<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997
REGISTRATION NO. 333-34557
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL MANUFACTURING SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3672 77-0393609
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2071 CONCOURSE DRIVE
SAN JOSE, CALIFORNIA 95131
(408) 953-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT G. BEHLMAN
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD OF DIRECTORS
INTERNATIONAL MANUFACTURING SERVICES, INC.
2071 CONCOURSE DRIVE
SAN JOSE, CALIFORNIA 95131
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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JEFFREY D. SAPER, ESQ. ELLYN K. LAZARUS, ESQ.
HERBERT P. FOCKLER, ESQ. RICHARD G. COSTELLO, ESQ.
ROBERT G. DAY, ESQ. SHELLI M. CHING, ESQ.
CAINE T. MOSS, ESQ. HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN,
WILSON SONSINI GOODRICH & ROSATI A PROFESSIONAL CORPORATION
PROFESSIONAL CORPORATION THREE EMBARCADERO CENTER
650 PAGE MILL ROAD SEVENTH FLOOR
PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CA 94111
(650) 493-9300 (415) 434-1600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1997
5,000,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------------
All of the 5,000,000 Shares of Class A Common Stock offered hereby are
being sold by International Manufacturing Services, Inc. (the "Company"). Prior
to this offering (the "Offering"), there has been no public market for the Class
A Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $10.00 and $12.00 per share. See "Underwriting"
for a discussion of the factors considered in determining the initial public
offering price. The Company has applied to have its Class A Common Stock
approved for quotation on the Nasdaq National Market under the symbol "IMSX."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................. $ $ $
Total(3)................... $ $ $
============================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Class A Common Stock are offered by the several Underwriters
named herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that delivery of
the certificates representing such shares will be made against payment therefor
at the office of Montgomery Securities on or about , 1997.
------------------------
MONTGOMERY SECURITIES
ALEX. BROWN & SONS
INCORPORATED
UBS SECURITIES
, 1997
<PAGE> 3
[ARTWORK]
------------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
------------------------
This Prospectus includes trademarks and trade names of the Company and
other entities.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CLASS A
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF CLASS A
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors," and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. The discussion in this Prospectus contains forward-looking
statements. Future events anticipated in the forward-looking statements
contained in this Prospectus are uncertain. Actual events, and the Company's
actual results, may differ materially from those predicted, assumed or discussed
in such forward-looking statements. Factors that may cause or contribute to such
differences include those discussed in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
as well as those discussed elsewhere in this Prospectus. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements, wherever they appear in this Prospectus.
THE COMPANY
International Manufacturing Services, Inc. (together with its subsidiaries,
the "Company") provides a broad range of advanced, integrated electronics
manufacturing services ("EMS") to electronics original equipment manufacturers
("OEMs") primarily in the computer peripherals, data communications and
telecommunications markets. The Company's services include product design,
prototyping, printed circuit board ("PCB") assembly, final system assembly,
materials procurement, inventory management, testing, packaging, distribution
and depot repair. The Company combines its manufacturing experience and
operational infrastructure in Asia with its design, prototype and manufacturing
capabilities in the United States to provide cost-effective, flexible EMS
solutions to its customers. The Company maintains its materials procurement
operations in Hong Kong to be near low cost suppliers and conducts volume
manufacturing operations in Thailand and China to access low cost labor, reduce
overhead and take advantage of certain local tax benefits.
According to Technology Forecasters, the worldwide market for electronics
manufacturing services was $59 billion in 1996 and is expected to grow, at an
annual rate of approximately 25% through the year 2001, to $178 billion. As OEMs
have become aware of the long-term advantages of outsourcing, EMS providers have
expanded the range of services offered and have become increasingly integral to
OEMs' overall enterprise strategies. Today, OEMs rely upon EMS providers'
advanced manufacturing capabilities and related services to obtain a number of
benefits, including: lower product cost; shorter new product introduction
cycles; more rapid time to market and time to volume production; reduced working
capital and capital expenditures; and more flexible response to design changes
and fluctuations in the availability of materials. Outsourcing also allows OEMs
to focus resources on their core competencies, such as research and development
and sales and marketing.
A key component of the Company's strategy is to leverage its presence in
low cost regions of Asia and its expertise in materials procurement and
manufacturing to provide technologically advanced, flexible and cost-effective
EMS solutions to OEMs' increasingly complex needs. In addition, the Company
intends to diversify its revenue base by establishing strategic relationships
with major and emerging OEMs in rapidly growing industry sectors, such as data
communications and telecommunications, while expanding the range of
manufacturing services it provides to its existing customer base. Further, by
participating in the early stages of product design and leveraging its volume
materials procurement capabilities, the Company seeks to increase manufacturing
efficiency and accelerate its customers' time to market and time to volume
production.
The Company's electronics assembly and manufacturing services range from
PCB and backplane assembly to subsystem and complete product assembly. The
majority of these products include complex, high density surface-mount
assemblies. PCB assembly activity primarily consists of the placement and
attachment of electronic and mechanical components on printed circuit boards
using both surface-mount and pin-through-hole technologies. The Company has
recently added press-fit technology to its existing capabilities for the
manufacturing of backplane assemblies. The Company also performs final assembly
of customer products ("box-build") as well as a range of testing, logistics,
distribution and depot repair services. The Company's major customers include
Maxtor Corporation ("Maxtor"), Bay Networks, Inc., Asante Technologies, Inc.,
3
<PAGE> 5
Polaroid Corporation and Symbios Logic, Inc. The Company has also recently
initiated significant customer relationships with Advanced Fibre Communications
and Polycom, Inc.
The Company's Hong Kong operations, which commenced business in 1983, were
acquired in 1990 by Maxtor, a manufacturer of hard disk drives, along with other
manufacturing operations and assets. International Manufacturing Services, Inc.
was formed in November 1994 as a wholly-owned subsidiary of Maxtor. In June
1996, the Company was recapitalized as an independent company. In this regard,
the Company redeemed approximately 76.5% of Maxtor's share ownership with a
combination of $25.0 million cash, $20.0 million principal amount senior
subordinated notes (including $4.3 million rolled over from a previously
outstanding note payable) and a warrant for 300,000 shares of Class A Common
Stock. The Company raised the cash portion of the redemption price by issuing a
combination of common stock, preferred stock and $12.5 million principal amount
junior subordinated notes to a group of investors. These redemption and
financing transactions are collectively referred to in this prospectus as the
"Recapitalization." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Certain Transactions" and "Description of
Capital Stock."
The Company's executive offices are located at 2071 Concourse Drive, San
Jose, CA 95131, and its telephone number is (408) 953-1000.
THE OFFERING
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Class A Common Stock offered....................... 5,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 18,327,500 shares(1)
Use of proceeds.................................... For repayment of related party
indebtedness and bank borrowings,
capital expenditures and general
corporate purposes, including working
capital
Proposed Nasdaq National Market Symbol............. IMSX
</TABLE>
- ---------------
(1) Based on 10,818,075 shares of Class A Common Stock and 2,509,425 shares of
Class B Common Stock as of July 31, 1997, assuming conversion of all
outstanding shares of preferred stock into Common Stock as a result of this
Offering. Excludes (i) 2,895,000 shares issuable upon exercise of
outstanding options as of July 31, 1997 granted under the Company's 1996
Stock Option Plan, (ii) 420,000 shares reserved for future issuance as of
July 31, 1997 under the Company's 1996 Stock Option Plan, (iii) 250,000
shares reserved for future issuance under the Company's 1997 Employee Stock
Purchase Plan and 1997 Non-U.S. Employee Stock Purchase Plan, (iv) 1,750,000
shares reserved for future issuance under the Company's 1997 Stock Plan (of
which options to purchase up to 1,027,500 shares are intended to be granted
contingent upon this Offering), and (v) 225,000 shares reserved for future
issuance under the Company's 1997 Director Option Plan (of which options to
purchase 70,000 shares will be automatically granted contingent upon this
Offering). See "Management -- Compensation Plans" and Note 14 of Notes to
Consolidated Financial Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
FISCAL YEARS ENDED(1) THREE MONTHS ENDED
--------------------------------------------------------- ---------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, APRIL 30, JULY 31, JULY 31,
1993(2) 1994 1995 1996 1997(3) 1996(3) 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ -- $ 254 $ 3,089 $ 68,361 $ 80,546 $21,139 $34,500
Revenues from affiliates(4)......... 42,425 42,093 36,284 340,487 89,149 26,276 30,236
Total revenues.................... 42,425 42,347 39,373 408,848 169,695 47,415 64,736
Gross profit........................ 7,123 6,553 5,578 13,374 14,667 1,052 6,339
Income (loss) from operations....... 4,359 3,973 2,730 7,994 3,626 (3,652) 3,673
Net income (loss)................... 3,513 3,114 1,996 6,137 (599) (4,328) 2,081
Net income (loss) per share(5)...... $ (0.04) $ (0.27) $ 0.13
Shares used to compute net income
(loss) per share(5)............... 16,108 16,108 16,108
SUPPLEMENTAL DATA:
Supplemental net income (loss) per
share(6).......................... $ 0.06 $ (0.23) $ 0.14
</TABLE>
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<CAPTION>
AS OF JULY 31, 1997
------------------------
ACTUAL AS ADJUSTED(7)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 1,813 $ 24,463
Working capital................................................................ 5,827 35,977
Total assets................................................................... 70,809 93,459
Current-portion of long-term debt and bank borrowings.......................... 7,580 80
Long-term debt................................................................. 12,635 12,635
Long-term debt due Maxtor...................................................... 20,000 --
Total stockholders' equity (deficit)........................................... (8,536) 41,614
</TABLE>
- ---------------
(1) Prior to fiscal 1997, the Company's fiscal year ended on the Saturday
nearest to March 31. Commencing with fiscal 1997, the Company's fiscal year
ends on the Saturday nearest to April 30. Prior to June 1996, the Company's
operations were conducted through certain wholly-owned subsidiaries of
Maxtor.
(2) The consolidated statement of operations data for the fiscal year ended
March 31, 1993 are derived from unaudited consolidated financial statements.
(3) In the three months ended July 31, 1996, a $2.0 million inventory charge was
taken for a customer's cancellation of orders. Portions of this reserve were
subsequently reversed in the three months ended January 31, 1997 and April
30, 1997, because the customer purchased some of the inventory in question.
In the three months ended July 31, 1996 and in fiscal 1997, the Company also
recorded a restructuring charge of $3.0 million associated with the
relocation of its Hong Kong manufacturing operations to China.
(4) Sales to Maxtor were made on a consignment basis for years prior to fiscal
1996, on a turnkey basis for fiscal 1996, and on a partial turnkey basis for
fiscal 1997 and the three months ended July 31, 1997. If sales to Maxtor had
been made on a partial turnkey basis during fiscal 1995 and fiscal 1996, the
Company estimates that pro forma revenues from affiliates would have been
approximately $96.9 million and $108.5 million, respectively. Management
believes that if the partial turnkey arrangement with Maxtor had been in
place during fiscal 1995 and fiscal 1996, the net impact of such
arrangements on reported gross profit and income from operations would not
have been material. See Note 1 of Notes to Consolidated Financial
Statements. The foregoing are estimates made by the Company's management as
to events that did not actually occur, and no assurance can be given that,
had the Company's sales to Maxtor been on a partial turnkey basis, the above
results would actually have been achieved.
(5) For an explanation of the determination of net income (loss) per share and
per share calculations, see Note 1 of Notes to Consolidated Financial
Statements.
(6) Represents earnings per share as if long-term debt due to Maxtor and bank
borrowings had been retired at the beginning of the period or the date of
issuance of the debt, if later, and assumes that an equivalent amount was
financed through the sale of equity securities at the assumed price of this
Offering (less underwriting discount and offering expenses).
(7) Adjusted to reflect the sale by the Company of 5,000,000 shares of Class A
Common Stock offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
As used in this Prospectus, the "Company" refers to International
Manufacturing Services, Inc. and its consolidated subsidiaries, unless context
otherwise indicates. Except as otherwise indicated, the information contained in
this Prospectus reflects a three-for-two stock split of the Common Stock and
Preferred Stock effected in September 1997 and assumes (i) the conversion of all
outstanding shares of the Company's Series A Preferred Stock and Series B
Preferred Stock (the "Preferred Stock") into 3,490,575 shares of Class A Common
Stock and 2,509,425 shares of Class B Common Stock, respectively, which will
occur upon the consummation of this Offering, (ii) the Company will file an
amended and restated certificate of incorporation concurrently with the closing
of this Offering to eliminate the Company's currently existing series of
Preferred Stock and authorize undesignated preferred stock, and (iii) no
exercise of the Underwriters' over-allotment option. "Common Stock" as used
herein refers collectively and without distinction to the Company's Class A
Common Stock and Class B Common Stock. See "Capitalization," "Description of
Capital Stock," "Underwriting" and Note 14 of Notes to Consolidated Financial
Statements.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Class A Common Stock offered hereby. The discussion in this Prospectus
contains forward-looking statements. Future events anticipated in the
forward-looking statements contained in this Prospectus are uncertain. Actual
events, and the Company's actual results, may differ materially from those
predicted, assumed or discussed in such forward-looking statements. Factors that
may cause or contribute to such differences include, but are not limited to,
those discussed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." The cautionary statements
made in this Prospectus should be read as being applicable to all related
forward-looking statements, wherever they appear in this Prospectus.
SHORT PERIOD OF INDEPENDENT OPERATIONS; NO ASSURANCE OF FUTURE PROFITABILITY
The Company's Hong Kong operations, which commenced business in 1983, were
acquired in 1990 by Maxtor, a manufacturer of hard disk drives, along with other
manufacturing operations and assets. International Manufacturing Services, Inc.
was formed in November 1994 as a wholly-owned subsidiary of Maxtor. In June
1996, the Company was recapitalized as an independent company. Through December
1996, the Company was dependent upon Maxtor for certain financial and
administrative services. The Company has limited experience operating as an
independent entity, and there can be no assurance that it will be able to
operate effectively as an independent company. The Company only began
implementing independent financial and consolidated reporting systems and
procedures in June 1996. The Company believes that continued enhancements in
financial, management and operational information systems will be needed to
manage any expansion of the Company's operations. The failure to implement such
enhancements could have a material adverse effect upon the Company's business,
financial condition and operating results. See "Certain Transactions."
The Company's limited history of operations as an independent entity make
reliable predictions of future operating results difficult. In particular, the
Company's performance to date should not be considered indicative of future
results. There can be no assurance that any of the Company's business strategies
will be successful or that the Company will be able to sustain growth or
profitability on an annual or quarterly basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
VARIABILITY OF OPERATING RESULTS
The primary factors affecting the Company's annual and quarterly operating
results are: timing of customer orders; price competition; volume of orders
received relative to the Company's capacity; announcements, introductions and
market acceptance of a customer's new products; evolution in the life cycles of
customer products; timing of expenditures in anticipation of future customer
orders; effectiveness in managing manufacturing processes; changes in cost and
availability of labor and components; fluctuations in material costs; the mix of
material costs relative to labor and manufacturing overhead costs; and the mix
of revenues derived from consignment and turnkey manufacturing (consignment
manufacturing tends to result in higher gross margins but lower revenues, and
turnkey manufacturing tends to result in lower gross margins but higher
revenues). Other factors affecting operating results include the Company's level
of experience in manufacturing a particular product, the degree of automation
used in the assembly process, the efficiencies achieved by the Company in
managing inventories and fixed assets, and customer product delivery
requirements. An adverse change in any one of these factors or a combination
thereof could have a material adverse effect on the Company's future business,
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company has no long-term volume purchase commitments from any customer
other than Maxtor. From time to time, the Company may procure materials without
a customer purchase commitment. The Company must continually make other
significant decisions based on estimates of future conditions, including the
level of business that it will accept, production schedules, personnel needs and
other resource requirements. A variety of conditions, however, both specific to
particular customers and generally affecting the
7
<PAGE> 9
market segments served by the Company, may cause customers to cancel, reduce or
delay orders. The level and timing of a customer's orders may vary due to a
number of factors including product design changes, the customer's attempts to
balance its inventory, changes in the customer's manufacturing strategy,
acquisitions of or consolidations among customers, and variations in demand for
the customer's products. Most of the Company's customers typically do not commit
to firm delivery dates more than one quarter in advance. The Company's inability
to forecast the level of customer orders with certainty makes it difficult to
schedule production and maximize utilization of manufacturing capacity. In the
past, anticipated orders from several of the Company's customers have failed to
materialize or have been deferred in certain cases. On other occasions,
customers have required rapid increases in production which have placed a
significant burden on the Company's resources. Such customer order fluctuations
and deferrals have had a material adverse effect on the Company's results of
operations in the past, and there can be no assurance that the Company will not
experience such effects in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Backlog."
The Company's business has experienced and is expected to continue to
experience significant seasonality due, among other things, to the slowdown
during the summer months which historically has occurred in the electronics
industry. Typically, the Company's revenues are lowest during the first half of
a fiscal year and highest during the second half of the fiscal year, which ends
in April. In addition, the market segments served by the Company are subject to
economic cycles and have in the past experienced, and are likely in the future
to experience, recessionary periods. A recessionary period affecting the
industry segments served by the Company could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company occasionally experiences constraints in production capacity around
national holidays in Thailand and China. Results of operations in any period
should not be considered indicative of the results to be expected for any future
period, and fluctuations in operating results may also result in variations in
the price of the Class A Common Stock. In future periods, the Company's total
revenues or results of operations may be below the expectations of public market
analysts and investors; in such event, the price of the Class A Common Stock
would likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
CUSTOMER CONCENTRATION; DEPENDENCE ON CERTAIN INDUSTRIES
For fiscal 1996 and fiscal 1997, and for the three months ended July 31,
1997, Maxtor accounted for approximately 83.1%, 48.6% and 44.1% of total
revenues, respectively, and Bay Networks, Inc. ("Bay Networks") accounted for
approximately 1.6%, 31.3% and 42.1% of the Company's total revenues,
respectively. For fiscal 1996, Diamond Multimedia Systems, Inc. ("Diamond
Multimedia") accounted for approximately 12.8% of total revenues. The Company
expects to continue to depend upon a relatively small number of customers for a
significant percentage of its total revenues. There can be no assurance that the
Company's principal customers will continue to purchase services from the
Company at current levels, or at all. In the past, certain of the Company's
customers have significantly reduced or delayed the volume of manufacturing
services ordered from the Company. There can be no assurance that present or
future customers will not terminate their manufacturing arrangements with the
Company or significantly change, reduce or delay the manufacturing services
ordered from the Company. Significant reductions in sales to any of the
Company's principal customers, or the loss of any one or more major customers,
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has no long-term volume
purchase commitments from any customers other than Maxtor. The timely
replacement of canceled, delayed or reduced contracts with new business cannot
be assured. These risks are accentuated because a majority of the Company's
sales are to customers in the electronics industry, which is subject to rapid
technological change and product obsolescence. Accordingly, the Company is
dependent upon the continued growth, viability and financial stability of its
customers, which are in turn substantially dependent on the growth of the
computer peripherals, data communications and telecommunication markets. Any
factors adversely affecting the electronics industry in general, or any of the
Company's major customers in particular, 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" and "Business -- Customers, Sales and Marketing."
8
<PAGE> 10
MAXTOR CORPORATION -- BUSINESS RISKS; AFFILIATION
Maxtor is a wholly-owned subsidiary of Hyundai Electronics America and
historically has been the Company's largest customer. Maxtor develops,
manufactures and markets hard disk drive storage products for personal computer
systems. Maxtor's business depends in large part upon its ability to continue to
develop and market new hard disk drive products successfully. Any adverse
developments affecting Maxtor could adversely affect its demand for the
Company's services. Maxtor has experienced losses in each of the past five
fiscal years. During the first half of fiscal 1997, orders from Maxtor were
reduced significantly below what the Company expected, and the Company's
operating results were adversely affected. The loss of Maxtor's sales volume or
a significant portion thereof would have a material adverse effect on the
Company's business, financial condition and results of operations.
Maxtor is contractually entitled to one representative on the Company's
Board of Directors. Although Maxtor and the Company have separate managements
and boards of directors, Maxtor is a major customer of the Company, a major
shareholder, and an executive officer of Maxtor is a member of the Company's
board of directors. This creates the risk that the Company may give preference
to Maxtor over other customers in the allocation of components in short supply
or production capacity or in the pricing of manufacturing services. Concern over
such risks could affect the willingness of customers and potential customers of
the Company to conduct business with the Company. In an attempt to reduce
potential pricing and other conflicts, in June 1996, the Company and Maxtor
executed a three-year manufacturing and services agreement, the terms of which
the Company believes are no less favorable to the Company and no more favorable
to Maxtor than arrangements that either company could negotiate with others in
an arm's-length transaction. In addition, Maxtor has a second source supplier of
services provided by the Company. Conflicts of interest could arise, however,
notwithstanding such agreement or upon its termination or renegotiation. See
"Certain Transactions."
LIMITED AVAILABILITY OF MATERIALS
A significant portion of the Company's total revenues is derived from
turnkey manufacturing, in which the Company performs both materials procurement
and assembly services and bears the risk of materials price increases. Almost
all products manufactured by the Company require one or more materials that are
ordered from single or sole sources. Some of these materials are allocated by
such single or sole sources in response to supply shortages. In some cases,
supply shortages may substantially curtail the Company's production of all
assemblies using that component. Further, at various times there have been
industry wide shortages of electronic components, particularly DRAMs, memory
modules, logic devices, microprocessors, specialized capacitors, crystals, ASICs
and other integrated circuits. Materials shortages could result in manufacturing
and shipping delays or price increases, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Selected Quarterly Operating Results" and
"Business -- International Manufacturing Capability."
COMPETITION
The electronics assembly and manufacturing industry is intensely
competitive and includes numerous local, 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 cost,
manufacturing technology, product quality, responsiveness and flexibility, the
range of services provided and the location of facilities. To be competitive,
the Company must provide technologically advanced manufacturing services, high
product quality levels, 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 against numerous domestic
and foreign manufacturers, including Flextronics International Ltd., Jabil
Circuits, Inc., Sanmina Corporation, SCI Systems, Inc. ("SCI") and Solectron
Corporation, as well as certain large Asia entities. The Company also faces
indirect competition from the 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 international
operations, as well as substantially greater manufacturing, financial, volume
procurement, research and development, and
9
<PAGE> 11
marketing resources than the Company. 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 and adding new 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 or operating results. See
"Business -- Competition."
FUTURE CAPITAL NEEDS
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 management information systems, working
capital and debt service. The Company has added significant manufacturing
capacity and increased capital expenditures over the past year. It has relocated
its Hong Kong manufacturing facilities to China, expanded its facilities in
Thailand, established a manufacturing facility in San Jose and, through the
acquisition of Pentagon Systems, Inc. ("Pentagon Systems"), established a design
and prototype production operation in San Jose. The Company also continues to
invest in manufacturing equipment and management information systems. The
Company anticipates that its capital expenditures will continue to increase as
the Company expands its facilities in Asia, 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 Company also intends to use a portion of the net
proceeds of this Offering to repay $20.0 million principal amount senior
subordinated notes due Maxtor (the "Maxtor Notes") and all of its outstanding
bank borrowings, which was $7.5 million at July 31, 1997. Upon completion of
this Offering and the application of the estimated net proceeds therefrom, as of
July 31, 1997, the Company would have had approximately $36.0 million in working
capital, including approximately $24.5 million in cash and cash equivalents.
After this Offering, the Company will still have outstanding approximately $12.5
million aggregate principal amount of junior subordinated notes. Accordingly,
upon completion of this Offering, the Company will continue to have limited cash
resources and significant future obligations and expects that it will require
additional capital to support future growth, if any. 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 curtail
its capital expenditures and facilities expansion, which could materially
adversely affect the Company's business, financial condition and results of
operations. Moreover, the Company's need to raise additional capital through the
issuance of equity securities may result in additional dilution to earnings per
share. See "Use of Proceeds," "Capitalization," "Dilution" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RISKS OF INTERNATIONAL OPERATIONS
Substantially all of the Company's manufacturing operations are located in
Thailand and China. The distance between Asia and the United States creates
logistical barriers, and the Company's success depends in part on its ability to
convince OEMs in the United States that the advantages of the Company's
Asia-based manufacturing facilities outweigh any perceived inconvenience or
uncertainty of overseas manufacturing.
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 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 and cost of compliance with a
variety of foreign laws, and, in certain parts of the world, political
instability. For example, the Company could be adversely affected if the current
policies encouraging foreign investments or foreign trade by Thailand and China
were to be abandoned. 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. In the past, United States
government officials have discussed the possible refusal of the United States to
extend China's "most
10
<PAGE> 12
favored nation" status. 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 operations and assets are subject to significant political,
economic, legal and other uncertainties in China and Thailand. Under its current
leadership, the Chinese government has been pursuing economic reform policies,
including the encouragement of foreign trade and investment and greater economic
decentralization. No assurance can be given, however, that the Chinese
government will continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be significantly altered
from time to time. Moreover, despite progress in developing its legal system,
China does not have a comprehensive and highly developed system of laws,
particularly with respect to foreign investment activities and foreign trade.
Enforcement of existing and future laws and contracts is uncertain, and
implementation and interpretation thereof may be inconsistent. As the Chinese
legal system develops, the promulgation of new laws, changes to existing laws
and the preemption of local regulations by national laws may adversely affect
foreign operations in China. While Thailand has a longer history of promoting
foreign investments than China, Thailand has recently experienced economic
turmoil and a significant devaluation of the Thai currency. There can be no
assurance that this period of economic turmoil will not result in the reversal
of current policies encouraging foreign investment and trade, restrictions on
the transfer of funds overseas, employee turnover, labor unrest or other
domestic Thai economic problems that could adversely affect the Company. To
date, economic problems in Thailand have not had an adverse impact on the
Company's business, financial condition or results of operations, but there can
be no assurance that there will not be such an impact in the future.
RISK OF INCREASED TAXES
The Company has structured its global operations to take advantage of the
generally lower statutory income tax rates in Asian countries and certain tax
holidays in China and Thailand that have been extended to encourage foreign
investment. As part of this structure, the Company renders certain technical and
administrative services on behalf of its Asia subsidiaries in the United States.
If tax rates were to rise, if the Company's tax holidays were not renewed or if
tax authorities were to challenge successfully the adequacy of the amounts paid
to the Company for these services or generally the manner in which profits are
recognized and allocated among the Company and its subsidiaries, the Company's
taxes would increase and its business, financial condition, results of
operations or cash flow could be materially adversely affected. The Company
believes that profits from its operations in Asia are not sufficiently connected
to the United States to give rise to United States taxation, but there can be no
assurance that United States tax authorities will not challenge the Company's
position or, if such challenge is made, that the Company would prevail in any
such dispute. In certain circumstances, United States tax law requires a United
States parent corporation to recognize as current income profits earned by its
foreign subsidiaries. The Company believes that, except for certain passive
income which is not expected to be material in amount, these laws should not be
applicable to the subsidiaries' activities and income, but there can be no
assurance that United States tax authorities will not challenge the Company's
position or, if such challenge is made, that the Company would prevail in any
such dispute. If the Company's profits from its Asia operations become subject
to United States income taxes, the Company's taxes could increase, and its
results of operations and cash flow could be materially adversely affected. The
expansion by the Company of its operations in the United States may also
increase its effective tax rate. The current maximum United States federal
income tax rate is 35.0%; the Company currently expects its effective income tax
rate for fiscal 1998 to be approximately 14%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Provision for Income Taxes."
CURRENCY FLUCTUATIONS
While the Company transacts business predominately in United States
dollars, and substantially all of its revenues are collected in United States
dollars, a portion of the Company's costs are denominated in other currencies,
such as the Thai baht, the Hong Kong dollar and the Chinese renminbi. As a
result, changes in the
11
<PAGE> 13
relation of these and other currencies to the United States dollar will affect
the Company's costs of goods sold and operating expenses and could result in
exchange losses. To date, the recent economic problems in Thailand, including
the devaluation of the Thai baht, have not had an adverse impact on the
Company's business, financial condition or results of operations, but there can
be no assurance that there will not be such an impact in the future. The impact
of future exchange rate fluctuations on the Company's results of operations
cannot be accurately predicted. From time to time the Company has engaged in,
and may continue to engage in, exchange rate hedging activities. There can be no
assurance that any hedging techniques implemented by the Company will be
successful.
MANAGEMENT OF GROWTH AND EXPANDED OPERATIONS
During fiscal 1997 and through the three months ended July 31, 1997, the
Company experienced a period of rapid expansion through both internal growth and
acquisition. Expansion has caused, and is expected to continue to cause, strain
on the Company's infrastructure, including its managerial, technical, financial
and other resources. To manage further growth, the Company must continue to
enhance financial and operational controls, develop additional executive
officers and hire qualified personnel. Continued growth will also require
increased investments to add manufacturing capacity and to enhance management
information systems. The Company may experience certain inefficiencies as it
integrates new operations and manages geographically dispersed operations. There
can be no assurance that the Company will be able to manage its expansion
effectively, and a failure to do so could have a material adverse effect on the
Company's business, financial condition or 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
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," "Business -- Strategy" and
" -- International Manufacturing Capability."
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 retaining key managerial
and technical employees to date, the loss of services of certain key employees,
in particular any of its three executive officers, could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Management."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy includes the expansion of its business and
manufacturing capabilities, including through acquisitions. The Company
occasionally reviews various acquisition prospects, including companies or
manufacturing process technologies complementary to the Company's business.
Acquisitions involve numerous risks, including: difficulties in the assimilation
of the operations, products, personnel and cultures of the acquired companies;
the ability to manage geographically remote units effectively; the diversion of
management attention from other day-to-day business concerns; difficulties
entering markets in which the Company has limited or no direct experience; and
the potential loss of key employees of the acquired companies. In addition,
acquisitions may result in dilutive issuances of equity securities; incurrence
of additional debt; reduction of existing cash balances; amortization expenses
related to goodwill and other intangible assets; and other charges to operations
that may have a material adverse effect on the Company's business, financial
condition or results of operations. Moreover, there can be no assurance that any
equity or debt financings proposed in connection with any acquisition would be
available to the Company on acceptable terms, or at all, if suitable strategic
acquisition opportunities were to arise. Although the Company expects to analyze
any opportunity before committing its resources, there can be no assurance that
any acquisition that is completed will result in long-term benefits to the
Company or that it will be able to manage the resulting business effectively.
12
<PAGE> 14
TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT
The markets in which the Company's customers compete are characterized by
rapid technological change, evolving industry standards and frequent product
introductions and enhancements. The Company is continually evaluating the
advantages and feasibility of new manufacturing processes. The Company believes
that its future success will depend upon its ability to deliver manufacturing
services which meet changing customer needs and to successfully anticipate or
respond to technological changes in manufacturing processes on a cost-effective
and timely basis. There can be no assurance that the Company will be successful
in these efforts. See "Business -- Services."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this Offering, the current directors and executive
officers of the Company and their respective affiliates will, in the aggregate,
beneficially own approximately 72.3% of the Company's outstanding shares of
Common Stock (including shares issuable pursuant to stock options which may be
exercised within 60 days of July 31, 1997). As a result, such persons, acting
together, would have the ability to approve or disapprove significant corporate
transactions. In addition, effective upon the closing of the Offering, the Board
of Directors will have the authority to issue up to 10,000,000 shares of
undesignated preferred stock, to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any unissued series of undesignated preferred stock, and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the Company's stockholders. The preferred stock could
be issued with voting, liquidation, dividend and other rights superior to the
rights of the Common Stock. The concentration of ownership and the issuance of
preferred stock under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. See "Principal Stockholders" and
"Description of Capital Stock."
ENVIRONMENTAL COMPLIANCE
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. Although the Company believes that it is currently in
compliance with all material environmental regulations, any failure by the
Company to comply with present and future regulations could subject it to future
liabilities or cause affected operations to be suspended. In addition, such
regulations could restrict the Company's ability to expand its facilities or
could require the Company to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's certificate of incorporation and bylaws contain provisions
that may discourage or prevent certain types of transactions involving an actual
or potential change in control of the Company, including transactions in which
the stockholders might otherwise receive a premium for their shares over
then-current market prices, and may limit the ability of the stockholders to
approve transactions that they may deem to be in their best interest. In
addition, the Board of Directors has the authority to fix the rights and
preferences of up to 10,000,000 shares of undesignated preferred stock and to
issue such shares without action by the Company's stockholders, which may have
the effect of delaying or preventing a change in control of the Company. It is
possible that the provisions in the Company's certificate of incorporation and
bylaws, and the ability of the Board of Directors to issue the preferred stock,
may have the effect of delaying, deferring or preventing a change of control of
the Company, may discourage bids for the Class A Common Stock at a premium over
its market price, and may adversely affect the market price of the Class A
Common Stock and the voting and other rights of the holders of Class A Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALES; REGISTRATION RIGHTS
Sales of a substantial number of shares of Class A Common Stock in the
public market following this Offering could adversely affect the market price
for the Company's Class A Common Stock. The number of
13
<PAGE> 15
shares of Class A Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"), and lock-up agreements under which the holders of such shares
have agreed not to sell or otherwise dispose of any of their shares for a period
of 180 days after the effective date of the Offering made hereby without the
prior written consent of Montgomery Securities, which may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. As a result of these restrictions,
shares of Common Stock will be eligible for future sale as follows: on the date
of this Prospectus, no shares other than the 5,000,000 shares offered hereby;
180 days after the effective date of the Offering, an additional 14,327,211
shares (including 1,509,711 shares issuable upon exercise of outstanding
options) will be eligible for sale. In addition, the Company intends to file
within 90 days after the effective date of this Offering a registration
statement on Form S-8, covering the shares of Class A Common Stock subject to
outstanding options or reserved for issuance under the Company's stock and stock
option plans. See "Management -- Compensation Plans." Effective 180 days after
the date of this Offering, holders of approximately 13,327,500 shares of Class A
Common Stock will be entitled to certain registration rights with respect to
such shares. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have a material adverse effect on the market price for the Class A
Common Stock. See "Shares Eligible for Future Sale."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that an active public market for the
Class A Common Stock will develop or be sustained after the Offering. The
initial public offering price will be determined by negotiations between the
Company and the representatives of the underwriters in this Offering and may not
be indicative of future market prices. The market price of the Company's Class A
Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results and other factors, such as
announcements of new products by the Company or its competitors and changes in
financial estimates by securities analysts or other events or factors. Moreover,
the stock market and the market prices for many technology companies have in
recent years experienced significant price and volume fluctuations. These
fluctuations often have been unrelated to the operating performance of the
specific companies whose stocks are traded. Broad market fluctuations, as well
as economic conditions generally and in the EMS industry specifically, may
adversely affect the market price of the Class A Common Stock. There can be no
assurance that the market price of the Class A Common Stock will not decline
below the initial public offering price. See "Underwriting."
DILUTION
Investors participating in this Offering will incur immediate and
substantial dilution of book value. To the extent that outstanding options to
purchase Class A Common Stock are exercised, there will be further dilution. See
"Dilution" and "Underwriting."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of 5,000,000 shares of Class
A Common Stock being offered hereby are estimated to be approximately $50.2
million at an assumed initial public offering price of $11.00 per share
(approximately $57.8 million if the Underwriters' over-allotment option is
exercised in full). Approximately $20.0 million of the net proceeds will be used
to pay down indebtedness under the Maxtor Notes, which are payable in three
equal installments on June 10, 1999, June 10, 2000 and June 10, 2001 and
currently bear interest at a weighted average rate of approximately 9.7% per
annum. See "Certain Transactions." The Company also intends to repay all of its
outstanding bank borrowings, which it currently anticipates will be
approximately $19.0 million upon completion of this Offering. Such bank
borrowings bear interest at either the prime rate plus 1.5% or LIBOR plus 2.25%
and mature in June 2001. At July 31, 1997, the amount of such bank borrowings
outstanding was approximately $7.5 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company expects to use the remaining net proceeds from
this Offering for capital expenditures and general corporate purposes, including
working capital. A portion of the proceeds may also be used to acquire or invest
in complementary businesses or products, to obtain the right to use
complementary technologies or to expand operations into new geographic regions;
however, there are no negotiations or discussions with respect to any such
transactions at the present time. Pending use of the net proceeds for the above
purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment-grade obligations.
