<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED: JANUARY 2, 1999
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)
-------------------------
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:
COMMON STOCK, $.0025 PAR VALUE
------------------------------
RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
----------------------------------------------------------------
(TITLE OF CLASS)
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 18, 1999 (based on the last reported price of the Common
Stock on the Nasdaq Stock Market on such date) was $18,903,784.
The number of shares outstanding of the registrant's Common Stock as of March
18, 1999 was 6,453,541
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual Report to Stockholders for the fiscal year ended
December 31, 1998, 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 or about May 19, 1999, and to be filed
with the Commission no later than April 19, 1999, is incorporated by reference
in Part III of this Form 10-K to the extent stated herein.
<PAGE> 2
SMARTFLEX SYSTEMS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 20
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 21
ITEM 6. SELECTED FINANCIAL DATA 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 22
ITEM 11. EXECUTIVE COMPENSATION 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 23
</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.
<PAGE> 3
PART I
ITEM 1. BUSINESS
The information contained in this Annual Report on form 10-K, other than
historic information, is comprised of forward-looking statements relating to
future events or the future financial performance of the Company, and the
Company intends that such forward-looking statements be subject to the
safeharbors created within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Readers are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipates," believes," "intends," "estimates," "expects," and similar
expressions, are only predictions or estimations and are subject to known and
unknown risks and uncertainties. In evaluating such statements, readers should
consider the various factors identified in this Annual Report on Form 10-K,
including matters set forth in "Risk factors," which could cause actual events,
performance or results to differ materially from those indicated by such
statements.
DESCRIPTION OF THE COMPANY
Smartflex Systems, Inc., ("Smartflex" or the "Company") is a technology
leader in electronics manufacturing services. The Company provides a diverse
range of services to customers to achieve their product realization needs. These
services include product, Application Specific Integrated Circuits ("ASIC"),
software and Radio Frequency ("RF") design; modeling, and package/enclosure
management; and the precision assembly of comprehensive advanced interconnect
solutions, utilizing precision surface mount and Direct-Chip-Attach ("DCA")
technologies. Prototype through high volume manufacturing of electronic circuit
board and box build services is provided through nine facilities worldwide for
customers in the Americas, Europe and Asia. 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"), Samsung Electronics Company Ltd. ("Samsung"),
Seagate Technology, Inc. ("Seagate") and Western Digital Corporation ("Western
Digital"). The Company's principal non-HDD customers include Iomega Corporation
("Iomega"), Hewlett-Packard Company ("H-P"), and Quantum Corporation
("Quantum"). The Company's net revenues have grown from $31 million in fiscal
1991 to $146 million in fiscal 1996, and ending the fiscal year 1998 at $108
million.
The Company's principal manufacturing services have consisted of product
design 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 the COF and
FCOF process technologies for the computer industry. COF and FCOF technologies,
in which a bare silicon die (without the standard lead frame package) is mounted
directly on substrate material, enable improved performance, a greater density
of components and reduced size when compared with traditional assembly
technologies. Smartflex had previously (before acquisitions, described below)
served its customers from four locations, one in each of Tustin, California
("Tustin"); Singapore; Monterrey, Mexico ("Monterrey"); and Cebu, the
Philippines ("Cebu").
The Company recently began to diversify its customer base by expanding
into additional markets. This expansion was achieved both internally and through
acquisitions. Late in 1998 and into early 1999, the Company acquired Logical
Services Incorporated, a design and engineering services firm; certain assets of
the Methuen, Massachusetts division of EA Industries, now owned by Smartflex New
England, Inc.; and certain assets of the Tanon subsidiary of EA Industries, now
owned, collectively, by Smartflex Fremont, Inc. and Smartflex New Jersey Inc. It
is believed that these acquisitions will provide a platform for diversification
into the automotive, RF communications, and medical marketplaces. Also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 7 through 10 of the Company's Annual Report to the
Stockholders for the fiscal year ended December 31, 1998.
3
<PAGE> 4
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.
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. 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 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. Also see "Risk Factors."
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 and
FCOF, 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 and FCOF 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.
With the Company's recent acquisitions it is now engaged in providing
contract manufacturing services ranging from the design and assembly of printed
circuit boards to the complete procurement, production, assembly, test and
delivery of entire electronic products and systems.
STRATEGY
The Company's objective is to encompass all aspects of product
realization, from design and engineering to prototyping and manufacturing. Also
see "Risk Factors." The key elements of the Company's strategy are as follows:
Manufacturing Flexibility
The Company focuses on providing a global diversified resource base for
manufacturing flexibility to its customers, and operates prototype, low volume
and automated, high volume production factories. The operations produce
precision interconnect assemblies, hard boards, backplanes, and box builds. A
key component of the flexibility is an integration of design expertise with
engineering and prototyping. The Company believes that through these resources,
it helps its customers reduce manufacturing costs and shorten delivery times,
resulting in efficient time-to-volume production for rapidly evolving industries
such as portable computer products, RF telecommunications, automotive and
medical electronics.
Expand in Growing Market Segments
Smartflex has applied the technology and processes it developed for the
HDD industry to other storage devices, such as disk array storage systems,
removable personal storage, tape drives and optical drives, other computer
peripherals, scanners, portable computers and communications products. The
Company expects that the technological characteristics of its precision
assemblies will help accommodate the trend toward smaller, lighter
4
<PAGE> 5
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. The Company believes that with the
product and market diversification achieved through recent acquisitions it will
be able to accelerate its participation in these expanded market segments across
multiple product lines.
Exploit Global Manufacturing Presence
Smartflex currently has operations in California, New Jersey,
Massachusetts, Singapore, Monterrey and Guadalajara, Mexico, and Cebu,
Philippines. The Company believes its U.S. operations are strategically located
for high mix regional support while the high volume factories in Mexico and the
Philippines provide low cost, high volume international reach with ISO 9002
quality. 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. For example, in
the Company's flex-based precision business, the Tustin, California and
Singapore facilities are designated as the Regional Technology and Services
Centers for the regions they support (the Americas and Asia, respectively),
providing state-of-the-art prototype and low-volume production capabilities,
while, the Monterrey and Cebu facilities serve as major volume production
facilities in the Americas and Asia, respectively.
Continual Process Improvement
The Company has traditionally focused on providing precision
manufacturing of high-volume precision assemblies on a turnkey basis. This
process involves the exact placement of miniaturized components on rigid and
flexible circuit boards 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.
Before a single product is approved for production, it undergoes a
comprehensive series of tests, including failure mode defects analysis (FMDA) to
fully functional subsystem testing, with products being examined to verify
design readiness, quality standards compliance, and performance criteria. The
Company's goal is to help the customer devise new procedures to certify quality
standards of visionary, next generation products, assemblies, components, and
manufacturing technologies. Also see "Patents."
MANUFACTURING SERVICES
The Company's manufacturing services consist of design, procurement,
assembly and test.
Design--Working interactively, Smartflex customers are assured that
every part of the process is focused on meeting market windows. The Company
utilizes a process, referred to as "Synchronized Manufacturing" in the product
introduction procedure, which emphasizes discipline at the start of design. It
begins with a unique, cross-functional planning process and extends through
every step of highly disciplined program management, to volume production. The
Company believes that the real-time integration between design and manufacturing
makes certain that optimal recommendations are relayed directly to its
customer's designers for quick approval or modification. This interdisciplinary
approach also relies on supply chain and resource management controls to
integrate all aspects of the process.
The Company believes that customers rely on them for flexibility in
hardware and software design, RF design and test simulation, and conversion of
schematics and code into products with reliable functionality testing in
real-world environments.
5
<PAGE> 6
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 material 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--To validate a design's manufacturability and to accelerate new
product development, the Company offers multiple levels of service, including
(1) circuit design verification and testing, (2) value engineering to improve
yields, reliability and cost, (3) quick turn prototyping, and (4) pre-production
to optimize the ramp-to-volume.
The Company has historically been centered on precision assembly
involving the exact placement of miniaturized components on multiple substrate
types. The Company's current assembly techniques are highly automated and based
almost exclusively on advanced SMT and Direct-Chip-Attach ("DCA"). SMT is a
method of affixing electronic components, including integrated circuits, onto
the surface of the 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 4 millimeters. The Company's SMT assembly
process has become increasingly complex because of these smaller 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 in 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 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 magnetoresistive ("MR") head technology, which requires twice as many leads
to the head as do competitive head technologies.
COF has enjoyed significant customer acceptance. The Company has
increased its shipments of assemblies that include COF to more than 300,000
units, on average, per week. COF assemblies have been manufactured in volume for
certain of the Company's customers, including IBM, Seagate, and Western Digital.
Assemblies incorporating COF technology accounted for approximately 45%, 50%,
and 44% of net revenues in fiscal 1998, 1997, and 1996, 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 that offer higher precision and thus
greater component densities. Also see "Risk Factors."
The Company also utilizes the Chip-On-Ceramic ("COC") assembly process
in which one or more semiconductor die(s) without the standard lead frame
package is/are attached directly on to ceramic substrates.
In 1997, Smartflex began volume production using the FCOF process.
Flip-Chip mounting eliminates wire bonding, permitting a smaller semiconductor
"footprint." FCOF uses 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.
6
<PAGE> 7
In addition to FCOF, these advanced integrated circuit assembly
technologies include Tape Automated Bonding ("TAB"), both on the flex
("TAB-on-Flex") and within the flex structure ("TAB-in-Flex"). TAB technology
utilizes a very thin gold lead frame attached directly to the flex, which
replaces the need for wire bonding.
Test--Following prototyping and pre-production, production testing
becomes central. The Company's quality assurance processes range from
environmental stress to thermal property analysis, to in-circuit, x-ray, and
full parametric testing. Software debugging is also incorporated to ensure
unhindered ramp to production.
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 nine design,
manufacturing, and service facilities strategically located to support both U.S.
and international markets. In 1997, the Company realigned its flex-based
operations such that the California and Singapore facilities, where most of the
customer design activities take place, would operate as Regional Technology and
Services Centers, offering development, engineering and quick-turn manufacturing
capabilities to the two regions they support, namely, the Americas and Asia. As
soon as a customer's product is established in the marketplace and volume
production begins, the Company transfers manufacturing from Tustin and Singapore
to one of its international volume manufacturing facilities, located in
Monterrey, or Cebu.
The Company's state-of-the-art facilities in Monterrey and Cebu, serve
as high-volume, lower-cost manufacturing centers supporting the Americas and
Asia. The Monterrey facility, with approximately 65,000 square feet of
manufacturing space, is capable of producing over 400,000 interconnect
assemblies per week. Similarly, the Cebu facility, with approximately 45,000
square feet of manufacturing space, is capable of producing 350,000 interconnect
assemblies per week.
As a result of the Company's recent acquisitions, additional
manufacturing capability has been added in the United States. The Company's New
England location is approximately 35,000 square feet providing high-mix
electronic contract manufacturing assembly and test services for a wide range of
products, in support of telecommunications, medical, automotive, and aerospace
markets. The Company's Fremont and New Jersey locations will be approximately
50,000 square feet each (after appropriate sizing) providing contract
manufacturing services, for quick turn, prototype, and high-mix, intermediate
volume products to the telecommunications, industrial controls, performance
printing, and medical marketplaces. Also see "Risk Factors."
MARKETS
To date, the rapid advance of technology in HDDs has driven the market
for precision flex assemblies. High-performance flex assemblies have found the
most significant application in the small form factor (3.5" and smaller),
high-capacity portion of the HDD market. The Company believes that COF and FCOF
technology are the predominant interconnect technologies in this portion of the
HDD market. Also see "Risk Factors."
Intense competition, relatively short product life cycles and rapid
technological change have characterized the HDD market in the recent past. As a
result, HDD manufacturers have been forced to aggressively pursue technologies,
which improve performance and cost. The Company has focused its efforts 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
7
<PAGE> 8
drives. The Company is able to manufacture advanced flex assemblies at low cost
due to high manufacturing yields and the spread of the high capital costs
necessary to perform high-volume, precision manufacturing of these assemblies
across a large number of units. Also see "Risk Factors."
At the end of 1997, the Company changed the way it classifies its
markets. The removable storage business, which was previously reported as HDD
business, will be reported as non-HDD business, combined with the tape and
optical storage business. Under this modified method of reporting, the Company's
HDD business represented 44%, 55%, and 50% of net revenues in fiscal 1998, 1997,
and 1996, respectively. In addition, sales to the HDD market have generally been
concentrated among a few large customers, including IBM, Maxtor Corporation,
Samsung, Seagate and Western Digital.
The Company's core business primarily manufactures advanced flexible
assemblies for products with high-storage 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.
Through the Company's recent acquisitions it has expanded its contract
electronic manufacturing services ranging from the assembly of printed circuit
boards to complete fulfillment, production, assembly, test, and delivery of
entire electronic products and systems. The new markets served include micro,
mini and mainframe computers, computer peripheral equipment, high quality
graphic equipment, and office equipment, medical, automotive,
telecommunications, and industrial products.
Smartflex is qualified to manage the special certification procedures
required by U.S. and international standards and regulatory authorities. In the
field of telecommunications, the Company has knowledge in conformance testing
for FCC, European Union, and worldwide EMI/EMC qualifications to help streamline
approvals and ensure on-time new product introductions. Shortened approval times
are also afforded on medical products as the company has in-depth expertise with
FDA's QSR and CGMP requirements.
The following table lists the markets served by the Company, describes the
function of the corresponding assembly/service supplied by the Company to each
market and lists representative customers for each market.
<TABLE>
<CAPTION>
APPLICATION SEGMENT ASSEMBLY/SERVICE FUNCTION REPRESENTATIVE CUSTOMERS
- ------------------- ------------------------- ------------------------
<S> <C> <C>
Hard Disk Drives Read/write head assemblies on IBM, Samsung, Seagate,
flexible substrate ("F.S.") Western Digital
Removable Storage Read/write head assemblies Iomega
on F.S.
Disk Arrays SCSI interface assemblies H-P, Sequent Computer
on F.S. Xyratex
Optical Drives RF/Laser optics and carriage H-P
assemblies on F.S.
Tape Drives Head preamp assemblies on F.S. Quantum
Scanners Charge-coupled device (CCD) H-P
control assemblies on F.S.
Printers Printhead assemblies on F.S. Topaz, Rastergraphics,
backplanes, electromechanical Iris Graphics
sub-assemblies, circuit boards,
box build
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C> <C>
Communications, Headset interconnect assemblies, Motorola, Plantronics,
data communications cellular battery and control panel Hughes Network, VC.com
telecommunications assemblies on F.S., fulfillment, box Sierra Comm, Mitec, Rascom
builds, ISDN headset, design P-Comm, Teledex, C.P.I.
Biomedical DNA analyzer cartridge on F.S. Nanogen
Medical Design, circuit boards Vidamed, PhorMax,
Eclipse, Radionics,
Hybricon, Instr. Labs
Aerospace/Nuclear/Military Avionics, box builds, control panels GE Nuclear, Kollsman
Automotive Circuit Boards Textron
Industrial/Commercial Controls Circuit Boards, end product, box builds Jandy
Portable Computing Design Micron
</TABLE>
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, the transition of
volume manufacturing operations from Singapore to the Philippines, efficient
utilization of manufacturing facilities, interruption of the flow of components
from a limited number of suppliers, subsequent changes in business strategy or
plan, timely 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.
9
<PAGE> 10
Because of these and other factors affecting the Company's operating
results, past financial performance should not be relied upon as an indicator of
future performance, and investors should not overly rely upon historical trends
to anticipate results or trends in future periods.
The following factors also may materially affect results and therefore
should be considered. Also see "Backlog," "Patents," "Competition" and "Year
2000 Issue."
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. Although the Company operated
profitably from 1990 through 1996 and 1998, it experienced operating losses in
fiscal 1997. There can be no assurance that the Company will be able to achieve
or improve its profitability in future periods. Also see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 7 through 10 of the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1998.
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 7 through 10 of the
Company's Annual Report to Stockholders for the fiscal year ended December 31,
1998. Also see "Competition."
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
10
<PAGE> 11
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 has been 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 now or
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 a majority of its revenues for the foreseeable future.
Also see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 7 through 10 of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1998 and "Markets."
Customer Concentration
The Company's customer base is highly concentrated. During fiscal 1998
and 1997, the Company's five largest customers (which include, in some cases,
multiple divisions) accounted for approximately 94% and 90% 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"), IBM, Mektec
Corporation ("Mektec"), Texas Instruments, Inc. ("TI"), Silicon Systems, Inc. (a
wholly owned subsidiary of TI), and VTC, Inc. ADFlex is also one the Company's
competitors. During fiscal 1998, 1997 and 1996, the Company purchased a majority
of its flex components from either ADFlex or Mektec, a majority of its
integrated circuits from IBM, TI and VTC, Inc. Delivery problems relating to
components purchased and from any one of these or the Company's other key
suppliers could have a material adverse impact on the financial performance of
the Company. From time to time, the Company's suppliers allocate components
among their customers in response to supply shortages. In some cases, supply
shortages will substantially curtail production of all assemblies using a
particular component. In addition, at various times there have been
industry-wide shortages of electronic components, such as servo or read/write
circuits. The Company has experienced shortages of components in the recent
past. For example, in the first quarter of 1997, the Company experienced a
shortage of ceramic substrates for its COC program. During the second quarter of
1997 this issue was resolved since all three of the Company's
11
<PAGE> 12
ceramic substrate suppliers were able to reach their planned production goals.
However, there can be no assurance that such shortages will not recur in the
future. Any such shortages could have a material adverse effect on the Company's
operating results. Also see "Manufacturing Services" and "Competition."
International Operations
The Company maintains international operations in Singapore, Mexico, and
the Philippines. In September 1997, the Company announced a restructuring plan
to streamline worldwide operations. As part of this restructuring, the Company
is in the process of moving its volume manufacturing from Singapore to its
lower-cost manufacturing facility in Cebu. The Singapore operations are intended
to become the focal point of Smartflex customer support in Asia as the Company's
Far East Regional Services and Technology Center. In light of the continued
growth of offshore facilities on the part of the Company's customers, Smartflex
anticipates that it will be required to 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, and accordingly, if the relative value of the U.S. dollar
in comparison to the currency of the Company's foreign customers or competitors
should increase, the resulting effective price increase of the Company's
products to such foreign customers could result in decreased sales. The
Company's production employees at the Monterrey, 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 2000. While the Company believes that it has established
good relationships with its labor force in Monterrey, 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 7 through 10 of the Company's
Annual Report to Stockholders for the fiscal year ended December 31, 1998.
Rapid Technological Change
The Company and 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
12
<PAGE> 13
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
"Competition," " Industry Background," "Manufacturing Services" and "Markets."
Management of Growth
The Company has experienced certain periods of rapid growth which has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company expects
that continued growth would require the addition of new management personnel and
the development of additional expertise by existing management personnel. The
Company's ability to manage growth effectively, particularly given the
increasingly international scope of its operations, will require it to continue
to implement and improve its operational, financial and management information
systems as well as to develop the management skills of its managers and
supervisors and to train, motivate and manage its employees. The Company's
failure to effectively manage growth could have a material adverse effect on the
Company's results of operations. Also see "Management."
Integration of Acquisitions
Effective October 1998, the Company made its first acquisition, and has
since made a total of three acquisitions through March 1999. The Company
believes that these acquisitions are an integral part of its diversification
strategy for both markets and customers. The Company's ability to effectively
integrate these acquisitions and control the costs associated with the
integration will be key to its future success. The Company's failure to
effectively manage these acquisitions 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 or that personnel cost increases will not have an adverse effect on
the Company's net income or results of operations. 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 expenses. 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
54% of the outstanding Common Stock as of March 18, 1999 including shares
subject to presently exercisable options or options that become exercisable
within 60 days of March 18, 1999. 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
13
<PAGE> 14
Company's Common Stock is held by TDK U.S.A. Corporation ("TDK"), which holds
the shares formerly owned by Silicon Systems, Inc.
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 the Board of Directors determines 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.
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 other than pursuant to the Rights Plan. 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 and therefore could adversely affect the price of the
Company's Common Stock, or the ability of stockholders to receive a premium
price for their shares upon an acquisition.
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, 1998, the Company employed 37 sales, support and marketing
personnel. In addition, the Company has agreements with 15 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 Europe and Asia whose activities are managed
from the Company's Tustin headquarters.
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 $21 million and $53 million at
December 31, 1998 and 1997, respectively. The 1998 backlog numbers do not
include the go-forward business of Smartflex Fremont and Smartflex New Jersey,
estimated at $22 million at the time of the Company's purchase. The Company does
not have any long-term agreements with its customers that require the customers
to purchase products. Backlog
14
<PAGE> 15
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
patents require public disclosure of information that 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."
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."
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, Parlex 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, who primarily assemble products that attach to flex
assemblies. 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.
15
<PAGE> 16
In relation to the Company's recent acquisitions competitors include
numerous domestic and offshore contract manufacturers as well as the in-house
manufacturing capabilities of certain of its existing and potential customers. A
number of these 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.
YEAR 2000 ISSUE
The "Year 2000 issue," also known as "Y2K issue" or the "Millennium
Bug," arises out of the fact that many existing computer programs and other
devices use only two digits to identify a year in the date field and, if
uncorrected, would fail or create erroneous results as a result of the Year
2000.
Early in 1997, the Company evaluated the Y2K issue and its impact on the
Company's operations. Currently, the Company uses certain IBM AS400
applications, which are not Y2K compliant, and various desktop applications,
which are Y2K compliant. So-called "embedded systems," that control certain
manufacturing equipment and other fixtures and equipment, have been identified
and have been determined to be Y2K compliant.
A project to implement the latest versions of the IBM AS400 applications
was launched in late 1997. This project also addresses the Y2K issue. The
project team consists of both dedicated resources and key functional
participants. The project consists of five main steps or phases: the first phase
consisting of an assessment of viable alternatives from commercially available
applications; the second phase being the decision process as for which
applications to obtain; the third phase consisting of configuring the system to
run the Company's business; phase four being training, testing and piloting of
all applications; and the final phase consisting of Company-wide implementation.
The team has identified, and the Company has committed to implement, an
enterprise application that is Y2K compliant. Maintenance or modification costs
will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life. The Company has
completed phases one, two and three and is currently in the training process.
All user functions have or will be going through training, and all requirements
are being developed for immediate use upon implementation. The total project is
estimated to be completed by the middle of fiscal 1999 at a cost of
approximately $1,000,000, which has been or will be spent throughout the
duration of the project implementation. Costs to December 31, 1998 have been
approximately $700,000. Failure to execute successfully and complete this
project and each step thereof as scheduled could cause material disruption of
the Company's operations and have material adverse impacts on its competitive
posture, financial position and results of operations. Many of the Company's
customers, suppliers and lenders have required the Company to provide assurances
concerning the Company's Y2K issue, and any failure by or affecting the Company
in regard to those assurances could result in material demands or assertions of
liability by such third parties or others.
The Company is in the process of contacting its major external
suppliers, customers and other business partners to estimate their compliance
with the Y2K issue and is presently evaluating inputs received from these
external relationships. Failure of any of the Company's major external suppliers
and customers to appropriately and timely address the Y2K issue could cause
material disruption of the Company's business and have material adverse impacts
on the Company's results of operations.
The Company feels that it will successfully implement the Y2K compliant
applications, described above. However, a contingency plan has been developed
for the possibility that timely and successful implementation is not achieved.
The contingency plan is primarily to continue the implementation of the new
application and continue to use the Company's existing applications and manually
manipulate due dates until the implementation has been completed.
PERSONNEL
16
<PAGE> 17
As of December 31, 1998 the Company had a total of 1,653 employees,
including 1,426 in manufacturing and operations support, 104 in engineering, 37
in marketing, sales and program management and 86 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.
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 54 President, Chief Executive Officer and
Chairman of the Board of Directors
Anthony R.W. Richardson 54 Executive Vice President and
Chief Operating Officer
John W. Hohener 43 Vice President, Chief Financial Officer and
Treasurer
Richard D. Bell 54 Vice President of Worldwide Sales
James C. Cogan 59 Vice President and General Manager of
EMS Business Unit
Christopher J. Rollison 40 Vice President and General Manager of
Advanced Interconnect Business Unit
KEY EMPLOYEES
Marilyn A. Gosz 50 Vice President of Marketing
Cheryl L. Moreno 43 Vice President of Human Resources
Joe L. Pendergrass 44 Director of Logistics and
Information Technology
Hal Schoenberg 46 Director of Quality Assurance
Robert W. Ulrickson 61 President, Logical Services Incorporated
</TABLE>
EXECUTIVE OFFICERS
William L. Healey has served as President and Chief Executive Officer of
the Company since July 1989, and as a director since its incorporation in
September 1993. In January 1996, Mr. Healey was elected Chairman of the Board.
Prior to joining Smartflex, Mr. Healey worked at Silicon Systems, Inc. ("Silicon
Systems"), a principal supplier of mixed signal integrated circuits to the
Company. While employed by Silicon Systems, Mr. Healey 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 Director of Publicly held Sypris Solutions
Inc., a diversified provider of specialized industrial products and technical
services.
Anthony R.W. Richardson joined Smartflex in February 1998 as Executive
Vice President and Chief Operating Officer. Prior to joining Smartflex, Mr.
Richardson spent twenty-four years in senior management roles at Raychem
Corporation ("Raychem"), a material sciences company. Mr. Richardson's positions
at Raychem included Director of Operations, Director of Sales and Marketing, and
General Manager for businesses in Asia, North America, South America, Europe and
the Middle East.
John W. Hohener has served as Vice President, Chief Financial Officer
and Treasurer since August 1997. From May 1988 through July 1997, Mr. Hohener
served as the Company's Corporate Controller and Treasurer.
17
<PAGE> 18
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.
Richard D. Bell joined Smartflex in January 1987, and has served as Vice
President of Worldwide Sales since June 1998. From March 1993 to June 1998, Mr.
Bell was Vice President of Marketing and Sales. 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.
James C. Cogan has served as Vice President and General Manager of the
Company's EMS Business Unit since February 1999. Prior to joining Smartflex, Mr.
Cogan spent twenty years in senior management roles with Tanon Manufacturing,
General Parametics Corporation, Wicat Systems and Datapoint Corporation. Mr.
Cogan's previous positions have included President of the West Coast Division of
Tanon Manufacturing, Chief Operating Officer and Senior Vice President of
General Parametrics Corporation, Vice President and General Manager of Wicat
Systems and Vice President and General Manager of Datapoint Corporation.
Christopher J. Rollison has served as Vice President and General Manager
of Advanced Interconnect Business Unit since February 1999 and has served as
Vice President of Operations since July 1995. 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 including Director of
Operations of the Company from October 1992 to July 1995 culminating in his
current role as Vice President of Operations and General Manager of Advanced
Interconnect Business Unit.
KEY EMPLOYEES
Marilyn A. Gosz joined Smartflex in June 1996 and has served as Vice
President of Marketing since June 1998. From June 1996 until June 1998 Ms. Gosz
served as the Company's Director of Strategic Marketing and Business
Development. 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.
Cheryl L. Moreno, joined Smartflex in November 1997 and has served as
Vice President of Human Resources since March 1999. From November 1997 until
March 1999, Ms. Moreno served as the Company's Director of Human Resource. Prior
to joining Smartflex, Ms. Moreno held senior level human resources positions at
Beckman Instruments, MAI Systems Corporation, and divisions of Ball Corporation
and Alps Electric, Ltd.
Joe L. Pendergrass joined Smartflex as Director of Materials in May 1995
and was promoted to Director of Logistics and Information Technology in February
1998. 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.
Hal Schoenberg has served as Director of Quality Assurance of the
Company since June 1997. Prior to joining the Company, Mr. Schoenberg was a
quality management consultant and educator. Prior to 1995, Mr. Schoenberg was
Director of Quality and Customer Satisfaction for International Rectifier
Corporation, and Region Quality Manager for Hewlett-Packard Company.
Robert W. Ulrickson has served as President and founder of Logical
Services Incorporated, since its founding in 1973. Mr. Ulrickson has served in
the same capacity since the Smartflex Systems, Inc. acquisition in
18
<PAGE> 19
October 1998. Prior to founding Logical in 1973 Mr. Ulrickson held marketing,
applications, operations, and aerospace telemetry engineering positions at
Lockheed.
19
<PAGE> 20
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 approximately 12,000 square
feet. The Mexico facility comprises approximately 65,000 square feet, which was
completed in 1997. The Singapore and Mexico facilities are held under lease
arrangements extending through 2002 and 2003, respectively. The Company's
manufacturing facility in Cebu, the Philippines, comprises approximately 45,000
square feet and is held under a lease agreement extending through 2003. The
Company's facilities in Fremont, California, West Long Branch, New Jersey, and
Hudson, New Hampshire (formerly Methuen, Massachusetts), comprise approximately
50,000, 50,000, and 31,400 square feet, respectively. These leases all extend to
the year 2004.
The description under "Business - International Manufacturing
Capability" is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a party to ordinary routine litigation
incidental to the business.
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.
20
<PAGE> 21
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, 1998.
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, 1998.
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 7 through 10 of the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7a 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 7 through 10 of the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1998.
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 11
through 23 of the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 22
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 to be filed in connection with the
Annual Meeting of Stockholders to be held on or about May 19, 1999, 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 to be filed in connection with the
Annual Meeting of Stockholders to be held on or about May 19, 1999, 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 to be filed
in connection with the Annual Meeting of Stockholders to be held on or about May
19, 1999, 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 to be filed in connection with the Annual Meeting of
Stockholders to be held on or about May 19, 1999, is hereby incorporated by
reference.
22
<PAGE> 23
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.
A current report on Form 8-K, announcing under Item 5 the
appointment of Anthony R.W. Richardson as the Executive Vice
President and Chief Operating Officer was filed on March 20,
1998.
A current report on Form 8-K, announcing under Item 5 the
acquisition of Logical Services Incorporated was filed on October
7, 1998.
23
<PAGE> 24
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 2nd day of April, 1999.
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 John W. Hohener, 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 April 2, 1999
- ----------------------------- Officer and Chairman of the Board
William Healey (Principal Executive Officer)
/s/ John W. Hohener Vice President, Chief Financial April 2, 1999
- ----------------------------- Officer, Treasurer (Principal Financial
John W. Hohener and Accounting Officer)
/s/ William E. Bendush Director April 2, 1999
- -----------------------------
William E. Bendush
/s/ Alan V. King Director April 2, 1999
- -----------------------------
Alan V. King
/s/ William A. Klein Director April 2, 1999
- -----------------------------
William A. Klein
/s/ Gary E. Liebl Director April 2, 1999
- -----------------------------
Gary E. Liebl
</TABLE>
24
<PAGE> 25
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, 1998, are incorporated by reference:
<TABLE>
<CAPTION>
Annual Report
Description Page Reference
----------- --------------
<S> <C>
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 11
Consolidated Balance Sheets as of December 31, 1998 and 1997 12
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 13
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 14
Notes to Consolidated Financial Statements 15-23
Report of Independent Auditors 24
</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 26
</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.
Consent of Independent Auditors Exhibit 23.2
25
<PAGE> 26
SMARTFLEX SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning of costs and other end of
Description Period expenses accounts Deductions period
----------- ------------ ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $ 925 $ -- $ -- $ 5(1) $ 920
Reserve for excess and obsolete inventory 1,171 (115) -- 190(2) 866
------ ------ ----- ---- ------
Total $2,096 $ (115) $ -- $ 195 $1,786
====== ====== ===== ===== ======
Year ended December 31, 1997:
Allowance for doubtful accounts $ 920 $ 11 $ 477 $ 24(1) $1,384
Reserve for excess and obsolete inventory 866 910 -- 160(2) 1,616
------ ------ ----- ---- ------
Total $1,786 $ 921 $ 477 $184 $3,000
====== ====== ===== ==== ======
Year ended December 31, 1998:
Allowance for doubtful accounts $1,384 $ 162 $ -- $589(1) $ 957
Reserve for excess and obsolete inventory 1,616 2,048 -- 153(2) 3,511
------ ------ ----- ---- ------
Total $3,000 $2,210 $ -- $742 $4,468
====== ====== ===== ==== ======
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
26
<PAGE> 27
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)
4.4 Rights Agreement dated as of July 17, 1996 between the Registrant and
The First National Bank of Boston, which includes as Exhibit A
thereto a form of Certificate of Designation for the Preferred stock,
as exhibit B thereto the Form of Rights Certificate and as Exhibit C
thereto a Summary of Terms of Shareholders Rights Plan (6)
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)
10.9 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)
10.13 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)
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)
</TABLE>
27
<PAGE> 28
INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
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)
10.29 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)
10.32+ Second Amendment to Smartflex Systems, Inc. 1995 Employee Stock Purchase Plan(8)
10.33 Restated Loan Agreement, dated September 26, 1997, amending and restating the Loan
Agreement dated September 29, 1995 between the Registrant and Union Bank of
California, N.A.(9)
10.34 Promissory note dated September 18, 1997, made by the Registrant in favor of Union
Bank of California, N.A.(9)
10.35 Notice of Waiver dated January 26, 1998, addressed to the Registrant
from Union Bank of California(10)
10.36 Stock Purchase Agreement dated as of October 7, 1998, among the Registrant, Logical
Services Incorporated and each of the shareholders of Logical Services Incorporated(11)
10.37 Smartflex Systems, Inc. 1998 Acquisition Nonstatutory Stock Option Plan(11)
10.38 Agreement of Purchase and Sale dated as of December 2, 1998, between EA Industries,
Inc. and Methuen Acquisition Corp., a wholly-owned subsidiary of the Registrant.(11)
10.39 Agreement of Purchase and Sale dated as of December 2, 1998, between Tanon
Manufacturing, Inc. and the Registrant, as amended and restated as of January 28,
1999.(11)
10.40 First Amendment, dated October 1, 1998, to the Amended and Restated Loan Agreement, dated
September 26, 1997, between the Registrant and Union Bank of California, N. A.(11)
10.41 Second Amendment, dated November 17, 1998, to the Amended and Restated Loan
Agreement, dated September 26, 1997, between the Registrant and Union Bank of
California, N. A.(11)
10.42 Promissory Note, dated October 1, 1998, from the Registrant in favor of Union Bank
of California, N. A.(11)
10.43 Promissory Note, dated November 6, 1998, from the Registrant in favor of Union Bank
of California, N. A.(11)
10.44 Notice of Waiver, dated January 26, 1998, from Union Bank of California, N. A., in
favor of the Registrant.(11)
10.45 Notice of Waiver, dated October 9, 1998, from Union Bank of California , N. A., in
favor of the Registrant.(11)
10.46 Third Amendment and Waiver, dated March 30, 1999, to the Amended and Restated Loan
Agreement, dated September 26, 1997, between the Registrant and Union Bank of
California, N. A.(11)
10.47 Third Amendment and Waiver Letter, dated March 30, 1999, between the Registrant and
Union Bank of California, N. A.(11)
13 Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1998(11)
21.1 Subsidiaries of the Registrant(11)
23.2 Consent of Independent Auditors(11)
27.1 Financial Data Schedule. (Filed electronically)
</TABLE>
28
<PAGE> 29
- ----------------
+ 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) 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,
1996
(6) Incorporated herein by reference to exhibit 1 to Registrant's Registration
Statement on Form S-4, dated July 24, 1996
(7) Incorporated herein by reference to the Registrant's Quarterly report on
Form 10-Q for the quarter ended March 29, 1997
(8) Incorporated herein by reference to the Registrant's Quarterly report on
Form 10-Q for the quarter ended June 28, 1997
(9) Incorporated herein by reference to the Registrant's Quarterly report on
Form 10-Q for the quarter ended September 27, 1997
(10) 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,
1997
(11) Filed with this Form 10-K.
29
<PAGE> 1
EXHIBIT 10.36
STOCK PURCHASE AGREEMENT
dated as of
October 7, 1998
by and among
LOGICAL SERVICES INCORPORATED,
the Shareholders of
LOGICAL SERVICES INCORPORATED
and
SMARTFLEX SYSTEMS, INC.
<PAGE> 2
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of
October 7, 1998, by and among SMARTFLEX SYSTEMS, INC., a Delaware corporation
("Buyer"), LOGICAL SERVICES INCORPORATED, a California corporation (the
"Company"), and the shareholders of the Company listed on Schedule 1 attached
hereto (such Shareholders are sometimes referred to herein collectively as the
"Shareholders" and individually as a "Shareholder").
R E C I T A L S :
A. The Company is engaged in the business of, among others, providing
engineering driven, turn-key services (the "Business").
B. The Shareholders own, beneficially and of record, one hundred percent
(100%) of the issued and outstanding capital stock of the Company (collectively,
the "Shares") consisting of an aggregate of 1,479,250 shares of the Company's
Common Stock, $.10 par value (the "Common Stock").
C. Buyer desires to acquire from the Shareholders, and the Shareholders
desire to sell to Buyer, the Shares upon the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the terms, covenants, and conditions
hereinafter set forth, the parties hereto agree as follows:
1. Purchase and Sale of Shares.
Upon the terms and subject to the conditions set forth in this
Agreement, at the Closing (as defined in Section 11 hereof) on the Closing Date
(as defined in Section 11 hereof), the Shareholders agree to sell, convey,
assign, transfer, set over and deliver to Buyer, the number of the Shares set
forth opposite the name of each Shareholder on Schedule 1 attached hereto, in
each case free and clear of all liens, claims, encumbrances, rights of first
refusal, security interests, pledges, equities, options, charges, conditional
sale contracts, restrictions and other adverse interests and defects in title of
any nature whatsoever (collectively, the "Liens"), and Buyer agrees to purchase
and accept such Shares from the Shareholders.
2. Purchase Price and Terms of Payment.
2.1 Purchase Price. As consideration for the sale hereunder to
Buyer of the Shares, Buyer shall pay to each Shareholder, in the manner set
forth in Section 2.2 and Section 3 below, his proportionate share, based on the
number of Shares owned of record by such Shareholder at the time of Closing
(such Shareholder's "Prorata Share"), of an aggregate purchase price (the
"Purchase Price") of Two Million Three Hundred Thousand Dollars ($2,300,000),
which (i) shall be subject to adjustment as provided in Section 2.3 below and
(ii) shall consist of Two Million Seventy Thousand Dollars ($2,070,000) to be
paid at the Closing (the "Closing Date Payment") and Two Hundred Thirty Thousand
Dollars ($230,000) to be withheld by the Buyer in accordance with Section 3 (the
"Holdback Amount").
2.2 Payment of Purchase Price. The Purchase Price shall be paid
to the Shareholders as follows:
-2-
<PAGE> 3
(a) the Closing Date Payment shall be paid to the
Shareholders at the Closing by delivery of a bank cashier's check or wire
transfer of funds to each Shareholder in the amount of such Shareholder's
Prorata Share of the Purchase Price as set forth on Schedule 1; and
(b) the Holdback Amount shall be paid to, or for the
account of, the Shareholders as provided in Section 3 below.
2.3 Adjustment to Purchase Price. On the date hereof, the Company
shall deliver to the Buyer a balance sheet as of August 31, 1998, which has been
prepared by the Company and attached hereto as Schedule 2.3 (the "Balance
Sheet"). Within ninety (90) days following the Closing Date, Ernst & Young LLP
("E&Y") shall deliver to the Buyer and to the Shareholder Representative (as
defined in Section 4 below) an audited balance sheet as of the Closing Date (the
"Closing Balance Sheet") showing the Company's Net Asset Value (as defined
herein) as of the close of business on the day prior to the Closing Date (the
"Closing Balance Sheet Net Asset Value"). The Closing Balance Sheet shall be
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied using the same methodology as was used in the preparation
of the Financial Statements (as defined in Section 6.5 hereof) and the Balance
Sheet. In the event that the Closing Balance Sheet Net Asset Value is less than
the Net Asset Value as shown on the Balance Sheet (the "Target Net Asset
Value"), the Purchase Price shall be reduced by one dollar for each dollar that
the Closing Balance Sheet Net Asset Value is less than the Target Net Asset
Value. In the event that the amount of the Closing Balance Sheet Net Asset Value
is more than the Target Net Asset Value, the Purchase Price shall be increased
by one dollar for each dollar that the Closing Balance Sheet Net Asset Value is
more than the Target Net Asset Value (collectively, the "Purchase Price
Adjustment"). The Shareholder Representative and the Buyer shall be entitled to
review the Closing Balance Sheet for a period of thirty (30) days after delivery
by E&Y. In the event that before the end of such thirty (30) day period, either
of such persons notifies the other in writing that they dispute the Closing
Balance Sheet Net Asset Value shown on the Closing Balance Sheet, then the
Closing Balance Sheet Shareholders' Equity shall be determined by
PricewaterhouseCoopers LLP, or other Big 5 accounting firm mutually agreed to by
Buyer and the Shareholder Representative ("Second Auditor"), which determination
shall be made within thirty (30) days of the date such firm is retained and when
delivered shall be final and binding on the parties. If the Closing Balance
Sheet Net Asset Value as determined by the Second Auditor varies in favor of the
requesting party, the cost of the Second Auditor shall be paid by the
non-requesting party. If the Closing Balance Sheet Net Asset Value as determined
by the Second Auditor does not vary in favor of the requesting party, the cost
of the Second Auditor shall be paid by the requesting party. If neither the
Shareholder Representative nor the Buyer notifies the other that it is
contesting the Closing Balance Sheet within the above specified time period, the
Closing Balance Sheet provided by E&Y shall be final and binding on all parties
for purposes of making the above specified Purchase Price Adjustment. When the
Purchase Price Adjustment has been finally determined, if a Purchase Price
reduction results, the Buyer shall reduce the Holdback Amount by the amount of
the Purchase Price Adjustment; provided, that, if the Purchase Price Adjustment
is greater than the Holdback Amount, then each of the Shareholders shall refund
such Shareholder's Prorata Share of the amount by which the Purchase Price
Adjustment exceeds the Holdback Amount in cash (or by immediately available
funds transfer) to the Buyer within five (5) days of the date that the Purchase
Price Adjustment is finally determined. If the Purchase Price Adjustment results
in a Purchase Price increase, the amount of such increase shall be added to the
Holdback Amount and shall be paid as provided in Section 3 below. For purposes
hereof, "Net Asset Value" shall mean the tangible assets of the Business less
the liabilities of the Business.
