<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period March 29, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period ________________ to ________________
Commission File Number: 0-26472
-------
SMARTFLEX SYSTEMS, INC.
- - -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0581151
- - -----------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
14312 Franklin Avenue, Tustin, California 92781-2085
- - -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 838-8737
- - -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- - -----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of latest practicable date:
Common Stock, $.0025 par value - 6,333,013 shares as of May 7, 1997
- - --------------------------------------------------------------------------------
Page 1 of 17
Exhibit Index on Page 17
<PAGE> 2
SMARTFLEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997 and December 3
31, 1996
Condensed Consolidated Statements of Operations for the three months ended 4
March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the three months ended 5
March 31, 1997 and 1996
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
</TABLE>
The Company's fiscal year is 52 or 53 weeks, ending on the Saturday nearest
December 31 each year, and follows a four-four-five week quarterly cycle. For
clarity of presentation, the Company has presented its fiscal years as ending
December 31, and its fiscal quarters as ending on March 31, June 30, September
30 and December 31.
-2-
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
- - -----------------------------
SMARTFLEX SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,442 $ 1,164
Short-term investments 25,046 24,796
Accounts receivable, net of allowance for doubtful accounts
of $705 at March 31, 1997 and $920 at December 31, 1996 16,837 18,837
Inventories:
Raw materials 11,595 7,722
Work-in-process 2,512 2,968
Finished goods 1,141 400
------- -------
Total inventories 15,248 11,090
Deferred tax asset 1,634 1,634
Prepaid expenses and other current assets 2,327 1,944
------- -------
Total current assets 62,534 59,465
Property and equipment, at cost:
Machinery and equipment 15,023 13,415
Office furniture and equipment 2,650 2,622
Leasehold improvements 2,620 2,581
------- -------
20,293 18,618
Less accumulated depreciation and amortization (7,405) (6,492)
------- -------
Total property and equipment 12,888 12,126
Other Assets 2,134 541
------- -------
$77,556 $72,132
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to related parties $ 1,842 $ 2,041
Accounts payable 15,883 11,457
Accrued compensation and related costs 1,175 1,452
Other accrued liabilities 1,858 2,215
Current portion of notes 620 587
------- -------
Total current liabilities 21,378 17,752
Deferred tax liability 909 909
Long-term portion of notes payable 2,241 722
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000
Issued and outstanding -- none - -
Common stock, $.0025 par value:
Authorized shares -- 25,000,000
Issued and outstanding shares -- 6,315,689 at March 31, 1997
and 6,301,313 at December 31, 1996, respectively 16 16
Additional paid-in capital 35,693 35,649
Retained earnings 17,319 17,084
------- -------
Total stockholders' equity 53,028 52,749
------- -------
$77,556 $72,132
======= =======
</TABLE>
See accompanying notes.
-3-
<PAGE> 4
SMARTFLEX SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
-------- -------
Net revenues $30,272 $40,025
Cost of revenues 28,319 35,013
------- -------
Gross margin 1,953 5,012
Costs and expenses:
Marketing and sales expense 857 645
General and administrative expense 1,299 1,514
------- -------
Operating (loss) income (203) 2,853
Interest income 277 231
Interest expense (65) (64)
Other income (expense) 21 (3)
------- -------
Income before income taxes 30 3,017
Income tax (benefit) provision (204) 1,105
------- -------
Net income $ 234 $ 1,912
======= =======
Net income per common and common
equivalent share:
Primary $ 0.04 $ 0.30
======= =======
Fully diluted $ 0.04 $ 0.30
======= =======
Common and common equivalent
shares used in computing per
share amounts:
Primary 6,442 6,371
======= =======
Fully diluted 6,442 6,386
======= =======
See accompanying notes.
-4-
<PAGE> 5
SMARTFLEX SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Net cash flow from operating
Net income $ 234 $ 1,912
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 919 635
Loss on sale of property and equipment - 28
Provision for doubtful accounts (189) -
Provision for inventory obsolescence - 19
Other changes in operating assets and liabilities:
Receivables 2,189 2,891
Inventories (4,158) 5,467
Prepaid expenses and other assets (1,950) (429)
Accounts payable to related parties (199) (221)
Accounts payable and accrued expenses 3,793 (6,480)
Income taxes payable/receivable - 755
------- -------
Net cash provided by operating activities 639 4,577
Cash flow from investing activities:
Capital expenditures (1,701) (811)
Purchase of short-term investments (4,241) (4,072)
Proceeds from the sale of short-term investments 3,985 2,833
------- -------
Net cash used in investing activities (1,957) (2,050)
------- -------
Cash flow from financing activities:
Net proceeds from sale of common stock 44 287
Net borrowings (repayments) on revolving line of credit 1,695 (2,505)
Repayments on term loan (143) (152)
------- -------
Net cash provided by (used in) financing activities 1,596 (2,370)
------- -------
Net increase in cash 278 157
Cash at beginning of period 1,164 1,398
------- -------
Cash at end of period $ 1,442 $ 1,555
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 36 $ 97
Taxes paid - -
</TABLE>
See accompanying notes.
-5-
<PAGE> 6
SMARTFLEX SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1997
Note (A) -- Basis of Presentation
- - ---------------------------------
The accompanying unaudited condensed consolidated financial statements
include the accounts of Smartflex Systems, Inc. and its wholly owned
subsidiaries ("Smartflex" or "the Company"), and have been prepared in
accordance with generally accepted accounting principles for interim financial
information, and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report to Stockholders for the year ended December 31, 1996.
Note (B) -- Fiscal Year
- - -----------------------
The Company's fiscal year is 52 or 53 weeks, ending on the Saturday
nearest December 31 each year, and follows a four-four-five week quarterly
cycle. For clarity of presentation, the Company has presented its fiscal years
as ending December 31, and its fiscal quarters as ending on March 31, June 30,
September 30 and December 31.