DIVIDEND POLICY
For the foreseeable future, the Company expects to retain any earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements and operating and financial condition of the
Company, among other factors. In addition, the Company's credit facility
restricts the Company's ability to declare dividends.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company and
certain short-term liabilities as of July 31, 1997, (i) on an actual basis, (ii)
pro forma to give effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock as a result of this Offering and the amendment
of the Company's certificate of incorporation, and (iii) as adjusted to reflect
the sale of 5,000,000 shares of Class A Common Stock offered hereby (at an
assumed initial public offering price of $11.00 per share and after deducting
the estimated underwriting discounts and offering expenses) and the application
of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JULY 31, 1997
----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank borrowings........................................... $ 7,500 $ 7,500 $ --
Current portion of long-term debt......................... 80 80 80
Long-term debt, less current portion:
Long-term debt.......................................... $ 12,635 $ 12,635 $ 12,635
Long-term debt due Maxtor............................... 20,000 20,000 --
-------- -------- --------
Total long-term debt............................ 32,635 32,635 12,635
Total stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 8,509,425 shares
authorized actual; 10,000,000 authorized pro forma
and as adjusted; 6,000,000 issued and outstanding
actual; none issued and outstanding pro forma and as
adjusted............................................. 6 -- --
Common Stock, $0.001 par value; 25,500,000 shares
authorized actual; 100,000,000 authorized pro forma
and as adjusted; 7,327,500 issued and outstanding
actual; 13,327,500 issued and outstanding pro forma;
and 18,327,500 issued and outstanding as
adjusted(1).......................................... 7 13 18
Additional paid-in capital.............................. 12,793 12,793 62,938
Distributions in excess of net book value............... (20,608) (20,608) (20,608)
Accumulated deficit..................................... (734) (734) (734)
-------- -------- --------
Total stockholders' equity (deficit)................. (8,536) (8,536) 41,614
-------- -------- --------
Total capitalization............................ $ 24,099 $ 24,099 $ 54,249
======== ======== ========
</TABLE>
- ---------------
(1) Shares issued and outstanding as adjusted represents 15,818,075 shares of
Class A Common Stock and 2,509,425 shares of Class B Common Stock, and
excludes (i) 2,895,000 shares of Common Stock issuable upon exercise of
outstanding options granted under the Company's 1996 Stock Option Plan, (ii)
420,000 shares reserved for future issuance under the Company's 1996 Stock
Option Plan, (iii) 250,000 shares reserved for future issuance under the
Company's 1997 Employee Stock Purchase Plan and 1997 Non-U.S. Employee Stock
Purchase Plan, (iv) 1,750,000 shares reserved for future issuance under the
Company's 1997 Stock Plan (of which options to purchase up to 1,027,500
shares are intended to be granted contingent upon this Offering) and (v)
225,000 shares reserved for future issuance under the Company's 1997
Director Option Plan (of which options to purchase 70,000 shares will be
automatically granted contingent upon this Offering). See
"Management -- Compensation Plans" and Note 14 of Notes to Consolidated
Financial Statements.
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<PAGE> 18
DILUTION
The net tangible book (deficit) value of the Company as of July 31, 1997,
after giving effect to the automatic conversion of the Preferred Stock upon the
closing of this Offering, was ($11,672,000), or ($0.88) per share of Common
Stock. Net tangible book value per share is determined by dividing the tangible
book value of the Company (total tangible assets less total liabilities) by the
number of outstanding shares of Common Stock at that date. After giving effect
to the sale by the Company of the 5,000,000 shares of Class A Common Stock
offered hereby (based upon an assumed initial public offering price of $11.00
per share and after deducting estimated underwriting discounts and estimated
offering expenses), the Company's net tangible book value at July 31, 1997 would
have been $38,478,000, or $2.10 per share. This represents an immediate increase
in net tangible book value to existing stockholders of $2.98 per share and an
immediate dilution to new public investors of $8.90 per share. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $11.00
Net tangible book value (deficit) per share as of July
31, 1997.............................................. ($0.88)
Increase in net tangible book value per share
attributable to new public investors.................. 2.98
======
Net tangible book value per share after Offering........... 2.10
------
Dilution per share to new public investors................. $ 8.90
======
</TABLE>
The following table summarizes, on a pro forma basis as of July 31, 1997,
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the new public investors (based upon an assumed
initial public offering price of $11.00 per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 13,327,500 72.7% $13,400,000 19.6% $ 1.01
New public investors..... 5,000,000 27.3 55,000,000 80.4 $ 11.00
---------- ----- ----------- -----
Total.......... 18,327,500 100.0% $68,400,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations exclude (i) 2,895,000 shares of Common Stock at
a weighted average exercise price of $1.02 per share issuable upon exercise of
outstanding options granted under the Company's 1996 Stock Option Plan, (ii)
420,000 shares reserved for future issuance under the Company's 1996 Stock
Option Plan, (iii) 250,000 shares reserved for future issuance under the
Company's 1997 Employee Stock Purchase Plan and 1997 Non-U.S. Employee Stock
Purchase Plan, (iv) 1,750,000 shares reserved for future issuance under the
Company's 1997 Stock Plan (of which options to purchase up to 1,027,500 shares
are intended to be granted contingent upon this Offering), and (v) 225,000
shares reserved for future issuance under the Company's 1997 Director Option
Plan (of which options to purchase 70,000 shares will be automatically granted
contingent upon this Offering). See "Management -- Compensation Plans" and Note
14 of Notes to Consolidated Financial Statements.
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<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein. The consolidated statement of operations data set
forth below with respect to the years ended March 31, 1995 and 1996 and April
30, 1997, and the consolidated balance sheet data at March 31, 1996 and April
30, 1997, are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this Prospectus. The
consolidated statement of operations data for the year ended March 31, 1994, and
the consolidated balance sheet data at March 31, 1995, are derived from, and are
qualified by reference to, the audited consolidated financial statements not
included herein. The consolidated statement of operations data for the year
ended March 31, 1993, and the consolidated balance sheet data at March 31, 1993
and 1994, are derived from, and are qualified by reference to, unaudited
consolidated financial statements not included herein. The selected consolidated
financial data for the three months ended July 31, 1996 and 1997, and as of July
31, 1997, are derived from, and are qualified by reference to, unaudited
consolidated financial statements included elsewhere herein. The unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company believes are necessary for a
fair presentation of such information for the periods presented. Operating
results for the three months ended July 31, 1997 are not necessarily indicative
of the results that may be expected for the year ending April 30, 1998 or any
other future period. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED(1) ENDED
--------------------------------------------------------- -------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, APRIL 30, JULY 31, JULY 31,
1993(2) 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ -- $ 254 $ 3,089 $ 68,361 $ 80,546 $21,139 $34,500
Revenues from affiliates(3)..................... 42,425 42,093 36,284 340,487 89,149 26,276 30,236
------- ------- ------- -------- -------- ------- -------
Total revenues.............................. 42,425 42,347 39,373 408,848 169,695 47,415 64,736
Cost of revenues(4)............................. 35,302 35,794 33,795 395,474 155,028 46,363 58,397
------- ------- ------- -------- -------- ------- -------
Gross profit.................................... 7,123 6,553 5,578 13,374 14,667 1,052 6,339
Operating expenses:
Selling, general and administrative........... 2,764 2,580 2,848 5,380 8,041 1,704 2,845
Restructuring charge(5)....................... -- -- -- -- 3,000 3,000 (179)
------- ------- ------- -------- -------- ------- -------
Total operating expenses.................... 2,764 2,580 2,848 5,380 11,041 4,704 2,666
Income (loss) from operations................... 4,359 3,973 2,730 7,994 3,626 (3,652) 3,673
Interest expense, net........................... 161 197 180 64 3,972 676 1,255
------- ------- ------- -------- -------- ------- -------
Income (loss) before income taxes............... 4,198 3,776 2,550 7,930 (346) (4,328) 2,418
Provision for income taxes...................... 685 662 554 1,793 253 -- 337
------- ------- ------- -------- -------- ------- -------
Net income (loss)............................... $ 3,513 $ 3,114 $ 1,996 $ 6,137 $ (599) $(4,328) $ 2,081
======= ======= ======= ======== ======== ======= =======
Net income (loss) per share..................... $ (0.04) $ (0.27) $ 0.13
======== ======= =======
Shares used to compute net income (loss) per
share(6)...................................... 16,108 16,108.. 16,108
SUPPLEMENTAL DATA:
Supplemental income (loss) per share(7)......... $ 0.06 $ (0.23) $ 0.14
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 31, MARCH 31, APRIL 30, JULY 31,
1993(2) 1994(2) 1995 1996 1997 1997
--------- --------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................. $ 6,316 $ 7,583 $ 7,834 $10,716 $ 3,980 $ 5,827
Total assets.................................... 24,316 21,764 24,943 83,687 60,471 70,809
Long-term debt, less current portion............ 2,889 1,845 708 -- 12,660 12,635
Long-term debt due Maxtor....................... 8,469 8,469 8,469 4,300 20,000 20,000
Total stockholders' equity (deficit)............ 7,352 6,666 8,662 17,666 (10,367) (8,536)
</TABLE>
- ---------------
(1) Prior to fiscal 1997, the Company's fiscal year ended on the Saturday
nearest to March 31. Commencing with fiscal 1997, the Company's fiscal year
ends on the Saturday nearest to April 30. Prior to June 1996, the Company's
operations were conducted through certain wholly-owned subsidiaries of
Maxtor.
(2) The consolidated statement of operations data for the year ended March 31,
1993, and the consolidated balance sheet data at March 31, 1993 and 1994,
are derived from, and are qualified by reference to, unaudited consolidated
financial statements not included herein.
(3) Sales to Maxtor were made on a consignment basis for years prior to fiscal
1996, on a turnkey basis for fiscal 1996, and on a partial turnkey basis for
fiscal 1997 and the three months ended July 31, 1997. If sales to Maxtor had
been made on a partial turnkey basis during fiscal 1995 and fiscal 1996, the
Company estimates that pro forma revenues from affiliates would have been
$96.9 million and $108.5 million, respectively. Management believes that if
the partial turnkey arrangement with Maxtor had been in place during fiscal
1995 and fiscal 1996, the net impact of such arrangements on reported gross
profit and income from operations would not have been material. See Note 1
of Notes to Consolidated Financial Statements. The foregoing are estimates
made by the Company's management as to events that did not actually occur,
and no assurance can be given that, had the Company's sales to Maxtor been
on a partial turnkey basis, the above results would actually have been
achieved.
18
<PAGE> 20
(4) Cost of revenues for the three months ended July 31, 1996 included a $2.0
million inventory charge associated with a customer's cancellation of
orders. Portions of this reserve were subsequently reversed in the three
months ended January 31, 1997 and April 30, 1997, because the customer
purchased some of the inventory in question.
(5) In June 1996, the Company relocated its Hong Kong manufacturing operations
to China. The restructuring charge totaled $3.0 million and involved the
termination of approximately 900 employees for approximately $2.3 million
and excess facilities costs of approximately $700,000. As of July 31, 1997,
the Company had completed all of its restructuring actions.
(6) Net income per share data for prior fiscal years have not been presented as
such amounts are not deemed to be meaningful in view of the significant
change in capital structure of the Company in June 1996 as a result of the
Recapitalization. See Note 1 of Notes to Consolidated Financial Statements
for an explanation of the method used to determine the number of shares for
computing per share amounts.
(7) Represents earnings per share as if long-term debt due to Maxtor and bank
borrowings had been retired at the beginning of the period or the date of
issuance of the debt, if later, and assumes that an equivalent amount was
financed through the sale of equity securities at the assumed price of this
Offering (less underwriting discount and offering expenses).
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
International Manufacturing Services, Inc. provides product design,
prototyping, printed circuit board assembly, final system assembly, materials
procurement, inventory management, testing, packaging, distribution and depot
repair services to original equipment manufacturers in the electronics industry.
The Company's Hong Kong operations, which commenced business in 1983, were
acquired in 1990 by Maxtor, a manufacturer of hard disk drives, along with other
manufacturing operations and assets. International Manufacturing Services, Inc.
was formed in November 1994 as a wholly-owned subsidiary of Maxtor, and in June
1996 the Company was recapitalized as an independent company.
On June 13, 1996, the Company redeemed approximately 76.5% of Maxtor's
share ownership with a combination of $25.0 million cash, $20.0 million
principal amount Maxtor Notes and a warrant for 300,000 shares of Class A Common
Stock, which warrant is not currently exercisable and terminates if the Maxtor
Notes are repaid prior to June 13, 1998. The Company raised the cash portion of
the redemption price by issuing to a group of investors a combination of Common
Stock, Preferred Stock and junior subordinated notes. These redemption and
financing transactions are collectively referred to in this Prospectus as the
"Recapitalization." For accounting purposes, the redemption of Maxtor's share
ownership was treated as a recapitalization and, accordingly, no change in the
accounting basis of the Company's assets was made. See "Certain Transactions,"
"Description of Capital Stock" and Note 1 of Notes to Consolidated Financial
Statements.
Prior to fiscal 1996, substantially all the Company's revenues were derived
from sales to Maxtor. In connection with the Recapitalization, Maxtor agreed to
purchase from the Company certain quarterly minimum quantities of products
through June 1999, provided that the Company continues to be competitive on the
bases of price and quality. Over the last two fiscal years, the Company has
evolved from being a captive EMS provider to Maxtor to an independent EMS
provider serving 15 additional customers. These customers collectively
represented approximately 55.9% of total revenues for the three months ended
July 31, 1997. The Company typically enters into manufacturing contracts with
each of its customers, but has no long-term volume purchase commitments from any
customer other than Maxtor. The Company remains dependent upon a relatively
small number of customers for a significant percentage of its revenues. For
fiscal 1996 and 1997, and the three months ended July 31, 1997, Maxtor accounted
for approximately 83.1%, 48.6% and 44.1% of total revenues, respectively, and
Bay Networks accounted for approximately 1.6%, 31.3% and 42.1% of total
revenues, respectively. For fiscal 1996, Diamond Multimedia accounted for
approximately 12.8% of total revenues.
During fiscal 1997, the Company took significant steps to expand its
manufacturing operations and to broaden the range of the manufacturing services
it provides. As part of its strategy to locate operations in low cost regions,
the Company transferred its Hong Kong manufacturing operations to China while
retaining its component procurement and regional administrative functions in
Hong Kong. In connection with the relocation, the Company recorded a charge of
$3.0 million associated with employee severance and excess facilities costs. The
Company also expanded its manufacturing facilities in Thailand from 41,000
square feet to 93,000 square feet. In January 1997, the Company acquired the
assets of Pentagon Systems, a design and prototype production company, for $4.4
million cash, 450,000 shares of Class A Common Stock and assumed certain
liabilities. The Company recorded goodwill of $3.4 million in connection with
the acquisition, which is being amortized over seven years on a straight line
basis. In May 1997, the Company commenced manufacturing operations in San Jose,
California.
The Company has chosen to locate its manufacturing facilities in certain
countries in Asia to improve operational efficiencies and to take advantage of
generally lower income tax rates and the availability of tax incentives extended
to encourage foreign investment. The Company has operating subsidiaries located
in foreign countries, some of which enjoy multiple year tax holidays. As a
result, the Company estimates its effective tax rate for fiscal 1998 to be
approximately 14%.
20
<PAGE> 22
The Company's sales to Maxtor were made on a consignment basis during
fiscal 1995, on a turnkey basis during fiscal 1996, and on a partial turnkey
basis during fiscal 1997. The Company's sales to customers other than Maxtor are
generally performed on a turnkey basis. The extent to which revenues are
generated on a turnkey or consignment basis has a significant effect on the
level of the Company's total revenues and gross margin. For revenues generated
on a turnkey basis, the Company procures all materials used to manufacture the
customer's product, which results in higher revenue per unit. For revenues
generated on a consignment basis, the customer procures the materials and
provides them to the Company at no charge. As a result, revenues from turnkey
manufacturing tend to be higher and gross margins tend to be lower than revenues
and margins generated from consignment manufacturing. The Company's total
revenues and overall gross margin may fluctuate significantly from period to
period depending upon the mix of revenues derived from turnkey and consignment
manufacturing.
The United States dollar is the functional currency of the Company's
foreign subsidiaries and substantially all of its revenues are collected in
United States dollars. Exchange gains and losses resulting from transactions
denominated in currencies other than the United States dollar are included in
results of operations for the year. To date, such amounts have not been
material, and the Company has not undertaken any material foreign currency
hedging activities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1997
Total Revenues
The Company's total revenues increased 36.5% from $47.4 million in the
three months ended July 31, 1996 to $64.7 million in the three months ended July
31, 1997. Revenues from affiliates increased 15.1% from $26.3 million in the
three months ended July 31, 1996 to $30.2 million in the three months ended July
31, 1997. Revenues from other customers increased 63.2% from $21.1 million in
the three months ended July 31, 1996 to $34.5 million in the three months ended
July 31, 1997. The increase in total revenues was the result of increased demand
from Maxtor and Bay Networks, a higher percentage of total revenues derived from
turnkey operations and, to a lesser extent, sales to new accounts.
Gross Profit
Gross profit consists of total revenues less the costs of revenues, which
includes the cost of materials, the cost of labor and manufacturing overhead.
Gross profit increased from $1.1 million in the three months ended July 31, 1996
to $6.3 million in the three months ended July 31, 1997. Gross margin (gross
profit as a percentage of total revenues) increased from 2.2% to 9.8% for the
same periods. Gross profit and gross margin in the three months ended July 31,
1996 were adversely affected by a $2.0 million inventory charge associated with
a financially troubled customer's cancellation of orders. Increases in gross
profit and gross margin during the three months ended July 31, 1997 were
attributable to the higher utilization rate of the Company's manufacturing
facilities and labor savings resulting from the relocation of the Company's Hong
Kong manufacturing facility to China.
The Company's gross margin may fluctuate from period to period depending
upon the mix of revenues derived from turnkey and consignment manufacturing,
product mix, production efficiencies, utilization of manufacturing capacity and
pricing within the electronics industry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel
and related overhead costs for sales, marketing, finance, human resources,
information systems and general management. Selling, general and administrative
expenses increased 67.0% from $1.7 million in the three months ended July 31,
1996 to $2.8 million in the three months ended July 31, 1997. As a percentage of
total revenues, selling, general and administrative expenses increased from 3.6%
to 4.4% for the same periods. The increase in absolute dollars was the result of
increased personnel costs, marketing expenses to support new customer
development,
21
<PAGE> 23
increased administrative expenses associated with the new manufacturing facility
in China, expanded operations in Thailand and the inclusion of Pentagon Systems.
The Company anticipates that its selling, general and administrative expenses
will generally continue to increase in absolute dollars for the foreseeable
future.
Net Interest Expense
Net interest expense increased from approximately $676,000 in the three
months ended July 31, 1996 to approximately $1.3 million in the three months
ended July 31, 1997. The increase was primarily due to Recapitalization-related
interest expense for a full quarter in fiscal 1998 compared to a partial quarter
of such interest expense in the comparable prior period.
Provision for Income Taxes
For the three months ended July 31, 1996, the Company incurred losses and
did not provide for any income taxes. For the three months ended July 31, 1997,
the Company recorded a provision for income taxes of $337,000.
The Company conducts its operations through subsidiaries in China,
Thailand, Hong Kong, the Cayman Islands and the United States, each of which is
subject to the taxation rules of the country in which it operates. The Company
has structured its global operations to take advantage of the generally lower
statutory income tax rates in Asian countries and certain tax holidays in China
and Thailand that have been extended to encourage foreign investment. The
Company's Hong Kong subsidiary is subject to local income taxes at a statutory
rate of 16.5%. The Company's Thailand subsidiary enjoys a full tax holiday from
the current local statutory rate of 30.0% through the year 2003 and a tax rate
of one-half of the then current local statutory rate for the ensuing five
calendar years. The Company expects to be granted a full tax holiday from the
current local statutory rate of 30.0% for its China subsidiary's calendar 1997
and 1998 operations and a tax rate of one-half of the then current local
statutory rate for the ensuing three calendar years.
The Company's effective income tax rate is a function of the mix of income
in the various countries in which it operates and the applicable income tax
rates in such countries. The Company derives substantially all of its income
from its foreign operations for which it either enjoys certain tax holidays or
pays foreign income taxes at local statutory rates, which are significantly
lower than the United States statutory rate of 35.0%. The Company currently
expects its effective tax rate for fiscal 1998 to be approximately 14%. The
losses incurred in any national jurisdiction are not deductible by entities in
other jurisdictions in the calculation of their respective local taxes. To date,
the Company's income taxes have consisted primarily of taxes paid by its Hong
Kong subsidiary. A change in the mix of income generated by the Company's
domestic and various foreign operations may cause the Company's tax rate to
fluctuate.
If tax rates were to rise, if the Company's tax holidays were not renewed,
or if tax authorities were to challenge successfully the adequacy or the manner
in which profits are recognized and allocated among the Company and its domestic
and foreign subsidiaries, the Company's taxes could increase and its business,
financial condition, results of operations or cash flow could be materially
adversely affected. In certain circumstances, United States tax law requires a
United States parent corporation to recognize as current income profits earned
by its foreign subsidiaries. The Company believes that these laws should not be
applicable to its subsidiaries' activities and income. There can be no assurance
that United States tax authorities will not challenge the Company's position or,
if such challenge is made, that the Company would prevail in any such dispute.
If the Company's profits from operations in the United States increase or
profits from its Asia operations become subject to United States income taxes,
the Company's taxes could increase, and its results of operations and cash flow
could be materially adversely affected. Expansion of the Company's operations in
the United States may also increase its effective tax rate. The current maximum
United States federal income tax rate is 35.0%. The Company currently expects
its effective income tax rate for fiscal 1998 to be approximately 14%. See "Risk
Factors -- Risk of Increased Taxes."
22
<PAGE> 24
FISCAL YEARS ENDED MARCH 31, 1995 AND 1996 AND APRIL 30, 1997
Total Revenues
The Company's total revenues increased from $39.4 million in fiscal 1995 to
$408.8 million in fiscal 1996 and then decreased to $169.7 million in fiscal
1997. Revenues from sales to affiliates increased from $36.3 million in fiscal
1995 to $340.5 million in fiscal 1996 and then decreased to $89.1 million in
fiscal 1997, as the terms on which the Company's services to Maxtor changed. In
fiscal 1995, when the Company was a captive supplier to Maxtor, sales to Maxtor
were made on a consignment basis and did not reflect any revenues associated
with the sourcing of materials. In fiscal 1996, revenues from affiliates
increased as a result of the transition of sales to Maxtor to a turnkey basis,
resulting in higher revenues per unit associated with procured materials. In
fiscal 1997, revenues from affiliates decreased as a result of the transition of
sales to Maxtor to a partial turnkey basis, as well as a decrease in order
volume from Maxtor unrelated to the transition to partial turnkey. Revenues from
sales to other customers increased from $3.1 million in fiscal 1995 to $68.4
million in fiscal 1996 and to $80.5 million in fiscal 1997. The Company's
revenues from sales to other customers, which are primarily performed on a
turnkey basis, increased significantly from fiscal 1995 through fiscal 1997
principally due to an increase in the number of new OEM customers and the
increase in orders from existing customers, offset in part by decreased revenues
in fiscal 1997 from a previously greater than 10% customer.
Pro Forma Revenues
If sales to Maxtor had been made on a partial turnkey basis during fiscal
1995 and fiscal 1996, the Company estimates that pro forma revenues from
affiliates would have been approximately $96.9 million and $108.5 million,
respectively. Management believes that if the partial turnkey arrangement with
Maxtor had been in place during fiscal 1995 and fiscal 1996, the net impact of
such arrangements on reported gross profit and income from operations would not
have been material. See Note 1 of Notes to Consolidated Financial Statements.
The foregoing are estimates made by the Company's management as to events that
did not actually occur, and no assurance can be given that, had the Company's
sales to Maxtor been on a partial turnkey basis, the above results would
actually have been achieved.
Gross Profit
Gross profit increased 139.8% from $5.6 million in fiscal 1995 to $13.4
million in fiscal 1996 and then increased 9.7% to $14.7 million in fiscal 1997.
Gross profit increased in fiscal 1996 primarily due to increased sales to new
customers and increases in the volume of shipments to Maxtor. During fiscal
1997, the relocation of the Company's Hong Kong manufacturing operations to
China reduced the Company's manufacturing costs, which had a positive effect on
gross profit. This effect, however, was partially offset by associated
reductions in selling prices, as the Company passed through cost savings to its
customers as well as the decline in unit volumes from Maxtor. Gross margin was
14.2%, 3.3% and 8.6%, respectively, for fiscal 1995, 1996 and 1997. The
fluctuations in gross margin resulted primarily from the changes in the
percentage of total revenues derived from turnkey operations and the relocation
from Hong Kong to China, as previously discussed.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 88.9% from $2.8
million in fiscal 1995 to $5.4 million in fiscal 1996 and then increased 49.5%
to $8.0 million in fiscal 1997. As a percentage of total revenues, selling,
general and administrative expenses were 7.2%, 1.3% and 4.7%, respectively, for
the same periods. The increase in absolute dollars from fiscal 1995 to fiscal
1996 was the result of the establishment of a sales and marketing organization
to support sales to new customers and increased expenditures associated with the
opening of the Company's new manufacturing facility in Thailand. The increase in
absolute dollars and as a percentage of total revenues from fiscal 1996 to
fiscal 1997 was the result of increased personnel costs, marketing expenses to
support new customer development, increased expenses to support the
establishment of the new manufacturing facility in China, and the inclusion of
Pentagon Systems' expenses commencing with its acquisition in January 1997.
During fiscal 1997, the Company recorded $163,000 of goodwill amortization
resulting from the Company's acquisition of Pentagon Systems in January 1997.
23
<PAGE> 25
Restructuring Charge
During fiscal 1997, the Company recorded a charge of $3.0 million
associated with the relocation of its Hong Kong manufacturing operations to
China. As of July 31, 1997, the Company had completed all such restructuring
activities. See Note 5 of Notes to Consolidated Financial Statements.
Net Interest Expense
Net interest expense decreased from $180,000 in fiscal 1995 to $64,000 in
fiscal 1996, as a result of the partial repayment of a previously outstanding
term note, and increased to $4.0 million in fiscal 1997, due to the indebtedness
incurred in connection with the Recapitalization.
Provision for Income Taxes
The Company's provision for income taxes for fiscal 1995, 1996 and 1997
consisted primarily of foreign income taxes related to its Hong Kong operations.
During these periods, the Company's United States operations generated losses,
for which the Company did not record any tax benefit. Historically, the
Company's effective tax rate has been lower than the United States federal
statutory rate of 35.0% due primarily to the fact that income generated by its
foreign operations has been subject to lower or no foreign income taxes. At
April 30, 1997, the Company had United States federal net operating loss
carryforwards of approximately $6.0 million, of which approximately $4.4 million
were subject to certain annual limitations on utilization. As of such date, the
Company had gross United States deferred tax assets of approximately $2.4
million. Based on factors which include the Company's history of losses
generated by its United States operations and lack of carryback capacity, the
Company believes that it is more likely than not that the Company will not be
able to realize its United States deferred tax assets. Accordingly, a full
valuation reserve for such assets has been recorded. See Note 11 of Notes to
Consolidated Financial Statements.
24
<PAGE> 26
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected unaudited statement of operations
data in dollar amounts and as a percentage of total revenues for each of the
five quarters through the period ended July 31, 1997. The unaudited data have
been prepared on the same basis as the audited consolidated financial statements
contained in this Prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
information for the periods presented. Such statement of operations data should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. The Company's results of
operations fluctuated and are likely to continue to fluctuate significantly from
quarter to quarter. Results of operations in any period should not be considered
indicative of the results to be expected in any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1996 1996 1997 1997 1997
-------- ----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 21,139 $16,851 $20,222 $ 22,334 $ 34,500
Revenues from affiliates...................... 26,276 20,709 18,806 23,358 30,236
------- ------- ------- ------- -------
Total revenues...................... 47,415 37,560 39,028 45,692 64,736
Cost of revenues.............................. 46,363 33,430 34,841 40,394 58,397
------- ------- ------- ------- -------
Gross profit.................................. 1,052 4,130 4,187 5,298 6,339
Operating expenses:
Selling, general and administrative......... 1,704 1,729 1,870 2,738 2,845
Restructuring charge........................ 3,000 -- -- -- (179)
------- ------- ------- ------- -------
Total operating expenses............ 4,704 1,729 1,870 2,738 2,666
Income (loss) from operations................. (3,652) 2,401 2,317 2,560 3,673
Interest expense, net......................... 676 1,063 915 1,318 1,255
------- ------- ------- ------- -------
Income (loss) before income taxes............. (4,328) 1,338 1,402 1,242 2,418
Provision for income taxes.................... -- -- -- 253 337
------- ------- ------- ------- -------
Net income (loss)............................. $ (4,328) $ 1,338 $ 1,402 $ 989 $ 2,081
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1996 1996 1997 1997 1997
-------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues...................................... 44.6% 44.9% 51.8% 48.9% 53.3%
Revenues from affiliates...................... 55.4 55.1 48.2 51.1 46.7
----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues.............................. 97.8 89.0 89.3 88.4 90.2
----- ----- ----- ----- -----
Gross margin.................................. 2.2 11.0 10.7 11.6 9.8
Operating expenses:
Selling, general and administrative......... 3.6 4.6 4.8 6.0 4.4
Restructuring charge........................ 6.3 0.0 0.0 0.0 (0.3)
----- ----- ----- ----- -----
Total operating expenses............ 9.9 4.6 4.8 6.0 4.1
Income (loss) from operations................. (7.7) 6.4 5.9 5.6 5.7
Interest expense, net......................... 1.4 2.8 2.3 2.9 1.9
----- ----- ----- ----- -----
Income (loss) before income taxes............. (9.1) 3.6 3.6 2.7 3.7
Provision for income taxes.................... 0.0 0.0 0.0 0.6 0.5
----- ----- ----- ----- -----
Net income (loss)............................. (9.1)% 3.6% 3.6% 2.1% 3.2%
===== ===== ===== ===== =====
</TABLE>
Total revenues during fiscal 1997 varied significantly from quarter to
quarter, generally reflecting changes in demand from existing customers and the
mix of revenues derived from turnkey and consignment manufacturing. In
particular, the Company experienced a significant decline in demand from its
three largest customers in the three months ended October 31, 1996 and January
31, 1997 due to reasons unrelated to the Company. In the three months ended
April 30, 1997, demand from existing customers increased and the
25
<PAGE> 27
Company also added new customers. In addition, in the three months ended April
30, 1997 and July 31, 1997, as the Company's revenues increased, so did the
percentage of total revenues derived on a turnkey basis.
Gross profit and gross margin in the three months ended July 31, 1996 were
adversely affected by a $2.0 million inventory charge associated with a
financially troubled customer's cancellation of orders. A portion of this
reserve was subsequently reversed in the three months ended January 31, 1997 and
April 30, 1997, because the customer purchased some of the inventory in
question. Gross margin was favorably affected in the three months ended October
31, 1996, January 31, 1997 and April 30, 1997 by reduced manufacturing costs as
a result of the relocation of the Company's Hong Kong manufacturing operations
to China. The decline in gross margin in the three months ended July 31, 1997
reflects a higher proportion of revenues derived on a turnkey basis.
The primary factors affecting the Company's annual and quarterly operating
results are: timing of customer orders; price competition; volume of orders
received relative to the Company's capacity; announcements, introductions and
market acceptance of a customer's new products; evolution in the life cycles of
customer products; timing of expenditures in anticipation of future customer
orders; effectiveness in managing manufacturing processes; changes in cost and
availability of labor and components; fluctuations in material costs; the mix of
materials costs relative to labor and manufacturing overhead costs; and the mix
of revenues derived from consignment and turnkey manufacturing (consignment
manufacturing tends to result in higher gross margins but lower revenues, and
turnkey manufacturing tends to result in lower gross margins but higher
revenues). Other factors affecting operating results include the Company's level
of experience in manufacturing a particular product, the degree of automation
used in the assembly process, the efficiencies achieved by the Company in
managing inventories and fixed assets, and customer product delivery
requirements. An adverse change in any one of these factors or a combination
thereof could have a material adverse effect on the Company's future business,
financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Prior to June 1996, the Company was a wholly-owned subsidiary of Maxtor and
funded its operations through cash provided by operations and intercompany
financing provided by Maxtor. Since the Recapitalization, the Company has funded
its working capital needs and capital expenditures through borrowings under its
credit facility and cash provided by operations. At July 31, 1997, the Company's
principal sources of liquidity consisted of cash provided by operations and
available borrowings under the Company's credit facilities.
Cash provided by operating activities for fiscal 1995, 1996 and 1997 and
the three months ended July 31, 1997 was $5.5 million, $7.7 million, $6.7
million and $3.2 million, respectively.
Cash used in investing activities in fiscal 1995 and 1996 totaled $4.1
million and $8.9 million, respectively, and related primarily to the purchase of
equipment and leasehold improvements associated with the establishment of the
Company's Thailand facility. In fiscal 1997, cash used in investing activities
totaled $12.1 million, primarily as a result of capital expenditures for
equipment and leasehold improvements associated with establishing the Company's
China operations, expanding its Thailand operations and initiating manufacturing
in its California facilities, as well as the Company's acquisition of Pentagon
Systems. In the three months ended July 31, 1997, cash used in investing
activities totaled $2.5 million for the purchase of property and equipment.
During fiscal 1997, the Company generated $7.2 million from financing
activities, including $12.1 million in net proceeds from sales of Common Stock
and Preferred Stock, $12.5 million from issuances of 12.0% junior subordinated
notes, and $9.0 million from borrowings under its line of credit. Approximately
$25.0 million of these amounts were used to redeem a portion of Maxtor's share
ownership in the Company in the Recapitalization. See "Certain Transactions."
In conjunction with the Recapitalization, the Company issued the Maxtor
Notes, which require early repayment upon the successful completion of an
initial public offering. The amount of repayment varies depending upon the net
proceeds to the Company from the public offering, with total repayment required
if the Company receives at least $45.0 million. Based upon an estimated initial
public offering price of $11.00
26
<PAGE> 28
per share, the Company anticipates that the Maxtor Notes will be repaid in their
entirety out of the net proceeds of this Offering. During the three months ended
July 31, 1997, the Company repaid $1.5 million of its bank line of credit.
The Company has a committed line of credit with Chase Manhattan Bank that,
subject to certain limitations, provides for up to $32.0 million of borrowing
capacity to fund working capital and capital expenditures. The line of credit
expires June 21, 2001, with availability of borrowings declining on a quarterly
basis beginning in July 1997. The availability of the line of credit will be
reduced by $10.0 million upon the completion of this Offering to a maximum
availability of $21.8 million. The Company intends to renegotiate its credit
agreement after the completion of this Offering. At July 31, 1997, borrowings
under the line of credit were $7.5 million, compared to $9.0 million at April
30, 1997. Additional borrowings of $24.3 million were available under the line
of credit at July 31, 1997. At July 31, 1997, the effective interest rate under
the line of credit was approximately 7.9%. In addition, the Company intends to
repay the outstanding borrowings under the line of credit with the proceeds of
this Offering. See "Use of Proceeds."
The Company's future liquidity and cash requirements will depend upon many
factors, including the level of its operations, the degree and pace of its
expansion or acquisition of facilities and adoption of new manufacturing
technology, and the mix of revenues derived from consignment and turnkey
manufacturing. The Company anticipates that its planned purchases of capital
equipment for fiscal 1998 will require aggregate expenditures of approximately
$17.0 million, of which approximately $2.5 million have been made as of July 31,
1997. The Company believes that the proceeds of this Offering, funds available
under its line of credit and any cash generated from operations will be
sufficient to satisfy its currently anticipated working capital, capital
expenditure and debt service requirements for at least the next twelve months.
Nonetheless, in the event that the Company experiences significant continued
growth, the Company may need to finance such growth and any corresponding
working capital needs with additional public and private offerings of its debt
or equity. There can be no assurance as to the availability of such financing
or, if available, the terms thereof.
27
<PAGE> 29
BUSINESS
GENERAL
International Manufacturing Services, Inc. (the "Company") provides a broad
range of integrated, advanced manufacturing services to electronics original
equipment manufacturers in the computer peripherals, data communications,
telecommunications and other segments of the electronics industry. The Company
offers a full range of services, including product design, prototyping, printed
circuit board assembly, final system assembly, materials procurement, inventory
management, testing, packaging, distribution and depot repair. Major customers
include Maxtor, Bay Networks, Asante, Polaroid and Symbios Logic. In addition,
the Company has recently initiated significant customer relationships with
Advanced Fibre Communications and Polycom.
INDUSTRY BACKGROUND
Original equipment manufacturers in the electronics industry have become
increasingly reliant upon independent providers of electronics manufacturing
services to deliver an expanding range of manufacturing and related services.
OEMs, which historically utilized the services of EMS providers primarily to
obtain extra manufacturing capacity during periods of peak demand, have become
aware of the longer term advantages of outsourcing, and view EMS providers as
increasingly integral to their overall enterprise strategies. OEMs rely upon EMS
providers for a broad range of manufacturing related services, including:
product design; component selection and sourcing; procurement and inventory
control; design for manufacturability; PCB assembly; system level assembly; test
process design and implementation; packaging and shipment; distribution and
order fulfillment; and warranty and repair. According to Technology Forecasters
estimates, the worldwide market for electronics manufacturing services was $59
billion in 1996 and is expected to grow, at an annual rate of approximately 25%
through the year 2001, to $178 billion.
As OEMs seek to enhance their position in today's global marketplace, they
are increasingly turning to EMS providers to access advanced design expertise,
volume materials procurement and flexible, high volume manufacturing
capabilities. Access to such outsourcing capabilities provides OEMs with a range
of benefits, including: lower product cost; shorter new product introduction
cycles; more rapid time to market and time to volume production; reduced working
capital and capital expenditures; and more flexible response to design changes
and fluctuations in the availability of materials. Outsourcing also allows OEMs
to focus resources on their core competencies, such as research and development
and sales and marketing.
