- -------
Credit & Collections
Total Credit Report cost (yearly) 18,000
SfS percentage use 15%
------
Subtotal Monthly Credit Report cost 225
Subtotal Finance 225
Communications
Installation and Training 28.75
Hours per month 12
------
345
Personal Computers
PC Support and purchasing 28.75
Hours per month 1
------
29
Subtotal Unburdened MIS 374
Burden: 45% 168
------
Subtotal Communications/MIS 542
Telephone-voicemail, hardware 4,000
Subtotal Corporate Services 4,767
-----
Pg 3 of 4
<PAGE> 5
Exhibit A
Smartflex Charges
Facilities 12/09/96
Service Amount
- - ------- ------
Security Service
Monthly Security Labor 24,533
Total Sq. footage Bldgs. A,B,C,D,E 279,183
-------
Security Labor Cost per sq. foot 0.09
Total SfS sq. footage 43,640
-------
subtotal Unburdened Security Labor 3,835
Burden: 27% 1,035
-------
Subtotal Security 4,870
Admin Services
Postage per month 2,917
SfS % 0.25
-------
subtotal Postage 729
Mail Labor Rate 13.00
SfS Hours per month 20
-------
subtotal Mail Support 260
Subtotal Unburdened Admin Services 989
Burden: 6% 59
Paper per month 904
Subtotal Admin Services 1,952
Rent
Finance/Warehouse
-----------------
Bldg. E Rent per sq. foot 0.27
SfS total square footage 6,655
-------
subtotal Bldg E rent. 1,797
Note: Bldg. D Rent billed to SfS
directly - Building & Parking.
Subtotal Rent 1,797
Facilities Support
Facilities Support
Expense per Sqft./Mo. $0.31
Building D - Assy & Admin
36,985 Sqft. 11,465
Building E - Finance & Warehouse
6,655 Sqft. 2,063
Subtotal Facilities Support 13,528
Subtotal Facilities 22,147
-------
Pg 4 of 4
<PAGE> 1
EXHIBIT 11.1
SMARTFLEX SYSTEMS, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
-----------------------------
1996 1995
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRIMARY
Net income $7,157 $5,513
================== ==============
Calculation of shares outstanding for computing net
income per share:
Weighted average common and common equivalent shares
outstanding used in calculating net income per
share in accordance with generally accepted
accounting principles
including the effects of SAB 83 6,396 1,803
Adjustment to reflect the effects of the assumed
conversion of convertible preferred stock from the
date of issuance - 3,400
------------------ --------------
Shares used in computing net income per share 6,396 5,203
================== ==============
Net income per share $ 1.12 $ 1.06
================== ==============
FULLY DILUTED
Net income $7,157 $5,513
================== ==============
Calculation of shares outstanding for computing net
income per share:
Weighted average common and common equivalent shares
outstanding used in calculating net income per
share in accordance with generally accepted
accounting principles
including the effects of SAB 83 6,423 1,809
Adjustment to reflect the effects of the assumed
conversion of convertible preferred stock from the
date of issuance - 3,400
------------------ --------------
Shares use in computing net income per share 6,423 5,209
================== ==============
Net income per share $ 1.11 $ 1.06
================== ==============
</TABLE>
26
<PAGE> 1
EXHIBIT 13
This exhibit contains portions of the Company's Annual Report to Stockholders
for the year ended December 31, 1996. Page number references made in this
exhibit are to the page numbers on the said Annual Report.
[Financial Highlights]
<TABLE>
<CAPTION>
Fiscal year ended December 31,
Dollars in thousands except per share data 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net revenues $146,100 $125,258 $76,045 $69,116 $38,425
Gross margin 18,791 17,109 9,490 8,023 3,943
Operating income 10,446 8,795 4,305 3,096 1,385
Net income (1) 7,157 5,513 2,534 3,564 1,432
Pro forma net income (unaudited) (1) N/A N/A N/A 1,746 859
Net income per common share (2) $ 1.12 $ 1.06 $ 0.60 N/A N/A
Year-end Position
Working capital $ 41,713 $ 40,519 $17,338 $ 7,684 $ 5,378
Total assets 72,132 69,414 31,345 18,411 14,453
Long-term debt, excluding current portion 722 3,948 5,026 -- --
Stockholders' equity 52,749 44,923 17,864 10,473 5,991
Number of employees 1,006 868 701 596 371
</TABLE>
(1) Smartflex was a joint venture and did not recognize income tax expense
prior to October 4, 1993. Taxes on its income were payable by the joint venture
partners. Pro forma net income is unaudited and reflects provisions for federal
and state income taxes using an effective tax rate of 40% for each of the two
years in the period ended December 31, 1993, as if the Company had operated as
a corporation during all periods presented.
(2) The net income per share for fiscal 1994 was computed using the weighted
average number of shares and common stock equivalents (when dilutive)
outstanding during the period, and assuming that all outstanding shares of
Series A Preferred Stock were converted into Common Stock at the beginning of
the period.
<TABLE>
<S> <C>
For the year ended December 31, 1996
Closing stock price $16.50
Earnings per share - primary $ 1.12
Price/earnings ratio 14.7
Common stockholders' equity per share $ 8.37
Common shares outstanding 6,301,313
</TABLE>
1
<PAGE> 2
Pages 18 through 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information contained in this annual report includes forward-looking
statements, the realization of which may be impacted by certain important
factors discussed in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1996, under "Risk Factors - Important Factors Related
to Forward-Looking Statements and Associated Risks."
Overview
The Company provides custom design and precision turnkey manufacturing of
sophisticated interconnect assemblies to manufacturers of compact, high
performance electronic products, with particular emphasis on advanced surface
mount ("SMT"), Chip-on-Flex ("COF") and Flip-Chip-on-Flex ("FCOF") assembly
technologies. The Company was incorporated in September 1993 to acquire all of
the assets, liabilities and business of Smartflex Systems, a general
partnership founded in November 1985 by Silicon Systems, Inc. ("SSI"), a
supplier of mixed signal integrated circuits to the hard disk drive ("HDD")
market, and Rogers Corporation, a supplier of flexible circuits to the HDD
market. On July 31, 1995, the Company completed an initial public offering of
3,220,000 shares of common stock, of which 2,000,000 shares were sold by the
Company.
The Company's market includes HDD and non-HDD customers. The HDD industry
represents the Company's predominant market, accounting for 61.3%, 71.2% and
87.0% of net revenues in fiscal 1996, 1995 and 1994, respectively.
Additionally, sales to the HDD market have generally been concentrated among a
few large customers, including International Business Machines Corporation
("IBM"), Iomega Corporation ("Iomega") and Seagate Technology, Inc.