Note (C) -- Use of Estimates
- - ----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Note (D) -- Credit Facility
- - ---------------------------
On 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 0.25% per annum. Interest is payable monthly and principal is
payable at maturity on September 30, 1998. At March 31, 1997, borrowings under
the revolving loan totaled $1.7 million; there were no letters of credit
outstanding as of that date. The facility additionally provides for an
unsecured term loan totaling $2.2 million. Funds under this loan are available
to the Company in one or more disbursements of not less than $500,000. The
expiration date of the unsecured term loan has been extended to September 30,
1997.
Note (E) -- Impact of newly issued pronouncement by the Financial Accounting
Standards Board
- - ----------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the first
quarter ended March 31, 1997 and March 31, 1996 of $0.00 and $0.01 per share,
respectively. The Company has not yet determined what the impact of Statement
128 will be on the calculation of fully diluted earnings per share.
-6-
<PAGE> 7
SMARTFLEX SYSTEMS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - ------------------------------------------------------------------------
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed in
"Risk Factors," below, and the other information in this Form 10-Q.
OVERVIEW
Smartflex provides custom design and turnkey manufacturing of flexible
interconnect assemblies to customers who are manufacturers of compact,
high-performance electronic products. Smartflex specializes in precision
surface mount ("SMT") and direct chip attach technologies on flexible circuit
substrates. The Company's customer base includes hard disk drive ("HDD") and
non-HDD manufacturers. To date, HDD revenues have represented the Company's
predominant market. For the three months ended March 31, 1997, HDD revenues
comprised 85.5% of total revenues, compared to 56.6% for the same period last
year.
During the first quarter of 1997, the Company continued to experience
component availability difficulties. The most significant issue the Company
faced was the restricted availability of ceramic substrates for the Company's
new Chip-on-Ceramic ("COC") program. Net revenues decreased 16.4%, from the
fourth quarter of 1996, and 24.4% from the comparable period of the prior year.
During the first quarter ended March 31, 1997, total unit shipments were
approximately 199,000 less than the fourth quarter of 1996, and approximately
500,000 more than the same period in 1996. HDD unit shipments increased
approximately 751,000 or 36.0% over the comparable quarter of the prior year,
while non-HDD units decreased approximately 252,000 or 40.6% from the same
period in the prior year. The non-HDD business dropped significantly, both in
dollars and units during the first quarter as compared to both the previous and
the year earlier quarter as a result of shipment postponements (due to a
customer inventory build-up in previous quarters) for a high volume non-HDD
program. Average selling prices ("ASP"s) decreased during this period from
the comparable period in the prior year. The decline in ASPs during the
current quarter was attributable primarily to component cost decreases passed
through to customers in the form of lower prices and price decreases as a
result of competitive pressures.
Continuing the Company's strategy to expand manufacturing
capabilities, the Company committed an additional $2.0 million to add surface
mount and Chip-on-Flex ("COF") capability in Cebu, the Philippines, $1.5
million for expansion of both surface mount and COF in Monterrey, Mexico and
$500,000 to increase COC capacity in Singapore.
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the quarter ended March 31, 1997 decreased 24.4%
compared to the comparable period in 1996. The most significant issue,
affecting revenue, that the Company faced was the restricted availability of
ceramic substrates for the COC program. In addition, the decrease in net
revenues was impacted by the decrease of non-HDD revenue as a result of
shipment postponements described above. Revenue was further impacted by
decreases in component costs, which was passed through to customers in the form
of lower prices, and price decreases as a result of competitive pressures.
Net revenues from HDD units accounted for 85.5% of total revenues as
compared to 56.6% during the same period in the prior year. Net revenues
attributable to non-HDD programs declined significantly to 14.5% from 43.4% in
the comparable quarter of the prior year due primarily to the shipment
postponements described above.
-7-
<PAGE> 8
Export sales, which arise primarily from the shipment of assembled
products to international operations of U.S.-based companies, rose to 83.2%
from 74.9% for the fourth quarter of 1996 and 55.8% in the comparable quarter
in 1996. These increases were primarily due to the continuing trend of
shipping product directly to international head stack assemblers of the
Company's customers.
Gross Margins
Gross margins as a percentage of net revenues were 6.5% and 12.5% for
the first quarters of fiscal 1997 and 1996, respectively. The current year
decline was primarily due to under absorption of factory costs resulting from
substantial reduction in both produced and shipped product volumes during the
first quarter of 1997. This was especially evident in the Cebu facility where
the ceramic substrate shortfall, mentioned above, left a newly hired workforce
highly unproductive. Additional fixed costs were also incurred to support
expected sales volumes in future quarters.
Marketing and Sales Expense
Marketing and sales expenses consist primarily of salaries, facility
and travel costs for marketing, sales and customer service personnel, and sales
commissions paid to direct sales personnel and sales representative
organizations. As a percentage of net revenues, these expenses increased to
2.8% for the quarter ended March 31, 1997, compared to 2.1% for the same period
in fiscal 1996. The percentage increase was the combined result of increased
advertising expenses, increased sales commission expenses, and reduced revenues
for the period.
General and Administrative Expenses
General and administrative ("G & A") expenses declined both as a
percentage of net revenues, and in absolute dollars, for the quarter ended
March 31, 1997 compared to the same period in 1996. As a percentage of net
revenues, G & A expenses were 4.3% for the current year's first quarter,
compared to 5.0% for the quarter ended March 31, 1996. These declines were due
primarily to the absence of profit sharing expense and the reversal of certain
bad debt reserves which were no longer deemed necessary.
Interest Income
Interest income increased $46,000 for the three months ended March 31,
1997, compared to the same prior-year period. Higher balances in short-term
investments due to the investment of cash generated from operations and the
reinvestment of interest earnings contributed to this increase.