The EMS industry is highly fragmented, with a relatively small number of
participants having revenues over $500 million. Certain EMS providers have
sought through acquisitions to broaden the range of manufacturing capabilities
they offer and to expand the scope of their manufacturing operations. In
addition, certain OEMs have sold or spun-off their captive manufacturing
operations. OEMs desire strategic relationships with EMS providers who deliver a
broad range of high quality services in a timely and cost-effective manner. EMS
providers can lower OEM direct manufacturing costs for both labor and materials,
as well as their indirect costs, such as time to market and volume production,
materials purchasing and handling, and flexibility to respond to market demands.
Certain EMS providers can also lower costs by locating their operations in
regions of the world, such as Asia, Latin America or Eastern Europe, that offer
lower labor and infrastructure costs, advantageous tax treatment, and proximity
to production facilities of manufacturers of electronic components and related
materials.
In view of the foregoing factors, the Company believes that in order to
succeed, an EMS provider must offer a broad range of high quality manufacturing
services, obtain significant economies of scale in component procurement, and
manage multiple international facilities providing advanced manufacturing
capabilities in lower cost countries.
28
<PAGE> 30
STRATEGY
The Company's objective is to strengthen its position as a leading provider
of advanced, cost-effective, integrated electronics manufacturing services to
OEMs in the electronics industry. To achieve this objective, the Company is
pursuing the following strategies:
Provide Advanced, Cost-Effective EMS Solutions. The Company strives to
provide cost-effective, technologically advanced manufacturing solutions to
OEMs' increasingly complex needs. By leveraging its historical expertise in the
procurement of materials for, and the manufacturing of, computer peripherals,
the Company is able to provide significant cost advantages to OEMs in a variety
of industry sectors. The Company has located its materials procurement,
technical support and regional administrative operations in Hong Kong, near low
cost suppliers of electronic and system level components, and maintains volume
manufacturing operations in Thailand and China to access low cost labor and
overhead and to take advantage of certain local tax benefits. Further, as part
of its strategy to provide advanced manufacturing services in low cost regions,
the Company has equipped each of its manufacturing facilities with advanced
manufacturing technologies and staffed each of its operations with highly
skilled engineers and other professionals.
Diversify Customer Base. The Company intends to diversify its revenue base
by adding new customers in rapidly growing industry sectors, while expanding the
range of manufacturing services that it provides to its existing customers. The
Company seeks strategic relationships with major and emerging OEMs in industry
sectors, such as data communications and telecommunications, that require the
custom design and flexible manufacturing capabilities that the Company offers.
Over the last two fiscal years, the Company has evolved from being a captive EMS
provider to Maxtor to an independent EMS provider serving 15 additional OEM
customers. These customers collectively represented approximately 56% of total
revenues for the three months ended July 31, 1997.
Provide a Broad Range of Manufacturing Services. The Company offers its
customers a comprehensive EMS solution, with services that include: initial
circuit board layout, product design and prototype production; materials
sourcing and management; assembly of complex printed circuit boards, including
backplanes, system level subassemblies and final products; system testing;
packaging, distribution and fulfillment; and post production warranty and
repair. In January 1997, the Company added advanced PCB design layout and
prototype production capabilities by acquiring Pentagon Systems, a design and
prototype production firm with over ten years experience serving Silicon Valley
companies.
Accelerate Customers' Time to Market and Time to Volume. The Company's
expertise in design, materials management and manufacturing reduces its
customers' time to market. The custom design center operates on a twenty-four
hour-a-day basis to provide shorter design cycles. The Company's access to its
customers' product information early in the design cycle and its volume
procurement relationships with component suppliers enables the Company to
establish the materials supply chain necessary to ensure volume availability of
components for rapid transitions to volume production. As a result of its prior
experience in manufacturing for the computer peripherals industry, the Company
has also developed organizational disciplines to respond to rapid changes in
volume production.
Leverage International Manufacturing Capabilities. The Company applies its
manufacturing experience, operational infrastructure in Asia, and design,
prototype and manufacturing capabilities in the United States to provide
cost-effective flexible EMS solutions to its customers. The Company's primary
volume manufacturing operations, based in Asia, offer advanced capabilities and
technologies which the Company believes have generally been available primarily
in higher cost world regions. The Company's operations are also structured to
integrate its international operations in order to provide its customers
flexible service from multiple facilities. For example, to reduce overall costs,
the Company may perform manufacturing services at one facility and complete
system level assembly at another. The Company intends to continue to broaden its
manufacturing and engineering expertise and capabilities by expanding its
current facilities, by developing a manufacturing presence in other low cost
geographic markets and by pursuing strategic acquisitions.
29
<PAGE> 31
INTERNATIONAL MANUFACTURING CAPABILITY
The Company has manufacturing facilities located in Thailand, China and the
United States. During fiscal 1997, the Company transferred its Hong Kong
manufacturing operations to a new manufacturing facility in China with 12 SMT
lines and over 1,000 employees. The Company's Hong Kong operation now performs
materials procurement for the Company's manufacturing operations, certain
engineering and quality management functions as well as regional administrative
functions. In fiscal 1997, the Company also expanded its manufacturing
operations in Thailand by adding two SMT lines and approximately 52,000 square
feet of manufacturing capacity. The Company's manufacturing facilities in Asia
are registered to the quality requirements of the International Organization for
Standardization (ISO 9002), and its California manufacturing facility is
expected to receive ISO certification by the end of fiscal 1998. The Company
believes that it has sufficient space within and adjacent to its current China
and Thailand facilities to accommodate possible expansion needs in the
foreseeable future.
In January 1997, the Company further broadened the range of its
manufacturing related services by acquiring the assets of Pentagon Systems, a
design and prototype production company in San Jose, California with two
prototype SMT lines. With its access to engineering resources in Karachi,
Pakistan, the Company now offers twenty-four hour-a-day design services.
Certain additional information as of July 31, 1997 about the Company's
global facilities, all of which are leased under leases expiring within
approximately one to fifteen years, is set forth below:
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
APPROXIMATE YEAR SMT NUMBER OF
LOCATION SQUARE FEET COMMENCED SERVICES LINES EMPLOYEES
- -----------------------------------------------------------------------------------------------------------
Changping, China 97,000 1996 Complex PCB assembly, systems level 12 1,049
assembly, backplane assembly
- -----------------------------------------------------------------------------------------------------------
Siracha, Thailand 93,000 1995 Complex PCB assembly, systems level 7 1,118
assembly
- -----------------------------------------------------------------------------------------------------------
Hong Kong 80,000 1983 Engineering services, quality -- 149
management, materials procurement
management, regional administration
functions
- -----------------------------------------------------------------------------------------------------------
San Jose, California 20,000 1996 Full systems manufacturing, backplane 1 45
assembly, PCB assembly, program
management and corporate headquarters
- -----------------------------------------------------------------------------------------------------------
San Jose, California 14,000 1987* Design, prototype and pre-production 2 51
services
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* The Company acquired this facility as part of its acquisition of Pentagon
Systems in January 1997.
The Company's operations are structured to provide its customers with
competitive levels of service. The Company utilizes its electronic
communications and access to a global freight infrastructure to integrate its
marketing, design and prototype and manufacturing functions in the United States
with its high volume manufacturing operations in Asia. The Company's success in
developing new customers depends in part on its ability to convince OEMs that
the advantages of the Company's principally Asia-based manufacturing operations
outweigh any perceived inconvenience or uncertainty of overseas manufacturing.
See "Risk Factors -- Risks of International Operations," and "-- Management of
Growth and Expanded Operations."
SERVICES
The Company offers a broad range of integrated advanced electronic
manufacturing services to OEMs in the computer peripherals, data communications
and telecommunications and other market segments.
Custom Design Services. The Company's custom design services include
initial PCB design, design for manufacturability and prototype production. The
objective of these services is to improve product manufacturability, decrease
time to market and reduce overall costs. The Company's design center located in
San Jose, California, together with its access to engineering resources in
Pakistan, offers twenty-four hour-a-day product design services. This center,
acquired by the Company in connection with the Pentagon Systems acquisition, has
over ten years of experience in assisting customers with initial circuit board
design and has expertise in
30
<PAGE> 32
radio frequency products, PCBs with higher layer counts, and complex PCB
assemblies where components require ball-grid array and/or fine pitch packaging.
Materials Management. From its Hong Kong-based logistics center, the
Company provides comprehensive materials management, including planning,
purchasing, scheduling and other activities associated with the manufacturing
process. The Company has extensive experience in materials management,
particularly with product lines characterized by rapid volume ramps, schedule
changes and short product life cycles. The Company generally orders components
after it has a firm purchase order or formal authorization from the customer and
uses real time inventory management tools and automated material tracking
systems to achieve inventory accuracy and efficiency. The Company's materials
management capabilities assist customers in reducing manufacturing costs and
total cycle time. The Company's primary materials procurement function is
located in Hong Kong near low cost suppliers of electronic components and
box-build materials.
Assembly and Manufacturing. The Company provides a broad range of
electronics assembly and manufacturing services, including PCB assembly and the
manufacture of both subsystems and complete products. The majority of such
products incorporate complex, high density surface-mount assemblies. The PCB
assembly activity primarily consists of the placement and attachment of
electronic and mechanical components on printed circuit boards using both
surface-mount and pin-through-hole technologies. The Company has recently added
press fit technology to its existing capabilities for the manufacture of
backplane assemblies. The Company is continually evaluating the advantages and
feasibility of new manufacturing technologies and intends to continue to invest
in new technologies to maintain its reputation for advanced manufacturing
capabilities. The Company is also establishing a system of standardized
processes, equipment and quality procedures to provide maximum flexibility,
process consistency and interchangeability across multiple production lines and
facilities.
In addition, the Company performs box-build assembly of customer products.
Such services can include procurement and assembly of sheet metal, plastics,
cables, connectors, power supplies and other materials. Such completed products
are then packaged and shipped by the Company to the customer or, in certain
instances, directly to its distribution channel or end users. The Company's
development of this box-build capability is intended to take advantage of the
lower cost structures of its Asia-based operations and their proximity to
manufacturers of electronics and box-build components.
Testing Services. The Company provides a range of test capabilities,
including development and implementation of test software and test fixtures for
in-circuit testing, functional testing, system level testing, burn-in and
environmental stress testing. The breadth of these capabilities is designed to
ensure that the Company provides its customers with high quality products which
reduce the need for OEMs to perform separate or repeat testing.
Logistics Support and Distribution Services. The Company's logistics
services include disk duplication (floppy/CD ROM), documentation duplication
(manuals, warranty cards, etc.) and other customer packaging requirements.
Products may be distributed directly to the customer, the customer's
distribution center or directly to the end user. The Company also offers
just-in-time delivery programs allowing shipments of PCB assemblies or
subsystems to be coordinated with the customer's manufacturing process.
Depot Repair Services. The Company's depot repair capability enables its
customers to service products in different markets. These services include
warranty and post-warranty repairs and field return failures.
The markets for the products of the Company's customers are highly
competitive. The Company believes that its future success will depend upon its
ability to market manufacturing services which meet changing customer needs,
maintain technological leadership and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. There can be no assurance that the Company will be successful in
providing these services. See "Risk Factors."
CUSTOMERS, SALES AND MARKETING
The Company's customers consist of OEMs in the computer peripherals, data
communications and telecommunications and other sectors of the electronics
industry. Over the last two fiscal years, the Company
31
<PAGE> 33
has evolved from being a captive EMS provider to Maxtor to an independent EMS
provider serving 15 additional OEM customers. These customers collectively
represented approximately 56% of total revenues for the three months ended July
31, 1997. For fiscal 1995, 1996 and 1997, and for the three months ended July
31, 1997, Maxtor accounted for approximately 92.0%, 83.1%, 48.6% and 44.1% of
total revenues, respectively. For fiscal 1996 and 1997, and for the three months
ended July 31, 1997, Bay Networks accounted for approximately 1.6%, 31.3% and
42.1% of the Company's total revenues, respectively. For fiscal 1996, Diamond
Multimedia accounted for approximately 12.8% of total revenues.
The following table presents information regarding certain key customers
with which the Company is currently conducting business.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
INDUSTRY SEGMENT CUSTOMER CUSTOMER END PRODUCT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer Peripherals and Diamond Multimedia Systems, Inc. Multimedia Graphics Cards
Components Maxtor Corporation Hard Disk Drives
Symbios Logic Inc. Scanner Controllers
- ----------------------------------------------------------------------------------------------------------
Data Communications Asante Technologies, Inc. Networking Devices
Bay Networks, Inc. Networking Devices
Farallon Communications, Inc. Networking Devices
- ----------------------------------------------------------------------------------------------------------
Telecommunications Advanced Fibre Communications, Inc. Telecommunications Switching
Equipment
Polycom, Inc. Telecommunications Conferencing
Equipment
- ----------------------------------------------------------------------------------------------------------
Industrial Polaroid Corporation Scanners
Semi Power Systems, Inc. Motor Control Electronics
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company has also provided product design or prototyping services to a
number of customers, including National Semiconductor Corporation, S3
Incorporated, LSI Logic Corporation, Sony Corporation and 3Com Corporation.
The Company sells its services to OEMs in the electronics industry
worldwide through its sales and marketing staff and its senior executive
management. As of July 31, 1997, the Company employed 42 persons in its sales,
marketing and program management departments. Moreover, each member of the
Company's executive staff is assigned responsibility for specific high-level
relationships with both existing key customers and prospective accounts. In
addition, the Company's sales and marketing staff works closely with two
manufacturers' representatives in developing relationships with additional OEM
customers and providing sales force coverage to the eastern and southwestern
regions of the United States.
Significant reductions in sales to any of the Company's principal
customers, or the loss of any major customer, would have a material adverse
effect on the Company. There can be no assurance that Maxtor and Bay Networks
will continue to purchase services from the Company, at current levels, or at
all, or that the Company will be successful in its strategy to diversify its
customer base. These risks are accentuated because a majority of the Company's
sales are to customers in the electronics industry, which is subject to rapid
technological change and product obsolescence. The Company is, therefore,
dependent on the continued growth, viability and financial stability of its
customers, which are in turn substantially dependent on the growth of the
computer peripherals, data communications, telecommunications and other sectors
of the electronics industry. The factors affecting the electronics industry in
general, or any of the Company's major customers in particular, could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Risk Factors -- Customer Concentration; Dependence
on Certain Industries."
BACKLOG
The Company's backlog was $50.5 million at March 30, 1996, $53.6 million at
April 30, 1997 and $88.5 million at July 31, 1997. Backlog consists of purchase
orders and firm forecasts with delivery dates scheduled within the next six
months. The Company believes that the EMS industry has been increasingly
characterized by shorter lead times for customer orders and the implementation
of just-in-time systems. For these reasons, and because of the timing of orders,
delivery intervals, customer and product mix and the
32
<PAGE> 34
possibility of customer changes in delivery schedules, the Company's backlog as
of any particular date may not be a meaningful indicator of future financial
results.
COMPETITION
The electronics assembly and manufacturing industry is intensely
competitive and consists of numerous local, 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 cost,
manufacturing technology, product quality, responsiveness and flexibility, the
range of services provided and the location of facilities. To be competitive,
the Company must provide technologically advanced manufacturing services, high
product quality levels, 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 against numerous domestic
and foreign manufacturers, including Flextronics International Ltd., Jabil
Circuits, Inc., Sanmina Corporation, SCI Systems, Inc. and Solectron
Corporation, as well as certain large Asia entities. The Company also faces
indirect competition from the 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 international
operations, as well as substantially greater manufacturing, financial, volume
procurement, research and development and marketing resources than the Company.
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 and adding new 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 or operating results.
EMPLOYEES
At July 31, 1997, the Company had 2,412 employees. None of the Company's
employees is represented by a labor union. The Company believes that its
employee relations are good.
Recruitment of personnel in the EMS industry is highly competitive. The
Company believes that its future success will depend, to a large extent, on its
ability to attract and retain key employees. Although to date the Company has
been successful in retaining key managerial employees the loss of services of
certain of these key employees, particularly any of its executive officers,
could have a material adverse effect on the Company.
33
<PAGE> 35
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The following table sets forth certain information regarding the executive
officers, directors and other key employees of the Company as of July 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ----------------------------------------------
<S> <C> <C>
Executive Officers and Directors
Robert G. Behlman.................. 53 President, Chief Executive Officer and
Chairman of the Board of Directors
Nathan Kawaye...................... 44 Senior Vice President and Chief Financial
Officer
Neo Kia Quek....................... 50 Senior Vice President, Manufacturing
Operations
William J. Almon(1)................ 64 Director
Dixon R. Doll...................... 54 Director
John A. Downer(2).................. 39 Director
Fredric W. Harman(1)............... 37 Director
Mark Rossi(1)...................... 41 Director
J. Larry Smart(2).................. 50 Director
Paul J. Tufano(2).................. 43 Director
Other Key Employees
Anthony Pham....................... 37 Vice President, Sales and Customer Support
Iris Grable........................ 48 Vice President, Marketing and Business
Development
Muder Kothari...................... 43 Vice President, and General Manager, United
States Operations
Gary M. Workman.................... 51 Senior Vice President, Business Development
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Robert G. Behlman has been President, Chief Executive Officer and Chairman
of the Board of Directors of the Company since its formation in November 1994.
From July 1994 to November 1994, Mr. Behlman served as a consultant to Maxtor, a
manufacturer of hard disk drives. From September 1992 until May 1994, Mr.
Behlman served as Vice President and Chief Operating Officer of Sanmina
Corporation, an integrated electronics manufacturer. From August 1988 until
September 1992, Mr. Behlman held senior management positions at SCI, a contract
manufacturer of electronic components, including Vice President of Business
Development (Western Region) from March 1991 to September 1992 and Vice
President and General Manager (San Jose, California plant) from August 1988 to
March 1991. Mr. Behlman received a B.S. in Industrial Engineering from
California Polytechnic University, Pomona.
Nathan Kawaye has served as Senior Vice President and Chief Financial
Officer of the Company since August 1996. From November 1991 to July 1996, Mr.
Kawaye held senior management positions at Maxtor, including Vice President and
Chief Financial Officer. From 1989 to 1991, Mr. Kawaye was Vice President,
Finance and Administration and Chief Financial Officer of Sigma Circuits, a
manufacturer of printed circuit boards. Mr. Kawaye held various financial
management positions including Vice President, Chief Financial Officer of Priam
Corporation, a disk drive manufacturer, from 1983 to 1989 and held financial
management positions at Intel Corporation from 1979 to 1983. Mr. Kawaye received
a B.S. in Biochemistry from the University of California at Berkeley and a
M.B.A. from the University of California at Los Angeles.
Neo Kia Quek has served as Senior Vice President, Manufacturing Operations
since the Company's inception in November 1994. From 1988 to November 1994, Mr.
Quek held various management positions at SCI including Plant Manager and Vice
President (Thailand). Previously, Mr. Quek was at Seagate Technology, Inc., a
disk drive manufacturer, heading its worldwide repair center in Singpore, and
held various
34
<PAGE> 36
management positions at General Electric Corporation (Singapore), including
Managing Director. Mr. Quek received degrees from the Singapore Technical
Teacher's College and the Singapore Institute of Management.
William J. Almon has been a director of the Company since June 1996. He has
served as Chairman of the Board of Directors and Chief Executive Officer of
StorMedia Incorporated ("StorMedia"), a supplier of thin film disks for hard
disk drives, since May 1994. Prior to joining StorMedia, Mr. Almon served as an
independent consultant from February 1993 to May 1994. From 1988 to February
1993, Mr. Almon was President and Chief Operating Officer of Conner Peripherals,
Inc., an independent disk drive manufacturer. Prior thereto, Mr. Almon served in
various management capacities, including Vice President, Low End Storage
Products, of IBM. Mr. Almon is also a director of Read-Rite Corporation, a
supplier of thin film magnetic heads for disk drives, and Sigma Designs, Inc., a
provider of multimedia imaging display systems. Mr. Almon received a B.S. in
Electrical Engineering from the United States Military Academy, West Point.
Dixon R. Doll has been a director of the Company since June 1996. He has
served as Managing General Partner of Doll Capital Management, a venture capital
investment firm, since June 1996. From September 1994 to June 1996, Mr. Doll was
an independent venture capitalist. From 1985 to September 1994, Mr. Doll served
as General Partner of Accel Partners, a venture capital investment firm. Mr.
Doll has held various senior management positions at DMW Group LLC and
predecessor entities, including Chairman of the Board of Directors and Chief
Executive Officer, from 1973 to the present. Mr. Doll is also a director of
Network Equipment Technologies, Inc., a manufacturer of multi-service
communications products, Racotek, Inc., a supplier of mobile data communication
software, and a number of private companies. Mr. Doll received a B.S. in
Electrical Engineering from Kansas State University and a M.S.E. and Ph.D. from
the University of Michigan.
John A. Downer has been a director of the Company since June 1996. Since
December 1996, Mr. Downer has served as Managing Director of Cornerstone Equity
Investors, L.L.C. ("Cornerstone"), a venture capital firm and successor to
Prudential Equity Investors, Inc. ("Prudential"). From 1989 to December 1996,
Mr. Downer was a partner of various venture capital funds managed by Prudential.
Mr. Downer is also a director of StorMedia. Mr. Downer received a B.A., M.B.A.
and J.D. from Harvard University.
Fredric W. Harman has been a director of the Company since June 1996. Mr.
Harman has served as General Partner of Oak Investment Partners, a venture
capital firm, since July 1994. From 1991 to July 1994, Mr. Harman was General
Partner of Morgan Stanley Venture Capital, Inc., a venture capital firm. Mr.
Harman is also a director of ILOG S.A., a provider of software components for
computer graphics and resource optimization, and SPSS Inc., a developer of
statistical software products. Mr. Harman received a B.S. and a M.S. in
Electrical Engineering from Stanford University and a M.B.A. from Harvard
University.
Mark Rossi has been a director of the Company since 1996. Mr. Rossi has
served as Senior Managing Director of Cornerstone since December 1996. From 1983
to 1996, Mr. Rossi was a partner of various venture capital funds managed by
Prudential. Mr. Rossi is also a director of StorMedia. Mr. Rossi holds a B.A.
from Saint Vincent College and a M.B.A. from Northwestern University.
J. Larry Smart has been a director of the Company since June 1996. He has
served as Chief Executive Officer and a director of Visioneer, Inc., a developer
and marketer of intelligent paper input systems and image management software,
since April 1997. From July 1995 to March 1997, Mr. Smart served as Chief
Executive Officer, President and Chairman of the Board of Directors of
Streamlogic Corporation (formerly Micropolis Corporation), a developer and
marketer of data management solutions. From April 1994 to March 1995, Mr. Smart
served as President and Chief Executive Officer of Maxtor, and from 1991 to
February 1994, he was Chief Executive Officer and a director of Southwall
Technologies, Inc., a manufacturer of commercial, thin-film materials. Mr. Smart
is also a director of Western Micro Technology, Inc., a computer systems
distributor. Mr. Smart received a B.S.I.M. from the Georgia Institute of
Technology and a M.B.A. from Southern Methodist University.
35
<PAGE> 37
Paul J. Tufano has been a director of the Company since October 1996. Since
August 1996, Mr. Tufano has served as Vice President, Finance and Chief
Financial Officer of Maxtor. From 1979 to July 1996, Mr. Tufano held various
management positions at IBM, including manager of worldwide logistics for IBM's
Storage Systems Division from October 1995 to July 1996. Mr. Tufano holds a B.S.
in Economics from St. John's University and a M.B.A. from Columbia University.
Anthony Pham has been Vice President, Sales and Customer Support since the
Company's formation in November 1994. From 1984 to November 1994, Mr. Pham
served in management positions, including International Business Development
Manager, at SCI. Mr. Pham received a B.S. in Computer Science from the
California Sate University at Hayward.
Iris Grable has been Vice President, Marketing and Business Development of
the Company since its formation in November 1994. From November 1993 to November
1994 she served as Asian Sales Manager at AVEX Electronics Corporation, an EMS
provider, and from May 1988 to November 1994, Ms. Grable served as Marketing
Manager at SCI. Prior thereto, Ms. Grable held management positions at
Micropolis Corporation and Pertec Peripheral Corporation, a computer peripherals
manufacturer. Ms. Grable received a B.S. in Business Management from Pepperdine
University.
Muder Kothari has served as the Company's Vice President and General
Manager, United States Operations since the Company acquired Pentagon Systems in
January 1997. Mr. Kothari founded Pentagon Systems, and from its inception in
December 1987 to December 1996 served as its President and Chief Executive
Officer. From 1982 to 1987, Mr. Kothari held management positions at
Ungermann-Bass, Inc., a network computer systems provider.
Gary M. Workman joined the Company as Senior Vice President, Business
Development in December 1996. From 1972 to November 1996, Mr. Workman held
various management positions at Anixter International, Inc., a distributor of
LAN and WAN solutions, including President of Anixter Asia/Pacific Division
(Singapore) from 1992 to November 1996. Mr. Workman received a B.S. in Business
and Marketing from Central Washington University.
BOARD OF DIRECTORS
The Company's Board of Directors has eight members, including seven
non-employee directors. Messrs. Behlman, Harman, Tufano, Downer and Rossi were
elected directors pursuant to a stockholders agreement; the provisions providing
for their appointments terminate upon effectiveness of this Offering, except as
to Mr. Tufano. Maxtor is contractually entitled to appoint one director to the
Company's Board of Directors until such time as the Maxtor Notes have been fully
repaid and Maxtor holds fewer than 1,492,500 shares of Class A Common Stock.
In July 1996, the Board of Directors formed a Compensation Committee and an
Audit Committee. Prior thereto, decisions regarding the compensation of
executive officers were made by the Board of Directors as a whole. The
Compensation Committee, which currently consists of Messrs. Rossi, Harman and
Almon, makes recommendations to the Board concerning the compensation for the
Company's officers and administers the Company's 1996 Stock Option Plan, 1997
Stock Plan, 1997 Director Option Plan and 1997 Employee Stock Purchase Plan and
1997 Non-U.S. Employee Stock Purchase Plan. The Audit Committee, which currently
consists of Messrs. Downer, Smart and Tufano, reviews the Company's financial
controls, evaluates the scope of the annual audit, reviews audit results,
consults with management and the Company's independent auditors prior to the
presentation of financial statements to stockholders, and, as appropriate,
initiates inquiries into aspects of the Company's internal accounting controls
and financial affairs.
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of
Directors but are reimbursed for reasonable out-of-pocket expenses they incur in
attending board and committee meetings. Messrs. Almon, Doll and Smart each
received options to purchase 37,500 shares of Class A Common Stock upon their
initial elections, pursuant to the 1996 Stock Option Plan. Upon effectiveness of
this Offering, directors who are
36
<PAGE> 38
employees of the Company will be eligible to receive stock options pursuant to
the 1996 Stock Option Plan and 1997 Stock Plan; non-employee directors will
receive stock options pursuant to the automatic option grant provisions of the
1997 Director Option Plan and will be eligible to receive stock options pursuant
to the 1997 Stock Plan. Options to purchase 10,000 shares of Class A Common
Stock will be automatically granted to each of the Company's non-employee
directors contingent upon this Offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Rossi, Harman and
Almon. No member of the Compensation Committee or executive officer of the
Company has a relationship that would constitute an interlocking relationship
with executive officers and directors of another entity.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's certificate of incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except for any
liability arising with respect to (i) any breach of their duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, or (iii) any
transaction from which the director derived an improper personal benefit.
The Company's certificate of incorporation further provides that the
Company must indemnify its directors and executive officers and may indemnify
its other officers and employees and agents to the fullest extent permitted by
Delaware law. The Company believes that indemnification under its certificate of
incorporation covers negligence and gross negligence on the part of indemnified
parties. The Company's certificate of incorporation also permits the Company to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether Delaware law would permit indemnification.
The Company has entered into agreements to indemnify its directors and
officers, in addition to indemnification provided for in the Company's
certificate of incorporation. These agreements, among other things, require the
Company to indemnify such directors and officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or officer of
the Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company and to obtain
directors and officers liability insurance, if available, on reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any pending or threatened
litigation or proceeding that might result in a claim for such indemnification.
37
<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation paid by the Company during the fiscal year ended April 30, 1997 to
the Company's Chief Executive Officer and each of the Company's other executive
officers whose salary and bonus for such fiscal year exceeded $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS
- --------------------------------------------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C>
Robert G. Behlman............................ $217,598 $57,000 $ 206,045(2) 825,000
President, Chief Executive Officer and
Chairman of the Board of Directors
Nathan Kawaye(3)............................. 134,987 26,250 -- 225,000
Senior Vice President and Chief Financial
Officer
Neo Kia Quek................................. 220,578 95,811 -- 262,500
Senior Vice President, Manufacturing
Operations
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for such officer.
(2) Consists of a release by the Company of Mr. Behlman's payment obligations
under a full recourse promissory note in connection with the purchase of
150,000 shares of the Company's Class A Common Stock and compensation in the
amount of Mr. Behlman's tax liability associated therewith. See "Certain
Transactions."
(3) Mr. Kawaye's employment with the Company commenced August 1, 1996.
Accordingly, salary and bonus amounts reflect service for only that portion
of the fiscal year in which Mr. Kawaye served as an employee of the Company.
STOCK OPTIONS
The following table sets forth, as to the Named Executive Officers,
information concerning stock options granted during the fiscal year ended April
30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
---------------------------------------------------- ASSUMED ANNUAL RATE OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(5)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
GRANTED(1) FISCAL YEAR(2) SHARE(3) DATE(4) 5% 10%
---------- -------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Behlman......... 825,000 30.0% $0.737463 06/12/06 $382,621 $969,643
Nathan Kawaye............. 225,000 8.2 0.737463 06/12/06 104,351 264,448
Neo Kia Quek.............. 262,500 9.5 0.737463 06/12/06 121,743 308,523
</TABLE>
- ---------------
(1) All options were granted on June 13, 1996 under the Company's 1996 Stock
Option Plan, were vested as to 25% of the shares at the date of grant, and
continue to vest at the rate of 1/16 of the remaining shares at the end of
each quarterly anniversary thereafter, subject to continued service as an
employee or consultant; provided that each quarterly vesting date shall be
accelerated by the equivalent of one year upon consummation of this
Offering. The term of each option is ten years.
(2) Based upon options to purchase an aggregate of 2,752,500 shares of Class A
Common Stock that were granted to employees, including the Named Executive
Officers, during the fiscal year ended April 30, 1997 (excluding options to
purchase 36,750 shares of Class A Common Stock which were granted to
employees and subsequently canceled during the fiscal year ended April 30,
1997).
(3) The exercise price per share of each option was equal to the fair market
value of the underlying Class A Common Stock on the date of grant as
determined by the Board of Directors.
(4) Options may terminate before their expiration date if the optionee's status
as an employee or consultant is terminated or upon the death of the
optionee.
(5) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holder's continued employment through the
vesting period.
38
<PAGE> 40
On September 15, 1997, the Compensation Committee of the Board of Directors
approved, contingent upon this Offering, the grant of options to purchase at the
public offering price 195,000 shares and 195,000 shares of Class A Common Stock,
to Messrs. Kawaye and Quek, respectively, under the 1997 Stock Plan.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option exercises and
unexercised options for the fiscal year ended April 30, 1997 with respect to
each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Behlman.............. -- -- 322,266 502,734 $ 406,872 $ 634,720
Nathan Kawaye.................. -- -- 87,891 137,109 $ 110,966 $ 173,105
Neo Kia Quek................... -- -- 102,539 159,961 $ 129,459 $ 201,957
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the Common Stock as of the fiscal year ended April 30, 1997 ($2.00) and the
per share exercise price of the options ($0.737463).
COMPENSATION PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted in June
1996. The 1996 Plan provides for the grant to employees of the Company
(including officers and employee directors) of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the grant of nonstatutory stock options to employees and
consultants of the Company. The 1996 Plan may be administered by the Board of
Directors or a committee of the Board of Directors (the "Administrator") in a
manner that complies with Rule 16b-3 of the Securities Exchange Act of 1934, as
amended. The Administrator has discretion, within the limits of the 1996 Plan,
to select the optionees, determine the number of shares to be subject to each
option and determine the exercise price of each option. The 1996 Plan authorizes
the issuance of up to 3,352,500 shares of Class A Common Stock. As of July 31,
1997, 37,500 shares had been issued pursuant to the 1996 Plan, options to
purchase 2,895,000 shares were outstanding, and 420,000 shares remained
available for future grants. The exercise price of incentive stock options
granted under the 1996 Plan must be at least equal to the fair market value per
share of the Class A Common Stock on the date of grant. The exercise price of
nonstatutory stock options granted under the 1996 Plan is determined by the
Administrator. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date and the maximum term of the option must
not exceed five years. The term of all other options granted under the 1996 Plan
may not exceed ten years.
In the event of a merger of the Company with or into another corporation,
or the sale of all or substantially of the assets of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation or a parent or subsidiary of such
successor corporation. If the successor corporation refuses to assume or
substitute for the options, the optionee will have the right to exercise the
option as to all or a portion of the stock subject thereto, including shares
which would not otherwise be exercisable. Unless terminated sooner, the 1996
Plan will terminate ten years from its effective date. The Board has authority
to amend or terminate the 1996 Plan, provided no such action may impair the
rights of any optionholder without the written consent of such holder.
39
<PAGE> 41
1997 Stock Plan
The Company's 1997 Stock Plan (the "1997 Plan") was adopted in August 1997
and will become effective upon the closing of this Offering. The 1997 Plan
provides for the grant to employees of the Company (including officers and
employee directors) of incentive stock options, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants of the Company. As with the 1996 Plan, the 1997 Plan is administered
by the Board of Directors or a committee of the Board of Directors, which
selects the optionees, determines the number of shares subject to each option or
right and determines the exercise price of each option or right. The 1997 Plan
authorizes the issuance of up to 1,750,000 shares of Class A Common Stock. The
exercise price of incentive stock options granted under the 1997 Plan must be at
least equal to the fair market value of the Class A Common Stock on the date of
grant. The exercise price of nonstatutory stock options granted under the 1997
Plan is determined by the Administrator. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of stock
of the Company, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date, and the maximum
term of an incentive stock option must not exceed five years. The term of all
other options granted under the 1997 Plan may not exceed ten years. No person
may receive an option for more than 250,000 shares in any one fiscal year,
except that an employee may receive an option for up to 500,000 shares in the
year such employee is hired by the Company.
In the event of a merger of the Company with or into another corporation,
or the sale of all or substantially all of the assets of the Company, the 1997
Plan requires that each outstanding option or right be assumed or an equivalent
option or right substituted by the successor corporation or a parent or
subsidiary of such successor corporation. If the successor corporation refuses
to assume or substitute for the options or rights, the holder of such options or
rights will have the right to exercise the options or rights as to all or a
portion of the stock subject thereto, including shares which would not otherwise
be exercisable. Unless terminated sooner, the 1997 Plan will terminate ten years
from its effective date. The Board has authority to amend or terminate the 1997
Plan, provided no such action may impair the rights of the holder of any
outstanding options or rights without the written consent of such holder.
1997 Director Option Plan
The Company's 1997 Director Option Plan (the "Director Plan") was adopted
in August 1997 and will become effective upon the closing of this Offering. A
total of 225,000 shares of Common Stock has been reserved for issuance under the
Director Plan. The Director Plan provides for the grant of nonstatutory stock
options to nonemployee directors of the Company (the "Outside Directors"). The
grants are made pursuant to an automatic, nondiscretionary grant mechanism. The
Director Plan provides that each Outside Director is granted a nonstatutory
stock option to purchase 25,000 shares of Common Stock on the date upon which
such person first becomes an Outside Director (the "First Option"). Thereafter,
each Outside Director is automatically granted an option to purchase 10,000
shares of Common Stock on the date such Outside Director is reelected to the
Board of Directors by the Company's stockholders at the Company's annual meeting
of stockholders (a "Subsequent Option"), if, on such date, such Outside Director
has served on the Company's Board of Directors for at least six months. Outside
Directors on the effective date of the Company's this Offering will receive
nonstatutory stock option for 10,000 shares of Class A Common Stock (the "IPO
Option"). The Director Plan provides that the First Option, the IPO Option and
all Subsequent Options become exercisable as to 25% of the shares subject to the
option one year after the grant date and as to 1/48 of the shares subject to the
option for each month thereafter. The exercise price per share of all options
granted under the Director Plan is equal to the fair market value of a share of
the Company's Common Stock on the date of grant. Options granted to Outside
Directors under the Director Plan have a ten year term, but terminate earlier
upon termination of an Outside Director's status as a director. In the event of
the merger or sale of substantially all of the assets of the Company, all
outstanding options must be assumed or substituted by the successor corporation,
or if they are not assumed or substituted for, they become fully vested and
exercisable. If the options are assumed or substituted for, they also will
become fully exercisable if the director is terminated other than upon voluntary
termination. Until terminated earlier, the Director Plan has a term of ten
years.
40
<PAGE> 42
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in August 1997 and will become effective upon the closing of this
Offering. A total of 250,000 shares of Class A Common Stock less any shares
issued under the 1997 Non-U.S. Employee Stock Purchase Plan has been reserved
for issuance under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, will have successive six month offering
periods, with the first offering period commencing on the date of the closing of
this Offering and ending on the last business day in the period ending May 31,
1998. Employees are eligible to participate if they are regularly employed by
the Company for at least twenty hours per week and more than five months in any
calendar year.
