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Saturn Electronics & Engineering Inc – IPO: ‘S-1’ on 3/29/00

On:  Wednesday, 3/29/00   ·   Accession #:  950124-0-1698   ·   File #:  333-33472

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/29/00  Saturn Elecs & Engineering Inc    S-1                   28:1.2M                                   Bowne - Bde

Initial Public Offering (IPO):  Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Registration Statement (General Form)                117    564K 
10: EX-10.10    Amendment #1 Stock Option Plan                         4     23K 
11: EX-10.11    Amendment #2 Stock Option Plan                         1      9K 
12: EX-10.12    Amendment #3 Stock Option Plan                         2     13K 
13: EX-10.13    Loan Agreement                                        22     71K 
14: EX-10.14    Amendment #1 Loan Agreement                            2     13K 
15: EX-10.15    Amendment #2 Loan Agreement                            2     14K 
16: EX-10.16    Credit Agreement                                     141    486K 
17: EX-10.17    Amendment #1 Credit Agreement                         21     35K 
18: EX-10.18    Amendment #2 Credit Agreement                          4     17K 
 2: EX-10.2     Stock Purchase Agreement                              45    213K 
19: EX-10.20    Saturn Membership Regulations                         38    131K 
20: EX-10.21    Amendment #1 Membership Regulations                    1     10K 
21: EX-10.22    Amendment #2 Membership Regulations                    4     21K 
22: EX-10.23    Amendment #3 Membership Regulations                    1     10K 
23: EX-10.24    Amendment #4 Membership Regulations                    1     11K 
24: EX-10.25    Sublease                                               8     35K 
25: EX-10.26    Amendment to Sublease                                  1     12K 
 3: EX-10.3     Methuen Division                                      21    100K 
 4: EX-10.4     Stock Purchase Agreement                               6     31K 
 5: EX-10.5     Agreement and Plan of Merger                          44    222K 
 6: EX-10.6     Split Dollar Agreement                                12     40K 
 7: EX-10.7     Independent Contractor                                 6     26K 
 8: EX-10.8     Amendment to Independent Contractor                    1     11K 
 9: EX-10.9     Saturn Stock Option Plan                              12     46K 
26: EX-23.1     Consent Pricewaterhousecoopers LLP                     1      9K 
27: EX-23.2     Consent Ernst & Young                                  1      9K 
28: EX-27.1     Financial Data Schedule                                1     11K 


S-1   —   Registration Statement (General Form)
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Saturn Electronics & Engineering, Inc
7Prospectus Summary
9The Offering
11Risk Factors
22Cautionary Note Regarding Forward-Looking Statements
23Use of proceeds
"Dividend Policy
24Capitalization
25Dilution
26Selected Consolidated Financial Data
27Management's Discussion and Analysis of Financial Condition and Results of Operations
28Net revenue
29Gross profit
"Development expense
"Selling, general and administrative expense
"Amortization expense
"Net Income
32Business
45Management
51Certain Transactions
52Principal and Selling Shareholders
53Description of Capital Stock
55Shares Eligible For Future Sale
57Underwriting
59Notice to Canadian Residents
"Resale Restrictions
60Experts
"Where You Can Find More Information
"Legal Matters
61Index to Consolidated Financial Statements
67Notes to Consolidated Financial Statements
"Inventories
781999
86Short-term investments
87Earnings Per Share
97Accounting for Stock-Based Compensation
104Notes to Unaudited Condensed Consolidated Financial Statements
106Saturn
110Item 13. Other Expenses of Issuance and Distribution
"Item 14. Indemnification of Directors and Officers
111Item 15. Recent Sales of Unregistered Securities
"Item 16. Exhibits and Financial Statement Schedules
113Item 17. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000 REGISTRATION NO. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SATURN ELECTRONICS & ENGINEERING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Enlarge/Download Table] MICHIGAN 3672 38-2622745 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.) 255 REX BOULEVARD AUBURN HILLS, MICHIGAN 48326 (248) 853-5724 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ WALLACE K. TSUHA, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER SATURN ELECTRONICS & ENGINEERING, INC. 255 REX BOULEVARD AUBURN HILLS, MICHIGAN 48326 (248) 853-5724 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: [Download Table] DONALD J. KUNZ, ESQ. THOMAS J. MURPHY, ESQ. HONIGMAN MILLER SCHWARTZ AND COHN MCDERMOTT, WILL & EMERY 2290 FIRST NATIONAL BUILDING 227 WEST MONROE STREET DETROIT, MICHIGAN 48226 CHICAGO, ILLINOIS 60606-5096 (313) 465-7000 (312) 372-2000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE [Enlarge/Download Table] ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- PROPOSED TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE ---------------------------------------------------------------------------------------------------------------- Common Stock, without par value............................. $125,000,000 $33,000 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- (1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MARCH 29, 2000 Shares [SATURN LOGO TO COME] Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of common stock is expected to be between $ and $ per share. We have reserved the symbol "SATR" to list our common stock on The Nasdaq Stock Market's National Market. We are selling shares of common stock and the selling shareholders are selling shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling shareholders. The underwriters have an option to purchase a maximum of additional shares from the selling shareholders to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. [Enlarge/Download Table] UNDERWRITING PROCEEDS TO PROCEEDS TO PRICE TO DISCOUNTS AND SATURN ELECTRONICS & SELLING PUBLIC COMMISSIONS ENGINEERING, INC. SHAREHOLDERS -------- ------------- -------------------- ------------ Per Share............................................ $ $ $ $ Total................................................ $ $ $ $ Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO. NEEDHAM & COMPANY, INC. The date of this prospectus is , 2000.
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[SATURN ARTWORK]
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[SATURN ARTWORK]
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[SATURN ARTWORK]
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--------------------- TABLE OF CONTENTS [Download Table] PAGE ---- PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 5 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.......... 16 USE OF PROCEEDS....................... 17 DIVIDEND POLICY....................... 17 CAPITALIZATION........................ 18 DILUTION.............................. 19 SELECTED CONSOLIDATED FINANCIAL DATA................................ 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 21 BUSINESS.............................. 26 [Download Table] PAGE ---- MANAGEMENT............................ 39 CERTAIN TRANSACTIONS.................. 45 PRINCIPAL AND SELLING SHAREHOLDERS.... 46 DESCRIPTION OF CAPITAL STOCK.......... 47 SHARES ELIGIBLE FOR FUTURE SALE....... 49 UNDERWRITING.......................... 51 NOTICE TO CANADIAN RESIDENTS.......... 53 EXPERTS............................... 54 WHERE YOU CAN FIND MORE INFORMATION... 54 LEGAL MATTERS......................... 54 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1 --------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATIONS UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that is important to you. You should read the entire prospectus, including risk factors and our consolidated financial statements and related notes, before making an investment decision. OUR COMPANY We are a global provider of value-added electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, and their suppliers. We offer our customers integrated, cost-effective solutions that are responsive to their outsourcing needs and provide a broad range of services, including design and engineering; materials management; manufacturing and assembly; testing and qualification; fulfillment; and after-sales support. Through our 12 manufacturing facilities in the United States, Mexico and the Philippines, we provide our customers a full range of manufacturing capabilities, from low- volume/high-mix to high-volume/low-mix manufacturing. Our facilities are generally located in regions that offer proximity to our customers or lower our manufacturing costs. We provide our services to customers primarily in the automotive, communications, computer and military end markets. Our customers include industry leaders such as DaimlerChrysler, Ford, General Dynamics, Hewlett-Packard, Hughes, IBM and Motorola. We also seek to identify and nurture strategic outsourcing alliances with emerging companies that we believe have the potential to develop next-generation products. We provide our design, engineering and other value-added services to these emerging companies in exchange for preferred manufacturing rights to the applicable products. The EMS industry has experienced rapid growth over the last several years and is expected to continue growing rapidly. Technology Forecasters, Inc., or TFI, forecasts that overall EMS industry revenue will grow 20% annually from 2000 through 2003, to approximately $149 billion. As the electronics content in commercial and consumer goods has increased and grown more complex, OEMs have been increasingly outsourcing their internal manufacturing capacity and related services to EMS providers, to focus on their core competencies. TFI forecasts that OEMs will increasingly outsource more complex services and products, with the communications and computer markets representing the largest growth opportunities. These markets are characterized by rapidly evolving product technologies and shortening product lifecycles. We believe that these trends will favor EMS providers with scale, a global presence, broad service offerings and advanced technological capabilities. In order to strengthen our competitive position in the midst of this industry growth, we have pursued selective strategic acquisitions and alliances. In August 1999, we acquired Smartflex Systems, or Smartflex, a high-technology product design and precision EMS provider based in Tustin, California. Through this acquisition, we gained access to full-service electronics capabilities, significantly increased our scale of operations, expanded our customer base to the communications and computer end markets, and enhanced our geographic presence. Most recently, in March 2000, we entered into a strategic outsourcing alliance with Motorola pursuant to which we became a preferred EMS provider to its Integrated Electronics System Sector, or IESS. As a preferred EMS provider, we have the opportunity to participate in requests for quotations, bids or other opportunities to provide manufacturing and related services to IESS, subject to our being competitive in price and quality. We believe that this strategic relationship could generate significant business opportunities for us over the next few years. To better target customers and serve the needs of different end markets, we have strategically aligned our business into three segments: electronics, electromechanical and electrical. - Our electronics segment provides services in connection with flex assembly, printed circuit board assembly and the incorporation of electronic assemblies into subassemblies and final systems box-build. We significantly increased our capabilities in this segment with our acquisition of Smartflex. 1
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- Our electromechanical segment provides services in connection with junction blocks, relays, actuators, solenoids and transmission modules. - Our electrical segment provides services in connection with battery cables, wire harnesses and power distribution systems. This segment is comprised of a limited liability company, the Saturn LLC, of which we own 53%. We intend to continue to strengthen and expand our position in the rapidly growing EMS industry by: - building strategic outsourcing alliances with both leading and emerging OEMs; - targeting an increasingly diverse customer base in high-growth end markets, such as communications; - leveraging our design and engineering capabilities; - expanding our global presence; - pursuing selective acquisitions; and - seeking additional minority business enterprise opportunities. We were incorporated in Michigan on October 1, 1985. Our principal executive offices are located at 255 Rex Boulevard, Auburn Hills, Michigan 48326, and our telephone number is (248) 853-5724. Our web site is located at www.saturnee.com. Information contained on, or linked to, our web site does not constitute part of this prospectus. "Global Innovator of Smart Products" and the Saturn logo are our trademarks and service marks. 2
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THE OFFERING [Enlarge/Download Table] Common stock offered by: Saturn Electronics & Engineering, Inc...... shares The selling shareholders................... shares Total................................. shares Common stock to be outstanding after the offering................................... shares Use of proceeds.............................. We intend to use approximately $ million of our net proceeds to reduce indebtedness under our credit facility, and the remainder for working capital and other general corporate purposes. We will not receive any proceeds from the sale of shares of our common stock being offered by the selling shareholders. Proposed Nasdaq National Market symbol....... SATR The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of March 27, 2000 and excludes: - 2,834,400 shares of common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $2.75 per share; - 2,500,000 shares of common stock available for future grant under our 2000 Stock Option Plan; and - 1,565,331 shares of common stock issuable upon the exercise of a warrant held by Motorola with an exercise price equal to 90% of the initial public offering price per share. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option and reflects a recapitalization of our capital stock, which we will effect immediately prior to this offering, as follows: - each outstanding share of our Class A Voting Common Stock will be converted into 3.25 shares of our common stock, no par value; - each outstanding share of our Class B Nonvoting Common Stock will be converted into 2.75 shares of common stock, no par value; - each option to purchase a share of our common stock will be converted into an option to purchase 3.00 shares of common stock, no par value; and - each warrant to purchase a share of Class B Nonvoting Common Stock will be converted into a warrant to purchase 3.00 shares of common stock, no par value. 3
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SUMMARY CONSOLIDATED FINANCIAL DATA The following tables set forth summary consolidated financial data and certain pro forma financial data for our business during the years and as of the date indicated. The 1999 pro forma consolidated statement of operations data give effect to our acquisition of Smartflex Systems, Inc. as if this acquisition had been completed on January 1, 1999. This acquisition was accounted for under the purchase method of accounting, and, accordingly, Smartflex has been included in our financial results since August 26, 1999. [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- PRO FORMA 1995 1996 1997 1998 1999 1999 ---------- ---------- ---------- ----------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue............... $ 122,550 $ 168,707 $ 161,048 $ 188,464 $ 257,107 $ 325,579 Cost of revenue........... 119,272 146,070 133,568 147,661 205,341 268,975 ---------- ---------- ---------- ----------- ---------- ---------- Gross profit.............. 3,278 22,637 27,480 40,803 51,766 56,604 Development expense....... 2,468 3,260 3,563 4,861 7,741 8,465 Selling, general and administrative expense................. 2,431 4,976 8,039 12,777 19,146 29,467 Amortization expense...... 1,650 1,650 1,650 1,649 2,582 4,772 Restructuring expense..... -- -- -- -- -- 3,833 ---------- ---------- ---------- ----------- ---------- ---------- Operating income (loss)... (3,271) 12,751 14,228 21,516 22,297 10,067 Net income (loss)......... $ (3,378) $ 7,002 $ 8,059 $ 11,954 $ 9,905 $ (2,537) ========== ========== ========== =========== ========== ========== Basic and diluted earnings (loss) per share........ $ (0.09) $ 0.19 $ 0.22 $ 0.32 $ 0.31 $ (0.08) Basic and diluted weighted average number of common shares outstanding...... 37,176,600 37,176,600 37,176,600 37,176,600 32,145,026 32,145,026 [Enlarge/Download Table] AS OF DECEMBER 31, 1999 -------------------------- ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 1,929 $ Working capital............................................. 44,645 Total assets................................................ 231,974 Long-term debt.............................................. 107,361 Total shareholders' equity.................................. 51,858 The as adjusted balance sheet data reflect: - our receipt of the estimated net proceeds from our sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and - the assumed repayment of $ million of long-term debt outstanding under our credit facility using the estimated proceeds from this offering. 4
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RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before deciding to invest in shares of our common stock. While these are the risks and uncertainties we believe are most important for you to consider, you should know that they are not the only risks and uncertainties facing us or which may adversely affect our business. If any of the following risks or uncertainties actually occur, our business, financial condition or results of operations would likely suffer. In that event, the market price of our common stock could decline, and you could lose all or part of the money you paid to buy our common stock. RISKS RELATING TO OUR BUSINESS THE LOSS OF ONE OR MORE OF OUR SIGNIFICANT CUSTOMERS WOULD ADVERSELY AFFECT OUR BUSINESS. DaimlerChrysler accounted for approximately 31% of our net revenue, and Ford accounted for approximately 19% of our net revenue for the year ended December 31, 1999. Our ten largest customers accounted for approximately 68% of our net revenue during 1999. We expect to continue to depend upon a core group of customers for a material percentage of our net revenue in the future. We cannot assure you that our significant customers will continue to purchase services and products from us in the future or that they will not reduce or delay the amount of services and products they purchase. For example, during the third quarter of 2000, a significant automotive program that generated $31.5 million of net revenue during 1999 for our electromechanical segment is scheduled to end. Any reduction or delay in orders from any of our significant customers would result in a significant reduction in our net revenue. In addition, a majority of our accounts receivable outstanding at any given time are owed by our significant customers. The inability of one or more of our significant customers to pay for the services and products we provide, due to insolvency or otherwise, would have a material adverse effect on our business, financial condition or results of operations. WE MAY EXPERIENCE VARIABILITY IN OUR QUARTERLY RESULTS OF OPERATIONS, WHICH COULD REDUCE OUR REVENUES AND THE PRICE OF OUR COMMON STOCK. Our quarterly results of operations may vary significantly depending on various factors, many of which are beyond our control. These factors include: - variations in the timing and volume of customer orders relative to our capacity; - customer introduction of new services and products and market acceptance of these services and products; - the timing of our expenditures in anticipation of future net revenue; - our effectiveness in managing our manufacturing processes; - changes in competitive and economic conditions generally or in the industries we serve; and - the timing of, and the price we pay for, acquisitions and related integration costs. Because of these and other factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Because a significant portion of our operating expenses are fixed, even a small reduction in our net revenue could have a disproportionate effect on our quarterly results of operations. Our results of operations may be below the expectations of securities analysts or investors in one or more future quarters, which could cause the trading price of our common stock to decline. 5
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LOSS OF OUR STATUS AS A QUALIFIED MINORITY BUSINESS ENTERPRISE COULD NEGATIVELY AFFECT OUR ABILITY TO RETAIN EXISTING BUSINESS, PROCURE FUTURE BUSINESS AND PURSUE CERTAIN STRATEGIC ALLIANCES OR JOINT VENTURES. We are certified as a minority business enterprise by the Michigan Minority Business Development Council. Minority business enterprise status generally offers us a significant competitive advantage for our business and is an important element of many of our customer relationships. At times minority business enterprise status has provided us with the ability to compete for business opportunities that might have been otherwise unavailable. For example, because of our status, in February 1998 we were able to establish a strategic relationship with United Technologies Automotive, Inc., now Lear Corporation. This strategic alliance took the form of a jointly owned limited liability company, referred to in this prospectus as the Saturn LLC, in which we own a 53% interest. The Saturn LLC constitutes our electrical business segment, which accounted for 14% of our net revenue in 1999. The guidelines applicable to minority business enterprises which engage in public offerings are pending final approval by the National Minority Supplier Development Council, or the National Council. While most of our customers currently require us to provide a certification from the Michigan Minority Business Development Council, or the Michigan Council, to recognize our status as a minority business enterprise, the Michigan Council follows the guidelines approved by the National Council. We have been advised by the National Council that the Executive Committee of the National Council has approved the continuation of our status as a certified minority business enterprise after this offering so long as: - minorities own at least 30% of our common stock; - a majority of the members of our board of directors continue to be ethnic minorities; and - a minority person continues to be responsible for our day-to-day management. Following the completion of this offering, we believe we will meet these criteria. The National Council, however, expects to approve a clear definition of a minority-owned publicly traded company which would meet minority business enterprise certification requirements within the next few months. While the National Council currently anticipates that the criteria described above would be acceptable under the definition to be approved, it also has indicated that our status will be reviewed once that definition is adopted. We cannot assure you that the criteria set forth above will be finally approved or that we will qualify as a minority business enterprise under any criteria adopted by the National Council. For example, if a majority of our board of directors ceases to be ethnic minorities, or if a minority person ceases to be responsible for our day-to-day management, we may no longer be certified as a minority business enterprise. Also, we cannot assure you that our customers will continue to follow the guidelines adopted by the National Council or that our customers will continue or expand any commitments to purchase services and goods from certified minority business enterprises. In addition, assuming the criteria listed above are adopted, if we issue additional stock in the future, in connection with acquisitions or otherwise, or if Mr. Tsuha's or his family's beneficial ownership is reduced voluntarily or involuntarily through sale, transfer, death, personal bankruptcy or otherwise, and other ethnic minorities cease to hold at least 30% of our common stock, we may lose our status as a minority business enterprise. Our loss of minority business enterprise status or the reduction of commitments by our customers to purchase goods from minority business enterprises could negatively affect our ability to retain some of our existing business, procure future business and pursue certain strategic alliances or joint ventures. In particular, if we lose our minority business enterprise status, Lear has the right under our agreement to require us to sell our membership interest in the Saturn LLC to another minority partner. We cannot assure you that we would be capable of replacing the net revenue we derived from the Saturn LLC after such sale. 6
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OUR CUSTOMERS GENERALLY DO NOT ENTER INTO LONG-TERM PURCHASE ORDERS OR COMMITMENTS, AND CANCELLATIONS, REDUCTIONS OR DELAYS IN CUSTOMER ORDERS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. We generally do not obtain long-term, firm purchase orders from our communications, computer, military or other non-automotive customers. Rather, these customers typically place orders for delivery within 30 to 90 days. Our automotive customers typically place annual blanket purchase orders, but these orders do not obligate them to purchase any specific services or products from us until they issue a release. Releases are typically placed within 30 to 90 days of required delivery and may be canceled at any time, in which case the customer would generally be liable only for work in process and finished goods. We often purchase components with lead times in excess of 90 days based on customer forecasts, at times without a customer commitment or order to pay for them. We also rely on our estimates of anticipated future orders when making decisions regarding: - the levels of business that we will seek and accept; - the timing of production schedules; - the purchase of materials; - the purchase or lease of facilities and equipment; and - the levels and utilization of personnel and other resources. For a variety of reasons, customers may cancel, reduce or delay commitments or orders that were either previously made or anticipated. Significant or numerous cancellations, reductions or delays in our customers' commitments or orders could have a material adverse effect on our business, financial condition or results of operations. UNEXPECTED INCREASES IN THE PRICE OF OUR RAW MATERIALS AND INACCURACIES IN FORECASTING OUR RAW MATERIAL AND INVENTORY NEEDS COULD NEGATIVELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. Because most of our agreements with our customers contain fixed prices, we bear the risk of unexpected fluctuations in the cost of many raw materials. In addition, a substantial portion of our net revenue is derived from our ability to meet short customer timelines and provide just-in-time services. Accordingly, we are often required to forecast our future inventory needs based upon the anticipated demands of our customers. As a result, inaccuracies in forecasting our needs could result in a shortage or an excess of materials or inventory, either of which could have a material adverse effect on our business, financial condition or results of operations. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR IF WE BECOME INVOLVED IN INTELLECTUAL PROPERTY RELATED LITIGATION, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY SUFFER A MATERIAL ADVERSE EFFECT. Our success depends, in part, on our proprietary designs, technologies, techniques, processes and other intellectual property, most of which is not protected by patents. We rely primarily on trade secret protection to secure this intellectual property. We may be unable to remain competitive if others infringe on our intellectual property, are able to reverse engineer our products or otherwise replicate our intellectual property. Protecting our intellectual property in foreign jurisdictions may also be difficult or impossible. In addition, competitors and others may claim that we are infringing on their intellectual property. Litigation may be necessary to protect our intellectual property or to determine the validity and scope of the proprietary rights of our competitors and others. Our involvement in existing and future intellectual property litigation could result in significant expense to us or adversely affect our use of the challenged technologies or our sales of the challenged products, whether or not such litigation is resolved in our favor. Intellectual property related litigation could also divert the efforts of our management and our design, 7
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engineering and technical personnel. In the event of an adverse outcome in any intellectual property litigation, we may be required to: - pay substantial damages; - cease the manufacture, use, sale or importation of infringing products or technologies; or - expend significant resources to develop, acquire or license necessary technologies. We may not be successful in the development or acquisition of replacement technology, and licenses may not be available under terms acceptable to us or at all. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND SKILLED EMPLOYEES. We depend on the services of our senior executives, including Wallace K. Tsuha, Jr., our chairman, chief executive officer and president. Specifically, Mr. Tsuha's departure would result in the loss of our minority business enterprise status, unless we appoint an ethnic minority as our new chief executive officer. Our business also depends on our ability to continue to recruit, train and retain skilled employees, particularly management, engineering and sales personnel. Recruiting personnel in our industry is highly competitive. We have no employment agreements with any of our executive officers or skilled employees. In addition, our ability to successfully integrate acquired companies or portions of businesses depends, in part, on our ability to retain key management and skilled personnel of these companies. The loss of, or inability to retain, Mr. Tsuha or one or more of our other senior executives or other skilled personnel, including personnel of acquired companies, could have a material adverse effect on our business, financial condition or results of operations. RISKS PARTICULAR TO OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR OVERALL RESULTS. In addition to operations in the United States, we have manufacturing facilities in Mexico and the Philippines, and engineering and sales operations in Singapore. We also intend to expand our operations in existing and into new markets worldwide. Expanding our operations in foreign markets may require considerable management time as well as start-up expenses for market development, hiring personnel and establishing office facilities before any significant revenue is generated. As a result, operations in new or expanded foreign markets may have lower margins or may be unprofitable. Our international manufacturing and other operations are also subject to certain risks inherent in carrying on business outside of the United States. These risks include: - exchange rate fluctuations or increases in the level of inflation; - greater risk of political or economic instability; - difficulties in staffing or management; - possible longer payment cycles from customers or greater difficulty in collecting accounts receivable; - unexpected changes in and the burdens and costs of compliance with a variety of foreign laws and labor practices; - adherence to and unexpected changes in trade restrictions such as export duties, import controls or trade barriers, including quotas and tariffs; - inability to utilize net operating losses incurred by our foreign operations to reduce our United States income taxes; and - difficulties in coordinating domestic and foreign operations. We cannot assure you that we will realize the anticipated benefits of our international expansion or that our current or future international operations will contribute positively to our business, financial condition or results of operations. 8