Income Taxes
The Company had an income tax benefit of approximately $204,000 for
the three months ended March 31, 1997 as compared to a provision of $1,105,000
during the comparable period in 1996. Domestic tax benefits primarily
resulting from the successful conclusion of an Internal Revenue Service
examination allowed the Company to reduce its tax liability. In addition, the
foreign subsidiaries operated at a profit while the domestic parent company did
not, generating additional tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's principal sources of liquidity
included $26.4 million in cash and short-term investments, and $15.5 million in
available borrowings under its bank credit facility ("facility"), net of
borrowings under the revolving loan. The facility was amended on October 4,
1996, 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
-8-
<PAGE> 9
of the credit line bear interest at 0.25% per annum. Interest is payable
monthly and principal is payable at maturity on September 30, 1998. At March
31, 1997, borrowings under the revolving loan totaled $1.7 million; there were
no letters of credit outstanding as of that date. The facility additionally
provides for an unsecured term loan totaling $2.2 million. Funds under this
loan are available to the Company in one or more disbursements of not less than
$500,000. The expiration date of the unsecured term loan has been extended to
September 30, 1997.
Short-term investments at March 31, 1997 totaled $25.0 million, and
consisted primarily of holdings in municipal bonds and money market instruments
in accordance with the Company's investment policy, which is designed to
maintain a highly liquid portfolio with minimal risk. The Company's short-term
investments, which are classified as available-for-sale, increased $1.9 million
for the quarter ended March 31, 1997 as compared to the comparable period in
the prior year, primarily due to the investment of cash flows generated from
operations and the reinvestment of interest earnings. For all short-term
investments at March 31, 1997, cost approximated fair market value.
Over the three months ended March 31, 1997, inventory levels have
increased $4.2 million. Inventory levels fluctuate directly with the volume of
the Company's manufacturing; changes or significant fluctuations in market
demands can cause fluctuations in inventory levels which may result in changes
in levels of inventory turns and liquidity. Historically, the Company has
managed its inventory levels with regard to these fluctuations. See "Risk
Factors."
During the three months ended March 31, 1997, the Company acquired
$1.7 million in capital equipment and leasehold improvements, primarily for the
expansion of its offshore manufacturing facilities.
On July 18, 1996, the Company entered into a facilities and services
agreement with Silicon Systems, Inc. ("SSI"), a wholly owned subsidiary of
Texas Instruments Incorporated, whereby SSI provides certain administrative
services and facilities to the Company for agreed-upon fees, totaling
approximately $35,000 per month. This agreement is in effect until June 1997,
at which time it may be automatically renewed for additional twelve-month
periods unless terminated by either party with proper notice. Management
believes that these events will not adversely affect the Company's financial or
operating results.
The Company believes that existing cash and investments balances,
funds generated from operations and funds available under its current bank
credit facility will be sufficient to meet the Company's cash requirements
during the next twelve months. See "Risk Factors."
-9-
<PAGE> 10
RISK FACTORS
Important Factors Related to Forward-Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q contains forward-looking statements
that are based on current expectations and involve a number of risks and
uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the impact of competitive
products and pricing, interruption of the flow of components from a limited
number of suppliers, subsequent changes in business strategy or plan, timely
customer qualification of the Company's new Chip-On-Ceramic process, timely
customer qualification of, and commencement of volume production at, the
Company's new facilities in Cebu and Monterrey, and structural and strategic
changes affecting certain of the Company's existing customers, suppliers and
competitors.
The forward-looking statements included herein are based on current
assumptions that the Company will continue to develop, market, manufacture and
ship new products on a timely basis, that competitive conditions within the
Company's market will not change materially or adversely, that demand for the
Company's products and services will remain strong, that the market will accept
the Company's new products and services, that the Company will retain existing
key management personnel, that inventory risks due to shifts in market demand
will be minimized, that the Company's forecasts will accurately anticipate
market demand, and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing
involve judgments that are difficult to predict accurately and are subject to
many factors that can materially affect results. Budgeting and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure, or other budgets, which may in turn affect the Company's
results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be overly relied upon as an
indicator of future performance, and investors should not overly rely upon
historical trends to anticipate results or trends in future periods. The
following factors also may materially affect results and therefore should be
considered.
Substantial Fluctuations in Future Operating Results
The Company has experienced substantial fluctuations in its annual and
quarterly operating results, and such fluctuations are expected to continue in
future periods. The Company's operating results are affected by a number of
factors, many of which are beyond the Company's control. All products
manufactured by the Company are custom designed and assembled for a specific
customer's requirement in anticipation of the receipt of volume production
orders from that customer, which may not always materialize. The Company
typically incurs significant start- up costs in the production of a particular
product, which costs are expensed as incurred. Accordingly, the Company's
level of experience in manufacturing a particular product and its efficiency in
minimizing start-up costs will affect the Company's operating results during
the periods in which production begins and ramp-up occurs. The efficiencies of
the Company in managing inventories and fixed assets, shortages of components
or labor, the degree of automation used in the assembly process, fluctuations
in material costs and the mix of materials, labor, manufacturing and overhead
costs are also significant factors affecting annual and quarterly operating
results. Other factors contributing to fluctuations in the Company's operating
results include price competition, the inability to pass on cost overruns, the
timing of expenditures in anticipation of increased sales, customer product
delivery requirements and the range of services provided. In addition, the
amount and timing of orders placed by a customer may vary due to a number of
factors, including inventory balancing, changes in manufacturing strategy and
variation in product demand attributable to, among other things, product life
cycles, competitive factors and general economic
-10-
<PAGE> 11
conditions. Any one of these factors, or a combination thereof, could
adversely affect the Company's annual and quarterly results of operations.