The Purchase Plan permits eligible employees to purchase Class A Common
Stock through payroll deductions, which may not exceed 15% during the first
offering period, and 10% thereafter, of an employee's base compensation,
including commissions, but exclusive of bonuses and overtime, at a price equal
to 85% of the fair market value of the Class A Common Stock at either the
beginning or the end of each six month offering period, whichever is lower. In
the event of a merger of the Company with or into another corporation, or the
sale of all or substantially all of the assets of the Company, the Purchase Plan
provides that a new exercise date will be set for each option under the plan,
which exercise date must occur before the date of the merger or asset sale.
Unless terminated sooner, the Purchase Plan will terminate ten years after its
effective date. The Board of Directors has authority to amend or terminate the
Purchase Plan, provided no such action may adversely affect the rights of any
participant.
1997 Non-U.S. Employee Stock Purchase Plan
The Company's 1997 Non-U.S. Employee Stock Purchase Plan (the "Non-U.S.
Purchase Plan") was adopted in August 1997 and will become effective upon the
closing of this Offering. A total of 250,000 shares of Class A Common Stock less
any shares issued under the Purchase Plan has been reserved for issuance under
the Non-U.S. Purchase Plan. The Non-U.S. Purchase Plan has the same terms as the
Purchase Plan except that the Non-U.S. Purchase Plan is not qualified under
Section 423 of the Code and the Board of Directors may vary the terms of the
Non-U.S. Purchase Plan to conform to applicable local law.
Management Incentive Plan
The Company has adopted a Management Incentive Plan designed to reward
management and key employees for achieving certain financial performance
objectives determined by the Board of Directors on an annual basis. Quarterly
payouts are set as a percentage of base compensation, subject to certain
holdbacks for officers of the Company.
41
<PAGE> 43
CERTAIN TRANSACTIONS
Prior to June 1996, the Company's business was operated through certain
wholly-owned subsidiaries of Maxtor Corporation. In June 1996, the Company
effected a series of related transactions, whereby these subsidiaries were
consolidated as subsidiaries of the Company, and the Company was recapitalized
as an independent entity. To effect such a consolidation, Maxtor first
contributed to the Company all outstanding stock of IMS International
Manufacturing Services Limited, an exempted company incorporated in the Cayman
Islands; IMS International Manufacturing Services (Thailand) Limited, a company
organized under the laws of Thailand; and IMS International Manufacturing
Services (Hong Kong) Limited, a company organized under the laws of Hong Kong.
The Company then raised $25.0 million through the issuance of (a) 3,390,000
shares of Common Stock at a per share purchase price of $0.74, (b) 6,000,000
shares of Preferred Stock at a per share purchase price of $1.67, which shares
are convertible into 6,000,000 shares of Common Stock and (c) subordinated
promissory notes in the aggregate principal amount of $12.5 million. These
securities were issued to a number of new investors, including Prudential
Private Equity Investors III, L.P., Oak Investment Partners VI, L.P. and Oak
Affiliates Fund L.P., Brinson Venture Capital Fund III, L.P. and Brinson Trust
Company, Doll Technology Investment Fund, and certain other investors, including
directors William J. Almon and J. Larry Smart. John A. Downer and Mark Rossi,
also directors of the Company, are a Managing Director and a Senior Managing
Director, respectively, of Cornerstone Equity Investors, L.L.C., which serves as
the investment advisor for Prudential Equity Investors, Inc., the general
partner of Prudential Private Equity Investors III, L.P. Fredric W. Harman,
another director of the Company, is a General Partner of Oak Investment
Partners, which manages Oak Investment Partners VI, L.P. and Oak Affiliates Fund
L.P. Dixon R. Doll, another director of the Company, is the Managing Director of
Doll Technology Investment Management LLC, which is the General Partner of Doll
Technology Investment Fund. The Company also obtained a revolving credit
facility of $32.0 million.
The following table sets forth the aggregate number of shares of Common
Stock, Preferred Stock and subordinated notes received by each of the principal
parties in connection with the Recapitalization and the amount of consideration
contributed therefor.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE PRINCIPAL
NUMBER OF PURCHASE NUMBER OF PURCHASE AMOUNT OF
SHARES OF PRICE FOR SHARES OF PRICE FOR SUBORDINATED TOTAL
COMMON COMMON PREFERRED PREFERRED NOTES PURCHASE
STOCK STOCK STOCK(1) STOCK PURCHASED PRICE
--------- ---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Prudential Private Equity
Investors III, L.P.................... 1,637,370 $1,207,500 2,898,000 $4,830,000 $6,037,500 $12,075,000
Entities Associated with Oak Investment
Partners.............................. 1,356,000 1,000,000 2,400,000 4,000,000 5,000,000 10,000,000
Entities Associated with Brinson
Partners, Inc......................... 277,980 205,000 492,000 820,000 1,025,000 2,050,000
Doll Technology Investment Fund......... 71,400 25,000 60,000 100,000 125,000 250,000
William J. Almon........................ 33,900 25,000 60,000 100,000 125,000 250,000
J. Larry Smart.......................... 13,560 10,000 24,000 40,000 50,000 100,000
</TABLE>
- ---------------
(1) Of the Preferred Stock issued to Prudential Private Equity Investors III,
L.P., 388,575 shares were issued as Series A Preferred Stock, and 2,509,425
shares were issued as Series B Preferred Stock. The Preferred Stock issued
to all other persons was issued as Series A Preferred Stock.
In connection with the above transactions, the Company redeemed from Maxtor
shares of Common Stock representing approximately 76.5% of the Company's then
outstanding capital stock in exchange for $25.0 million in cash, three senior
subordinated notes from the Company in the aggregate principal amount of $20.0
million, and a warrant to purchase 300,000 shares of Common Stock at an exercise
price of $6.67 per share. For accounting purposes, the redemption of Maxtor's
share ownership was treated as a recapitalization and, accordingly, no change in
the accounting basis of the Company's assets was made. See Note 1 of Notes to
Consolidated Financial Statements.
In June 1996, Robert G. Behlman, the Company's President, Chief Executive
Officer and Chairman of the Board of Directors, purchased 75,000 shares of Class
A Common Stock for an aggregate purchase price of
42
<PAGE> 44
$55,310 paid in cash, and an additional 150,000 shares of Class A Common Stock
for an aggregate purchase price of approximately $110,619 paid by means of a
full recourse promissory note in favor of the Company. This note was forgiven on
July 26, 1996 in recognition of Mr. Behlman's contribution to the successful
completion of the Recapitalization and Mr. Behlman's tax liability associated
therewith was paid by the Company as compensation.
The following summarizes the number of shares of Class A Common Stock
purchased on June 13, 1996 by Named Executive Officers, and the number of shares
of Class A Common Stock subject to options granted to each officer and director:
Robert G. Behlman purchased 225,000 shares of Common Stock (as set forth above)
and was granted stock options to purchase 825,000 shares; Nathan Kawaye
purchased 75,000 shares of Common Stock and was granted stock options to
purchase 225,000 shares; Neo Kia Quek purchased 75,000 shares of Common Stock
and was granted stock options to purchase 262,500 shares; William J. Almon was
granted stock options to purchase 37,500 shares; Dixon R. Doll was granted
options to purchase 37,500 shares of Class A Common Stock (which options were
subsequently exercised and the resulting shares subjected to a similar vesting
schedule with respect to a repurchase right in favor of the Company); and J.
Larry Smart was granted stock options to purchase 37,500 shares. These options
and restricted stock were granted under the 1996 Stock Option Plan, were vested
as to 25% of the shares at the date of grant and continue to vest at the rate of
1/16 of the remaining shares at the end of each quarterly anniversary
thereafter, subject to continued service to the Company, provided that each
quarterly vesting date shall be accelerated by the equivalent of one year upon
consummation of this Offering.
In June 1996 in connection with the Recapitalization, the Company entered
into a Manufacturing Services Agreement (the "Manufacturing Agreement") with
Maxtor. Pursuant to the Manufacturing Agreement, the Company has agreed for a
three year term to provide certain products and manufacturing services to Maxtor
at specified prices per unit. In addition, Maxtor has agreed, subject to certain
conditions, to place purchase orders for the Company's manufacture of such
products in accordance with certain minimum quarterly volume commitments. The
terms of the Manufacturing Agreement also allow Maxtor to consign to the
Company, from time to time and at its sole discretion, certain component parts,
equipment and other materials for the Company's use in assembling and testing
products it manufactures under the Manufacturing Agreement. Maxtor has agreed to
indemnify the Company, subject to certain limitations and conditions, for any
and all claims and expenses relating to (i) Maxtor's negligence or intentional
misconduct in its distribution, sale or use of any product manufactured by the
Company pursuant to the Manufacturing Agreement and (ii) allegations of
infringement or misappropriation of the intellectual property rights of any
third party arising out of the use of a Maxtor design.
Mr. Behlman is engaged as the Company's President and Chief Executive
Officer under an at-will employment agreement dated as of October 16, 1994.
43
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of July 31, 1997 and as adjusted to
reflect the sale of Common Stock offered hereby for (i) each person who is known
by the Company to beneficially own more than 5% of the Common Stock, (ii) each
of the Company's directors, (iii) each of the Named Executive Officers and (iv)
all directors and executive officers as a group. Except as indicated in the
table above or the footnotes thereto and pursuant to applicable community
property laws, the stockholders named in the table have sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name, and the address of each 5% stockholder is c/o International
Manufacturing Services, Inc., 2071 Concourse Drive, San Jose, California 95131.
<TABLE>
<CAPTION>
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED(1) OFFERING OFFERING
- ----------------------------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Prudential Private Equity Investors III, L.P.(2)........... 4,535,370 34.0% 24.7%
John A. Downer(3)
Mark Rossi(3)
717 Fifth Avenue, 11th Floor
New York, New York 10022
Entities associated with Oak Investment Partners VI,
L.P.(4).................................................. 3,756,000 28.2% 20.5%
Fredric W. Harman(3)(4)
525 University Avenue, Suite 1300
Palo Alto, California 94031
Maxtor Corporation......................................... 2,985,000 22.4% 16.3%
Paul Tufano(3)(5)
510 Cottonwood Drive
Milpitas, California 95035
Entities associated with Brinson Partners, Inc.(6)......... 769,980 5.8% 4.2%
209 LaSalle Street, Suite 114
Chicago, Illinois 60604
Robert G. Behlman(3)(7).................................... 779,297 5.6% 4.1%
N. K. Quek(8).............................................. 251,367 1.9% 1.4%
Nathan Kawaye(9)........................................... 226,172 1.7% 1.2%
Doll Technology Investment Fund(10)........................ 131,400 1.0% *
Dixon R. Doll(3)
J. Larry Smart(3)(11)...................................... 62,755 * *
William J. Almon(3)(12).................................... 25,195 * *
All executive officers and directors as a group (14
persons)(13)............................................. 14,097,531 97.1% 72.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person
that are currently exercisable or exercisable within 60 days of July 31,
1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person.
(2) Includes 2,509,425 shares of the Company's Class B Common Stock. Messrs.
Downer and Rossi, directors of the Company, are Managing Director and
Senior Managing Director, respectively, of Cornerstone Equity Investors,
L.L.C. ("Cornerstone"), which acts as the investment advisor to Prudential
Private Equity Investors III, L.P. ("PPEI") pursuant to an Investment
Advisory Agreement (the "Investment Advisory Agreement) dated as of July
19, 1996. The Investment Advisory Agreement gives Cornerstone the authority
to direct the voting and disposition of the Common Stock owned by
Prudential. Prudential and The Prudential Insurance Company of America may
restrict or terminate such authority at any time. As a result of the
authority granted pursuant to the Investment Advisory Agreement,
Cornerstone may be deemed to be a beneficial owner of any shares of Common
Stock held
44
<PAGE> 46
by PPEI. Each of Messrs. Downer and Rossi disclaims any beneficial
ownership of the shares held by PPEI, except to the extent of his
proportionate partnership interest therein.
(3) The named person is a director of the Company.
(4) Includes 3,670,364 shares held by Oak Investment Partners VI, L.P. and
85,637 shares held by Oak VI Affiliates Fund, L.P. Mr. Harman disclaims any
beneficial ownership of the shares held by Oak Investment Partners VI, L.P.
and Oak VI Affiliates Fund, L.P., except to the extent of his pecuniary
interests in the respective entities.
(5) Mr. Tufano disclaims any beneficial ownership of the shares held by Maxtor
Corporation, except to the extent of his pecuniary interest therein.
(6) Includes 662,015 shares held by Brinson Venture Capital Fund III, L.P. and
107,966 shares held by Brinson Trust Company, as Trustee of the Brinson MAP
Venture Capital Fund III.
(7) Includes 554,297 shares issuable pursuant to stock options which may be
exercised within 60 days.
(8) Includes 176,367 shares issuable pursuant to stock options which may be
exercised within 60 days.
(9) Includes 151,172 shares issuable pursuant to stock options which may be
exercised within 60 days.
(10) Includes (i) 93,900 shares held by Doll Technology Investment Fund and (ii)
37,500 shares held personally by Mr. Doll which are subject to a repurchase
right in favor of the Company upon cessation of Mr. Doll's service to the
Company. Mr. Doll is the Managing Member of Doll Technology Investment
Management LLC, the general partner of Doll Technology Investment Fund. Mr.
Doll disclaims any beneficial ownership of the shares held by Doll
Technology Investment Fund, except to the extent of his pecuniary interest
therein.
(11) Includes 25,195 shares issuable pursuant to stock options which may be
exercised within 60 days and includes 24,000 shares held by the J. Larry
Smart and Cheryl L. Smart Trust.
(12) Includes 25,195 shares issuable pursuant to stock options which may be
exercised within 60 days. Excludes 60,000 shares transferred by Mr. Almon
to the William J. Almon, Jr. Irrevocable Trust in November 1996, and an
aggregate of 33,900 shares transferred by Mr. Almon to family members in
December 1996, all shares of which Mr. Almon disclaims beneficial
ownership.
(13) Includes 1,183,680 shares issuable pursuant to stock options which may be
exercised within 60 days.
45
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company upon the closing of the sale of
the shares offered hereby will consist of 75,000,000 shares of Class A Common
Stock, $0.001 par value, 25,000,000 shares of Class B Common Stock, $0.001 par
value, and 10,000,000 shares of undesignated preferred stock, $0.001 par value.
Class A Common Stock
The holders of Class A Common Stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors and paid out of funds
legally available therefor, subject to the simultaneous payment of dividends to
the holders of Class B Common Stock. See "Class B Common Stock" below. Holders
of shares of Class A Common Stock are entitled to one vote per share upon all
matters upon which stockholders have the right to vote. Cumulative voting of
shares is not permitted. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Class A Common Stock
are entitled to receive and share ratably, along with the holders of Class B
Common Stock, in all assets remaining available for distribution to
stockholders, after payment of any preferential amounts to which the holders of
preferred stock may be entitled. The Class A Common Stock has no preemptive
rights and is not redeemable, assessable or entitled to the benefits of any
sinking fund. Shares of Class A Common Stock held by Prudential Private Equity
Investors III, L.P. ("PPEI"), Prudential Insurance Company of America or any of
its affiliates may be converted at the option of the holder thereof into an
equal number of fully paid and non-assessable shares of Class B Common Stock.
Shares of Class A Common Stock held by all other persons are not convertible.
All outstanding shares of Class A Common Stock are, and the Class A Common Stock
to be issued in this Offering will be, validly issued, fully paid and
nonassessable.
Class B Common Stock
The holders of Class B Common Stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors and paid out of funds
legally available therefor. Such dividends shall be equal to dividends declared
on Class A Common Stock; provided, however, that in the event that the holders
of Class A Common Stock receive a dividend payable in shares of Class A Common
Stock, the holders of Class B Common Stock are entitled to receive a
proportionate number of shares of Class B Common Stock. In the event of the
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of Class B Common Stock are entitled to receive and share ratably,
along with the holders of Class A Common Stock, in all assets remaining
available for distribution to stockholders, after payment of any preferential
amounts to which the holders of preferred stock may be entitled. The Class B
Common Stock has no preemptive rights and is not redeemable or assessable, or
entitled to the benefits of any sinking fund. All outstanding shares of Class B
Common Stock are validly issued, fully paid and nonassessable.
Holders of Class B Common Stock have no rights to vote except upon the
occurrence of a Voting Event (as defined in the Company's certificate of
incorporation) and then vote as a single class with the Class A Common Stock, or
as expressly provided by law. Each share of Class B Common Stock shall have a
number of votes equal to the number of shares of Class A Common Stock into which
it is then convertible, which, as of the date of this Prospectus, was one for
one. The Voting Events include, without limitation, (i) an amendment to the
Company's certificate of incorporation, (ii) the liquidation, dissolution,
winding-up or bankruptcy of the Company or reclassification of its capital stock
and (iii) the consolidation, merger or other business combination of the Company
or its subsidiaries, requiring submission for approval to the stockholders of
the Company, or the sale of all or substantially all of its assets.
Holders of Class B Common Stock have the right to convert any such shares
to Class A Common Stock upon the occurrence of a Conversion Event (as defined in
the Company's certificate of incorporation), subject to certain restrictions.
Conversion Events with respect to shares of Class B Common Stock include,
without limitation, (i) sale of substantially all of the Company's assets or any
acquisition of the Company by means of a merger or stock acquisition, (ii) the
incurrence of two consecutive quarterly net losses from operations by
46
<PAGE> 48
the Company, (iii) the transfer of such shares of Class B Common Stock to an
unaffiliated party by the holder, (iv) the resignation or replacement during any
twelve-month period of more than 30% of the Company's directors, (v) receipt by
PPEI of notice of default or event of default by the Company or any of its
subsidiaries on any indebtedness for borrowed money as to which the Class B
stockholder is not a holder, (vi) the transfer of shares of Class B Common Stock
by PPEI or any of its affiliates to a party not affiliated with PPEI or any of
its affiliates and (vi) if, after giving effect to the conversion of such shares
of Class B Common Stock, PPEI and its affiliates would not collectively hold the
greater of (x) an amount equal to 4.9% of the aggregate amount of voting capital
stock of the Company then outstanding and (y) the lesser of (1) one share less
than the aggregate amount of voting capital stock of the Company held by a
single other stockholder not affiliated with PPEI or its affiliates and (2) an
amount equal to 19.9% of the aggregate amount of voting capital stock of the
Company then outstanding. PPEI is the only holder of Class B Common Stock as of
the date of this Prospectus, and intends to periodically convert shares of Class
B Common Stock into Class A Common Stock in order to maintain ownership of 19.9%
of the outstanding voting stock.
Preferred Stock
The Board of Directors of the Company is authorized, without further
stockholder action, to authorize and issue any of the 10,000,000 undesignated
shares of preferred stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
preemption rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences of such shares of the
preferred stock. The issuance of any class or series of preferred stock could
adversely affect the rights of the holders of Common Stock by restricting
dividends on, diluting the power of, impairing the liquidation rights of Common
Stock, or delaying, deferring or preventing a change in control of the Company.
The Company has no present plans to issue any preferred stock.
WARRANT
In connection with the Recapitalization, on June 13, 1996, the Company
issued to Maxtor a warrant to purchase 300,000 shares of Class A Common Stock at
an exercise price (the "Exercise Price"), subject to certain adjustments, of
$6.67 per share (the "Maxtor Warrant"). Maxtor may exercise the Maxtor Warrant
on or after June 13, 1998, by means of (i) a cash payment in an amount equal to
the Exercise Price or (ii) in the event the Common Stock is publicly traded, a
net issue exercise whereby Maxtor would receive shares equal to the value of the
Maxtor Warrant, as calculated pursuant to the terms set forth therein. The
Maxtor Warrant expires upon the earlier to occur of (x) June 12, 2006 and (y)
such time as the Maxtor Notes issued in connection with the Recapitalization
shall have been fully paid by the Company, if the final payment has been made
prior to June 13, 1998. Full payment of the Maxtor Notes is expected to occur
upon completion of this Offering.
REGISTRATION RIGHTS
Under the terms of the Stockholders Agreement dated as of June 13, 1996 and
Amendment No. 1 to Stockholders Agreement dated as of December 24, 1996, each
among the Company and certain holders of its securities (collectively, the
"Rights Agreements"), following the closing of this Offering, the holders of
13,327,500 shares of Common Stock (the "Registrable Securities") will be
entitled to certain rights with respect to the registration of such shares of
Common Stock under the Securities Act. Under the Rights Agreements, if the
Company proposes to register any of its Common Stock under the Securities Act,
certain holders of Registrable Securities are entitled to notice of such
registration and to include their Registrable Securities therein; provided,
among other conditions, that the underwriters have certain rights to limit the
number of shares included in any such registration. Beginning six months after
the closing of the Offering, (i) Maxtor and (ii) the holders of at least fifty
percent (50%) of the Registrable Securities (other than Maxtor), have the right
to require the Company, on not more than two and four occasions, respectively,
to file a registration statement under the Securities Act in order to register
all or any part of their Registrable Securities, subject to certain conditions
and limitations. The Company may, in certain circumstances, defer such
registrations and the underwriters have the right, subject to certain
limitations, to limit the number of
47
<PAGE> 49
shares included in such registrations. Further, the holders of Registrable
Securities may require the Company to register all or any portion of their
Registrable Securities on Form S-3, when such form becomes available to the
Company, subject to certain conditions and limitations. See "Shares Eligible for
Future Sale."
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
Certain provisions of the Company's certificate of incorporation and bylaws
are designed to enhance the likelihood of continuity and stability in the
Company's Board of Directors and in the policies formulated thereby.
Accordingly, such provisions may have the effect of preventing, discouraging or
delaying any potential acquisition proposals or changes in the control of the
Company and of preventing changes in the management of the Company.
Effect of Delaware Anti-Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Class A Common Stock is
The First National Bank of Boston.
LISTING
The Company has applied to list its Class A Common Stock on the Nasdaq
National Market under the trading symbol IMSX.
48
<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 18,327,500 shares
of Common Stock outstanding. Of these shares, the 5,000,000 shares sold in this
Offering will be freely tradeable without restriction under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. Approximately 14,327,211 additional shares
(including 1,509,711 shares issuable upon exercise of outstanding options) will
be available for sale in the public market following the expiration of the
180-day lockup agreements with the Representatives of the Underwriters or the
Company, subject in some cases to compliance with the volume and other
limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER DATE SHARES
OF THIS PROSPECTUS ELIGIBLE FOR SALE COMMENT
- ------------------------------ ------------------ -----------------------------------------------
<S> <C> <C>
Upon Effectiveness............ 5,000,000 Freely tradeable shares sold in Offering and
shares saleable under Rule 144 that are not
subject to 180 day lockup
180 days...................... 14,327,211 Lockup released; shares saleable under 144(k)
or 701
Thereafter.................... 510,000 Restricted securities held for one year or less
</TABLE>
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell within any three-month period commencing 90 days after the date of this
Prospectus a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 18,327,500 shares
immediately after this Offering) or (ii) the average weekly trading volume of
Class A Common Stock during the four calendar weeks preceding such sale, subject
to the filing of a Form 144 with respect to such sale. A person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above. Persons deemed to be affiliates must always sell pursuant to Rule 144,
even after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Class A Common
Stock of the Company, the personal circumstances of the sellers and other
factors. Prior to this Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that a significant public market for
the Class A Common Stock will develop or be sustained after this Offering. Any
future sale of substantial amounts of the Common Stock in the open market may
adversely affect the market price of the Class A Common Stock offered hereby.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of Montgomery Securities for a period of 180
days from the date of this Prospectus (the "180-day Lockup Period"), except that
the Company may, without such consent, grant options and sell shares pursuant to
the 1996 Plan, the 1997 Plan, the Director Plan, the Purchase Plan and the
Non-U.S. Purchase Plan.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register certain shares of Common Stock subject to outstanding
options or reserved for issuance under the 1996 Plan, the 1997 Plan, the
Director Plan, the Purchase Plan and the Non-U.S. Purchase Plan within 90 days
after the date of this Prospectus, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. As of July 31, 1997, the holders of options exercisable into
approximately 1,509,711 shares of Class A Common Stock will be eligible to sell
their shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the
expiration of the 180-day Lockup Period.
49
<PAGE> 51
In addition, after this Offering, the holders of 13,327,500 shares of
Common Stock will be entitled to certain rights with respect to registration of
such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
50
<PAGE> 52
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities, Alex. Brown & Sons Incorporated and UBS Securities LLC
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Class A Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain terms and conditions precedent and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Montgomery Securities.............................................
Alex. Brown & Sons Incorporated...................................
UBS Securities LLC................................................
-------
Total................................................... 5,000,000
=======
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to initially offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share, and the Underwriters may
allow, and any such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 750,000 additional shares of Class A Common Stock to
cover over-allotments, if any, at the same price per share as the initial
5,000,000 shares to be purchased by the Underwriters. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may exercise this option only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments to the Underwriters may be
required to make in respect thereof.
Each director and officer of the Company and certain of other holders of
Common Stock prior to this Offering have agreed not to sell, offer to sell, or
otherwise dispose of any rights with respect to any shares of Common Stock, any
options or warrants to purchase Common Stock, or any securities convertible or
exchangeable for Common Stock, owned directly by such holders or with respect to
which they have power of disposition for a period of 180 days after the date of
this Prospectus without the prior written consent of Montgomery Securities. In
addition, the Company has agreed not to sell, offer to sell, contract to sell or
otherwise sell or dispose of any shares of Common Stock or any rights to acquire
Common Stock, other than pursuant to the 1996 Plan, the 1997 Plan, the Director
Plan, the Purchase Plan and the Non-U.S. Purchase Plan, upon exercise of
outstanding options and warrants, for a period of 180 days after the date of
this Prospectus without the prior written consent of Montgomery Securities.
Montgomery Securities may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to these lock-up
agreements. See "Shares Eligible for Future Sale."
During and after the Offering, the Underwriters may purchase and sell Class
A Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to
51
<PAGE> 53
cover syndicate short positions created in connection with the Offering. The
Representatives also may impose penalty bids, whereby selling concessions
allowed to an Underwriter or a syndicate member in respect of the Common Stock
originally sold in the Offering by such Underwriter or syndicate member may be
reclaimed if such securities are repurchased by the Representatives in
stabilizing or short-covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of Class A Common Stock, which may
be higher than the price that might otherwise prevail in the open market. These
transactions may be effected on the Nasdaq National Market or otherwise and
these activities, if commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Class A Common Stock to accounts over which they
exercise discretionary authority.
Montgomery Associates 1992, L.P. ("Montgomery Associates"), an affiliate of
Montgomery Securities, purchased 46,950 shares of Class A Common Stock and
received a $62,500 principal amount 12% junior subordinated note in connection
with the Recapitalization.
Prior to the Offering, there has been no public market for the Class A
Common Stock of the Company. Consequently, the initial public offering price has
been determined through negotiations among the Company and the Representatives.
Among the factors considered in such negotiations were the history of, and
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, the present state of the Company's development, the
prospects for future earnings of the Company, the prevailing market conditions
at the time of the Offering, market valuations of publicly traded companies that
the Company and the Representatives believe to be comparable to the Company, and
other factors deemed relevant. See "Risk Factors -- No Prior Market for Common
Stock; Possible Volatility of Stock Price" and "-- Dilution."
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation ("WSG&R"), Palo Alto, California. Certain legal matters in
connection with this Offering will be passed upon for the Underwriters by
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, a Professional Corporation
("HRNCF&R"), San Francisco, California. Jeffrey D. Saper, a member of WSG&R, is
Secretary of the Company. Upon consummation of this Offering, Mr. Saper will
beneficially own 23,945 shares of Class A Common Stock and a $31,875 principal
amount 12% junior subordinated note, and certain members of WSG&R, and
investment partnerships of which such persons are partners, will beneficially
own 23,006 shares of Class A Common Stock and $30,625 principal amount 12%
junior subordinated notes. Also upon consummation of this Offering, a director
of HRNCF&R will beneficially own 9,390 shares of Class A Common Stock and a
$12,500 principal amount 12% junior subordinated note.
EXPERTS
The consolidated financial statements of the Company as of April 30, 1997
and for the year then ended included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting. The
consolidated financial statements of the Company as of March 31, 1996 and for
the two years in the period then ended, included in this Prospectus, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report, given upon the authority of such firm as experts in accounting and
auditing.
52
<PAGE> 54
CHANGE OF ACCOUNTANTS
In March 1996, Price Waterhouse LLP was engaged as the Company's
independent accountants effective fiscal 1997. Ernst & Young LLP as independent
auditors of Maxtor performed the role of the Company's independent auditors
through fiscal 1996. Prior to March 1996, the Company had not consulted with
Price Waterhouse LLP on items which included the Company's accounting principles
or the form of audit report to be issued on the Company's financial statements.
The reports of Ernst & Young LLP on the financial statements of the
registrant for the two years ended March 31, 1996 and March 31, 1995 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits by Ernst & Young LLP of the two fiscal years
of the registrant ended March 31, 1996 and March 31, 1995, there were no
disagreements between the registrant and Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which, if not resolved to the satisfaction of Ernst & Young
LLP, would have caused them to make reference to the matter in their report.
Ernst & Young LLP has not been associated with any financial statements of the
registrant subsequent to March 31, 1996.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, of
which this Prospectus constitutes a part, under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily complete,
and in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. Information concerning the Company is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
53
<PAGE> 55
INTERNATIONAL MANUFACTURING SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Report of Independent Auditors........................................................ F-3
Consolidated Balance Sheets........................................................... F-4
Consolidated Statements of Operations................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)............................. F-6
Consolidated Statements of Cash Flows................................................. F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
International Manufacturing Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
(deficit) present fairly, in all material respects, the financial position of
International Manufacturing Services, Inc. and its subsidiaries at April 30,
1997, and the results of their operations and their cash flows for the year then
ended and for the one month period ended April 30, 1996 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
July 3, 1997, except for Note 14
which is as of September 16, 1997
F-2
<PAGE> 57
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of International
Manufacturing Services, Inc. as of March 31, 1996 (formerly the combined balance
sheet of Maxtor (Hong Kong) Limited, International Manufacturing Services
(Delaware), Inc., International Manufacturing Services (Cayman Islands),
Limited, and International Manufacturing Services (Thailand) each of which was a
wholly owned subsidiary of Maxtor Corporation), and the related consolidated
statements of income, stockholders' equity (deficit), and cash flows for each of
the two fiscal years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Manufacturing Services, Inc. at March 31, 1996, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
April 25, 1996, except for Note 14
as to which the date is September 16, 1997
F-3
<PAGE> 58
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
(DEFICIT)
JULY 31,
MARCH 31, APRIL 30, JULY 31, 1997
1996 1997 1997 NOTE 1
--------- --------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 938 $ 2,828 $ 1,813
Accounts receivable, less allowance for doubtful
accounts of $235, $210 and $276 (unaudited)... 12,892 10,976 10,237
Accounts receivable from Maxtor and affiliates... 11,915 5,344 6,461
Inventories...................................... 45,009 20,242 32,091
Other current assets............................. 1,383 2,612 1,779
------- -------- --------
Total current assets..................... 72,137 42,002 52,381
Property and equipment, net........................ 10,822 13,936 14,767
Other assets....................................... 728 4,533 3,661
------- -------- --------
$83,687 $ 60,471 $ 70,809
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $47,351 $ 22,570 $ 30,938
Accounts payable to Maxtor....................... 8,536 358 84
Accrued liabilities.............................. 3,681 5,484 7,081
Income taxes payable............................. 1,145 531 871
Bank borrowings.................................. -- 9,000 7,500
Current portion of long-term debt................ 708 79 80
------- -------- --------
Total current liabilities................ 61,421 38,022 46,554
Long-term debt..................................... -- 12,660 12,635
Long-term debt due to Maxtor....................... 4,300 20,000 20,000
Deferred tax liabilities........................... 300 156 156
Commitments (Notes 6 and 7)
Stockholder's equity (deficit):
Preferred stock $0.001 par value; 8,509,425
shares authorized actual; 10,000,000 shares
authorized pro forma (unaudited), 6,000,000
shares issued and outstanding actual; none
issued and outstanding pro forma
(unaudited)................................... -- 6 6 $ --
Common Stock $0.001 par value; 25,500,000 shares
authorized actual (15,000,000 as of March 31,
1996);
100,000,000 shares authorized pro forma
(unaudited);
15,000,000 and 7,327,500 shares issued and
outstanding actual, 7,327,500 shares issued
and
outstanding (unaudited); and 13,327,500 shares
issued
and outstanding pro forma (unaudited)......... 15 7 7 13
Additional paid-in capital....................... 4,506 12,793 12,793 12,793
Distributions in excess of net book value (Note
1)............................................ -- (20,608) (20,608) (20,608)
Retained earnings (accumulated deficit).......... 13,145 (2,565) (734) (734)
------- -------- -------- --------
Total stockholders' equity (deficit)..... 17,666 (10,367) (8,536) $ (8,536)
========
------- -------- --------
$83,687 $ 60,471 $ 70,809
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 59
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
--------------------------------- -------------------
MARCH 31, MARCH 31, APRIL 30, JULY 31, JULY 31,
1995 1996 1997 1996 1997
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 3,089 $ 68,361 $ 80,546 $ 21,139 $ 34,500
Revenues from affiliates....................... 36,284 340,487 89,149 26,276 30,236
------- -------- -------- ------- -------
Total revenues....................... 39,373 408,848 169,695 47,415 64,736
Cost of revenues............................... 33,795 395,474 155,028 46,363 58,397
------- -------- -------- ------- -------
Gross profit................................... 5,578 13,374 14,667 1,052 6,339
------- -------- -------- ------- -------
Selling, general and administrative............ 2,848 5,380 8,041 1,704 2,845
Restructuring charge........................... -- -- 3,000 3,000 (179)
------- -------- -------- ------- -------
Total operating expenses............. 2,848 5,380 11,041 4,704 2,666
Income (loss) from operations.................. 2,730 7,994 3,626 (3,652) 3,673
Interest expense............................... 180 64 4,048 676 1,277
Interest income................................ -- -- (76) -- (22)
------- -------- -------- ------- -------
Income (loss) before income taxes.............. 2,550 7,930 (346) (4,328) 2,418
Provision for income taxes..................... 554 1,793 253 -- 337
------- -------- -------- ------- -------
Net income (loss).............................. $ 1,996 $ 6,137 (599) (4,328) 2,081
======= ========
Dividends on convertible preferred stock....... 883 133 250
-------- ------- -------
Net income (loss) available for common
stockholders................................. $ (1,482) $ (4,461) $ 1,831
======== ======= =======
Net income (loss) per share.................... $ (0.04) $ (0.27) $ 0.13
======== ======= =======
Shares used to compute net income (loss) per
share........................................ 16,108 16,108 16,108
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 60
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE DISTRIBUTIONS RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL IN EXCESS EARNINGS
------------------ -------------------- PAID-IN OF NET BOOK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL VALUE DEFICIT) TOTAL
--------- ------ ----------- ------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994...... -- $ -- 15,000,000 $ 15 $ 1,639 $ -- $ 5,012 $ 6,666
Net income..................... -- -- -- -- -- -- 1,996 1,996
--------- ---- ----------- ---- ------ -------- -------- --------
Balance at March 31, 1995...... -- -- 15,000,000 15 1,639 -- 7,008 8,662
Capital contribution........... -- -- -- -- 2,867 -- -- 2,867
Net income..................... -- -- -- -- -- -- 6,137 6,137
--------- ---- ----------- ---- ------ -------- -------- --------
Balance at March 31, 1996...... -- -- 15,000,000 15 4,506 -- 13,145 17,666
Net income for the month of
April 1996 to reflect the
change in the Company's
fiscal year end (Note 3)..... -- -- -- -- -- -- 1,343 1,343
Recapitalization and redemption
of Maxtor stock.............. -- -- (12,015,000) (12) (4,507) (20,608) (15,571) (40,698)
Issuance of common stock, net
of issuance costs............ -- -- 3,855,000 4 2,531 -- -- 2,535
Issuance of convertible
preferred stock, net of
issuance costs............... 6,000,000 6 -- -- 9,530 -- -- 9,536
Issuance of common stock on
Pentagon Acquisition......... -- -- 450,000 -- 705 -- -- 705
Issuance of common stock upon
exercise of options.......... -- -- 37,500 -- 28 -- -- 28
Net loss....................... -- -- -- -- -- -- (599) (599)
Dividends on convertible
preferred stock.............. -- -- -- -- -- -- (883) (883)
--------- ---- ----------- ---- ------ -------- -------- --------
Balance at April 30, 1997...... 6,000,000 6 7,327,500 7 12,793 (20,608) (2,565) (10,367)
Net income (unaudited)......... -- -- -- -- -- -- 2,081 2,081
Dividends on convertible
preferred stock
(unaudited).................. -- -- -- -- -- -- (250) (250)
--------- ---- ----------- ---- ------ -------- -------- --------
Balance at July 31, 1997
(unaudited).................. 6,000,000 $ 6 7,327,500 $ 7 $ 12,793 $ (20,608) $ (734) $ (8,536)
========= ==== =========== ==== ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 61
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
--------------------------------- ---------------------
MARCH 31, MARCH 31, APRIL 30, JULY 31, JULY 31,
1995 1996 1997 1996 1997
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)............................................. $ 1,996 $ 6,137 $ (599) $ (4,328) $ 2,081
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................... 4,751 6,145 6,347 1,694 1,983
Deferred income taxes....................................... (66) 300 (144) -- --
(Gain) loss on disposal of property and equipment........... (20) 12 -- -- --
Changes in assets and liabilities:
Accounts receivable....................................... (210) (12,682) 5,440 7,153 739
Accounts receivable from Maxtor and affiliates............ (60) (4,676) 4,124 1,812 (1,117)
Inventories............................................... (1,432) (43,577) 3,154 1,957 (11,849)
Other current assets...................................... (1,520) 985 (955) (351) 833
Other assets.............................................. (207) 321 (703) (1,347) 546
Accounts payable.......................................... 2,652 44,358 (5,561) (9,833) 8,368
Accounts payable to Maxtor................................ -- 8,536 (4,565) (4,818) (274)
Accrued liabilities....................................... 599 1,029 805 2,809 1,511
Income taxes payable...................................... (957) 822 (600) (60) 340
------- -------- ------- ------- --------
Net cash provided by (used in) operating activities.... 5,526 7,710 6,743 (5,312) 3,161
------- -------- ------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment, net....................... (4,919) (8,980) (8,372) (356) (2,488)
Proceeds from disposal of property and equipment.............. 818 45 -- -- --
Acquisition of Pentagon Systems, net of cash acquired of
$700........................................................ -- -- (3,716) -- --
------- -------- ------- ------- --------
Net cash used in investivities......................... (4,101) (8,935) (12,088) (356) (2,488)
------- -------- ------- ------- --------
Cash flows from financing activities:
Borrowings (repayments) under line of credit.................. -- -- 9,000 8,000 (1,500)
Proceeds from issuance of notes............................... -- -- 12,500 12,500 --
Proceeds from issuance of convertible preferred stock......... -- -- 9,536 9,536 --
Recapitalization and distributions to Maxtor.................. -- -- (24,998) (24,998) --
Principal payments on debt and capital lease obligations...... (1,045) (1,136) (606) (502) (24)
Payment of dividends.......................................... -- -- (797) -- (164)
Capital contribution.......................................... -- 2,867 -- -- --
Proceeds from issuance of common stock........................ -- -- 2,563 2,535 --
------- -------- ------- ------- --------
Net cash provided by (used in) financing activities.... (1,045) 1,731 7,198 7,071 (1,688)
------- -------- ------- ------- --------
Net change in cash and cash equivalents......................... 380 506 1,853 1,403 (1,015)
Cash and cash equivalents at beginning.......................... 52 432 975 975 2,828
------- -------- ------- ------- --------
Cash and cash equivalents at end of per......................... $ 432 $ 938 $ 2,828 $ 2,378 $ 1,813
======= ======== ======= ======= ========
Supplemental disclosures:
Cash paid for:
Interest.................................................... $ 180 $ 100 $ 2,867 $ 179 $ 922
Income taxes................................................ 1,511 672 832 -- --
Noncash investing and financing activities:
Items settled through accounts receivable from affiliates
Fixed assets transferred from affiliates.................... $ 965 $ (912) -- -- --
Settlement of long-term debt to Maxtor...................... -- 4,169 -- -- --
Issuance of note payable to Maxtor in connection with the
recapitalization............................................ -- -- (15,700) (15,700) --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 62
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
International Manufacturing Services, Inc. ("IMS" or the "Company")
provides original equipment manufacturers (OEMs) with design, prototype,
pre-production services, printed circuit board assembly, product sub-assembly
and final assembly. Customers also take advantage of a full range of test
services, including in-circuit, functional and environmental stress testing at
the Company's manufacturing sites in Hong Kong, China and Thailand. The
Company's services are sold in transactions denominated in U.S. dollars on a
worldwide basis to OEMs.
