<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-34557
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 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)
<TABLE>
<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:
<TABLE>
<S> <C>
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 OCTOBER 21, 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 Class A Common Stock has been 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 6 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 NationsBanc Montgomery Securities, Inc. on or about
, 1997.
------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN
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 manufacturing services range from the assembly of
PCBs and backplanes (interconnecting structures which hold, provide power to,
and connect data signals among PCB assemblies in electronic systems) 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.
3
<PAGE> 5
The Company's major customers include Maxtor Corporation ("Maxtor"), Bay
Networks, Inc., Asante Technologies, Inc., 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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<S> <C>
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
upon the effectiveness of this Offering at the initial public offering
price), 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 upon the effectiveness of this Offering
at the initial public offering price). See "Management -- Compensation
Plans" and Note 14 of Notes to Consolidated Financial Statements.
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.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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>
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
------------------------
ACTUAL AS ADJUSTED(7)
------- --------------
<S> <C> <C>
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) Revenues from affiliates include sales to Maxtor and other entities related
to Maxtor through Maxtor's parent company, Hyundai Electronics America. See
Note 12 of Notes to Consolidated Financial Statements. Sales to Maxtor were
made on a consignment basis (where Maxtor procured all materials used to
manufacture product and provided them to the Company at no charge) for years
prior to fiscal 1996, on a turnkey basis (where the Company procured all
materials used to manufacture product) for fiscal 1996, and on a partial
turnkey basis (where some materials were procured by the Company and some
materials were procured by Maxtor) for fiscal 1997 and the three months
ended July 31, 1997.
(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
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, where the customer procures materials, tends to result in higher
gross margins but lower revenues, and turnkey manufacturing, where the Company
procures materials, 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 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
6
<PAGE> 8
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. In addition, the Company's customers have
the ability to request that manufacturing be performed on a consignment, turnkey
or partial turnkey basis, which can cause significant fluctuations in the
Company's revenues and gross margins. 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."
7
<PAGE> 9
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 services agreement (the "Manufacturing
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. Pursuant to
the Manufacturing Agreement, the Company has agreed to provide certain products
and services to Maxtor at specified prices per unit. In addition, Maxtor has
agreed to place purchase orders for the Company's manufacture of such products
in accordance with certain minimum quarterly volume purchase commitments, which
commitments decrease upon each twelve month anniversary of the effective date of
the Manufacturing Agreement. Maxtor's commitment to place purchase orders for
the Company's manufacture of products is conditioned upon the Company's
providing products competitive in both price and quality with alternative
suppliers of Maxtor. In the event that Maxtor determines that the products the
Company manufactures are not price or quality competitive, and the Company fails
within a specified time period to become competitive in price or quality, then
Maxtor's quarterly volume purchase commitments shall be reduced to the extent of
products not price or quality competitive. See "Certain Transactions." 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.
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. From time to time, the Company has experienced
supply shortages with respect to various of these components, although such
shortages have not had a material adverse effect on the Company's operating
results. Nonetheless, materials shortages in the future 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
8
<PAGE> 10
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 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.
9
<PAGE> 11
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 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
10
<PAGE> 12
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 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, although to date such hedging activities have not been material.
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.
None of the Company's key employees is party to an agreement that provides the
Company with assurance as to his or her continued employment. Moreover, the
Company does not maintain key-man life insurance on any of its personnel. See
"Management."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy includes the expansion of its business and
manufacturing capabilities, including through acquisitions. Although the Company
is not currently contemplating any material acquisition or reviewing any
particular opportunity, 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
11
<PAGE> 13
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.
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.
12
<PAGE> 14
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 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
NationsBanc Montgomery Securities, Inc., 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."
13
<PAGE> 15
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.
14
<PAGE> 16
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(2)............ (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 upon the effectiveness of this Offering at
the initial public offering price) 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 granted upon the effectiveness of
this Offering at the initial public offering price). See
"Management -- Compensation Plans" and Note 14 of Notes to Consolidated
Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for the factors
used to determine distributions in excess of net book value.
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<PAGE> 17
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.... 14,837,211 74.8% $14,604,000 21.0% $ 0.98
New public investors..... 5,000,000 25.2 55,000,000 79.0 $ 11.00
---------- ----- ----------- -----
Total.......... 19,837,211 100.0% $69,604,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computation (a) includes 1,509,711 shares of Common Stock at a
weighted average exercise price of $0.80 per share issuable upon exercise of
outstanding options granted under the Company's 1996 Stock Option Plan and
exercisable within 60 days of July 31, 1997 (giving effect to the vesting of
certain options as a result of the Offering), but (b) excludes (i) 1,385,289
shares of Common Stock at a weighted average exercise price of $1.27 per share
issuable upon exercise of outstanding options granted under the Company's 1996
Stock Option Plan but not exercisable within 60 days of July 31, 1997, (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 upon the effectiveness of this Offering at the
initial public offering price), 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 upon the effectiveness of
this Offering at the initial public offering price). See "Management --
Compensation Plans" and Note 14 of Notes to Consolidated Financial Statements.
16
<PAGE> 18
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 from product sales:(3)
Affiliates(4)................................. $ -- $ -- $ -- $340,487 $ 89,149 $26,276 $30,236
Other......................................... -- 254 3,089 68,361 80,546 21,139 34,500
Other revenues:(3)
Affiliates(4)................................. 42,425 42,093 36,284 -- -- -- --
------- ------- ------- -------- -------- ------- -------
Total revenues.............................. 42,425 42,347 39,373 408,848 169,695 47,415 64,736
Cost of revenues from product sales(5).......... -- -- 2,649 395,474 155,028 46,363 58,397
Cost of other revenues.......................... 35,302 35,794 31,146 -- -- -- --
------- ------- ------- -------- -------- ------- -------
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(6)....................... -- -- -- -- 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(7)...................................... 16,108 16,108.. 16,108
SUPPLEMENTAL DATA:
Supplemental income (loss) per share(8)......... $ 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.
17
<PAGE> 19
(3) Revenues from product sales include revenues derived from sales made on a
turnkey or a partial turnkey basis. Other revenues include revenues from
sales made on a consignment basis.
(4) Revenues from affiliates include sales to Maxtor and other entities related
to Maxtor through Maxtor's parent company, Hyundai Electronics America. See
Note 12 of Notes to Consolidated Financial Statements. Sales to Maxtor were
made on a consignment basis (where Maxtor procured all materials used to
manufacture product and provided them to the Company at no charge) for years
prior to fiscal 1996, on a turnkey basis (where the Company procured all
materials used to manufacture product) for fiscal 1996, and on a partial
turnkey basis (where some materials were procured by the Company and some
materials were procured by Maxtor) for fiscal 1997 and the three months
ended July 31, 1997.
(5) 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.
(6) 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.
(7) 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.
(8) 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).
18
<PAGE> 20
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%.
19
<PAGE> 21
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. To date, the Company's sales to customers other than
Maxtor generally have been 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. Moreover, the Company's agreement with Maxtor
permits Maxtor to consign component parts to the Company from time to time. The
Company believes that Maxtor and other customers consider various factors in
choosing to allocate procurement responsibility to the Company, including their
relationships with key component suppliers and their ability to obtain
components at lower prices than obtainable by the Company. Because none of the
Company's customers, including Maxtor, is committed over the long term to any
particular manufacturing basis, the Company is unable to predict the mix of
revenues derived from turnkey and consignment manufacturing for any future
period. See "Certain Transactions."
The Company carries property insurance, as well as cargo insurance, to
cover consignment inventory in its possession. The Company determines the extent
of its insurance coverage by anticipating the level of consigned inventory as
well as the level of turnkey inventory; however, there can be no assurance that
any such insurance will be adequate to cover any inventory losses suffered.
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 increases in the
volume of units shipped primarily to Maxtor, Bay Networks and new accounts in
the data communications and telecommunications industries. Revenues from sales
to Maxtor and affiliates increased by approximately $4.0 million, and revenues
from sales to Bay Networks increased by approximately $11.7 million over the
comparable period of the prior fiscal year. Additionally, revenues were affected
by a favorable mix of revenues derived from sales made on a turnkey basis and
revenue of $1.6 million generated from newly offered design services.
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
20
<PAGE> 22
the three months ended July 31, 1997 were also attributable to direct labor
savings of approximately $2.4 million resulting from the relocation of the
Company's Hong Kong manufacturing facility to China, where direct labor hourly
rates are significantly lower than in Hong Kong and the higher utilization rate
of the Company's manufacturing facilities. This effect, however, was partially
offset by associated reductions in selling prices, as the Company passed through
certain cost savings to its customers.
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 and marketing expenses of approximately $424,000 to
support new customer development, the inclusion of approximately $320,000 of
expenses attributable to Pentagon Systems and, to a lesser extent, increased
administrative expenses associated with the new manufacturing facility in China
and expanded operations in Thailand. Such increase was offset in part by the
absence in fiscal 1997 of certain compensation expenses. In June 1996, Robert G.
Behlman, the Company's President, Chief Executive Officer and Chairman of the
Board of Directors purchased 150,000 shares of Class A Common Stock for an
aggregate purchase price of approximately $111,000 paid by means of a full
recourse note in favor of the Company. In July 1996, the Board of Directors
forgave the note in recognition of Mr. Behlman's contribution to the successful
completion of the Recapitalization. The forgiveness of the note was recorded by
the Company as additional compensation to Mr. Behlman. 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. These tax holidays result
in a permanent tax savings to the Company from the related foreign income taxes
for the duration of the holiday.
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%. To date,
the
21
<PAGE> 23
Company has generated losses from its United States operations, and it does not
anticipate this trend to change in the near future. 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 operations in the United States become profitable 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."
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. The increase in revenues from fiscal 1995 to fiscal 1996 was due to an
increase of $304.2 million in revenues from Maxtor and affiliates and a $65.3
million increase in revenues from other customers. Revenues from Maxtor and
affiliates increased from fiscal 1995 to fiscal 1996 due primarily to a change
in the terms on which the Company transacted its sales to Maxtor, as well as an
approximately 23% increase in the volume of units shipped. Through fiscal 1995,
sales to Maxtor were made on a consignment basis, in which Maxtor procured all
materials used to manufacture products and provided them to the Company at no
charge. In fiscal 1996, the terms of sales to Maxtor were changed, and the
Company billed Maxtor on a full turnkey basis. Accordingly, the costs of all
materials used in products manufactured for Maxtor during fiscal 1996 were
included in revenues, and revenues increased. The $239.2 million decrease in
total revenues from fiscal 1996 to fiscal 1997 resulted primarily from a
decrease of $251.4 million in revenues from Maxtor and affiliates, which was
partially offset by an increase of $12.2 million in revenues from other
customers. Revenues from Maxtor and affiliates decreased primarily due to a
further change in the terms on which sales were made to Maxtor, from a full
turnkey to a partial turnkey basis, and a decrease of approximately 12% in the
volume of units shipped to Maxtor. Under this partial turnkey arrangement,
Maxtor procured certain key materials used to manufacture product, which
accounted for a substantial portion of the total material costs. Accordingly,
the Company's revenues decreased significantly. Revenues from 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 other customers,
which are derived primarily from sales made on a turnkey basis, increased
significantly from fiscal 1995 through fiscal 1997 principally due to an
increase in the volume of units shipped. Such volume increases, in turn,
reflected increases in the number of new OEM customers in the computer
peripherals industry in fiscal 1996 and the data communications industry in
fiscal 1997, and increases in orders from existing customers in each year,
offset in part in fiscal 1997 by decreased revenues from a previously greater
than 10% customer.
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 an increased volume of shipments to Maxtor. During fiscal 1997,
the relocation of the Company's Hong Kong manufacturing operations to China
reduced the Company's direct labor costs by
22
<PAGE> 24
approximately $6.5 million compared to fiscal 1996. This effect, however, was
partially offset by associated reductions in selling prices, as the Company
passed through certain cost savings to its customers, and the decline in unit
volumes to Maxtor.
The Company's gross margins, which are computed by dividing gross profits
by revenues, from product sales are affected significantly by the mix of
revenues derived from sales made on a full turnkey versus a partial turnkey
basis. The Company generally obtains lower margins from full turnkey sales as
compared to partial turnkey sales. For partial turnkey sales, the Company is
responsible for procuring only a portion of the components as compared to full
turnkey sales, wherein the Company procures, and accordingly bills to customers
costs of, all components in a product. Relatedly, revenues from full turnkey
sales tend to be higher than revenues from partial turnkey sales. However, the
differences in revenues between partial turnkey and full turnkey sales do not
result in a proportionate difference in gross profits, as customers generally
pay lower margins for material procurement activities undertaken by the Company.
Consequently, revenue increases attributable to a higher mix of full turnkey
revenues do not translate into a proportionate increase in gross profits, and,
as a result, gross margins tend to be lower. Typically, the Company's gross
margins from consignment sales tend to be higher than gross margins from turnkey
sales. Nevertheless, in fiscal 1995, the Company's gross margin from turnkey
sales approximated the gross margin from consignment sales. The Company believes
that given the limited amount of revenues derived from turnkey sales in 1995,
gross margin from turnkey sales in 1995 is not representative of normal gross
margins.
Gross margins decreased from 14.2% in fiscal 1995 to 3.3% in fiscal 1996
due primarily to a shift in the terms of sales to Maxtor from consignment in
fiscal 1995 to full turnkey in fiscal 1996. Gross margins improved to 8.6% in
fiscal 1997 due primarily to a shift in the terms of sales to Maxtor from full
turnkey to partial turnkey and the reduction in direct labor costs attributable
to relocation of the Company's Hong Kong manufacturing operations to China.
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 increased expenditures of approximately $1.0 million
associated with the opening of the Company's new manufacturing facility in
Thailand and the establishment of a sales and marketing organization to support
sales to new customers. 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 and marketing expenses in the United States to support new
customer development aggregating approximately $1.5 million, increased expenses
of approximately $350,000 to support the establishment of the new manufacturing
facility in China, and the inclusion of approximately $400,000 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.
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
23
<PAGE> 25
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.
Change in Fiscal Year
During fiscal 1997, the Company changed its financial reporting year end
from the Saturday nearest to March 31, to the Saturday nearest to April 30. As a
result of this change, the Company had a one month transition period.
During the one month ended April 30, 1996, the Company had revenues, gross
profit and net income of $23.5 million, $1.7 million and $1.3 million,
respectively. The revenues and profitability during this one month period were
favorably affected by an increase in unit shipments to Maxtor. Net income for
April 1996 was also favorably affected by reversals of approximately $350,000 of
previously established employee bonus awards due to changes to the awards made
by management.
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, $6.9
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 $7.1 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." Borrowings under the line of credit are
secured by all of the Company's assets. The line of credit requires that the
Company maintain compliance with certain financial minimums, including with
respect to earnings before income tax, depreciation and amortization ("EBITDA"),
and certain financial ratios, including EBITDA to interest expense, EBITDA less
capital expenditures to interest expense, and total debt to EBITDA. The line of
credit also imposes certain restrictions, including limits on amounts
attributable to capital leases, performance bonds, permitted investments,
dividends, employee loans, amendments of certain existing agreements and
instruments, prepayments of other indebtedness, and capital expenditures. As of
July 31, 1997, the Company was in compliance with all such covenants and
restrictions.
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. Customers other than Maxtor 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. The Company is
currently in the process of leasing additional manufacturing space in San Jose.