The Company's customers generally require short delivery cycles, and a
substantial portion of the Company's backlog is typically scheduled for
delivery within 90 days. Quarterly sales and operating results therefore
depend in large part on the volume and timing of bookings received during the
quarter, which are difficult to forecast. The short lead time for the
Company's backlog also affects its ability to accurately plan production and
inventory levels. In addition, a significant portion of the Company's
operating expenses are relatively fixed in nature and planned expenditures are
based in part on anticipated orders. Any inability to adjust spending by a
sufficient amount or quickly enough to compensate for any revenue shortfall may
magnify the adverse impact of such revenue shortfall on the Company's results
of operations.
Dependence on Hard Disk Drive Industry
The Company's principal market is the HDD industry, which is
characterized by intense competition, relatively short product life cycles,
rapid technological change, significant fluctuations in product demand and
significant pressure on vendors to reduce or minimize costs. The HDD industry
is also highly cyclical and has experienced periods of increased demand and
rapid growth followed by periods of oversupply and contraction. The impact of
cyclical trends on suppliers to this industry has been exacerbated by the
tendency of HDD manufacturers to order components in excess of their needs
during growth periods, followed by a sharp reduction in demand for components
during periods of contraction. The Company's operating results have been
adversely affected from time to time during HDD industry slowdowns and could be
materially adversely affected in the event of significant slowdowns in this
industry in the future. Although the Company is attempting to reduce its
dependence on the HDD industry, the Company expects revenues attributable to
this market to continue to represent the majority of its revenues for the
foreseeable future.
Customer Concentration
The Company's customer base is highly concentrated. For the first
three months of 1997 and 1996, the Company's five largest customers (which
include, in some cases, multiple divisions) accounted for approximately 88% and
91% of net revenues, respectively. Although the Company is attempting to
reduce its dependence on a limited number of customers, the Company expects
that sales to a relatively small number of original equipment manufacturers
("OEMs") will continue to account for a substantial portion of net revenues for
the foreseeable future, and the loss of, or a decline in orders from, one of
the Company's key customers would have a material adverse effect on the
Company's financial and operating results.
Competition
The Company operates in a highly competitive industry and competes
against several domestic and foreign providers of electronics manufacturing
services. The principal competitors in the high-end segment of the flex
assembly market include Solectron Corporation, CTS Corporation, and ADFlex
Solutions, Inc. ("ADFlex"). The Company also faces competition from the
manufacturing operations of its current and potential OEM customers, which the
Company believes continue to evaluate the merits of manufacturing flex
assemblies internally, and from offshore contract manufacturers, which, because
of their lower labor rates, enjoy a comparative advantage over the Company with
respect to labor-intensive, high-volume production. The Company has also
experienced competition from head stack assemblers in the past; however, most
competition from such manufacturers has been in the lower-end SMT segment of
the market in which the Company does not direct a significant amount of
resources. The Company expects to encounter future competition from other
large electronics manufacturers that currently provide or may begin to provide
contract manufacturing services. A number of the Company's competitors have
substantially greater manufacturing, financial, technical, marketing and other
resources, and offer a
-11-
<PAGE> 12
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 continuing trend of shorter product life cycles, particularly
in the HDD industry, is expected to result in more intense competition as each
new customer program is generally open to bidding by the Company and its
competitors. Furthermore, the Company is often only one of two or more
contract manufacturers supplying a particular customer requirement and is
therefore subject to continuing competition on existing programs. In order to
remain competitive, the Company must continually provide timely technologically
advanced manufacturing services, ensure the quality of its products and compete
favorably with respect to price. If the Company were to fail to compete
favorably with respect to the principal competitive factors in its industry,
the Company's business and operating results would be adversely affected.
Component Supply and Sources
Substantially all of the Company's manufacturing services are provided
on a turnkey basis in which the Company, in addition to providing design,
assembly and testing services, is responsible for the procurement of the
components which are assembled by the Company for the customer. In certain
circumstances, the Company is required to bear the risk of component price
fluctuations, which could adversely affect the Company's gross margins. In
addition, in order to assure an adequate supply of certain key components which
have long procurement lead times, such as integrated circuits, the Company
often must order such components prior to receiving customer purchase orders
for the assemblies which require such components. Failure to accurately
anticipate the volume or timing of customer orders can result in component
shortages or excess component inventory, which in either case could adversely
affect the Company's financial and operating results.
Some of the assemblies manufactured by the Company require one or more
components that are ordered from, or which may be available from, only one
source or a limited number of sources. In particular, the Company relies on
the timely supply of components from ADFlex, Mektec Corporation, SSI, Toshiba
America, Inc., and VTC, Inc. During the first three months of 1997 and the
year ended 1996, the Company purchased flex components primarily from ADFlex
and Mektec Corporation, and integrated circuits primarily from SSI and VTC,
Inc. Delivery problems relating to components purchased from any one of these
or the Company's other key suppliers could have a material adverse impact on
the financial performance of the Company. From time to time, the Company's
suppliers allocate components among their customers in response to supply
shortages. In some cases, supply shortages will substantially curtail
production of all assemblies using a particular component. In addition, at
various times there have been industry-wide shortages of electronic components,
such as servo or read/write circuits. The Company has experienced shortages of
components in the recent past, and 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.
In the first quarter of fiscal 1997, the Company experienced
restricted availability of ceramic substrates for its Chip-on-Ceramic program.
To address this issue, the Company has engaged two additional sources for this
material, of which one has begun production shipments, and the other is
currently in qualification. There can be no assurance, however, that such
shortages will not recur in the future or that such shortages would not have a
material adverse effect on the Company's operating results.