3. Purchase Price Holdback.
-3-
<PAGE> 4
(a) The Buyer shall withhold the Holdback Amount as collateral to
secure the Shareholders' obligations described in Section 3(b) below, during the
period commencing on the Closing Date and terminating on the date that is one
(1) year from the Closing Date. On the date that is one (1) year from the
Closing Date (or if such date is not a business day, on the next business day
thereafter), the Holdback Amount, less the amount of any reductions thereto, as
provided in Section 3(b) below, if a positive amount, shall be distributed to
the Shareholders, without interest, in accordance with such Shareholder's
Prorata Share. The Buyer shall not be required to segregate or set aside the
Holdback Amount. The Buyer may, without obligation, file a UCC-1 or other
appropriate instruments with the California Secretary of State evidencing
Buyer's security interest in the Holdback Amount, and the Shareholder
Representative is authorized to execute and deliver such UCC-1 or other
appropriate instruments, and each Shareholder shall be fully bound thereby.
(b) The Holdback Amount is subject to reduction and retention by
Buyer as follows:
(i) In the event that there is a Purchase Price reduction
pursuant to the terms of Section 2.3 above; and
(ii) In satisfaction of any claim for Damages by the Buyer
against the Shareholders pursuant to the provisions of Section 14, below.
(c) Without limiting the foregoing, in the event that reductions
to the Holdback Amount made by the Buyer pursuant to this Section 3 exceed the
amount of the Holdback Amount, then, in addition to any other remedies available
to the Buyer, the Buyer shall be able to recover any excess amounts directly
from the Shareholders, on a joint and several basis.
(d) Under no circumstances will the Shareholders, without the
prior written consent of the Buyer, assign, transfer or grant any security
interest in the Holdback Amount to any party other than (i) the Buyer pursuant
to Section 3(a) above, or (ii) an existing Shareholder who shall accept such
assignment, transfer or security interest subject to the prior rights of the
Buyer hereunder.
4. Shareholder Representative. Each of the Shareholders (and their
successors and assigns) hereby irrevocably consents to the appointment of, and
does hereby appoint and empower, Robert W. Ulrickson (and Robert W. Ulrickson
does hereby accept such appointment), as the sole and exclusive representative
of the Shareholders (the "Shareholder Representative"), until replaced by the
Shareholders, as evidenced in a writing delivered to the Buyer which is executed
by the Shareholders holding a majority of the Shares immediately prior to the
Closing Date. All decisions of the Shareholder Representative shall be final and
binding on all of the Shareholders, and the Buyer shall be entitled to rely
upon, without independent investigation, any decision of the Shareholder
Representative and shall be jointly and severally indemnified by the
Shareholders and held harmless by each Shareholder for any action or inaction
taken or omitted to be taken by Buyer in reliance thereon.
5. Several Representations and Warranties of the Shareholders.
Except as disclosed in the disclosure schedules delivered to
Buyer concurrently herewith (the "Disclosure Schedules") by reference to the
specific section or subsections to which a disclosure pertains, each
Shareholder, severally but not jointly, represents and warrants to Buyer as
follows:
5.1 Authority. Such Shareholder has the full legal right,
capacity, power and authority to execute and deliver, and to perform such
Shareholder's obligations under this Agreement.
-4-
<PAGE> 5
This Agreement has been duly executed and delivered by such Shareholder,
constitutes the valid and binding obligation of such Shareholder, and is
enforceable against such Shareholder in accordance with its terms, except as
such enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
other similar laws affecting creditors' rights and (ii) general principles of
equity relating to the availability of equitable remedies (regardless of whether
such Agreement is sought to be enforced in a proceeding at law or in equity).
Any Employment Agreement required to be executed by such Shareholder pursuant to
Section 9.11 below, when executed and delivered by such Shareholder, will be the
valid and binding obligation of such Shareholder, and will be enforceable
against such Shareholder in accordance with its terms except, in each case, as
such enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
other similar laws affecting creditors' rights and (ii) general principles of
equity relating to the availability of equitable remedies (regardless of whether
any such agreements are sought to be enforced in a proceeding at law or in
equity).
5.2 Title to Shares. Such Shareholder is the owner, beneficially
and of record, of the number of Shares set forth opposite such Shareholder's
name on Schedule 1 attached hereto and at the Closing shall transfer, convey and
vest in Buyer, legal and beneficial ownership of (including, but not limited to,
the right to vote), and good, valid and marketable title to, such Shares free
and clear of all Liens other than restrictions imposed by federal and applicable
state securities laws which do not constitute an impediment to the sale and
transfer of the Shares contemplated by this Agreement. Neither such Shareholder
nor any Shares owned by such Shareholder are or will be a party or subject to
any agreement or commitment, written or oral, granting any rights or options in
or to such Shares or any interest therein or imposing any restrictions thereon.
5.3 No Shareholder Conflicts. Except as set forth in Schedule 5.3
attached hereto, neither the execution and delivery of this Agreement by such
Shareholder, the performance by such Shareholder of such Shareholder's
obligations hereunder, nor the consummation of the transactions contemplated
hereby, including, but not limited to, the execution by such Shareholder of an
Employment Agreement pursuant to Section 9.11 hereto, will result in any of the
following: (a) a default or an event that, with notice or lapse of time, or
both, would constitute a default, breach or violation of (i) any of the terms,
conditions or provisions of any lease, license, franchise, promissory note,
contract, agreement, commitment, indenture, mortgage, deed of trust, or other
instrument, document or arrangement to which such Shareholder is a party or by
which his properties or assets may be bound and which is material to the
Shareholder (a "Material Shareholder Contract"); (b) the creation or imposition
of any Lien on any of the assets or properties of such Shareholder; (c) the
termination of any Material Shareholder Contract or the acceleration of the
maturity of any indebtedness or other material obligation of such Shareholder;
or (d) a violation or breach of any order, writ, injunction, decree, law,
statute or regulation of any court or governmental authority applicable to such
Shareholder or any of such Shareholder's properties or assets.
5.4 No Third Party Consents. Except as set forth in Schedule 5.4
attached hereto, no consent, approval, order or authorization of, or
registration, declaration or filing with, any person or entity or any court,
administrative agency or commission or other governmental authority or
instrumentality is required by or with respect to such Shareholder in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
5.5 Absence of Claims. Except as set forth in Schedule 5.5
attached hereto, such Shareholder does not, and at the Closing will not, have
any claim, demand or cause of action against the Company, or its officers,
directors, employees, agents or representatives and knows of no fact, event or
circumstance which could reasonably be expected to result in any such claim.
-5-
<PAGE> 6
5.6 Delegation of Authority to Shareholder Representative. The
delegation of authority by each of the Shareholders to the Shareholder
Representative pursuant to this Agreement, is a valid and enforceable delegation
and each Shareholder has the full power and authority to make such delegation.
6. Representations and Warranties of the Company and Shareholders.
Except as disclosed in the Disclosure Schedules by reference to
the specific section or subsections to which a disclosure pertains, the Company
and each of the Shareholders, jointly and severally, represent and warrant to
Buyer as follows:
6.1 Organization and Good Standing; Corporate Matters. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of California, and is duly authorized or qualified
to do business as a foreign corporation in each jurisdiction in which the
character of the properties owned by it or the nature of the Business makes such
authorization or qualification necessary and where the failure to be so
authorized or qualified would have a Material Adverse Effect (as hereinafter
defined) on the Company. As used in this Agreement, unless otherwise indicated,
the term "Material Adverse Effect" when used in connection with the Company,
means any event, circumstance, change or effect that is, or could reasonably be
expected to be, materially adverse to the condition (financial or otherwise),
properties, assets, liabilities, businesses, operations, results of operations
or prospects of the Company either prior to or following the Closing, other than
Material Adverse Effects set forth or described in the Disclosure Schedules. The
Company does not own or control, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, limited
liability company, joint venture, association, business organization, trust or
entity. The Company has all necessary corporate power and authority to conduct
the Business as it is now, and has since its organization been, conducted and to
own, lease and/or operate the properties and assets which it now owns, leases or
operates. The Company has delivered to Buyer true and correct copies of (a) the
Articles of Incorporation of the Company and all amendments thereto, certified
by the Secretary of State of the State of California, (b) the Bylaws of the
Company and all amendments thereto, duly certified by its corporate secretary,
(c) the minute and stock books of the Company and (d) any agreements,
commitments or understandings restricting the transfer of or otherwise relating
to the Shares or any other securities of the Company to which the Company or any
Shareholder is a party. Such Articles of Incorporation and Bylaws are in full
force and effect and the Company is not in violation of its Articles of
Incorporation or Bylaws. The minute and stock books of the Company are complete
and accurate in all material respects.
6.2 Capital Structure of the Company. The authorized capital
stock of the Company consists solely of 5,000,000 shares of Common Stock, par
value $0.10 of which 1,479,250 shares are issued and outstanding. There are no
outstanding subscriptions, options, calls, warrants, convertible or exchangeable
debt or securities, agreements, arrangements, commitments, understandings or
other rights, oral or written, obligating the Company to offer, sell or issue
any additional shares of its capital stock of any class or any outstanding
shares of capital stock of the Company. Except as set forth in Schedule 6.2,
none of the Shareholders is a party to any voting trust agreement or any other
contract, agreement, commitment, plan or understanding restricting or otherwise
relating to voting or dividend rights or privileges with respect to, or which
either provide for or restrict the sale, transfer or assignment of, the Shares.
All of the outstanding shares of capital stock of the Company are validly
issued, fully paid, nonassessable, and were not issued in violation or
contravention of any federal or applicable state securities laws or regulations,
any preemptive rights (contractual or other) of any person or entity, or any
agreement to which the Company or any shareholder of the Company is or was a
party. Except as set
-6-
<PAGE> 7
forth in Schedule 6.2, there are no obligations, contingent or otherwise, of the
Company to repurchase, redeem or otherwise acquire any currently outstanding, or
make any payments in respect of any currently or previously outstanding, shares
of capital stock of the Company. Except as disclosed in Schedule 6.2 or in the
Financial Statements (as hereinafter defined), the Company has not repurchased,
redeemed or otherwise acquired any shares of its capital stock or declared, paid
or set aside funds for the payment of any dividend or other distribution on its
shares of capital stock, or effected any recapitalization, reclassification,
combination, stock split or other transaction affecting its authorized or
outstanding shares of capital stock. Each repurchase, redemption or other
acquisition of shares of capital stock, and each dividend or other distribution
and each recapitalization, reclassification, combination, stock split or other
transaction disclosed in Schedule 6.2 was made in accordance with all applicable
provisions of California Law and without violation of any Material Contract (as
hereinafter defined).
6.3 No Conflicts. Except as set forth in Schedule 6.3 attached
hereto, neither the execution and delivery of this Agreement by the Company or
any Shareholder, the performance by the Company or any Shareholder of its
obligations hereunder, the execution and delivery by the Company or any
Shareholder of any agreement required to be entered into pursuant to this
Agreement, nor the consummation of the transactions contemplated hereby, will
result in any of the following: (a) a default or an event that, with notice or
lapse of time, or both, would constitute a default, breach or violation of (i)
any provision of the Articles of Incorporation or Bylaws of the Company, or (ii)
any of the terms, conditions or provisions of any lease, license, franchise,
promissory note, contract, agreement, commitment, indenture, mortgage, deed of
trust, or other instrument, document or arrangement to which the Company is a
party or by which it or any of its respective properties or assets may be bound
and which is material to the Company (a "Material Contract"); (b) the creation
or imposition of any Lien on any of the assets or properties of the Company; (c)
the termination of any Material Contract or the acceleration of the maturity of
any indebtedness or other material obligation of the Company; (d) a violation or
breach of any order, writ, injunction, decree, law, statute or regulation of any
court or governmental authority applicable to the Company or any of its
respective properties or assets; (e) the cessation or termination of any other
business relationship or arrangement between the Company and any third party the
cessation or termination of which would have a Material Adverse Effect; (f) any
adverse effect on the Intangible Personal Property (as defined in Section 6.7(b)
below) or on the Company's rights or ability to use the Intangible Personal
Property or on the Company's rights or privileges under the license agreements
or other arrangements, if any, listed on Schedule 6.7(b).
6.4 Consents and Approvals. Except as set forth in Schedule 6.4,
no consent, approval, order or authorization of, or registration, declaration or
filing with, any person or entity or any court, administrative agency or
commission or other governmental authority or instrumentality is required by or
with respect to the Company in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby.
6.5 Financial Statements. The Shareholders have delivered or
caused the Company to deliver to Buyer true and correct copies of the unaudited
consolidated financial statements of the Company for the period from January 1,
1998 to August 31, 1998 and for each of the years in the two (2) year period
ended December 31, 1997, consisting of balance sheets and statements of income
(collectively, the "Financial Statements"), true and correct copies of which
Financial Statements are also attached hereto as Schedule 6.5. The Financial
Statements (i) were prepared in accordance with GAAP consistently applied; (ii)
present fairly, in all material respects, the financial position, results of
operations of the Company as at the relevant dates thereof and for the
respective periods covered thereby; and (iii) reflect that the Company has
calculated and set aside reserves or allowances for doubtful accounts, warranty
claims, obsolete, excessive or slow moving inventory and other
-7-
<PAGE> 8
contingencies and claims in amounts which are adequate in relation to potential
write-downs or write-offs of assets and potential liabilities or losses that may
arise out of any pending or threatened claims or other contingencies to which
the Company or its Business are subject, determined in accordance with GAAP
consistently applied. Other than as expressly set forth in Schedule 6.5 or in
the (August 31, 1998) Balance Sheet included in the Financial Statements or the
notes thereto, the Company has no debts, liabilities, obligations or commitments
of any nature, secured or unsecured and whether due or to become due, absolute,
contingent or otherwise, which, in accordance with GAAP consistently applied,
either would be required to be shown on a balance sheet of the Company prepared
in accordance with GAAP or, although it is not required to be shown on the
Company's balance sheet, are individually or in the aggregate material in
amount, except for liabilities that have been incurred by the Company after
August 31, 1998, in the ordinary course of business and consistent with past
practice, that are not material in amount and have not had, and are not
reasonably expected to have, a Material Adverse Effect on the Company.
6.6 Absence of Certain Changes. Except as set forth in Schedule
6.6 attached hereto, since January 1, 1995, the Company has conducted the
Business in the ordinary course, and there has not been or occurred with respect
to the Company: (i) any change in or amendment to its Articles of Incorporation
or Bylaws or any recapitalization or reclassification of its authorized or
outstanding capital stock; (ii) any damage, destruction or loss, whether or not
covered by insurance, which has had or may have a Material Adverse Effect on the
Company or its ability to operate the Business in the ordinary course and
consistent with past practices; (iii) any amendment, modification or termination
of any Material Contract or the termination, cessation or loss of or any
material change in the pricing or other material terms of any product supply or
other business arrangement or relationship which would or could reasonably be
expected to have a Material Adverse Effect; (iv) other than immaterial increases
in regular salaries or wages made in the ordinary course of business and
consistent with past practices, any increase in, or commitment to increase, the
direct or indirect compensation or benefits payable or to become payable to any
of the Company's officers, directors, employees, agents, or independent
contractors, or the payment or awarding, or the making of any commitment to pay,
any severance, bonus, incentive or special or deferred compensation to or
similar arrangements with any of such officers, directors, employees, agents or
independent contractors or the adoption of any new, or any material amendment or
modification of any existing, Employee Plan (as hereinafter defined); (v) any
sale or issuance of, or grant of options, warrants or other rights to acquire,
any shares of capital stock or other securities (whether currently outstanding
or authorized or available for issuance); (vi) any declaration, setting aside or
payment of a dividend or other distribution in respect of its capital stock, or
any direct or indirect redemption, repurchase or other acquisition of any shares
of its capital stock or other securities, or any issuance or the creation of any
commitment or obligation to issue any shares of capital stock or any rights or
securities convertible, exchangeable or exercisable into shares of capital
stock, or any transfer, sale, pledge, assignment or other disposition of, any of
the Shares, or any interest in or right to acquire any of the Shares; (vii) any
waiver or release of any material right or claim of the Company; (viii) except
for sales of inventory made, and Permitted Liens (as defined in Subsection
6.7(d) below) incurred in the ordinary course of business and consistent with
past practices, any sale, transfer, mortgage, pledge or subjection to Lien of or
affecting any of its properties or assets other than sales of assets that are
not material to and are no longer needed in the Business; (ix) the incurrence of
any indebtedness for borrowed money or capitalized lease obligations or any
guaranty of indebtedness of any other person or entity; (x) any capital
expenditures or any commitment involving more than [$25,000] individually or
[$50,000] in the aggregate; (xi) any material alteration in the manner of
keeping the books, accounts or records of the Company or in the manner of
preparing financial statements, or any change in the accounting principles,
practices, policies or procedures of the Company (except as may have been
required by any modification or change in GAAP); (xii) any material alteration
in the operating or
-8-
<PAGE> 9
employment policies and procedures of the Company; (xiii) any other event or
condition of any character that has had or could reasonably be expected to
result in a Material Adverse Effect on the Company or the Business; or (xiv) any
agreement or commitment by the Company or any Shareholder to do any of the
things described in the preceding clauses (i) through (xiii).
6.7 Property of the Company. Except as set forth in Schedule 6.7,
the Company owns or otherwise has the right to use (free of any burdensome
conditions or restrictions) all of the property and assets, real, personal or
mixed, tangible or intangible, now used in the operation of the Business, or the
use of which is necessary for the performance of any Material Contract or the
conduct of the Business as now conducted and as presently contemplated to be
conducted.
(a) Tangible Personal Property. Except as set forth in
Schedule 6.7(a), the Company has furnished to Buyer a true and correct listing
of all machinery, implements, supplies, equipment, computers, furniture,
fixtures, vehicles, tools, and all other similar assets or tangible personal
property owned, leased or used by the Company other than any of such items that
are not necessary for the conduct of the Business as currently conducted. The
assets contained on such listing constitute all the tangible personal property
reasonably necessary for the conduct by the Company of the Business, and such
assets are in good operating condition and repair, ordinary wear and tear
excepted, and have been properly maintained. Except as disclosed in Schedule
6.7(a), no personal property used by the Company in connection with the Business
is held under any lease, security agreement, conditional sales contract, or
other title retention or security agreement, or is located other than in the
possession of the Company.
(b) Intangible Personal Property. Schedule 6.7(b) attached
hereto contains a true and correct list of all patents and patent applications,
copyrights and applications therefor, trademarks, trade names and service marks,
whether or not registered, and whether owned or licensed for use by the Company,
and any applications therefor, designs, drawings, processes, inventions,
products, computer software, firmware or hardware and other trade secrets and
know-how (the "Intangible Personal Property") owned by the Company or used in or
necessary to the conduct of the Business. Schedule 6.7(b) also contains a list
of all license agreements and other arrangements under which the Company uses,
or licenses to any third party, any patents, trademarks or other intellectual
property, true and complete copies of which have been provided to Buyer. The
Company owns or is licensed, or otherwise has the full right and authority to
use, all Intangible Personal Property required for the conduct of the Business
in the manner presently conducted, and such use does not conflict with, infringe
upon or violate any trademark, trade name, copyright, patent rights or trade
secret rights of any other person or entity. Neither the Company nor any of its
products or advertising or marketing materials, (i) has infringed, or is now
infringing, any patent, trade name, trademark, service mark, copyright, trade
secret, technology, know-how or process belonging to any other person, firm or
corporation, which infringement would have a Material Adverse Effect on the
Company or (ii) has breached or violated or is in breach or violation of any
license agreement governing the use of any intellectual property by the Company
which, in either case, would have a Material Adverse Effect on the Company.
Except as disclosed in Schedule 6.7(b), neither the Company nor any Shareholder
has received any written notice or other indication of any such claim of
infringement or violation.
(c) Real Property. Schedule 6.7(c) attached hereto
contains a correct list of the addresses of each parcel of real property owned
by, leased to or used in any way by the Company (the "Real Properties"),
together with a brief description of the structures thereon and the uses being
made thereof, and a list of all leases under which the Company possesses or uses
real property (the "Real Property Leases"). True and correct copies of the Real
Property Leases, and any and all amendments thereto, have been delivered to
Buyer. The Real Properties constitute all of the real properties and
-9-
<PAGE> 10
structures and improvements necessary for the Company to conduct the Business.
Each of the Real Property Leases is valid, binding and enforceable in accordance
with its terms, and is in full force and effect. The Company is not in material
default, and no event has occurred which, with the giving of notice or lapse of
time or both, would constitute a material default under, or which would entitle
the lessor to terminate, any of such Real Property Leases. The Company has also
delivered to Buyer true and correct copies of any and all title insurance
policies or commitments and environmental studies or reports in the possession
or control of the Company or any Shareholder with respect to any of the Real
Properties. The zoning of each parcel of Real Property permits the presently
existing improvements and structures and the continuation of the Business
presently conducted thereon. To the best knowledge of the Shareholders, no
changes in such zoning are pending or threatened, and no condemnation or similar
proceedings are pending against any such parcel of real property.
(d) Title. Except as set forth in the Financial Statements
or in Schedule 6.7(d) attached hereto, the Company has good, valid and
marketable title to, or a valid leasehold interest in, all of the assets and
properties (personal, real, mixed, tangible or intangible) which it purports to
own or lease, free and clear of any and all Liens other than Permitted Liens. As
used in this Agreement, the term "Permitted Liens" shall mean (i) mechanics',
carriers', workmen's, repairmen's or other similar Liens arising or incurred in
the ordinary course of business in respect of obligations which are not overdue,
or which are being contested in good faith; (ii) such Liens and minor
imperfections of title, if any, as are not material in amount, do not materially
detract from the value or impair the use of any material assets subject thereto
or the operations of the Business by the Company and have arisen only in the
ordinary course of business; and (iii) Liens for current Taxes (as hereinafter
defined) not yet due or for Taxes being contested in good faith by appropriate
proceedings and for which adequate reserves have been set aside.
(e) Accounts Receivable. The Company has delivered to
Buyer a complete and current aging of all accounts receivable of the Company as
of August 31, 1998, as set forth on Schedule 6.7(e) attached hereto. All such
accounts receivable represent, and all accounts receivable arising from the
operation of the business of the Company between the date hereof and the Closing
(collectively, the "Accounts Receivable") will represent, amounts due the
Company for bona fide sales of products actually made or services actually
performed on or prior to the date such Accounts Receivable were or will be
recorded on the books of the Company, in the ordinary course of the Business and
consistent with past practices, and are, or on or prior to the Closing Date will
be, valid and collectible in full in the ordinary course of business. No
reserves for invalid or uncollectible receivables have been made, and, in the
opinion of the Shareholders, no such reserves are necessary. There is no
contest, claim or right of set-off contained in any oral or written agreement
with any account debtor relating to the amount or validity of any Account
Receivable.
(f) Inventories. The Company has furnished to Buyer a
complete, current and correct list of all inventories, including packaging
materials, components, supplies, raw materials, work-in-process and finished
goods, of the Company as of August 31, 1998 (the "Inventories"), as set forth in
Schedule 6.7(f) attached hereto. The Inventories are, and as of the Closing Date
will be, of a quality and quantity usable and salable in the ordinary course of
business, except for items of obsolete, damaged or slow moving materials and
materials of below standard quality, all of which have been written off or
written down to net realizable value and, in the aggregate, are not material in
amount.
6.8 Contracts and Agreements. Except as described in Schedules
6.7, 6.8 or 6.9 attached hereto, the Company is not a party to, and none of its
assets and properties are subject to: (a) any employment contract with any
officer, consultant, director or employee or any affiliate of the
-10-
<PAGE> 11
foregoing; (b) any lease of real or personal property; (c) any agreement or
understanding, written or oral, that provides for or relates to the purchase,
sale or other disposition of any property, materials, equipment or supplies
(except purchase or sales orders from or to individual customers or individual
suppliers incurred in the ordinary course of business); (d) any instrument
creating or providing for the creation of any Lien on any of the assets or
properties of the Company or evidencing or relating to indebtedness constituting
notes payable or long-term debt; or (e) any other Material Contract, which shall
include, without limitation, any contracts or agreements relating to, or entered
into by the Company in connection with, the purchase or sale of any business or
product line. There has been delivered to Buyer (i) true and correct copies of
each written contract or agreement listed on Schedules 6.7, 6.8 or 6.9, and any
and all amendments thereto, and (ii) an accurate written summary of the terms of
any oral agreement or understanding that the Company may have with any other
person or entity that is material to the Company or the Business, which shall
include, without limitation, any oral agreement or understanding that the
Company may have with any of the customers or suppliers listed on Schedule 6.10,
and any amendments thereto. Except as otherwise set forth on Schedule 6.8, each
of such contracts, agreements, licenses and instruments so listed, or required
to be so listed, or described or required to be described in a written summary
required to be delivered pursuant hereto, is a valid and binding obligation of
the Company and, to the knowledge of the Shareholders, also of the other parties
thereto, and is enforceable in accordance with its terms, except as
enforceability may be affected by bankruptcy, insolvency, moratorium or similar
laws affecting creditors' rights generally and general principles of equity
relating to the availability of equitable remedies. Except as otherwise set
forth in Schedule 6.8 hereto, there have not been any defaults by the Company
or, to the knowledge of the Shareholders, any defaults or claims of default or
of non-enforceability by the other party or parties to such contracts,
agreements, licenses and instruments which, individually or in the aggregate,
would have a Material Adverse Effect on the Company or the Business and, to the
knowledge of the Shareholders, there are no facts, events or conditions that
have occurred which, through the passage of time or the giving of notice, or
both, would constitute a default by the Company or by the other party or parties
under any of such contracts, agreements, licenses and instruments that could
reasonably be expected to have a Material Adverse Effect on the Company or the
Business or that would create or result in the imposition of a Lien on any
material assets or properties of the Company.
6.9 Employees; Labor Matters and Employee Plans.
(a) Schedule 6.9 attached hereto contains complete,
current and correct lists of each director and officer of the Company and of all
employees of the Company, which lists include the job position(s) of and
compensation and benefits payable to each of such individuals as a result of his
or her employment by or association with the Company. Schedule 6.9 also contains
a list of consultants and any other independent contractors that have provided
professional or other services to the Company and have received or are expected
to receive fees or other compensation from the Company. The Company has
furnished to Buyer a true and correct copy of its employee handbook (if one
exists) and a written description of all material employment or personnel
policies of the Company not set forth therein.
(b) Except as set forth in Schedule 6.9, the Company is
not a party to or otherwise bound by or subject to any collective bargaining or
other labor, employment, deferred compensation, bonus, retainer, consulting, or
incentive agreement, plan or contract. Except as disclosed in Schedule 6.9,
there has been no strike or other work stoppage by, nor, to the knowledge of any
of the Shareholders, has there been any union organizing activity among any of
the employees of the Company. The Company is in compliance, in all material
respects, with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and is not
engaged
-11-
<PAGE> 12
in any unfair labor practice. Except as set forth in Schedule 6.9, there is no
unfair labor practice complaint pending or, to the best knowledge of any of the
Shareholders, threatened against the Company, nor, to the best knowledge of any
of the Shareholders, is there any factual basis for any such complaint.
(c) Schedule 6.9 also contains a complete, current and
correct list of all Employee Plans (as hereinafter defined) of the Company
(true, correct and complete copies of which have been delivered to Buyer). For
purposes of this Agreement, the term "Employee Plan" includes all present plans,
programs, agreements or any other arrangements (including all amendments to and
components of the same, such as a trust with respect to a plan) providing any
remuneration or benefits, other than current cash compensation, to any current
or former employee of the Company or to any other person who provides, or at any
time since January 1, 1995 provided, services to the Company, whether or not
such plans, programs, agreements or any such other arrangements, are subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
are qualified under the Internal Revenue Code of 1986, (as amended, the "Code").
By way of example, but without limiting the generality of the foregoing, the
term Employee Plan includes, but is not limited to, employee benefit plans (as
defined in Section 3(3) of ERISA), pension, retirement, profit sharing, stock
option, stock bonus, and non-qualified deferred compensation plans, any
multiemployer plan (as defined in Section 3(37) of ERISA), disability, medical,
dental, health insurance, life insurance, incentive compensation, vacation
benefit, and fringe benefit plans, programs or arrangements. Any and all tax
returns, reports, forms or other documents required to be filed by the Company
under applicable federal, state or local law with respect to the Employee Plans
have been timely filed and are correct and complete in all material respects;
and any and all amounts due by the Company to any governmental agency or entity
with respect to the Employee Plans have been timely and fully paid. Except as
disclosed in Schedule 6.9, the Company has not terminated any Employee Plan.
(d) Except as set forth in Schedule 6.9, all Employee
Plans are now, and have always been, established, maintained and operated in
accordance, in all material respects, with all applicable laws (including, but
not limited to, ERISA and the Code) and all regulations and interpretations
thereunder and in accordance with their plan documents. All communications with
respect to each Employee Plan by any members of any plan committee, plan
fiduciaries, plan administrators, the Company or its Boards of Directors or
employees, accurately reflect the documents and operations of each such Employee
Plan in all material respects. The Internal Revenue Service has issued one or
more determination letters with respect to each funded Employee Plan stating
that, from the inception of each such Employee Plan, such Employee Plan has been
and is qualified under Section 401 of the Code and each trust maintained in
connection with each such Employee Plan has been and is exempt under Section 501
of the Code. No Employee Plan is a multiemployer plan within the meaning of the
Code or ERISA, a defined benefit plan within the meaning of Section 3(35) of
ERISA, a plan subject to Section 302 of ERISA or Section 412 of the Code, or
funded through a welfare benefit fund (as defined in Section 419 of the Code).
The Company has not participated in, maintained, contributed to or been required
to contribute to any employee benefit plan subject to Title IV of ERISA or any
retiree medical or retiree life insurance benefit plan. All contributions
required to be made to or with respect to each Employee Plan and all costs of
administering each Employee Plan have been completely and timely paid. All
reports, forms and other documents required to be filed with any governmental
entity with respect to any Employee Plan have been timely filed and are
accurate. There is and there has been no actual or, to the knowledge of the
Shareholders, no threatened or expected litigation or arbitration concerning or
involving any Employee Plan. No complaints to or by any government entity have
been filed or, to the knowledge of the Shareholders, have been threatened or are
expected with respect to any Employee Plan. No Employee Plan or any other person
has any liability to any plan participant, beneficiary or other person under any
provision of ERISA, the Code or any other applicable law by
-12-
<PAGE> 13
reason of any action or failure to act in connection with any Employee Plan.
There has been no breach of fiduciary duty or prohibited transaction as
described in Section 406 of ERISA and Section 4975 of the Code with respect to
any Employee Plan. No Employee Plan provides medical benefits to one or more
former employees (including retirees), other than benefits required to be
provided under Section 4980B of the Code or Sections 601 to 608 of ERISA. Each
welfare benefit plan (as defined in Section 3(2) of ERISA) is, and has been, in
material compliance with the requirements of Code Section 4980B and Sections 601
to 608 of ERISA. There is no contract, agreement or benefit arrangement covering
any employee of the Company which individually or collectively would constitute
an "excess parachute payment" under Section 280G of the Code.
(e) Except as set forth in Schedule 6.9, the consummation
of the transactions contemplated by this Agreement will not (i) entitle any
individual to severance pay, or (ii) accelerate the time of payment or vesting,
or increase the amount, of compensation that, but for such transactions, would
be due to any individual. The Company has delivered to the Buyer true, correct
and complete copies of each plan, agreement or arrangement relating to the
foregoing, including all amendments thereto.
(f) With respect to any insurance policy providing funding
for benefits under any Employee Plan, (i) there is no material liability of the
Company in the nature of a retroactive or retrospective rate adjustment, loss
sharing arrangement, or other actual or contingent liability, nor would there be
any such material liability if such insurance policy was terminated on the date
hereof, and (ii) to the knowledge of the Shareholders, no insurance company
issuing any such policy is in receivership, conservatorship, liquidation or
similar proceeding and, neither the Company nor any of the Shareholders has
received any notice that any such proceeding with respect to any such insurance
company is pending or imminent.
6.10 Customers and Suppliers. Except as set forth on Schedule
6.10, Schedule 6.10 attached hereto contains correct and current lists of (a)
all customers or clients of the Company, including original equipment
manufacturers ("OEMs"), who accounted for more than five percent (5%) of the
consolidated sales of the Company in either of the two most recent fiscal years,
showing the approximate aggregate dollar amount of sales to each such customer
during each of such fiscal years; and (b) the ten (10) largest suppliers of the
Company in terms of purchases during each of the two most recent fiscal years,
showing the approximate aggregate dollar amounts of purchases by the Company
from each such supplier during each of such fiscal years. Except as set forth on
Schedule 6.10, there has been no change in the business relationship of the
Company with any customer or supplier named in Schedule 6.10 which has had or
could reasonably be expected to have a Material Adverse Effect on the Company or
the Business. Except as set forth on Schedule 6.10, no Shareholder has any
present information or is aware that, due to any events or circumstances that
have occurred prior to the date of this Agreement, any of the customers or
suppliers listed in Schedule 6.10 intends to cease doing business with the
Company, or alter materially the amount of the business that any of them is
presently doing with the Company, or will require, as a condition of continuing
to purchase products from or to sell raw materials or components to the Company,
a change in the prices at or in any other material terms under which it has been
doing business with the Company.
6.11 Product Warranties and Liabilities. Schedule 6.11 attached
hereto sets forth the product return policies (the "Return Policies") of, and
all Warranties (as hereinafter defined) given or made by, the Company.
"Warranties" shall mean all service, repair, replacement and other obligations
based upon or arising out of express and implied warranties made or deemed made
in connection with the sale of goods or the performance of services by the
Company. The Company has not extended or
-13-
<PAGE> 14
granted any return rights or given or made any Warranties with respect to any
products sold or services performed by it, except for those set forth in
Schedule 6.11. None of the customers of the Company has claimed to the Company
or, to the best knowledge of any of the Shareholders, to the Company's
suppliers, that the Company's products are defective. Neither the Company nor
any of the Shareholders nor, to the best knowledge of any of the Shareholders,
any of the employees of the Company, has any particular knowledge of any
products which have been shipped by the Company in a condition that such
products might reasonably be expected to be returned by the customer, or of any
intention on the part of any customer to return any of the Company's products,
except returns by customers in the ordinary course of business and consistent
with the Return Policies and which, in any event, are not expected to be
material in amount. Except as otherwise set forth in Schedule 6.11, no
Shareholder has any knowledge of any fact or of the occurrence of any event
forming the basis of any present or future claim against the Company, whether or
not fully covered by insurance, for liability on account of negligence or
product liability or on account of any Warranties which would have, individually
or in the aggregate, a Material Adverse Effect on the Company or the Business,
and adequate reserves have been set aside in the Financial Statements for
Warranty claims and product returns.
6.12 Licenses and Permits; Compliance With Laws. Schedule 6.12
contains a true and correct list of all governmental licenses, permits,
franchises, authorizations, certificates, rights, privileges and registrations
held by or issued to the Company which are required for the lawful conduct of
its business and which the failure to maintain would have a Material Adverse
Effect (the "Material Licenses and Permits"). Each of the Material Licenses and
Permits is in full force and effect, and there are no pending or, to the
knowledge of the Shareholders, threatened claims or proceedings challenging the
validity of, or seeking to revoke or discontinue, any of the Material Licenses
and Permits. None of the transactions contemplated by this Agreement will affect
the validity of or cause the revocation or discontinuation of any of the
Material Licenses and Permits. Except as otherwise set forth in Schedule 6.12,
the Business is being, and has been, conducted in compliance with all applicable
federal, state, local and international laws, statutes, ordinances, rules,
regulations, orders, decrees and other requirements of all governmental
authorities and other political subdivisions and agencies thereof having
jurisdiction over the Company, including, without limitation, all such laws,
regulations, ordinances and requirements relating to environmental matters,
antitrust, consumer protection, labor and employment, zoning and land use,
immigration, health and occupational safety matters, except where any instances
of noncompliance, either individually or in the aggregate, have not had, and
could not be reasonably expected to have, any Material Adverse Effect on the
Company or the Business.
6.13 Environmental and Safety Matters. Except as set forth in
Schedule 6.13, the Company and the use of its respective properties and assets
and the operation of the Business have complied and are in compliance in all
material respects with all federal, state, local and regional statutes, laws,
ordinances, rules, regulations and orders relating to the protection of human
health and safety, natural resources or the environment, including, but not
limited to, air pollution, water pollution, noise control, on-site or off-site
hazardous substance discharge, disposal or recovery, toxic or hazardous
substances, training, information and warning provisions relating to toxic or
hazardous substances, or employee safety, and no notice of violation of any such
statutes, laws, ordinances, rules, regulations and orders with respect thereto
and no notice of the violation, cancellation or revocation of any permit,
license or other authorization relating thereto, has been received, nor is any
such notice pending or, to the best knowledge of any of the Shareholders,
threatened. Except as set forth in Schedule 6.13, no underground or above-ground
storage tanks or surface impoundments are located on any of the Real Properties.
Except as set forth on Schedule 6.13 and in compliance with applicable statutes,
laws, ordinances, rules, regulations, orders, licenses and permits, there has
been no generation, use, treatment, storage, transfer, disposal, release or
threatened release, in, at, under, or on any of the Real Properties of
-14-
<PAGE> 15
toxic or hazardous substances during the ownership or occupancy thereof by the
Company, or, to the knowledge of any of the Shareholders, except for the
existence of toxic or hazardous substances or any generation, use, treatment,
storage, transfer, disposal, or release thereof that set forth in Schedule 6.13,
prior to such ownership or occupancy; and, except as otherwise set forth in
Schedule 6.13, there are not now, and at Closing there will not be, any toxic or
hazardous substances on, in or under any of the Real Properties except in
compliance with all applicable laws, regulations, ordinances and permits
relating to environmental protection or the protection of health and safety.
Except as otherwise set forth on Schedule 6.13, (i) none of the Company or any
of the Shareholders has received any notice or claim to the effect, and none of
the Shareholders knows or is aware, that the Company is or may be or become
liable to any governmental authority or private party as a result of the
release, or threatened release, of any toxic or hazardous substances in
connection with the operations of the Company, or any of the predecessors of the
Company; and (ii) to the best knowledge of any of the Shareholders, none of such
operations is the subject of any federal, state or local investigation
evaluating whether any remedial action is needed to respond to a release or a
threatened release of any toxic or hazardous substances at any of the Real
Properties or any other real properties that have been owned, used or leased by
the Company or predecessors thereof. For the purposes of this Section 6.13,
"toxic or hazardous substances" shall include any material, substance or waste
that, because of its quantity, concentration or physical or chemical
characteristics, is at any time deemed under any federal, state, local or
regional statute, law, ordinance, regulation or order, or by any governmental
agency pursuant thereto, to pose a present or potential hazard to human health
or safety or the environment, including, but not limited to, (i) any material,
waste or substance which is defined as a "hazardous substance" pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(42 U.S.C. 9601 et seq.), as amended from time to time ("CERCLA"), and its
related state and local counterparts; (ii) asbestos and asbestos containing
materials and polychlorinated biphenyls; and (iii) any petroleum hydrocarbon,
including oil, gasoline (refined and unrefined) and their respective
constituents and any wastes associated therewith.