("Seagate"). The steady decrease in the percentage of net revenues attributable
to HDD programs represents the Company's success to date in expanding its
non-HDD business. Though the Company continues to reduce its dependence on the
HDD industry, revenues attributable to this market are expected to increase and
to continue to represent the majority of net revenues for the foreseeable
future. Accordingly, the occurrence of significant slowdowns in this industry
could have a materially adverse effect on the Company's operating results.
By mid-1992 the Company developed the methodology to begin high-volume
production of assemblies using the COF process. In the fourth quarter of 1992,
IBM became the Company's first customer to commit to a COF program. Sales of
assemblies incorporating COF technology, which to date are largely attributable
to HDD programs, have grown to represent a substantial portion of the Company's
business and accounted for approximately 43.5%, 50.6% and 53.9% of net revenues
in fiscal 1996, 1995 and 1994, respectively. During fiscal 1996 the Company
continued to expand its worldwide manufacturing operations. The Company's Far
East manufacturing capabilities were expanded with the completion of a new
facility in Cebu, the Philippines. An automated FCOF manufacturing line was
implemented in Tustin, CA. In addition, COF capacity was enhanced with the
addition of a new high-volume, low-cost COF assembly line in the Monterrey,
Mexico facility. During fiscal 1995 the Company also expanded its worldwide
manufacturing operations when a third SMT assembly line was added to the
Company's Monterrey, Mexico facility, and a second SMT assembly line was added
to its Singapore facility. Additionally in Singapore, COF capacity was
increased by 50%.
The Company's revenue growth is, and historically has been, a function of unit
shipment growth, offset in part by reductions in the average selling prices of
products shipped. Over the past few years, the Company's revenues have grown
substantially. The Company believes that its ability to continue to achieve
growth will depend primarily on growth in sales to existing customers for their
current and future product generations and successful marketing to new
customers. The Company has no firm long-term volume commitments from its
customers; customer contracts can be canceled and volume levels can be changed
or delayed. The timely replacement of delayed, canceled, or reduced orders with
new business cannot be assured. Because of these factors, there can be no
assurance that the Company's historical revenue growth rate will continue.
2
<PAGE> 3
The Company currently serves the electronics industry, which is subject to
rapid technological change, product obsolescence and price competition. These
and other factors affecting the electronics industry, or any of the Company's
major customers in particular, could have a materially adverse effect on the
Company's results of operations.
During the first quarter of fiscal 1996, certain of the Company's customers
experienced structural and strategic changes. Conner Peripherals, Inc. became a
wholly owned subsidiary of Seagate, and Quantum Corporation ("Quantum")
announced an exclusive manufacturing agreement with Matsushita-Kotobuki
Electronics Industries Ltd. ("MKE") covering all of Quantum's HDD products.
Also during the first quarter of fiscal 1996, ADFlex Solutions, Inc., a
supplier to the Company, acquired the flexible circuit division of Xyratex
Limited, a competitor of the Company. During the second quarter of fiscal
1996, Hewlett-Packard Company ("H-P"), one of the Company's largest customers
and previously a high-volume purchaser of the Company's HDD assemblies,
announced that it was discontinuing the manufacture of HDD products. The
Company currently believes that these events will not materially affect net
revenues or results of operations during fiscal 1997.
Results of Operations
The following table sets forth consolidated statements of operations data of
the Company expressed as a percentage of net revenues for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 87.1 86.3 87.5
----- ----- -----
Gross margin 12.9 13.7 12.5
Marketing and sales expense 1.9 2.1 2.3
General and administrative expense 3.8 4.6 4.5
----- ----- -----
Operating income 7.2 7.0 5.7
Interest income 0.7 0.5 0.1
Interest expense (0.2) (0.3) (0.4)
Other expense -- (0.1) (0.1)
----- ----- -----
Income before provision for taxes 7.7 7.1 5.3
Income tax provision 2.8 2.7 2.0
----- ----- -----
Net income 4.9% 4.4% 3.3%
===== ===== =====
</TABLE>
Net Revenues
Net revenues increased in fiscal 1996, 1995 and 1994, generally, as demand for
the Company's services increased. This was due primarily to growth in the
overall HDD market and, in particular, in the higher-capacity HDD segment, as
well as expansion of the Company's presence in other markets. Shipment growth
was further accelerated by expanded production capacity throughout 1996, 1995,
and 1994 and the Company's introduction of COF capability in late 1992.
Revenues generated by increases in unit shipments have been partially offset by
decreases in aggregate average selling prices, which have generally declined
during these periods due primarily to decreases in component costs, which are
generally passed through to customers, competitive pressures and fluctuations
in product mix. The relative impact of any one of these factors varies from
period to period. Net revenues rose $20.8 million, or 16.6%, in fiscal 1996
compared to fiscal 1995. Fiscal 1996 net revenues reflected an increase in
aggregate shipment volumes as a result of increased capacity, offset by price
reductions reflecting component cost decreases. Additionally, two customers,
Quantum/MKE and H-P, ceased their volume production requirements for HDD
assemblies.
3
<PAGE> 4
Net revenues derived from non-HDD programs increased to 38.7% of total net
revenues in fiscal 1996 from 28.8% in fiscal 1995 and 13.0% in fiscal 1994.
This growth was primarily due to two factors. First, the Company sold more
units in connection with its major non-HDD programs. Second, the Company
assumed responsibility, beginning in the third quarter of fiscal 1995, for
adding a particular high-cost component to one of these programs. This
component previously had been handled by the Company on a consignment basis.
Net revenues increased $49.2 million, or 64.7% in fiscal 1995 over fiscal 1994,
which included a $26.1 million increase in sales to non-HDD markets. This
growth was due primarily to the Company's success in obtaining new customers
and programs in non-HDD markets, as part of its market diversification
strategy.
Total export sales, arising primarily from the shipment of assembled products
to international operations of U.S.-based customers, were 70.9%, 49.5%, and
37.5% of total revenues in fiscal 1996, 1995 and 1994, respectively. The fiscal
1996 and 1995 increases were due largely to production transferred to Far
East-based operations by these U.S.-based companies. During fiscal 1994, the
Company added manufacturing capacity in the Far East with the establishment of
a dedicated manufacturing line with a subcontractor in the Philippines, which
was used for the production of high-volume, low-cost SMT assemblies. During
fiscal 1996, the Company transferred this subcontracted capacity into its new
facility in Cebu, the Philippines. The Company anticipates that export sales
will continue to account for a significant portion of net revenues for the
foreseeable future.
