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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2007
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-50812
MULTI-FINELINE ELECTRONIX, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-3947402 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3140 East Coronado Street
Anaheim, California 92806
(Address of principal executive offices, Zip code)
(714) 238-1488
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.0001 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of Common Stock held by non-affiliates of the registrant (based upon the closing sale price of the NASDAQ Global Select Market on March 30, 2007) was $76,005,863. Shares held by each executive officer, director and by each person that owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of November 30, 2007 was 24,673,700.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2008 Annual Meeting of Stockholders expected to be held in March 2008.
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Multi-Fineline Electronix, Inc.
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Part I
| Item 1. | Business |
Overview
This Annual Report on Form 10-K, or Annual Report, contains forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements and predictions as to our expectations regarding our net sales, operating expenses, net income and operations, gross margins, yields, anticipated cash needs, capital requirements and capital expenditures, payment terms, expected tax rates, needs for additional financing, use of working capital, the benefits of our China operations, plans for future products and services and for enhancements of existing products and services, trends in, and our focus on, flex circuitry and the complexity of assemblies, anticipated growth strategies, ability to attract customers, sources of net sales, anticipated trends and challenges in our business and the markets in which we operate, the adequacy and capabilities of our facilities, the impact of economic and industry conditions on our customers and our business, the benefits and risks of our strategies and joint ventures, the benefits, risks and synergies that could be achieved from our acquisitions, our diversification efforts, current and upcoming programs and product mix and the material content of such programs, the release and sales of our camera cell phone modules and embedded magnetic technology, the development of and applications for new technology, customer demand, our competitive position, the existence, outcome and impact on our business of any litigation, critical accounting policies, expected tax rates, the results of our audits in China and the United States and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement which is preceded by the word “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “aim,” “potential,” “plan,” or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, the impact of changes in demand for our products, our success with new and current customers, our ability to develop and deliver new technologies, our ability to diversify our customer base, our effectiveness in managing manufacturing processes and costs and expansion of our operations, the degree to which we are able to utilize available manufacturing capacity, achieve expected yields, obtain expected gross margins, enter into new markets and execute our strategic plan, our ability to successfully manage power shortages in China, the impact of competition and of technological advances, the outcome of any litigation, and the risks set forth below under Item 1A. “Risk Factors.” These forward-looking statements represent our judgment as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.
We are one of the world’s largest producers of flexible printed circuits and flexible circuit assemblies. With operations in Anaheim, California, Tucson, Arizona and Suzhou, China, we offer a global service and support base for the design and manufacture of flexible interconnect solutions.
We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that has the ability to offer a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We target our solutions within the electronics market and, in particular, we focus on applications where flexible printed circuits facilitate human interaction with an electronic device and are the enabling technology in achieving a desired size, shape, weight or functionality of the device. Current applications for our products include mobile phones, smart mobile devices, portable bar code scanners, personal digital assistants, computer/storage devices and medical devices. We provide our solutions to original equipment manufacturers, or OEMs, such as Motorola, Inc. and International Business Machines Corporation; to electronic manufacturing services, or EMS, providers such as Foxconn Electronics, Inc. and Flextronics International Ltd.; and to display manufacturers such as Optrex Corporation Japan. In 2005, we acquired the business of an optical and photonic imaging solution company as part of our strategy to capture a portion of the expanding camera cell phone market. We now operate this business as Aurora Optical, Inc., or Aurora Optical, as a wholly owned subsidiary of M-Flex.
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Our growth has been due, in part, to our early supplier involvement allowing our engineers to gain an understanding of the application and use of the customers’ circuits. This knowledge allows our engineers to utilize their expertise in flex circuit design and assist in the selection of materials and technologies to provide a high quality and cost effective product. Vertically integrated flex circuit manufacturing, assembly, and tooling operations have allowed us to offer superior lead time support to facilitate “quick turn” customer requirements.
We were incorporated as Multi-Fineline Electronix, Inc. in California in October 1984. In connection with our initial public offering, we reincorporated as Multi-Fineline Electronix, Inc. in Delaware on June 4, 2004. References in this Annual Report to “we,” “our,” “us” and “M-Flex” refer to Multi-Fineline Electronix, Inc. and our consolidated subsidiaries, Multi-Fineline Electronix (Suzhou) Co., Ltd., or MFC1; Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., or MFC2; M-Flex Cayman Islands, Inc.; Multi-Fineline Electronix Singapore Pte. Ltd.; and Aurora Optical, except where it is made clear that the term means only the parent company.
Industry Background
We believe that the global market for flexible printed circuits will continue to grow over the coming years as consumers continue to demand smaller, more functional devices. Given inherent design and cost advantages of flexible printed circuits, they quickly are becoming a favored solution for electronics manufacturers who are striving to increase the features and functionality of electronic devices while reducing the size, shape and weight of such devices. Asia is one of the largest and fastest growing market for flexible printed circuits, largely because of two trends that occurred in the early 1990s—the outsourcing by OEMs of their manufacturing needs and the shifting of manufacturing facilities from the United States to Asian countries.
Historically, electronics manufacturers have relied upon rigid printed circuit boards to provide the electrical interconnections between the components in electronics devices. Rigid printed circuit boards consist of a board that contains multiple transistors, microprocessors and other components that are connected by copper wires embedded on the circuit board. Given that the rigid printed circuit boards cannot bend or twist, they inherently limit the design options available to engineers. For example, in order to design and build “flip-phone” style mobile phones, engineers had to create a method to connect the rigid printed circuit board in the base of the phone with the rigid printed circuit board in the screen. Copper wires could not be used because they are subject to failure as a result of stress from the constant bending and flexing of the wires; therefore, design engineers had to look to new materials to provide a means of electrical interconnection between the various components of the device.
To address this need, companies such as M-Flex began to design flexible printed circuits and flexible printed circuits containing components, or component assemblies, to serve as electrical interconnections. These flexible printed circuits can twist, bend and flex in a device with less risk of failure while connecting the components of the device. In addition to these functionality advantages, flexible printed circuits and component assemblies enable OEMs, EMS providers and display manufacturers to design and construct modular components that can be incorporated into the final product, which in turn reduces the complexity of the assembly of the final product, reduces the manufacturing costs and facilitates human interaction with the electronic device. As a result, manufacturers can reduce the number of assembly operations required for a product and improve the efficiency of their supply chains.
We believe that the overall market for flexible printed circuits and component assemblies is poised for substantial growth over the next several years as a result of favorable technological and market developments, including:
| • | Miniaturization, Portability and Complexity of Electronic Devices. As electronic devices become more powerful, complex and compact, product size becomes a principal design limitation. From an engineering standpoint, flexible printed circuits possess enhanced heat dissipation properties because they are thinner than rigid printed circuit boards and provide higher signal integrity interconnection. They also enable faster operating speeds because the components can be placed closer together and |
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can serve as a medium for analog and digital devices. As a result, the electronics industry has relied increasingly upon flexible printed circuits and component assemblies. For example, the placement of chips and liquid crystal displays directly on the flexible printed circuit enables OEMs to increase functionality and improve packaging characteristics while managing time-to-market for their products in an overall cost-effective manner. Moreover, as electronics companies develop increased functionality for semiconductors, the traditional packaging and mounting technologies are becoming obsolete. For example, designs of electronics devices that incorporate camera modules require the performance and flexibility characteristics offered by flexible printed circuits. |
| • | Outsourcing. Electronics companies increasingly are relying upon outsourcing to technically qualified, strategically located manufacturing partners that provide integrated, end-to-end flexible printed circuit and component assembly solutions comprised of design and application engineering, prototyping and competitive high-volume production services. By employing these end-to-end manufacturers, electronics companies are able to reduce time-to-market, avoid product delays, reduce manufacturing costs, minimize logistical problems and focus on their core competencies. |
| • | Expanding Markets and Flexible Component Demand. The global demand for wireless communication products and the complexity of wireless devices, including those supporting products with digital cameras and personal digital assistants, increasingly are driving the demand for more complex flexible printed circuits and component assemblies. Electronics companies have discovered that they can increase the functionality of flexible printed circuits and reduce the number of required interconnects by mounting components, such as connectors, switches, resistors, capacitors, light emitting devices, integrated circuits and optical sensors, to the flexible printed circuits. While we believe that the wireless industry in general is expanding rapidly, we believe that the number of flexible printed circuits and component assemblies incorporated into these wireless devices will grow even more rapidly, requiring significantly more flexible components per device than have been used in previous-generation wireless applications. |
Competitive Strengths
We are a leading global provider of high-quality, technologically advanced flexible printed circuit and component assembly solutions to the electronics industry. We believe our competitive strengths include:
| • | Our Seamless and Efficient End-to-End Solution for Flexible Printed Circuit Applications. We provide a seamless, integrated end-to-end flexible printed circuit solution for our customers, ranging from design and application engineering, prototyping and high-volume manufacturing to turnkey component assembly and testing. By relying on a single provider for their flexible printed circuit requirements, our customers can benefit from opportunities for more robust product designs and process optimization during the development phase. This, in turn, frequently leads to production cost savings and quicker time-to-market. Our operations possess the expertise and capabilities to provide a seamless, integrated end-to-end solution that provides our customers with the ability to leverage any one or more of our facilities to meet their global requirements. |
| • | Our Design and Application Engineering Expertise Supports Our Strong Customer Relationships. Our expertise in designing and manufacturing flexible printed circuits and component assemblies has enabled us to become a partner to our customers at the earliest stages of product development. We employ our design and application engineers as part of our sales process; therefore, our customers rely on us to assist them in the early design phase of their products. Early design participation enables us to gain intricate knowledge of our customers’ products and thereby provide value-added engineering support to them. Early design participation also enables our customers to achieve lower production costs through better product design and utilization of our flexible printed circuit assembly expertise. In addition, this process fosters strong relationships with our customers, often resulting in their reliance on our products and engineering support for the life of the specific application and subsequent generations of similar applications. |
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| • | Our Manufacturing Capabilities. We maintain manufacturing facilities in the United States and China. Our U.S. operations primarily provide design and application engineering and small scale manufacturing, while our Chinese operations are organized to concentrate on ramping up production of new products from prototype stage to high volume, while allowing us to consolidate the labor intensive aspects of high-volume manufacturing in a cost-efficient environment. We also are continuing to enhance our design and application engineering capabilities in China to best position us to provide an integrated end-to-end solution to the emerging domestic electronics markets in China and other parts of Asia. In fiscal 2006, we set up a production line and clean room environment in Suzhou, China to enable us to cost-effectively manufacture camera modules. Since 2000, we have expanded our manufacturing capacity in China by acquiring additional and technologically advanced machinery, and by expanding our manufacturing facilities. Our ongoing attention to integrating the manufacturing processes between our facilities allows us to improve our product yields, shorten our customers’ supply chains and lower the overall costs of our products. Furthermore, expansion of our manufacturing facilities and the capital equipment addition at our second manufacturing facility in China, or MFC2, which became operational in October 2006, can increase substantially our manufacturing capacities in China and enable us to take on additional high-volume manufacturing programs. While we believe our Chinese manufacturing facilities benefit the company, they do subject us to additional risks inherent in international business, including those detailed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results.” |
| • | Our Forward Integration in the Value Chain. We have implemented a strategy of upward integration focusing on the value-added services that we provide to our customers—design and application engineering and component assembly—rather than only concentrating on acquiring the capabilities to produce the materials used to manufacture flexible printed circuits. By employing suppliers to provide us with raw materials, we have avoided unnecessary capital equipment and research and development costs and have focused more intensely on the integral steps in the manufacturing process, from design and prototyping to high-volume manufacturing and component assembly. The result of this strategy has been superior design and application engineering expertise, strong customer relationships and yearly sequential net sales growth. |
| • | Our Management Experience and Expertise. Many of our executive officers have been with us for between 12 and 20 years. During that time, our executive management has made a number of critical, strategic decisions that successfully managed our growth and profitability, including pursuing a strategy of deploying our design and application engineers at the early stages of a customer’s product designs; responding to the trend of OEM outsourcing; identifying China’s manufacturing capabilities; creating a seamless, integrated end-to-end solution in each of our U.S. and Chinese operations to serve the needs of multinational OEMs, EMS providers and display manufacturers; and adopting a forward integration strategy in order to focus on the engineering and assembly needs of our customers. |
Business Strategy
Our objective is to continue to expand our product offering to become a global provider of electronic products packaging technology and manufacturing by using our core technologies of high-quality, technologically advanced flexible printed circuits and assemblies as the essential ingredients. To achieve our objective, we intend to pursue the following strategies:
| • | Provide an Integrated Solution to Our Customers. We intend to maintain our leadership in providing a complete end-to-end solution to our customers that includes design and application engineering, prototyping, high-volume manufacturing, material acquisition, component assembly and testing. In addition, we intend to leverage our value-added services—design and application engineering and turnkey component assembly—to help solve our customers’ product design challenges and to provide our customers with flexible printed circuit solutions designed and manufactured to maximize the reliability and functionality of their end products. By focusing on customers’ product applications and providing them with a seamless, integrated and cost-efficient flexible printed circuit and |
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component assembly solution, we believe that we can continue to grow our market share by eliminating the need of our customers to negotiate with multiple vendors and reducing the time-to-market for their products. |
| • | Support the Development of Applications for Flexible Printed Circuit Technology in New Markets. We believe that flexible printed circuit technology provides a cost-effective solution to improving the functionality and packaging of electronic devices. We believe that the trend towards miniaturization will continue to drive the growth of flexible printed circuits in many industries that we currently do not serve. To address these new market opportunities, we will continue our efforts to research, develop and market new applications for flexible printed circuits and component assemblies. We believe that our design and application engineering and manufacturing capabilities, coupled with our flexible printed circuit assembly expertise, will enable us to effectively target additional high-volume flexible printed circuit applications in various markets of the electronics industry, including the camera cell phone and charger markets, where size, shape and weight are primary drivers of product development. |
| • | Expand Our Existing Expertise in the Design and Manufacture of Flexible Printed Circuit Technology. By expanding our market share in existing markets, penetrating new markets and partnering with customers in the early stage design of their products, we will continue to expand our engineering and manufacturing expertise and capabilities for applications and functionality for electronic product packaging technology and assist our customers in developing more efficient manufacturing processes for their products. We believe that we will be able to continue to capture additional market share in the sectors we serve and attract companies from other markets of the electronics industry by utilizing our expertise in design and application engineering to expand product designs and applications for flexible printed circuit solutions in conjunction with our high-volume, cost-effective manufacturing capabilities. |
| • | Diversify Our End Customers. We primarily serve the wireless sector. We plan to leverage our internal sales force comprised entirely of design and application engineers with our existing outside non-exclusive sales representatives to attract new customers in the wireless sector, as well as in other sectors of the electronics industry where functionality and packaging size dictate the need for flexible printed circuits and component assemblies, including markets where embedded magnetic applications are used, such as in chargers and power supplies. |
| • | Increase Manufacturing Capacity and Capabilities. We intend to continue to improve our manufacturing capabilities and cost reduction efforts by transitioning our Anaheim, California facility to a research and development, prototype facility and expanding the engineering capabilities and manufacturing facilities in China, while enhancing capabilities and innovation at our Anaheim facilities. In addition, MFC2 has been specifically designed and equipped for complex programs, which are flexible printed circuits with smaller features, and a high density of components and interconnection. This capability allows us to offer our customers an efficient, technologically advanced manufacturing process for complex flexible printed circuit fabrication. |
Products
Our design and application engineering expertise enable us to offer flexible printed circuit and value-added component assembly solutions for a wide range of electronic applications. We offer products in a broad range of markets, including mobile phones, smart mobile devices, portable bar code scanners, personal digital assistants, computer/storage devices and medical devices. Representative OEM customers and their end products that incorporate our flexible printed circuit products include the following:
OEM Customer | Product Category | Representative Application | ||
| Motorola, Inc. | Wireless | Keypad, hinge and display flexible printed circuit component assemblies | ||
| Motorola, Inc. | Industrial | Flexible printed circuit component assemblies for bar code scanners and terminals | ||
International Business Machines Corporation | Computer/data storage | Flexible printed circuit in data storage device | ||
| GE Healthcare | Medical applications | Flexible printed circuit in diagnostic equipment | ||
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Flexible Printed Circuits. Flexible printed circuits, which consist of copper conductive patterns that have been etched or printed while affixed to flexible substrate materials such as polyimide or polyester, are used to provide connections between electronic components and as a substrate to support these electronic devices. The circuits are manufactured by subjecting the base materials to multiple processes, such as drilling, screening, photo imaging, etching, plating and finishing. We produce a wide range of flexible printed circuits, including single-sided, double-sided, multi-layer (with and without gaps between layers) and rigid-flex. Single-sided flexible printed circuits, which have an etched conductive pattern on one side of the substrate, are normally less costly and more flexible than double-sided flexible printed circuits because their construction consists of a single patterned conductor layer. Double-sided flexible printed circuits, which have conductive patterns or materials on both sides of the substrate that are interconnected by a drilled or copper-plated hole, can provide either more functionality than a single-sided flexible printed circuit by containing conductive patterns on both sides, or greater shielding of components against electromagnetic interference than a single-sided flexible printed circuit by covering one side of the circuit with a shielding material rather than a circuit pattern. Multi-layer and rigid-flex printed circuits, which consist of layers of circuitry that are stacked and then laminated, are used where the complexity of the design demands multiple layers of flexible printed circuitry. If some of the layers of circuitry are rigid printed circuit material, the product is known as a rigid-flex printed circuit. Gapped flexible printed circuits, which consist of layers of circuitry that are stacked and separated in some parts of the circuit, and laminated in other parts of the circuit, are used where the complexity of the design demands multiple layers of flexible printed circuitry but the flexibility of a single-sided flexible printed circuit in some parts of the circuit.
Flexible Printed Circuit Assemblies. Flexible printed circuits can be enhanced by attaching electronic components, such as connectors, switches, resistors, capacitors, light emitting devices, integrated circuits, cameras and optical sensors, to the circuit. The reliability of flexible printed circuit component assemblies is dependent upon proper assembly design and the use of appropriate fixtures to protect the flex-to-connector interface. Connector selection is also important in determining the signal integrity of the overall assembly—a factor which is very important to devices that rely upon high system speed to function properly. We are one of the pioneers in attaching connectors and components to flexible printed circuits and have developed the expertise and technology to mount a full range of electronic devices, from ordinary passive components to advanced and sophisticated surface mount components.
Customers
Our customers include leading OEMs, EMS providers and display manufacturers in a variety of sectors of the electronics industry. These sectors include mobile phones, smart mobile devices, portable bar code scanners, personal digital assistants, computer/storage devices and medical devices. Our expertise in flexible printed circuit design and component assembly enables us to assist our customers in resolving their design challenges through our design and assembly techniques, which frequently results in the customer placing our product designs on the customers’ design specifications and can enhance the likelihood of us becoming the main provider for flexible printed circuits and component assembly included in that product. Achieving status as a main provider to an OEM for a high-volume program can enable us to build strong customer relationships with respect to existing products and any future product that requires the use of flexible printed circuits and component assemblies.
We generally work with OEMs in the design of their products, and the OEMs subsequently either purchase our products directly or instruct the EMS providers and display manufacturers to purchase our products to be
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incorporated into the OEM’s product. EMS providers that we sell to include Foxconn and Flextronics. Our relationships with EMS providers and display manufacturers normally are directed by the OEMs; therefore, it is typically the OEMs that negotiate product pricing and volumes directly with us, even though the purchase orders come from the EMS providers. For the past several years, Motorola and its subcontractors have been our largest customers. In the fiscal years ended September 30, 2007, 2006 and 2005, we sold products to be incorporated into Motorola’s products to approximately 30, 52 and 45 Motorola subcontractors, which aggregated 57%, 82% and 81% of our net sales (including direct sales to Motorola amounting to 43%, 68% and 55%), respectively. In addition, during fiscal year 2007, Sony Ericsson Mobile Communications (USA) Inc., or Sony Ericsson became one of our largest customers. In the fiscal years ended September 30, 2007, 2006 and 2005, we sold products to be incorporated into Sony Ericsson’s products to approximately 8, 6 and 5 Sony Ericsson subcontractors, which aggregated 25%, 5% and 2% of our net sales, respectively.
Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products. Over recent years, we have experienced a strong first fiscal quarter, followed by reduced net sales in the second fiscal quarter, as a result of partial seasonality of our major customers and the markets that we serve. Our major customers provide consumer-related products that generally experience their highest sales activity during the calendar year-end holiday season; therefore, we typically experience a decline in our second fiscal quarter sales as this holiday period ends. However, this pattern may not continue. Our net sales and operating results have fluctuated significantly from period-to-period in the past are likely to do so in the future.
Our facilities in the United States and China enable us to manufacture products for shipment anywhere in the world. For the fiscal year ended September 30, 2007, we derived 9% of our net sales in the United States and 91% of our net sales outside the United States. For the fiscal year ended September 30, 2006, we derived 29% of our net sales in the United States and 71% of our net sales outside the United States. For the fiscal year ended September 30, 2005, we derived 12% of our net sales in the United States and 88% of our net sales outside the United States.
For the fiscal year ended September 30, 2007, 25% of our net sales were shipped to Hong Kong, 36% of our net sales were shipped to China, 1% of our net sales were shipped to Japan, 13% of our net sales were shipped to Malaysia and 18% of our net sales were shipped to North America For the fiscal year ended September 30, 2006, 10% of our net sales were shipped to Hong Kong, 51% of our net sales were shipped to China, 1% of our net sales were shipped to Japan, 2% of our net sales were shipped to Malaysia and 29% of our net sales were shipped to North America. For the fiscal year ended September 30, 2005, 13% of our net sales were shipped to Hong Kong, 65% of our net sales were shipped to China, 2% of our net sales were shipped to Japan, 3% of our net sales were shipped to Malaysia and 13% of our net sales were shipped to North America.
For the fiscal years ended September 30, 2007, 2006 and 2005, we had long-lived assets of $20.4 million, $20.5 million and $22.7 million, respectively, in the United States; and $113.4 million, $74.8 million and $59.4 million, respectively, in China.
Sales and Marketing
We sell our products primarily through our in-house design and application engineers, who meet regularly with our customers and potential customers to assist in the initial design of the proposed products and to provide suggestions on how our flexible printed circuit solutions can enhance product design. By utilizing market and product teams in each sector of the electronics industry that we target, we have successfully expanded our market penetration by leveraging our design and application engineers within each of these teams. In particular, these engineers apply the principal of concurrent engineering to our customers’ engineers in the early phases of the product development cycle.
We engage the services of 16 non-exclusive sales representatives to interact with customers and potential customers on our behalf. Fourteen of these sales representatives are located throughout the United States, with one also covering China. We also have one sales representative in each of Canada, Korea, Japan and Taiwan. We rely on these sales representatives to initiate contact with potential customers and provide leads to our internal sales and marketing teams, as well as to create, build and maintain our customer relationships and assist in the resolution of contractual disputes.
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As of September 30, 2007, our backlog, which constitutes customer orders placed with us that we believe to be firm but that have not yet shipped, was $164.1 million. We expect to ship this entire backlog during fiscal year 2008. We cannot guarantee that our customers will not cancel any or all of the orders in our backlog. Our current backlog also is not indicative of our future operating results. As of September 30, 2006, our backlog was $141.6 million. As of September 30, 2005, our backlog was $149.6 million.
Technology
We are a global provider of single, double-sided, multi-layer and gapped flexible printed circuit technology and component assemblies. Our process technology includes proprietary processes and chemical recipes, which coupled with our design expertise, unique customized fixtures and tooling and manufacturing experience, enables us to deliver high-unit volumes of complex flexible printed circuits and component assemblies at cost-effective yields.
Design Technology. The flexible printed circuits we manufacture are designed specifically for each application, frequently requiring significant joint design activities with the customer at the start of a project. We have developed design methodologies that solve difficult interconnection problems and save our customers time and money. We design and mass produce flexible printed circuits that range from single-sided circuits to more complex double-sided, multi-layer (with and without gaps between layers) and rigid-flex. We continually are investing in and improving our computer-based design tools to more quickly design new flexible printed circuits, enhance cooperative design and communication with our customers and more closely integrate design and application engineering to our prototyping and manufacturing process.