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
-12-
<PAGE> 13
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, but not limited to, imposition of governmental controls, compliance
with a wide variety of foreign and United States export laws, currency
fluctuations, unexpected changes in trade restrictions, tariffs and barriers,
political and economic instability, longer payment cycles typically associated
with foreign sales, difficulties in administering business overseas, labor
union issues and potentially adverse tax consequences. The Company
historically has denominated all export sales in United States dollars. The
Company's production employees at the Mexico facility are represented by a
labor union and covered by a collective bargaining agreement that is subject to
revision annually under Mexican law. The current agreement is subject to
revision in February 1998. While the Company believes that it has established
good relationships with its labor force in Mexico, there can be no assurance
that such relationships will continue in the future.
Variability of Customer Requirements and Customer Financing
The level and timing of orders placed by customers vary due to the
customers' attempts to balance their inventory, changes in customers'
manufacturing strategies and variations in demand for the customers' products.
Due in part to these factors, most of the Company's customers do not commit to
firm production schedules for more than three months in advance of
requirements. The Company's inability to forecast the level of customer orders
with certainty makes it difficult to schedule production and optimize
utilization of manufacturing capacity. In the past, the Company has been
required to increase staffing and incur other expenses in order to meet the
anticipated demand of its customers. From time to time, anticipated orders
from some of the Company's customers have failed to materialize and delivery
schedules have been deferred as a result of changes in a customer's business
needs, both of which have adversely affected the Company's operating results.
On other occasions, customers have required rapid increases in production which
have placed an excessive burden on the Company's resources. Such customers'
order fluctuations and deferrals have had an adverse effect on the Company's
operating results in the past, and there can be no assurance that the Company
will not experience such effects in the future. In addition, the Company
incurs significant accounts receivable in connection with providing
manufacturing services to its customers. If one or more of the Company's
principal customers were to become insolvent, or otherwise were to fail to pay
for the services and materials provided by the Company, the Company's operating
results and financial condition would be adversely affected.
Rapid Technological Change
The Company's customer base competes in markets that are characterized
by rapid technological change and short product life cycles. In particular,
the HDD, computer and communications markets are prone to rapid product
obsolescence by new technologies. The flexible interconnect industry could
experience future competition from new or emerging technologies that render
existing technology less competitive or obsolete. The inability of the Company
to develop technologies to meet the evolving market requirements of its
customer base could have a material adverse effect on the Company's business,
financial condition and results of operations, including the Company's ability
to maintain its revenue base.
Management of Growth
The Company has experienced certain periods of rapid growth which has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company'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
-13-
<PAGE> 14
and manage its employees. The Company's failure to effectively manage growth
could have a material adverse effect on the Company's results of operations.
Dependence on Key Employees
The Company is highly dependent on its Chief Executive Officer,
William L. Healey, and other principal members of its management team, the loss
of whose services could have a material adverse effect upon the business and
financial condition of the Company, as well as the ability of the Company to
achieve its development objectives. None of such persons has an employment
contract with the Company. The Company is also dependent on other key
personnel, and on its ability to continue to attract, retain and motivate
highly skilled personnel. The competition for such employees is intense, and
there can be no assurance that the Company will be successful in attracting,
retaining or motivating key personnel.
Environmental Compliance
The Company is subject to a variety of environmental regulations
relating to the use, storage, discharge and disposal of hazardous chemicals and
substances used in its manufacturing process. While the Company believes that
it is in material compliance with all existing applicable environmental
statutes and regulations, any failure by the Company to comply with statutes
and regulations presently existing or enacted in the future could subject it to
liabilities or the suspension of production. In addition, compliance with such
statutes and regulations could restrict the Company's ability to expand its
facilities or require the Company to acquire costly equipment or to incur other
significant expenses.
Factors Inhibiting Change of Control
The Company's Certificate of Incorporation includes a provision that
allows the Board of Directors to issue up to 5,000,000 shares of Preferred
Stock and to determine the rights, preferences, privileges and restrictions of
those shares without stockholder approval. Preferred Stock could be issued
with voting, liquidation and dividend rights superior to those of holders of
Common Stock. An issuance of Preferred Stock also could have the effect of
delaying or preventing a change of control of the Company.
In addition, Section 203 of the Delaware General Corporation Law
restricts certain business combinations with any "interested stockholder" as
defined by such statute.
The Company's Shareholder Rights Plan provides for holders of Common
Stock (other than certain acquirors) to have the right to purchase stock of the
Company or an acquiring person at 50% of its fair market value following
certain events. The Shareholder Rights Plan could have the effect of delaying
or preventing a change of control of the Company.
Such provisions may reduce the price that certain investors may be
willing to pay in the future for shares of the Company's Common Stock, and may
reduce the possibility of any acquisition of the Company at a premium price,
unless such acquisition meets with approval by the Company's Board of
Directors.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -- See exhibit index
(b) No report on Form 8-K was filed for the quarter ended
March 31, 1997.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SMARTFLEX SYSTEMS, INC.
-----------------------
(Registrant)
May 12, 1997 By: /s/ Alfred B. Castleman
- - ---------------------- ----------------------------------------------
Date Alfred B. Castleman
Vice President, Chief Financial
Officer, and Duly Authorized Officer
(Principal financial and accounting officer)
-16-
<PAGE> 17
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------- -----------
10.31 Fourth Amendment, dated April 4, 1997, to the Loan Agreement
dated September 29, 1995, between the Registrant and Union Bank
of California, N.A.
11.1 Computation of net income per share.
27 Financial Data Schedule (filed electronically).
-17-
<PAGE> 1
[UNION BANK OF CALIFORNIA LOGO] EXHIBIT 10.31
COMMERCIAL PORTFOLIO ADMINISTRATION
Acknowledgment Copy
April 4,1997
William Healey, President
Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, California 92680
Re: Loan Agreement ("Agreement")
Dated: September 29, 1995
Dear Mr. Healey:
In reference to the Agreement between Union Bank of California, N.A.