Gross Margin
Gross margins as a percentage of net revenues were 12.9%, 13.7% and 12.5% in
fiscal 1996, 1995 and 1994, respectively. The fiscal 1996 decrease resulted
primarily from the conversion of a high-cost component for a non-HDD program
from a consignment to a turnkey basis, resulting generally in a pass-through of
costs, effecting a net decrease in the program's gross margin percentage. This
was compounded by the rapid growth of the program during fiscal 1996,
offsetting gross margins overall. The Company anticipates that the effects of
this program will not materially impact gross margins in the future. The effect
of these circumstances on gross margins was offset somewhat in 1996 by the
reversal of certain inventory- and warranty-related reserves, which were no
longer deemed necessary because of improved operating controls. The Company
believes that in future periods overall gross margins as a percentage of net
revenues will not increase significantly, if at all, over the level attained
during fiscal 1996 because of competitive pressures and additional expenses
relating to adding production capacity.
The fiscal 1995 gross margin increase over 1994 was primarily the result of the
increased proportion of slightly higher-margin COF products in the overall
product mix and the increased productivity associated with the increased
utilization of COF equipment capacity.
The Company's gross margin, as a percentage of revenues, historically has not
been materially affected by declines in average selling prices because price
reductions generally have been offset by reductions in component costs and
improved operating efficiencies. However, there can be no assurance that future
declines in average selling prices will not negatively impact the Company's
gross margin. The Company's gross margin has been, and will continue to be,
affected by a variety of factors, including the costs associated with
implementing and ramping new production capacity to full utilization, sales
volumes, fluctuations in material costs and the mix of materials for particular
products, price competition, the timing of expenditures in anticipation of
increased sales, changes in customer product delivery schedules and the range
of services provided. Gross margins for new products are typically lower than
those of mature products due to the inefficiencies associated with the start-up
of manufacturing operations for new products.
Marketing and Sales Expense
Marketing and sales expenses consist primarily of salaries, facility and travel
costs for marketing, sales and customer service personnel, and sales
commissions paid to direct sales personnel and sales representative
organizations. As a percentage of net revenues, these expenses were 1.9%, 2.1%
and 2.3% in fiscal 1996, 1995 and 1994, respectively. The percentage decreases
were attributable generally to revenue growth, combined with the
4
<PAGE> 5
effect of lower rates of increase in staffing and other administrative costs.
Additionally, in fiscal 1996, although current-year sales volumes increased,
changes in the product mix resulted in lower average sales commission rates.
This was offset somewhat by slight increases in other marketing and selling
expenses as a percentage of net revenues. The overall spending increase in
fiscal 1995 versus fiscal 1994 was primarily due to sales commissions on
increased sales volumes.
General and Administrative Expense
General and administrative ("G & A") expenses decreased $130,000 and totaled
3.8% of net revenues in fiscal 1996, versus 4.6% of net revenues in fiscal 1995
and 4.5% in fiscal 1994. The decrease in 1996 was largely the result of the
absence of significant legal, accounting and insurance costs incurred in the
first quarter of fiscal 1995 related to a proposed acquisition of the Company
by Group Technologies Corporation. The proposed acquisition was subsequently
abandoned. In the second through fourth quarters of fiscal 1995, the Company
increased its reserves for doubtful accounts based on its review of certain
specific customer situations.
The Company expects that G & A expenses will increase in absolute amounts in
the future due, in part, to program management and other staffing additions
needed to support higher business volumes, added profit sharing costs based on
increased profits, and incremental spending on process development activities
in all of its facilities.
Interest Income/Expense
The fiscal 1996 increase in interest income totaling $454,000 was largely due
to the investment of most of the proceeds from the Company's initial public
offering ("IPO") for an entire year versus five months during fiscal 1995. The
fiscal 1995 increase in interest income over fiscal 1994 totaling $468,000 was
due to the initial placement of the Company's IPO proceeds and cash generated
from operations in short-term investments. Interest expense is incurred through
the use of the Company's line of credit facilities, the balances of which vary
daily depending upon operating cash flows.
Income Taxes
Income tax expense increased $691,000 in fiscal 1996 versus 1995 and $1.9
million in fiscal 1995 versus 1994. The Company's effective tax rate was 36.3%
for fiscal 1996 compared to 38.1% for fiscal 1995, and 36.9% in fiscal 1994.
Changes in the effective tax rate reflect changes in incremental volume
contributions from the Company's offshore manufacturing facilities. Income tax
expense for the periods increased proportionally to the increases in pre-tax
income.
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferral method to the liability method required by
Financial Accounting Standards Board Statement No. 109 ("SFAS 109"),
"Accounting for Income Taxes." There was no cumulative effect of adopting SFAS
109.
Financial Condition
Summary
The Company has financed its growth and operations through proceeds from the
sale of its common stock, bank financing and funds generated from operations.
At December 31, 1996, cash and short-term investments totaled $26.0 million, an
increase of $2.7 million from fiscal 1995's year- end balances. This increase
was primarily a result of additional purchases of short-term investments as a
result of increased cash flow from operating activities and reduced inventory
levels. To date, uses of the net proceeds from the IPO have included increases
in working capital, funding of manufacturing capacity expansion and repayment
of debt.
5
<PAGE> 6
Sale of Common Stock
On July 31, 1995, the Company completed an initial public offering of 3,220,000
shares of common stock, of which 2,000,000 shares were sold by the Company. Net
proceeds to the Company from the IPO, after underwriting discounts and offering
costs, totaled $21.5 million. In 1994, the Company received $4.8 million from
the sale of common stock, including $4.7 million sold to AMP Incorporated.
Bank Financing
The Company entered into a bank credit facility ("facility") on September 29,
1995, which was later amended on October 4, 1996, that provides for aggregate
unsecured borrowings of $15.0 million under a revolving line of credit ("credit
line"). Borrowings under the credit line, which expires in September 1998,
include a sublimit for the issuance of up to $2.0 million in commercial or
standby letters of credit for the importation or purchase of inventory. No such
letters of credit were outstanding at December 31, 1996. Outstanding balances
on the credit line bear interest at the bank's prime rate or, at the Company's
option, LIBOR plus 1.5%, and unused portions of the credit line bear interest
at .25% per annum. At December 31, 1996 there were no borrowings outstanding
under the credit line. The facility additionally provides for an unsecured term
loan totaling $2.2 million for the purchase of equipment. This unsecured term
loan will bear interest at the bank's reference rate plus .5% or, at the
Company's option, LIBOR plus 2%. At December 31, 1996, there were no borrowings
outstanding under this unsecured term loan. The facility contains certain
financing and operating covenants relating to net worth, liquidity, leverage,
profitability, debt coverage and a prohibition on payment of cash dividends. At
December 31, 1996 the Company was in compliance with all debt covenants.
In December 1995, the Company's Singapore subsidiary entered into a $1.1
million secured term loan agreement. This loan, guaranteed by the Company, was
used to purchase primarily manufacturing equipment for the Company's Singapore
manufacturing facility. This loan bears interest at a variable rate, based on
SIBOR plus 3.925%, and is secured by the equipment purchased.