In addition, although it has no specific plans and commitments in this regard,
the Company is also continually evaluating expansion into other low-cost
geographic areas.
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 following full
implementation at such facility of ISO 9002 compliant procedures and the passing
of certification audits. 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,
30
<PAGE> 32
has over ten years of experience in assisting customers with initial circuit
board design and has expertise in 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."
31
<PAGE> 33
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 has evolved from being a
captive EMS provider to Maxtor to an independent EMS provider serving 15
additional OEM customers. Customers other than Maxtor 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."
32
<PAGE> 34
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 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. It
is expected that all current directors will continue to serve after the
Offering.
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
36
<PAGE> 38
elections, pursuant to the 1996 Stock Option Plan. Upon effectiveness of this
Offering, directors who are 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 upon the effectiveness of this Offering at
the initial public offering price.
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.
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<PAGE> 40
On September 15, 1997, the Compensation Committee of the Board of Directors
approved, contingent upon the effectiveness of this Offering, the grant of
options to purchase at the initial public offering price 195,000 shares of Class
A Common Stock to each of Messrs. Kawaye and Quek 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 $ 729,139 $ 1,137,454
Nathan Kawaye.................. -- -- 87,891 137,109 $ 198,857 $ 310,214
Neo Kia Quek................... -- -- 102,539 159,961 $ 231,998 $ 361,918
</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, as adjusted by
the Company's Board of Directors in August 1997 ($3.00), and the per share
exercise price of the options ($0.737463).
OFFER LETTERS
Each of the Company's employees, including each of its executive officers,
has received an offer letter from the Company which sets forth compensation and
related terms of such persons' employment. All such persons are employed on an
at-will basis.
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
39
<PAGE> 41
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.
1997 Stock Plan
The Company's 1997 Stock Plan (the "1997 Plan") was adopted in August 1997
and will become effective upon the effectiveness 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 effectiveness 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
40
<PAGE> 42
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.
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 effectiveness 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
effectiveness 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.
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<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 Managing Member of Oak Associates VI, LLC,
which is the General Partner of Oak Investment Partners VI, L.P. Mr. Harman is
also a Managing Member of Oak Affiliates, LLC, which is the General Partner of
the Oak VI Affiliate 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.
42
<PAGE> 44
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 $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 to place purchase
orders for the Company's manufacture of such products in accordance with certain
minimum quarterly volume purchase commitments, which commitments decrease upon
each twelve month anniversary of the effective date of the Manufacturing
Agreement. Moreover, in the event that Maxtor requests rescheduling of the
delivery dates of products specified in the Manufacturing Agreement, Maxtor has
agreed to give notice in advance of such rescheduling request. The Company's
ability to accept or reject Maxtor's rescheduling requests is contingent upon
length of time prior to the originally scheduled shipment date that Maxtor
provides notice to the Company of such rescheduling. The terms of the
Manufacturing Agreement also allow Maxtor to consign to the Company, from time
to time, 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. The Company, in turn, has agreed to indemnify Maxtor, subject to
certain notice and other conditions, for any and all claims and expenses
relating to (i) allegations of infringement or misappropriation against Maxtor
arising from products supplied by the Company, (ii) processes used by the
Company to manufacture products specified in the Agreement and (iii) the
intellectual property of any third party not arising out of the use of a Maxtor
design. Maxtor's commitment to place purchase orders for the Company's
manufacture of products is conditioned upon the Company's providing products
competitive in both price and quality with alternative suppliers of Maxtor. In
the event that Maxtor determines that the products the Company manufactures are
not price or quality competitive, and the Company fails within a specified time
period to become competitive in price or quality, then Maxtor's quarterly volume
purchase commitments shall be reduced to the extent of products not price or
quality competitive. There can be no assurance that the Company will satisfy the
pricing and quality criteria established by Maxtor. Any significant reduction in
the volume of sales to Maxtor would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Maxtor Corporation -- Business Risks; Affiliation."
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 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
46
<PAGE> 48
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") of $6.67 per share (the "Maxtor
Warrant"), subject to certain customary, proportionate adjustments in the event
that the Company engages in a merger, reclassification, stock split or the like.
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 all current holders of its outstanding stock
(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. 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 (a "Demand
Registration") and to pay all registration expenses in connection with any
registration so initiated. The Company may defer such registrations: (x) during
the period commencing with the date 60 days prior to the Company's good faith
estimate of the date of filing of, and ending on the date 120 days after the
effective date of, a Company-initiated registration; (y) during the period
ending 6 months after any other registration; and (z) during the period ending
six months after a Demand Registration, if the Company and the holders of more
than 50% of the Registrable Securities agree that such a Demand Registration
would reasonably be expected to have an
47
<PAGE> 49
adverse effect on any proposal by the Company to engage in any acquisition of
assets, merger or similar transaction. In addition, the underwriters have the
right to limit the number of shares included in such registrations, in the event
that the underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in the offering related to such registration without
adversely affecting the marketability of that offering. Further, when Form S-3
becomes available to the Company, the holders of Registrable Securities agree
that they will not request a long-form registration, but may require the Company
to register, any number of times, all or any portion of their Registrable
Securities on Form S-3, 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's Class A Common Stock has been approved for listing on the
Nasdaq National Market under the trading symbol IMSX.
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<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 NationsBanc Montgomery Securities, Inc. 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
NationsBanc Montgomery Securities, Inc., BT Alex. Brown 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>
NationsBanc Montgomery Securities, Inc............................
BT Alex. Brown 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 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 NationsBanc Montgomery
Securities, Inc. 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
NationsBanc Montgomery Securities, Inc. NationsBanc Montgomery Securities, Inc.
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.
Upon consummation of the Offering, Montgomery Associates 1992, L.P.
("Montgomery Associates"), an affiliate of NationsBanc Montgomery Securities,
Inc., will beneficially own 46,950 shares of Class A Common Stock and a $62,500
principal amount 12% junior subordinated note.
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
On March 11, 1996, Ernst & Young LLP was dismissed and 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 the issuance of their report concerning
the fiscal 1996 accounts dated April 25, 1996. The dismissal of Ernst & Young
LLP and the appointment of Price Waterhouse LLP was approved by the Company's
Board of Directors. 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, and the subsequent
period through June 12, 1996, 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
San Jose, California
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 from product sales:
Affiliates................................... $ -- $ 340,487 $ 89,149 $ 26,276 $ 30,236
Other........................................ 3,089 68,361 80,546 21,139 34,500
Other revenues:
Affiliates................................... 36,284 -- -- -- --
------- -------- -------- ------- -------
Total revenues....................... 39,373 408,848 169,695 47,415 64,736
Cost of revenues from product sales............ 2,649 395,474 155,028 46,363 58,397
Cost of other revenues......................... 31,146 -- -- -- --
------- -------- -------- ------- -------
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............ -- -- 3,705,000 4 2,420 -- -- 2,424
Issuance of common stock in
exchange for services
rendered..................... -- -- 150,000 -- 111 -- -- 111
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) -- --
Forgiveness of note receivable.............................. -- -- 111 111 --
(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 6,854 (5,201) 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 investing activities.................. (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........................ -- -- 2,452 2,424 --
------- -------- ------- ------- --------
Net cash provided by (used in) financing activities.... (1,045) 1,731 7,087 6,960 (1,688)
------- -------- ------- ------- --------
Net change in cash and cash equivalents......................... 380 506 1,853 1,403 (1,015)
Cash and cash equivalents at beginning of period................ 52 432 975 975 2,828
------- -------- ------- ------- --------
Cash and cash equivalents at end of period...................... $ 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) -- -- --
Offset of long-term debt to Maxtor against receivable from
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. Revenues from product sales include revenues derived
from projects contracted on a turnkey basis. Other revenues include revenues
from projects contracted on a consignment basis. 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,
F-9
<PAGE> 64
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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. Prior to
the Recapitalization, the Company's income (loss) from its U.S. operations was
included in the consolidated tax returns of Maxtor. For the purposes of
preparing these financial statements, the Company has computed its provision for
income taxes for periods prior to the Recapitalization on a separate return
basis.
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.
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
F-10
<PAGE> 65
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The
results of operations and statement of cash flows data for the one month ended
April 30, 1996 are summarized below.
<TABLE>
<CAPTION>
MONTH ENDED
APRIL 30,
1996
--------------
<S> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues from product sales............................................ $ 23,541
Cost of revenues from product sales.................................... 21,847
-------
Gross profit........................................................... 1,694
Selling, general and administrative.................................... 204
-------
Income from operations................................................. 1,490
Interest income, net of interest expense............................... (3)
-------
Income before income taxes............................................. 1,493
Provision for income taxes............................................. 150
-------
Net income............................................................. $ 1,343
=======
</TABLE>
F-12
<PAGE> 67
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MONTH ENDED
APRIL 30,
1996
--------------
<S> <C>
(IN THOUSANDS)
STATEMENT OF CASH FLOWS:
Cash flows from operating activities:
Net income........................................................... $ 1,343
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization..................................... 742
Changes in assets and liabilities:
Accounts receivable............................................... (2,472)
Accounts receivable from Maxtor and affiliates.................... 2,363
Inventories....................................................... 21,981
Other current assets.............................................. (987)
Accounts payable.................................................. (19,729)
Accounts payable to Maxtor........................................ (3,613)
Accrued liabilities............................................... 637
Income taxes payable.............................................. (29)
-------
Net cash provided by operating activities.................... 236
-------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations............. (199)
-------
Net cash used in financing activities........................ (199)
-------
Net change in cash and cash equivalents................................ 37
Cash and cash equivalents at beginning of period....................... 938
-------
Cash and cash equivalents at end of period............................. $ 975
=======
</TABLE>
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-13
<PAGE> 68
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-14
<PAGE> 69
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. In addition, the Loan Agreement
restricts the Company's ability to declare dividends. 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-15
<PAGE> 70
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-16
<PAGE> 71
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 $ 1.02
=========
</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.
In June 1996, Robert G. Behlman, the Company's President, Chief Executive
Officer and Chairman of the Board of Directors, purchased 150,000 shares of
Class A Common Stock for an aggregate purchase price of approximately $111,000
paid by means of a full recourse note in favor of the Company. In July 1996, the
Board of Directors forgave the note in recognition of Mr. Behlman's contribution
to the successful completion of the Recapitalization. The forgiveness of the
note was recorded by the Company as additional compensation to Mr. Behlman.
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>
F-17
<PAGE> 72
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. However, with
respect to certain options granted in April 1997 and the three months ended July
31, 1997, the Company subsequently determined that a compensation expense of
$189,000 should be recorded. 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.
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>
F-18
<PAGE> 73
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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 include sales to Maxtor and other entities related
to Maxtor through Maxtor's parent company, Hyundai Electronics America.
Prior to the Recapitalization and for a short period subsequent thereto,
Maxtor provided varying levels of corporate, general and administrative support
to the Company's U.S. operations. Charges for these services
F-19
<PAGE> 74
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
were estimated based upon actual costs incurred, to the extent practical, and
reasonable estimations made by Maxtor management, using primarily employee
headcounts, when actual identification was not possible. Charges from Maxtor for
fiscal 1995 were not billed on grounds of materiality. Charges to the Company
from Maxtor for fiscal 1996 and 1997 aggregated $37,000 and $49,000,
respectively.
Prior to the Recapitalization, the Company's principal sources of liquidity
were interest-free intercompany borrowings from Maxtor and favorable payment
terms on sales to Maxtor. Subsequent to the Recapitalization, the payment terms
for sales made to Maxtor were normalized.
The amount of receivables from Maxtor as of March 31, 1996 included in the
balance sheet represents a net balance as the result of various transactions
between the Company and Maxtor. Prior to Recapitalization, there were no terms
of settlement or interest charges associated with the account balance. The
balance was primarily the result of the Company's participation in Maxtor's
central cash management program, wherein all the Company's cash receipts were
remitted to Maxtor and all cash disbursements were funded by Maxtor.
The following is an analysis of transactions in the intercompany account
between the Company and Maxtor for fiscal 1995, 1996 and the two months ended
May 31, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWO
--------------------- MONTHS
MARCH 31, MARCH 31, ENDED MAY
1995 1996 31, 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................... $ 11,401 $ 10,496 $ 11,368
Sales to Maxtor...................................... 36,284 339,577 42,103
Net receipts from Maxtor............................. (34,853) (330,551) (54,498)
Cash disbursements made by Maxtor on behalf of the
Company............................................ (2,336) (3,985) (126)
Offset of loan to Maxtor against receivable from
Maxtor............................................. -- (4,169) --
-------- -------- --------
Ending balance....................................... $ 10,496 $ 11,368 $ (1,153)
======== ======== ========
Average balance during the period.................... $ 13,560 $ 7,999 $ 5,313
-------- -------- --------
</TABLE>
As of March 31, 1996, the intercompany account balance does not agree with
the total balance of accounts receivable from affiliates on the balance sheet as
another related party accounted for $547,000 of the balance. Additionally, total
sales to affiliates on the statement of operations for the fiscal year ended
March 31, 1996 is $910,000 higher than the reconciliation above due to sales
made to the other related party.
In addition, an analysis of transactions in the long-term debt due to
Maxtor, for which there were no terms of settlement or interest charges for each
of the two years in the period ended March 31, 1996, and the two months ended
May 31, 1996 follows.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWO MONTHS
----------------------- ENDED
MARCH 31, MARCH 31, MAY 31,
1995 1996 1996
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................. $ 8,469 $ 8,469 $4,300
Offset of loan to Maxtor against receivable from
Maxtor........................................... -- (4,169) --
------ ------- ------
Ending balance..................................... $ 8,469 $ 4,300 $4,300
====== ======= ======
Average balance during the period.................. $ 8,469 $ 6,385 $4,300
======
------ -------
</TABLE>
F-20
<PAGE> 75
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-21
<PAGE> 76
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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-22
<PAGE> 77
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> 78
============================================================
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............................... 6
Use of Proceeds............................ 14
Dividend Policy............................ 14
Capitalization............................. 15
Dilution................................... 16
Selected Consolidated Financial Data....... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
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
------------------------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
BT ALEX. BROWN
UBS SECURITIES
, 1997
============================================================
<PAGE> 79
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........................................... 150,000
Legal Fees and Expenses.......................................... 400,000
Accounting Fees and Expenses..................................... 300,000
Transfer Agent Fees.............................................. 2,000
Miscellaneous.................................................... 87,815
----------
Total.................................................. $1,000,000
=========
</TABLE>
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 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.
II-1
<PAGE> 80
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.
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
II-2
<PAGE> 81
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.
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.
</TABLE>
II-3
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<S> <C>
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+ Offer Letter 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.
10.22+ Offer Letter dated October 14, 1994 by and between the Registrant and N.K.
Quek.
10.23+ Offer Letter dated June 1, 1996 by and between the Registrant and Nathan
Kawaye.
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. This
Exhibit omits certain confidential information, and such omitted information
has been filed separately with the Commission.
+ Previously filed.