("Bank") and SMARTFLEX SYSTEMS, INC. ("Borrower") dated September 29, 1995, the
Bank and Borrower desire to amend the Agreement. This amendment shall be called
the Fourth Amendment to the Agreement. Initially capitalized terms used herein
which are not otherwise defined shall have the meaning assigned thereto in the
Agreement.
Amendment to the Agreement:
(a) Section 1.1.2 The Term Loan. The first sentence in this section
shall be amended to: "Bank will loan to Borrower the sum of Two Million Two
Hundred Thousand Dollars ($2,200,000) (the "Term Loan") at Borrower's request,
in one or more disbursements of not less than Five Hundred Thousand Dollars
($500,000) on or before September 30, 1997 in accordance with the terms of the
Term Note".
This Fourth Amendment shall become effective on April 4, 1997. The
acknowledgment copy of this Fourth Amendment executed by the Borrower must be
received by Bank before April 30, 1997.
Except as specifically amended hereby, the Agreement shall remain in
full force and effect and is hereby ratified and confirmed. This Fourth
Amendment shall not be a waiver of any existing default or breach of a condition
to covenant unless specified herein.
UNION BANK OF CALIFORNIA, N.A. Agreed and Accepted to this 29th day
of April, 1997
By: /s/ [ILLEGIBLE]
---------------------------------
Title: Vice President SMARTFLEX SYSTEMS, INC., a Delaware
------------------------------ Corporation
By: /s/ [ILLEGIBLE] By: William L. Healey
--------------------------------- ---------------------------------
Title: Vice President Title: President
------------------------------ ------------------------------
<PAGE> 2
[UNION BANK OF CALIFORNIA LOGO]
PROMISSORY NOTE
(BASE RATE)
Borrower Name SMARTFLEX SYSTEMS, INC.
Borrower Address Office 45061 Loan Number 8439907413
14312 FRANKLIN AVENUE
TUSTIN, CA 92680-7028 Maturity Date SEPTEMBER 30, 2001
Amount $2,200,000.00
$2,200,000.00 Date April 29, 1997
FOR VALUE RECEIVED, on SEPTEMBER 30, 2001, the undersigned ("Debtor")
promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as
indicated below, the principal sum of TWO MILLION TWO HUNDRED THOUSAND AND
NO/100 Dollars ($2,200,000.00), or so much thereof as is disbursed, together
with interest on the balance of such principal from time to time
outstanding, at the per annum rate or rates and at the times set forth
below.
1. PAYMENTS.
PRINCIPAL PAYMENTS. Principal shall be payable in 48 equal consecutive
monthly instalments, each instalment in an amount sufficient to fully
amortize the principal balance by the final maturity date, beginning OCTOBER
31, 1997 and continuing on the LAST day of each consecutive month. The
availability under this Note shall be reduced on the same day and in the
same amount as each scheduled principal payment.
INTEREST PAYMENTS. Debtor shall pay interest on the LAST day of each MONTH
(commencing APRIL 30, 1997). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a
year of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. After September 30, 1997, amounts outstanding
hereunder in increments of at least $500,000 shall bear interest at a
rate, based on an index selected by Debtor, which is 2.00% per annum in
excess of Bank's LIBOR-Rate for the Interest Period so selected by Debtor.
Any Base Interest Rate may not be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in Bank's
records, which records shall be prima facie evidence of the amount
borrowed under either interest option and the interest rate; provided,
however, that failure of Bank to make any such notation in its records
shall not discharge Debtor from its obligations to repay in full with
interest all amounts borrowed. In no event shall any Interest Period
extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing, and
on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and Interest Period by
telephoning an authorized lending officer of Bank located at the banking
office identified below prior to 10:00 a.m., Pacific time, on any Business
Day and advising that officer of the selected index, Interest Period and
the Origination Date selected (which Origination Date, for a Base Interest
Rate Loan based on the LIBOR-Rate, shall follow the date of such election
by no more than two (2) Business Days).
Bank will mail a written communication of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves the
right to fund the principal from any source of funds notwithstanding any
Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is
not bearing interest at a Base Interest Rate shall bear interest at a rate
per annum of 0.50% in excess of the Reference Rate, which rate shall vary
as and when the Reference Rate changes.
-1-
<PAGE> 3
Debtor shall pay all amounts due under this note in lawful money of the
United States at Bank's ORANGE COUNTY COMMERCIAL BANKING Office, or such
other office as may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option
of Bank, and, to the extent permitted by law, interest shall be payable on
the outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in paragraph 1.b, of
this note, calculated from the date of default until all amounts payable
under this note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on
the Reference Rate may be prepaid in whole or in part at any time, without
penalty or premium. Amounts outstanding under this note bearing interest
at a Base Interest Rate may only be prepaid, in whole or in part provided
Bank has received not less than five (5) Business Days prior written
notice of an intention to make such prepayment and Debtor pays a
prepayment fee to Bank in an amount equal to the present value of the
product of: (i) the difference (but not less than zero) between (a) the
Base Interest Rate applicable to the principal amount which Debtor intends
to prepay, and (b) the return which Bank could obtain if it used the
amount of such prepayment of principal to purchase at bid price regularly
quoted securities issued by the United States having a maturity date most
closely coinciding with the relevant Base Rate Maturity Date and such
securities were held by Bank until the relevant Base Rate Maturity Date
("Yield Rate"); (ii) a fraction, the numerator of which is the number of
days in the period between the date of prepayment and the relevant Base
Rate Maturity Date and the denominator of which is 360; and (iii) the
amount of the principal so prepaid (except in the event that principal
payments are required and have been made as scheduled under the terms of
the Base Interest Rate Loan being prepaid, then an amount equal to the
lesser of (A) the amount prepaid or (B) 50% of the sum of (1) the amount
prepaid and (2) the amount of principal scheduled under the terms of the
Base Interest Rate Loan being prepaid to be outstanding at the relevant
Base Rate Maturity Date). Present value under this note is determined by
discounting the above product to present value using the Yield Rate as the
annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim against
Bank, should the return which Bank could obtain under the above prepayment
formula exceed the interest that Bank would have received if no prepayment
had occurred. All prepayments shall include payment of accrued interest on
the principal amount so prepaid and shall be applied to payment of
interest before application to principal. A determination by Bank as to
the prepayment fee amount, if any, shall be conclusive. In the event of
partial prepayment, such prepayments shall be applied to principal
payments in the inverse order of their maturity.