Cash Flow
At December 31, 1996, the Company's principal sources of liquidity included
$26.0 million in cash and short-term investments and $17.2 million in available
borrowings under its bank credit facility. Short-term investments at December
31, 1996 totaled $24.8 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 interest-rate risk.
Total cash provided by operations increased $9.3 million in fiscal 1996,
compared to fiscal 1995, due largely to improved operating results and
reductions in inventories in fiscal 1996. Cash totaling $9.3 million was used
in fiscal 1996 investing activities, which included manufacturing and other
equipment purchases of $6.4 million, and net purchases of $3.0 million in
short-term investments. Fiscal 1996 financing activities absorbed $2.6 million
in cash through repayments on the revolving line of credit.
Total cash provided by operations increased $4.0 million in fiscal 1995,
compared to fiscal 1994, due largely to improved operating results in fiscal
1995. Cash totaling $22.2 million was used in fiscal 1995 investing activities,
which included manufacturing and other equipment purchases of $5.1 million, and
net purchases of $17.1 million in short-term investments. Fiscal 1995 financing
activities provided the Company with $20.7 million, a $10.6 million increase
over fiscal 1994. The sources of this cash included $21.5 million from the IPO
and $1.1 million in borrowings under a secured term loan, offset by net
repayments of debt, including the credit line, totaling $1.9 million.
The Company presently expects to purchase approximately $8.5 million of capital
equipment in fiscal 1997, primarily for (a) manufacturing enhancements and new
technology, (b) facilities expansion in Mexico and the Philippines, (c)
computer and information systems improvements, and (d) quality control
equipment and general improvements.
6
<PAGE> 7
The Company may require additional capital to finance enhancements to, or
acquisitions and expansion of, its manufacturing capacity in accordance with
its business strategy. Management believes that the level of working capital
should continue to grow at a rate generally consistent with the near-term
growth of the Company's operations. Although no assurance can be given that
future financing will be available on terms acceptable to the Company, the
Company may seek additional funds from time to time through public- or
private-debt or equity offerings or through bank borrowings. Management
believes, however, that existing cash balances, funds generated from operations
and borrowings under the line of credit will be sufficient to permit the
Company to meet its expansion plans and liquidity requirements in fiscal 1997.
7
<PAGE> 8
Page 23
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share data) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenues $146,100 $125,258 $76,045
Cost of revenues 127,309 108,149 66,555
-------- -------- -------
Gross margin 18,791 17,109 9,490
Costs and expenses:
Marketing and sales expense 2,755 2,594 1,733
General and administrative expense 5,590 5,720 3,452
-------- -------- -------
Operating income 10,446 8,795 4,305
Interest income 1,015 561 93
Interest expense (214) (392) (294)
Other expense (4) (56) (86)
-------- -------- -------
Income before income taxes 11,243 8,908 4,018
Income tax provision 4,086 3,395 1,484
-------- -------- -------
Net income $ 7,157 $ 5,513 $ 2,534
-------- -------- -------
Net income per share $ 1.12 $ 1.06 $ .60
Shares used in computing net income per share 6,396 5,203 4,216
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
Page 24
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
(Dollar amounts in thousands) 1996 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash $ 1,164 $ 1,398
Short-term investments 24,796 21,846
Accounts receivable, less allowance of $920
in 1996 and $925 in 1995 18,837 17,396
Inventories 11,090 17,325
Deferred tax asset 1,634 1,915
Prepaid expenses and other current assets 1,944 678
------- -------
Total current assets 59,465 60,558
Property and equipment, net 12,126 8,665
Other assets 541 191
------- -------
$72,132 $69,414
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable to related parties $ 2,041 $ 3,417
Accounts payable 11,457 12,397
Other accrued liabilities 3,667 3,604
Current portion of notes payable 587 621
------- -------
Total current liabilities 17,752 20,039
Deferred tax liability 909 504
Long-term portion of notes payable 722 3,948
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
None issued and outstanding -- --
Common stock, $.0025 par value:
Authorized shares - 25,000,000
Issued and outstanding shares -
6,301,313 in 1996, 6,223,606 in 1995 16 16
Additional paid-in capital 35,649 34,980
Retained earnings 17,084 9,927
------- -------
Total stockholders' equity 52,749 44,923
------- -------
$72,132 $69,414
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 10
Page 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred stock Common stock paid-in Retained
(In thousands) Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,1993 8,500 $ 9 320 $ 1 $8,583 $ 1,880 $10,473
Reverse receivable from SSI -- -- -- -- (577) -- (577)
Fixed asset contribution by SSI -- -- -- -- 618 -- 618
Purchase of common shares -- -- 452 1 4,699 -- 4,700
Purchase of common shares by
directors and an officer -- -- 45 -- 141 -- 141
Repurchase of common shares -- -- (8) -- (25) -- (25)
Net income -- -- -- -- -- 2,534 2,534
------ ---- ----- ---- ------- ------- -------
Balances at December 31, 1994 8,500 9 809 2 13,439 4,414 17,864
Proceeds from public offering, net -- -- 2,000 5 21,489 -- 21,494
Conversion of preferred stock to
common stock (8,500) (9) 3,400 9 -- -- --
Exercise of stock options -- -- 15 -- 15 -- 15
Tax benefit associated with exercise
of stock options -- -- -- -- 37 -- 37
Net income -- -- -- -- -- 5,513 5,513
------ ---- ----- ---- ------- ------- -------
Balances at December 31, 1995 -- -- 6,224 16 34,980 9,927 44,923
Exercise of stock options -- -- 20 -- 61 -- 61
Employee stock purchase plan -- -- 57 -- 570 -- 570
Tax benefit associated with exercise
of stock options -- -- -- -- 38 -- 38
Net income -- -- -- -- -- 7,157 7,157
------ ---- ----- ---- ------- ------- -------
Balances at December 31, 1996 -- $ -- 6,301 $ 16 $35,649 $17,084 $52,749
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 11
Page 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollar amounts in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 7,157 $ 5,513 $ 2,534
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 2,905 1,919 1,302
Provision for doubtful accounts -- 721 --
Provision for inventory obsolescence (115) 628 343
Deferred income taxes 686 (573) 332
Tax benefit associated with exercise of stock options 38 37 --
Other changes in operating assets and liabilities:
Receivables (1,441) (6,019) (3,047)
Inventories 6,350 (11,413) (2,859)
Prepaid expenses and other assets (1,616) (198) 34
Accounts payable to related parties (1,376) 1,750 (1,345)
Accounts payable and accrued liabilities (877) 10,085 1,182
-------- -------- --------
Net cash provided by (used in) operating activities 11,711 2,450 (1,524)
Cash flow from investing activities:
Capital expenditures (6,414) (5,085) (3,751)
Proceeds from sale of capital assets 85 -- --
Purchases of short-term investments (19,043) (67,893) (11,070)
Proceeds from the sale of short-term investments 16,056 50,830 6,287
-------- -------- --------
Net cash used in investing activities (9,316) (22,148) (8,534)
Cash flows from financing activities:
Proceeds from issuance of common stock 631 21,509 4,841
Repurchase of common stock -- -- (25)
Net borrowings (repayments) on revolving line of credit (2,505) (1,615) 4,120
Borrowings on term loans -- 1,132 1,363
Payments on term loans (755) (281) (150)
-------- -------- --------
Net cash provided by (used in) financing activities (2,629) 20,745 10,149
Net increase (decrease) in cash (234) 1,047 91
Cash at beginning of period 1,398 351 260
Cash at end of period $ 1,164 $ 1,398 $ 351
-------- -------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 190 $ 347 $ 243
Taxes paid 3,530 3,185 1,905
Non-cash transactions:
Conversion of preferred stock to common stock -- (9) --
Contribution of fixed assets -- -- 618
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
Pages 27 - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Organization
Smartflex Systems, Inc. ("the Company") provides custom design and turnkey
manufacturing of flexible interconnect assemblies for use in compact high
performance electronic products.
