UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 3, 1998
Commission File Number: 333-50981
MCMS, Inc.
(Exact name of registrant as specified in its charter)
Idaho
(State or other jurisdiction
of incorporation or organization)
82-0480109
(I.R.S. Employer
Identification No.)
16399 Franklin Road, Nampa, Idaho 83687
(Address, including Zip Code, of principal executive offices)
(208) 898-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
None
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,
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of 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.
The aggregate market value of the registrant's voting and non-
voting common stock held by non-affiliates of the registrant as
of September 3, 1998 was approximately $12 million.
The number of shares outstanding of each of the issuer's
classes of common stock on September 3, 1998 was as follows:
Class A Common Stock: 3,261,177
Class B Common Stock: 863,823
Class C Common Stock: 874,999
PART I
______
ITEM 1. BUSINESS
The following discussion contains trend information and
other forward-looking statements that involve a number of risks
and uncertainties. The actual results of MCMS, Inc. ("MCMS or
the Company") could differ materially from MCMS's historical
results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ
materially are included, but are not limited to, those identified
in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Certain Factors."
MCMS is a leading electronics manufacturing services ("EMS")
provider serving original equipment manufacturers ("OEMs") in the
networking, telecommunications, computer systems and other
rapidly growing sectors of the electronics industry. The Company
offers a broad range of capabilities and manufacturing management
services, including product design and prototype manufacturing;
materials procurement and inventory management; the manufacturing
and testing of printed circuit board assemblies ("PCBAs"), memory
modules and systems; quality assurance; and end-order
fulfillment. By delivering this comprehensive range of
manufacturing and customer service capabilities through its
strategically located facilities in the United States, Asia and
Europe, the Company enables its OEM customers to focus their
capital and resources on their core competencies of research,
product development, marketing and sales.
The Company's principal operations were established in 1984
as the Memory Applications Group of Micron Technology, Inc.
("MTI"). The Company began providing electronic manufacturing
services to external customers in 1989, was incorporated as a
wholly owned subsidiary of MTI in 1992 and became a wholly owned
subsidiary of Micron Electronics, Inc. ("MEI"), which is a
majority owned subsidiary of MTI, in 1995.
On February 26, 1998, the Company consummated a
recapitalization (the "Recapitalization") pursuant to an Amended
and Restated Recapitalization Agreement dated as of February 1,
1998 (as amended, the "Recapitalization Agreement") by and among
MEI, MEI California, Inc. ("MEIC"), a wholly owned subsidiary of
MEI, Cornerstone Equity Investors IV, L.P. ("Cornerstone") and
the Company. Pursuant to the Recapitalization, the Company
redeemed from MEIC 90% of the then outstanding common stock of
the Company. In order to finance the Recapitalization, the
Company: (i) issued $145.0 million in aggregate principal amount
of 9 3/4% Senior Subordinated Notes due 2008, (ii) issued $30.0
million in aggregate principal amount of Floating Interest Rate
Subordinated Term Securities due 2008, (iii) issued 250,000
shares of redeemable preferred stock ($25.0 million liquidation
preference), and (iv) received an equity contribution of $61.2
million in cash from Cornerstone and other investors (v) and used
$3.3 million of its own cash. The Company used these proceeds to
purchase 90% of the then outstanding common stock of the Company
from MEIC for $249.2 million, fund $15.0 million in transaction
related fees and expenses, and repay $0.3 million of existing
indebtedness. MEIC retained a 10% equity interest in the
Company.
Manufacturing Services and Capabilities
The Company provides a comprehensive array of manufacturing
services which require the Company and its OEM customers to make
a substantial investment of time and resources in their
relationships. The Company becomes an integral partner with OEMs
who are evolving toward a new paradigm of "virtual" manufacturing
in which the OEMs maintain no internal production capabilities
and rely solely on EMS providers for a comprehensive array of
manufacturing services. The Company believes that this trend in
which OEMs outsource increasing levels of their manufacturing
requirements to EMS providers should continue, as OEMs realize
the benefits of focusing on their core competencies of research
and development, and sales and marketing. The Company's
manufacturing services, which are provided on both a turnkey and
consignment basis, include:
Pre-production Services
The Company's pre-production electronics manufacturing
services include product development and materials procurement
and inventory management.
- Product Development. The Company's product development
group interacts frequently with OEM customers early in the design
process to optimize product design and product manufacturability.
For each project, MCMS creates a design strategy based on a
particular customer's requirements, product attributes, design
guidelines and previous experience with similar products. After
design, the Company often provides quick-turn prototype assembly.
By participating in product design and prototype development, the
Company reduces an OEM's manufacturing costs, accelerates
time-to-volume production and ensures that new designs can be
properly tested at a reasonable cost.
2
- Materials Procurement and Inventory Management. The
Company provides a broad range of materials management services
and works in partnership with key component manufacturers and
distributors through procurement and the deployment of programs
such as schedule sharing, electronic data interface and Internet
links. In addition, the Company has consignment and other
just-in-time inventory programs in place with a number of its
suppliers pursuant to which such suppliers consign or deliver
materials and components to the Company for purchase by the
Company as and if necessary to meet manufacturing requirements.
Manufacturing and Test Services
The majority of the printed circuit board assemblies
("PCBA") manufactured by MCMS utilize surface mount technology
("SMT") interconnection technology or a combination of SMT and
pin-through-hole interconnection technologies. In addition, the
Company has expertise in such advanced technologies as flip chip
assembly, ball grid array ("BGA") and micro BGA. The Company also
offers a comprehensive range of test services, including
automated in-circuit and x-ray testing of PCBAs, as well as
functional and environmental stress testing of both PCBAs and
system level assemblies. MCMS, in conjunction with its customers,
either fabricates or procures test hardware and develops
application-specific test software. The Company employs, where
practicable, a standard manufacturing platform at all
manufacturing facilities. This standardization allows the Company
to deliver consistent product quality on a worldwide basis to its
OEM customers.
Memory Module Assembly
The Company is a leading provider of memory modules which it
primarily supplies to MTI, the largest manufacturer of dynamic
random access memory ("DRAM") in the United States. MCMS
manufactures standard and custom memory modules for MTI on a
consignment basis and for other customers on a turnkey basis. As
a former subsidiary of MTI, the Company has its roots in memory
module production, and has used this expertise to gain access to
new customers. Once the Company has been selected as a provider
of memory modules to an OEM, MCMS seeks to expand the
relationship to include a broader set of services.
System Level Assembly
System level assembly is the connection of two or more
sub-assemblies (such as PCBAs) into a finished enclosure. The
Company specializes in the system level assembly of Internet
Protocol switches and Internet servers. The Company's system
level assembly operations are staffed with personnel from various
functional areas including engineering, manufacturing management,
testing and training.
End-Order Fulfillment
The Company's relationship with several of its OEM customers
extends beyond manufacturing to encompass the shipment of
products directly to the OEM's customers. Prior to shipment, the
Company performs all quality and testing functions to ensure that
the products conform to the customer's standards of
functionality, performance and durability. In addition, the
Company possesses the flexibility, manufacturing expertise and
information systems necessary to custom configure assemblies to
meet the customer's unique requirements.
Sales and Marketing
Manufacturing Services and Customer Profile
The Company provides a broad range of services for the
manufacture of custom PCBAs, memory modules, and systems,
including design, product engineering, procurement and material
management, assembly, test engineering, quality assurance, and
just-in-time delivery or end-order fulfillment. MCMS focuses on
marketing its services to OEMs in the high-growth networking,
telecommunications, and computer system industries that generally
require custom board and system level design, assembly, and test
and short manufacturing lead times at competitive pricing.
3
The Company generally targets customers who: (i) focus on
the high-end of their respective markets; (ii) possess
significant volume growth opportunities; (iii) offer the
possibility of multiple project or product prospects for MCMS and
(iv) are interested in a long-term, strategic partnership.
In fiscal 1998, the Company provided manufacturing services
for 29 active customers. As is typical for an EMS provider, a few
of the Company's major customers represent a significant
percentage of its net sales. During fiscal 1997 and 1998, the
Company had two customers that comprised more than 10% of the
Company's net sales. The Company's two largest customers
represented 32.4% and 20.1%, respectively, of the Company's net
sales in fiscal 1997 and 39.2% and 24.1%, respectively, of the
Company's net sales in fiscal 1998. No other customer accounted
for more than 10% of the Company's net sales in fiscal 1998.
Decreases in sales to or margins with these or any other key
customers could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Factors--Customer Concentration;
Dependence on Certain Industries." The Company operates in one
industry segment, electronic manufacturing services, and has
presence in three geographic regions, North America, Asia and
Europe. Sales shipped to customers outside of the U.S. totaled
approximately $54.2 million, $20.8 million and $43.4 million, or
approximately 15%, 7% and 13% of total net sales, in fiscal 1996,
1997 and 1998, respectively. The Company had no sales
attributable to foreign operations for fiscal 1996. In fiscal
1997 and 1998, net sales attributable to foreign operations
totaled $6.0 million and $24.5 million or 2% and 7.3% of total
net sales, respectively. Sales of these foreign operations are
primarily denominated in United States dollars with sales for the
Company's Belgian operation principally in Belgian and French
Francs.
Backlog
The Company's backlog as of September 3, 1998 was
approximately $72.4 million. Backlog consists of purchase orders
believed to be firm and that are expected to be filled typically
within one to three months. Because of variations in the timing
of orders, quantities ordered, delivery intervals, customer and
product mix and delivery schedules, the Company's backlog as of
any particular date may not be representative of actual sales for
any subsequent period. In addition, customer orders can be
canceled and volume levels can be changed or delayed. From time
to time, some of the Company's customers have terminated their
manufacturing arrangements with the Company, and other customers
have reduced or delayed the volume of design and manufacturing
services performed by the Company. Program or relationship
termination and the replacement of canceled, delayed or reduced
contracts with new business cannot be assured. Termination of a
manufacturing relationship or changes, reductions or delays in
orders could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors -- Variability of
Results of Operation."
Sales and Marketing Organization
The Company markets its contract manufacturing services
through a direct sales force as well as independent
manufacturers' sales representatives throughout the world. The
Company believes that this combination provides a cost-effective
means for the Company to market its services, as compensation to
its representatives is commission-based. The Company's marketing
and sales organization consists of 4 marketing employees, 5
regional sales managers and 29 program managers. Regional sales
managers have primary responsibility for identifying and
developing new customer accounts. Regional sales managers also
manage the Company's independent sales representatives in their
respective territories, working closely with representatives to
define effective account development strategies.
The Company's ability to consistently meet or exceed
customers' expectations has been its most effective marketing
tool. Consequently, the program manager plays a critical role.
Once a new account is brought in, a program manager is assigned
to each customer and is responsible for the day to day management
and the progress of existing programs. The program manager also
uses his or her daily interface with the customer to identify and
pursue additional revenue opportunities within the existing
customer base.
Engineering
The Company concentrates its engineering efforts principally
on developing manufacturing process technologies to meet specific
customer needs. The Company also conducts a limited amount of
research and development in response to general technology trends
in the EMS market, realizing these developments will likely
become specific customer requirements in the future. As of
September 3, 1998, the Company had approximately 225 employees
engaged in PCBA design, process, product and test engineering,
and product and equipment technical support.
4
Intellectual Property
As of September 3, 1998, the Company held 17 patents and
37 patent applications on file with the U.S. Patent and Trademark
Office. Though the Company considers these patents and patent
applications important to its business, no patent or patent
application is material to the operation of the business.
Competition
The EMS industry is intensely competitive and highly
fragmented. Competition consists of numerous regional, national
and international participants as well as, indirectly, the
manufacturing operations of a large number of OEMs who elect to
perform their manufacturing internally rather than through an
outside EMS firm. The Company competes directly with a number of
EMS firms, including Celestica International Holdings Inc.,
Flextronics International, Ltd., Jabil Circuits, Inc., SCI
Systems, Inc., Sanmina Corporation, and Solectron Corporation.
To be competitive, the Company must provide technologically
advanced manufacturing services, high quality products, flexible
production schedules and reliable delivery of finished products
on a timely and price competitive basis. Many of the Company's
competitors have more geographically diversified manufacturing
facilities, international procurement capabilities, research and
development capabilities and sales and marketing resources than
the Company. In addition, the Company may be at a competitive
disadvantage because some of the Company's competitors are less
financially leveraged, resulting in, among other things, greater
operational and financial flexibility for such competitors. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-Certain Factors-Competition."
Environmental
The Company's operations are subject to regulatory
requirements and potential liabilities arising under certain
federal, state, local and foreign environmental laws and
regulations governing, among other things, air emissions, waste
water discharge, waste storage, treatment and disposal, and
remediation of releases of hazardous materials. In the course of
its operations, MCMS handles limited amounts of materials that
are considered hazardous under applicable law. The Company
believes that it is in substantial compliance with all applicable
environmental requirements, including without limitation, those
governing the handling, storage and disposal of such materials
and is aware of no outstanding legal proceedings against it
arising under such laws.
Legal Proceedings
From time to time, the Company is involved in various legal
proceedings arising in the ordinary course of its business. The
Company does not expect that these matters will have a material
adverse effect on the Company's business, financial condition and
results of operations.
5
Employees
As of September 3, 1998, the Company had 1,578 full-time
employees. Except for employees at its Colfontaine, Belgium
facility, none of the Company's employees are represented by a
labor union or any collective bargaining agreement. The Company's
Belgian operations are subject to labor union agreements covering
managerial, supervisory and production employees that set
standards for, among other things, the maximum number of working
hours and compensation levels. The Company believes that its
employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company currently operates manufacturing facilities in
Nampa, Idaho, Durham, North Carolina, Penang, Malaysia, and
Colfontaine, Belgium, and has an international procurement office
in Singapore. With the exception of the Colfontaine, Belgium
facility, which is currently in the process of ISO 9001
certification, each of these manufacturing facilities is ISO 9001
certified. All of the Company's manufacturing facilities employ,
where practicable, standard hardware platforms.
The following table sets forth certain information regarding
the Company's manufacturing facilities as of September 3, 1998:
Approx. Owned/
Location Sq. Ft. Leased
________ _______ _______
Nampa, Idaho 216,000 Owned
Durham, North Carolina 110,000 Leased
Penang, Malaysia 20,000 Leased
Colfontaine, Belgium 85,000 Owned
_______
Total 431,000
========
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
fourth quarter covered by this report.
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for any class
of the Company's common equity.
As of September 30, 1998, there were 7 holders of record of
the registrant's Class A Common Stock, 2 holders of record of the
registrants Class B Common Stock and 7 holders of record for the
registrants Class C Common Stock.
The Company has never declared or paid any cash dividends on
any class of its common equity. Except as the Company may be
otherwise required to pay dividends on its outstanding preferred
stock, the Company currently intends to retain its earnings for
reinvestment in its business and does not currently anticipate
paying any cash dividends on any class of common equity in the
foreseeable future. Notwithstanding the foregoing, under the
Company's Certificate of Incorporation, the Company may not
declare or pay dividends on its common equity unless and until
the Company has declared and paid full preferential dividends on
any then outstanding 12 1/2% Series B Senior Exchangeable
Preferred Stock ("Redeemable Preferred Stock"), Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock.
Moreover, the Company's existing credit facility, as well as the
indenture governing its outstanding Series B 9 3/4% Senior
Subordinated Notes due 2008 and Series B Floating Interest Rate
Subordinated Term Securities due 2008, restrict the Company from
declaring or paying cash dividends on its outstanding common
equity.
6
In February 1998, the Company consummated the
Recapitalization and, in connection therewith, the Company issued
(i) 2,761,177 shares of Class A Common Stock, (ii) 863,823 shares
of Class B Common Stock, (iii) 874,999 shares of Class C Common
Stock, (iv) 2,761,177 shares of Series A Preferred Stock, (v)
863,823 shares of Series B Preferred Stock, and (vi) 874,999
shares of Series C Preferred Stock, to Cornerstone and other
investors in exchange for $61.2 million in cash. In connection
with the Recapitalization, the Company also issued 500,000 shares
of Class A Common Stock and 500,000 shares of Series A Preferred
Stock to MEIC in partial payment for all of the then outstanding
shares of the Company's capital stock then held by MEIC. The
Company believes that the foregoing issuances of capital stock
were exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(2) thereof,
and the rules and regulations promulgated by the Securities and
Exchange Commission thereunder, insofar as the offer and sale of
such securities did not involve a public offering.
In addition to the foregoing, in connection with the
Recapitalization, the Company also issued 250,000 shares of 12
1/2% Senior Exchangeable Preferred Stock (the "Senior Preferred
Stock") to BT Alex Brown, as the initial purchaser, in exchange
for $24,000,000 in cash. The Company believes that this issuance
of capital stock was exempt from the registration and prospectus
delivery requirements of the Securities Act under Section 4(2)
thereof, and the rules and regulations promulgated by the
Securities and Exchange Commission thereunder, insofar as the
offer and sale of such securities did not involve a public
offering. Following the issuance of such securities to BT Alex
Brown, the Company effected an exchange offer, registered under
the Securities Act, pursuant to which the Senior Preferred Stock
was exchanged for Series B 12 1/2% Redeemable Preferred Stock with
substantially the same terms and conditions as the Senior
Preferred Stock.
The Company used the proceeds from the issuance and sale of
the equity securities described above to Cornerstone and other
investors to fund a portion of the purchase price for shares of
the Company's capital stock acquired from MEIC in connection with
the Recapitalization.
During fiscal 1998, MCMS also granted options under its 1998
Stock Option Plan (the "Option Plan") to employees of the Company
to purchase an aggregate of 1,240,000 shares of the Company's
Common Stock at an exercise price of $2.27 per share. The
Company believes that the foregoing stock option grants did not
require registration under the Securities Act, nor an exemption
from the registration requirements thereof, insofar as such
grants did not involve the "offer" or "sale" of securities within
the meaning of Section 2(3) of the Securities Act.
7
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information of
MCMS has been derived from the historical consolidated financial
statements and should be read in conjunction with the
consolidated financial statements and the notes included therein.