FISCAL YEAR
Prior to fiscal 1997, the Company's fiscal year ended on the Saturday
nearest to March 31. Commencing with fiscal 1997 the Company's fiscal year ends
on the Saturday nearest to April 30. The Company reports quarterly results on
thirteen-week quarterly periods, each ending on the Saturday nearest to
month-end. For purposes of presentation, the Company has indicated its fiscal
year as ending on March 31 or April 30, as the case may be and its interim
quarterly periods as ending on the respective calendar month-ends. Results of
operations for the month of April 1996 were credited directly to retained
earnings (see Note 3).
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could vary
from those estimates.
RECAPITALIZATION
Until June 13, 1996, the Company was a wholly-owned subsidiary of Maxtor
Corporation (Maxtor). Maxtor acquired the Company's operations as a result of
acquisition of certain assets in 1990. Maxtor conducted the Company's business
under distinct wholly-owned subsidiaries incorporated in Delaware, Cayman,
Thailand and Hong Kong, all of which were consolidated pursuant to a legal
reorganization in June 1996. Subsequent to the legal reorganization, Maxtor
diluted its ownership of IMS to 23.5% through a series of recapitalization and
redemption agreements. Under these agreements IMS raised cash of $25.0 million
($24.0 million, net of issuance costs) by issuing a combination of common stock,
convertible preferred stock and junior subordinated notes to a group of
investors.
IMS redeemed approximately 76.5% of Maxtor's outstanding shares for $25.0
million in cash and issuance of senior subordinated notes payable of $20.0
million (including $4.3 million rolled over from a previously outstanding note
payable to Maxtor) and warrants to purchase an additional 300,000 shares of
common stock (see Notes 6 and 9). Additionally, Maxtor agreed to purchase from
IMS certain minimum quantities of products for a period of three years.
The redemption of Maxtor's ownership interest has been accounted for as a
recapitalization, and accordingly, no change in the accounting basis of the
Company's net assets has been made in the accompanying financial statements. The
amount of cash paid and note payable issued to Maxtor exceeded the Company's net
assets on the date of the transaction and has been recorded in the equity
section as distributions in excess of net book value. As of May 31, 1996 (the
month end immediately prior to the
F-8
<PAGE> 63
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recapitalization), the Company had approximately $54 million in assets
(unaudited) and approximately $34 million in liabilities (unaudited).
Had the above noted debt and preferred stock financing and recapitalization
transactions taken place at the beginning of fiscal 1997, the Company's pro
forma loss, pro forma loss allocable to common stockholders and pro forma loss
per share would have been $969,000, $1,977,000 and $0.06, respectively
(unaudited).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which are purchased
with a maturity of three months or less, to be cash equivalents. At March 31,
1996 and April 30, 1997, all of the Company's investments were classified as
cash equivalents on the balance sheet. At March 31, 1996 and April 30, 1997, the
fair value of the Company's investments approximated cost.
The Company has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" and,
classifies investment securities as either held-to-maturity or
available-for-sale. At March 31, 1996 and April 30, 1997, the Company did not
hold any investment securities.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight line method over the estimated
useful lives of the assets, which are generally three to five years. Assets held
under capital leases are amortized using the straight line method over the term
of the lease or their estimated useful lives, whichever is shorter.
GOODWILL
Goodwill, arising from the Pentagon Systems acquisition (see Note 4), has
been included in other assets and is being amortized over its estimated useful
life of seven years.
LONG-TERM ASSETS
The Company periodically reviews the recoverability of long-term assets
including goodwill, whenever events or changes in circumstances indicate that
the carrying amount of an asset might not be recoverable.
REVENUE RECOGNITION
Revenue is recognized upon product shipment. A provision for the estimated
cost to repair or replace products under warranty is recorded at the time of
sale based on historical experience.
Revenue and related costs can vary significantly based on whether projects
are contracted on a turnkey basis where the Company purchases all materials to
manufacture the goods, or contracted on a consignment basis, where materials are
provided by the customer. Accordingly, the accompanying statements of operations
reflect no materials cost for consignment sale revenues. During fiscal 1997,
sales to Maxtor were contracted for on a partial consignment basis and sales to
other customers were contracted for on a turnkey basis. However, during fiscal
1996, substantially all projects were contracted for on a turnkey basis, and in
fiscal 1995, sales to Maxtor were generally contracted for on a consignment
basis. If sales to Maxtor would have been on a partial turnkey basis during
fiscal 1995 and 1996, the Company estimates that pro forma revenues from
affiliates
F-9
<PAGE> 64
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
would have been approximately $96.9 million (unaudited) and $108.5 million
(unaudited), respectively. Such proforma revenues have been estimated by
management by making certain assumptions as to the mix of components purchased
by the Company and components consigned by Maxtor, which are events that did not
actually occur. As the Company's sales to Maxtor during fiscal 1997 were on a
partial turnkey basis, management believes that disclosure of pro forma revenues
from sales to Maxtor during fiscal 1995 and 1996 on a partial turnkey basis
provides a more consistent basis for comparison between historical periods.
Management believes that if the partial turnkey arrangement had been in place
during fiscal years 1995 and 1996, the net impact of such arrangements on
reported gross profit and income from operations would not have been material.
The pro forma revenues from affiliates on a partial turnkey basis for fiscal
1995 and 1996 should not be considered in isolation or as a substitute for the
information prepared and presented in accordance with generally accepted
accounting principles, and no assurance can be given that, had the Company's
sales to Maxtor been on a partial turnkey basis, the above results would
actually have been achieved.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency of the Company's foreign
subsidiaries. Exchange gains and losses resulting from transactions denominated
in currencies other than the U.S. dollar are included in the results of
operations for the year. To date such gains and losses have not been material.
The Company has not undertaken any material foreign currency hedging activities.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
and recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements. No provision for U.S. deferred income taxes is made for the
undistributed earnings of the Company's foreign subsidiaries to the extent such
earnings are deemed to be indefinitely reinvested in such operations.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company's policy is
to grant options with an exercise price equal to the fair market value of the
underlying common stock as determined by the Board of Directors on the grant
date. The Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" (see Note 9).
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the "if
converted" method) and stock options (using the "treasury stock" method). Common
equivalent shares are excluded from the computation if their effect is
antidilutive, except that, pursuant to a Securities and Exchange Commission
Staff Accounting Bulletin, convertible preferred stock and warrants (using the
"if converted" method) and common equivalent shares (using the "treasury stock"
method and the assumed initial public offering price) issued in conjunction with
and subsequent to the recapitalization of the Company have been included in the
computation as if they were outstanding for all periods for which net income
(loss) per share data has been presented.
Net income per share data for fiscal 1995 and 1996 have not been presented
as such amounts are not deemed to be meaningful in view of the significant
change in capital structure of the Company in June 1996 as a result of the
recapitalization.
F-10
<PAGE> 65
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
accounts receivable. The Company's investment policies limit the amount of
credit exposure to any one financial institution and restrict placement of these
investments to financial institutions evaluated as highly credit-worthy. The
Company's products are sold worldwide to OEMs with an emphasis on the United
States market. The Company performs ongoing credit evaluations of its customers'
financial condition and at times requires collateral for its receivables. The
Company maintains reserves for potential credit losses. As of March 31, 1996,
two customers accounted for approximately 46% and 37% of the accounts receivable
balance. As of April 30, 1997, three customers accounted for approximately 34%,
32% and 11% of the accounts receivable balance.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This statement
is effective for the Company's fiscal period ending January 31, 1998. The
Statement adjusts the calculation of earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share and fully diluted earnings per share is
replaced by diluted earnings per share. If the Company had adopted this
Statement for the year ended April 30, 1997 and for the three month period ended
July 31, 1997, the Company's pro forma earnings (loss) per share would have been
as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JULY 31,
APRIL 30, ----------------
1997 1996 1997
---------- ------ -----
(UNAUDITED)
<S> <C> <C> <C>
Basic income (loss) per share................... $(0.04) $(0.32) $0.16
Diluted income (loss) per share................. (0.04) (0.27) 0.13
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS
130) and No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131). The Company does not believe that FAS 130 and 131 will
have any material impact on its financial statement reporting requirements.
PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
If the Offering is consummated, all shares of convertible preferred stock
outstanding at the closing date will automatically convert into an aggregate of
6,000,000 shares of Common Stock. The pro forma effect of such conversion has
been reflected in the accompanying unaudited pro forma balance sheet as of July
31, 1997.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of July 31, 1997, the
consolidated statements of operations and of cash flows for the three months
ended July 31, 1996 and 1997 and the consolidated statement of stockholders'
equity (deficit) for the three months ended July 31, 1997 are unaudited. In the
opinion of management, these statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for the fair presentation of the results
for the interim periods. The data disclosed in the consolidated financial
statements as of such dates and for such periods are unaudited.
F-11
<PAGE> 66
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, APRIL 30, JULY 31,
1996 1997 1997
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Inventories:
Raw materials............................. $ 35,351 $ 17,675 $ 26,755
Work-in-process........................... 8,087 2,359 4,419
Finished Goods............................ 1,571 208 917
-------- -------- --------
Total inventories............... $ 45,009 $ 20,242 $ 32,091
======== ======== ========
Property and equipment:
Machinery and equipment................... $ 30,229 $ 37,228 $ 37,868
Furniture and fixtures.................... 1,883 2,018 2,890
Leasehold improvements.................... 2,576 4,027 4,037
-------- -------- --------
34,688 43,273 44,795
Less accumulated depreciation and
amortization............................ (23,866) (29,337) (30,028)
-------- -------- --------
Total property and equipment.... $ 10,822 $ 13,936 $ 14,767
======== ======== ========
Accrued liabilities:
Accrued employee compensation............. $ 2,246 $ 1,197 $ 1,781
Other accrued liabilities................. 1,435 4,287 5,300
-------- -------- --------
$ 3,681 $ 5,484 $ 7,081
======== ======== ========
</TABLE>
Machinery and equipment at April 30, 1997 and July 31, 1997 (unaudited)
include approximately $321,000 of assets under leases that have been
capitalized. Accumulated depreciation for such equipment at April 30, 1997 and
July 31, 1997 approximated $84,000 and $111,000 (unaudited), respectively.
NOTE 3. CHANGE IN FISCAL YEAR
During fiscal 1997, the Company changed its financial reporting year end
from the Saturday closest to March 31, to the Saturday closest to April 30. As a
result of this change, the Company had a one month transition period during
which it had revenues and net income of $23,541,000 and $1,343,000,
respectively.
NOTE 4. PENTAGON SYSTEMS ACQUISITION
In January 1997, the Company acquired the assets of Pentagon Systems
(Pentagon) for $4.4 million in cash, issuance of 450,000 shares of Class A
Common Stock and the assumption of certain liabilities. Pentagon provides
computer design related engineering services and assembly of computer components
to original equipment manufacturers from facilities located in San Jose.
The acquisition was accounted for as a purchase, and accordingly,
Pentagon's net assets and results of operations have been included in the
Consolidated Financial Statements from the acquisition date. The excess of the
purchase price over the fair value of the net assets acquired aggregated $3.4
million and has been included in other assets as goodwill. Goodwill amortization
totaled $163,000 at April 30, 1997.
F-12
<PAGE> 67
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents unaudited pro forma results of operations as
if the acquisition had occurred as of the beginning of the respective periods
after giving effect to the amortization of goodwill. The unaudited pro forma
information is provided for comparative purposes only and does not purport to be
indicative of the results which actually would have been obtained if the
acquisition had been effected for the periods indicated, or the results which
may be obtained in the future (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------
MARCH 31, APRIL 30,
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Total revenues......................................... $ 412,978 $ 174,064
Net income (loss)...................................... 6,040 (266)
Net income (loss) per share............................ -- (0.02)
</TABLE>
NOTE 5. RESTRUCTURING CHARGE
In June 1996, the Company implemented a restructuring plan to significantly
reduce its manufacturing operations in Hong Kong. The costs of restructuring
actions totaled $3 million and involved the termination of approximately 900
employees with an associated cost of approximately $2.3 million and excess
facilities costs of approximately $700,000. As of July 31, 1997 the Company had
substantially completed all of its restructuring actions.
NOTE 6. DEBT AND BANKING ARRANGEMENTS
<TABLE>
<CAPTION>
MARCH 31, APRIL 30,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Senior subordinated notes due through 2002.............. $ -- $ 20,000
12% junior subordinated notes due through 2005.......... -- 12,500
Noninterest bearing notes due to Maxtor................. 4,300 --
8.4% term note.......................................... 708 --
Bank borrowings......................................... -- 9,000
Capital lease obligations............................... -- 239
------ -------
5,008 41,739
Current portion of capital lease obligations and bank
borrowings............................................ (708) (9,079)
------ -------
Long-term debt and capital lease obligations............ $ 4,300 $ 32,660
====== =======
</TABLE>
At the time of recapitalization of the Company in June 1996, the
outstanding interest free note due to Maxtor was consolidated into the senior
subordinated notes due 2002 (see Note 1). The notes had a fixed interest rate of
7% for the first twelve months. Effective June 1997, the interest rate changed
to a six-month Eurodollar rate (including the applicable bank spread) plus one
and a half percent (approximately 9.7% as of July 31, 1997).
The senior subordinated notes are repayable upon the closing of an
underwritten public offering. The amount of repayment varies depending upon the
net proceeds to the Company with total repayment required if the Company
receives at least $45.0 million from the Offering. The senior and junior
subordinated notes are repayable in full in the event of a sale or transfer of
all or substantially all of the assets of the Company on a consolidated basis or
a merger to which the Company is a party, unless to do so would violate the
terms of the bank credit facility.
At April 30, 1997, management believes the fair values of the Company's
debt approximated book values based on prevailing interest rates.
F-13
<PAGE> 68
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At April 30, 1997, future minimum principal payments on long term debt and
capitalized lease obligations were as follows (in thousands):
<TABLE>
<S> <C>
FISCAL YEAR ENDING APRIL 30,
1998..................................................... $ 79
1999..................................................... 82
2000..................................................... 6,744
2001..................................................... 6,667
2002..................................................... 6,667
Thereafter............................................... 12,500
-------
$32,739
=======
</TABLE>
In June 1996, the Company entered into a five year loan and security
agreement (the "Loan Agreement") with a U.S. bank which provides for borrowings
of up to $32.0 million. The Loan Agreement expires June 21, 2001, with
availability of borrowings declining on a quarterly basis beginning in July
1997. The availability of borrowings under the Loan Agreement will be reduced by
$10.0 million upon the completion of the Offering. Borrowings under the Loan
Agreement bear interest at either the prime rate plus 1.5% or LIBOR plus 2.25%
and are secured by all of the Company's assets. The effective interest rate for
borrowings under the line of credit was approximately 7.9% as of April 30, 1997.
At April 30, 1997, borrowings under the Loan Agreement totaled $9.0 million. The
Loan Agreement and senior subordinated notes require that the Company maintain
certain financial ratios and covenants. The Company was in compliance with such
covenants as of April 30, 1997.
NOTE 7. LEASE COMMITMENTS
The Company leases certain property, facilities and equipment under
noncancelable capital and operating leases. Future minimum lease payments under
these leases as of April 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
FISCAL YEAR ENDING APRIL 30,
1998............................................ $ 105 $ 2,420
1999............................................ 92 1,760
2000............................................ 66 956
2001............................................ -- 889
2002............................................ -- 639
Thereafter...................................... -- 7,336
---- ------
Total minimum lease payments.................... 263 $14,000
======
Less amount representing interest............... 24
----
$ 239
====
</TABLE>
Rent expense for operating leases was $2,580,000, $2,732,000 and $3,158,000
during the years ended March 31, 1995 and March 31, 1996 and April 30, 1997,
respectively.
NOTE 8. CONVERTIBLE PREFERRED STOCK
The certificate of incorporation of the Company, as amended, authorizes
8,509,425 shares of convertible preferred stock of which 6,000,000 shares have
been designated as Series A and 2,509,425 shares as Series B. Pursuant to the
recapitalization of the Company (see Note 1), IMS issued 3,490,575 shares of its
Series A
F-14
<PAGE> 69
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 2,509,425 shares of B convertible preferred stock (Series A and Series B
shares) at a purchase price of $1.67 per share.
The Series A and Series B shares have certain rights with respect to
voting, dividends, liquidation and conversion, as follows:
Voting
Series A and Series B shares have voting rights equal to the shares of
common stock into which they may be converted. Holders of Series A convertible
preferred stock are entitled to vote on all matters. However, holders of Series
B convertible preferred stock are entitled to vote only on certain matters
relating to the Company's capitalization, borrowings, liquidation sale, mergers
or acquisitions.
Dividends
Holders of Series A and Series B shares are entitled to receive a
cumulative dividend at the rate of 10% of the original issue price, per annum,
to be paid when and as declared by the Company's Board of Directors, prior to
and in preference to any declaration or payment of any dividend on the Company's
common stock.
Liquidation
In the event of liquidation and to the extent assets are available, the
holders of Series A and Series B shares are entitled to receive, prior and in
preference to any distribution to the holders of common stock, an amount equal
to the original issue price of such shares plus all accumulated but unpaid
dividends.
Conversion
Each Series A and Series B share is convertible into one share of Class A
and Class B common stock, respectively, subject to adjustments in the case of
certain dilutive events. Each Series A and Series B share will automatically
convert into one share of Class A and Class B common stock, respectively, in the
event of either (i) the affirmative vote of a majority of the holders of Series
A and Series B shares outstanding at the time of such vote; or (ii) the closing
of an underwritten public offering in which the aggregate offering price is not
less than $30,000,000 and the per share price is not less than $5.00 per share.
NOTE 9. COMMON STOCK
At April 30, 1997, the Company's Board of Directors had designated
18,000,000 shares of common stock as Class A voting common stock and 7,500,000
shares as Class B nonvoting common stock. To date, the Company has not issued
any shares of Class B nonvoting common stock.
In conjunction with the recapitalization, the Company issued to Maxtor
warrants to purchase 300,000 shares of its Class A common stock at approximately
$6.67 per share. The warrants have a term of ten years but are exercisable only
in the event the Company fails to repay the senior subordinated debt due to
Maxtor by June 13, 1998.
At April 30, 1997, the Company had reserved 6,000,000 shares of common
stock for issuance upon conversion of the Series A and Series B convertible
preferred stock.
F-15
<PAGE> 70
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLANS
1994 Stock Option Plan
The Company's Cayman subsidiary had a 1994 Stock Option Plan which provided
for grant of options and stock purchase rights to employees and directors or
consultants, advisors or other independent contractors. The Plan was approved by
the Company's stockholders in March 1995. Approximately two million options were
granted under this plan, and none were exercised. Following the recapitalization
of the Company (see Note 1), the 1994 Stock Option Plan was terminated and all
outstanding options were canceled.
1996 Stock Option Plan
Pursuant to the terms of the Company's 1996 Stock Option Plan (the "Option
Plan"), options to purchase 3,352,500 shares of common stock may be granted to
employees, directors and consultants with an exercise price of not less than the
fair value at the date of grant. The plan provides that the options shall be
exercisable over a period not to exceed ten years. Options generally vest in
annual increments of 25% per year. However, options to purchase 2,136,000 shares
granted in June and July 1996 provided for 25% immediate vesting upon grant.
The following table summarizes the Company's stock option activity for the
Option Plan described above and weighted average exercise price within each
transaction type.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARE EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at beginning of year......... -- --
Options granted.................................. 2,901,750 $ 0.95
Options exercised................................ (37,500) $ 0.73
Options returned to plan......................... (36,750) $ 1.09
---------
Options outstanding at April 30, 1997............ 2,827,500 $ 0.95
Options granted (unaudited)...................... 75,000 $ 4.00
Options returned to plan (unaudited)............. (7,500) $ 2.00
---------
Options outstanding at July 31, 1997
(unaudited).................................... 2,895,000 $ 1.03
=========
</TABLE>
At April 30, 1997 and July 31, 1997, the Company had 487,500 and 420,000
(unaudited) shares available under the Option Plan for future grants,
respectively. With respect to certain options granted at the end of fiscal 1997
and during the three months ended July 31, 1997, the Company is recognizing a
compensation charge of approximately $189,000 over the four year vesting periods
of such options.
Significant option groups outstanding at April 30, 1997 and related
weighted average exercise price and remaining life were as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------- ----------------- REMAINING
EXERCISE PRICE RANGE SHARES PRICE SHARES PRICE LIFE (YEARS)
------------------------- --------- ----- ------- ----- ------------
<S> <C> <C> <C> <C> <C>
$0.73 - $1.33............ 2,349,000 $0.81 849,620 $0.75 9.17
$1.57 - $2.00............ 478,500 $1.65 23,438 $1.57 9.74
</TABLE>
All options were granted with exercises prices equal to the estimated fair
market value of the Company's common stock at the date of grant. The weighted
average estimated minimum value, as defined by SFAS 123, for options granted
during 1997 was $0.26 per option. Vesting of options to purchase approximately
530,000 shares of common stock will accelerate upon the successful completion of
an initial public offering prior to June 13, 1998.
F-16
<PAGE> 71
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following weighted average assumptions are included in the estimated
minimum value calculations for the Company's stock option awards:
<TABLE>
<S> <C>
Expected life (years)............................... 4 years
Risk free interest rate............................. 6.42%
Dividend yield...................................... 0%
</TABLE>
PRO FORMA NET LOSS AND NET LOSS PER SHARE
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its stock
option plan, the Company's net loss and net loss per share would have increased
to the following pro forma amounts shown for the year ended April 30, 1997 (in
thousands, except per share data):
<TABLE>
<S> <C>
Pro forma net loss.................................. $ (785)
Pro forma net loss per share........................ $(0.05)
</TABLE>
401(K) PLAN
Effective January 1, 1997, the Company adopted the 401(k) Plan (the "401(k)
Plan") for its U.S. employees that qualifies as a deferred salary arrangement
under Section 401 of the Internal Revenue Code. Under the 401(k) Plan,
participating employees may defer a portion of their pretax earnings not to
exceed 15% of their total compensation. The Company, at its discretion, may make
contributions for the benefit of eligible employees. The Company's contributions
to the 401(k) plan for fiscal 1997 were not material.
NOTE 11. INCOME TAXES
The income (loss) before income taxes included $2,895,000, $9,432,000 and
$5,710,000 of income relating to the non U.S. operations of the Company for
fiscal 1995, 1996 and 1997, respectively.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 30,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Foreign.................................... $ 620 $ 1,493 $ 397
Deferred:
Foreign.................................... (66) 300 (144)
---- ------ -----
Total.............................. $ 554 $ 1,793 $ 253
==== ====== =====
</TABLE>
A reconciliation of the tax provision to the amounts computed using the
statutory U.S. federal income tax rate of 35% is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 30,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax (benefit) at U.S. federal statutory
rate....................................... $ 893 $ 2,776 $ (121)
Tax savings from foreign operations.......... (480) (1,483) (1,746)
Nondeductible interest, goodwill and other... 41 -- 320
Valuation allowance.......................... 100 500 1,800
----- ------- -------
Total.............................. $ 554 $ 1,793 $ 253
===== ======= =======
</TABLE>
F-17
<PAGE> 72
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and (liabilities) are as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 31, APRIL 30,
1996 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................ $ 600 $ 2,400
Depreciation............................................ (300) (156)
----- -------
300 2,244
Valuation reserve....................................... (600) (2,400)
----- -------
$(300) $ (156)
===== =======
</TABLE>
The Company enjoys a tax holiday in Thailand which expires in the year
2003. The net impact of the tax holiday was an increase in net income of
$750,000 in fiscal 1996 and to decrease net loss by $1,800,000 ($0.11 per share)
in fiscal 1997.
At April 30, 1997, the Company has approximately $6,000,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future U.S. taxable income; such carryforwards expire at various dates beginning
in the year 2010. Under the U.S. tax laws, the amount of and benefits from net
operating losses that can be carried forward may be impaired or limited in
certain circumstances. Events which may cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of 50% over a three year period.
At April 30, 1997, approximately $4,400,000 of the Company's net operating
losses were subject to annual limitations.
Based on factors which include a history of losses generated by the U.S.
operations and the lack of carryback capacity, the weight of available evidence
indicates that it is more likely than not that the Company will not be able to
realize its U.S. deferred tax assets and thus a full valuation reserve has been
recorded. The Company has generated approximately $7,500,000 of earnings from
foreign operations for which no U.S. tax has been provided. These earnings are
considered to be permanently reinvested outside of the United States.
The Company's effective tax rate for the three months ended July 31, 1997
was approximately 14% and has been based primarily on the Company's estimation
of the expected geographical mix of its fiscal 1998 income (unaudited).
NOTE 12. TRANSACTIONS WITH AFFILIATES
Revenues from affiliates includes sales to Maxtor and other entities
related to Maxtor through Maxtor's parent company, Hyundai Electronics America.
During fiscal 1996 and 1997, Maxtor provided certain corporate
administrative and accounting services to the Company for which the Company was
charged $37,000 and $49,000, respectively.
NOTE 13. SIGNIFICANT CUSTOMERS AND FOREIGN OPERATIONS
The Company provides its customers with printed circuit board assembly,
product sub-assembly and final assembly on both a turnkey and consignment basis.
The Company markets and sells its products through a direct sales force to OEM's
worldwide, with an emphasis on the U.S. market. The Company operates in a single
industry segment.
F-18
<PAGE> 73
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the percentage of net sales to significant
customers:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
MARCH 31, MARCH 31, APRIL 30,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Maxtor................................... 92% 83% 49%
Diamond Multimedia....................... -- 13% --
Bay Networks............................. -- 2% 31%
</TABLE>
No other customer accounted for 10% or more of the Company's total revenues
during fiscal 1995, 1996 and 1997.
The Company's operations by geographical region were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 30,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Sales to unaffiliated customers
United States.......................... $ -- $ -- $ 1,931
Asia................................... 3,089 68,361 78,615
------- -------- --------
3,089 68,361 80,546
Sales to affiliated customers
Asia................................... 36,284 340,487 89,149
------- -------- --------
Total revenues.................... $39,373 $ 408,848 $ 169,695
======= ======== ========
Income (loss) from operations:
United States............................. $ (345) $ (1,402) $ (3,332)
Asia...................................... 3,075 9,396 6,958
------- -------- --------
Total operating income............ $ 2,730 $ 7,994 $ 3,626
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, APRIL 30,
1996 1997
--------- ---------
<S> <C> <C>
Identifiable assets at year end:
United States......................................... $ 66 $ 6,753
Far East.............................................. 83,621 53,718
------- -------
Total identifiable assets..................... $83,687 $ 60,471
======= =======
</TABLE>
Revenues are designated as to the country which records the sale. Asia is
comprised of the Company's subsidiaries in Hong Kong, Thailand (commenced
operations at the end of fiscal 1995) and China (commenced operations in fiscal
1997).
14. SUBSEQUENT EVENTS
On August 26, 1997 the Company's Board of Directors authorized management
of the Company to file a Registration Statement with the Securities and Exchange
Commission covering the proposed sale of shares of its common stock to the
public. On September 16, 1997 the stockholders of the Company approved a three-
for-two stock split of each of the Company's existing issued and unissued shares
of each class and series of the capital stock of the Company (including all
outstanding preferred shares). In addition, the stockholders approved the 1997
Stock Plan with 1,750,000 shares authorized for future option grants; the 1997
Director Option Plan with 225,000 shares authorized for future option grants;
and the 1997 Employee Stock Purchase Plan and 1997 Non-U.S. Employee Stock
Purchase Plan with an aggregate of 250,000 shares reserved for
F-19
<PAGE> 74
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
future issuance. All these plans become effective upon the closing of the
initial public offering. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted for all periods presented
to reflect the stock split.
The Board of Directors also approved that effective upon the closing of the
initial public offering, the Company will be authorized to issue 100 million
shares of common stock and 10 million shares of undesignated preferred stock.
F-20
<PAGE> 75
APPENDIX - DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
On the left side of the page, in the middle, is a picture of the
Company's executive offices in San Jose, California, and immediately beneath
this picture is text which reads "IMS San Jose." On the right side of the page,
at the top, is a picture of the Company's manufacturing facility in China, and
immediately beneath this picture is text which reads "IMS China." Below this
text is a picture of the Company's manufacturing facility in Thailand, and
immediately beneath this picture is text which reads "IMS Thailand." Below this
text is a picture of the Company's design and prototype production center in San
Jose, California, and immediately beneath this picture is text which reads "IMS
Design Center." Below this text is a picture of the Company's materials
procurement facility in Hong Kong, and immediately beneath this picture is text
which reads "IMS Hong Kong."
At the bottom right side of the page is an IMS logo, immediately
beneath which is text that reads "International Manufacturing Services, Inc."
A globe appears behind the foregoing pictures, text and logo, and a
blue sky with clouds provides background for the inside front cover page.
INSIDE BACK COVER
On the left side of the page, at the top, is an IMS logo, immediately
beneath which is text that reads "International Manufacturing Services, Inc."
Below this logo, in descending order on the left side of the page are the words
"Design," "Prototypes," "Manufacturing," "Testing" and "Logistics," each
appearing in boldface type.
At the upper right hand corner of the page are two pictures of persons
performing certain quality control and process verification functions in
connection with the Company's manufacturing services. Below these pictures, in
the middle right side of the page, is a picture of a printed circuit board
assembly. Underneath this graphic is a picture of a person performing product
testing. And below this picture, at the lower right corner of the page, is a
picture of persons performing an engineering review of certain design
documentation.
A blue sky with clouds provides background for the back cover page.
<PAGE> 76
======================================================
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations in connection with this
Offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any securities
other than the shares of Class A Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company or that information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 28
Management............................ 34
Certain Transactions.................. 42
Principal Stockholders................ 44
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Change of Accountants................. 53
Additional Information................ 53
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
Until , 1997 (25 days after the date
of this Prospectus), all dealers effecting transactions in the Class A Common
Stock, whether or not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
======================================================
======================================================
5,000,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
MONTGOMERY SECURITIES
ALEX. BROWN & SONS
INCORPORATED
UBS SECURITIES
, 1997
======================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration Fee................................................. $ 20,910
NASD Fee......................................................... 7,400
Nasdaq National Market Listing Fee............................... 31,875
Printing and Engraving........................................... *
Legal Fees and Expenses.......................................... *
Accounting Fees and Expenses..................................... *
Transfer Agent Fees.............................................. *
Miscellaneous.................................................... *
----------
Total.................................................. $1,000,000
=========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's certificate of incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach or
alleged breach of their duty of care to the Company or its stockholders. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the certificate of incorporation of the Registrant provides, inter alia, that
each person who is made a party or is threatened to be made a party to or
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a director or officer of the Company or, while a
director or officer of the Company, is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a director
or officer or in any other capacity while serving as a director or officer,
shall be indemnified and held harmless by the Company to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee's heirs, executors and administrators; provided, however, that,
except with respect to the proceedings brought by an indemnitee to enforce
rights to indemnification (subject to certain restrictions and as more fully
described in the Registrant's certificate of incorporation), the Company shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company. The right to
indemnification conferred in the Registrant's certificate of incorporation
includes the right to be paid by the Company the expenses incurred in connection
with any such proceeding in advance of its final disposition; provided, however,
that, if and to the extent that the Delaware General Corporation Law requires,
such an advancement of expenses incurred by an indemnitee in his or her capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service with respect to an employee benefit plan, shall be made only
upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final
II-1
<PAGE> 78
judicial decision from which there is no further right to appeal that such
indemnitee is not entitled to be indemnified for such expenses under the
Company's certificate of incorporation or otherwise.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the bylaws, as well as certain additional procedural
protections. The indemnity agreements provide that directors and executive
officers will be indemnified to the fullest possible extent not prohibited by
law against all expenses (including attorney's fees) and settlement amounts paid
or incurred by them in any action or proceeding, including any derivative action
by or in the right of the Registrant, on account of their services as directors
or executive officers of the Registrant or as directors or officers of any other
company or enterprise when they are serving in such capacities at the request of
the Registrant. Pursuant to the indemnity agreements, the Company will not be
obligated to indemnify or advance expenses to an indemnified party with respect
to proceedings or claims initiated by the indemnified party and not by way of
defense, except with respect to proceedings specifically authorized by the Board
of Directors or brought to enforce a right to indemnification under such
indemnity agreement, the Company's certificate of incorporation, bylaws or any
statute or law, or as otherwise required under Section 145 of the Delaware
General Corporation Law. Also under the indemnity agreements, the Company is not
obligated to indemnify the indemnified party for (i) any expenses incurred by
the indemnified party with respect to any proceeding instituted by the
indemnified party to enforce or interpret the agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous, (ii) acts, omissions or transactions on the part of the indemnified
party from which such party may not be relieved of liability under applicable
law or (iii) expenses and the payment of profits arising from the purchase and
sale by the indemnified party of securities in violation of Section 16(b) of the
Exchange Act, or any similar or successor statute.