Smartflex Systems was formed on November 15, 1985, as a joint venture between
Rogers Corporation ("Rogers"), a Massachusetts corporation, and Silicon
Systems, Inc. ("SSI"), a Delaware corporation. Smartflex Systems was formed
pursuant to the provisions of the Joint Venture Agreement under the Uniform
Partnership Act as adopted by the State of California. On June 28, 1993, the
Joint Venture Agreement was amended whereby J.V. Acquisition Corporation
("JVAC"), a Delaware corporation, was admitted as a partner in the joint
venture and Rogers was redeemed by a payment from the joint venture. On
September 17, 1993, the Company was incorporated in the State of Delaware.
Effective October 4, 1993, the Company acquired all of the assets and assumed
all of the liabilities of Smartflex Systems. In consideration for the net
assets acquired, the Company issued 8,500,000 shares of preferred stock to the
general partners of Smartflex Systems. The 1993 reorganization transactions
have been treated for accounting purposes as changes in the legal form of the
Company and resulted in no changes to the carrying value of the Company's net
assets.
Basis of Presentation and Fiscal Year
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Smartflex Systems Singapore, Pte.
Ltd., Smartflex Systems de Mexico, S.A. de C.V., and Smartflex Systems
Philippines, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The Company operates and reports financial results on a 52- or 53-week year,
ending on the Saturday nearest December 31 each year, and follows a
four-four-five week quarterly cycle. Fiscal years 1996, 1995 and 1994 each
included 52 weeks of operations. For clarity of presentation, all periods are
presented as if the fiscal year ended December 31.
Short-Term Investments
The Company's short-term investments are composed primarily of municipal bonds
and money market instruments. The Company's short-term investments at December
31, 1996 and 1995, are classified as available-for-sale and are carried at fair
value with the net unrealized gains or losses reported as a separate component
of stockholders' equity, net of their related tax effects. Fair values are
based on quoted market prices where available. Amortization of premiums or
discounts, if any, associated with marketable debt securities is included in
investment income. Realized gains and losses, and declines in value judged to
be other-than-temporary, as well as interest and dividends on available-for-
sale securities, are included in investment income.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market (estimated net realizable
value).
12
<PAGE> 13
<PAGE> 14
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment and
provides an appropriate allowance for estimated sales returns and warranties
based on historical experience and other known factors.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment are
computed using the straight-line method over the estimated useful lives of the
assets, which is usually five years.
Foreign Currency
The Company uses the United States dollar as the functional currency for its
wholly owned subsidiaries in Singapore, Mexico and the Philippines.
Remeasurement gains and losses, resulting from the process of remeasuring the
financial statements of these foreign subsidiaries into U.S. dollars, are
included in operations. To date, the effect on income of remeasurement gains
and losses has not been significant.
Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes." Under this method, deferred taxes are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are recognized and
measured based on the likelihood of realization of the related tax benefit in
the future.
Earnings Per Share
Net income per share for the years ended December 31, 1996, 1995 and 1994 is
computed using the weighted average number of common shares and common share
equivalents (when the effect is dilutive) outstanding during the periods
presented. Common share equivalents result from outstanding options to purchase
common stock and restricted stock. Pursuant to the requirements of the
Securities and Exchange Commission ("SEC"), shares of common stock issued by
the Company during the twelve months immediately preceding the initial public
offering on July 31, 1995, plus the number of shares issuable upon exercise of
stock options granted during the remainder of 1995, were included in the
calculation of the shares used in computing net income per share as if they
were outstanding for all periods presented (using the treasury stock method and
the public offering price of $12.00 per share in calculating equivalent
shares). In addition, pursuant to SEC policy, the calculation of the shares
used in computing net income per share for the year ended December 31, 1994
also included 8,500,000 shares of Series A convertible preferred stock which
converted to 3,400,000 shares of common stock in connection with the initial
public offering, after consideration of the two-for-five reverse split (see
Note 9).
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.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 1996 presentation.
13
<PAGE> 15
Note 2. Short-Term Investments
Short-term investments, for which cost approximated fair value, were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Municipal bonds $15,663 $14,410
Money market preferred stock 6,000 5,300
Money market funds 2,954 1,687
Other 179 449
------- -------
$24,796 $21,846
======= =======
</TABLE>
Certain of the Company's municipal bond investments include instruments that
have original maturities at various dates through 2022. As a result of the
Company's ability and intent to redeem these investments at their stated
principal value at various dates throughout 1997, the Company has classified
these investments as maturing within one year. Realized gains and losses from
securities transactions are determined on a specific identification basis.
Realized or unrealized gains or losses for the years ended December 31, 1996
and 1995, were not material.
Note 3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Raw materials $ 7,722 $ 9,138
Work-in-process 2,968 3,457
Finished goods 400 4,730
------- -------
$11,090 $17,325
======= =======
</TABLE>
Note 4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Machinery and equipment $13,415 $ 9,177
Office furniture and equipment 2,622 1,888
Leasehold improvements 2,581 1,353
------- -------
18,618 12,418
Less: Accumulated depreciation (6,492) (3,753)
------- -------
$12,126 $ 8,665
======= =======
</TABLE>
14
<PAGE> 16
Note 5. Other Accrued Liabilities
Other accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Accrued compensation and related costs $1,452 $1,528
Income tax payable 310 479
Other accrued liabilities 1,905 1,597
------ ------
$3,667 $3,604
====== ======
</TABLE>
Note 6. Credit Facilities and Long-Term Debt
On October 4, 1996, the Company amended its bank credit facility ("facility")
which provides for aggregate borrowings of $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 for the purchase of inventory. 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 .25% per
annum. The interest rates on any amounts outstanding at December 31, 1996 and
1995 would have been 8.25% and 8.5%, respectively. Interest is payable monthly
and principal is payable at maturity on September 30, 1998.