6.14 Insurance Coverage. Schedule 6.14 attached hereto contains a
list and description of each policy of fire, general liability, product
liability, worker's compensation and other forms of insurance maintained by the
Company. True and correct copies of each such policy have been delivered to
Buyer. All such policies are, and since January 1, 1995, such policies (or
policies substantially equivalent thereto) have been, continuously in full force
and effect and without any gaps in coverage, all premiums with respect thereto
covering all periods up to and including the date hereof have been paid, and no
notice of cancellation, termination or denial of coverage has been received with
respect to any such policy. Such policies (i) are valid, outstanding and
enforceable policies, (ii) to the best knowledge of the Shareholders, provide
adequate insurance coverage for the properties, assets and operations of the
Company as presently conducted, and (iii) will remain in full force and effect
through the respective dates set forth on Schedule 6.14 attached hereto, without
the payment of additional premiums, and (iv) will not in any way be affected by,
or terminate or lapse by reason of, the transactions contemplated by this
Agreement. There has also been furnished to Buyer a schedule that describes all
claims of the Company which are pending under such insurance policies or have
been paid to or on behalf of the Company since January 1, 1995. Since January 1,
1995, the Company has not been refused any insurance with respect to its
properties, assets or operations, nor has its coverage been limited, by any
insurance carrier to which it has applied for any such insurance or with which
it has carried insurance.
6.15 Litigation. Except as set forth in Schedule 6.15 attached
hereto, there is no pending, or to the best knowledge of any of the Shareholders
is there any threatened, action, suit, arbitration proceeding, charge,
complaint, allegation, investigation, inquiry or other proceeding or claim
before any court or governmental or administrative body or agency or other
entity against, relating to or
-15-
<PAGE> 16
affecting the Company or any director, shareholder, officer, agent or employee
of the Company in its, his or her capacity as such, or the assets, properties or
Business of the Company or the transactions contemplated by this Agreement, nor
is any Shareholder aware of any facts or circumstances which could reasonably
lead to or provide the basis for any such action, suit, arbitration proceeding,
investigation or inquiry that, if brought or adversely determined against the
Company, could reasonably be expected to have a Material Adverse Effect. Except
as set forth in Schedule 6.15, there is not in effect any order, judgment or
decree of any court or governmental or administrative body or agency enjoining,
barring, suspending, prohibiting or otherwise limiting any of Shareholders, the
Company, or any officer, director, employee or agent of the Company, in its
capacity as such, from conducting or engaging in any aspect of the Business, or
requiring such Shareholder, the Company, or any officer, director, employee or
agent of the Company to take or refrain from taking any action with respect to
any aspect of the Business which could reasonably be anticipated to have a
Material Adverse Effect on the Company or the Business.
6.16 Taxes and Tax Returns.
(a) Except as set forth on Schedule 6.16: (i) the Company
has duly and timely filed all Tax Returns (as hereinafter defined) which are
required by law to be filed by it and has duly and timely paid all Taxes (as
hereafter defined) due or claimed to be due from it (whether or not shown on any
Tax Return), and there are no assessments or claims for payment of Taxes now
pending or, to the best knowledge of any of the Shareholders, threatened, or any
audit of the records of the Company being made or threatened by, any taxing
authority; (ii) each Tax Return previously filed is, or to be filed in the
future relating to any period up to the Closing Date shall be, correct and
complete in all respects; and (iii) the Company is not currently the beneficiary
of any extension of time within which to file any Tax Return. The amounts set up
as provisions for Taxes, if any, on the December 31, 1997 and August 31, 1998
balance sheets of the Company included in the Financial Statements are
sufficient for the payment of all unpaid Taxes accrued for or applicable to the
periods ended on such dates and all years and periods prior thereto and for
which the Company, at those dates, may have been liable. Except as disclosed in
Schedule 6.16, the Company has properly withheld and paid, or accrued for
payment, when due, to appropriate state and/or federal authorities, all sales
and use taxes, if any, and all amounts required to be withheld from payments
made to its employees, independent contractors, creditors, Shareholders, or
other third parties and has also paid all employment taxes as required under
applicable laws. The Company has not agreed to or is required to make any
adjustment under Code Section 481(a) by reason of a change in accounting method.
There is no income reportable by the Company for a period ending after the
Closing Date attributable to a transaction or other event (e.g., an installment
sale) occurring prior to the Closing Date involving in excess of $25,000. The
Company is not (nor has been) a "reporting corporation" subject to the
information reporting and record maintenance requirements of Code Section 6038A
and the regulations thereunder. The Company does not own any interest in real
property located in any state or local taxing jurisdiction that imposes a tax on
the transfer of such an interest that could apply with respect to the
transactions contemplated by this Agreement.
(b) Except as set forth in Schedule 6.16, the Company has
not waived any statute of limitation in respect of any taxes or assessments by
any federal, state, county, local, foreign or other taxing jurisdiction or
agreed to any extension of time with respect to an assessment or deficiency in
any Tax, and has not been audited by any taxing authority. The Company has not
filed a consent under Section 341(f) of the Code concerning collapsible
corporations.
(c) Except as set forth in Schedule 6.16, the Company has
not made any payments, nor is the Company a party to any agreement that under
any circumstances could obligate it to
-16-
<PAGE> 17
make any payments, that would not be deductible under Section 280G of the Code.
The Company has not been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. The Company is not a party to
any tax allocation or tax sharing agreement or has any obligations under any
such agreement to which it may, in the past, have been a party.
(d) Except as set forth in Schedule 6.16, the Company (i)
is not nor ever has been required to file a consolidated or combined state or
federal income Tax Return with any other person or entity, and (ii) is not
liable for the Taxes of any person under Treas. Reg. 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or successor, by
contract or otherwise.
(e) For purposes of this Agreement, the term "Tax" or
"Taxes" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A),
customs duties, capital stock, franchise, profits, withholding, social security,
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
(f) For purposes of this Agreement, the term "Tax Return"
means any return, declaration, report, claim for refund, or information return
or statement (including, but not limited to, information returns or reports
related to back-up withholding and any payments to third parties) relating to
Taxes, including any schedule or attachment thereto, and including any amendment
thereof.
(g) The Company has furnished to Buyer true and complete
copies of (A) relevant portions of income tax audit reports, statements of
deficiencies, closing or other agreements received by or on behalf of the
Company relating to Taxes for all open years, and (B) all federal, state, local
and foreign tax returns for all open years.
(h) The Company has disclosed on its federal and state
income tax returns all positions taken therein that could give rise to a
substantial understatement penalty within the meaning of Code Section 6662 or
corresponding provisions of state tax law. There are no requests for rulings
with respect to any Tax or potential Tax of the Company pending before any
taxing authority.
6.17 Related Party Transactions. Except as described on Schedule
6.17, no officer, director, shareholder or employee of the Company, and none of
their relatives or affiliates, owns any interest in any competitor, lessor,
lessee or customer or supplier of the Company; and the Company is not a party to
any transaction or arrangement with any of its respective officers, directors,
shareholders or employees, or any relative or affiliate of any of them, which
relates to or affects the ownership, lease or use or disposition of any assets,
properties or the operations of the Company or the sale, lease or use of goods
or services, or the loan of money or any extension of credit or guaranty, by or
to the Company, other than the payment of wages, salaries and bonuses to
employees of the Company for services performed in the ordinary course of
business. Except as disclosed in the Financial Statements or described on
Schedule 6.17, none of the assets or properties of the Company include any
receivables or contract rights from, or notes payable or evidences of
indebtedness of, any of the officers, directors, shareholders or employees of
the Company or any relative or affiliate of any of them.
6.18 Certain Payments. To the best knowledge of the
Shareholders, neither the Company nor any shareholder, officer, director,
employee of the Company or any agent or other
-17-
<PAGE> 18
representative who has been retained by the Company to act on its behalf, has
made, directly or indirectly, any political contributions with corporate funds,
payments from corporate funds not fully and accurately recorded on its books and
records, payments from corporate funds to governmental officials in their
individual capacities or to obtain or retain business either within the United
States of America or abroad. The Company has not engaged and is not engaging in
any course of conduct and has not been and is not a party to any agreements or
involved in any transactions which would give rise to a violation of the
applicable provisions of the Foreign Corrupt Practices Act of 1977 (U.S. Public
Law No. 95-213).
6.19 Bank Accounts. Schedule 6.19 attached hereto contains a true
and complete list showing the name of each person who holds a power of attorney
authorizing such person to act in the name or on behalf of the Company, the name
and address of each bank, savings and loan or other financial institution in
which the Company maintains any account or safe deposit box, the title and
number of each such account, and the names of all persons authorized to draw
thereon or effect transactions in connection with such accounts or to have
access to such safe deposit boxes.
6.20 Brokers and Finders. Neither the Company nor any Shareholder
has engaged or authorized any broker, finder, investment banker or other third
party to act on behalf of the Company or the Shareholders, directly or
indirectly, as a broker, finder, investment banker or in any other like capacity
in connection with this Agreement or the transactions contemplated hereby, or
has consented to or acquiesced in anyone so acting, and none of the Company or
any of the Shareholders knows of any claim for compensation from any such
broker, finder, investment banker or other third party for so acting or of any
basis for such a claim.
6.21 Disclosure. None of the representations or warranties of the
Company or the Shareholders contained in this Agreement or the Schedules and
Exhibits hereto, or in any certificate furnished or to be furnished pursuant
hereto, contains any statement of a material fact that was untrue when made or
omits to state any material fact necessary to make the statements of fact
contained herein or therein not misleading in any material respect.
6.22 Knowledge. For purposes of determining under this Section 6
whether the Shareholders know of any facts, events, conditions or circumstances
relating to the subject matter of the representations and warranties contained
in this Section 6, each Shareholder shall be deemed to have knowledge of the
facts, events, conditions and circumstances actually known on or before the date
hereof by any of the persons listed on Schedule 6.22.
7. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to the Shareholders as
follows:
7.1 Organization and Good Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Buyer is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where such qualification is necessary
under applicable law as a result of the conduct of its business and where the
failure to be so qualified would have a material adverse effect on Buyer. Buyer
has the requisite corporate power and authority to carry on its business as now
being conducted and to execute and deliver and perform its obligations under
this Agreement and the Employment Agreements.
7.2 Necessary Actions; Binding Effect. Buyer has taken all
corporate action necessary to authorize its execution and delivery of, and the
performance of its obligations under, this
-18-
<PAGE> 19
Agreement. This Agreement constitutes, and upon execution and delivery the
Employment Agreements will constitute, valid obligations of Buyer that are
legally binding on and enforceable against Buyer in accordance with their
respective terms, except as such enforceability may be limited by (i)
bankruptcy, insolvency, moratorium or other similar laws affecting creditors'
rights, and (ii) general principles of equity relating to the availability of
equitable remedies (regardless of whether such Agreements are sought to be
enforced in a proceeding at law or in equity).
7.3 No Conflicts. Except as set forth on Schedule 7.3, neither
the execution and delivery of this Agreement by Buyer or the performance by
Buyer of its obligations hereunder nor the consummation of the transactions
contemplated hereby, will result in any of the following: (a) a default or an
event that, with notice or lapse of time, or both, would constitute a default,
breach or violation of (i) any provision of the Certificate of Incorporation or
Bylaws of Buyer, or (ii) any lease, license, franchise, promissory note,
contract, agreement, commitment, indenture, mortgage, deed of trust, security or
pledge agreement, or other agreement, instrument or arrangement to which Buyer
is a party and which is material to Buyer, considered together with all of
Buyer's subsidiaries as a whole (a "Material Buyer Contract"); (b) the
termination of any Material Buyer Contract or the acceleration of the maturity
of any indebtedness or other monetary obligation of Buyer that is material in
amount when considered in relation to Buyer and its subsidiaries taken as a
whole; or (c) a violation or breach of any writ, injunction or decree of any
court or governmental instrumentality to which the Buyer is a party or by which
any of its properties is bound or any laws or regulations applicable to Buyer,
where the violation would have a material adverse effect on Buyer considered
together with all of its subsidiaries, as a whole.
7.4 Brokers and Finders. Except as set forth on Schedule 7.4,
Buyer has not engaged or authorized any broker, finder, investment banker or
other third party to act on behalf of Buyer, directly or indirectly, as a
broker, finder, investment banker or in any other like capacity in connection
with this Agreement or the transactions contemplated hereby, or has consented to
or acquiesced in anyone so acting, and the Buyer does not know of any claim for
compensation from any such broker, finder, investment banker or other third
party for so acting or of any basis for such a claim.
7.5 Disclosure. None of the representations or warranties of
Buyer contained herein or the Schedules and Exhibits hereto, or in any
certificate furnished or to be furnished pursuant hereto, contains any statement
of a material fact that was untrue when made or omits to state any material fact
necessary to make the statements of fact contained herein or therein not
misleading in any material respect.
7.6 Consents and Approvals. Except as set forth in Schedule 7.6,
no consent, approval, order or authorization of, or registration, declaration or
filing with, any person or entity or any court, administrative agency or
commission or other governmental authority or instrumentality is required by or
with respect to the Buyer in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
7.7 Litigation. Except as set forth in Schedule 7.7 attached
hereto, there is no pending or, to the best knowledge of the Buyer, threatened
action, suit, arbitration proceeding, charge, compliant, allegation,
investigation, inquiry or other proceeding or claim before any court or
governmental or administrative body or agency or other entity against, relating
to or affecting the Buyer or any director, shareholder, officer, agent or
employee of the Buyer in its, his or her capacity as such, or the assets,
properties or business of the Buyer or the transactions contemplated by this
Agreement.
8. Obligations Pending and Following the Closing.
-19-
<PAGE> 20
8.1 Full Access. The Shareholders shall afford, and shall cause
the Company to afford, to Buyer, its counsel, accountants, investment bankers
and lenders (and their respective accounting and legal and other authorized
representatives), full access during normal business hours to all properties,
personnel and information of the Company, including, without limitation,
financial statements, books and records, leases and agreements and tax returns,
to enable Buyer to determine that the transactions contemplated hereby can be
consummated in accordance with applicable statutes and regulations, to verify
the accuracy of the representations and warranties made herein and to fully
investigate the affairs of the Company as fully as Buyer may desire; provided,
that such investigation shall be conducted in a manner which does not
unreasonably interfere with the operation of the Business. Without limiting the
generality of the foregoing, the Company and the Shareholders shall furnish or
cause to be furnished to Buyer and its representatives such information, data
and reports concerning the ownership of the Shares, the capital structure of the
Company and the assets and properties and businesses, financial condition and
operating results of the Company as Buyer or any such representative shall
reasonably request. No information or knowledge obtained in any investigation
pursuant to this Section 8.1 shall affect or be deemed to modify any
representation or warranty contained in this Agreement or in any certificates
delivered by the Company or the Shareholders at the Closing.
8.2 Conduct of Business. Unless Buyer gives its prior written
consent for actions to be taken to the contrary, from the date hereof and until
the Closing or termination of this Agreement, whichever first occurs, the
Shareholders shall cause the Company to operate and conduct the Business
diligently and only in the ordinary course of business consistent with past
practices. Without limiting the generality of the foregoing, the Shareholders
shall cause the Company to:
(a) Organization and Relationships. Preserve intact its
properties, assets and business organizations and use its reasonable best
efforts to keep available the services of its officers, directors and employees
and to maintain satisfactory relationships with all vendors, suppliers,
distributors, sales representatives, customers, agents, consultants and others
having commercially beneficial relationships with it, commensurate with the
requirements of the Business;
(b) Indebtedness. Not increase the amount due and owing to
any lender for borrowed money, incur any capitalized lease obligations, or
guaranty or otherwise become obligated in respect of the obligations of any
other person or entity;
(c) Insurance. Maintain insurance coverage consistent with
past practices and, unless comparable insurance is substituted therefor or is
not generally available to businesses of the type conducted by the Company not
take any action to terminate or modify, nor permit the lapse or termination of,
the present insurance policies and coverages of the Company;
(d) Compensation and Benefits. Not increase the
compensation or benefits of any employee, independent contractor or agent; not
adopt or amend any commission plan or arrangement or any Employee Plan of any
type; not make, pay, award or grant any bonus or incentive or deferred
compensation; and not lend or advance any sum or extend credit to any employee,
director, shareholder or any affiliate; except that, without obtaining Buyer's
prior written consent, the Company may be permitted to increase the regular
salaries or wages of non-management employees in the ordinary course of business
and consistent with past practices, provided that such increases do not average
more than 4%;
(e) Lawsuits and Claims. Promptly notify Buyer of all
lawsuits, claims, proceedings or investigations that are, or which any officers
of the Company or any of the Shareholders
-20-
<PAGE> 21
has reason to believe may be, threatened, brought, asserted or commenced against
the Company or any of its officers or directors, and which could have a Material
Adverse Effect on the Company or the Business or which relates or could affect
in any way the Shares or the transactions contemplated hereby; and not release,
settle, compromise or relinquish any claims, causes of action or rights
involving more than $25,000 individually or $50,000 in the aggregate which the
Company may have against any other person or entity;
(f) Sales of or Liens on Assets. Not sell or otherwise
dispose, or enter into any agreement for the sale or other disposition, of any
of its assets or properties, except for sales of inventory and obsolete
equipment in the ordinary course of business and consistent with past practices,
and not permit or allow, or enter into any agreements providing for or
permitting, any of its assets or properties to be subjected to any Lien other
than Permitted Liens;
(g) Condition of Assets. Maintain in good working order
and condition, ordinary wear and tear excepted, all items of tangible personal
property, wherever located, that are used, leased or owned by it;
(h) Agreements and Transactions. Observe and perform all
terms, conditions, covenants and obligations contained in, and take all actions
necessary or appropriate to preserve the rights of the Company under, all
existing agreements, written or oral, between the Company and any third parties
the violation or loss of which would have, individually or in the aggregate, a
Material Adverse Effect on the Company or the Business; and, except as required
by any existing agreements, not enter into any new agreements or transactions,
or incur any expenditures, liabilities or obligations, involving more than
$50,000 individually or $100,000 in the aggregate (except for purchase from
customers or sales orders to suppliers incurred in the ordinary course of
business and consistent with past practice), or renew, extend, amend or modify
any existing agreement (written or oral) involving any commitments, obligations,
liabilities or requiring any expenditures that would exceed $50,000 individually
or $100,000 in the aggregate or which would govern the pricing or any other of
the material terms of sales to be made to any customers or purchases of raw
materials or components from any suppliers that are expected to account for more
than 5% of the Company's product sales or purchases of supplies during the next
12 months; not take any action which would cause a breach or violation of or
default under any Material Contract and promptly notify Buyer in writing of the
occurrence of any such breach or default; and not enter into any transaction
with any shareholder, director or officer or any person or entity related to or
affiliated with any such person other than to continue those transactions that
are described on Schedule 6.17 hereto;
(i) Consents; Compliance with Laws. Use its best efforts
to obtain and maintain all consents, assignments or approvals of third parties,
governmental and other, in form and substance reasonably satisfactory to Buyer,
the absence or loss of which would have a Material Adverse Effect on the Company
or the Business; and not take any action which would result in a violation of or
the noncompliance with any Material Contract or any laws or regulations
applicable to or any permits or licenses or contractual rights held by the
Company where such violation or non-compliance would or is reasonably likely to
have a Material Adverse Effect on the Company or the Business, or result in the
incurrence of any material liability by the Company or in the revocation,
modification or loss of any license, permit or contractual right needed for the
operation of the Business as presently conducted by the Company, or which would
adversely affect the obtaining of third-party consents or approvals for or
otherwise adversely affect the ability of the parties to consummate the
transactions contemplated by this Agreement; and cooperate with Buyer and render
to Buyer such assistance as Buyer may reasonably request in obtaining such
consents and approvals;
-21-
<PAGE> 22
(j) Taxes. Pay, when due, and prior to the imposition or
assessment of any interest, penalties or Liens by reason of the non-payment of,
all Taxes assessed against the Company;
(k) Dividends; Significant Transactions. Not: (i) declare
or pay any dividends or make any distributions with respect to, or redeem or
otherwise acquire any shares of, the capital stock of the Company; (ii)
accelerate the maturity or payment of or prepay any indebtedness or other
obligations of the Company; (iii) approve or effect any reclassification or
recapitalization of the Company or its authorized or outstanding shares of
capital stock; (iv) merge or consolidate the Company with or into a third party
or reorganize the Company; (v) approve or commence any proceedings for the
dissolution or liquidation of the Company; or (vi) enter into any agreement or
commitment to do any of the foregoing;
(l) Corporate Matters. Not: (i) amend in any manner the
Articles of Incorporation or Bylaws of the Company; (ii) authorize or issue any
shares of capital stock of any class or series; or (iii) create or issue any
warrants, obligations, subscriptions, options, convertible securities or other
commitments under which any additional shares of the capital stock of any class
or other equity securities of the Company may be directly or indirectly
authorized, issued or transferred; or (iv) agree to do any of the foregoing;
(m) Liabilities and Expenses. Not create or incur (whether
as principal, surety or otherwise) any material liabilities, secured or
unsecured, or fixed, absolute or contingent, other than liabilities and expenses
incurred in the ordinary course of business consistent with past practices;
(n) Tax Matters. Prepare and timely file any Tax Returns
required to be filed by the Company on or before the Closing Date and not make
or change any election, change any annual accounting period, adopt or change any
accounting method, file any amended Return, enter into any closing agreement,
settle any Tax claim or assessment, surrender any right to claim refund of
Taxes, consent to any extension or waiver of the limitation period applicable to
any Tax claim or assessment relating to the Company, take any other action or
omit to take any action, if any such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission would have
the effect of causing or increasing a Tax liability of the Company or the Buyer;
or
(o) Other. Not enter into any agreement or commitment to
take any action that would violate any of the covenants set forth in this
Section 8.2.
8.3 Shareholder Indebtedness. On or prior to the Closing Date,
each Shareholder shall satisfy any indebtedness of such Shareholder to the
Company, which indebtedness is reflected on Schedule 6.17.
8.4 Further Assurances. Each party hereto shall execute and
deliver, both before and after the Closing, such instruments and take such other
actions as the other party or parties, as the case may be, may reasonably
request in order to carry out the intent of this Agreement or to better evidence
or effectuate the transactions contemplated herein, provided that, with respect
to any such request, the requesting party bears the reasonable costs of
preparing, executing and delivering such instruments or the taking of such
actions, unless the other party is obligated, under any other terms or
provisions of this Agreement, to execute and deliver such documents or to take
any such action.
8.5 Transfer of Property Rights. The Shareholders shall each
have entered into an agreement in a form reasonably acceptable to the Buyer with
the Company (in the form of an
-22-
<PAGE> 23
employment agreement, assignment, transfer, release or otherwise) whereby each
Shareholder (i) acknowledges and agrees that all rights, title and interests in
and to the property of the Company (the "Property"), including without
limitation the property and assets referenced, referred to or contemplated by
Section 6.7 hereof, and all parts of such Property, including all copyrights,
patents, trade secrets, and trademarks therein, in whatever media or form, shall
be and remain the exclusive property of the Company; (ii) unconditionally and
irrevocably transfers, conveys and assigns to the Company all of the
Shareholder's current and hereafter acquired rights, title and interests in and
to such Products, and all parts thereof, including, without limitation, rights
in copyright, patent, trade secret and trademark; and (iii) agrees to take all
actions and execute all documents, as the Company may reasonably request, to
effectuate the acknowledgement of ownership and the vesting of complete and
exclusive ownership of the Products in the Company.
8.6 Notice of Breach. Each party to this Agreement will
immediately give notice to the other parties of the occurrence of any event, or
the failure of any event to occur, that results in or constitutes a breach by it
of any representation or warranty or a failure by it to comply with or fulfill
any covenant, condition or agreement contained herein.
8.7 Employment Agreements. At the Closing, each of Rocky R.
Arnold, Robert W. Ulrickson and Baxter R. Watkins shall execute and deliver an
employment agreement with the Company in the form attached hereto as Exhibit A
(the "Employment Agreements").
8.8 Releases. At the Closing, each of the Shareholders shall have
executed a release in favor of the Company, in the form attached hereto as
Exhibit B (the "Releases").
8.9 Certain Covenants of the Shareholders; No Solicitation.
Except for the sale of the Shares to Buyer, from and after the date hereof and
continuing until the termination of this Agreement or the consummation of the
sale of the Shares to Buyer hereunder, whichever first occurs, none of the
Shareholders shall sell, transfer, pledge, hypothecate or otherwise dispose of
any of the Shares now outstanding and none of the Shareholders shall grant any
options or rights to purchase, or enter into any agreements which would obligate
any of the Shareholders to sell, or entitle any person or entity to acquire, any
of such Shares, or any interest therein or rights thereunder, whether absolute
or contingent. Each Shareholder agrees that such Shareholder will not, and the
Shareholders shall cause the Company to not, directly or indirectly through any
of its respective officers, directors, employees, representatives or agents, (i)
solicit, initiate or encourage any inquiries or proposals (from any person or
entity other than Buyer) that constitute, or could reasonably be expected to
lead to, or accept, any proposal or offer for a merger, consolidation,
reorganization, business combination, sale of substantial assets, sale of shares
of capital stock (including, without limitation, by way of a tender offer), or
the issuance of any new securities of the Company or any other transaction or
series of transactions which could cause or result in a change of control of or
any material change in the Company or the Business, or which could interfere in
any manner, directly or indirectly, with the consummation of the transactions
contemplated by this Agreement (any of the foregoing inquiries or proposals
being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage
in negotiations or discussions concerning, or provide any non-public information
to any person or entity relating to or which could lead to or facilitate the
making of, any Acquisition Proposal by any person or entity other than Buyer, or
(iii) agree to, approve or recommend any Acquisition Proposal. The Shareholders
shall notify the Buyer immediately (and no later than 24 hours) after receipt by
the Company or such Shareholder (or by any of their advisors) of any written
bona fide Acquisition Proposal or any written request for nonpublic information
or for access to the properties, books or records of the Company. Such notice to
Buyer shall be made
-23-
<PAGE> 24
orally and in writing and shall indicate in reasonable detail the identity of
the person or entity making such Proposal or request and the terms and
conditions of such proposal, inquiry or contact.
8.10 Furnishing of Certain Information. If requested by Buyer,
the Shareholders shall cause the Company to (i) permit Buyer's independent
public accountants to have access to the books and records of the Company so
that, if required by Buyer, any unaudited historical financial statements and
other financial information of the Company can be reviewed or audited by Buyer's
independent public accountants; and (ii) permit such financial statements and
other information of or concerning the Company or its businesses to be disclosed
in any public filing by Buyer under or pursuant to the Securities Act of 1933,
as amended (the "Securities Act"), or the documents filed by the Buyer with the
Securities and Exchange Commission (the "Securities Filings"). In addition, each
Shareholder shall cause the Company's independent public accountants to provide
such information (including, without limitation, such accountants' workpapers)
and assistance, including the execution and delivery of opinions and consents,
with respect to the Company's historical consolidated financial statements, as
may be required by Buyer in connection with the preparation of financial
statements for, and their inclusion in, any such Securities Filings. The
Shareholders also shall cause the Company to provide to Buyer such assistance
and other information, including, without limitation, information concerning the
Company and the Business of the type and nature that would be required to be
included in a Registration Statement that the Company would be required by the
Securities Act to file on Form S-1 for a public offering of its equity
securities, for inclusion in any Securities Filing. Disclosure of such financial
statements and information furnished hereunder in any Securities Filing shall
not constitute a breach or violation of the confidentiality provisions of
Section 15 of this Agreement. The reasonable out-of-pocket expenses of the
Company's accountants and other professionals retained by the Company to prepare
any documents or information and accounting services specifically requested of
the Company by Buyer or its accountants shall be paid by Buyer, provided the
incurring of such expenses has been approved in advance and in writing by Buyer.
8.11 Monthly Financial Statements. As soon as practicable, and in
any event within 30 days following the end of each month ending on or after the
date of this Agreement, true and correct copies of the consolidated financial
statements of the Company, consisting of a balance sheet and statements of
income, and cash flows, as of and for the month then ended, shall be furnished
to Buyer, together with a copy of any compliance certificates furnished to the
Company's bank lenders.
8.12 Employee Benefits. In addition to the Buyer's obligations
under Section 8.14 below, Buyer shall, with respect to all full-time employees
employed by the Company, cause the Company to provide employee benefit plans,
programs and arrangements having benefits that, in all material respects, are
comparable to the employee benefit plans, programs and arrangements provided by
Buyer for its own employees of a similar position; provided, that the foregoing
shall not require Buyer to maintain any specific type of employee benefit plan;
provided, however, that, notwithstanding the foregoing, no full time employees
employed by the Company shall be entitled to any credit for accrued vacation to
the extent such accrued vacation exceeds the number of vacation days that
employees of Buyer are entitled to accrue.
8.13 Environmental Assessments. Buyer shall have the right to
obtain, at Buyer's expense and from environmental consultants selected by Buyer,
environmental assessments of any of the Real Properties (the "Environmental
Assessments") for the purpose of determining whether there exists any toxic or
hazardous substances (as such terms are defined in Section 6.13 above) on, about
or underneath the Real Properties, or migrating or threatening to migrate from
any of the Real Properties, or any condition, circumstance or activity which
constitutes a violation of or noncompliance with any
-24-
<PAGE> 25
Environmental Law (as defined below) which, in the reasonable judgment of Buyer,
based on the results of or any recommendations from its environmental
consultants, is required to be remedied or corrected (a "Hazardous Condition")
and which is attributable to the operations of the Company on or after, or to
any Hazardous Condition on, about or underneath or migrating from any such Real
Property which neither existed nor was originated prior to, inception. For
purposes of this Section 8.11, "Environmental Law" shall mean any federal, state
or local law, order, rule or regulation relating to the discharge, remediation,
removal, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of toxic or hazardous substances.
8.14 Executive Bonus Plan. Without limiting the provisions of
Section 8.12 above, on the Closing Date, the Buyer shall cause the Company to
establish a bonus plan in the form attached hereto as Exhibit C (the "Bonus
Plan"), to incentivize the senior executives of the Company named therein to
increase sales revenue derived from the Company's and the Buyer's engineering
and manufacturing businesses. The Company, the Buyer and the Shareholders each
hereby acknowledge that (i) any payments made under the Bonus Plan to the senior
executives of the Company are in consideration for services rendered by such
senior executives, and/or are incentives for continued employment by such senior
executives with the Company and (ii) in no event shall any such payments have
any correlation or relation to the number of Shares being sold to the Buyer by
any of such senior executives, or the transactions contemplated in this
Agreement.
8.15 Sable Technologies Matter. In the exercise of its fiduciary
obligations, the Board of Directors of the Company will confer from time to time
with Robert W. Ulrickson concerning the current arbitration with Sable
Technologies Incorporated ("Sable"), and will cause its responsible officer or
officers to consult with, and utilize, to the extent deemed reasonably
appropriate, the services and leadership of Robert W. Ulrickson in the
prosecution and resolution of such arbitration. In the event that the Company
receives any amounts (the "Recovery Amount") from Sable, then the Company will
pay the Shareholders, in proportion to each Shareholder's Prorata Share, the
difference between (i) the Recovery Amount and (ii) the sum of (A) all of the
Company's costs and expenses incurred in connection with the current arbitration
with Sable, except to the extent such expenses are reflected as liabilities
reducing the Net Asset Value in the Closing Balance Sheet and (B) any amounts
paid by Sable which are reflected as assets increasing the Net Asset Value in
the Closing Balance Sheet. Such amounts shall be paid by the Company within
thirty (30) days after the Company receives such amounts, by delivery of a check
to each Shareholder at their address as set forth on Schedule 1 attached hereto.
9. Conditions to Buyer's Obligations.
The obligations of Buyer to consummate the transactions
contemplated herein shall be subject to the satisfaction or waiver, on or before
the Closing Date, of each of the following conditions:
9.1 Accuracy of Representations and Warranties. All of the
representations and warranties of the Company and the Shareholders contained
herein shall be true and correct as of the date when made and shall be true and
correct as of the Closing Date with the same force and effect as though such
representations and warranties were made at and as of the Closing Date.
9.2 Due Diligence. The Buyer, its officers, directors, employees,
accountants, attorneys, representatives, advisors and/or agents shall have
completed to their satisfaction, a due diligence review of the Company's
business and financial condition pursuant to Section 8.1, and specifically,
Buyer's independent public accountants shall have completed their review of the
Financial
-25-
<PAGE> 26
Statements of the Company to their satisfaction, and Buyer deems such Financial
Statements to have been prepared in accordance with, and in satisfaction of
GAAP.
9.3 Performance. The Company and each of the Shareholders shall
have performed and complied with all agreements, obligations and conditions
required by this Agreement to be performed or complied with by them on or prior
to the Closing Date, and all actions which the Shareholders have been required
to cause to be taken by the Company at or prior to the Closing, as provided in
this Agreement, shall have been taken by them in accordance with the terms of
this Agreement.
9.4 Adverse Changes. From August 31, 1998, no material adverse
change shall have occurred and no event shall have taken place that would, or
could have a Material Adverse Effect on the Company or the Business and Buyer
shall have received a letter, in form and substance reasonably requested by
Buyer updating the Balance Sheet.
9.5 No Governmental Proceeding or Litigation. No suit, action,
investigation, inquiry or administrative or other proceeding by any governmental
body or other person or entity shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby.
There shall be no pending or threatened litigation, or asserted or unasserted
claims, assessments, or other loss contingencies, which could have a Material
Adverse Effect on the Company other than as disclosed in the Disclosure
Schedules delivered pursuant hereto as of the date of this Agreement.
9.6 Certificates. Buyer shall have received the following:
(a) Good Standing Certificate, dated as of a recent date,
with respect to the Company from (i) the Secretary of State of the State of
California and (ii) the Secretaries of State or other appropriate state agencies
of each other jurisdiction in which the Company is engaged in business
activities that would require qualification under the laws of such state; and
(b) Certificate signed by the President of the Company and
by the Shareholder Representative, dated as of the Closing Date, certifying that
(i) all representations and warranties of the Shareholders were true and correct
when made and remain true and correct in all material respects as of the Closing
Date; (ii) all of the respective covenants, agreements, obligations and
conditions of the Shareholders, and the actions of the Company required to have
been performed or complied with under or pursuant to this Agreement as of or
prior to the Closing have been fully performed or complied with; unless waived
in writing by Buyer; and (iii) all of the conditions to the obligations of Buyer
under this Agreement required to be satisfied by any of the Shareholders or the
Company by the Closing Date have been satisfied and fulfilled or have been
waived in writing by Buyer.
9.7 Consents. All consents, authorizations, permits or approvals
from third parties, governmental and other, required to permit the parties to
consummate the transactions contemplated hereby shall have been obtained,
without the imposition of any burdensome conditions on the Company or Buyer, and
shall not have been revoked or withdrawn.
9.8 Employment Obligations. All employment agreements and
commitments of the Company, including, without limitation, any commitments for
parachute payments or other amounts payable as a result of the transactions
contemplated hereunder, will be terminated as of the Closing Date
-26-
<PAGE> 27
without liability to, or will have been paid or otherwise fully discharged by
the Shareholders other than from funds or assets of the Company.
9.9 Shareholder Indebtedness. Each Shareholder shall have paid,
in full, all amounts owing to the Company by such Shareholder, as provided in
Section 8.3 above.
9.10 Opinion of Counsel. Buyer shall have received an opinion,
dated the Closing Date, of The Corporate Law Group, substantially in the form of
Exhibit D hereto.
9.11 Employment Agreement. Each of Rocky R. Arnold, Robert W.
Ulrickson and Baxter R. Watkins shall have executed and delivered their
respective Employment Agreements to Company.
9.12 Releases. Each of the Shareholders shall have executed and
delivered the Releases to the Buyer.
9.13 Resignation. Buyer shall have received written resignation
letters from each director and executive officer of the Company designated in
writing by Buyer on or before the Closing Date.
9.14 Additional Instruments. Buyer shall have received such other
or additional instruments, consents, endorsements and documents as Buyer
reasonably deems to be necessary to enable the transactions contemplated by this
Agreement to be consummated as provided in this Agreement. All other proceedings
in connection with this Agreement and the transactions contemplated hereby, and
all documents and instruments incident to such transactions, shall be reasonably
satisfactory in form and substance to Buyer and its counsel.
9.15 Results of Environmental Assessments. Buyer shall be
reasonably satisfied with the results of the Environmental Assessments conducted
pursuant to Section 8.11 relating to the presence on, about or underneath the
Real Properties of Hazardous Substances that were not present at such Real
Properties prior to, and the Company's compliance with Environmental Laws since,
inception.
10. Conditions to the Shareholder's Obligations.
The obligations of the Shareholders to consummate the
transactions contemplated herein shall be subject to the satisfaction or waiver,
on or before the Closing Date, of each of the following conditions:
10.1 Accuracy of Representations and Warranties. All of the
representations and warranties of Buyer contained herein shall be true and
correct as of the date when made and shall be true and correct as of the Closing
Date with the same force and effect as though such representations and
warranties were made at and as of the Closing.
10.2 Performance. Buyer shall have performed and complied with
all agreements, obligations and conditions required by this Agreement to be
performed by or complied with on or prior to the Closing Date.
10.3 No Governmental Proceeding or Litigation. No suit, action,
investigation, inquiry or administrative or other proceeding by any governmental
body or other person or entity shall
-27-
<PAGE> 28
have been instituted or threatened which questions the validity or legality of
the transactions contemplated hereby.
10.4 Employment Agreements. Company shall have executed and
delivered Employment Agreements to Rocky R. Arnold, Robert W. Ulrickson and
Baxter R. Watkins in substantially the respective forms attached in Exhibit A
hereto; provided that any of such individuals shall, with the prior consent of
the Buyer, be entitled to waive such condition with respect to his Employment
Agreement.
10.5 Certificates. The Shareholders shall have received the
following:
(a) A Good Standing Certificate of Buyer as of a recent
date from the Secretary of State of the State of Delaware; and
(b) A certificate signed by the Chief Executive Officer
and Chief Financial Officer of Buyer, dated as of the Closing Date, certifying
that (i) all representations and warranties of Buyer were true and correct when
made and remain, in all material respects, true and correct as of the Closing;
(ii) all of the covenants, agreements, obligations and conditions of Buyer
required to have been performed or complied with by Buyer as of or prior to the
Closing have been fully performed or complied with, unless waived in writing by
the Company and the Shareholders; and (iii) all of the conditions to the
Shareholders' obligations under this Agreement required to be satisfied by the
Closing Date by Buyer have been satisfied and fulfilled or waived in writing by
the Company and the Shareholders.
10.6 Consents. All consents, authorizations, permits or approvals
from third parties, governmental and other, required to permit the parties to
consummate the transactions contemplated hereby shall have been obtained,
without the imposition of any burdensome conditions on the Company or Buyer, and
shall not have been revoked or withdrawn.
10.7 Opinion of Counsel. The Shareholders shall have received an
opinion, dated the Closing Date, of Stradling Yocca Carlson & Rauth,
substantially in the form of Exhibit E hereto.
10.8 Additional Instruments. The Shareholders shall have received
certified copies of resolutions duly adopted by the Board of Directors of Buyer
approving this Agreement and authorizing the transactions contemplated hereby,
and such other or additional instruments, consents, endorsements and documents
as the Shareholders reasonably deem to be necessary to enable the transactions
contemplated by this Agreement to be consummated as provided in this Agreement.
All other proceedings in connection with this Agreement and the transactions
contemplated hereby, and all documents and instruments incident to such
transactions, shall be reasonably satisfactory in form and substance to the
Shareholders and their counsel.
11. Closing.
11.1 Closing; Closing Date. The consummation of the purchase and
sale of the Shares (the "Closing") shall take place at the offices of Stradling
Yocca Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach,
California 92660, at 10:00 A.M. on or before October 7 1998, but in no event
later than , 1998, or at such other place, date and time as Buyer and the
holders of a majority of the Company's outstanding Shares may mutually agree
(the "Closing Date").
-28-
<PAGE> 29
11.2 Closing Deliveries. In connection with and at the time of
the Closing:
(a) By the Shareholders. The Shareholders shall deliver or
cause to be delivered to Buyer the following:
(i) The stock certificates evidencing all of the
Shares, accompanied by appropriate instruments of transfer duly executed
by the Shareholders;
(ii) The Employment Agreements, duly executed by
Rocky R. Arnold, Robert W. Ulrickson and Baxter R. Watkins;
(iii) The Releases, duly executed by the
Shareholders; and
(iv) Each of the certificates, documents,
instruments and evidences required to be delivered to Buyer pursuant to
Section 9 above.