The indemnification provisions in the certificate of incorporation and the
indemnification agreements entered into between the Registrant and its directors
and executive officers, may be sufficiently broad to permit indemnification of
the Registrant's officers and directors for liabilities arising under the 1933
Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------------------------------------------------------------------- ------
<S> <C>
Form of Underwriting Agreement...................................... 1.1
Amended and Restated Certificate of Incorporation, as amended....... 3.1
Form of Indemnification Agreement entered into by the Registrant
with each of its directors and managers........................... 10.1
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since July 31, 1994, the Registrant has sold and issued the following
securities (as adjusted to reflect the Company's 3-for-2 split of the Common
Stock effected in September 1997 and the one-for-one conversion of the Preferred
Stock effected in connection with this Offering):
1. In June 1996 and pursuant to the Recapitalization, the Registrant
sold an aggregate of 3,390,000 shares of Class A Common Stock to the
following investors at an aggregate purchase price of $2,499,999.58:
1,637,370 shares to Prudential Private Equity Investors III, L.P.;
1,325,999 shares to Oak Investment Partners VI, L.P.; 30,917 shares to Oak
VI Affiliates Fund, L.P.; 239,003 shares to Brinson Venture Capital Fund
III, L.P.; 38,978 shares to Brinson Trust Company, as Trustee of the
Brinson MAP Venture Capital Fund III; 16,950 shares to Montgomery
Associates, 1992 L.P.; 33,900 shares to William J. Almon; 33,900 shares to
Doll Technology Investment Fund; 13,560 shares to the J. Larry Smart and
Cheryl L. Smart Trust dated 3/29/95; 3,390 shares to Daniel J. Winnike;
8,475 shares to WS Investment Company 96A; 7,797 shares to Jeffrey D.
Saper; and 678 shares to Herbert P. Fockler.
II-2
<PAGE> 79
2. In June 1996 and pursuant to the Recapitalization, the Registrant
sold an aggregate of 315,000 shares of Class A Common Stock to the
following officers and directors at an aggregate purchase price of
$232,300: 75,000 shares to Robert G. Behlman; 75,000 shares to Nathan
Kawaye; 75,000 shares to Neo Kia Quek; 60,000 shares to Anthony Pham;
15,000 shares to Iris Grable; and 15,000 shares to Julie Mahowald.
3. In June 1996, the Registrant sold 150,000 shares of Class A Common
Stock to Robert G. Behlman at a purchase price of $110,619.45.
4. In June 1996 and pursuant to the Recapitalization, the Registrant
sold an aggregate of 3,490,575 shares of Series A Preferred Stock to the
following investors at an aggregate purchase price of $5,817,625: 68,988
shares to Brinson Trust Company, as Trustee of the Brinson MAP Venture
Capital Fund III; 30,000 shares to Montgomery Associates, 1992 L.P.; 60,000
shares to William J. Almon; 60,000 shares to Doll Technology Investment
Fund; 24,000 shares to J. Larry Smart and Cheryl L. Smart Trust dated
3/29/95; 6,000 shares to Daniel J. Winnike; 15,000 shares to WS Investment
Company 96A; 13,800 shares to Jeffrey D. Saper; 1,200 shares to Herbert P.
Fockler; 423,012 shares to Brinson Venture Capital Fund III, L.P.; 54,720
shares to Oak VI Affiliates Fund, L.P.; 2,345,280 shares to Oak Investment
Partners VI, L.P.; and 388,575 shares to Prudential Private Equity
Investors III, L.P.
5. In June 1996, the Registrant sold 2,509,425 shares of Series B
Preferred Stock to Prudential Private Equity Investors III, L.P. at an
aggregate purchase price of $4,182,375.
6. In July 1996, pursuant to a Restricted Stock Purchase Agreement
between the Registrant and Dixon R. Doll, Mr. Doll exercised options to
purchase 37,500 shares of Class A Common Stock and received restricted
stock, which restricted stock is subject to a right of repurchase in favor
of the Company in accordance with the same vesting schedule as the prior
options.
7. In January 1997, the Registrant sold 450,000 shares of Class A
Common Stock to Pentagon Systems, Inc. at an aggregate purchase price of
$705,000.
The issuances described in items 2 and 3 were deemed exempt from
registration under the 1933 Act in reliance upon Rule 701 promulgated under the
1933 Act. The issuance of the securities described in items 1, 4, 5 and 6 were
deemed to be exempt from registration under the 1933 Act in reliance on Section
4(2) of such Act as transactions by an issuer not involving any public offering.
In addition, the recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
2.1+ Recapitalization Agreement dated as of May 16, 1996 by and among the
Registrant, Maxtor and the Investors named therein.
2.2+ Redemption Agreement dated as of May 16, 1996 by and between the Registrant
and Maxtor.
3.1 Amended and Restated Certificate of Incorporation of the Registrant, as
amended
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant
3.3+ Amended and Restated Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Warrant dated June 13, 1996 issued to Maxtor to purchase 300,000 shares of
Common Stock.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding legality of the
securities being issued.
</TABLE>
II-3
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<S> <C>
10.1+ Form of Indemnification Agreement entered into by and between the
Registrant and each of its directors and managers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1997 Stock Plan and related agreements.
10.4+ 1997 Employee Stock Purchase Plan and related agreements.
10.5+ 1997 Non-U.S. Employee Stock Purchase Plan and related agreements.
10.6+ Summary of Management Incentive Plan.
10.7+ 1997 Director Option Plan and related agreements.
10.8+ Form of Common Stock Purchase Agreement dated June 1996 by and between the
Registrant and management.
10.9+ Stockholders Agreement dated June 16, 1996 by and among the Registrant, the
Investor Stockholders and the Management Stockholders named therein.
10.10+ Amendment No. 1 to Stockholders Agreement dated December 24, 1996 by and
among the Registrant and the Stockholders named therein.
10.11+ Senior Subordinated Promissory Note dated June 10, 1996 issued by the
Registrant for the benefit of Maxtor.
10.12+ Senior Subordinated Promissory Note dated June 10, 1996 issued by Maxtor
(Hong Kong) Limited for the benefit of Maxtor.
10.13+ Senior Subordinated Promissory Note dated June 10, 1996 issued by IMS
International Manufacturing Services (Thailand) Limited for the benefit of
Maxtor.
10.14*+ Manufacturing Services Agreement dated as of June 13, 1996 by and between
the Registrant and Maxtor.
10.15+ Manufacturing and Purchase Agreement dated as of January 1, 1996 and
between the Registrant and Bay Networks Centillion Business Unit.
10.16+ Lease Agreement dated March 8, 1995 by and between The Industrial Estate
Authority of Thailand Ltd. and IMS International Manufacturing Services
(Thailand) Ltd.
10.17+ Lease Agreement dated November 1, 1996 by and between The Industrial Estate
Authority of Thailand Ltd. and IMS International Manufacturing Services
(Thailand) Ltd.
10.18 Lease Agreement dated April 11, 1996 by and between Dongguan Municipal
Changping Town Maiyuan Administrative District and Dongguan IMS Electronics
Ltd.
10.19+ Lease Agreement dated July 9, 1996 by and between Barinet Company Limited
and IMS International Manufacturing Services (Hong Kong) Limited.
10.20+ Employment Agreement dated October 14, 1994 by and between the Registrant
and Robert G. Behlman.
10.21+ Credit Agreement dated as of June 13, 1996 by and among the Registrant, the
Lenders referred to therein and Chemical Bank, as amended.
11.1+ Statement of computation of earnings per share.
16.1+ Letter from Ernst & Young LLP dated August 27, 1997, Concurring With
Statements Made Regarding Change in Certifying Accountant.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.1).
23.2 Consent of Price Waterhouse LLP Independent Accountants.
23.3 Consent of Ernst & Young LLP Independent Auditors.
24.1+ Power of Attorney (See page II-6).
27.1+ Financial Data Schedule
</TABLE>
- ---------------
* Confidential treatment requested as to certain portions of this exhibit.
+ Previously filed.
II-4
<PAGE> 81
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts and Reserves.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each Purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of San Jose, State of California, on this 17th day of September 1997.
INTERNATIONAL MANUFACTURING
SERVICES, INC.
By: /s/ ROBERT G. BEHLMAN
------------------------------------
Robert G. Behlman,
Chairman of the Board of Directors,
President, and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------
<C> <S> <C>
/s/ ROBERT G. BEHLMAN Chairman of the Board of September 17, 1997
- ------------------------------------------ Directors, President and Chief
Robert G. Behlman Executive Officer (Principal
Executive Officer)
* Vice President and Chief September 17, 1997
- ------------------------------------------ Financial Officer (Principal
Nathan Kawaye Financial and Accounting
Officer)
* Director September 17, 1997
- ------------------------------------------
William J. Almon
* Director September 17, 1997
- ------------------------------------------
Dixon R. Doll
* Director September 17, 1997
- ------------------------------------------
John A. Downer
* Director September 17, 1997
- ------------------------------------------
Fredric W. Harman
* Director September 17, 1997
- ------------------------------------------
Mark Rossi
* Director September 17, 1997
- ------------------------------------------
J. Larry Smart
* Director September 17, 1997
- ------------------------------------------
Paul J. Tufano
*By: /s/ ROBERT G. BEHLMAN
- ------------------------------------------
Robert G. Behlman
(Attorney-in-Fact)
</TABLE>
II-6
<PAGE> 83
SCHEDULE II
INTERNATIONAL MANUFACTURING SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended March 31,1995
Allowance for doubtful accounts..................... $ -- $ -- $ -- $ --
==== ==== ===== ====
Year Ended March 31, 1996
Allowance for doubtful accounts..................... $ -- $266 $ (31) $ 235
==== ==== ===== ====
Year Ended April 30, 1997
Allowance for doubtful accounts..................... $235 $ 46 $ (71) $ 210
==== ==== ===== ====
</TABLE>
S-1
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT EXHIBIT DESCRIPTION NUMBERED PAGE
- ------- -------------------------------------------------------------------- -------------
<S> <C> <C>
1.1+ Form of Underwriting Agreement......................................
2.1+ Recapitalization Agreement dated as of May 16, 1996 by and among the
Registrant, the International IMS entities defined therein, Maxtor
Corporation ("Maxtor") and the Investors named therein..............
2.2+ Redemption Agreement dated as of May 16, 1996 by and between the
Registrant and Maxtor...............................................
3.1 Amended and Restated Certificate of Incorporation of the Registrant,
as amended..........................................................
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant..........................................................
3.3+ Amended and Restated Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.......................
4.2+ Warrant dated June 13, 1996 issued to Maxtor to purchase 300,000
shares of Common Stock..............................................
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding legality
of the securities being issued......................................
10.1+ Form of Indemnification Agreement entered into by and between the
Registrant and each of its directors and executive managers.........
10.2+ 1996 Stock Option Plan and related agreements.......................
10.3+ 1997 Stock Plan and related agreements..............................
10.4+ 1997 Employee Stock Purchase Plan and related agreements............
10.5+ 1997 Non-U.S. Employee Stock Purchase Plan and related agreements...
10.6+ Summary of Management Incentive Plan................................
10.7+ 1997 Director Option Plan and related agreements....................
10.8+ Form of Common Stock Purchase Agreement dated June 1996 by and
between the Registrant and certain executive officers...............
10.9+ Stockholders Agreement dated June 13, 1996 by and among the
Registrant, the Investor Stockholders and the Management
Stockholders named therein..........................................
10.10+ Amendment No. 1 to Stockholders Agreement dated December 24, 1996 by
and among the Registrant and the Stockholders named therein.........
10.11+ Senior Subordinated Promissory Note dated June 10, 1996 issued by
the Registrant for the benefit of Maxtor............................
10.12+ Senior Subordinated Promissory Note dated June 10, 1996 issued by
Maxtor (Hong Kong) Limited for the benefit of Maxtor................
10.13+ Senior Subordinated Promissory Note dated June 10, 1996 issued by
IMS International Manufacturing Services (Thailand) Limited for the
benefit of Maxtor...................................................
10.14*+ Manufacturing Services Agreement dated as of June 13, 1996 by and
between the Registrant and Maxtor...................................
10.15+ Manufacturing and Purchase Agreement dated as of January 1, 1996 by
and between the Registrant and Bay Networks Centillion Business
Unit................................................................
10.16+ Lease Agreement dated March 8, 1995 by and between The Industrial
Estate Authority of Thailand and IMS International Manufacturing
Services (Thailand) Ltd.............................................
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT EXHIBIT DESCRIPTION NUMBERED PAGE
- ------- -------------------------------------------------------------------- -------------
<S> <C> <C>
10.17+ Lease Agreement dated November 1, 1996 by and between The Industrial
Estate Authority of Thailand and IMS International Manufacturing
Services (Thailand) Ltd.............................................
10.18 Lease Agreement dated April 11, 1996 by and between Dongguan
Municipal Changping Town Maiyuan Administrative District and
Dongguan IMS Electronics Ltd.
10.19+ Lease Agreement dated July 9, 1996 by and between Barinet Company
Limited and IMS International Manufacturing Services (Hong Kong)
Limited.............................................................
10.20+ Employment Agreement dated October 14, 1994 by and between the
Registrant and Robert G. Behlman....................................
10.21+ Credit Agreement dated as of June 13, 1996 by and among the
Registrant, the IMS Entities defined therein, the Lenders referred
to therein and Chemical Bank, as amended............................
11.1+ Statement of computation of earnings per share......................
16.1+ Letter from Ernst & Young LLP dated August 27, 1997 Concurring With
Statements Made Regarding Change in Certifying Accountant...........
21.1+ Subsidiaries of the Registrant......................................
23.1 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in
Exhibit 5.1)........................................................
23.2 Consent of Price Waterhouse LLP Independent Accountants.............
23.3 Consent of Ernst & Young LLP Independent Auditors...................
24.1+ Power of Attorney (See page II-6)...................................
27.1+ Financial Data Schedule.............................................
</TABLE>
- ---------------
* Confidential treatment requested as to certain portions of this exhibit.
+ Previously filed.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL MANUFACTURING SERVICES, INC.
. . . .
1. The name of the corporation (which is hereinafter referred
to as the "CORPORATION") is International Manufacturing Services, Inc.
2. The original Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on November 21, 1994, under the
name International Manufacturing Services, Inc.
3. This Restated Certificate of Incorporation has been duly
proposed by resolutions adopted and declared advisable by the Board of
Directors of the Corporation, duly adopted by written consent of the
stockholders of the Corporation in lieu of a meeting and vote and duly executed
and acknowledged by the officers of the Corporation in accordance with the
provisions of Sections 103, 228, 242 and 245 of the General Corporation Law of
the State of Delaware and, upon filing with the Secretary of State in
accordance with Section 103, shall thenceforth supersede the original
Certificate of Incorporation and shall, as it may thereafter be amended in
accordance with its terms and applicable law, be the Certificate of
Incorporation of the Corporation.
4. The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by the laws of the State of Delaware, and
all rights conferred herein are granted subject to this reservation.
5. The text of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation is INTERNATIONAL MANUFACTURING
SERVICES, INC.
SECOND: The address of the Corporation's registered office in the
State of Delaware is The Corporation Trust Center, 1209 Orange Street,
Wilmington Delaware 19801, in the County of New Castle. The name of the
corporation's registered agent at such address shall be The Corporation Trust
Company.
THIRD: The nature of the business of the Corporation and its objects
and purposes are to have and exercise all the powers conferred by the laws of
the State of Delaware upon corporations formed under the General Corporation
Law of such State.
FOURTH: The Corporation is authorized to issue 6,000,000 shares of
Series A Preferred Stock, Par Value $0.001 per share (the "Series A Preferred
Stock"), 2,509,425 shares of Series B Preferred Stock, Par Value $0.001 per
share (the "Series B Preferred Stock" and together with the Series A Preferred
Stock, the "Preferred Stock"), 18,000,000 shares of voting common stock $0.001
par value (the "Class A Common Stock") and 7,500,000 shares of nonvoting common
stock $0.001 par value (the "Class B Common Stock").
At the time this Restated Certificate is filed with the
Delaware Secretary of State (the "Effective Time") each two (2) shares of Class
A Common Stock, Class B Common Stock, Series A Preferred Stock and Series B
Preferred Stock outstanding immediately prior to the Effective Time shall be
reclassified as and converted into three (3) shares of Class A Common Stock,
Class B Common Stock, Series A Preferred Stock and Series B Preferred Stock,
respectively, with all the preferences, limitations and rights attendant
thereto. As used in this Article Fourth, "Common Stock" means the Class A
Common Stock, the Class B Common Stock and any capital stock of any class of
the Corporation hereafter authorized which is not limited to a fixed sum or
percentage of par value in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
-1-
<PAGE> 2
Set forth below is a statement of the preferences, limitations
and relative rights of each class and series of stock of the Corporation.
Unless otherwise indicated, all cross-references in each subdivision of this
Article Fourth refer to other paragraphs in such subdivision.
I. PREFERRED STOCK
Section 1. Dividends.
1A. General Obligation. When and as declared by the
Corporation's Board of Directors and to the extent permitted under the General
Corporation Law of Delaware, the Corporation shall pay preferential dividends
in cash to the holders of the Preferred Stock as provided in this Section 1.
Dividends on each share of the Preferred Stock (a "Share") shall accrue on a
daily basis at the rate of 10% per annum of the sum of the Liquidation Value
thereof plus all accumulated and unpaid dividends thereon from and including
the date of issuance of such Share to and including the first to occur of (i)
the date on which the Liquidation Value of such Share (plus all accrued and
unpaid dividends thereon) is paid to the holder thereof in connection with the
liquidation of the Corporation or the redemption of such Share by the
Corporation, (ii) the date on which such Share is converted into shares of
Conversion Stock hereunder or (iii) the date on which such share is otherwise
acquired by the Corporation. Such dividends shall accrue whether or not they
have been declared and whether or not there are profits, surplus or other funds
of the Corporation legally available for the payment of dividends. The date on
which the Corporation initially issues any Share shall be deemed to be its
"date of issuance" regardless of the number of times transfer of such Share is
made on the stock records maintained by or for the Corporation and regardless
of the number of certificates which may be issued to evidence such Share.
Additionally, in the event that a Share of Series B Preferred Stock is
converted into a Share of Series A Preferred Stock, the "date of issuance" with
respect to such Share of Series A Preferred Stock shall be the date of issuance
of the Share of Series B Preferred Stock, the conversion of which resulted in
the issuance of such Share of Series A Preferred Stock.
1B. Dividend Reference Dates. To the extent not paid on
March 31, June 30, September 30, and December 31 of each year, beginning June
30, 1996 (the "Dividend Reference Dates"), all dividends which have accrued on
each Share outstanding during the three-month period (or other period in the
case of the initial Dividend Reference Date) ending upon each such Dividend
Reference Date shall be accumulated and shall remain accumulated dividends with
respect to such Share until paid to the holder thereof.
1C. Distribution of Partial Dividend Payments. Except as
otherwise provided herein, if at any time the Corporation pays less than the
total amount of dividends then accrued with respect to the Preferred Stock,
such payment shall be distributed pro rata among the holders thereof based upon
the number of Shares held by each such holder.
1D. Payment of Dividends with Shares. Notwithstanding
any other provision of this Section 1, if at any time the Company is unable to
pay any dividends accruing on the Preferred Stock then such dividends shall, at
the election of the holders of the Preferred Stock, be paid in lieu of cash
dividends by the issuance of additional Shares of (i) Series A Preferred Stock
(including fractional Shares), in the case of dividends on the Series A
Preferred Stock or (ii) Series B Preferred Stock (including fractional Shares),
in the case of dividends on the Series B Preferred Stock, having an aggregate
Conversion Price (as defined below) at the time of such payment equal to the
amount of the dividend to be paid. If and when any Shares are issued under
this paragraph 1D for the payment of accrued dividends, such Shares shall be
deemed to be validly issued and outstanding and fully paid and nonassessable.
1E. Participating Dividends. In the event that the
Corporation declares or pays any dividends upon the Common Stock (whether
payable in cash, securities or other property) other than dividends payable
solely in shares of Common Stock, the Corporation shall also declare and pay to
the holders of the Preferred Stock at the same time that it declares and pays
such dividends to the holders of the Common Stock, the dividends which would
have been declared and paid with respect to the Common Stock issuable upon
conversion of the Preferred Stock had all of the outstanding Preferred Stock
been converted immediately prior to the record date for such dividend, or if no
record date is fixed, the date as of which the record holders of Common Stock
entitled to such dividends are to be determined; provided that if any dividend
consists of voting securities, the Corporation shall make available to each
holder of Series A Preferred, at such holder's request, dividends consisting of
securities which are non-voting (except as otherwise required by law), which
are otherwise identical to the dividends consisting of voting securities and
which are convertible into such voting securities on the same terms as Class B
Common Stock is convertible into Class A Common Stock.
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Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation (whether voluntary or involuntary), each holder of Preferred Stock
shall be entitled to be paid, before any distribution or payment is made upon
any Junior Securities, an amount in cash equal to the aggregate Liquidation
Value of all Shares held by such holder (plus all accrued and unpaid dividends
thereon), and, except as set forth herein, the holders of Preferred Stock shall
not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation the Corporation's assets to be
distributed among the holders of the Preferred Stock are insufficient to
permit payment to such holders of the aggregate amount which they are entitled
to be paid under this Section 2, then the entire assets available to be
distributed to the Corporation's stockholders shall be distributed pro rata
among such holders based upon the aggregate Liquidation Value (plus all accrued
and unpaid dividends) of the Preferred Stock held by each such holder. Prior
to the liquidation, dissolution or winding up of the Corporation, the
Corporation shall declare for payment all accrued and unpaid dividends with
respect to the Preferred Stock, but only to the extent of funds of the
Corporation legally available for the payment of dividends. Not less than 60
days prior to the payment date stated therein, the Corporation shall mail
written notice of any such liquidation, dissolution or winding up to each
record holder of Preferred Stock, setting forth in reasonable detail the
amount of proceeds to be paid with respect to each Share and each share of
Common Stock in connection with such liquidation, dissolution or winding up.
Any Change in Ownership or Fundamental Change (both as defined below) may be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this Section 2.
In addition to and after payment in full of all other amounts
payable to the holders of the Preferred Stock under this Section 2, upon any
liquidation, dissolution or winding up of the Corporation (whether voluntary or
involuntary), the holders of the Preferred Stock shall be entitled to
participate on an as if converted basis with the holders of Common Stock as a
single class in the distribution of assets of the Corporation with respect to
the Common Stock (the amount received with respect to each Share of Preferred
Stock being referred to in this Section 2 as the "Participation Amount"),
provided that, notwithstanding anything to the contrary in this Section 2, if
the quotient obtained by dividing the aggregate Participation Amount by the
aggregate number of Shares is equal to or greater than $6.67 (as adjusted to
take into effect stock splits, combinations, recapitalizations, etc.), then the
amount paid upon liquidation with respect to each Share shall equal only the
Participation Amount with respect to such Share and shall not include the
Liquidation Value thereof.
Section 3. Priority of Preferred Stock on Dividends and
Redemptions.
So long as any Preferred Stock remains outstanding, without
the prior written consent of the holders of a majority of the outstanding
shares of Preferred Stock, the Corporation shall not, nor shall it permit any
Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any
Junior Securities, nor shall the Corporation directly or indirectly pay or
declare any dividend or make any distribution upon any Junior Securities, if at
the time of or immediately after any such redemption, purchase, acquisition,
dividend or distribution the Corporation has failed to pay the full amount of
dividends accrued on the Preferred Stock or the Corporation has failed to make
any redemption of the Preferred Stock required hereunder; provided that the
Corporation may repurchase shares of Common Stock from present or former
employees of the Corporation and its Subsidiaries in accordance with the
provisions of agreements providing the Corporation with repurchase rights for
an aggregate purchase price of no more than $2,000,000 in any twelve-month
period and, unless waived by a majority vote of the Preferred Stock (the Series
A Preferred Stock and Series B Preferred Stock voting together as a single
class), so long as no Event of Noncompliance is in existence at the time of or
immediately after such repurchase or would be caused by such repurchase.
Section 4. Redemptions.
4A. Special Redemptions.
(i) If a Change in Ownership has occurred or the
Corporation obtains knowledge that a Change in Ownership is proposed to occur,
the Corporation shall give prompt written notice to each holder of Preferred
Stock of such Change in Ownership describing in reasonable detail the material
terms and date of consummation thereof to each holder of Preferred Stock, but
in any event such notice shall not be given later than five days after the
occurrence of such Change in Ownership, and the Corporation shall give each
holder of Preferred Stock prompt written notice of any material change in the
terms or timing of such transaction. Any holder of Preferred Stock may, to the
extent permitted
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<PAGE> 4
by the Delaware General Corporation Law, require the Corporation to redeem all
or any portion of the Preferred Stock owned by such holder at a price per
Share equal to the Liquidation Value thereof (plus all accrued and unpaid
dividends thereon), plus an amount (the "Participation Amount") equal to the
number of shares of Conversion Stock then issuable upon conversion of such
Share multiplied by the consideration payable with respect to each share of
Common Stock in such Change of Ownership, by giving written notice to the
Corporation of such election prior to the later of (a) 21 days after receipt of
the Corporation's notice and (b) five days prior to the consummation of the
Change in Ownership (the "Expiration Date"); provided that, if the quotient
obtained by dividing the aggregate Participation Amount by the aggregate number
of Shares being redeemed is equal to or greater than $6.67 (as adjusted to take
into effect stock splits, combinations, recapitalizations, etc.), then the
price per Share shall equal only the Participation Amount with respect to such
Share and shall not include the Liquidation Value thereof. The Corporation
shall give prompt written notice of any such election to all other holders of
Preferred Stock within five days after the receipt thereof, and each such
holder shall have until the later of (a) the Expiration Date or (b) ten days
after receipt of such second notice to request redemption hereunder (by giving
written notice to the Corporation) of all or any portion of the Preferred
Stock owned by such holder.
Upon receipt of such election(s), the Corporation shall, to
the extent permitted by the Delaware General Corporation Law, be obligated to
redeem the aggregate number of Shares specified therein on the later of (a) the
occurrence of the Change in Ownership or (b) five days after the Corporation's
receipt of such election(s) (the "Redemption Date"). If any proposed Change in
Ownership does not occur, all requests for redemption in connection therewith
shall be automatically rescinded, or if there has been a material change in the
terms or the timing of the transaction, any holder of Preferred Stock may
rescind such holder's request for redemption by giving written notice of such
rescission to the Corporation.
The term "Change in Ownership" means any sale, transfer or
issuance or series of sales, transfers and/or issuances of Common Stock by the
Corporation or any holders thereof which results in any Person or group of
Persons (as the term "group" is used under the Securities Exchange Act of
1934), other than the holders of Common Stock and Preferred Stock as of the
date of the Recapitalization Agreement, owning more than 50% of the Common
Stock outstanding at the time of such sale, transfer or issuance or series of
sales, transfers and/or issuances.
(ii) If a Fundamental Change is proposed to occur, the
Corporation shall give written notice of such Fundamental Change describing in
reasonable detail the material terms and date of consummation thereof to each
holder of Preferred Stock not more than 45 days nor less than 20 days prior to
the consummation of such Fundamental Change, and the Corporation shall give
each holder of Preferred Stock prompt written notice of any material change in
the terms or timing of such transaction. Any holder of Preferred Stock may, to
the extent permitted by the Delaware General Corporation Law, require the
Corporation to redeem all or any portion of the Preferred Stock owned by such
holder at a price per Share equal to the Liquidation Value thereof (plus all
accrued and unpaid dividends thereon), plus an amount (the "Participation
Amount") equal to the number of shares of Conversion Stock then issuable upon
conversion of such Share multiplied by the consideration payable with respect
to each share of Common Stock in such Fundamental Change, by giving written
notice to the Corporation of such election prior to the later of (a) ten days
prior to the consummation of the Fundamental Change or (b) ten days after
receipt of notice from the Corporation; provided that, if the quotient obtained
by dividing the aggregate Participation Amount by the aggregate number of
Shares being redeemed is equal to or greater than $6.67 (as adjusted to take
into effect stock splits, combinations, recapitalizations, etc.), then the
price per Share shall equal only the Participation Amount with respect to such
Share and shall not include the Liquidation Value thereof. The Corporation
shall give prompt written notice of such election to all other holders of
Preferred Stock (but in any event within five days prior to the consummation of
the Fundamental Change), and each such holder shall have until two days after
the receipt of such notice to request redemption (by written notice given to
the Corporation) of all or any portion of the Preferred Stock owned by such
holder.
Upon receipt of such election(s), the Corporation shall, to
the extent permitted by the Delaware General Corporation Law, be obligated to
redeem the aggregate number of Shares specified therein upon the consummation
of such Fundamental Change (the "Redemption Date"). If any proposed
Fundamental Change does not occur, all requests for redemption in connection
therewith shall be automatically rescinded, or if there has been a material
change in the terms or the timing of the transaction, any holder of Preferred
Stock may rescind such holder's request for redemption by delivering written
notice thereof to the Corporation prior to the consummation of the transaction.
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The term "Fundamental Change" means (a) any sale or transfer
of more than 50% of the assets of the Corporation and its Subsidiaries on a
consolidated basis (measured either by book value in accordance with generally
accepted accounting principles consistently applied or by fair market value
determined in the reasonable good faith judgment of the Corporation's Board of
Directors) in any transaction or series of transactions (other than sales in
the ordinary course of business) and (b) any merger or consolidation to which
the Corporation is a party, except for a merger in which the Corporation is the
surviving corporation, the terms of the Preferred Stock are not changed and the
Preferred Stock is not exchanged for cash, securities or other property, and
after giving effect to such merger, the holders of the Corporation's
outstanding capital stock possessing a majority of the voting power (under
ordinary circumstances) to elect a majority of the Corporation's Board of
Directors immediately prior to the merger shall continue to own the
Corporation's outstanding capital stock possessing the voting power (under
ordinary circumstances) to elect a majority of the Corporation's Board of
Directors; provided that a merger or other transaction conducted for the sole
purpose of changing the Company's domicile shall not be considered a
Fundamental Change.
4B. Redemption Payments. For each Share which is to be
redeemed hereunder, the Corporation shall, to the extent permitted by the
Delaware General Corporation Law, be obligated on the Redemption Date to pay to
the holder thereof (upon surrender by such holder at the Corporation's
principal office of the certificate representing such Share) the amount
required to be paid hereunder (plus all accrued and unpaid dividends thereon).
If the funds of the Corporation legally available for redemption of Shares on
any Redemption Date are insufficient to redeem the total number of Shares to be
redeemed on such date, those funds which are legally available shall be used to
redeem the maximum possible number of Shares pro rata among the holders of the
Shares to be redeemed based upon the aggregate Liquidation Value of such Shares
held by each such holder (plus all accrued and unpaid dividends thereon). At
any time thereafter when additional funds of the Corporation are legally
available for the redemption of Shares (as determined by reference to the
monthly unaudited financial data prepared by the Company), such funds shall
promptly be used to redeem the balance of the Shares which the Corporation has
become obligated to redeem on any Redemption Date but which it has not
redeemed. Prior to any redemption of Preferred Stock, the Corporation shall
declare for payment all accrued and unpaid dividends with respect to the Shares
which are to be redeemed, but only to the extent of funds of the Corporation
legally available for the payment of dividends.
4C. Partial Redemption. In case fewer than the total
number of Shares represented by any certificate are redeemed, a new certificate
representing the number of unredeemed Shares shall be issued to the holder
thereof without cost to such holder within five business days after surrender
of the certificate representing the redeemed Shares.
4D. Dividends After Redemption Date. No Share shall be
entitled to any dividends accruing after the date on which the Liquidation
Value of such Share (plus all accrued and unpaid dividends thereon) is paid to
the holder of such Share. On such date, all rights of the holder of such Share
shall cease, and such Share shall no longer be deemed to be issued and
outstanding.
4E. Redeemed or Otherwise Acquired Shares. Any Shares
which are redeemed or otherwise acquired by the Corporation shall be canceled
and retired and shall thereupon become authorized but unissued shares of
Preferred Stock and shall not be reissued, sold or transferred.
4F. Other Redemptions or Acquisitions. The Corporation
shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire
any Shares of Preferred Stock, except as expressly authorized herein or
pursuant to a purchase offer made pro rata to all holders of Preferred Stock
on the basis of the number of Shares owned by each such holder.
Section 5. Voting Rights. The holders of Preferred Stock
shall have no right to vote except as set forth in this paragraph 5 and as
otherwise expressly provided by law. Each holder of the Series A Preferred
Stock (i) shall be entitled to vote, together as a single class with the
holders of the Class A Common Stock, on all matters submitted to the
stockholders for a vote, (ii) shall have one vote for each share of Class A
Common Stock that would be issuable to such holder upon the conversion of all
the shares of Series A Preferred Stock held by such holder on the record date
for the determination of stockholders entitled to vote, or if no record date is
specified, as of the date of such vote, and (iii) shall be entitled to notice
of each stockholders' meeting in accordance with the Bylaws of the Corporation.
Each holder of Series B Preferred Stock (x) shall be entitled to vote, together
as a single class with the holders of the Class
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<PAGE> 6
A Common Stock, (y) shall be entitled to one vote for each share of Class A
Common Stock that would be issuable to such holder upon the conversion of all
the shares of Series B Preferred Stock held by such holder (whether by way of
conversion through Class B Common Stock or through Series A Preferred Stock) on
the record date for the determination of stockholders entitled to vote, or if
no record date is specified, as of the date of such vote, and (z) shall be
entitled to notice of any stockholders' meeting in accordance with the Bylaws
of the Corporation, in each case only with respect to the following corporate
actions (each a "Voting Event"):
(a) any amendment or modification to the
Certificate of Incorporation or, at such time as it shall be submitted
to a vote of the stockholders of the Corporation, any amendment or
modification to the Bylaws of the Corporation;
(b) the liquidation, dissolution, winding-up or
bankruptcy of the Corporation, the reorganization, reclassification or
recapitalization of the capital stock of the Corporation, or the sale
of all or substantially all of the property and assets of the
Corporation (other than sales of inventory in the ordinary course of
business);
(c) any change in the number of shares of the
Class A Common Stock or the Class B Common Stock authorized as of the
date of original issuance of the Preferred Stock;
(d) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any material change in
the nature of the Corporation's business from that as is conducted, or
contemplated to be conducted, by the Corporation on the date of the
issuance of the Series B Preferred Stock;
(e) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any issuance of shares of
capital stock or other equity securities of the Corporation or any of
its subsidiaries, other than pursuant to options or warrants to
purchase up to 3,352,500 shares of Class A Common Stock, which at the
time of the original issuance of the Preferred Stock have been or may
be granted to employees, officers and directors of the Corporation;
(f) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any issuance of any
options, warrants or other rights to acquire any shares of capital
stock of the Corporation or any of its subsidiaries, other than
options to purchase up to 3,352,500 shares of Class A Common Stock
which at the time of the original issuance of the Preferred Stock have
been or may be granted to employees, officers and directors of the
Corporation;
(g) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any merger, consolidation
or other business combination of the Corporation or any of its
subsidiaries with, acquisition by the Corporation or any of its
subsidiaries of, or investment by the Corporation of any of its
subsidiaries in, any other entity or business in connection with which
the aggregate consideration to be paid by the Corporation and its
subsidiaries exceeds $1,000,000;
(h) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any incurrence by the
Corporation and its subsidiaries of indebtedness for borrowed money in
aggregate outstanding at any time in excess of $250,000.
Section 6. Conversion.
6A. Conversion Procedure.
(i) At any time and from time to time, any holder of
Preferred Stock may convert all or any portion of the Preferred Stock
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be
converted by $1.67 and dividing the result by the Conversion Price then in
effect. Any holder of Series B Preferred Stock may convert all or any portion
of the Series B Preferred Stock (including any fraction of a Share) held by
such holder into an equal number of shares of Series A Preferred Stock upon the
occurrence of a Conversion Event (as defined below) with respect to the Series
B Preferred
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Stock, provided that, in the case of any Conversion Event set forth in
subparagraph 6B(e),6B(g) or 6B(i), such right of conversion shall exist only
during the 60-day period following receipt by such holder of written notice
from the Corporation of the occurrence of such Conversion Event and shall lapse
thereafter until the occurrence of any subsequent Conversion Event.
(ii) Except as otherwise provided herein, each conversion
of Preferred Stock shall be deemed to have been effected as of the close of
business on the date on which the certificate or certificates representing the
Preferred Stock to be converted have been surrendered for conversion at the
principal office of the Corporation. At the time any such conversion has been
effected, the rights of the holder of the Shares converted as a holder of
Preferred Stock or Series B Preferred Stock, as applicable, shall cease and the
Person or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock or Series A Preferred Stock, as applicable, are to
be issued upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Conversion Stock or Series A Preferred
Stock, as applicable, represented thereby.
(iii) The conversion rights of any Share subject to
redemption hereunder shall terminate on the Redemption Date for such Share
unless the Corporation has failed to pay to the holder thereof the Liquidation
Value of such Share (plus all accrued and unpaid dividends thereon and all
other amounts required to be paid hereunder).
(iv) Notwithstanding any other provision hereof, if a
conversion of Preferred Stock is to be made in connection with a Public
Offering, a Change in Ownership, a Fundamental Change or other transaction
affecting the Corporation, the conversion of any Shares of Preferred Stock
may, at the election of the holder thereof, be conditioned upon the
consummation of such transaction, in which case such conversion shall not be
deemed to be effective until immediately prior to such transaction being
consummated.
(v) As soon as possible after a conversion has been
effected (but in any event within five business days in the case of
subparagraph (a) below), the Corporation shall deliver to the converting
holder:
(a) a certificate or certificates representing
the number of shares of Conversion Stock or Series A Preferred Stock,
as applicable, issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder
has specified;
(b) payment in an amount equal to all accrued and
unpaid dividends with respect to each Share converted which have not
been paid prior thereto, plus the amount payable under subparagraph
(x) below with respect to such conversion; and
(c) a certificate representing any Shares of
Preferred Stock which were represented by the certificate or
certificates delivered to the Corporation in connection with such
conversion but which were not converted.