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WE HAVE EXPOSURE TO PRODUCT LIABILITY CLAIMS AND RECALLS OF PRODUCTS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. As a service provider in the EMS industry, we have exposure to product liability claims with respect to our operations in the event that the failure of one or more of our services or products results in personal injury or death. In addition, if any of the services we provide or the products we manufacture prove to be defective, we may be required to participate in a government mandated or OEM required recall involving those related products. Our insurance against product liability claims may be insufficient to cover liabilities ultimately incurred by us, or insurance may cease to be available on terms acceptable to us. WE MAY INCUR SIGNIFICANT LIABILITIES IF WE FAIL TO COMPLY WITH ENVIRONMENTAL AND HEALTH AND SAFETY REGULATIONS. Our operations are regulated under a number of federal, state, local and foreign environmental and health and safety laws and regulations, which govern, among other things, the use, storage, treatment, discharge and disposal of hazardous chemicals and substances used in our manufacturing processes. Also, because our manufacturing processes result in the generation of some hazardous wastes, we may be subject to potential financial exposure for costs associated with investigation or remediation of sites at which we have arranged for the disposal of hazardous wastes if such sites become contaminated, even if we fully comply with applicable environmental laws. Moreover, liabilities, including sanctions, may be imposed without regard to the legality of our original conduct and without regard to whether we knew of, or were responsible for, the presence of such hazardous or toxic substances, and this liability may be joint and several with other parties. If the liability is joint and several, we could be held responsible for payment of the full amount of the liability, whether or not any other responsible party is also liable. In the event of a violation of environmental laws, we could be held liable for damages, penalties, sanctions and costs of remedial actions and could also be subject to revocation of our permits. Any revocation could require us to cease or limit production at one or more of our facilities. Environmental and health and safety laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation. In addition, compliance with these laws and regulations could restrict our ability to expand our facilities or require us to acquire costly equipment or incur other significant expenses. OUR BUSINESS MAY SUFFER IF GOVERNMENT REGULATION HINDERS OUR ABILITY TO SELL CERTAIN COMMUNICATIONS OR MEDICAL SERVICES OR PRODUCTS. Although our sales to the communications market currently constitute a small portion of our net revenue, we intend to increase our sales to this end market. Many of our communications customers are subject to regulation by the Federal Communications Commission, or the FCC, the European Union, and other federal, state and foreign governmental and non-governmental authorities. The failure of our current or potential communications customers to meet FCC or similar requirements could result in the non-approval, recall or discontinuation of products which could substantially reduce or eliminate their demand for our services. This could significantly reduce an area of anticipated growth in net revenue, resulting in a material adverse effect on our business, financial condition or results of operations. In addition, although our sales to the medical market currently constitute a small portion of our net revenue, we intend to increase our sales to this market. The design, development, testing, manufacture, promotion and sale of medical devices are subject to extensive regulation by the Food and Drug Administration, or the FDA, and other federal, state and foreign authorities. Noncompliance with applicable requirements can result in a device not being cleared or approved for sale, product recalls, fines and other significant regulatory, civil or criminal actions. Medical device manufacturers are also subject to strict federal regulations regarding the design, development, manufacture, packaging and labeling of medical devices known as the Quality System Regulations, formerly Good Manufacturing Practices. If the FDA determines that our medical customers or we fail to meet such FDA and similar regulatory requirements, the FDA could institute regulatory proceedings or product recalls, assess penalties or take other significant actions. The failure of our current or potential medical end market customers or us to obtain or maintain FDA approvals and maintain compliance with the Quality System Regulations, 9
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therefore, could substantially reduce their demand for our services, reducing an area of anticipated revenue growth. This could have a material adverse effect on our business, financial condition or results of operations. WE MAY FAIL TO SECURE ADDITIONAL FINANCING WHICH MAY BECOME NECESSARY TO MAKE CAPITAL EXPENDITURES TO EXPAND OUR OPERATIONS AND REMAIN COMPETITIVE. We have made and will continue to make substantial capital expenditures to maintain our facilities and expand our operations in order to remain competitive. Our future success may depend on our ability to obtain additional financing to support our continued growth and operations. We may seek to raise funds by: - issuing additional common stock or other equity instruments; - issuing debt securities; - obtaining additional lease financings; - increasing our credit facility; or - obtaining off-balance sheet financing. We may not be able to obtain additional financing when we need it on satisfactory terms or at all. In addition, our current credit facility imposes restrictions on our ability to increase our leverage. Furthermore, any additional financing may have terms or conditions that adversely affect our business, such as financial or operating covenants. If we issue additional equity securities or convertible debt to raise capital, it may be dilutive to your ownership interests. Moreover, our ability to raise additional financing through the issuance of equity securities or convertible debt securities may be hindered due to our desire to retain our minority business enterprise status, which we believe will require at least 30% of our stock to be beneficially owned by ethnic minorities. UNEXPECTED INTERRUPTIONS TO OUR SERVICES COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS. Our services are subject to a number of potential causes of interruption, including labor difficulties and strikes, natural disasters, fire, vandalism, civil disturbances and mechanical failures, any of which could impair or prevent our ability to provide one or more of our services. Any significant reduction or stoppage of production at one or more of our manufacturing facilities or impairment or prevention of our ability to provide design and engineering, materials management, testing and qualification, fulfillment or after-sales support services could have a material adverse effect on our business, financial condition or results of operations. RISKS RELATING TO OUR INDUSTRY AND MARKETS OUR INDUSTRY IS INTENSELY COMPETITIVE, AND WE MAY BE UNSUCCESSFUL IF WE CANNOT COMPETE EFFECTIVELY. The EMS industry is intensely competitive. We compete against many domestic and foreign EMS providers, some of which possess significant global or domestic operations and greater financial, manufacturing, sales, marketing, research, engineering and acquisition resources and capabilities than we have. Also, current and prospective customers may decide to internally perform some of the services we offer. In addition, because the basic technology necessary to be an EMS provider is generally not subject to significant proprietary protection, competitors may replicate such basic technology and additional competitors may enter the market in the future. We compete on the basis of, among other things, product quality, responsiveness to customers, manufacturing and engineering technology and price. To the extent our services and products do not provide quality, timing or technological advantages over those offered by our competitors, or which can be realized by our customers internally, we are likely to experience increased price competition, reduced margins or loss of market share with respect to those services and 10
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products, any of which could have a material adverse effect on our business, financial condition or results of operations. WE MAY BE UNABLE TO OBTAIN RAW MATERIALS OR COMPONENTS NEEDED FOR OUR MANUFACTURING OPERATIONS ON A TIMELY BASIS OR AT ALL. We rely on a limited number of suppliers for single source components used in the manufacture and assembly of our products, and we generally do not have long-term supply agreements. Shortages of materials and components have occurred from time to time and will likely occur in the future. Raw materials or component shortages and price fluctuations could result in shipping delays or increased prices, which could adversely affect our ability to manufacture products for our customers on a timely basis or at an acceptable cost. Moreover, the current consolidation trend among suppliers to EMS providers could result in changes in supply relationships and in the price, availability and quality of components and raw materials. Due to our use of just-in-time inventory techniques, the timely availability of many components is dependent on our abilities to develop accurate forecasts of customer requirements and to manage the materials supply chain. If we fail to do either, we may lose customers which could have a material adverse effect on our business, financial condition or results of operations. IF WE ARE UNABLE TO RESPOND TO RAPIDLY CHANGING TECHNOLOGY AND CONTINUOUS PROCESS DEVELOPMENT, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. The EMS industry is characterized by rapidly changing technology and continuous process development. The future success of our business will largely depend on our ability to maintain and enhance our technological capabilities, develop and market services that meet changing customer needs, and successfully anticipate or respond to technological changes on a cost-effective and timely basis. In addition, in the future our industry could encounter competition from new or revised technologies that render our current technology less competitive or obsolete or that reduce the demand for our services. We may not be able to effectively respond to the technological requirements of changing markets. To the extent we determine that we must develop or secure new technologies and equipment to remain competitive, we may be required to make significant capital or other investments. Financing on acceptable terms may not be available for these purposes in the future and our investments in new technologies may not result in commercially viable technologies. A DOWNTURN IN THE AUTOMOTIVE INDUSTRY WOULD LIKELY REDUCE OUR NET REVENUE. For the year ending December 31, 1999, approximately 74% of our net revenue was derived from customers in the automotive industry. The automotive industry is subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. A recession or any other event leading to either excess capacity or a downturn in the automotive industry may have a material adverse effect on our business, financial condition or results of operations. OUR SALES MAY BE ADVERSELY AFFECTED BY LABOR INTERRUPTIONS AT OUR CUSTOMERS. Substantially all of the hourly employees of North American automotive OEMs, and a significant proportion of the employees of our other customers who sell to automotive OEMs, are represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America under collective bargaining agreements. Because we deliver products to our customers on a just-in-time basis, a work stoppage caused by labor difficulties at any significant automotive customer could prevent sales and deliveries of our services and products to that customer, which could have a material adverse effect on our business, financial condition or results of operations. 11
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RISKS ASSOCIATED WITH INTERNAL GROWTH AND ACQUISITIONS WE INTEND TO RAPIDLY GROW OUR BUSINESS AND MAY HAVE TROUBLE MANAGING THAT GROWTH. We intend to rapidly grow our business by seeking additional programs for each of our segments and entering into strategic outsourcing alliances. Rapid growth involves risks, including the following: - inability to attract and retain the management personnel and skilled employees necessary to support expanded operations; - inability to efficiently integrate new operations, expand existing operations and manage geographically dispersed operations; - incurrence of cost overruns; - construction delays, equipment delays or shortages, labor shortages and disputes and production start-up costs; - inability to obtain financing or capital on acceptable terms or at all; and - incurrence of new fixed operating expenses, including increases in depreciation expense and rental expense. For example, in March 2000, we entered into a strategic outsourcing alliance with Motorola pursuant to which we became a preferred EMS supplier to their Integrated Electronics Systems Sector. We anticipate that this could generate significant business opportunities for us in the next few years. We expect to dedicate resources and management time toward fostering and maintaining this relationship, which may divert personnel from other matters. If we are unable to meet the requirements of this new strategic outsourcing alliance, there could be a material adverse effect on our business, financial condition or results of operations. In addition, our rapid growth has placed and will continue to place a significant strain on our management resources and information, operating and financial systems. For example, we anticipate that within the next four years we may need to replace or expand our current information system. If our information system does not work effectively or if we experience any difficulties in our transition to a new information system, we may experience delays or failures in our accounting and other information processing. This could adversely affect the promptness and accuracy of our transaction processes and our financial accounting and reporting. Furthermore, to manage the expected growth of our operations and personnel, we may need to improve our other operational and financial systems, transaction processes, procedures and controls. Our current and planned systems, transaction processes, procedures and controls may be inadequate to support future operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations. OUR ACQUISITION STRATEGY MAY NOT SUCCEED. As part of our business strategy, we have also grown, and expect to continue growing, by acquiring other product lines, technologies or facilities that complement or expand our existing business. For example, in August 1999, we expanded our business through the acquisition of Smartflex Systems, an EMS provider based in Tustin, California. However, we may not realize any of the anticipated benefits of the Smartflex acquisition or any other past or future acquisition. Future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the acquired product line, technology or facilities. Any future issuances of equity securities will dilute your ownership interests. In addition, future acquisitions might never increase, and may even decrease, our earnings or earnings per share and the benefits derived by us from an acquisition may not outweigh or exceed the dilutive effect of the acquisition. We may also incur additional debt burden in connection with any future acquisitions or suffer costs of adverse tax and accounting consequences. 12
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In addition, there is keen competition for acquisition targets in the EMS industry. As a result, we may not be able to identify suitable acquisition candidates or negotiate attractive terms. In addition, we may have difficulty obtaining the financing necessary to complete transactions we pursue. For example, our current credit facility restricts the amount we can borrow to undertake acquisitions. Moreover, our ability to issue equity securities or convertible debt securities as financing for an acquisition may be limited due to the extent we desire to maintain our minority business enterprise status. Our failure to execute our acquisition strategy may have a material adverse effect on our business, financial condition or results of operations. WE MAY HAVE TROUBLE INTEGRATING ACQUIRED PRODUCT LINES, TECHNOLOGIES AND FACILITIES. In accordance with our business strategy, we have historically engaged in, and intend to continue to engage in, a number of acquisitions, the most recent of which was our purchase of Smartflex. In addition to the risks that the intended benefits of an acquisition may not materialize, or an acquisition might prove costly or dilutive, acquisitions, including Smartflex, involve numerous other risks, including the following: - difficulty in integrating operations, technologies, systems, services and products; - diversion of management's attention and disruption of operations; - increased expenses and working capital requirements; - entering markets in which competitors have stronger market positions or in which we have limited or no prior experience; - potential loss of key employees and customers of acquired businesses or portions of businesses; and - potential liabilities of acquired product lines, assets or companies. We may not be able to meet performance expectations or successfully integrate acquisitions on a timely basis without disrupting the quality and reliability of services to our customers or diverting management resources, either of which could have a material adverse effect on our business, financial condition or results of operations. RISKS RELATING TO OUR COMMON STOCK WALLACE K. TSUHA, JR. AND HIS FAMILY WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AFTER THIS OFFERING AND THEY, ESPECIALLY IN COMBINATION WITH MASCOTECH, A SIGNIFICANT SHAREHOLDER, COULD DELAY, DETER OR PREVENT A CHANGE OF CONTROL OR OTHER BUSINESS COMBINATION EVEN THOUGH SOME OF OUR SHAREHOLDERS MIGHT CONSIDER SUCH A DEVELOPMENT FAVORABLE. Upon completion of this offering, Mr. Wallace K. Tsuha, Jr. our chairman, chief executive officer and president, and his family, will beneficially own approximately % of our common stock on a fully diluted basis, or %, on a fully diluted basis, if the underwriters' over-allotment is exercised in full. By virtue of this stock ownership, Mr. Tsuha and his family will continue to have substantial control over all matters submitted to our shareholders, including the election of our directors, and to exercise significant control over our business, policies and affairs. Such concentration of voting power could delay, deter or prevent a change of control or other business combination that might otherwise be beneficial to our shareholders. Upon completion of this offering, MascoTech will own approximately % of our common stock on a fully diluted basis, or %, on a fully diluted basis, if the underwriters' over-allotment is exercised in full. By virtue of this stock ownership, MascoTech will continue to have significant influence over us through its ability to influence the election of directors and all other matters that require action by our shareholders. This concentration of voting power, especially in combination with Mr. Tsuha's and his family's voting power, could delay, deter or prevent a change of control or other business combination that might otherwise be beneficial to our shareholders. In addition, one of the executive officers of MascoTech is currently a member of our board of directors. We sell services and products to affiliates of MascoTech. 13
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At times, it may be possible that this director may be presented with a conflict of interest by virtue of his positions at both MascoTech and our company, particularly given MascoTech's share ownership and the fact that some of MascoTech's affiliates are also our customers. PROVISIONS IN STATE LAW AND OUR ARTICLES OF INCORPORATION AND BYLAWS MAY MAKE IT MORE DIFFICULT FOR OTHERS TO OBTAIN CONTROL OF OUR COMPANY EVEN THOUGH SOME SHAREHOLDERS MIGHT CONSIDER THIS DEVELOPMENT FAVORABLE. Provisions in state law and our amended and restated articles of incorporation and amended and restated bylaws may deter, delay or prevent a change of control or changes in our management even though some of our shareholders may consider those changes favorable or beneficial. For example, our bylaws provide for a classified board of directors with staggered terms, so that it would take three successive annual meetings of the shareholders to replace all of our directors. Our articles also authorize the issuance of preferred stock, with rights senior or superior to common shares, by our board of directors, without prior shareholder approval. Our bylaws also require unanimous consent for shareholder action by writing, and establish advance notice for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by the shareholders at a meeting. In addition, Michigan law has specific fair price and control share provisions that could delay, deter, or prevent a change of control. RISKS RELATED TO THIS OFFERING NON-CASH ACCOUNTING CHARGES RELATED TO EMPLOYEE OPTIONS AND A WARRANT HELD BY MOTOROLA WILL RESULT IN A REDUCTION OF OUR EARNINGS, MAY RESULT IN US REPORTING LOSSES AND MAY RESULT IN A REDUCTION OF OUR STOCK PRICE. Upon completion of this offering, we will record non-cash deferred compensation and related paid in capital to reflect the grant of stock options to employees at prices below fair market value of our common stock on the date of this offering. At an assumed initial public offering price of $ per share, this deferred compensation will be $ million, and will be amortized as stock-based compensation using an accelerated method over the exercise period of the related options. This charge will result in a reduction of our earnings, may result in us reporting a loss in the applicable amortization period and may result in a reduction of our stock price. In addition, in March 2000, we will recognize a non-cash charge through our results of operations in the amount of $ million in relation to the issuance of a warrant to purchase 1,565,331 shares of our common stock to reflect the difference between the fair market value and the exercise price of the warrant. This charge will result in a reduction of our earnings, may result in us reporting a loss for year 2000 and may result in a reduction in our stock price. THERE MAY NOT BE AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK FOLLOWING THE OFFERING, WHICH COULD MAKE IT DIFFICULT FOR YOU TO SELL YOUR STOCK. Prior to this offering, there has not been a public market for our common stock. We cannot assure you that an active trading market for our common stock will develop or be sustained after this offering. The initial public offering price for our common stock will be determined by negotiations between the underwriters and us and may not be indicative of prices that will prevail in the trading market. You may not be able to sell shares of our common stock at or above the initial offering price or at all. OUR STOCK PRICE COULD BE VOLATILE AND COULD DROP UNEXPECTEDLY FOLLOWING THIS OFFERING. Historically, stock prices and trading volumes for newly public companies fluctuate widely for a number of reasons, including some reasons that may be unrelated to their businesses or results of operations. This type of market volatility could decrease the price of our common stock without regard to our operating performance. In addition, our results of operations may be below the expectations of public market analysts or investors. If this occurs, the market price of our common stock could decrease, perhaps significantly. 14
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FUTURE SALES OF OUR COMMON STOCK, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD CAUSE OUR STOCK PRICE TO DECLINE. The market price of our common stock could decline as a result of sales in the public market of our common stock by our existing shareholders after this offering, or the perception that these sales could occur. These sales also might make it difficult for us to issue additional equity securities in the future. After this offering, we will have shares of common stock outstanding. This includes the shares we and the selling shareholders are selling in this offering, which may be resold in the public market immediately. The remaining shares, or % of our total outstanding shares, and our shares subject to outstanding options and the Motorola warrant, are restricted from immediate resale by federal securities laws and lock-up agreements between our current shareholders and the underwriters, but may be sold into the public market in the near future. These shares will become available for sale at various times following the expiration of the lock-up agreements, which is 180 days after the date of this prospectus, subject to volume limitations under Rule 144 of the Securities Act. In addition, MascoTech, one of our current significant shareholders, and Motorola with respect to the shares it may acquire pursuant to its warrant, each has the right to require us to register their shares following this offering under certain circumstances. You should read the section titled "Shares Eligible For Future Sale" beginning on page 49 for a more complete discussion of shares that may be sold in the public market in the future. INVESTORS WHO PURCHASE OUR COMMON STOCK IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION. Our existing shareholders paid substantially less for their shares of our common stock than the initial public offering price. As a result, you will suffer immediate and substantial dilution in net tangible book value per share. In addition, to the extent outstanding and newly issued options and the Motorola warrant are exercised in the future, you will experience further dilution. 15
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS We make forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 throughout this prospectus. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed above in the section captioned "Risk Factors," as well as any cautionary language in this prospectus provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, financial condition or results of operations. You should read this prospectus completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements after the date of this prospectus, even though our situation will change in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. 16
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USE OF PROCEEDS We will receive net proceeds of approximately $ million from our sale of shares of our common stock in this offering at the assumed initial public offering price of $ per share after deducting underwriting discounts and commissions paid by us. We will not receive any of the proceeds from the sale of our shares being offered by the selling shareholders, including shares they will sell if the underwriters exercise their over-allotment option. We expect to use approximately $ million of our net proceeds from this offering to reduce our indebtedness under our credit facility, and expect to use the remainder for working capital and other general corporate purposes. You should be aware, however, that we have broad discretion under our bank credit facility as to the amount we choose to repay. We may actually repay more or less of our long-term debt. Our bank credit facility matures in August, 2002. At December 31, 1999, we had $107.4 million outstanding under our bank credit facility, of which $71.3 million was used to finance our acquisition of Smartflex in August 1999 and $27.0 million was used to finance a share repurchase in April 1999. At December 31, 1999, the weighted average interest rate on our credit facility was 8.46%. Our net proceeds from this offering not used to reduce our indebtedness under the bank credit facility will be invested in short-term, interest-bearing securities until allocated for a specific use. DIVIDEND POLICY We have not declared or paid a cash dividend on our common stock since our formation, and we do not anticipate paying any cash dividends in the foreseeable future. We presently intend to retain earnings to finance future operations and expansion and to reduce indebtedness. 17
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CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999: - on an actual basis; and - on an as adjusted basis to reflect our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, and our receipt and use of the estimated net proceeds after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. While we have assumed for purposes of the adjusted capitalization data below that we will apply approximately $ million of our net proceeds to reduce long-term debt, you should be aware that we have broad discretion under our bank credit facility as to the amount we choose to repay. [Download Table] AS OF DECEMBER 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS EXCEPT SHARE DATA) Cash........................................................ $ 1,929 $ ======== ======== Long-term debt.............................................. $107,361 $ -------- -------- Shareholders' equity: Common stock -- no par value; 200,000,000 shares authorized, actual and as adjusted; 29,741,280 shares outstanding, actual, shares outstanding as adjusted............................................... -- Additional paid-in capital................................ 7,737 Retained earnings......................................... 44,121 -------- -------- Total shareholders' equity............................. 51,858 -------- -------- Total capitalization................................. $159,219 $ ======== ======== The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 27, 2000 and excludes: - 2,834,400 shares issuable upon exercise of outstanding stock options with a weighted average exercise price of $2.75 per share; - 2,500,000 shares of common stock available for future grant under our 2000 Stock Option Plan; and - 1,565,331 shares issuable upon the exercise of a warrant held by Motorola with an exercise price equal to 90% of the initial public offering price per share. 18
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DILUTION If you invest in shares of our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share after this offering. As of December 31, 1999, we had a negative net tangible book value of approximately $(15.0) million, or $(.50) per share of common stock. Net tangible book value per share is determined by dividing the amount of our total tangible assets less total liabilities by the number of shares of common stock outstanding. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. Our pro forma net tangible book value as of December 31, 1999 would have been approximately $ million, or $ per share, after giving effect to our sale of shares of common stock in this offering at an assumed public offering price of $ and our receipt of the net proceeds, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing shareholders and an immediate dilution of $ per share to new investors purchasing shares at the initial public offering price. If the initial public offering price is higher or lower, the dilution to the new investors will be greater or less, as applicable. The following table illustrates this dilution: [Download Table] Assumed initial public offering price per share............. $ Pro forma net tangible book value per share at December 31, 1999............................................... $ Increase per share attributable to new investors.......... ------- Pro forma tangible book value per share after this offering.................................................. ------- Dilution per share to new investors......................... $ ======= The following table sets forth, as of December 31, 1999, the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by our existing shareholders and new investors assuming an initial offering price of $ per share, before deducting the underwriting discounts and commissions and our estimated offering expenses. [Enlarge/Download Table] SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- -------- ---------- -------- ------------- Existing shareholders.......... % $ % $ New investors.................. % % ---------- -------- ---------- -------- Total..................... 100.0% $ 100.0% $ ========== ======== ========== ======== The foregoing table and calculations assume no exercise of any options and excludes: - 2,834,400 shares issuable upon exercise of outstanding stock options with a weighted average exercise price of $2.75 per share; - 2,500,000 shares of common stock available for future grant under our stock option plan; and - 1,565,331 shares issuable upon the exercise of a warrant held by Motorola with an exercise price equal to 90% of the initial public offering price per share. To the extent outstanding or newly acquired options or the Motorola warrant are exercised in the future, there will be further dilution to new investors. 19