II-4
<PAGE> 83
(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> 84
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 21st day of October 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 October 21, 1997
- ------------------------------------------ Directors, President and Chief
Robert G. Behlman Executive Officer (Principal
Executive Officer)
* Vice President and Chief October 21, 1997
- ------------------------------------------ Financial Officer (Principal
Nathan Kawaye Financial and Accounting
Officer)
* Director October 21, 1997
- ------------------------------------------
William J. Almon
* Director October 21, 1997
- ------------------------------------------
Dixon R. Doll
* Director October 21, 1997
- ------------------------------------------
John A. Downer
* Director October 21, 1997
- ------------------------------------------
Fredric W. Harman
* Director October 21, 1997
- ------------------------------------------
Mark Rossi
* Director October 21, 1997
- ------------------------------------------
J. Larry Smart
* Director October 21, 1997
- ------------------------------------------
Paul J. Tufano
*By: /s/ ROBERT G. BEHLMAN
- ------------------------------------------
Robert G. Behlman
(Attorney-in-Fact)
</TABLE>
II-6
<PAGE> 85
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> 86
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> 87
<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+ Offer Letter 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............................
10.22+ Offer Letter dated October 14, 1994 by and between the Registrant
and N.K. Quek.......................................................
10.23+ Offer Letter dated June 1, 1996 by and between the Registrant and
Nathan Kawaye.......................................................
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. This
Exhibit omits certain confidential information, and such omitted information
has been filed separately with the Commission.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
5,000,000 Shares
INTERNATIONAL MANUFACTURING SERVICES, INC.
Common Stock
Underwriting Agreement
dated September ___, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES........................................... 2
Effectiveness of the Registration Statement; No Stop Order..................... 2
Compliance with Registration Requirements...................................... 2
Quantities Furnished to Underwriters........................................... 3
Distribution of the Offering Materials......................................... 4
The Underwriting Agreement..................................................... 4
Authorization of the Common Shares............................................. 4
No Applicable Registration or Other Similar Rights............................. 4
No Material Adverse Change..................................................... 4
Independent Accountants........................................................ 5
Preparation of the Financial Statements........................................ 5
Incorporation and Good Standing of the Company and its
Subsidiaries............................................................. 5
Capitalization and Other Capital Stock Matters................................. 6
Stock Exchange Listing......................................................... 6
Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required..................................... 7
No Material Actions or Proceedings............................................. 7
Intellectual Property Rights................................................... 8
All Necessary Permits, etc..................................................... 8
Title to Properties............................................................ 8
Tax Law Compliance............................................................. 9
Company Not an "Investment Company."........................................... 9
Insurance...................................................................... 9
No Price Stabilization or Manipulation......................................... 9
Related Party Transactions..................................................... 10
No Unlawful Contributions or Other Payments.................................... 10
Company's Accounting System.................................................... 10
SECTION 2. PURCHASE, SALE AND DELIVERY OF COMMON
SHARES......................................................................... 10
The Firm Common Shares......................................................... 10
The First Closing Date......................................................... 11
The Optional Common Shares; The Second Closing Date............................ 11
Public Offering of the Common Shares........................................... 12
Payment for the Common Shares.................................................. 12
Delivery of the Common Shares.................................................. 12
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3. ADDITIONAL COVENANTS..................................................... 13
Representatives' Review of Proposed Amendments and
Supplements.............................................................. 13
Securities Act Compliance...................................................... 13
Amendments and Supplements to the Prospectus and Other
Securities Act Matters................................................... 14
Copies of any Amendments and Supplements to the Prospectus..................... 14
Blue Sky Compliance............................................................ 14
Use of Proceeds................................................................ 15
Transfer Agent................................................................. 15
Earnings Statement............................................................. 15
Periodic Reporting Obligations................................................. 15
Company Agreement Not To Offer or Sell Additional Securities................... 15
SECTION 4. PAYMENT OF EXPENSES...................................................... 16
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE
UNDERWRITERS................................................................... 16
Effectiveness of Registration Statement........................................ 17
Accountants' Comfort Letter.................................................... 17
Compliance with Registration Requirements; No Stop Order; No
Objection from NASD...................................................... 17
No Material Adverse Change..................................................... 18
Opinion of Counsel for the Company............................................. 18
Opinion of Counsel for the Underwriters........................................ 18
Officers' Certificate.......................................................... 18
Bring-down Comfort Letter...................................................... 18
Lock-Up Agreement from Stockholders of the Company............................. 19
Additional Documents........................................................... 19
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.................................. 19
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.......................................... 20
SECTION 8. INDEMNIFICATION.......................................................... 20
Indemnification of the Underwriters............................................ 20
Indemnification of the Company, Its Directors and Officers..................... 21
Notifications and Other Indemnification Procedures............................. 22
Settlements.................................................................... 23
SECTION 9. CONTRIBUTION............................................................. 24
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL
UNDERWRITERS............................................................. 25
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
SECTION 11. TERMINATION OF THIS AGREEMENT........................................... 26
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE
DELIVERY................................................................ 27
SECTION 13. NOTICES................................................................. 27
SECTION 14. SUCCESSORS.............................................................. 28
SECTION 15. PARTIAL UNENFORCEABILITY................................................ 28
SECTION 16. GOVERNING LAW PROVISIONS................................................ 29
SECTION 17. GENERAL PROVISIONS...................................................... 29
</TABLE>
-iii-
<PAGE> 5
UNDERWRITING AGREEMENT
October ___, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN INCORPORATED
UBS SECURITIES LLC
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. International Manufacturing Services, Inc., a Delaware
corporation (the "Company), proposes to issue and sell to the several
underwriters named in Schedule A hereto (the "Underwriters") an aggregate of
5,000,000 shares (the "Firm Common Shares") of its Class A Common Stock, par
value $0.001 per share (the "Common Stock"). In addition, the Company has
granted to the Underwriters an option to purchase up to an additional 750,000
shares (the "Optional Common Shares") of Common Stock, as provided in Section 2
hereof. The Firm Common Shares and, if and to the extent such option is
exercised, the Optional Common Shares are herein collectively called the "Common
Shares." NationsBanc Montgomery Securities, Inc., BT Alex. Brown Incorporated
and UBS Securities LLC have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-34557), which registration statement contains a form of prospectus to be
used in connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements, exhibits
and schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of such effectiveness
pursuant to Rule 430A or Rule 434 under the Securities Act, is herein called the
"Registration Statement." Any registration statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is herein called the "Rule
462(b) Registration Statement," and from and after the date and time of such
filing of a Rule 462(b) Registration Statement the term "Registration Statement"
shall include
<PAGE> 6
the Rule 462(b) Registration Statement. Such prospectus, in the form first used
by the Underwriters to confirm sales of the Common Shares, is herein called the
"Prospectus;" provided, however, if the Company, with the consent of NationsBanc
Montgomery Securities, Inc. has elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated September 22,
1997 (such preliminary prospectus herein called the "Rule 434 preliminary
prospectus") together with the applicable term sheet (the "Term Sheet") prepared
and filed by the Company with the Commission under Rules 434 and 424(b) under
the Securities Act and provided, further, that all references in this Agreement
to the date of the Prospectus shall mean the date of such applicable Term Sheet.
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus and the Term
Sheet, or any amendments or supplements to any of the foregoing, shall be deemed
to include any copy thereof filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval System ("EDGAR").
The Representatives have advised the Company that the Underwriters
propose to make a public offering of their respective portions of the Common
Shares as soon as the Representatives deem advisable after this Agreement has
been executed and delivered.
The Company hereby confirms its agreement with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents and warrants to, and covenants with, each
Underwriter as follows:
(a) Effectiveness of the Registration Statement; No Stop Order. The
Registration Statement has been declared effective by the Commission under
the Securities Act. The Company has complied, to the Commission's
satisfaction, with all requests of the Commission for providing additional
or supplemental information. No stop order suspending the effectiveness of
either of the Registration Statement or the Rule 462(b) Registration
Statement, if any, is in effect and no proceedings for such purpose have
been instituted or are pending or, to the best knowledge of the Company,
are contemplated or threatened by the Commission.
(b) Compliance with Registration Requirements. Each preliminary
prospectus and Prospectus filed as part of the Registration Statement, as
part of any amendment thereto or pursuant to Rule 424 under the Securities
Act, complied when so filed in all material respects with the Securities
Act
-2-
<PAGE> 7
and, if so filed by electronic transmission pursuant to EDGAR (except as
may be permitted by Regulation S-T under the Securities Act), was
identical to the copy thereof delivered to the Underwriters for use in
connection with the offer and sales of the Common Shares. At the
respective times that the Registration Statement, the Rule 462(b)
Registration Statement, if any, and any post-effective amendments thereto
became effective, and at all times subsequent thereto up to and including
each Closing Date referred to below, the Registration Statement, such Rule
462(b) Registration Statement and each such post-effective amendment
thereto complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus, as amended or supplemented, as of its date and at all times
subsequent thereto up to and including each Closing Date referred to
below, did not and will not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. If the Company has elected to rely upon Rule
434 under the Securities Act, and has obtained NationsBanc Montgomery
Securities, Inc.'s consent thereto, the Company confirms that the Rule 434
preliminary prospectus is not materially different from the Company's
prospectus contained in the Registration Statement at the time it was
declared effective, and the Company agrees that it shall comply with the
requirements of Rule 434. Notwithstanding the foregoing, the
representations and warranties set forth in the second and third sentences
of this Section 1(b) do not apply to statements in or omissions from the
Registration Statement, the Rule 462(b) Registration Statement, if any,
and any post-effective amendments thereto, or the Prospectus, or any
amendments or supplements thereto, made in reliance upon and in conformity
with information relating to any Underwriter furnished to the Company in
writing by the Representatives expressly for use therein. There are no
contracts or other documents required to be described in the Prospectus or
to be filed as exhibits to the Registration Statement under the Securities
Act which have not been described or filed as required.
(c) Quantities Furnished to Underwriters. The Company has delivered
to the Representatives three complete manually signed copies of the
Registration Statement and of each consent and certificate of experts
filed as a part thereof, and such quantities of conformed copies of the
Registration Statement (without exhibits) and preliminary prospectuses and
the Prospectus, as amended or supplemented, as the Representatives have
reasonably requested for each of the Underwriters.
-3-
<PAGE> 8
(d) Distribution of the Offering Materials. The Company has not
distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection
with the offering and sale of the Common Shares other than a preliminary
prospectus, the Prospectus, the Registration Statement and the other
offering materials permitted under the Securities Act.
(e) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable
law and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting the rights and remedies of creditors or by general equitable
principles.
(f) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued, fully paid and
non-assessable.
(g) No Applicable Registration or Other Similar Rights. Except as
disclosed in the Prospectus under the caption "Shares Eligible for Future
Sale," there are no persons with registration or other similar rights to
have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as have been duly waived.
(h) No Material Adverse Change. Except as otherwise may be stated in
the Prospectus, subsequent to the respective dates as of which information
is given in the Prospectus: (i) with respect to the Company and its
subsidiaries, considered as one entity, there has been no material adverse
change, or any development that would reasonably be expected to result in
a material adverse change, in the condition, financial or otherwise, or in
the earnings, business or operations, whether or not arising from
transactions in the ordinary course of business (any such change referred
to herein as a "Material Adverse Change"); (ii) the Company and its
subsidiaries, considered as one entity, have not incurred any material
liability or obligation, direct or contingent, not in the ordinary course
of business nor entered into any material transaction not in the ordinary
course of business; and (iii) except for dividends paid pursuant to the
terms of the Company's outstanding Preferred Stock, there has been no
dividend or distribution of
-4-
<PAGE> 9
any kind declared, paid or made by the Company or, except for dividends
paid to the Company or other subsidiaries, any of its subsidiaries on any
class of capital stock or repurchase or redemption by the Company or any
of its subsidiaries of any class of capital stock.
(i) Independent Accountants. Price Waterhouse LLP and Ernst & Young
LLP, who have expressed their respective opinions with respect to the
financial statements (which term as used in this Agreement includes the
related notes thereto) and supporting schedules filed with the Commission
as a part of the Registration Statement and included in the Prospectus and
in the Registration Statement, are independent public accountants as
required by the Securities Act.
(j) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus and in the Registration Statement
present fairly the consolidated financial position of the Company and its
subsidiaries as of and at the dates indicated and the results of their
operations and changes in financial position for the periods specified.
The supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. Such financial
statements and supporting schedules have been prepared in conformity with
generally accepted accounting principles in the United States applied on a
consistent basis throughout the periods involved, except as may be stated
in the related notes thereto. No other financial statements or supporting
schedules are required to be included in the Registration Statement. The
financial data set forth in the Prospectus under the captions "Prospectus
Summary-Summary Consolidated Financial Data," "Selected Consolidated
Financial Data" and "Capitalization" fairly present the information set
forth therein on a basis consistent with that of the audited financial
statements contained in the Registration Statement.
(k) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company, IMS Industries Inc., a Delaware
corporation, IMS Holdco, Inc., a Delaware corporation, IMS International
Manufacturing Services (Hong Kong) Limited, a Hong Kong corporation, IMS
International Manufacturing Services, Limited, a Cayman Islands
corporation, IMS International Manufacturing Services (Thailand) Limited,
a Thailand corporation, and Dongguan IMS Electronics Ltd., a China
corporation, and each other subsidiary of the Company, if any, which is a
"significant subsidiary" as defined in Rule 405 under the Securities Act
(each, a "Subsidiary" and, collectively, the "Subsidiaries"), has been
duly incorporated and is validly existing as a corporation in good
standing, where applicable, under the laws of the jurisdiction of its
organization and has the
-5-
<PAGE> 10
requisite power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and, in the case of
the Company, to enter into and perform its obligations under this
Agreement. Each of the Company and each Subsidiary is duly qualified as a
foreign corporation to transact business and is in good standing in the
State of California and each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except for such jurisdictions
(other than the State of California with respect to the Company) where the
failure to so qualify or to be in good standing would not, individually or
in the aggregate, result in a Material Adverse Change. All of the issued
and outstanding capital stock of each Subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim, except as
disclosed in the Prospectus. The subsidiaries listed in Exhibit 21 to the
Registration Statement are the only subsidiaries, direct or indirect, of
the Company.
(l) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options described in the
Prospectus). The Common Stock (including the Common Shares) conforms in
all material respects to the description thereof contained in the
Prospectus. All of the shares of Common Stock have been duly authorized
and validly issued, are fully paid and non-assessable and have been issued
in compliance with the federal and state securities laws. None of the
shares of Common Stock were issued in violation of or subject to any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants or rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable
for, any capital stock of the Company or any of its subsidiaries other
than those accurately described in the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted and exercised thereunder, set
forth in the Prospectus accurately presents the information required to be
shown with respect to such plans, arrangements, options and rights in all
material respects.
(m) Stock Exchange Listing. The Common Shares have been approved for
listing on the Nasdaq National Market, subject to official notice of
issuance.
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(n) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, loan or credit
agreement, note, contract, franchise, lease or other instrument to which
the Company or any of its subsidiaries is a party or by which it or any of
them may be bound (including, without limitation, the Credit Facility, the
Maxtor Notes and the Junior Subordinated Notes (each such term as defined
in the Prospectus)), or to which any of the property or assets of the
Company or any of its subsidiaries is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in
the aggregate, result in a Material Adverse Change. The Company's
execution, delivery and performance of this Agreement and consummation of
the transactions contemplated hereby and by the Prospectus (i) have been
duly authorized by all necessary corporate action and will not result in
any violation of the provisions of the charter or by-laws of the Company
or any subsidiary, (ii) will not conflict with or constitute a breach of,
or Default or a Debt Repayment Triggering Event (as defined below) under,
or result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not, individually or in
the aggregate, result in a Material Adverse Change, and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any
subsidiary. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus, except such as have been obtained by the Company
and are in full force and effect under the Securities Act, applicable
state securities or blue sky laws and the NASD. As used herein, a "Debt
Repayment Triggering Event" means any event or condition which gives, or
with the giving of notice or lapse of time would give, the holder of any
note, debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
of its subsidiaries.