c. Such prepayment fee, if any, shall also be payable if prepayment occurs
as the result of the acceleration of the principal of this note by Bank
because of any default hereunder. If, following such acceleration, all or
any portion of a Base Interest Rate Loan is satisfied, whether through
sale of property encumbered by any security agreement or other agreement
securing this note, at a foreclosure sale held thereunder or through the
tender of payment at any time following such acceleration, but prior to
such a foreclosure sale, then such satisfaction shall be deemed an evasion
of the prepayment conditions set forth above, and Bank shall,
automatically and without notice or demand, be entitled to receive,
concurrently with such satisfaction the prepayment fee set forth above,
and the amount of such prepayment fee shall be added to the principal.
DEBTOR HEREBY ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT MAKE THE LOAN TO
DEBTOR EVIDENCED BY THIS NOTE WITHOUT DEBTOR'S, AGREEMENT, AS SET FORTH
ABOVE, TO PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY
PORTION OF THE PRINCIPAL BEARING INTEREST AT A BASE INTEREST RATE
FOLLOWING THE ACCELERATION OF THE MATURITY DATE HEREOF BY REASON OF A
DEFAULT. DEBTOR HAS CAUSED THOSE PERSONS SIGNING THIS NOTE ON ITS BEHALF
TO SEPARATELY INITIAL THE AGREEMENT CONTAINED IN THIS PARAGRAPH BY PLACING
THEIR INITIALS BELOW:
INITIALS: /s/ [ILLEGIBLE]
----------------
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement between
Bank and any Obligor; (c) the insolvency of any Obligor or the failure of
any Obligor generally to pay such Obligor's debts as such debts become due;
(d) the commencement as to any Obligor of any voluntary or involuntary
proceeding under any laws relating to bankruptcy, insolvency,
reorganization, arrangement, debt adjustment or debtor relief; (a) the
assignment by any Obligor for the benefit of such Obligor's creditors; (f)
the appointment, or commencement of any proceeding for the appointment of a
receiver, trustee, custodian or similar official for all or substantially
all of any Obligor's property: (g) the commencement of any proceeding for
the dissolution or liquidation of any Obligor; (h) the termination of
existence or death of any Obligor; (i) the revocation of any guaranty or
subordination agreement given in connection with this note; (j) the failure
of any Obligor to comply with any order, judgement, injunction, decree, writ
or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any notice
of levy, notice to withhold, or other legal process for taxes other than
property taxes; (l) the default by any Obligor personally liable for amounts
owed hereunder on any obligation concerning the borrowing of money; (m) the
issuance against any Obligor, or the property of any Obligor, of any writ of
attachment, execution, or other judicial lien; or (n) the deterioration of
the financial condition of any Obligor which results in Bank deeming itself,
-2-
<PAGE> 4
in good faith, insecure. Upon the occurrence of any such default, Bank, in
its discretion, may cease to advance funds hereunder and may declare all
obligations under this note immediately due and payable; however, upon the
occurrence of an event of default under d, e, f, or g, all principal and
interest shall automatically become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or
enforcement of this note. Debtor and any endorsers of this note, for the
maximum period of time and the full extent permitted by law, (a) waive
diligence, presentment, demand, notice of nonpayment, protest, notice of
protest, and notice of every kind; (b) waive the right to assert the defense
of any statute of limitations to any debt or obligation hereunder: and (c)
consent to renewals and extensions of time for the payment of any amounts
due under this note. If this note is signed by more than one party, the term
"Debtor" includes each of the undersigned and any successors in interest
thereof; all of whose liability shall be joint and several. Any married
person who signs this note agrees that recourse may be had against the
separate property of that person for any obligations hereunder. The receipt
of any check or other item of payment by Bank, at its option, shall not be
considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the
credit of such payment based upon Bank's schedule of funds availability, and
interest under this note shall accrue until the funds are deemed collected.