Circuit Fabrication Technology. We have extensive experience producing fine-line flexible printed circuits and have developed manufacturing processes that are designed to deliver high-unit volumes at cost-effective yields. In the flexible printed circuit industry, fine-line flexible printed circuits are easier to construct as the thickness of the copper decreases; however, as the thickness of the copper decreases, the cost of fabrication increases. We have developed a manufacturing process to pattern plate in selective regions of the circuitry pattern, such as around the holes used to connect the two sides of a double-sided flexible printed circuit. In addition, the normal manufacturing technology, by itself, has been improved with new equipment which enables thicker, less expensive copper to be etched down precisely enough to form fine-line circuitry. The combination of these two processes allows us to achieve finer patterns without a substantial increase in costs and with generally acceptable yields.
In addition to fine-line techniques, we have developed a proprietary process using ultraviolet lasers to drill 0.003 inch diameter holes, known as micro-vias, for the connection of circuits on the reverse side of the substrate. The combination of the fine-lines and micro-vias are part of the new high density interconnect technology that is one of our competitive strengths.
Component Assembly and Test Technology. Our component assembly and test technology involve the arrangement of the circuits on a panel to minimize material waste and facilitate requirements for component assembly, such as placing tooling holes, optical locators for vision-based machines, test points and pre-cut zones to allow part removal without compromising the integrity of the components. We assemble passive electrical and various mechanical components, including capacitors, resistors, integrated circuits, connectors, stiffeners, diodes and other devices to flexible printed circuits. We also perform advanced assembly of integrated circuit devices, as well as the functional testing of these flexible printed circuit component assemblies. Assembling these components directly onto the flexible printed circuit increases performance and reduces space, weight and cost.
In addition, through our subsidiary Aurora Optical, we have developed advanced optical, packaging, software and material designs to manufacture ultra-thin camera modules and highly integrated flex assemblies using optical modules. We have also developed our own software for optical testing, which will allows us to better integrate the key components necessary to our customers with the flex, thus providing them with a high value-added service.
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Intellectual Property
Our success will depend in part on our ability to protect our intellectual property. Our intellectual property relates to proprietary processes and know-how covering methods of designing and manufacturing flexible printed circuits, attaching components, optical and photonic designs, process technology for circuit manufacturing, and embedded magnetics for chargers. We regularly require our employees to enter into confidentiality agreements and assignment of invention agreements to protect our intellectual property. In addition, we consider filing patents on our inventions that are significant to our business, although none of our existing patents or patent applications pertain to inventions that are significant to our current business. We also pursue trademarks where applicable and appropriate.
In the future, we may encounter disputes over rights and obligations concerning intellectual property. We believe that our design and manufacturing processes do not infringe the intellectual property rights of any third party; however, we cannot assure you that we will prevail in any intellectual property dispute.
Suppliers
We purchase raw circuit materials, process chemicals and various components from a limited number of outside sources, including E.I. DuPont de Nemours & Co., Rogers Corporation, Molex Inc., Supertex, Inc and ITT, Inc. For components, we normally make short-term purchasing commitments to key suppliers for specific customer programs. These commitments are usually made for three to 12-month periods. These suppliers agree to cooperate with us in engineering activities, as required, and in some cases maintain a local inventory to provide shorter lead times and reduced inventory levels for us. In most cases, suppliers are approved and often dictated by our customers. For process chemicals, certain copper and polyimide laminate materials and certain specialty chemicals used in our manufacturing process, we rely on a limited number of key suppliers. Alternate chemical products are available from other sources, but process chemical changes often require approval by our customers and requalification of the processes, which could take weeks or months to complete. We seek to mitigate these risks by identifying stable companies with leading technology and delivery capabilities and by attempting to qualify at least two suppliers for all critical raw materials and components.
Competition
The flexible printed circuit market is competitive, with a variety of large and small companies offering design and manufacturing services. The flexible printed circuit market is differentiated by customers, applications and geography, with each niche requiring specific combinations of complex packaging and interconnection. We believe that our ability to offer an integrated, end-to-end flexible printed circuit solution has enabled us to compete favorably with respect to design capabilities; product performance, reliability and consistency; price; customer support and application support; and resources, equipment and expertise in component assembly on flexible printed circuits.
We compete on a global level with a number of leading Asian providers, such as Flextronics, Foxconn Electronics, Inc., Global Flex Holidays Ltd., Sumitomo Bakelite, and Fujikura Ltd., and with domestic providers. We expect others to enter the market in the Asian region because of government subsidies and lower labor rates available there.
We believe that our technology leadership and capabilities in designing and manufacturing flexible printed circuits and component assemblies have enabled us to build strong partnerships and customer relationships with many companies. We believe that customers typically rely upon a limited number of vendors’ designs for the life of specific applications and, to the extent possible, subsequent generations of similar applications. Accordingly, it is difficult to achieve significant sales to a particular customer for any application once a different vendor has been selected to design and manufacture a specific flexible printed circuit. This market paradigm may provide a barrier to our competitors in the markets in which we compete; however, it may also present an obstacle to our entry into other markets. Any expansion of existing products or services could expose us to new competition.
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Employees
As of November 30, 2007, we employed approximately 16,021 full-time employees and 1,157 contract employees, including 294 full-time employees and 6 contract employees in the United States, and 15,727 full-time employees and 1,151 contract employees in China. We have never had a work stoppage. We consider our employee relations to be good.
We do not have employment agreements with any of our executive officers. We have entered into employment agreements with substantially all of our employees in China. In general, these employment agreements provide for either a one or two-year term.
In addition, we believe that a small number of our employees in China have formed a trade union committee which has proposed that we enter into a collective bargaining agreement. At this time, we are not a party to, nor do we intend to enter into, a collective bargaining agreement with these or any of our other employees at any of our facilities in China. We are not aware that the committee represents any employee other than the employees who actually are members of the committee. We presently do not believe that we will experience any material harm to our business if we do not enter into a collective bargaining agreement.
Environmental Controls
Flexible printed circuit manufacturing requires the use of chemicals. As a result, we are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture our products in the United States and China. As of September 30, 2007 and 2006, we reserved $135,000 and $129,000 of restricted cash, at the direction of the County of Orange, California, to finance estimated environmental clean-up costs in the event that we vacate our Anaheim facilities; otherwise, our review of our facilities suggests that no material remediation costs will be required. However, given the uncertainties associated with environmental contamination, there can be no assurance that such costs will not harm our business, financial condition or results of operations.
We believe we have been operating our facilities in substantial compliance in all material respects with existing environmental laws and regulations. However, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. For this reason, we implemented procedures designed to minimize the negative impacts and reduce potential financial risks arising from environmental issues. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of regulatory agencies could require substantial expenditures by us and could harm our business, results of operations and financial condition. We do not anticipate any material amount of environmental-related capital expenditures in fiscal year 2008.
Available Information
We file reports with the Securities and Exchange Commission (“SEC”). We make available on our website under “Investor Relations,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. Our website address is www.mflex.com. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
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| Item 1A. | Risk Factors |
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS
Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth below, any of which could cause our actual results to vary materially from recent results or from our anticipated future results.
Risks Related to Our Business
We depend on a limited number of customers for significant portions of our net sales and if we lose business with any of these customers, our net sales could decline.
For the past several years, a substantial portion of our net sales has been derived from products that have been incorporated into products that are manufactured by or on behalf of Motorola, Inc. For the years ended September 30, 2007, 2006 and 2005, 57%, 82% and 81%, respectively, of our net sales were to Motorola and approximately 30, 52 and 45 of its subcontractors, respectively. Several subcontractors of Motorola also have, from time to time, constituted significant customers of ours. In addition, we also rely on sales from a limited number of other emerging customers. For example, for the three months ended September 30, 2007, 39% of our net sales were to Sony Ericsson or its subcontractors and 11% of our net sales were to Research in Motion or its subcontractors.
Although generally we assist our customers in the design of their products and the customer directs its subcontractors to purchase products from us, one or more subcontractors could look to another source for the components to be incorporated into the products they supply to the customer. In addition, if the customer were to reduce its orders to any of its subcontractors or if the customer were to choose another flexible printed circuit assembly manufacturer to supply any portion of its products, it could reduce the orders that these customers place with us, which could substantially harm our business, financial condition and results of operations. For example, our net sales in fiscal year 2007 were impacted by a significant decline in net sales to Motorola, which sales decreased 33% in fiscal 2007 compared to the prior year.
We must obtain orders from new and existing customers on an ongoing basis to increase our net sales and grow our business. We are continuing our efforts to reduce dependence on a limited number of customers; however, net sales attributable to a limited number of customers and their subcontractors are expected to continue to represent a substantial portion of our net sales for the foreseeable future. The loss of any one of these customers, a significant reduction in sales we make to them, a reduction in the pricing of our products sold to them or any problem collecting accounts receivable from them would reduce our net income.
In addition, even if we are able to increase sales to other customers, we still expect to have a small number of customers to whom we make significant sales.
We are heavily dependent upon the wireless industry, and in particular, the handset market, and any downturn in this industry may reduce our net sales.
For the years ended September 30, 2007, 2006 and 2005, 91%, 88% and 84%, respectively, of our net sales were derived from sales to companies that provide products or services to the wireless industry. In general, the wireless industry is subject to economic cycles and has experienced in the past, and is likely to experience in the future, periods of slowdown. Intense competition, relatively short product life cycles and significant fluctuations in product demand characterize the industry as a whole. The wireless industry also generally is subject to rapid technological change and product obsolescence. Fluctuations in demand for our products as a result of periods of slowdown in the wireless market or discontinuation of products or modifications developed in connection with next generation products could reduce our net sales.
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Our customers have and may continue to cancel their orders, change production quantities, delay production or qualify additional vendors, any of which could reduce our net sales.
Substantially all of our sales are made on a purchase order basis, and we are not always able to predict with certainty the timing or magnitude of these orders. We cannot guarantee that we will continue to receive any orders from our customers, and our net sales will be harmed if we are unable to obtain a sufficient number of orders from, or ship a sufficient number of products to, customers in each quarter. In addition, our customers may cancel, change or delay product purchase orders with little or no advance notice to us. Business practices of certain customers may change from sales on a purchase order basis to sales on a master purchase contract basis, which may affect the way we do business with those customers. Also, we believe customers may be increasing the number of vendors upon which they rely for manufacturing. Qualification of additional vendors for an application for which we are also qualified may result in our net sales being lower than our forecast of sales. As a result of the foregoing factors, we are not able always to forecast with certainty the net sales that we will make in a given period and sometimes we may increase our production capacity, working capital and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced or canceled. The following factors, among others, affect our ability to forecast accurately our net sales and production capacity:
| • | changes in the specific products or quantities our customers order; |
| • | variability in our manufacturing yields; |
| • | long lead times and advance financial commitments for our plant and equipment expenditures; |
| • | long lead times and advance financial commitments for components required to complete anticipated customer orders; and |
| • | price reductions due to competitive pressure. |
Delayed, reduced or canceled orders also may result in our inability to recover costs that we incur in anticipation of those orders, such as costs associated with purchased raw materials or components, because we are often required, and in the past year, we have experienced a trend where we are more often being required, to purchase materials and components before a customer becomes contractually committed to an order in order to be able to timely deliver such order to the customer. In addition, delayed, reduced or canceled orders may result in write-offs of obsolete inventory and the underutilization of our manufacturing capacity if we decline other potential orders because we expect to use our capacity to produce orders that are later delayed, reduced or canceled. For example, in fiscal 2006, we incurred a net $3 million in write-downs as a result of the bankruptcy of one of our customers, which had a material impact on our earnings in the fourth quarter of fiscal year 2006 (although a certain portion of this amount was recovered in the second and third quarters of fiscal 2007).
We will have difficulty selling our products if customers do not design our flexible printed circuit products into their product offerings, if our customers’ product offerings are not commercially successful, or if we do not timely execute our operational and strategic plans.
We sell our flexible printed circuit products directly or indirectly to original equipment manufacturers, or OEMs, that include our products and component assemblies in their product offerings. As a result, we rely on OEMs to select our products to be designed into their product offerings. We must qualify our products with our customers, which involves demonstrating to our customers that our products can be manufactured within specified tolerances. This process can be time-consuming, complex, costly and difficult. If an OEM selects one of our competitors to provide a product instead of us, it becomes significantly more difficult for us to sell our products to that OEM because changing component providers after the initial production runs begin involves significant cost, time, effort and risk for the OEM. Our customers typically are not obligated to purchase products from us and can stop using our products at any time. Even if an OEM designs one of our products into its product offering, we have no assurance that the product will be commercially successful, that we will receive any order from that manufacturer or that we will not be undercut by a competitor’s pricing.
We cannot be certain that our current products will continue to be selected for design into our customers’ products or that our customers will not also qualify additional vendors for their products. In addition, our long term strategy relies in part on new technologies and products. We cannot be certain that our new technology and
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products will be selected by customers, especially if we are unable to obtain certain industry approval, including Underwriters Laboratory approval for the charger products we are working to develop. If we are unable to obtain additional customer qualifications, if we cannot qualify our products for high-volume production quantities, if we do not execute our operational and strategic plans for new products in a timely manner or if our customers increase their reliance on additional sources for their production, our net sales may decrease.
WBL Corporation beneficially owns 60% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.
WBL Corporation beneficially owns 60% of our outstanding common stock. As a result of WBL Corporation’s ownership interest and its influence over the composition of our board of directors, WBL Corporation has influence over our management, operations and potential significant corporate actions. For example, so long as WBL Corporation continues to control more than a majority of our outstanding common stock, it will have the ability to control who is elected to our board of directors each year. In addition, for so long as WBL Corporation effectively owns at least one-third of our voting stock, it has the ability, through a stockholders agreement with us, to approve the appointment of any new chief executive officer or the issuance of securities that would reduce WBL Corporation’s effective ownership of us to a level that is below a majority of our outstanding shares of common stock. As defined in this stockholders agreement, WBL Corporation is deemed to effectively own approximately 56% of our current outstanding stock. Given that WBL Corporation has the ability to block any proposed issuance of shares that would reduce its effective ownership to less than a majority of our common stock, measured on an effective ownership basis, WBL Corporation could preclude us from engaging in an acquisition or other strategic opportunity that we may want to pursue if such acquisition or opportunity required the issuance of our common stock.
This concentration of ownership may also discourage, delay or prevent a change of control of our company, which could deprive our other stockholders of an opportunity to receive a premium for their stock as part of a sale of our company, could harm the market price of our common stock and could impede the growth of our company. To the extent that WBL Corporation beneficially owns a significant portion of our outstanding common stock, even if less than a majority, it will continue to have significant influence over all matters submitted to our stockholders. WBL Corporation is not prohibited from selling a controlling interest in us to a third party, including a participant in our industry, or from buying additional shares of our stock.
WBL Corporation and its designees on our board of directors may have interests that conflict with our interests.
We believe that WBL Corporation and its designees on our board of directors may have interests that conflict with, or are different from, the interests of our other stockholders, including, for example, as a result of WBL Corporation’s substantial ownership of MFS.
These conflicts of interest could include potential competitive business activities, corporate opportunities, indemnity arrangements, registration rights, sales or distributions by WBL Corporation of our common stock and the exercise by WBL Corporation of its ability to influence our management and affairs. If any conflict of interest is not resolved in a manner favorable to our stockholders, our stockholders’ interests may be substantially harmed.
In general, WBL Corporation does not have the ability to prevent us from making operational decisions that do not require stockholder approval; however, WBL Corporation does have the ability to control who is elected to our board of directors each year and therefore can influence decisions that require board approval. In addition, pursuant to our stockholders agreement with WBL Corporation, for so long as WBL Corporation effectively owns at least one-third of our voting stock, it has the ability to approve the appointment of any new chief executive officer or the issuance of securities that would reduce WBL Corporation’s effective ownership of us to a level that is below a majority of the outstanding shares of our common stock.
In general, our certificate of incorporation does not contain any provision and we do not have any other established procedure that is designed to facilitate resolution of actual or potential conflicts of interest or to ensure that potential business opportunities that may become available to both WBL Corporation and us will be reserved for or made available to us.
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WBL Corporation is currently unable to vote its shares on specified matters that require stockholder approval without obtaining its own stockholders’ and regulatory approval and it is possible that WBL Corporation’s stockholders or the relevant regulators may not approve the proposed corporate action.
WBL Corporation’s ordinary shares are listed on the Singapore Securities Exchange Trading Limited, or the Singapore Exchange. Under the rules of the Singapore Exchange, to the extent that we constitute a principal subsidiary of WBL Corporation, as defined by the rules of the Singapore Exchange, at any time that we submit a matter for the approval of our stockholders, WBL Corporation may be required to obtain the approval of its own stockholders for such action before it can vote its shares with respect to our proposal or dispose of our shares of common stock.
For the fiscal year ended September 30, 2007, we were a principal subsidiary of WBL Corporation as defined by the rules of the Singapore Exchange, which state that we are deemed a principal subsidiary of WBL Corporation for any given fiscal year that our audited consolidated pre-tax profits consolidated into WBL Corporation accounts for more than 20% of the consolidated pre-tax profits of WBL Corporation during our immediately prior fiscal year. We expect to continue to be a principal subsidiary of WBL Corporation for the foreseeable future.
Examples of corporate action we may seek to take for which we would need to obtain our stockholder approval include:
| • | an amendment of our certificate of incorporation; |
| • | a sale of all or substantially all of our assets; |
| • | a merger or reorganization transaction; and |
| • | an issuance of shares of our common stock in an offering other than a public offering at a price of less than fair market value if the number of shares being sold exceeds 20% of our then outstanding common stock. |
To obtain stockholder approval, WBL Corporation must prepare a circular describing the proposal, obtain approval from the Singapore Exchange and send the circular to its stockholders, which may take several weeks or longer. In addition, WBL Corporation is required under its corporate rules to give its stockholders advance notice of the meeting. Consequently, if we need to obtain the approval of WBL Corporation at a time in which we qualify as a principal subsidiary (including this year), the process of seeking WBL Corporation’s stockholder approval may delay our proposed action and it is possible that WBL Corporation’s stockholders may not approve our proposed corporate action. It is also possible that we might not be able to establish a quorum at our stockholder meeting if WBL Corporation was unable to vote at the meeting as a result of the Singapore Exchange rules.
The rules of the Singapore Exchange that govern WBL Corporation are subject to revision from time to time, and policy considerations may affect rule interpretation and application. It is possible that any change to or interpretation of existing or future rules may be more restrictive and adverse to us than the existing rules and interpretations.
If we are unable to attract or retain personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.
We are heavily dependent on our current executive officers and management. We believe that our success is highly dependent on the contributions of Philip A. Harding, our chief executive officer and chairman of the board of directors, and Reza Meshgin, our president and chief operating officer. We do not have employment contracts with these or any other key personnel, and their knowledge of our business and industry would be extremely difficult to replace.
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In addition, due to the expansion of companies into the flex market and increased competition in the flex market, we anticipate that our employees may be heavily recruited by our competitors. Furthermore, we believe an increase in the number of manufacturers in Suzhou, China and the surrounding areas has increased the competition for qualified employees and we are experiencing a significant employee turn-over rate in our facilities in China. The costs of retaining such employees, in China, and the location of certain of our facilities in the United States may make it difficult to recruit qualified employees at those facilities.
The loss of any key employee or the inability to attract or retain qualified personnel, including engineers, sales and marketing personnel, management or finance personnel could delay the development and introduction of our products, harm our reputation or otherwise damage our business.
Rapidly changing standards and competing technologies could make our products obsolete, which would cause our net sales to decrease.
The development and evolution of markets for our flexible printed circuit products depends on industry standards. Our products are designed to conform to current specific industry standards, such as operating temperature range. Competing standards may emerge that are preferred by our customers. We will need to make capital expenditures to support technological advances and to develop and manufacture new products and product features that our customers demand. In addition, any new product we introduce may have competing technologies available from which we may have to choose. If we choose technology or a standard that does not become the industry standard, we may be unable to sell those products or we may be unable to obtain a supplier for the raw materials for such products.
We also expect future flexible printed circuits and component assembly solutions to require higher performance specifications, including, for example, higher density circuitry than we have historically produced, and to incorporate new materials and components which may impact manufacturing yields and efficiencies. We may incur higher manufacturing costs if manufacturing processes or standards change, and we may need to replace, modify or design, build and install equipment, all of which would require additional capital expenditures. If our customers were to switch to alternative technologies or adopt new or competing industry standards with which our products are not compatible or fail to adopt standards with which our products are compatible, our existing products would become less desirable to our customers and our net sales may decrease.
Problems with manufacturing yields could result in higher operating costs and could impair our ability to meet customer demand for our products.
If we cannot achieve expected yields in the manufacture of our products, we may incur higher per unit costs, lower profits and reduced product availability and may be subject to substantial penalties by our customers. Low yields may result from, among other things, design errors, manufacturing failures in new or existing products, the inexperience of new employees, or the learning curve experienced during the initial and ramp-up stages of a new product introduction. Any reduction in our ability to timely deliver products to customers could adversely affect our customer relationships and make it more difficult to sustain and grow our business. In addition, reduced yields can significantly harm our gross margins thereby contributing to lower profitability or even losses. Further, we have not yet manufactured camera modules in high-volume production, and we may encounter difficulties in doing so. Any such difficulties could harm our ability to sustain or grow our business.
We may not be able to compete effectively, which will cause our net sales and market share to decline.
On a global level, we compete primarily with large flexible printed circuit board manufacturers located throughout Asia, including Taiwan, China, Korea, Japan and Singapore. We believe the number of customers in the market is consolidating and the number of suppliers continues to increase. The competitive landscape in our market is changing rapidly and we may lose our market share if we do not implement operational improvements in response to the evolving marketplace. If we do not compete successfully, our net sales and market share may decline. We believe that one of our principal competitive advantages is our ability to interact closely with our customers throughout the design and engineering process. If we are not successful in maintaining or establishing close relationships with customers in markets in which we compete, we may not be able to grow our market share or net sales. To the extent that we are not able to provide regular interaction between our engineers and our
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customers and potential customers, our business may be harmed. In some cases, our competitors may offer more favorable pricing to potential or existing customers. In addition, we believe more companies are now producing flexible printed circuit boards than before. Such competition could increase pressure on us to lower our prices, which, in turn, would harm our margins and operating results.
In addition, many of our customers are larger, established electronic manufacturing services, or EMS, providers. Certain of these EMS providers have developed or acquired their own flexible printed circuit manufacturing capabilities or have extensive experience in electronics assembly, and in the future, may cease ordering products from us and may compete with us on future OEM programs. Furthermore, many companies in our target customer base are moving the design and manufacturing of their products to original design manufacturers, or ODMs, in Asia. If we are unable to capture, maintain and continue to service these ODMs as customers, we may be unable to sustain or grow our business.
In addition, we sell both flex and flex assemblies to our customers, which include both EMS providers and OEMs. Even if the EMS providers aren’t able to capture a significant portion of the flex business from us, they or the OEMs could still stop ordering the flex assembly from us, or significantly reduced their assembly orders to us. If this occurs, our net sales could be significantly reduced and our net income would also be impacted.
Our products and their terms of sale are subject to various pressures from our customers and our competitors, any of which could harm our gross profit.
We deal with a limited number of large customers who are able to exert significant pressure on us, both in terms of pricing and contract terms. We enter into price reduction negotiations with these customers on a periodic basis, typically annually, semi-annually or quarterly. We also renegotiate the terms of our contracts, which specify, among other items, quality requirements, liability and indemnification thresholds and payment terms, with many of our customers on an annual or semi-annual basis. Due to increased competition, customers have recently exerted significant pricing pressure on us, which has contributed to a decline in our profitability. We may lose our market share if we do not participate in such negotiations; furthermore, changes in contract terms, including price reduction activities, may result in lower margins for us and the extension of payment terms for our customers, which could negatively affect our cash flow. Our selling prices are also affected by changes in overall demand for our products, changes in the specific products our customers buy, pricing of competitors’ products and our products’ life cycles. In addition, from time to time we may elect to reduce the price of certain programs we produce in order to gain additional orders on those programs. A typical life cycle for one of our products begins with higher prices when the product is introduced and decreasing prices as it matures. To offset price decreases during a product’s life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a product’s cost. If we cannot reduce our manufacturing costs as prices decline during a product’s life cycle, or if we are required to pay liquidated damages to a customer due to a breach of contract claim, including due to quality or delivery issues, our cost of sales may increase, which would harm our profitability.