Five Year Selected Financial Highlights
(Dollars in thousands, except per share data)
September 1, August 31, August 29, August 28, September 3,
Fiscal year ended 1994 1995 1996 1997 1998
____________ ____________ ____________ ____________ _____________
Statement of Operations Data:
Net sales $117,313 $188,782 $374,116 $292,379 $ 333,920
Cost of goods sold 104,857 169,758 341,110 258,982 303,251
-------- -------- -------- -------- --------
Gross profit 12,456 19,024 33,006 33,397 30,669
Selling, general and
Administrative expenses 5,129 6,464 9,303 12,560 15,798
-------- -------- -------- -------- --------
Income from operations 7,327 12,560 23,703 20,837 14,871
Other expense (income):
Interest expense (income), net (163) (613) (482) (380) 9,212
Transaction expenses - - - - 8,398
-------- -------- -------- -------- --------
Income (loss) before taxes 7,490 13,173 24,185 21,217 (2,739)
Income tax provision (benefit) 2,869 5,142 9,190 8,465 (930)
________ ________ ________ ________ ________
Net income (loss) $ 4,621 $ 8,031 $ 14,995 $ 12,752 $ (1,809)
======== ======== ======== ======== ========
Net income (loss) per share -
basic and diluted (4) (5) $ 4,621 $ 8,031 $ 14,995 $ 12,752 $ (1.36)
======== ======== ======== ======== ========
Balance Sheet Data (End of Period):
Cash and cash equivalents $ 693 $ 15,000 $ 16,290 $ 13,636 $ 7,542
Working capital, excluding
cash and cash equivalents 13,999 25,218 10,065 15,454 21,929
Total assets 43,515 93,823 113,245 124,862 145,052
Total debt 7,660 6,671 - 1,049 185,157
Redeemable preferred stock - - - - 25,675
Shareholders' equity (deficit)(1) 18,843 50,493 65,881 78,191 (113,051)
Statement of Cash Flow Data:
Cash provided by (used in)
Operating activities (2,016) 2,124 33,620 20,723 1,353
Cash used in investing activities (4,837) (9,931) (25,643) (23,969) (19,742)
Cash provided by (used in)
financing activities 2,368 22,114 (6,687) 592 12,508
Other Financial Data:
EBITDA (2) $ 9,763 $ 16,029 $ 29,128 $ 29,656 $ 27,263
Depreciation and amortization (3) 2,436 3,469 5,425 8,819 12,392
Total capital expenditures 5,180 10,116 31,229 24,120 20,164
(1) As of September 1, 1994 and August 31, 1995, shareholders' equity amounts represent division equity.
(2) "EBITDA" is defined herein as income before income taxes, depreciation, amortization, transaction expenses and
net interest expense. EBITDA is presented because the Company believes it is frequently used by investors in the
evaluation of companies. However, EBITDA should not be used as an alternative to GAAP measurements such as net
income as a measure of results of operations or to cash flows as a measure of liquidity in accordance with generally
accepted accounting principles.
(3) In fiscal 1998 depreciation and amortization amount excludes $526,000 of deferred loan amortization that was
expensed as interest.
(4) The weighted average number of shares used to calculated net income (loss) per share was 1,000 shares in fiscal
1994, 1995, 1996 and 1997 and 2,534,183 shares in fiscal 1998.
(5) Net income (loss) per share reflects a loss of 0.72 per share plus the effect of 0.64 loss per share related to
dividend payments in kind on Redeemable Preferred Stock on June 1, 1998 and September 1, 1998. See - "Item 14:
Exhibits, Financial Statement Schedule and Reports on Form 8-K--Exhibit 11".
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Many of the statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are
forward-looking in nature and, accordingly, whether they prove to
be accurate is subject to many risks and uncertainties. The
actual results that the Company achieves may differ materially
from any forward - looking statements in this Management's
Discussion and Analysis of Financial Condition and Results of
Operations. See "Certain Factors."
MCMS is a leading electronics manufacturing services ("EMS")
provider serving original equipment manufacturers ("OEMs") in the
networking, telecommunications, computer systems and other
rapidly growing sectors of the electronics industry. The Company
offers a broad range of capabilities and manufacturing management
services, including product design and prototype manufacturing;
materials procurement and inventory management; the manufacture
and testing of printed circuit board assemblies ("PCBAs"), memory
modules and systems; quality assurance; and end-order
fulfillment.
On February 26, 1998, the Company consummated a
recapitalization (the "Recapitalization") pursuant to an Amended
and Restated Recapitalization Agreement dated as of February 1,
1998 (as amended, the "Recapitalization Agreement") by and among
MEI, MEI California, Inc. ("MEIC"), a wholly owned subsidiary of
MEI, Cornerstone Equity Investors IV, L.P. ("Cornerstone") and
the Company. Pursuant to the Recapitalization, the Company
redeemed from MEIC 90% of the then outstanding common stock of
the Company. In order to finance the Recapitalization, the
Company: (i) issued $145.0 million in aggregate principal amount
of 9 _% Senior Subordinated Notes due 2008, (ii) issued $30.0
million in aggregate principal amount of Floating Interest Rate
Subordinated Term Securities due 2008, (iii) issued 250,000
shares of redeemable preferred stock ($25.0 million liquidation
preference), (iv) received an equity contribution of $61.2
million in cash from Cornerstone and other investors, and (v)
used $3.3 million of its own cash. The Company used these
proceeds to purchase 90% of the then outstanding common stock of
the Company from MEIC for $249.2 million, fund $15.0 million in
transaction related fees and expenses, and repay $0.3 million of
existing indebtedness. MEIC retained a 10% equity interest in
the Company.
MCMS provides manufacturing services on both a turnkey and
consignment basis. Under a consignment arrangement, the OEM
procures the components and the Company assembles them in
exchange for a process fee. Under a turnkey arrangement, the
Company assumes responsibility for both the procurement of
components and their assembly. Turnkey manufacturing generates
higher net sales than consignment manufacturing due to the
generation of revenue from materials as well as labor and
manufacturing overhead, but also results in lower gross margins
than consignment manufacturing because the Company generally
realizes lower gross margins on materials-based revenue than on
manufacturing-based revenue. The Company also provides services
on a partial consignment basis, whereby the OEM procures certain
materials and the Company procures the remaining materials.
Consignment revenues (excluding partial consignment revenues)
accounted for 6.4% of the Company's fiscal 1998 net sales.
In fiscal 1998, approximately 13.0% of the Company's net
sales were shipped to customers outside of the U.S. with less
than 1.0% direct into the Southeast Asian market, which is
currently experiencing unfavorable currency and economic
conditions. Certain of the Company's major customers sell
products into the Southeast Asian market, although the Company
estimates, based on conversations with its customers, that less
than 10% of its sales in fiscal 1998 were directly or indirectly
into the Southeast Asian market. These and other factors which
affect the industries or the markets that the Company serves, and
which affect any of the Company's major customers in particular,
could have a material adverse effect on the Company's results of
operations. See "Certain Factors-International Operations."
9
Results of Operations
August 29, August 28, September 3,
Fiscal year ended 1996 1997 1998
- ---------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.1%
Costs of sales 91.2 88.6 90.8
------ ------ ------
Gross margin 8.8 11.4 9.2
Selling, general and administrative expenses 2.5 4.3 4.7
------ ------ ------
Income from operations 6.3 7.1 4.5
Other expense (income):
Interest expense (income), net (0.1) (0.1) 2.8
Transaction expenses - - 2.5
------ ------ ------
Income (loss) before taxes 6.4 7.2 (0.8)
Income tax provision (benefit) 2.4 2.8 (0.3)
------ ------ ------
Net income (loss) 4.0% 4.4% (0.5)%
====== ====== =======
Depreciation and amortization 1.5% 3.0% 3.7%
====== ====== =======
(1) In fiscal 1998 depreciation and amortization amount excludes $526,000 of deferred loan
amortization that was expensed as interest.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales for fiscal 1998 increased by
$41.5 million, or 14.2%, to $333.9 million from $292.4 million
for fiscal 1997. The increase in net sales was primarily
attributable to an increase in the number of PCBAs and system
assemblies shipped to customers in the networking and
telecommunication industries and, to a lesser extent, an increase
in sales of consigned memory modules. The increase in unit PCBA
sales was partially offset by lower prices and a decline in the
sales derived from turnkey memory modules. The Company's ability
to meet demand for increased shipments was the result of an
expansion of manufacturing capacity at its Nampa facilities as
well as continued ramp-up of the Malaysian facility which began
operations in the second quarter of fiscal 1997.
In fiscal 1997 and 1998, net sales attributable to foreign
operations totaled $6.0 million and $24.5 million or 2% and 7.3%
of total net sales, respectively. Foreign net sales in 1998
reflect $10.3 million from the Company's Belgian operation
acquired in November 1997.
Gross Profit. Gross profit for fiscal 1998 decreased by
$2.7 million, or 8.2%, to $30.7 million from $33.4 million for
fiscal 1997. Gross margin for fiscal 1998 decreased to 9.2% of
net sales from 11.4% in fiscal 1997. The decrease in gross margin
was principally attributable to lower gross margins realized on
the Company's PCBA sales and custom modules as well as a higher
percentage of sales in fiscal 1998 derived from PCBAs. The lower
margins on PCBAs was primarily due to lower prices and
inefficiencies related to new product introductions. To a lesser
extent, start-up costs in the Company's Belgian operation had a
negative impact on gross margin. The Company anticipates that
the Belgian operation will continue to have a negative impact on
margins in fiscal 1999.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses ("SG&A") for fiscal 1998
increased by $3.2 million, or 25.8%, to $15.8 million from
$12.6 million for fiscal 1997. As a percentage of net sales for
fiscal 1998, SG&A increased to 4.7% from 4.3%. This increase
for fiscal 1998 was the result of additional headcount in senior
management, finance and administration, sales and marketing, and
information technology, additional SG&A in the Malaysian and
Belgian operations and duplicative costs associated with the
transition service charges from MTI and MEI which were incurred
as part of the Recapitalization. This increase in SG&A was
partially offset by a change in estimate related to allowance for
doubtful accounts of $0.8 million.
Transaction Expenses. In connection with the
Recapitalization, the Company incurred transaction expenses of
$8.4 million. Transaction expenses included $2.7 million in fees
under a transaction agreement, $2.2 million in banking fees, $1.4
million to terminate employment contracts of certain executives
with MEI; $0.7 million to buyout certain MTI and MEI options held
by certain executives; and $1.4 million in accounting fees,
legal fees and other transaction costs.
Interest Expense. Interest expense for fiscal 1998
increased by $9.6 million to $9.2 million from $0.4 million in
interest income for fiscal 1997. The interest expense increased
due to the addition of $175 million in long-term debt which
was incurred in conjunction with the Recapitalizaton.
Provision (Benefit) for Income Taxes. Income taxes for the
year ended September 3, 1998 decreased by $9.4 million to ($0.9)
million from $8.5 million for the year ended August 28, 1997.
The Company's effective income tax rate for 1998 decreased to
33.9% from 39.9% for the comparable period in 1997 principally as
a result of certain transaction expenses for which no tax
deduction is allowed, offset in part by certain changes in
estimates for accrued liabilities as a result of the
Recapitalization Agreement and reduction in taxes due to foreign
operations. During fiscal 1998, the Company's international
subsidiaries generated $1.2 million of income on which the
Company provided no income taxes.
10
Net Income. For the reasons stated above, net income for
fiscal 1998 decreased by $14.6 million, or 114.2%, to ($1.8)
million, compared to $12.8 million for fiscal 1997. As a
percentage of net sales, net income for the fiscal 1998 decreased
to (0.5%) from 4.4% for fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales for fiscal 1997 decreased by $81.7
million, or 21.8%, to $292.4 million from $374.1 million for
fiscal 1996. This decline was primarily attributable to the
substantial decline in the price of DRAM, which resulted in a
$155.2 million decrease in turnkey memory module net sales,
despite an increase in volume. In addition, $16.5 million of the
net sales decline was attributable to a price decrease in
consignment memory modules. These decreases were partially offset
by an increase of $93.5 million in net sales primarily related to
increased shipments from complex PCBA and system level
manufacturing.
Gross Profit. Gross profit for fiscal 1997 increased by
$0.4 million, or 1.2% to $33.4 million from $33.0 million for
fiscal 1996. Gross profit increased slightly despite a decline in
net sales as a result of increased unit volumes of complex PCBAs,
partially offset by declines related to turnkey memory modules.
Gross margin for fiscal 1997 increased to 11.4% of net sales from
8.8% in fiscal 1996 primarily as a result of the reduced revenue
base from the DRAM price decline and shift in revenues towards
consignment and partial consignment sales. In addition, gross
margins improved as a result of increased utilization at the
Durham and Nampa facilities for fiscal 1997.
Selling, General and Administrative Expenses. SG&A for
fiscal 1997 increased by $3.3 million, or 35.0%, to $12.6 million
from $9.3 million in fiscal 1996. As a percentage of net sales,
SG&A increased to 4.3% for fiscal 1997 from 2.5% for fiscal 1996.
This increase was principally attributable to increased headcount
in senior management, finance and administration, and sales and
marketing, and information technology, as well as start-up costs
associated with the Malaysian facility. The increase in SG&A as a
percentage of net sales was primarily attributable to factors
noted above as well as the decreased absorption of fixed costs.
Provision for Income Taxes. Income taxes for fiscal 1997
decreased by $0.7 million, or 7.9%, to $8.5 million from $9.2
million for fiscal 1996. The Company's effective income tax rate
for fiscal 1997 increased to 39.9% from 38.0% for fiscal 1996.
For fiscal 1997, the Company is included in the U.S. federal
income tax return of MEI. Income tax expenses for all years were
computed as if the Company were a separate taxpayer. The increase
in effective tax rate is principally due to operating losses of
the Malaysian facility for which related deferred tax assets were
fully reserved.
Net Income. For the reasons stated above, net income for
fiscal 1997 decreased by $2.2 million, or 15.0%, to $12.8
million, compared to $15.0 million for fiscal 1996. As a
percentage of net sales, net income for fiscal 1997 increased to
4.4% from 4.0% for fiscal 1996.
Liquidity and Capital Resources
During fiscal 1998, the Company's cash and cash equivalents
decreased by $6.1 million. Net cash provided by operating
activities was $1.4 million, net of $8.4 million of transaction
expenses and $9.2 million of interest expense. Net cash used by
investing activities was $19.8 million and net cash provided by
financing activities was $12.3 million. Net cash used by
investing activities during the fiscal year ended September 3,
1998 was primarily attributable to capital expenditures for
additional manufacturing capacity in the U.S., the acquisition
and improvement of the company's Belgian operation and
implementation of the Baan Enterprise Resource Planning ("ERP")
system. Net cash generated from financing activities principally
resulted from net borrowings under the Company's existing credit
facilities.
Receivables, inventory, accounts payable, and accrued
expenses on a net basis increased by $6.5 million during 1998.
The average collection period for accounts receivable and the
average inventory turns were 40.4 days and 11.1 turns compared to
43.5 days and 11.4 turns during fiscal 1998 and 1997,
respectively. The average collection period and average inventory
turn level vary as a function of sales volume, sales volatility,
product mix, payment terms with customers and suppliers and the
mix of consigned and turnkey business.
11
Capital expenditures during fiscal 1998 were $20.1 million,
including, $8.5 million for additional manufacturing capacity in
the U.S., $6.2 million for the acquisition and improvement of the
Company's Belgian operation and $5.4 million toward the
implementation of the Baan ERP system. The Company anticipates
spending an additional $4.6 in fiscal 1999 to complete the ERP
system implementation. See "Certain Factors -- "Baan
Implementation" and "Year 2000 Compliance." "
In conjunction with the Recapitalization, the Company
entered into a revolving credit facility ("Revolving Credit
Facility") with Bankers Trust Company, as agent, which provides
for borrowings of up to $40.0 million for working capital,
capital expenditures and other general corporate purposes. As of
September 3, 1998, the Company had drawn $9.5 million on the
Revolving Credit Facility. As of September 3, 1998, the Company
was in compliance with the covenants under the Revolving Credit
Facility, as amended May 20, 1998 for periods through August 31,
1999.
The Company's principal sources of future liquidity are cash
flows from operating activities and borrowings under the
Revolving Credit Facility. The Company is highly leveraged and
believes that these sources should provide sufficient liquidity
and capital resources to meet its current and future interest
payments, working capital and capital expenditures obligations.
No assurance can be given, however, that this will be the case.
Depending upon rate of growth and profitability and the ability
of the Company to manage its working capital effectively,
including its inventory turns and accounts receivable collection
period, the Company may require additional equity or debt
financing to meet its interest payments and working capital
requirements or capital equipment needs. There can be no
assurance that additional financing will be available when
required or, if available, will be on terms satisfactory to the
Company. The Company's future operating performance and ability
to service or refinance the Notes and to repay, extend or
refinance the Revolving Credit Facility will be subject to future
economic conditions and to financial, business and other factors,
many of which are beyond the Company's control. See "Certain
Factors-- High Level of Indebtedness; Ability to Service
Indebtedness and Satisfy Preferred Stock Dividend Requirements."
Certain Factors
High Level of Indebtedness; Ability to Service Indebtedness and
Satisfy Preferred Stock Dividend Requirements
The Company is highly leveraged. At September 3, 1998, the
Company had approximately $185.2 million of total indebtedness
outstanding (exclusive of unused commitments of $30.5 million
under the Revolving Credit Facility), Series B 12 1/2% Senior
Preferred Stock (the "Redeemable Preferred Stock") outstanding
with an aggregate liquidation preference of $26.6 million, and
convertible preferred stock outstanding with an aggregate
liquidation preference of approximately $56.7 million. The
Company may incur additional indebtedness from time to time to
provide for working capital or capital expenditures or for other
purposes, subject to certain restrictions in the (i) the
Revolving Credit Facility (ii) Indenture (the "Indenture")
governing the Series B 9 3/4% Senior Subordinated Notes due 2008
and the Series B Floating Interest Rate Subordinated Term
Securities due 2008 (collectively, the "Notes"), (iii) the
Certificate of Designation relating to the Redeemable Preferred
Stock (the "Certificate of Designation") and (iv) the Indenture
governing the 12 1/2% Subordinated Exchange Debentures (the
"Exchange Debentures") due 2010 issuable in exchange for the
Redeemable Preferred Stock (the "Exchange Indenture").