(o) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the Company's
knowledge, threatened, (i) against or affecting the Company or any of its
subsidiaries, (ii) which has as the subject thereof
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<PAGE> 12
any officer or director of, or property owned or leased by, the Company or
any of its subsidiaries or (iii) relating to environmental or
discrimination matters, where (A) there is a reasonable possibility that
such action, suit or proceeding might be determined adversely to the
Company or such subsidiary and (B) any such action, suit or proceeding,
individually or in the aggregate with any other actions, suits or
proceedings, if so determined adversely, would reasonably be expected to
result in a Material Adverse Change, or materially and adversely affect
the consummation of the transactions contemplated by this Agreement. All
pending governmental or legal actions, suits or proceedings to which the
Company or any of its subsidiaries is a party or of which any of their
respective property or assets is the subject which are not described in
the Prospectus, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material. No material
labor dispute with the employees of the Company or any of its subsidiaries
exists or, to the Company's knowledge, is threatened or imminent.
(p) Intellectual Property Rights. The Company and its subsidiaries
own or possess sufficient trademarks, trade names, patent rights, mask
works, copyrights, licenses and approvals (collectively, the "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expiration of any of such Intellectual Property Rights
would not result in a Material Adverse Change. Neither the Company nor any
of its subsidiaries has received any notice of infringement or conflict
with asserted rights with respect to trademark, trade name, patent, mask
work, copyright, license, trade secret or other similar rights of others,
which infringement or conflict has not been resolved, and which, if the
subject of an unfavorable decision, would reasonably be expected to result
in a Material Adverse Change.
(q) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct their respective businesses, and neither the
Company nor any subsidiary has received any notice of proceedings relating
to the revocation or modification of, or non-compliance with, any such
certificate, authorization or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Change with respect thereto.
(r) Title to Properties. The Company and each of its subsidiaries
has good and marketable title to all the properties and assets reflected
as owned in the financial statements referred to in Section 1(j) above (or
elsewhere in the Prospectus), in each case free and clear of any security
interests,
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<PAGE> 13
mortgages, liens, encumbrances, equities, claims and other defects, except
such as do not materially and adversely affect the value of such property
and do not materially interfere with the use made or proposed to be made
of such property by the Company or such subsidiary. The real property,
improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not materially
interfere with the use made or proposed to be made of such real property,
improvements, equipment or personal property by the Company or such
subsidiary.
(s) Tax Law Compliance. The Company and its subsidiaries have filed
all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against
any of them. The Company has made adequate charges, accruals and reserves
in the applicable financial statements referred to in Section 1(j) above
in respect of all federal, state and foreign income and franchise taxes
for all periods as to which the tax liability of the Company or any of its
subsidiaries has not been finally determined.
(t) Company Not an "Investment Company." The Company has been
advised of rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not an
"investment company" or an entity "controlled" by an "investment company"
within the meaning of the Investment Company Act and intends to conduct
its business in a manner so that it will not become subject to the
Investment Company Act.
(u) Insurance. Each of the Company and its subsidiaries are insured
by recognized financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks
generally deemed adequate and customary for their businesses including,
but not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft damage,
destruction and acts of vandalism. The Company has no reason to believe
that it or any subsidiary will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change.
(v) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to or
that
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<PAGE> 14
might be reasonably expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Shares.
(w) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any subsidiary or
any other person required to be described in the Prospectus, other than
those that have been disclosed therein.
(x) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the Company's knowledge, any employee
or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(y) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles in the United States and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Any certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters pursuant hereto shall be
deemed to be a representation and warranty by the Company to each Underwriter as
to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A hereto. The purchase price per Firm Common Share to be paid by the
several Underwriters to the Company shall be $[___] per share.
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<PAGE> 15
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters against payment therefor by wire
transfer of immediately available funds to the order of the Company shall be
made at the offices of NationsBanc Montgomery Securities, Inc., 600 Montgomery
Street, San Francisco, California (or such other place as may be agreed to by
the Company and the Representatives) at [___] a.m., San Francisco time on [___],
1997, or such other time and date not later than 10:30 a.m., San Francisco time
on [___], 1997 [10 business days later] as the Representatives shall designate
by notice to the Company (the time and date of such closing are herein called
the "First Closing Date"). The Company hereby acknowledges that circumstances
under which the Representatives may provide such notice to postpone the First
Closing Date as originally scheduled include, but are in no way limited to, any
determination by the Company or the Representatives to recirculate to the public
copies of an amended or supplemented Prospectus or a delay as contemplated by
the provisions of Section 10 hereof.
The Optional Common Shares; The Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 750,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is herein called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A hereto opposite the
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<PAGE> 16
name of such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its lapse by giving
written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective and the Representatives, in their sole judgment, have
determined is advisable and practicable. The Representatives hereby further
advise the Company that (i) the Underwriters will offer the Common Shares for
sale to the public initially at a price of $[___] per share and to certain
dealers selected by the Representatives at a price that represents a concession
of not more than $[___] per share from such initial public offering price and
(ii) any Underwriter may allow, and such dealers may reallow, a concession of
not more than $[___] per share to any other Underwriter or to certain other
dealers.
Payment for the Common Shares. Payment for the Common Shares shall be made
at the First Closing Date (and, if applicable, at the Second Closing Date) by
wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
own accounts and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Common
Shares and any Optional Common Shares the Underwriters have agreed to purchase.
NationsBanc Montgomery Securities, Inc., individually and not as a
Representative of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by the Representatives by the First Closing Date or
the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to be
delivered, to the Representatives for the accounts of the several Underwriters
certificates for the Firm Common Shares at the First Closing Date, against
payment by wire transfer of immediately available funds therefor. The Company
shall also deliver, or cause to be delivered, to the Representatives for the
accounts of the several Underwriters, certificates for the Optional Common
Shares the Underwriters have agreed to purchase at the First Closing Date or the
Second Closing Date, as the case may be, against payment by wire transfer of
immediately available funds therefor. The certificates for the Common Shares
shall be in definitive form and registered in such names and denominations as
the Representatives shall have requested at least two full business days prior
to the
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<PAGE> 17
First Closing Date (or the Second Closing Date, as the case may be) and shall be
made available for inspection on the business day preceding the First Closing
Date (or the Second Closing Date, as the case may be) at a location in New York
City as the Representatives may designate. Time shall be of the essence, and
delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
SECTION 3. ADDITIONAL COVENANTS.
The Company further covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
The Company agrees that, during such period beginning on the date hereof
and ending on the later of the First Closing Date or such date as in the
opinion of counsel for the Underwriters the Prospectus is required by law
to be delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed under
Rule 462(b) under the Securities Act) or the Prospectus, the Company shall
furnish to the Representatives for review a copy of each such proposed
amendment or supplement, and the Company further agrees not to file any
such proposed amendment or supplement to which the Representatives
reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus, or of any proceedings to remove or suspend from listing or
quotation the Common Stock from any securities exchange upon which it is
listed for trading or quotation, or of the threatening or initiation of
any proceedings for any of such purposes. If the Commission shall enter
any such stop order at any time, the Company will use its best efforts to
obtain the lifting of such order at the earliest possible moment.
Additionally, the Company agrees that it shall comply with the provisions
of Rules 424(b), 430A and 434, as applicable, under the Securities Act and
will use its
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<PAGE> 18
reasonable efforts to confirm that any filings made by the Company under
such Rule 424(b) were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if in the opinion of the
Representatives or counsel for the Underwriters it is otherwise necessary
to amend or supplement the Prospectus to comply with law, the Company
agrees to promptly prepare (subject to Section 3(A)(a) hereof), file with
the Commission and furnish, at its own expense, to the Underwriters and to
dealers and such other persons (whose names and addresses will be
furnished to the Company by the Representatives) to whom Common Shares
might have been sold, amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
supplements and amendments thereto as the Representatives may reasonably
request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the Blue Sky or state securities laws of those
jurisdictions designated by the Representatives, shall comply with such
laws and shall continue such qualifications, registrations and exemptions
in effect so long as reasonably required for the distribution of the
Common Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The
Company will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to
obtain the withdrawal thereof.
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<PAGE> 19
(f) Use of Proceeds. The Company shall apply the net proceeds of the
sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as reasonably practicable, the
Company will make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited) covering
the twelve-month period ending October 31, 1998 that satisfies the
provisions of Section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall file with the
Commission all reports on Form SR as may be required under Rule 463 under
the Securities Act.
(j) Company Agreement Not To Offer or Sell Additional Securities.
During the period of 180 days following the date of the Prospectus, the
Company agrees that it will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc. (which consent may be withheld at
the sole discretion of NationsBanc Montgomery Securities, Inc.), on behalf
of the several Underwriters, directly or indirectly, sell, offer or
contract to sell, grant any option for the sale of, or otherwise dispose
of or transfer, or announce the offering of, or file any registration
statement under the Securities Act in respect of, any shares of Common
Stock or any debt or equity securities convertible into or exchangeable or
exercisable for Common Stock (other than as contemplated by this Agreement
with respect to the Common Shares), provided, however, that the Company
may issue shares of its Common Stock or options to purchase its Common
Stock, or Common Stock upon exercise of options, pursuant to any stock
option, stock bonus or other stock plan or arrangement described in the
Prospectus, or, with respect to up to 1,000,000 shares of Common Stock, in
connection with any acquisition transaction, but only if the holders of
such shares, options, or shares issued upon exercise of such options,
agree in writing not to sell, offer, dispose of or otherwise transfer any
such shares or options during such 180 day period without the prior
written consent of NationsBanc Montgomery Securities, Inc. (which consent
may be withheld at the sole discretion of NationsBanc Montgomery
Securities, Inc.).
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<PAGE> 20
The Representatives, on behalf of the several Underwriters, may, in their sole
discretion, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES.
The Company agrees to pay whether or not the transactions contemplated
hereunder are consummated, all costs, fees and expenses incurred in connection
with the performance of its obligations hereunder and in connection with the
transactions contemplated hereby, including without limitation, (i) all expenses
incident to the issuance and delivery of the Common Shares (including all
printing and engraving costs), (ii) all fees and expenses of the registrar and
transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public accountants and other advisors, (v) all costs and expenses
incurred in connection with the preparation, printing, filing, shipping and
distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the Blue Sky laws, and, if
requested by the Representatives, preparing and printing a "Blue Sky Survey" or
memorandum, and any supplements thereto, and advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with listing the Common Stock on the Nasdaq National Market, and (ix)
all other fees, costs and expenses referred to in Item 14 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to the matters set forth under subparagraph (vi) above).
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the
Common Shares as provided herein on the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and the First Closing Date and,
with respect to the Optional Common Shares, as of the Second Closing Date, to
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the timely performance by the Company of its covenants and other obligations
hereunder, and to each of the following additional conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective no later than the date hereof.
(b) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Price Waterhouse LLP, independent
public accountants for the Company, a letter dated the date hereof, in
form and substance satisfactory to the Representatives and Price
Waterhouse LLP, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the audited and unaudited financial statements and certain
financial information contained in the Registration Statement and the
Prospectus (and the Representatives shall have received an additional
[___] conformed copies of such accountants' letter for each of the several
Underwriters).
(c) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under
the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company
shall have filed a post-effective amendment to the Registration
Statement containing the information required by such Rule 430A, and
such post-effective amendment shall have become effective; or, if
the Company elected to rely upon Rule 434 under the Securities Act
and obtained NationsBanc Montgomery Securities, Inc.'s consent
thereto, the Company shall have filed a Term Sheet with the
Commission in the manner and time period required by such Rule
424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment to the Registration Statement, shall be
in effect, and no proceedings for such purpose shall have been
instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
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(d) No Material Adverse Change. For the period from and after
effectiveness of this Agreement and prior to the First Closing Date and,
with respect to the Optional Common Shares, the Second Closing Date there
shall not have occurred any Material Adverse Change.
(e) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date, the Representatives shall have received
the opinion of Wilson, Sonsini, Goodrich & Rosati, counsel for the
Company, dated as of such Closing Date, in form and substance satisfactory
to counsel for the Underwriters, with respect to the matters set forth in
Exhibit A hereto (and the Representatives shall have received an
additional [____] conformed copies of such counsel's legal opinion for
each of the several Underwriters).
(f) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date, the Representatives shall have
received the opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation, counsel for the Underwriters, dated as of such
Closing Date, with respect to the matters set forth in paragraphs(i),
(vii) through (xi), inclusive, and the next-to-last paragraph of Exhibit A
hereto (and the Representatives shall have received an additional [___]
conformed copies of such counsel's legal opinion for each of the several
Underwriters).
(g) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date, the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsections (c)(ii) and (d) of this Section 5, and
further to the effect that:
(i) the representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made at and as of such
Closing Date; and
(ii) the Company has complied with all the agreements
hereunder and satisfied all the conditions hereunder on its part to
be performed or satisfied at or prior to such Closing Date.
(h) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date, the Representatives shall have received from
Price Waterhouse, LLP, independent public accountants for the Company, a
letter dated such date, in form and substance satisfactory to the
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<PAGE> 23
Representatives and Price Waterhouse LLP, to the effect that they reaffirm
the statements made in the letter furnished by them pursuant to subsection
(b) of this Section 5, except that the specified date referred to therein
for the carrying out of procedures shall be no more than three business
days prior to the First Closing Date or Second Closing Date, as the case
may be (and the Representative shall have received an additional [___]
conformed copies of such accountants' letter for each of the several
Underwriters).
(i) Lock-Up Agreement from Stockholders of the Company. On the date
hereof, the Company shall have furnished to the Representatives an
agreement substantially in the form of Exhibit C hereto from all
stockholders of the Company, and such agreement shall be in full force
and effect on each of the First Closing Date and the Second Closing Date.
(j) Opinions of Foreign Counsel for the Company. On or before each
of the First Closing Date and the Second Closing Date, as the case may be,
the Representatives shall have received opinions from counsel in Hong
Kong, the People's Republic of China, the Cayman Islands and Thailand
regarding certain matters relating to the Company's subsidiaries in such
jurisdictions, in form reasonably acceptable to counsel for the
Underwriters.
(k) Additional Documents. On or before each of the First Closing
Date and the Second Closing Date, as the case may be, the Representatives
and counsel for the Underwriters shall have received such information,
documents and opinions as they may reasonably require for the purposes of
enabling them to pass upon the issuance and sale of the Common Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by the Representatives pursuant to any of Section 5, Section 7,
Section 11(iv) or Section 11(v), or if for any reason the sale to the
Underwriters of the Common Shares at the First Closing is not consummated
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Representatives and the other Underwriters (or such
Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase
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<PAGE> 24
and the sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges relating to the offering contemplated by the Prospectus.