(vi) If for any reason the Corporation is unable to pay
any portion of the accrued and unpaid dividends on Preferred Stock being
converted into Conversion Stock, such dividends may, at the converting holder's
option, be converted into an additional number of shares of Conversion Stock
determined by dividing the amount of the unpaid dividends to be applied for
such purpose, by the Conversion Price then in effect.
(vii) The issuance of certificates for shares of Conversion
Stock or Series A Preferred Stock, as applicable, upon conversion of Preferred
Stock shall be made without charge to the holders of such Preferred Stock for
any issuance tax in respect thereof or other cost incurred by the Corporation
in connection with such conversion and the related issuance of shares of
Conversion Stock or Series A Preferred Stock, as applicable, provided that the
Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Preferred Stock
which is being converted. Upon conversion of each Share of Preferred Stock,
the Corporation shall take all such actions as are necessary in order to insure
that the Conversion Stock or Series A Preferred Stock, as applicable, issuable
with respect to such conversion shall be validly issued, fully paid and
nonassessable, free and clear of all taxes, liens, charges and encumbrances
with respect to the issuance thereof.
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(viii) The Corporation shall not close its books against the
transfer of Preferred Stock or of Conversion Stock issued or issuable upon
conversion of Preferred Stock in any manner which interferes with the timely
conversion of Preferred Stock . The Corporation shall assist and cooperate
with any holder of Shares required to make any governmental filings or obtain
any governmental approval prior to or in connection with any conversion of
Shares hereunder (including, without limitation, making any filings required to
be made by the Corporation).
(ix) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock and
Series A Preferred Stock, solely for the purpose of issuance upon the
conversion of the Preferred Stock, such number of shares of Conversion Stock
and Series A Preferred Stock, as applicable, issuable upon the conversion of
all outstanding Preferred Stock . All shares of Conversion Stock and Series A
Preferred Stock, as applicable, which are so issuable shall, when issued, be
duly and validly issued, fully paid and nonassessable and free from all taxes,
liens and charges. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Conversion Stock and Series A
Preferred Stock, as applicable, may be so issued without violation of any
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Conversion Stock or Series A Preferred
Stock, as applicable, may be listed (except for official notice of issuance
which shall be immediately delivered by the Corporation upon each such
issuance). The Corporation shall not take any action which would cause the
number of authorized but unissued shares of Conversion Stock and Series A
Preferred Stock, as applicable, to be less than the number of such shares
required to be reserved hereunder for issuance upon conversion of the Preferred
Stock.
(x) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be delivered upon
any conversion of the Preferred Stock , the Corporation, in lieu of delivering
the fractional share therefor, shall pay an amount to the holder thereof equal
to the Market Price of such fractional interest as of the date of conversion.
6B. Conversion Events. Each of the following shall
constitute a "Conversion Event" with respect to shares of Series B Preferred
Stock or Class B Common Stock, as the case may be:
(a) upon the transfer of such shares by
Prudential Private Equity Investors III, L.P. ("PPEI") or a party affiliated
with PPEI or The Prudential Insurance Company of America ("Prudential") to a
party not affiliated with PPEI or Prudential;
(b) upon the distribution of such shares to any
limited partner of PPEI other than Prudential Equity Investors, Inc. or any
other affiliate of Prudential;
(c) if, after giving effect to conversion of such
shares, PPEI and Prudential or any affiliate thereof would not collectively
hold more than the greater of (i) an amount equal to 4.9 percent of the
aggregate amount of voting capital stock of the Corporation then outstanding
and (ii) the lesser of (x) one share less than the aggregate amount of voting
capital stock of the Corporation held by a single other stockholder, not
affiliated with Prudential and (y) an amount equal to 19.9 percent of the
aggregate amount of voting capital stock of the Corporation then outstanding;
(d) upon a sale of all or substantially all the
assets of the Corporation or of the Corporation and its subsidiaries on a
consolidated basis or upon any other acquisition of the Corporation or any of
its subsidiaries by merger, a negotiated stock purchase or a purchase pursuant
to a tender for substantially all of the outstanding shares of Common Stock of
the Corporation or such subsidiary;
(e) upon a failure by the Corporation or any of
its subsidiaries to make payment due for indebtedness on borrowed money (unless
and until such failure to pay is cured or waived) if at the time of such
failure to pay either Prudential or any of its Affiliates is a holder of such
indebtedness or in cases in which none of Prudential or its Affiliates is a
holder of such indebtedness, upon the receipt by Prudential or any of its
Affiliates of notice of any default or event of default under any material
agreement pursuant to which the Corporation or any of its subsidiaries has
incurred indebtedness for borrowed money (unless and until such default or
event of default is cured or waived);
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(f) if, at any time, the total number of shares
of Common Stock and the number of shares convertible at the option of the
holder thereof into shares of Common Stock held by PPEI as a percentage of the
total number of shares of Common Stock outstanding on a fully-diluted basis is
less than 50% of such percentage on the date of original issuance of the
Preferred Stock;
(g) if, during any twelve-month period, more than
30% of the Corporation's directors resign or are replaced;
(h) upon the sale by one or more members of
management of the Corporation of more than 50% of the stock owned at the time
of original issuance of the Preferred Stock by all members of management of the
Corporation or upon the sale by any of the three largest management
stockholders of more than 75% of the Corporation's stock owned by such person
at the time of original issuance of the Preferred Stock; or
(i) if, for two consecutive quarterly periods of
the Corporation, the quarterly financial statements of the Corporation show
that it has suffered a net loss from operations (with the Corporation's net
income or loss from operations to be calculated in accordance with generally
accepted accounting principles, consistently applied) but before taking into
account any non-cash or extraordinary items of income or expense.
6C. Conversion Price.
(i) The initial Conversion Price shall be $1.67. In
order to prevent dilution of the conversion rights granted under this Section
6, the Conversion Price shall be subject to adjustment from time to time
pursuant to this paragraph 6C.
(ii) If and whenever on or after the original date of
issuance of the Preferred Stock the Corporation issues or sells, or in
accordance with paragraph 6D is deemed to have issued or sold, any shares of
its Common Stock for a consideration per share less than the Conversion Price
in effect immediately prior to the time of such issue or sale, then immediately
upon such issue or sale or deemed issue or sale the Conversion Price shall be
reduced to the Conversion Price determined by dividing (a) the sum of (1) the
product derived by multiplying the Conversion Price in effect immediately prior
to such issue or sale by the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale, plus (2) the
consideration, if any, received by the Corporation upon such issue or sale, by
(b) the number of shares of Common Stock Deemed Outstanding immediately after
such issue or sale.
(iii) Notwithstanding the foregoing, there shall be no
adjustment in the Conversion Price as a result of any issue or sale (or deemed
issue or sale) of up to an aggregate of 3,352,500 shares of Common Stock to
employees, directors, consultants, vendors, lessors and lenders of the
Corporation and its Subsidiaries pursuant to stock option plans and stock
ownership plans and lease and loan transactions approved by the Corporation's
Board of Directors and pursuant to the exercise of the warrant issued to Maxtor
Corporation on the date of the issuance of the Preferred Stock (as such number
of shares is proportionately adjusted for subsequent stock splits, combinations
and dividends affecting the Common Stock and as such number includes all such
stock options and purchase rights outstanding at the time of the issuance of
the Preferred Stock).
6D. Effect on Conversion Price of Certain Events. For
purposes of determining the adjusted Conversion Price under paragraph 6C, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in
any manner grants or sells any Options and the price per share for which Common
Stock is issuable upon the exercise of such Options, or upon conversion or
exchange of any Convertible Securities issuable upon exercise of such Options,
is less than the Conversion Price in effect immediately prior to the time of
the granting or sale of such Options, then the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon conversion
or exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting or sale of
such Options for such price per share. For purposes of this paragraph, the
"price per share for which Common Stock is issuable" shall be determined by
dividing (A) the total amount, if any, received or receivable by the
Corporation as consideration for the granting or sale of such
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Options, plus the minimum aggregate amount of additional consideration payable
to the Corporation upon exercise of all such Options, plus in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the issuance
or sale of such Convertible Securities and the conversion or exchange thereof,
by (B) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible Securities
are actually issued upon the exercise of such Options or when Common Stock is
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the
Corporation in any manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuable upon conversion or exchange
thereof is less than the Conversion Price in effect immediately prior to the
time of such issue or sale, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities shall be
deemed to be outstanding and to have been issued and sold by the Corporation at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this paragraph, the "price per share for which
Common Stock is issuable" shall be determined by dividing (A) the total amount
received or receivable by the Corporation as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (B) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities. No further adjustment of the Conversion Price shall be made when
Common Stock is actually issued upon the conversion or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Conversion Price had been or are to be made pursuant to other provisions of
this Section 6, no further adjustment of the Conversion Price shall be made by
reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Conversion Price in
effect at the time of such change shall be immediately adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; provided that if such adjustment would
result in an increase of the Conversion Price then in effect, such adjustment
shall not be effective until 30 days after written notice thereof has been
given by the Corporation to all holders of the Preferred Stock. For purposes
of paragraph 6D, if the terms of any Option or Convertible Security which was
outstanding as of the date of issuance of the Preferred Stock are changed in
the manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change; provided that no such change shall at any time cause the
Conversion Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. Upon the expiration of any Option or the termination
of any right to convert or exchange any Convertible Security without the
exercise of any such Option or right, the Conversion Price then in effect
hereunder shall be adjusted immediately to the Conversion Price which would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued. For purposes of paragraph
6D, the expiration or termination of any Option or Convertible Security which
was outstanding as of the date of issuance of the Preferred Stock shall not
cause the Conversion Price hereunder to be adjusted unless, and only to the
extent that, a change in the terms of such Option or Convertible Security
caused it to be deemed to have been issued after the date of issuance of the
Preferred Stock.
(v) Calculation of Consideration Received. If any Common
Stock, Option or Convertible Security is issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor (net of discounts,
commissions and related expenses). If any Common Stock, Option or Convertible
Security is issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation shall be the Market Price thereof as of the date of receipt. If
any Common Stock, Option or Convertible Security is
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issued to the owners of the non-surviving entity in connection with any merger
in which the Corporation is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Option or Convertible Security, as the case may be. The
fair value of any consideration other than cash and securities shall be
determined jointly by the Corporation and the holders of a majority of the
outstanding Preferred Stock. If such parties are unable to reach agreement
within a reasonable period of time, the fair value of such consideration shall
be determined by an independent appraiser experienced in valuing such type of
consideration jointly selected by the Corporation and the holders of a majority
of the outstanding Preferred Stock. The determination of such appraiser shall
be final and binding upon the parties, and the fees and expenses of such
appraiser shall be borne by the Corporation.
(vi) Integrated Transactions. In case any Option is
issued in connection with the issue or sale of other securities of the
Corporation, together comprising one integrated transaction in which no
specific consideration is allocated to such Option by the parties thereto, the
Option shall be deemed to have been issued for a consideration of $0.01.
(vii) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by
or for the account of the Corporation or any Subsidiary, and the disposition of
any shares so owned or held shall be considered an issue or sale of Common
Stock.
(viii) Record Date. If the Corporation takes a record of
the holders of Common Stock for the purpose of entitling them (a) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (b) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or upon the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased. If the Corporation in any manner
subdivides its outstanding shares of Series A Preferred Stock into a greater
number of shares, then the Series B Preferred Stock shall be similarly
subdivided and, if the Corporation in any manner combines its outstanding
shares of Series A Preferred Stock into a smaller number of shares, then the
number of shares of Series B Preferred Stock immediately prior to such
combination shall be proportionately reduced.
6F. Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Corporation's
assets or other transaction, in each case which is effected in such a manner
that the holders of Common Stock are entitled to receive (either directly or
upon subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock, is referred to herein as an "Organic Change". Prior
to the consummation of any Organic Change, the Corporation shall make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Preferred Stock then outstanding) to insure that each of the
holders of Preferred Stock shall thereafter have the right to acquire and
receive, in lieu of or in addition to (as the case may be) the shares of
Conversion Stock immediately theretofore acquirable and receivable upon the
conversion of such holder's Preferred Stock, such shares of stock, securities
or assets as such holder would have received in connection with such Organic
Change if such holder had converted its Preferred Stock immediately prior to
such Organic Change. In each such case, the Corporation shall also make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Preferred Stock then outstanding) to insure that the provisions
of this Section 6 and Sections 7 and 8 hereof shall thereafter be applicable to
the Preferred Stock (including, in the case of any such consolidation, merger
or sale in which the successor entity or purchasing entity is other than the
Corporation, an immediate adjustment of the Conversion Price to the value for
the Common Stock reflected by the terms of such consolidation, merger or sale,
and a corresponding immediate adjustment in the number of shares of Conversion
Stock acquirable and receivable upon conversion of Preferred Stock, if the
value so reflected is less than the Conversion Price in effect immediately
prior to such consolidation, merger or sale). The Corporation
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shall not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor entity (if other than the Corporation)
resulting from consolidation or merger or the entity purchasing such assets
assumes by written instrument (in form and substance satisfactory to the
holders of a majority of the Preferred Stock then outstanding), the obligation
to deliver to each such holder such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be entitled to
acquire.
6G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 6 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Corporation's Board of Directors shall make an appropriate
adjustment in the Conversion Price so as to protect the rights of the holders
of Preferred Stock; provided that no such adjustment pursuant to this Section
6G shall increase the Conversion Price as otherwise determined pursuant to this
Section 6 or decrease the number of shares of Conversion Stock issuable upon
conversion of each Share of Preferred Stock.
6H. Notices.
(i) Immediately upon any adjustment of the Conversion
Price, the Corporation shall give written notice thereof to all holders of
Preferred Stock, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Corporation shall give written notice to all
holders of Preferred Stock at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata
subscription offer to holders of Common Stock or (c) for determining rights to
vote with respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Preferred Stock at least 20 days prior to the date on which any
Organic Change shall take place.
6I. Mandatory Conversion. The Corporation may at any
time require the conversion of all of the outstanding Preferred Stock if the
Corporation is at such time effecting a firm commitment underwritten Public
Offering of shares of its Common Stock in which (i) the aggregate price paid by
the public for the shares shall be at least $30 million, and (ii) the price per
share paid by the public for such shares shall be at least (a) 200% of the
Conversion Price in effect immediately prior to the closing of the sale of such
shares pursuant to the Public Offering, if such sale occurs before the first
anniversary of the date of issuance of the Preferred Stock, or (b) 300% of the
Conversion Price in effect immediately prior to the closing of the sale of such
shares pursuant to the Public Offering, otherwise. Any such mandatory
conversion shall only be effected at the time of and subject to the closing of
the sale of such shares pursuant to such Public Offering and upon written
notice of such mandatory conversion delivered to all holders of Preferred Stock
at least seven days prior to such closing.
Section 7. Purchase Rights.
If at any time the Corporation grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock generally (the "Purchase Rights"), then each holder of Preferred
Stock shall be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Preferred Stock immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase
Rights, or if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights; provided that if the Purchase Rights involve voting
securities, the Corporation shall make available to each holder of Series B
Preferred Stock, at such holder's request, Purchase Rights involving securities
which are non-voting (except as otherwise required by law), which are otherwise
identical to the Purchase Rights involving voting securities and which are
convertible into such voting securities on the same terms as Class B Common
Stock is convertible into Class A Common Stock.
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Section 8. Events of Noncompliance.
8A. Definition. An Event of Noncompliance shall have
occurred if:
(i) the Corporation fails to pay on any Dividend
Reference Date the full amount of dividends then accrued on the Preferred
Stock, whether or not such payment is legally permissible or is prohibited by
any agreement to which the Corporation is subject, provided that, any failure
to make such dividend payment arising from compliance by the Corporation with
the terms of the Maxtor Notes or agreements governing the Senior Debt (both as
defined in the Recapitalization Agreement) shall not constitute an Event of
Noncompliance;
(ii) the Corporation fails to make any redemption payment
with respect to the Preferred Stock which it is required to make hereunder,
whether or not such payment is legally permissible or is prohibited by any
agreement to which the Corporation is subject, provided that, any failure to
make such redemption payment arising from compliance by the Corporation with
the terms of the Maxtor Notes or agreements governing the Senior Debt shall not
constitute an Event of Noncompliance;
(iii) the Corporation breaches or otherwise fails to
perform or observe any other covenant or agreement set forth herein, provided
that no Event of Noncompliance shall have occurred under this subparagraph
(iii) if the Corporation establishes (to the reasonable satisfaction of the
holders of at least 50.1% of the Preferred Stock then outstanding) that (a) the
particular Event of Noncompliance has not been caused by knowing or purposeful
conduct by the Corporation or any Subsidiary, (b) the Corporation has
exercised, and continues to exercise, best efforts to expeditiously cure the
Event of Noncompliance (if cure is possible), (c) the Event of Noncompliance is
not material to the financial condition, operating results, operations, assets
or business prospects of the Corporation and its Subsidiaries, taken as a
whole, and (d) the Event of Noncompliance is not material to any holder's
investment in the Preferred Stock;
(iv) the Corporation or any material Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; or an order, judgment or decree is
entered adjudicating the Corporation or any material Subsidiary bankrupt or
insolvent; or any order for relief with respect to the Corporation or any
material Subsidiary is entered under the Federal Bankruptcy Code; or the
Corporation or any material Subsidiary petitions or applies to any tribunal for
the appointment of a custodian, trustee, receiver or liquidator of the
Corporation or any material Subsidiary or of any substantial part of the assets
of the Corporation or any material Subsidiary, or commences any proceeding
(other than a proceeding for the voluntary liquidation and dissolution of a
Subsidiary) relating to the Corporation or any material Subsidiary under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced, against the
Corporation or any material Subsidiary and either (a) the Corporation or any
such Subsidiary by any act indicates its approval thereof, consent thereto or
acquiescence therein or (b) such petition, application or proceeding is not
dismissed within 60 days;
(v) a judgment in excess of $250,000 is rendered against
the Corporation or any material Subsidiary and, within 6 days after entry
thereof, such judgment is not discharged or execution thereof stayed pending
appeal, or within 60 days after the expiration of any such stay, such judgment
is not discharged; or
(vi) the Corporation or any material Subsidiary defaults
in the performance of any obligation or agreement if the effect of such default
is to cause an amount exceeding $250,000 to become due prior to its stated
maturity or to permit the holder or holders of any obligation to cause an
amount exceeding $250,000 to become due prior to its stated maturity.
8B. Consequences of Events of Noncompliance. (a) If an
Event of Noncompliance has occurred, then the holders of the Preferred Stock,
by majority vote of the Series A Preferred Stock and Series B Preferred Stock
voting together as a single class, may elect by written notice to the
Corporation, one of the remedies outlined in (i) through (iii) below, provided
that the remedy outlined in (i) below may not be elected at any time as there
shall be an event of default existing under the Maxtor Notes. The remedy so
elected shall be effective as of the time of occurrence of the Event of
Noncompliance. The election of a remedy with respect to any Event of
Noncompliance may be made at any time following such Event of Noncompliance and
no failure to elect a remedy shall be deemed to constitute a waiver of the
rights of the holders of the Preferred Stock hereunder.
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(i) If an Event of Noncompliance has occurred, the
dividend rate on the Preferred Stock shall increase immediately by an increment
of two (2) percentage point(s). Thereafter, until such time as no Event of
Noncompliance exists, the dividend rate shall increase automatically at the end
of each succeeding 90-day period by an additional increment of two (2)
percentage point(s) (but in no event shall the dividend rate exceed 16%). Any
increase of the dividend rate resulting from the operation of this subparagraph
shall terminate as of the close of business on the date on which no Event of
Noncompliance exists, subject to subsequent increases pursuant to this
paragraph.
(ii) If any Event or Events of Noncompliance exist for an
aggregate of 365 days (whether or not such days are consecutive), the
Conversion Price of the Preferred Stock shall be reduced immediately by 10% of
the Conversion Price in effect immediately prior to such adjustment (the "First
Adjustment"). If any Event or Events of Noncompliance exist for an aggregate
of 365 days after the First Adjustment (whether or not such days are
consecutive and whether or not such days immediately follow the First
Adjustment), the Conversion Price shall be reduced immediately by 10% of what
the Conversion Price would have been immediately prior to such adjustment if
the First Adjustment had not been made (the "Second Adjustment"). If any Event
or Events of Noncompliance exist for an aggregate of 365 days after the Second
Adjustment (whether or not such days are consecutive and whether or not such
days immediately follow the Second Adjustment), the Conversion Price shall be
reduced immediately by 10% of what the Conversion Price would have been
immediately prior to such adjustment if the First and Second Adjustments had
not been made. In no event shall any Conversion Price adjustment be rescinded,
and in no event shall there be more than three Conversion Price adjustments
pursuant to this subparagraph.
For example, assume that the Conversion Price of the Preferred Stock
is $1.67. If Events of Noncompliance are in existence for an
aggregate of 365 days, the Conversion Price would be reduced
immediately by 10% of $1.67, or $0.17, for a new Conversion Price of
$1.50. If Events of Noncompliance exist for an additional 365 days,
the existing Conversion Price would be reduced by 10% of what the
Conversion Price would have been if there had been no previous
adjustment pursuant to this paragraph (i.e., $1.67), or $0.17, for a
new Conversion Price of $1.33. Then assume that there is a
two-for-one stock split, in which case the Conversion Price would be
decreased hereunder from $1.33 to $0.67, and assume that Events of
Noncompliance exist for an additional 365 days. In this case, the
Conversion Price would be reduced by 10% of what the Conversion Price
would have been immediately prior to such adjustment if there had been
no previous adjustments pursuant to this paragraph (i.e. $0.84), or
$0.08, for a new Conversion Price of $0.59.
(iii) If any Event of Noncompliance has occurred, the
number of directors constituting the Corporation's Board of Directors shall, at
the request of a majority of the Preferred Stock then outstanding, be increased
by one member, and the holders of Preferred Stock shall have the special right,
voting separately as a single class (with each Share being entitled to one
vote) and to the exclusion of all other classes of the Corporation's stock, to
elect an individual to fill such newly created directorship, to fill any
vacancy of such directorship and to remove any individual elected to such
directorship. The newly created directorship shall constitute a separate class
of directors, and the director elected by the holders of the Preferred Stock
shall be entitled to cast a number of votes on each matter considered by the
Board of Directors (including for purposes of determining the existence of a
quorum) equal to the sum of the number of votes entitled to be cast by all of
the other directors plus one. The special right of the holders of Preferred
Stock to elect members of the Board of Directors may be exercised at the
special meeting called pursuant to this subparagraph (iii), at any annual or
other special meeting of stockholders and, to the extent and in the manner
permitted by applicable law, pursuant to a written consent in lieu of a
stockholders meeting. Such special right shall continue until such time as
there is no longer any Event of Noncompliance in existence, at which time such
special right shall terminate subject to revesting upon the occurrence and
continuation of any Event of Noncompliance which gives rise to such special
right hereunder.
At any time when such special right has vested in the holders
of Preferred Stock, a proper officer of the Corporation shall, upon the written
request of the holder of at least 10% of the Preferred Stock then outstanding,
addressed to the secretary of the Corporation, call a special meeting of the
holders of Preferred Stock for the purpose of electing a director pursuant to
this subparagraph. Such meeting shall be held at the earliest legally
permissible date at the principal office of the Corporation, or at such other
place designated by the holders of at least 10% of the Preferred Stock then
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outstanding. If such meeting has not been called by a proper officer of the
Corporation within 10 days after personal service of such written request upon
the secretary of the Corporation or within 20 days after mailing the same to
the secretary of the Corporation at its principal office, then the holders of
at least 10% of the Preferred Stock then outstanding may designate in writing
one of their number to call such meeting at the expense of the Corporation, and
such meeting may be called by such Person so designated upon the notice
required for annual meetings of stockholders and shall be held at the
Corporation's principal office, or at such other place designated by the
holders of at least 10% of the Preferred Stock then outstanding. Any holder of
Preferred Stock so designated shall be given access to the stock record books
of the Corporation for the purpose of causing a meeting of stockholders to be
called pursuant to this subparagraph.
At any meeting or at any adjournment thereof at which the
holders of Preferred Stock have the special right to elect directors, the
presence, in person or by proxy, of the holders of a majority of the Preferred
Stock then outstanding shall be required to constitute a quorum for the
election or removal of any director by the holders of the Preferred Stock
exercising such special right. The vote of a majority of such quorum shall be
required to elect or remove any such director.
Any director so elected by the holders of Preferred Stock
shall continue to serve as a director until the expiration of the lesser of (a)
a period of six months following the date on which there is not longer any
Event of Noncompliance in existence or (b) the remaining period of the full
term for which such director has been elected. After the expiration of such
six-month period or when the full term for which such director has been elected
ceases (provided that the special right to elect directors has terminated), as
the case may be, the number of directors constituting the board of directors of
the Corporation shall decrease to such number as constituted the whole board of
directors of the Corporation immediately prior to the occurrence of the Event
or Events of Noncompliance giving rise to the special right to elect directors.
(b) If any Event of Noncompliance exists, each holder of Preferred
Stock shall also have any other rights which such holder is entitled to under
any contract or agreement at any time and any other rights which such holder
may have pursuant to applicable law.
Section 9. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Preferred Stock. Upon the surrender of any certificate
representing Preferred Stock at such place, the Corporation shall, at the
request of the record holder of such certificate, execute and deliver (at the
Corporation's expense) a new certificate or certificates in exchange therefor
representing in the aggregate the number of Shares represented by the
surrendered certificate. Each such new certificate shall be registered in such
name and shall represent such number of Shares as is requested by the holder of
the surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Preferred Stock
represented by such new certificate from the date to which dividends have been
fully paid on such Preferred Stock represented by the surrendered certificate.
Section 10. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of Preferred Stock, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement shall be satisfactory), or, in the
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate, and
dividends shall accrue on the Preferred Stock represented by such new
certificate from the date to which dividends have been fully paid on such lost,
stolen, destroyed or mutilated certificate.
Section 11. Definitions.
"Recapitalization Agreement" means the Recapitalization
Agreement, dated as of May 16, 1996, by and among the Corporation and certain
investors, as such agreement may from time to time be amended in accordance
with its terms.
"Change in Ownership" has the meaning set forth in paragraph
4A hereof.
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"Common Stock" means, collectively, the Corporation's Class A
Common Stock, par value $0.001 per share, the Corporation's Class B Common
Stock, par value $0.001 per share, and any capital stock of any class of the
Corporation hereafter authorized which is not limited to a fixed sum or
percentage of par or stated value in respect to the rights of the holders
thereof to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus
the number of shares of Common Stock deemed to be outstanding pursuant to
subparagraphs 6D(i) and 6D(ii) hereof whether or not the Options or Convertible
Securities are actually exercisable at such time, but excluding any shares of
Common Stock issuable upon conversion of the Preferred Stock.
"Conversion Stock" with respect to the Series A Preferred
Stock, means shares of the Corporation's Class A Common Stock, par value $0.001
per share and with respect to the Series B Preferred Stock, means shares of the
Corporation's Class B Common Stock, par value $0.001 per share; provided that
if there is a change such that the securities issuable upon conversion of the
Preferred Stock are issued by an entity other than the Corporation or there is
a change in the type or class of securities so issuable, then the term
"Conversion Stock" shall mean one share of the security issuable upon
conversion of the Preferred Stock if such security is issuable in shares, or
shall mean the smallest unit in which such security is issuable if such
security is not issuable in shares.
"Convertible Securities" means any stock or securities
directly or indirectly convertible into or exchangeable for Common Stock.
"Fundamental Change" has the meaning set forth in paragraph 4A
hereof.
"Junior Securities" means any capital stock or other equity
securities of the Corporation, except for the Preferred Stock.
"Liquidation Value" of any Share as of any particular date
shall be equal to $1.67.
"Market Price" of any security means the average of the
closing prices of such security's sales on the principal securities exchange on
which such security may at the time be listed, or, if there has been no sales
on such exchange on any day, the average of the highest bid and lowest asked
prices on such exchange at the end of such day, or, if on any day such security
is not so listed, the average of the representative bid and asked prices quoted
in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such
security is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive business days prior to such day. If at any time such security is
not listed on any securities exchange or quoted in the NASDAQ System or the
over-the-counter market, the "Market Price" shall be the fair value thereof
determined jointly by the Corporation and the holders of a majority of the
Preferred Stock. If such parties are unable to reach agreement within a
reasonable period of time, such fair value shall be determined by an
independent appraiser experienced in valuing securities jointly selected by the
Corporation and the holders of a majority of the Preferred Stock. The
determination of such appraiser shall be final and binding upon the parties,
and the Corporation shall pay the fees and expenses of such appraiser.
"Options" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
"Public Offering" means any offering by the Corporation of its
capital stock or equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force.
"Person" means an individual, a partnership, a corporation, a
limited liability company, a limited liability, an association, a joint stock
company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
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"Redemption Date" as to any Share means the date specified in
the notice of any redemption at the holder's option or the applicable date
specified herein in the case of any other redemption; provided that no such
date shall be a Redemption Date unless the Liquidation Value of such Share
(plus all accrued and unpaid dividends thereon and any required premium with
respect thereto) is actually paid in full on such date, and if not so paid in
full, the Redemption Date shall be the date on which such amount is fully paid.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority
of limited liability company, partnership, association or other business entity
gains or losses or shall be or control the managing general partner of such
limited liability company, partnership, association or other business entity.
Section 12. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 13 hereof without the
prior written consent of the holders of at least 50.1% of the Preferred Stock
outstanding at the time such action is taken; provided that no such action
shall change (a) the rate at which or the manner in which dividends on the
Preferred Stock accrue or the times at which such dividends become payable or
the amount payable on redemption of the Preferred Stock or the times at which
redemption of Preferred Stock is to occur, without the prior written consent of
the holders of at least 75% of the Preferred Stock then outstanding and, if any
of the Maxtor Notes then remain outstanding, the holder of the Maxtor Notes,
(b) the Conversion Price of the Preferred Stock or the number of shares or
class of stock into which the Preferred Stock is convertible, without the prior
written consent of the holder of at least 75% of the Preferred Stock then
outstanding or (c) the percentage of Preferred Stock required to approve any
change described in clauses (a) and (b) above, without the prior written
consent of the holders of at least 75% of the Preferred Stock then outstanding;
and provided further that no change in the terms hereof may be accomplished by
merger or consolidation of the Corporation with another corporation or entity
unless the Corporation has obtained the prior written consent of the holders of
the applicable percentage of the Preferred Stock then outstanding.
Section 13. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
II. CLASS A COMMON STOCK
A. DIVIDENDS. The holders of shares of Class A Common Stock
shall be entitled to receive such dividends as from time to time may be
declared by the Board of Directors of the Corporation, subject to the
provisions of subdivision I of this Article Fourth with respect to the rights
of holders of the Preferred Stock and subject to the simultaneous payment of
dividends on the Class B Common Stock as set forth in subdivision III hereof.
B. LIQUIDATION. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, after payment in full of
the amounts to be paid to holders of Preferred Stock pursuant to subdivision I,
Section 2 hereof, the holders of Class A Common Stock, the holders of Class B
Common Stock and the holders of the Preferred Stock shall share ratably based
upon the number of shares of Common Stock held by them (or, in the case of
holders of Preferred Stock, the number of shares of Common Stock into which
their Preferred Stock was convertible
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immediately prior to said liquidation, dissolution or winding up of the
Corporation) in all remaining assets of the Corporation available for
distribution to its stockholders.
C. VOTING RIGHTS. All shares of Class A Common Stock shall be
identical with each other in every respect. The shares of Class A Common Stock
shall entitle the holders thereof to one vote for each share upon all matters
upon which stockholders have the right to vote.
D. CONVERSION. Shares of Class A Common Stock held by PPEI,
Prudential or any of their affiliates may be converted, at the option of the
holder thereof at any time, into an equal number of fully paid and
non-assessable shares of Class B Common Stock. The Corporation shall at all
times take such action as is necessary to assure that an adequate number of
shares of Class B Common Stock is available and reserved for issuance upon
conversion of all outstanding shares of Class A Common Stock. The Corporation
will not take any action with respect to any series or class of its capital
stock if subsequent to such action the provisions of the preceding sentence
could not be complied with.
III. CLASS B COMMON STOCK
A. DIVIDENDS. The holders of shares of Class B Common Stock
shall be entitled to receive such dividends as from time to time may be
declared by the Board of Directors of the Corporation, subject to the
provisions of subdivision I of this Article Fourth with respect to the rights
of holders of the Preferred Stock. Such dividends shall be equal to dividends
declared on Class A Common Stock: provided, however, that in the event that the
holders of Class A Common Stock receive a dividend payable in shares of Class A
Common Stock, then holders of Class B Common Stock shall receive a number of
shares of Class B Common Stock which is equal to the number of shares of Class
A Common Stock which they would, but for this proviso, have received pursuant
to this paragraph A.
B. LIQUIDATION. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, after payment in full of
the amounts to be paid to holders of Preferred Stock pursuant to subdivision I,
Section 2 hereof, the holders of Class B Common Stock, the holders of Class A
Common Stock and the holders of the Preferred Stock shall share ratably based
upon the number of shares of Common Stock held by them (or, in the case of
holders of Preferred Stock, the number of shares of Common Stock into which
their Preferred Stock was convertible immediately prior to said liquidation,
dissolution or winding up of the Corporation) in all remaining assets of the
Corporation available for distribution to its stockholders.
C. CONVERSION.
(a) RIGHT TO CONVERT. Subject to the terms and
conditions of this paragraph C, the holder of any share or shares of Class B
Common Stock shall have the right, at its option, to convert any shares of
Class B Common Stock (except that upon any liquidation, dissolution or winding
up of the Corporation the right of conversion shall terminate at the close of
business on the last full business day next preceding the date fixed for
payment of the amount distributable on Class B Common Stock) into an equal
number of fully paid and nonassessable shares of Class A Common Stock upon the
occurrence of a Conversion Event with respect to such shares of Class B Common
Stock provided that, in the case of any Conversion Event set forth in Section
6B(e), 6B(g) or 6B(i) of subdivision I, such right of conversion shall exist
only during the 60-day period following receipt by such holder of written
notice from the Corporation of the occurrence of such Conversion Event and
shall lapse thereafter until the occurrence of any subsequent Conversion Event.
Such right of conversion shall be exercised by the holder thereof by giving
written notice that the holder elects to convert a stated number of shares of
Class B Common Stock into Class A Common Stock and by surrender of a
certificate or certificates for the shares so to be converted to the
Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holder
or holders of Class B Common Stock) at any time during its usual business hours
on the date set forth in such notice, together with a statement of the name or
names (with address) in which the certificate or certificates for shares of
Class A Common Stock shall be issued.
(b) ISSUANCE OF CERTIFICATES; TIME CONVERSION EFFECTED.
Promptly after the receipt of the written notice referred to in subparagraph
C(a) and surrender of the certificate or certificates for the share or shares
of Class B Common Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to
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the holder, registered in such name or names as such holder may direct, a
certificate or certificates for the number of whole shares of Class A Common
Stock issuable upon the conversion of such share or shares of Class B Common
Stock. To the extent permitted by law, such conversion shall be deemed to have
been effected immediately prior to the close of business on the day the
certificate or certificates for such share or shares shall have been
surrendered as aforesaid, and at such time the rights of the holder of such
share or shares of Class B Common Stock shall cease, and the person or persons
in whose name or names any certificate or certificates for shares of Class A
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby.
(c) FRACTIONAL SHARES; DIVIDENDS; PARTIAL CONVERSION. In
lieu of delivering any fractional share that would otherwise be deliverable
upon any conversion of Class B Common Stock, the Corporation shall pay in cash
to the holder thereof an amount equal to the Market Price of such share as of
the date of such conversion. No payment or adjustment shall be made upon any
conversion on account of any cash dividends on the Class A Common Stock issued
upon such conversion. At the time of each conversion, the Corporation shall
pay in cash an amount equal to all dividends declared and unpaid on the shares
surrendered for conversion to the date upon which such conversion is deemed to
take place as provided in subparagraph C(b). In case the number of shares of
Class B Common Stock represented by the certificate or certificates surrendered
pursuant to subparagraph C(a) exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder
thereof, at the expense of the Corporation, a new certificate or certificates
for the number of shares of Class B Common Stock represented by the certificate
or certificates surrendered which are not to be converted.
(d) SUBDIVISION OR COMBINATION OF STOCK. If the
Corporation in any manner subdivides its outstanding shares of Class A Common
Stock into a greater number of shares, then the Class B Common Stock shall be
similarly subdivided, and, if the Corporation in any manner combines its
outstanding shares of Class A Common Stock into a smaller number of shares,
then the number of shares of Class B Common Stock immediately prior to such
combination shall be proportionately reduced.