Significant product failures could harm our reputation and our business.
Continued improvement in manufacturing capabilities, quality control, material costs and successful product testing capabilities are critical to our growth. Return rates on our products may fluctuate, and we have recently experienced an increase in our return rate. Our efforts to monitor, develop, modify and implement stringent testing and manufacturing processes for our products may not be sufficient. If any flaw in the design, production, assembly or testing of our flexible printed circuit products was to occur, we may experience a rate of failure in our products that would result in significant delays in product shipments, cancellation of orders, substantial penalties from our customers and their customers, substantial repair or replacement costs and potential damage to our reputation.
Any failure to maintain ongoing sales through our independent sales representatives could harm our business.
To date, we have sold our products through our direct sales force and a network of non-exclusive independent sales representatives. We rely on these sales representatives to provide customer contacts and market
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our products directly to our global customer base. Our sales representatives are not obligated to continue selling our products, and they may terminate their arrangements with us at any time with limited notice. It is possible that we may not be able to maintain or expand these relationships successfully or secure agreements with additional sales representatives on commercially reasonable terms, or at all. Any failure to develop and maintain our relationships with these sales representatives and any failure of our sales representatives to effectively market our products could harm our business, financial condition and results of operations.
We must continue to be able to procure raw materials and components on commercially reasonable terms to manufacture our products profitably.
At times, there are worldwide shortages of the components and raw materials used in the fabrication of flexible printed circuits and imaging solutions. Our customers require that we use components that have been pre-qualified by them, which further limits the supply of components available to us and frequently results in our need to seek components from a limited number of suppliers. In addition, suppliers of certain of our components may consider us too small of a customer to sell to directly, which could require us to buy through distributors, which could increase the cost of such components. We generally do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on short-term supply contracts with third-party suppliers to provide these raw materials and components in a timely fashion and on commercially reasonable terms. Our operations would be negatively impacted if we are unable to receive raw materials or components on a timely or cost-effective basis. In addition, our operations and gross margins may be negatively impacted if materials or components do not meet our or our customers’ specifications, even if our customer had specified from whom we must purchase such materials or components.
Given the rapid increase in demand for flexible printed circuits and imaging solutions, a worldwide shortage for these materials may exist from time to time. In the past, a similar shortage for flexible printed circuit materials required that we qualify an additional supplier in order to maintain the delivery of our largest production run, and during certain quarters of fiscal 2006, we experienced component shortages which resulted in delayed shipments to customers. We expect that these delays could occur in future periods, and we may not be successful in managing any shortage of raw materials or components that we may experience, which would decrease our net sales.
During the year ended September 30, 2007, 2006 and 2005 we purchased greater than 80% of all materials used to make flexible printed circuits from three sources, E.I. Dupont de Nemours & Co., Mitsui Plastic, Inc. and Rogers Corporation. In the fiscal years 2007, 2006 and 2005, we purchased approximately 29%, 53% and 84% of these materials from Dupont, 38%, 15% and 0% from Mitsui, and approximately 18%, 14% and 16% from Rogers, respectively.
For many of our large customers, we now purchase components directly from the OEM. Where we do not purchase components directly from the OEM, Molex Inc. and ITT, Inc. are currently our largest component suppliers. In the fiscal year 2007, we purchased 5% and 9% of our components from Molex and ITT. In the fiscal year 2006, we purchased 10% and 24% of our components from Molex and ITT. In the fiscal year 2005, we purchased 12% and 13% of our components from Molex and ITT.
We face business, political, regulatory, operational, financial and economic risks because a significant portion of our operations and sales are to customers outside of the United States.
Our primary manufacturing facilities are located in China. Although our headquarters are located in California and we also have operations in Arizona, we expect that our operations in China will continue to assume a larger and more important role in our business. We are subject to risks inherent in international business, many of which are beyond our control, including:
| • | difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses and compliance with foreign laws, including employment laws; |
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| • | difficulties in collecting payments from foreign customers to whom we have extended significant amounts of credit if those customers do not pay us on the payment terms extended to them; |
| • | difficulties in staffing and managing foreign operations, including cultural differences in the conduct of business, labor and other workforce requirements and inadequate local infrastructure; |
| • | the need to successfully migrate our foreign locations to the financial reporting system used by us in the United States, including the need to implement and maintain financial controls that comply with the Sarbanes-Oxley Act; |
| • | trade restrictions or higher tariffs; |
| • | transportation delays and difficulties of managing international distribution channels; |
| • | longer payment cycles for, and greater difficulty collecting, accounts receivable; |
| • | foreign currency exchange rate fluctuations that render our prices uncompetitive or increase our cost of doing business, specifically the Chinese RMB, which has consistently appreciated against the U.S. Dollar since the fourth quarter of our fiscal 2005. During the third quarter of fiscal 2007, the People’s Bank of China increased the rate at which the RMB/U.S. Dollar exchange can fluctuate, which resulted in greater RMB appreciation during the third and fourth quarters. We expect the RMB appreciation against the U.S. Dollar to continue to increase in the future, which will result in the increase in the cost of our business in China due to the movement in the exchange rates; |
| • | unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings and affect our effective income tax rate due to profits generated or lost in foreign countries; |
| • | political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions; |
| • | increases in the cost of doing business in China, including increases due to changes in environmental regulations, increased competition for employees and new or increased governmental fees or assessments; |
| • | requests from the government that we relocate facilities which we had planned to continue to operate for the foreseeable future, and actions from agencies controlled by the government possibly designed to compel or encourage such relocation; |
| • | unforeseen changes in regulatory requirements, including without limitation, safety, labor, health or occupational welfare regulations, which could require us to change the manner in which we do business or increase the costs of our doing business. For example, in October 2007, the minimum wage in Suzhou, China was increased from a monthly wage of RMB 750 to RMB 850 with only two weeks notice to employers; |
| • | disruptions or shortages in the supply of electricity or other utilities; |
| • | the occurrence of natural disasters or other acts of force majeure which may disrupt or otherwise impede communications between our facilities and may cause our facilities not to have access to the systems or information required to operate the business; and |
| • | public health emergencies such as SARS and avian flu. |
Any of these factors could harm our international sales and operations significantly.
Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient sources of electricity in China, or if there is a natural disaster or other catastrophic event in China.
The flexible printed circuit fabrication process requires a stable source of electricity. As our production capabilities increase in China and our business grows, our requirements for a stable source of electricity in China will grow substantially. We have experienced a lack of sufficient electricity supply and expect that we may continue to experience insufficient power supplies in the foreseeable future. Although we have purchased several
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generators, we cannot be assured that such generators will produce sufficient electricity supply in the event of a disruption in power. Power interruptions, electricity shortages, the cost of diesel fuel to run our back-up generators or government intervention, particularly in the form of rationing, are factors that could restrict our access to electricity in Suzhou, China, the location of our Chinese manufacturing facilities, and affect our manufacturing costs. Any such shortages could result in delays in our shipments to our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.
Our two primary manufacturing facilities are both located in Suzhou, China. Natural disasters or other catastrophic events, including wildfires and other fires, earthquakes, excessive rain, terrorist attacks and wars, could disrupt our manufacturing or operational abilities, which could harm our operations and financial results.
China’s legal and regulatory systems embody uncertainties that could harm our business operations.
Since 1979, many new laws and regulations covering general economic matters have been promulgated in China. Despite the development of the legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of any litigation, and interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. In addition, changes in the regulations or policies (or the application of existing regulations or policies) in China generally, or specifically in Suzhou where our factories are located, may affect our ability to conduct or expand our business. For example, in 2006 the Chinese government announced that the printed circuit board, or PCB, business was no longer considered to be a high-tech industry, and as such, it was no longer an encouraged industry to migrate to, or expand in, China. In addition, we have recently been informed that effective December 1, 2007, the production of single-sided flexible printed circuit boards will no longer be considered a high-tech industry. Although these classifications have not affected our operations to date, if the government were to determine that multi-layer flexible printed circuit boards are no longer within the high-tech industry classification, it could adversely affect our ability to maintain or expand operations in China. As another example, we have recently been informed that one of our facilities in China may no longer meet the current fire department regulations. If interpretations or changes in the application of the fire code resulted in our need to take immediate corrective action, it could also adversely affect our ability to maintain or expand our operations in Suzhou.
Our activities in China will be subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Failure to obtain the requisite governmental approval for any of our activities could impede our ability to operate our business or increase our expenses.
We may have difficulty managing any growth that we might experience.
If we continue to experience growth in our operations, our manufacturing facilities, operational and financial systems, procedures and controls may need to be expanded, which will distract our management team from our business plan and involve increased expenses. Our success will depend substantially on the ability of our management team to manage any growth effectively. These challenges may include:
| • | the ability to timely and in a cost-effective manner hire and retain employees, particularly in our Suzhou, China locations; |
| • | the ability of our management to predict accurately increases or decreases in demand for our products and manage our manufacturing capacity appropriately; |
| • | maintaining our cost structure at an appropriate level based on the net sales we generate; |
| • | managing multiple, concurrent manufacturing expansion projects; |
| • | the ability to ramp-up and manage multiple new programs concurrently; |
| • | higher over-time and scrap rates often associated with periods of growth; |
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| • | implementing and improving our operational and financial systems, procedures and controls, including our computer systems; |
| • | managing operations in multiple locations and multiple time zones; |
| • | the ability to timely and in a cost-effective manner increase our manufacturing capacity and build new manufacturing facilities in order to meet customer demands, the failure of either of which could cause customers to take their business to our competitors; and |
| • | the ability to acquire customers in a new line of business. |
If we do not effectively manage any growth we might experience, and deliver on any increase in orders we might receive from any customer, in addition to losing a growth opportunity, we may lose the customer and its orders all together, which could adversely affect our net sales and income.
The Sarbanes-Oxley Act and other rules and regulations may increase the time and costs of certain activities.
We incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and Nasdaq, have required changes in corporate governance practices of public companies. These rules and regulations have increased our financial compliance costs and have made some activities more time-consuming and costly. We believe that these rules and regulations have also affected the cost of our director and officer liability insurance, and, from time to time, we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We continue to evaluate and monitor developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Our business is capital intensive and the failure to obtain capital could require that we curtail capital expenditures.
To remain competitive, we must continue to make significant investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for anticipated growth. We may need to raise additional funds through further debt or equity financings. We may not be able to raise additional capital on reasonable terms, or at all. In addition, under the terms of our stockholders agreement with WBL Corporation, WBL Corporation’s approval is required for the issuance of securities that would reduce its effective ownership of us to a level that is below a majority of the outstanding shares of common stock. If WBL Corporation’s approval is required, it is possible that WBL Corporation may not approve any transaction we may seek to complete, which could affect whether we are able to complete such a transaction. If we cannot raise the required capital when needed, we may not be able to satisfy the demands of existing and prospective customers and may lose net sales and market share.
The following factors could affect our ability to obtain additional capital on favorable terms, or at all:
| • | our results of operations; |
| • | general economic conditions and conditions in the electronics industry; |
| • | the perception of our business in the capital markets; |
| • | our ratio of debt to equity; |
| • | our financial condition; |
| • | our business prospects; |
| • | WBL Corporation’s approval, if required; |
| • | the international aspects of our business, including the foreign location of a majority of our physical assets and the fact that a majority of our customers are located overseas; and |
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| • | interest rates. |
If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a reduction in net sales, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reduced manufacturing efficiencies or other harm to our business.
We are subject to the risk of increased income and other taxes in China.
We currently enjoy tax holidays and other tax incentives for our operations in China. The tax holiday rate of 12% for our first manufacturing facility in China, MFC1, will expire on December 31, 2007. After this time, MFC1 will be subject to an income tax rate of 25%, based on current law.
We have obtained two tax holidays for our second manufacturing facility in China, MFC2. The first tax holiday allows for tax-free operation for the first two years (beginning in the first year of profitability) followed by three years of operation at a reduced rate of income tax equal to 12% on the profits generated from the original registered capital. The second tax holiday allows for tax-free operation for the first two years followed by three years of operation at a reduced rate of income tax equal to 12% on the profits generated from the increased capital. Beginning on February 1, 2006, MFC2 became subject to a tax holiday rate of 12% on approximately 46% of its profits and a tax holiday rate of 0% on approximately 54% of its profits. However, these tax holidays may be challenged, modified or even eliminated by taxing authorities or changes in law. For the fiscal years ended September 30, 2007 and 2006 we realized tax savings of $1.5 million and $4.4 million respectively, for our operations in China.
The National People’s Congress, China’s top legislative body, passed the Unified China Corporate Income Tax Law on March 16, 2007. The new corporate income tax rate will decrease from 27% to 25% effective January 1, 2008. Unused tax holidays for existing foreign invested enterprises will be grandfathered until they expire. MFC1’s tax holiday will expire on December 31, 2007. MFC2’s first and second tax holidays will expire on December 31, 2008 and 2010, respectively. We have analyzed the tax impact of this law change and concluded that there is no material impact on our consolidated financial position, results of operations or cash flows.
In addition, from time to time we may be subject to various types of tax audits by the tax authorities. For example, an audit relating to the import and export of raw and component materials at MFC1 during fiscal year 2005 resulted in our need to incur a charge of approximately $1.5 million to cost of sales for value added tax and duty, plus interest and penalties.
Our bank facilities contain restrictive covenants that, if not satisfied or waived, could impact our ability to borrow money under these facilities and could result in acceleration of our debt obligations under these facilities that may be outstanding from time to time.
Our failure to comply with restrictive covenants in our bank facilities could result in an event of default which, if not satisfied or waived, could preclude us from borrowing money under one or more of these facilities or may result in us being required to repay any borrowings we may have under our facilities from time to time. In addition, our facility with Norddeutsche Landesbank Girozentrale, or NLG, provides that NLG can refuse to honor a draw request from us for any reason, even if we are in full compliance with the terms of the facility. If we were unable to borrow under these facilities to finance our operations or we were unable to refinance borrowings under our facilities that may come due, our financial condition and results of operations could be harmed.
If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our net sales or increase our costs.
We primarily rely on trade secrets relating to our manufacturing processes to protect our proprietary rights. Our efforts to protect our intellectual property may not be effective and may be challenged by third parties. In addition, other parties may independently develop similar or competing technologies. We compete in industries
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with rapid development and technological innovation. If we fail to protect our proprietary rights adequately, our competitors could offer similar products using processes or technologies developed by us and thereby potentially harm our competitive position and our financial condition.
We also rely on patent protection for the intellectual property that we have developed. It is possible that a third party may challenge the validity of any of these patents, or circumvent the patents by developing competing products based on technology that does not infringe our patents. Consequently, our patents may not provide meaningful protections against competition for these products. Further, in some countries outside the United States, patent protection is not available. Moreover, some countries that do allow registration of patents do not provide meaningful redress for patent violations. As a result, protecting intellectual property in those countries is difficult and competitors may sell products in those countries that have functions and features that infringe on our intellectual property.
We may be sued by third parties for alleged infringement of their proprietary rights.
From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Some of these claims may lead to litigation. Any intellectual property lawsuit, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert our management from normal business operations. Adverse determinations in litigation could subject us to significant liability and could result in the loss of our proprietary rights. A successful lawsuit against us could also force us to cease selling or redesign products that incorporate the infringed intellectual property. In addition, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our business, financial condition and results of operations could be harmed.
Complying with environmental laws and regulations may increase our costs and reduce our profitability.
We are subject to a variety of environmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used in the manufacture of flexible printed circuits and component assemblies. A significant portion of our manufacturing operations are located in China, where we are subject to constantly evolving environmental regulation. The costs of complying with any change in such regulations and the costs of remedying potential violations or resolving enforcement actions that might be initiated by governmental entities in China could be substantial.
Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data for materials used in our manufacturing processes. We reserved $135,000 and $129,000 of restricted cash for the fiscal years ended September 30, 2007 and 2006, respectively, at the direction of the County of Orange, California, to finance estimated environmental clean-up costs in the event that we vacate our Anaheim facilities.
In the event of a violation, we may be required to halt one or more segments of our operations until such violation is cured. Although we attempt to operate in compliance with all applicable environmental laws and regulations, we may not succeed in this effort at all times. The costs of remedying violations or resolving enforcement actions that might be initiated by governmental authorities could be substantial. Any remediation of environmental contamination would involve substantial expense that could harm our results of operations. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our operations may be subject or the manner in which existing or future laws will be administered or interpreted. Future regulations may be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations could be significant.
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We may not address successfully problems encountered in connection with any acquisition.
We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:
| • | problems assimilating the purchased technologies, products or business operations, including the timely integration of financial reporting systems. |
| • | problems maintaining uniform standards, procedures, controls and policies; |
| • | unanticipated costs associated with the acquisition; |
| • | start-up costs associated with any new line of business we may acquire; |
| • | diversion of management’s attention from our core business; |
| • | adverse effects on existing business relationships with suppliers and customers; |
| • | risks associated with entering new markets in which we have no or limited prior experience; |
| • | potential loss of key employees of acquired businesses; |
| • | potential litigation risks associated with acquisitions, whether completed or not; |
| • | the need to hire additional employees to operate effectively the acquired business, including employees with specialized knowledge; and |
| • | increased legal and accounting costs as a result of the Sarbanes-Oxley Act. |
If we fail to evaluate and execute acquisitions and strategic investments properly, our management team may be distracted from our day-to-day operations, our business may be disrupted and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our stockholders would be diluted. We also may be limited in our ability to finance an acquisition through the issuance of convertible debt or equity as a result of our stockholders agreement with WBL Corporation, which requires WBL Corporation’s approval before we issue securities which would dilute its effective ownership (as defined in the agreements) below 50% of our outstanding common stock.
Litigation may distract us from operating our business.
Litigation that may be brought by or against us could cause us to incur significant expenditures and distract our management from the operations and conduct of our business. Furthermore, there can be no assurance that we would prevail in such litigation or resolve such litigation on terms favorable to us, which may adversely affect our operations.
In connection with the terminated conditional offer for the outstanding shares of MFS Technology Ltd, we may be sued by WBL Corporation, MFS, or others, including stockholders of us and/or MFS. There is no guarantee that any such suits will be covered by our insurance or that such suits might not result in substantial fines, penalties or adverse judgments against us.
In addition, the Singapore Securities Industry Council, or the SIC, may review whether the actions of our board of directors and special committee of our board of directors are, from the Singapore regulatory perspective, reasonable and appropriate in light of the developments and circumstances. Any such review, if it commences, likely will involve a significant distraction to management. Further, if the SIC determines that our board of directors or special committee have not acted appropriately, it may impose sanctions or fines or censures on us, which may further distract our management and harm our business.
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Risks Related to the Market for our Common Stock
Our stock price may be volatile, and you may not be able to resell our shares at a profit or at all.
The trading price of our common stock could fluctuate, and has fluctuated, due to the factors discussed in this report and elsewhere in our SEC filings. For example, during the 12 months ended September 30, 2007, our stock traded between $9.70 and $26.30 per share. In addition, the trading market for our common stock may be influenced by the public float that exists in our stock from time to time. For example, although we have approximately 24.6 million shares of common stock outstanding, approximately 19.3 million of those shares are held by a few investors. If any of those investors were to decide to sell a substantial portion of their respective shares, it would place substantial downward pressure on our stock price. The trading market for our common stock also may be influenced by the research and reports that industry or securities analysts publish about us or our industry. If one or more of the analysts who cover us were to publish an unfavorable research report or to downgrade our stock, our stock price likely would decline. If one or more of these analysts were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
In addition, the stock market in general, and Nasdaq and technology companies in particular, have experienced extreme price and volume fluctuations. Our historical trading prices and valuations may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
In the event we are unable to remedy any deficiency we identify in our system of internal controls over financial reporting, or if our internal controls are not effective, our business and our stock price could suffer.
In preparation for the annual report of management regarding our evaluation of our internal controls that is required to be included in each of our fiscal year-end annual reports by Section 404 of the Sarbanes-Oxley Act, or Section 404, we adopted a project work plan to assess the adequacy of our internal controls, remediate any deficiency that we may identify, validate that controls are functioning as documented and implement a continuous reporting and improvement process for internal controls. As part of this continuous process, we may discover deficiencies that require us to improve our procedures, processes and systems in order to ensure that our internal controls are adequate and effective and that we are in compliance with the requirements of Section 404.
If any deficiency we may find from time to time is not adequately addressed, or if we are unable to complete all of our testing and any remediation in time for compliance with the requirements of Section 404 and the SEC rules thereunder, we would be unable to conclude that our internal controls over financial reporting are effective, which could adversely affect investor confidence in our internal controls over financial reporting. If we do not complete our testing with sufficient time for an independent registered public accounting firm to complete their audit of internal control over financial reporting, we may not be compliant with all of the requirements under Section 404 since we may not receive an unqualified report on internal control over financial reporting, and our business and stock price may be adversely affected.
Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our common stock to decline.
Our operating results fluctuate from quarter to quarter as a result of changes in demand for our products, our ability to sell our products at specific prices, our effectiveness in managing manufacturing processes and costs and the degree to which we are able to utilize our available manufacturing capacity. Historically, we have experienced a strong first fiscal quarter, followed by reduced net sales in the second fiscal quarter, as a result of partial seasonality of our major customers and the markets that we serve. As a result, our net sales and operating results have fluctuated significantly from period-to-period in the past and are likely to do so in the future. These fluctuations could cause the market price of our common stock to decline. You should not rely on period-to- period
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comparisons of our operating results as an indication of our future performance. In future periods, our net sales and results of operations may be below our expectations or the expectations of analysts and investors, which could cause the market price of our common stock to decline.
Our expense levels in the future will be based, in large part, on our expectations regarding net sales. Many of our expenses are fixed in the short term or are incurred in advance of anticipated sales. We may not be able to decrease our expenses in a timely manner to offset any shortfall of sales.
Future sales of our common stock in the public market could cause our stock price to fall.
Future sales of our common stock in the public market, or the perception that such sales might occur, could cause the market price of our common stock to decline. As of September 30, 2007, we had 24.6 million shares of common stock outstanding and 1.3 million shares subject to unexercised options that are fully vested. All of these shares are eligible for resale, subject to certain volume limitations. To the extent any major stockholder sells its shares into the market, the market price of our common stock could decline.
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
| • | the existence of a classified board of directors requiring that not all directors be elected at one time; |
| • | a majority of our directors are required to be independent; |
| • | the ability of our board of directors to increase or decrease the size of our board of directors without stockholder approval; |
| • | the ability of our board of directors to fill vacancies on the board of directors created by the death, resignation or incapacity of a director or the enlargement of the board of directors without stockholder approval; |
| • | the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates; |
| • | advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting; |
| • | the ability of our board of directors to alter our bylaws without obtaining stockholder approval; |
| • | the ability of the board of directors to issue and designate the rights of, without stockholder approval, up to 5,000,000 shares of preferred stock, which rights could be senior to those of common stock; |
| • | the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent; and |
| • | so long as a single or related group of stockholders own at least one-third of our outstanding common stock, a transaction between us and any person or entity in which such stockholder or stockholders have a material interest, if required under applicable federal and state law and/or Nasdaq rules to be approved by our stockholders, will require approval of a majority of the outstanding shares not held by such interested stockholders present in person or by proxy at the meeting of stockholders held with respect to such transaction. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or Delaware law. These provisions may prohibit stockholders owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our charter, bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would without these provisions.