The facility additionally provides for an unsecured term loan totaling $2.2
million for the purchase of equipment. The loan will bear interest at the
bank's reference rate plus .5% or, at the Company's option, LIBOR plus 2%.
Principal and interest are payable monthly and the loan matures on March 30,
2001. At December 31, 1996, no amounts were outstanding under the term loan.
The facility requires maintenance of certain financial covenants pertaining to
key financial ratios and a minimum level of net worth. In addition, the
facility restricts the Company's ability to pay cash dividends and places
restrictions on the sale of assets and the incurrence of additional debt.
In December 1995, the Company's Singapore subsidiary entered into a term loan
agreement ("loan"). The loan, guaranteed by the Company, was used to purchase
primarily manufacturing equipment for the Company's Singapore manufacturing
facility. The loan bears interest at a variable rate, based on SIBOR plus
3.925%, and is secured by equipment with a net book value of $623,000 at
December 31, 1996.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Revolving line of credit $ -- $2,505
Secured note payable to bank, principal payments in
equal monthly installments through June 1998, interest at 9.53% 598 932
Secured note payable, principal payments in equal monthly
installments through December 1999, interest is payable
monthly at variable interest rates averaging 6.77% in 1996 711 1,132
------ ------
1,309 4,569
Less: Current portion (587) (621)
------ ------
$ 722 $3,948
====== ======
</TABLE>
15
<PAGE> 17
Long-term debt will mature in fiscal years after December 31, 1996 as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fiscal Year:
1997 $ 587
1998 462
1999 260
------
$1,309
======
</TABLE>
Note 7. Fair Value of Financial Instruments
The fair value of the Company's cash, cash equivalents, accounts receivable and
accounts payable approximated their carrying amounts due to the relatively
short maturity of these items. The fair value of the Company's short-term
investments approximated cost and was determined based on quoted market prices.
The fair value of long-term debt approximated its carrying amount at December
31, 1996 based on rates currently available to the Company for debt with
similar terms and remaining maturities.
Note 8. Commitments
The Company has entered into leases for its Tustin, California headquarters,
Monterrey, Mexico and Cebu, the Philippines facilities which expire at various
dates through March 15, 2004 and provide for renewal options at the then
current market rate, adjusted for changes in the Consumer Price Index. The
Company also leases certain equipment under a noncancelable operating lease
which expires in 1998. Future minimum lease payments under these noncancelable
obligations at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fiscal Year:
1997 $ 951
1998 859
1999 690
2000 602
2001 602
Thereafter 711
------
$4,415
======
</TABLE>
Total rent expense was $437,000, $219,000 and $158,000 in 1996, 1995 and 1994,
respectively.
In addition to the above operating lease agreements, the Company utilizes
certain space and receives other support services pursuant to a facilities and
service agreement that expires December 31, 1997. Such services approximate
$30,000 a month.
16
<PAGE> 18
Note 9. Stockholders' Equity
Sale of Common Stock
On July 31, 1995, the Company completed an initial public offering of 3,220,000
shares of common stock, of which 2,000,000 shares were sold by the Company. The
selling price for all shares sold was $11.16 per share, net of underwriting
discounts.
On June 7, 1995, the Company and JVAC agreed in principle to enter into a
reorganization agreement, to be consummated immediately prior to the initial
public offering, whereby the Company issued 1,700,000 shares of Common Stock to
JVAC in exchange for substantially all of the assets of JVAC, which consist
primarily of 4,250,000 shares of the Company's Series A Preferred Stock.
Immediately after the consummation of this exchange, JVAC dissolved and
distributed all of its assets to its two stockholders, Ampersand Materials and
Ampersand Chemicals.
In April 1994 the Company sold 451,921 shares of its common stock at an
aggregate purchase price of $4.7 million ($10.40 per share).
Series A Preferred Stock
At December 31, 1994, the Company had authorized 8,500,000 shares of Series A
convertible preferred stock ("Series A Preferred Stock") with $.001 par value.
Shares of Series A Preferred Stock were converted to 3,400,000 shares of common
stock, after giving effect to the two-for-five reverse split, upon the closing
of the initial public offering on July 31, 1995.
Authorized Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, par value
$.001, none of which is issued or outstanding. Shares of this preferred stock
can be issued in one or more series on terms and conditions, and with such
rights, preferences and privileges, as the Board of Directors may from time to
time determine. In connection with the Shareholder Rights Plan adopted July 17,
1996, there are 200,000 shares of preferred stock reserved for issuance upon
exercise of the Rights.
Note 10. Income Taxes
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $2,688 $3,257 $ 945
State 622 674 207
Foreign 52 -- --
------ ------ ------
3,362 3,931 1,152
Deferred:
Federal 576 (474) 284
State 110 (99) 48
------ ------ ------
686 (573) 332
Charge in lieu of income taxes attributable to benefits
of stock option exercises 38 37 --
------ ------ ------
$4,086 $3,395 $1,484
</TABLE>
17
<PAGE> 19
Income tax expense differed from the amounts computed by applying the U.S.
statutory federal income tax rate to pretax income as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rates $ 3,823 $ 3,118 $ 1,406
State taxes, net of federal benefit 487 384 166
Foreign earnings not subject to tax (246) (143) (105)
Other 22 36 17
------- ------- -------
$ 4,086 $ 3,395 $ 1,484
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory obsolescence reserve $ 351 $ 474
Reserve for returns and allowances 419 584
Inventory capitalization 76 194
Vacation accrual 127 133
Allowance for doubtful accounts 377 379
Other reserves 79 187
State tax, net of federal benefit 205 150
------ ------
Total deferred tax assets 1,634 2,101
Deferred tax liabilities:
Tax over book depreciation 909 690
------ ------
Total deferred tax liabilities 909 690
------ ------
Net deferred tax assets $ 725 $1,411
====== ======
</TABLE>
The Company has not recorded any valuation allowance against deferred tax
assets because management believes all of the temporary differences listed
above will be realized against taxable income in future fiscal years.
Effective March 1, 1994, the Company obtained a Pioneer Status tax holiday in
Singapore which expires five years from the effective date assuming the Company
continues to maintain certain levels of capital expenditures and employment,
and implements certain technology development. Net income tax relief resulting
from the tax holiday was $246,000, or $.04 per share in 1996, $143,000, or $.03
per share in 1995 and $105,000, or $.02 per share in 1994.
Residual income taxes of approximately $503,000 have not been provided on
approximately $1.5 million of undistributed earnings of certain foreign
subsidiaries at December 31, 1996, because the Company intends to keep those
earnings reinvested indefinitely.