(b) By the Company. The Shareholders shall cause the
Company to deliver to Buyer the following:
(i) The minute books, stock transfer books and
records, the corporate seal and other corporate records of the Company;
(ii) All documents and instruments and records
pertaining to bank accounts and safety deposit boxes of the Company
together with such instruments as the depository institutions where such
accounts and safety boxes are maintained may require to change the
signatories on such accounts and for such safety deposit boxes; and
(iii) Each of the certificates, documents,
instruments and evidences required to be delivered to Buyer pursuant to
Section 9 above; and
(iv) The Employment Agreements, duly executed by
the Company; and
(c) By Buyer. Buyer shall deliver to the Shareholders the
following:
(i) Bank cashiers' checks or wire transfers of
funds payable to the order of the Shareholders in an aggregate amount
equal to the Closing Date Payment; and
(ii) Each of the certificates, documents,
instruments and evidences required to be delivered by Buyer pursuant to
Section 10 above.
12. Termination and Abandonment.
12.1 Methods of Termination. This Agreement may be terminated and
the purchase and sale of the Shares herein contemplated may be abandoned at any
time but not later than the Closing Date:
(a) By mutual written consent of the Shareholders and
Buyer; or
-29-
<PAGE> 30
(b) By any party, if the Closing has not occurred by
November 1, 1998;
provided, that the party so terminating is not in breach of any of its material
obligations under this Agreement.
12.2 Procedure Upon Termination. In the event of termination and
abandonment by Buyer or by the Shareholders, or both, pursuant to Section 12.1
hereof, written notice thereof shall forthwith be given to the other party or
parties. Upon termination, the purchase and sale of the Shares shall be
abandoned, without further action by Buyer or the Shareholders. If this
Agreement is terminated as provided herein:
(a) Each party will redeliver all documents, workpapers
and other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same;
(b) The obligations of confidentiality set forth in
Section 15 hereof shall continue despite such termination; and
(c) The parties shall be relieved of any obligation to
sell or purchase the Shares, but none of the parties shall be relieved of any
liability for any material breach or default under this Agreement.
13. Survival of Covenants, Representations and Warranties.
All of the representations and warranties set forth in this
Agreement or in any certificates delivered pursuant hereto, and all covenants
which by their terms require performance or compliance following the Closing,
shall remain in full force and effect and shall survive the Closing
indefinitely.
14. Indemnification.
14.1 Indemnification by the Shareholders.
(a) Each Shareholder shall, jointly and severally, through
the Holdback or otherwise, indemnify, hold harmless and defend Buyer and its
directors, officers, shareholders, employees, agents and successors and assigns,
and, from and after the Closing, and also the Company and those persons who,
following the Closing Date, are the Company's officers, directors, agents and
successors and assigns (collectively, all of the foregoing, the "indemnified
parties" or, individually, an "indemnified party") from and against any and all
"Damages" (as hereinafter defined) that arise from or are in connection with:
(i) Except as provided in Section 14.1(b) below,
any breach of, or inaccuracy in, any of the representations or
warranties of any of the Shareholders contained in this Agreement or in
any of the Disclosure Schedules or any certificates delivered hereunder;
(ii) Except as provided in Section 14.1(b) below,
any breach or default by the Shareholders of their covenants or
agreements contained in this Agreement;
(iii) Any claim, lawsuit, action or other
proceeding that (i) is pending against the Company and/or any of the
Shareholders on the Closing Date, except only to the
-30-
<PAGE> 31
extent that such claim, lawsuit, action or other proceeding is taken
into account as a reduction of the Net Asset Value in the Closing
Balance Sheet, or (ii) is brought against Buyer or the Company as a
result of or arising from any acts or omissions of or for the Company or
the Shareholders that have occurred on or before the Closing Date or any
acts or omissions of the Shareholders that may occur after the Closing
Date, and whether or not the bringing or assertion of any such claim,
lawsuit, action or other proceeding constitutes a breach of the
Shareholders' representations or warranties contained in this Agreement
or is disclosed in Disclosure Schedules;
(iv) The failure to have paid or to pay, when due,
any Taxes or effect any withholdings that arose out of the operations of
the Company or the consummation of the transactions contemplated by or
preceding this Agreement or the failure to have filed, when due, any Tax
Returns related to any such Taxes or any period up to the Closing Date,
whether or not such failure constitutes a breach of the representations
or warranties of Seller contained in this Agreement or is disclosed in
the Disclosure Schedules;
(v) Any claim, lawsuit, action or other proceeding
that is brought against the Company or the Buyer in connection with any
payments made to the senior executives of the Company under the Bonus
Plan;
(vi) The existence prior to the Closing Date of any
toxic or hazardous substances or materials upon, about or beneath the
Real Properties or migrating or threatening to migrate from any of the
Real Properties or the violation of applicable environmental laws or
regulations pertaining to the Real Properties, or any real properties at
which the Company previously conducted any operations and whether or not
the existence of such toxic or hazardous substances or materials or the
existence or occurrence of any such violations was disclosed to Buyer.
(b) Each Shareholder, severally and not jointly, shall
indemnify, hold harmless and defend Buyer and each of the other indemnified
parties named in Section 14.1(a) above, from and against any and all Damages
that arise from or in connection with any breach or inaccuracy in any of such
Shareholder's representations or warranties contained in Section 5 or in any
Disclosure Schedules or Closing certificate relating to any such representations
or warranties of such Shareholder.
14.2 Damages. "Damages," as used in this Section 14, shall mean:
(i) demands, claims, actions, suits, investigations and legal or other
proceedings brought against any indemnified party or parties, and any judgments
or assessments, fines or penalties rendered therein or any settlements thereof,
and (ii) all liabilities, damages, losses, Taxes, assessments, costs and
expenses (including, without limitation, reasonable attorneys' and accountants'
fees and expenses) incurred by any indemnified party or parties, to the extent
not reimbursed or paid for by insurance, whether or not they have arisen from or
were incurred in or as a result of any demand, claim, action, suit, assessment
or other proceeding or any settlement or judgment.
14.3 Limitations.
(a) Time. No claim for indemnification under this Section
14 may be made after April 7, 2000, except that claims for indemnification may
be made by the Buyer at any time after the Closing and prior to the expiration
of the applicable statute of limitations with respect to Damages arising from
any breach of any of the representations and warranties of the Company and the
-31-
<PAGE> 32
Shareholders (and indemnification therefor) contained in Section 6.13
(Environmental and Safety Matters), and Section 6.16 (Taxes and Tax Returns).
(b) Threshold Amount. The Shareholders shall not have any
obligation to indemnify the Buyer or any of the other indemnified parties named
in Section 14.1(a) unless and until the indemnified parties have incurred or
suffered Damages in an aggregate amount in excess of Twenty-Five Thousand
Dollars ($25,000) (the "Threshold"), whereupon the Shareholders shall become
obligated to indemnify the indemnified parties for all Damages they have
incurred, including the amount of the Threshold, but subject to the
Indemnification Ceilings hereinafter set forth in Section 14.3(b); provided,
however, that the foregoing limitation shall not apply to any indemnification
obligation of the Shareholders pursuant to Section 14.1(a)(iii), 14.1(a)(iv) or
14(a)(v) above, or any reduction to the Purchase Price pursuant to Sections 2.3,
3 and 8.12 above.
(c) Ceiling Amount. The aggregate liability for
indemnification under Section 14.1 of the Shareholders shall in no event exceed
the Purchase Price (the "Indemnification Ceiling").
14.4 Notice of Claims. Whenever any claim shall arise for
indemnification hereunder, the indemnified party shall promptly notify the other
party or parties from whom indemnity may be sought therefor under this Section
14 (the "indemnifying party") of the claim and, when known, the facts
constituting the basis for such claim; provided that the indemnified party's
failure to give such notice shall not affect any rights or remedies of such
indemnified party hereunder with respect to indemnification for Damages except
to the extent that the indemnifying party is materially prejudiced thereby. In
the event that the Shareholders are collectively the indemnifying parties, the
Buyer shall only be required to deliver a Notice of Claim to the Shareholder
Representative. In the event of any claim for indemnification hereunder
resulting from or in connection with any claim or legal proceeding by a third
party, the notice to the indemnifying party shall specify, if known, the amount
or any estimate of the amount of the liability arising therefrom. Neither the
indemnified party nor any indemnifying party shall settle or compromise any
claim by a third party for which the indemnified party is entitled to
indemnification hereunder, without the prior written consent of the other party
(which shall not be unreasonably withheld), unless suit shall have been
instituted against the indemnified party and the indemnifying party shall not
have taken control of such suit after notification thereof as provided in
Section 14.6 of this Agreement.
14.5 Third Party Claims. In connection with any claim giving
rise to indemnity hereunder that results or may result from or arises or may
arise out of any claim or legal proceeding by a person who is not a party to
this Agreement, the indemnifying party at its sole cost and expense may, upon
written notice to the indemnified party, assume the defense of any such claim or
legal proceeding if, within fifteen (15) days of receipt of notice of the claim
or proceeding, it elects in writing to do so, and thereafter diligently conducts
the defense thereof with counsel reasonably acceptable to the indemnified party.
If the indemnifying party has so assumed the defense of any such claim or legal
proceeding, the indemnified party shall be entitled to participate in (but not
control) the defense of any such action, with its counsel and at its own
expense. If the indemnifying party does not assume or fails to conduct in a
diligent manner the defense of any such claim or litigation resulting therefrom
with counsel reasonably acceptable to the indemnified party, then (i) the
indemnified party may defend against such claim or litigation, in such manner as
it may deem appropriate, including, but not limited to, settling such claim or
litigation, after giving notice of the same to the indemnifying party, on such
terms as the indemnified party may deem appropriate, (ii) the indemnifying party
shall pay the costs and expenses (including the reasonable fees and cost of the
attorneys and accountants for the indemnified
-32-
<PAGE> 33
parties) incurred in the defense of such claim or other proceeding as and when
the same are incurred, and (iii) the indemnifying party shall be entitled to
participate in (but not control) the defense of such claim or proceeding, with
its counsel and at its own expense. If the indemnifying party thereafter seeks
to question the manner in which the indemnified party defended such third-party
claim or proceeding or the amount or nature of any such settlement, the
indemnifying party shall have the burden to prove, by a preponderance of the
evidence, that the indemnified party did not defend or settle such third-party
claim or proceeding in a reasonably prudent manner. Each party agrees to
cooperate fully with the other, such cooperation to include, without limitation,
attendance at depositions and the provision of relevant documents as may be
reasonably requested by the indemnifying party; provided that the indemnifying
party will hold the indemnified party harmless from all of its expenses,
including reasonable and actual attorneys' fees, as and when incurred in
connection with such cooperation by the indemnified party.
14.6 Indemnification Procedures. Upon receipt of a notice of
claim for indemnification (a "Notice of Claim"), the indemnifying parties shall
have fifteen (15) business days to contest their indemnification obligation with
respect to such claim, or the amount thereof, by written notice to the
indemnified party (a "Contest Notice"); provided, however, that if, at the time
a Notice of Claim is submitted to the indemnifying parties the amount of the
Damages in respect thereof cannot yet be determined, such fifteen (15) day
period shall not commence until a further written notice (a "Notice of
Liability") has been sent or delivered by the indemnified party to the
indemnifying parties setting forth the amount of the Damages incurred by the
indemnified parties in respect of the indemnification claims that were the
subject of the earlier Notice of Claim. Any Contest Notice shall specify the
reasons or bases for the objection of the indemnifying party to the claim, and
if the objection relates to the amount of the Damages asserted, the amount, if
any, which indemnifying parties believe is due the indemnified party or parties.
If no such Contest Notice is given within such 15-day period, the obligation of
the indemnifying parties to pay to the indemnified parties the amount of the
Damages set forth in the Notice of Claim, or subsequent Notice of Liability,
shall be deemed established and accepted by the indemnifying parties; provided,
however, that if the actual Damages later prove to be greater or less than that
set forth in the Notice of Claim or Notice of Liability, the indemnifying
parties shall be responsible for the actual Damages incurred. If, on the other
hand, the indemnifying parties contest a Notice of Claim or Notice of Liability
(as the case may be) within such 15-day period, the indemnified and indemnifying
parties shall thereafter attempt in good faith to resolve their dispute by
agreement. If they are unable to so resolve their dispute within the immediately
succeeding thirty (30) days, such dispute shall be resolved by binding
arbitration in Orange County, California, as provided in Section 18.8 below. The
award of the arbitrator shall be final and binding on the parties and may be
enforced in any court of competent jurisdiction. Upon final determination of the
amount of the Damages that is the subject of an indemnification claim (whether
such determination is the result of indemnifying parties' acceptance of, or
failure to contest, a Notice of Claim or Notice of Liability, or as a result of
resolution of any dispute with respect thereto by agreement of the parties or
binding arbitration), such amount shall be payable, in cash, by the indemnifying
parties to the indemnified party or parties who have been determined to be
entitled thereto within five (5) days of such final determination of the amount
of the Damages due by the indemnifying parties. Notwithstanding anything to the
contrary contained elsewhere in this Section 14, if the indemnifying parties are
contesting only the amount of any Damages, then as a condition precedent to the
effectiveness of any Contest Notice, they shall pay to the indemnified parties,
concurrently with the delivery of such Contest Notice, the portion of the
Damages which they are not contesting. Any amount that becomes due hereunder and
is not paid when due shall bear interest at a rate of eight percent (8%) per
annum until paid.
14.7 Subrogation. In the event that an indemnifying party pays
all or any portion of a third party claim or demand concerning which the
indemnified party submits a claim for indemnification
-33-
<PAGE> 34
pursuant to this Section 14, the indemnifying party shall be subrogated to any
and all defenses, claims or other matters which the indemnified party asserted
or could have asserted against the third party making such claim or demand. The
indemnified party shall execute and deliver to the indemnifying party (and at
the indemnifying party's expense) such documents as may be reasonably necessary
to establish by way of subrogation the ability of the indemnifying party to
assert such defenses, claims or other matters against any third party making
such claim or demands.
14.8 No Benefit to Third Parties. None of the limitations
contained in this Section 14 on the rights of the indemnified parties or on the
obligations or liabilities of the Shareholders is intended or shall be construed
to confer or give, nor shall they confer or give, to any person, corporation or
other entity, other than the parties hereto and their respective heirs,
executors, representatives, successors and permitted assigns, any legal or
equitable or other right, remedy or benefit, nor shall they be construed to
alter or diminish any rights of the Company or any of the obligations of any
person, corporation or other entity, under any agreement that may exist between
the Company on the one hand, and any such other person, corporation or other
entity, on the other hand, as the provisions of this Section 14 are intended to
be and shall be for the sole and exclusive benefit of the parties hereto and
their respective heirs, executors, representatives, successors and permitted
assigns, and for the benefit of no other person, corporation or other entity.
14.9 Holdback Amount. The Buyer shall be entitled to, but shall
not be obligated to, reduce the Holdback Amount by the amount of any Damages for
which the Buyer is entitled to indemnification from the Shareholders under this
Section 14.
15. Confidentiality.
Each party acknowledges that it may have access to various items
of proprietary and confidential information of the other in the course of
investigations and negotiations prior to Closing. Except as otherwise provided
in Section 9.8 above, each party agrees that any such confidential information
received from the other party shall be kept confidential and shall not be used
for any purpose other than to facilitate the arrangement of financing for and
the consummation of the transactions contemplated herein. The furnishing of
financial statements and other information of or relating to the Company or the
Business by Buyer for purposes of obtaining financing for the transactions
contemplated hereby, or the disclosure of such financial or other information by
Buyer as provided in Section 9.8 above, or the release of information to Buyer's
insurers for risk assessment purposes, shall not constitute a breach of this
Section 15. Confidential information shall include any business or other
information which is delivered by one party to the other, unless such
information (i) is already public knowledge or (ii) becomes public knowledge
through no fault, action or inaction of the receiving party, or (iii) was known
by the receiving party, or any of its directors, officers, employees,
representatives, agents or advisors prior to the disclosure of such information
by the disclosing party to the receiving party. No party hereto, nor its
respective officers, directors, employees, accountants, attorneys, or agents
shall intentionally disclose the existence or nature of, or any of the terms and
conditions relating to, the transaction referred to herein, to any third person,
specifically including, but not limited to, the employees of the Company;
provided, however, that such information may be disclosed (i) with the consent
of the other parties hereto, (ii) in applications or requests required to be
made to obtain licenses, permits, approvals or consents needed to consummate the
transactions contemplated herein, (iii) in Securities Filings as provided in
Section 9.8 above, (iv) to the professional advisors of each party hereto, or
(v) pursuant to court order or subpoena. The restrictions contained in this
Section 15 that are applicable to Buyer shall terminate at the Closing.
-34-
<PAGE> 35
16. Expenses.
Each of the parties shall pay all costs and expenses incurred or
to be incurred by it in negotiating and preparing this Agreement and in closing
and carrying out the transactions contemplated by this Agreement, including
without limitation, the fees and expenses of their respective counsel,
accountants and consultants and none of the assets of the Company shall be
reduced or diminished by any such costs or expenses incurred by the
Shareholders.
17. Notices.
All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly served or
delivered (i) upon actual physical delivery when delivered in person, or (ii) if
sent by facsimile to the facsimile number of such party set forth hereinafter,
upon receipt of confirmation of the transmission thereof to that number,
provided that the sender thereof mails a copy of such notice, request, demand or
other communication by the business day next succeeding the date such facsimile
was transmitted, or, (iii) if mailed, seventy-two (72) hours after being
deposited in the United States Mail, provided it is sent by certified mail,
return receipt requested, postage prepaid, and addressed as follows:
(a) If to the Company:
Logical Services Incorporated
3235 Kifer Road, Suite 210
Santa Clara, California 95051
Attention: Robert Ulrickson, President and
Chief Executive Officer
Facsimile No. (408) 739-6364
with copies to:
Paul David Marotta, Esq.
The Corporate Law Group
500 Airport Blvd., Suite 120
Burlingame, CA 94010-1914
Facsimile No: (650) 373-1501
(b) If to any Shareholder, to the address set forth
opposite such Shareholder's name on Schedule 1
attached hereto.
with copies to:
the Company and to Paul David Marotta, Esq.
(c) If to Buyer, to:
Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, California 92781
Attention: William L. Healey, President
and Chief Executive Officer
Facsimile No. (714) 838-8787
-35-
<PAGE> 36
with copies to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attention: Nick E. Yocca, Esq.
Facsimile No. (949) 725-4100
Any party hereto may from time to time, by written notice to the other party
given in the manner hereinabove set forth, designate a different address or
different facsimile number, which shall be substituted for the one specified
above for such party.
18. Miscellaneous.
18.1 Binding Effect. Subject to the provisions of Section 18.10
below, this Agreement shall be binding upon and inure to the benefit of the
respective heirs, executors, representatives, successors and assigns of the
parties hereto.
18.2 Counterparts. This Agreement may be executed in any number
of separate counterparts, each of which shall be deemed to be an original and
all of which together shall be deemed to be one and the same instrument.
18.3 Headings. The subject headings of the sections and
subsections of this Agreement are included for purposes of convenience only and
shall not affect the construction or interpretation of any of its provisions.
18.4 Waivers. Any party to this Agreement may waive any right it
may have hereunder or any breach or default hereunder by any other party hereto;
provided that no such waiver will be effective against the waiving party unless
it is in writing and specifically refers to this Agreement. No waiver will be
deemed to be a waiver of any subsequent or other right, breach or default of the
same or similar nature.
18.5 Entire Agreement. This Agreement, including the Schedules
and Exhibits and other documents referred to herein which form a part hereof,
embodies the entire agreement and understanding of the parties hereto with
respect to the subject matter hereof, and supersedes all prior or
contemporaneous agreements or understandings (whether written or oral) among the
parties, in respect to the subject matter contained herein. This Agreement may
not be modified, amended or terminated except by written agreement specifically
referring to this Agreement signed by the Buyer and the holders of a majority of
the outstanding Shares, provided, however, that any amendment which would reduce
the Purchase Price payable to the Shareholders for the Shares shall require the
approval, in writing, of all of the Shareholders.
18.6 Governing Law. This Agreement is deemed to have been made in
the State of California, and shall be governed by and construed in accordance
with the laws of, the State of California for contracts made and to be performed
in that State.
18.7 Public Communications. The Shareholders will cooperate with
the Buyer, if necessary, with respect to the making of a public communications
release relating to this Agreement. Except as may be required by applicable law,
neither the Shareholders nor the Company shall issue any
-36-
<PAGE> 37
press releases or other public communications relating to this Agreement or the
transactions contemplated hereunder without the prior written consent of the
Buyer. In the event that any such press release or other public communication
shall be required by applicable law, the Shareholders shall first consult in
good faith with the Buyer with respect to the form and substance of such release
or communication.
18.8 Disputes; Arbitration. In lieu of litigation, all disputes
concerning this Agreement or any attachment hereto or any asserted breach hereof
shall be resolved as follows:
(a) Cooperation. The parties agree to cooperate with each
other to attempt to settle all disputes arising under this Agreement without
resort to mediation or arbitration.
(b) Mediation. If the parties are unsuccessful in
resolving a dispute within forty-five (45) days from the date the parties begin
attempting to resolve it, either party may submit the dispute to a mediation
administered by Judicial Arbitration & Mediation Services, Inc. ("JAMS"), by
requesting in writing to JAMS and the other party that a mediation settlement
conference be scheduled. Each party shall use best efforts to complete the
mediation within forty-five (45) days after such notice pursuant to the rules of
JAMS. The mediation shall take place in Orange County, California. The parties
shall attempt in good faith to reach agreement on the appointment of a retired
judge from the JAMS panel as mediator. If they cannot agree within twenty (20)
days after such notice, JAMS will provide a list of three available retired
judges (which judges, to the extent available on a timely basis, should have
substantial experience in the area of the Dispute) and each party may strike one
name from the list. The remaining judge shall be appointed as mediator. The
parties shall each pay their own expenses of mediation, including attorney's
fees, and shall share equally the mediator's fees and expenses.
(c) Arbitration. All disputes which are not resolved
through cooperation and mediation shall be finally resolved by binding
arbitration by a single arbitrator in accordance with the Federal Arbitration
Act, 9 USCA 1, et. seq. in effect at the time. Each party to this Agreement can
initiate arbitration pursuant to this Agreement by serving notice on the other
party of an intent to arbitrate. Each of the parties consents to venue for such
arbitration in Orange County, California, if proceedings are commenced by the
Buyer, and in Santa Clara County, California, if proceedings are commenced by
the Company or any Shareholder. The notice shall specify with particularity the
claims or issues that are to be arbitrated. Within ten days of receipt of the
notice by all parties, the parties shall use all reasonable efforts to obtain a
list of available arbitrators from the appropriate office of JAMS and select a
mutually acceptable arbitrator. If the parties are unable to agree on an
arbitrator within ten days, any party may petition the Presiding Judge of the
forum's Superior Court to select a single arbitrator from the JAMS list. The
parties shall have the discovery rights available under the forum's Civil Rules,
subject to the limitation that each side shall be limited to no more than five
depositions unless, upon a showing of good cause, the party can convince the
arbitrator that more depositions should be permitted. It shall be the intention
of the parties to select an arbitrator and set a schedule according to the
following: (1) all discovery must be concluded within 120 days of the selection
of an arbitrator, (2) the arbitration hearing must be concluded within 30 days
of the close of discovery and it will be conducted in accordance with the
forum's Rules of Evidence, and (3) the arbitrator's final decision shall be
rendered within ten days of the final hearing day. Judgment upon the
arbitrator's final award may be entered in any court having jurisdiction
thereof. The parties shall bear in equal shares the arbitrator's fees and costs.
In those cases where the arbitrator's judgment consists solely of monetary
damages, the prevailing party in the arbitration shall be awarded its reasonable
attorneys' fees and all costs, other than the arbitrator's fees and costs. For
the purpose of determining who is the prevailing party, each side will submit to
the other a single written offer of settlement ten days prior to the start of
the arbitration hearing
-37-
<PAGE> 38
and the party whose offer most closely resembles the arbitrator's award shall be
deemed the prevailing party for the purpose of awarding attorneys' fees.
18.9 Assignment. No Shareholder may assign this Agreement, or
assign its rights or delegate its duties hereunder, without the prior written
consent of Buyer. Prior to the Closing, Buyer may not assign this Agreement, or
assign its rights or delegate its duties hereunder, without the prior written
consent of the Shareholder Representative.
18.10 Severability. Any provision of this Agreement which is
illegal, invalid or unenforceable shall be ineffective to the extent of such
illegality, invalidity or unenforceability, without affecting in any way the
remaining provisions hereof.
-38-
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
BUYER: SMARTFLEX SYSTEMS, INC.,
a Delaware corporation
By: //s// William L. Healey
--------------------------------------
William L. Healey, President and Chief
Executive Officer
COMPANY: LOGICAL SERVICES INCORPORATED,
a California corporation
By: //s// Robert Ulrickson
--------------------------------------
Robert Ulrickson, President and Chief
Executive Officer
-39-
<PAGE> 40
SHAREHOLDERS:
//s// Rocky R. Arnold //s// James W. Moyer
- ---------------------------- ------------------------------------
Rocky R. Arnold, Ph.D. James W. Moyer, Ph.D.
//s// Douglas L. Bish //s// John L. Nichols
- ---------------------------- ------------------------------------
Douglas L. Bish John L. Nichols
//s// Timothy Barry //s// David H. Nudelman
- ---------------------------- ------------------------------------
Timothy Barry David H. Nudelman
//s// Anthony D. Castagna //s// John M. O'Keefe
- ---------------------------- ------------------------------------
Anthony D. Castagna, Ph.D. John M. O'Keefe
//s// Robert K. Chipman //s// Connie R. Praast
- ---------------------------- ------------------------------------
Robert K. Chipman Connie R. Praast
//s// Jackie M. Daemion //s// Theodore D. Praast
- ---------------------------- ------------------------------------
Jackie M. Daemion Theodore D. Praast
//s// Ronald J. Heath //s// Tim R. Russell
- ---------------------------- ------------------------------------
Ronald J. Heath Tim R. Russell
//s// John N. Hendrick //s// Michael R. Seliskar
- ---------------------------- ------------------------------------
John N. Hendrick Michael R. Seliskar
//s// lb W. Larson //s// Michael Slater
- ---------------------------- ------------------------------------
lb W. Larson Michael Slater
//s// Richard M. Levy //s// David E. Smoler
- ---------------------------- ------------------------------------
Richard M. Levy, Ph.D. David E. Smoler
//s// Douglas J. Littlejohn //s// Douglas S. Thom
- ---------------------------- ------------------------------------
Douglas J. Littlejohn Douglas S. Thom
//s// David P. Manley //s// Robert W. Ulrickson
- ---------------------------- ------------------------------------
David P. Manley Robert W. Ulrickson
-40-
<PAGE> 41
Ulrickson-Weaver Charitable Trust
R. W. Ulrickson, Trustee
By: //s// R. W. Ulrickson
-------------------------
//s// Baxter R. Watkins
- ----------------------------
Baxter R. Watkins
//s// Nancy J. Weaver
- ----------------------------
Nancy J. Weaver
//s// Paul J. White
- ----------------------------
Paul J. White
//s// Bruce D. Wong
- ----------------------------
Bruce D. Wong
//s// Sun N. Yu
- ----------------------------
Sun N. Yu
-41-
<PAGE> 1
SMARTFLEX SYSTEMS, INC.
1998 ACQUISITION NONSTATUTORY STOCK OPTION PLAN
Section 1. Purpose
The purpose of the Smartflex Systems, Inc. 1998 Acquisition
Nonstatutory Stock Option Plan (the "Plan") is to attract and retain persons not
previously employed by the Company but who may have been employed by a business
acquired by the Company, as an inducement essential to such persons' entering
into an employment contract with the Company, and to provide an incentive for
such persons to achieve long-range performance goals, and to enable them to
participate in the long-term growth of the Company.
Section 2. Definitions
"Affiliate" means any business entity in which the Company owns
directly or indirectly 50% or more of the total combined voting power.
"Award" means any Option awarded under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor to such Code.
"Committee" means a committee of not less than two members of the
Board appointed by the Board to administer the Plan.
"Common Stock" or "Stock" means the Common Stock, $0.0025 par
value, of the Company.
"Company" means Smartflex Systems, Inc.
"Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Committee, to receive amounts due or
exercise rights of the Participant in the even of the Participant's death. In
the absence of an effective designation by a Participant, "Designated
Beneficiary" shall mean the Participant's estate.
"Effective Date" means December 9, 1998, the date of the Plan's
adoption by the Board of Directors, and, unless the Plan shall theretofore have
been terminated, the Plan shall terminate on December 9, 2008.
"Fair Market Value" means for any date under the Plan on which
the Common Stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and traded on the open market, the closing selling price per share
of the Common Stock on such date, as officially quoted on the principal
securities exchange on which the Common Stock is at the time traded or, if not
traded
<PAGE> 2
on any securities exchange, the closing selling price per share of the Common
Stock on such date, as reported on the Nasdaq National Market. If there are no
sales of the Common Stock on such day, then the closing selling price per share
on the next preceding day for which such closing selling price is quoted shall
be determinative of Fair Market Value. During such times as there is not a
market price available, the Fair Market Value of the Common Stock shall be
determined by the Committee in good faith, which determination shall be
conclusive and binding on all interested parties.
"Nonstatutory Stock Option" means an option to purchase shares of
Common Stock awarded to a Participant under Section 6 that is not intended to be
an Incentive Stock Option.
"Option" means a Nonstatutory Stock Option.
"Participant" means a person selected by the Committee to
receive an Award under the Plan.
Section 3. Administration
The Plan shall be administered by the Committee. The Committee
shall have authority to adopt, alter and repeal such administrative rules,
guidelines and practices governing the operation of the Plan as it shall from
time to time consider advisable, and to interpret the provisions of the Plan.
The Committee's decisions shall be final and binding. To the extent permitted by
applicable law, the Committee may delegate to one or more executive officers of
the Company the power to make Awards to Participants and all determinations
under the Plan with respect thereto, provided that the Committee shall fix the
maximum amount of such Awards for all such Participants and a maximum for any
one Participant.
Section 4. Eligibility
Executive officers and other key employees of businesses acquired
by the Company from time to time are eligible to be Participants in the Plan,
provided that such persons have not previously been employed by the Company and
provided further that participation in the Plan is a material inducement
essential to such persons' entering into an employment contract with the
Company.
Section 5. Stock Available for Awards
(a) Subject to adjustment under subjection (b), Awards may be
made under the Plan for up to 200,000 shares of Common Stock. If any Award in
respect of shares of Common Stock expires or is terminated unexercised or is
forfeited without the Participant having had the benefits of ownership (other
than voting rights), the shares subject to such Award, to the extent of such
expiration, termination or forfeiture, shall again be available for award under
the Plan. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) In the event that the Committee determines that any stock
dividend, extraordinary cash dividend, creation of a class of equity securities,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights
-2-
<PAGE> 3
offering to purchase Common Stock at a price substantially below fair market
value, or other similar transaction affects the Common Stock such that an
adjustment is required in order to preserve the benefits or potential benefits
intended to be made available under the Plan, then the Committee may equitably
adjust any or all of (i) the number and kind of shares in respect of which
Awards may be made under the Plan, (ii) the number and kind of shares subject to
outstanding Awards, and (iii) the award, exercise or conversion price with
respect to any of the foregoing, and if considered appropriate, the Committee
may make provision for a cash payment with respect to an outstanding Award,
provided that the number of shares subject to any Award shall always be a whole
number.
(c) Notwithstanding any other provisions of the Plan, the maximum
number of shares of Common Stock with respect to which any Participant may
receive Awards hereunder during any calendar year may not exceed 100,000.
Section 6. Stock Options
(a) Subject to the provisions of the Plan, the Committee may
award Nonstatutory Stock Options and determine the number of shares to be
covered by each Option, the option price therefor and the conditions and
limitations applicable to the exercise of the Option.
(b) The Committee shall establish the option price at the time
each Option is awarded. Nonstatutory Stock Options may be granted at such prices
as the Committee may determine, but the option price therefor shall not be less
than 85% of the Fair Market Value of the Common Stock on the date of the Award.
(c) Each Option shall be exercisable at such times and subject to
such terms and conditions as the Committee may specify in the applicable Award
or thereafter; provided, however, that no Option shall have a term of more than
10 years from the date of the Award. The Committee may impose such conditions
with respect to the exercise of Options, including conditions relating to
applicable federal or state securities laws, as it considers necessary or
advisable.
(d) No shares shall be delivered pursuant to any exercise of an
Option until payment in full of the option price therefor is received by the
Company. Such payment may be made in whole or in part in cash or, to the extent
permitted by the Committee at or after the award of the Option, by delivery of a
note or shares of Common Stock owned by the optionee, or by retaining shares
otherwise issuable pursuant to the Option, in each case valued at their Fair
Market Value on the date of delivery or retention, through a sale and remittance
procedure with a Company-designated brokerage firm or such other lawful
consideration as the Committee may determine.
Section 7. General Provisions Applicable to Awards
(a) Documentation. Each Award under the Plan shall be evidenced
by a Stock Option Agreement delivered to the Participant specifying the terms
and conditions thereof and containing such other terms and conditions not
inconsistent with the provisions of the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or to comply with
applicable tax and regulatory laws and accounting principles.
-3-
<PAGE> 4
(b) Committee Discretion. Each Award may be made alone, in
addition to or in relation to any other type of award under any other equity
incentive plan of the Company. The terms of each Award need not be identical,
and the Committee need not treat Participants uniformly. Except as otherwise
provided by the Plan or a particular Award, any determination with respect to an
Award may be made by the Committee at the time of award or at any time
thereafter.
(c) Termination of Employment. The Committee shall determine the
effect on an Award of the disability, death, retirement or other termination of
employment of a Participant and the extent to which, and the period during
which, the Participant's legal representative, guardian or Designated
Beneficiary may receive payment of an Award or exercise rights thereunder.
(d) Change in Control. In order to preserve a Participant's
rights under an Award in the event of a change in control of the Company, (i)
the time period relating to the exercise or realization of all outstanding
Awards shall automatically accelerate immediately prior to the consummation of
such change in control event and (ii) the Committee in its discretion may, at
any time an Award is made or at any time thereafter, take one or more of the
following actions: (A) provide for the purchase of the Award upon the
Participant's request for an amount of cash or other property that could have
been received upon the exercise or realization of the Award had the Award been
currently exercisable or payable, (B) adjust the terms of the Award in a manner
determined by the Committee to reflect the change in control, (C) cause the
Award to be assumed, or new rights substituted therefor, by another entity, or
(D) make such other provision as the Committee may consider equitable and in the
best interests of the Company. A "change in control" of the Company shall mean a
merger or consolidation in which the Company is not the surviving entity, except
for a transaction the principal purpose of which is to change the state in which
the Company is incorporated; the sale, transfer or other disposition of all or
substantially all of the assets of the Company; a complete liquidation or
dissolution of the Company; or any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from the persons holding those
securities immediately prior to such merger.
(e) Loans. The Committee may authorize the making of loans or
cash payments to Participants in connection with any Award under the Plan, which
loans may be secured by any security, including Common Stock, underlying or
related to such Award (provided that such Loan shall not exceed the Fair Market
Value of the security subject to such Award), and which may be forgiven upon
such terms and conditions as the Committee may establish at the time of such
loan or at any time thereafter.
(f) Withholding Taxes. The Participant shall pay to the Company,
or make provision satisfactory to the Committee for payment of, any taxes
required by law to be withheld in respect of Awards under the Plan no later than
the date of the event creating the tax liability. In the Committee's discretion,
such tax obligations may be paid in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value on the date of delivery. The Company and its Affiliates
may, to the extent permitted by law, deduct any such tax obligations from any
payment of any kind otherwise due to the Participant.
-4-
<PAGE> 5
(g) Foreign Nationals. Awards may be made to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or to comply with
applicable laws.
(h) Amendment of Award. The Committee may amend, modify or
terminate any outstanding Award, including substituting therefor another Award
and changing the date of exercise, provided that the Participant's consent to
such action shall be required unless the Committee determines that the action,
taking into account any related action, would not materially and adversely
affect the Participant.
Section 8. Miscellaneous
(a) No Right To Employment. No person shall have any claim or
right to be granted an Award, and the grant of an Award shall not be construed
as giving a Participant the right to continued employment. The Company expressly
reserves the right at any time to dismiss a Participant free from any liability
under the Plan, except as expressly provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the holder thereof.
(c) Amendment of Plan. The Board may amend, suspend or terminate
the Plan or any portion thereof at any time, subject to any stockholder approval
that the Board determines to be necessary or advisable.
-5-
<PAGE> 1
EXHIBIT 10.38
METHUEN DIVISION
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT dated as of the 2nd day of December, 1998 is entered into
by and between EA Industries, Inc., a New Jersey corporation (the "Company"),
and Methuen Acquisition Corp., a Delaware corporation (the "Purchaser").
WITNESSETH:
WHEREAS, the Company is engaged, among other things, in the business of
providing contract manufacturing electronic assembly services, including the
quick-turn, prototype and volume assembly and testing of a wide range of
products at a facility in Methuen, Massachusetts (such activities being
hereinafter referred to as the "Business"); and
WHEREAS, effective on the date of the Closing (as defined in Section VI
hereof), the Purchaser desires to acquire from the Company certain assets of the
Company as described in Section I(a) hereof (the "Assets"), and the Company
desires to sell or assign the Assets, on the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, and intending to be legally
bound, the parties hereto hereby agree as follows:
SECTION I
PURCHASE AND SALE OF THE ASSETS
(a) Purchase and Sale of the Assets. Subject to the terms and conditions
of this Agreement and on the basis of the representations, warranties, covenants
and agreements herein contained:
(i) The Company hereby sells, assigns and conveys to the
Purchaser, and the Purchaser hereby purchases, acquires and accepts from the
Company, the Assets, free and clear of any liens, charges, security interests or
encumbrances of any kind whatsoever, including any successor liabilities
(collectively, "Liens or Encumbrances"). The Assets shall include the Business,
all assets used in connection with the Business, all assets specified on
Schedule I(a)(i) hereto, work in process, inventory, contract rights, equipment,
financial books and records, all other assets of every kind and nature, real,
personal, and mixed, tangible and intangible, wherever located, of the Company
used in or in any way related to the Business, except for the assets listed on
Schedule I(a)(i) hereto (the "Excluded Assets"), which Excluded Assets shall
include, without limitation, the Lease referred to in Section I(g) hereof, and
all cash and all accounts receivable related to the Business.
(ii) Except to the extent expressly set forth in this Agreement
or any document, instrument or agreement executed or entered into pursuant
hereto or contemporaneously herewith,
<PAGE> 2
the Purchaser shall not assume and shall have no responsibility with respect to,
and shall be indemnified by the Company, against, any and all liabilities or
obligations of the Company, known or unknown, absolute or contingent, accrued or
unaccrued, whether due or to become due (collectively, "Liabilities").
(b) Purchase Price. The purchase price (the "Purchase Price") for the
Assets is Two Million Five Hundred Thousand Dollars ($2,500,000), which shall be
paid as follows. At the Closing, Purchaser shall pay to the Company an amount
(the "Closing Date Payment") equal to the Purchase Price minus the items set
forth on Schedule I(b) (the "Payout Amounts"), which Payout Amounts shall be
paid by the Purchaser except as otherwise noted on Schedule I(b). and less the
Holdback Amount described in Section I(d) below. The Closing Date Payment shall
be paid by wire transfer of immediately available funds to an account designated
by the Company; and
(c) Purchase Price Adjustment for Inventory. In the event the Inventory
Value determined in accordance with Section II(g) below is less than Six Hundred
Thousand Dollars ($600,000), the Purchase Price shall be reduced by one dollar
for each dollar that the Inventory Value is less than Six Hundred Thousand
Dollars ($600,000).
(d) Purchase Price Holdback.
(i) The Purchaser shall withhold from the Purchase Price an
amount equal to $350,000 (the "Holdback Amount") as collateral to secure the
Company's obligations described in Section VII(a) below, during the period
commencing on the Closing Date and terminating on the date that is eighteen (18)
months from the Closing Date. On the date that is eighteen (18) months from the
Closing Date (or if such date is not a business day, on the next business day
thereafter), the Holdback Amount, less the amount of any reductions thereto, as
provided in Section I(d)(ii) below, if a positive amount, shall be distributed
to the Company, without interest. The Purchaser shall not be required to
segregate or set aside the Holdback Amount. The Purchaser may, without
obligation, file a UCC-1 or other appropriate instruments with the California
and New Jersey Secretaries of State evidencing Purchaser's security interest in
the Holdback Amount.