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| Item 2. | Properties |
Our corporate headquarters are located in Anaheim, California and our manufacturing facilities are located in Anaheim, California and Suzhou, China. We also have a facility located in Tucson, Arizona related to Aurora Optical. Following is a summary of our properties:
Function | Location | Square Feet | Lease Expiration Dates | |||
| Executive offices, engineering and circuit fabrication and assembly | Anaheim, California | Owned—105,000 Leased—19,001* | N/A March 2008 to April 2009 | |||
| Aurora Optical, Inc.— Engineering, lens assembly and manufacturing | Tucson, Arizona | Owned—47,000 | N/A | |||
| MFC1—Engineering, circuit fabrication and assembly | Suzhou, China | 105,600 194,686 | 2043** November 2007 to March 2009 | |||
| MFC2—Engineering, circuit fabrication and assembly | Suzhou, China | 485,000 Leased —60,772 Leased — 81,475 | 2052 September 2008 May 2010 | |||
| * | We have 4 leases relating to this space, which range in terms from six months to three years and range in size from approximately 2,000 square feet to approximately 6,000 square feet. These leases expire in various months of each year. In general, as these leases expire, we extend them on substantially the same terms. |
| ** | We have several other parcels that have long-term land leases expiring beyond 2043. Under the terms of these leases, we paid an upfront fee for use of the parcel through expiration of the lease. We have no other financial obligations on these long-term land leases other than payments of real estate taxes. However, we believe we may desire to move this facility to a more industrialized area in the coming years. |
We believe our facilities are adequate for our current needs and that suitable additional or substitute space will be available to accommodate foreseeable expansion of our operations or to move our operations in the event one or more of our short-term leases can no longer be renewed on commercially reasonable terms at the expiration of its term.
| Item 3. | Legal Proceedings |
From time to time, we may be party to lawsuits in the ordinary course of business. We are currently not a party to any material legal proceedings.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during the fourth quarter of our fiscal year through the solicitation of proxies or otherwise.
Executive Officers of the Registrant
The following table sets forth information about our executive officers as of November 30, 2007:
Name | Age | Position(s) | ||
Philip A. Harding | 75 | Chief Executive Officer and Chairman of the Board of Directors | ||
Reza Meshgin | 44 | President and Chief Operating Officer | ||
Craig Riedel | 51 | Chief Financial Officer | ||
Thomas Lee | 48 | Executive Vice President of Operations |
Philip A. Hardinghas served as our Chief Executive Officer since January 1988 and as a director since September 1988. In December 2003, Mr. Harding assumed the position of Chairman of the board of directors.
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Prior to joining us, Mr. Harding served as the Chief Executive Officer of Weltec Digital Corporation from 1984 to 1987. From 1981 to 1984, Mr. Harding served as the President of the Remex Division of Excello Corporation after joining Excello in 1979 as the Vice President of Engineering. Prior to joining Excello, Mr. Harding served as the General Manager of the Commercial Systems Division of Electronic Memories and Magnetics Corporation from 1973 to 1979. Each of these companies manufactured computer peripherals and components. From February 1988 to March 2004, Mr. Harding served as Chief Executive Officer of Wearnes Hollingsworth Corporation, an electronic connector company and a member of the WBL Corporation group of companies. Mr. Harding also served as Chairman of the board of directors of Advanced Logic Research, Inc., a former member of the WBL Corporation group of companies, from October 1985 to March 1988. Mr. Harding also served as a member of the board of directors of MFS Technology Pte Ltd., a member of the WBL Corporation group of companies, from October 1994 to September 2000. Mr. Harding holds a B.S.E.E. from Cooper Union College and an M.S. from Columbia University.
Reza Meshginjoined us in June 1989 and assumed his current position as our President and Chief Operating Officer in January 2004. Prior to this role, Mr. Meshgin served as our Vice President and General Manager from May 2002 through December 2003, and as our Engineering Supervisor, Application Engineering Manager, Director of Engineering and Telecommunications Division Manager. Mr. Meshgin holds a B.S. in electrical engineering from Wichita State University and an M.B.A. from University of California at Irvine.
Craig Riedelhas served as our Chief Financial Officer and Secretary since November 1992. Mr. Riedel served as the Chief Financial Officer of Wearnes Hollingsworth Corporation from 1998 until March 2004. From 1986 to 1992, Mr. Riedel served in various positions, including Controller, for Interconnection Products, Inc., a member of the WBL Corporation group of companies. Prior to joining Interconnection, Mr. Riedel held various finance positions from 1981 to 1986 and served as an accountant with Deloitte Haskins & Sells (now Deloitte & Touche LLP), most recently as Audit Senior, from 1978 to 1981. Mr. Riedel received his Certified Public Accounting certificate in 1980. Mr. Riedel holds an AA.S. in financial services and a B.S. in business administration from Lake Erie College.
Thomas Lee joined us in October 1986 as our Supervisor of Photo Department and subsequently served as our Manufacturing Manager and Director of Operations from May 1995 to May 2002. Since May 2002, Mr. Lee has served as our Vice President of Operations. Prior to joining us, Mr. Lee served as a mechanical engineer at the Agricultural Corporation in Burma. Mr. Lee holds a B.E. in mechanical engineering from the Rangoon Institute of Technology in Burma.
Part II
| Item 5. | Market for Registrant’s Common Equity |
Our common stock, par value $0.0001, or Common Stock, is traded on the NASDAQ Global Select Market, or Nasdaq, under the symbol “MFLX.” The following table sets forth, for the periods indicated, the high and low closing prices for our Common Stock on Nasdaq, as reported in its consolidated transaction reporting system:
| Fiscal 2007 | Fiscal 2006 | |||||||||||
| High | Low | High | Low | |||||||||
First Quarter | $ | 26.06 | $ | 19.95 | $ | 48.17 | $ | 25.16 | ||||
Second Quarter | 20.28 | 15.35 | 66.28 | 44.97 | ||||||||
Third Quarter | 17.95 | 14.70 | 62.41 | 26.91 | ||||||||
Fourth Quarter | 17.51 | 10.28 | 34.39 | 18.00 | ||||||||
Stockholders of record on November 30, 2007 numbered approximately 24. Because many of the shares of our Common Stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record. We have never declared or paid any cash dividend on our Common Stock, nor do we currently intend to pay any cash dividend on our Common Stock in the foreseeable future. We expect to retain our earnings, if any, for the growth and development of our business. A description of the terms of our revolving credit facility can be found in this Annual Report under Item 7 under the caption “Liquidity and Capital Resources” and under Item 8 under Note 7.
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The following graph shows the cumulative total stockholder return (change in stock price plus reinvested dividends) assuming the investment of $100 on June 25, 2004 (the day of the Company’s initial public offering) in each of our Common Stock, the NASDAQ Index and the NASDAQ Electronic Components Index. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of the our Common Stock. This Stock Price Performance Graph is not deemed to be “soliciting material” or “filed” with the SEC under the Securities Exchange Act of 1934, and is not incorporated by reference in any past or future filing by us under the Securities Exchange Act of 1934 or the Securities Act of 1933, unless it is specifically referenced.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report.
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| Item 6. | Selected Consolidated Financial Data |
The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Item 7 of this Annual Report and the Consolidated Financial Statements and related notes included in Item 8 of this Annual Report. The selected consolidated statements of income data for the years ended September 30, 2007, 2006 and 2005 and selected consolidated balance sheet data as of September 30, 2007 and 2006 are derived from audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statements of income data for the years ended September 30, 2004 and 2003 and selected consolidated balance sheet data as of September 30, 2005, 2004 and 2003 were derived from audited consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative of our future results.
| Year Ended September 30, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (in thousands, except share, per share data and ratios) | ||||||||||||||||||||
Consolidated Statement of Income Data: | ||||||||||||||||||||
Net sales | $ | 508,147 | $ | 504,204 | $ | 357,090 | $ | 253,049 | $ | 129,415 | ||||||||||
Cost of sales | 461,376 | 413,156 | 277,202 | 197,412 | 107,418 | |||||||||||||||
Gross profit | 46,771 | 91,048 | 79,888 | 55,637 | 21,997 | |||||||||||||||
Operating expenses | ||||||||||||||||||||
Research and development | 2,499 | 2,035 | 883 | 284 | 196 | |||||||||||||||
Sales and marketing | 12,544 | 9,233 | 8,783 | 7,649 | 5,621 | |||||||||||||||
General and administrative | 24,216 | 22,231 | 17,587 | 11,285 | 8,473 | |||||||||||||||
Terminated acquisition expenses | 7,821 | — | — | — | — | |||||||||||||||
Total operating expenses | 47,080 | 33,499 | 27,253 | 19,218 | 14,290 | |||||||||||||||
Operating (loss) income | (309 | ) | 57,549 | 52,635 | 36,419 | 7,707 | ||||||||||||||
Other income (expense), net | ||||||||||||||||||||
Interest income (expense), net | 1,229 | 1,257 | 514 | (468 | ) | (310 | ) | |||||||||||||
Other income (expense), net | 200 | (229 | ) | 378 | (100 | ) | (525 | ) | ||||||||||||
Income before benefit from (provision for) income taxes | 1,120 | 58,577 | 53,527 | 35,851 | 6,872 | |||||||||||||||
Benefit from (provision for) income taxes | 1,918 | (18,220 | ) | (16,361 | ) | (10,145 | ) | (2,295 | ) | |||||||||||
Net income | $ | 3,038 | $ | 40,357 | $ | 37,166 | $ | 25,706 | $ | 4,577 | ||||||||||
Net income per share: | ||||||||||||||||||||
Basic | $ | 0.12 | $ | 1.66 | $ | 1.57 | $ | 1.33 | $ | 0.39 | ||||||||||
Diluted | $ | 0.12 | $ | 1.59 | $ | 1.51 | $ | 1.27 | $ | 0.38 | ||||||||||
Shares used in calculating net income per share: | ||||||||||||||||||||
Basic | 24,520,040 | 24,353,854 | 23,603,935 | 19,310,044 | 11,720,295 | |||||||||||||||
Diluted | 25,164,401 | 25,315,548 | 24,593,998 | 20,306,842 | 11,978,610 | |||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 27,955 | $ | 24,460 | $ | 38,253 | $ | 16,631 | $ | 5,211 | ||||||||||
Working capital | $ | 107,481 | $ | 129,444 | $ | 108,126 | $ | 78,961 | $ | 17,656 | ||||||||||
Total assets | $ | 377,287 | $ | 327,045 | $ | 259,600 | $ | 189,998 | $ | 98,729 | ||||||||||
Current ratio | 1.8 | 2.5 | 2.6 | 2.7 | 1.5 | |||||||||||||||
Long-term debt | $ | — | $ | — | $ | — | $ | — | $ | 4,358 | ||||||||||
Stockholders equity | $ | 250,006 | $ | 238,365 | $ | 189,041 | $ | 141,084 | $ | 45,486 | ||||||||||
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The following table presents our unaudited quarterly consolidated income statement data for the eight quarters ended September 30, 2007. These quarterly results include all adjustments consisting of normal recurring adjustments that we consider necessary for the fair presentation for the quarters presented and are not necessarily indicative of the operating results for any future period.
For the Quarter Ended (Unaudited) | ||||||||||||||||||||||||||||||||
September 30, 2007 | June 30, 2007 | March 31, 2007 | December 31, 2006 | September 30, 2006 | June 30, 2006 | March 31, 2006 | December 31, 2005 | |||||||||||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Net sales | $ | 166,716 | $ | 104,138 | $ | 113,406 | $ | 123,887 | $ | 110,340 | $ | 130,327 | $ | 123,804 | $ | 139,733 | ||||||||||||||||
Cost of sales | 152,588 | 99,355 | 100,553 | 108,880 | 98,451 | 110,561 | 97,783 | 106,361 | ||||||||||||||||||||||||
Gross profit | 14,128 | 4,783 | 12,853 | 15,007 | 11,889 | 19,766 | 26,021 | 33,372 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Research and development | 701 | 570 | 639 | 589 | 544 | 487 | 491 | 460 | ||||||||||||||||||||||||
Sales and marketing | 4,234 | 3,263 | 2,489 | 2,558 | 2,290 | 2,239 | 2,257 | 2,447 | ||||||||||||||||||||||||
General and administrative | 6,182 | 5,606 | 5,462 | 6,966 | 6,155 | 5,612 | 5,188 | 5,329 | ||||||||||||||||||||||||
Terminated acquisition expenses | — | 7,821 | — | — | — | — | — | — | ||||||||||||||||||||||||
Total operating expenses | 11,117 | 17,260 | 8,590 | 10,113 | 8,989 | 8,338 | 7,936 | 8,236 | ||||||||||||||||||||||||
Operating income (loss) | 3,011 | (12,477 | ) | 4,263 | 4,894 | 2,900 | 11,428 | 18,085 | 25,136 | |||||||||||||||||||||||
Interest income, net | 345 | 414 | 237 | 233 | 245 | 284 | 447 | 281 | ||||||||||||||||||||||||
Other (expense) income, net | (435 | ) | 457 | 54 | 124 | 51 | (334 | ) | 13 | 41 | ||||||||||||||||||||||
Income (loss) before (provision for) benefit from income taxes | 2,921 | (11,606 | ) | 4,554 | 5,251 | 3,196 | 11,378 | 18,545 | 25,458 | |||||||||||||||||||||||
Benefit from (provision for) income taxes | 110 | 4,894 | (1,488 | ) | (1,598 | ) | (1,004 | ) | (3,091 | ) | (5,999 | ) | (8,126 | ) | ||||||||||||||||||
Net income (loss) | $ | 3,031 | $ | (6,712 | ) | $ | 3,066 | $ | 3,653 | $ | 2,192 | $ | 8,287 | $ | 12,546 | $ | 17,332 | |||||||||||||||
Net income (loss) per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.12 | $ | (0.27 | ) | $ | 0.13 | $ | 0.15 | $ | 0.09 | $ | 0.34 | $ | 0.52 | $ | 0.72 | |||||||||||||||
Diluted | $ | 0.12 | $ | (0.27 | ) | $ | 0.12 | $ | 0.14 | $ | 0.09 | $ | 0.32 | $ | 0.49 | $ | 0.69 | |||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Annual Report on Form 10-K contains forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include but are not limited to, statements and predictions as to our expectations regarding our operating expenses, sales and operations, margins, yields, anticipated cash needs, capital requirements and capital expenditures, payment terms, expected tax rates, results of audits of us in China, needs for additional financing, use of working capital, the benefits of our China operations, anticipated growth strategies, ability to attract customers and diversify our customer base, sources of net sales, anticipated trends and challenges in our business and the markets in which we operate, the adequacy of our facilities, the impact of economic and industry conditions on our customers and our business, customer demand, our competitive position, critical accounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement which is preceded by the word “may,”, “might,”“ will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “aim,” “potential,” “plan,” or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may
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differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, the impact of changes in demand for our products, our success with new and current customers, our ability to develop and deliver new technologies, our ability to diversify our customer base, our effectiveness in managing manufacturing processes and costs and expansion of our operations, the degree to which we are able to utilize available manufacturing capacity, achieve expected yields and obtain expected gross margins, and the impact of competition and of technological advances, and the other risks set forth in this Annual Report on Form 10-K under “Item 1A. – Risk Factors.” These forward-looking statements represent our judgment as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.
Overview
We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We offer customized flexible printed circuit applications and services ranging from design and application engineering, prototyping and high-volume manufacturing to turnkey component assembly and testing. We target our solutions within the electronics market and, in particular, we focus on applications where flexible printed circuits facilitate human interaction with an electronic device and are the enabling technology in achieving a desired size, shape, weight or functionality of the device. Current applications for our products include mobile phones and smart mobile devices, portable bar code scanners, personal digital assistants, power supplies and consumable medical sensors.
From our inception in 1984 until 1989, we were engaged primarily in the manufacturing of flexible printed circuits for military and aerospace applications. In early 1990, we began to develop the concept of attaching components on flexible printed circuits for Motorola. Through these early efforts, we developed the concept of the value-added approach with respect to integrating our design engineering expertise with our component assembly capabilities. This strategy has enabled us to capitalize on two trends over the course of the 1990s, the outsourcing by OEMs of their manufacturing needs and the shift of manufacturing facilities outside of the United States. In 1994, we formed a wholly owned Chinese subsidiary, MFC1, to better serve customers that have production facilities in Asia and provide a cost-effective, high-volume production platform for the manufacture of our products. MFC1 provides a complete range of capabilities and services to support our global customer base, including design engineering and high-volume production of single-sided, double-sided and multi-layer flexible printed circuits and component assemblies. In fiscal 2002, we formed a second wholly owned subsidiary in China, MFC2, to further expand our flexible printed circuit manufacturing and assembly capacity. In fiscal 2005, we acquired the assets of Applied Optics, Inc., a company which designed and manufactured optical and photonic imaging solutions, and now operate this business as Aurora Optical, Inc., a subsidiary of M-Flex.
Net Sales
We design and manufacture our products to customer specifications. We engage the services of 16 non-exclusive sales representatives to provide customer contacts and market our products directly to our global customer base. Thirteen of these sales representatives are located throughout the United States, with one also covering Japan. We also have one sales representative in each of Canada, Korea and Taiwan. The variety of products our customers manufacture are referred to as programs. The majority of our sales are to customers outside of the United States. Sales volumes may be impacted by customer program and product mix changes and delivery schedule changes imposed on us by our customers. All sales from our Anaheim, California and Tucson, Arizona facilities are denominated in U.S. Dollars. All sales from our China facilities are denominated in U.S. Dollars for sales outside China or Chinese Renminbi for sales made in China.
During fiscal year 2007, our net sales were impacted by a shift in our customer base. Although net sales to our largest customer decreased from 86% of net sales in fiscal year 2006 to 57% of net sales in fiscal year 2007, our net sales to all other customers grew in total by $145 million, or nearly 200%, in fiscal year 2007 as compared to 2006. This growth was driven primarily by a 427% increase in net sales during fiscal year 2007 to our second largest customer, as well as growth in net sales to two other customers.
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Cost of Sales
Cost of sales consists of four major categories: material, overhead, labor and purchased process services. Material cost relates primarily to the purchase of copper foil, polyimide substrates and electronic components. Overhead costs include all materials and facilities associated with manufacturing support, processing supplies and expenses, support personnel costs, utilities, amortization of facilities and equipment and other related costs. Labor cost represents the cost of personnel related to the manufacture of the completed product and includes stock-based compensation expense related to such personnel. Purchased process services relate to the subcontracting of specific manufacturing processes to outside contractors. Cost of sales may be impacted by capacity utilization, manufacturing yields, product mix and production efficiencies. Also, we may be subject to increased costs as a result of changing material prices because we do not have long-term fixed supply agreements.
During fiscal year 2007, we experienced reduced gross margins, primarily due to lower yields associated with the ramp-up and high-volume production of numerous new parts across an expanded base of customers, price reductions established in early fiscal 2007 and overhead increases.
Research and Development
Research and development costs are incurred in the development of new products and processes, including significant improvements and refinements to existing products and are expensed as incurred.
Sales and Marketing Expense
Sales and marketing expense includes commissions paid to sales representatives, personnel-related costs associated with our sales and marketing, business development and engineering support groups and expenses for overseas sales support, trade show and promotional and marketing brochures.
General and Administrative Expense
General and administrative expense primarily consists of salaries and benefits of administrative, finance, human resources, regulatory, information services and executive personnel and other expenses related to external accounting, legal and professional expenses, business insurance, management information systems, stock-based compensation, travel and entertainment and other corporate office expenses.
Interest Income
Interest income consists of interest income earned on cash, cash equivalents balances and short-term investments.
Interest Expense
Interest expense consists of interest expense incurred on our lines of credit.
Other Income (Expense), Net
Other income and expense, net, consists primarily of our gain or loss on foreign currency exchange.
Provision for Income Taxes
We record a provision for income taxes based on the statutory rates applicable in the countries in which we do business, subject to any tax holiday periods granted by the respective governmental authorities. We account for income taxes under the provisions of Statement of Financial Accounting Standards, or SFAS, No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
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The American Jobs Creation Act of 2004, or the Job Creation Act, was signed into law on October 22, 2004. The Job Creation Act contains provisions that replace an export incentive with a deduction from domestic manufacturing income. We completed our evaluation of this deduction and concluded there is no material impact on our current year tax liability. However, we continue to evaluate the financial impact on future years.
Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to inventories, income taxes, accounts receivable allowances and warranty. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions.
We apply the following critical accounting policies in the preparation of our consolidated financial statements:
| • | Revenue Recognition. Revenues, which we refer to as net sales, are generated from the sale of flexible printed circuit boards, which are sold to OEMs, subcontractors and EMS providers to be included in other electronic products. We recognize revenue when there is persuasive evidence of an arrangement with the customer that states a fixed or determinable sales price, when title and risk of loss transfers, when delivery of the product has occurred in accordance with the terms of the sale and collectibility of the related account receivable is reasonably assured. Our remaining obligation to customers after delivery is limited to our warranty obligations on our product. We report revenues net of an allowance for returns, refunds and credits, which we estimate based on historical experience. |
| • | Inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory and record a provision for excess or obsolete inventory based primarily on historical usage and our estimate of expected and future product demand. Our estimates of future product demand will differ from actual demand; therefore, our estimates of the provision required for excess and obsolete inventory may increase or decrease, which we will record in the period such determination was made. |
| • | Income Taxes. We determine if our deferred tax assets and liabilities are realizable on an ongoing basis by assessing our need for a valuation allowance and by adjusting the amount of such allowance, as necessary. In the determination of any valuation allowance, we have considered taxable income in prior carryback years, future taxable income and the feasibility of tax planning initiatives. If we determine that it is more likely than not that we will realize certain of our deferred tax assets for which we previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance. Conversely, if we determine that we would not be able to realize our recorded net deferred tax asset, an adjustment to increase the valuation allowance would be charged to our results of operations in the period such conclusion was reached. In addition, we operate within multiple domestic and foreign taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that adequate consideration has been made for such issues, it is possible that the ultimate resolution of such issues could be significantly different than originally estimated. |
| • | Accounts Receivable Allowance. We perform ongoing credit evaluations of our customers and adjust credit limits and their credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based on our historical experience, our anticipation of uncollectible amounts and any specific customer collection issues that we have identified. While our credit losses historically have been within our expectations and the allowance provided, we might not continue to |
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experience the same credit loss rates that we have in the past. The majority of our receivables are concentrated in relatively few customers; therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts. |
| • | Warranty Reserves. We provide a two to thirty-six month warranty on our products. We provide a warranty reserve for the estimated cost of product warranties at the time the net sales are recognized. While we engage in quality programs and processes, up to and including the final product, our warranty obligation is affected by product failure rates, the cost of the failed product and the inbound and outbound freight costs incurred in replacing defective parts. We continuously monitor and analyze product returns for warranty and maintain a reserve for the related warranty costs based on historical experience and assumptions. If actual failure rates and the resulting cost of replacement vary from our historically based estimates, revisions to the estimated warranty reserve would be required. |
| • | Goodwill. We evaluate the carrying value of goodwill during July of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated competition, or (iii) an adverse action or assessment by a regulator. In performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. To evaluate whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. We determine the fair value of each reporting unit using the present value of expected future cash flows for that reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. To date, we have had no impairments of goodwill. |
| • | Stock-Based Compensation.In first quarter of fiscal 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share Based Payment: An Amendment of FASB Statements No. 123 and 95(“SFAS 123R”). In accordance with SFAS 123R, in our first quarter of fiscal year 2006, we started to recognize compensation expense related to stock options granted to employees based on: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with SFAS No 123,Accounting for Stock-Based Compensation(“SFAS 123”), adjusted for an estimated future forfeiture rate, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. |
Our assessment of the estimated fair value of the stock options granted is affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. We utilize the Black-Scholes model to estimate the fair value of stock options granted subsequent to our initial public offering on June 25, 2004 (our “IPO”) and the minimum value method for stock options granted prior to our IPO. Generally, our calculation of the fair value for options granted under SFAS 123R is similar to the calculation of fair value under SFAS 123 with the exception of the treatment of forfeitures. Expected forfeitures of stock options are estimated based on the historical turnover of our employees. Prior to SFAS 123R, we recognized forfeitures under SFAS 123 as they occurred. The fair value of restricted stock units granted is based on the grant date price of our common stock.
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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:
| (a) | The expected volatility of our common stock price, which we determine based on historical volatility of our common stock since the date of our IPO; |
| (b) | Expected dividends, which are nil, as we do not currently anticipate issuing dividends; |
| (c) | Expected life of the stock option, which is estimated based on the historical stock option exercise behavior of our employees; and |
| (d) | Risk free interest rate is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period. |
In the future, we may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on our net income or loss.