Any such termination shall be without liability of any party to any other party
except that the provisions of this Section 6, Section 4, Section 8 and Section 9
shall at all times be effective and shall survive such termination.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
The parties hereto agree that this Agreement shall not become effective
until the later of (i) the execution of this Agreement by the parties hereto and
(ii) notification by the Commission to the Company and the Representatives of
the effectiveness of the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any party
by notice to each of the other parties hereto, and any such termination shall be
without liability on the part of (a) the Company to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter
to the Company, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of the Company), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a
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<PAGE> 25
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or
(iii) in whole or in part upon any failure of the Company to perform its
obligations hereunder or under law, and to reimburse each Underwriter and
each such controlling person for any and all expenses (including the fees
and disbursements of counsel chosen by NationsBanc Montgomery Securities,
Inc.) as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement shall
not apply to any loss, claim, damage, liability or expense to the extent,
but only to the extent, arising out of or based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto); and provided, further, that with respect to any
preliminary prospectus, the foregoing indemnity agreement shall not inure
to the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Common Shares, or person
controlling such Underwriter, if a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Common Shares
to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage,
liability or expense. The indemnity agreement set forth in this Section
8(a) shall be in addition to any liabilities that the Company may
otherwise have.
(b) Indemnification of the Company, Its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls
the Company within the meaning of the Securities Act or the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred, to
which the Company, or any such director, officer or controlling person may
become subject under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of such Underwriter), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged
untrue statement of a material fact contained in the Registration
Statement, any preliminary
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<PAGE> 26
prospectus or the Prospectus (or any amendment or supplement thereto), or
arises out of or is based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in the Registration Statement,
any preliminary prospectus, the Prospectus (or any amendment or supplement
thereto), in reliance upon and in conformity with written information
furnished to the Company by the Representatives expressly for use therein;
and to reimburse the Company, or any such director, officer or controlling
person for any legal and other expense reasonably incurred by the Company,
or any such director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action. The Company hereby
acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the last paragraph
on the inside front cover page of the Prospectus concerning stabilization
by the Underwriters and (B) in the table in the first paragraph and as the
second paragraph under the caption "Underwriting" in the Prospectus; and
the Underwriters confirm that such statements are correct. The indemnity
agreement set forth in this Section 8(b) shall be in addition to any
liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that a conflict may
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<PAGE> 27
arise between the positions of the indemnifying party and the indemnified
party in conducting the defense of any such action or that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties.
Upon receipt of notice from the indemnifying party to such indemnified
party of such indemnifying party's election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with
the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more
than one separate counsel (together with local counsel), approved by the
indemnifying party (NationsBanc Montgomery Securities, Inc. in the case of
Section 8(b) and Section 9), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by Section 8(c) hereof, the
indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement
is entered into more than 30 days after receipt by such indemnifying party
of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment in, any pending or
threatened action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party,
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<PAGE> 28
unless such settlement or compromise, or consent to the entry of judgment
included an unconditional release of such indemnified party from all
liability on claims that are the subject action, suit or matter of such
proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 hereto is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or the alleged inaccurate representation and/or warranty relates
to information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in subparagraph (c) of Section 8 herein,
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The provisions
set forth in
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<PAGE> 29
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9. The aggregate amount of
losses, liabilities, claims, damages and expenses incurred by an indemnified
party and referred to above in this Section 9 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A hereto. For purposes of this Section 9, each officer and employee of
an Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement and each person, if any,
who controls the Company within the meaning of the Securities Act and the
Exchange Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the several Underwriters shall fail or refuse to purchase
Common Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the
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<PAGE> 30
other Underwriters shall be obligated, severally, in the proportions that the
number of Firm Common Shares set forth opposite their respective names on
Schedule A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representatives with the consent of the
non-defaulting Underwriters, to purchase the Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any Underwriter or Underwriters shall fail or refuse to purchase Common
Shares and the aggregate number of Common Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Common Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares are not made within 48 hours
after such default this Agreement shall terminate without liability of any party
to any other party except that the provisions of Section 4, Section 6, Section 8
and Section 9 shall at all times be effective and shall survive such
termination. In any such case either the Representatives or the Company shall
have the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and in the Prospectus or
in any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT.
For the period from and after the effectiveness of this Agreement and
prior to the First Closing Date, this Agreement shall be subject to termination
by the Representatives by notice given to the Company if at any time during such
period (i) trading or quotation in any of the Company's securities shall have
been suspended or limited by the Commission or by the Nasdaq National Market, or
trading in securities generally on either of the Nasdaq National Market or the
New York Stock Exchange shall have been suspended or limited, or minimum or
maximum prices shall have been generally established on any of such markets or
exchanges by the Commission or the NASD; (ii) a general banking moratorium shall
have been declared by any of federal, New York, Delaware or California
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any
substantial change in the United States or international financial markets, or
any substantial change or development involving a prospective substantial change
in United States or
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<PAGE> 31
international political, financial or economic conditions, as in the judgment of
the Representatives, is material and adverse and makes it impracticable to
market the Common Shares in the manner and on the terms described in the
Prospectus or to enforce contracts for the sale of securities; (iv) there shall
have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured. Any termination pursuant to this Section 11 shall be without
liability on the part of (a) the Company to any Underwriter, except that the
Company shall be obligated to reimburse the expenses of the Representatives and
the Underwriters to the extent provided in Sections 4 and 6 hereof, (b) of any
Underwriter to the Company or (c) of any party hereto to any other party except
that the provisions of Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers and of the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES.
All communications hereunder shall be in writing and shall be mailed,
delivered or telecopied and confirmed to the parties hereto as follows:
If to the Representative:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5512
Attention: David A. DeRuff
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<PAGE> 32
with a copy to:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If sent to the Company:
International Manufacturing Services, Inc.
2071 Concourse Drive
San Jose, CA 95131
Facsimile: (408) 922-2727
Attention: Nathan Kawaye
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 10
hereof, and to the benefit of the officers and directors and controlling persons
referred to in Section 8 and Section 9, and in each case their respective
successors, personal representatives and assigns, and no other person will have
any right or obligation hereunder. No such assignment shall relieve any party of
its obligations hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or provision
of this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
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<PAGE> 33
SECTION 16. GOVERNING LAW PROVISIONS.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York applicable to agreements made and to be
performed in such State.
SECTION 17. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement may not be amended or
modified unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party for
whom the condition is meant to benefit. The Table of Contents and the section
headings herein are for the convenience of the parties only and shall not affect
the construction or interpretation of this Agreement. Unless otherwise
specified, times of day shall mean New York City time.
Each of the parties hereto hereby acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and are fully informed regarding said provisions. Each of the parties
hereto hereby further acknowledges that the provisions of Sections 8 and 9
hereto fairly allocate the risks in light of the ability of the parties to
investigate the Company, its affairs and its business in order to assure that
adequate disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
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<PAGE> 34
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
INTERNATIONAL MANUFACTURING
SERVICES, INC.
By:
--------------------------------------
Robert G. Behlman
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN INCORPORATED
UBS SECURITIES LLC
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES, INC.
By:
----------------------------------
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<PAGE> 35
SCHEDULE A
<TABLE>
<CAPTION>
Underwriters Number of Number of
Firm Common Optional Common
Shares Shares
to be Purchased to be Purchased
<S> <C> <C>
NationsBanc Montgomery Securities, Inc. ... [___] [___]
BT Alex. Brown Incorporated................ [___] [___]
UBS Securities LLC......................... [___] [___]
[___] ..................................... [___] [___]
[___] ..................................... [___] [___]
</TABLE>
<PAGE> 36
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of California and in each
other jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except for such
jurisdictions (other than the State of California) where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change.
(iv) Each of IMS Industries Inc. and IMS Holdco, Inc. (each, a "U.S.
Subsidiary") has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, and
has corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus.
(v) All of the issued and outstanding capital stock of each U.S.
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and is owned by the Company, directly or through subsidiaries,
free and clear of any security interest, mortgage, pledge, lien, encumbrance or,
to the best knowledge of such counsel, any pending or threatened claim.
(vi) The authorized capital stock of the Company (including the
Common Stock) conforms as to legal matters to the description thereof set forth
in the Prospectus. All of the shares of Common Stock have been duly authorized
and validly issued, are fully paid and non-assessable and, to such counsel's
knowledge, were not issued in violation of or subject to any preemptive rights
or other rights to subscribe for or purchase any securities under the General
Corporation Law of the State of Delaware or the Company's certificate of
incorporation. The form of certificate used to evidence the Common Stock, as
included in Exhibit 4.2 to the Registration Statement, is in due and proper form
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<PAGE> 37
and complies with all applicable requirements of the charter and by-laws of the
Company and the General Corporation Law of the State of Delaware.
(vii) No stockholder of the Company or any other person has any
preemptive right of first refusal or other similar right to subscribe for or
purchase securities of the Company (i) arising by operation of the certificate
of incorporation or by-laws of the Company or the General Corporation Law of the
State of Delaware or (ii) to the knowledge of such counsel, arising from any
Existing Instrument filed as an Exhibit to the Registration Statement or
otherwise known to such counsel.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and non-assessable.
(x) Based solely upon the oral advice of the staff of the
Securities and Exchange Commission, each of the Registration Statement and the
Rule 462(b) Registration Statement, if any, has been declared effective by the
Commission under the Securities Act and no stop order suspending the
effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act and no
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each amendment or supplement to the
Registration Statement and the Prospectus, as of their respective effective or
issue dates (other than the financial statements and supporting schedules
included therein or in exhibits to or excluded from the Registration Statement,
as to which no opinion need be rendered) complied as to form in all material
respects with the applicable requirements of the Securities Act.
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(xii) The Common Shares have been approved for listing on the Nasdaq
National Market.
(xiii) The statements (i) in the Prospectus under the captions "Risk
Factors-Shares Eligible for Future Sale; Registration Rights,"
"Management-Compensation Plans," "Description of Capital Stock" and "Shares
Eligible for Future Sale" and (ii) in Item 14 of the Registration Statement
insofar as such statements constitute matters of law, summaries of legal
matters, the Company's charter or by-law provisions, documents or legal
proceedings, has been reviewed by such counsel and accurately summarize, in all
material respects, the matters referred to therein.
(xiv) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or overtly threatened which
are required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xv) To the knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto; and the descriptions thereof
and references thereto are accurate in all material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except such as have been obtained by the Company and are
in full force and effect under the Securities Act, applicable state securities
or blue sky laws and the NASD.
(xvii) The execution, delivery and performance of the Underwriting
Agreement by the Company (other than performance by the Company of its
obligations under the indemnification section of the Underwriting Agreement, as
to which no opinion need be rendered) (i) have been duly authorized by all
necessary corporate action on the part of the Company, (ii) will not result in
any violation of the provisions of the charter or by-laws of the Company or any
U.S. Subsidiary, (iii) will not constitute a breach of, or Default or a Debt
Repayment Triggering Event under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, any material Existing Instrument filed as an
Exhibit to the Registration Statement or otherwise known to such counsel; and
(iv) to the knowledge of such counsel, will not result in any violation of any
law, administrative regulation or administrative or court decree applicable to
the
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Company or any subsidiary, which could reasonably be expected to result in a
Material Adverse Change.
(xviii) The Company is not an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(xix) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale," to the knowledge of such counsel, there are
no persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by the Underwriting Agreement, except for such rights
as have been duly waived.
(xx) To the knowledge of such counsel, neither the Company nor any
U.S. Subsidiary is in violation of its certificate of incorporation or by-laws
except in each such case for such violations as would not, individually or in
the aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and with
representatives of the Underwriters at which the contents of the Registration
Statement and the Prospectus, and any supplements or amendments thereto, and
related matters were discussed and, although such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus (other than as specified above), and any supplements or amendments
thereto, on the basis of the foregoing, nothing has come to their attention
which would lead them to believe that either the Registration Statement or any
amendments thereto, at the time the Registration Statement or such amendments
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or at
the First Closing Date or the Second Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief as to the financial statements or
schedules or other financial or statistical data included in the Registration
Statement or the Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the General Corporation Law of the
State of
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California or the federal law of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion (which shall be dated the
First Closing Date or the Second Closing Date, as the case may be, shall be
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters, and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
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EXHIBIT C
_________, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN INCORPORATED
UBS SECURITIES LLC
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
Re: Agreement Not to Sell Stock
Ladies and Gentlemen:
This letter is being delivered in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement") among International
Manufacturing Services, Inc., a Delaware corporation (the "Company"), and
NationsBanc Montgomery Securities, Inc., BT Alex. Brown Incorporated and UBS
Securities LLC, as the Representatives (the "Representatives") of the several
underwriters named or to be named in Schedule A thereto (the "Underwriters"),
relating to an underwritten public offering of shares (the "Common Shares") of
Class A Common Stock, par value $0.001 per share (the "Common Stock"), of the
Company.
In order to induce the Representatives and the Underwriters to enter
into the Underwriting Agreement, and in recognition of the benefits of the
contemplated Common Stock offering to the Company, the undersigned hereby
represents and warrants to, and covenants and agrees with, each Underwriter and
the Company, and shall be deemed to represent and warrant to each Underwriter on
the date on which the Underwriting Agreement is executed and on each date on
which any Common Shares are sold under the Underwriting Agreement, as follows:
(a) The undersigned will not, for a period of 180 days following the
date of the prospectus first used to confirm sales of the Common Shares, (i)
directly or indirectly, sell, offer or contract to sell, grant any option for
the sale of, or otherwise dispose of or transfer, or announce any offering of,
any shares of Common Stock or any debt or equity securities convertible into or
exchangeable or exercisable for Common Stock, whether owned on the date of
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<PAGE> 42
this letter or hereafter acquired, or (ii) cause to be filed any registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to any of the foregoing, other than (w) as a sale pursuant to the
Underwriting Agreement, (x) as a bona fide gift or gifts, provided the donee or
donees thereof agree in writing to be bound by the terms of this letter, (y) as
a distribution to limited partners or shareholders of the undersigned, provided
that the distributees thereof agree in writing to be bound by the terms of this
letter, or (z) with the prior written consent of NationsBanc Montgomery
Securities, Inc.; and
(b) The undersigned waives any and all registration rights with
respect to registration under the Securities Act of the Common Stock held by the
undersigned, including any and all rights to receive notice with respect to the
offering referred to above, as, and only as, such registration rights apply to
the offering of the Common Shares referred to above.
If for any reason the Underwriting Agreement shall not have been
entered into by December 15, 1997, the agreement set forth above shall be
terminated, and shall be of no further force and effect.
Yours very truly,
[Stockholder]
By
--------------------------------------
Authorized Signatory
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<PAGE> 1
EXHIBIT 10.4
INTERNATIONAL MANUFACTURING SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean International Manufacturing Services,
Inc., a Delaware corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, including payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which
has been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each
Offering Period.
(i) "Exercise Date" shall mean the last day of each Offering
Period.