(ii) The Holdback Amount is subject to reduction and retention by
Purchaser as follows:
(A) In the event that there is a Purchase Price reduction
pursuant to the terms of Section I(c) above, provided that immediately
after any reduction is made pursuant to Section I(c) ("Inventory
Reduction"), Purchaser shall promptly pay to the Company from the
Holdback Amount the difference between $100,000 and the Inventory
Reduction. If the Inventory Reduction is greater than $100,000, then
Purchaser shall withhold any additional monies from the Holdback Amount;
and
(B) In satisfaction of any claim for Damages by the
Purchaser against the Company pursuant to the provisions of Section
VII(a) below.
(iii) Without limiting the foregoing, in the event that
reductions to the Holdback Amount made by the Purchaser pursuant to this Section
I(d) exceed the amount of the Holdback Amount, then, in addition to any other
remedies available to the Purchaser, the Purchaser shall be able to recover any
excess amounts directly from the Company.
-2-
<PAGE> 3
(iv) Under no circumstances will the Company, without the prior
written consent of the Purchaser, assign, transfer or grant any security
interest in the Holdback Amount to any party other than the Purchaser pursuant
to Section I(d)(i) above.
(e) Allocation. The Purchase Price for the Assets shall be allocated to
the Assets at their fair market values. The portion of the Purchase Price not
allocated to specific Assets shall be allocated to goodwill. The Purchase Price
shall be allocated as set forth in Schedule I(e)(i) hereto and the Purchaser
agrees to file Internal Revenue Service Form 8594 which shall be prepared in
accordance with the Internal Revenue Code of 1986, as amended and all rules and
regulations promulgated thereunder.
(f) Removal of Assets by Purchaser. The Company shall allow Purchaser up
to ninety (90) days from the Closing Date (as defined in Section VI hereof) in
which to transition the business and remove the Assets from the Company's
facility located at 126 Merrimack Street, Methuen, Massachusetts 01844 (the
"Facility"). Purchaser shall have full access and all rights of the Company to
the Facility. Notwithstanding the foregoing, the Purchaser acknowledges that the
Company's rights to the Facility are subject to the lease (the "Lease") between
Tanon Manufacturing, Inc., a California corporation and wholly-owned subsidiary
of the Company, and Tri-Star Realty Trust, a Massachusetts trust (the "Lease"),
which expires on January 31, 1999, and as a result, Purchaser shall remove all
of the Assets from the Facility prior to such date. This Section I(f) does not
constitute a lease or sublease, and nothing contained in this Section I(f) or
elsewhere in this Agreement shall be construed as subjecting Purchaser to or
obligating Purchaser under any of the terms and conditions of the Lease and
Purchaser shall incur no liability in connection with the Lease. Any obligation
to reimburse rental payments or other expenses shall be subject to negotiation.
(g) Business Cut-Off. All business conducted on and after the Closing
Date shall be the obligation and responsibility of the Purchaser, and all
business conducted prior to the Closing Date shall be the obligation and
responsibility of the Company. Accordingly, all sales commissions payable to
sales representatives of the Company who operate with respect to the Business
which were earned in connection with product shipped prior to the Closing Date
shall be paid by the Company, and all sales commissions earned in connection
with product shipped after the Closing Date shall be paid by the Purchaser.
SECTION II
REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS OF THE COMPANY
The Company hereby represents and warrants to, and covenants and agrees
with, the Purchaser, as of the date of the Closing that:
(a) Organization and Qualification. The Company is duly organized,
validly existing and in good standing under the laws of the State of New Jersey
and has full corporate power and authority to own its properties and to conduct
the business in which it is now engaged. The Company has full corporate power
and authority, and all necessary approvals, permits, licenses and
-3-
<PAGE> 4
authorizations to own its properties and to conduct the Business as currently
conducted and to enter into and consummate the transactions contemplated under
this Agreement.
(b) Authority/Enforceability. The execution and delivery of this
Agreement by the Company, the performance by the Company of its covenants and
agreements hereunder and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate action.
This Agreement constitutes a valid and legally binding obligation of the
Company, enforceable against the Company in accordance with its terms, and
constitutes a valid and legal binding obligation of the Purchaser, enforceable
against it in accordance with its terms. The Bill of Sale, when executed and
delivered at Closing, and assuming due and proper execution by the Purchaser,
will constitute a valid and legal binding obligation of the Company, enforceable
against it in accordance with its terms.
(c) No Legal Bar; Conflicts. Except as listed on Schedule II(c), neither
the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, violates any provision of the charter or
by-laws of the Company as amended or any statute, ordinance, regulation, order,
judgment or decree of any court or governmental agency or board, or conflicts
with or will result in any breach of any of the terms of or constitute a default
under or result in the termination of or the creation of any lien pursuant to
the terms of any contract or agreement to which the Company is a party or by
which the Company or any of its assets are bound. No consents, approvals or
authorizations of, or filings with, any governmental authority or any other
person or entity are required in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
except for required consents, if any, to assignment of permits, certificates,
contracts, leases and other agreements as set forth in Schedule II(c) attached
hereto.
(d) Title to Assets. Except as noted on Schedule II(d) or as set forth
in a validly filed UCC-1 financing statement, copies of which are attached
hereto as Exhibit II(d), (i) the Company has good and valid title to all Assets
and (ii) none of the Assets is subject to any liens, charges, encumbrances or
security interests. None of the Assets (or uses to which they are put) fails to
conform with any applicable agreement, law, ordinance or regulation in a manner
which is likely to be material to the operations of the Business.
(e) Condition and Sufficiency of Assets. The Assets are in good working
order and condition, ordinary wear and tear excepted and are suitable for the
uses for which they are being utilized in the Business. The Assets together with
the Excluded Assets constitute all of the assets, properties, rights, privileges
and interests necessary for the operation of the Business as it has been owned
and operated by the Company.
(f) Permits; Compliance with Applicable Law.
(i) General. The Company is not in default under any, and has
complied with all, statutes, ordinances, regulations and laws, orders, judgments
and decrees of any court or governmental entity or agency, relating to the
Business or the Assets as to which a default or failure to comply might result
in a material adverse affect on the Assets or the Business. The Company has no
knowledge of any basis for assertion of any violation of the foregoing or for
any claim for compensation or damages or otherwise arising out of any violation
of the foregoing. The Company
-4-
<PAGE> 5
has not received any notification of any asserted present or past failure to
comply with any of the foregoing which has not been satisfactorily responded to
in the time period required thereunder.
(ii) Permits; Intellectual Property. Set forth on Schedule II(f)
is a complete and accurate list of all permits, licenses, approvals, franchises,
patents, registered and common law trademarks, service marks, tradenames,
copyrights (and applications for each of the foregoing), notices and
authorizations issued by governmental entities or other regulatory authorities,
federal, state or local (collectively the "Permits"), held by the Company in
connection with the Business. Except as set forth on Schedule II(f), the Permits
are all the Permits required for the conduct of the Business in its present
form. All the Permits set forth in Schedule II(f) are in full force and effect,
and neither the Company nor its shareholders have engaged in any activity which
would cause or permit revocation or suspension of any such Permit, and no action
or proceeding looking to or contemplating the revocation or suspension of any
such Permit is pending or threatened. There are no existing defaults or events
of default or event or state of facts which with notice or lapse of time or both
would constitute a default by the Company under any such Permit. The Company has
no knowledge of any default or claimed or purported or alleged default or state
of facts which with notice or lapse of time or both would constitute a default
on the part of any other party in the performance of any obligation to be
performed or paid by any other party under any Permit set forth in Schedule
II(f). The use by the Company of any proprietary rights relating to any Permits
does not involve any claimed infringement of such Permit or rights. The
consummation of the transactions contemplated hereby will in no way affect the
continuation, validity or effectiveness of the Permits set forth in Schedule
II(f) or require the consent of any person. Except as set forth on Schedule
II(f), the Company is not required to be licensed by, nor is it subject to the
regulation of, any governmental or regulatory body by reason of the conduct of
the Business in its present form.
(g) Inventories. The inventory of the Company related to the Business at
Closing will have an accounting value of at least $600,000 computed in
accordance with GAAP and will consist at Closing of usable raw materials and
supplies for which there are related purchase orders ("Useable Raw Materials
Inventory"), manufactured and purchased parts, work and goods in process, and
finished goods, all of which are fit for the purpose for which they were
procured or manufactured, and none of which is obsolete, or damaged, adjusted
for the passage of time through the Closing Date in accordance with the past
custom and practice of the Company, and GAAP. The finished goods inventory is
merchantable. Within ninety (90) days following the Closing Date, Ernst & Young
LLP ("E&Y") shall deliver to the Purchaser and to the Company, E&Y's
determination of the value of the inventory (the "Inventory Value") included in
the Assets purchased by Purchaser hereunder, as of the Closing Date, which
determination shall be made in accordance with generally accepted accounting
principles ("GAAP"). The Company shall have twenty days from the date of
delivery of the Inventory Value to dispute such value and on the twenty-first
day after the Inventory Value is delivered to the Company, the Inventory Value
shall be deemed accepted. The Company shall have the right to receive the
information upon which such determination was made, and shall, in the event of a
dispute as to the amount or method of calculation, have the right to review all
work papers relating to the determination. In the event the Company disputes
such determination, the Purchaser and the Company shall have the right to
designate an independent certified accountant, as mutually agreed, to review
such determination. Failing such agreement, the parties shall apply to the
American Arbitration Association for the designation of such accountant. The
final determination of such independent certified public accountant shall be
deemed conclusive. The costs and expenses of such independent certified public
accountant shall be paid fifty percent (50%) by the Purchaser and
-5-
<PAGE> 6
fifty percent (50%) by the Company. In the event that the Inventory Value is
less than Six Hundred Thousand Dollars ($600,000), the Purchase Price shall be
reduced by one dollar for each dollar that the Inventory Value is less than Six
Hundred Thousand Dollars ($600,000). In the event that the Inventory Value is
greater than Six Hundred Thousand Dollars ($600,000) (the inventory with a value
in excess of $600,000 shall be deemed to be the "Excess Inventory"), then the
Purchaser shall reimburse the Company for the Excess Inventory utilized by the
Purchaser during such ninety (90) day period at a price equal to the lower of
the book or market value of such utilized Excess Inventory. After such ninety
(90) day period, if there is any remaining Excess Inventory, Purchaser shall be
entitled to purchase all or any portion of such Excess Inventory at a price
equal to the lower of book or market value of such Excess Inventory. In the
event that Purchaser does not purchase such Excess Inventory, the Company shall
be entitled to sell such Excess Inventory to third parties.
(h) The Assigned Contracts and Other Agreements. Schedule II(h) hereto
contains an accurate and complete list of each material contract, agreement,
indenture, note, lease, or other instrument or commitment, written or oral, to
which the Company is a party or is bound or which relates to any of the Assets
or the consummation of the transactions contemplated by this Agreement (the
"Material Contracts"), which shall include without limitation all Material
Contracts included in the Assets and being assigned to the Purchaser at the
Closing (the "Assigned Contracts"), all of which are designated as "Assigned
Contracts" on Schedule II(h) hereto. Accurate and complete copies of all of the
Assigned Contracts have been furnished by the Company, or made available to
Purchaser prior to the date hereof. Except for the Material Contracts, there is
no contract, lease, license or other agreement, commitment or understanding that
is material to the Assets or the Business. Each of the Assigned Contracts is a
valid and binding obligation of The Company and, to the Company's knowledge, the
other parties thereto, enforceable in accordance with its terms, except as may
be affected by bankruptcy, insolvency, moratorium or similar laws affecting
creditors' rights generally and general principles of equity relating to the
availability of equitable remedies. There have not been any defaults by the
Company or, to the knowledge of the Company, defaults, claims of default or
claims of nonenforceability by the other party or parties under or with respect
to any of the Assigned Contracts which, individually or in the aggregate, have
had an adverse effect on the Business or any of the Assets, and to the Company's
knowledge there are no facts or conditions that have occurred or that are
anticipated to occur which, with the passage of time or the giving of notice, or
both, would constitute a default by the Company or by the other party or parties
under any of the Assigned Contracts or would cause the creation or imposition of
any Lien or Encumbrance upon any of the Assets or otherwise have an adverse
effect on the Business.
(i) Financial Statements. True and correct copies of the financial
statements of the Company are attached as Schedule II(i) hereto (the "Financial
Statements"). The Financial Statements were prepared in accordance with GAAP,
consistently applied, and fairly present the financial condition of the Company
and the results of its operations as at the relevant dates thereof and for the
respective periods covered thereby. Except as set forth on Schedule II(i), the
Company has no debts, obligations or liabilities, fixed or contingent, of a
nature that would be required, in accordance with GAAP, to be shown on a balance
sheet and that are not shown on the balance sheet as of September 30, 1998,
other than liabilities incurred after September 30, 1998 in the ordinary course
of the Company's business and consistent with past practice.
(j) Litigation; Disputes. Except as set forth in Schedule II(j), there
are no claims, disputes, actions, suits, investigations or proceedings pending
or threatened against the Company,
-6-
<PAGE> 7
the Business or any of the Assets, which would hinder the ability of the Company
to consummate the transactions contemplated hereby, and, to the best of the
knowledge of the Company, there is no basis for any such claim, dispute, action,
suit, investigation or proceeding. The Company has no knowledge of any default
under any such action, suit or proceeding. Except as set forth in Schedule
II(h), the Company is not in default in respect of any judgment, order, writ,
injunction or decree of any court or of any federal, state, municipal or other
government department, commission, bureau, agency or instrumentality or any
arbitrator.
(k) Environmental and Safety Matters. Except as set forth in Schedule
II(k), the Company has complied with, and the operation of the Business and the
use of the Assets are in compliance with, in all material respects, all federal,
state, regional and local statutes, laws, ordinances, rules, regulations and
orders relating to the protection of human health and safety, natural resources
or the environment, including, but not limited to, air pollution, water
pollution, noise control, on-site or off-site hazardous substance discharge,
disposal or recovery, toxic or hazardous substances, training, information and
warning provisions relating to toxic or hazardous substances, and employee
safety relating to the Business or the Assets (collectively the "Environmental
Laws"); and no notice of violation of any Environmental Laws or of any permit,
license or other authorization relating thereto has been received or threatened
against the Company, and to the best knowledge of the Company, is there any
factual basis for the giving of any such notice. Except as set forth in Schedule
II(k), no underground or above-ground storage tanks or surface impoundments are
located on any of the real properties owned or leased in connection with the
Business and (i) except in compliance with applicable Environmental Laws and any
licenses or permits relating thereto, there has been no generation, use,
treatment, storage, transfer, disposal, release or threatened release in, at,
under, from, to or into, or on such properties of toxic or hazardous substances
during the occupancy thereof by the Company or, to the best knowledge of the
Company, prior to such occupancy, and (ii) in no event has there been any
generation, use, treatment, storage, transfer, disposal, release or threatened
release in, at, under, from, to or into, or on such properties of toxic or
hazardous substances that has resulted in or is reasonably likely to result in a
material adverse effect on the Business or on the Assets. The Company has not
received any notice or claim to the effect that the Company or the Business is
or may be liable to any governmental authority or private party as a result of
the release or threatened release of any toxic or hazardous substances in
connection with the conduct or operation of the Business, and none of the
operations of the Business or the Company and none of the Assets is the subject
of any federal, state or local investigation evaluating whether any remedial
action is needed to respond to a release or a threatened release of any toxic or
hazardous substances at any of the real properties owned or leased in connection
with the Business. For the purposes of this Section II(k), "toxic or hazardous
substances" shall include any material, substance or waste that, because of its
quantity, concentration or physical or chemical characteristics, is deemed under
any federal, state, local or regional statute, law, ordinance, regulation or
order, or by any governmental agency pursuant thereto, to pose a present or
potential hazard to human health or safety or the environment, including, but
not limited to, (i) any material, waste or substance which is defined as a
"hazardous substance" pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. Section 9601, et seq.), as
amended, and its related state and local counterparts, (ii) asbestos and
asbestos containing materials and polychlorinated biphenyls, and (iii) any
petroleum hydrocarbon including oil, gasoline (refined and unrefined) and their
respective constituents and any wastes associated with the exploration,
development or production of crude oil, natural gas or geothermal energy.
-7-
<PAGE> 8
(l) Disclosure. No representation or warranty made under any Section
hereof and none of the information furnished by the Company set forth herein, in
the exhibits hereto or in any document delivered by the Company to the
Purchaser, or any authorized representative of the Purchaser, pursuant to this
Agreement contains any untrue statement of a material fact or fails to state a
material fact necessary to make the statements herein or therein not misleading.
SECTION III
REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS OF THE PURCHASER
The Purchaser represents and warrants to the Company that the statements
contained in this Section III are correct and complete as of the date of this
Agreement:
(a) Organization. The Purchaser is a corporation duly incorporated,
validly existing, and in good standing under the laws of the State of Delaware.
(b) Authorization of Transaction. The Purchaser has full corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes a valid and legal binding
obligation of the Purchaser, enforceable against it in accordance with its
terms. The Purchaser is not required to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by this
Agreement.
(c) Non-Contravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Purchaser is subject or any provision
of its charter or by-laws, or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which the Purchaser is bound or to which any of its assets is subject.
SECTION IV
ADDITIONAL REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE COMPANY AND THE PURCHASER
(a) Post Closing Cooperation. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the parties will take such further action (including the
execution and delivery of such further instruments and documents) as the other
may request, all at the sole cost and expense of the requesting party (unless
the requesting party is entitled to indemnification therefor under Section VII),
so long as such documents do not increase the liability or risk of liability of
the party of whom action is requested.
-8-
<PAGE> 9
(b) Discharge of Obligations. The Company covenants and agrees to pay
promptly and otherwise to fulfill and discharge all of the Liabilities of the
Company when due and payable and otherwise prior to the time at which any of
such Liabilities could in any way result in or give rise to a claim against the
Assets, the Business or the Purchaser, result in the imposition of any lien,
charge or encumbrance on any of the Assets, or adversely affect the Purchaser's
title to or use of any of the Assets.
(c) Access. The Company shall give to the Purchaser and its
representatives, from and after the date of execution of this Agreement, on
prior reasonable request therefor from the Purchaser or such representatives,
such access to the premises, employees, agents and consultants of the Company,
and such copies of the Financial Statements, books and records, and contracts
and leases and other documentation, so as to enable the Purchaser to inspect and
evaluate all aspects of the Business and operations, assets, operating results,
financial condition, capitalization, ownership, and legal affairs thereof. This
shall include the right of the Purchaser to have Phase I environmental
evaluations conducted on the any real property owned or leased by the Company in
connection with the Business. The Purchaser agrees to conduct its review, and to
cause its representatives to conduct their review, in a manner designed to
minimize any disruption of the operations of the Company.
(d) Conduct of Business. From the date of this Agreement and until the
Closing or termination of this Agreement, whichever first occurs, the Company
shall use its commercially reasonable best efforts, consistent with prior
practice (a) to preserve intact the business organization and employees and
other business relationships relating to the Business, (b) to continue to
operate in the ordinary course of its business and to maintain its books,
records and accounts in accordance with GAAP and (c) to preserve and maintain
the Assets, ordinary wear and tear excepted.
(e) "No Shop". The Company agrees that during the period commencing on
the date hereof and ending on the Closing Date, or ending sixty (60) days after
the date hereof, whichever first occurs, if the Company receives a firm offer to
buy any of the Business and/or the Assets (other than sales of inventory in the
ordinary course of the Business), in whole or in part, the Company shall
promptly after receipt of a proposal advise the Purchaser of the details of such
proposal and submit copies of all pertinent documents to the Purchaser. However,
if the Purchaser enters into a commitment or agreement with IBJ Schroeder Bank &
Trust Co. ("Schroeder") to participate in the Schroeder loans to Tanon
Manufacturing, Inc. ("Tanon"), pursuant to the terms of Section 4(g) of the
Letter of Intent among the Purchaser, on the one hand, and the Company and
Tanon, on the other hand (the "Tanon Letter of Intent"), the Company will not,
directly or indirectly, during the period commencing on the date hereof and
ending on the Closing Date, or ending sixty (60) days after the date hereof,
whichever first occurs: (a) offer or agree to sell any of the Business and/or
the Assets (other than sales of inventory in the ordinary course of the
Business), in whole or in part, (b) make or assist anyone else in making any
proposal to purchase any of the Business and/or the Assets (other than sales of
inventory in the ordinary course of the Business), (c) encourage, solicit or
initiate discussions or negotiations with or provide any information to any
corporation, partnership, person, entity or group, other than the Purchaser,
concerning any merger, consolidation, sale of assets, sale of securities or
acquisition of beneficial ownership with respect to the Business, or (d)
otherwise take any action which would prejudice the ability of the Purchaser to
complete the transactions described in this Agreement.
-9-
<PAGE> 10
(f) Litigation Support and Accounts Receivable Collection. So long as
any party hereto is actively contesting or defending against any action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand in
connection with (i) any transaction contemplated under this Agreement or (ii)
any fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act or transaction on or prior
to the Closing Date relating to this Agreement or the Business, the other party
will cooperate with him or it or his or its counsel in the contest or defense,
make available their personnel, and provide such testimony and access to their
books and records as shall be necessary in connection with the contest or
defense, all at the sole cost and expense of the contesting or defending party
(unless the contesting or defending party is entitled to indemnification
therefor under Section VII below). For a period of five years from the Closing
Date, the Purchaser shall use its commercially reasonable best efforts to retain
the books and records of the Business in substantially their condition at the
time of the Closing and no such books and records shall be destroyed without the
prior written approval of the Company or without first offering such books and
records to the Company.
The Purchaser shall deliver to the Company on a weekly basis any funds
and any checks, notes, drafts and other instruments for the payment of money,
duly endorsed to the Company, received by it (i) comprising payment of any of
the accounts receivable of the Business for periods on or before the Closing or
(ii) comprising payment of any amounts due from customers of the Business for
services rendered by the Business for periods on or before the Closing Date. The
Purchaser shall use its commercially reasonable best efforts to assist the
Company and its agents and representatives in collecting such accounts
receivable.
(g) Acknowledgement of Parties. The parties hereto acknowledge and agree
that the transactions contemplated herein, and the terms and conditions of this
Agreement, were negotiated by the parties in good faith and that the Purchase
Price being paid by the Purchaser hereunder for the Assets is not less than the
fair market value of such Purchased Assets.
SECTION V
CONDITIONS PRECEDENT
(a) Conditions Precedent to the Obligations of the Purchaser. The
obligation of the Purchaser to consummate the purchase of the Assets from the
Company shall be subject to the fulfillment, or the waiver by the Purchaser, at
or prior to the Closing, of each of the following conditions precedent:
(i) Representations and Warranties. The representations and
warranties made by the Company in this Agreement, including information set
forth on the Schedules hereto shall have been true and correct on the date
hereof, and shall also be true and correct at and as of the Closing Date with
the same force and effect as if made again at and as of that time.
(ii) Absence of Material Litigation. There shall be (i) no
pending or overtly threatened litigation (other than litigation which is
determined by the parties in good faith, after consulting their respective
attorneys, to be without legal or factual substance or merit), whether brought
against the Company or the Purchaser, that seeks to enjoin the consummation of
any of the transactions contemplated by this Agreement, (ii) no order that has
been issued by any court or governmental agency having jurisdiction that
restrains or prohibits the consummation of the
-10-
<PAGE> 11
purchase and sale of the Assets hereunder and no proceedings pending which are
reasonably likely to result in the issuance of such an order; and (iii) no
pending or overtly threatened litigation, which has had or is expected to have a
material adverse affect on the Business or the Assets.
(iii) Performance of Obligations. The Company shall have
performed and complied with all of its covenants required by this Agreement to
have been performed on or prior to the Closing.
(iv) No Material Adverse Change. Since October 31, 1998, there
shall not have been any change in or other event affecting the Business or the
condition (financial or other) or operating results of Company that has had or
is expected to have a material adverse effect on the Business or the Assets.
(v) Certificates. Receipt of a certificate executed by the
Company's President or Chief Financial Officer, dated as of the Closing Date and
reasonably satisfactory in form and substance to the Purchaser, certifying that
(i) each of the representations and warranties of the Company contained herein
was true and correct when made and is true and correct on and as of the Closing
Date with the same force and effect as if such representations and warranties
had been made on the Closing Date, (ii) the Company has performed and complied
with all of its covenants required to have been performed or complied with by it
pursuant hereto on or prior to the Closing Date, and (iii) all of the conditions
precedent to the Purchaser's obligations the satisfaction of which was the
responsibility of the Company has been satisfied, except to the extent waived by
the Purchaser.
(vi) Consents Obtained. All consents, waivers, approvals,
authorizations or orders required to be obtained by the Company and the
Purchaser for the authorization, execution and delivery of this Agreement and
the consummation by it by the transactions contemplated hereby shall have been
obtained by the Company or the Purchaser, as the case may be, including, without
limitation, all lease and equipment assignments and/or consents for the
assumption by, or assignment to, the Purchaser of the Assigned Contracts, in
form and substance acceptable to the Purchaser or the Purchaser's counsel in its
sole discretion.
(vii) Due Diligence; Phase I Evaluation. The results of the
Purchaser's business, legal and accounting due diligence with respect to the
Business shall be satisfactory to Purchaser in its sole discretion. Without
limiting the foregoing, the results of any Phase I environmental evaluation
conducted by the Purchaser on any of the real properties owned or leased by the
Company in connection with the Business shall be satisfactory to Purchaser in
its sole discretion.
(viii) Delivery of Additional Instruments. On the Closing Date,
unless waived in writing by Purchaser, the Company shall deliver, or cause to be
delivered to the Purchaser, the documents and instruments referenced in Section
VI(b)(ii), in form and substance satisfactory to Purchaser and its counsel.
(ix) Board Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite vote
of the Board of Directors of the Purchaser.
(b) Conditions Precedent to the Obligations of the Company. The
obligation of the
-11-
<PAGE> 12
Company to consummate the sale of the Assets to Purchaser shall be subject to
the fulfillment, or the waiver by the Company, at or prior to the Closing, of
each of the following conditions precedent:
(i) Representations and Warranties. The representations and
warranties made by the Purchaser in this Agreement hereto shall have been true
and correct on the date hereof, and also at and as of the Closing Date with the
same force and effect as if made again at and as of that time.
(ii) Absence of Material Litigation. There shall be (i) no
pending or overtly threatened litigation (other than litigation which is
determined by the parties in good faith, after consulting their respective
attorneys, to be without legal or factual substance or merit), whether brought
against the Company or the Purchaser that seeks to enjoin the consummation of
any of the transactions contemplated by this Agreement, and (ii) no order that
has been issued by any court or governmental agency having jurisdiction that
restrains or prohibits the consummation of the purchase and sale of the Assets
hereunder or any proceedings pending which are reasonably likely to result in
the issuance of such an order.
(iii) Performance of Obligations. The Purchaser shall have
performed and complied with all of its covenants required by this Agreement to
have been performed by it at or prior to the Closing.
(iv) Certificates. Receipt from the Purchaser of a certificate,
dated as of the Closing Date and signed by the President or the Chief Financial
Officer of the Purchaser, certifying that (i) each of its representations and
warranties contained herein was true and correct when made and is true and
correct on and as of the Closing Date with the same force and effect as if such
representations and warranties had been made on the Closing Date, and (ii) it
has performed and complied with all agreements, obligations, covenants and
conditions required to be performed or complied with by it pursuant hereto on or
prior to the Closing Date, except as may be waived in writing by the Company.
(v) Delivery of Additional Instruments. On the Closing Date,
unless waived in writing by Company, the Purchaser shall deliver, or cause to be
delivered to Company, the Purchase Price and the documents and instruments
referenced in Section VI(b)(i), in form and substance satisfactory to Company
and its counsel.
SECTION VI
CLOSING AND DELIVERIES
(a) Time and Place of Closing. The closing of the purchase and sale of
the Assets as set forth herein (the "Closing") shall be held at the offices of
the Business. The Closing shall commence at 2:00 p.m.. local time on December 2,
1998 or such other date upon which the Purchaser and the Company shall agree
(the "Closing Date").
(b) Deliveries.
(i) At the Closing, the Purchaser shall deliver to the Company
the following:
-12-
<PAGE> 13
(A) A wire transfer for the Closing Date Payment of the
Purchase Price, as described and adjusted in accordance with Section
I(b); and
(B) Such certificates, instruments and other documents, in
form and substance satisfactory to the Company and its counsel, as they
shall have reasonably requested in connection with the transactions
contemplated hereby.
(ii) At the Closing, the Company shall deliver to the Purchaser,
as a condition to Closing, the following:
(A) A Bill of Sale in the form attached hereto as Exhibit
VI(b)(ii)(A), such other instruments of conveyance and transfer, and
such powers of attorney, as shall be effective to vest in the Purchaser
title to or other interest in, and the right to full custody and control
of, the Assets, free and clear of all Liens or Encumbrances whatsoever;
(B) The Assigned Contracts and the books and records of
the Company constituting a part of the Assets;
(C) Evidence that any and all sales or use taxes assessed
in connection with this transaction have been paid by the Company;
(D) Such certificates, instruments and other documents, in
form and substance satisfactory to the Purchaser and its counsel, as
they shall have reasonably requested in connection with the transactions
contemplated hereby;
(E) An opinion of Howard P. Kamins, Esq., counsel for the
Company, delivered to the Purchaser pursuant to the instructions of the
Company, substantially to the effect set forth in Exhibit VI(b)(ii)(E)
attached hereto; and
(F) All necessary consents of third parties under the
Assigned Contracts and other instruments of the Company to the
consummation of the transactions contemplated hereby, which consents
shall not provide for the acceleration of any liabilities or any other
detriment to the Purchaser or the Company.
(c) Other Inventory. At the Closing, the Company shall consign its
rights to the Other Inventory (as defined below) of the Business to the
Purchaser for a period of at least ninety (90) days from the Closing Date.
During such period, such Other Inventory shall remain on the Company's premises
and the Purchaser shall be entitled, but without obligation, and from time to
time, to draw down on the Other Inventory for sale and use in connection with
the Business as and where conducted by Purchaser. During such ninety (90) day
period, the purchase price to be paid by the Purchaser for such Other Inventory
shall be the lower of the Company's cost or the market price of such Other
Inventory. On or prior to the expiration of such ninety (90) day period, the
Purchaser shall be entitled to purchase all or part of the remaining Other
Inventory in bulk for a price and upon terms to be negotiated by the parties at
such time. Payments by Purchaser shall be within thirty (30) days of the draw
down of any such Other Inventory. Following the expiration of such ninety (90)
day period, the Purchaser shall be entitled to purchase all or part of the
remaining Other Inventory at a price and upon terms to be negotiated by the
parties at such time; provided that, if the parties are unable to negotiate a
mutually acceptable price at which such remaining Other Inventory may be
-13-
<PAGE> 14
purchased by the Purchaser, then the Company may sell any Other Inventory after
the expiration of such ninety (90) day period to any third party other than the
Purchaser. For purposes hereof, the term "Other Inventory" shall mean all
inventory other than the Useable Raw Materials Inventory included in the Assets.
SECTION VII
INDEMNIFICATION
(a) Indemnification by the Company. The Company shall indemnify and hold
harmless the Purchaser and its successors and assigns, directors, officers,
employees, agents and representatives, from and against any and all losses,
claims, assessments, actions, suits, claims, demands, debts, liabilities,
obligations, losses, damages, costs and expenses, including without limitation
the cost of investigation and reasonable attorney's fees and court costs,
arising out of, resulting from, related to, or caused by, directly or
indirectly, in whole or in part any or all of the following (hereinafter
referred to collectively as "Damages"):
(i) Damages based on, arising out of or attributable to the
Liabilities:
(ii) Damages based on, arising out of or attributable to any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties and covenants made by the Company in this Agreement, except for those
in Section II(g), the sole remedy for which is the adjustment mechanism Section
I(d)(ii)(A);
(iii) Damages arising out of or attributable from the failure of
the Company to comply with the provisions of the Uniform Commercial Code and/or
any "Bulk Sales" laws, in connection with the sale of the Assets to the
Purchaser;
(iv) Damages arising out of or attributable to the presence on or
in or the discharge from any of the real properties owned or leased in
connection with the Business or any of the Assets, any toxic or hazardous
substances (as defined in Section II(k) above) that originated or took place
prior to the Closing Date, whether or not the same constitutes a breach of the
representations or warranties contained in Section II(k) hereof or is disclosed
in this Agreement or the Schedules hereto;
(v) Damages arising out of or attributable to the operations
prior to the Closing Date of the Company, and/or to the acts or omissions prior
to the Closing Date of any of its current or former shareholders, directors,
officers, employees or agents, including without limitation Damages arising out
of claims (a) for violation of federal or state insurance, antitrust,
securities, unfair trade practice or other laws, (b) personal injury claims, (c)
claims of any nature by past or present directors, officers, employees or agents
of the Company (including workers' compensation claims to the extent not fully
insured against and claims under federal or state employment statutes and
judicial decisions), (d) claims based on breach of warranty, products liability
or defective or omitted service, and (e) any other Liabilities. It is understood
and agreed that the acts, omissions or events for which Purchaser is entitled to
indemnification hereunder include, but are not limited to, claims asserted after
the Closing (whether such claims are tort claims, contract claims or otherwise)
which are based upon (1) alleged defects in products or services which were
either sold, delivered or
-14-
<PAGE> 15
rendered by the Company on or before the Closing, (2) alleged defects in
products which were in the inventory of the Company at the time of the Closing
and sold or delivered thereafter by the Purchaser or (3) defects in services
which were rendered by the Company at or before the time of Closing and were
completed thereafter by the Purchaser. It is further understood and agreed that
the acts, omissions and events for which Purchaser is entitled to
indemnification hereunder include claims (whether tort, contract or otherwise)
which are based upon any injury to any Person or any damage to any property
which occurs after the Closing and which results in whole or in part from acts,
omissions and events which occurred at or before the Closing; the Company's lack
of knowledge of such act, omission or event, or the fact that such act, omission
or event was unknowable by such person, shall not be a defense to the claim for
indemnity.
(vi) any liability for taxes heretofore or hereafter imposed by
any taxing authority (including penalties and interest) owed by, relating to,
resulting from or attributable to the business or operations of the Company on
or before the Closing Date, including interest and penalties related to such
taxes.
(b) Indemnification by the Purchaser. The Purchaser shall indemnify and
hold harmless the Company from and against (i) any and all Damages sustained or
incurred by the Company by reason of the breach of any of the obligations,
covenants or provisions of, or the inaccuracy of any of the representations or
warranties made by, the Purchaser herein, (ii) Damages arising out of or
attributable to the operations after the Closing Date of the portion of the
Business which is purchased by the Purchaser, including without limitation
Damages arising out of claims (a) for violation of federal or state insurance,
antitrust, securities, unfair trade practice or other laws, (b) personal injury
claims, (c) claims of any nature by directors, officers, employees or agents of
the Purchaser based on occurrences after the Closing Date (including workers'
compensation claims to the extent not fully insured against and claims under
federal or state employment statutes and judicial decisions), and (d) claims
based on breach of warranty, products liability or defective or omitted service.
It is understood and agreed that the acts, omissions or events for which the
Company is entitled to indemnification hereunder include, but are not limited
to, claims asserted after the Closing Date (whether such claims are tort claims,
contract claims or otherwise) which are based in whole upon alleged defects in
products or services which were either sold, delivered or rendered by the
Purchaser on or after the Closing Date; and (iii) any liability for taxes
heretofore or hereafter imposed by any taxing authority (including penalties and
interest) owed by, relating to, resulting from or attributable to the business
or operations of the portion of the Business which is purchased by the Purchaser
on or after the Closing Date, including interest and penalties related to such
taxes.
(c) Procedure for Indemnification. If a claim by a third party is made
against any party hereto, and such party (the "Indemnified Party") intends to
seek indemnity with respect to such claim under this Section VII, such
Indemnified Party shall promptly notify the party from whom such indemnity may
be sought (the "Indemnifying Party") of such claim. The Indemnifying Party shall
have thirty (30) days after receipt of the above-mentioned notice to undertake,
conduct and control, through counsel of such party's own choosing (subject to
the consent of the Indemnified Party, such consent not to be unreasonably
withheld) and at such party's expense, the settlement or defense of it, and the
Indemnified Party shall cooperate with the Indemnifying Party in connection with
such efforts; provided that: (i) the Indemnifying Party shall not by this
Agreement permit to exist any lien, encumbrance or other adverse charge upon any
asset of any Indemnified Party, (ii) the Indemnifying Party shall permit the
Indemnified Party to participate in such settlement or defense
-15-
<PAGE> 16
through counsel chosen by the Indemnified Party, provided that the fees and
expenses of such counsel shall be borne by the Indemnified Party, and (iii) the
Indemnifying Party shall agree promptly to reimburse the Indemnified Party for
the full amount of any loss resulting from such claim and all related expense
incurred by the Indemnified Party pursuant to this Section VII. So long as the
Indemnifying Party is reasonably contesting any such claim in good faith, the
Indemnified Party shall not pay or settle any such claim. If the Indemnified
Party does not notify the Indemnified Party within thirty (30) days after
receipt of the Indemnified Party's notice of a claim of indemnify under this
Section VI that such party elects to undertake the defense of such claim, the
Indemnified Party shall have the right to contest, settle or compromise the
claim in the exercise of the Indemnified Party's exclusive discretion at the
expense of the Indemnifying Party, and the Indemnifying Party shall within 30
days pay to the Indemnified Party the amount of expenses and damages as a result
of contesting, settling or compromising such claim. In the event that any party
hereto shall incur any Damages in respect of which indemnity may be sought by
such party pursuant to this Section VII, the Indemnifying Party shall be given
written notice thereof by the Indemnified Party, which notice shall specify the
amount and nature of such Damages and include the request of the Indemnified
Party for indemnification of such amount. The Indemnifying party shall within 30
days pay to the Indemnified Party the amount of the Damages so specified.
(d) The amount of Damages payable to an Indemnified Party pursuant to
this Section VII shall be reduced by the actual amount of proceeds received by
such party from an insurance carrier on account of such Damages. The Indemnified
Party shall not be entitled to make a claim for indemnification hereunder, or to
withhold from the Holdback Amount, until the total amount of the Damages
suffered by the Purchaser exceeds $25,000. Once that threshold amount is
reached, such party may recover the full amount of its Damages, including the
threshold amount.
SECTION VIII
BROKERS AND FINDERS
(a) The Company's Obligation. Except as set forth in Schedule VIII(a)
hereto, the Purchaser shall not have any obligation to pay any fee or other
compensation to any person, firm or corporation engaged by the Company in
connection with this Agreement and the transactions contemplated hereby, and the
Company, hereby agrees to indemnify and save the Purchaser harmless from any
liability, damage, cost or expense arising from any claim for any such fee or
other compensation.
(b) The Purchaser's Obligation. Except as set forth in Schedule VIII(b)
hereto, the Company shall not have any obligation to pay any fee or other
compensation to any person, firm or corporation engaged by the Purchaser in
connection with this Agreement and the transactions contemplated hereby, and the
Purchaser hereby agrees to indemnify and save the Company harmless from any
liability, damage, cost or expense arising from any claim for any such fee or
other compensation.
-16-
<PAGE> 17
SECTION IX
TERMINATION
(a) This Agreement may be terminated and the transactions herein
contemplated may be abandoned at any time prior to the Closing:
(i) By mutual written consent of the Purchaser and the Company;
(ii) By the Purchaser, if there has been a material breach by the
Company of any of its representations, warranties, agreements or covenants set
forth herein, or a failure of any condition to which the obligations of the
Purchaser are subject; or
(iii) By the Company, if there has been a material breach by the
Purchaser of any of its representations, warranties, agreements or covenants set
forth herein, or a failure of any condition to which the obligations of the
Company is subject, or if the Closing does not occur on or before sixty (60)
days from the date hereof and there has been no material breach by the Company
of its obligations hereunder.
(b) Procedure Upon Termination. In the event of termination of this
Agreement by the Purchaser or the Company or by both the Purchaser and the
Company pursuant to Section IX(a) hereof, written notice thereof shall forthwith
be given to the other party or parties hereto and the transactions contemplated
herein shall be abandoned without further action by the Purchaser or the
Company. In addition, if this Agreement is terminated as provided herein:
(i) Each party will redeliver all documents, workpapers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same.
(ii) All information of a confidential nature received by any
party hereto with respect to the business of any other party (other than
information which is a matter of public knowledge or which has heretofore been
or is hereafter published in any publication for public distribution or filed as
public information with any governmental authority) shall continue to be kept
confidential for a period of two (2) years.