Results of Operations
The following table sets forth our Statement of Operations data, expressed as a percentage of net sales for the periods indicated.
| Year Ended September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 90.8 | 81.9 | 77.6 | ||||||
Gross profit | 9.2 | 18.1 | 22.4 | ||||||
Research and development | 0.5 | 0.4 | 0.2 | ||||||
Sales and marketing expense | 2.5 | 1.8 | 2.5 | ||||||
General and administrative expense | 4.8 | 4.5 | 5.0 | ||||||
Terminated acquisition expenses | 1.5 | — | — | ||||||
Operating (loss) income | (0.1 | ) | 11.4 | 14.7 | |||||
Interest income, net | 0.2 | 0.2 | 0.1 | ||||||
Other income, net | 0.1 | 0.0 | 0.1 | ||||||
Income before income taxes | 0.2 | 11.6 | 14.9 | ||||||
Benefit from (provision for) income taxes | 0.4 | (3.6 | ) | (4.6 | ) | ||||
Net income | 0.6 | % | 8.0 | % | 10.3 | % | |||
Year Ended September 30, 2007 Compared to Year Ended September 30, 2006
Net Sales. The essentially flat net sales of $508.1 million in fiscal 2007 versus $504.2 million in fiscal 2006 were primarily attributable to significant offsetting fluctuations in net sales to customers within our wireless sector, which comprised 91% of net sales in fiscal 2007 versus 88% during fiscal 2006. While net sales to our largest customer decreased $141.5 million, or 33%, compared to the prior fiscal year due to price reductions and substantially reduced sales volume as a result of increased competition and softer demand from this customer, net sales to our second largest customer increased $101.8 million, or 427%, during the current fiscal year due to the continuation of high-volume orders on programs which were initiated at the end of fiscal 2006 as well as the ramping of several new programs during the current fiscal year. Sales to our largest customer, which represented 86% of our net sales in fiscal 2006, decreased to 57% of our net sales in the current fiscal year due to the declines mentioned above as well as the success of our customer diversification efforts, which resulted in our second largest customer increasing from a concentration of 5% of our net sales in fiscal 2006 to 25% in fiscal 2007. We believe that this expanded wireless customer base will provide an increased opportunity for top line revenue growth in fiscal 2008. Net sales to the industrial sector, our second largest sector, decreased 14% or $4.1 million to $24.8 million for the year ended September 30, 2007 versus $28.9 million in the prior fiscal year million due to the continued decline in demand.
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Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 91% for fiscal 2007 versus 82% for fiscal 2006. The increase in cost of sales as a percentage of net sales was driven by several factors. The main driver was manufacturing yield decreases, which comprised approximately 50% of the increase. Manufacturing yields were negatively impacted by the substantially larger number of new high-volume program ramp-ups that occurred during fiscal 2007 versus fiscal 2006. Yield improvements were achieved during the fourth quarter of fiscal year 2007 due to the stabilization of these new programs and we expect that further yield improvements will provide additional benefit in fiscal 2008. Increased overhead spending driven by a 10% increase in sales volumes drove approximately 35% of the increase in cost of sales as a percentage of net sales. The increase in overhead spending was primarily driven by the $33 million MFC2 capacity expansion that was on-going throughout the second half of fiscal 2007 and resulted in some de-leveraging of fixed overhead expenses during the current fiscal year in anticipation of higher sales volumes in the latter portion of fiscal 2007 and throughout fiscal 2008. These sales volume increases were beginning to be realized in the fourth quarter of fiscal 2007. Approximately 15% of the increase was attributable to customer price reductions which were initiated early in fiscal 2007.
Gross profit decreased to $46.8 million in the year ended September 30, 2007 versus $91.0 million in the prior year, a decrease of 49%. As a percentage of net sales, gross profit decreased to 9% for fiscal year 2007 from 18% in the prior fiscal year. The decrease in gross profit is primarily due to the price reductions on our products and decreased manufacturing yields, as compared to the prior fiscal year. As a result of the sales volume increases and manufacturing yield improvements we began to experience at the end of fiscal 2007, we expect quarterly gross margins to return to the 10% to 15% range in the first half of fiscal 2008.
Research and Development. Research and development expenses increased to $2.5 million for the year ended September 30, 2007 from $2.0 million for the year ended September 30, 2006, an increase of 25%. The increase is primarily due to our increasing focus on new technologies, primarily lens applications and low profile camera modules, as well as increased research and development activities at our Anaheim location. We expect these expenses to grow as we continue to focus on additional new technologies, primarily those which will provide for additional miniaturization and cost reduction of our products, and also allow us to further differentiate ourselves from our competition.
Sales and Marketing Expense. Sales representatives’ commissions and other sales related expense increased to $6.6 million for fiscal 2007 from $4.5 million in fiscal 2006, an increase of 47%. The increase is primarily attributable to a $1.7 million increase in commission expense related to the higher commission rates on new programs as well as a $400,000 increase in customer support expenses related to the expansion of our international sales offices, particularly our Netherlands sales office. Compensation and benefit expense increased to $5.9 million in fiscal 2007 from $4.7 million in fiscal 2006, an increase of 26%. As a percentage of net sales, compensation and benefit expense for fiscal 2007 increased to 1.2% from 0.9% in fiscal 2006, primarily due to the increased engineering headcount in China to support the number of new program ramp-ups during fiscal 2007.
General and Administrative Expense. As a percentage of net sales, general and administrative expense increased slightly from 4.5% in fiscal 2006 to 4.8% in fiscal 2007. The $2.0 million increase in general and administrative expense was primarily due to the $1.5 million increase in litigation expenses related to the terminated offer to acquire all of the outstanding shares of MFS Technology Ltd. (the “MFS Offer”) which were expensed as incurred during the year ended September 30, 2007. Head count increases in China related to the planned expansion of the manufacturing capacity of MFC2 in China also generated approximately $300,000 in additional administrative expense during fiscal 2007. We expect general and administrative expense, as a percentage of net sales, to remain relatively flat during the upcoming fiscal year.
Terminated Acquisition Costs.During the fiscal year ended September 30, 2007, we recorded a $7.8 million non-recurring charge to write-off deferred transaction costs related to the termination of the MFS Offer. No charges were recorded during the prior fiscal year.
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Interest Income.Interest income remained constant at $1.5 million for fiscal 2006 and 2007.
Interest Expense. Interest expense increased slightly to $311,000 in fiscal 2007 from $203,000 in fiscal 2006. The increase is attributable to a higher average balance of $1.7 million carried on our lines of credit during the fiscal 2007 versus an average balance of $1.3 million carried in the prior fiscal year.
Other (Income) Expense, Net. Net other income/expense changed to income of $200,000 for the year ended September 30, 2007 from expense of $229,000 for the prior year. The change is primarily due to a $484,000 increase in gain on foreign exchange. We experienced a loss from foreign exchange of $306,000 during the year ended September 30, 2006 versus a gain of $178,000 during the year ended September 30, 2007. The increase in gain on foreign exchange is due to gains experienced on MFC2 purchases made in U.S. Dollars and recorded in RMB, MFC2’s functional currency.
Income Taxes.The effective tax rate for fiscal 2007 was a benefit of 171% compared to a provision of 31% for fiscal 2006. The higher effective tax benefit was mainly due to foreign tax credits offsetting U.S. taxes, the tax benefit of losses generated in the U.S., a higher tax jurisdiction, and income generated in China, a lower tax jurisdiction.
Year Ended September 30, 2006 Compared to Year Ended September 30, 2005
Net Sales. The increase of $147.1 million, or 41%, from fiscal 2005 to fiscal 2006 was attributable primarily to $145.8 million of increased net sales to the wireless sector, which accounted for approximately 88% of total net sales in fiscal year 2006 versus 84% in fiscal 2005. The increased wireless sales were attributable to increased volume of units shipped during the year. Sales to our largest customer, which represented 86% of our annual sales in fiscal 2006, increased by $125.4 million, or 41% as compared to the prior fiscal year. In addition, sales to our second largest customer increased by $16.8 million or 240% versus the prior fiscal year. In fiscal 2006, industrial customers net sales, our second largest sector, equaled $28.9 million, an increase of $1.1 million or 4% as compared to fiscal 2005, primarily due to a continued increase in volume of bar code scanners. In addition, compared to the prior fiscal year, sales to the computer/storage device sector increased by $1.2 million or 17% during fiscal 2006 and sales to power supply customers increased by $0.7 million or 99% during fiscal 2006. Sales to the medical and personal digital assistant sectors remained relatively flat during fiscal year 2006, while net sales to the network telecommunications industry decreased by $1.1 million, or 31%.
Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 82% for fiscal 2006 versus 78% for fiscal 2005. The increase in cost of sales was driven by a change in product mix at lower margins. The change in product mix was partially due to the ramp-up of new programs as well as a shift in sales of product to our largest customer from higher to lower margin products. In addition, in the fourth quarter of the fiscal year, our cost of sales was negatively impacted when we had an inventory write-down of $2.5 million related to our third largest customer declaring bankruptcy.
In absolute dollars, gross profit increased to $91 million in fiscal 2006 from $79.9 million in fiscal 2005. As a percentage of net sales, gross profit for the year ended September 30, 2006 decreased to 18% versus 22% for the prior year. The decrease in gross profit is primarily due to price reductions on our products. In addition, during the second half of the fiscal year a slow down in sales, due to a loss of market share with our largest customer, resulted in a decrease in gross profit, as we had a lower revenue base over which to leverage our fixed costs. An overall change in product mix from higher to lower margin products also negatively impacted our gross profit percentage. As a result, our gross margins shifted substantially lower to a range of approximately 10% to 15%. This lower range was being driven by pricing pressures resulting from increased competition, and the trend toward higher component content, which are primarily pass through costs with minimal opportunity for mark-up.
Research and Development. Research and development expenses increased to $2.0 million for the year ended September 30, 2006 from $883,000 for the year ended September 30, 2005, an increase of 127% on an absolute basis and an increase from 0.2% of net sales for the year ended September 30, 2005 to 0.4% of net sales in fiscal 2006. The increase is primarily due to our increasing focus on new technologies, primarily camera module assemblies. We expect these expenses to grow as we continue transitioning our Anaheim facility to a research and development, small-volume, prototype operation in order to continue to differentiate ourselves from our competition.
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Sales and Marketing Expense. Sales representatives’ commissions and other sales related expense increased to $4.5 million for fiscal 2006 from $3.9 million in fiscal 2005, an increase of 15%, due an increase in sales volumes. As a percentage of net sales, commissions decreased from 1.1% in fiscal 2005 to 0.9% in fiscal 2006. Compensation and benefit expense decreased to $4.7 million in fiscal 2006 from $4.9 million in fiscal 2005, a decrease of 4%. As a percentage of net sales, compensation and benefit expense for fiscal 2006 decreased to 0.9% from 1.4% in fiscal 2005, primarily due to the leveraging of expenses over increased sales. Even with our focus to continually decrease operating expenses as a percentage of net sales, we believe this may be at the lower end of our sustainable range.
General and Administrative Expense. As a percentage of net sales, general and administrative expense decreased from 5% in fiscal 2005 to 4.5% in fiscal 2006. The $4.6 million increase in general and administrative expense was due partially to the adoption of SFAS 123R, which resulted in an increase to stock-based compensation of $1.5 million. Head count increases in China and other infrastructure growth during the last quarter of fiscal year 2005 and throughout 2006 have also contributed to the administrative cost increase. The increase in general and administrative expense as a percentage of sales was offset by a small increase in compensation and benefits expense leveraged over a larger increase in net sales. As of September 30, 2006, we had capitalized $4.5 million in deferred transaction costs in relation to the MFS Offer which were subsequently expensed when the transaction was terminated in June 2007.
Interest Income. Interest income increased to $1.5 million for fiscal 2006 from $688,000 for fiscal 2005, an increase of 118%. The increase in interest income was primarily due to interest earned on short-term investments.
Interest Expense. Interest expense increased slightly to $203,000 for fiscal 2006 from $174,000 for fiscal 2005, an increase of 17%. The increase in interest expense was primarily due the higher average debt balance carried in fiscal 2006 versus 2005.
Other (Income) Expense, Net. Net other income/expense changed to expense of $229,000 for the year ended September 30, 2006 from income of $378,000 for the prior year. The change is primarily due to a $358,000 increase in loss on foreign exchange. We experienced a gain from foreign exchange of $52,000 during the year ended September 30, 2005 versus a loss of $306,000 during the year ended September 30, 2006. The increase in loss on foreign exchange is due to the strengthening of the RMB against the U.S. dollar.
Income Taxes.The effective tax rate for fiscal 2006 and 2005 remained relatively constant at 31%. Although the effective tax rate at MFC2 increased from 0% in fiscal 2005 to 5.6% in fiscal year 2006, the impact of this increase was offset by the non-recurring tax charges that were recorded in fiscal 2005 for additional tax contingency reserves and the valuation allowance relating to deferred tax benefits from capital loss carryforwards.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations, equity offerings and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future.
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It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next twelve months; however, there can be no assurance that any growth will occur and unexpected events may result in our need to raise additional capital.
The following table sets forth, for the years indicated, our net cash flows provided by (used in) operating, investing and financing activities, our period-end cash and cash equivalents and certain other operating measures:
| Years Ended September 30, | ||||||||||||
| (dollars in thousands) | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Cash flow provided by operating activities | $ | 46,690 | $ | 16,307 | $ | 43,969 | ||||||
Cash flow used in investing activities | $ | (45,083 | ) | $ | (41,083 | ) | $ | (23,311 | ) | |||
Cash flow provided by (used in) financing activities | $ | (3,309 | ) | $ | 8,918 | $ | (373 | ) | ||||
Cash and cash equivalents at year end | $ | 27,955 | $ | 24,460 | $ | 38,253 | ||||||
Days sales outstanding | 82.8 | 64.4 | 58.4 | |||||||||
Inventory turnover | 7.7 | 8.2 | 6.6 | |||||||||
Net cash generated from operations during fiscal 2007 was $46.7 million. During fiscal 2007, net income of $3.0 million, adjusted for depreciation and amortization, provision for doubtful accounts, deferred taxes, loss on equipment disposal and stock-based compensation expense generated $26.4 million of operating cash. In addition, $20.3 million in working capital was generated.
Changes in the principal components of operating cash flows in our 2007 fiscal year were as follows:
| • | Our net accounts receivable increased to $124.3 million at September 30, 2007 from $109.5 million for the prior year, an increase of 14%. The increase in outstanding accounts receivable is attributable to the increase in sales volume in the fourth quarter of fiscal 2007. Our net inventory balances increased to $63.4 million at September 30, 2007 from $56.4 million for the prior year, an increase of 12%. The principal reason for the increase was the build up of inventory to support the higher sales volumes experienced in the fourth quarter as well as the expected sales increase in the first quarter of fiscal 2008. Our accounts payable increased to $111.9 million at September 30, 2007 from $70.1 million for the prior year, an increase of 60%, as a result of increased purchases in support of the higher business volumes as well as the equipment expansion at MFC2. |
| • | Depreciation and amortization expense was $20.4 million for fiscal 2007 versus $14.5 million in the prior year due to the increased fixed asset base, mainly at MFC2. |
Our principal investing and financing activities in our 2007 fiscal year were as follows:
| • | Net cash used in investing activities was $45.1 million for fiscal 2007. Capital expenditures included $55.7 million of capital equipment and other assets, and $1.7 million in deposits for fixed asset purchases, which were related to the MFC2 manufacturing capacity expansion. As of September 30, 2007, we had outstanding purchase commitments related to MFC2 capital projects, which totaled $8.5 million. |
| • | Net cash used in financing activities was $3.3 million for fiscal 2007 and consisted of $4.0 million of repayments on our lines of credit offset by $638,000 of proceeds from the exercise of stock options. Our loans payable and borrowings outstanding against credit facilities decreased to zero at September 30, 2007 from $4.0 million at September 30, 2006. |
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Net cash generated from operations during fiscal 2006 was $16.3 million. During fiscal 2006, net income of $40.4 million, adjusted for depreciation, deferred taxes, loss on equipment disposal and loss on equity investment generated $54.5 million of operating cash, offset by $38.2 million required for working capital.
Changes in the principal components of operating cash flows in our 2006 fiscal year were as follows:
| • | Our net accounts receivable increased to $109.5 million at September 30, 2006 from $71.5 million for the prior year, an increase of 53%. The increase in outstanding accounts receivable is attributable to the extension of the payment terms for our major customer from 60 days to 90 days. Our net inventory balances increased to $56.4 million at September 30, 2006 from $45 million for the prior year, an increase of 25%. The principal reason for the increase was an increase in hubbing activity and increased raw materials levels to support higher sales volumes. Our accounts payable increased to $70.1 million at September 30, 2006 from $58 million for the prior year, an increase of 21%, as a result of increased purchases in support of the higher business volumes. |
| • | Depreciation and amortization expense was $14.5 million for fiscal 2006 versus $11.4 million in the prior year due to the increased fixed asset base, mainly at MFC2. |
Our principal investing and financing activities in our 2006 fiscal year were as follows:
| • | Net cash used in investing activities was $41.1 million for fiscal 2006. Capital expenditures included $37.8 million of capital equipment and other assets, including $3.2 million in deposits for fixed asset purchases, which were related to the construction of the MFC2 expansion as well as improvements at the Anaheim facility. As of September 30, 2006 and 2005, we had outstanding purchase commitments related to MFC2 capital projects which totaled $8.3 million and $4.6 million, respectively. |
| • | Net cash provided by financing activities was $8.9 million for fiscal 2006 and consisted of $1.6 million of proceeds from the exercise of stock options and $4.0 million of net borrowings on our lines of credit. Our loans payable and borrowings outstanding against credit facilities increased to $4.0 million at September 30, 2006 from $0 million at September 30, 2005. The increase in outstanding loan amounts resulted from a $4.0 million draw down on our credit facility with Norddeutsche Landesbank Girozentrale (“NLG”) to fund working capital needs. In addition, $3.4 million in cash was generated by the tax benefit related to stock options. |
Net cash generated from operations during fiscal 2005 was $44.0 million. During fiscal 2005, net income of $37.2 million, adjusted for depreciation, deferred taxes, loss on equipment disposal and loss on equity investment generated $56.3 million of operating cash, offset by $12.3 million required for working capital.
Changes in the principal components of operating cash flows in our 2005 fiscal year were as follows:
| • | Our net accounts receivable increased to $71.5 million at September 30, 2005 from $44.4 million for the prior year, an increase of 61%. The increase in outstanding accounts receivable was attributable to the higher average monthly sales in fiscal 2005 versus the prior year. Our net inventory balances increased to $45 million at September 30, 2005 from $39.2 million for the prior year, an increase of 15%. The principal reason for the increase was the expected growth in program order volumes for high-volume, high-density flexible printed circuit assembly programs for the wireless sector. Our accounts payable increased to $58 million at September 30, 2005 from $26.1 million for the prior year, an increase of 122%, as a result of increased purchases in support of the higher business volumes. |
| • | Depreciation and amortization expense was $11.4 million for fiscal 2005 versus $6.7 million in the prior year due to the increased fixed asset base, mainly at MFC2. |
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Our principal investing and financing activities in our 2005 fiscal year were as follows:
| • | Net cash used in investing activities was $23.3 million for fiscal 2005. Capital expenditures included $22.9 million of capital equipment and other assets, including a $1.5 million reduction in deposits for fixed asset purchases, which were related to the construction of MFC2 and the purchase of machinery and equipment for our new China operations. As of September 30, 2005 and 2004, we had outstanding purchase commitments related to MFC2 capital projects which totaled $4.6 million and $18 million, respectively. |
| • | Net cash provided by financing activities was $6 million for fiscal 2005 and consisted of $3 million of proceeds from the exercise of stock options and $3.4 million of net payments on our line of credit and notes payable. Our loans payable and borrowings outstanding against credit facilities decreased to $0 at September 30, 2005 from $3.4 million at September 30, 2004. The decrease in outstanding loan amounts was due to the pay down in debt from cash generated by operating activities. In addition, $6.4 million in cash was generated by the tax benefit related to stock options |
Capital Commitments
As of September 30, 2007, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s, or SEC’s, Regulation S-K. The following summarizes our contractual obligations at September 30, 2007 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
| Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | ||||||||||
Operating leases (facilities) | $ | 633 | $ | 577 | $ | 56 | $ | — | $ | — | |||||
Capital lease obligations | 150 | 119 | 31 | — | — | ||||||||||
Purchase obligations (MFC2) | 8,457 | 8,457 | — | — | — | ||||||||||
Total contractual obligations | $ | 9,240 | $ | 9,153 | $ | 87 | $ | — | $ | — | |||||
We have four leases or contractual arrangements relating to space at our California facilities, which range in terms from six-months to three years, and range in size from approximately 4,000 square feet to approximately 6,000 square feet. These leases expire in various months of each year. In general, as these leases expire, we extend them on substantially the same terms. We have several parcels at MFC1 that have long-term land leases expiring beyond 2043. Under the terms of the leases, we paid an upfront fee for use of the parcel through expiration of the lease. We have no other financial obligations on the long-term land leases at MFC1 other than payments of real estate taxes. However, we expect that we may determine to move this facility to a more industrialized areas in the coming years.
During fiscal 2005 our board of directors approved an additional expansion at MFC2, which became operational during the first quarter of fiscal 2007. As of September 30, 2006, we had purchase obligations of $8.3 million related to this expansion. In April 2007 our board of directors approved a $33.0 million capital expansion plan to increase our assembly capacity in the expanded MFC2 facility and in one satellite location in Suzhou. As of September 30, 2007 essentially all of the equipment related to the expansion had been installed. As of September 30, 2007, we had purchase obligations of $8.5 million which were primarily related to this expansion.
Recent Accounting Pronouncements
On October 22, 2004, the President signed the Job Creation Act. The Job Creation Act provides a deduction for income from qualified domestic production activities which will be phased in from 2006 through 2011. On December 21, 2004, the Financial Accounting Standards Board Staff Position (“FSP”) No. FAS 109-1,Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP No. 109-1”), was issued. FSP No. 109-1 clarifies that this tax deduction should be accounted for as a special deduction in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109,Accounting for Income Taxes (“SFAS 109”).
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As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of the enactment. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return beginning in 2006. We completed our evaluation of this deduction and concluded there is no material impact on our current year tax liability. However, we are evaluating the impact on future years and currently do not believe it will have any material impact on our consolidated financial position, results of operation or cash flows.
In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (“EITF 06-3”). The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 states that a company should disclose its accounting policy (i.e. gross or net presentation) regarding the presentation of taxes within its scope, and if significant, these disclosures should be applied retrospectively to the financial statements for all periods presented. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. EITF 06-3 was effective for us beginning January 1, 2007 and did not have a material impact on our consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. FIN 48 requires that a company recognize the financial statement effects of a tax position when there is a likelihood of more than 50%, based on the technical merits, that the position will be sustained upon examination. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As such, we will adopt the accounting provisions of FIN 48 as of October 1, 2007. We are currently evaluating the impact, if any, the adoption of FIN 48 will have on our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are in the process of determining the impact, if any, the adoption of SFAS 157 will have on our consolidated financial position, results of operations or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 regarding the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The interpretations in SAB 108 contain guidance on correcting errors under the dual approach and provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS No. 154,Accounting for Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 Accounting Changes in Interim Financial Statements, for the correction of an error on financial statements. SAB 108 was effective for us for the year ended September 30, 2007 and did not have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement on Financial Accounting Standards No. 159 (“FAS No. 159”), The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under U.S. GAAP. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, the adoption of SFAS 159 will have on our consolidated financial position, results of operations or cash flows.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risks |
Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At September 30, 2007, no amounts were outstanding under our loan agreements with Shanghai Pudong
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Development Bank, Bank of China or NLG. The amounts outstanding under these loan agreements at any time may fluctuate and we may from time to time be subject to refinancing risk. We do not believe that a change of 100 basis points in interest would have a material effect on our results of operations or financial condition based on our current borrowing level.
