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
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000
REGISTRATION NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SATURN ELECTRONICS & ENGINEERING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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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)
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COPIES TO:
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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
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, without par value............................. $125,000,000 $33,000
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) of the Securities Act of 1933, as amended.
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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
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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.
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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.
[SATURN ARTWORK]
[SATURN ARTWORK]
[SATURN ARTWORK]
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TABLE OF CONTENTS
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PAGE
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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
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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
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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.
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.
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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
THE OFFERING
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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
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.
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YEAR ENDED DECEMBER 31,
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PRO FORMA
1995 1996 1997 1998 1999 1999
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(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
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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
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AS OF DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
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(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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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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
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
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
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
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
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
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
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
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
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
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
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;
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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.
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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
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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:
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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
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
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
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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.
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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.
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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.
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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
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.
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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.
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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.
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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.
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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.
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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
(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
[SATURN ARTWORK]
F-48
[LOGO TO COME]
SATURN ELECTRONICS &
ENGINEERING, INC.
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
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
[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
[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
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
[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
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
[Download Table]
EXHIBIT NO.
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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
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* To be filed by Amendment.
Dates Referenced Herein
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