(iii) Upon any termination of this Agreement pursuant to this
Section IX(a) the respective obligations of the parties hereto under this
Agreement shall terminate and no party shall have any liability whatsoever to
any other party hereto by reason of such termination, irrespective of the cause
of such termination, except as expressly provided to the contrary in this
Section IX and in Section IV(e) above.
SECTION X
MISCELLANEOUS
(a) Notices. All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopy or sent by registered or
certified mail, postage prepaid, as follows:
-17-
<PAGE> 18
If to the Purchaser: Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, California 92781
Attention: William L. Healey,
President and Chief Executive Officer
Facsimile No. (714) 838-8787
with copies to: Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attention: Nick E. Yocca, Esq.
Facsimile No. (949) 725-4100
If to the Company: EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
Attention: President
Telecopy No.: (732) 229-6162
Telephone No.: (732) 229-1100
with a copy to: Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
Attention: Richard P. Jaffe, Esquire
Telecopy No.: (215) 994-1111
Telephone No.: (215) 994-1046
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
(b) Survival of Representations. Each representation, warranty, covenant
and agreement of the parties hereto herein contained shall survive closing,
notwithstanding any investigation at any time made by or on behalf of any party
hereto.
(c) Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement among the parties hereto with respect to the
transactions contemplated hereby, and no modification hereof shall be effective
unless in writing and signed by the party against which it is sought to be
enforced.
(d) Expenses. Each of the parties hereto shall bear such party's own
expenses in connection with this Agreement and the transactions contemplated
hereby.
(e) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or any breach hereof, shall be settled by arbitration in
accordance with the rules of the American
-18-
<PAGE> 19
Arbitration Association then in effect and judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof. The
arbitration shall be held in Orange County, California.
(f) Invalidity. Should any provision of this Agreement be held by a
court or arbitration panel of competent jurisdiction to be enforceable only if
modified, such holding shall not affect the validity of the remainder of this
Agreement, the balance of which shall continue to be binding upon the parties
hereto with any such modification to become a part hereof and treated as though
originally set forth in this Agreement. The parties further agree that any such
court or arbitration panel is expressly authorized to modify any such
unenforceable provision of this Agreement in lieu of severing such unenforceable
provision from this Agreement in its entirety, whether by rewriting the
offending provision, deleting any or all of the offending provision, adding
additional language to this Agreement, or by making such other modifications as
it deems warranted to carry out the intent and agreement of the parties as
embodied herein to the maximum extent permitted by law. The parties expressly
agree that this Agreement as modified by the court or the arbitration panel
shall be binding upon and enforceable against each of them. In any event, should
one or more of the provisions of this Agreement be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as provided above, this Agreement shall be construed
as if such invalid, illegal or unenforceable provisions had never been set forth
herein.
(g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the Company and the
Purchaser.
(h) Governing Law. The validity of this Agreement and of any of its
terms or provisions, as well as the rights and duties of the parties under this
Agreement, shall be construed pursuant to and in accordance with the laws of the
State of California, without regard to conflict of laws principles.
(i) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
-19-
<PAGE> 20
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first written above.
PURCHASER: METHUEN ACQUISITION CORP..
By: //s// William L. Healey
----------------------------------------
Name: William L. Healey
---------------------------------
Title: President
--------------------------------
COMPANY: EA INDUSTRIES, INC.
By: //s// Howard Kamins
----------------------------------------
Name: Howard P. Kamins
---------------------------------
Title: Vice President
--------------------------------
-20-
<PAGE> 21
SCHEDULE I(b)
PAYOUT AMOUNTS
<TABLE>
<S> <C>
1. Promissory Note $400,000
2. Commissions to Sales Representatives 5,000
3. Benefit Premiums 40,000
4. Payroll Setup 5,000
5. ISO Certification 8,000
6. Retention Bonuses 50,000
7. Micro MRP License** 25,000
8. Payables to Customers** 49,000
</TABLE>
**To be paid directly by the Company, and to be reimbursed to the Company by the
Purchaser upon presentation of documentation reasonably satisfactory to the
Purchaser evidencing that such payment has been made.
<PAGE> 1
TANON MANUFACTURING, INC.
AMENDED AND RESTATED
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT (the "Agreement"), dated as of the 2nd day of December,
1998, is made by and between Tanon Manufacturing, Inc., a California corporation
(the "Company"), and Smartflex Systems, Inc., a Delaware corporation or a
nominee who shall be a wholly-owned subsidiary of Smartflex Systems, Inc. (the
"Purchaser").
W I T N E S S E T H:
WHEREAS, the Company is engaged, among other things, in the business of
providing contract manufacturing electronic assembly services, including the
quick-turn, prototype and volume assembly and testing of a wide range of
products at a facility in West Long Branch, New Jersey and at a facility in
Fremont, California (such activities being hereinafter referred to as the
"Business"). The term Business as used in this Purchase Agreement includes all
revenues from the business of providing contract manufacturing electronic
assembly services, including quick turn prototype and volume assembly from (1)
any customer of the Company on or before the Closing Date, provided at any
location in the continental United States and, (2) from any other customer
provided at any location in the continental United States excluding the facility
located in the Meutheun Mass;
WHEREAS, on December 3, 1998, the Company intends to file a voluntary
petition (the "Bankruptcy Case") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Northern District of California (the "Bankruptcy Court"); and
WHEREAS, effective on the date of the Closing (as hereinafter defined)
and subject to and conditioned upon the Bankruptcy Court's approval, the
Purchaser desires to acquire from the Company certain assets of the Company as
described in Section I(c) hereof (the "Assets"), and the Company desires to sell
or assign the Assets, on the terms and subject to the conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, and intending to be legally
bound, the parties hereto hereby agree as follows:
SECTION I
PURCHASE AND SALE OF THE ASSETS
(a) Purchase and Sale of the Assets. Subject to the terms and conditions
of this Agreement and on the basis of the representations, warranties, covenants
and agreements herein contained:
(i) The Company hereby sells, assigns and conveys to the
Purchaser, and the Purchaser hereby purchases, acquires and accepts from the
Company, the Assets, free and clear of
<PAGE> 2
any liens, charges, security interests, encumbrances or liabilities, including
successor liabilities pursuant to Section 363 of the Bankruptcy Code
(collectively, "Liens or Encumbrances"). The Assets shall include the business,
all other assets used in connection with the Business, the Assigned Contracts
(as defined in Section I(a)(iv)), equipment (other than the Designated
Equipment, which shall be subject to the provisions of Section I(a)(iii) below),
the inventory (which shall be purchased pursuant to the terms of Section I(a)(v)
below and which shall not include the Raw Inventory (as defined in Section I(e)
below)), financial books and records, of every kind and nature, real, personal,
and mixed, tangible and intangible, wherever located, of the Company used in or
in any way related to the Business and as further described on Schedule I(a)(i)
to be delivered to the Purchaser and attached hereto within twenty one (21) days
from the date hereof, except for the assets also included on Schedule I(a)(i) to
be delivered to the Purchaser and attached hereto within ten (10) days from the
date hereof (the "Excluded Assets"), which Excluded Assets shall include,
without limitation, all accounts receivable (other than Purchaser Receivables
(as defined in Section XI(j) below)), Raw Inventory and the Leases (as defined
in Section I(g) below) and all other contract rights relating to the Business,
other than the Assigned Contracts.
(ii) Except to the extent expressly set forth in this Agreement,
in the order or orders of the Bankruptcy Court, or in any document, instrument
or agreement executed or entered into pursuant hereto or contemporaneously
herewith, the Purchaser shall not assume and shall have no responsibility with
respect to, any and all liabilities or obligations of the Company, known or
unknown, absolute or contingent, accrued or unaccrued, whether due or to become
due (collectively, "Liabilities").
(iii) Set forth in Schedule I(a)(iii) to be delivered to the
Purchaser and attached hereto within ten (10) days from the date hereof is a
list of all equipment designated as "Designated Equipment." As soon as possible
after the execution of this Agreement, the Company shall file in the Bankruptcy
Court its motion for an order approving the terms and conditions of this
Agreement (the "Motion"). The date for which a hearing is set on the Motion is
hereinafter referred to as the "Motion Date." On a date which is not less than
ten (10) days prior to the Motion Date, the Purchaser shall notify the Company
of any Designated Equipment that it desires to purchase and the purchase price
that the Purchaser is willing to pay for such Designated Equipment. On a date
which is seven (7) days prior to the Motion Date, the Company shall notify the
Purchaser if it accepts the offer for the Designated Equipment, and upon such
acceptance, the Company shall give notice to the Bankruptcy Court by filing a
notice in the Bankruptcy Case setting forth the Designated Equipment to be
purchased and the proposed purchase price therefor. The purchase price for the
Designated Equipment (the "Designated Equipment Price") shall be paid at the
same time and in the same manner as the Initial Purchase Price. The purchase
price for the Designated Equipment is One Million Two Hundred Fifty Thousand
Dollars ($1,250,000).
(iv) On a date which is not less than thirty (30) days prior to
the Motion Date (as defined above), the Purchaser shall notify the Company of
any contract rights relating to the Business that the Purchaser will want
assigned to it at the Closing. Any such contract rights shall be referred to
herein as the "Assigned Contracts." Upon receipt of such notice, the Company
shall make a timely motion to assume and assign the Assigned Contracts to the
Purchaser on the Motion Date.
-2-
<PAGE> 3
(v) At the Closing, the Company shall purchase all
Work-in-Process Inventory (as defined below) used in connection with the
Business at a purchase price (the "Inventory Purchase Price") which shall be
equal to one hundred percent (100%) of the labor and material costs ("Labor and
Material Costs") allocable to the Work-in-Process Inventory, as reflected in the
Company's books and records and as calculated in accordance with generally
accepted accounting principles ("GAAP"). The Company and the Purchaser shall
agree on what constitutes the Work-in-Process Inventory to be purchased at the
Closing and what constitutes the Raw Inventory (which shall be subject to the
provisions of Section I(e) below, as well as the aggregate Inventory Purchase
Price, not less than seven (7) days prior to the Motion Date. For purposes
hereof, the term "Work-in-Process Inventory" shall mean all inventory used in
the Business which is to be sold to an identified customer of the Company
following the Closing, pursuant to an existing order which is binding on such
customer as of the Closing Date. The Inventory Purchase Price shall be paid at
the same time and in the same manner as the Initial Purchase Price.
(b) Initial Purchase Price. The purchase price (the "Initial Purchase
Price") for the Assets is $7,650,000, plus the Inventory Purchase Price and the
Designated Equipment Price (if any). At the Closing, Purchaser shall pay to the
Company an amount (the "Closing Date Payment"), equal to the Initial Purchase
Price plus the Inventory Purchase Price and the Designated Equipment Price (if
any), less the Holdback Amount (as defined in Section I(d)) and less the amount
of any Loan Amount (as defined in Section I(h) below). The Closing Date Payment
shall be made by wire transfer of immediately available funds to an account
designated by the Company. At the Closing, the Purchaser shall assign to the
Company any note or participation interest relating to any Loan Amount for which
credit is so received.
(c) Additional Purchase Price.
(i) In addition to the amount to be paid to the Company pursuant
to Section I(b) hereof, the Purchaser shall pay the Company, or its successor in
interest, as the case may be, on and subject to the terms of this Agreement,
additional consideration (the "Additional Purchase Price") not exceeding Three
Million Dollars ($3,000,000), subject to reduction pursuant to the provisions of
Section I(c)(iv) below, at the noncumulative higher of one of the following
amounts, only if the indicated revenue level is achieved:
(A) Two Million Five Hundred Thousand Dollars
($2,500,000), if the gross revenues attributable to the Business are
less than $90 Million during fiscal year 1999; or
(B) Three Million Dollars ($3,000,000), if the gross
revenues attributable to the Business equal or exceed $90,000,000 during
fiscal year 1999.
"Fiscal Year" as used herein shall mean the year commencing April
1, 1999 and ending March 30, 2000.
(ii) The calculation of gross revenues for the Business during
calendar year 1999 shall be made net of returns and allowances. The
determination of the amount, if any, to be paid in the form of Additional
Purchase Price shall be made by the Purchaser together with its auditors
regularly employed to audit the books of account and financial statements of
Purchaser, and shall be made in
-3-
<PAGE> 4
accordance with GAAP. All determinations of Purchaser made pursuant to this
Section I(c)(ii) shall be deemed binding and conclusive.
(iii) The Additional Purchase Price shall be paid on or before
the expiration of thirty (30) days following the date upon which the final and
binding determinations are made or arrived at pursuant to Section I(c)(ii) above
by delivery of a bank cashier's check or wire transfer of funds to the Company.
(iv) On Closing, Purchaser shall execute and interest-free
negotiable promissory note in the amount of $2,500,000 to confirm the minimum
payment set forth herein.
(d) [Deletion.]
(e) Raw Inventory. At the Closing, the Company shall consign its rights
to the Raw Inventory (as defined below) of the Business to the Purchaser for a
period of at least ninety (90) days from the Closing Date. During such period,
such Raw Inventory shall remain on the Company's premises and the Purchaser
shall be entitled, but without obligation, and from time to time, to draw down
on the Raw Inventory for sale and use in connection with the Business as and
where conducted by Purchaser. During such ninety (90) day period, the purchase
price to be paid by the Purchaser for such Raw Inventory shall be sixty percent
(60%) of the lower of the Company's cost or the market price of such Raw
Inventory. On or prior to the expiration of such ninety (90) day period, the
Purchaser shall be entitled to purchase all or part of the remaining Raw
Inventory in bulk for a price and upon terms to be negotiated by the parties at
such time. Payments by Purchaser shall be within thirty (30) days of the draw
down of any such Raw Inventory. Following the expiration of such ninety (90) day
period, the Purchaser shall be entitled to purchase all or part of the remaining
Raw Inventory at a price and upon terms to be negotiated by the parties at such
time; provided that, if the parties are unable to negotiate a mutually
acceptable price at which such remaining Raw Inventory may be purchased by the
Purchaser, then the Company may sell any Raw Inventory after the expiration of
such ninety (90) day period to any third party other than the Purchaser. For
purposes hereof, the term "Raw Inventory" shall mean all inventory used in the
Business which is not Work-in-Process Inventory (as defined in Section I(a)(v)
above).
(f) Allocation. The Purchase Price for the Assets shall be allocated to
the Assets at their fair market values. The portion of the Purchase Price not
allocated to specific Assets shall be allocated to goodwill. The Purchase Price
shall be allocated as set forth in Schedule 1(f)(i) to be delivered to the
Purchaser and attached hereto within twenty one (21) days from the date hereof
and the Purchaser agrees to file Internal Revenue Service Form 8594 which shall
be prepared in accordance with the Internal Revenue Code of 1986, as amended and
all rules and regulations promulgated thereunder.
(g) Removal of Assets by Purchaser. The Company shall allow Purchaser up
to ninety (90) days from the Closing Date (as defined in Section VII hereof) in
which to transition the business and remove the Assets from the Company's
facilities located at 185 Monmouth Parkway, West, Long Branch, New Jersey 07764
and 46360 Fremont Boulevard, Fremont, California 94538 (the "Facilities").
Purchaser shall have full access and all rights of the Company to the
Facilities; provided, however, that the Purchaser hereby agrees that it shall
reimburse the Company for that portion of the rent and expenses paid by the
Company with respect to the Facilities, which are
-4-
<PAGE> 5
allocable to the portions of the Facilities used exclusively by the Purchaser to
store the Assets. This Section I(g) does not constitute a lease or sublease, and
nothing contained in this Section I(g) or elsewhere in this Agreement shall be
construed as subjecting Purchaser to or obligating Purchaser under any of the
terms and conditions of the leases relating to the Facilities and Purchaser
shall incur no liability in connection with such leases.
(h) Loan Amount. The Purchaser may, but shall not be obligated to, loan
money to the Company directly, or indirectly by participating in any loans made
to the Company by IBJ Schroeder Bank & Trust Company. Any such amount loaned by
the Purchaser to the Company, either directly or indirectly, shall be referred
to herein as the "Loan Amount."
SECTION II
REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS OF THE COMPANY
There are no representations and warranties of the Company.
SECTION III
REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS OF THE PURCHASER
The Purchaser represents and warrants to the Company that the statements
contained in this Section III are correct and complete as of the date of this
Agreement:
(a) Organization. The Purchaser is a corporation duly incorporated,
validly existing, and in good standing under the laws of the State of Delaware.
(b) Authorization of Transaction. The Purchaser has full corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes a valid and legal binding
obligation of the Purchaser, enforceable against it in accordance with its
terms. The Purchaser is not required to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by this
Agreement.
(c) Non-Contravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Purchaser is subject or any provision
of its charter or by-laws, or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which the Purchaser is bound or to which any of its assets is subject.
SECTION IV
BANKRUPTCY MATTERS
(a) Filing of Bankruptcy. The Company represents and warrants that the
Bankruptcy will be duly and promptly filed with the Bankruptcy Court, and that
the Company has not sold and
-5-
<PAGE> 6
hereby covenant to not sell or otherwise dispose of the Assets in a manner that
is inconsistent with the provisions of this Agreement.
(b) Bankruptcy Proceedings. The Company hereby covenants to cooperate
fully with the Bankruptcy Court and with the Purchasers to expedite the
Bankruptcy Case and to obtain an order or orders from the Bankruptcy Court
consistent with the intentions of the parties stated in this Agreement.
(c) Order for Overbid Procedures. Within a reasonable time after
entering into this Agreement and in advance of the Motion Date, the Company
shall seek from the Bankruptcy Court an order (the "Overbid Procedures Order")
providing for the procedure for the parties to follow in the event that the
Company receives, in writing, any offer or proposal relating to the sale of the
Assets other than the transactions contemplated by this Agreement (a "Competing
Proposal"). The Company agrees that the Overbid Procedures Order shall provide,
among other things, the following:
(i) The Bankruptcy Court will not consider any Competing Proposal
unless the Competing Proposal (a) provides for a purchase price consideration
for the Assets of at least One Hundred Percent (100%) of the aggregate
consideration being paid by the Purchaser hereunder, plus the topping fee of
Four Hundred Fifty Thousand Dollars ($450,000) described in Section IV(c)(vii)
below and the $25,000 overbid amount described in Section IV(c)(vi) below, (b)
is set forth in a written agreement containing other terms and conditions that
are at least as favorable to the Company as those set forth in this Agreement,
(c) is made by a person financially qualified to consummate the Competing
Proposal on a timely basis and to operate the Business or the Assets on a
financially viable basis, (d) is made by a person who has completed its due
diligence review of the Company's books and records, and is satisfied with the
results thereof, (e) is made by a person who is obligated to pay an initial
deposit in the amount of the greater of $450,000 or 10% of the aggregate
purchase price payable to the Company, and (f) the Competing Proposal is
delivered to the Company and filed with the Bankruptcy Court at least two (2)
court days prior to the Motion Date. A Competing Proposal that satisfies the
foregoing criteria shall be referred to as a "Qualifying Competing Proposal."
(ii) At the hearing on the Motion Date, only the Purchaser and
any party who has submitted a Qualifying Competing Proposal shall be entitled to
bid.
(iii) At the hearing on the Motion Date, the Bankruptcy Court
shall decide which of the bids are the highest and best bid, and such bid shall
be deemed to be the "High Bid." The bidder whose bid is definitively deemed by
the Bankruptcy Court to be the High Bid must pay all amounts reflected in the
High Bid in cash at the Closing.
(iv) If the Purchaser's bid is not the High Bid, then the
Purchaser shall be entitled to match the High Bid and the Purchaser's matching
bid shall be deemed to be the High Bid.
(v) Thereafter, bidding will be conducted as ordered by the
Bankruptcy Court with the Purchaser always entitled to meet and match the other
bids, and if the Purchaser matches another higher bid, its bid will be declared
the successful High Bid.
-6-
<PAGE> 7
(vi) Any counterbid in the bidding process will be at least
$25,000 higher than the prior bid or counterbid. For purposes hereof, the
topping fee payable to the Purchaser pursuant to Section IV(c)(vii) shall be
credited to the Purchaser as part of its bid.
(vii) If the Company terminates this Agreement because the
Purchaser's bid is not the High Bid, regardless of whether or not the Company
consummates a transaction with the successful bidder, then the Purchaser shall
be delivered a topping fee equal to Four Hundred Fifty Thousand Dollars
($450,000), which fee shall be paid within five (5) days of the date of such
termination and shall be paid solely from the deposit paid by the successful
bidder as part of such successful bidder's Qualifying Competing Proposal,
without any administrative liability therefor to the estate.
SECTION V
ADDITIONAL REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE COMPANY AND THE PURCHASER
(a) Post Closing Cooperation. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the parties will take such further action (including the
execution and delivery of such further instruments and documents) as the other
may request, all at the sole cost and expense of the requesting party (unless
the requesting party is entitled to indemnification therefor under Section
VIII), so long as such documents do not increase the liability or risk of
liability of the party of whom action is requested.
(b) Discharge of Obligations. Consistent with and subject to an order of
the Bankruptcy Court, the Company covenants and agrees to pay promptly and
otherwise to fulfill and discharge all of the Liabilities of the Company arising
from and after the filing of the Bankruptcy Case, when due and payable and
otherwise prior to the time at which any of such Liabilities could in any way
result in or give rise to a claim against the Assets, the Business or the
Purchaser, result in the imposition of any lien, charge or encumbrance on any of
the Assets, or adversely affect the Purchaser's title to or use of any of the
Assets.
(c) Access. The Company shall give to the Purchaser and its
representatives, from and after the date of execution of this Agreement, on
prior reasonable request therefor from the Purchaser or such representatives,
such access to the premises, employees, agents and consultants of the Company,
and such copies of the Financial Statements, books and records, and contracts
and leases and other documentation, so as to enable the Purchaser to inspect and
evaluate all aspects of the Business and operations, assets, operating results,
financial condition, capitalization, ownership, and legal affairs thereof. This
shall include the right of the Purchaser to have Phase I environmental
evaluations conducted on the any real property owned or leased by the Company in
connection with the Business, at the Purchaser's sole expense. The Purchaser
agrees to conduct its review, and to cause its representatives to conduct their
review, in a manner designed to minimize any disruption of the operations of the
Company.
(d) Conduct of Business. From the date of this Agreement and until the
Closing or termination of this Agreement, whichever first occurs, the Company
shall use commercially reasonable best efforts, consistent with prior practice
(a) to preserve intact the business organization and employees and other
business relationships relating to the Business, (b) to continue to operate in
-7-
<PAGE> 8
the ordinary course of its business and to maintain its books, records and
accounts in accordance with GAAP and (c) to preserve and maintain the Assets,
ordinary wear and tear excepted.
(e) "No Shop". The Company agrees that during the period commencing on
the date hereof and ending on the Closing Date, or ending one hundred eighty
(180) days after the date hereof, whichever first occurs, the Company will not,
directly or indirectly (a) offer to sell any of the Business and/or the Assets
(other than sales of inventory in the ordinary course of the Business), in whole
or in part, (b) make or assist anyone else to make any proposal to purchase any
of the Business and/or the Assets (other than sales of inventory in the ordinary
course of the Business), (c) encourage, solicit or initiate discussions or
negotiations with any corporation, partnership, person, entity or group, other
than the Purchaser, concerning any merger, consolidation, sale of assets, sale
of securities or acquisition of beneficial ownership with respect to the
Business, or (d) otherwise initiate any action (unless in response to an
unsolicited offer) which would prejudice the ability of the Purchaser to
complete the transactions described in this Agreement; provided, however, that
notwithstanding the foregoing, nothing set forth in this Section V(e) shall
prohibit or limit in any way, the Company's ability to notify (including by
means of advertisement) any corporation, partnership, person, entity or group of
(1) the contents of the Overbid Procedure Order, (2) their ability to submit a
Qualifying Competing Proposal, (3) the procedures to be followed when submitting
a Qualifying Competing Proposal and (4) information relating to the Motion Date,
including the time and location thereof.
(f) Purchaser's Covenants Relating to Additional Purchase Price. During
the period for which the Additional Purchase Price is to be determined pursuant
to Section I(f), the Purchaser shall (a) maintain books and records and
accounting system reflecting the status of the Business for the purpose of
determining gross revenue of the Business and making all other determinations
necessary for determination of the amount of the Additional Purchase Price, if
any; (b) manage and operate the Business generally in accordance with the
business principles and practices employed in the management and operation of
Purchaser's own business, with a view to the achievement of reasonable growth
objectives in both sales and earnings; provided, however, that the Purchaser
shall only be obligated to operate the Business in a manner which is consistent
with its corporate policy considered on a consolidated basis, and in a manner
consistent with Purchaser's consolidated strategy, policies, practices and
resources.
(g) Notice Regarding Failure to Fulfill Condition Precedent. On the date
which is fourteen (14) days prior to the Motion Date, the Purchaser shall
deliver a notice to the Company setting forth either (i) that the Purchaser
currently has no actual knowledge of any condition precedent to the obligations
of the Purchaser to consummate the purchase of the Assets which has not been
fulfilled as of such date other than such conditions which are not to be
fulfilled until after such date or (ii) the conditions precedent to the
obligations of the Purchaser to consummate the purchase of the Assets which were
required to be fulfilled, but which have not been fulfilled, as of such date.
The delivery of such notice by the Purchaser shall in no way limit or otherwise
affect the Purchaser's ability to terminate this Agreement pursuant to the
provisions of Section X(a) in the event that there has been a failure of any
condition to which the obligations of the Purchaser are subject, other than a
failure which was actually known by the Purchaser on the date such notice was
delivered but which was not set forth in such notice.
-8-
<PAGE> 9
SECTION VI
CONDITIONS PRECEDENT
(a) Conditions Precedent to the Obligations of the Purchaser. The
obligation of the Purchaser to consummate the purchase of the Assets from the
Company shall be subject to the fulfillment, or the waiver by the Purchaser, at
or prior to the Closing, of each of the following conditions precedent:
(i) [Deletion.]
(ii) Bankruptcy Court Order. The Bankruptcy Court shall have
entered an order in form reasonably acceptable to Purchaser, approving the sale
or sales of the Assets on the terms specified in this Agreement.
(iii) Absence of Material Litigation. Except as set forth in
Section VI(a)(ii) above, there shall be (i) no pending or overtly threatened
litigation (other than litigation which is determined by the parties in good
faith, after consulting their respective attorneys, to be without legal or
factual substance or merit), whether brought against the Company or the
Purchaser, that seeks to enjoin the consummation of any of the transactions
contemplated by this Agreement, (ii) no order that has been issued by any court
or governmental agency having jurisdiction that restrains or prohibits the
consummation of the purchase and sale of the Assets hereunder and no proceedings
pending which are reasonably likely to result in the issuance of such an order;
and (iii) no pending or overtly threatened litigation, which has had or is
expected to have a material adverse affect on the Business or the Assets.
(iv) Performance of Obligations. The Company shall have performed
and complied with all of its covenants required by this Agreement to have been
performed on or prior to the Closing.
(v) No Material Adverse Change. Since October 31, 1998, there
shall not have been any change in or other event affecting the Business or the
condition (financial or other) or operating results of Company that has had or
is expected to have a material adverse effect on the Business or the Assets.
(vi) Certificates. Receipt of a certificate executed by the
Company's President or Chief Financial Officer, dated as of the Closing Date and
reasonably satisfactory in form and substance to the Purchaser, certifying that
(i) each of the representations and warranties of the Company contained herein
was true and correct when made and is true and correct on and as of the Closing
Date with the same force and effect as if such representations and warranties
had been made on the Closing Date, (ii) the Company has performed and complied
with all of its covenants required to have been performed or complied with by it
pursuant hereto on or prior to the Closing Date, and (iii) all of the conditions
precedent to the Purchaser's obligations the satisfaction of which was the
responsibility of the Company has been satisfied, except to the extent waived by
the Purchaser.
(vii) Consents Obtained. All consents, waivers, approvals,
authorizations or orders required to be obtained by the Company and the
Purchaser for the authorization, execution and delivery of this Agreement and
the consummation by it by the transactions contemplated hereby shall have been
obtained by the Company or the Purchaser, as the case may be, including, without
-9-
<PAGE> 10
limitation, all lease and equipment assignments and/or consents for the
assumption by, or assignment to, the Purchaser of the Assigned Contracts, in
form and substance acceptable to the Purchaser or the Purchaser's counsel in its
sole discretion.
(viii) Due Diligence; Phase I Evaluation. The results of the
Purchaser's business, legal and accounting due diligence with respect to the
Business shall be satisfactory to Purchaser in its sole discretion. Without
limiting the foregoing, the results of any Phase I environmental evaluation
conducted by the Purchaser on any of the real properties owned or leased by the
Company in connection with the Business shall be satisfactory to Purchaser in
its sole discretion. This condition shall be deemed waived if Purchaser does not
inform Company of the failure of its due diligence analysis on a date which is
fourteen (14) days prior to the Motion Date. If Purchaser does not exercise its
right to terminate this Agreement due to the failure of due diligence fourteen
(14) days prior to the Motion Date then it shall have no further right to
terminate based on its due diligence. Upon termination due to such due diligence
there shall be no further rights under this Agreement and Company shall have
absolutely no liability whatsoever to the Purchaser.
(ix) Compliance With Terms of Loan Amount. The Company shall have
complied with the terms under which the Loan Amount was made available to the
Company, including, without limitation, the mandated uses of the Loan Amount as
determined by the Purchaser.
(x) Delivery of Additional Instruments. On the Closing Date,
unless waived in writing by Purchaser, the Company shall deliver, or cause to be
delivered to the Purchaser, the documents and instruments referenced in Section
VI(b)(ii), in form and substance satisfactory to Purchaser and its counsel.
(xi) Board Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite vote
of the Board of Directors of the Purchaser at least fourteen (14) days prior to
the Motion Date.
(xii) Methuen Acquisition. EA Industries, Inc., a New Jersey
corporation ("EA") and the Purchaser shall have entered into an Agreement of
Purchase and Sale, dated December __, 1998, relating to the Purchaser's proposed
acquisition of certain assets used in connection with the business of the
"Methuen Division" of EA, or a definitive agreement relating to the subject
matter thereof, and each of EA and the Purchaser shall have performed their
respective obligations thereunder to the extent such obligations have become due
on or prior to the Closing Date.
(xiii) Consignment of Inventories. The parties shall have
established procedures for the Purchaser to pay the prices established pursuant
to Section I(f) above for the inventory of the Company used by the Purchaser in
the continued operations of the Business, as contemplated by Section V(c) above.
(xiv) Disclosure Schedules. The disclosure schedules to this
Agreement which are required to be delivered by the Company to the Purchaser and
attached by the Company hereto, shall have been so delivered and attached within
the time periods prescribed in this Agreement, and the contents of such
disclosure schedules shall be satisfactory to Purchaser in its sole discretion.
This condition shall be deemed waived with respect to any such disclosure
schedule if Purchaser does not
-10-
<PAGE> 11
inform the Company of the failure of its acceptance of such disclosure schedule
on a date which is ten (10) days from the date such disclosure schedule is
received by the Purchaser. If Purchaser does not exercise its right to terminate
this Agreement due to the failure of its acceptance of any disclosure schedule
within ten (10) days from the date such disclosure schedule is received by the
Purchaser, then the Purchaser shall have no further right to terminate based on
its failure to accept such disclosure schedule. Upon termination due to the
failure to accept a disclosure schedule, there shall be no further rights under
this Agreement and Company shall have absolutely no liability whatsoever to the
Purchaser.
(b) Conditions Precedent to the Obligations of the Company. The
obligation of the Company to consummate the sale of the Assets to Purchaser
shall be subject to the fulfillment, or the waiver by the Company, at or prior
to the Closing, of each of the following conditions precedent:
(i) Representations and Warranties. The representations and
warranties made by the Purchaser in this Agreement hereto shall have been true
and correct on the date hereof, and also at and as of the Closing Date with the
same force and effect as if made again at and as of that time.
(ii) Absence of Material Litigation. There shall be (i) no
pending or overtly threatened litigation (other than litigation which is
determined by the parties in good faith, after consulting their respective
attorneys, to be without legal or factual substance or merit), whether brought
against the Company or the Purchaser that seeks to enjoin the consummation of
any of the transactions contemplated by this Agreement, and (ii) no order that
has been issued by any court or governmental agency having jurisdiction that
restrains or prohibits the consummation of the purchase and sale of the Assets
hereunder or any proceedings pending which are reasonably likely to result in
the issuance of such an order.
(iii) Performance of Obligations. The Purchaser shall have
performed and complied with all of its covenants required by this Agreement to
have been performed by it at or prior to the Closing.
(iv) Certificates. Receipt from the Purchaser of a certificate,
dated as of the Closing Date and signed by the President or the Chief Financial
Officer of the Purchaser, certifying that (i) each of its representations and
warranties contained herein was true and correct when made and is true and
correct on and as of the Closing Date with the same force and effect as if such
representations and warranties had been made on the Closing Date, and (ii) it
has performed and complied with all agreements, obligations, covenants and
conditions required to be performed or complied with by it pursuant hereto on or
prior to the Closing Date, except as may be waived in writing by the Company.
(v) Delivery of Additional Instruments. On the Closing Date,
unless waived in writing by Company, the Purchaser shall deliver, or cause to be
delivered to Company, the Purchase Price and the documents and instruments
referenced in Section VI(b)(i), in form and substance satisfactory to Company
and its counsel.
-11-
<PAGE> 12
SECTION VII
CLOSING AND DELIVERIES
(a) Time and Place of Closing. The closing of the purchase and sale of
the Assets as set forth herein (the "Closing") shall be held at the offices of
Stradling, Yocca, Carlson & Rauth, 660 Newport Center Drive, Newport Beach,
California 92660. The Closing shall occur on a date which is one (1) business
day after entry of the Bankruptcy Court order referenced in Section VI(a)(ii) is
issued, or at such later date and time upon which the Purchaser and the Company
shall mutually agree (the "Closing Date").
(b) Deliveries.
(i) At the Closing, the Purchaser shall deliver to the Company
the following:
(A) A wire transfer for the Closing Date Payment of the
Purchase Price, as described in Section I(b); and
(B) Such certificates, instruments and other documents, in
form and substance satisfactory to the Company and its counsel, as they
shall have reasonably requested in connection with the transactions
contemplated hereby.
(ii) At the Closing, the Company shall deliver to the Purchaser,
as a condition to Closing, the following:
(A) A Bill of Sale in the form attached hereto as Schedule
VI(b)(ii)(a), such other instruments of conveyance and transfer, and
such powers of attorney, as shall be effective to vest in the Purchaser
title to or other interest in, and the right to full custody and control
of, the Assets, free and clear of all Liens or Encumbrances whatsoever;
(B) The Assigned Contracts and the books and records of
the Company constituting a part of the Assets;
(C) Evidence that any and all sales or use taxes assessed
in connection with this transaction have been paid by the Company;
(D) Such certificates, instruments and other documents, in
form and substance satisfactory to the Purchaser and its counsel, as
they shall have reasonably requested in connection with the transactions
contemplated hereby;
(E) Either (i) all necessary consents of third parties
under the Assigned Contracts and other instruments of the Company to the
consummation of the transactions contemplated hereby, which consents
shall not provide for the acceleration of any liabilities or any other
detriment to the Purchaser or the Company, or, in the alternative, (ii)
an order or orders of the Bankruptcy Court authorizing the assumption of
such contracts by the Company and their assignment to Purchaser.
-12-
<PAGE> 13
SECTION VIII
INDEMNIFICATION
[Not used.]
SECTION IX
BROKERS AND FINDERS
(a) The Company's Obligation. Except as set forth in Schedule IX(a)
hereto, the Purchaser shall not have any obligation to pay any fee or other
compensation to any person, firm or corporation engaged by the Company in
connection with this Agreement and the transactions contemplated hereby, and the
Company, hereby agrees to indemnify and save the Purchaser harmless from any
liability, damage, cost or expense arising from any claim for any such fee or
other compensation.
(b) The Purchaser's Obligation. Except as set forth in Schedule IX(b)
hereto, the Company shall not have any obligation to pay any fee or other
compensation to any person, firm or corporation engaged by the Purchaser in
connection with this Agreement and the transactions contemplated hereby, and the
Purchaser hereby agrees to indemnify and save the Company harmless from any
liability, damage, cost or expense arising from any claim for any such fee or
other compensation.
SECTION X
TERMINATION
(a) This Agreement may be terminated and the transactions herein
contemplated may be abandoned at any time prior to the Closing:
(i) By mutual written consent of the Purchaser and the Company;
(ii) By the Purchaser, if there has been a material breach by the
Company of any of its material representations, warranties, agreements or
covenants set forth herein, or a failure of any condition to which the
obligations of the Purchaser are subject; or
(iii) By the Company, if there has been a material breach by the
Purchaser of any of its representations, warranties, agreements or covenants set
forth herein, or a failure of any condition to which the obligations of the
Company is subject or if the Purchaser's bid is not the High Bid, as provided in
Section IV above.
(b) Procedure Upon Termination. In the event of termination of this
Agreement by the Purchaser or the Company or by both the Purchaser and the
Company pursuant to Section X(a) hereof, written notice thereof shall forthwith
be given to the other party or parties hereto and the transactions contemplated
herein shall be abandoned without further action by the Purchaser or the
Company. In addition, if this Agreement is terminated as provided herein:
-13-
<PAGE> 14
(i) Each party will redeliver all documents, workpapers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same.
(ii) All information of a confidential nature received by any
party hereto with respect to the business of any other party (other than
information which is a matter of public knowledge or which has heretofore been
or is hereafter published in any publication for public distribution or filed as
public information with any governmental authority) shall continue to be kept
confidential for a period of two (2) years.
(iii) Upon any termination by the Purchaser upon the failure of
any condition to which the obligations of the Purchaser are subject, where such
failure is caused by the Company, the Company shall pay to the Purchaser, in
addition to any amounts required to be paid by the Company pursuant to Section
IV(c)(vii) above, an amount equal to the costs and expenses of the Purchaser
actually incurred in the preparation and negotiation of this Agreement
(including attorneys' fees) and the Purchaser's and its representatives' due
diligence review, which amount shall be paid within five (5) days of the date of
such termination; provided, however, that the provisions of this Section
X(b)(iii) shall not apply to any termination of this Agreement due to the fact
that the Purchaser's bid is not the High Bid, and the amounts specified herein
shall not be paid to the Purchaser in the event that the Purchaser is paid the
topping fee referenced in Section IV(c)(vii).
(iv) Upon any termination of this Agreement pursuant to Section
X(a) hereof the respective obligations of the parties hereto under this
Agreement shall terminate and no party shall have any liability whatsoever to
any other party hereto by reason of such termination, irrespective of the cause
of such termination, except as expressly provided to the contrary in this
Section X and in Section V(e) above.
SECTION XI
MISCELLANEOUS
(a) Notices. All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopy or sent by registered or
certified mail, postage prepaid, as follows:
If to the Purchaser: Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, California 92781
Attention: William L. Healey,
President and Chief Executive Officer
Facsimile No. (714) 838-8787
with copies to: Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attention: Nick E. Yocca, Esq.
Facsimile No. (949) 725-4100
-14-
<PAGE> 15
If to the Company: Tanon Manufacturing, Inc.
c/o EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
President: President
Telecopy No.: (732) 229-6162
Telephone No.: (732) 229-1100
in each case,
with a copy to: Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
Attention: Richard P. Jaffe, Esquire
Telecopy No.: (215) 994-1111
Telephone No.: (215) 994-1046
and to: Sheppard, Mullin, Richter & Hampton LLP
Seventeenth Floor
Four Embarcadero Center
San Francisco, CA 94111
Attention: Michael Ahrens, Esq.
Telecopy No.: (415) 434-3947
Telephone No.: (415) 434-9100
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
(b) Survival of Representations. Each representation, warranty, covenant
and agreement of the parties hereto herein contained shall survive Closing, for
a period of eighteen (18) months, notwithstanding any investigation at any time
made by or on behalf of any party hereto.
(c) Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement among the parties hereto with respect to the
transactions contemplated hereby, and no modification hereof shall be effective
unless in writing and signed by the party against which it is sought to be
enforced.
(d) Expenses. Each of the parties hereto shall bear such party's own
expenses in connection with this Agreement and the transactions contemplated
hereby.
(e) Dispute Resolution. Each of the parties to this Agreement agrees to
submit themselves to the jurisdiction of the Bankruptcy Court supervising the
Bankruptcy Case to interpret and enforce the terms and conditions of this
Agreement.