We derive a substantial portion of our sales outside of the United States. Approximately $444 million, or 96%, of total shipments to these foreign manufacturers for fiscal 2007 were made in U.S. Dollars. The balance of our net sales are denominated in Chinese Renminbi, or RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 7.7 RMB per U.S. Dollar for the fiscal year ended September 30, 2007. Transactions in RMB represent approximately 4% of total net sales from foreign customers for the fiscal year ended September 30, 2007. In July 2005, the People’s Bank of China, or PBOC, terminated the fixed exchange rate between the RMB and the U.S. Dollar, adjusted the exchange rate from 8.3 to 8.1 and established a 0.3% maximum daily appreciation against the U.S. Dollar. However, during the third quarter of fiscal 2007, the PBOC increased the rate at which the RMB/U.S. Dollar exchange can fluctuate, which resulted in a greater RMB appreciation. We expect the RMB appreciation against the U.S. Dollar to continue to increase in the future, which will result in an increase in the cost of our business expenses in China due to the movement of the exchange rates. We generally do not consider it necessary to hedge against currency risk, as a significant portion of our material cost of sales is denominated in U.S. Dollars, eliminating much of the need to hedge; however, we continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. Dollar.
| Item 8. | Financial Statements and Supplementary Data |
MULTI-FINELINE ELECTRONIX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Multi-Fineline Electronix, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Multi-Fineline Electronix, Inc. and its subsidiaries at September 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Orange County, California
December 3, 2007
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MULTI-FINELINE ELECTRONIX, INC.
(In Thousands, Except Per Share and Share Data)
| September 30, | ||||||
| 2007 | 2006 | |||||
| ASSETS | ||||||
Cash and cash equivalents | $ | 27,955 | $ | 24,460 | ||
Short term investments | 7,000 | 19,355 | ||||
Restricted cash | 2,343 | 2,161 | ||||
Accounts receivable, net of allowances of $1,300 and $604 | 124,313 | 109,517 | ||||
Inventories | 63,424 | 56,430 | ||||
Due from affiliates | — | 267 | ||||
Deferred taxes | 4,073 | 4,346 | ||||
Income taxes receivable | 2,701 | — | ||||
Other current assets | 2,749 | 1,270 | ||||
Total current assets | 234,558 | 217,806 | ||||
Property, plant and equipment, net | 133,633 | 95,231 | ||||
Restricted cash | 135 | 129 | ||||
Deferred taxes | 2,185 | 1,187 | ||||
Goodwill | 3,629 | 3,629 | ||||
Other assets | 3,147 | 9,063 | ||||
Total assets | $ | 377,287 | $ | 327,045 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Accounts payable | $ | 111,934 | $ | 70,143 | ||
Accrued liabilities | 14,994 | 13,053 | ||||
Due to affiliates | 30 | 417 | ||||
Lines of credit | — | 4,000 | ||||
Other current liabilities | 119 | 80 | ||||
Income taxes payable | — | 669 | ||||
Total current liabilities | 127,077 | 88,362 | ||||
Other liabilities | 204 | 318 | ||||
Total liabilities | 127,281 | 88,680 | ||||
Commitments and contingencies (Note 10) | ||||||
Stockholders’ equity | ||||||
Preferred stock, $0.0001 par value, 5,000,000 and 5,000,000 shares authorized; none issued or outstanding | — | — | ||||
Common stock, $0.0001 par value; 100,000,000 and 100,000,000 shares authorized; 24,598,510 and 24,443,371 shares issued and outstanding | 2 | 2 | ||||
Additional paid-in capital | 108,872 | 105,466 | ||||
Retained earnings | 132,532 | 129,494 | ||||
Accumulated other comprehensive income | 8,600 | 3,403 | ||||
Total stockholders’ equity | 250,006 | 238,365 | ||||
Total liabilities and stockholders’ equity | $ | 377,287 | $ | 327,045 | ||
The accompanying notes are an integral part of these consolidated financial statements.
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MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
| Years Ended September 30, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Net sales | $ | 508,147 | $ | 504,204 | $ | 357,090 | ||||||
Cost of sales | 461,376 | 413,156 | 277,202 | |||||||||
Gross profit | 46,771 | 91,048 | 79,888 | |||||||||
Operating expenses | ||||||||||||
Research and development | 2,499 | 2,035 | 883 | |||||||||
Sales and marketing | 12,544 | 9,233 | 8,783 | |||||||||
General and administrative | 24,216 | 22,231 | 17,587 | |||||||||
Terminated acquisition expenses | 7,821 | — | — | |||||||||
Total operating expenses | 47,080 | 33,499 | 27,253 | |||||||||
Operating (loss) income | (309 | ) | 57,549 | 52,635 | ||||||||
Other income (expense), net | ||||||||||||
Interest expense | (311 | ) | (203 | ) | (174 | ) | ||||||
Interest income | 1,540 | 1,460 | 688 | |||||||||
Other income (expense), net | 200 | (229 | ) | 378 | ||||||||
Income before provision for income taxes | 1,120 | 58,577 | 53,527 | |||||||||
Benefit from (provision for) income taxes | 1,918 | (18,220 | ) | (16,361 | ) | |||||||
Net income | $ | 3,038 | $ | 40,357 | $ | 37,166 | ||||||
Net income per share: | ||||||||||||
Basic | $ | 0.12 | $ | 1.66 | $ | 1.57 | ||||||
Diluted | $ | 0.12 | $ | 1.59 | $ | 1.51 | ||||||
Shares used in computing net income per share: | ||||||||||||
Basic | 24,520,040 | 24,353,854 | 23,603,935 | |||||||||
Diluted | 25,164,401 | 25,315,548 | 24,593,998 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands, Except Share Data)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | Comprehensive Income | |||||||||||||||
| Shares | Amount | |||||||||||||||||||
Balance at September 30, 2004 | 23,264,835 | $ | 2 | $ | 89,110 | $ | 51,971 | $ | 1 | $ | 141,084 | $ | 25,776 | |||||||
Exercise of stock options | 915,049 | — | 2,996 | — | — | 2,996 | ||||||||||||||
Compensation relating to the modification of stock options | — | — | 99 | — | — | 99 | ||||||||||||||
Stock-based compensation income tax benefits | — | — | 6,359 | — | — | 6,359 | ||||||||||||||
Net income | — | — | — | 37,166 | — | 37,166 | $ | 37,166 | ||||||||||||
Translation adjustment | — | — | — | — | 1,337 | 1,337 | 1,337 | |||||||||||||
Balance at September 30, 2005 | 24,179,884 | $ | 2 | $ | 98,564 | $ | 89,137 | $ | 1,338 | $ | 189,041 | $ | 38,503 | |||||||
Exercise of stock options | 263,487 | — | 1,562 | — | — | 1,562 | ||||||||||||||
Stock-based compensation expense | — | — | 1,984 | — | — | 1,984 | ||||||||||||||
Stock-based compensation income tax benefits | — | — | 3,356 | — | — | 3,356 | ||||||||||||||
Net income | — | — | — | 40,357 | — | 40,357 | $ | 40,357 | ||||||||||||
Translation adjustment | — | — | — | — | 2,065 | 2,065 | 2,065 | |||||||||||||
Balance at September 30, 2006 | 24,443,371 | $ | 2 | $ | 105,466 | $ | 129,494 | $ | 3,403 | $ | 238,365 | $ | 42,422 | |||||||
Exercise of stock options | 155,139 | — | 638 | — | — | 638 | ||||||||||||||
Stock-based compensation expense | 2,715 | — | — | 2,715 | ||||||||||||||||
Stock-based compensation income tax benefits | 53 | — | — | 53 | ||||||||||||||||
Net Income | 3,038 | — | 3,038 | $ | 3,038 | |||||||||||||||
Translation adjustment | 5,197 | 5,197 | 5,197 | |||||||||||||||||
Balance at September 30, 2007 | 24,598,510 | $ | 2 | $ | 108,872 | $ | 132,532 | $ | 8,600 | $ | 250,006 | $ | 8,235 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Years Ended September 30, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 3,038 | $ | 40,357 | $ | 37,166 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation and amortization | 20,447 | 14,473 | 11,434 | |||||||||
Loss from equity method investee | — | — | 40 | |||||||||
Provision for doubtful accounts | 696 | 3 | 351 | |||||||||
Income tax benefit related to stock option exercise | — | — | 6,359 | |||||||||
Deferred income taxes | (725 | ) | (2,423 | ) | 678 | |||||||
Stock-based compensation expense | 2,715 | 1,984 | 99 | |||||||||
Loss on disposal of equipment | 190 | 107 | 136 | |||||||||
Changes in operating assets and liabilities | ||||||||||||
Accounts receivable | (15,492 | ) | (38,032 | ) | (27,158 | ) | ||||||
Inventories | (6,994 | ) | (11,455 | ) | (5,665 | ) | ||||||
Due to/from affiliates, net | (120 | ) | 237 | (5,515 | ) | |||||||
Other current assets | (1,479 | ) | (345 | ) | (81 | ) | ||||||
Other assets | 4,127 | (3,610 | ) | (3,831 | ) | |||||||
Accounts payable | 41,791 | 12,173 | 31,585 | |||||||||
Accrued liabilities | 1,941 | 2,031 | 4,901 | |||||||||
Income tax payable | (3,370 | ) | 923 | (6,553 | ) | |||||||
Other liabilities | (75 | ) | (116 | ) | 23 | |||||||
Net cash provided by operating activities | 46,690 | 16,307 | 43,969 | |||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from sales and (purchases) of short-term investments | 12,355 | (3,265 | ) | 5,475 | ||||||||
Cash paid for property and equipment | (55,711 | ) | (34,552 | ) | (24,417 | ) | ||||||
Purchases of software and capitalized internal-use software | (195 | ) | (461 | ) | (110 | ) | ||||||
Deposits on property and equipment | (1,713 | ) | (3,217 | ) | 1,523 | |||||||
Proceeds from sale of equipment | 369 | 569 | 2,454 | |||||||||
Increase in restricted cash, net | (188 | ) | (157 | ) | (1,830 | ) | ||||||
Cash paid for acquisition | — | — | (6,406 | ) | ||||||||
Net cash used in investing activities | (45,083 | ) | (41,083 | ) | (23,311 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Borrowings on line of credit | — | 12,000 | 4,950 | |||||||||
Payments on line of credit | (4,000 | ) | (8,000 | ) | (8,319 | ) | ||||||
Income tax benefit related to stock option exercise | 53 | 3,356 | — | |||||||||
Proceeds from exercise of options | 638 | 1,562 | 2,996 | |||||||||
Net cash (used in) provided by financing activities | (3,309 | ) | 8,918 | (373 | ) | |||||||
Effect of exchange rate changes on cash | 5,197 | 2,065 | 1,337 | |||||||||
Net increase (decrease) in cash | 3,495 | (13,793 | ) | 21,622 | ||||||||
Cash and cash equivalents at beginning of year | 24,460 | 38,253 | 16,631 | |||||||||
Cash and cash equivalents at end of year | $ | 27,955 | $ | 24,460 | $ | 38,253 | ||||||
Supplemental disclosure | ||||||||||||
Interest paid | $ | 248 | $ | 68 | $ | 187 | ||||||
Income taxes paid | 2,073 | 17,504 | 9,852 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share and Share Data)
1. Basis of Presentation and Significant Accounting Policies
Description of the Company
Multi-Fineline Electronix, Inc. (the “Company”) was incorporated in 1984 in the State of California and reincorporated in the State of Delaware in June 2004. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.
Affiliates and subsidiaries of WBL Corporation Limited (collectively “Wearnes”), a Singapore company, owned approximately 60%, 61% and 61% of the Company’s outstanding common stock as of September 30, 2007, 2006 and 2005, respectively, allowing Wearnes to exercise operating control over the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has two wholly owned subsidiaries located in China, Multi-Fineline Electronix (Suzhou) Co., Ltd. (“MFC1”), and Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”); one located in the Cayman Islands: M-Flex Cayman Islands Inc.; one located in Singapore: Multi-Fineline Electronix Singapore Pte. Ltd.; and one located in Arizona, Aurora Optical, Inc. (“Aurora Optical”). All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. Estimates are used in the determination of accounts receivable allowances, valuation of inventory, warranty reserves, valuation of the Company’s common stock options and income tax contingencies. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents as of September 30, 2007 and 2006 consisted of money market funds.
Short-Term Investments
Short-term investments consist of certain marketable debt securities, which consist primarily of short to intermediate term fixed income auction rate securities issued by U.S. government agencies and municipalities. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments to cash to fund current operations, or satisfy other cash requirements as needed. Short-term investments are classified as available for sale and are carried at fair value which approximates amortized cost.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. The carrying value of the Company’s lines of credit approximates fair value based on borrowing rates currently available to the Company.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, to the extent balances exceed limits that are insured by the Federal Deposit Insurance Corporation, and accounts receivable. The Company maintains its cash with major financial institutions. Credit risk exists because the Company’s flexible printed circuit boards and related component assemblies are sold to a limited number of customers (Note 9). The Company does not require collateral and maintains reserves for potential credit losses. Such losses have historically been within management’s expectations.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Accounts Receivable
The Company invoices customers at shipment for the value of the related products delivered. Accounts receivable are recorded at the invoiced amount, net of any amount that is in deferred revenue that is not yet due based on the payment terms and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical write-off experience as well as specific identification of credit issues with invoices. The Company reviews the allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on an aggregate basis. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be collected. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. The Company records a provision for excess and obsolete inventory based on historical usage and expected future product demand.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:
| Building | 30 - 39 years | |
| Machinery and equipment | 5 or 10 years | |
| Furniture and fixtures | 5 years | |
| Leasehold improvements | Shorter of 10 years or life of lease |
Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized. The cost of assets and related accumulated depreciation are removed from the balance sheet when such assets are disposed of, and any related gains or losses are included in operating expenses.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows attributable to such assets, including any cash flows upon their eventual disposition, to their carrying value. If the carrying value of the assets exceeds the forecasted undiscounted cash flows, then the assets are written down to their fair value. As of September 30, 2007 and 2006, there were no such impairments.
Capitalized Software Costs
Costs incurred to develop software for internal use are accounted for in accordance with Statement of Position (“SOP”) No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. In accordance with SOP No. 98-1, expenses related to preliminary project assessment, research and development, re-engineering, training and application maintenance are expensed as incurred. Costs that qualify for capitalization under SOP No. 98-1 are included in other assets and consist primarily of purchased software, payroll costs and consulting fees related to the development of the internal use software. Capitalized costs commence depreciation when they are put in service and are amortized using the straight-line method over a period of three years.
Goodwill
The Company records the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Valuation of intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
The Company reviews the recoverability of the carrying value of goodwill on an annual basis every July, or more frequently when an event occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. The determination of whether any potential impairment of goodwill exists is based upon a comparison of the fair value of the reporting unit to the accounting value of the underlying net assets of such reporting unit. If the fair value of the reporting unit is less than the accounting value of the underlying net assets, goodwill is deemed impaired and an impairment loss is recorded to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of all its underlying identifiable assets and liabilities. The Company has one reporting unit for evaluating its goodwill for impairment. As of September 30, 2007 and 2006, there were no such impairments of goodwill, intangible assets or other long-lived assets.
Revenue Recognition
The Company’s revenues, net of allowance for returns, refunds and credits, which are estimated based on historical experience, which the Company refers to as net sales, are generated from the sale of flexible printed circuit boards and related component assemblies, which are sold to original equipment manufacturers and electronic manufacturing services providers to be included in other electronic products. The Company recognizes revenue when there is persuasive evidence of an arrangement with the customer that states a fixed or determinable sales price, when title and risk of loss transfers, when delivery of the product has occurred in accordance with the terms of the sale and collectibility of the related accounts receivable is reasonably assured. The Company does not have any post-shipment obligations (e.g., installation or training), customer acceptance or multiple-element arrangements. The Company’s remaining obligation to its customer after delivery is limited to warranty on its product.
Shipping and Handling Costs
Products shipped utilizing the customer specified shipping service are paid directly by the customer. Products that are not shipped utilizing customer shipping services are charged by the Company to its customers and are included in net sales. Shipping and handling costs incurred by the Company are expensed as incurred and are recorded as a component of cost of sales.
Product Warranty Accrual
The Company warrants its products from 2 to 36 months. The standard warranty requires the Company to replace defective products returned to the Company at no cost to the customer. The Company records an estimate for warranty related costs at the time revenue is recognized based on historical amounts incurred for warranty expense and historical return rates. The warranty accrual is included in accrued liabilities in the accompanying condensed consolidated balance sheets.
Changes in product warranty accrual for the years ended September 30, 2007, 2006 and 2005 was as follows:
Warranty Accrual Balance at October 1 | Warranty Expenditures | Provision for Estimated Warranty Cost | Warranty Accrual Balance at September 30 | ||||||||||
2007 | $ | 1,285 | $ | (4,779 | ) | $ | 5,167 | $ | 1,673 | ||||
2006 | 1,439 | $ | (3,549 | ) | $ | 3,395 | 1,285 | ||||||
2005 | 1,549 | (2,892 | ) | 2,782 | 1,439 | ||||||||
Research and Development
Research and development costs are incurred in the development of new products and processes, including significant improvements and refinements to existing products and are expensed as incurred.
Income Taxes
Income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities. Valuation allowances are established when it is more likely than not that such deferred tax assets will not be realized. The Company does not file a consolidated return with its foreign wholly owned subsidiaries.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The difference between net income and comprehensive income for the years ended September 30, 2007, 2006 and 2005 was comprised entirely of the Company’s foreign currency translation adjustment.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the local currency. Balances are translated into U.S. Dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for statement of income amounts. Currency translation adjustments are recorded in other comprehensive income, a component of stockholders’ equity.
Foreign currency transactions occur when there is a receivable or payable denominated in other than the respective entity’s functional currency. The Company records the changes in the exchange rate for these transactions in the consolidated statements of income. For the years ended September 30, 2007, 2006 and 2005, foreign exchange transaction gains and losses were included in other expenses and were a net gain of $178, a net loss of $306, and a net gain of $52, respectively.
Accounting for Stock-Based Compensation
Through the end of fiscal 2005, the Company measured compensation expense for stock-based incentive programs utilizing the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. Under this method, the Company did not record compensation expense when stock options were granted to eligible participants as long as the exercise price was not less than the fair market value of the stock when the option was granted. In accordance with SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”) and SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure, the Company disclosed the pro forma net income per share as if the fair value-based method had been applied in measuring compensation expense for stock-based incentive awards. No stock-based compensation was recognized in the Consolidated Statement of Income for the year ended September 30, 2005 for options granted under the Company’s 1994 Stock Plan (the “1994 Plan”), as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Stock-based compensation cost of $99 was recognized in the Consolidated Statement of Income for the year ended September 30, 2005 due to the acceleration of the vesting period for certain options granted under the 2004 Stock Incentive Plan (the “2004 Plan”).
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R,Share Based Payment: An Amendment of FASB Statements No. 123 and 95(“SFAS 123R”). This statement requires that the cost resulting from all share-based payment transactions be recognized in the Company’s consolidated financial statements. In addition, in March 2005, the SEC released SEC Staff Accounting Bulletin No. 107,Share-Based Payment(“SAB 107”). SAB 107 provides the SEC staff’s position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123; however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition, as allowed under SFAS 123, is no longer an alternative. In November 2005, the FASB issued FASB Staff Position No. FAS 123R-3,Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards(“FSP 123R-3”). The Company adopted the alternative transition method provided in FSP 123R-3 regarding the methodology for calculating the tax effects of stock-based compensation pursuant to SFAS123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
In the first quarter of fiscal 2006, the Company adopted the fair value recognition provisions of SFAS 123R utilizing the modified-prospective-transition method, as prescribed by SFAS 123R. Under that transition method, compensation cost recognized during year ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with SFAS 123, adjusted for an estimated future forfeiture rate, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Under the modified-prospective-transition method, results for the prior periods have not been restated. See Note 11 for further discussion of stock-based compensation.
Net Income Per Share—Basic and Diluted
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. The impact of potentially dilutive securities are determined using the treasury stock method.
The following table presents a reconciliation of basic and diluted income per share:
| Years Ended September 30, | ||||||
| 2007 | 2006 | 2005 | ||||
Basic weighted-average number of common shares outstanding | 24,520,040 | 24,353,854 | 23,603,935 | |||
Dilutive effect of outstanding stock options | 644,361 | 961,694 | 990,063 | |||
Diluted weighted-average number of common and potential common shares outstanding | 25,164,401 | 25,315,548 | 24,593,998 | |||
Potential common shares excluded from the per share calculation because the effect of their inclusion would be anti-dilutive | 192,384 | 58,882 | — | |||
Recent Accounting Pronouncements
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Job Creation Act”). The Job Creation Act provides a deduction for income from qualified domestic production activities which will be phased in from 2006 through 2011. On December 21, 2004, the Financial Accounting Standards Board Staff Position (“FSP”) No. FAS 109-1,Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP No. 109-1”), was issued. FSP No. 109-1 clarifies that this tax deduction should be accounted for as a special deduction in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109,Accounting for Income Taxes (“SFAS 109”). As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of the enactment. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the Company’s tax return beginning in 2006. M-Flex completed its evaluation of this deduction and concluded there is no material impact on the Company’s current year tax liability. However, the Company is evaluating the impact on future years and currently does not believe it will have any material impact on the Company’s consolidated financial position, results of operations or cash flows.
In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (“EITF 06-3”). The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 states that a company should disclose its accounting policy (i.e. gross or net presentation) regarding the presentation of taxes within its scope, and if significant, these disclosures should be applied retrospectively to the financial statements for all periods presented. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. EITF 06-3 was effective for the Company beginning January 1, 2007 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a recognition threshold and measurement process for
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. FIN 48 requires that a company recognize the financial statement effects of a tax position when there is a likelihood of more than 50 percent, based on the technical merits, that the position will be sustained upon examination. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As such, the Company will adopt the accounting provisions of FIN 48 as of October 1, 2007. The Company is currently evaluating the impact, if any, the adoption of FIN 48 will have on its consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of determining the impact, if any, the adoption of SFAS 157 will have on its consolidated financial position, results of operations or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 regarding the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The interpretations in SAB 108 contain guidance on correcting errors under the dual approach and provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS No. 154,Accounting for Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 Accounting Changes in Interim Financial Statements, for the correction of an error on financial statements. SAB 108 was effective for the Company for the year ended September 30, 2007 and did not have a material impact on its consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement on Financial Accounting Standards No. 159 (“FAS No. 159”),The Fair Value Option for Financial Assets and Financial Liabilities. FAS No. 159 permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under U.S. GAAP. FAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the provisions of FAS No. 159 will have on its consolidated financial statements.
Reclassification
The Company has reclassified research and development expenses of $883 from general and administrative expenses for the year ended September 30, 2005, to conform to current and prior year presentation.
2. Restricted Cash
Restricted cash consists of funds held in short-term deposits that are legally restricted as to withdrawal. Restricted cash of $2,343 and $2,161 as of September 30, 2007 and 2006, respectively, was on deposit with various banks in China to secure the Company’s customs activities.
The Company also had restricted cash of $135 and $129 as of September 30, 2007 and 2006, respectively, held at the direction of the County of Orange, California, to finance environmental clean-up costs, estimated by the Company and approved by the County, in the event the Company vacates its Anaheim, California manufacturing facilities. The Company is not a party to any environmental claims. As of September 30, 2007, the Company believes the amount held as restricted cash is sufficient to pay environmental clean-up costs that may exist, if any, should the Company vacate its facilities.