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SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data and selected pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page and our consolidated financial statements and related notes included elsewhere in this prospectus. The 1999 pro forma consolidated statement of operations data give effect to the acquisition of Smartflex Systems as if this acquisition had been completed on January 1, 1999. This acquisition was accounted for under the purchase method of accounting and accordingly Smartflex has been included in our financial results since August 26, 1999, the date of the acquisition. The consolidated statements of operations data for the years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1998 and 1999 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 1995 and 1996 and the consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited consolidated financial statements, which are not included in this prospectus. Historical results are not necessarily indicative of the results of operations to be expected for future periods. [Enlarge/Download Table] YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- PRO FORMA 1995 1996 1997 1998 1999 1999 ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue......................... $ 122,550 $ 168,707 $ 161,048 $ 188,464 $ 257,107 $ 325,579 Cost of revenue..................... 119,272 146,070 133,568 147,661 205,341 268,975 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit........................ 3,278 22,637 27,480 40,803 51,766 56,604 Development expense................. 2,468 3,260 3,563 4,861 7,741 8,465 Selling, general and administrative expense........................... 2,431 4,976 8,039 12,777 19,146 29,467 Amortization expense................ 1,650 1,650 1,650 1,649 2,582 4,772 Restructuring expense............... -- -- -- -- -- 3,833 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)............. (3,271) 12,751 14,228 21,516 22,297 10,067 Interest income..................... -- -- 100 176 331 -- Interest expense.................... (1,722) (1,981) (977) (142) (3,340) (8,736) Other income (expense), net......... (158) 449 116 (131) (161) (710) Write down of investment............ -- -- -- (905) -- -- Minority interest................... -- -- -- (1,701) (2,788) (2,788) ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes... (5,151) 11,219 13,467 18,813 16,339 (2,167) Income taxes........................ (1,773) 4,217 5,408 6,859 6,434 370 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)................... $ (3,378) $ 7,002 $ 8,059 $ 11,954 $ 9,905 $ (2,537) ========== ========== ========== ========== ========== ========== Basic and diluted earnings (loss) per share of common stock......... $ (0.09) $ 0.19 $ 0.22 $ 0.32 $ 0.31 $ (0.08) Basic and diluted weighted average number of common shares outstanding....................... 37,176,600 37,176,600 37,176,600 37,176,600 32,145,026 32,145,026 [Enlarge/Download Table] AS OF DECEMBER 31, -------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash................................ $ 101 $ 2,331 $ 1,136 $ 1,020 $ 1,929 Working capital..................... 22,404 21,828 18,283 22,259 44,645 Total assets........................ 87,026 84,616 83,425 98,604 231,974 Long-term debt, net of current portion........................... 27,074 18,070 6,630 3,976 107,361 Total shareholders' equity.......... 41,938 48,940 56,999 68,953 51,858 20
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the "Selected Consolidated Financial Data" section of this prospectus and our consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion contains trend analysis and other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results may differ from those indicated in such forward-looking statements as a result of factors set forth elsewhere in this prospectus, including under "Risk Factors" beginning on page 5. OVERVIEW We are a global provider of value-added electronics manufacturing services, or EMS, to OEMs and their suppliers. We provide these services to customers primarily in the automotive, communications, computer and military end markets. As the amount and complexity of electronics content in commercial and consumer goods have grown, OEMs have been increasingly using EMS providers to outsource their internal manufacturing capacity. We also offer OEMs integrated cost-effective solutions that are responsive to their outsourcing needs and provide a broad range of services, including product design and engineering; materials management; manufacturing and assembly; testing and qualification; fulfillment; and after-sales support. Our customers include industry leaders such as DaimlerChrysler, Ford, General Dynamics, Hewlett-Packard, Hughes, IBM and Motorola. To better target customers and serve the needs of different end markets, we have strategically aligned our business into three segments: electronics, electromechanical and electrical. - Our electronics segment provides services in connection with printed circuit board, flex circuit assembly and the incorporation of electronic assemblies into subassemblies and final systems box-build. We significantly increased our capabilities in this segment with the acquisition of Smartflex in August 1999. - Our electromechanical segment provides services in connection with devices such as junction blocks, relays, actuators, solenoids and transmission modules. - Our electrical segment provides services in connection with battery cables, wire harnesses and power distribution systems. This segment is comprised of the Saturn LLC, of which we own 53%. For the year ended December 31, 1999, our electronics segment accounted for 32% of our net revenue, our electromechanical segment accounted for 54% of our net revenue and our electrical segment accounted for 14% of our net revenue. In future periods, we expect that our electronics segment will account for a significantly higher portion of our net revenue, as our 1999 results only include the operations of Smartflex beginning after August 26, 1999. In addition, some of our manufacturing facilities in our electronics segment currently have excess capacity for which we are seeking new programs. We recognize revenue when products are shipped to our customers. We have historically relied on a small number of customers for a majority of our net revenue. For the year ended December 31, 1999, DaimlerChrysler accounted for 31% of our net revenue and Ford accounted for 19% of our net revenue. We expect to continue to generate a significant portion of our net revenue from a small group of customers in the future. The loss of any one of our major customers would have a material adverse effect on our business, financial condition or results of operations. During the third quarter of 2000, a significant automotive program is scheduled to end. This program generated $31.5 million of net revenue during 1999 for our electromechanical segment. We do not generally obtain long-term, firm purchase orders from our communications, computer, military and other non-automotive customers. Rather, these customers typically place orders for delivery within 30 to 90 days. Our automotive customers typically place annual blanket purchase orders, but these orders do not obligate them to purchase any specific or minimal amount of services or products from us 21
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until a release is issued under the blanket purchase order. Releases are typically placed within 30 to 90 days of required delivery and may be canceled at any time, in which case the customer generally would be liable only for finished goods and work in process. Therefore, we must anticipate delivery dates and future volume of orders based upon our customer forecasts. The level and timing of orders placed by our customers vary due to: - customer attempts to manage inventory; - changes in customer manufacturing strategy; and - variation in demand for customer products resulting from, among other things, introduction of new products, product life cycles, competitive conditions or industry or economic conditions. We rely on a single or limited number of suppliers for many proprietary and other components used in the assembly of our products, and we do not typically have any long-term supply agreements. Shortages of materials and components have occurred from time to time and will likely occur in the future. Some key electronics components have long procurement lead times in addition to being available from only one source or a limited number of sources. Failure to anticipate the volume or timing of customer orders or delivery problems relating to components from limited source suppliers could have a material adverse effect on our financial performance. A significant portion of our business is presently dependent upon the automotive industry. The automotive industry is cyclical and dependent on consumer spending. In addition, EMS providers to the automotive industry experience seasonal variations in OEM orders and revenue. Decreased revenues and operating income are generally experienced during the months of July and December of each year as a result of scheduled OEM plant shut downs for vacations and holidays as well as changeovers in production lines for the next model year. RECENT ACQUISITION In August 1999, we acquired Smartflex Systems, Inc. for $71.3 million. This acquisition was accounted for under the purchase method of accounting, and, accordingly, Smartflex has been included in our financial results since August 26, 1999. STOCK OPTIONS AND WARRANT Upon completion of this offering, we will record non-cash deferred compensation related to paid in capital to reflect the grant of stock options to employees at prices below fair market value of our common stock on the date of this offering. At an assumed initial offering price of $ per share, this deferred compensation will be $ million, and will be amortized as stock-based compensation using an accelerated method over the exercise period of the related options. In addition, in March 2000, we will recognize a non-cash charge through our results of operations in the amount of $ million in relation to the issuance of a warrant to purchase 1,565,331 shares of our common stock, to reflect the difference between the fair market value and the exercise price of this warrant. YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 Net Revenue Our net revenue increased $68.6 million, or 36.4%, to $257.1 million in 1999 from $188.5 million in 1998. This increase reflected higher business volume in all of our business segments. Net revenues were higher in the electronics segment by $36.1 million, in the electromechanical segment by $22.8 million and in the electrical segment by $9.8 million. The increase in the electronics segment was attributable to the acquisition of Smartflex, which added $52.2 million in net revenue for the period beginning August 26, 1999 and ending December 31, 1999. This increase was offset by a $16.1 million decrease in net revenue of our electronics business which existed prior to the Smartflex acquisition, primarily due to the phase-out 22
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of certain programs. The increase in the electromechanical segment was primarily attributable to $15.2 million of net revenue associated with a major junction block program which was launched during the second quarter of 1999, $3.9 million of net revenue associated with increased sales of relay products, and the remainder of the increase was attributable to solenoids and other electromechanical products. The increase in the electrical segment was attributable to the operation of this segment for 12 months during 1999 compared to 10 months during 1998. Gross Profit Our gross profit increased $11.0 million, or 27.0%, to $51.8 million in 1999 from $40.8 million in 1998. However, our gross profit as a percent of net revenue declined to 20.1% in 1999 from 21.6% in 1998. This decline was primarily attributable to a higher proportion of net revenue from our electronics segment, which generally has lower profit margins than our other business segments. Also during 1999 our gross profit as a percent of net revenue was negatively affected by excess capacity in our electronics segment. Development Expense Development expense includes payroll and related benefits for design and process engineering and information services. Our development expense increased $2.8 million, or 57.1%, to $7.7 million in 1999 from $4.9 million in 1998. This increase reflected additional development activities, together with development expense at Smartflex of approximately $600,000. Selling, General and Administrative Expense Selling, general and administrative expense includes payroll and benefit expense, certain facilities expense, professional service fees, travel and related costs. Our selling, general and administrative expense increased $6.3 million, or 49.2%, to $19.1 million in 1999 from $12.8 million in 1998. Selling, general and administrative expense as a percentage of net revenue increased to 7.4% in 1999 from 6.8% in 1998. These increases reflect $6.8 million attributable to Smartflex, which was partially offset by lower expense in our other business segments. These lower expenses resulted primarily from the absence of management fees for administrative services which were provided to the Saturn LLC by our strategic alliance partner in 1998. Amortization Expense Amortization expense increased $1.0 million, or 62.5%, to $2.6 million in 1999 from $1.6 million in 1998. This increase reflected the amortization of $1.1 million, for the period from August 26 through December 31 related to $52.7 million of intangible assets recorded in connection with the acquisition of Smartflex. Net Income Our net income declined $2.1 million, or 17.5%, to $9.9 million in 1999 from $12.0 million in 1998. This decline was a result of the lower gross profit margins and the higher expenses mentioned above as well as significantly higher interest expense and a higher effective tax rate. Interest expense increased by $3.2 million which reflected the incurrence of significant debt to finance the Smartflex acquisition and a stock repurchase. Our effective tax rate increased to 39.4% in 1999 from 36.5% in 1998 as a result of nondeductible amounts for tax purposes pertaining to certain assets acquired in the Smartflex acquisition. Our earnings per share of common stock declined by 3% to $0.31 per share in 1999 from $0.32 per share in 1998. The 1999 weighted average number of shares of common stock declined by 5,031,574 as a result of a stock repurchase of 7,435,320 shares in April 1999. 23
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YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 Net Revenue Our net revenue increased $27.5 million, or 17.1%, to $188.5 million in 1998 from $161.0 million in 1997. The increase was primarily attributable to the initiation of operations of the Saturn LLC in March 1998 which contributed $27.0 million. Gross Profit Our gross profit increased $13.3 million, or 48.4%, to $40.8 million in 1998 from $27.5 million in 1997. Our gross profit as a percent of net revenue increased to 21.6% in 1998 from 17.1% during 1997. The dollar and percentage increases primarily reflect improvements in materials management achieved during 1998. Development Expense Our development expense increased $1.3 million, or 36.1%, to $4.9 million in 1998 from $3.6 million in 1997, reflecting increased development activities. Selling, General and Administrative Expense Our selling, general and administrative expense increased $4.8 million, or 60.0%, to $12.8 million in 1998 from $8.0 million in 1997. This increase was primarily due to $3.4 million attributable to the Saturn LLC, which began operations in February, 1998. The remainder of the increase resulted from higher salary and benefit expenses in our existing businesses. Net Income Our net income increased $3.9 million, or 48.1%, to $12.0 million in 1998 from $8.1 million in 1997. This increase resulted principally from the higher net revenue and gross profit mentioned above and lower interest expense. These positive impacts were partially offset by the write-down of an investment in a joint venture in the amount of $905,478 in 1998. The lower interest expense was attributable to lower debt balances and lower interest rates during 1998. Our effective tax rate decreased to 36.5% in 1998 from 40.2% in 1997 as a result of adjustments of deferred tax assets in 1997. LIQUIDITY AND CAPITAL RESOURCES During 1999, our cash requirements were met through operations and borrowings from our credit facility. On December 31, 1999, we had cash on hand of $1.9 million. For the year ended December 31, 1999, net cash provided by operating activities amounted to $4.4 million compared to $17.6 million in 1998 and $16.7 million in 1997. The decrease in the net cash provided by operating activities during 1999 was primarily attributable to higher inventory and accounts receivable as well as a significant amount of payment activity associated with our accounts payable and other liabilities toward the end of 1999. The inventory increase primarily reflected additions to inventory at the end of 1999 for Y2K contingency purposes and a build up of inventory to support a major automotive program with Ford, which is being launched during the first quarter of 2000 in our electrical segment. The increase in accounts receivable was primarily attributable to accounts receivable being carried at Smartflex and, to a lesser extent, a general increase in our business volume. For the year ended December 31, 1999, net cash used in investing activities amounted to $61.3 million compared to $16.9 million in 1998 and $6.5 million in 1997. The increase in the net cash used in investing activities during 1999 resulted primarily from the acquisition of Smartflex for $52.7 million which is net of cash acquired in the amount of $18.6 million. Capital expenditures were $8.6 million in 1999, $16.9 million in 1998 and $6.5 million in 1997. 24
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For the year ended December 31, 1999, net cash provided by financing activities amounted to $57.8 million. Net cash used by financing activities amounted to $879,000 in 1998 and $11.4 million in 1997. During 1999, we borrowed a total of $251.6 million to finance our acquisition of Smartflex, a repurchase of our common stock, and working capital requirements in excess of the amount which was financed by our operations. The proceeds from borrowings were partially offset by $164.9 million of debt repayments. In August 1999, we replaced our existing $60.0 million credit facility with a $125.0 million credit facility. Our credit facility is a revolving line of credit which expires in August 2002. On December 31, 1999, the unused amount of this facility was $17.6 million. The Saturn LLC also has a credit facility in the amount of $15.0 million which expires in January 2001. The Saturn LLC has never incurred any borrowings under this facility. We intend to use $ of the proceeds of this offering to reduce indebtedness under our credit facility, and the remainder, if any, will be used for working capital and general corporate purposes. Our need for, and the cost of and access to funds are dependent, in the long-term, on our future operating results as well as conditions external to us. We may require additional financing in connection with our business. We may seek additional funds from time to time through public or private debt or equity offerings or obtaining further bank borrowings or off-balance sheet financing. No assurance can be given that any additional financing will be available on terms satisfactory to us, or at all. In addition, our credit facility imposes restrictions on our ability to increase our financing. Moreover, our desire to maintain our minority business enterprise status, which we believe requires 30% of our common stock to be owned by ethnic minorities, may limit our ability to raise funds through additional equity issuances. We believe that our current sources of liquidity and the net proceeds from this offering will be adequate to support our anticipated liquidity needs for, at least, the next 12 months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to changes in interest rates and foreign currency exchange rates primarily in our cash, debt and foreign currency transactions. We do not hold derivative financial instruments for trading or speculative purposes. Our exposure related to adverse movements in interest rates is primarily derived from the variable rates associated with our credit facility. We have a $125.0 million credit facility which bears interest at variable rates in relation to the outstanding balances. At December 31, 1999, the interest rate on $90.0 million of the outstanding balance of $107.4 million under the credit facility was 8.4%, and the interest rate of the remainder of the borrowings was 8.75%. Based upon the outstanding balances relating to this facility, an increase of one percent in the interest rates would cause a corresponding increase in interest expense of approximately $1.1 million on an annual basis. The foreign currencies to which we have exchange rate exposure are the Mexican peso, the Philippine peso and the Singapore dollar. Foreign currency transaction gains (losses) were not material during the three years ended December 31, 1999. Future changes in interest rates and foreign exchange rates could potentially have a material adverse effect on our financial position. 25
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BUSINESS OVERVIEW We are a global provider of value-added electronics manufacturing services, or EMS, to OEMs and their suppliers. We provide these services to customers primarily in the automotive, communications, computer and military end markets. We have proven expertise in providing services in connection with electronics, electromechanical and electrical products to diverse companies including industry leaders such as DaimlerChrysler, Ford, General Dynamics, Hewlett-Packard, Hughes, IBM and Motorola. The EMS industry is growing rapidly, primarily as a result of the increasing reliance of OEMs on outsourcing. As the electronics content in commercial and consumer goods grows, OEMs are increasingly outsourcing their design and engineering, materials management, manufacturing and assembly, testing and fulfillment services to EMS providers in order to focus on their core competencies. We offer OEMs integrated, cost-effective solutions that are responsive to their outsourcing needs. Our broad range of services includes: - design and engineering; - materials management; - manufacturing and assembly; - testing and qualification; - fulfillment; and - after-sales support. Our manufacturing facilities are generally located in regions that offer proximity to our customers or lower manufacturing costs. Presently we have 12 manufacturing facilities in the United States, Mexico and the Philippines. We offer a broad range of manufacturing services from low-volume/high-mix to high- volume/low-mix manufacturing, using advanced technologies such as surface mount technology, or SMT. To better target customers and serve the needs of different end markets, we have strategically aligned our business into three segments: electronics, electromechanical and electrical. In recent years, we have significantly grown by engaging in strategic alliances and acquisitions. For example, in March 2000, we entered into a strategic outsourcing alliance with Motorola pursuant to which we became a preferred EMS provider to its IESS. As a preferred EMS provider, we have the opportunity to participate in requests for quotations, bids or other opportunities to provide manufacturing and related services to IESS, subject to our being competitive in price and quality. We believe that this strategic outsourcing alliance could generate significant business opportunities for us over the next few years. In addition, our August 1999 acquisition of Smartflex enabled us to broaden our service offerings, significantly increase our scale of operations, expand our base of customers to the communications and computer end markets and enhance our geographic presence. We intend to continue our expansion in the rapidly growing EMS industry by: - building strategic outsourcing alliances; - targeting an increasingly diverse customer base in high-growth end markets; - leveraging our design and engineering capabilities; - expanding our global presence; - pursuing selective acquisitions; and - seeking additional minority business enterprise opportunities. 26
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ELECTRONICS MANUFACTURING SERVICES INDUSTRY The EMS industry is comprised of businesses that provide a range of manufacturing services to OEMs and their suppliers. The industry has experienced rapid growth in the past several years and is expected to continue growing rapidly. TFI estimates that from 1994 to 1999 overall EMS industry revenue grew from approximately $25 billion to $73 billion. TFI forecasts that overall EMS industry revenue will grow 20% annually from 2000 through 2003, to approximately $149 billion. The growth in the EMS industry is being fueled, in part, by the expansion of the broader electronics industry. The electronics content of many of today's commercial and consumer products has increased dramatically in recent years, and the nature of electronics content has shifted toward complex, high-density assemblies. As the amount of electronics content has grown, OEMs have been increasingly using EMS providers to outsource their internal manufacturing capacity, as well as other services, such as design, engineering, assembly, testing, qualification and fulfillment, primarily in order to: - accelerate time-to-market and time-to-volume production; - benefit from EMS providers' materials management and logistics expertise; - reduce capital investment in manufacturing; - access advanced technologies in product design and manufacturing processes; and - focus resources on core competencies, such as research and development and sales and marketing. TFI forecasts that OEMs will increasingly outsource more complex services and products, with the communications and computer end markets representing the largest growth opportunities. These markets are characterized by rapidly changing technologies and shortening product life cycles. We believe that these trends will favor EMS providers having scale, a global presence, broad service offerings and advanced technological capabilities. We believe that we are well positioned to benefit from these EMS industry trends. OUR STRATEGY Our objective is to continue to strengthen and expand our position as a value-added EMS provider. Our strategy to achieve this objective is comprised of the following key elements: Build Strategic Outsourcing Alliances We believe that our ability to provide an integrated range of services to OEMs, beginning at the product design stage and continuing throughout the production process, enables us to develop close customer relationships. We work closely with our customers at the earliest stages of design to optimize product manufacturability and quality. We then coordinate closely with them to anticipate product delivery timetables and volume requirements. We believe that the relationships we develop throughout this process position us to provide additional services or attract additional programs from existing customers. Our ability to provide value-added services through our extensive design, engineering and global manufacturing capabilities make us an attractive strategic outsourcing alliance partner. For example, as a result of our existing business performance with Motorola and our capability to provide value-added services, we recently became a preferred EMS supplier to Motorola's IESS. In addition, we identify and enter into strategic outsourcing alliances with emerging companies that we believe have the potential to develop next-generation products. We help bring these products to market by providing extensive design, engineering and other value-added services in exchange for preferred manufacturing rights for these products. Examples include our strategic outsourcing alliance with an emerging company for the design and production of digital x-ray detectors, and our strategic outsourcing alliance with an emerging communications company for the design and production of high-efficiency power supplies for communications OEMs. 27
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Target a Diversified Customer Base in High-Growth End Markets We intend to further enhance our long-term growth prospects by continuing to diversify our customer base, particularly in high-growth end markets such as communications and medical. These markets are characterized by technology-driven products that are subject to rapid technological advances and shortening product life cycles, as well as accelerated time-to-market and time-to-volume requirements. We believe that our value-added design and engineering services and global manufacturing capabilities enable us to serve customers effectively in these end markets. We also target high-growth opportunities in mature markets such as the automotive industry. We believe that we are well positioned to benefit from this development because of our electronics capabilities and our traditional strength in serving the largest automobile manufacturers. Leverage Our Design and Engineering Capabilities We believe that EMS providers seeking to build long-term customer relationships must be able to provide a broad range of capabilities. Proven design and engineering expertise is often the first of these requirements. We employ over 150 design engineers, manufacturing engineers and technicians, and have developed a significant number of patents as well as unpatented proprietary processes and design capabilities. Our design and engineering work has yielded innovative products and processes and is critical to customer retention and new business generation. We intend to continue to focus our design and engineering capabilities on developing new proprietary intellectual property, which enables us to improve our margins and positions us to provide additional value-added services. We also intend to continue leveraging Lear's design and engineering capabilities in connection with our electrical business segment. Our process engineering team begins to work closely with our design engineers at the concept stage to deliver products that have been simultaneously engineered for functionality and manufacturability. We believe that this parallel and integrated approach gives us a competitive advantage, as some of our competitors do not provide these services. We believe that these capabilities reduce development costs for OEMs and accelerate the time-to-market of their products. We plan to continue to provide our design and engineering expertise to strengthen existing, and build additional, strategic outsourcing alliances. In addition, we intend to obtain new business by capturing system integration opportunities. As one of the few EMS providers that has capabilities in all three of the electronics, electromechanical and electrical business segments, we are able to provide complete system solutions, for which we typically attain higher margins. For example, we are currently providing prototypes of a complex exhaust emission reduction device which uses components from all three of our business segments. Expand Our Global Presence OEMs increasingly seek EMS providers with a global presence in order to accelerate time-to-market for their products and obtain lower production costs. We currently have 12 manufacturing facilities in the United States, Mexico and the Philippines, and an engineering and sales operation in Singapore. We intend to establish new, or expand our existing, facilities worldwide. We believe that having a global presence enables us to reduce our production costs, procure components more efficiently, accelerate time-to-market and meet local content requirements. Pursue Selective Acquisitions We intend to continue to expand through the acquisition of companies with complementary product lines, advanced technologies and worldwide facilities. We may acquire entire companies or selected assets, 28
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including captive manufacturing assets of OEMs. We intend to pursue acquisitions that offer one or more of the following advantages: - opportunity to increase our base of Fortune 100 customers and other large international customers; - expansion into existing or new high-growth end markets; - advanced technology; - additional manufacturing capacity; and - additional global presence. Seek Additional Minority Business Enterprise Opportunities We believe that we are the largest minority business enterprise in the EMS industry. Our minority business enterprise status generally offers us a significant competitive advantage for our business. A number of current and potential customers have announced their commitment to increase the amount of purchases from minority business enterprises. For example, DaimlerChrysler, Ford and GM have executed a Memorandum of Understanding with the Small Business Administration by which they collectively committed to purchase up to nearly $8.8 billion of automotive parts from minority business enterprise suppliers in 2000. In addition, a number of communications industry leaders are increasingly encouraging communications OEMs to increase their minority business enterprise supplier content. We are currently one of the few minority business enterprises in the EMS industry that is capable of offering services and products in each of the electronics, electromechanical and electrical business segments. As a result, we believe that we are well positioned to benefit from these commitments. OUR STRATEGIC OUTSOURCING ALLIANCES AND ACQUISITIONS We were founded in 1985, primarily as an engineering design company, by Wallace K. Tsuha, Jr., our chairman, chief executive officer and president. Since then, we have grown significantly and have expanded our service offerings, in part, by entering into strategic outsourcing alliances and engaging in business acquisitions. For example, in March 2000, we entered into a strategic outsourcing alliance with Motorola pursuant to which we became a preferred EMS provider to Motorola's IESS. As a preferred EMS provider, we receive the opportunity to participate in requests for quotations, bids or other opportunities to provide manufacturing and related services to IESS, subject to our being competitive in price and quality. As part of this transaction, Motorola received a warrant to purchase 1,565,331 shares of our common stock, representing approximately % of our outstanding common stock after this offering, at an exercise price equal to 90% of our initial public offering price. For every $100.0 million that we receive from Motorola for services rendered, 10% of the shares subject to this warrant will become exercisable immediately, otherwise the warrant is exercisable between March 2004 and March 2005. We believe that this strategic relationship could generate significant business opportunities for us over the next few years. In August 1999, we acquired Smartflex, a high-technology product design and precision EMS provider based in Tustin, California. Through this acquisition, we gained full-service electronics capabilities and we: - increased our base of Fortune 100 customers to include companies such as Hewlett-Packard, Motorola and IBM; - expanded into new and high-growth end markets, such as the communications and computer markets; - gained access to advanced manufacturing technology; 29