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
<PAGE> 2
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(4) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement on Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Period" shall mean a period of approximately six
(6) months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after June 1 and terminating on the
last Trading Day in the period ending the following November 30, or commencing
on the first Trading Day on or after December 1 and terminating on the last
Trading Day in the period ending the following May 31; provided, however, that
the first Offering Period under the Plan shall commence with the first Trading
Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and ending on the last
Trading Day on or before May 31. The duration of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1997 Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
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<PAGE> 3
(p) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a
given Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding options
to purchase such stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any Subsidiary, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the fair market value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after June 1st and December 1st of each year, or on such other date as the
Board shall determine, and continuing thereafter until terminated in accordance
with Section 20 hereof; provided, however, that the first Offering Period under
the Plan shall commence with the first Trading Day on or after the date on which
the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before May 31,
1998. The Board shall have the power to change the duration of Offering Periods
(including the commencement dates thereof) with respect to future offerings
without stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Offering Period to be affected
thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
prior to the applicable Enrollment Date, in accordance with the applicable due
dates established by the Company from time to time.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
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<PAGE> 4
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period; provided, however, that for the first Offering Period under the Plan a
participant may elect to have payroll deductions at a rate not exceeding fifteen
percent (15%) of the Compensation such participant receives on each pay day
during the Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the rate
of his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. A participant may change his or her payroll deduction
rate only one time per Offering Period. The change in rate shall be effective
with the first full payroll period following five (5) business days after the
Company's receipt of the new subscription agreement unless the Company elects to
process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Offering Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise
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<PAGE> 5
Date by the applicable Purchase Price; provided that in no event shall an
Employee be permitted to purchase during each Offering Period more than 20,000
shares (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan
as provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of the shares purchased upon exercise of his
or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the
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<PAGE> 6
person or persons entitled thereto under Section 15 hereof, and such
participant's option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment (but not a participant receiving severance pay) shall
be treated as continuing to be an Employee for the participant's customary
number of hours per week of employment during the period in which the
participant is subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 250,000 shares
less any shares issued under the Company's 1997 Non-U.S. Employee Stock Purchase
Plan, subject to adjustment upon changes in capitalization of the Company as
provided in Section 19 hereof. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such parti cipant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
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<PAGE> 7
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the Reserves, the maximum number of shares
each participant may purchase per Offering Period (pursuant to Section 7), as
well as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration". Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class,
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shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, the
Offering Period then in progress shall be shortened by setting a new Exercise
Date (the "New Exercise Date"). The New Exercise Date shall be before the date
of the Company's proposed sale or merger. The Board shall notify each
participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any other applicable law, regulation or
stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a
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<PAGE> 9
participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Compensation, and establish such other limitations or procedures as the Board
(or its committee) determines in its sole discretion advisable which are
consistent with the Plan.
21. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being pur chased only for investment and without
any present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
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<PAGE> 10
EXHIBIT A
INTERNATIONAL MANUFACTURING SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the International Manufacturing Services, Inc. 1997 Employee Stock
Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to 15% for the first
Offering Period) during the Offering Period in accordance with the
Employee Stock Purchase Plan. (Please note that no fractional
percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
_____________.
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at
the time of such disposition in an amount equal to the excess of the
fair market value of the shares at the time such shares were purchased
by me over the price which I paid for the shares. I hereby agree to
notify the Company in writing within 30 days after the date of any
disposition of shares and I will make adequate provision for Federal,
state or other tax
<PAGE> 11
withholding obligations, if any, which arise upon the disposition of the
Common Stock. The Company may, but will not be obligated to, withhold
from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable to
sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the expiration of the 2-year holding period, I
understand that I will be treated for federal income tax purposes as
having received income only at the time of such disposition, and that
such income will be taxed as ordinary income only to the extent of an
amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which
I paid for the shares, or (2) 15% of the fair market value of the shares
on the first day of the Offering Period. The remainder of the gain, if
any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) __________________________________________________
(First) (Middle) (Last)
_________________________ __________________________________________________
Relationship
__________________________________________________
(Address)
Employee's Social
Security Number: __________________________________________________
Employee's Address: _________________________________________________
__________________________________________________
__________________________________________________
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<PAGE> 12
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: _______________ _____________________________________________________
Signature of Employee
_____________________________________________________
Spouse's Signature (If beneficiary other than spouse)
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<PAGE> 13
EXHIBIT B
INTERNATIONAL MANUFACTURING SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the International
Manufacturing Services, Inc. 1997 Employee Stock Purchase Plan which began on
___________ 19____ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
_____________________________________
_____________________________________
_____________________________________
Signature:
_____________________________________
Date: _______________________________
<PAGE> 1
EXHIBIT 10.5
INTERNATIONAL MANUFACTURING SERVICES, INC.
1997 NON-U.S. EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide non-U.S. employees of
the Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions.
2. Definitions.
(a) "Applicable Law" shall mean legal requirements relating to the
administration of employee stock purchase plans under the applicable laws of any
country or jurisdiction to which this Plan is extended.
(b) "Board" shall mean the Board of Directors of the Company or any
of its committees that may be administering the Plan.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean International Manufacturing Services, Inc.,
a Delaware corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
and commissions, including payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship may, pursuant to
regulations established by the Board and as permitted or required by Applicable
Law, be treated as continuing intact while the individual is on sick leave or
other leave of absence approved by the Company.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq
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<PAGE> 2
SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system on the date of such
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement on Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Period" shall mean a period of approximately six (6)
months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after June 1 and terminating on the
last Trading Day in the period ending the following November 30, or commencing
on the first Trading Day on or after December 1 and terminating on the last
Trading Day in the period ending the following May 31; provided, however, that
the first Offering Period under the Plan shall commence with the first Trading
Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and ending on the last
Trading Day on or before May 31. The duration of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1997 Non-U.S. Employee Stock Purchase
Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
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<PAGE> 3
(p) "Trading Day" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who is not an Employee for U.S. tax purposes and
who shall be employed by the Company on a given Enrollment Date shall be
eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive Offering
Periods with a new Offering Period commencing on the first Trading Day on or
after June 1st and December 1st of each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 20 hereof; provided, however, that the first Offering Period under the
Plan shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the last Trading Day on or before May 31, 1998. The
Board shall have the power to change the duration of Offering Periods (including
the commencement dates thereof) with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a Participation Agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date in accordance with the applicable due dates
established by the Company from time to time.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
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<PAGE> 4
(c) Notwithstanding anything to the contrary contained herein, an
Employee's enrollment in the Plan shall also constitute enrollment in the
Company's 1997 Employee Stock Purchase Plan (the "U.S. ESPP") as of the
Enrollment Date of the current Offering Period under the U.S. ESPP. Such
Employee's payroll deductions with respect to the U.S. ESPP prior to the
effective date of a transfer of the Employee to the Company or a Designated
Subsidiary that results in the Employee becoming an Employee for U.S. tax
purposes shall be zero percent (0%), and such Employee's payroll deductions with
respect to the U.S. ESPP following the effective date of the Employee's transfer
may be at the same rate as the Employee's rate of payroll deductions with
respect to this Plan prior to such transfer, or may be adjusted by the Employee
pursuant to Section 6 of the U.S. ESPP. Such Employee's payroll deductions with
respect to this Plan shall be zero percent (0%) as of the effective date of such
transfer.
6. Payroll Deductions.
(a) At the time a participant files his or her Participation
Agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period; provided, however, that for the first Offering Period under the Plan a
participant may elect to have payroll deductions made at a rate not exceeding
fifteen percent (15%) of the Compensation such participant receives on each
payday during the Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new Participation Agreement authorizing a change in payroll
deduction rate. A participant may only change his or her payroll deduction rate
one time per Offering Period. The change in rate shall be effective with the
first full payroll period following five (5) business days after the Company's
receipt of the new Participation Agreement unless the Company elects to process
a given change in participation more quickly. A participant's Participation
Agreement shall remain in effect for successive Offering Periods unless
terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during an
Offering Period. Payroll deductions shall recommence at the rate provided in
such participant's Participation Agreement at the beginning of the first
Offering Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
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<PAGE> 5
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than
20,000 shares (subject to any adjustment pursuant to Section 19), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, notice of exercise of his or her option shall be
deemed to have been given by the participant and his or her option for the
purchase of shares shall be exercised automatically on the Exercise Date, and
the maximum number of full shares subject to option shall be purchased for such
participant at the applicable Purchase Price with the accumulated payroll
deductions in his or her account. No fractional shares shall be purchased; any
payroll deductions accumulated in a participant's account which are not
sufficient to purchase a full share shall be retained in the participant's
account for the subsequent Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on which
a purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of the shares purchased upon exercise of his or her
option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant
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<PAGE> 6
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new Participation Agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment (but not a participant who is receiving severance pay)
shall be treated as continuing to be an Employee for the participant's customary
number of hours per week of employment during the period in which the
participant is subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be the number of shares
reserved and still available under the U.S. ESPP, subject to adjustment upon
changes in capitalization of the Company as provided in Section 19 hereof. If,
on a given Exercise Date, the number of shares with respect to which options are
to be exercised exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it shall
determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and
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<PAGE> 7
exclusive discretionary authority to construe, interpret and apply the terms of
the Plan, to determine eligibility and to adjudicate all disputed claims filed
under the Plan and to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations necessary to conform the
Plan to Applicable Law. Every finding, decision and determination made by the
Board or its committee shall, to the full extent permitted by law, be final and
binding upon all parties and to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations necessary to
conform the Plan to Applicable Law.
15. Designation of Beneficiary.
(a) Subject to Applicable Law, a participant may file a written
designation of a beneficiary who is to receive any shares and cash, if any, from
the participant's account under the Plan in the event of such participant's
death subsequent to an Exercise Date on which the option is exercised but prior
to delivery to such participant of such shares and cash. In addition, a
participant may file a written designation of a beneficiary who is to receive
any cash from the participant's account under the Plan in the event of such
participant's death prior to exercise of the option. If a participant is married
and the designated beneficiary is not the spouse, spousal consent shall be
required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
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<PAGE> 8
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
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<PAGE> 9
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Applicable Law, the Company shall obtain shareholder approval in
such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being pur chased only for investment and without
any present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
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<PAGE> 10
EXHIBIT A
INTERNATIONAL MANUFACTURING SERVICES, INC.
1997 NON-U.S. EMPLOYEE STOCK PURCHASE PLAN
PARTICIPATION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in the
International Manufacturing Services, Inc. 1997 Non-U.S. Employee Stock
Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to
purchase shares of the Company's Common Stock in accordance with this
Participation Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 15% for the first
Offering Period only) during the Offering Period in accordance with the
Employee Stock Purchase Plan. (Please note that no fractional percentages
are permitted.)
3. I understand that said payroll deductions shall be accumulated in order to
exercise the option(s) granted to me pursuant to the Plan and to purchase
shares of Common Stock at the applicable Purchase Price determined in
accordance with the Employee Stock Purchase Plan. I understand that if I
do not withdraw from an Offering Period, any accumulated payroll
deductions will be used to automatically exercise my option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Participation Agreement is
subject to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): .
6. I understand that:
(a) neither the Plan nor this Participation Agreement shall form any
part of any contract of employment between me and the Company or any
Designated Subsidiary, and it shall not confer on me any legal or
equitable rights (other than those constituting the options granted
under the Plan themselves) against the Company or any Designated
-1-
<PAGE> 11
Subsidiary, directly or indirectly, or give rise to any cause of
action in law or in equity against the Company or any subsidiary;
(b) my benefits under the Plan shall not form any part of my wages, pay
or remuneration or count as wages, pay or remuneration for pension
fund or other purposes;
(c) in no circumstances shall I, upon ceasing to hold my office or
employment by virtue of which I am eligible to participate in the
Plan, be entitled to any compensation for any loss of any right or
benefit or prospective right or benefit under the Plan, which I
might otherwise have enjoyed, whether such compensation is claimed
by way of damages for wrongful dismissal or other breach of contract
or by way of compensation for loss of office or otherwise.
(d) that the Company expressly retains the right to terminate the Plan
at any time and that I will have no right to continued option grants
under the Plan in such event.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Participation Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
-------------------------------------------------------
(First) (Middle) (Last)
- ------------------------- --------------------------------------------------
Relationship
--------------------------------------------------
(Address)
Employee's Social
Security Number:
--------------------------------------------------
Employee's Address:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
-2-
<PAGE> 12
I UNDERSTAND THAT THIS PARTICIPATION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
------------------- --------------------------------------------------
Signature of Employee
--------------------------------------------------
Spouse's Signature
(If beneficiary other than spouse)
-3-
<PAGE> 13
EXHIBIT B
INTERNATIONAL MANUFACTURING SERVICES, INC.
1997 NON-U.S. EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the International
Manufacturing Services, Inc. 1997 Non-U.S. Employee Stock Purchase Plan which
began on ___________ 19____ (the "Enrollment Date") hereby notifies the Company
that he or she hereby withdraws from the Offering Period. He or she hereby
directs the Company to pay to the undersigned as promptly as practicable all the
payroll deductions credited to his or her account with respect to such Offering
Period. The undersigned understands and agrees that his or her option for such
Offering Period will be automatically terminated. The undersigned understands
further that no further payroll deductions will be made for the purchase of
shares in the current Offering Period and the undersigned shall be eligible to
participate in succeeding Offering Periods only by delivering to the Company a
new Participation Agreement.
Name and Address of Participant:
------------------------------------
------------------------------------
------------------------------------
Signature:
------------------------------------
Date:
------------------------------
<PAGE> 1
Note: This Exhibit 10.14 omits certain confidential information. Such omitted
information, indicated with an asterisk (*), has been filed separately with the
Securities and Exchange Commission.
EXHIBIT 10.14
MANUFACTURING SERVICES AGREEMENT
This Manufacturing Services Agreement ("Agreement") is entered into by
and between Maxtor Corporation, a Delaware corporation, with its principal place
of business at 211 River Oaks Parkway, San Jose, California 95134, U.S.A.
("Maxtor") and International Manufacturing Services, Inc., a Delaware
corporation, with its principal place of business at 211 River Oaks Parkway, San
Jose, California 95134 U.S.A. ("IMS"). This Agreement is effective as of May 16,
1996 ("Effective Date").
RECITALS
WHEREAS, Maxtor wishes to procure certain products and manufacturing
services from IMS;
WHEREAS, IMS is willing to provide such products and services on the
terms and conditions set forth below;
WHEREAS, concurrent with the execution of this Agreement, Maxtor and
IMS will close certain related transactions set forth in that certain
Recapitalization Agreement dated as of May 16, 1996 and that certain Redemption
Agreement and Stockholders Agreement of even date therewith (the "Related
Agreements");
NOW THEREFORE, in consideration of the mutual promises and covenants
set forth herein and in the Related Agreements, the parties agree as follows:
AGREEMENT
1. Product Appendix. IMS will sell and Maxtor will purchase the
products set forth in Exhibit A, as amended from time to time by mutual
agreement ("Products"). For each Product, Maxtor will specify, from time to
time, (i) a bill of materials listing the components of the Product; (ii) which
components are to be procured by IMS and which are to be consigned to IMS by
Maxtor; and (iii) approved vendors from whom IMS must source particular
components. The parties shall agree in writing on any Product-specific tooling
(manufacturing or test) and any other equipment which is required to be acquired
by IMS solely for use in manufacturing or testing such Product, along with the
financial and ownership arrangements for such tooling and equipment. IMS shall
not change any vendor of a Product component or any manufacturing process for
any Product without Maxtor's prior written approval.
2. Orders and Forecasts. Every fiscal month, Maxtor shall issue to
IMS binding purchase orders ("Orders") for Products, covering a thirteen (13)
week period from such issue date and a nonbinding forecast for an additional
subsequent thirteen (13) week period. No Order shall be binding upon IMS unless
accepted by IMS in writing, subject to Section 7.3 ("Sales Commitment"),
provided
<PAGE> 2
that if such written acceptance is not received by Maxtor within five (5)
working days from date of Order issuance, said Order shall be deemed accepted.