The level of the Company's indebtedness could have important
consequences to the Company and the holders of the Company's
securities, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional
financing in the future, as needed, may be limited; (iii) the
Company's leveraged position and covenants contained in the
Indenture, the Certificate of Designation, the Exchange Indenture
and the Revolving Credit Facility may limit its ability to grow
and make capital improvements and acquisitions; (iv) the
Company's level of indebtedness may make it more vulnerable to
economic downturns; and (v) the Company may be at a competitive
disadvantage because some of the Company's competitors are less
financially leveraged, resulting in greater operational and
financial flexibility for such competitors.
The ability of the Company to pay cash dividends on, and to
satisfy the redemption obligations in respect of, the Redeemable
Preferred Stock and to satisfy its debt obligations, including
the Notes, will be primarily dependent upon the future financial
and operating performance of the Company. Such performance is
dependent upon financial, business and other general economic
factors, many of which are beyond the control of the Company. If
the Company is unable to generate sufficient cash flow to meet
its debt service obligations or provide adequate long-term
liquidity, it will have to pursue one or more alternatives, such
as reducing or delaying capital expenditures, refinancing debt,
selling assets or raising equity capital. There can be no
assurance that such alternatives could be accomplished on
satisfactory terms, if at all, or in a timely manner.
12
Restrictions Imposed by Terms of Indebtedness and Redeemable
Preferred Stock
The Indenture, the Certificate of Designation, the Exchange
Indenture and the Revolving Credit Facility contain certain
covenants that restrict, among other things, the ability of the
Company and its subsidiaries to incur additional indebtedness,
consummate certain assets sales and purchases, issue preferred
stock, incur liens, pay dividends or make certain other
restricted payments, enter into certain transactions with
affiliates, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company and its
subsidiaries, none of which impaired the Company's ability to
conduct business in fiscal 1998. A breach of any of these
covenants could result in a default under the Revolving Credit
Facility, the Indenture and the Exchange Indenture and would
violate certain provisions of the Certificate of Designation.
The Revolving Credit Facility also requires the Company to
maintain specified financial ratios and to satisfy certain
financial condition tests. The ability of the Company to meet
those financial ratios and financial condition tests can be
affected by events beyond its control, and there can be no
assurance that the Company will meet those ratios and tests.
In the event the Company does not meet such tests, the
availability of capital from bank borrowings, including but not
limited to the ability to access the Revolving Credit Facility,
could be adversely affected. The inability to borrow under the
Revolving Credit Facility could have a material adverse effect on
the Company's business, financial condition and results of
operations.
Upon an event of default under the Revolving Credit
Facility, the Indenture or the Exchange Indenture, the lenders
thereunder could elect to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due
and payable. In the case of the Revolving Credit Facility, if the
Company were unable to repay those amounts, the lenders
thereunder could proceed against the collateral granted to them
to secure that indebtedness. Such collateral is comprised of
substantially all of the tangible and intangible assets of the
Company, including the capital stock of its subsidiaries (limited
to no more than 65% of the capital stock of its foreign
subsidiaries).
On May 20, 1998, the Company and its lenders under the
Revolving Credit Facility amended certain financial covenants
under the Revolving Credit Facility through August 31, 1999. As
of September 3, 1998, the Company was in compliance with such
financial covenants, as amended.
Customer Concentration; Dependence on Certain Industries
At any given time, certain customers may account for
significant portions of the Company's net sales. For fiscal 1998,
approximately 76% of net sales were derived from networking and
telecommunications customers. For fiscal 1998, the Company's ten
largest customers accounted for approximately 88.0% of net sales.
The Company's top two customers accounted for approximately 39.2%
and 24.1% of net sales for fiscal 1998. In addition, the Company
has another major customer that operates under a consignment
manufacturing model and, while sales are less than 10% of total
revenue, the customer makes an important contribution to the
Company's overall financial performance. Decreases in sales to or
margins with these or any other key customers could have a
material adverse effect on the Company's business, financial
condition and results of operations.
The Company expects to continue to depend upon a relatively
small number of customers for a significant percentage of its net
sales. There can be no assurance that the Company's principal
customers will continue to purchase services at current levels,
if at all. The percentage of the Company's sales to such major
customers may fluctuate from period-to-period. Significant
reductions in sales to any of the Company's major customers as
well as period-to-period fluctuations in sales and changes in
product mix ordered by such customers could have a material
adverse effect on the Company's business, financial condition and
results of operations.
In addition, the Company is dependent upon the continued
growth, viability and financial stability of its OEM customers,
which are in turn substantially dependent on the growth of the
networking, telecommunications, computer systems and other
industries. These industries are subject to rapid technological
change, product obsolescence and price competition. In addition,
many of the Company's customers in these industries are affected
by general economic conditions. Recent currency devaluations and
economic slowdowns in various Asian economies may have an adverse
effect on the results of operations of certain of the Company's
OEM customers, and in turn, their orders from the Company. These
and other competitive factors affecting the networking,
telecommunications and computer system industries in general, and
13
the Company's OEM customers in particular, could have a material
adverse effect on the Company's business, financial condition and
results of operations. Moreover, any further volatility in the
market for DRAM components caused by, among other things, the
turmoil in the Asian economies, could have a material adverse
effect on MTI, which has historically been one of the Company's
major customers, and consequently the Company's business,
financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
Variability of Results of Operations
The Company's results of operations may be affected by a
number of factors including economic conditions, price
competition; the level of volume and the timing of customer
orders, product mix, management of manufacturing processes,
materials procurement and inventory management, fixed asset
utilization, foreign currency fluctuations, the level of
experience in manufacturing a particular product, customer
product delivery requirements, availability and pricing of
components, availability of experienced labor, the integration of
acquired businesses, start-up costs associated with adding new
geographical locations, research and development costs, and
failure to introduce, or lack of market acceptance, new
processes, services, technologies and products. In addition, the
level of net sales and gross margin can greatly shift based on
whether certain projects are contracted on a turnkey basis where
the Company purchases materials, versus on a consignment basis,
where materials are provided by the customer (turnkey
manufacturing tends to result in higher net sales and lower gross
margins than consignment manufacturing). An adverse change in
one or more of these factors could have a material adverse effect
on the Company's business, financial condition and results of
operations.
In addition, customer orders can be canceled and volume levels
can be changed or delayed. From time to time, some of the
Company's customers have terminated their manufacturing
arrangements with the Company, and other customers have reduced
or delayed the volume of design and manufacturing services
performed by the Company. Resolving customer obligations due to
program or relationship termination and the replacement of
canceled, delayed or reduced contracts with new business cannot
be assured. Termination of a manufacturing relationship or
changes, reductions or delays in orders could have a material
adverse effect on the Company's business, financial condition and
results of operations.
Management of Growth
The Company opened a new manufacturing facility in Penang,
Malaysia in October 1996 and completed the acquisition of an
Alcatel Bell N.V. facility and related assets in November 1997.
Expansion has caused, and is expected to cause, strain on the
Company's infrastructure, including its managerial, technical,
financial, information systems and other resources. To manage
further growth, the Company must continue to enhance financial
and operational controls, develop or hire additional executive
officers and other qualified personnel. Continued growth will
also require increased investments to add manufacturing capacity
and to enhance management information systems. See "Certain
Factors--Baan Implementation." There can be no assurance that the
Company will be able to scale its internal infrastructure and
other resources to effectively manage growth and the failure to
do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
The markets served by the Company are characterized by short
product life cycles and rapid technology changes. The Company's
ability to successfully support new product introductions is
critical to the Company's customers. New product introductions
have caused, and are expected to continue to cause, certain
inefficiencies and strain on the Company's resources. Any such
inefficiencies could have a material adverse effect on the
Company's business, financial condition and results of
operations.
New operations, whether foreign or domestic, can require
significant start-up costs and capital expenditures. In the event
that the Company continues to expand its domestic or
international operations, there can be no assurance that the
Company will be successful in generating revenue to recover
start-up and operating costs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--
Results of Operations."
Baan Implementation
In fiscal 1997, the Company finalized selection of a company-
wide enterprise resource planning software solution to, among
other things, accommodate the future growth and requirements of
the Company and, in October 1997, the Company began
implementation of ERP software provided by Baan U.S.A., Inc. (the
"Baan ERP System"). The Company based its selection criteria on
a number of items it deemed critical, and included among other
things, multi-site and foreign currency capabilities, 7x24 hour
14
system availability, enhanced customer communications, end-order
fulfillment and other mix mode manufacturing support and year
2000 compliance. The Company intends to implement the software
beginning in late 1998 with completion scheduled in 1999. There
can be no assurance that the Company will be successfully and
timely in its implementation efforts and any delay of such
implementation could have a material adverse affect on the
Company's business, financial condition and results of
operations.
Year 2000 Compliance
State of Readiness
The Year 2000 presents issues because many computer hardware
and software systems use only the last two digits to refer to a
calendar year. Consequently, these systems may fail to process
dates correctly after December 31, 1999, which may cause system
failures. In October 1997, the Company established a cross
functional team chartered with the specific task of evaluating
all of the Company's software, equipment and processes for Year
2000 compliance. This team determined that a substantial
portion of the Company's systems, including its company-wide
enterprise resource planning ("ERP") system, were not Year
2000 compliant and therefore developed a plan to resolve
this issue which includes, among other things, implementing the
Baan ERP system. The Baan ERP system is being implemented across
all of the Company's sites beginning late 1998 with targeted
completion scheduled in 1999. In addition, the Company retained
the services of an outside consulting firm to review and validate
the Company's evaluation and implementation plan. The Company
believes that the Baan ERP system will make all "mission critical"
company information systems compliant.
As part of the Company's Year 2000 compliance evaluation,
the Company has contacted key suppliers and significant customers
to determine the extent to which the Company is exposed to those
third parties' failure to remedy their Year 2000 compliance
issues. To date, approximately 12% of the suppliers contacted
have responded, and, of those responding, approximately 20% have
stated to the Company that they are Year 2000 compliant. The
Company will continue to contact key suppliers and significant
customers as part of its Year 2000 compliance evaluation. In
addition, the Company intends to conduct audits and/or testing of
certain suppliers for Year 2000 compliance. Although there can
be no assurance, the Company anticipates that its actions will
reduce risks to the Company which might arise from the failure of
such suppliers to adequately address Year 2000 issues.
Costs
The total costs, whether capitalized or expensed, associated
with implementation and system modification is anticipated to be
approximately $10 million, excluding internal programming time on
existing systems. The total amount spent in fiscal 1998 related
to this project was $5.8 million with anticipated expenditures of
$4.6 million in fiscal 1999. This amount includes the costs
associated with new systems that will be Year 2000 compliant
even though such compliance was not the primary reason for
installation.
Contingency Plan
The Company does not currently have in place any contingency
plans if Year 2000 issues are not resolved in time or go
undetected.
Risks Associated with the Company's Year 2000 Issues
The Company presently believes that by modifying existing
software and converting to new software, such as the Baan ERP
system, the Year 2000 problem will not pose significant
operational problems for the Company's information systems.
However, if such modifications and conversions are not timely or
not properly implemented, the Year 2000 problem could affect the
ability of the Company, among other things, to manufacture
product, procure and manage materials, and administer functions
and processes, which could have a material adverse effect on the
Company's business, financial condition and results of
operations. Additionally, failure of third party suppliers to
become Year 2000 compliant on a timely basis could create a need
for the Company to change suppliers and otherwise impair the
sourcing of components, raw materials or services to the Company,
or the functionality of such components or raw materials, any of
which could have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company's Year 2000 compliance efforts have
caused significant strain on the Company's information technology
resources and, as a result, could cause the deferral or
15
cancellation of other important Company projects. There can be
no assurance that the delay or cancellation of such projects will
not have a material adverse affect on the Company's business,
financial condition and results of operations. Also, see
Customer Concentration; Dependence on Certain Industries.
Competition
The electronics manufacturing services industry is intensely
competitive and subject to rapid change, and includes numerous
regional, national and international companies, a number of which
have achieved substantial market share. The Company believes that
the primary competitive factors in its targeted markets are
manufacturing technology, product quality, responsiveness and
flexibility, consistency of performance, range of services
provided, the location of facilities and price. To be
competitive, the Company must provide technologically advanced
manufacturing services, high quality products, flexible
production schedules and reliable delivery of finished products
on a timely and price competitive basis. Failure to satisfy any
of the foregoing requirements could materially and adversely
affect the Company's competitive position. The Company competes
directly with a number of EMS firms, including Celestica
International Holdings Inc., Flextronics International, Ltd.,
Jabil Circuits, Inc., SCI Systems, Inc., Sanmina Corporation, and
Solectron Corporation. The Company also faces indirect
competition from the captive manufacturing operations of its
current and prospective customers, which continually evaluate the
merits of manufacturing products internally rather than using the
services of EMS providers. Many of the Company's competitors have
more geographically diversified manufacturing facilities,
international procurement capabilities, research and development
and capital and marketing resources than the Company. In
addition, the Company may be at a competitive disadvantage
because some of the Company's competitors are less financially
leveraged, resulting in, among other things, greater operational
and financial flexibility for such competitors. See "Certain
Factors--High Level of Indebtedness; Ability to Service
Indebtedness and Satisfy Preferred Stock Dividend Requirements."
In recent years, the EMS industry has attracted new entrants,
including large OEMs with excess manufacturing capacity, and many
existing participants have substantially expanded their
manufacturing capacity by expanding their facilities through both
internal expansion and acquisitions. In the event of a decrease
in overall demand for EMS services, this increased capacity could
result in substantial pricing pressures, which could have a
material adverse effect on the Company's business, financial
condition and results of operations.
Capital Requirements
The Company believes that, in order to achieve its long-term
expansion objectives and maintain and enhance its competitive
position, it will need significant financial resources over the
next several years for capital expenditures, including
investments in manufacturing capabilities and management
information systems, working capital and debt service. The
Company has added significant manufacturing capacity and
increased capital expenditures since 1995. In April 1995, it
opened its Durham, North Carolina facility. In October 1996, it
opened its first international facility in Penang, Malaysia and
moved from its former Boise, Idaho facility to a new facility in
Nampa, Idaho. In November 1997, it purchased its first European
facility in Colfontaine, Belgium from Alcatel. The Company
anticipates that its capital expenditures will continue to
increase as the Company expands its facilities in Asia and
Europe, invests in necessary equipment to continue new product
production, and continues to invest in new technologies and
equipment to increase the performance and the cost efficiency of
its manufacturing operations. The precise amount and timing of
the Company's future funding needs cannot be determined at this
time and will depend upon a number of factors, including the
demand for the Company's services and the Company's management of
its working capital. The Company may not be able to obtain
additional financing on acceptable terms or at all. If the
Company is unable to obtain sufficient capital, it could be
required to reduce or delay its capital expenditures and
facilities expansion, which could materially adversely affect the
Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources."
International Operations
The Company currently offers EMS capabilities in North America,
Asia and Europe. Management believes that the percentage of the
Company's revenue derived from international sales will increase
in the future as international OEMs increasingly adopt the
outsourcing model as a manufacturing solution. In fiscal 1998,
net sales attributable to foreign operations totaled $24.5
million or 7.3% of total net sales. The Company may be affected
by economic and political conditions in each of the countries in
which it operates and certain other risks of doing business
abroad, including fluctuations in the value of currencies, import
duties, changes to import and export regulations (including
quotas), possible restrictions on the transfer of funds, employee
turnover, labor or civil unrest, long payment cycles, greater
difficulty in collecting accounts receivable, the burdens, cost
and risk of compliance with a variety of foreign laws, and, in
certain parts of the world, political and economic instability.
16
In addition, the attractiveness of the Company's services to its
United States customers is affected by United States trade
policies, such as "most favored nation" status and trade
preferences, which are reviewed periodically by the United States
government. Changes in policies by the United States or foreign
governments could result in, for example, increased duties,
higher taxation, currency conversion limitations, hostility
toward United States-owned operations, limitations on imports or
exports, or the expropriation of private enterprises, any of
which could have a material adverse effect on the Company's
business, financial condition or results of operations. The
Company's Belgian operations are subject to labor union
agreements covering managerial, supervisory and production
employees, which set standards for, among other things, the
maximum number of working hours and minimum compensation levels.
In addition, economic considerations may make it difficult for
the Company to compete effectively compared to other lower cost
European locations. The Company's Malaysian operations and
assets are subject to significant political, economic, legal and
other uncertainties customary for businesses located in Southeast
Asia.
The Company's international operations are based in Belgium
and Malaysia. The functional currencies of the Company's
international operations are the Belgian Franc and the Malaysian
Ringgit. The Company's financial performance may be adversely
impacted by changes in exchange rates between these currencies
and the U.S. dollar. Fixed assets for the Belgian and Malaysian
operations are denominated in each entity's functional currency
and translation gains or losses will occur as the exchange rate
between the local functional currency and the U.S. dollar
fluctuates on each balance sheet reporting date. The Company's
investments in fixed assets as of September 3, 1998 were $6.6
million (10.7% of total fixed assets) and $2.5 million (4.0% of
total fixed assets) in Belgium and Malaysia, respectively. The
Company's cumulative translation losses as of September 3, 1998,
were $0.0 million and $2.3 million for the Belgian and Malaysian
operations, respectively. The Company's investments in Belgium
and Malaysia are long-term in nature and, therefore, the
translations adjustments are shown as a separate component of
shareholders' equity and do not effect the Company's net income.
An additional risk is that certain working capital accounts such
as accounts receivable and accounts payable are denominated in
currencies other than the functional currency and may give rise
to exchange gains or losses upon settlement or at the end of any
financial reporting period. Sales in currencies other than the
functional currency were approximately 2.6% and 4.2% of
consolidated sales for the fiscal year ended September 3, 1998
for Belgium and Malaysia, respectively. The Company's transaction
gains for the fiscal year ended September 3, 1998 were $0.2
million and $0.0 million for the Belgian and Malaysian
operations, respectively. The exchange rate between the
Malaysian Ringgit and U.S. dollar has been extremely volatile
over the last year. In September 1998, the Malaysian government
imposed currency control measures which, among other things,
fixed the exchange rate between the United States dollar and the
Malaysian Ringgit. The Company attempts to minimize the impact of
exchange rate volatility by entering into U.S. dollar denominated
transactions whenever possible for purchases of raw materials and
capital equipment and by keeping minimal cash balances of foreign
currencies. Direct labor, manufacturing overhead, and selling,
general and administrative costs of the international operations
are also denominated in the local currencies. Transaction losses
are reflected in the Company's net income. As exchange rates
fluctuate, the Company will continue to experience translation
and transaction adjustments related to its investments in Belgium
and Malaysia which could have a material and adverse effect on
the Company's business, financial condition and results of
operations.