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- increased our manufacturing capacity; and - enhanced our geographic presence by adding facilities in Mexico, the Philippines and Singapore. In February 1998, we entered into a strategic alliance with United Technologies Automotive, now Lear Corporation. This alliance took the form of a jointly owned limited liability company, referred to as the Saturn LLC, in which we own a 53% interest. The Saturn LLC, which constitutes our electrical business segment, manufactures battery cables, wire harnesses, ground straps, trailer tow harnesses, electrical distribution systems and complete vehicle wiring systems. We provide our management and administrative services, in addition to manufacturing and materials management expertise, to the Saturn LLC, while Lear provides design and engineering services. Effective October 1994, we acquired three affiliates of MascoTech. As a result of this transaction, MascoTech became our second largest shareholder. MascoTech currently holds approximately 36% of our outstanding common stock and, after the offering, will hold approximately % of our outstanding common stock. This acquisition substantially expanded our electromechanical business. OUR SERVICES We offer our customers integrated, cost-effective EMS solutions that are responsive to their outsourcing needs. Our broad service offerings include the following: - design and engineering; - materials management; - manufacturing and assembly; - testing and qualification; - fulfillment; and - after-sales support. At the core of our services is a multi-disciplinary team consisting of designers, engineers, manufacturing managers, quality management personnel, procurement representatives, and sales organization members coordinated by program managers. By working closely with our customers, we are able to focus on meeting their timelines and cost, quality and other requirements. By focusing on customer needs and involving our diverse capabilities at all stages of a product's cycle, we believe that we are able to reduce costs, accelerate time-to-market, time-to-volume production and increase overall product quality. Design and Engineering We currently employ over 150 design engineers, manufacturing engineers and technicians to provide design and engineering services to our customers. We focus on concept development, product design and engineering and advanced manufacturing engineering for our electronics and electromechanical business segments. Our electrical business segment, through the Saturn LLC, leverages Lear's engineering and design capabilities on an as-needed basis. We focus our efforts on enhancing existing product lines as well as developing new products for our customers. We offer design and engineering services to develop a working product from an initial concept. Our process engineering team works closely with our design engineers from the concept stage to deliver products that have been simultaneously engineered for functionality and manufacturability. These services ensure that products meet their functional specifications and can be manufactured efficiently and economically. Our engineers use sophisticated computer-aided design tools to improve the efficiency of the design process and enhance design quality. We also build and test working product samples, or prototypes, to test and refine our design and engineering specifications. We then validate prototypes under operating conditions. 30
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We believe that we have the design and engineering capabilities needed to develop innovative products that, in many instances, offer substantial advantages over our competitors' products. For example, we believe that our patented variable force solenoids are smaller, less expensive and possess better operating functionality than our competitors' products. We believe that this enabling technology will allow us to win subassembly programs. Materials Management We provide a wide array of materials management services for our customers including materials planning, procurement, inventory management and handling services. In cases where we have product design responsibility, our early involvement in the design and engineering process allows us to assist in the selection of components and suppliers to enhance manufacturability and logistical support for product lines. We use an extensive supplier qualification process to help ensure that our suppliers meet our quality and delivery standards. We also leverage our position as a value-added EMS provider and work with our customers to obtain better pricing from our suppliers. Manufacturing and Assembly We have a full range of advanced electronics, electromechanical and electrical manufacturing and assembly capabilities. Our assembly and manufacturing capabilities for electronics and electromechanical products include high-volume full automation, low-volume/high-mix production and high-volume manual processes. Our electronics manufacturing and assembly services include the production of printed circuit board assemblies and electronic subassemblies as well as final systems box-build. Our electromechanical operations produce a wide range of products such as solenoids, actuators, relays and junction blocks. Our electrical manufacturing services include wire cutting and stripping, die cast and injection molding, and manual harness assembly. Our 12 manufacturing facilities located in the United States, Mexico and the Philippines enable us to reduce our costs and source our products globally. Our manufacturing technologies in the electronics segment include advanced SMT and direct chip attach technologies. SMT is a method of affixing electronic components, including integrated circuits, onto the surface of printed circuit boards. The very fine lead-to-lead spacing in SMT uses a significantly more precise manufacturing process than traditional manufacturing methods. SMT allows printed circuit boards to interconnect integrated circuits in density greater than traditional processes. This greater density permits tighter component spacing and, as a result, reduces the size of printed circuit boards. Greater density also improves product functionality. Our precision SMT allows an even more precise placement of miniaturized components onto printed circuit boards, leading to reduced size and increased functionality. In addition, we use grid array and micro ball grid array SMT technologies, which use small balls of solder, instead of the traditional leads, to pre-package several electronics components into one package, which is then assembled onto a printed circuit board. As a result, fewer individual components need to be attached to the printed circuit board, providing improved electrical performance, higher input/output capabilities, better assembly yields and lower cost. We also offer direct chip attach technology, which creates enhanced performance by attaching bare, unpackaged components onto printed circuit boards. Our flexible circuit technology allows us to mount components within precise parameters to flexible printed circuit boards, leading to higher density packaging. Our electromechanical manufacturing process involves fully automated manufacturing lines. We use closed loop feedback, which measures the efficiency and accuracy of the manufacturing process and enables automated management of our process. We also use semi-automated equipment and manual assembly for certain products. Our electronics and electromechanical advanced manufacturing technologies and processes enable us to offer a broad range of services to our customers, including: - High-Volume Production. We generally perform the design and engineering services and initial manufacturing of our products in the United States. Once a product is ready for high-volume production, we typically transition the manufacturing to our highly-automated, state-of-the-art 31
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facilities in Mexico and the Philippines to minimize our production costs. However, some high-volume electromechanical products are produced at our facilities in the United States. - Low-Volume/High-Mix Production. We offer precision manufacturing capabilities for complex products involving highly complicated designs and lower production volumes through some of our facilities in the United States. We are able to manufacture a variety of products for a number of customers on the same production line. - Box-Build/Complete System Assembly. We assemble final products or complete systems from various subassemblies, modules and components. We manufacture a wide range of state-of-the-art final products for applications in the automotive, communications, computer and military end markets. This allows our customers to reduce their number of suppliers. Our electrical manufacturing processes include automated wire cutting and stripping, injection molding, die cast molding and manual harness assembly. By using cost-effective manufacturing processes, we are able to provide our customers with competitively priced products. We believe that we have achieved significant productivity improvements by streamlining our manufacturing processes, reducing floor space requirements, minimizing inventory and implementing automated systems. We control costs and maintain quality by using quality operating system goals to measure performance criteria such as customer returns, supplier rejects, scrap, training and cost of quality in each manufacturing plant. We also reduce costs by using electronic information and order exchange, a master production scheduling system and repetitive manufacturing cycles, rather than build-to-order cycles. All of our manufacturing facilities are certified by independent organizations. Our manufacturing facilities serving the communications, computer, military and other non-automotive end markets are registered under ISO 9001 or ISO 9002, a set of standards published by the International Standardization Organization and used to document, implement and demonstrate quality management and assurance systems in design and manufacturing. As part of the ISO 9001 and ISO 9002 registration process, we have developed quality systems manuals and internal systems of quality controls and audits for each facility. Although ISO 9002 registration is of particular importance to companies in the European Community, we believe that domestic OEMs are increasingly requiring ISO 9002 registration of suppliers. All of our manufacturing facilities serving the automotive market are registered under QS 9000, a set of standards published by our automotive customers, which is used to document, implement and demonstrate quality management and assurance systems in a manner similar to ISO 9001 and ISO 9002. When applicable, the products we manufacture are BellCore, British Approval Board for Telecommunications and Underwriters Laboratories compliant. These qualifications establish product standards for quality, manufacturing process control and documentation and are required by many OEMs. Testing and Qualification We typically conduct product validation testing and production testing to ensure that our products meet our customers' operating and quality requirements. Product validation testing is conducted as part of our engineering development activities. We perform this testing to ensure that the product under development meets customer requirements. This testing includes heat, cold, humidity, vibration, thermal shock, mechanical shock, salt spray and dust testing. Durability testing is also conducted by submitting the product to many cycles of typical operating conditions. Production testing consists of in-process testing and end-of-line testing to verify that products are manufactured properly and meet product specifications. In the communications end market, we provide development test services that help our customers develop their products to meet FCC requirements. We believe that our expertise in this field shortens the FCC approval process. In the medical end market, we provide services to help our customers comply with the FDA approval process and the Quality Systems Regulations. 32
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Fulfillment In order to respond more rapidly to the market demands of our customers, we offer delivery programs designed with the flexibility to ship products directly to an OEM's customer. Under these programs, we package products to the customer's specifications with appropriate product documentation and manage the logistics of delivery. After-Sales Support We offer a wide range of after-sales support services, which are tailored to meet customer requirements, including field failure analysis, product upgrades, repair and engineering modification. Our quality engineers provide on-site after-sales support by helping customers use our products correctly. They also collect customer feedback and work with our in-house engineers and other staff to incorporate improvements and customer suggestions into the products we manufacture. In addition, our plant-based teams are responsible for addressing all customer manufacturing issues to ensure continuity through a product's life cycle. Our continuous improvement support teams also offer our customers support from our in-house engineers to improve product reliability. We believe that these efforts have produced warranty reductions and cost savings for our customers. The success of our continuous improvement support teams is exemplified by DaimlerChrysler's awarding us its Role Model of the Year for Continuous Improvement Award in 1999 in connection with our minivan junction block product. OUR BUSINESS SEGMENTS To better serve the needs of different end markets, we have organized our operations into three business segments: electronics, electromechanical and electrical. We believe that this organization allows us to better target customers due to differences in manufacturing processes, customer expectations, technologies, bidding processes and product life cycles for each segment. Our electronics segment represented approximately 32% of our net revenue in 1999. Through this business segment, we provide services to our customers, primarily in the automotive, communications and computer end markets, in connection with the following products: - Printed Circuit Assemblies -- Using our precision manufacturing technology, we assemble printed circuit assemblies by placing various components onto pre-manufactured printed circuit boards. - Flexible Printed Circuit Assemblies -- Using our precision flexible circuit capabilities we assemble various products including hard disk drives, smart battery packs, flexible sensors and assemblies that require limited space. - Complete System Assembly -- We assemble a wide variety of final products by building entire electronic systems from various subassemblies, modules and components. Our products include complete systems, such as Internet service provider switches for video, data and voice; complete industrial control systems; and position locators for wireless communications equipment. Our electromechanical segment represented approximately 54% of our net revenue in 1999. Through this business segment, we provide services to our customers, primarily in the automotive end-market, in connection with the following products: - Junction Blocks -- Junction blocks are power distribution centers for motor vehicles. Currently we manufacture these products for use in full size trucks, sport utility vehicles and mini-vans. - Relays -- Relays are electrical switches that turn power on and off using low voltage electrical signals. - Actuators -- Actuators transform electrical or vacuum power into linear or rotational motion using a motor. We manufacture a number of actuators, including innovative patented devices. - Solenoids and Transmission Modules -- Solenoids transform electrical power into magnetic flux and then into linear motion. We supply solenoids for use in a number of vehicles and applications. We 33
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intend to expand our solenoid business by expanding our production of transmission modules. Transmission modules integrate solenoids, sensors and wiring or flex circuit interconnects with other devices to perform complete electronic transmission shifting control. Our electrical segment represented approximately 14% of our net revenue in 1999. Through the Saturn LLC, we provide services to our customers, primarily in the automotive end market, in connection with the following products: - Battery Cables -- Battery cables are used to distribute electricity between different components of a vehicle. We currently sell a wide range of battery cables, including die cast and stamped cables. - Niche Harnesses -- Niche harnesses include cable and harness assemblies, such as trailer tow kits and ground straps. - Electrical Distribution Systems -- Electrical distribution systems consist of the wiring harness that is used to transmit signal and power from a battery to functional components of a motor vehicle. We offer a number of electrical distribution systems, including complete wiring systems. You should read note 12 of our consolidated financial statements included elsewhere in this prospectus for financial information regarding our business segments and geographic areas. OUR CUSTOMERS We serve a wide range of customers, from emerging-growth enterprises to Fortune 100 companies, primarily in the automotive, communications, computer and military end markets. Although historically most of our sales have been to automotive OEMs, our acquisition of Smartflex provides us with a significant platform in the communications and computer end markets. We expect that our customer base in those markets will represent an increasingly large proportion of our net revenue in the near future. We currently provide services to over 25 customers, including the following: [Download Table] Automotive Communications Computer Military ---------- -------------- -------- -------- DaimlerChrysler FVC.com Hewlett-Packard General Dynamics Exemplar Motorola IBM Hughes Ford Sierracom Iomega General Motors True Position Iris Graphics DaimlerChrysler accounted for approximately 31% of our net revenue in 1999, 40% of our net revenue in 1998, and 45% of our net revenue in 1997. Ford accounted for approximately 19% of our net revenue in 1999, and 10% of our net revenue in 1998. In addition, General Motors accounted for approximately 14% of our net revenue in 1997. Our top ten customers accounted for approximately 68% of our net revenue in 1999. We expect to continue to depend on a core group of customers for a substantial portion of our net revenue in the future. We cannot assure you that our significant customers will continue to purchase services and products from us in the future or that they will not reduce or delay the amount of services and products they purchase from us. Any reduction or delay in orders from our customers could have a material adverse effect on our business, financial condition or results of operations. In addition, a majority of our accounts receivable outstanding at any given time are owed by our significant customers. The inability of one or more of our significant customers to pay for the services and products we provide, due to insolvency or otherwise, could have a material adverse affect on our business, financial condition or results of operations. SALES AND MARKETING We seek to develop close, long-term relationships with our customers by working with them throughout the design and engineering, materials management, manufacturing and assembly, testing and qualification, fulfillment and after-sales support processes. EMS providers generally must perform satisfactorily on a trial basis prior to obtaining significant orders from an OEM. As a result, we seek to develop these close relationships with customers during the initial product design and development stage. 34
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We then support our existing customer relationships through a comprehensive staff of program managers dedicated to individual customer accounts. Program managers are responsible for the development of our manufacturing relationship with our customers, including the allocation of our resources to meet customers' requirements. We market our services primarily through a direct sales force, and to a lesser extent, through independent sales representatives. We rely on our direct sales team to respond to the needs of existing customers and targeted new accounts, and rely on independent sales representatives to obtain additional new business. In addition, we attend trade shows in which there is a focused customer and industry presence. We also undertake media relations efforts to encourage the publication of articles featuring our company and our services in trade journals and other publications. OUR SUPPLIERS Our business segments typically negotiate purchase orders directly with suppliers, and to a lesser extent, through independent distributors, that have demonstrated timely delivery, quality products, responsiveness and competitive prices. We use a standardized rating system to more effectively evaluate these suppliers. Most of the components used by our business segments are available from numerous sources. Even so, we rely on a limited number of suppliers for some proprietary and other components. In addition, some of our electronics products require one or more components for which there is a limited supply and, in some instances, our supplier is also a competitor. Delivery problems relating to components purchased from any of our key suppliers could have a material adverse effect on our financial performance. From time to time, our electronics suppliers allocate components among their customers in response to supply shortages. For example, the recent upsurge of demand for cellular wireless products has created an electronics industry-wide shortage of certain SMT components such as tantalum capacitors. As a result, we are required to make continual spot buys of these components in an attempt to have the components on hand to meet customer requirements. COMPETITION While the competitive challenges we face differ across our business segments, the EMS industry is highly competitive. A number of our current and potential competitors have substantially greater manufacturing, financial, technical, marketing and other resources, and offer a broader line of services, than we do. In addition, many of our competitors have a broader geographic presence than we have. To the extent we do not provide timing or technological advantages over our competitors, we are likely to experience increased price competition or loss of market share. Increased competition could also result in reduced prices, reduced margins or loss of market share, any of which could materially adversely affect our business, financial condition or results of operations. We also face competition from the manufacturing operations of our current and potential OEM customers, which we believe continue to evaluate the merits of manufacturing internally, and from foreign EMS providers. Significant competitive factors in the EMS industry include quality, price, ability to enhance time-to-market and time-to-volume production, manufacturing capacity, test capabilities and design and engineering expertise. Our electronics business segment competes with a number of large EMS companies including ACT Manufacturing, Benchmark Electronics, C-MAC Industries, Celestica, Flextronics International, Jabil Circuit, Innovex, Parlex, Pemstar, Plexus, SCI, Siemens and Solectron. We have also experienced competition from head stack assemblers, which primarily assemble products that attach to flexible circuit assemblies. We expect our electronics business segment to encounter future competition from other large electronics manufacturers. The markets served by our electrical and electromechanical business segments are also served by large, well established companies including Borg-Warner Automotive, Delphi Automotive, Eaton Corporation, Robert Bosch, Siemens, TRW and Yazaki North America. We expect our electrical and electromechanical business segments to encounter future competition from other large electrical and electromechanical businesses. 35
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INTELLECTUAL PROPERTY We have been granted 39 domestic patents and have applications pending for an additional 16 domestic patents. In addition, we have been granted 14 patents, corresponding to our U.S. patents, in various foreign jurisdictions. Although we believe that, taken together, our patents are significant, the loss or expiration of any particular patent would not, in our opinion, be material to us. We also possess significant non-patented proprietary information related to our manufacturing processes, engineering processes and other trade secrets and intellectual capital that forms a substantial foundation for our business activities. REGULATIONS Environmental and Health and Safety Laws Our operations are regulated under a number of federal, state, local and foreign environmental and health and safety laws and regulations, which govern, among other things, the use, storage, treatment, discharge and disposal of hazardous chemicals and substances used in our manufacturing processes. In addition, because we are a generator of hazardous wastes, we, along with any other person who arranges for the disposal of our hazardous wastes, may be subject to potential financial exposure for costs associated with investigation and remediation of sites at which we have arranged for the disposal of hazardous wastes, if such sites become contaminated, even if we fully comply with applicable environmental laws. Moreover, such liabilities or sanctions may be imposed without regard to the legality of our original conduct and without regard to whether we knew of, or were responsible for, the presence of such hazardous or toxic substances. Also, such liability may be joint and several with other parties. If the liability is joint and several, we could be held responsible for payment of the full amount of the liability, whether or not any other responsible party is also liable. In the event of a violation of environmental laws, we could be held liable for damages, penalties, sanctions and the costs of remedial actions and also could be subject to revocation of our permits. Any such revocations could require us to cease or limit production at one or more of our facilities, thereby having a material adverse effect on our operations. Environmental and health and safety laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, which could have a material adverse effect on business, financial condition or our results of operations. In addition, compliance with such laws and regulations could restrict our ability to expand our facilities or require us to acquire costly equipment or to incur other significant expenses. We believe that we are in material compliance with all existing applicable environmental and health and safety statutes and regulations. Additional Laws Many of our communications end market customers are subject to regulation by the Federal Communications Commission, or the FCC, the European Union and other federal, state and foreign governmental and non-governmental authorities. The failure of our current or potential communication end market customers to meet certain FCC or similar requirements could result in the non-approval, recall or discontinuation of their products and could substantially reduce or eliminate their demand for our services. The failure of our current or potential communications end market customers to meet such requirements could significantly reduce an area of anticipated revenue growth, resulting in a material adverse effect on our business, financial condition or results of operations. In addition, although our sales to the medical end market currently constitute a small portion of our net revenue, we intend to increase our sales to this end market. The design, development, testing, manufacture, production and sale of medical devices are subject to extensive regulation by the Food and Drug Administration, or the FDA, and other federal, state and foreign authorities. Noncompliance with applicable requirements can result in a device not being cleared or approved for sale, product recalls, fines and other significant regulatory, civil or criminal actions. Medical device manufacturers are also subject to strict federal regulations regarding the design, development, manufacture, packaging and labeling of medical devices known as the Quality System Regulations, formerly Good Manufacturing Practices. If the 36
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FDA determines that we or our medical customers fail to meet such FDA and similar regulatory requirements, the FDA could institute regulatory proceedings or product recalls, assess penalties or take other significant actions. The failure of our current or potential medical end market customers or us to obtain or maintain FDA approvals and maintain compliance with the Quality System Regulations, therefore, could substantially reduce their demand for our services, reducing an area of anticipated revenue growth. This could have a material adverse effect on our business, financial condition or results of operations. BACKLOG We do not generally obtain long-term, firm purchase orders from our communications, computer, military and other non-automotive customers. Rather, these customers place orders for delivery within 30 to 90 days. Our automotive customers typically place annual blanket purchase orders, but these orders do not obligate them to purchase any specific or minimal amount of products from us until a release is issued by the customer under the blanket purchase order. Releases are typically placed within 30 to 90 days of required delivery and may be canceled at any time, in which case the customer would be liable for work in process and finished goods. We do not believe that our backlog of expected product sales covered by firm purchase orders is a meaningful indicator of future sales since orders may be rescheduled or canceled. EMPLOYEES As of February 29, 2000, we employed a total of 3,981 persons. We have no collective bargaining contracts other than in Mexico where we have 2,272 employees, where collective bargaining agreements are required by law. Our collective bargaining agreements covering our facilities in Juarez and Monterrey, Mexico are subject to renegotiation in 2002, and the agreements covering our employees in Guadalajara, Mexico are subject to renegotiation in September of each year. We have never experienced a work stoppage and believe that our relations with our employees are good. LEGAL PROCEEDINGS From time-to-time, we are subject to claims or litigation incidental to our business. We are not currently involved in any legal proceedings that, individually or in the aggregate, are expected to have a material effect on our business, financial condition or results of operations. FACILITIES Our operations are conducted in a number of owned and leased facilities. We believe that these facilities are sufficient for our activities as currently conducted. Our significant facilities are as follows: [Enlarge/Download Table] LOCATION OWNED/LEASED SIZE (SQ./FT.) BUSINESS SEGMENT ACTIVITIES -------- ------------ -------------- --------------------------- Auburn Hills, MI................. Leased 68,000 Corporate headquarters; Design and Engineering; Electronics Manufacturing Coopersville, MI................. Owned 40,000 Electromechanical Manufacturing Fremont, CA...................... Leased 42,000 Electronics Manufacturing Hudson, NH....................... Leased 33,200 Electronics Manufacturing Marks, MS........................ Leased 45,000 Electromechanical Manufacturing Oxford, MI....................... Owned 62,000 Electromechanical Manufacturing Rocky Mount, NC.................. Owned 88,000 Electromechanical Manufacturing Santa Clara, CA.................. Leased 11,500 Electronics Design and Engineering Tustin, CA....................... Leased 37,000 Administration/Electronics Design and Engineering Juarez, Mexico................... Owned 140,000 Electrical Manufacturing 37