18
<PAGE> 20
Note 11. Equity Incentive Plans and Stock Purchase Plan
1995 Equity Incentive Plan
The Company's 1995 Equity Incentive Plan ("1995 Plan"), approved by
stockholders in July 1995, provides for the grant of stock options, performance
shares, restricted stock, stock units and other stock-based awards of the
Company's common stock to employees, executive officers, directors and
consultants. Incentive stock options may be granted only to employees and the
exercise price per share may not be less than 100% of the fair market value
("FMV") of a share of common stock on the grant date. The exercise price per
share of non-qualified stock options shall not be less than 85% of the FMV of a
share of common stock on the grant date. The 1995 Plan provides for the
automatic grant of a non- qualified option to purchase 10,000 shares of common
stock to each non-employee director of the Company upon his or her initial
election to the board of directors, and an additional automatic grant of a
non-qualified option to purchase 3,000 shares of common stock each time such
director is reelected. Automatic grants shall be at the fair market price of
the common stock on the date that such director is elected or reelected.
An aggregate of 600,000 shares of common stock has been initially reserved for
issuance under the 1995 Plan. The number of shares of common stock authorized
under the 1995 Plan will increase automatically on January_1 of each year
commencing on January 1, 1997, by an amount equal to 1% of the total number of
issued and outstanding shares of common stock of the Company as of the
immediately preceding December 31; provided, however, that the number of shares
of common stock which may be issued pursuant to incentive stock options may not
exceed 600,000.
As of December 31, 1996, incentive stock options and non-qualified stock
options to purchase 194,750 shares of common stock have been granted with
prices ranging from $12.00 to $18.25 per share. All employee options vest at a
rate of 25% on the first anniversary of the grant date and 6.25% per quarter
thereafter. At December 31, 1996, incentive stock options to purchase 46,002
shares of common stock under the 1995 Plan were exercisable.
1994 Equity Incentive Plan
The Company's 1994 Equity Incentive Plan ("1994 Plan") provided for the grant
of stock options, and other stock-based awards of the Company's common stock to
officers, key employees, directors and consultants. The 1994 Plan allowed for
the issuance of up to 100,000 shares of common stock. Effective with the
Company's initial public offering, the Board of Directors resolved to cease
issuance of new awards under the 1994 Plan. As of December 31, 1996, 37,200
restricted shares of common stock at $3.125 per share, and non-qualified stock
options to purchase 26,000 shares of common stock ranging in price from $3.125
to $9.250 per share have been granted to non-employee directors of the Company.
At December 31, 1996, 37,200 shares of restricted common stock, and
non-qualified stock options to purchase 10,000 shares of common stock under the
1994 Plan were exercisable.
1993 Equity Incentive Plan
The Company's 1993 Equity Incentive Plan ("1993 Plan") provided for the grant
of stock options and other stock-based awards of the Company's common stock to
employees, consultants and affiliates. The 1993 Plan allowed for the issuance
of up to 280,000 shares of common stock. Effective with the Company's initial
public offering, the Board of Directors resolved to cease issuance of new
awards under the 1993 Plan. As of December 31, 1996, options to purchase
156,000 shares of common stock have been granted with prices ranging from $.958
to $10.400 per share. All options vest at a rate of 25% on the first
anniversary of the grant date and 6.25% per quarter thereafter. At December 31,
1996, incentive stock options to purchase 84,575 shares of common stock under
the 1993 Plan were exercisable.
19
<PAGE> 21
The following is a summary of equity incentive plan activity for the periods
indicated:
<TABLE>
<CAPTION>
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding, December 31, 1993 102,400 $ 0.958 - $ 3.125
Granted 103,600 $ 3.125 - $10.400
Canceled (8,800) $ 0.958 - $ 3.125
-------------
Outstanding, December 31, 1994 197,200 $ 0.958 - $10.400
Granted 173,950 $ 9.250 - $17.000
Exercised (14,485) $ 0.958 - $ 3.125
Canceled (6,150) $ 0.958 - $12.000
-------------
Outstanding, December 31, 1995 350,515 $ 0.958 - $17.000
Granted 42,000 $10.250 - $18.250
Exercised (20,540) $ 0.958 - $12.000
Canceled (12,412) $ 0.958 - $14.625
-------------
Outstanding, December 31, 1996 359,563 $ 0.958 - $18.250
</TABLE>
The weighted average exercise price per share of options granted, exercised and
canceled during 1996 and outstanding at December 31, 1996 were $15.11, $2.97,
$9.30 and $8.23, respectively. The weighted average exercise price per share of
options granted, exercised and canceled during 1995 and outstanding at December
31, 1995 were $11.77, $1.00, $2.54 and $7.14, respectively. The weighted
average remaining contractual life of stock options outstanding at December 31,
1996 and 1995 were 8.1 years and 8.8 years, respectively.
1995 Employee Stock Purchase Plan
In July 1995, stockholders approved an employee stock purchase plan, under
which eligible employees may elect to contribute from 1% to 15% of their base
compensation toward the purchase of the Company's common stock through weekly
payroll deductions. The purchase price per share is the lesser of 85% of the
fair market value of the stock on the commencement date, or last business day,
of each six-month purchase period. The total number of shares of stock that may
be issued under the plan may not exceed 200,000 shares. As of December 31,
1996, 57,167 shares have been issued under the plan.
Common Stock Reserved
At December 31, 1996, the Company had reserved 1,087,808 shares of common stock
for issuance pursuant to the 1995, 1994 and 1993 equity incentive plans and the
1995 Employee Stock Purchase Plan.
Accounting for Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates ranging from 5.6% to 6.4% for 1995 and
5.3% to 6.5% for 1996; volatility factors of the expected market price of the
Company's common stock of .65 for both years; and a weighted-average expected
life of the option of 6 years.
20
<PAGE> 22
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
(In thousands, except earnings per share information) 1996 1995
---- ----
<S> <C> <C>
Pro forma net income $6,744 $5,357
Pro forma earnings per share:
Primary $ 1.07 $ 1.04
Fully diluted 1.06 1.03
</TABLE>
The per share weighted average fair value of options granted during 1996 and
1995 were $9.75 and $7.60, respectively.
Note 12. Employee Benefit Plans
Employee Investment Plan
The Company sponsors a 401(k) employee salary deferral plan that allows
voluntary contributions by substantially all full-time employees. Under the
plan, eligible employees may contribute up to 15% of their pre-tax earnings,
not to exceed the Internal Revenue Service annual contribution limit. The
Company may make discretionary matching contributions, which vest over five
years. During 1996 and 1995, the Company matched 100% of the first 3% of each
employee's contribution which totaled $226,000 and $213,000, respectively.
Profit Sharing Bonus Plan
The Company also has a profit sharing bonus plan whereby all full-time
employees are eligible to participate in a pool of before-tax earnings of the
Company. The profit sharing pool is established annually by the Board of
Directors based on the operational performance expectations of the Company. In
1996 and 1995, the Company recognized compensation expense totaling $260,000
and $416,000, respectively, pursuant to the employees' profit sharing portion
of the plan.