(e) NOTICE OF ADJUSTMENT. Upon any adjustment made
pursuant to subparagraph C(d), then and in each such case the Corporation shall
give written notice thereof, by first class mail, postage prepaid, addressed to
each holder of shares of Class B Common Stock at the address of such holder as
shown on the books of the Corporation, which notice shall state the number of
shares of Class A Common Stock issuable upon conversion of the Class B Common
Stock resulting from such adjustment and set forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
(f) OTHER NOTICES. In case at any time:
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to, another
corporation;
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; or
(5) the Corporation shall take any action or there shall be any
event which would result in (i) an automatic conversion of the Preferred Stock
or (ii) a Conversion Event,
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of Class B
Common Stock at the address of such holder as shown on the books of the
Corporation, (a) at least 20 days' prior written notice of the date on which
the books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days'
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prior written notice of the date when the same shall take place and (c) in the
case of any event which would result in an automatic conversion of the
Preferred Stock pursuant to subparagraph 6H of subdivision I, at least 20 days'
prior written notice of the date on which the same is expected to be completed.
Such notice in accordance with the foregoing clause (a) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
D. STOCK TO BE RESERVED. The Corporation will at all
times reserve and keep available out of its authorized Class A Common Stock or
its treasury shares, solely for the purpose of issuance upon the conversion of
the Class B Common Stock as herein provided such number of shares of Class A
Common Stock as shall then be issuable upon the conversion of all outstanding
shares of Class B Common Stock. The Corporation covenants that all shares of
Class A Common Stock which shall be so issued shall be duly and validly issued
and fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof. The Corporation will take all such
action as may be necessary to assure that all such shares of Class A Common
Stock may be so issued without violation of any applicable law or regulation,
or of any requirements of any national securities exchange upon which the Class
A Common Stock of the Corporation may be listed. The Corporation will not take
any action which results in any adjustment of the number of shares of Class A
Common Stock issuable upon conversion of the Class B Common Stock if the total
number of shares of Class A Common Stock issued and issuable after such action
upon conversion of the Class B Common Stock would exceed the total number of
shares of Class A Common Stock then authorized by the Corporation's Articles of
Incorporation.
E. NO REISSUANCE OF COMMON STOCK. Shares of Class B
Common Stock which are converted into shares of Class A Common Stock as
provided herein shall not be reissued.
F. ISSUE TAX. The issuance of certificates for shares
of Class A Common Stock upon conversion of the Class B Common Stock shall be
made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Class B Common Stock which is being converted.
G. CLOSING OF BOOKS. The Corporation will at no time
close its transfer books against the transfer of any Class B Common Stock or of
any shares of Class A Common Stock issued or issuable upon the conversion of
any shares of Class B Common Stock in any manner which interferes with the
timely conversion of such Class B Common Stock.
H. VOTING RIGHTS. Holders of Class B Common Stock shall
have no rights to vote except as provided in this paragraph and as otherwise
expressly provided by law. Each holder of Class B Common Stock (i) shall be
entitled to vote, together as a single class with the holders of the Class A
Common Stock, (ii) shall be entitled to one vote for each share of Class A
Common Stock that would be issuable to such holder upon the conversion of all
of the shares of Class B Common Stock held by such holder on the record date
for determination of stockholders entitled to vote and (iii) shall be entitled
to notice of any stockholders meeting in accordance with the Bylaws of the
Corporation, in each case only with respect to a Voting Event.
FIFTH:
I. DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for any breach of the director's duty
of loyalty to the Corporation or its stockholders, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the director derived any improper personal benefit. If
the Delaware General Corporation Law is amended after approval by the
stockholders of this Article FIFTH to authorize corporate action further
eliminating or limiting the
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personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
II. INDEMNIFICATION
1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved
(including involvement as a witness) in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than
permitted prior thereto), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in paragraph 2.
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation. The
right to indemnification conferred in this Section shall be a contract right
and shall include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if and to
the extent that the Delaware General Corporation Law requires, an advancement
of expenses incurred by an indemnitee in his or her capacity in which service
was or is rendered by such indemnitee, including, without limitation, service
to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf
of such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or otherwise.
2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim for
indemnification (including the advancement of expenses) under paragraph 1. of
this Section is not paid in full by the Corporation within forty-five days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that the indemnitee has not met the applicable standard of conduct set
forth in the Delaware General Corporation Law. In any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an undertaking
the Corporation shall be entitled to recover such expenses upon a final
adjudication that the indemnitee has not met the applicable standard of conduct
set forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption
that the indemnitee has not met the applicable standard of conduct or, in the
case of such a suit brought by the indemnitee, be a defense to such suit. In
any suit brought by the indemnitee to enforce a right to indemnification or to
an advancement
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of expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that
the indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this section or otherwise shall be on the Corporation.
3. SERVICE FOR SUBSIDIARIES. Any person serving as a director,
officer, employee or agent of another corporation, partnership, joint venture
or other enterprise, at least 50% of whose equity interests are owned by the
Corporation (hereinafter a "subsidiary"), shall be conclusively presumed to be
serving in such capacity at the request of the Corporation.
4. RELIANCE. Persons who after the date of the adoption of this
provision become or remain directors or officers of the Corporation or who,
while a director or officer of the Corporation, become or remain a director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity and advancement of expenses contained in
this Article Fifth in entering into or continuing such service. The rights to
indemnification and to the advancement of expenses conferred in this Section
shall apply to claims made against an indemnitee arising out of acts or
omissions which occurred or occur both prior and subsequent to the adoption
hereof.
5. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and
to the advancement of expenses conferred in this Section shall not be exclusive
of any other right which any person may have or hereafter acquire under this
Certificate of Incorporation or under any statute, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
6. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
7. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Section with respect to the indemnification and advancement
of expenses of directors and officers of the Corporation.
SIXTH: The following provisions are inserted for the regulation and
conduct of the business and affairs of the Corporation and are in furtherance
of and not in limitation or exclusion of any powers conferred upon it by
statute:
1. PREEMPTIVE RIGHTS. No stockholder shall have pursuant to this
Certificate of Incorporation preemptive rights to acquire unissued shares of
the Corporation.
2. CUMULATIVE VOTING. There shall be no cumulative voting in
election of directors.
3. BOARD OF DIRECTORS POWER AS TO BYLAWS. The Board of
Directors, by vote of a majority of the whole Board, shall have the power to
adopt, make, amend, alter or repeal the Bylaws of the Corporation, but any
bylaw adopted by the Board may be amended or repealed by the stockholders.
4. MEETINGS OF STOCKHOLDERS, PRESENCE. A special meeting of the
Stockholders of the Corporation may be called, in accordance with the notice
provisions of the Corporation's bylaws, by any stockholder or group of
stockholders holding shares of the Company that represent not less than 10% of
the votes that will be entitled to vote at the meeting so called.
SEVENTH: The number of directors constituting the Corporation's Board
of Directors shall be determined as set forth in the Bylaws of the Corporation.
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EIGHTH: The Corporation is to have perpetual existence.
DATED this ____ day of___________, 1997.
INTERNATIONAL MANUFACTURING
SERVICES, INC.
_____________________________________
Robert G. Behlman
Chairman of the Board of Directors,
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL MANUFACTURING SERVICES, INC.
. . . .
1. The name of the corporation (which is hereinafter referred
to as the "CORPORATION") is International Manufacturing Services, Inc.
2. The original Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on November 21, 1994, under the
name International Manufacturing Services, Inc.
3. This Restated Certificate of Incorporation has been duly
proposed by resolutions adopted and declared advisable by the Board of
Directors of the Corporation, duly adopted by written consent of the
stockholders of the Corporation in lieu of a meeting and vote and duly executed
and acknowledged by the officers of the Corporation in accordance with the
provisions of Sections 103, 228, 242 and 245 of the General Corporation Law of
the State of Delaware and, upon filing with the Secretary of State in
accordance with Section 103, shall thenceforth supersede the original
Certificate of Incorporation and all prior amendments and restatements thereto
and shall, as it may thereafter be amended in accordance with its terms and
applicable law, be the Certificate of Incorporation of the Corporation.
4. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation
in the manner now or hereafter prescribed by the laws of the State of Delaware,
and all rights conferred herein are granted subject to this reservation.
5. The text of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation is INTERNATIONAL MANUFACTURING
SERVICES, INC.
SECOND: The address of the Corporation's registered office in the
State of Delaware is The Corporation Trust Center, 1209 Orange Street,
Wilmington Delaware 19801, in the County of New Castle. The name of the
corporation's registered agent at such address shall be The Corporation Trust
Company.
THIRD: The nature of the business of the Corporation and its objects
and purposes are to have and exercise all the powers conferred by the laws of
the State of Delaware upon corporations formed under the General Corporation
Law of such State.
FOURTH: The Corporation is authorized to issue 10,000,000 shares of
Preferred Stock, Par Value $0.001 per share (the "Preferred Stock"), 75,000,000
shares of voting common stock $0.001 par value (the "Class A Common Stock") and
25,000,000 shares of nonvoting common stock $0.001 par value (the "Class B
Common Stock").
As used in this Article Fourth, "Common Stock" means the Class
A Common Stock, the Class B Common Stock and any capital stock of any class of
the Corporation hereafter authorized which is not limited to a fixed sum or
percentage of par value in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
Set forth below is a statement of the preferences, limitations
and relative rights of each class and series of stock of the Corporation.
Unless otherwise indicated, all cross-references in each subdivision of this
Article Fourth refer to other paragraphs in such subdivision.
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I. PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, subject to limitations
prescribed by law and the provisions of this Article Fourth, to fix by
resolution or resolutions the designations, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
A. The number of shares constituting that series and the
distinctive designation of that series.
B. The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series.
C. Whether that series shall have the voting rights in addition
to the voting rights provided by law, and, if so, the terms of such voting
rights.
D. Whether that series shall have conversion privileges, and, if
so, the terms and conditions of such privileges, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine.
E. Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption rates.
F. Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and the
amount of such sinking funds.
G. The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series.
H. Any other relative rights, preferences and limitations of that
series.
The Board of Directors is further authorized to increase (but not
above the total number of authorized shares of the class) or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any series, the number of which was fixed by it, subsequent to the
issue of shares of such series then outstanding, subject to the powers,
preferences and rights, and the qualifications, limitations and restrictions
thereof stated in the resolution of the Board of Directors originally fixing
the number of shares of such series. If the number of shares of any series is
so decreased, then the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
II. CLASS A COMMON STOCK
A. DIVIDENDS. The holders of shares of Class A Common Stock
shall be entitled to receive such dividends as from time to time may be
declared by the Board of Directors of the Corporation, subject to any future
rights which may arise with respect to the rights of holders of the Preferred
Stock and subject to the simultaneous payment of dividends on the Class B
Common Stock as set forth in subdivision III hereof.
B. LIQUIDATION. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary and subject to any
preference accorded to the holders of Preferred Stock, if any, the holders of
Class A Common Stock and the holders of Class B Common Stock shall share
ratably based upon the number of shares of Common Stock held by them in all
remaining assets of the Corporation available for distribution to its
stockholders.
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C. VOTING RIGHTS. All shares of Class A Common Stock shall be
identical with each other in every respect. The shares of Class A Common Stock
shall entitle the holders thereof to one vote for each share upon all matters
upon which stockholders have the right to vote.
D. CONVERSION. Shares of Class A Common Stock held by PPEI,
Prudential or any of their affiliates may be converted, at the option of the
holder thereof at any time, into an equal number of fully paid and
non-assessable shares of Class B Common Stock. The Corporation shall at all
times take such action as is necessary to assure that an adequate number of
shares of Class B Common Stock is available and reserved for issuance upon
conversion of all outstanding shares of Class A Common Stock. The Corporation
will not take any action with respect to any series or class of its capital
stock if subsequent to such action the provisions of the preceding sentence
could not be complied with.
III. CLASS B COMMON STOCK
A. DIVIDENDS. The holders of shares of Class B Common Stock
shall be entitled to receive such dividends as from time to time may be
declared by the Board of Directors of the Corporation, subject to any future
rights which may arise with respect to the rights of holders of the Preferred
Stock. Such dividends shall be equal to dividends declared on Class A Common
Stock; provided, however, that in the event that the holders of Class A Common
Stock receive a dividend payable in shares of Class A Common Stock, then
holders of Class B Common Stock shall receive a number of shares of Class B
Common Stock which is equal to the number of shares of Class A Common Stock
which they would, but for this proviso, have received pursuant to this
paragraph A.
B. LIQUIDATION. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary and subject to any
preference accorded to the holders of Preferred Stock, if any, the holders of
Class B Common Stock, the holders of Class A Common Stock in all remaining
assets of the Corporation available for distribution to its stockholders.
C. CONVERSION.
(a) RIGHT TO CONVERT. Subject to the terms and
conditions of this paragraph C, the holder of any share or shares of Class B
Common Stock shall have the right, at its option, to convert any shares of
Class B Common Stock (except that upon any liquidation, dissolution or winding
up of the Corporation the right of conversion shall terminate at the close of
business on the last full business day next preceding the date fixed for
payment of the amount distributable on Class B Common Stock) into an equal
number of fully paid and nonassessable shares of Class A Common Stock upon the
occurrence of a Conversion Event (as hereinafter defined in subsection (g))
with respect to such shares of Class B Common Stock provided that, in the case
of any Conversion Event set forth in subparagraph C(f)(5), C(f)(7) or C(f)(9),
such right of conversion shall exist only during the 60-day period following
receipt by such holder of written notice from the Corporation of the occurrence
of such Conversion Event and shall lapse thereafter until the occurrence of any
subsequent Conversion Event. Such right of conversion shall be exercised by
the holder thereof by giving written notice that the holder elects to convert a
stated number of shares of Class B Common Stock into Class A Common Stock and
by surrender of a certificate or certificates for the shares so to be converted
to the Corporation at its principal office (or such other office or agency of
the Corporation as the Corporation may designate by notice in writing to the
holder or holders of Class B Common Stock) at any time during its usual
business hours on the date set forth in such notice, together with a statement
of the name or names (with address) in which the certificate or certificates
for shares of Class A Common Stock shall be issued.
(b) ISSUANCE OF CERTIFICATES; TIME CONVERSION EFFECTED.
Promptly after the receipt of the written notice referred to in subparagraph
C(a) and surrender of the certificate or certificates for the share or shares
of Class B Common Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Class A Common Stock issuable upon the conversion of
such share or shares of Class B Common Stock. To the extent permitted by law,
such conversion shall be deemed to have been effected immediately prior to the
close of business on the day the certificate or certificates for such share or
shares shall have been surrendered as aforesaid, and at such time
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the rights of the holder of such share or shares of Class B Common Stock shall
cease, and the person or persons in whose name or names any certificate or
certificates for shares of Class A Common Stock shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of
the shares represented thereby.
(c) FRACTIONAL SHARES; DIVIDENDS; PARTIAL CONVERSION. In
lieu of delivering any fractional share that would otherwise be deliverable
upon any conversion of Class B Common Stock, the Corporation shall pay in cash
to the holder thereof an amount equal to the Market Price (as defined below) of
such share as of the date of such conversion. No payment or adjustment shall
be made upon any conversion on account of any cash dividends on the Class A
Common Stock issued upon such conversion. At the time of each conversion, the
Corporation shall pay in cash an amount equal to all dividends declared and
unpaid on the shares surrendered for conversion to the date upon which such
conversion is deemed to take place as provided in subparagraph C(b). In case
the number of shares of Class B Common Stock represented by the certificate or
certificates surrendered pursuant to subparagraph C(a) exceeds the number of
shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder thereof, at the expense of the Corporation, a new
certificate or certificates for the number of shares of Class B Common Stock
represented by the certificate or certificates surrendered which are not to be
converted.
"Market Price" of any security means the average of
the closing prices of such security's sales on the principal securities
exchange on which such security may at the time be listed, or, if there has
been no sales on such exchange on any day, the average of the highest bid and
lowest asked prices on such exchange at the end of such day, or, if on any day
such security is not so listed, the average of the representative bid and asked
prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on
any day such security is not quoted in the NASDAQ System, the average of the
highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which "Market Price" is
being determined and the 20 consecutive business days prior to such day. If at
any time such security is not listed on any securities exchange or quoted in
the NASDAQ System or the over-the-counter market, the "Market Price" shall be
the fair value thereof determined jointly by the Corporation and the holders of
a majority of the capital stock of the Corporation. If such parties are unable
to reach agreement within a reasonable period of time, such fair value shall be
determined by an independent appraiser experienced in valuing securities
jointly selected by the Corporation and the holders of a majority of the
capital stock of the Corporation. The determination of such appraiser shall be
final and binding upon the parties, and the Corporation shall pay the fees and
expenses of such appraiser.
(d) SUBDIVISION OR COMBINATION OF STOCK. If the
Corporation in any manner subdivides its outstanding shares of Class A Common
Stock into a greater number of shares, then the Class B Common Stock shall be
similarly subdivided, and, if the Corporation in any manner combines its
outstanding shares of Class A Common Stock into a smaller number of shares,
then the number of shares of Class B Common Stock immediately prior to such
combination shall be proportionately reduced.
(e) NOTICE OF ADJUSTMENT. Upon any adjustment made
pursuant to subparagraph C(d), then and in each such case the Corporation shall
give written notice thereof, by first class mail, postage prepaid, addressed to
each holder of shares of Class B Common Stock at the address of such holder as
shown on the books of the Corporation, which notice shall state the number of
shares of Class A Common Stock issuable upon conversion of the Class B Common
Stock resulting from such adjustment and set forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
(f) OTHER NOTICES. In case at any time:
(1) the Corporation shall declare any dividend
upon its Common Stock payable in cash or stock or make any other distribution
to the holders of its Common Stock;
(2) the Corporation shall offer for subscription
pro rata to the holders of its Common Stock any additional shares of stock of
any class or other rights;
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(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with, or a sale of all or substantially all its
assets to, another corporation;
(4) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; or
(5) the Corporation shall take any action or
there shall be any event which would result in a Conversion Event (as
hereinafter defined in subsection (g)),
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of Class B
Common Stock at the address of such holder as shown on the books of the
Corporation, (a) at least 20 days' prior written notice of the date on which
the books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution
or subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
(g) CONVERSION EVENTS. Each of the following shall
constitute a "Conversion Event" with respect to shares Class B Common Stock:
(1) upon the transfer of such shares by
Prudential Private Equity Investors III, L.P. ("PPEI") or a party affiliated
with PPEI or The Prudential Insurance Company of America ("Prudential") to a
party not affiliated with PPEI or Prudential;
(2) upon the distribution of such shares to any
limited partner of PPEI other than Prudential Equity Investors, Inc. or any
other affiliate of Prudential;
(3) if PPEI and Prudential or any affiliate
thereof would not collectively hold more than the greater of (i) an amount
equal to 4.9 percent of the aggregate amount of voting capital stock of the
Corporation then outstanding and (ii) the lesser of (x) one share less than the
aggregate amount of voting capital stock of the Corporation held by a single
other stockholder, not affiliated with Prudential and (y) an amount equal to
19.9 percent of the aggregate amount of voting capital stock of the
Corporation then outstanding;
(4) upon a sale of all or substantially all the
assets of the Corporation or of the Corporation and its subsidiaries on a
consolidated basis or upon any other acquisition of the Corporation or any of
its subsidiaries by merger, a negotiated stock purchase or a purchase pursuant
to a tender for substantially all of the outstanding shares of Common Stock of
the Corporation or such subsidiary;
(5) upon a failure by the Corporation or any of
its subsidiaries to make payment due for indebtedness on borrowed money (unless
and until such failure to pay is cured or waived) if at the time of such
failure to pay either Prudential or any of its affiliates ("Affiliates") is a
holder of such indebtedness or in cases in which none of Prudential or its
Affiliates is a holder of such indebtedness, upon the receipt by Prudential or
any of its Affiliates of notice of any default or event of default under any
material agreement pursuant to which the Corporation or any of its subsidiaries
has incurred indebtedness for borrowed money (unless and until such default or
event of default is cured or waived);
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(6) if, at any time, the total number of shares
of Common Stock held by PPEI as a percentage of the total number of shares of
Common Stock outstanding on a fully-diluted basis is less than 50% of such
percentage on the date of original issuance of the Class B Common Stock;
(7) if, during any twelve-month period, more than
30% of the Corporation's directors resign or are replaced;
(8) upon the sale by one or more members of
management of the Corporation of more than 50% of the stock owned at the time
of original issuance of the Class B Common Stock by all members of management
of the Corporation or upon the sale by any of the three largest management
stockholders of more than 75% of the Corporation's stock owned by such person
at the time of original issuance of the Class B Common Stock; or
(9) if, for two consecutive quarterly periods of
the Corporation, the quarterly financial statements of the Corporation show
that it has suffered a net loss from operations (with the Corporation's net
income or loss from operations to be calculated in accordance with generally
accepted accounting principles, consistently applied) but before taking into
account any non-cash or extraordinary items of income or expense.
D. STOCK TO BE RESERVED. The Corporation will at all
times reserve and keep available out of its authorized Class A Common Stock or
its treasury shares, solely for the purpose of issuance upon the conversion of
the Class B Common Stock as herein provided such number of shares of Class A
Common Stock as shall then be issuable upon the conversion of all outstanding
shares of Class B Common Stock. The Corporation covenants that all shares of
Class A Common Stock which shall be so issued shall be duly and validly issued
and fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof. The Corporation will take all such
action as may be necessary to assure that all such shares of Class A Common
Stock may be so issued without violation of any applicable law or regulation,
or of any requirements of any national securities exchange upon which the Class
A Common Stock of the Corporation may be listed. The Corporation will not take
any action which results in any adjustment of the number of shares of Class A
Common Stock issuable upon conversion of the Class B Common Stock if the total
number of shares of Class A Common Stock issued and issuable after such action
upon conversion of the Class B Common Stock would exceed the total number of
shares of Class A Common Stock then authorized by the Corporation's Articles of
Incorporation.
E. NO REISSUANCE OF COMMON STOCK. Shares of Class B
Common Stock which are converted into shares of Class A Common Stock as
provided herein shall not be reissued.
F. ISSUE TAX. The issuance of certificates for shares
of Class A Common Stock upon conversion of the Class B Common Stock shall be
made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Class B Common Stock which is being converted.
G. CLOSING OF BOOKS. The Corporation will at no time
close its transfer books against the transfer of any Class B Common Stock or of
any shares of Class A Common Stock issued or issuable upon the conversion of
any shares of Class B Common Stock in any manner which interferes with the
timely conversion of such Class B Common Stock.
H. VOTING RIGHTS. Holders of Class B Common Stock shall
have no rights to vote except as provided in this paragraph and as otherwise
expressly provided by law. Each holder of Class B Common Stock (i) shall be
entitled to vote, together as a single class with the holders of the Class A
Common Stock, (ii) shall be entitled to one vote for each share of Class A
Common Stock that would be issuable to such holder upon the conversion of all
of the shares of Class B Common Stock held by such holder on the record date
for determination of stockholders entitled to vote and (iii) shall be entitled
to notice of any stockholders meeting in accordance with the Bylaws of the
Corporation, in each case only with respect to the following corporate actions
(each, a "Voting Event"):
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(1) any amendment or modification to the
Certificate of Incorporation or, at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any amendment or modification to
the Bylaws of the Corporation;
(2) the liquidation, dissolution, winding-up or
bankruptcy of the Corporation, the reorganization, reclassification or
recapitalization of the capital stock of the Corporation, or the sale of all or
substantially all of the property and assets of the Corporation (other than
sales of inventory in the ordinary course of business);
(3) any change in the number of shares of the
Class A Common Stock or the Class B Common Stock authorized as of the date of
this Restated Certificate of Incorporation;
(4) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any material change in the nature
of the Corporation's business from that as is conducted, or contemplated to be
conducted, by the Corporation on the date of the issuance of the Series B
Preferred Stock;
(5) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any issuance of shares of capital
stock or other equity securities of the Corporation or any of its subsidiaries,
other than pursuant to options or warrants to purchase up to 3,352,500 shares
of Class A Common Stock, which at the time of the original issuance of the
Preferred Stock have been or may be granted to employees, officers and
directors of the Corporation;
(6) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any issuance of any options,
warrants or other rights to acquire any shares of capital stock of the
Corporation or any of its subsidiaries, other than options to purchase up to
3,352,500 shares of Class A Common Stock which at the time of the original
issuance of the Preferred Stock have been or may be granted to employees,
officers and directors of the Corporation;
(7) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any merger, consolidation or other
business combination of the Corporation or any of its subsidiaries with,
acquisition by the Corporation or any of its subsidiaries of, or investment by
the Corporation of any of its subsidiaries in, any other entity or business in
connection with which the aggregate consideration to be paid by the Corporation
and its subsidiaries exceeds $1,000,000; or
(8) at such time as it shall be submitted to a
vote of the stockholders of the Corporation, any incurrence by the Corporation
and its subsidiaries of indebtedness for borrowed money in aggregate
outstanding at any time in excess of $250,000.
FIFTH:
I. DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for any breach of the director's duty
of loyalty to the Corporation or its stockholders,
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, under Section 174 of the Delaware
General Corporation Law, or for any transaction from which the director
derived any improper personal benefit. If the Delaware General Corporation Law
is amended after approval by the stockholders of this Article FIFTH to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
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II. INDEMNIFICATION
A. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved
(including involvement as a witness) in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than
permitted prior thereto), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in paragraph B.
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation. The
right to indemnification conferred in this Section shall be a contract right
and shall include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if and to
the extent that the Delaware General Corporation Law requires, an advancement
of expenses incurred by an indemnitee in his or her capacity in which service
was or is rendered by such indemnitee, including, without limitation, service
to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf
of such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or otherwise.
B. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim for
indemnification (including the advancement of expenses) under paragraph A. of
this Section is not paid in full by the Corporation within forty-five days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that the indemnitee has not met the applicable standard of conduct set
forth in the Delaware General Corporation Law. In any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an undertaking
the Corporation shall be entitled to recover such expenses upon a final
adjudication that the indemnitee has not met the applicable standard of conduct
set forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption
that the indemnitee has not met the applicable standard of conduct or, in the
case of such a suit brought by the indemnitee, be a defense to such suit. In
any suit brought by the indemnitee to enforce a right to indemnification or to
an advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this section or otherwise shall be on the
Corporation.
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C. SERVICE FOR SUBSIDIARIES. Any person serving as a director,
officer, employee or agent of another corporation, partnership, joint venture
or other enterprise, at least 50% of whose equity interests are owned by the
Corporation (hereinafter a "subsidiary"), shall be conclusively presumed to be
serving in such capacity at the request of the Corporation.
D. RELIANCE. Persons who after the date of the adoption of this
provision become or remain directors or officers of the Corporation or who,
while a director or officer of the Corporation, become or remain a director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity and advancement of expenses contained in
this Article Fifth in entering into or continuing such service. The rights to
indemnification and to the advancement of expenses conferred in this Section
shall apply to claims made against an indemnitee arising out of acts or
omissions which occurred or occur both prior and subsequent to the adoption
hereof.
E. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and
to the advancement of expenses conferred in this Section shall not be exclusive
of any other right which any person may have or hereafter acquire under this
Certificate of Incorporation or under any statute, Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
F. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
G. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Section with respect to the indemnification and advancement
of expenses of directors and officers of the Corporation.
SIXTH: The following provisions are inserted for the regulation and
conduct of the business and affairs of the Corporation and are in furtherance
of and not in limitation or exclusion of any powers conferred upon it by
statute:
A. PREEMPTIVE RIGHTS. No stockholder shall have pursuant to this
Restated Certificate of Incorporation preemptive rights to acquire unissued
shares of the Corporation.
B. CUMULATIVE VOTING. There shall be no cumulative voting in
election of directors.
C. BOARD OF DIRECTORS POWER AS TO BYLAWS. The Board of
Directors, by vote of a majority of the whole Board, shall have the power to
adopt, make, amend, alter or repeal the Bylaws of the Corporation, but any
bylaw adopted by the Board may be amended or repealed by the stockholders.
D. MEETINGS OF STOCKHOLDERS, PRESENCE. A special meeting of the
Stockholders of the Corporation may be called, in accordance with the notice
provisions of the Corporation's bylaws, by any stockholder or group of
stockholders holding shares of the Company that represent not less than 10% of
the votes that will be entitled to vote at the meeting so called.
SEVENTH: The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of Directors. The
number of directors constituting the Corporation's Board of Directors shall be
determined as set forth in the Bylaws of the Corporation. The directors of the
Corporation need not be elected by written ballot unless a stockholder demands
election by written ballot at a meeting of the stockholder and before voting
begins or unless the Bylaws of the Corporation so provide.
-9-
<PAGE> 10
EIGHTH: The Corporation is to have perpetual existence.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
______________, 1997.
INTERNATIONAL MANUFACTURING
SERVICES, INC.
_____________________________________
Robert G. Behlman
Chairman of the Board of Directors,
President and Chief Executive Officer
_____________________________________
Jeffrey D. Saper
Secretary
-10-
<PAGE> 11
The undersigned certify under penalty of perjury that they have read
the foregoing Restated Certificate and know the contents thereof, and that the
statements therein are true.
Executed at Palo Alto, California on _____________, 1997.
INTERNATIONAL MANUFACTURING
SERVICES, INC.
_____________________________________
Robert G. Behlman
Chairman of the Board of Directors,
President and Chief Executive Officer
_____________________________________
Jeffrey D. Saper
Secretary
-11-
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
October __, 1997
International Manufacturing Services, Inc.
2071 Concourse Drive
San Jose, CA 95131
RE: REGISTRATION STATEMENT ON FORM S-1
OF INTERNATIONAL MANUFACTURING SERVICES, INC.
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 which you
filed with the Securities and Exchange Commission on August 28, 1997
(Registration No. 333-34557), as amended (the "Registration Statement"), in
connection with your proposed initial public offering of up to 5,750,000 shares
of your Class A Common Stock, $0.001 par value per share (the "Shares"). The
Shares include an over-allotment option granted to the underwriters in the
offering to purchase 750,000 shares. We understand that the Shares are to be
sold to the underwriters in the offering for resale to the public, as described
in the Registration Statement. As your legal counsel, we have examined the
proceedings taken, and are familiar with the proceedings proposed to be taken,
by you in connection with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by your
Board of Directors, will be legally and validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever
appearing in the Registration Statement, including the Prospectus constituting
a part thereof, and any amendments thereto.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 10.18
CONTRACT OF LEASE OF FACTORY BUILDINGS
Maiyuan Administration Area of Changping Township, Dongguan City shall
lease to IMS (HK) Ltd. in a compensable and terminable form the two factory
buildings constructed for industrial purposes and their corresponding
complementary living quarters to run a wholly-owned enterprise. Its trade name
registered domestically is "Dongguan IMG Electronics Co. Ltd." which will be
engaged in the operation and manufacture of circuit boards, multimedia cards
and other products. In the principle of sincere cooperation and mutual
benefit, the parties have, through friendly discussions, reached the following
agreement. The Lessor, Maiyuan Administration Area, is Party A (Same as
below) to this Contract; the Lessee, Dongguan IMG Electronics Co. Ltd., is
Party B (Same as below) to this Contract.
I. Location and Area of the Premises
1. Party A's factory buildings are located on the left side of
"Changdong" highway within Maiyuan Administration Area, Building A to the
southeast and Building B to the southwest. Building A includes areas of
various construction as below: 4,412.8 square meters for workshops, 2,107.5
square meters for living quarters and 17.2 square meters for entrance security
room; Building B includes areas of various construction as below: 4,480.2
square meters for workshops, 2,118.3 square meters for living quarters and 18
square meters for entrance security room; the adjoining area between Building A
and B is 342 square meters; on top of the elevator rooms of Building A and B is
an area of 165.7 square meters; a power room has an area of ________[illegible]
square meters. The total area of the premises covers _______________ square
meters.
II. Term of Lease, Rent, Compensation of Foreign Exchange
Settlement and Calculation of Management Fees for Comprehensive Services
2. The term of lease is five years from June 1, 1996 to May 31,
2001. Upon expiration of the term, Party B shall be entitled the priority for
a renewal of the leasehold under the same terms and conditions.
3. Party A shall lease the workshops, living quarters and other
structures to Party B at a flat monthly rate of 9 yuan (Renminbi) per square
meter, and the rent at the base of 9 yuan will be increased at a rate of 10%
every two years.
4. In accordance with the relevant policies and conventional
practice, a compensation of foreign exchange settlement will be collected at a
certain rate towards "wholly foreign-owned enterprises, equity and cooperative
joint ventures" as a makeup for the interest of the Chinese side. The parties
agree that Party B shall compensate Party A at 70 yuan per person a month,
which will be calculated on the basis of total number of employees as set by
the Office of Processing Work of the Township. If Party B's total number of
employees is less than 800, Party A shall charge Party B based on the
conversion of one person into 12 square meters out of the total area of the
factory buildings.
5. Party A shall collect from Party B the comprehensive service
fees of RMB 3,000 yuan a month.
1
<PAGE> 2
III. Methods of Payment/Collection for Rent and Other Fees
6. The total amount of annual rent and compensation of foreign
exchange settlement shall be paid by Party B in four quarters, and each payment
shall be made by the end of each quarter. In case of a default in payment,
Party A shall impose on Party B a fine equal to 10% of the remaining balance.
7. The comprehensive services management fees of a given year
shall be paid at one time by the end of December.
IV. Liabilities of the Parties
8. Party A shall provide Party B with the necessary facilities
for the supply of water and electricity, lay 75MM of water pipes to the
peripheries of the factory and high-voltage transmission lines to the side of
power room, and shall be responsible for the expenses to increase electricity
capacity to 100KV for Party B. Party B shall be responsible for the expenses
of other facilities. Party A shall assist Party B in handling the procedures
involved.
9. Party A shall comply with Party B's intention to install in
the factory qualified fire prevention facilities, two cargo elevators and two
door gates.
10. Party A shall play an active role in assisting Party B to
perform a good job in terms of security and other management so as to ensure
Party B of a secured and stable environment for production and livelihood and
also to collaborate with Party B in coordinating various business relationship
with the relevant authorities of higher authorities.
11. Party A must provide Party B with a certificate of
qualification on the inspection and acceptance of the factory buildings issued
by the Construction Commission of Dongguan Municipal Government, the content of
which shall testify to the standards of weigh load at 500 kg per floor, a
demonstration of the safety.
12. During the first year of Party B's leasehold, Party A shall be
responsible for the maintenance and repair work of the factory and living
quarters for any problem related to the structures. But Party B shall be
responsible for the maintenance in the ensuing four years .
13. Party B must conduct its business lawfully, accept supervision
and instructions from the relevant departments, make sure to carry out
production safely and implement various kinds of safety measures. Any debt or
creditor's interest occurred during the leasehold shall be irrelevant to Party
A.
14. Party B shall handle the procedures of underwriting insurance
policies with an insurance institution for the structures it has leased as of
the first month of the leasehold, with Party A as the beneficiary party for the
compensation of insurance.
15. Party B must do a good job of environmental protection.
Garbage should be placed in a constructed dumping ground and Party A will be
commissioned at 300 yuan a month to ship away the garbage.
16. In addition to the aforesaid fees, Party B shall pay to the
"Foreign and Economic Office" of the Township People's Government a fee equal
to 6 per thousand of the total export value. The fees collected by Party A on
behalf of the higher government (such as security fees, management fees for
outside workers, etc.) shall be paid in time to Party A's security association
at approximately 225 yuan per person a year.
2
<PAGE> 3
V. Fine on Violation of the Contract
17. If a party unilaterally violates the Contract within the valid
term provided by this Contract upon its effectiveness, it shall pay to the
other party a fine equal to six months' rent.
VI. Ownership of the Properties
18. The ownership of the structures and other fixtures used by
Party B belong to Party A.
19. The ownership of production equipment, materials, products,
office equipment, daily utensils and electrical appliances for daily use belong
to Party B and they shall be disposed by Party B according to the relevant
provisions.
VII. Miscellaneous
20. Party A shall pay Party B a deposit of 200,000 yuan within 10
days upon validation of this Contract, which shall be offset by the deduction
of the said year's rent.
21. If there is any matter that is not provided for in this
Contract, the parties shall work out through consultation a supplementary
agreement which shall be equally authentic as this Contract.
22. In case this Contract conflicts with the state laws and
regulations, the latter shall be held as the standards.
23. This Contract has two originals with each party in possession
of one and shall become effective upon execution.
Party A: Party B:
Maiyuan Administration Area Dongguan IMG Electronics Co. Ltd.
of Changping Township, Dongguan City (Official Seal)
(Official Seal)
Representative: Chen Yinyuan (Signature) Representative: Dong Jiahua
(Signature)
Date: April 11, 1996
3
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 3, 1997 except as to
Note 14, which is as of September 16, 1997 relating to the consolidated
financial statements of International Manufacturing Services, Inc., which
appears in such Prospectus. We also consent to the application of such report to
the Financial Statement Schedule for the year ended April 30, 1997 listed under
Item 16(b) of this Registration Statement when such schedule is read in
conjunction with the consolidated financial statements referred to in our
report. The audit referred to in such report also included this schedule. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
San Jose, California
September 16, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 25, 1996, except for Note 14 as to which the
date is September 16, 1997 in the Registration Statement (Form S-1) and related
Prospectus of International Manufacturing Services, Inc. for the registration
of 5,750,000 shares of its common stock.
Our audits also included the financial statement schedule of International
Manufacturing Services, Inc., listed in Item 16b. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
/s/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
San Jose, California
September 16, 1997