Dependence on Key Personnel
The Company's continued success depends to a large extent
upon the efforts and abilities of key managerial and technical
employees. The Company's business will also depend upon its
ability to continue to attract and retain qualified employees.
Although the Company has been successful in attracting and
retaining key managerial and technical employees to date, the
loss of services of certain key employees, in particular any of
its three executive officers, or the Company's failure to
continue to attract and retain other key managerial and technical
employees could have a material adverse effect on the Company's
business, financial condition and results of operations.
Environmental Regulations
The Company is subject to a variety of environmental laws
and regulations governing, among other things, air emissions,
waste water discharge, waste storage, treatment and disposal, and
remediation of releases of hazardous materials. While the Company
believes that it is currently in material compliance with all
such environmental requirements, any failure to comply with
present and future requirements could have a material adverse
effect on the Company's business, financial conditions and
results of operations. Such requirements could require the
Company to acquire costly equipment or to incur other significant
expenses to comply with environmental regulations. The imposition
of additional or more stringent environmental requirements, the
results of future testing at the Company's facilities, or a
determination that the Company is potentially responsible for
remediation at other sites where problems are not presently
known, could result in expenditures in excess of amounts
currently estimated to be required for such matters.
17
Concentration of Ownership
Upon consummation of the Recapitalization, Cornerstone and
certain other investors beneficially owned in the aggregate
approximately 90.0% of the outstanding capital stock (other than
the Redeemable Preferred Stock) of the Company. As a result,
although no single investor has more than 49.0% of the voting
power of the Company's outstanding securities or the ability to
appoint a majority of the directors, the aggregate votes of these
investors could determine the composition of a majority of the
board of directors and, therefore, influence the management and
policies of the Company.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the presentation of comprehensive
income in the financial statements. Comprehensive income
includes income and loss components which are otherwise recorded
directly to shareholders' equity under generally accepted
accounting principles. The adoption of SFAS No. 130 is effective
for the Company in fiscal 1999. As this Statement addresses
reporting and presentation issues only, there will be no impact
on earnings from its adoption.
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS
No. 131 requires publicly held companies to report financial and
other information about key revenue-producing segments of the
entity for which such information is available and is utilized by
the chief operating decision-maker. Specific information to be
reported for individual segments includes profit or loss, certain
revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the
financial statements is also to be provided. SFAS No. 131 is
effective for the Company in fiscal 1999 and the form of the
presentation in the Company's financial statements has not yet
been determined.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company has $145 million in fixed rate debt and $30
million in variable rate debt. The Company's Series B Floating
Interest Rate Subordinated Term Securities ("FIRSTS") due 2008
and Revolving Credit Facility are floating interest rate
borrowings and are subject to periodic adjustments. As interest
rates fluctuate the Company may experience interest expense
increases that may materially impact financial results. For
example, if interest rates were to increase or decrease by 1%
the result would be an annual increase or decrease of $300,000 to
interest expense, with respect to the FIRSTS, on the Company's
statement of operations.
The Company uses the U.S. dollar as its functional currency,
except for its operations in Belgium and Malaysia. The Company
has evaluated the potential costs and benefits of hedging
potential adverse changes in the exchange rates between U.S.
dollar, Belgian Franc and Malaysian Ringgit. Currently, the
Company does not enter into derivative financial instruments
because a substantial portion of the Company's sales in these
foreign operations are in U.S dollar. The assets and
liabilities of the these two operations are translated into U.S.
dollars at an exchange rates in effect at the period end date.
Income and expense items are translated at the year-to-date
average rate. Aggregate transaction gains or losses included in
net income have not been material.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Consolidated Financial Statements:
Report of Independent Accountants 20
Consolidated Balance Sheets as of August 28, 1997 and 22
September 3, 1998
Consolidated Statements of Operations for the Fiscal Years 23
Ended August 29, 1996, August 28, 1997 and September 3, 1998
Consolidated Statements of Shareholders' Equity for the Fiscal 24
Years Ended August 29, 1996, August 28, 1997 and
September 3, 1998
Consolidated Statements of Cash Flows for the Fiscal Years 27
Ended August 29, 1996, August 28, 1997 and September 3, 1998
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 40
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Fiscal 41
Years Ended August 19, 1996, August 28, 1997 and
September 3, 1998
19
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
MCMS, Inc.
We have audited the accompanying consolidated balance sheet
of MCMS, Inc. and subsidiaries as of September 3, 1998, and the
related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of MCMS, Inc. and subsidiaries as of September
3, 1998, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted
accounting principles.
KPMG Peat marwick LLP
Denver, Colorado
October 2, 1998
20
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholder and Board of Directors
Micron Custom Manufacturing Services, Inc.
We have audited the accompanying consolidated balance sheet
of Micron Custom Manufacturing Services, Inc. as of August 28,
1997, and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the two years in
the period ended August 28, 1997, which financial statements are
included in the accompanying index. We have also audited the
financial statement schedule listed in the accompanying index for
each of the two years in the period ended August 28, 1997. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Micron Custom Manufacturing
Services, Inc. as of August 28, 1997, and their consolidated
results of operations and cash flows for each of the two years in
the period ended August 28, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
Boise, Idaho
October 29, 1997
21
MCMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
August 28, September 3,
As of 1997 1998
- ------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 13,636 $ 7,542
Trade accounts receivable, net of allowances for doubtful accounts
of $881 and $97 33,715 34,231
Receivable from affiliates 4,247 2,096
Inventories 17,786 29,816
Deferred income taxes 1,600 1,255
Other current assets 63 356
-------- --------
Total current assets 71,047 75,296
Property, plant and equipment, net 53,484 62,106
Other assets 331 7,650
-------- --------
Total assets $124,862 $ 145,052
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current portion of long-term debt $ 1,049 $ 420
Accounts payable and accrued expenses 34,930 44,433
Payable to affiliates 5,978 775
Interest payable - 197
-------- --------
Total current liabilities 41,957 45,825
Notes payable, net of current portion - 184,737
Deferred income taxes 4,208 1,286
Other liabilities 506 580
-------- --------
Total liabilities 46,671 232,428
Redeemable preferred stock, no par value, 750,000 shares
authorized; 266,313 shares issued and outstanding; mandatory
redemption value of $26.6 million - 25,675
-------- --------
Commitments and contingencies - -
Common stock, par value $0.10 per share, authorized 100,000 shares;
1,000 issued and outstanding as of August 28, 1997 - -
Series A convertible preferred stock, par value $0.001 per share,
6,000,000 shares authorized; 3,261,177 shares issued and
outstanding as of September 3, 1998 aggregate liquidation
preference of $36,949,135 - 3
Series B convertible preferred stock, par value $0.001 per share,
6,000,000 shares authorized; 863,823 shares issued and outstanding
as of September 3, 1998, aggregate liquidation preference of
$9,787,115 - 1
Series C convertible preferred stock, par value $0.001 per share,
1,000,000 shares authorized; 874,999 shares issued and outstanding
as of September 3, 1998, aggregate liquidation preference of
$9,913,739 - 1
Class A common stock, par value $0.001 per share, 30,000,000 shares
authorized; 3,261,177 shares issued and outstanding as of
September 3, 1998 - 3
Class B common stock, par value $0.001 per share, 12,000,000
shares authorized; 863,823 shares issued and outstanding as of
September, 1998 - 1
Class C common stock, par value $0.001 per share, 2,000,000 shares
authorized; 874,999 shares issued and outstanding as of September
3, 1998 - 1
Additional paid-in capital 35,813 63,318
Foreign currency translation adjustment (630) (2,270)
Retained earnings (deficit) 43,008 (174,109)
-------- ---------
Total shareholders' equity (deficit) 78,191 (113,051)
-------- ---------
Total liabilities and shareholders' equity (deficit) $124,862 $ 145,052
======== =========
See accompanying notes to consolidated financial statements.
22
MCMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
August 29, August 28, September 3,
Fiscal year ended 1996 1997 1998
- -------------------------------------------------------------------------------------------
Net sales $ 374,116 $ 292,379 $ 333,920
Cost of goods sold 341,110 258,982 303,251
----------- ----------- -----------
Gross profit 33,006 33,397 30,669
Selling, general and administrative expenses 9,303 12,560 15,798
----------- ----------- -----------
Income from operations 23,703 20,837 14,871
Other expense (income):
Interest expense (income), net (482) (380) 9,212
Transaction expenses - - 8,398
----------- ----------- -----------
Income (loss) before taxes 24,185 21,217 (2,739)
Income tax provision (benefit) 9,190 8,465 (930)
----------- ----------- -----------
Net income (loss) $ 14,995 $ 12,752 $ (1,809)
=========== =========== ===========
Net income (loss) per share - basic and
diluted $ 14,995 $ 12,752 $ (1.36)
=========== =========== ===========
Weighted average common shares outstanding -
basic and diluted 1,000 1,000 2,534,183
=========== =========== ===========
See accompanying notes to consolidated financial statements.
23
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
PREFERRED STOCK
-----------------------------------------------------------------
SERIES A SERIES B SERIES C
($0.001 PAR) ($0.001 PAR) ($0.001 PAR)
-------------------------------- --------------------------------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- ------- -------- ---------
Balance as of August 31,
1995 - - - - - -
Tax effect of stock plans - - - - - -
Net income - -
-------- -------- -------- ------- -------- --------
Balance as of August 29,
1996 - - - - - -
Capital contribution - - - - - -
Net income - - - - - -
Translation loss - - - - - -
-------- -------- -------- ------- -------- --------
Balance as of August 28,
1997 - - - - - -
Capital contribution - - - - - -
Redemption of common stock
and recapitalization 500,000 $ 1 - - - -
Issuance of Series A and B
and C preferred stock 2,761,177 2 863,823 $ 1 874,999 $ 1
Issuance of Class A and B
and C common stock - - - - - -
Net income - - - - - -
Translation loss - - - - - -
Preferred stock dividends - - - - - -
-------- -------- -------- ------- -------- --------
Balance as of September 3,
1998 3,261,177 $ 3 863,823 $ 1 874,999 $ 1
========= ======= ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
24
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
COMMON STOCK
-------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
($0.001 PAR) ($0.001 PAR) ($0.001 PAR) ($0.001 PAR)
----------------- ------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------ ------- ------ ------- ------ ------- ------
Balance as of August 31,
1995 1,000 - - - - - - -
Tax effect of stock plans - - - - - - - -
Net income - - - - - - - -
------- ------ ------- ------ ------- ------ ------- ------
Balance as of August 29,
1996 1,000 - - - - - - -
Capital contribution - - - - - - - -
Net income - - - - - - - -
Translation loss - - - - - - - -
------- ------ ------- ------ ------- ------ ------- ------
Balance as of August 28,
1997 1,000 - - - - - - -
Capital contribution - - - - - - - -
Redemption of common stock
and recapitalization (1,000) - 500,000 $ 1 - - - -
Issuance of Series A and B
and C preferred stock - - - - - - - -
Issuance of Class A and B
and C common stock - - 2,761,177 2 863,823 $ 1 874,999 $ 1
Net income - - - - - - - -
Translation loss - - - - - - - -
Preferred stock dividends - - - - - - - -
------- ------ --------- ------ ------- ------ ------- ------
Balance as of September 3,
1998 - - 3,261,177 $ 3 863,823 $ 1 874,999 $ 1
======= ====== ========= ====== ======= ====== ======= ======
See accompanying notes to consolidated financial statements.
25
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
FOREIGN TOTAL
ADDITIONAL CURRENCY RETAINED SHAREHOLDERS'
PAID-IN TRANSLATION EARNINGS EQUITY
CAPITAL ADJUSTMENT (DEFICIT) (DEFICIT)
----------- ------------ ----------- -------------
Balance as of August 31,
1995 $ 35,232 - $ 15,261 $ 50,493
Tax effect of stock plans 393 - - 393
Net income - - 14,995 14,995
---------- --------- --------- -----------
Balance as of August 29,
1996 35,625 - 30,256 65,881
Capital contribution 188 - - 188
Net income - - 12,752 12,752
Translation loss - $ (630) - (630)
---------- --------- --------- -----------
Balance as of August 28,
1997 35,813 (630) 43,008 78,191
Capital contribution 1,786 - - 1,786
Redemption of common stock
and recapitalization (33,841) - (215,308) (249,147)
Issuance of Series A and B
and C preferred stock 50,996 - - 51,000
Issuance of Class A and B
and C common stock 10,196 - - 10,200
Net income (loss) - - (1,809) (1,809)
Translation loss - (1,640) - (1,640)
Preferred stock dividends (1,632) - - (1,632)
---------- --------- --------- -----------
Balance as of September 3,
1998 $ 63,318 $ (2,270) $(174,109) $ (113,051)
========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
26
MCMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
August 29, August 28, September 3,
Fiscal year ended 1996 1997 1998
________________________________________________________________________________________________________________________________
Net income (loss) $ 14,995 $ 12,752 $ (1,809)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 5,425 8,819 12,918
Gain on sale of property, plant and equipment 98 (72) (90)
Write-off of deferred loan costs - - 206
Changes in operating assets and liabilities:
Receivables, net 6,003 (5,498) 419
Inventories 279 3,881 (12,301)
Other assets 22 - (855)
Accounts payable and accrued expenses 7,356 (2,173) 5,372
Deferred income taxes (536) 2,886 (2,577)
Other liabilities (22) 128 80
--------- --------- -----------
Net cash provided by operating activities 33,620 20,723 1,363
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (31,229) (24,120) (20,111)
Proceeds from sales of property, plant and equipment 5,597 151 359
Other (11) - -
--------- --------- -----------
Net cash used by investing activities (25,643) (23,969) (19,752)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions - - 1,786
Repurchase of common stock and recapitalization - - (249,147)
Proceeds from issuance of common stock - - 10,200
Proceeds from issuance of convertible preferred stock - - 51,000
Proceeds from issuance of redeemable preferred stock - - 24,000
Proceeds from borrowings - 12,300 186,500
Repayments of debt (6,687) (11,487) (3,964)
Payment of deferred debt issuance costs - - (7,867)
Other - (221) -
--------- --------- -----------
Net cash provided by (used for) financing activities (6,687) 592 12,508
--------- --------- -----------
Effect of exchange rate changes on cash and cash equivalents - - (213)
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents 1,290 (2,654) (6,094)
Cash and cash equivalents at beginning of period 15,000 16,290 13,636
---------- ----------- -----------
Cash and cash equivalents at end of period $ 16,290 $ 13,636 $ 7,542
========== =========== ==========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 9,293 $ 9,962 $ 792
Interest paid, net of amounts capitalized 360 21 9,023
Noncash investing activities:
Foreign currency translation adjustment - 630 1,640
Contracts payable and notes payable incurred for capitalized software - - 1,659
See accompanying notes to consolidated financial statements.
27
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar amounts in thousands, except share and per share amounts)
Note 1. Significant Accounting Policies
Business: MCMS, Inc. (the "Company"), is an electronics
manufacturing services provider serving OEMs. The Company
provides product design and prototype manufacturing; materials
procurement and inventory management; the manufacture and testing
of PCBAs, memory modules and systems; quality assurance; and
end-order fulfillment. The Company markets and sells products and
manufacturing services primarily to original equipment
manufacturers in diverse electronic industries including
computers, peripherals, networking and telecommunications. The
Company operates two sites in the United States and one site in
Asia and acquired a site in Colfontaine, Belgium in November
1997.
On February 26, 1998 the Company completed a
Recapitalization. Prior to the closing of the Recapitalization,
the Company was a wholly owned subsidiary of MEI California, Inc.
("MEIC"), a wholly owned subsidiary of Micron Electronics, Inc.
("MEI"). Under the terms of the amended and restated
Recapitalization Agreement, certain unrelated investors (the
"Investors") acquired an equity interest in the Company. In order
to complete the Recapitalization, the Company arranged for
additional financing in the form of notes and redeemable
preferred stock totaling $200.0 million. The Company used the
proceeds from the Investors' equity investment and the issuance
of notes and redeemable preferred stock to redeem a portion of
MEIC's outstanding equity interest for approximately $249.2
million. Subsequent to the Recapitalization, MEIC holds a 10%
equity interest in the Company. In connection with the
Recapitalization, the Company's name was changed from Micron
Custom Manufacturing Services, Inc. to MCMS, Inc.
Basis of presentation: The financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
Company's fiscal year is the 52 or 53 week period ending on the
Thursday closest to August 31. As of September 3, 1998 the
Company was 10% owned by MEIC which is indirectly majority owned
by Micron Technology, Inc. ("MTI").
Use of estimates: The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements. Although,
actual results could differ from those estimates, management
believes its estimates are reasonable.
Revenue recognition: Revenue from product sales to
customers is generally recognized upon shipment. A provision for
estimated sales returns under warranty is recorded in the period
in which the sales are recognized.
Earnings per share: Basic earnings per share is computed
using the weighted average number of common shares outstanding.
Diluted earnings per share is computed using the weighted average
number of common and common stock equivalent shares outstanding.
Common equivalent shares result from the assumed exercise of
outstanding stock options and affect earnings per share when they
have a dilutive effect. For the fiscal year ended September 3,
1998, the inclusion of 3.3 million , 0.9 million and 0.9 million
common shares issuable upon conversion of the Series A, Series B
and Series C Preferred Convertible Stock are not included in the
calculation of diluted earnings per share because the effect
would be antidilutive.
Stock options: The Company has adopted the disclosure-only
provisions of SFAS 123, "Accounting for Stock-Based
Compensation." The Company continues to measure compensation
expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, "Accounting for
Stock Issued to Employees."
Cash Equivalents: The Company considers all highly liquid
debt instruments with original maturities of three months or less
to be cash equivalents.
Financial instruments: Prior to the Recapitalization, the
Company invested its excess cash in an investment pool
administered by MEI. The investment pool included highly liquid
short-term investments with original maturities of three months
or less and readily convertible to cash.
28
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
Since the Recapitalization, the Company has invested it
excess cash in overnight repurchase agreements consisting of
treasuries and government agency securities.