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[Enlarge/Download Table] LOCATION OWNED/LEASED SIZE (SQ./FT.) BUSINESS SEGMENT ACTIVITIES -------- ------------ -------------- --------------------------- Juarez, Mexico................... Leased 138,500 Electrical Manufacturing Monterrey, Mexico................ Owned 70,000 Electromechanical Manufacturing Monterrey, Mexico................ Leased 55,000 Electronics Manufacturing Cebu, Philippines................ Leased 40,000 Electronics Manufacturing Singapore........................ Leased 11,000 Asia Business Development Center; Electronics Engineering We also provide manufacturing services at an OEM-owned facility in Guadalajara, Mexico. The terms of most of our leases expire between 2002 and 2004, and most of our leases have options to renew for between one and five years. 38
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MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth our executive officers and directors, their ages and the positions they currently hold: [Enlarge/Download Table] NAME AGE POSITION ---- --- -------- Wallace K. Tsuha, Jr.(1)................... 56 Chief executive officer, president and chairman of the board Donald J. Cowie............................ 53 Chief financial officer, executive vice president, treasurer and assistant secretary Nick Najmolhoda............................ 42 Executive vice president and general manager, electromechanical business segment Gene R. Smith, Jr.......................... 50 Executive vice president and general manager, electronics business segment William T. Anderson(3)..................... 53 Director David E. Cole(2)........................... 62 Director Sherman L. Cruz............................ 47 Director Forest J. Farmer(3)........................ 59 Director Rick Inatome(2)............................ 46 Director Gary E. Liebl(3)........................... 58 Director --------------- (1) Member of the Nominating Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. Wallace K. Tsuha, Jr., the founder of our company, has served as our chief executive officer and chairman of the board since November 1985. Mr. Tsuha has also served as our president from November 1985 to March 1995, and since December 1995. Prior to founding our company, Mr. Tsuha had over 18 years of EMS business experience in product development, engineering and manufacturing while working at GM, Rockwell and TRW. Mr. Tsuha is the brother of Sherman L. Cruz, one of our directors and a consultant to our electronics business segment. Donald J. Cowie has served as our executive vice president, chief financial officer, treasurer and assistant secretary since 1996. Prior to joining us, he was a group vice president -- OEM from 1993 through 1995, and vice president -- finance & administration from 1988 through 1993, at International Jensen, a manufacturer of automotive and consumer electronics products. Nick Najmolhoda has served as our executive vice president and general manager of our electromechanical business segment since September 1999. He also served as our executive vice president -- operations from February 1996 to September 1999. He joined us as group vice president -- electromechanical in March 1995, following our acquisition of MascoTech Controls. While at MascoTech Controls, Mr. Najmolhoda served as executive vice president of operations for the Coopersville facility and vice president of sales & marketing for the Rocky Mount and Coopersville facilities from May 1992 until our acquisition of MascoTech. Gene R. Smith, Jr. has served as our executive vice president and general manager of our electronics business segment since November 1999. Mr. Smith served as our executive vice president of business management from December 1996 through November 1999. From February 1996 through June 1996, Mr. Smith served as the president and general manager of the Kenmar Business Group, an electronics contract manufacturing company. Mr. Smith worked as an electronics industry consultant for us and others from July 1996 through December 1996. 39
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William T. Anderson has served as our director since March 1995. Since July 1998, Mr. Anderson has served as a vice president and the controller at MascoTech, an automotive supplier, and one of our significant shareholders. From July 1994 through June 1998, Mr. Anderson served as the vice president of operational accounting at MascoTech. David E. Cole, Ph.D., has served as our director since January 1997. Since 1967, Dr. Cole has been the Director of the Office for the Study of Automotive Transportation and professor of engineering at the University of Michigan. Dr. Cole is also a director of Mechanical Dynamics, a virtual prototyping software company, MSX International, an affiliate of MascoTech to which we sublease a portion of our Auburn Hills headquarters, Thyssen/Krupp U.S., a metals distributor and processor, and Plastech, a plastic automotive products company. Dr. Cole frequently provides consulting services to the automotive industry. Sherman L. Cruz has served as our director since March 1995. Since 1996, Mr. Cruz has served as a financial consultant to various companies, including our electronics business segment, providing consulting services and assisting companies in acquisitions and financial and general management. From 1991 to 1996, Mr. Cruz served as our vice president and chief financial officer. Mr. Cruz is the brother of Mr. Tsuha, our chairman, chief executive officer and president. Forest J. Farmer has served as our director since January 1997. Since 1995, Mr. Farmer has served as chairman and chief executive officer of the Farmer Group, a holding company, and Trillium Teamologies, an information systems and software development company. In 1995, Mr. Farmer co-founded Bing Manufacturing, a manufacturer of assemblies modules for automobile manufacturers and suppliers. Mr. Farmer also served as president of Bing Manufacturing from 1995 to 1999. Mr. Farmer is a director of Lubrizol Corporation, a chemicals company specializing in lubricant additives. Mr. Farmer also serves on the board of directors of American Axle and Manufacturing, a manufacturer of automotive and truck drivetrains and axles. Rick Inatome has served as our director since March 1995. Since September 1999, Mr. Inatome has been the chief executive officer, president and a director of ZapMe!, a satellite-based computer network system providing internet access and aggregated educational content to middle and high schools throughout the U.S. Mr. Inatome served as the chairman of the board of directors of Inacom, a computer leasing company, from January 1980 to September 1999. Mr. Inatome currently serves on the board of directors of Sylvan Learning Systems, Inacom and Atlantic Premium Brands, a food processing company. Gary E. Liebl has served as our director since October 1999. He recently retired from Qlogic, a semiconductor company, where he served as chairman of the board from February 1993 to May 1999. Mr. Liebl was formerly a member of the board of directors of Smartflex and currently serves on the board of directors of Pressure Systems, a diversified aerospace industry company. BOARD OF DIRECTORS COMPOSITION Our amended and restated bylaws provide that our board of directors consists of three to fifteen members. The size of our board is determined by the board and currently consists of seven members. Our board is divided into three classes, each serving three year terms. Each class is to consist, as nearly as possible, of one-third of our directors. One class of our directors stands for election each year as follows: [Enlarge/Download Table] EXPIRATION CLASS OF TERMS MEMBERS ----- ---------- ------- Class I.............................. 2001 Sherman L. Cruz and David E. Cole Class II............................. 2002 Rick Inatome and Forest J. Farmer Class III............................ 2003 Wallace K. Tsuha, Jr., Gary E. Liebl and William T. Anderson Mr. Anderson, an officer of MascoTech, one of our significant shareholders, was appointed to our board pursuant to a stockholders agreement among us and our shareholders. This stockholders agreement will terminate upon the effectiveness of this offering. This, however, will not affect the length of his term on our board of directors. Our amended and restated articles of incorporation provide that our directors 40
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may be removed only with cause, by vote of the holders of a majority of the shares of the common stock entitled to vote at an election of directors. Approval by at least 80% of our outstanding shares of our common stock is required to amend or repeal these provisions of our amended and restated articles of incorporation and bylaws. To maintain our minority business status after this offering, we believe that at least a majority of our board must consist of ethnic minorities. Messrs. Cruz, Farmer, Inatome and Tsuha are ethnic minorities. Our officers are elected annually by our board of directors and serve at the pleasure of the board. To maintain our ethnic minority status after this offering, we also believe that our chief executive officer must be an ethnic minority. BOARD COMMITTEES Our board of directors has a compensation committee, an audit committee and a nominating committee. The compensation committee, currently composed of Messrs. Cole and Inatome, reviews and approves the compensation of our executive officers, including payment of salaries, bonuses and incentive compensation, determines our compensation policies and programs and administers our stock option plan. The audit committee, currently composed of Messrs. Anderson, Liebl and Farmer, makes recommendations to the board concerning the appointment of independent auditors, reviews our accounting principles, practices and reporting standards, aids management in the establishment and supervision of our internal audits and accounting control systems and reviews the scope and results of audits. The nominating committee consists solely of our chairman, and recommends nominees for election to our board to our shareholders. DIRECTOR COMPENSATION Members of our board of directors who are not employees of our company are paid an annual retainer of $11,500. Nonemployee directors also receive a fee of $950 for each board meeting attended and $850 for each meeting of a committee of the board attended. The chairman of each committee, if a nonemployee, receives $1200 per committee meeting attended. All directors are also eligible to participate in our stock option plan. Directors who are employees of our company receive no compensation for service on the board. All directors, including employees are also reimbursed for their travel and related expenses incurred in connection with board meetings and related activities. LIMITATION OF LIABILITY AND INDEMNIFICATION Michigan law allows the articles of incorporation of a Michigan corporation to contain a provision eliminating or limiting directors' liability to a corporation or its shareholders for money damages for any action taken or any failure to take any action as a director, except for liability for specified acts, and our amended and restated articles of incorporation contain such a provision. In addition, our amended and restated bylaws obligate us to indemnify our directors and officers, and our former directors and officers, to the maximum extent permitted by Michigan law. Our obligation to indemnify such individuals includes indemnification against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service as an officer or director in advance of the final disposition of any covered matter. To be indemnified, the officer or director must have acted, or failed to act, in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our or our shareholders' best interests and he or she must not have derived an improper personal benefit from such actions or omission. To be indemnified in connection with any criminal action or proceeding, a director or officer must have had no reasonable cause to believe his or her conduct was unlawful. Our indemnification obligations extend to claims made against our officers or directors because they acted as an officer or director of another company at our request. We maintain directors' and officers' liability insurance that provides coverage in the amount of $15.0 million. 41
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These provisions may discourage shareholders from bringing lawsuits against our directors for breach of their fiduciary duties. These provisions may also reduce the likelihood of derivative litigation against our directors and officers, even though such action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder's investment may be adversely affected to the extent we are liable for damages awarded against our directors and officers pursuant to these indemnification provisions. We believe that these provisions and the related insurance are necessary to attract and retain talented, experienced directors and officers. At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for indemnification. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Neither of the two directors on our compensation committee has ever been an officer or employee of our company. In addition, none of our executive officers serves as a member of the board of directors or compensation committee of any company that has one or more executive officers serving as a member of our board of directors or our compensation committee. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation we paid in the fiscal year ended December 31, 1999 to our chief executive officer and to our other three executive officers. For ease of reference, we collectively refer to these executive officers throughout this section as our "named executive officers". SUMMARY COMPENSATION TABLE [Enlarge/Download Table] LONG-TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------------- ------------ OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION(1) --------------------------- -------- -------- ------------ ------------ --------------- Wallace K. Tsuha, Jr., $423,600 $150,000 $90,571(2) -- $ 39,728(3) Chairman, chief executive officer and president Gene R. Smith, $170,000 $ 60,000 -- 78,000 $ 1,200 Executive vice president and general manager, electronics business segment Donald J. Cowie, $163,000 $ 50,000 -- 48,000 $ 1,200 Chief financial officer and executive vice president Nick Najmolhoda, $172,800 $ 40,000 -- 48,000 $ 1,200 Executive vice president and general manager, electromechanical business segment --------------- (1) Includes matching contributions of $1,200 made by us under our 401(k) plan. (2) Includes $77,500 paid by us for interest accrued on a promissory note made by Mr. Tsuha in favor of us. (3) Includes a bonus in the amount of $38,528 paid to Mr. Tsuha for constructive income and income taxes pursuant to a split-dollar life insurance policy insuring Mr. Tsuha's life in the face amount of $20.0 million. 42
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OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1999 The following table contains information concerning the stock option grants which were made to our named executive officers in the fiscal year ended December 31, 1999 under our 1995 Management Stock Option Plan, or the 1995 Plan. Only three of those officers were granted options. [Enlarge/Download Table] POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE NUMBER % OF TOTAL APPRECIATION FOR OF SHARES OPTIONS GRANTED OPTION TERM UNDERLYING TO EMPLOYEES EXERCISE PRICE EXPIRATION ----------------- NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE 5% 10% ---- --------------- --------------- --------------- --------------- ---- ---- Donald J. Cowie.......... 48,000 5.5 $3.888 12/31/04 $ $ Nick Najmolhoda.......... 48,000 5.5 $3.888 12/31/04 Gene R. Smith(1)......... 48,000 5.5 $3.888 12/31/04 30,000 3.5 $3.888 12/31/04 --------------- (1) Mr. Smith received an option grant for 48,000 shares on May 14, 1999 and an option grant for 30,000 shares on October 28, 1999. Once the options become exercisable, these options terminate 90 days after the termination of the optionee's employment for any reason other than cause, retirement, death or disability, and one year after the termination of the optionee's employment due to retirement, disability or death or immediately upon termination of the optionee's employment for cause. Options were granted at an exercise price equal to the fair market value per share of common stock on the date of grant as determined by our board of directors. The potential realizable value is calculated based on the option expiration date of December 31, 2004, and with a stock price appreciation at 5% and 10% annual rates as assumed pursuant to rules promulgated by the SEC, and does not represent our prediction of our stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that each option's exercise price appreciates at the indicated rates for the entire term of the option and that the option is exercised at the exercise price, and the share sold, on the last day of its term at the appreciated prices. FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning the year-end number and value of unexercised options with respect to three of our named executive officers. The other named executive officer did not hold any options to acquire common stock from us as of the end of the fiscal year 1999. No options were exercisable in fiscal year 1999 by any of our named executive officers. There was no public trading market for our common stock as of December 31, 1999. Accordingly, the values set forth below have been calculated on the basis of the assumed initial public offering price of $ per share, less the applicable exercise price per share, multiplied by the number of shares underlying the options. [Enlarge/Download Table] VALUE OF NUMBER OF SHARES UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT NAME DECEMBER 31, 1999 DECEMBER 31, 1999 ---- ---------------------- ----------------- Donald J. Cowie......................................... 258,000 $ Nick Najmolhoda......................................... 264,000 Gene R. Smith........................................... 198,000 Our compensation committee can make the options granted under the 1995 Plan exercisable at any time at its discretion, and all options granted under the 1995 Plan will also become immediately exercisable in full upon a change of control of our company. In addition, the options granted under the 1995 Plan may become exercisable over time upon the earlier to occur of the following events: we offer 43
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our shares to the public under a registration statement or we merge with a publicly traded corporation but we do not experience a change of control. STOCK OPTION PLANS 2000 Stock Option Plan Our 2000 Stock Option Plan is designed to enable us to attract and retain qualified officers, directors, employees and consultants and to provide these individuals with an increased incentive to make significant and extraordinary contributions to our long-term performance and growth, by making them eligible to receive awards of stock options. A total of 2,500,000 shares of our common stock have been authorized to date for issuance under the plan. No options have been issued under the plan as of the date of this prospectus. The 2000 Stock Option Plan is administered by the compensation committee of our board of directors. Subject to the provisions of the plan, the compensation committee will determine: - when and to whom options will be granted; - the number of shares covered by each option; - the terms of the options, including the exercise price, although the exercise price for incentive stock options may not be less than the fair market value of our common stock on the date of grant, or 110% of the fair market value if granted to an employee who at the time of the grant owns more than 10% of our outstanding common stock; and - subject to applicable law, whether the options will be incentive stock options or non-qualified stock options. Options granted under the plan will become exercisable at those times and under the conditions determined by the compensation committee. Under the plan, unless the compensation committee otherwise provides, all options held by an option holder will automatically terminate when that person ceases to be an employee, director or consultant for any reason. The compensation committee may interpret the plan and may at any time adopt rules and regulations for the plan as it deems advisable. In determining the persons to whom options will be granted and the number of shares covered by each option, the compensation committee may take into account any factors it deems relevant. Our board of directors may amend or terminate the 2000 Stock Option Plan. However, no change will be effective without the approval of our shareholders if shareholder approval is required by any law, regulation or stock exchange rule. In addition, no change may adversely affect an option previously granted, except with the written consent of the option holder. The plan provides for adjustments to the number of shares and to the exercise price of outstanding options in the event of stock dividends, stock splits, recapitalizations, mergers, statutory share exchanges or reorganizations of or by us, as the compensation committee, in its discretion, deems appropriate. 1995 Management Stock Option Plan We have outstanding under our 1995 Management Stock Option Plan, or the 1995 Plan, options to purchase a total of 2,834,400 shares of common stock. The 1995 Plan will be terminated upon the consummation of this offering and no further options will be granted under the 1995 Plan. However, the options which are now outstanding will continue to be exercisable according to their terms. Our compensation committee can make the options granted under the 1995 Plan exercisable at any time at its discretion, and all options granted under the 1995 Plan will also become immediately exercisable in full upon a change of control of our company. In addition, the options granted under the 1995 Plan may become exercisable over time upon the earlier to occur of the following events: we offer our shares to the public under a registration statement or we merge with a publicly traded corporation but we do not experience a change of control. 44
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CERTAIN TRANSACTIONS In 1995, we loaned to Mr. Tsuha, our chairman, president and chief executive officer, the amount of $1.0 million, bearing interest at a rate of 7.75% per annum due on the earlier March 31, 2002 or 90 days following the effective date of a registration statement of a public offering of our common stock. This loan is evidenced by an amended promissory note made by Mr. Tsuha in our favor and has no principal amortization prior to maturity. Under the terms of Mr. Tsuha's now expired employment agreement, we have paid the quarterly interest payments on this promissory note. Interest on the promissory note amounted to $77,500 each year from 1997 through 1999. Assuming Mr. Tsuha's continued employment with us, we intend to continue to make interest payments on his behalf in the future. In 1999, we sold approximately $6.7 million in services and products to affiliates of MascoTech, one of our significant shareholders. In 1998, we sold approximately $5.1 million and in 1997 we sold approximately $4.2 million of services and products to affiliates of MascoTech. Mr. William T. Anderson, one of our directors, is also a vice president and controller at MascoTech. We have continued to provide services and products to MascoTech during 2000 and intend to continue to do so. Until August 20 1999, we subleased our Auburn Hills, Michigan facility from an affiliate of MascoTech for a total of $273,669. In 1998, we subleased the facility for a total of $453,207 and in 1997 we subleased the facility for a total of $439,774. Pursuant to a sublease agreement dated August 20, 1999, we sublease a portion of our Auburn Hills, Michigan facility to another affiliate of MascoTech. Rental income for this sublease in 1999 was $101,154, however, in March of 2000 the monthly rental was reduced to $4,700 because of a reduction in the amount of leased space. We believe this constitutes fair market rent. We have entered into a consulting agreement with Sherman L. Cruz, one of our directors and the brother of Mr. Tsuha, our chairman, chief executive officer and president. The consulting agreement, which expires on August 31, 2000, provides for a monthly fee of $13,000 paid to Mr. Cruz for administrative services. Mr. Cruz received a total of $144,000 in 1999 pursuant to a similar consulting agreement. In 1998, we paid a total of $54,400 to Mr. Cruz for services and in 1997 we paid a total of $7,550 to Mr. Cruz for such services. In 1999, we purchased $3.0 million of materials from Bitron, an affiliate of World Wide Industrial Invest B.V., or Worldwide, one of our shareholders until April 29, 1999. In 1998 we purchased $6.7 million of materials from Bitron and in 1997 we purchased $5.1 million of materials from Bitron. On April 29, 1999, we purchased from Worldwide 7,435,320 shares of our common stock for $27.0 million. 45
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PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of our outstanding shares of common stock as of March 27, 2000 by: - each person who is the beneficial owner of more than 5% of our outstanding common stock; - each of our directors; - each of our named executive officers; and - all of our directors and executive officers as a group. Unless otherwise indicated below, the shareholders in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Unless otherwise indicated, the address of each shareholder is our principal executive office. [Enlarge/Download Table] SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED BEFORE THIS OFFERING NUMBER OF AFTER THIS OFFERING (1) --------------------- SHARES BEING ----------------------- NAME NUMBER PERCENT OFFERED (1) NUMBER PERCENT ---- ---------- ------- ------------ ----------- -------- Wallace K. Tsuha, Jr.(2)............ 12,403,895 41.7% MascoTech, Inc...................... 10,781,280 36.3 21001 Van Born Rd Taylor, Michigan 48180 Jennifer Tsuha Pelling(3)(5)........ 2,156,105 7.2 2285 Rutherford Road Carlsbad, California 92008 Bank One Trust N.A. ................ 4,400,000 14.8 2155 West Big Beaver Troy, Michigan 48084(4) Sherman L. Cruz (4)(5).............. 4,400,000 14.8 Donald J. Cowie..................... -- -- Nick Najmolhoda..................... -- -- Gene R. Smith, Jr................... -- -- William T. Anderson................. -- -- David E. Cole....................... -- -- Forest J. Farmer.................... -- -- Rick Inatome........................ -- -- Gary E. Liebl....................... -- -- All directors and executive officers as a group (10 persons)........... 16,803,895 56.5 --------------- (1) These numbers assume that the underwriters' over-allotment option is not exercised. Mr. Tsuha is offering shares of common stock and MascoTech is offering shares of common stock in the over-allotment option. Assuming full exercise of the over-allotment option, Mr. Tsuha will own shares of common stock, constituting % of the shares outstanding, and MascoTech will own shares of common stock, constituting % of the shares outstanding. (2) Includes 1,264,307 shares held by the Wallace K. Tsuha Grantor Retained Annuity Trust U/A/D 5/18/98, for which Mr. Tsuha is the trustee and has sole investment and voting power, and includes 11,139,588 shares held by The Wallace K. Tsuha Trust dated 10/14/91. Mr. Tsuha is the brother of Sherman L. Cruz and the father of Jennifer Tsuha Pelling. (3) Includes 1,032,119 shares held by the Wallace K. Tsuha Grantor Retained Annuity Trust U/A/D 9/23/93 and 1,123,986 shares held by the Wallace K. Tsuha Grantor Retained Annuity Trust U/A/D 11/7/94, for which Ms. Pelling is the trustee and has sole voting and investment power. (4) Includes 4,400,000 shares owned by the Tsuha Family Dynasty Trust U/A/D 12/31/91, for which Mr. Cruz and Bank One Trust N.A. serve as co-trustees and jointly share investment and voting power. (5) Ms. Pelling is the daughter of Mr. Tsuha and Mr. Cruz is the brother of Mr. Tsuha. 46
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DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of the offering, the total amount of our authorized capital stock will consist of 200,000,000 shares of common stock, no par value, and 1,000,000 shares of preferred stock, no par value. The following description of our capital stock describes all material provisions of our amended and restated articles of incorporation and bylaws, but does not purport to be complete, and does not give full effect to Michigan statutory or common law. The following is in all respects, qualified by reference to the applicable provisions of the Michigan Business Corporation Act and our amended and restated articles of incorporation and bylaws. As of March 27, 2000, there were six holders of record of our common stock. COMMON STOCK All of our issued and outstanding shares of common stock have been validly issued and are fully paid and nonassessable. The shares of common stock we are offering will be, when paid for, validly issued, fully paid and nonassessable. Subject to the prior rights of the holders of any preferred stock that we may later issue, the holders of outstanding shares of common stock will be entitled to receive dividends out of assets legally available at such time and in such amounts as our board of directors may from time to time determine. The common stock is neither redeemable nor convertible, and holders of common stock have no preemptive or subscription rights to purchase any of our securities. There is no sinking fund provision applicable to our common stock. Upon our liquidation, dissolution or winding up, the holders of common stock will be entitled to receive, on a pro rata basis, our assets that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding. Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of shareholders. There is no cumulative voting in the election of directors. PREFERRED STOCK Our board of directors may, without further action by our shareholders, from time to time, issue shares of preferred stock in a series and may, at the time of issuance, determine the rights, preferences and limitations of each series with respect to, among other things, dividends, redemption and conversion terms and voting rights. We may issue shares of preferred stock with voting, dividend and liquidation rights superior to our common stock, any of which could adversely affect the rights of holders of common stock. Our ability to issue preferred stock, or our actual issuance of preferred stock, could have the effect of discouraging, delaying, deterring or preventing a change of control. Currently there are no shares of preferred stock outstanding, and we have no present intention to issue any shares of preferred stock. ANTI-TAKEOVER LEGISLATION AND PROVISIONS OF OUR ARTICLES AND BYLAWS Chapters 7A and 7B of the Michigan Business Corporation Act may affect attempts to acquire control of a Michigan corporation. Chapter 7A prohibits a Michigan corporation from consummating a "business combination" with an "interested shareholder" unless the proposed business combination is approved by at least 90% of the votes of each class of the corporation's shares entitled to vote and by at least two-thirds of such voting shares not held by the interested shareholder, its affiliates and associates. These requirements do not apply, however, when the interested shareholder satisfies certain price, form of consideration and other requirements and at least five years have elapsed after the person involved became an interested shareholder. In general, under Chapter 7A, business combinations are defined to include certain mergers, substantial sales of assets or securities and recapitalizations between covered Michigan business corporations or their subsidiaries and an interested shareholder. Generally, an interested shareholder is defined as a direct or indirect beneficial owner of 10% or more of the voting power of the corporation's outstanding shares. Our board of directors has the power to elect not to be subject to Chapter 7A as to specifically identified or unidentified interested shareholders. 47