In any action brought under or arising out of this note, Debtor and any
Obligor, including their successors and assigns, hereby consent to the
jurisdiction of any competent court within the State of California, as
provided in any alternative dispute resolution agreement executed between
Debtor and Bank, and consent to service of process by any means authorized
by said state's law. The term "Bank" includes, without limitation, any
holder of this note. This note shall be construed in accordance with and
governed by the laws of the State of California. This note hereby
incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "BASE INTEREST RATE" shall mean a rate of
interest based on the LIBOR-Rate. "BASE INTEREST RATE LOAN" shall mean
amounts outstanding under this note that bear interest at a Base interest
Rate. "Base Rate Maturity Date" shall mean the last day of the Interest
Period with respect to principal outstanding under a Base Interest Rate
Loan. "BUSINESS DAY" shall mean a day which is not a Saturday or Sunday on
which Bank is open for business in the state identified in paragraph 6,
above, and, with respect to the rate of interest based on the LIBOR-Rate, on
which dealings in U.S. dollar deposits outside of the United States may be
carried on by Bank. "INTEREST PERIOD" shall mean with respect to funds
bearing interest at a rate based on the LIBOR-Rate, any calendar period of
one, three, six, nine or twelve months. In determining an Interest Period, a
month means a period that starts on one Business Day in a month and ends on
and includes the day preceding the numerically corresponding day in the next
month. For any month in which there is no such numerically corresponding
day, then as to that month, such day shall be deemed to be the last calendar
day of such month. Any Interest Period which would otherwise end on a
non-Business Day shall end on the next succeeding Business Day unless that
is the first day of a month, in which event such Interest Period shall end
on the next preceding Business Day. "LIBOR Rate" shall mean a per annum rate
of interest (rounded upward, if necessary, to the nearest 1/100 of 1%) at
which dollar deposits, in immediately available funds and in lawful money of
the United States would be offered to Bank, outside of the United States,
for a term coinciding with the Interest Period selected by Debtor and for an
amount equal to the amount of principal covered by Debtor's interest rate
election, plus Bank's costs, including the cost, if any, of reserve
requirements. "ORIGINATION DATE" shall mean the Business Day on which funds
are made available to Debtor relating to Debtor's selection of a Base
Interest Rate. "REFERENCE RATE" shall mean the rate announced by Bank from
time to time at its corporate headquarters as its "Reference Rate." The
Reference Rate is an index rate determined by Bank from time to time as a
means of pricing certain extensions of credit and is neither directly tied
to any external rate of interest or index nor necessarily the lowest rate of
interest charged by Bank at any given time.
SMARTFLEX SYSTEMS, INC.
By /s/ WILLIAM L. HEALEY
-----------------------------------
WILLIAM L. HEALEY, PRESIDENT
-3-
<PAGE> 5
[UNION BANK OF CALIFORNIA LOGO]
AUTHORIZATION
Borrower Name SMARTFLEX SYSTEMS, INC. Office Loan Number
Borrower Address 14312 FRANKLIN AVENUE 45061 8439907413
TUSTIN, CA 92680-7028 0081-00-0-001
Maturity Date Amount
SEPTEMBER 30, 2001 $2,200,000.00
Union Bank of California, N.A. ("Bank") is hereby authorized and instructed to
disburse the proceeds of that certain Note referenced above in the following
manner:
RENEWAL OF OBLIGATION 0081-00-0-001. $ 2,200,000.00
TOTAL LOAN PROCEEDS: $ 2,200,000.00
Fees itemized below are payable as follows (check one):
[X] Charge account #4500144314* [ ] Check enclosed
.25% fee on each funding of $500,000.00 or more.
TERMS AND CONDITIONS
1. Bank is authorized to charge account number 4500144314 in the name(s) of
SMARTFLEX SYSTEMS, INC. for payments of interest (or principal/interest)
when due in connection with this Note and all renewals or extensions
thereof.
2. Bank shall disburse proceeds in the amounts stated above in accordance
with the foregoing authorization or when Bank receives verbal or
written authorization from Borrower(s) to do so, or any one of the
Borrowers, if there are joint Borrowers, but not later than SEPTEMBER
30, 2001. The Bank, at its discretion, may elect to extend this date
without notice to or acknowledgement by the borrowers). This
Authorization and the above mentioned Note will remain in full force
and effect until the obligations in connection with this Note have been
fulfilled.
3. Unless dated by Bank prior to execution, the Note shall be dated by Bank as
of the date on which Bank disburses proceeds.
4. Notwithstanding anything to the contrary herein, Bank reserves the
right to decline to advance the proceeds of the above described Note if
there is a filing as to the Borrower(s), or any of them of a voluntary
or involuntary petition under the provisions of the Federal Bankruptcy
Act or any other insolvency law; the issuance of any attachment,
garnishment, execution or levy of any asset of the Borrower(s), or any
endorser or guarantor which results in Bank deeming itself, in good
faith insecure.
5. The borrower(s) authorizes Bank to release information concerning the
borrower(s) financial condition to suppliers, other creditors, credit
bureaus and other credit reporters; and also authorizes Bank to obtain
such information from any third party at any time.
The Borrower(s) by their execution of this Authorization accept the foregoing
terms, conditions and instructions.
Executed on April 29, 1997.
SMARTFLEX SYSTEMS, INC.
By: /s/ WILLIAM L. HEALEY
----------------------------------
WILLIAM L. HEALEY, PRESIDENT
<PAGE> 1
EXHIBIT 11.1
SMARTFLEX SYSTEMS, INC.
Computation of Earnings per Share
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
- - --------------------------
Net income $ 234 $ 1,912
========== ==========
Weighted average number of common
shares outstanding during the period 6,315,689 6,242,511
Incremental common shares attributable
to outstanding options 126,341 128,518
---------- ----------
Total shares 6,442,030 6,371,029
========== ==========
Primary earnings per share $ 0.04 $ 0.30
========== ==========
FULLY DILUTED EARNINGS PER SHARE
- - --------------------------------
Net income $ 234 $ 1,912
========== ==========
Weighted average number of common
shares outstanding during the period 6,315,689 6,242,511
Incremental common shares attributable
to outstanding options 126,386 143,221
---------- ----------
Total shares 6,442,075 6,385,732
========== ==========
Fully diluted earnings per share $ 0.04 $ 0.30
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,442
<SECURITIES> 25,046
<RECEIVABLES> 17,542
<ALLOWANCES> 705
<INVENTORY> 15,248
<CURRENT-ASSETS> 62,534
<PP&E> 20,293
<DEPRECIATION> 7,405
<TOTAL-ASSETS> 77,556
<CURRENT-LIABILITIES> 21,378
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 53,012
<TOTAL-LIABILITY-AND-EQUITY> 77,556
<SALES> 30,272
<TOTAL-REVENUES> 30,272
<CGS> 28,319
<TOTAL-COSTS> 28,319
<OTHER-EXPENSES> 2,156
<LOSS-PROVISION> (189)
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 30
<INCOME-TAX> (204)
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