Financial instruments that potentially subject the Company
to concentration of credit risk consist principally of cash and
cash equivalents and trade accounts receivable. A concentration
of credit risk may exist with respect to trade receivables, as
many of the Company's customers are affiliated with the computer,
peripheral, networking and telecommunications industries. The
Company performs ongoing credit evaluations on its customers and
generally does not require collateral. Historically, the Company
has not experienced significant losses related to receivables
from individual customers or groups of customers in any
particular industry or geographic area.
The amounts reported as cash equivalents, receivables, other
assets and accounts payable and accrued expenses and debt are
considered by the Company to be reasonable approximations of
their fair values, based on market information available to
management as of September 3, 1998. The use of different market
assumptions and estimation methodologies could have a material
effect on the estimated fair value amounts. The reported fair
values do not take into consideration potential taxes or other
expenses that would be incurred in an actual settlement.
Inventories: Inventories are stated at the lower of average
cost or market.
Property, plant and equipment: Property, plant and
equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 5 to 30
years for buildings and 2 to 5 years for software and equipment.
Accounting for Long-lived Assets: The Company reviews
property and equipment for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of property and equipment
is measured by comparison of its carrying amount to future net
cash flows the property and equipment are expected to generate.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the property and equipment exceeds its fair market
value. To date, the Company has made no adjustments to the
carrying value of its long-lived assets.
Debt Issuance Costs: Costs incurred in connection with the
issuance of new debt instruments are deferred and included in
other assets. Such costs are amortized over the term of the
related debt obligation.
Income Taxes: The Company uses the asset and liability
method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
When necessary, a valuation allowance is recorded to reduce tax
assets to an amount whose realization is more likely than not.
Foreign currency translation: The functional currency of
the Company's international subsidiaries are the Malaysian
Ringgit and the Belgian Franc. Financial statements of the
international subsidiaries are translated into U.S. dollars for
consolidated financial reporting using the exchange rate in
effect at each balance sheet date for assets and liabilities. The
resulting translation adjustments are recorded as a separate
component of shareholders' equity and, accordingly, have no
effect on income. Revenues, expenses, gains and losses are
translated using a weighted average exchange rate for each
period. Transaction gains and losses are included in the
determination of consolidated net income. For the fiscal year
ended August 28, 1997 and September 3, 1998, the Company incurred
net transaction gains of $159,000 and $151,000, respectively.
There were no transaction gains or losses in 1996.
Recently issued accounting standards: In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statements
of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the
presentation of comprehensive income in the financial statements.
Comprehensive income includes income and loss components which
are otherwise recorded directly to shareholders' equity under
generally accepted accounting principles. The adoption of SFAS
No. 130 is effective for the Company in fiscal 1999. As this
SFAS addresses reporting and presentation issues only, there will
be no impact on earnings from its adoption.
29
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS
No. 131 requires publicly held companies to report financial and
other information about key revenue-producing segments of the
entity for which such information is available and is utilized by
the chief operating decision-maker. Specific information to be
reported for individual segments includes profit or loss, certain
revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the
financial statements is also to be provided. SFAS No. 131 is
effective for the Company in fiscal 1999 and the form of the
presentation in the Company's financial statements has not yet
been determined.
Note 2. Inventories
August 28, September 3,
1997 1998
---------- ------------
Raw materials ...................... $ 11,885 $ 18,126
Work in progress ................... 4,043 11,020
Finished goods ..................... 1,858 670
--------- ---------
$ 17,786 $ 29,816
========= =========
Note 3. Property, Plant and Equipment
August 28, September 3,
1997 1998
---------- ------------
Land ............................... $ 751 $ 1,320
Buildings .......................... 24,577 29,490
Equipment and software ............. 48,609 57,820
Construction in progress ........... 62 4,556
--------- ---------
73,999 93,186
Less accumulated depreciation
and amortization ................. (20,515) (31,080)
--------- ---------
$ 53,484 $ 62,106
========= =========
Note 4. Other Assets
August 28, September 3,
1997 1998
---------- ------------
Deferred financing costs ........... $ 215 $ 7,554
Equipment deposits ................. 50 -
Deferred patent costs .............. 66 96
--------- ---------
$ 331 $ 7,650
========= =========
Note 5. Accounts Payable and Accrued Expenses
August 28, September 3,
1997 1998
---------- ------------
Trade accounts payable ............. $ 29,248 $ 39,152
Short-term equipment contracts ..... 1,307 543
Salaries, wages, and benefits ...... 3,521 3,619
Other .............................. 854 1,119
--------- ---------
$ 34,930 $ 44,433
========= =========
30
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
Note 6. Debt
August 28, September 3,
1997 1998
------------ -------------
Revolving loan, monthly installments through May 3, 1998, interest rate
7.70% at August 28, 1997 ................................................................ $ 833 $ -
Revolving loan, maturities at the Company's option to February 26, 2003, interest due
quarterly, interest rates ranging from 8.38% to 10.75% (8.38% at September 3, 1998).... - 9,500
Note payable, matures on August 15, 1998, interest due at maturity,
Weighted average interest rate equal to interest earned on the Company's
Cash investments (5.84% and 5.24% at August 28, 1997 and
September 3, 1998, respectively) ....................................................... 216 212
Senior subordinated notes (the "Fixed Rate Notes"), unsecured, interest due
Semiannually, matures on March 1, 2008, interest rate of 9.75% .......................... - 145,000
Floating interest rate subordinated term securities, (the "Floating Rate
Notes"), unsecured, interest due semiannually, matures on March 1, 2008,
Variable interest rate equal to LIBOR plus 4.63% ( 10.22% at September 3, 1998)......... - 30,000
Note payable, quarterly installments through October 1, 2000,
Interest rate of 3.51% .................................................................. - 445
----------- -----------
Total debt ................................................................................ 1,049 185,157
Less current portion ...................................................................... (1,049) (420)
----------- -----------
$ - $ 184,737
=========== ===========
Maturities of debt as of September 3, 1998 are as
follows:
Fiscal year
------------
1999 ......................... $ 420
2000 ......................... 189
2001 ......................... 48
2002 ......................... -
2003 and thereafter .......... 184,500
--------
$185,157
========
The Fixed Rate Notes are redeemable at the
Company's option, in whole any time or in part from time to time,
on and after March 1, 2003, upon not less than 30 nor more than
60 days notice. The redemption rate, if redeemed during the
twelve month period commencing on March 1, dec reases from
104.875% in 2003 to 100.000% in 2006 and thereafter (expressed as
percentages of the principal amount thereof). At any time, or
from time to time, on or prior to March 1, 2001, the Company may
use the net cash proceeds of one or more Public Equity Offerings
to redeem the Fixed Rate Notes at a redemption price equal to
109.750% of the principal amount thereof if certain restrictions
regarding principal amount and additional fixed rate notes are
met.
The Floating Rate Notes are redeemable, at the Company's
option, in whole at any time or in part from time to time, upon
not less than 30 nor more than 60 days notice. The redemption
price, if redeemed during the twelve month period commencing on
March 1, decreases from 105% in 1998 to 100% in 2003 and
thereafter (expressed as percentages of the principal amount
thereof).
Among other restrictions, the Notes described above contain
covenants relating to limitation on incurrence of additional
indebtedness, limitation on restricted payments, limitation on
asset sales and limitation on dividends.
On February 26, 1998, the Company entered into a $40,000,000
Revolving Credit Facility (the "Revolving Facility") with various
lending institutions. Amounts outstanding bear interest at the
lesser of the applicable Eurodollar Rate plus 2.75% or the Base
Rate plus 1.75%, as defined in the Revolving Facility (8.38% as
of September 3, 1998). The Company is required to pay a
commitment fee of 0.5% per annum based upon the average unused
portion. Borrowings under the Revolving Facility accrue interest
at rates adjusted periodically depending on the Company's
financial performance as measured each fiscal quarter and
31
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
market interest rates. As of September 3, 1998, $9,500,000 was
outstanding under the Revolving Facility. The Revolving Facility
matures on February 26, 2003 and contains various covenants
including minimum levels of EBITDA, minimum interest coverage,
maximum leverage ratios, restrictions on capital expenditures and
additional indebtedness as well as restrictions on payment of
dividends. The Revolving Facility contains customary events of
default. In the event any default or breach of covenant under the
Revolving Facility occurs, the default could result in events of
default for the Notes and Redeemable Preferred Stock.
On April 15, 1997, the Company entered into a Revolving Loan
Agreement (the "Agreement") with a financial institution that
provides for borrowings up to $15,000,000. Under the terms of the
Agreement, the amount available to borrow decreases by $1,000,000
annually. The interest rate on the borrowed funds is based on the
30 day commercial paper rate plus 2.15% (7.70% as of August 28,
1997). The Agreement expires in May 2007 and borrowings are
collaterized by the Company's real property located in Nampa,
Idaho. Under the Agreement, the Company is subject to certain
financial ratios and covenants including limitations on the
amount of dividends. As of August 28, 1997, $833,000 was
outstanding under the Agreement. In conjunction with the
Recapitalization Agreement the then outstanding balance of
$333,000 was paid off and the Agreement was cancelled on
February 26, 1998.
On March 17, 1997, the Company entered into an unsecured
Revolving Credit Facility with MEI that provides for borrowings
up to $20,000,000, based upon the Company's net worth. As of
August 28, 1997 the Company was eligible to borrow up to
$17,000,000 pursuant to the agreement but had no borrowings
outstanding. The interest rate on borrowed funds is based upon
the 90 day LIBOR rate plus 1.00%. In conjunction with the
Recapitalization Agreement the above agreement was cancelled on
February 26, 1998.
Interest income is net of $233,000 and $65,000, of interest
expense in fiscal years ended August 29, 1996 and August 28,
1997, respectively. Interest expense is net of interest income of
$549,000 in the fiscal year ended September 3, 1998.
Construction period interest of $18,000, $228,000, and $34,000
was capitalized in fiscal years ended August 29, 1996,
August 28, 1997 and September 3, 1998, respectively.
Note 7. Redeemable Preferred Stock
The Redeemable Preferred Stock is redeemable at the
Company's option, in whole or in part, at any time on or after
March 1, 2003. The redemption rate, if redeemed during the twelve
month period commencing on March 1, decreases from 106.25% in
2003 to 100.00% in 2006 and thereafter (expressed in percentages
of the liquidation preference thereof). At any time, or from time
to time, prior to March 1, 2001, the Company may use the net cash
proceeds of one or more Public Equity Offerings to redeem the
preferred stock at a redemption price of 112.50% of the then
effective liquidation preference thereof plus, without
duplication, an amount equal to all accumulated and unpaid
dividends to the redemption date including an amount equal to the
prorated dividend for the period from the dividend payment date
immediately prior to the redemption date to the redemption date.
The Redeemable Preferred Stock will be subject to mandatory
redemption in whole on March 1, 2010 at a price equal to 100% of
the liquidation preference thereof plus all accumulated and
unpaid dividends to the date of redemption. The Redeemable
Preferred Stock is recorded at its liquidation preference
discounted for issuance costs of $1,000,000. The preferred stock
discount is being accreted by charging additional paid-in capital
over the twelve-year term of the Redeemable Preferred Stock.
The Redeemable Preferred Stock, subject to certain
restrictions, is exchangeable for the Exchange Debentures at the
option of the Company on any dividend payment date on or after
the issue date. The Redeemable Preferred Stock has liquidation
preferences over Common Stock and has a liquidation value of $100
per share plus cumulative unpaid dividends thereon. Redeemable
Preferred Stockholders are entitled to a cumulative 12 1/2%
annual dividend based upon the liquidation preference per share
of Redeemable Preferred Stock, payable quarterly. On June 1,
1998 and September 1, 1998, the Company elected to pay such
dividends in kind.
Accrued dividends on the Redeemable Preferred Stock are
payable upon certain defined events which include: any voluntary
or involuntary liquidation, dissolution or winding up of the
Company. At the Company's option, dividends may be paid either
in cash or by the issuance of additional shares
32
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
of Redeemable Preferred Stock with a liquidation preference equal
to the amount of such dividends through March 1, 2003,
thereafter, dividends will be payable in cash. All dividends are
cumulative, whether or not earned or declared, on a daily basis
from February 26, 1998 and compound on a quarterly basis.
Dividends on the Redeemable Preferred Stock are accrued monthly
to the liquidation preference amount by charges to additional
paid-in capital for dividends expected to be paid by issuing
additional shares of Redeemable Preferred Stock. The holders
of Redeemable Preferred Stock are not entitled to vote on any
matter required or permitted to be voted upon by the shareholders
of the Company.
Note 8. Shareholders' Equity
Each share of Series A, Series B, and Series C preferred
stock (hereinafter called the "Convertible Preferred Stock") is
convertible into one share of Class A, Class B and Class C common
stock (hereinafter called the "Common Stock"), respectively.
Holders of Series A preferred stock and Class A common stock are
entitled to one vote per share. Holders of Series B preferred
stock and Class B common stock do not have any voting rights.
Holders of Series C preferred stock and Class C common stock
are entitled to two votes per share. The holders of all voting
series of Convertible Preferred Stock and classes of Common Stock
will vote as a single class on all matters.
Holders of Convertible Preferred Stock will be paid
dividends, when and if declared by the Company, on each share of
Convertible Preferred Stock on the liquidation value per share
plus all declared and unpaid dividends. Such dividends shall not
be cumulative. Holders of Convertible Preferred Stock will
participate together with the shares of Common Stock as if such
shares of Convertible Preferred Stock had been converted into
shares of Common Stock in all dividends paid with respect to the
Common Stock.
Upon any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Convertible Preferred
Stock will be entitled to be paid, out of the assets of the
Company available for distribution to shareholders after payment
of amounts owed with respect to any stock senior to the
Convertible Preferred Stock (including the Redeemable Preferred
Stock), the liquidation preference per share of Convertible
Preferred Stock, plus, without duplication, an amount in cash
equal to all declared and unpaid dividends thereon before any
distribution is made on the Common Stock. The aggregate
liquidation preference of the Convertible Preferred Stock is
approximately $56.7 million.
Note 9. Transaction Expenses
Transaction expenses associated with the Recapitalization
Agreement are comprised of the following items:
Transaction agreement fee ............... $2,710
Bank fees .............................. 2,150
Termination agreements .................. 1,400
MEI/MTI stock option buyback ............ 698
Other ................................... 1,440
------
$8,398
======
Note 10. Stock Purchase and Incentive Plans
MEI's 1995 Stock Option Plan provided for the granting of
incentive and nonstatutory stock options to eligible employees of
both MEI and the Company. As of August 28, 1997, there were
5,000,000 shares of MEI's common stock reserved for issuance
under the plan. MEI's Board of Directors had approved reserving
an additional 5,000,000 shares of common stock for the plan,
subject to shareholder approval. Exercise prices of the incentive
and nonstatutory stock options had generally been 100% and 85%,
respectively, of the fair market value of MEI's stock on the date
of grant. Options were granted subject to terms and conditions
determined by MEI's Board of Directors, and generally were
exercisable in increments of 20% for each year of employment
beginning one year from date of grant and generally expire six
years from date of grant.
MEI's 1995 Employee Stock Purchase Plan allowed eligible
employees of both MEI and the Company to purchase shares of MEI
common stock through payroll deductions. The shares could be
33
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
purchased for 85% of the lower of the beginning or ending fair
market value of each six month offering period and were
restricted from resale for a period of one year from the date of
purchase. Purchases were limited to 20% of an employee's eligible
compensation. A total of 2,500,000 shares of MEI common stock were
reserved for issuance under the plan, of which approximately
271,000 shares had been issued to employees of both MEI and the
Company as of August 28, 1997.
As a result of the Recapitalization Agreement, employees of
the Company no longer participate in the MEI stock option plan.
In accordance with the MEI option plan, employees had 30 days
from the date of Recapitalization to exercise any vested options.
The Company elected to pay employees who maintained continuous
employment with the Company for six months after the
Recapitalization date $2.00 per option for any options not
exercised 30 days subsequent to the Recapitalization in return
for cancellation of those options. In September 1998, the
Company paid $471,000 related to the cancellation of these
options.
Option activity for the Company's portion of MEI's option
plan is summarized as follows:
Weighted Weighted
August 29, Average August 28, Average
Fiscal year ended 1996 Price 1997 Price
- ----------------- ---------- -------- ---------- --------
Outstanding at beginning of year.. 126,000 $18.71 379,000 $14.14
Granted .......................... 259,000 11.97 316,000 20.60
Exercised ........................ - -- (8,000) 14.36
Terminated or canceled ........... (6,000) 16.21 (20,000) 18.18
---------- ----------
Outstanding at end of year ...... 379,000 $14.14 667,000 $17.08
========== ====== ========== ======
Exercisable at the end of year ... 25,000 $18.71 90,000 $15.22
========== ====== ========== ======
Options available for future
Grants to employees of both
MEI and the Company ........... 3,141,000 1,416,000
========= ==========
The fair value of options at date of grant was estimated
using the Black-Scholes options pricing model. The assumptions
and resulting fair values at date of grant for options granted
during the fiscal years ended August 29, 1996 and August 28, 1997
follow:
Employee Stock
Stock Option Plan Shares Purchase Plan Shares
__________________________ _________________________
Fiscal year ended August 29, August 28, August 29, August 28,
1996 1997 1996 1997
---------- ---------- ---------- ----------
Assumptions:
Expected life ......................... 3.5 years 3.5 years 0.5 years 0.5 years
Risk-free interest rate................ 5.9% 6.2% 5.1% 5.0%
Expected volatility ................... 70.0% 70.0% 70.0% 70.0%
Dividend yield ........................ 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market price .. $6.33 $11.00 --- ---
Exercise price less than market price.. 6.50 11.78 $3.67 $5.37
In order to provide financial incentives for certain of the
Company's or its subsidiaries' senior executives and other
employees, the Company's board of directors has adopted the 1998
Stock Option Plan (the "Option Plan") pursuant to which it will
be able to grant options to purchase Class A Common to senior
executives and other employees of the Company and its
subsidiaries. Under the Plan, the Company will also be able to
grant options to purchase Class A Common to the Company's
Consultants. The Plan provides for option grants representing
2,500,000 shares of Common Stock. Under each option grant
contemplated under the Plan for certain executive officers, 50%
of the options will vest over four years from the date of grant
and the other 50% will vest if certain financial performance
targets are met (or at the end of seven years if such targets are
not met and if the grantee has remained continuously employed
with the Company). Under each option grant for other key
employees, all options will vest over four years from the date of
grant. As of
34
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
September 3, 1998, the Company's had 1,060,000 options
outstanding under the Plan. Upon an employee's termination with
the Company, all of the employee's unvested options will expire,
the exercise period of all the employee's vested options will be
reduced to a period ending no later than 30 days after such
employee's termination, and if such termination occurs prior to
an initial public offering of the Company's Class A Common, the
Company shall have the right to repurchase the Class A Common of
the Company held by the employee.