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Generally, under Chapter 7B, an entity that acquires "control shares" of a corporation exercises voting rights with respect to the control shares on any matter only if a majority of all shares, and of all shares that are not "interested shares," of each class of shares entitled to vote as a class, approve those voting rights. In general, interested shares of a corporation are shares owned by employee-directors or officers of the company, or by an entity making a "control share acquisition." Control shares are shares that, when added to those already owned by an entity, would give the entity voting power in the election of directors over any of three thresholds: one-fifth, one-third and a majority of such voting power. If control shares acquired in a control share acquisition are accorded full voting rights and the acquirer of such control shares has acquired a majority of all voting power of the company, Chapter 7B would afford special dissenters' rights to the company's shareholders other than the acquirer, unless otherwise provided in the articles of incorporation or bylaws before the control share acquisition occurs. The effect of the statute is to condition the acquisition of voting control of the company on the approval of a majority of the pre-existing disinterested shareholders. While our amended and restated bylaws currently provide that Chapter 7B does not apply to us, our board of directors may amend the bylaws to make Chapter 7B apply to us. In addition, certain provisions of our amended and restated articles of incorporation and our amended and restated bylaws could have the effect of discouraging, delaying, deterring or preventing a change of control. Such provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. These provisions include those which: - classify our board of directors into three classes, each class as nearly equal in number as possible, with members serving staggered three year terms; - permit our board of directors to issue up to 1,000,000 shares of preferred stock and to fix the rights and preferences of any series of the preferred stock, without any further vote or action by our shareholders; - require the approval of at least 80% of the outstanding shares of our voting stock to amend or repeal the provision establishing a classified board of directors; - provide that special meetings of shareholders may only be called by our chief executive officer, our board of directors or a majority of our shareholders entitled to vote at the meeting; and - provide that directors may be removed only for cause, by a vote of the holders of a majority of the shares entitled to vote at an election of directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is . LISTING We have reserved the trading symbol "SATR" for listing our shares of common stock on The Nasdaq Stock Market's National Market. 48
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SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock and we cannot make any predictions as to the effect, if any, that market sales of shares or the availability of shares of our common stock for future sale will have in the market price of our common stock from time to time. Furthermore, although many shares will be unavailable for sale shortly after this offering due to contractual and legal restrictions on resale described below, the sale of a substantial amount of shares of common stock in the public market after these restrictions lapse could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding, an aggregate of shares of our common stock. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by our affiliates as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 of the Securities Act. The remaining shares of common stock held by existing shareholders are restricted securities as that term is defined in Rule 144 under the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration, including exemptions under Rule 144 or Rule 701 under the Securities Act. These rules are summarized below. Upon the expiration of the lock-up agreements described below and subject to the provisions of Rule 144 and Rule 701, restricted shares totaling will be available for sale in the public market 180 days after the date of this prospectus. The sale of these restricted securities is subject, in the case of shares held by affiliates, to the timing, volume and manner of sale restrictions contained in those rules. RULE 144 In general, under Rule 144, beginning 90 days after the consummation of this offering, a person who has beneficially owned shares of our common stock for at least one year from the date those shares of common stock were acquired from us or from an affiliate of ours would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1.0% of the number of shares of common stock then outstanding, which will equal approximately shares of common stock immediately after this offering; or - the average weekly trading volume of the common stock in the public market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. The sales of any shares of common stock under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, without the restrictions on our outstanding shares contained in the lock-up agreements, those shares could have been sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act, each of our employees, consultants or advisors who purchased shares from us under our stock option plans or other written agreements, is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period requirements, contained in Rule 144. 49
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LOCK-UP AGREEMENTS Together with our directors and executive officers and all our existing shareholders, we have entered into lock-up agreements with the underwriters. Under those agreements, neither we nor any of our directors, executive officers or current shareholders may dispose of or hedge any shares of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without notice, Credit Suisse First Boston Corporation may, in its sole discretion, release all or some of the securities from these lock-up agreements. Transfers or dispositions can be made sooner with the prior written consent of Credit Suisse First Boston Corporation, provided the transferee becomes bound by the terms of a lockup agreement. STOCK PLANS AND WARRANT We intend to file a registration statement under the Securities Act covering 2,500,000 shares of common stock reserved for issuance under our 2000 Stock Option Plan and covering 2,834,400 shares of common stock reserved for issuance for options outstanding under our 1995 Management Stock Option Plan. Currently, there are no options outstanding under our 2000 Stock Option Plan. Once we file this registration statement, all of the shares issued upon exercise of the options granted under these plans will be eligible for sale in the public market from time to time, subject to the expiration of applicable lock-up agreements. This registration statement is expected to be filed as soon as practicable after the effective date of this offering. In addition to our outstanding options, we have granted to Motorola a warrant to acquire 1,565,331 shares of our common stock, at a per share exercise price equal to 90% of the price per share of our initial public offering. The warrant is exercisable between March 2004 and March 2005. However, for every $100.0 million that we receive from Motorola for services rendered, 10% of the shares subject to this warrant will become exercisable immediately. The shares issued upon exercise of this warrant may be sold in the public market only if they are registered with the SEC or if the sale qualifies for an exemption from registration, including exemption under Rule 144 under the Securities Act. REGISTRATION RIGHTS Following 180 days after the effectiveness of this offering, MascoTech, one of our current significant shareholders, will, under certain circumstances, have the right to require us to register a portion of its shares for future sale. In addition, if we determine to register our common stock in an underwritten offering, MascoTech has the right to be included in such offering, subject to certain exceptions. In addition, Motorola, a holder of a warrant to purchase 1,565,331 shares of our common stock will, under certain circumstances, have the right to require us to register the shares it obtains through the exercise of the warrant. After our common stock is publicly traded, Motorola will have the right to require us to file a registration statement providing for the sale of Motorola's shares under Rule 415 of the Securities Act, which permits registration of an offering to be made on a continuous or delayed basis. However, we have the right to require Motorola not to sell any securities registered under this registration statement under certain circumstances. In addition, at Motorola's request, we have agreed to use our best efforts to include common stock issuable under this warrant in any future registration statement that we may file with respect to our common stock, subject to certain limitations. 50
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UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2000, we and the selling shareholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Needham & Company, Inc. are acting as representatives, the following respective numbers of shares of common stock: [Download Table] NUMBER UNDERWRITER OF SHARES ----------- --------- Credit Suisse First Boston Corporation...................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... Needham & Company, Inc...................................... -------- Total............................................. ======== The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. The selling shareholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we and the selling shareholders will pay: [Enlarge/Download Table] PER SHARE TOTAL -------------------------------- -------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us..... $ $ $ $ Expenses payable by us....... $ $ $ $ Underwriting discounts and commissions paid by selling shareholders............... $ $ $ $ Expenses payable by selling Shareholders............... $ $ $ $ The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. 51
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All of our executive officers, directors and shareholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such aforementioned transaction is to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price up to shares of the common stock for employees, directors and certain other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in this offering will be reduced to the extent such persons purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares. We and the selling shareholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. We have reserved the symbol "SATR" to list the shares of common stock on The Nasdaq Stock Market's National Market. Prior to this offering, there was no established public trading market for our common stock. The initial public offering price for the common stock will be determined by negotiation among Credit Suisse First Boston Corporation, the representatives and us and the selling shareholders. The primary factors to be considered in determining the initial public offering price include: - the history and prospects of the industry in which we compete; - the ability of our management; - our past and present operations; - our prospects for future earnings; - the general condition of the securities markets at the time of this offering; and - the recent market prices of securities of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of our common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market, or otherwise and, if commenced, may be discontinued at any time. 52
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NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling shareholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us, the selling shareholders and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as a principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the United States federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All the issuer's directors and officers as well as the experts named herein and the selling shareholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such person pursuant to this offering. Such report must be in the form attached to the British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisers with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 53
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EXPERTS Our consolidated balance sheets as of December 31, 1999 and 1998, and our consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The consolidated balance sheets for Smartflex Systems, Inc. as of December 31, 1998 and 1997, and the consolidated statements of operations, stockholders' equity and cash flows of Smartflex Systems, Inc. for each of the three years in the period ended December 31, 1998, included in this prospectus, have been included in reliance on the report of Ernst & Young LLP, independent auditors, given on the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with respect to the common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information about us and our common stock, you should refer to the registration statement as permitted by the SEC's rules. Any statements made in this prospectus as to the contents of any contract, agreement or other document are necessarily incomplete and we refer you to the exhibit for a more complete description of the matter involved, and each statement in this prospectus shall be deemed qualified in its entirety by this reference. On completion of this offering we will be subject to the information requirements of the Securities Exchange Act of 1934 and will file reports, proxy statements and other information with the SEC. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at the public reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549 and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference rooms. Our filings, including the registration statement, will also be available to you on the Internet site maintained by the SEC at www.sec.gov. LEGAL MATTERS The legality of the shares offered hereby by us and by Wallace K. Tsuha, Jr., one of the selling shareholders, is being passed upon by Honigman Miller Schwartz and Cohn, Detroit, Michigan, counsel for us. Certain legal matters will be passed upon for the underwriters by McDermott, Will & Emery, Chicago, Illinois. 54
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SATURN ELECTRONICS & ENGINEERING, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS [Download Table] OUR ANNUAL FINANCIAL STATEMENTS Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997............. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 SMARTFLEX SYSTEMS, INC. FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-21 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-22 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................... F-23 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996...... F-24 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... F-25 Notes to Consolidated Financial Statements.................. F-26 Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.................................................. F-41 Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998 and for the three months ended June 30, 1999 and 1998.............................. F-42 Consolidated Statements of Cash Flows for six months ended June 30, 1999 and 1998.................................... F-43 Notes to Unaudited Condensed Consolidated Financial Statements................................................ F-44 PRO FORMA CONSOLIDATED FINANCIAL STATEMENT OF OPERATIONS Pro Forma Consolidated Statement of Operations for the year ended December 31, 1999................................... F-46 Notes to Pro Forma Consolidated Statement of Operations..... F-46 F-1
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THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF SATURN ELECTRONICS & ENGINEERING, INC. HAVE BEEN PREPARED GIVING EFFECT TO THE AUTHORIZATION OF ADDITIONAL SHARES OF COMMON STOCK AND CERTAIN STOCK SPLITS AS MORE FULLY DESCRIBED IN NOTE 14. WE HAVE BEEN INFORMED THAT AUTHORIZATION OF ADDITIONAL SHARES AND THE STOCK SPLITS ARE CONTINGENT UPON THE EFFECTIVENESS OF THE OFFERING. UPON THE CONSUMMATION OF THE AFOREMENTIONED EVENTS WE WILL BE IN A POSITION TO ISSUE THE FOLLOWING REPORT: REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Saturn Electronics & Engineering, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Saturn Electronics & Engineering, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP March 2, 2000, except as to the authorization of additional shares and the stock splits described in Note 14 which is as of March 25, 2000. F-2
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] DECEMBER 31, DECEMBER 31, 1999 1998 -------------- -------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 1,929 $ 1,020 Accounts receivable, trade (less allowances of $1,783 and $455 in 1999 and 1998, respectively)................... 46,012 28,265 Note receivable........................................... 1,000 -- Inventories............................................... 32,271 9,474 Deferred income taxes..................................... 8,982 1,665 Prepaid expenses.......................................... 2,634 336 Other current assets...................................... 3,125 967 -------- ------- Total current assets................................... 95,953 41,727 Property, plant and equipment, net........................ 66,798 39,105 Process technology, net................................... 14,357 -- Customer lists and other intangible assets, net........... 17,137 463 Goodwill, net............................................. 35,382 16,270 Note receivable........................................... -- 1,000 Other assets.............................................. 2,347 39 -------- ------- Total assets........................................... $231,974 $98,604 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade................................... $ 30,080 $13,959 Seller Payable............................................ 4,279 -- Income taxes payable...................................... -- 412 Product warranty.......................................... 3,307 2,779 Other accrued expenses.................................... 13,642 2,318 -------- ------- Total current liabilities.............................. 51,308 19,468 Long term debt.............................................. 107,361 3,976 Deferred income taxes....................................... 13,757 2,731 -------- ------- Total liabilities...................................... 172,426 26,175 -------- ------- Minority interest........................................... 7,690 3,476 -------- ------- Shareholders' Equity: Common stock, no par value -- 200,000,000 shares authorized, 29,741,280 shares issued and outstanding... -- -- Additional paid-in-capital................................ 7,737 34,737 Retained earnings......................................... 44,121 34,216 -------- ------- Total shareholders' equity............................. 51,858 68,953 -------- ------- Total liabilities and shareholders' equity............. $231,974 $98,604 ======== ======= The accompanying notes are an integral part of the consolidated financial statements. F-3
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS [Enlarge/Download Table] YEARS ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Net revenue............................................ $ 257,107 $ 188,464 $ 161,048 Cost of revenue........................................ 205,341 147,661 133,568 ---------- ---------- ---------- Gross profit...................................... 51,766 40,803 27,480 Development expense.................................... 7,741 4,861 3,563 Selling, general and administrative expense............ 19,146 12,777 8,039 Amortization expense................................... 2,582 1,649 1,650 ---------- ---------- ---------- Operating income.................................. 22,297 21,516 14,228 Interest income........................................ 331 176 100 Interest expense....................................... (3,340) (142) (977) Other income (expense), net............................ (161) (131) 116 Write down of investment............................... -- (905) -- Minority interest...................................... (2,788) (1,701) -- ---------- ---------- ---------- Income before income taxes........................ 16,339 18,813 13,467 Income taxes........................................... 6,434 6,859 5,408 ---------- ---------- ---------- Net income........................................ $ 9,905 $ 11,954 $ 8,059 ========== ========== ========== Basic and diluted earnings per share of common stock... $ 0.31 $ 0.32 $ 0.22 ========== ========== ========== Basic and diluted weighted average number of common shares outstanding................................... 32,145,026 37,176,600 37,176,600 ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements. F-4
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 [Enlarge/Download Table] COMMON ADDITIONAL STOCK, NO PAID-IN RETAINED SHAREHOLDERS' PAR VALUE CAPITAL EARNINGS EQUITY ---------- ---------- -------- ------------- Balances, January 1, 1997.................... 37,176,600 $ 34,737 $14,203 $ 48,940 Net income................................... -- -- 8,059 8,059 ---------- -------- ------- -------- Balances, December 31, 1997.................. 37,176,600 34,737 22,262 56,999 Net income................................... -- -- 11,954 11,954 ---------- -------- ------- -------- Balances, December 31, 1998.................. 37,176,600 34,737 34,216 68,953 Stock Repurchase............................. (7,435,320) (27,000) -- (27,000) Net income................................... -- -- 9,905 9,905 ---------- -------- ------- -------- Balances, December 31, 1999.................. 29,741,280 $ 7,737 $44,121 $ 51,858 ========== ======== ======= ======== The accompanying notes are an integral part of the consolidated financial statements. F-5
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 --------- ------- -------- (IN THOUSANDS) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income.................................................. $ 9,905 $11,954 $ 8,059 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation.............................................. 6,614 4,524 3,125 Amortization.............................................. 2,582 1,649 1,650 Deferred income taxes..................................... 500 (884) 248 Write off of investment................................... -- 905 -- Loss on disposal of fixed assets.......................... -- 1,169 -- Minority interest in income............................... 2,788 1,701 -- Changes in operating assets and liabilities, net of business acquisition: Accounts receivable, trade................................ (2,323) (7,479) 527 Inventories............................................... (9,410) 641 2,384 Prepaid expenses.......................................... (563) 176 153 Accounts payable, trade................................... (4,390) 2,339 (171) Income taxes payable...................................... 857 (403) 382 Accrued expenses and other................................ (2,113) 1,348 366 --------- ------- -------- Net cash provided by operating activities.......... 4,447 17,640 16,723 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Acquisition of business, net of cash acquired............... (52,694) -- -- Capital expenditures........................................ (8,640) (16,877) (6,478) --------- ------- -------- Net cash used in investing activities.............. (61,334) (16,877) (6,478) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from borrowings.................................... 251,646 44,939 20,360 Payment of borrowings....................................... (164,884) (47,593) (31,800) Stock repurchase............................................ (27,000) -- -- Payment of finance fee...................................... (1,991) -- -- Minority interest investment................................ 25 1,775 -- --------- ------- -------- Net cash provided by (used in) financing activities....................................... 57,796 (879) (11,440) Net increase(decrease) in cash.............................. 909 (116) (1,195) Cash, beginning of year..................................... 1,020 1,136 2,331 --------- ------- -------- Cash, end of year........................................... $ 1,929 $ 1,020 $ 1,136 ========= ======= ======== Supplemental disclosures of cash flow information, Cash paid during the period for: Income taxes.............................................. $ 6,895 $ 8,567 $ 4,604 ========= ======= ======== Interest.................................................. $ 2,748 $ 168 $ 1,011 ========= ======= ======== The accompanying notes are an integral part of the consolidated financial statements. F-6
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Except as the context otherwise indicates, the term "the Company" refers to Saturn Electronics & Engineering, Inc. and its subsidiaries. The Company is a global provider of value added electronics manufacturing services to original equipment manufacturers in the automotive, communications, computer and military markets. The Company provides a broad range of services including design and engineering, material management, manufacturing and assembly, testing and qualification, fulfillment and after-sales support. In August 1999, the Company acquired Smartflex Systems, Inc., a high technology product design and precision manufacturing firm based in Tustin, California. Through this acquisition, the Company gained access to full-service electronics capabilities and significantly increased its scale of operations. This acquisition expanded the Company's customer base to the communications and computer markets, and enhanced its geographic presence. The Company has manufacturing facilities in the United States, Mexico and the Philippines, and an engineering and sales facility in Singapore. During the year ended December 31, 1999, the Company had sales to two customers aggregating approximately 31% and 19%, respectively, of total net revenue. During the year ended December 31, 1998, the Company had sales to two customers aggregating approximately 40% and 10% respectively of total sales. During the year ended December 31, 1997, the Company had sales to two customers aggregating approximately 45% and 14%, respectively, of total net revenue. 2. ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The Company participates in a strategic alliance with a major Tier 1 automotive supplier ("Tier 1") through a limited liability company ("LLC") for the purpose of manufacturing battery cables, wire harnesses, ground straps, trailer tow harnesses and non-automotive electrical distribution systems. On December 31, 1999, the Company held an approximate 53% membership interest in the LLC. All products of the LLC are sold and serviced through the Company. The remaining 47% membership interest in the LLC is reflected as a minority interest. The LLC is operating as a subsidiary of the Company and, for financial reporting purposes, the assets, liabilities, results of operations and cash flows of the LLC are included in the Company's consolidated financial statements. Revenue recognition Revenue is generally recognized when a product is shipped, and the Company provides an applicable allowance for estimated sales returns based on historical experience. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. F-7
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACCOUNTING POLICIES -- (CONTINUED) Property, plant and equipment Property, plant and equipment is stated at cost. Depreciation is computed principally using the straight-line method over the following estimated useful lives: buildings and land improvements from 10 to 40 years and machinery and equipment from 3 to 15 years. Costs of maintenance and repairs are charged to expense when incurred; costs of renewals or betterments are capitalized. Upon sale or retirement of property, plant and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is included in the statement of operations. Intangible assets Goodwill is amortized using the straight-line method over periods ranging from 18 to 20 years. At December 31, 1999 and 1998, accumulated amortization amounted to $8,783,000 and $7,362,000 respectively. Process technology and customer lists and other intangible assets are amortized under the straight line method over periods ranging from 13 to 18 years. At December 31, 1999, accumulated amortization pertaining to process technology, and customer lists and other intangible assets amounted to $3,081,000 and $705,600 respectively. At December 31, 1998, accumulated amortization pertaining to process technology amounted to $2,618,850. Intangible assets are reviewed for impairment whenever the facts and circumstances indicate that the carrying amount may not be recoverable. Financial instruments Financial instruments which potentially subject the Company to concentrations of credit risk represent primarily accounts receivable. At December 31, 1999, two customers represented 19.4% and 12.3%, respectively, of the Company's accounts receivable balance. The Company performs ongoing credit evaluations of its customers' financial condition and currently requires no collateral from its customers. The carrying amounts of the Company's receivable and payable balances approximate fair value because of the short maturity of these instruments. The carrying amounts of the Company's bank borrowings under its revolving credit facility approximate fair value because the applicable interest rates are based on floating rates identified by reference to market rates. Translation of foreign currency The financial statements of the Company's operations outside the United States are measured using the U.S. dollar as the functional currency. Monetary assets and liabilities are translated at the rates of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates of exchange. Income and expense items associated with monetary assets and liabilities are translated at average rates of exchange for the period, while the income and expense items associated with non-monetary assets and liabilities are translated at historical rates. The resultant translation adjustments are included in results of operations as transaction gains and losses. Transaction gains/(losses) were not material during 1999, 1998 and 1997. F-8
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACCOUNTING POLICIES -- (CONTINUED) Earnings Per Share Basic earnings per share is calculated by dividing consolidated net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing consolidated net income by the sum of the weighted average number of common shares outstanding and the weighted average number of common stock equivalents outstanding. During 1999, 1998 and 1997, the Company had no common stock equivalents outstanding. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions, and changes in such estimates and assumptions may affect amounts reported in future periods. 3. BUSINESS ACQUISITION Effective August 26, 1999, the Company acquired all of the outstanding shares of common stock of Smartflex Systems, Inc. ("Smartflex") for $71,308,000. In connection with this acquisition, the Company also incurred transaction costs in the amount of approximately $385,000. This acquisition was funded through the Company's revolving credit facility. In addition, cash acquired in this acquisition in the amount of $18,614,000 was utilized in the extinguishment of certain debt of Smartflex. The acquisition was accounted for as a purchase, and accordingly, the operating results of Smartflex have been included in the Company's financial statements since August 26, 1999. The excess of the purchase price over the fair value of net assets acquired is presently estimated at $20,503,000 and is being amortized over 18 years. The Company's allocation of the aggregate purchase price of Smartflex to the tangible and intangible assets acquired in connection with this acquisition were based on fair values as determined by an independent appraiser. The allocation is summarized below (in thousands). [Download Table] Current assets.............................................. $ 41,048 Property, plant & equipment................................. 23,600 Unpatented technology....................................... 14,700 Customer lists and other intangible assets.................. 17,500 Goodwill.................................................... 20,525 Other assets................................................ 5,604 -------- Total assets........................................... 122,977 -------- Current liabilities......................................... 30,756 Seller payable.............................................. 4,279 Long-term debt.............................................. 4,596 Deferred income taxes....................................... 11,946 Other non current liabilities............................... 92 -------- Total liabilities...................................... 51,669 -------- Total purchase price................................. 71,308 -------- Less: cash acquired.................................. 18,614 -------- Purchase price, net of cash acquired................. $ 52,694 ======== F-9