3. Purchase Price. Purchase prices under this Agreement are set
forth in Exhibit A as amended from time to time by both parties in writing.
Purchase prices will be FOB IMS' applicable manufacturing facility and do not
include any foreign, federal, state, local or other taxes or duties or charges
of any kind that may be applicable. When IMS has the legal obligation to collect
such taxes, the appropriate amount (excluding taxes based on IMS' net Income)
will be added to Maxtor's invoice and paid by Maxtor unless Maxtor provides IMS
with a valid tax exemption certificate authorized by the appropriate taxing
authority. IMS agrees to keep its prices competitive and shall use reasonable
commercial efforts to achieve ongoing cost reductions and to lower prices
proportionately. The parties shall meet at least once a quarter, and more often
if appropriate in the reasonable judgement of either party, to negotiate price
changes. At such meetings, IMS will disclose to Maxtor all cost elements related
to the Products.
4. Payment Terms. Payment terms shall be net thirty (30) days from
receipt of invoice by Maxtor. All invoices shall be paid in U.S. dollars. If IMS
terminates this Agreement for cause pursuant to Section 14 ("Term and
Termination"), all outstanding invoices will automatically be accelerated and
will become immediately due and payable.
5. Shipping Terms, etc.
5.1 Shipping Terms. All Products shall be packed for shipment in
accordance with reasonable industrial practice and marked for shipment to
Maxtor's designated shipping destination and delivered to Maxtor's carrier agent
FOB IMS' applicable manufacturing facility. IMS will obtain Maxtor's written
approval prior to any change from IMS' present packaging. IMS will mark all
containers with necessary lifting, handling and shipping information and with
Order information, date of shipment and the names of the consignee and
consignor. An itemized packing list will accompany each shipment which shall
include (i) Order information, and (ii) the description, part number, revision
level and quantity of the Products so shipped. RISK OF LOSS SHALL PASS TO MAXTOR
AT IMS' SHIPPING LOCATION UPON DELIVERY TO MAXTOR'S CARRIER AGENT. Maxtor shall
select the carrier. All freight, insurance and other shipping expenses,
including without limitation any special packaging expenses, shall be paid by
Maxtor. Delivery shall not occur until IMS has obtained any export license or
other official authorization necessary for export of the Products. Export
licensing shall be the sole responsibility and at the sole expense of IMS.
5.2 Miscellaneous. Maxtor's Order number must appear on all
invoices, packing lists and bills of lading and shall appear on each package,
container or envelope on each shipment. Either an invoice or delivery order may
be used when making deliveries, with each set containing three (3) copies. A
complete packing list specifying Maxtor's applicable Order number, quantity of
goods shipped and part number shall be enclosed with each shipment. Bills of
lading shall be mailed in triplicate to the destination address shown on the
face of each Order, or to the consignee of the Order, on the day shipment is
made.
-2-
<PAGE> 3
6. Order Cancellation and Rescheduling.
6.1 Rescheduling. Maxtor may gives notice to IMS, either by
facsimile transmission, in other written form, or orally with follow-up written
confirmation, requesting rescheduling of Products for which purchase orders have
been accepted by IMS. IMS shall reply within two (2) working days. The following
rules shall apply based on the number of calendar weeks notice IMS is given
prior to the scheduled shipment date:
Time Prior to Delivery Limits on Rescheduling
-------------------------------------------------------------------
up to 1 week [*]
1+ to 4 weeks [*]
4+ to 8 weeks [*]
8+ weeks [*]
Maxtor's request for new ship date(s) more than ninety (90) days beyond the
original ship date(s) shown on the affected purchase order shall be deemed a
cancellation of the original purchase order governed by Section 7.2. If Maxtor's
reschedule request represents an acceleration or increase, IMS will use its best
efforts to meet the requested delivery dates.
6.2 Cancellation. Any purchases of material by IMS shall be
solely for the account of IMS, except for raw materials detailed in the bills of
materials for the corresponding Products. IMS shall not purchase any materials
to be consigned by Maxtor. Maxtor shall not be responsible for excess and
obsolete inventory which is not covered by a Maxtor Purchase Order or other
written form of authorization from Maxtor. Maxtor shall be responsible for
exposures caused by EOL, rescheduling and engineering changes where IMS has
purchased property under written authorization from Maxtor according to
lead-time and within the cancellation window on the attached Exhibit C. Beyond
that, IMS shall use reasonable commercial efforts to mitigate the costs incurred
by IMS on account of any such cancellation, and any and all resulting liability
of Maxtor. Once formal notification of cancellation has been received, IMS shall
promptly cease all efforts in fulfillment of canceled Orders and shall promptly
cancel orders to suppliers (in consultation with Maxtor where a cancellation
penalty may be incurred). At the option of IMS, Maxtor shall purchase all or any
portion of the materials purchased by IMS consistent with raw material lead
times, and within the cancellation windows in Exhibit C unless Maxtor has
provided written authorization to exceed the cancellation window. Maxtor must
settle all valid claims from IMS regarding surplus inventory within forty-five
(45) days of receipt of IMS' written demand setting for the grounds of the claim
in reasonable detail. The foregoing, together with the remedies set forth in
Section 7.1 ("Purchase Commitment"), shall be IMS' sole and exclusive remedies
for any canceled Orders. The foregoing remedies shall also apply to Products
manufactured by IMS for contractors of Maxtor named on Exhibit D, which Exhibit
may be amended by Maxtor from time to time.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
-3-
<PAGE> 4
6.3 Product Mix Changes. It is understood that market conditions
or requirements by Maxtor's customers may require changes in Product mix and it
is anticipated that such changes may occur frequently. IMS, therefore, grants to
Maxtor the right at any time to make changes to the Product mix without penalty
to the extent such changes do not materially alter IMS' raw materials
requirements, as long as such changes are made more than fifteen (15) days prior
to delivery. Maxtor and IMS agree to work together to respond to such changes in
a timely manner.
7. Purchase and Sale Commitments.
7.1 Purchase Commitment. Maxtor agrees to place Orders with IMS,
which Orders IMS shall accept, and Maxtor agrees to accept corresponding
conforming shipments from IMS aggregating as follows:
Period Quarterly Unit Volume
- -----------------------------------------------------------------------------
Initial 12 month period following the [*]
Effective Date
Second 12 month period following the [*]
Effective Date
Third 12 month period following the Effective [*]
Date
IMS' sole and exclusive remedies for Maxtor's failure to place any of the above
orders and/or Maxtor's cancellation of such Orders once placed shall be (i)
suspension during the first year following the Effective Date, until cure of
such failure, of the interest payments not yet paid and due under that certain
Twenty Million Dollar ($20,000,000) Seven Percent (7%) Senior Subordinated Note
issued at the closing of the Acquisition Transaction, provided that such unpaid
interest will be repaid in equal monthly installments during the thirteen (13)
months following cure of such failure, and (ii) if applicable, the remedies set
forth in Section 6.2 ("Cancellation"). All purchases of Products by contractors
of Maxtor named on Exhibit D shall be considered purchases of Products by Maxtor
for purposes of this Section 7 ("Purchase and Sale Commitments").
7.2 Condition of Purchase Obligation. Maxtor's commitment to
purchase the amounts set forth in Section 7.1 ("Purchase Commitment") is
conditioned upon IMS providing Products competitive in both price and quality.
If Maxtor qualifies, pursuant to the qualification criteria set forth in Exhibit
E, which criteria may be amended from time to time by Maxtor at its sole
discretion, one or more alternate suppliers of Products whose price or quality
is more favorable to Maxtor than IMS' price or quality and who are capable of
meeting Maxtor's quality and volume (in whole or in part) requirements, Maxtor
shall so notify IMS in writing. If such alternate supplier provides a more
favorable price, superior quality, or both, Maxtor shall notify IMS of the lower
price and/or superior quality and give IMS the opportunity to adjust its prices
and/or improve its quality. If IMS fails, within [*] to lower its prices and/or
provide a plan acceptable to Maxtor to improve IMS' quality, so as to be
competitive with such alternate supplier, Maxtor shall have the option of
placing orders with such alternate suppliers. Maxtor's purchase commitments set
forth in Section 7.1 ("Purchase Commitment") shall be reduced to the extent of
Products as to which IMS is not price or quality competitive.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 5
7.3 Sales Commitment. IMS agrees to accept Orders placed by
Maxtor and to manufacture and sell such Products to Maxtor in the amounts
specified in Section 7.1 ("Purchase Commitment") above. IMS acknowledges that
due to the primary source nature of the Products, it is important that IMS
maintain the ability to increase its manufacturing capacity upon Maxtor's
reasonable request. IMS shall provide for reasonable contingency plans,
including but not limited to double shifts and triple shifts of personnel, so as
to expeditiously increase IMS' manufacturing capacity to meet Maxtor's customer
demand. [*] IMS will be responsible for processing sufficient Product starts,
procuring sufficient inventory (except those components to be procured by Maxtor
pursuant to Section 9 ("Product Materials")) and taking all other actions to
provide Maxtor with the quantity of Product set forth in accepted Orders.
8. Inspection and Acceptance.
8.1 Testing. IMS will ensure that each Product meets Maxtor
specifications and is tested prior to shipment in accordance with quality and
reliability testing methods and procedures for such Product as specified by
Maxtor from time to time. IMS will provide to Maxtor only those Products
conforming to the applicable test requirements unless IMS has obtained prior
written approval from Maxtor for any deviation from such requirements.
8.2 Acceptance. Maxtor shall inspect each shipment and return
all non-conforming units to IMS with a return authorization number obtained from
IMS with shipping cost to be borne by IMS. All returned Products must be
accompanied by a written notice describing with reasonable particularity any
defects rendering the Products non-conforming. IMS shall, at its expense,
replace within ten (10) business days of return all non-conforming Products or
refund the purchase price therefor. In addition to any such replacement and
refund, IMS shall promptly reimburse Maxtor for reasonable costs, expenses and
fees incurred by Maxtor as a result of non-conforming Products. Within ten (10)
business days of IMS' receipt of any non-conforming Product, IMS will perform
failure analysis and provide Maxtor with a failure analysis report and a
corrective action plan detailing the actions IMS shall take to avoid or minimize
similar defects in the future.
9. Consignment. Maxtor may consign to IMS certain component parts,
equipment and/or other materials (the "Materials") for use in assembling and
testing Products. IMS agrees to (1) receive shipments of Materials ordered by
Maxtor and designated for delivery to IMS, (2) perform incoming inspection and
testing of Materials as reasonably required by Maxtor (any such Maxtor-required
and Maxtor-unique testing to be at Maxtor's expense), (3) store and insure such
Materials until needed, (4) use such Materials solely for the benefit of Maxtor,
and (5) provide inventory and stocking reports to Maxtor. IMS shall provide such
services with respect to Materials stored by IMS for up to one hundred twenty
(120) days at no charge. The parties shall negotiate in good faith on
reimbursement to IMS for IMS' actual incremental costs incurred in connection
with storage of Material in excess of one hundred twenty (120) days. IMS shall
be responsible and liable for all Materials consigned by Maxtor to IMS, unless
IMS provides Maxtor within forty-eight (48) hours of arrival of any consigned
Materials with written notice and an accompanying receipt showing a discrepancy
between the amount and/or type of Materials actually received by IMS and the
amount and/or type consigned by Maxtor, as shown on
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
-5-
<PAGE> 6
applicable shipping documents. Notwithstanding IMS' management and storage of
the consigned Materials, Maxtor will retain all rights, title and interest to
such Materials. IMS agrees that all Maxtor consigned Materials are the property
of Maxtor and shall not mortgage, pledge, assign or borrow against such
Materials or otherwise create or attempt to create a security interest in the
Materials. IMS will post signs, make public filings, and take such other steps
reasonably calculated to notify third parties concerning Maxtor's ownership of
such Materials. IMS agrees to maintain fire and extended insurance, including
all risk and earthquake coverage, on the building containing and contents of the
Materials in an amount agreed upon by the parties. IMS shall name Maxtor as an
additional assured with respect to the contents of the Materials and shall, if
required by Maxtor, furnish certificates or adequate proof of the foregoing
insurance. IMS will be liable to Maxtor for damages for loss of, or injury to,
the consigned Materials caused by IMS' failure to exercise such care in regard
to the Materials as a reasonably careful person would exercise under like
circumstances. IMS agrees to accept responsibility for the actual cash value of
any Materials while such Materials are in IMS' custody. In the event of any
canceled Orders involving Materials, IMS shall ship such Materials to Maxtor (at
Maxtor's expense). [*] IMS requests that consigned components are received by
IMS at least five (5) business days prior to the scheduled Product shipment date
and in sufficient quantities to allow for normal component attrition.
10. Limited Warranty. IMS warrants that the Products sold to Maxtor
shall conform to the corresponding written product specification provided by
Maxtor to IMS and current at the time of Maxtor's Order ("Specification") [*]
for a period of twelve (12) months from the date of receipt by Maxtor. The
materials portion of this warranty shall not apply to the extent of defects in
the Product directly attributable to the failure of any Materials consigned or
supplied to IMS by Maxtor. All claims for breach of warranty with respect to any
unit of the Products must be received by IMS no later than fifteen (15) days
after the expiration of the warranty period. The warranty does not extend to any
Products (i) which have been subjected to misuse, neglect, excessive
deterioration or erosion, abuse, accident, improper installation, extreme
electrical or physical stress, or any other use by Maxtor in violation of or
contrary to IMS' instructions; (ii) which have been repaired or altered in any
manner by anyone other than IMS or persons expressly authorized by IMS; or (iii)
which are defective as a result of causes external to the Product. IMS' sole and
exclusive obligation with respect to defective Products returned under warranty
shall be, at IMS' option, repair or replacement thereof or refund of the
purchase price. THE EXPRESS WARRANTY AND WARRANTY REMEDIES PROVIDED IN THIS
SECTION ARE MAXTOR'S SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF THE WARRANTIES IN
THIS SECTION. IMS MAKES, AND HAS MADE, NO OTHER WARRANTIES TO MAXTOR, AND IMS
HEREBY EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, WRITTEN OR ORAL,
EXPRESS, IMPLIED, OR STATUTORY, IN ANY MANNER OR FORM WHATSOEVER, INCLUDING, BUT
NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR ANY PARTICULAR
PURPOSE OR NONINFRINGEMENT OF THIRD PARTY RIGHTS (EXCEPT AS EXPRESSLY PROVIDED
IN SECTION 17 ("INDEMNIFICATION")). Maxtor shall pay IMS such amounts as are
mutually agreed from time to time for (i) testing of returned units in "no
problem found" situations (i.e., where Product units returned to IMS conform to
the above warranty) and (ii) network of returned units where the failure
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
-6-
<PAGE> 7
of the units to conform to the above warranty is not due to any breach of
warranty by IMS (e.g., situations where the Product unit has been abused or
damaged by persons other than IMS).