The following table summarizes information about the MCMS
stock options activity under the Option Plan as of September 3,
1998.
Options Outstanding
_______________________________________________________________________
Fiscal year ended Weighted
- ----------------- September 3, Average
1998 Price
------------ ---------
Outstanding at February 26, 1998 ..... - -
Granted .............................. 1,240,000 $2.27
Exercised ............................ - -
Terminated or canceled ............... (180,000) 2.27
----------
Outstanding at end of year .......... 1,060,000 $2.27
========== ======
Exercisable at the end of year ....... -
==========
Options available for future
Grants to employees of the Company.. 1,440,000
==========
The fair value of options outstanding at date of grant was
estimated using the Black-Scholes options pricing model. The
weighted average remaining life of the outstanding options was
4.2 years and all outstanding options have an exercise price of
$2.27 per share. The assumptions and resulting fair values at
date of grant for options granted during the fiscal years ended
September 3, 1998 follow:
Fiscal year ended September 3,
- ----------------- 1998
Assumptions:
Expected life ......................... 4.5 years
Risk-free interest rate................ 6.20%
Expected volatility ................... 0.0%
Dividend yield ........................ 0.0%
Weighted average fair values:
Exercise price equal to market price .. $0.50
Stock based compensation costs would have reduced pretax
income by $326,000, $1,399,000, and $85,000 in fiscal 1996, 1997
and 1998, respectively ($202,000, $841,000 and $52,000,
respectively, net of taxes), and pro forma net income (loss) per
share would have been $14,793, $11,911 and ($1.39) in fiscal
1996, 1997 and 1998, respectively, if the fair values of all
options granted to the Company's employees had been recognized as
a compensation expense on a straight-line basis over the vesting
period of the grants. The pro forma effect on net income for the
fiscal years ended August 29, 1996 and August 28, 1997 is not
representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants prior to the fiscal year
ended August 29, 1996. In addition, the pro forma effect on net
income for the fiscal year ended September 3, 1998 does not
include option grants in prior years due to their termination.
35
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
Note 11. Employee Savings Plan
Prior to the Recapitalization, MEI had a 401(k)
profit-sharing plan (the "RAM Plan") in which eligible employees
of the Company could participate. Under the RAM Plan, which was
administered by MTI, employees could contribute from 2% to 16% of
eligible pay to various savings alternatives. The RAM Plan
provided for an annual match by the Company of the first $1,500
of eligible employee contributions, and for additional
contributions by the Company based upon MEI's financial
performance. In connection with the Recapitalization Agreement
the RAM plan was modified to become a multi-employer plan and
employees of the Company continued to participate in the RAM plan
until July 1, 1998.
On July 1, 1998 the Company established a new 401(k)
profit-sharing plan (the "401k Plan") and the account balances
for all eligible employees were transferred to this plan. Under
the 401k Plan, employees may contribute from 2% to 16% of
eligible pay to various savings alternatives. The 401k Plan
provides for an annual match by the Company of the first $1,500
of eligible employee contributions, and for additional
contributions by the Company based upon the Company's financial
performance. The Company's expense pursuant to these plans was
approximately $744,000, $621,000, and $1,333,000 in the fiscal
years ended August 29, 1996, August 28, 1997 and September 3,
1998, respectively.
Note 12. Transactions with Affiliates
Transactions with MEI and MTI are as follows:
Fiscal Year Ended
_________________________________________
August 29, August 28, September 3,
1996 1997 1998
---------- ---------- ------------
Net sales ................................... $42,003 $25,864 $27,454
Inventory purchases ......................... 66,568 28,076 8,518
Administrative services expenses ............ 1,181 1,938 1,432
Property, plant and equipment purchases ..... 543 1,493 972
Property, plant and equipment sales ......... 69 886 264
Construction management services ............ 437 118 -
Rental income ............................... - 400 357
As part of the Recapitalization Agreement, the Company
entered into a Transition Service Agreement with both MEI and
MTI. Pursuant to the Transition Services Agreement, MTI and MEI
agreed to provide a variety of services (including payroll,
financial accounting and benefits, among others) for a period of
six months after February 26, 1998, except that MTI agreed to
provide the Company with services in connection with certain
proprietary MTI software for a period of 12 months. As of
September 3, 1998, substantially all services under this
agreement have been terminated although the Company still has the
right to request certain services as necessary through February
1999.
An income tax payable to an affiliate of $2,557,000 at
August 29, 1996 is included in accounts payable and accrued
expenses.
Note 13. Commitments
As of September 3, 1998, the Company had commitments of
$3,888,000 for equipment purchases.
The Company's facilities in North Carolina and Malaysia, and
certain other property and equipment, are leased under operating
lease agreements with non-cancelable terms expiring through 2003,
with renewals thereafter at the option of the Company. Future
minimum lease payments total approximately $2,580,000 and are as
follows: $1,065,000 in fiscal 1999, $762,000 in fiscal 2000,
$503,000 in fiscal 2001, $130,000 in fiscal 2002 and $120,000 in
fiscal 2003.
Rental expense was approximately $661,000, $667,000, and
$863,000 in the fiscal years ended August 29, 1996, August 28,
1997, and September 3, 1998, respectively.
36
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
Note 14. Income Taxes
Prior to the Recapitalization, the Company was included in
the consolidated U.S. federal income tax return of its parent.
The provision (benefit) for income taxes is computed as if the
Company were a separate taxpayer. Subsequent to the
Recapitalization, the Company became a separate taxable
corporation. Components of income tax expense are:
Fiscal Year Ended
________________________________________
August 29, August 28, September 3,
1996 1997 1998
---------- ---------- ------------
Current:
U.S. federal ................... $8,236 $4,357 $ 2,109
State .......................... 1,490 1,222 (460)
------- ------- --------
9,726 5,579 1,648
------- ------- --------
Deferred:
U.S. federal ................... (312) 2,703 (2,469)
State .......................... (224) 183 (109)
------- ------- --------
(536) 2,886 (2,578)
------- ------- --------
Income tax provision (benefit) .. $9,190 $8,465 $ (930)
======= ======= ========
The current portion of the income tax provision reflects the
agreed upon determination of income taxes owed to the Company's
parent for the period ended February 26, 1998 during which the
Company was a member of the parent's consolidated group,
calculated as described above.
The tax benefit associated with nonstatutory stock options
and disqualifying dispositions by employees of shares issued
under MTI's Plans reduced taxes payable by $393,000, $0 and $0
in fiscal years ended August 29, 1996, August 28, 1997 and
September 3, 1998, respectively. Such benefits were credited to
capital. Income taxes paid to the Parent during the fiscal years
ended August 29, 1996, August 28, 1997 and September 3, 1998 were
$9,293,000, $9,530,000 and $756,000, respectively.
A reconciliation between the income tax provision and income
tax computed using the federal statutory rate follows:
Fiscal Year Ended
________________________________________
August 29, August 28, September 3,
1996 1997 1998
---------- ---------- ------------
U.S. federal income tax at statutory rate ...... $8,465 $7,426 $ (959)
State taxes, net of federal benefit ............ 934 733 (53)
Nondeductible transaction costs ................ - - 1,791
Rate adjustment - foreign operations ........... - - (435)
Other .......................................... (209) 306 (1,274)
-------- ------- ---------
$9,190 $8,465 $ (930)
======== ======= =========
As a part of the Recapitalization, the Company revised its
estimated accrual for prior period's tax matters and recorded a
decrease in such estimated accrued taxes of $1,208,000. This
adjustment is reflected in the reconciliation shown above under
Other.
37
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Tabular dollar amounts in thousands, except share and per share amounts)
Deferred income taxes reflect the estimated future tax
effect of temporary differences between the amounts of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Deferred income tax assets
totaled $2,653,000 and $5,863,000, and liabilities totaled
$5,261,000 and $5,894,000, at August 28, 1997 and September 3,
1998. The components of deferred tax assets (liabilities) are
as follows:
August 28, September 3,
As of 1997 1998
---------- ------------
Current deferred tax asset:
Allowance on receivables ...................... $ 404 $ 30
Inventory reserves and allowances ............. 800 647
State taxes ................................... 80 -
Accrued compensation .......................... 324 373
Other ......................................... (8) 205
-------- --------
1,600 1,255
-------- --------
Noncurrent deferred tax liability:
Property, plant and equipment ................ (2,920) (4,354)
Net Operating Loss Carryover .................. - 3,794
Accrued compensation .......................... 194 260
Investment tax credits ........................ 243 103
Other ......................................... (1,725) (1,089)
-------- --------
(4,208) (1,286)
-------- --------
Total net deferred tax liability ............... $(2,608) $ (31)
======== ========
The Company intends to reinvest the unremitted earnings of
its non-U.S. subsidiaries and postpone their remittance
indefinitely. Accordingly, no provision for U.S. income taxes
was required on such earnings during the three years ended
September 3, 1998. The cumulative amount of undistributed
earnings of foreign subsidiaries as of September 3, 1998 is
approximately $1,207,000.
As of September 3, 1998, the Company has foreign tax
credit, Idaho investment tax credit and U.S. net operating loss
carryovers of approximately $29,000, $159,000 and $9,720,000,
respectively. The foreign tax credit, Idaho investment tax
credit and U.S. net operating loss carryovers are available to
offset regular taxable income through the years 2003, 2005 and
2018, respectively. Management believes that it is more likely
than not that the Company will generate sufficient taxable income
to ensure realization of these tax benefits.
Note 15. Concentration
The Company operates in one industry segment, electronic
manufacturing services, and has presence in three geographic
regions, North America, Asia and Europe. Sales shipped to
customers outside of the U.S. totaled approximately $54.2
million, $20.8 million and $43.4 million or approximately 15%, 7%
and 13% of total net sales, in fiscal 1996, 1997 and 1998,
respectively. In fiscal 1996, three of the Company's largest
customers comprised more than 10% of the Company's net sales and
accounted for 29.5%, 13.4% and 12.9% of net sales. During fiscal
1997 and 1998, the Company had two customers, which comprised
more than 10% of the Company's net sales. The Company's two
largest customers represented 32.4% and 20.1%, respectively, of
the Company's net sales in fiscal 1997, and 39.2% and 24.1%,
respectively, of the Company's net sales in fiscal 1998.
38
Note 16. Unaudited Quarterly Financial Information
(In thousands except per share amounts)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
________________________________ ________ ________ _________ _________
Net sales $ 71,001 $ 74,680 $ 88,565 $ 99,674
Cost of goods sold 60,909 67,182 82,689 92,471
--------- --------- --------- ---------
Gross profit 10,092 7,498 5,876 7,203
Selling, general and
administrative expenses 3,122 3,805 4,405 4,466
--------- --------- --------- ---------
Income from operations 6,970 3,693 1,471 2,737
Other expense (income):
Interest expense (income),net (135) (194) 4,418 5,123
Transaction expense - 8,312 142 (56)
--------- --------- --------- ---------
Income (loss) before taxes 7,105 (4,425) (3,089) (2,330)
Income tax provision (benefit) 2,629 (562) (1,052) (1,945)
--------- --------- --------- ---------
Net income $ 4,476 $ (3,863) $ (2,037) $ (385)
========= ========= ========= =========
Net income (loss) per share -
basic and diluted $ 4,476 $ (3,863) $ (0.57) $ (0.24)
========= ========= ========= =========
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
________________________________ ________ ________ _________ __________
Net sales $ 51,980 $ 72,137 $ 83,837 $ 84,425
Cost of goods sold 45,401 62,735 76,425 74,421
--------- --------- --------- ---------
Gross profit 6,579 9,402 7,412 10,004
Selling, general and
Administrative expenses 2,577 3,364 3,334 3,285
--------- --------- --------- ---------
Income from operations 4,002 6,038 4,078 6,719
Other expense (income):
Interest expense (income),net (169) ( 91) 2 (122)
--------- --------- --------- ---------
Income before taxes 4,171 6,129 4,076 6,841
Income tax provision 1,702 2,541 1,712 2,510
--------- --------- --------- ---------
Net income $ 2,469 $ 3,588 $ 2,364 $ 4,331
========= ========= ========= =========
Net income (loss) per share -
basic and diluted $ 2,469 $ 3,588 $ 2,364 $ 4,331
========= ========= ========= =========
39
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
MCMS, Inc.
Under date of October 2, 1998, we reported on the
consolidated balance sheet of MCMS, Inc. and subsidiaries as of
September 3, 1998, and the related statements of operations,
shareholders' equity and cash flows for the year then ended,
which are included in the Company's Annual Report on Form 10-K
for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also
audited the related accompanying consolidated financial statement
schedule for the year ended September 3, 1998. This financial
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial
statement schedule based upon our audit.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Denver, Colorado
October 2, 1998
40
Schedule II
MCMS. Inc
Valuation and Qualifying Accounts
(in thousands)
Balance at Balance at
Beginning of End of
Description Period Additions(a) Deductions(b> Period
________________________________________________________________________________________________
Allowance for trade receivables
Year ended August 29, 1996 $755 $ 227 $ (8) $974
Year ended August 28, 1997 974 (93) - 881
Year ended September 3, 1998 881 (766) (18) 97
- --------------------------------
Notes:
(a) Amounts charged to expense.
(b) Bad debt write-offs and charges to allowances.
41
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In connection with the Recapitalization, the Company
replaced Coopers & Lybrand L.L.P. ("Coopers & Lybrand") with KPMG
Peat Marwick LLP as its independent public accountants. The
decision to change accountants was approved by the Company's
board of directors. Coopers & Lybrand's report on the Company's
consolidated financial statements for the fiscal years ended
August 29, 1996 and August 28, 1997 did not contain an adverse
opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended August 29, 1996 and August 28,
1997, the Company had no disagreements with Coopers & Lybrand on
any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Coopers &
Lybrand, would have caused Coopers & Lybrand to make reference to
the subject matter of the disagreements in its report.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth the names, ages and a brief
account of each person who is a director or executive officer of
the Company as of September 3, 1998:
Name Age Position
------- ----- ------------------
Robert F. Subia ..... 36 President, Chief Executive Officer and Director
Chris J. Anton ...... 36 Vice President, Finance and Chief Financial Officer
Jess Asla ........... 36 Vice President, Operations
R. Stephen Cheheyl... 52 Director
Finis F. Conner ..... 55 Director
John A. Downer ...... 40 Director
C. Nicholas Keating.. 56 Director
Michael E. Najjar ... 31 Director
Mark Rossi .......... 42 Director
____________________________________________________________________________________
Robert F. Subia joined MTI in 1986 in the Production Control
department. He served as a Regional Sales Manager for MTI from
1989 until February 1993. In February 1993, Mr. Subia joined MCMS
as Director of Sales and held this position until August 1994,
when he was appointed Vice President, Sales. In April 1995,
Mr. Subia was appointed Chairman of the Board of Directors,
President and Chief Executive Officer of MCMS. Mr. Subia served
as a member of the Board of Directors of MEI from October 1995
until February 1998. Mr. Subia holds a Bachelor of Science in
Business Administration with an emphasis in Marketing from Boise
State University.
Chris J. Anton joined MCMS in July 1996 from Futura Corporation
where he was Chief Financial Officer and now serves as Vice
President, Finance and Chief Financial Officer of the Company.
Prior to joining MCMS, Mr. Anton also held the positions of
President and General Manager of Image National, Inc., and Vice
President of Engineering and New Product Development at Morrison
Knudsen Corporation. Mr. Anton's background also includes five
years of industry experience in financial and technical positions
with Hewlett Packard Company and MTI. Mr. Anton received a
Bachelor of Science degree in Chemistry from the University of
Idaho and an M.B.A. from the Columbia University School of
Business.
Jess Asla joined MTI in June 1984 in the Quality Assurance
Department. He worked as a Process Engineer for MTI in the clean
room assembly area for two years. He later served as the Process
Engineer Manager for MTI's Memory Applications Group from 1988
until July 1994 when he was named Director of Engineering for
MCMS. In April 1995, Mr. Asla was appointed Vice President,
Operations and a member of the Board of Directors of MCMS. Mr.
Asla served as a member of the Board of Directors of MCMS until
February 1998. Mr. Asla holds a Bachelor of Mechanical
Engineering from the University of Notre Dame.
R. Stephen Cheheyl became a Director of the Company in connection
with the Recapitalization. Mr. Cheheyl served until December 1995
as an Executive Vice President, Business Operations of Bay
Networks, Inc. ("Bay Networks"), when Bay Networks was formed
through the merger of Wellfleet Communications, Inc.
("Wellfleet") and Synoptics Communications, Inc. From December
1990 to October 1994, Mr. Cheheyl served as Senior Vice President
of Finance and Administration of Wellfleet. He also serves as a
director of Auspex Systems, Inc., Infinium Software, Inc. and
Sapient Corporation. Mr. Cheheyl received an A.B. from Dartmouth
College and an M.B.A. from Northwestern University.
42
Finis F. Conner became a Director of the Company in connection
with the Recapitalization. Until 1996, Mr. Conner was Chairman of
the Board and Chief Executive Officer of Conner Peripherals, Inc.
which he founded in 1986. A leading manufacturer of 3 1/2"
Winchester disk drives used in personal computers, Conner
Peripherals was merged with Seagate Technology, Inc. ("Seagate")
in February 1996. Mr. Conner was a co-founder of Seagate, and
served as its Vice-Chairman from 1979 to 1985. Mr. Conner has
been Chairman of the Board of Golf Media, Inc., a company engaged
in the design of Internet web sites for the promotion of golf
products, and, since February 1996, Mr. Conner has been a
principal of the Conner Group, an independent consulting
organization. Mr. Conner is also a director of BoxHill Systems
Corporation and Adams Golf, LTD. Mr. Connor received a B.S in
Business Management from San Jose State University.
John A. Downer became a Director of the Company in connection
with the Recapitalization. Since December 1996, Mr. Downer has
served as a Managing Director of Cornerstone. From 1989 to
December 1996, Mr. Downer was a partner of various venture
capital funds managed by Prudential Equity Investors, Inc.