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. BUSINESS ACQUISITION -- (CONTINUED) The following unaudited pro forma consolidated results of operations for the years ended December 31, 1999 and 1998 assume that this acquisition occurred on January 1, 1998: [Download Table] 1999 1998 -------- -------- (IN THOUSANDS) Net revenue................................................. $325,578 $296,065 Net income (loss)........................................... $ (2,537) $ 4,126 The Company is in the process of implementing a rationalization plan established shortly after the acquisition of Smartflex. The rationalization plan takes into consideration duplicate capacity and opportunities for further leveraging of cost and technology platforms. The Company's actions approved and committed to in the fourth quarter of 1999 will result in the displacement of approximately 81 current positions all of which are manufacturing positions. The Company has decided to close one Smartflex facility and transition the manufacturing of applicable product lines to other sites of the Company. The Company estimates that the costs associated with closing the Smartflex facility will be approximately $2,900,000 (which mostly represents contractual commitments, severance and related costs). This amount has been capitalized as part of the purchase price of Smartflex and is reflected in the other accrued expenses classification of the Company's balance sheet at December 31, 1999. The above mentioned charges were determined based upon plans approved by the Company's management utilizing the best information available at the time. The amounts the Company may incur may differ from the total amount accrued as the Company's initiative in relation to this rationalization plan is executed. Management expects the execution of this plan will be completed in the second quarter of 2000. 4. DETAILS TO CONSOLIDATED BALANCE SHEETS Inventories consisted of the following: [Download Table] DECEMBER 31, ----------------- 1999 1998 ------- ------ (IN THOUSANDS) Raw materials............................................... $18,601 $4,453 Work-in-process............................................. 4,817 1,892 Finished goods.............................................. 8,853 3,129 ------- ------ $32,271 $9,474 ======= ====== Inventories are net of allowances for slow-moving and obsolete inventory of approximately $3,958,000 and $1,402,000 at December 31, 1999 and 1998, respectively. F-10
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. DETAILS TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED) Property, plant and equipment consisted of the following: [Download Table] DECEMBER 31, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Land and improvements....................................... $ 1,438 $ 1,487 Buildings and improvements.................................. 19,283 9,785 Machinery and equipment..................................... 64,695 34,280 Construction in progress.................................... 4,430 12,501 -------- -------- 89,846 58,053 Less -- accumulated depreciation............................ (23,048) (18,948) -------- -------- $ 66,798 $ 39,105 ======== ======== During the fourth quarter of 1998, the Company determined that the cash flows related to an investment in a joint venture were not sufficient to recover the carrying value. As a result of this determination, the Company recognized a pretax write down of this investment in the amount of $905,478. 5. DEBT On August 24, 1999, the Company entered into a $125,000,000 revolving line of credit facility, which expires on August 9, 2002 with one year renewals based upon the meeting of certain requirements at each anniversary date of the facility. This arrangement involves a consortium of banks led by one major financial institution. This line of credit replaced an existing $60,000,000 line of credit facility. A facility fee applicable to this arrangement amounts to 0.50% per annum of the maximum commitment of the facility, payable quarterly, subject to adjustment under certain circumstances. Letter of credit fees and facing fees on each letter of credit also apply to this arrangement. This agreement contains financial covenants relating to leverage, interest coverage and shareholder's equity. Interest pertaining to borrowings associated with this facility are based upon either a Eurodollar rate or the prime rate of the financial institution. During 1999, the maximum borrowings under the Company's credit arrangements were $113,673,086; average borrowings were $29,739,715 at a weighted average interest rate of 7.75%. Borrowings pertaining to this arrangement are collateralized by all of the Company's assets, except for the assets pertaining to the LLC. The unutilized amount of this arrangement amounted to $17,639,000 on December 31, 1999. The LLC has a revolving credit facility, as amended, with the above mentioned financial institution. During the term of this facility, the financial institution agrees to lend to the LLC sums not to exceed $15,000,000 in aggregate principal amount outstanding at any one time. The term of this facility expires on January 1, 2001. Interest on any unpaid principal balance shall be payable monthly at a per annum rate equal to the financial institution's prime rate. Borrowings pertaining to this facility shall be collateralized by all of the LLC's assets. This facility contains covenants which include restrictions pertaining to the issuance of debt, business acquisitions, and transfers of assets. At December 31, 1999, there were no borrowings outstanding, and no borrowings have been incurred in relation to this arrangement. F-11
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. EMPLOYEE INVESTMENT PLANS Saturn Electronics & Engineering, Inc. sponsors a 401(k) savings plan covering substantially all employees with the exception of Smartflex employees. Employees are eligible to participate in this plan following one year of service. The Company matches 100% of the first $500 and 50% of the next $1,400 of each participant's annual contributions. These contributions vest immediately. The Company also pays certain administrative expenses associated with this plan. Total expense pertaining to this plan amounted to $476,000, $441,000 and $453,000 for 1999, 1998 and 1997, respectively. Smartflex sponsors a 401(k) savings plan covering substantially all full-time employees of Smartflex. Employees are eligible to participate in this plan following six months of service. Smartflex may make discretionary matching contributions, which vest over five years. Smartflex matches 100% of the first 3% of each employee's contribution. Total expense pertaining to this plan amounted to $126,000 during the period of August 26, 1999 through December 31, 1999. 7. INCOME TAXES Income before income taxes consisted of the following: [Download Table] YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Domestic.............................................. $15,113 $18,813 $13,467 Foreign............................................... 1,226 -- -- ------- ------- ------- $16,339 $18,813 $13,467 ======= ======= ======= The components of income tax expense are: [Download Table] YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ (IN THOUSANDS) Current provision Federal................................................ $5,394 $7,503 $5,010 State.................................................. 323 186 150 Foreign................................................ 248 -- -- ------ ------ ------ Total.......................................... 5,965 7,689 5,160 Deferred................................................. 469 (830) 248 ------ ------ ------ Total provision................................ $6,434 $6,859 $5,408 ====== ====== ====== F-12
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES -- (CONTINUED) 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 amounts utilized for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows: [Download Table] DECEMBER 31, ------------------ 1999 1998 ------- ------- (IN THOUSANDS) Deferred Tax Assets: Inventory................................................. $ 1,705 $ 575 Product Warranty.......................................... 1,018 890 Allowance for Doubtful Accounts........................... 468 -- Accrued Liabilities....................................... 2,982 200 Net Operating Loss Carryforwards.......................... 2,809 -- ------- ------- Deferred Tax Assets......................................... 8,982 1,665 ------- ------- Deferred Tax Liabilities State Deferred Taxes...................................... 11,653 -- Property, Plant and Equipment............................. 1,925 3,048 Other..................................................... 179 (317) ------- ------- Deferred Tax Liabilities.................................... 13,757 2,731 ------- ------- Net Deferred Tax Liabilities................................ $(4,775) $(1,066) ======= ======= The tax credit carryforwards relate to net operating losses generated by Smartflex prior to August 26, 1999. On that date, Smartflex had available for income tax purposes approximately $8,026,000 in federal net operating loss carryforwards, which is subject to an annual limitation of approximately $3,694,000 pursuant to Section 382 of the Internal Revenue Code, regarding the offset of future taxable income. These loss carryforwards expire in 2014. At December 31, 1999, Smartflex had state tax credit carryforwards in the approximate amount of $2,999,000 of which $1,628,000 existed at August 26, 1999. These credits expire in 2004. The Company has not recognized a deferred tax liability of approximately $275,000 for the undistributed earnings generated prior to August 26, 1999 of certain foreign subsidiaries of Smartflex because the Company currently does not expect those unremitted earnings to reverse and become taxable in the foreseeable future. At December 31, 1999, the undistributed earnings of these subsidiaries amounted to $726,000. Smartflex has a tax holiday in the Philippines, which expires on October 1, 2000. There was no income tax relief resulting from this holiday during the period of August 26, 1999 through December 31, 1999. In addition to tax credit carryforwards, deferred tax assets and liabilities in the respective amounts of $9,377,000 and $12,581,000 applied to Smartflex at the date of its acquisition by the Company. F-13
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES -- (CONTINUED) Major differences between income tax expense computed using the United States statutory tax rate and actual income tax expense were as follows: [Download Table] YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ (IN THOUSANDS) Federal income taxes at statutory rate................... $5,719 $6,584 $4,713 State income taxes (net of federal benefit).............. 209 121 98 Goodwill................................................. 317 176 184 Other.................................................... 189 (22) 413 ------ ------ ------ Income taxes........................................... $6,434 $6,859 $5,408 ====== ====== ====== 8. SHAREHOLDERS' EQUITY Stock Repurchase On April 29, 1999, the Company purchased 7,435,320 shares of Common Stock for $27,000,000, pursuant to a Stock Purchase Agreement. The Company utilized its line of credit to finance this transaction. 9. STOCK OPTION PLAN The 1995 Management Stock Option Plan (the "Plan"), as amended, provides for the grant of options to directors and key employees of the Company, for the purchase of up to 1,240,000 shares of the Company's common stock. Options granted under the Plan may be incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock options. Options awarded three years or less before the effective date of an initial public offering ("IPO") or merger with a public company will become exercisable to the extent of 25% at each interval of 12, 18, 24, and 30 months after the effective date of an IPO or merger with a public company. Options awarded more than three years before the effective date of an IPO or merger with a public company will become exercisable to the extent of 50% at each interval of 12 and 18 months after the effective date of an IPO or merger with a public company. All options are exercisable, at the discretion of the Compensation Committee (the "Committee") of the Board of Directors. Upon change of control of the Company, all outstanding options shall become immediately exercisable. The term of the options granted pursuant to this plan shall not exceed 10 years. F-14
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK OPTION PLAN -- (CONTINUED) The following table summarizes stock option activity: [Enlarge/Download Table] NUMBER OPTION PRICE WEIGHTED AVERAGE OF SHARES PER SHARE EXERCISE PRICE --------- ------------ ---------------- Outstanding at December 31, 1996........... 843,000 $ 1.83 Granted.................................. 831,000 $1.75 - 2.23 Cancelled................................ (150,000) $1.85 - 2.23 --------- Outstanding at December 31, 1997........... 1,524,000 $ 2.01 Granted.................................. 709,500 $2.23 - 2.88 Cancelled................................ (90,000) $1.85 - 2.88 --------- Outstanding at December 31, 1998........... 2,143,500 $ 2.29 Granted.................................. 870,900 $3.89 Cancelled................................ (184,500) $1.88 - 3.89 --------- Outstanding at December 31, 1999........... 2,829,900 $ 2.75 ========= The exercise prices of the options under grant were determined based upon the fair value of the Company's common stock at the date of grant as determined by the Company's Board of Directors. All options under grant are nonqualified stock options. No options have been exercised through December 31, 1999 in relation to the Plan, and no outstanding options were exercisable at December 31, 1999. Had compensation expense been determined based on the fair value of the options on the date of this offering, consistent with the methodology of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." The pro forma effects of compensation expense associated with these options would have amounted to approximately $ . The fair value is based on the public offering price of the Company's common stock. 10. RELATED PARTY TRANSACTIONS The Company has a note receivable from a shareholder, who is also the President and Chief Executive Officer of the Company, in the amount of $1,000,000. This note bears interest at the rate of 7.75% per annum and shall be due and payable on the earlier to occur of (i) the 90th day following the effective date of a registration statement of a public offering of the common stock of the Company, or (ii) March 31, 2002. On December 1, 1999, the Company entered into a consulting agreement with one of its directors to provide administrative services to the Company. This agreement covers the period of December 1, 1999 through February 28, 2000. A monthly fee of $13,000 applies to this agreement. The director is a brother to the Company's Chairman. Expenses associated with director fees and various consulting agreements pertaining to this consultant amounted to $162,800, $76,100 and $26,300 during 1999, 1998 and 1997, respectively. On February 28, 2000, the term of this agreement was extended until August 31, 2000. The Company subleased corporate office space from an affiliate of a shareholder affiliate ("shareholder affiliate"). Rent expense pertaining to this sublease amounted to $273,669, $453,207 and $439,774, respectively, during the first seven months of 1999 and the years ended December 31, 1998 and 1997. This sublease expired on July 31, 1999. In August, 1999, the Company entered into a sublease agreement, as amended, involving the lease of office space to the Shareholder Affiliate. The Company recognized $101,154 during 1999 in relation to this F-15
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. RELATED PARTY TRANSACTIONS -- (CONTINUED) sublease. This agreement provides for a monthly rental payment which varies based upon space occupied and expires on January 31, 2001. During the period of January 1, 1999 through April 30, 1999 and during the years ended December 31, 1998 and 1997, the Company purchased materials from a stockholder of the Company in the approximate amounts of $2,997,000, $6,707,000 and $5,100,000, respectively. The shares of the Company's stock held by this stockholder were purchased by the Company on April 29, 1999. The Company had sales to affiliates of a shareholder in the amounts of $6,668,500, $5,075,000, and $4,172,600 during the respective years of 1999, 1998 and 1997. The Company incurred interest expense pertaining to a subordinated note payable to a stockholder in the approximate amount of $548,000 for the year ended December 31, 1997. This note was extinguished on July 8, 1997. Management believes that transactions in the ordinary course of business with shareholders and their affiliates are at arms length and are under terms no less favorable to the Company than those with other customers or vendors. At December 31, 1999 and 1998, accounts receivable balances pertaining to shareholders and their affiliates amounted to $503,033 and $385,648, respectively. At the same date, accounts payable balances pertaining to shareholders and their affiliates amounted to $367,429 and $488,116, respectively. 11. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain facilities and equipment pursuant to noncancellable operating leases. Total rent expense pertaining to these leases amounted to $2,042,000, $1,396,000 and $1,253,000, respectively, during 1999, 1998 and 1997. The following is a schedule by years of future minimum rental payments required pursuant to the above mentioned leases: [Download Table] YEARS ENDING DECEMBER 31, ------------------------- (IN THOUSANDS) 2000........................................................ $ 3,450 2001........................................................ 3,170 2002........................................................ 2,356 2003........................................................ 2,293 2004........................................................ 1,880 Thereafter.................................................. 3,491 ------- $16,640 ======= Employment Agreement On March 21, 1995, the Company entered into a five-year employment agreement with its Chairman and Chief Executive Officer ("Chairman"). The Company's potential minimum obligation in relation to this agreement was $154,286 at December 31, 1999. This agreement provides for base salary, reimbursement for the cost of life insurance benefiting a trust of the Chairman and the Company absorbing the interest costs associated with a $1,000,000 promissory note of the Chairman in favor of the Company. This agreement expires on March 21, 2000. F-16
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Insurance Agreement On July 15, 1999, the Company entered into an agreement with a trust, benefiting the Chairman's estate. Under this agreement, the Company shall pay premiums associated with a $20,000,000 life insurance policy, which insures the life of the Chairman. Upon collection of proceeds in relation to this policy, the Company shall be reimbursed for all applicable premiums paid. During 1999, the Company paid premiums amounting to $242,084 in relation to this policy. Contingencies The Company is subject to various legal actions and claims incidental to its business and the business of Smartflex. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. After discussions with counsel, it is the opinion of management that the outcome of such matters will not have a material adverse impact on the Company's consolidated financial statements. 12. SEGMENT INFORMATION The Company is a supplier of products and solutions to the communications, military, automotive and computer markets. The Company operates in three segments, each of which are strategic businesses, which are managed separately. Each of these businesses develops, manufactures and sells distinct products and provides distinct services. A description of the businesses of the Company's segments follows: - The electronics segment provides services in connection with flex assembly, printed circuit board assembly and the incorporation of electronic assemblies into subassemblies and final systems box-build. - The electromechanical segment provides services in connection with junction blocks, relays, actuators, solenoids and transmission modules. - The electrical segment provides services in connection with battery cables, wire harnesses and power distribution systems. This segment is comprised of the Saturn LLC, of which the Company owns 53%. The dominant measurements that management utilizes to measure segment performance and to allocate resources to the segments is consistent with the information reported herein. Management evaluates the performance of its segments and allocates resources to these segments primarily based upon pretax income as well as cash flows and overall economic returns. Inter-segment sales are insignificant. The accounting policies of the segments are substantially equivalent to the policies described in Note 2, "Accounting Policies". Certain items are maintained at the Company's corporate headquarters (Corporate) and, therefore, not allocated to the segments. These items primarily include certain debt and related interest expense, deferred income taxes and certain non-trade receivables and investments. F-17
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SEGMENT INFORMATION -- (CONTINUED) [Enlarge/Download Table] ELECTRO- AS OF AND FOR THE YEARS ENDED DECEMBER 31, ELECTRONICS MECHANICAL ELECTRICAL OTHER ------------------------------------------ ----------- ---------- ---------- ------- (IN THOUSANDS) 1999 Net revenue...................................... $ 82,605 $137,725 $36,777 $ -- Depreciation and amortization.................... 3,942 4,500 754 -- Interest expense................................. -- -- -- 3,340 Income before income taxes....................... (2,778) 19,267 3,227 (3,377) Assets........................................... 121,630 75,820 24,050 10,474 Expenditures for long-lived assets............... 1,856 6,053 731 -- 1998 Net revenue...................................... $ 46,539 $114,964 $26,961 $ -- Depreciation and amortization.................... 1,944 4,059 170 -- Interest expense................................. -- -- -- 142 Income before income taxes....................... 3,533 14,099 2,080 (899) Assets........................................... 11,052 68,334 16,553 2,665 Expenditures for long-lived assets............... 958 8,998 6,921 -- 1997 Net revenue...................................... $ 44,314 $116,734 $ -- $ -- Depreciation and amortization.................... 1,013 3,762 -- -- Interest expense................................. -- -- -- 977 Income before income taxes....................... 2,123 12,664 -- (1,320) Assets........................................... 13,040 67,852 -- 2,533 Expenditures for long-lived assets............... 963 5,515 -- -- Long lived assets consist of property, plant and equipment and goodwill. Expenditures for long lived assets in 1999 exclude long lived assets totaling $50,469,000 acquired in a business combination. [Enlarge/Download Table] FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Income before income taxes: Income before income taxes from segments.................. $19,716 $19,712 $14,787 Unallocated amounts: Interest expense.......................................... (3,340) (142) (977) Other corporate items..................................... (37) (757) (343) ------- ------- ------- Consolidated income before income taxes..................... $16,339 $18,813 $13,467 ======= ======= ======= F-18
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SEGMENT INFORMATION -- (CONTINUED) [Enlarge/Download Table] DECEMBER 31, ------------------------------ 1999 1998 1997 -------- ------- ------- (IN THOUSANDS) Assets: Total segment assets...................................... $221,500 $95,939 $80,892 Unallocated assets Equity investment...................................... 250 -- 234 Deferred income taxes.................................. 8,982 1,665 1,299 Other corporate assets................................. 1,242 1,000 1,000 -------- ------- ------- Consolidated total assets................................... $231,974 $98,604 $83,425 ======== ======= ======= Geographic Information: The following geographic data includes sales and long-lived assets based on product shipment destination and physical location, respectively. [Enlarge/Download Table] AS OF AND FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) SALES United States.............................................. $193,770 $157,559 $126,778 Canada..................................................... 27,631 23,010 23,584 Mexico..................................................... 10,410 2,068 5,899 Other...................................................... 25,296 5,827 4,787 -------- -------- -------- Consolidated totals........................................ $257,107 $188,464 $161,048 ======== ======== ======== Long-lived assets United States.............................................. $118,009 $ 47,971 $ 46,245 International.............................................. 15,665 7,867 58 -------- -------- -------- $133,674 $ 55,838 $ 46,303 ======== ======== ======== 13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company is currently evaluating SFAS 133 and has yet to form an opinion on whether its adoption will have any significant impact on the Company's consolidated financial statements. The Company will be required to implement SFAS 133 for the year ended December 31, 2001. 14. SUBSEQUENT EVENTS Warrant On March 15, 2000, the Company issued a warrant to a major electronics OEM, (the "Warrant Holder") for the purchase of 1,565,331 shares of the Company's common stock at an exercise price of 90% of the Company's initial public offering price. This warrant is exercisable in whole or in part between F-19
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SATURN ELECTRONICS & ENGINEERING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUBSEQUENT EVENTS -- (CONTINUED) March 2004 and March 2005. However, for every $100,000,000 that the Company receives from the Warrant Holder, 10% of the shares subject to the Warrant shall become immediately exercisable. Common Stock On March 25, 2000 the Board of Directors approved an increase to the total authorized number of shares of common stock, no par value, from 20,000,000 to 200,000,000 shares upon the effectiveness of this public offering. On March 25, 2000 the Company's Board of Directors authorized the equivalent of a 3 for 1 split of its common stock, including outstanding stock options and the warrant, upon effectiveness of this public offering. All share data in the accompanying consolidated financial statements have been restated to give effect to the stock split. Prior to this stock split, the Company had 4,956,880 shares of each of its Class A Voting Stock and Class B Non-Voting Stock. The Class A Voting Stock was split on a 3.25 to 1 basis and the Class B Non-Voting Stock was split on a 2.75 to 1 basis resulting in an overall 3 for 1 stock split. The distinction between Class A and Class B Common Stock will cease upon the effectiveness of this offering, and, therefore, the equivalent of the Class B shares will have voting rights. Preferred Stock On March 25, 2000, the Company's Board of Directors approved the authorization of 1,000,000 shares of preferred stock upon the effectiveness of this offering. Shares of the preferred stock shall be issued from time to time in one or more series. Each series shall bear a distinctive designation and have such relative rights and preferences as shall be prescribed by resolution of the Company's Board of Directors. Public Offering of the Company's Common Stock On March 25, 2000, the Board of Directors approved an underwritten public offering of shares of the Company's common stock. The proposed aggregate offering price associated with this offering amounts to $125,000,000. The proceeds from the offering will be used to reduce indebtedness under the Company's credit facility in the estimated amount of $ , with the remainder to be used for working capital and general corporate purposes. F-20
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REPORT OF INDEPENDENT AUDITORS The Board of Directors Smartflex Systems, Inc. We have audited the accompanying consolidated balance sheets of Smartflex Systems, Inc. as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smartflex Systems, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Orange County, California February 4, 1999 F-21
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 2,613 $ 2,069 Short-term investments.................................... 24,743 26,051 Accounts receivable, trade (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 ------- ------- Total assets...................................... $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 ======= ======= See accompanying notes to consolidated financial statements. F-22
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS [Enlarge/Download Table] YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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 ======== ======== ======== See accompanying notes to consolidated financial statements. F-23
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 [Enlarge/Download Table] ADDITIONAL COMMON STOCK PAID-IN ------------ CAPITAL RETAINED SHARES AMOUNT AMOUNT EARNINGS TOTAL ------ ------ ---------- -------- ------- (IN THOUSANDS) 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 ===== === ======= ======= ======= See accompanying notes to consolidated financial statements. F-24
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 1,516 $ (4,129) $ 7,157 Adjustments to reconcile net income to net 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 -- -- See accompanying notes to consolidated financial statements. F-25
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SMARTFLEX SYSTEMS, INC. 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. 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. F-26
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 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. F-27
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the computation of Basic and Diluted earnings per share. [Enlarge/Download Table] YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ------ ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ====== ======= ====== 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 used internally for evaluating the segment performance. The Company F-28
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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: [Download Table] 1998 1997 ------- ------- (IN THOUSANDS) 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 ======= ======= 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 and unrealized gains or losses for the years ended December 31, 1998, 1997 and 1996 were not material. F-29
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. INVENTORIES Inventories consisted of the following: [Download Table] 1998 1997 ------ ------- (IN THOUSANDS) Raw materials............................................... $1,329 $ 6,943 Work in progress............................................ 1,352 2,725 Finished goods.............................................. 1,246 2,432 ------ ------- $3,927 $12,100 ====== ======= NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: [Download Table] 1998 1997 -------- -------- (IN THOUSANDS) 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 ======== ======== NOTE 6. OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following: [Download Table] 1998 1997 ------ ------- (IN THOUSANDS) 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 ====== ======= 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, he 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. F-30
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: [Download Table] 1998 1997 ------- ------- (IN THOUSANDS) 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 ======= ======= 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 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 F-31
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) worth, for which the Company has obtained a waiver. Debt of the Company will mature in fiscal years after December 31, 1998 as follows: [Download Table] FISCAL YEAR (IN THOUSANDS) ----------- -------------- 1999........................................................ $1,150 2000........................................................ 3,036 2001........................................................ 967 2002........................................................ 600 2003........................................................ 600 ------ $6,353 ====== 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. 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: [Download Table] FISCAL YEAR (IN THOUSANDS) ----------- -------------- 1999........................................................ $1,143 2000........................................................ 979 2001........................................................ 851 2002........................................................ 338 2003........................................................ 322 Thereafter.................................................. 67 ------ $3,700 ====== 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. F-32