3. Related Party Transactions
During the years ended September 30, 2007, 2006 and 2005, the Company has recognized revenue and recorded purchases from the following affiliated companies: (a) Wearnes Hollingsworth Corporation; (b) MFS Technology Ltd. (“MFS”); (c) MFS Technologies (M) Sdn. Bhd., a subsidiary of MFS; (d) Suzhou Wearnes-Xirlink Electric Co. Ltd., a subsidiary of Wearnes; and (e) Wearnes. As discussed in Note 1, Wearnes owns 60% and 61% of the Company’s common stock as of September 30, 2007 and 2006, respectively. MFS is an indirect subsidiary of Wearnes.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Net amounts due from/to affiliated companies comprise the following:
| September 30, | ||||||
| 2007 | 2006 | |||||
Due from affiliates | ||||||
MFS Technologies (M) Sdn. Bhd. | $ | — | $ | 223 | ||
Suzhou Wearnes-Xirlink Electric Co. Ltd. | — | 44 | ||||
| $ | — | $ | 267 | |||
| September 30, | ||||||
| 2007 | 2006 | |||||
Due to affiliates | ||||||
Wearnes | $ | — | $ | 41 | ||
Suzhou Wearnes-Xirlink Electric Co. Ltd. | 30 | 52 | ||||
Wearnes Hollingsworth Corporation | — | 324 | ||||
| $ | 30 | $ | 417 | |||
Sales to and purchases from affiliates comprise the following:
| Years Ended September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Sales to affiliates | |||||||||
MFS | $ | — | $ | 25 | $ | 368 | |||
| $ | — | $ | 25 | $ | 368 | ||||
Purchases from affiliates | |||||||||
MFS | $ | — | $ | — | $ | 1,543 | |||
| $ | — | $ | — | $ | 1,543 | ||||
4. Composition of Certain Balance Sheet Components
Inventories comprise the following:
| September 30, | ||||||
| 2007 | 2006 | |||||
Raw materials and supplies | $ | 25,436 | $ | 23,202 | ||
Work-in-progress | 26,341 | 18,488 | ||||
Finished goods | 11,647 | 14,740 | ||||
| $ | 63,424 | $ | 56,430 | |||
Property, plant, and equipment, net, comprise the following:
| September 30, | ||||||||
| 2007 | 2006 | |||||||
Land | $ | 4,054 | $ | 4,054 | ||||
Building | 39,483 | 29,042 | ||||||
Machinery and equipment | 141,129 | 96,772 | ||||||
Furniture and fixtures | 5,131 | 3,823 | ||||||
Leasehold improvements | 2,703 | 2,900 | ||||||
| 192,500 | 136,591 | |||||||
Accumulated depreciation and amortization | (58,867 | ) | (41,360 | ) | ||||
| $ | 133,633 | $ | 95,231 | |||||
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Depreciation expense for the years ended September 30, 2007, 2006 and 2005, was $19,956, $13,821 and $10,901, respectively.
Included in other assets as of September 30, 2007 and 2006 is capitalized purchased software and internally developed software costs. Amortization of software costs and intangibles for the years ended September 30, 2007, 2006 and 2005 was $491, $652 and $533, respectively.
In addition, included in other assets as of September 30, 2007 and 2006 is $1,713 and $3,217, respectively, of deposits on equipment to be purchased.
Accrued liabilities comprise the following:
| September 30, | ||||||
| 2007 | 2006 | |||||
Wages and compensation | $ | 7,200 | $ | 5,298 | ||
Warranty accrual | 1,673 | 1,285 | ||||
Other taxes | 578 | 328 | ||||
Other | 5,543 | 6,142 | ||||
| $ | 14,994 | $ | 13,053 | |||
5. Investment - Cornerstone
In June 2004, the Company entered into a definitive agreement with Cornerstone Equipment Management, Inc. (“Cornerstone”), in which the Company agreed to invest $450 in exchange for shares equal to approximately 14% of the ownership of Cornerstone. In addition, the Company agreed to provide certain services to Cornerstone at the Company’s standard terms and conditions. The investment balance as of September 30, 2007 and 2006 is $450 and is included in other assets in the consolidated balance sheets. The Company accounts for its investment in Cornerstone using the cost method of accounting.
The Company periodically reviews this investment for other-than-temporary declines in fair value. Fair value for this investment is evaluated based on several factors including; recent financial information, historical and forecasted financial and business information, and estimates of the fair value of the Cornerstone common stock or potential new investments in Cornerstone by third parties. As of September 30, 2007, there has been no impairment of the investment in Cornerstone.
6. Income Taxes
United States and foreign (loss) income before taxes are as follows:
| Years Ended September 30, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||
United States | $ | (5,261 | ) | $ | 45,685 | $ | 38,474 | |||
Foreign | 6,381 | 12,892 | 15,053 | |||||||
| $ | 1,120 | $ | 58,577 | $ | 53,527 | |||||
The (benefit from) provision for income taxes consisted of the following components:
| Years Ended September 30, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Current | ||||||||||||
Federal | $ | (2,732 | ) | $ | 16,399 | $ | 10,767 | |||||
State | (69 | ) | 2,317 | 1,295 | ||||||||
Foreign | 1,608 | 1,927 | 3,622 | |||||||||
| $ | (1,193 | ) | $ | 20,643 | $ | 15,684 | ||||||
Deferred | ||||||||||||
Federal | $ | 421 | $ | (1,799 | ) | $ | (94 | ) | ||||
State | (67 | ) | (89 | ) | 62 | |||||||
Foreign | (1,079 | ) | (535 | ) | 709 | |||||||
| (725 | ) | (2,423 | ) | 677 | ||||||||
| $ | (1,918 | ) | $ | 18,220 | $ | 16,361 | ||||||
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Deferred tax assets and (liabilities) comprise the following:
| September 30, | ||||||||
| 2007 | 2006 | |||||||
Deferred tax assets | ||||||||
Inventory | $ | 2,432 | $ | 2,854 | ||||
Depreciation | 1,559 | 657 | ||||||
Stock-based compensation | 940 | 679 | ||||||
Accrued expenses | 472 | 432 | ||||||
Allowance for doubtful accounts | 506 | 227 | ||||||
Warranty reserve | 658 | 503 | ||||||
Capital loss carryforward | 59 | 60 | ||||||
Net operating loss | 299 | 448 | ||||||
Investments | 272 | 276 | ||||||
State taxes | — | 548 | ||||||
Other | 85 | 84 | ||||||
Subtotal deferred tax assets | 7,282 | 6,768 | ||||||
Valuation allowance | (331 | ) | (336 | ) | ||||
Total deferred tax assets | 6,951 | 6,432 | ||||||
Deferred tax liabilities | ||||||||
Depreciation | (419 | ) | (850 | ) | ||||
Amortization | (108 | ) | (48 | ) | ||||
State taxes | (166 | ) | — | |||||
Other | — | (1 | ) | |||||
Total deferred tax liabilities | (693 | ) | (899 | ) | ||||
Net deferred tax assets | $ | 6,258 | $ | 5,533 | ||||
The Company established a valuation allowance of approximately $331 and $336 as of September 30, 2007 and 2006, respectively. The valuation allowance is comprised of two components including: capital loss carryforwards generated amounting to $59 generated in fiscal 2005 for which there is an uncertainty regarding the future realization and management has determined that it is more likely than not that these carryforwards will expire unused; deferred income tax benefits of the book losses attributable to the Company’s investment in a partnership amounting to $272 as of September 30, 2007 for which it is more likely than not that it will not receive future tax benefits.
As of September 30, 2007 and 2006, the Company had net operating loss carryforwards for state and foreign tax purposes of approximately $2,572, $797, $0 and $3,517, respectively. These net operating loss carryforwards will begin to expire in 2013 for state tax purposes and 2012 for foreign tax purposes.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
The (benefit from) provision for income taxes differs from the amount obtained by applying the statutory tax rate as follows:
| Years Ended September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Provision for income taxes at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
Increase (decrease) in taxes resulting from: | |||||||||
State taxes, net of federal benefit | (7.9 | )% | 2.5 | % | 1.0 | % | |||
Foreign tax credit | (96.4 | )% | (1.6 | )% | (3.4 | )% | |||
Foreign rate variance | (152.2 | )% | (5.3 | )% | (3.9 | )% | |||
Nondeductible expenses | 4.1 | % | 0.1 | % | 0.1 | % | |||
Return to provision adjustments | 7.2 | % | 0.2 | % | 0.5 | % | |||
IRS exam | 18.9 | % | 0.0 | % | 0.0 | % | |||
Tax contingency reserve | 17.7 | % | 0.0 | % | 0.6 | % | |||
Other | 2.4 | % | 0.2 | % | 0.6 | % | |||
| (171.2 | )% | 31.1 | % | 30.5 | % | ||||
The Company operates under a tax holiday in China, which had a zero percent tax rate for MFC1 until December 31, 2001. Beginning January 1, 2002, the zero percent tax rate expired for MFC1 and the Company became subject to a tax rate equal to 12% (versus the applicable Chinese tax rate of approximately 27%). This change in the tax holiday is similar to a change in enacted tax rates and has been reflected in the Company’s deferred tax computation as of September 30, 2007 and 2006. MFC1 will continue to be subject to taxes equal to 12% until December 31, 2007. After this time, MFC1 will be subject to the statutory rate of 25%. The Company has obtained two tax holidays for MFC2. The first tax holiday allows for a zero percent tax rate for the first two years (beginning in the first year of profitability) followed by three years of operation at a reduced rate of income tax equal to 12% on the profits generated from the original registered capital. The second tax holiday allows for tax-free operation for the first two years followed by three years of operation at a reduced rate of income tax equal to 12% on the profits generated from the increased capital. Beginning on February 1, 2006, MFC2 became subject to a tax holiday rate of 12% on approximately 46% of its profits and a tax holiday rate of 0% on approximately 54% of its profits.
Had the Company not received the tax holiday for its operations in China, net income for the years ended September 30, 2007, 2006 and 2005 would have been decreased to the pro forma amounts below:
| Years Ended September 30, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Net income, as reported | $ | 3,038 | $ | 40,357 | $ | 37,166 | ||||||
Additional tax in China | (1,520 | ) | (4,373 | ) | (3,532 | ) | ||||||
Pro forma net income | $ | 1,518 | $ | 35,984 | $ | 33,634 | ||||||
Net income per share | ||||||||||||
Basic, as reported | 0.12 | 1.66 | 1.57 | |||||||||
Basic, pro forma | 0.06 | 1.48 | 1.42 | |||||||||
Diluted, as reported | 0.12 | 1.59 | 1.51 | |||||||||
Diluted, pro forma | 0.06 | 1.42 | 1.37 | |||||||||
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $55,643, $48,811 and $36,339 for the years ended September 30, 2007, 2006 and 2005, respectively. Those earnings are considered to be permanently reinvested and, accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon repatriation of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign country. It is not practical to estimate the amount of unrecognized deferred U.S. taxes on those undistributed earnings.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
The Company establishes reserves when it believes that certain positions are likely to be challenged by the tax authorities and that the Company may not succeed, despite its belief that the tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, including the progress of a tax audit. The Company’s effective tax rate includes the impact of these estimates.
The IRS has begun its audit of fiscal year ended September 30, 2005. The Company has identified certain affirmative adjustments during the process of the IRS audit, resulting in additional tax and interest in the amount of $577. While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes the result of the audit is not expected to have a material impact on the Company’s financial position or results of operations. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution would be recognized as a reduction to the effective tax rate in the year of resolution. The Company’s tax contingency reserves are included in the balance sheet with income taxes receivable, or payable, as the case may be.
7. Lines of Credit
In January 2007, the Company entered into credit line agreements with Bank of China (“BC”) providing for two lines of credit in an aggregate of 200,000 RMB ($26,604 at September 30, 2007). The lines of credit will mature in January 2008 and bear interest at LIBOR (5.23% at September 30, 2007) plus 0.85%. As of September 30, 2007, the Company had no borrowings outstanding under these lines of credit.
In July 2007, the Company’s subsidiaries in China renewed and amended their credit line agreements with Shanghai Pudong Development Bank (“SPDB”), which provide for two borrowing facilities, one for 80,000 RMB ($10,642 at September 30, 2007) and one for 75,000 RMB ($9,977 at September 30, 2007). The line of credit will mature in July 2008 and bears interest at a 10% discount of the People’s Bank of China six-month RMB Benchmark Interest Rate (5.6% at September 30, 2007). As of September 30, 2007 and 2006, the Company had no borrowings under this line of credit.
In July 2005, the Company entered into a $15,000 credit facility with NLG. Borrowings under this facility will bear interest at LIBOR plus 2.5% correlating with the time period of the borrowing. Each borrowing under the facility matures six months after the borrowing date with respect to such borrowing. During the year ended September 30, 2007, the Company repaid $4,000 on the credit facility. As of September 30, 2007 and 2006, the Company had outstanding borrowings of zero and $4,000, respectively, under this line of credit.
The Company is required under the line of credit with NLG to maintain certain financial ratios, and the facility must be equal as to priority with all other obligations, with certain limited exceptions. In the event the Company defaults under its representations, warranties or covenants in the facility, including the covenants described above, NLG could require the Company to immediately repay all amounts outstanding under the facility and, if the Company were unable to make such payments, could seize the Company’s assets and property. In addition, if the Company defaults under its credit agreements with any other party, the Company will be considered in default under the agreement with NLG. As of September 30, 2007 and 2006, the Company was in compliance with these covenants with NLG.
A summary of the lines of credit follows:
Amounts Available at September 30, 2007 | Amounts Outstanding at September 30, | ||||||||
| 2007 | 2006 | ||||||||
Line of credit (BC) | $ | 26,604 | $ | — | $ | — | |||
Line of credit (SPDB) | 20,619 | — | — | ||||||
Line of credit (NLG) | 15,000 | — | 4,000 | ||||||
| $ | 62,223 | $ | — | $ | 4,000 | ||||
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
8. Segment Information
Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment which is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. The Company operates in two geographical areas: domestic (U.S.) and international (China). Net sales are presented based on the country in which the sales originate (i.e., where the legal entity is domiciled). The financial results of the Company’s geographic segments are presented on a basis consistent with the consolidated financial statements.
Financial information by geographic segment is as follows:
| Years Ended September 30, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Net sales | ||||||||||||
United States | $ | 485,088 | $ | 477,002 | $ | 271,393 | ||||||
China | 307,186 | 251,236 | 205,109 | |||||||||
Eliminations | (284,127 | ) | (224,034 | ) | (119,412 | ) | ||||||
Total | $ | 508,147 | $ | 504,204 | $ | 357,090 | ||||||
Operating (loss) income | ||||||||||||
United States | $ | (17,884 | ) | $ | 35,900 | $ | 19,048 | |||||
China | 17,575 | 21,649 | 33,587 | |||||||||
Total | $ | (309 | ) | $ | 57,549 | $ | 52,635 | |||||
Depreciation and amortization | ||||||||||||
United States | $ | 3,462 | $ | 3,510 | $ | 2,873 | ||||||
China | 16,985 | 10,963 | 8,561 | |||||||||
Total | $ | 20,447 | $ | 14,473 | $ | 11,434 | ||||||
| September 30, | ||||||||
| 2007 | 2006 | |||||||
Total assets | ||||||||
United States | $ | 307,661 | $ | 252,074 | ||||
China | 236,432 | 148,868 | ||||||
Eliminations | (166,806 | ) | (73,897 | ) | ||||
Total | $ | 377,287 | $ | 327,045 | ||||
Long-lived assets | ||||||||
United States | $ | 20,421 | $ | 20,520 | ||||
China | 113,347 | 74,840 | ||||||
Total | $ | 133,768 | $ | 95,360 | ||||
| Years Ended September 30, | ||||||
| 2007 | 2006 | |||||
Capital Expenditures | ||||||
United States | $ | 1,869 | $ | 7,164 | ||
China | 55,555 | 30,605 | ||||
Total | $ | 57,424 | $ | 37,769 | ||
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
9. Significant Concentrations
Customers and Vendors
Net sales to the Company’s customers, which account for more than 10% of the Company’s net sales are presented below. The Company’s customers consist principally of major U.S. based electronic companies and their subcontractors. In addition, purchases from the Company’s vendors, which account for more than 10% of the Company’s purchases, are presented below.
| Years Ended September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Net sales | |||||||||
Customer—A | 43 | % | 68 | % | 55 | % | |||
Customer—B | 18 | % | 3 | % | 2 | % | |||
| September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Accounts Receivable | |||||||||
Customer—A | 39 | % | 69 | % | 66 | % | |||
Customer—B | 32 | % | 6 | % | 0 | % | |||
During the years ended September 30, 2007, 2006 and 2005, 57%, 86% and 81%, respectively, of the Company’s net sales were realized from Customer A and its subcontractors. Customer B is a subcontractor of the Company’s second largest customer. During the years ended September 30, 2007, 2006 and 2005, 25%, 5% and 2%, respectively, of the Company’s net sales were realized from the Company’s second largest customer and its subcontractors.
| Years Ended September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Purchases | |||||||||
Vendor—A | 8 | % | 10 | % | 16 | % | |||
Vendor—B | 4 | % | 8 | % | 10 | % | |||
Vendor—C | 5 | % | 3 | % | 11 | % | |||
Vendor—D | 6 | % | 19 | % | 7 | % | |||
Vendor—E | 10 | % | 0 | % | 0 | % | |||
Vendor—F | 22 | % | 4 | % | 0 | % | |||
| September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Accounts payable | |||||||||
Vendor—E | 11 | % | 0 | % | 0 | % | |||
Vendor—F | 7 | % | 6 | % | 10 | % | |||
The Company’s customers require the use of materials that have been pre-qualified by them. Any interruption in pre-qualified sources of materials may result in the Company’s inability to timely deliver products to customers.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Geographic
Information regarding net sales by geographical area based on the location of the customer is summarized below:
| Years Ended September 30, | |||||||||
| 2007 | 2006 | 2005 | |||||||
North America | $ | 92,681 | $ | 144,946 | $ | 44,047 | |||
China | 185,196 | 259,892 | 231,393 | ||||||
Hong Kong | 126,037 | 50,356 | 45,786 | ||||||
Malaysia | 64,237 | 10,770 | 9,403 | ||||||
Other Asia-Pacific | 23,364 | 27,342 | 20,107 | ||||||
Europe | 9,094 | 7,341 | 3,777 | ||||||
Other foreign | 7,538 | 3,557 | 2,577 | ||||||
| $ | 508,147 | $ | 504,204 | $ | 357,090 | ||||
Sales to customers in North America include the United States, Canada, Mexico and Puerto Rico. Sales to customers in other Asia-Pacific countries include Singapore, Japan, Thailand, Taiwan, the Philippines, Israel and Korea. Sales to customers in Europe include the Netherlands, Austria, Sweden, Hungary, Denmark, Italy, Scotland, Germany, France and the United Kingdom.
Industry
In the years ended September 30, 2007, 2006 and 2005, 91%, 88% and 84% of net sales were derived from sales to companies that provide products or services to the wireless industry. The wireless industry is subject to economic cycles and has experienced period of slowdown in the past.
10. Commitments and Contingencies
Operating Leases
The Company leases its facilities and certain assets under non-cancelable operating leases which expire at various dates through 2009. Future minimum lease payments under non-cancelable operating leases at September 30, 2007 are as follows:
Year Ending September 30, | Operating Leases | ||
2008 | $ | 577 | |
2009 | 56 | ||
2010 | — | ||
2011 | — | ||
2012 and after | — | ||
Total | $ | 633 | |
Total rent expense was $1,301, $1,214 and $899 for the years ended September 30, 2007, 2006 and 2005, respectively.
Capital Leases
During the year ended September 30, 2004, the Company recorded a capital lease obligation of $318 related to the acquisition of a new phone system. In addition, during the year ended September 30, 2007 Aurora Optical extended the terms of its equipment capital lease by one year. The Company is obligated to pay $119 and $31 during the years ended September 30, 2008 through 2009, respectively, under the terms of these leases.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Terminated MFS Offer
In March 2006, the Company announced a proposed offer (the “MFS Offer”) to acquire all of the outstanding ordinary shares of MFS, a related party publicly traded in Singapore and a subsidiary of Wearnes. Approval of the shareholders of Wearnes for the MFS Offer was a pre-condition (the “WBL Shareholder Precondition”) to the Company making the MFS Offer. On June 26, 2007, Wearnes announced that its shareholders had voted against tendering its shares of MFS for stock consideration in the MFS Offer, and against voting Wearnes’ M-Flex stock in favor of the MFS Offer. Accordingly, since one of the pre-conditions to the MFS Offer, namely the WBL Shareholder Precondition, would not be met by June 30, 2007, the Company withdrew the Company’s amended Registration Statement on Form S-4 regarding the MFS Offer on June 28, 2007. As a result, $7,821 in deferred transaction costs were expensed during the year ended September 30, 2007.
Litigation
The Company is involved in litigation from time to time in the ordinary course of business, the outcome of which the Company’s management believes will not have a material adverse affect on the Company’s financial position, results of operations or cash flows.
Other Commitments
As of September 30, 2007 and 2006, the Company had outstanding purchase commitments related to MFC2 capital projects which totaled $8,457 and $8,320, respectively.
Pursuant to the laws applicable to the Peoples’ Republic of China’s Foreign Investment Enterprises, the Company’s two wholly owned subsidiaries in China, MFC1 and MFC2, are restricted from paying cash dividends on 10% of after-tax profit, subject to certain cumulative limits. The amount of net income restricted by the foregoing for the years ended September 30, 2007, 2006 and 2005 are equal $5,362, $4,979 and 1,664, respectively.
Indemnifications
In the normal course of business the Company provides indemnification and guarantee of varying scope to customers and others. These indemnities include among other things, intellectual property indemnities to customers in connection with sale of the Company’s products, warranty guarantees to customers related to products sold and indemnities to the Company’s directors and officers to the maximum extent permitted by Delaware law. The duration of these indemnities and guarantees varies, and, in certain cases, is indeterminate. Historically, costs related to these indemnification provision have not been significant and with the exception of the warranty accrual (Note 1) no liabilities have been recorded for these indemnification provisions.
11. Stock Option Plans
1994 Stock Plan
In December 1994, the Company adopted the 1994 Plan, which is administered by the Company’s board of directors or a committee thereof (the “administrator”). The 1994 Plan provides for the granting of stock options and stock purchase rights to employees, officers, directors (including non-employee directors) and consultants. The administrator determined the term of the options, which was prohibited from exceeding ten years from the grant date. Options granted under the 1994 Plan vest based on periods determined by the administrator, which has been one year for employees with greater than one year of service with the Company and two years for employees with less than one year of service with the Company. A total of 2,049,750 shares of common stock have been authorized for issuance and reserved under the 1994 Plan. The 1994 Plan officially terminated on December 9, 2004. Effective with the adoption of the 2004 Plan the Company ceased granting options under the 1994 Plan.
2004 Stock Incentive Plan
In June 2004, the Company adopted the 2004 Plan, which is also administered by the administrator. The 2004 Plan provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Options granted under the 2004 Plan vest and expire based on periods determined by the administrator, but in no event can the expiration date be later than ten years from the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
more than 10% of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Options may be either incentive stock options or nonqualified stock options. The per share exercise price on an incentive stock option shall not be less than 100% of the fair market value of the Company’s common stock on the date the option is granted (110% of the fair market value if the grant is to a 10% owner). The per share exercise price of a nonqualified stock option shall not be less than 85% of the fair market value of the Company’s common stock on the date the option is granted. A total of 2,876,400 shares of common stock have been authorized for issuance and reserved under the 2004 Plan.
The Company’s assessment of the estimated fair value of the stock options granted is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. The Company utilizes the Black-Scholes model to estimate the fair value of stock options granted. Generally, the Company’s calculation of the fair value for options granted under SFAS 123R is similar to the calculation of fair value under SFAS 123 with the exception of the treatment of forfeitures. Expected forfeitures of stock options are estimated based on the historical turnover of the Company’s employees. Prior to SFAS 123R, the Company recognized forfeitures under SFAS 123 as they occurred. The fair value of restricted stock units granted is based on the grant date price of the Company’s common stock.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:
| (a) | The expected volatility of the Company’s common stock price, which the Company determines based on historical volatility of the Company’s common stock since the date of the Company’s IPO on June 30, 2004; |
| (b) | Expected dividends, which are nil, as the Company does not currently anticipate issuing dividends; |
| (c) | Expected life of the stock option, which is estimated based on the historical stock option exercise behavior of the Company’s employees; and |
| (d) | Risk free interest rate is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period. |
The Company uses the minimum value method for each option grant prior to the Company’s IPO and the Black-Scholes model for each option grant on the date of and subsequent to the Company’s IPO. No stock options were granted during the year ended September 30, 2007.