("Prudential"). Mr. Downer is also a director of StorMedia
Incorporated and International Manufacturing Services, Inc.
Mr. Downer received an A.B., M.B.A. and J.D. from Harvard
University.
C. Nicholas Keating became a Director of the Company in
connection with the Recapitalization. Mr. Keating has been an
independent business advisor since 1993 to a number of companies
principally in the networking, software, semiconductor and
imaging industries. From 1987 to 1993, Mr. Keating was Vice
President of Network Equipment Technologies, a wide-area
networking company. Mr. Keating currently serves on the Boards of
Directors of E-Net Corporation, an enterprise software supplier
to the financial services industry, and LIC Energy, a European
simulation systems company serving the oil and gas transmission
market. Mr. Keating holds a B.A. and an M.A. from American
University and was a former Fulbright Scholar.
Michael E. Najjar became a Director of the Company in connection
with the Recapitalization. Mr. Najjar has served as a Managing
Director of Cornerstone since February 1997. From 1996 to 1997,
Mr. Najjar was a partner at Advanta Partners LP, a private equity
firm. Prior to 1996, Mr. Najjar worked in the Corporate Finance
Department of Donaldson, Lufkin & Jenrette Securities
Corporation. Mr. Najjar received a B.A. from Cornell University
and an M.B.A. from The Wharton School at The University of
Pennsylvania.
Mark Rossi became a director of the Company in connection with
the Recapitalization. Mr. Rossi has served as a Senior Managing
Director of Cornerstone since December 1996. From 1984 to 1996,
Mr. Rossi was a partner of various venture capital funds managed
by Prudential. Mr. Rossi is also a director of StorMedia
Incorporated, Maxwell Technology, Inc. and International
Manufacturing Services, Inc. Mr. Rossi holds a B.A. from Saint
Vincent College and an M.B.A. from Northwestern University.
43
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth information on the
compensation of the Chief Executive Officer and the other
executive officers of the Company for fiscal 1998 (collectively,
the "Named Executive Officers").
Summary Compensation Table
Long-term
Annual Compensation Compensation
_____________________________________________ ___________________
Securities
Other Annual Underlying All Other
Name Salary Bonus (1) Compensation (2) Options/SARs (#)(3) Compensation (4)
- ----- ------ --------- ---------------- ------------------- ----------------
Robert F. Subia $ 245,051 $1,226,686 $36,107 250,000 $4,700
President and Chief
Executive Officer
Chris J. Anton 130,616 37,506 5,250 145,000 3,408
Vice President, Finance and
Chief Financial Officer
Jess Asla 169,805 533,397 17,752 170,000 4,700
Vice President Operations
John P. McCarvel (5) 155,539 155,810 13,500 145,000 4,250
Vice President, Strategic
Business Development
(1) In connection with the Recapitalization, each of Robert F. Subia and Jess Asla entered into an agreement with MEI
(together, the "Termination Agreements"), effective as of the closing date of the Recapitalization, terminating his
employment relationship with MEI. Pursuant to the Termination Agreements, Messrs. Subia and Asla received lump-sum
payments of $1,026,223 and $373,320, respectively.
(2) Represents amounts paid to Named Executive Officers for accrued vacation time.
(3) Represents options issued pursuant to the MCMS 1998 Option Plan.
(4) Represents amounts paid on behalf of each of the Named Executive Officers under MCMS's defined contribution plan.
(5) Mr. McCarvel's employment with the Company ceased effective as of August 28, 1998.
The following table sets forth certain information
regarding the options granted to the Named Executive Officers
during fiscal 1998 pursuant to MCMS's 1998 Stock Option Plan (the
"Option Plan").
Option/SAR Grants in Last Fiscal Year
MCMS Plan
Individual Grants
__________________________________________________________ Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SAR's Price Appreciation
Underlying Granted to Exercise or For Option Term
Options/SARs Employees in Base Price Expiration ______________________
Name Granted (#)(1) Fiscal Year(2) ($/Sh) Date 5% ($) 10% ($)
- ----------------------------------- -------------- ------------ ---------- -------- ---------
Robert F. Subia ... 250,000 20.2% 2.27 5/14/08 356,898 904,449
Chris J. Anton ... 145,000 11.7 2.27 5/14/08 207,000 524,580
Jess Asla ........ 170,000 13.7 2.27 5/14/08 242,690 615,025
John P. McCarvel.. 145,000 11.7 2.27 5/14/08 207,000 524,580
___________________
(1) Under the Option Plan 50% of the options will vest over four years from the vesting commencement date and
50% will vest if certain financial performance targets are met (or at the end of seven years if such targets
are not met and if the grantee has remained continuously employed with the Company).
(2) Mr. McCarvel's employment with the Company ceased effective August 28, 1998. In accordance with the
Option Plan, the 145,000 options granted to Mr. McCarvel expired and were forfeited. After giving effect to
such forfeiture, Messrs. Subia, Asla, and Anton percentages of total options granted to employees of the
Company would be 22.8%, 15.5% and 13.2%, respectively.
In connection with the Recapitalization, Messrs. Subia
and Asla were entitled to exercise vested options to purchase MTI
common stock (the "MTI Options") issued pursuant to the MTI's
stock option plan within 30 days of the closing of the
Recapitalization. Messrs. Subia and Asla exercised 8,174 and
17,204 MTI Options, respectively (with a value of $210,502 and
$456,231, respectively), within such 30-day period, representing
44
the vested MTI Options held by Messrs. Subia and Asla. All
unvested MTI Options held by Messrs. Subia and Asla were
purchased by MEI on or about the 31st day after the closing of
the Recapitalization (the "Purchase Date") at an aggregate
purchase price of $28,410 for each of Messrs. Subia and Asla,
representing the difference between (a) $25.00 multiplied by the
number of unvested MTI Options held by each and (b) the aggregate
exercise price for all such unvested MTI Options. The Named
Executive Officers also held, as of the closing of the
Recapitalization, certain options to purchase MEI common stock
(the "MEI Options") issued pursuant to the MEI's stock option
plan. In connection with the Recapitalization, the Named
Executive Officers were entitled to exercise vested MEI Options
within 30 days of the closing of the Recapitalization.
Messrs. Subia, Anton and McCarvel exercised 7,203, 500 and 2,000
MEI Options, respectively (with a value of $3,675, $369 and
$8,364, respectively), within such 30-day period. Vested MEI
options not exercised within such 30-day period were cancelled in
their entirety. Unvested MEI Options were purchased from
Messrs. Subia and Asla by MEI following the Recapitalization for
$200,000 and $70,000, respectively.
Employment Agreements
In connection with the Recapitalization, the Company entered
into employment agreements with each of its Named Executive
Officers (the "Employment Agreements"). The terms of the
Employment Agreements provide that (i) Robert F. Subia will serve
as the President and Chief Executive Officer; (ii) Chris J. Anton
will serve as Vice President, Finance and Chief Financial
Officer; (iii) Jess Asla will serve as Vice President,
Operations; and (iv) John P. McCarvel will serve as Vice
President, Strategic Business Development, all for a period that
will end on the third anniversary of the closing of the
Recapitalization (the "Employment Period"); provided that the
Employment Period will automatically terminate upon the Named
Executive Officer's resignation (including if the Company
Constructively Terminates (as defined) the Named Executive
Officers), death or permanent disability or incapacity, or upon
termination by the Company, with or without cause. Under the
Employment Agreements, the Named Executive Officers will:
(i) receive an annual base salary (as set by the Board or
compensation committee thereof but subject to a minimum amount);
(ii) be eligible to participate in all of the Company's employee
benefit programs for which senior executive employees of the
Company and its subsidiaries are generally eligible, including
the Option Plan, with any awards under such plans to be set by
the Board or compensation committee; and (iii) will receive
certain other employee benefits. Under the terms of the
Employment Agreements, the base salaries for Messrs. Subia, Asla,
Anton and McCarvel are $250,000, $175,000, $150,000 and $150,000,
respectively.
If the Employment Period is terminated by the Company
without Cause (as defined) or the Company Constructively
Terminates (as defined), the Named Executive Officer, the Named
Executive Officer is entitled to receive his base salary plus all
employee benefits which the Named Executive Officer is receiving
on the termination date for 18 months following such termination
in the case of Robert F. Subia, and 12 months following such
termination for the other Named Executive Officers. If the
Employment Period terminates upon the Named Executive Officer's
death or permanent disability, the Named Executive Officer (or
his spouse or other beneficiary) will be entitled to receive his
base salary for 12 months following such termination. If the
Employment Period terminates upon the Named Executive Officer's
resignation or incapacity, or is terminated by the Company for
Cause, the Executive Officer will be entitled to receive his base
salary through the date of termination. Under the Employment
Agreements, the Named Executive Officers will agree not to
(i) compete with the Company during the period in which he is
employed by the Company and for 18 months thereafter in the case
of Robert F. Subia, and 12 months thereafter for the other Named
Executive Officers (the "Noncompete Period"); (ii) disclose any
confidential information unless and to the extent such
information becomes generally known to and available for use by
the public other than as a result of the Named Executive
Officer's acts or omissions; (iii) solicit or hire any employee
of the Company or its subsidiary during the Noncompete Period;
and (iv) induce or attempt to induce any customer, supplier,
licensee, licensor, franchisee or other business relation of the
Company or any subsidiary to cease doing business with the
Company or its subsidiaries during the Noncompete Period. In
addition, the Named Executive Officers will agree to disclose to
the Company any and all Work Product and to acknowledge that such
Work Product (as defined) will be the property of the Company and
its subsidiaries.
In connection with Mr. McCarvel's termination of employment
with the Company, the Company entered into a severance agreement
and release requiring, among other things, for a period of six
months following his employment termination, that the Company
continue to pay wages to Mr. McCarvel and that Mr. McCarvel not
compete with the Company or solicit or hire employees of the
Company. The scope of Mr. McCarvel's non-compete and non-
solicitation obligations to the Company is consistent with those
set forth in Mr. McCarvel's employment agreement. In addition,
on September 22, 1998 the Company repurchased 3,676 shares of
Series A Preferred Stock and 3,676 shares of Class A Common Stock
for $50,000 from Mr. McCarvel.
45
In connection with the Recapitalization, each of Robert F.
Subia and Jess Asla entered into an agreement with MEI (together,
the "Termination Agreements"), effective as of the closing date
of the Recapitalization, terminating his employment relationship
with MEI. Pursuant to the Termination Agreements, Messrs. Subia
and Asla received lump-sum payments of $1,026,223 and $373,320,
respectively. In consideration for such payments, Messrs. Subia
and Asla (i) forfeited all of their unvested options to purchase
MEI stock which were granted under the MEI's stock option plan,
(ii) released MEI from any future claims relating to their
employment with MEI, (iii) agreed to comply with certain
non-disclosure obligations, (iv) agreed to comply with the
noncompetition and nonsolicitation provisions of the
Recapitalization Agreement and (v) agreed that in the event his
employment with the Company is terminated, he will comply until
December 21, 1999 with the noncompetition and nonsolicitation
obligations set forth in the Termination Agreements.
Stock Option Plan
In order to provide financial incentives for certain of the
Company's or its subsidiaries' senior executives and other
employees, the Company's board of directors has adopted the 1998
Stock Option Plan pursuant to which it will be able to grant
options to purchase Class A Common Stock to senior executives and
other employees of the Company and its subsidiaries. Under the
Plan, the Company will also be able to grant options to purchase
Class A Common Stock to the Company's Consultants. The Plan
provides for option grants representing 2,500,000 Common Stock.
With respect to options granted to certain executive officers
under the Plan, 50% of the options will vest over four years from
the vesting commencement date and the other 50% will vest if
certain financial performance targets are met (or at the end of
seven years if such targets are not met and if the grantee has
remained continuously employed with the Company). Options granted
to other key employees vest over four years from the date of
grant. As of September 3, 1998, the Company had 1,060,000
options outstanding under the Plan. Upon an employee's
termination with the Company, all of the employee's unvested
options will expire, the exercise period of all the employee's
vested options will be reduced to a period ending no later than
30 days after such employee's termination, and if such
termination occurs prior to an initial public offering of the
Company's Class A Common Stock, the Company shall have the right
to repurchase the Class A Common Stock of the Company held by the
employee as the result of exercised vested options.
46
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, as of September
3, 1998 regarding the beneficial ownership of (i) capital stock
(other than Redeemable Preferred Stock) held by each person (other
than directors and executive officers of the Company) known to the
Company to own more than 5% of the outstanding capital stock (other
than the Redeemable Preferred Stock) of the Company, (ii) capital
stock held by each director and executive officer of the Company and
(iii) capital stock held by all directors and executive officers as a
group. To the knowledge of the Company, each of such stockholders has
sole voting and investment power as to the shares shown unless
otherwise noted.
Shares of Common Stock Beneficially Owned (1)
____________________________________________________________________________
Class A Percent of Class B Percent of Class C Percent of
Name Common Class A Common Class B Common Class C
------- -------- --------- ---------- --------- ---------- ---------
Cornerstone Equity Investors IV, L.P. 2,450,000 75.1% 123,529 14.3% - -
c/o Cornerstone Equity Investors L.L.C.
717 Fifth Avenue (Suite 1100)
New York, New York 10022
August Capital - - - - 424,632 48.5%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
BT Investment Partners 245,000 7.5 740,294 85.7 - -
130 Liberty Street
New York, New York 10006
MEI California, Inc. (2) 500,000 15.3 - - - -
c/o Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Oak Investment Funds (3) - - - - 424,632 48.5
c/o Oak Investment Partners
525 University Avenue, Suite 1300
Palo Alto, California 94301
Executive Officers and Directors
Robert F. Subia 14,706 * - - - -
Chris J. Anton 7,353 * - - - -
Jess Asla 11,030 * - - - -
R. Stephen Cheheyl - - - 7,353 *
Finis F. Conner - - - 14,706 1.7
John A. Downer (4) 2,450,000 75.1 123,529 14.3 - -
C. Nicholas Keating - - - 3,676 *
Michael E. Najjar (4) 2,450,000 75.1 123,529 14.3 - -
Mark Rossi (4) 2,450,000 75.1 123,529 14.3 - -
Directors and executive officers as a group (4) 2,483,089 76.9 123,529 14.3 25,735 2.9
- -----------------------------------------------
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. The Class A Common Stock entitles the holder to one vote
per share and the Class C Common Stock entitles the holder to two votes per share. The Class B Common Stock is nonvoting.
The Series A Preferred Stock and the Series C Preferred Stock entitle the holder to the number of votes per share they
would be entitled to if converted into Common Stock. The Series B Preferred Stock is nonvoting.
(2) MEIC is a wholly owned subsidiary of MEI, and MEI is a majority owned subsidiary of MTI. Accordingly, MEI and MTI may
be deemed to beneficially own shares owned by MEIC.
(3) Amounts shown reflect the aggregate number of shares of capital stock of the Company held by Oak Investment Partners VII,
Limited Partnership, Oak VII Affiliate Fund, Limited Partnership and Norman Nie.
(4) Messrs. Downer and Najjar are each Managing Directors and Mr. Rossi is a Senior Managing Director of CEI, the sole general
partner of Cornerstone. Accordingly, Messrs. Downer, Najjar and Rossi may be deemed to beneficially own shares owned by
Cornerstone. Each such person disclaims beneficial ownership of any such shares in which he does not have a pecuniary
interest.
Series A Percent of Series B Percent of Series C Percent of
Name Preferred Series A Preferred Series B Preferred Series C
---------- --------- ---------- --------- ---------- --------- ----------
Cornerstone Equity Investors IV, L.P. 2,450,000 75.1% 123,529 14.3% - -
c/o Cornerstone Equity Investors L.L.C.
717 Fifth Avenue (Suite 1100)
New York, New York 10022
August Capital - - - - 424,632 48.5%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
BT Investment Partners 245,000 7.5 740,294 85.7 - -
130 Liberty Street
New York, New York 10006
MEI California, Inc. (2) 500,000 15.3 - - - -
c/o Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Oak Investment Funds (3) - - - - 424,632 48.5
c/o Oak Investment Partners
525 University Avenue, Suite 1300
Palo Alto, California 94301
Executive Officers and Directors
Robert F. Subia 14,706 * - - - -
Chris J. Anton 7,353 * - - - -
Jess Asla 11,030 *
R. Stephen Cheheyl - - - - 7,353 *
Finis F. Conner - - - - 14,706 1.7
John A. Downer (4) 2,450,000 75.1 123,529 14.3 - -
C. Nicholas Keating - - - - 3,676 *
Michael E. Najjar (4) 2,450,000 75.1 123,529 14.3 - -
Mark Rossi (4) 2,450,000 75.1 123,529 14.3 - -
Directors and executive officers as a group (4) 2,483,089 76.9 123,529 14.3 25,735 2.9
- -----------------------------------------------
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. The Class A Common Stock entitles the holder to one vote
per share and the Class C Common Stock entitles the holder to two votes per share. The Class B Common Stock is nonvoting.
The Series A Preferred Stock and the Series C Preferred Stock entitle the holder to the number of votes per share they
would be entitled to if converted into Common Stock. The Series B Preferred Stock is nonvoting.
(2) MEIC is a wholly owned subsidiary of MEI, and MEI is a majority owned subsidiary of MTI. Accordingly, MEI and MTI may
be deemed to beneficially own shares owned by MEIC.
(3) Amounts shown reflect the aggregate number of shares of capital stock of the Company held by Oak Investment Partners VII,
Limited Partnership, Oak VII Affiliate Fund, Limited Partnership and Norman Nie.
(4) Messrs. Downer and Najjar are each Managing Directors and Mr. Rossi is a Senior Managing Director of CEI, the sole general
partner of Cornerstone. Accordingly, Messrs. Downer, Najjar and Rossi may be deemed to beneficially own shares owned by
Cornerstone. Each such person disclaims beneficial ownership of any such shares in which he does not have a pecuniary
interest.
47
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recapitalization Agreement
The Recapitalization Agreement contains customary provisions
for such agreements, including representations and warranties
with respect to the condition and operations of the business,
covenants with respect to the conduct of the business prior to
the closing date of the Recapitalization and various closing
conditions, including the execution of a transitional services
agreement, registration rights agreement and stockholders
agreement, the obtaining of financing, the expiration or
termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the continued
accuracy of the representations and warranties.