Note 13. Related Party Transactions
The Company has entered into facility and service agreements with SSI and
Silicon Systems Singapore Pte. Ltd. ("SSS"), both wholly owned subsidiaries of
Texas Instruments. The agreements state that SSI and SSS will provide certain
administrative services and facilities to the Company for agreed-upon fees
which are based upon actual costs. The agreements were in effect until November
9, 1996 for SSI and October 1, 1996, for SSS, at which time they automatically
renew from year to year unless and until terminated by either party upon six
months' prior written notice.
On January 2, 1994, SSS contributed fixed assets with a net book value of
$618,000 to Smartflex Systems Singapore Pte. Ltd.
21
<PAGE> 23
A summary of such purchases and expenses with related parties is as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SSI (former stockholder):
Purchases of raw materials $ 9,679 $10,176 $ 6,450
Administrative and facility expenses 843 813 568
ADFlex (an affiliate of JVAC):
Purchases of raw materials 12,768 19,329 14,737
AMP (stockholder):
Purchases of raw materials 1,973 2,370 1,400
TDK (stockholder):
Purchases of raw materials 479 -- --
</TABLE>
Note 14. Business Segment Information
The Company operates primarily in one business segment, which is the
development, production and distribution of flexible interconnection products
for use in computer and peripheral equipment. The Company's principal market is
the hard disk drive ("HDD") industry. In fiscal 1996, 61% of the Company's net
revenues were to HDD manufacturers.
The Company sells its products primarily to U.S.-based companies who are
manufacturers or distributors of computer and computer-related products. The
Company performs periodic credit evaluations on its customers' financial
condition and does not require collateral. Credit losses have traditionally
been minimal and such losses have been within management's expectation.
During fiscal years 1996, 1995 and 1994, net revenues to individual customers,
each of which represented over 10% of total net revenues, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A 7% 16% 27%
Customer B 32 30 21
Customer C 15 15 21
Customer D 24 19 18
Customer E 11 6 1
</TABLE>
Some of the assemblies manufactured by the Company require one or more
components that are ordered from, or which may be available from, a limited
number of suppliers. A change in suppliers could cause a delay in manufacturing
and a possible loss of sales, which would affect operating results adversely.
Total export revenues, primarily to the Far East, were $104.1 million, $63.6
million and $29.1 million during 1996, 1995 and 1994, respectively. Export
revenues by country in excess of 10% of total net revenues were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Singapore 33% 9% 4%
Thailand 23 26 16
Hong Kong 7 9 15
</TABLE>
The Company maintains manufacturing operations in Mexico, Singapore and the
Philippines. Pre-tax income from the Company's Singapore operations totaled
$723,000, $422,000 and $332,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Company's production employees at the Mexico facility are represented by a
labor union and covered by a collective bargaining agreement ("agreement") that
is subject to revision annually under Mexican law. These employees represent
40% of the Company's total labor force. The current agreement is subject to
revision in
22
<PAGE> 24
February 1997. 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.
Note 15. Selected Quarterly Financial Data (Unaudited)
The following table presents summarized quarterly results:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter 1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
Fiscal 1996
- - -----------
Net revenues $40,025 $34,290 $35,581 $36,204
Gross margin 5,012 4,354 4,707 4,718
Net income 1,912 1,644 1,702 1,899
Net income per share $ .30 $ .26 $ .27 $ .30
Fiscal 1995
- - -----------
Net revenues $23,875 $28,348 $33,026 $40,009
Gross margin 3,384 4,068 4,625 5,032
Net income 852 1,107 1,650 1,904
Net income per share $ .20 $ .26 $ .29 $ .30
</TABLE>
23
<PAGE> 25
Page 36
Report of Independent Auditors
The Board of Directors
Smartflex Systems, Inc.
We have audited the accompanying consolidated balance sheets of Smartflex
Systems, Inc. as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Smartflex
Systems, Inc. at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
February 7, 1997
24
<PAGE> 26
Common Stock Data
Smartflex Systems, Inc. Common Stock has traded on the Nasdaq National Market
System (symbol SFLX) since its initial public offering on July 31, 1995. The
high and low closing prices, as reported by Nasdaq, were as follows:
<TABLE>
<CAPTION>
1996 High Low
---- ---- ---
<S> <C> <C>
First Quarter $17.00 $11.88
Second Quarter $19.50 $12.88
Third Quarter $15.25 $ 9.44
Fourth Quarter $16.50 $11.00
</TABLE>
As of January 31, 1997 there were approximately 1,800 holders of the Company's
stock, including 71 stockholders of record.
Dividends
The Company does not currently pay cash dividends on its Common Stock and
intends to retain earnings for use in the operation and expansion of its
business. In addition, the covenants of certain of the Company's debt
agreements limit payment of cash dividends on its Common Stock.
25
<PAGE> 1
EXHIBIT 21.1
SMARTFLEX SYSTEMS, INC.
LISTING OF SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Name Organization
---- ---------------
<S> <C>
Smartflex Singapore Pte. Ltd. Singapore
Smartflex Systems de Mexico, C.V. de S.A. Mexico
Smartflex Systems Philippines Inc. Philippines
</TABLE>
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Smartflex systems, Inc. of our report dated February 7, 1997, included in
the 1996 Annual Report to Shareholders of Smartflex Systems, Inc.
Our audits also included the financial statement schedule of Smartflex Systems,
Inc., listed in the Index at Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such consolidted financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-95434) pertaining to the 1995 Equity Incentive Plan of
Smartflex Systems, Inc., the Registration statement (Form S-8 No. 33-95358)
pertaining to the 1995 Employee Stock Purchase Plan of Smartflex Systems, Inc.
and the Registration Statement (Form S-8 No. 33-95372) pertaining to the 1993
Equity Incentive Plan of Smartflex Systems, Inc. of our report dated February
7, 1997 with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report
(Form 10-K) of Smartflex Systems, Inc.
/s/ Ernst & Young LLP
Orange County, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,164
<SECURITIES> 24,796
<RECEIVABLES> 19,757
<ALLOWANCES> (920)
<INVENTORY> 11,090
<CURRENT-ASSETS> 59,465
<PP&E> 18,618
<DEPRECIATION> (6,492)
<TOTAL-ASSETS> 72,132
<CURRENT-LIABILITIES> 17,752
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 52,733
<TOTAL-LIABILITY-AND-EQUITY> 72,132
<SALES> 146,100
<TOTAL-REVENUES> 146,100
<CGS> 127,309
<TOTAL-COSTS> 127,309
<OTHER-EXPENSES> 8,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> 11,243
<INCOME-TAX> 4,086
<INCOME-CONTINUING> 7,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,157
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
</TABLE>