-15-
<PAGE> 16
(f) Invalidity. Should any provision of this Agreement be held by a
court or arbitration panel of competent jurisdiction to be enforceable only if
modified, such holding shall not affect the validity of the remainder of this
Agreement, the balance of which shall continue to be binding upon the parties
hereto with any such modification to become a part hereof and treated as though
originally set forth in this Agreement. The parties further agree that any such
court or arbitration panel is expressly authorized to modify any such
unenforceable provision of this Agreement in lieu of severing such unenforceable
provision from this Agreement in its entirety, whether by rewriting the
offending provision, deleting any or all of the offending provision, adding
additional language to this Agreement, or by making such other modifications as
it deems warranted to carry out the intent and agreement of the parties as
embodied herein to the maximum extent permitted by law. The parties expressly
agree that this Agreement as modified by the court or the arbitration panel
shall be binding upon and enforceable against each of them. In any event, should
one or more of the provisions of this Agreement be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as provided above, this Agreement shall be construed
as if such invalid, illegal or unenforceable provisions had never been set forth
herein.
(g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the Company and the
Purchaser.
(h) Governing Law. The validity of this Agreement and of any of its
terms or provisions, as well as the rights and duties of the parties under this
Agreement, shall be construed pursuant to and in accordance with the laws of the
State of California, without regard to conflict of laws principles.
(i) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
(j) Accounts Receivable and Business Records. From and after the
Closing, Purchaser shall cooperate with Company, at the Company's sole expense,
in the collection by Company of the Company's Accounts Receivable. Any and all
books and records which may be deemed part of the Assets shall be made available
at no cost to the Company, upon reasonable prior notice and during normal
business hours, in connection with the collection by Company of its Accounts
Receivable and for any other valid business purpose. None of the business
records that constitute part of the Assets shall be destroyed by Purchasers
without the written consent of Company. The obligations set forth in this
subparagraph shall survive Closing. Without limiting the foregoing, the
Purchaser shall be entitled to collect and retain all accounts receivable
attributable to the sales of inventory purchased by the Purchaser hereunder, or
otherwise sold by the Purchaser after the Closing Date (such receivables shall
be deemed "Purchaser Receivables").
-16-
<PAGE> 17
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
PURCHASER: SMARTFLEX SYSTEMS, INC.
By: //s// William L. Healey
----------------------------------------
Name: William L. Healey
----------------------------------
Title: President
---------------------------------
COMPANY: TANON MANUFACTURING, INC.
By: //s// Howard Kamins
----------------------------------------
Name: Howard P. Kamins
----------------------------------
Title: Vice President
---------------------------------
17
<PAGE> 1
EXHIBIT 10.40
[UNION BANK OF CALIFORNIA LETTERHEAD]
AMENDMENT AND WAIVER LETTER
Commercial Portfolio Administration
Union Bank of California
500 S. Main Street, Suite 200
Orange, CA 92868
October 1, 1998
Mr. William Healey, President
Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, CA 92690-7028
Re: FIRST AMENDMENT ("Amendment") to the Amended and Restated Loan Agreement
dated September 26, 1997 (this Amendment and the Amended and Restated
Loan Agreement together called the "Agreement")
Dear Mr. Healey:
In reference to the Agreement defined above between UNION BANK OF CALIFORNIA,
N.A. ("BANK") and SMARTFLEX SYSTEMS, INC. ("BORROWER"), Bank and Borrower desire
to amend the Agreement and waive certain breaches of the Agreement. Capitalized
terms used herein which are not otherwise defined shall have the meanings given
them in the Agreement.
1. Amendments to the Agreement:
(a) Section 1.1.1, line 5, is hereby amended by substituting
the date "October 2, 2000" for the date "September 30,
1999".
(b) Section 1.1.1.1, line 10, is hereby amended by
substituting the date "October 2, 2000" for the date
"September 30, 1999".
(c) Section 1.1.3, is hereby added in its entirety as follows:
"THE TERM LOAN I. Bank will loan to Borrower the sum of
THREE MILLION DOLLARS ($3,000,000) (the "Term Loan I") at
Borrower's request, in one disbursement on or before
December 31, 1998 in accordance with the terms of the Term
Note I. In the event of a prepayment of principal and
payment of any resulting fees, any prepaid amounts shall
be applied to the scheduled
<PAGE> 2
Smartflex Systems, Inc.
1st Amendment to Amended and Restated Loan Agreement
October 1, 1998
Page 2
principal payments in the reverse order of their maturity.
The Term Loan I shall be evidenced by a promissory note
(the "Term Note I") on the standard form used by Bank for
commercial loans."
(d) Section 1.3, is hereby amended by adding the following
language:
"The proceeds of the Term Loan I shall be used to purchase
real property."
(e) Section 1.4, is hereby amended in its entirety to read as
follows:
"INTEREST. The unpaid principal balance of the Loans shall
bear interest at the rate or rates provided in the Notes.
The Loans may be prepaid in full or in part only in
accordance with the terms of the Notes and any such
prepayment shall be subject to the prepayment fee provided
for therein."
(f) Section 1.5, line 3, is hereby amended by substituting the
date "October 2, 2000" for the date "September 30, 1999".
(g) Section 1.5.2, is hereby added in its entirety to read as
follows:
"TERM LOAN I COMMITMENT FEE. A NON-REFUNDABLE one eighth
of one percent (1/8%) fee shall be paid upon the funding
on the amount of the Term Loan I.
(h) Section 4.5(b), line 2, is hereby amended by deleting the
words "and consolidating".
(i) Section 4.6, is hereby amended in its entirety to read as
follows:
"TANGIBLE NET WORTH. From December 31, 1997, Borrower will
at all times maintain Tangible Net Worth of not less than
FORTY SEVEN MILLION DOLLARS ($47,000,000). Thereafter,
Borrower will at all times maintain a minimum Tangible Net
Worth that increases from said amount as of the end of
each Borrower's fiscal years by seventy-five percent (75%)
of Borrower's net profit after taxes plus one hundred
percent (100%) of any new equity capital additions.
"Tangible Net Worth" shall mean net worth increased by
indebtedness of Borrower subordinated to Bank and
decreased by patents, licenses, trademarks, trade names,
goodwill and other similar intangible assets,
organizational expenses, and monies due from affiliates
(including officers, shareholders and directors)."
2. Waivers to the Agreement:
(a) Bank hereby provides a waiver of Borrower's breach of
Section 5.3, of the Agreement.
<PAGE> 3
Smartflex Systems, Inc.
1st Amendment to Amended and Restated Loan Agreement
October 1, 1998
Page 3
"SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will
neither liquidate nor dissolve nor enter into any
consolidation, merger, partnership or other combination,
nor convey, nor sell, nor lease all or the greater part of
its assets or business, nor purchase or lease all or the
greater part of the assets or business of another."
(b) Bank hereby provides a waiver of Borrower's breach of
Section 5.5, of the Agreement.
"INVESTMENT. Borrower will not purchase the debt or equity
of another person or entity except for savings accounts
and certificate of deposit of Bank, direct U.S. Government
obligations and commercial paper issued by corporations
with the top ratings of Moody's or Standard & Poor's,
provided all such permitted investments shall mature
within two years of purchase."
Except as specifically amended hereby, the Agreement shall remain in full force
and effect and is hereby ratified and confirmed. This First Amendment and Waiver
shall not be a waiver of any existing or future default or breach of a condition
or covenant unless specified herein.
This First Amendment shall become effective when Bank shall have received the
acknowledgment copy of this First Amendment and Waiver executed by Borrower.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By: //s// Robert Thomas
--------------------------------
Robert Thomas
Title: Vice President
By: //s// Jim Heim
--------------------------------
Jim Heim
Title: Vice President
AGREED AND ACCEPTED TO THIS 13TH DAY OF OCTOBER, 1998.
SMARTFLEX SYSTEMS, INC.
By: //s// William Healey
--------------------------------
William Healey
Title: President
<PAGE> 1
EXHIBIT 10.41
[UNION BANK OF CALIFORNIA LETTERHEAD]
AMENDMENT LETTER
Commercial Banking Group
Union Bank of California
500 S. Main Street, Suite 200
Orange, CA 92868
November 17, 1998
Mr. William Healey, President
Smartflex Systems, Inc.
14312 Franklin Avenue
Tustin, CA 92680-7028
Re: SECOND AMENDMENT ("Amendment") to the Amended and Restated Loan
Agreement dated September 26, 1997 (this Amendment, the First Amendment
dated October 1, 1998, and the Amended and Restated Loan Agreement
together called the "Agreement")
Dear Mr. Healey:
In reference to the Agreement defined above between UNION BANK OF CALIFORNIA,
N.A. ("BANK") and SMARTFLEX SYSTEMS, INC. ("BORROWER"), Bank and Borrower desire
to amend the Agreement. Capitalized terms used herein which are not otherwise
defined shall have the meanings given them in the Agreement.
1. Amendment to the Agreement:
(a) Section 5.3, of the Agreement, is hereby amended in its
entirety to read as follows:
"SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will
neither liquidate nor dissolve nor enter into any
consolidation, merger, partnership or other combination,
nor convey, nor sell, nor lease all or the greater part of
its assets or business, nor purchase or lease all or the
greater part of the assets or business of another entity;
provided, however, that Borrower may merge or consolidate
with another entity, or may acquire, by purchase of stock
or by purchase of assets, all or the greater part of the
assets or business of another entity, if (a) Borrower is
the surviving entity, (b) the principal business of such
other entity is the same as that of Borrower, (c) such
merger, consolidation or acquisition is not contested, (d)
no part of the merger, consolidation or acquisition costs
represent Bank borrowings, and (e) the
<PAGE> 2
Smartflex Systems, Inc.
2nd Amendment to Amended and Restated Loan Agreement
November 17, 1998
Page 2
consideration paid or to be paid by Borrower in connection
with such merger, consolidation or acquisition, whether in
the form of shares of Borrower's stock, cash or otherwise,
entered into or made by Borrower at any time on or after
the date of this Agreement, does not exceed, TEN MILLION
DOLLARS ($10,000,000) per transaction."
Except as specifically amended hereby, the Agreement shall remain in full force
and effect and is hereby ratified and confirmed.
This Second Amendment shall become effective when Bank shall have received the
acknowledgment copy of this Second Amendment executed by Borrower.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By: //s// Robert Thomas
-------------------------------
Robert Thomas
Title: Vice President
By: //s// Anita Sardiya for
-------------------------------
Jim Heim
Title: Vice President
AGREED AND ACCEPTED TO THIS 17 DAY OF NOVEMBER, 1998.
SMARTFLEX SYSTEMS, INC.
By: //s// William Healey
-------------------------------
William Healey
Title: President
<PAGE> 1
EXHIBIT 10.42
UNION BANK OF CALIFORNIA
PROMISSORY NOTE
(BASE RATE)
================================================================================
Borrower Name SMARTFLEX SYSTEMS, INC.
- --------------------------------------------------------------------------------
Borrower Address Office 45061 Loan Number 8439907413 0080-00-0-001
14312 FRANKLIN AVENUE -------------------------------------------------------
TUSTIN, CA 92680-7028 Maturity Date OCTOBER 2, 2000 Amount $25,000,000.00
================================================================================
$25,000,000.00 Date OCTOBER 1, 1998
------------- ---------------
FOR VALUE RECEIVED, on OCTOBER 2, 2000, the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of TWENTY FIVE MILLION AND NO/100 Dollars ($25,000,000.00), or
so much thereof as is disbursed, together with interest on the balance of such
principal from time to time outstanding, at the per annum rate or rates and at
the times set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest an the 2ND day of each MONTH
(commencing DECEMBER 2, 1998). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder
in minimum amounts of at least $100,000.00 shall bear interest at a
rate, based on an index selected by Debtor, which is 1.50% per annum in
excess of Bank's LIBOR Rate for the Interest Period selected by Debtor,
acceptable to Bank.
No Base Interest Rate may 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 prime 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
<PAGE> 2
an index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index, the
Interest Period and the Origination Date selected (which Origination
Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall
follow the date of such selection by no more than two (2) Business
Days).
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds notwithstanding
any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is
not bearing interest at a Base Interest Rate shall bear interest at a
rate per annum equal to the Reference Rate, which rate shall vary as and
when the Reference Rate changes.
At any time prior to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note, Debtor may borrow, repay
and reborrow hereon so long as the total outstanding at any one time
does not exceed the principal amount of this note. Debtor shall pay all
amounts due under this note in lawful money of the United States at
Bank's ORANGE COUNTY COMMERCIAL BANKING Office, or such other office as
may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1.b. above,
calculated from the date of default until all amounts payable under this note
are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based
on the Reference Rate may be prepaid in whole or in part at any time,
without penalty or premium. Debtor may prepay amounts outstanding under
this note bearing interest at a Base Interest Rate in whole or in part
provided Debtor has given Bank not less than five (5) Business Days
prior written notice of Debtor's intention to make such prepayment and
pays to Bank the liquidated damages due as a result. Liquidated Damages
shall also be paid, if Bank, for any other reason, including
acceleration or foreclosure, receives all or any portion of principal
bearing interest at a Base Interest Rate prior to its scheduled payment
date. Liquidated Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less then zero) between
(a) the Base Interest Rate applicable to the principal amount which is
being prepaid, and (b) the return which Bank could obtain if it used the
amount of
-2-
<PAGE> 3
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 this
prepayment formula exceed the interest that Bank would have received if
no prepayment had occurred. All prepayments shall include payment of
accrued interest on the principal amount so prepaid and shall be applied
to payment of interest before application to principal. A determination
by Bank as to the prepayment fee amount, if any, shall be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor acknowledges that (i) Bank establishes a
Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepayment may result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquidated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceeding for the
appointment of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (g) the commencement of any
proceeding for the dissolution or liquidation of any Obligor; (h) the
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j) the
failure of any Obligor to comply with any order, judgement, injunction, decree,
writ or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any notice of
levy, notice to withhold, or other legal process for taxes other than property
taxes; (l) the default by any Obligor
-3-
<PAGE> 4
personally liable for amounts owed hereunder on any obligation concerning the
borrowing of money; (m) the issuance against any Obligor, or the property of any
Obligor, of any writ of attachment, execution, or other judicial lien; or (n)
the deterioration of the financial condition of any Obligor which results in
Bank deeming itself, in good faith, insecure. Upon the occurrence of any such
default, Bank, in its discretion, may cease to advance funds hereunder and may
declare all obligations under this note immediately due and payable; however,
upon the occurrence of an event of default under d, e, f, or g, all principal
and interest shall automatically become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any Obligor, including
their successors 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" means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding
under this note that bear interest at a Base Interest Rate. "Base Rate Maturity
Date" means the last day of the Interest Period with respect to principal
outstanding under a Base Interest Rate Loan. "Business Day" means a day on which
Bank is open for business for the funding of corporate loans, 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" means 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
-4-
<PAGE> 5
Rate" means a per annum rate of interest (rounded upward, if necessary, to the
nearest 1/100 of 1%) at which dollar deposits, in immediately available funds
and in lawful money of the United States would be offered to Bank, outside of
the United States, for a term coinciding with the Interest Period selected by
Debtor and for an amount equal to the amount of principal covered by Debtor's
interest rate selection, plus Bank's costs, including the costs, if any, of
reserve requirements. "Origination Date" means the first day of the Interest
Period. "Reference Rate" means 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
-5-
<PAGE> 1
EXHIBIT 10.43
UNION BANK OF CALIFORNIA
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 DECEMBER 1, 2003 Amount $3,000,000.00
===============================================================================
$3,000,000.00 Date NOVEMBER 6, 1998
------------ ----------------
FOR VALUE RECEIVED, on DECEMBER 1, 2003, the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of THREE MILLION AND NO/100 Dollars ($3,000,000.00), or so
much thereof as is disbursed, together with interest on the balance of such
principal from time to time outstanding, at the per annum rate or rates and at
the times set forth below.
1. PAYMENTS.
PRINCIPAL PAYMENTS. Debtor shall pay principal in installments of FIFTY THOUSAND
AND NO/100 Dollars ($50,000.00) each on the FIRST day of each MONTH, commencing
JANUARY 1, 1999. 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 FIRST day of each MONTH
(commencing JANUARY 1, 1999). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding
hereunder in minimum amounts of at least $500,000.00 shall bear
interest at a rate, based on an index selected by Debtor, which
is 1.75% per annum in excess of Bank's LIBOR-Rate for the
Interest Period so selected by Debtor, acceptable to Bank.
No Base Interest Rate may 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.
<PAGE> 2
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, the
Interest Period and the Origination Date selected (which
Origination Date, for a Base Interest Rate Loan based on the
LIBOR-Rate, shall follow the date of such selection by no more
than two (2) Business Days).
Bank will mail a written 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 equal to the Reference Rate, which
rate shall vary as and when the Reference Rate changes.
Debtor shall pay all amounts due under this note in lawful money
of the United States at Bank's ORANGE COUNTY COMMERCIAL BANKING
Office, or such other office as may be designated by Bank, from
time to time.
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. Debtor may prepay
amounts outstanding under this note bearing interest at a Base
Interest Rate in whole or in part provided Debtor has given Bank
not less than five (5) Business Days prior written notice of
Debtor's intention to make such prepayment and pays to Bank the
liquidated damages due as a result. Liquidated Damages shall also
be paid, if Bank, for any other reason, including acceleration or
foreclosure, receives all or any portion of principal bearing
interest at a Base Interest Rate prior to its scheduled payment
date. Liquidated Damages shall be 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 is being
-2-
<PAGE> 3
To exercise this option, Debtor may, from time to time with
respect to principal prepaid, 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 this 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. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor acknowledges that (i) Bank
establishes a Base Interest Rate upon the understanding that it
apply to the Base Interest Rate Loan for the entire Interest
Period, and (ii) any prepayment may result in Bank incurring
additional costs, expenses or liabilities; and Debtor agrees to
pay these liquidated damages as a reasonable estimate of the
costs, expenses and liabilities of Bank associated with such
prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceeding for the
appointment of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (g) the commencement of any
proceeding for the dissolution or liquidation of any Obligor: (h) the
-3-
<PAGE> 4
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j) the
failure of any Obligor to comply with any order, judgement, injunction, decree,
writ or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any notice of
levy, notice to withhold, or other legal process for taxes other than property
taxes; (l) the default by any Obligor personally liable for amounts owed
hereunder on any obligation concerning the borrowing of money; (m) the issuance
against any Obligor, or the property of any Obligor, of any writ of attachment,
execution, or other judicial lien; or (n) the deterioration of the financial
condition of any Obligor which results in Bank deeming itself, in good faith,
insecure. Upon the occurrence of any such default, Bank, in its discretion, may
cease to advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any Obligor, including
their successors 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" means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding
under this note that bear interest at a Base Interest Rate. "Base Rate Maturity
Date" means the last day of the Interest Period with respect to principal
outstanding under a Base Interest Rate Loan. "Business Day" means a day on which
Bank is open for business for the funding of corporate loans, 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" means 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
-4-
<PAGE> 5
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" means 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" means
the first day of the Interest Period. "Reference Rate" means 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
-5-
<PAGE> 1
EXHIBIT 10.44
[UNION BANK OF CALIFORNIA LETTERHEAD]
Date
January 26, 1998
John Hohener, CFO
SMARTFLEX SYSTEMS INCORPORATED
14312 Franklin Avenue
Tustin, CA 92781-2085
NOTICE OF WAIVER
Re: Loan Agreement
Dated: September 26, 1997
Dear Mr. Hohener:
You have requested the following waiver(s) in reference to the Loan
Agreement ("Agreement") between Union Bank of California, N.A. ("Bank") and
Smartflex Systems Incorporated ("Borrower") referred to above.
Bank hereby waives Borrower's breach of Section 4.8 Profit From
Operations and Section 4.9 Cash Flow of the Agreement occurring prior to January
1, 1998. Any further breach of these sections is not waived.
Except as waived hereby, the Agreement, as the same may have previously
been waived, shall remain unaltered and in full force and effect. This letter
shall not be a waiver of any existing default or breach of a covenant unless
specified herein.
If you agree with the foregoing, please sign the enclosed
acknowledgement copy and return it on or before February 15, 1998.
UNION BANK OF CALIFORNIA, N.A.
By Robert Thomas
----------------------------
Title: Vice President
----------------------------
By Jack Penhoff
----------------------------
Title: Vice President
----------------------------
<PAGE> 2
SMARTFLEX SYSTEMS INCORPORATED hereby agree to and
acknowledge this waiver this 30 day of January, 1998.
By //s// John Hohener
----------------------------
Title: VP/CFO
----------------------------
By
----------------------------
Title
----------------------------
<PAGE> 1
EXHIBIT 10.45
[UNION BANK OF CALIFORNIA LETTERHEAD]
COMMERCIAL PORTFOLIO ADMINISTRATION
Union Bank of California
500 S. Main Street
Suite 200
Orange, CA 92686
October 9, 1998
Mr. John Hohener, CFO
Smartflex Systems, Inc.
14312 Franklin Avenue
P.O. Box 2085
Tustin, CA 92781-2085
NOTICE OF WAIVER
Re: Loan Agreement
Dated: September 26, 1997
Dear John:
You have requested the following waiver in reference to the Loan
Agreement ("Agreement") in the principal sum of Twenty Seven Million Two
Hundred Thousand Dollars ($27,200,000) between Union Bank of California, N.A.
("Bank") and Smartflex Systems, Inc. ("Borrower") referred to above.
Bank hereby waives Borrower's breach of SECTION 5.5 INVESTMENTS of the
Agreement occurring prior to October 31, 1998. Any further breach of this
section is not waived.
Except as waived hereby, the Agreement, as the same may have previously
been waived, shall remain unaltered and in full force and effect. This letter
shall not be a waiver of any existing default or breach of a covenant unless
specified herein.
If you agree with the foregoing, please sign the enclosed
acknowledgement copy and return it on or before October 31, 1998.
UNION BANK OF CALIFORNIA, N.A.
By //s// Robert Thomas By //s// Jim Heim
--------------------------- ---------------------------
Title: Vice President Title: Vice President
--------------------------- ---------------------------
<PAGE> 2
SMARTFLEX SYSTEMS, INC. hereby agree to and
acknowledge this waiver this 28 day of Oct.,
1998
By //s// John Hohener By
--------------------------- ---------------------------
Title: VP/CFO Title
--------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.46
[UNION BANK OF CALIFORNIA LETTERHEAD]
AMENDMENT AND WAIVER LETTER
UNION BANK OF CALIFORNIA
500 S. Main Street, Suite 200
Orange CA 92868
March 30, 1999
Mr. William Healey, President
SMARTFLEX SYSTEMS, INC.
14312 Franklin Avenue
Tustin, CA 92680-7028
Re: THIRD AMENDMENT AND WAIVER ("Amendment" or "Waiver") to the Amended and
Restated Loan Agreement dated September 26, 1997 (this Amendment and the
Amended and Restated Loan Agreement together called the "Agreement")
Dear Mr. Healey:
In reference to the Agreement defined above between UNION BANK OF CALIFORNIA,
N.A. ("BANK") AND SMARTFLEX SYSTEMS, INC. ("Borrower"), Bank and Borrower desire
to amend the Agreement and waive certain breaches of the Agreement. Capitalized
terms used herein which are not otherwise defined shall have the meanings given
them in the Agreement.
1. Amendments to the Agreement:
(a) Section 4.6, is hereby amended in its entirety to read as
follows:
"TANGIBLE NET WORTH. From December 31, 1998, Borrower will
at all times maintain Tangible Net Worth of not less than
THIRTY MILLION DOLLARS ($30,000,000). Thereafter, Borrower
will at all times maintain a minimum Tangible Net Worth
that increases from said amount as of the end of each of
Borrower's fiscal years by seventy-five percent (75%) of
Borrower's net profit after taxes plus one hundred percent
(100%) of any new equity capital additions plus one
hundred percent (100%) of the cumulative amortization of
goodwill for fiscal periods ending subsequent to December
31, 1998. "Tangible Net Worth" shall mean net worth
increased by indebtedness of Borrower subordinated to Bank
and decreased by patents, licenses, trademarks, trade
names, goodwill and other similar intangible assets,
organizational expenses, and monies due from affiliates
(including officers, shareholders and directors)."
(b) Section 4.7, is hereby amended in its entirety to read as
follows:
<PAGE> 2
Smartflex Systems, Inc.
Third Amendment to Amended and Restated Loan Agreement
March 30, 1999
Page 2
"DEBT TO TANGIBLE NET WORTH. Borrower will at all times
maintain a ratio of total liabilities to tangible net
worth of not greater than 1.75 to 1.00."
(c) Section 4.8, is hereby amended in its entirety to read as
follows:
"PROFIT FROM OPERATIONS. Borrower will maintain a net
profit from operations, as defined by generally accepted
accounting principles, of any positive amount for each
fiscal year; provided, however, restructuring charges in
amounts not to exceed Four Million Five Hundred Thousand
Dollars ($4,500,000) shall be excluded from the
calculation for the fiscal year ending on or about
December 31, 1999."
(d) Section 4.9 shall be deleted in its entirety and replaced
with the following:
"FIXED CHARGE COVERAGE. Borrower will maintain a ratio of
Cash Flow to Fixed Charges of not less than 1.85 to 1.00.
Compliance with this subsection shall be measured at the
end of each fiscal quarter. "Cash Flow" shall mean
earnings before interest, taxes, depreciation and
amortization ("EBITDA") to which rent expense and lease
expense are added for the twelve (12) months immediately
preceding the date of calculation. "Fixed Charges" shall
mean that portion of long term debt and capital leases
coming due within twelve (12) months to which taxes, rent,
lease expense and interest expense are added for the
twelve (12) month period immediately preceding the date of
calculation."
(e) Section 4.10 shall be amended by substituting (1) the
ratio ".9:1.0" for the ratio "1.25:1.0" and (2) the date
"December 31, 1999" for the date "6/30/98.
(f) Section 5.3 is hereby amended by substituting the amount
"Three Million Dollars ($3,000,000)" for the amount "Ten
Million Dollars ($ 10,000,000)" appearing in the last line
thereof.
(g) Section 5.6 is hereby amended in its entirety to read as
follows:
"LOSSES. Borrower will not incur 2 or more consecutive
quarterly net losses in any fiscal year subsequent to June
30, 1999."
(h) Section 5.10 is hereby added in its entirety as follows:
"CAPITAL EXPENDITURES AND LEASE OBLIGATIONS. Borrower will
not acquire by purchase, nor become obligated as a lessee
under capital leases or operating leases for obtaining the
use of, property, plant and equipment
<PAGE> 3
Smartflex Systems, Inc.
Third Amendment to Amended and Restated Loan Agreement
March 30, 1999
Page 3
whose cost exceeds Twelve Million Dollars ($12,000,000)
for the two (2) year period ending December 31, 2000.
2. Waivers to the Agreement:
(a) Bank hereby provides a waiver of Borrower's breach of
Section 1.3 of the Agreement.
"The proceeds of the Term Loan I shall be used to
purchase real property.
(b) Borrower has advised Bank of its purchase of certain
assets and assumption of certain obligations of Tanon
Manufacturing, Inc. ("Tanon"), a wholly owned subsidiary
of EA Industries on or about February 2, 1999 for total
consideration of approximately $15,000,000 (the
"Transaction"). Borrower acknowledges that the Transaction
constitutes Events of Default under Section 5.3 of the
Loan Agreement (which prohibits acquisitions which are
consummated, in whole or in part, with Loans from Bank,
and which exceed Ten Million Dollars ($10,000,000) per
transaction), and Section 5.5 of the Loan Agreement (which
prohibits the purchase of debt or equity in another
entity), unless Bank agrees to waive such Events of
Default as provided for in this Amendment.
Bank's agreement to waive the aforementioned Events
of Default is hereby made subject to the following
conditions:
(1) On or before April 15, 1999, Borrower shall
provide a copy of the definitive purchase
agreement evidencing the Transaction and
executed by the parties thereto.
In consideration for the Amendment and Waiver, Borrower shall pay to Bank a fee
of Thirty Five Thousand Dollars ($35,000) concurrent with the execution and
return of the acknowledgement copy specified below.
Except as specifically amended hereby, the Agreement shall remain in full force
and effect and is hereby ratified and confirmed. This Third Amendment and Waiver
shall not be a waiver of any existing or future default or breach of a condition
or covenant unless specified herein.
<PAGE> 4
Smartflex Systems, Inc.
Third Amendment to Amended and Restated Loan Agreement
March 30, 1999
Page 4
This Third Amendment and Waiver shall become effective when Bank shall have
received the acknowledgment copy of this Third Amendment and Waiver executed by
Borrower.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By //s// Robert Thomas AGREED AND ACCEPTED TO THIS 31ST
------------------------------------- DAY OF MARCH, 1999
Robert Thomas
Vice President SMARTLFEX SYSTEMS, INC.
By: //s// William L. Healey
---------------------------------
William Healey
Title: President
By: //s// Jim Heim
------------------------------------
Jim Heim
Vice President
<PAGE> 1
EXHIBIT 10.47
[UNION BANK OF CALIFORNIA LETTERHEAD]
UNION BANK OF CALIFORNIA
500 S. Main Street, Suite 200
Orange, CA 92868
March 30, 1999
Mr. William Healey, President
SMARTFLEX SYSTEMS, INC.
14312 Franklin Avenue
Tustin, CA 92680-7028
Re: THIRD AMENDMENT AND WAIVER
Dear Mr. Healey:
In recognition of the financial implications arising from the recent
acquisitions, restructuring charges and on-going operating performance of
Smartflex Systems, Inc. ("Borrower" or "Company"), and in conjunction with the
Amendment and Waiver referenced above, the Bank is requiring the adoption of a
Performance Pricing Grid which will link the pricing on Borrower's credit
facilities to the Company's financial leverage as defined in the Third
Amendment. The proposed grid is as follows:
<TABLE>
<CAPTION>
REVOLVING LINE OF CREDIT PRICING GRID
- ------------------------------------------------ -----------------------------------------------
<S> <C>
LEVERAGE
(TOTAL LIABILITIES/TANGIBLE NET WORTH) PRICING OPTIONS
- ------------------------------------------------ -----------------------------------------------
<=1.00 Reference Rate or LIBOR + 1.50%
- ------------------------------------------------ -----------------------------------------------
>1.00 but <= 1.30 Reference Rate or LIBOR + 1.75%
- ------------------------------------------------ -----------------------------------------------
> 1.30 but <= 1.60 Reference Rate or LIBOR + 2.00%
- ------------------------------------------------ -----------------------------------------------
> 1.60 but <= 1.75 Reference Rate or LIBOR + 2.25%
- ------------------------------------------------ -----------------------------------------------
</TABLE>
Pricing on the term loans will be subject to the same leverage criteria but at
an additional .25% over the rate applicable to the revolving line of credit.
Pricing will be adjusted five days after receipt of quarterly or fiscal year end
financial statements and Borrower's compliance certificate. New notes reflecting
these changes will be provided for your signature within 10 days.
Please acknowledge Company's acceptance of the above terms by returning an
executed copy of this letter to the Bank by April 2, 1999.
<PAGE> 2
Smartflex Systems, Inc.
March 30, 1999
Page 2
Very truly yours.
UNION BANK OF CALIFORNIA, N.A.
By: //s// Robert Thomas
---------------------------------- AGREED AND ACCEPTED TO THIS 31ST DAY
Robert Thomas OF MARCH, 1999
Vice President
SMARTLFEX SYSTEMS, INC.
By: //s// William L. Healey
--------------------------------
William Healey
Title: President
By: //s// Jim Heim
--------------------------------
Jim Heim
Vice President
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information includes certain 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 under "Risk Factors -- Important
Factors Related to Forward-Looking Statements and Associated Risks."
OVERVIEW
Smartflex Systems Inc. ("Smartflex" or the "Company") is a technology
leader in electronics manufacturing services. The Company provides a diverse
range of services for customers to achieve their product realization needs.
These services include product, Application Specific Integrated Circuit
("ASIC"), software and Radio Frequency ("RF") design; modeling, and
package/enclosure management; and the precision assembly of comprehensive
advanced interconnect solutions, utilizing precision surface mount and
Direct-Chip-Attach ("DCA") technologies. Prototype through high volume
manufacturing of electronic circuit board and box build services is provided
through nine facilities worldwide for customers in the Americas, Europe and
Asia. The Company was founded as a joint venture in 1985 and incorporated in
1993. On July 31, 1995, the Company completed an initial public offering ("IPO")
of 3,220,000 shares of common stock, of which the Company sold 2,000,000 shares.
The Company operates in one business segment with applications for hard
disk drive ("HDD") and non-HDD industries. The non-HDD industries include
medical electronics, optical and tape storage, removable storage, arrays,
communications, computers and peripherals. The HDD, optical and tape storage,
removable storage and array products are collectively referred to as data
storage. Sales to the HDD and non-HDD industries have generally been
concentrated among a few large customers. The Company's predominant market has
been the HDD industry, accounting for approximately 43.6%, 54.8%, and 50.0% of
net revenues in fiscal 1998, 1997 and 1996, respectively. Customers in the HDD
market include International Business Machines Corporation ("IBM") and Samsung
Electronics Company Ltd. Customers in the non-HDD market include Iomega
Corporation, Quantum Corporation, and Hewlett Packard Company. Sales to both
segments of the market are made directly to various divisions of these companies
or to intermediary companies that also service these named accounts. Demand
swings from any of the aforementioned customers, which might be due to a number
of factors, including significant slowdowns or ramp-ups in their respective
industries, could have material effects on the Company's operating results.
By mid-1992 the Company had developed the methodology to begin
high-volume production of assemblies using DCA technologies, specifically
Chip-On-Flex ("COF"). DCA solutions include COF, Flip-Chip-On-Flex ("FCOF"),
Chip On Board ("COB") and Chip-On Ceramic ("COC") assembly technologies. In
1996, the Company developed the technique to
1
<PAGE> 2
produce assemblies utilizing the FCOF process. In early 1997, the Company
developed and began shipping volume production of assemblies incorporating the
COC process. Even though sales-to-date of assemblies incorporating these process
technologies have largely been in data storage applications, these technologies
also support an increasing need in non storage applications. In fiscal 1998,
1997 and 1996, these process technologies accounted for approximately 47.9%,
50.0% and 43.5% of net revenues, respectively.
During 1998 the Company continued to experience softness in demand,
competitive pricing and margin declines from its core data storage customers.
This softness resulted in relatively depressed business levels.
However, the Company has begun to diversify its customer base by
expanding into additional markets. This expansion was primarily achieved through
acquisitions. Late in 1998 and early in 1999, the Company acquired Logical
Services Incorporated, a design and engineering services firm; certain assets of
the Methuen, Massachusetts division of EA Industries, now owned by Smartflex New
England, Inc.; and certain assets of the Tanon subsidiary of EA Industries, now
owned by Smartflex Fremont, Inc. or Smartflex New Jersey, Inc. It is believed
that these acquisitions will provide a platform for diversification into the
automotive, RF communications, and medical product marketplaces.
The Company currently serves the electronics industry, which is subject
to rapid technological change, product obsolescence and price competition. 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 and other factors, there can be no assurance
of growth in the Company's revenues. These and other factors affecting the
electronics industry, or any of the Company's major customers in particular,
could have materially adverse effects on the Company's results of operations.
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>
Years Ended
December 31
---------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 88.8 93.0 87.1
- --------------------------------------------------------------------------------------
Gross margin 11.2 7.0 12.9
Costs and expenses:
Marketing and sales expense 3.4 2.7 1.9
General and administrative expense 6.9 5.5 3.8
Restructuring expense -- 3.9 --
- -------------------------------------------------------------------------------------
Operating income (loss) 0.9 (5.1) 7.2
Interest income 1.0 0.7 .7
Interest expense (0.2) (0.4) (0.2)
Other income 0.4 0.1 --
- --------------------------------------------------------------------------------------
Income (loss) before income taxes 2.1 (4.7) 7.7
Income tax provision (benefit) 0.7 (1.6) 2.8
- --------------------------------------------------------------------------------------
Net income (loss) 1.4% (3.1)% 4.9%
- --------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
Net Revenues
In 1998, revenues declined due to continuing demand softness in the data
storage industry. Unit shipments have increased year to year; however, the
impact of the increase in unit shipments on revenues has been partially offset
by decreases in aggregate average selling prices ("ASP"). The ASP's have
generally declined during this period, as well as in prior periods, primarily
due to decreases in component costs (which are generally passed through to
customers), competitive pricing pressures, and fluctuations in product mix. The
relative impact of any one of these factors varies from period to period. In
1997 revenue declined, when compared to 1996, due to flat demand in the data
storage market and reduced demand in the Company's primary other-end market -
scanners. In 1996, revenues increased compared to prior periods, due to growth
in the overall data storage market as well as expansion of the Company's
presence in other markets.
The data storage market for Smartflex includes HDD products, array
products, tape storage products, removable storage products, and optical storage
products. Through 1998 Smartflex primarily measures its revenues as "HDD" or as
all other revenues, defined as "non-HDD". During 1998 net revenues from non-HDD
increased to 56.4% of total revenues, up from 45.2% for fiscal 1997 and 50% for
fiscal 1996. This was primarily due to increases in the removable, array, and
tape storage products. Net revenues from HDD programs, and therefore total
revenues, decreased in 1998, when compared to 1997. Net revenues, in total, for
1998 were $107.6 million, a decline of 19 %, compared with the $133.3 million
for 1997.
Net revenues in fiscal 1997 declined $12.8 million, or 8.7% compared to
fiscal 1996, primarily due to reduced demand in the Company's scanner business,
which was offset by slight increases in the removable storage business. The HDD
business was flat in 1997 as compared to 1996.
Export sales arise primarily from the shipment of assembled products to
international operations of U.S.-based customers, as well as shipments to
intermediary companies who also service these accounts. Total export sales were
79.3%, 82.6%, and 70.9% of total revenues in fiscal 1998, 1997, and 1996,
respectively. The relatively large amount of export sales was due largely to
transferred production to these international operations by the Company's
U.S.-based customers. The Company anticipates that export sales will continue to
account for a significant portion of net revenues for the foreseeable future.
3
<PAGE> 4
Restructuring
In order to address the imbalance between demand and capacity, as well
as to position the Company's operations for future cost advantages, the Company
accelerated the streamlining of its worldwide operations in the third quarter of
1997. As part of this restructuring, volume manufacturing was moved from
Singapore to the Company's lower-cost facility in Cebu, Philippines. The
Singapore operations are now the focal point of Smartflex' customer support in
Asia, as the Company's Far East Regional Services and Technology Center. The
restructuring also included a reduction of manufacturing and other personnel
from the Company's Tustin, California operations. As part of this restructuring,
the Company provided for the following charges in the third quarter of 1997:
$1.4 million for the write-off of inventories, which is included in cost of
revenues, $3.5 million for the write-down of non-current assets and other
expenses, $1.1 million for severance and other employee-related costs associated
with the reduction in force, and approximately $500,000 toward a potential
Singapore tax liability. By the end of 1998, the Company had used all of the
restructuring reserve, with the exception of the $500,000 associated with the
Singapore tax liability, and a nominal portion associated with inventory. During
1999 the Company received certain new information and now expects to have a
favorable ruling regarding the Singapore tax liability, which would result in
this part of the restructuring reserve being reversed.
Gross Margin
Gross margins as a percentage of net revenues were 11.2%, 7.0%, and
12.9% in fiscal 1998, 1997 and 1996, respectively. The increase in gross margin
in fiscal 1998 is primarily attributable to a reduced cost structure from the
prior year as well as cost control measures put in place in 1998. The decrease
in fiscal 1997, from 1996, was primarily due to decreased revenue coupled with
increased costs associated with the expansion of the Company's manufacturing
operations.
The Company's gross margins, as a percentage of revenues, historically
had not been materially affected by declines in ASP's because price reductions
generally had been offset by reductions in component costs and improved
operating efficiencies. However, there can be no assurance that future declines
in ASP's will not negatively impact the Company's gross margins. The Company's
gross margins have 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, rate of exchange price
competition, the timing of expenditures in anticipation of increased sales,
changes in product delivery schedules and the range of services provided. Also
the 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
4
<PAGE> 5
Marketing and sales expenses consist primarily of salaries, facilities
and travel costs for marketing, sales, business development 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 3.4%, 2.7% and 1.9% in fiscal 1998, 1997 and 1996, respectively. The
increase in marketing and sales expense in 1998 is attributable to head count
increases for new business development as well as the fourth quarter expenses
related to the Company's acquisitions, partially offset by decreases in
commissions paid to outside sales firms. In fiscal 1997 increases in marketing
and sales expense were attributed to a general increase in commissions,
staffing, advertising and other administrative costs.