Pursuant to the Recapitalization Agreement, MEI and MEIC
agreed to indemnify Cornerstone against any and all damages
resulting from any misrepresentation or breach of warranty of
MEI, MEIC or the Company contained in the Recapitalization
Agreement, a claim for which is made (in most cases) no later
than one year after the closing date of the Recapitalization. The
indemnification obligations of MEI and MEIC under the
Recapitalization Agreement are generally subject to a $1.0
million minimum aggregate threshold amount and limited to an
aggregate payment of no more than $13.6 million.
In addition, MEI and MEIC have agreed for a period of two
years after the closing date of the Recapitalization not to
compete with the Company in the business of design, assembly and
testing of (i) complex PCBAs for third-party electronics OEMs, or
(ii) system level assembly when acting solely and strictly in the
capacity of a subcontractor of an OEM. Notwithstanding the
foregoing, MEI's advanced engineering group is not prohibited
from conducting activities consistent with the activities that it
conducted on or prior to December 21, 1997. MEI and MEIC have
also agreed for a period of two years after the closing date of
the Recapitalization not to solicit the employment of employees
of the Company. Similarly, except as to certain agreed upon
individuals, the Company has agreed not to solicit the employment
of employees of MEI for the same two-year period.
Memory Module Agreement
MTI has entered into an agreement with the Company,
effective as of the closing of the Recapitalization, to purchase
from the Company for a period of two years after the closing date
of the Recapitalization at least 50% of its industry standard
memory module requirements of up to 1,200,000 Equivalent Units
per week. In addition, MTI has agreed for a period of one year
from the closing date of the Recapitalization not to engage in a
business the primary purpose of which is to provide contract
manufacturing services for the assembly of custom printed circuit
assemblies for OEMs or third parties without the written consent
of the Company. In exchange, the Company has agreed to charge MTI
the lesser of (i) the lowest price it charges to its other
customers for equivalent products under similar circumstances, or
(ii) the average price quoted by other manufacturers for
equivalent products under similar circumstances. It is
contemplated that MTI will provide nonbinding forecasts of the
upcoming requirements for a 13 week rolling period. Under the
terms of the Memory Module Agreement, MTI will consign sufficient
raw materials to the Company to support MTI's memory module
requirements. This consignment relationship should insulate the
Company from fluctuations in the pricing of such raw materials,
including DRAM. The Memory Module Agreement automatically renews
for successive one-year periods after the initial two-year term
unless either party provides written notice of its intention to
terminate the contract. The Memory Module Agreement does not
require MTI to purchase memory modules exclusively from the
Company.
Patent and Invention Disclosure Assignment and License Agreement
In connection with the Recapitalization Agreement, MCMS and
MEI entered into a Patent and Invention Disclosure Assignment and
License Agreement (the "Patent Agreement"). Pursuant to the
Patent Agreement, MEI assigned certain patents, patent
applications and invention disclosures to MCMS, and MCMS has
granted MEI and its affiliates a non-exclusive, paid-up,
worldwide license to practice the inventions covered by the
patents, patent applications and invention disclosures, including
the right to make, have made, use, offer for sale, sell and lease
products that would otherwise infringe the patents. The Patent
Agreement is perpetual but may be terminated by either party on
90 days written notice in the event the other party is in
material breach and does not cure the breach within such 90 day
period.
Know-How License Agreement
In connection with the Recapitalization Agreement, MCMS and
MEI entered into an agreement (the "Know-How Agreement") pursuant
to which MEI granted to MCMS a non-exclusive, paid-up, worldwide
license to use in its business any trade secrets and know-how
48
conceived by MCMS prior to the closing or utilized by MCMS as of
the closing which relate to its business. The Know-How Agreement
will be perpetual but may be terminated by either party on 90
days written notice in the event the other party is in material
breach and does not cure the breach within such 90 day period.
Forbearance Agreement
In connection with the Recapitalization Agreement, MCMS and
MTI entered into an agreement (the "Forbearance Agreement")
pursuant to which MTI agreed to forbear from taking any action or
instituting any claim or other legal proceeding against MCMS or
its subsidiaries with respect to their use of any MTI trade
secrets, know-how or technology that was developed in conjunction
with, with the input of or at the request of MTI and which is
used by MCMS as of the closing in the conduct of its business.
The Forebearance Agreement does not apply to (i) certain
semiconductor manufacturing, processing and packaging technology
(ii) the testing or assembly of semiconductor components for sale
by MCMS of such components other than as part of a memory module
and (iii) technology developed by MCMS at MTI's request and
expense for use in association with the design, assembly and
testing of products manufactured by MCMS for MTI MCMS is not
obligated under the forbearance agreement to make any payments to
MTI. The Forebearance Agreement shall remain in effect until
terminated by both MTI and MCMS.
Management Services Agreement
In connection with the Recapitalization, the Company entered
into a Management Services Agreement with CEI pursuant to which
CEI agreed to provide: (i) general management services;
(ii) assistance with the identification, negotiation and analysis
of acquisitions and dispositions; (iii) assistance with the
negotiation and analysis of financial alternatives; and
(iv) other services agreed upon by the Company and CEI. In
exchange for such services, CEI will receive: (i) an annual
management fee of $250,000, plus reasonable out-of-pocket
expenses (payable quarterly); (ii) a transaction fee in an amount
equal to 1.0% of the aggregate transaction value in connection
with the consummation of any material acquisition, divestiture,
financing or refinancing by the Company or any of its
subsidiaries; and (iii) a one-time transaction fee of $2,710,000
upon the consummation of the Recapitalization. The Management
Services Agreement has an initial term of five years, subject to
automatic one-year extensions unless the Company or CEI provides
written notice of termination.
Transition Services Agreement
In connection with the Recapitalization, the Company entered
into the Transition Services Agreement with MTI and MEI. Pursuant
to the Transition Services Agreement, MTI and MEI agreed to
provide a variety of services (including payroll, financial
accounting and benefits, among others) at prices set forth in the
Transition Services Agreement for a period of six months after
the Closing Date, except that MTI agreed to provide the Company
with services in connection with certain proprietary MTI software
for a period of 12 months. Pursuant to the Transition Services
Agreement, the Company has agreed to provide certain accounting
and software support services to MEI at prices set forth in the
Transition Services Agreement for a period of six months after
the Closing Date. In connection with the Transition Services
Agreement, MTI and MEI have each granted MCMS a perpetual,
royalty-free license to use certain of their proprietary software
and customized software applications in the operation of the
Company's business. As of September 3, 1998, substantially all
services under this agreement have been terminated although the
Company still has the right to request certain services as
necessary through February 1999.
Stockholders Agreement
Upon the consummation of the Recapitalization, the Company
and all of its stockholders (other than holders of the Redeemable
Preferred Stock), including Cornerstone and MEIC (collectively,
the "Stockholders") entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement:
(i) requires that each of the parties thereto vote all of its
voting securities of the Company and take all other necessary or
desirable actions to cause the size of the Board of Directors of
the Company to be established at seven members and to cause three
designees of Cornerstone to be elected to the Board of Directors
of the Company; (ii) grants the Company and Cornerstone a right
of first refusal on any proposed transfer of shares of capital
stock of the Company held by MEIC and any of the other
Stockholders; (iii) grants tag-along rights on certain transfers
of shares of capital stock of the Company; (iv) requires the
Stockholders to consent to a sale of the Company to an
independent third party if such sale is approved by certain
holders of the then outstanding shares of voting common stock of
the Company; and (v) except in certain instances, prohibits MEIC
from transferring any shares of capital stock of the Company
until the second anniversary of the date of the consummation of
the Recapitalization. Certain of the foregoing provisions of the
Stockholders Agreement will terminate upon the consummation of an
initial Public Offering, a Qualified Public Offering or an
Approved Sale.
49
Investor Registration Rights Agreement
Upon the consummation of the Recapitalization, the Company
and all of its stockholders (other than holders of the Preferred
Stock), including Cornerstone and MEIC, entered into a
registration rights agreement (the "Investor Registration Rights
Agreement"). Under the Investor Registration Rights Agreement,
the holders of a majority of the Cornerstone Investor Registrable
Securities or BT Investment Partners, Inc. and/or its affiliates
have the right, subject to certain conditions, to require the
Company to register any or all of their shares of Common Stock of
the Company under the Securities Act at the Company's expense. In
addition, all holders of Registrable Securities are entitled to
request the inclusion of any shares of Common Stock of the
Company subject to the Investor Registration Rights Agreement in
any registration statement at the Company's expense whenever the
Company proposes to register any of its common stock under the
Securities Act. In connection with all such registrations, the
Company agreed to indemnify all holders of Registrable Securities
against certain liabilities, including liabilities under the
Securities Act.
Office Lease
In connection with the Recapitalization Agreement, MEI and
the Company amended the lease, dated as of November 1, 1996 (the
"Office Lease"), to provide MEI the right to occupy approximately
32,000 square feet of the Premises (as defined in the Office
Lease) at the Nampa, Idaho facility until December 31, 1998,
unless MEI terminates the lease prior to such time by providing
30 days written notice to the Company. During the term of the
lease, MEI shall pay rent to the Company for the Premises in an
amount of $40,000 per month. Following the closing of the
Recapitalization, MEI vacated approximately 3,625 square feet of
the Premises, and, on April 17, 1998, the Company received
written notice from MEI of MEI's intention to vacate
approximately 26,000 square feet of the Premises, effective
May 18, 1998. In addition, upon 60 days written notice to MEI,
the Company shall be entitled to occupy approximately 24,000
square feet of space currently leased by MEI at the Shilo
Property (as defined in the Office Lease) at a cost to the
Company which is no greater than that currently paid by MEI. As
of August 1998, MEI had vacated the premise in its entirety.
Power Substation Agreement
Pursuant to the Recapitalization Agreement, MEI has granted
the Company the ability to draw power from the power substation
located on MEI's real property in Nampa, Idaho. In furtherance
thereof, MEI, the Company and Idaho Power Company ("Idaho Power")
have executed an agreement (the "Power Substation Agreement"),
whereby Idaho Power will install the necessary Interconnecting
Facilities (as defined in the Power Substation Agreement) to
allow the Company, for its own account, to be connected to the
existing power substation located on MEI's property. The
Company's cost for installing the Interconnecting Facilities will
be in accordance with Rule H (Idaho Power's tariff governing line
installations). In August 1998, the Interconnecting Facilities
were successfully installed at a cost to the Company of
approximately $300,000. This one-time fee was paid to Idaho
Power for acquiring 6,000 kW of capacity in the power substation,
and Idaho Power, in turn, will pay such amount to MEI. Except for
such one time fee, the Company anticipates that its costs for
electrical power will be approximately the same as they were
prior to the Recapitalization.
Transactions with MEI and MTI
In the normal course of business, the Company sells PCBAs
and memory modules to, and purchases memory components and
property, plant and equipment from, MEI and MTI. Net sales in
fiscal 1998 were $27.5 million primarily relating to memory
module manufacturing services for MTI. In addition, the Company
purchased memory components for $8.5 million and property, plant
and equipment in the amount $1.0 million principally related to
module handlers and personal computers.
50
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K.
(a) The following are filed as a part of this report:
Financial statements and financial statement schedules - See "Item 8.
Financial Statements and Supplementary Data."
Exhibit Description
2.1 Recapitalization Agreement, dated as of December 21,
1997, by and among MCMS, Inc., Micron Electronics, Inc.
and Cornerstone Equity Investors IV, L.P. (1)
2.2 Amended and Restated Recapitalization Agreement, dated
as of February 1, 1998, by and among MCMS, Inc., Micron
Electronics, Inc., MEI California, Inc. and Cornerstone
Equity Investors IV, L.P. (1)
2.3 First Amendment to the Amended and Restated
Recapitalization Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Micron Electronics,
Inc., MEI California, Inc. and Cornerstone Equity
Investors IV, L.P. (1)
3.1 Articles of Amendment to the Amended and Restated
Articles of Incorporation of MCMS, Inc. and Amended and
Restated Articles of Incorporation of MCMS, Inc. (3)
3.2 Amended and Restated By-laws of MCMS, Inc. (1)
3.3 Amendment One to Amended and Restated By-laws of MCMS, Inc. (4)
4.1 Indenture, dated as of February 26, 1998, by and
between MCMS, Inc. and United States Trust Company of
New York, as trustee, paying agent and registrar, with
respect to 9 3/4% Senior Subordinated Notes due 2008
and the Floating Interest Rate Subordinated Term
Securities due 2008. (1)
4.2 Exchange Indenture, dated as of February 26, 1998, by
and between MCMS, Inc. and United States Trust Company
of New York, as paying agent and registrar, with
respect to the 12 1/2% Subordinated Exchange Debentures
due 2010. (1)
4.3 Certificate of Designation, dated as of February 26,
1998, with respect to the 12 1/2% Senior Exchangeable
Preferred Stock and 12 1/2% Series B Senior
Exchangeable Preferred Stock. (1)
4.4 First Supplemental Indenture, dated as of April 23,
1998 by and between MCMS, Inc. and United States Trust
Company of New York, as trustee, with respect to 9 3/4%
Senior Subordinated Notes due 2008 and the Floating
Interest Rate Subordinated Term Securities due 2008.(2)
10.1 Management Services Agreement, dated as of February 26,
1998, by and between MCMS, Inc. and Cornerstone Equity
Investors, LLC. (1)
10.2 Purchase Agreement, dated February 19, 1998, by and
between MCMS, Inc. and BT Alex. Brown Incorporated. (1)
10.3 Registration Rights Agreement, dated as of February 26,
1998, by and between MCMS, Inc. and BT Alex. Brown
Incorporated. (1)
10.4 Credit Agreement, dated as of February 26, 1998, among
MCMS, Inc., Bankers Trust Company, as agent, and the
other institutions named therein. (1)
10.4(a)First Amendment, dated as of May 20, 1998, to Credit
Agreement, dated as of February 26, 1998, among the
Company, Bankers Trust Company, as agent, and other
institutions named therein. (4)
51
10.5 Pledge Agreement, dated as of February 26, 1998, by and
between MCMS, Inc., and Bankers Trust Company, as
collateral agent. (1)
10.6 Security Agreement, dated as of February 26, 1998,
among MCMS, Inc., certain subsidiaries of MCMS, Inc.
and Bankers Trust Company, as collateral agent. (1)
10.7 Employment Agreement, dated as of February 26, 1998, by
and between MCMS, Inc. and Robert F. Subia. (1)
10.8 Employment Agreement, dated as of February 26, 1998, by
and between MCMS, Inc. and Chris Anton. (1)
10.9 Employment Agreement, dated as of February 26, 1998, by
and between MCMS, Inc. and Jess Asla. (1)
10.11 Shareholders Agreement, dated as of February 26, 1998,
by and among MCMS, Inc., Cornerstone Equity Investors
IV, L.P., MEI California, Inc., Randolph Street
Partners II, BT Investment Partners, Inc. and the other
investors named therein. (1)
10.12 Registration Rights Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Cornerstone Equity
Investors IV, L.P., MEI California, Inc., Randolph
Street Partners II, BT Investment Partners, Inc. and
the other investors named therein. (1)
10.13 MCMS Agreement, dated as of December 21, 1997, by and
between MCMS, Inc. and Micron Technology, Inc. (1)
10.14 Transition Services Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Micron Electronics, Inc.
and Micron Technology, Inc. (1)
10.15 Interim Agreement to Provide Electric Service
Agreement, dated as of February 26, 1998, by and among
MCMS, Inc., Micron Electronics, Inc. and Idaho Power. (1)
10.17 Tenancy Agreement, dated as of October 1, 1996, by and
between MCMS, Sdn. Bhd. and R.S. Roadstar Electronics,
Sdn. Bhd., as amended.
10.18 Lease, dated as of December 1994, by and between MCMS,
Inc. and Tri-Center South Limited Partnership, as
amended. (1)
10.19 Frame Manufacturing Agreement, dated as of November 18,
1997, by and between Alcatel Bell N.V. and MCMS Belgium
S.A. (1)
10.20 Stock Option Plan. (2)
10.21 Form of Indemnification Agreement. (1)
10.22 Patent and Invention Disclosure Assignment and License
Agreement, dated as of February 26, 1998, by and
between Micron Electronics, Inc. and MCMS, Inc. (3)
10.23 Know-How License Agreement, dated as of February 26,
1998, by and between Micron Electronics, Inc. and MCMS,
Inc. (2)
10.24 Forbearance Agreement, dated as of February 26, 1998,
by and between Micron Electronics, Inc. and MCMS, Inc. (2)
11 MCMS , Inc. Basic and Diluted Earnings per Share
16 Letter re Change in Certifying Accountant. (3)
21 Subsidiaries of MCMS, Inc.
27 Financial Data Schedule.
- -------------------------------------------------
(1) Incorporated by reference to Registration Statement on
Form S-4 (Registration No. 333-50981) dated April 24, 1998.
52
(2) Incorporated by reference to Amendment No. 1 to Registration
Statement of Form S-4 (Registration No. 333-50981) dated June 11, 1998.
(3) Incorporated by reference to Amendment No. 2 to Registration Statement
of Form S-4 (Registration No. 333-50981) dated June 23, 1998.
(4) Incorporated by reference to Quarterly report on Form 10-Q for the
fiscal quarter ended May 28, 1998.
(b): Reports on Form 8-K:
During the fourth quarter of Fiscal 1998, no reports on
Form 8-K were filed
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1933, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nampa,
State of Idaho, on November 4, 1998.
MCMS, Inc.
By: /s/ Chris J. Anton
(Chris J. Anton, Vice President,
Finance and Chief Financial Officer)
Pursuant to the requirements of the Securities Act of 1934,
this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Name Title Date
/s/ Robert F. Subia President, Chief Executive November 4, 1998
Officer and Director
(Principal Executive Officer)
/s/ Chris J. Anton Vice President, Finance November 4, 1998
and Chief Financial Officer
(Principal Financial Officer
and Accounting Officer)
/s/ Jess Asla Vice President, Operations November 4, 1998
/s/ R. Stephen Cheheyl Director November 4, 1998
/s/ Finis F. Conner Director November 4, 1998
/s/ John A. Downer Director November 4, 1998
/s/ C. Nicholas Keating Director November 4, 1998
/s/ Michael E. Najjar Director November 4, 1998
/s/ Mark Rossi Director November 4, 1998
54