Effect on Prior Periods
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the 1994 Plan and the 2004 Plan during fiscal year 2005.
| Year Ended September 30, 2005 | ||||
Net income, as reported | $ | 37,166 | ||
Stock-based compensation, intrinsic value method, net of tax | $ | 70 | ||
Total stock-based employee compensation expense determined under fair value-based method for all options | $ | (711 | ) | |
Pro forma net income | $ | 36,525 | ||
Net income per share | ||||
Basic, as reported | $ | 1.57 | ||
Basic, pro forma | $ | 1.55 | ||
Diluted, as reported | $ | 1.51 | ||
Diluted, pro forma | $ | 1.49 | ||
Shares used in computing net income per share | ||||
Basic | 23,603,935 | |||
Diluted | 24,593,998 | |||
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Pro Forma Effect of Stock-Based Compensation
In calculating pro forma information as required by SFAS 123, the fair value of stock options granted was estimated at the date of grant using the minimum value method for each option grant preceding the Company’s IPO and the Black-Scholes model for each option grant on the date of and subsequent to the Company’s IPO, with the following weighted-average assumptions: a risk-free interest rate of 3.84% for the year ended September 30, 2005, respectively, no dividend yield and expected life of five years. Volatility of 73% was used for the year ended September 30, 2005.
Stock Options
Stock option activity for the years ended September 30, 2007, 2006 and 2005 under the 1994 and 2004 Plans is summarized as follows:
Number of Shares | Weighted- Average Exercise Price | |||||
Options outstanding at September 30, 2004 | 2,798,405 | $ | 5.58 | |||
Granted | 177,000 | 18.37 | ||||
Exercised | (915,049 | ) | 3.28 | |||
Forfeited | (78,651 | ) | 11.64 | |||
Options outstanding at September 30, 2005 | 1,981,705 | $ | 7.65 | |||
Exercised | (263,487 | ) | 5.94 | |||
Forfeited | (12,151 | ) | 10.00 | |||
Options outstanding at September 30, 2006 | 1,706,067 | $ | 7.89 | |||
Exercised | (127,667 | ) | 5.00 | |||
Forfeited | (20,860 | ) | 10.00 | |||
Options outstanding at September 30, 2007 | 1,557,540 | $ | 8.10 | |||
The intrinsic value of options exercised during the year ended September 30, 2007 and 2006 was $1,582 and $10,901, respectively. During the years ended September 30, 2007 and 2006, the Company recognized compensation costs of $1,176 and $1,217, respectively, related to stock options. As of September 30, 2007 and 2006 there were stock options exercisable for up to 1,339,190 and 1,215,244 shares of common stock outstanding, respectively. Unearned compensation of $1,109 existed at September 30, 2007, related to non-vested stock options which will be recognized into expense over a weighted average period of 1.17 years.
The following table summarizes information about stock options outstanding and exercisable, as adjusted for the expected forfeiture rate, as of September 30, 2007:
Fully vested and expected to vest | Fully vested options | |||||||||||||||||||
Range of Exercise Prices | Outstanding | Weighted- Average Remaining Contractual Life (in years | Weighted- Average Exercise Price | Aggregate Intrinsic Value (000’s) | Number of Shares Exercisable | Weighted- Average Exercise Price | Aggregate Intrinsic Value (000’s) | Weighted- Average Remaining Contractual Life (in years | ||||||||||||
$2.00—$2.07 | 276,595 | 1.3 | $ | 2.04 | — | 276,595 | $ | 2.04 | — | 1.3 | ||||||||||
$3.73—$4.00 | 380,870 | 2.0 | 3.99 | — | 380,870 | 3.99 | — | 2.0 | ||||||||||||
$8.75 | 18,816 | 6.9 | 8.75 | 114 | 15,415 | 8.75 | 94 | 6.9 | ||||||||||||
$10.00 | 663,000 | 6.7 | 10.00 | 3,202 | 545,362 | 10.00 | 2,634 | 6.7 | ||||||||||||
$16.80—$18.08 | 94,936 | 7.7 | 17.48 | — | 57,200 | 17.47 | — | 7.7 | ||||||||||||
$20.18—$20.81 | 68,847 | 7.4 | 20.59 | — | 63,748 | 20.62 | — | 7.4 | ||||||||||||
| 1,503,064 | $ | 7.95 | $ | 3,316 | 1,339,190 | $ | 7.46 | $ | 2,728 | |||||||||||
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
Restricted Stock Units
Restricted stock unit activity for the years ended September 30, 2007 and 2006 under the 2004 Plan is summarized as follows:
| Number of Shares | Weighted- Average Grant-Date | |||||
Non-vested shares outstanding at September 30, 2005 | — | $ | — | |||
Granted | 88,290 | 42.86 | ||||
Forfeited | (1,400 | ) | 53.42 | |||
Non-vested shares outstanding at September 30, 2006 | 86,890 | $ | 42.69 | |||
Granted | 190,200 | 17.80 | ||||
Vested | (27,472 | ) | 47.61 | |||
Forfeited | (2,500 | ) | 42.79 | |||
Non-vested shares outstanding at September 30, 2007 | 247,118 | $ | 22.99 | |||
In December 2005, March and September 2006, and March, April, June and July 2007, the Company made restricted stock unit grants equal to 59,990, 10,800, 9,500, 160,500, 6,000, 3,500 and 12,200 shares of the Company’s common stock, respectively, under the 2004 Plan to certain employees, including executive officers, at no cost to the employee. Each restricted stock unit represents one hypothetical share of the Company’s common stock, without voting or dividend rights. The restricted stock units granted to employees in fiscal year 2006 vest over a period of four years with 25% vested on each of the anniversary dates of the vesting commencement date. In March 2006 and 2007, the Company also made restricted stock unit grants equal to 8,000 shares under the 2004 Plan to certain members of the board of directors. The restricted stock units granted to directors vest upon the earlier of one year after the date of grant or the next regularly scheduled annual meeting of stockholders. With respect to restricted stock unit grants equal to 155,500 of the Company’s common stock made during March 2007, one-third of the units were subject to vesting requirements based on certain financial metrics being achieved by the Company during fiscal 2007, and one-third of the units will vest on each of November 15, 2008 and 2009. The Company did not meet the vesting requirements placed on the March 2007 grant and one-third of the units associated with that grant lapsed in October 2007. With respect to restricted stock unit grants equal to 5,000, 6,000, 3,500 and 12,200 shares of the Company’s common stock made during March, April, June and July 2007, respectively, the restricted stock units will vest over a three year period with one-third vesting on each of the anniversary dates of the grant. No shares are delivered until the employee or director satisfies the vesting schedule.
Unearned compensation related to the restricted stock units is determined based on the fair value of the Company’s stock on the date of grant and the number of units management estimates will vest if there are vesting requirements associated with the grant. The unearned compensation is amortized to expense over the vesting period. Unearned compensation related to restricted stock units was $3,569 as of September 30, 2007, and will be recognized into expense over a weighted average vesting period of 2.1 years. During the year ended September 30, 2007 and 2006, the Company recognized compensation expense of $1,539 and $767 related to restricted stock units, respectively. The exercise price of all restricted stock units is zero. The Company anticipates making future grants of restricted stock units in lieu of stock options.
The Company realized a tax benefit of $732 and $474 for the years ended September 30, 2007 and 2006, respectively, related to SFAS 123R.
12. Employee Benefit Plan
The Company maintains a 401(k) defined contribution plan (the “Benefit Plan”). The Benefit Plan covers substantially all employees of the Company who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions are determined at the discretion of the Company’s board of directors. Contributions to the Benefit Plan were $151, $145 and $127 for the years ended September 30, 2007, 2006 and 2005, respectively.
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MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share and Share Data)
13. Acquisition
In June 2005, the Company completed an acquisition of the assets of Applied Optics, Inc. to add design and manufacturing capabilities of complete camera modules, including the lens, used in cell phones. The Company operates the business as a wholly owned subsidiary under the name Aurora Optical, Inc.
The subsidiary hired certain employees of Applied Optics, Inc. and assumed its facility lease in Tucson, Arizona. In accordance with SFAS No. 141,Business Combinations, this acquisition was accounted for using the purchase method of accounting. The acquisition purchase price and related purchase price allocation was as follows:
Cash paid | $ | 6,300 | ||
Direct transaction costs | 106 | |||
Total consideration paid and direct transaction costs | $ | 6,406 | ||
Less: | ||||
Fair value of tangible asset acquired | (3,026 | ) | ||
Add: | ||||
Fair value of tangible liabilities assumed | 567 | |||
Total fair value step-up | $ | 3,947 | ||
The total purchase price was allocated to the intangible assets and goodwill based on their fair values as follows:
Identifiable intangible assets | $ | 318 | |
Goodwill | 3,629 | ||
Total goodwill and intangible assets | $ | 3,947 | |
The useful lives of the intangible assets were determined to be between two and twenty-four months. During the years ended September 30, 2007, 2006 and 2005, $108, $153 and $56 of amortization expense was recognized, respectively. As of September 30, 2007 the net book value of the intangible assets is zero. The consolidated financial statements include the results of the subsidiary from the date of the acquisition. The pro forma revenues, net income and earnings per share for fiscal years 2005 and 2004 would not be materially different from those reported.
14. Subsequent Event
In October 2007, the Company entered into a sub-contract agreement with MFS to purchase flexible printed circuits which will be used in the manufacture of the Company’s finished assemblies.
In October 2007, the Company settled litigation involving Mind Wurx LLC (“Mind Wurx”) and Cornerstone. As a result of the settlement, the Company paid $75, which was recorded as expense during the fiscal year ended September 30, 2007. In addition, the Company returned its interest in Mind Wurx, which had a book value of zero as of September 30, 2007.
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MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
(In Thousands)
Accounts Receivable Reserves | ||||
Balances at September 30, 2004 | $ | 250 | ||
Charged to operations | 2,064 | |||
Write-offs | (1,713 | ) | ||
Balances at September 30, 2005 | 601 | |||
Charged to operations | 1,879 | |||
Write-offs | (1,876 | ) | ||
Balances at September 30, 2006 | 604 | |||
Charged to operations | 7,554 | |||
Write-offs | (6,858 | ) | ||
Balances at September 30, 2007 | $ | 1,300 | ||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There have been no changes in our independent registered public accounting firm or disagreements with such accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope of procedure.
| Item 9A. | Controls and Procedures |
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, or the Exchange Act. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer, or CEO and Chief Financial Officer, or CFO, management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2007. In making this assessment, management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled “Internal Control—Integrated Framework.” Based on this evaluation and on the criteria in Internal Control—Integrated Framework, management has concluded that our internal control over financial reporting was effective as of September 30, 2007.
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The effectiveness of the Company’s internal control over financial reporting as of September 30, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter, there was no change in our internal control over financial reporting identified in connection with the evaluation described above that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on an evaluation carried out as of the end of the period covered by this Annual Report, under the supervision and with the participation of our management, including our CEO and CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), are effective.
| Item 9B. | Other Information |
On December 13, 2007, our board of directors and the Special Compensation Committee of our board approved (a) an increase in the calendar year 2008 salaries of our 2008 named executive officers as follows: Philip A. Harding, our chairman and CEO to $400,000; Reza Meshgin, our president and chief operating officer to $375,000; Craig Riedel, our CFO to $209,000; Thomas Lee, our executive vice president of operations to $255,000; and Christine Besnard, our vice president, general counsel and secretary to $260,000 (to be pro-rated based on part-time schedule), and (b) a fiscal year 2008 bonus plan, pursuant to which such executives can obtain a cash bonus, or Bonus, at a target level equal to seventy percent for Messrs. Harding and Meshgin, and fifty percent for Messrs. Riedel and Lee and Ms. Besnard, of such executive’s annual base salary, based upon the attainment of certain goals in fiscal year 2008. In certain specified circumstances, the Bonuses may exceed these percentages.
The bonus plan includes the goals which M-Flex and each such executive must attain in order to be awarded the Bonuses. Fifty-one percent of each such executive’s target Bonus is tied to financial metrics related to our revenue, profit after tax and return on equity. The remaining forty-nine percent of each such executive’s target Bonus is tied to individual goals. Messrs. Harding’s and Meshgin’s individual goals related to capacity and strategic planning, financial metrics, SOX compliance and succession planning. Mr. Lee’s individual goals relate to capacity and strategic planning, succession planning, corporate reorganization initiatives, operational metrics and SOX compliance. Mr. Riedel’s individual goals relate to succession planning, operational reporting, departmental budgeting, SOX compliance, corporate reorganization initiatives and asset management. Ms. Besnard’s individual goals relate to equity plan administration, corporate reorganization initiatives, policy administration, attorney oversight and SOX compliance.
Part III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item (with respect to our directors) will be contained in the section called “Election of Directors” in our 2008 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2008 Annual Meeting of Stockholders expected to be held in March of 2008, and is incorporated herein by reference. Certain information regarding our executive officers required by this item is set forth in Part I of this Annual Report under the caption “Executive Officers of the Registrant.”
The information required by this item regarding compliance with Section 16(a) of the Exchange Act will be contained in, and is hereby incorporated by reference to, our 2008 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
We have adopted a Code of Ethics for Senior Officers, or Code of Ethics, that applies to our CEO, President, CFO and other key management employees (including other senior financial officers) who have been identified by the board of directors. We have also adopted a Code of Business Conduct that applies to all of our employees, officers and directors. The Code of Ethics is included as Exhibit 14.1 to this Annual Report. Each of the Code of Ethics and Code of Business Conduct may be found on our website at www.mflex.com. We will post (i) any waiver, if and when granted, to any provision of the Code of Ethics or Code of Business Conduct (for executive officers or directors) and (ii) any amendment to the Code of Ethics or Code of Business Conduct on our website.
We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Sanford L. Kane (Chairperson), Richard J. Dadamo and Sam Yau. All of such members meet the independence standards established by Nasdaq and the requirements under Section 10A of the Exchange Act for serving on an audit committee. Our board of directors has determined that Mr. Kane qualifies as an “audit committee financial expert” and “independent” for audit committee member purposes within the meaning of such regulations.
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| Item 11. | Executive Compensation |
The information required by this item regarding executive compensation will be contained in, and is hereby incorporated by reference to, our 2008 Proxy Statement under the captions “Election of Directors—Compensation of Directors,” “Executive Compensation” and “Election of Directors—Compensation Committee Interlocks and Insider Participation.”
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item regarding security ownership of certain beneficial owners and management will be contained in the section called “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our 2008 Proxy Statement, and is incorporated herein by reference.
Equity Compensation Plan Information
The following summarizes our equity compensation plans at September 30, 2007:
| (a) | (b) | (c) | |||||
Plan Category | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | ||||
Equity compensation plans approved by security holders | 1,804,658 | $ | 6.99 | 1,506,372 | |||
Equity compensation plans not approved by security holders | — | — | — | ||||
Total | 1,804,658 | $ | 6.99 | 1,506,372 | |||
| Item 13. | Certain Relationships, Related Transactions, and Director Independence |
The information required by this item regarding certain relationships and related transactions will be contained under the caption “Certain Relationships and Related Transactions” in our 2008 Proxy Statement, and is incorporated herein by reference. The information required by this item regarding director independence will be contained under the caption “Election of Directors” in our 2008 Proxy Statement, and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this item will be contained under the captions “Ratification of Appointment of Independent Registered Public Accounting Firm—Principal Accountant Fees and Services” and “Ratification of Appointment of Independent Registered Public Accounting Firm—Pre-Approval Policies and Procedures” in our 2008 Proxy Statement and is incorporated herein by reference.
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Part IV
| Item 15. | Exhibits, Financial Statement Schedules |
(a) Documents filed as part of this report:
(1) Financial Statements
See Index to Consolidated Financial Statements under Item 8
(2) Financial Statement Schedule
See Index to Consolidated Financial Statements under Item 8
(3) Exhibits
See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed has been so identified.
(b) Exhibits:
| 3.2(1) | Restated Certificate of Incorporation of the Company | |
| 3.4(2) | Amended and Restated Bylaws of the Company | |
| 4.1(1) | Form of Common Stock Certificate | |
| 10.1(1) | Form of Indemnification Agreement between the Company and its officers, directors and agents | |
| 10.2(1) | 1994 Stock Plan of the Company, as amended | |
| 10.3(6) | 2004 Stock Incentive Plan of the Company, as amended and restated | |
| 10.4(1) | Corporate Services Agreement dated as of June 4, 2004 by and between the Company and Wearnes Brothers Services (Private) Limited | |
| 10.18(3) | Uncommitted Revolving Credit Facility Agreement by and between Norddeutsche Landesbank Girozentrale, New York Branch and the company dated July 14, 2005 | |
| 10.19(3) | Revolving Credit Note dated July 14, 2005 with the Company as Borrower and Norddeutsche Landesbank Girozentrale, New York Branch, as Lender | |
| 10.20(4) | Amended and Restated Stockholders Agreement dated October 25, 2005 between Multi-Fineline Electronix, Inc., Wearnes Technology Pte. Ltd, United Wearnes Technology Pte. Ltd., and WBL Corporation Limited | |
| 10.21(5) | Form of Restricted Stock Unit Agreement | |
| 10.31(7) | Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou) Co., Ltd. and Bank of China Co., Ltd. Suzhou Wuzhong Sub-office dated January 25, 2007 | |
| 10.32(7) | Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. and Bank of China Co., Ltd. Suzhou Wuzhong Sub-office dated January 25, 2007 | |
| 10.33(8) | Corporate Supply Agreement between Multi-Fineline Electronix, Inc. and Motorola, Inc. dated October 1, 2006 | |
| 10.34 (9) | Comprehensive Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou) Co., Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.35 (9) | Collaboration Agreement by and between Multi-Fineline Electronix (Suzhou) Co. Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.36 (9) | Comprehensive Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.37 (9) | Collaboration Agreement by and between Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.38(10) | Master Purchase Agreement between Multi-Fineline Electronix, Inc., Multi-Fineline Electronix (Suzhou) Co., Ltd., and Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. and Sony Ericsson Mobile Communications (USA) Inc. dated April 19, 2006 | |
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| 14.1(11) | Code of Ethics for Senior Officers | |
| 21.1 | List of Subsidiaries of Registrant | |
| 23.1 | Consent of PricewaterhouseCoopers LLP | |
| 24.1 | Power of Attorney (see signature page of this Annual Report) | |
| 31.1 | Section 302 Certification by the Company’s chief executive officer | |
| 31.2 | Section 302 Certification by the Company’s principal financial officer | |
| 32.1 | Section 906 Certification by the Company’s chief executive officer and principal financial officer | |
(1) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Registration Statement on Form S-1, as amended (File No. 333-114510) declared effective by the Securities and Exchange Commission (“SEC”), on June 24, 2004. |
(2) | Incorporated by reference to an exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2005. |
(3) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2005. |
(4) | Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2005. |
(5) | Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2005. |
(6) | Incorporated by reference to exhibit (as Appendix A) to the Company’s Proxy Statement for its 2006 Annual Meeting of Stockholders on Form DEF 14A filed with the SEC on January 26, 2006. |
(7) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2007. |
(8) | Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K/A filed with the SEC on July 26, 2007. Confidential treatment has been granted for certain portions of this agreement. |
(9) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on August 6, 2007. |
(10) | Confidential treatment is being requested with respect to portions of this agreement. |
(11) | Incorporated by reference to exhibit (with same exhibit numbers) to the Company’s Annual Report on Form 10-K filed with the SEC for the year ended September 20, 2004. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Multi-Fineline Electronix, Inc. a Delaware Corporation | ||||||||
| Date: December 13, 2007 | By: | /s/ Philip A. Harding | ||||||
| Philip A. Harding | ||||||||
| Chairman and Chief Executive Officer | ||||||||
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Philip A. Harding and Craig Riedel, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||
/s/ Philip A. Harding Philip A. Harding | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | December 13, 2007 | ||
/s/ Craig Riedel Craig Riedel | Chief Financial Officer (Principal Financial and Accounting Officer) | December 13, 2007 | ||
/s/ Peter Blackmore Peter Blackmore | Director | December 12, 2007 | ||
/s/ Richard J. Dadamo Richard J. Dadamo | Director | December 12, 2007 | ||
/s/ Sanford L. Kane Sanford L. Kane | Director | December 12, 2007 | ||
/s/ Huat Seng Lim, Ph.D. Huat Seng Lim, Ph.D. | Director | December 12, 2007 | ||
/s/ Choon Seng Tan Choon Seng Tan | Director | December 12, 2007 | ||
/s/ Sam Yau Sam Yau | Director | December 12, 2007 | ||
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EXHIBIT INDEX
| 3.2(1) | Restated Certificate of Incorporation of the Company | |
| 3.4(2) | Amended and Restated Bylaws of the Company | |
| 4.1(1) | Form of Common Stock Certificate | |
| 10.1(1) | Form of Indemnification Agreement between the Company and its officers, directors and agents | |
| 10.2(1) | 1994 Stock Plan of the Company, as amended | |
| 10.3(6) | 2004 Stock Incentive Plan of the Company, as amended and restated | |
| 10.4(1) | Corporate Services Agreement dated as of June 4, 2004 by and between the Company and Wearnes Brothers Services (Private) Limited | |
| 10.18(3) | Uncommitted Revolving Credit Facility Agreement by and between Norddeutsche Landesbank Girozentrale, New York Branch and the company dated July 14, 2005 | |
| 10.19(3) | Revolving Credit Note dated July 14, 2005 with the Company as Borrower and Norddeutsche Landesbank Girozentrale, New York Branch, as Lender | |
| 10.20(4) | Amended and Restated Stockholders Agreement dated October 25, 2005 between Multi-Fineline Electronix, Inc., Wearnes Technology Pte. Ltd, United Wearnes Technology Pte. Ltd., and WBL Corporation Limited | |
| 10.21(5) | Form of Restricted Stock Unit Agreement | |
| 10.31(7) | Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou) Co., Ltd. and Bank of China Co., Ltd. Suzhou Wuzhong Sub-office dated January 25, 2007 | |
| 10.32(7) | Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. and Bank of China Co., Ltd. Suzhou Wuzhong Sub-office dated January 25, 2007 | |
| 10.33(8) | Corporate Supply Agreement between Multi-Fineline Electronix, Inc. and Motorola, Inc. dated October 1, 2006 | |
| 10.34 (9) | Comprehensive Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou) Co., Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.35 (9) | Collaboration Agreement by and between Multi-Fineline Electronix (Suzhou) Co. Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.36 (9) | Comprehensive Credit Line Agreement by and between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.37 (9) | Collaboration Agreement by and between Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd. and Shanghai Pudong Development Bank Suzhou Branch dated July 31, 2007 | |
| 10.38(10) | Master Purchase Agreement between Multi-Fineline Electronix, Inc., Multi-Fineline Electronix (Suzhou) Co., Ltd., and Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. and Sony Ericsson Mobile Communications (USA) Inc. dated April 19, 2006 | |
| 14.1(11) | Code of Ethics for Senior Officers | |
| 21.1 | List of Subsidiaries of Registrant | |
| 23.1 | Consent of PricewaterhouseCoopers LLP | |
| 24.1 | Power of Attorney (see signature page of this Annual Report) | |
| 31.1 | Section 302 Certification by the Company’s chief executive officer | |
| 31.2 | Section 302 Certification by the Company’s principal financial officer | |
| 32.1 | Section 906 Certification by the Company’s chief executive officer and principal financial officer | |
(1) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Registration Statement on Form S-1, as amended (File No. 333-114510) declared effective by the Securities and Exchange Commission (“SEC”), on June 24, 2004. |
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(2) | Incorporated by reference to an exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2005. |
(3) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2005. |
(4) | Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2005. |
(5) | Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2005. |
(6) | Incorporated by reference to exhibit (as Appendix A) to the Company’s Proxy Statement for its 2006 Annual Meeting of Stockholders on Form DEF 14A filed with the SEC on January 26, 2006. |
(7) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2007. |
(8) | Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K/A filed with the SEC on July 26, 2007. Confidential treatment has been granted for certain portions of this agreement. |
(9) | Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on August 6, 2007. |
(10) | Confidential treatment is being requested with respect to portions of this agreement. |
(11) | Incorporated by reference to exhibit (with same exhibit numbers) to the Company’s Annual Report on Form 10-K filed with the SEC for the year ended September 20, 2004. |
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