General and Administrative Expense
General and administrative ("G & A") expenses decreased to $7.4 million,
or 6.9% of net revenues, in fiscal 1998 as compared to $7.5 million,or 5.6% of
net revenues, in fiscal 1997. The G & A expenses in 1996 were $5.6 million, or
3.8% of net revenues. The slight decrease in G & A spending in 1998 from 1997
was due primarily to decreased spending in Singapore in 1998, as a result of the
Company's restructuring in 1997. These reductions were offset by expenses in
1998 associated with the hiring of the Company's Chief Operating Officer as well
as expenses related to the Company's recent acquisitions. The increase in 1997
from 1996 levels was largely due to increases in administrative personnel in the
Monterrey and Cebu locations, and due to increases in program management.
The Company expects that future G & A expenses will increase in absolute
amounts in the future due, in part, to its recent acquisitions and the related
support structure needed to run those acquired operations.
Interest Income/Expense
In fiscal 1998 interest income increased by $139,000 from fiscal 1997
largely due to additional short-term investments of cash generated from
operations. The fiscal 1997 interest income decreased by $48,000 from 1996
primarily due to a decrease in investments held during the year. 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 $2.9 million in fiscal 1998 compared to
fiscal 1997 as the Company was profitable in 1998 but was not profitable in
1997. Income tax expense decreased $6.2 million in fiscal 1997 compared to 1996.
The Company's effective tax rate was 34.0% in fiscal 1998 compared to 34.4% in
fiscal 1997, and 36.3% in fiscal 1996. Changes in the effective tax rate reflect
changes in incremental volume contributions from the Company's offshore
manufacturing facilities, which have foreign income tax obligations, if any,
that are generally less than U.S. income tax obligations.
5
<PAGE> 6
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, 1998, cash and short-term investments totaled $27.4
million, a decrease of $700,000 from fiscal 1997 year-end balances. This
decrease was primarily due to utilizing cash to cause a reduction in the amounts
of trade accounts payable, and accrued expenses, partially offset by cash
inflows resulting from a reduction of accounts receivable and inventory.
Sale of Common Stock
On July 31, 1995, the Company completed an IPO 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 offering, after underwriting discounts and offering
costs, totaled $21.5 million.
Bank Financing
The Company amended its bank credit facility (the "facility") on October
1, 1998 to provide for aggregate unsecured borrowings of $25 million under a
revolving line of credit (the "credit line"). Borrowings under the credit line,
which expires in September 2000, include a sub-limit for the issuance of up to
$2 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, 1998. 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 .125% per annum. At December 31, 1998 there was
$1.1 million 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%. Principal and interest
are payable monthly, and this term loan matures on March 30, 2001. At December
31, 1998, the outstanding balance on this term loan was $1.5 million. The
facility additionally provides for a second unsecured term loan (the "second
term loan") totaling $3.0 million to be used for general corporate purposes. The
second term loan bears interest at the bank's reference rate, or at the
Company's option, LIBOR plus 1.75%. At December 31, 1998, the outstanding
balance on the second term loan was $3.0 million. 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, 1998, the Company was in compliance with all of the covenants,
except those related to net worth, for which the Company has obtained a waiver.
6
<PAGE> 7
Cash Flow
At December 31, 1998, the Company's principal sources of liquidity
included $27.4 million in cash and short-term investments and $23.9 million in
available borrowings under its bank credit facility. Short-term investments at
December 31, 1998 totaled $24.7 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 decreased $3.4 million in fiscal 1998,
compared to fiscal 1997, due largely to cash utilized to reduce levels of trade
accounts payable and accrued expenses, although offset to some degree by cash
inflows resulting from the reduction of accounts receivable and inventory. In
fiscal 1998 approximately $9.6 million was used in investing activities, which
included manufacturing and other equipment purchases of $6.9 million partially
offset by a net decrease in short-term investments. Fiscal 1998 financing
activities provided $3.3 million through borrowing on the Company's credit line
and net borrowings involving the two term loans of the Company.
Total cash provided by operations decreased $1.5 million in fiscal 1997,
compared to fiscal 1996, due largely to the effects of the Company's
restructuring and an increase in inventories. In fiscal 1997, approximately
$11.2 million was used in investing activities, which included manufacturing and
other equipment purchases of $9.9 million and net short-term investments of $1.3
million. Fiscal 1997 financing activities provided $1.8 million in cash
primarily through borrowing on the term loan feature of the facility.
The Company presently expects to purchase approximately $10 million of
capital equipment in fiscal 1999, primarily for manufacturing equipment and
facility improvements associated with the Company's ongoing businesses,
primarily in the Cebu location, as well as equipment and facility improvements
to support the Company's recent acquisitions. In addition, the Company will
continue to finance information system improvements including year 2000 upgrades
(see "The Year 2000 Issue").
The Company may require additional capital to finance enhancements to,
purchase, and/or expand its manufacturing capacity in accordance with its
business strategy. The Company may also utilize capital for the purpose of
acquiring other businesses in accordance with its business strategy. 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 credit line will be
sufficient to permit the Company to meet its expansion plans and liquidity
requirements in fiscal 1999, with the exception of external acquisitions, where
size would determine if additional capital is needed over the Company's then
current availability.
7
<PAGE> 8
Quantitative And Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign exchange
and interest rates. The Company does not use derivative financial instruments
for speculative or trading purposes. The Company's earnings are affected by
fluctuations in the value of the U. S. dollar against foreign currencies, in
Singapore, the Philippines and Mexico.
The Company's earnings are affected by changes in short-term interest
rates as a result of its borrowings under the credit line, and the unsecured
term loans, all of which are based on variable interest rates. If market
interest rates for such borrowings average 1% higher during the fiscal year
ending January 1, 2000 then they did during the fiscal year ended January 2,
1999 the Company's interest expense would increase, and income before income
taxes would decrease by approximately $19,000. This analysis does not consider
the effects of the reduced level of overall economic activity that could exist
in such an environment. Further, in the event of a change of such magnitude,
management could take actions to further mitigate its exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no changes in the
Company's financial structure.
The Year 2000 Issue
The "Year 2000 issue," also known as "Y2K issue" or the "Millennium
Bug," arises out of the fact that many existing computer programs and other
devices use only two digits to identify a year in the date field and, if
uncorrected, would fail or create erroneous results as a result of the Year
2000.
Early in 1997, the Company evaluated the Y2K issue and its impact on the
Company's operations. Currently, the Company uses certain IBM AS400
applications, which are not Y2K compliant, and various desktop applications,
which are Y2K compliant. So-called "embedded systems," that control certain
manufacturing equipment and other fixtures and equipment, have been identified
and have been determined to be Y2K compliant.
A project to implement the latest versions of the IBM AS400 applications
was launched in late 1997. This project also addresses the Y2K issue. The
project team consists of both dedicated resources and key functional
participants. The project consists of five main steps or phases: the first phase
consisting of an assessment of viable alternatives from commercially available
applications; the second phase being the decision process as for which
applications to obtain; the third phase consisting of configuring the system to
run the Company's business; phase four being training, testing and piloting of
all applications; and the final phase consisting of Company-wide implementation.
The team has identified, and the Company has committed to implement, an
enterprise application that is Y2K compliant. Maintenance or modification costs
will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life. The Company has
completed phases one, two and three and is currently in the training process.
All user functions have or will be going through training, and all requirements
are being developed for immediate use upon implementation. The total project is
8
<PAGE> 9
estimated to be completed by the middle of fiscal 1999 at a cost of
approximately $1 million, which has been or will be spent throughout the
duration of the project implementation. Costs to December 31, 1998 have been
approximately $700,000. Failure to execute successfully and complete this
project and each step thereof as scheduled could cause material disruption of
the Company's operations and have material adverse impacts on its competitive
posture, financial position and results of operations. Many of the Company's
customers, suppliers and lenders have required the Company to provide assurances
concerning the Company's Y2K issue, and any failure by or affecting the Company
in regard to those assurances could result in material demands or assertions of
liability by such third parties or others.
The Company is in the process of contacting its major external
suppliers, customers and other business partners to estimate their compliance
with the Y2K issue and is presently evaluating inputs received from these
external relationships. Failure of any of the Company's major external suppliers
and customers to appropriately and timely address the Y2K issue could cause
material disruption of the Company's business and have material adverse impacts
on the Company's results of operations.
The Company feels that it will successfully implement the Y2K compliant
applications, described above. However, a contingency plan has been developed
for the possibility that timely and successful implementation is not achieved.
The contingency plan is primarily to continue the implementation of the new
application and continue to use the Company's existing applications and manually
manipulate due dates until the implementation has been completed.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share data
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues $107,601 $133,347 $146,100
Cost of revenues 95,543 123,963 127,309
-------- -------- --------
Gross margin 12,058 9,384 18,791
Costs and expenses:
Marketing and sales expense 3,689 3,537 2,755
General and administrative expense 7,402 7,492 5,590
Restructuring expense -- 5,150 --
-------- -------- --------
Operating income (loss) 967 (6,795) 10,446
Interest income 1,106 967 1,015
Interest expense (178) (486) (214)
Other income (expense) 402 25 (4)
-------- -------- --------
Income (loss) before income taxes 2,297 (6,289) 11,243
Income tax provision (benefit) 781 (2,160) 4,086
-------- -------- --------
Net income (loss) $ 1,516 $ (4,129) $ 7,157
======== ======== ========
Net income (loss) per share (basic) $ 0.24 $ (0.65) $ 1.14
======== ======== ========
Net income (loss) per share (diluted) $ 0.24 $ (0.65) $ 1.12
======== ======== ========
Number of shares used in computing
net income (loss) per share (basic) 6,418 6,333 6,271
======== ======== ========
Number of shares used in computing
net income (loss) per share (diluted) 6,463 6,333 6,395
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,613 $ 2,069
Short-term investments 24,743 26,051
Accounts receivable, less allowance of
$957 in 1998 and $1,384 in 1997 11,209 19,252
Inventories 3,927 12,100
Deferred income taxes 3,613 3,541
Prepaid expenses and other current assets 2,360 1,755
------- -------
Total current assets 48,465 64,768
Property and equipment, net 18,475 16,278
Deferred income taxes -- 350
Goodwill, net of accumulated amortization of $49 4,089 --
Other assets 1,262 510
------- -------
$72,291 $81,906
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to related parties $ 1 $ 533
Accounts payable 7,049 18,990
Other accrued liabilities 7,546 10,542
Current portion of notes payable 1,150 1,063
------- -------
Total current liabilities 15,746 31,128
Deferred income taxes 323 --
Long-term portion of notes payable and other liabilities 5,203 1,689
Commitments and contingencies
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--6,452,841 in 1998
and 6,362,477 in 1997 16 16
Additional paid-in capital 36,532 36,118
Retained earnings 14,471 12,955
------- -------
Total stockholders' equity 51,019 49,089
------- -------
$72,291 $81,906
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED
In thousands SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 6,223 $16 $34,980 $ 9,927 $ 44,923
Exercise of stock options 21 -- 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
Exercise of stock options 22 -- 59 -- 59
Employee stock purchase plan 39 -- 343 -- 343
Tax benefit associated with exercise
of stock options -- -- 67 -- 67
Net loss -- -- -- (4,129) (4,129)
----- --- ------- -------- --------
Balances at December 31, 1997 6,362 16 36,118 12,955 49,089
Exercise of stock options 52 -- 137 -- 137
Employee stock purchase plan 39 -- 277 -- 277
Net Income -- -- -- 1,516 1,516
- ------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 6,453 $16 $36,532 $ 14,471 $ 51,019
===== === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,516 $ (4,129) $ 7,157
Adjustments to reconcile net income to cash (loss)
provided by (used in) operating activities,
net of effects of acquisitions in 1998:
Depreciation 4,699 5,776 2,905
Amortization of goodwill 49 -- --
Provision for doubtful accounts 162 11 --
Provision for inventory obsolescence 2,252 910 (115)
Deferred income taxes 601 (3,166) 686
Tax benefit from exercise of stock options -- 67 38
Changes in operating assets and liabilities:
Receivables 8,271 (426) (1,441)
Inventories 6,517 (1,920) 6,350
Prepaid expenses and other assets (1,339) 218 (1,616)
Accounts payable to related parties (532) (1,508) (1,376)
Accrued restructuring cost (3,273) 6,500 --
Accounts payable and accrued liabilities (12,057) 7,908 (877)
-------- -------- --------
Net cash provided by
operating activities 6,866 10,241 11,711
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (6,845) (9,918) (6,414)
Proceeds from sales of capital assets -- -- 85
Acquisition of LSI and EA\Methuen (4,060) -- --
Purchases of short-term investments (94,260) (20,868) (19,043)
Proceeds from the sale of short-term investments 95,568 19,604 16,056
-------- -------- --------
Net cash used in investing activities (9,597) (11,182) (9,316)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 414 402 631
Line of credit, net 1,146 -- (2,505)
Borrowings on term loan 3,000 2,200 --
Payments on term loan (1,285) (756) (755)
-------- -------- --------
Net cash provided by (used in)
financing activities 3,275 1,846 (2,629)
-------- -------- --------
Net increase (decrease) in cash 544 905 (234)
Cash at beginning of period 2,069 1,164 1,398
-------- -------- --------
Cash at end of period $ 2,613 $ 2,069 $ 1,164
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 211 $ 428 $ 190
Taxes paid (refunded) 1,655 (79) 3,530
Supplemental disclosure of non-cash activities:
Seller note payable for acquisition of LSI and
EA\Methuen $ 740 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Smartflex Systems, Inc. is a technology leader in electronic
manufacturing services. The Company provides a diverse range of services for
customers to achieve their product realization needs. These services include
product Application Specific Integrated Circuits ("ASIC"), software and Radio
Frequency ("RF") design; modeling, and package/enclosure management; and the
precision assembly of comprehensive advanced interconnect solutions utilizing
precision surface mount and Direct Chip Attach technologies. Prototype through
high volume manufacturing of electronic circuit board and box build services are
provided through nine facilities worldwide for customers in the Americas, Europe
and Asia.
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 Philippines, Inc., Smartflex Systems de Mexico,
S.A. de C.V., Smartflex Systems de Guadalajara S. A. de C.V., Logical Services,
Incorporated. and Smartflex New England, Inc. Results of operations for the
fourth quarter and 1998 fiscal year include a full three months of operations
from the Company's Guadalajara and Logical Services subsidiaries. The Company's
New England subsidiary is consolidated in the results of operations for the
month of December 1998 only. All significant inter-company 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 year 1998 had 53 weeks and fiscal
years 1997 and 1996 each included 52 weeks of operations. For clarity of
presentation, all periods are described as if the fiscal year ended December 31.
13
<PAGE> 14
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, 1998 and 1997 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).
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 is
computed using the straight-line method over the estimated useful lives of the
assets, which is usually three to five years.
14
<PAGE> 15
Goodwill
Goodwill is recorded as the net of purchase price less amounts allocated
to tangible assets. Goodwill is amortized over various lives, usually ten to
twenty years.
Research and Development
Research and Development ("R&D") is reported as part of General and
Administration expense. R & D expenses were approximately $851,000, $864,000 and
$720,000 for 1998, 1997 and 1996, respectively.
Foreign Currency
The Company uses the United States dollar as the functional currency for
its wholly-owned subsidiaries in Singapore, the Philippines and Mexico.
Re-measurement gains and losses, resulting from the process of re-measuring the
financial statements of these foreign subsidiaries into U.S. dollars, are
included in operations. In 1998, the effect on income of re-measurement gains
was $255,000. In prior years the effect on net income of re-measurement gains
and losses had not been significant.
Income Taxes
The Company uses the liability method of accounting for income taxes,
whereby deferred taxes are determined based on the differences 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 benefits in the future.
Stock-based Compensation
The Company accounts for employee stock options under Accounting
Principles Board opinion No. 25 and related interpretations ("APB 25") and has
made certain pro forma disclosures
15
<PAGE> 16
for options granted at fair market value in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation".
Earnings Per Share
Net income (loss) per share has been computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share." Earnings (loss) per common share ("Basic EPS") was computed by dividing
net income (loss) by the weighted-average number of common shares outstanding
during the periods. Earnings (loss) per common share--assuming dilution
("Diluted EPS") was calculated by dividing net income (loss) by the
weighted-average number of common 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 using the treasury
stock method.
The following table sets forth the computation of Basic and Diluted
earnings per share.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Numerator:
Net income (loss) - numerator for basic
and diluted earnings per share $1,516 $(4,129) $7,157
====== ======= ======
Denominator:
Denominator for basic earnings per share --
weighted-average shares 6,418 6,333 6,271
Effect of dilutive securities:
Employee stock options 45 -- 124
------ ------- ------
Denominator for diluted earnings per share --
adjusted weighted-average shares and
assumed conversions 6,463 6,333 6,395
====== ======= ======
Basic earnings (loss) per share $ 0.24 $ (0.65) $ 1.14
====== ======= ======
Diluted earnings (loss) per share $ 0.24 $ (0.65) $ 1.12
====== ======= ======
</TABLE>
16
<PAGE> 17
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. Significant estimates are made relative to
valuation of accounts receivable, inventories, deferred income taxes and certain
accrued liabilities, including among others, those for warranties and
restructuring obligations. 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 1998 presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Segment Information".
Both of these standards are effective for fiscal years beginning after December
15, 1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. Comprehensive income was not materially different from net
income. SFAS No. 131 amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in SFAS No. 131, are components of an enterprise
for which separate financial information is available and is evaluated regularly
by the Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the basis
that is
17
<PAGE> 18
used internally for evaluating the segment performance. The Company believes
that through 1998 it operated in one business and operating segment and believes
the adoption of this standard did not have a material impact on the Company's
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative instruments and Hedging Activities." This
statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. This statement requires
all derivatives to be recorded on the balance sheet at fair value and
establishes accounting for several types of hedges, resulting in the recognition
of offsetting changes in value or cash flows of the hedge and hedged items in
earnings in the same period. The provisions of this statement are effective for
years beginning after June 15, 1999. The Company will adopt this statement for
fiscal year 2000. The Company does not expect SFAS No. 133 to materially impact
the Company's results of operations or financial position.
NOTE 2 ACQUISITIONS
On October 7, 1998 the Company acquired Logical Services Incorporated, a
California corporation ("LSI"), pursuant to the terms of a Stock Purchase
Agreement whereby the Company purchased all of the issued and outstanding shares
of stock of LSI for an aggregate purchase price of $2.3 million. LSI is an
electronics, engineering, design and development company with annual revenues of
$3 million. Upon the closing of the acquisition, LSI became a wholly-owned
subsidiary of the Company. The acquisition has been accounted for as a purchase
and the purchase price, including direct costs of the acquisition of $2.3
million, has been allocated to the fair value of the net assets acquired with
the excess approximating $2.1 million allocated to goodwill.
On December 2, 1998 the Company, through its wholly-owned subsidiary
Methuen Acquisition Corp., a Delaware corporation, acquired certain assets of
the Methuen, Massachusetts division of EA Industries, Inc., a New Jersey
corporation ("EA/Methuen"), pursuant to the terms of an Agreement of Purchase
and Sale for an aggregate purchase price of $2.5
18
<PAGE> 19
million. EA/Methuen is a provider of high-mix electronic contract manufacturing
assembly and test services with annual revenues of approximately $7 million. The
acquisition has been accounted for as a purchase and the purchase price,
including direct costs of the acquisition of $2.5 million, has been allocated to
the fair value of the net assets acquired with the excess approximating $2
million allocated to goodwill.
NOTE 3 SHORT-TERM INVESTMENTS
Short-term investments, for which cost approximated fair value, were as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Municipal bonds $20,592 $13,283
Money market preferred stock 1,000 5,000
Money market funds 1,003 7,740
Commercial paper 2,000 --
Other 148 28
------- -------
$24,743 $26,051
======= =======
</TABLE>
Certain of the Company's municipal bond investments include instruments
that have original maturities at various dates through 2021. As a result of the
Company's ability and intent to redeem these investments at their stated
principal values at various dates throughout 1999, 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, 1998,
1997 and 1996 were not material.
NOTE 4 INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Raw materials $1,329 $ 6,943
Work-in-process 1,352 2,725
Finished goods 1,246 2,432
------ -------
$3,927 $12,100
====== =======
</TABLE>
19
<PAGE> 20
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Machinery and equipment $25,718 $ 20,930
Office furniture and equipment 4,242 3,148
Leasehold improvements 5,474 4,460
------- --------
35,434 28,538
Less: Accumulated depreciation (16,959) (12,260)
------- --------
$18,475 $ 16,278
======= ========
</TABLE>
NOTE 6 OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Accrued compensation and related costs $1,627 $1,569
Income tax payable -- 1,248
Restructuring liabilities 650 3,923
Other accrued expenses 5,269 3,802
------ -------
$7,546 $10,542
====== =======
</TABLE>
In order to address the imbalance between demand and capacity, as well
as to position the Company's operations for future cost advantages, the Company
accelerated the streamlining of its worldwide operations in the third quarter of
1997. As part of this restructuring, volume manufacturing was moved from
Singapore to the Company's lower-cost facility in Cebu, Philippines. The
Singapore operations are now the focal point of Smartflex' customer support in
Asia, as the Company's Far East Regional Services and Technology Center. The
restructuring also included a reduction of manufacturing and other personnel
from the Company's Tustin, California operations. As part of this restructuring,
the Company provided for the following charges in the third quarter of 1997:
$1.4 million for the write-off of inventories, which is included in cost of
revenues, $3.5 million for the write-down of non-current assets and other
expenses, $1.1 million for severance and other employee-related costs associated
with the reduction in force, and approximately $500,000 toward a potential
Singapore tax liability. By the end of 1998, the Company had used all of the
restructuring reserve, with the exception of the $500,000 associated with the
Singapore tax liability, and a nominal portion associated with inventory. During
1999 the Company received certain new information and now expects to have a
favorable ruling
20
<PAGE> 21
regarding the Singapore tax liability, which would result in this part of the
restructuring reserve being reversed.
The increase in other accrued expenses was primarily due to billings to
customers in which revenue had not yet been recognized.
NOTE 7 CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Revolving line of credit $ 1,146 $ --
Unsecured term loan (LIBOR 7.37%) 1,467 2,108
Unsecured term loan (Interest rate 7.75%) 3,000 --
Note payable, secured by equipment, principal payments
in equal monthly installments through December 1998,
interest is payable monthly at variable
interest rates averaging 7.5% in 1997 -- 416
Note payable to bank, secured by equipment,
principal payments in equal monthly installments
through June 1998, interest at 9.53% -- 228
Note payable to seller's of LSI, due April 2000,
non-interest bearing 230 --
Note payable to seller's of EA/Methuen, due April 2000,
non-interest bearing 510 --
------- ------
6,353 2,752
Less: Current portion (1,150) (1,063)
------- ------
$ 5,203 $1,689
======= ======
</TABLE>
The Company amended its bank credit facility (the "facility") on October
1, 1998 to provide for aggregate unsecured borrowings of $25 million under a
revolving line of credit (the "credit line"). Borrowings under the credit line,
which expires in September 2000, include a sub-limit for the issuance of up to
$2 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, 1998. Outstanding balances on the credit line bear interest at the bank's
reference rate (7.75% at December 31, 1998) or, at the Company's option, LIBOR
plus 1.5%, and unused portions of the credit line bear interest at .125% per
annum. At December 31, 1998 there was $1.1 million
21
<PAGE> 22
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 bears 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 this term loan matures on March 30, 2001. At December 31, 1998, the
outstanding balance on this term loan was $1.5 million. The facility
additionally provides for a second unsecured term loan (the "second term loan")
totaling $3.0 million to be used for general corporate purposes. The second term
loan bears interest at the bank's reference rate, or at the Company's option,
LIBOR plus 1.75%. At December 31, 1998, the outstanding balance on the second
term loan was $3.0 million. 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,
1998, the Company was in compliance with all of the covenants, except those
related to net worth, for which the Company has obtained a waiver. Debt of the
Company will mature in fiscal years after December 31, 1998 as follows:
(In thousands)
<TABLE>
<S> <C>
Fiscal Year:
1999 $1,150
2000 3,036
2001 967
2002 600
2003 600
------
$6,353
======
</TABLE>
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, 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
approximates cost and was determined based on quoted market prices. The fair
value of long-term debt approximates its carrying amount at December 31, 1998
and 1997 based on rates currently available to the Company for debt with similar
terms and remaining maturities.
22
<PAGE> 23
NOTE 9 COMMITMENTS AND CONTINGENCIES
The Company has entered into leases for its Tustin, California
headquarters, Monterrey, Singapore, Cebu and Logical Services facilities, that
expire at various dates through March 15, 2004 and provide for renewal options
at the then current market rate, thereafter adjusted for changes in the Consumer
Price Index. Future minimum lease payments under these non-cancelable
obligations at December 31, 1998 are as follows:
(In thousands)
<TABLE>
<S> <C>
Fiscal Year:
1999 $1,143
2000 979
2001 851
2002 338
2003 322
Thereafter 67
------
$3,700
======
</TABLE>
Total rent expense was $1,043,000, $792,000 and $437,000 in 1998, 1997
and 1996, respectively.
In the normal course of business, the Company is named in legal
proceedings. There are currently no material legal proceedings pending with
respect to the company.
NOTE 10 INCOME TAXES
Income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
(In thousands) 1998 1997 1996
---- ------- ------
<S> <C> <C> <C>
Current:
Federal $106 $ 753 $2,688
State 74 131 622
Foreign -- 55 52
---- ------- ------
180 939 3,362
Deferred:
Federal 530 (2,911) 576
State 71 (255) 110
---- ------- ------
601 (3,166) 686
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
Charge in lieu of income taxes
attributable to benefits of
stock option exercises -- 67 38
---- ------- ------
$781 $(2,160) $4,086
==== ======= ======
</TABLE>
Income tax provision (benefit) differed from the amounts computed by applying
the U.S. statutory federal income tax rate to pretax income (loss) as a result
of the following:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
(In thousands) 1998 1997 1996
---- ------- ------
<S> <C> <C> <C>
Tax at U.S. statutory rates $781 $(2,138) $3,823
Permanent differences 157 -- --
State taxes, net of federal benefit 96 (77) 487
Foreign earnings not subject to tax (322) (45) (246)
Foreign losses not benefited 54 205 --
Other 15 (105) 22
---- ------- ------
$781 $(2,160) $4,086
==== ======= ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the 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>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Restructuring reserve $ 132 $1,821
Inventory obsolescence reserve 1,313 614
Reserve for returns and allowances 660 645
Inventory capitalization 15 17
Vacation accrual 149 152
Allowance for doubtful accounts 363 353
Other reserves 1,117 864
AMT credits (no expiration) 116 79
Other 30 --
------ ------
Total deferred tax assets 3,895 4,545
Deferred tax liabilities:
Tax over book depreciation 502 570
State taxes 103 84
------ ------
Total deferred tax liabilities 605 654
------ ------
Net deferred tax assets $3,290 $3,891
====== ======
</TABLE>
24
<PAGE> 25
The Company has not recorded a valuation allowance against the deferred
tax assets as management believes all of the temporary differences will be
realized.
Effective March 1, 1994, the Company obtained a Pioneer Status tax
holiday in Singapore, which expires five years thereafter, 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 $100,000 in 1998 and $246,000 in 1996. There was no income
tax relief in 1997.
Effective October 1, 1996, the Company obtained a tax holiday in the
Philippines, which expires four years thereafter. Net income relief resulting
from the tax holiday was $45,000 in 1997 and $226,000 in 1998.
Residual income taxes of approximately $659,000 have not been provided
on approximately $1.9 million of undistributed earnings of certain foreign
subsidiaries at December 31, 1998 because the Company intends to keep those
earnings reinvested indefinitely.
NOTE 11 EQUITY INCENTIVE PLANS AND STOCK PURCHASE PLAN
Acquisition Stock Plan
The purpose of the Company's Acquisition Nonstatutory Stock Plan (the
"Acquisition Plan") is to attract and retain key employees of the companies
acquired by the Company and its wholly-owned subsidiaries. This plan is designed
to provide an incentive for these new employees to achieve long-range
performance goals, and to enable them to participate in the long-term growth of
the Company. Nonstatutory options in this plan may only be awarded to the
employees of the Company's acquisitions 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.
An aggregate of 200,000 shares of common stock has been reserved for
issuance under the Acquisition Plan.
As of December 31, 1998, non-qualified stock options to purchase 105,250
shares of common stock have been granted with prices ranging from $5.75 to $7.44
per share. All
25
<PAGE> 26
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, 1998, no stock options to
purchase shares of common stock under the Acquisition Plan were exercisable.
1995 Equity Incentive Plan
The Company's 1995 Equity Incentive Plan (the "1995 Plan") 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 FMV of a share of common stock on the grant date. The exercise price
per share under 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 FMV of the common stock
on the date that such director is elected or reelected.
An aggregate of 600,000 shares of common stock was initially reserved
for issuance under the 1995 Plan. The number of shares of common stock
authorized under the 1995 Plan increases automatically on January 1 of each
year, from and after 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. The total shares reserved for issuance under
the 1995 Plan after the automatic increase was 791,169 at December 31, 1998.
As of December 31, 1998, incentive stock options and non-qualified stock
options to purchase 645,094 shares of common stock have been granted with prices
ranging from $5.94 to $18.25 per share. All employee options vest at a rate of
25% on the first anniversary of the grant
26
<PAGE> 27
date and 6.25% per quarter thereafter. At December 31, 1998, stock options to
purchase 214,383 shares of common stock under the 1995 Plan were exercisable.
1994 Equity Incentive Plan
The Company's 1994 Equity Incentive Plan (the "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 IPO, the Board of Directors resolved to cease issuance of new
awards under the 1994 Plan. As of December 31, 1998, a total of 37,200
restricted shares of common stock at $3.13 per share and non-qualified stock
options to purchase 20,000 shares of common stock ranging in price from $3.13 to
$9.25 per share have been granted to non-employee directors of the Company. At
December 31, 1998, there were no shares subject to restriction and no
unexercised non-qualified stock options under the 1994 Plan.
1993 Equity Incentive Plan
The Company's 1993 Equity Incentive Plan (the"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
IPO, the Company ceased issuance of new awards under the 1993 Plan. As of
December 31, 1998, options to purchase 144,825 shares of common stock have been
granted with prices ranging from $.96 to $10.40 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, 1998, stock options to purchase 56,225 shares of
common stock under the 1993 Plan were exercisable.
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, 1995 350,515 $ 0.96 - $ 17.00
Granted 42,000 $10.25 - $ 18.25
Exercised (20,540) $ 0.96 - $ 12.00
Canceled (12,412) $ 0.96 - $ 14.63
-------
Outstanding, December 31, 1996 359,563 $ 0.96 - $ 18.25
Granted 245,750 $ 9.00 - $ 16.75
Exercised (22,432) $ 0.96 - $ 12.00
Canceled (16,494) $ 0.96 - $ 16.50
-------
Outstanding, December 31, 1997 566,387 $ 0.96 - $ 18.25
Granted 376,500 $ 5.75 - $ 11.00
Exercised (51,725) $ 0.96 - $ 3.13
Canceled (51,975) $ 8.07 - $ 17.00
-------
Outstanding, December 31, 1998 839,187 $ 0.96 - $ 18.25
</TABLE>
27
<PAGE> 28
The weighted average exercise price per share of options granted,
exercised and canceled during 1998 and outstanding at December 31, 1998 were
$8.15, $2.63, $13.03 and $10.32, respectively. The weighted average exercise
price per share of options granted, exercised and canceled during 1997 and
outstanding at December 31, 1997 were $14.01, $2.62, $12.41 and $11.38,
respectively. 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 remaining
contractual life of stock options outstanding at December 31, 1998, 1997 and
1996 was 8.3 years, 7.9 years and 8.1 years, respectively.
The range of exercise prices, shares, weighted average remaining
contractual life and exercise price for the options outstanding as of December
31, 1998, 1997 and 1996 are:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Range of Number Weighted Average Weighted Average Number
Exercise Prices Outstanding Remaining Exercise Price Exercisable
Contractual Life,
(In Years)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
$ 0.96--$ 0.96 38,125 4.7 $ 0.96 38,125
$ 3.13--$ 9.25 283,425 9.3 $ 7.61 8,525
$ 9.38--$13.50 323,937 7.9 $10.89 142,104
$13.75--$18.25 156,500 7.9 $16.34 81,854
- -------------------------------------------------------------------------------------------
1997:
$ 0.96--$ 0.96 49,850 5.7 $ 0.96 49,850
$ 3.13--$ 3.13 40,125 6.2 $ 3.13 37,625
$ 9.00--$13.25 262,712 8.3 $11.29 99,330
$13.75--$18.25 176,500 8.4 $16.34 16,363
- -------------------------------------------------------------------------------------------
1996:
$ 0.96--$ 0.96 61,125 6.7 $ 0.96 46,200
$ 3.13--$ 3.13 50,625 7.2 $ 3.13 37,925
$ 9.25--$13.25 178,738 8.6 $11.81 55,372
$13.75--$18.25 31,875 8.6 $16.19 1,268
- -------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
1995 Employee Stock Purchase Plan
Under the Company's 1995 Employee Stock Purchase Plan ("ESPP"), 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 85% of the lesser of the FMV of the
stock on the commencement date or on last business day of each six-month
purchase period. The total number of shares of stock that may be issued under
the ESPP was 200,000 shares as of December 31, 1998. As of December 31, 1998, a
total of 134,538 shares have been issued under the ESPP.
Common Stock Reserved
At December 31, 1998, the Company had reserved 1,571,169 shares of
common stock for issuance pursuant to the 1993 Plan, the 1994 Plan, the 1995
Plan, the ESPP and the Acquisition Plan.
Accounting for Stock-Based Compensation
The Company applies APB 25 and related Interpretations in accounting for
its employee stock options for the reasons discussed below. The alternative fair
value method of accounting provided for under SFAS 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 (loss) and earnings (loss)
per share is required by SFAS 123, and has been determined as if the Company had
accounted for its
29
<PAGE> 30
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 rate 6.0% for 1998, 5.3% to 5.4% for 1997, and 5.3% to 6.5% for 1996;
volatility factors of the expected market price of the Company's common stock of
.78 for 1998, .60 for 1997,and .65 for 1996; and a weighted-average expected
life of the option of 3.7 to 3.9 years for 1998, 3.9 to 5.2 years for 1997 and
6.0 years for 1996.
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: (In thousands, except for earnings (loss) per
share information)
<TABLE>
<CAPTION>
Years ended:
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $ 537 $(4,680) $6,744
Pro forma earnings (loss) per share:
Basic $ .08 $ (.74) $ 1.07
Diluted $ .08 $ (.74) $ 1.06
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures are
not likely to be representative of such expenses for future years as the amounts
are based only on the grants subsequent to 1994.
30
<PAGE> 31
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 1998, 1997 and 1996, the Company matched 100% of the first 3% of each
employee's contribution, which totaled $175,000, $236,000 and $226,000,
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
1998, 1997, and 1996, the Company recognized compensation expense totaling
$72,000, $56,000, and $260,000, respectively, pursuant to the employees' profit
sharing portion of the plan.
NOTE 13 RELATED PARTY TRANSACTIONS
The Company had facility and service agreements in 1997 with Silicon
Systems, Inc. ("SSI") and Silicon Systems Singapore Pte. Ltd. ("SSS"), both
wholly-owned subsidiaries of Texas Instruments Incorporated. The agreements
states that SSI and SSS will provide certain administrative services and
facilities to the Company for agreed-upon fees, which were based upon actual
costs. One of the members of the Company's board of directors is a senior
executive with SSI.
In addition the Company sells services to Volterra Inc. One of the
members of the Company's Board of Directors is a senior executive with Volterra
Inc.
31
<PAGE> 32
A summary of such purchases and expenses with related parties is as
follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
SSI (current board member and former stockholder):
Purchases of raw materials $1,415 $5,528
Administrative and facility expenses 19 383
TDK (stockholder):
Purchases of raw materials 54 193
Volterra (current board member)
Sales of services 99 --
</TABLE>
NOTE 14 BUSINESS SEGMENT INFORMATION
Historically the Company has operated in one business segment, which is
the development, production and distribution of flexible interconnect products
for use in computers and peripheral equipment. The Company's principal market is
the HDD industry. In fiscal 1998, 1997, and 1996 approximately 43.6%, 54.8% and
50.0% respectively, of the Company's net revenues were to HDD manufacturers.
The Company sells its products primarily to U.S.-based companies that
are manufacturers or distributors of computer and computer-related products.
These products are often shipped directly to the international headstack
assemblers of these companies, or to the offshore facilities of these U.S.-based
companies.
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 1998, 1997 and 1996, net revenues attributed to
individual customers, each of which represented over 10% of total net revenues,
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A 16% 12% 32%
Customer B 35 27 15
Customer C 2 24 24
Customer D 28 20 11
</TABLE>
32
<PAGE> 33
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 $85.3 million,
$111.7 million, and $104.1 million, during 1998, 1997, and 1996, respectively.
Export revenues by country in excess of 10% of total net revenues were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Singapore 18% 20% 33%
Thailand 10 17 23
Hong Kong 21 24 7
Mexico 14 11 --
</TABLE>
The Company maintains manufacturing operations in Mexico, Singapore and
the Philippines. Pre-tax income (loss) from the Company's offshore operations
totaled, $863,000 $(308,000), and $723,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
The Company's direct employees at the Monterrey, Mexico facility are
represented by a labor union and are covered by a collective bargaining
agreement ("agreement") that is subject to revision annually under Mexican law.
These employees represent 80% of the Company's Monterrey labor force. The
current agreement covers all direct employees in Monterrey and is subject to
revision in February 2000. While the Company believes that it has established
good relationships with its labor force in Monterrey, there can be no assurance
that such relationships will continue in the future.
33
<PAGE> 34
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 1998
Net revenues $37,005 $27,037 $20,504 $23,055
Gross margin 4,145 2,983 2,419 2,511
Net income 828 387 134 167
Net income per share -- basic $ .13 $ .06 $ .02 $ .03
Net income per share -- diluted $ .13 $ .06 $ .02 $ .03
FISCAL 1997
Net revenues $30,272 $37,003 $28,010 $38,062
Gross margin 1,953 3,591 (10)(1) 3,850
Net income (loss) 234 558 (5,436)(1)(2) 515
Net income (loss) per share -- basic $ .04 $ .09 $ (.85)(3) $ .08
Net income (loss) per share -- diluted $ .04 $ .09 $ (.85)(3) $ .08
</TABLE>
(1) Includes non-recurring pre-tax inventory write-off of $1.4 million (related
to restructuring) included in cost of revenues
(2) Includes non-recurring pre-tax restructuring charge of $5.1 million
(3) Includes non-recurring charges totaling $(.70) per share on an after-tax
basis.
The summation of quarterly per share amounts for fiscal 1997 amounts
do not equal annual per share amounts due to the effects of stock issuances on
the weighted-average share calculation.
NOTE 16 SUBSEQUENT EVENT
On February 1, 1999, the Company, through its wholly-owned subsidiaries,
Smartflex Fremont, Inc. and Smartflex New Jersey, Inc., acquired certain assets
from Tanon Manufacturing, Inc., the principal operating subsidiary of EA
Industries, Inc. ("Tanon"). On December 3, 1998, Tanon had filed a voluntary
proceeding under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for Northern District of California. The acquisition of the
assets was subject to approval of the Bankruptcy Court, which was granted on
January 29, 1999. The assets acquired include certain specified contracts,
equipment and inventory used in connection with Tanon's contract manufacturing
electronic assembly business at facilities in Fremont, California and West Long
Branch, New Jersey. The aggregate purchase price paid was $14.9 million, $2.5
million of which is due in April of 2000 and the Company has delivered a
non-interest-bearing promissory note to guaranty this additional payment.
34
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of
Name Organization
- ---- ------------
<S> <C>
Logical Services Incorporated California
Methuen Acquisition Corp. Delaware
Smartflex Fremont Inc. Delaware
Smartflex New Jersey Inc. Delaware
Smartflex Singapore Pte. Ltd. Singapore
Smartflex Systems de Mexico, S.A. de C.V. Mexico
Smartflex Systems de Guadalajara S.A. de C.V. 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 4, 1999, included in the
1998 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 consolidated 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 4,
1999 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
April 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,613
<SECURITIES> 24,743
<RECEIVABLES> 12,166
<ALLOWANCES> 957
<INVENTORY> 3,927
<CURRENT-ASSETS> 48,465
<PP&E> 35,434
<DEPRECIATION> 16,959
<TOTAL-ASSETS> 72,291
<CURRENT-LIABILITIES> 15,746
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 51,003
<TOTAL-LIABILITY-AND-EQUITY> 72,291
<SALES> 107,601
<TOTAL-REVENUES> 107,601
<CGS> 95,543
<TOTAL-COSTS> 95,543
<OTHER-EXPENSES> 11,091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178
<INCOME-PRETAX> 2,297
<INCOME-TAX> 781
<INCOME-CONTINUING> 1,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,516
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