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. INCOME TAXES Income tax provision (benefit) is as follows: [Enlarge/Download Table] YEARS ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ---- ------- ------ (IN THOUSANDS) 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 Charge in lieu of income taxes attributable to benefits of stock option exercises.................................. -- 67 38 ---- ------- ------ $781 $(2,160) $4,086 ==== ======= ====== 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: [Enlarge/Download Table] YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ----- ------- ------ (IN THOUSANDS) 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 ===== ======= ====== F-33
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: [Download Table] YEARS ENDED DECEMBER 31, ---------------- 1998 1997 ------ ------ (IN THOUSANDS) 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 ====== ====== 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 F-34
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 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. F-35
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: [Download Table] SHARES EXERCISE PRICE ------- --------------- Outstanding, December 31, 1995............................ 350,515 $ 0.96 - $17.00 Granted................................................. 42,000 $10.25 - $18.25 Exercised............................................... (20,540) $ 0.96 - $12.00 Cancelled............................................... (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 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: [Enlarge/Download Table] WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE ------------------------ ----------- ---------------- -------- ----------- 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 F-36
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) [Enlarge/Download Table] WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE ------------------------ ----------- ---------------- -------- ----------- 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 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 the 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 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, F-37
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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) [Download Table] YEARS ENDED: ------------------------- 1998 1997 1996 ---- ------- ------ 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 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. 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 state 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. F-38
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of such purchases and expenses with related parties is as follows: [Download Table] 1998 1997 ------ ------ (IN THOUSANDS) 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 -- 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: [Download Table] 1998 1997 1996 ---- ---- ---- Customer A.................................................. 16% 12% 32% Customer B.................................................. 35 27 15 Customer C.................................................. 2 24 24 Customer D.................................................. 28 20 11 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: [Download Table] 1998 1997 1996 ---- ---- ---- Singapore................................................... 18% 20% 33% Thailand.................................................... 10 17 23 Hong Kong................................................... 21 24 7 Mexico...................................................... 14 11 -- F-39
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SMARTFLEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents summarized quarterly results: [Enlarge/Download Table] QUARTER 1ST 2ND 3RD 4TH ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 --------------- (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. F-40
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 3,052 $ 2,613 Short-term investments.................................... 18,662 24,743 Accounts receivable, trade (less allowance of $767 at June 30, 1999 and $957 at December 31, 1998)................ 14,969 11,209 Inventories............................................... 10,467 3,927 Deferred income taxes..................................... 3,613 3,613 Income tax receivable..................................... 1,735 -- Prepaid expenses and other current assets................. 2,821 2,360 ----------- -------- Total current assets.............................. 55,319 48,465 Property and equipment, net................................. 20,801 18,475 Goodwill, net of accumulated amortization of $398 at June 30, 1999 and $49 at December 31, 1998..................... 14,327 4,089 Other assets................................................ 1,167 1,262 ----------- -------- Total assets...................................... $ 91,614 $ 72,291 =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable to related parties....................... $ -- $ -- Accounts payable.......................................... 14,885 7,050 Other accrued liabilities................................. 7,044 7,546 Current portion of notes payable.......................... 5,673 1,150 ----------- -------- Total current liabilities......................... 27,602 15,746 Deferred income taxes....................................... 324 323 Long-term portion of notes payable and other liabilities.... 18,066 5,203 Commitments and contingencies Stockholder's 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................................ 36,534 36,532 Retained earnings......................................... 9,072 14,471 ----------- -------- Total stockholders' equity........................ 45,622 51,019 ----------- -------- Total liabilities and stockholder's equity...... $ 91,614 $ 72,291 =========== ======== See accompanying notes to consolidated financial statements. F-41
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) [Enlarge/Download Table] SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net revenues........................................ $53,491 $64,042 $30,339 $27,037 Cost of revenues.................................... 48,143 56,914 27,082 24,054 ------- ------- ------- ------- Gross margin...................................... 5,348 7,128 3,257 2,983 Costs and expenses: Marketing and sales expense....................... 1,844 1,816 687 886 General and administrative expense................ 6,032 3,967 3,178 1,886 Goodwill expense.................................. 398 -- 202 -- Restructuring expense............................. 3,847 -- -- -- ------- ------- ------- ------- Operating income (loss)............................. (6,773) 1,345 (810) 211 Interest income..................................... 489 484 174 221 Interest expense.................................... (652) (87) (342) (25) Other income (expense).............................. 188 98 151 171 ------- ------- ------- ------- Income (loss) before income taxes................... (6,748) 1,840 (827) 578 Income tax provision (benefit)...................... (1,348) 625 (281) 191 ------- ------- ------- ------- Net income (loss)................................... $(5,400) $ 1,215 $ (546) $ 387 ======= ======= ======= ======= Net income (loss) per share (basic)................. $ (0.84) $ 0.19 $ (0.08) $ 0.06 ======= ======= ======= ======= Net income (loss) per share (diluted)............... $ (0.83) $ 0.19 $ (0.08) $ 0.06 ======= ======= ======= ======= Number of shares used in computing net income (loss) per share (basic)................................. 6,467 6,397 6,481 6,422 ======= ======= ======= ======= Number of shares used in computing net income (loss) per share (diluted)............................... 6,500 6,469 6,508 6,476 ======= ======= ======= ======= See accompanying notes to consolidated financial statements. F-42
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SMARTFLEX SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) [Enlarge/Download Table] SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ---------- --------- (IN THOUSANDS) NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ (5,400) $ 1,215 Adjustments to reconcile net income to net cash (loss) provided by (used in) operating activities, Depreciation.............................................. 3,578 1,965 Amortization of goodwill.................................. 398 -- Provision for doubtful accounts........................... (105) 165 Provision for inventory obsolescence...................... (1,251) 1,941 Changes in operating assets and liabilities: Receivables............................................... (3,655) 5,308 Inventories............................................... (1,789) 4,418 Prepaid expenses and other assets......................... (2,100) 97 Accounts payable to related parties....................... -- (396) Accrued restructuring cost................................ 579 (1,406) Accounts payable and accrued liabilities.................. 6,754 (7,125) -------- ------- Net cash provided by operating activities.............. (2,991) 6,182 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................ (4,654) (3,358) Acquisition................................................. (11,604) -- Purchases of short-term investments....................... 36 (2,590) Proceeds from the sale of short-term investments.......... 6,045 -- -------- ------- Net cash used in investing activities.................. (10,177) (5,948) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock...................... 3 282 Line of credit, net......................................... 14,087 -- Payments on term loan..................................... (483) (888) -------- ------- Net cash provided by (used in) financing activities....... 13,607 (606) -------- ------- Net increase (decrease) in cash............................. 439 (372) Cash at beginning of period............................... 2,613 2,069 -------- ------- Cash at end of period..................................... $ 3,052 $ 1,697 ======== ======= Supplemental disclosures of cash flow information: Interest paid............................................. $ 652 $ 89 Taxes paid................................................ 53 960 See accompanying notes to consolidated financial statements. F-43
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SMARTFLEX SYSTEMS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 NOTE (A) -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Smartflex Systems, Inc. and its wholly owned subsidiaries ("Smartflex" or the "Company"), and have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. NOTE (B) -- FISCAL YEAR The Company's fiscal year is 52 or 53 weeks, ending on the Saturday nearest December 31 each year, and follows a four-four-five week quarterly cycle. For clarity of presentation, the Company has presented its fiscal years as ending December 31, and its fiscal quarters as ending on March 31, June 30, September 30 and December 31. NOTE (C) -- USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. NOTE (D) -- CREDIT FACILITY The Company amended its bank credit facility (the "facility") on March 30, 1999 and April 20, 1999 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 June 30, 1999. Outstanding balances on the credit line bear interest at the bank's prime rate or, at the Company's option, a sliding rate of LIBOR plus 1.50% to 2.25%, and unused portions of the credit line bear interest at .125% per annum. At June 30, 1999 there was $15.2 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, a sliding rate of LIBOR plus 1.75% to 2.50%. Principal and interest are payable monthly, and this term loan matures on March 30, 2001. At June 30, 1999, the outstanding balance on this term loan was $1.3 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, a sliding rate of LIBOR plus 1.75% to 2.50%. At June 30, 1999, the outstanding balance on the second term loan was $2.7 million. The facility contains certain financing and operating covenants relating to net worth, liquidity, leverage, profitability, fixed charge coverage and a prohibition on payment of cash dividends. At June 30, 1999, the Company was in compliance with all of the covenants, except those that relate to the quick ratio, for which the Company has received a waiver. NOTE (E) -- IMPACT OF NEWLY ISSUED PRONOUNCEMENT BY THE FINANCIAL ACCOUNTING STANDARDS BOARD 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 F-44
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SMARTFLEX SYSTEMS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 adoption of SFAS No. 133 will not materially impact the Company's results of operations or financial position. NOTE (F) -- TANON ACQUISITION 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 guarantee this additional payment. NOTE (G) -- TENDER OFFER FROM SATURN On July 7, 1999 the Company announced that it has entered into a definitive agreement pursuant to which all outstanding shares of common stock will be acquired by SSI Acquisition Corp. ("SSI") a subsidiary of Saturn Electronics and Engineering, Inc. ("Saturn"). Under the agreement, Saturn commenced a tender offer for all outstanding shares of common stock of Smartflex for $10.50 per share in cash. A successful completion of the tender offer will be followed by a merger in which any shares not acquired by Saturn in the tender offer will be acquired for the same amount of cash in the merger. The tender offer commenced on July 14, 1999, and is conditioned on a majority of the outstanding shares being tendered as well as other customary conditions. F-45
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PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following sets forth pro forma data for the Company for the year ended December 31, 1999 and has been prepared to illustrate the effects of the Smartflex acquisition as if it had occurred as of January 1, 1999 with respect to the Statement of Operations information. The Smartflex acquisition was accounted for under the purchase method of accounting. The pro forma Consolidated Statement of Operations is provided for comparative purposes only and does not purport to be indicative of the results that actually would have been obtained if this transaction had occurred on the date indicated. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Result of Operations," "Selected Financial Data," and the financial statements and notes thereto included elsewhere in this prospectus. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) [Enlarge/Download Table] SATURN ELECTRONICS SMARTFLEX & ENGINEERING SYSTEMS PRO FORMA PRO FORMA INC. INC. ADJUSTMENTS COMBINED ------------- --------- ----------- ---------- Net revenue.............................. $ 257,107 $ 68,472 $ 325,579 Cost of revenue.......................... 205,341 63,377 $ 257(1) 268,975 ---------- -------- ------- ---------- Gross profit........................... 51,766 5,095 (257) 56,604 Development expense...................... 7,741 724 8,465 Selling, general and administrative expense................................ 19,146 10,321 29,467 Amortization expense..................... 2,582 531 (531)(2) 2,190(3) 4,772 Restructuring expense.................... 3,833 3,833 ---------- -------- ------- ---------- Operating income (loss)................ 22,297 (10,314) (1,916) 10,067 Interest income.......................... 331 463 (463)(4) (331)(5) 0 Interest expense......................... (3,340) (898) 898(6) 3,340(7) (8,293)(8) (443)(9) (8,736) Other income (expense), net.............. (161) (549) (710) Minority Interest........................ (2,788) (2,788) ---------- -------- ------- ---------- Income (loss) before income taxes...... 16,339 (11,298) (7,208) (2,167) Income taxes............................. 6,434 (2,895) (3,169)(10) 370 ---------- -------- ------- ---------- Net income (loss)...................... $ 9,905 $ (8,403) $(4,039) $ (2,537) ========== ======== ======= ========== Basic and diluted earnings per share..... $ 0.31 $ (0.08) Basic and diluted weighted average number of common shares outstanding........... 32,145,026 32,145,026 --------------- Notes: (1) To record additional depreciation expense pertaining to appraised valuation of Smartflex property, plant and equipment. The associated asset amount is being depreciated over 5 years on a straight line basis. (2) To record reversal of amortization expense pertaining to pre-acquisition goodwill of Smartflex. (3) To record amortization expense on acquired intangible assets. These intangible assets are being amortized over periods ranging from 13 to 18 years. F-46
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(4) To record reversal of interest income pertaining primarily to pre-acquisition cash investments held by Smartflex. (5) To record reversal of interest income pertaining to cash investments held by Saturn. (6) To record reversal of interest expense incurred by Smartflex. (7) To record reversal of interest expense incurred Saturn. (8) To record interest expense assuming average borrowings outstanding of $107,000,000 at an interest rate of 7.75%. (9) To record amortization expense pertaining to deferred financing costs of $1,991,000. The deferred financing costs are being amortized on a straight line basis over three years. (10) To record the income tax impact of the pro forma adjustments. F-47
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[SATURN ARTWORK] F-48
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[LOGO TO COME] SATURN ELECTRONICS & ENGINEERING, INC.
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses of the issuance and distribution, all of which are payable by us, will be as follows (all amounts are estimated except the SEC registration fee, the NASD fee and the Nasdaq Market listing fee): [Download Table] SEC Registration Fee........................................ $33,000 NASD Fee.................................................... Nasdaq National Market Listing Fee.......................... Printing and Engraving Expenses............................. Accounting Fees and Expenses................................ Legal Fees and Expenses..................................... Transfer Agent's Fees and Expenses.......................... Miscellaneous Expenses...................................... ------- Total.................................................. $ ======= ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Michigan law allows the articles of incorporation of a Michigan corporation to contain a provision eliminating or limiting directors' liability to a corporation or its shareholders for money damages for any action taken or any failure to take any action as a director, except for liability for specified acts, and our amended and restated articles of incorporation contain such a provision. In addition, our amended and restated bylaws obligate us to indemnify our directors and officers, and our former directors and officers, to the maximum extent permitted by Michigan law. Our obligation to indemnify such individuals includes indemnification against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service as an officer or director in advance of the final disposition of any covered matter. To be indemnified, the officer or director must have acted, or failed to act, in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our or our shareholders' best interests and he or she must not have derived an improper personal benefit from such actions or omission. To be indemnified in connection with any criminal action or proceeding, a director or officer must have had no reasonable cause to believe his or her conduct was unlawful. Our indemnification obligations extend to claims made against our officers or directors because they acted as an officer or director of another company at our request. We maintain directors' and officers' liability insurance that provides coverage in the amount of $15.0 million. These provisions may discourage shareholders from bringing lawsuits against our directors for breach of their fiduciary duties. These provisions may also reduce the likelihood of derivative litigation against our directors and officers, even though such action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder's investment may be adversely affected to the extent we are liable for damages awarded against our directors and officers pursuant to these indemnification provisions. We believe that these provisions and the related insurance are necessary to attract and retain talented, experienced directors and officers. At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for indemnification. II-1
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information reflects our recent sales of unregistered securities, none of which involved any underwriters: On March 15, 2000, we granted a warrant for 1,565,331 shares of common stock to Motorola. The exercise price per share is 90% of the initial public offering price per share. We issued the warrant in reliance upon the exemption from registration available under Section (4)2 of the Securities Act, including Regulation D promulgated thereunder, as a transaction by an issuer not involving any public offering. The warrant certificate has a legend imprinted on it stating that it have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or unless an exemption applies. In 1999, we granted options to purchase 821,400 unregistered shares of common stock to 98 employees, including 3 executive officers, and 5 directors. The exercise price per share was $3.888. These shares were issued by us in reliance upon the exemption from registration contained in Rule 701 of the Securities Act. In 1998, we granted options to purchase 625,500 unregistered shares of common stock to 29 employees, including 3 executive officers, and 3 directors. The exercise price per share was $2.878. These shares were issued by us in reliance upon the exemption from registration contained in Rule 701 of the Securities Act. In 1997, we granted options to purchase 636,000 unregistered shares of common stock to 32 employees, including 2 executive officers, and 3 directors. The exercise price per share was $2.233. These shares were issued by us in reliance upon the exemption from registration contained in Rule 701 of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits [Download Table] 1* -- Form of Underwriting Agreement 3.1* -- Form of Amended and Restated Articles of Incorporation of Saturn Electronics & Engineering, Inc. 3.2* -- Form of Amended and Restated Bylaws of Saturn Electronics & Engineering, Inc. 4.1* -- Form of Certificate for shares of Common Stock 5** -- Opinion of Honigman Miller Schwartz and Cohn 10.1* -- Tanon Manufacturing, Inc. Amended and Restated Agreement of Purchase and Sale between Tanon Manufacturing, Inc. and Smartflex Systems, Inc., dated December 2, 1998 10.2 -- Stock Purchase Agreement by and among Logical Services Incorporated, the Shareholders of Logical Services Incorporated and Smartflex Systems, Inc., dated October 7, 1998 10.3 -- Methuen Division Agreement of Purchase and Sale by and between EA Industries, Inc. and Methuen Acquisition Corp., dated December 2, 1998 10.4 -- Stock Purchase Agreement between World Wide Industrial Invest, B.V. and Saturn Electronics & Engineering, Inc., dated April 16, 1999 10.5 -- Agreement and Plan of Merger among Saturn Electronics & Engineering, Inc., SSI Acquisition Corp., and Smartflex Systems, Inc., dated, July 6, 1999 10.6 -- Split-Dollar Agreement between Saturn Electronics & Engineering, Inc., Wallace K. Tsuha, and Sherman Cruz, Trustee of the Wallace K. Tsuha Irrevocable Life Insurance Trust of December 13, 1991, dated July 15, 1999 10.7 -- Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated December 1, 1999 II-2
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[Download Table] 10.8 -- Amendment to Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated February 28, 2000 10.9 -- Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan 10.10 -- Amendment No. 1 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated November 19, 1997 10.11 -- Amendment No. 2 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated July 29, 1999 10.12 -- Amendment No. 3 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated September 28, 1999 10.13 -- Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated April 16, 1998 10.14 -- Amendment No. 1 to Loan Agreement and Revolving Credit Note by and between Saturn Electronics Texas, LLC and Comerica Bank, dated June 10, 1999 10.15 -- Amendment No. 2 to Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated January 11, 2000 10.16 -- Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated August 24, 1999 10.17 -- Amendment No. 1 to Credit Agreement between Saturn Electronics & Engineering, Inc. and Comerica Bank, dated September 24, 1999 10.18 -- Amendment No. 2 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated November 10, 1999 10.19* -- Amendment No. 3 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated March 27, 2000 10.20 -- Saturn Electronics Texas, LLC Membership Regulations, dated February 25, 1998 10.21 -- Amendment No. 1 to Saturn Electronics Texas, LLC Membership Regulations, dated September 21, 1998 10.22 -- Amendment No. 2 to Saturn Electronics Texas, LLC Membership Regulations, dated February 28, 1999 10.23 -- Amendment No. 3 to Saturn Electronics Texas, LLC Membership Regulations, dated June 21, 1999 10.24 -- Amendment No. 4 to Saturn Electronics Texas, LLC Membership Regulations, dated October 21, 1999 10.25 -- Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated August 20, 1999 10.26 -- First Amendment to Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated March 27, 2000 10.27* -- Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 15, 2000 10.28* -- First Amendment to Saturn Electronics & Engineering, Inc. to Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 27, 2000 10.29* -- Registration Rights Agreement with MascoTech, Inc. 10.30* -- Saturn Electronics & Engineering, Inc. 2000 Stock Option Plan 21* -- List of subsidiaries 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2 -- Consent of Ernst & Young LLP 23.3* -- Consent of Honigman Miller Schwartz and Cohn (contained in their opinion filed as Exhibit 5) II-3
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[Download Table] 24 -- Power of Attorney (included on the signature page to this Registration Statement) 27 -- Financial Data Schedule --------------- * To be filed by Amendment. (b) Financial Statement Schedules. ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, or the Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4
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SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Auburn Hills, Michigan on March 29, 2000. SATURN ELECTRONICS & ENGINEERING, INC. By: /s/ WALLACE K. TSUHA, JR. ------------------------------------ Wallace K. Tsuha, Jr. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned officers and directors of Saturn Electronics & Engineering, Inc., a Michigan corporation (the "Company"), hereby constitutes and appoints Wallace K. Tsuha, Jr. and Donald J. Cowie, and each of them, the true and lawful attorneys-in-fact and agents of the undersigned, each with the power and substitution for him in any and all capacities, with full power and authority in said attorneys-in-fact and agents and in any one or more of them, to sign, execute and affix his seal thereto and file any and all amendments to this Registration Statement, including any amendment thereto changing the amount of securities for which registration is being sought, and any post-effective amendment and any and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1993, with all exhibits and any and all documents required to be filed with respect thereto with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, and each of them, or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. [Enlarge/Download Table] SIGNATURE TITLE DATE --------- ----- ---- /s/ WALLACE K. TSUHA, JR. President, chief executive March 27, 2000 --------------------------------------------------- officer, chairman of the board Wallace K. Tsuha, Jr. and director (principal executive officer) /s/ DONALD J. COWIE Chief financial officer, March 27, 2000 --------------------------------------------------- executive vice president, Donald J. Cowie treasurer and assistant secretary (principal financial and accounting officer) /s/ WILLIAM T. ANDERSON Director March 27, 2000 --------------------------------------------------- William T. Anderson II-5
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[Download Table] SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID E. COLE Director March 27, 2000 --------------------------------------------------- David E. Cole /s/ SHERMAN L. CRUZ Director March 27, 2000 --------------------------------------------------- Sherman L. Cruz /s/ FOREST J. FARMER Director March 27, 2000 --------------------------------------------------- Forest J. Farmer /s/ RICK INATOME Director March 27, 2000 --------------------------------------------------- Rick Inatome /s/ GARY E. LIEBL Director March 27, 2000 --------------------------------------------------- Gary E. Liebl II-6
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EXHIBIT INDEX [Download Table] EXHIBIT NO. ----------- 1* -- Form of Underwriting Agreement 3.1* -- Form of Amended and Restated Articles of Incorporation of Saturn Electronics & Engineering, Inc. 3.2* -- Form of Amended and Restated Bylaws of Saturn Electronics & Engineering, Inc. 4.1* -- Form of Certificate for shares of Common Stock 5* -- Opinion of Honigman Miller Schwartz and Cohn 10.1* -- Tanon Manufacturing, Inc. Amended and Restated Agreement of Purchase and Sale between Tanon Manufacturing, Inc. and Smartflex Systems, Inc., dated December 2, 1998 10.2 -- Stock Purchase Agreement by and among Logical Services Incorporated, the Shareholders of Logical Services Incorporated and Smartflex Systems, Inc., dated October 7, 1998 10.3 -- Methuen Division Agreement of Purchase and Sale by and between EA Industries, Inc. and Methuen Acquisition Corp., dated December 2, 1998 10.4 -- Stock Purchase Agreement between World Wide Industrial Invest, B.V. and Saturn Electronics & Engineering, Inc., dated April 16, 1999 10.5 -- Agreement and Plan of Merger among Saturn Electronics & Engineering, Inc., SSI Acquisition Corp. and Smartflex Systems, Inc., dated July 6, 1999 10.6 -- Split-Dollar Agreement between Saturn Electronics & Engineering, Inc., Wallace K. Tsuha, and Sherman Cruz, Trustee of the Wallace K. Tsuha Irrevocable Life Insurance Trust of December 13, 1991, dated July 15, 1999 10.7 -- Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated December 1, 1999 10.8 -- Amendment to Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated February 28, 2000 10.9 -- Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan 10.10 -- Amendment No. 1 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated November 19, 1997 10.11 -- Amendment No. 2 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated July 29, 1999 10.12 -- Amendment No. 3 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated September 28, 1999 10.13 -- Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated April 16, 1998 10.14 -- Amendment No. 1 to Loan Agreement and Revolving Credit Note by and between Saturn Electronics Texas, LLC and Comerica Bank, dated June 10, 1999 10.15 -- Amendment No. 2 to Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated January 11, 2000 10.16 -- Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated August 24, 1999 10.17 -- Amendment No. 1 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated September 24, 1999 10.18 -- Amendment No. 2 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated November 10, 1999 10.19* -- Amendment No. 3 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated March 27, 2000
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[Download Table] EXHIBIT NO. ----------- 10.20 -- Saturn Electronics Texas, LLC Membership Regulations, dated February 25, 1998 10.21 -- Amendment No. 1 to Saturn Electronics Texas, LLC Membership Regulations, dated September 21, 1998 10.22 -- Amendment No. 2 to Saturn Electronics Texas, LLC Membership Regulations, dated February 28, 1999 10.23 -- Amendment No. 3 to Saturn Electronics Texas, LLC Membership Regulations, dated June 21, 1999 10.24 -- Amendment No. 4 to Saturn Electronics Texas, LLC Membership Regulations, dated October 21, 1999 10.25 -- Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated August 20, 1999 10.26 -- First Amendment to Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated March 27, 2000 10.27* -- Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 15, 2000 10.28* -- First Amendment to Saturn Electronics & Engineering, Inc. to Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 26, 2000 10.29* -- Registration Rights Agreement with MascoTech, Inc. 10.30* -- Saturn Electronics & Engineering, Inc. 2000 Stock Option Plan 21* -- List of subsidiaries 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2 -- Consent of Ernst & Young LLP 23.3* -- Consent of Honigman Miller Schwartz and Cohn (contained in their opinion filed as Exhibit 5) 24 -- Power of Attorney (included on the signature page to this Registration Statement) 27 -- Financial Data Schedule --------------- * To be filed by Amendment.

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