11. Epidemic Failure. In the event of an epidemic failure of a
Product, the parties shall immediately work together to identify the nature of
the failure and to determine whether the failure results from certain components
of the Product or manufacture of the Product. For purposes of this Section,
"epidemic failure" shall mean a group of failures occurring within a thirty (30)
day period of a same or similar nature where the failure rate for such thirty
(30) day period is ten percent (10%) or more above the failure rate for the
particular Product over the term of this Agreement prior to such event. Maxtor
and IMS shall agree on an equitable allocation of the cost of resolving the
problem vis-a-vis Maxtor's customers and in regard to the relevant component(s)
vendors which shall depend on whether the primary source of the problem is
Maxtor's procurement of Materials for the Products or IMS' procurement of
components for or manufacture of the Product. Maxtor and IMS shall cooperate in
good faith to identify the most cost-effective solution to the problem.
12. Limitation of Liability. EXCEPT AS SET FORTH IN SECTION 17.2
("INDEMNIFICATION BY IMS") AND SECTION 17.3 ("INFRINGEMENT INDEMNIFICATION BY
MAXTOR") AND EXCEPT FOR BREACH OF THE OBLIGATIONS SET FORTH IN SECTION 18.1
("CONFIDENTIAL INFORMATION"), EITHER PARTY'S MAXIMUM LIABILITY ARISING OUT OR
RELATING TO THIS AGREEMENT SHALL BE LIMITED TO THE TOTAL PAYMENTS MADE BY MAXTOR
TO IMS HEREUNDER. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR
ANY OTHER PERSON OR ENTITY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, INDIRECT,
EXEMPLARY OR PUNITIVE DAMAGES, HOWEVER CAUSED, WHETHER FOR BREACH OF CONTRACT,
NEGLIGENCE OR OTHERWISE (INCLUDING, WITHOUT LIMITATION, DAMAGES BASED ON LOSS OF
PROFITS OR BUSINESS OPPORTUNITY), AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. THIS LIMITATION SHALL APPLY NOTWITHSTANDING
ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN.
13. Engineering or Process Changes.
13.1 Definition. The term "Engineering Change(s)" shall mean
those mechanical, electrical, piece part or subassembly design or Specification
changes, made to the Products or to any manufacturing, assembly or testing
method, procedure or process ("Process"), or, which, if made, could affect the
schedule, performance, reliability, availability, serviceability, appearance,
dimensions, tolerances, safety or costs, such determination to be made solely by
Maxtor.
13.2 IMS Change(s). IMS will notify Maxtor of any Engineering
Change proposed to be made by IMS to the Products or Process, and will supply a
written description of the expected effect of the Engineering Change on the
Products, including its effect on price, performance, reliability and
serviceability. Maxtor may elect to evaluate the prototype, parts and/or designs
specified as part of the proposed change and IMS shall provide the prototype,
parts and/or design to Maxtor at no charge
-7-
<PAGE> 8
for such evaluation. Maxtor agrees to use commercially reasonable efforts to
respond, within five (5) working days after receipt of IMS' request for
non-critical changes and within twenty-four (24) hours for critical changes, as
to whether or not Maxtor will negotiate with IMS as to a transition plan and
time frame for implementing such Engineering Changes. IMS will not change or
modify the Products or Process by implementation of such Engineering Change
without Maxtor's prior written approval. Maxtor, in its reasonable discretion,
may reject any and all IMS requested changes.
13.3 Maxtor Change(s). Maxtor may request, in writing and in a
manner similar to IMS' request as set forth in Section 13.2 ("IMS Change(s)"),
that IMS incorporate any non-critical Engineering Change into the Products, and
IMS will provide to Maxtor its written response within five (5) working days
after receipt of Maxtor's request. For critical Engineering Changes, as
determined by Maxtor, IMS will respond within twenty-four (24) hours of Maxtor's
written request. IMS' response will state the cost savings or increase, and
labor, inventory and scrap material impact, if any, expected to be created by
the Engineering Change, and the effect on the schedule, performance,
reliability, availability, safety, serviceability, appearance, dimensions,
tolerances, and composition of bills of material of the Products. If Maxtor
requests IMS to incorporate an Engineering Change into the Products, the
applicable Specifications will. be amended as required subject to mutual
agreement on reimbursement to IMS for its extra costs (including labor,
manufacturing supplies and inventory) incurred as a result of the Engineering
Change. IMS will not unreasonably refuse to incorporate Maxtor's Engineering
Changes into the Products.
14. Term and Termination. The term of this Agreement shall begin on
the Effective Date and continue for three years thereafter unless earlier
terminated as provided herein. Either party may terminate this Agreement for
default by the other party of any material obligation, unless the defaulting
party cures such material breach within thirty (30) days after receipt of
written notice from the non-defaulting party. In the event this Agreement is
terminated by IMS upon Maxtor's default, Maxtor shall be responsible for payment
or cancellation charges for any issued and accepted Orders as provided in
Section 6 ("Order Cancellation and Rescheduling"). In the event this Agreement
is terminated by Maxtor for IMS' default, IMS shall be responsible for payment
of any and all costs and expenses associated with Maxtor's transfer of Orders to
another supplier, including without limitation the incremental cost to procure
substitute goods in accordance with Section 2712 of the Uniform Commercial Code.
15. Maxtor Equipment. IMS shall be responsible for diligence and care
in the use, routine calibration and repair, maintenance and protection of any
Maxtor furnished equipment, including without limitation any Product-specific
tooling and equipment, and shall be liable for repairs or replacement due to
normal failure or wear and tear, and maintenance costs, provided, that HDAs
shall be supplied, maintained, repaired and replenished by Maxtor.
16. Customer and Technical Support. IMS will supply Maxtor on an
on-going basis at no charge with technical support, including without
limitation: (i) reasonable amounts of specialized backup technical assistance
in English by telephone and e-mail, with prompt response time; (ii) English
language technical documentation necessary to permit Maxtor to perform customer
support and troubleshooting or to analyze the technical benefits and risks of
introducing new releases of the Products into Maxtor's customer base; and (iii)
all error notes or other technical documentation (translated into the English
language) defining symptoms, solutions or work-arounds for Product problems.
On-site problem support for Products shall be as mutually agreed by Maxtor and
IMS. In addition, in consideration of the Orders to be placed by Maxtor
hereunder, IMS shall provide Maxtor with the following services:
(i) early involvement support and input, including without
limitation manufacturability requirements and improvements for IMS' process at
its supplier base (e.g. PCB layouts), ICT design (testability) input,
functional test input, and component selection (e.g. cost reduction
opportunities);
(ii) materials support for introduction of prototype or new
Products, including without limitation quick turn (minimum cycle times) PCBA's
and/or kits of materials for all components common to IMS bills of materials;
(iii) PCB, passives, and discrete IC's commodity management,
including without limitation all quotation, negotiation, administration, and
qualification requirements (subject to any consignment arrangements specified
by Maxtor); and
(iv) quality assurance of all components provided by IMS,
including without limitation incoming inspection, supplier qualification and
audits, component qualification, and failure analysis of defective
components.
The services described in clauses (i) and (ii) shall be at no additional
charge. The services described in clauses (iii) and (iv) shall be at no
additional charge for the first six (6) months following the Effective Date. If
Maxtor, at its option, desires to procure such services for a longer period,
the parties shall negotiate in good faith as to a reasonable fee to be paid to
IMS for such services provided more than six (6) months following the Effective
Date.
-8-
<PAGE> 9
17. Indemnification.
17.1 Indemnification by Maxtor for Products. Maxtor shall defend,
indemnify and hold IMS, its successors and assigns, harmless from and against
all actions, claims, liabilities, losses and expenses (including reasonable
attorneys' fees) arising out of or relating to Maxtor's gross negligence or
intentional misconduct in its distribution, sale or use of any Product. Such
indemnification obligation will be conditioned upon IMS (i) giving Maxtor prompt
notification in writing as to any such action; (ii)
tendering full control of the defense of such action to Maxtor; and (iii)
providing Maxtor with full information and assistance (at Maxtor's expense) for
such defense. IMS may participate in any such defense with counsel of its
choosing at its expense. Maxtor will not be responsible for any settlement or
compromise made without its consent.
17.2 Indemnification by IMS. IMS shall defend, indemnify and hold
Maxtor, its successors and assigns, harmless from and against all actions,
claims, liabilities, losses and expenses (including reasonable attorneys' fees)
arising out of or relating to any claim of infringement or misappropriation by
the Products or components thereof supplied by IMS, or the processes used by IMS
to manufacture Products, of any patent, copyright, trade secret, or any other
intellectual property right of any third party, except to the extent Maxtor is
obligated to indemnify IMS under Section 17.3 ("Infringement Indemnification by
Maxtor"). Such indemnification obligation will be conditioned upon Maxtor (i)
giving IMS prompt notification in writing as to any such action; (ii) tendering
full control of the defense of such action to IMS; and (iii) providing IMS with
full information and assistance (at IMS' expense) for such defense. Maxtor may
participate in any such defense with counsel of its choosing at its expense.
IMS will not be responsible for any settlement or compromise made without its
consent.
17.3 Infringement Indemnification by Maxtor. Maxtor shall defend,
indemnify and hold IMS, its successors and assigns, harmless from and against
all actions, claims, liabilities, losses and expenses (including reasonable
attorneys' fees) arising out of or relating to any claim of infringement or
misappropriation by a Product developed from designs provided by Maxtor for such
development, of any patent, copyright, trade secret, or any other intellectual
property right of any third party to the extent such infringement or
misappropriation arises out of use of such Maxtor designs. Such indemnification
obligation will be conditioned upon IMS (i) giving Maxtor prompt notification in
writing as to any such action; (ii) tendering full control of the defense of
such action to Maxtor; and (iii) providing Maxtor with full information and
assistance (at Maxtor's expense) for such defense. IMS may participate in any
such defense with counsel of its choosing at its expense. Maxtor will not be
responsible for any settlement or compromise made without its consent.
18. Confidentiality; Intellectual Property Rights.
18.1 Confidential Information. Each party (the "Disclosing
Party", as applicable) agrees during the term of this Agreement and thereafter
to take all steps reasonably necessary to hold the Confidential Information of
the other party (the "Receiving Party", as applicable) in trust and confidence.
"Confidential Information" includes, but is not limited to, technical and
business information relating to the Disclosing Party's inventions or products,
research and development, production, manufacturing and engineering processes,
costs, profit or margin information, employee skills and salaries, finances,
customers, marketing, and production and future business plans, and any third
party's proprietary or confidential information disclosed to the Receiving Party
in the course of providing services to the Disclosing Party. Notwithstanding the
other provisions of this Agreement, nothing received by the Receiving Party will
be considered to be the Disclosing Party's Confidential Information if (1) it
has been published or is otherwise readily available to the public other than by
a breach of this Agreement; (2) it has been rightfully received by the Receiving
Party from a third party without confidential limitations; (3) it has been
independently developed for the Receiving Party by personnel or agents having no
access to the Disclosing Party's Confidential Information; or (4) it was known
to the Receiving Party prior to its first receipt from the Disclosing Party. The
Receiving Party shall use the
-9-
<PAGE> 10
Disclosing Party's Confidential Information only for the purposes of providing
and receiving Products and services to and from the Disclosing Party as set
forth herein, unless otherwise mutually agreed in writing. The Receiving Party
may disclose the Disclosing Party's Confidential Information to affiliates and
to third persons, including contractors, solely for the purposes of this
Agreement or as otherwise allowed herein (e.g., Section 18.4 ("License of IMS
Rights")), including consultation regarding the purchase or provision of
Products and services, but only under the terms of a written confidentiality
agreement with such third person containing confidentiality and use terms
substantially similar to those imposed herein upon a Receiving Party. The
foregoing shall not affect Maxtor's rights under Section 18.4 ("License of IMS
Rights"), except that Maxtor shall require third persons who receive such
Section 18.4 IMS Intellectual Property which is IMS Confidential Information, to
execute such written confidentiality agreement.
18.2 No Conflict of Interest. Each party agrees during the term
of this Agreement not to accept work, enter into a contract or accept an
obligation inconsistent or incompatible with such party's obligations under this
Agreement or the scope of services rendered for the other party hereunder. Each
party warrants that to the best of its knowledge, there is no other existing
contract or duty on such party's part inconsistent with this Agreement. The
parties agree that the foregoing obligations shall not be construed in any
manner to supersede or conflict with the terms and conditions of Section 7.2
("Condition of Purchase Obligation") above.
18.3 Ownership of Proprietary Rights. Nothing in this Agreement
shall convey to either party any proprietary or intellectual property rights,
including without limitation, copyrights, trademarks, trade secrets, patents,
moral rights, contract rights and licensing rights (the "Intellectual Property
Rights") belonging to the other party, or be deemed to license either party to
use any such Intellectual Property Rights of the other party, except for the
express limited purposes set forth herein.
18.4 [*]
18.5 Joint Work Product. The term "Joint Work Product" means any
new or useful art, discovery, improvement or invention whether or not
patentable, and all related know-how, designs, mask works, trademarks, formulae,
processes, manufacturing techniques, trade secrets, ideas, artwork, software or
other copyrightable or patentable works, where the conception or reduction to
practice thereof occurs subsequent to the Effective Date and one or more
personnel of both Maxtor and IMS contribute materially to such conception or
reduction to practice. Maxtor and IMS shall jointly own the Joint Work Product,
with each owning an undivided one-half interest, and each shall be free to
commercially exploit Joint Work Product far its own account and nonexclusively
license Joint Work Product to third parties without any obligation to account
for profits to the other joint owner.
18.6 Return of Maxtor Property. The term "Maxtor Work Product"
means any new or useful art, discovery, improvement or invention whether or not
patentable, and all related know-how, designs, mask works, trademarks, formulae,
processes, manufacturing techniques, trade secrets, ideas, artwork, software or
other copyrightable or patentable works developed by Maxtor without the material
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
-10-
<PAGE> 11
contribution of IMS or otherwise acquired or licensed by Maxtor. Except as set
forth in a separate written licensing agreement:
(a) IMS shall have no right to use any Maxtor Work
Product provided by Maxtor to IMS, or learned by IMS from Maxtor, except to
perform services for Maxtor as contemplated by this Agreement.
(b) Upon termination of this Agreement for any reason
or in any manner, or at any earlier time upon Maxtor's request, IMS agrees to
promptly deliver all Maxtor property, including but not limited to all tangible
embodiments of the Maxtor Work Product, and all copies of Maxtor property in
IMS' possession to Maxtor, or promptly destroy all such Maxtor property and
promptly certify in writing to its destruction.
19. Miscellaneous Provisions.
19.1 Entire Agreement. This Agreement constitutes the entire
agreement between the parties regarding the subject matter hereof and supersedes
all prior agreements and understandings between the parties relating thereto.
This Agreement may not be modified except by a writing signed by an authorized
representative of both parties.
19.2 Independent Contractor. The relationship of the parties
established by this Agreement is that of independent contractors, and nothing
contained herein shall be constructed to constitute either party as the agent of
the other party or as partners, joint ventures, co-owners or otherwise as
participants in a joint or common undertaking.
19.3 Advertising. No advertising by either party shall display or
contain any trademarks or references to the other party without the other
party's prior written approval.
19.4 Assignment and Subcontracting. This Agreement may not be
assigned by either party without the advance written consent of the other party,
which shall not be unreasonably withheld. Notwithstanding the foregoing, either
party may assign this Agreement to any affiliate or subsidiary or pursuant to a
merger, sale of all or substantially all of its assets, or other corporate
reorganization. IMS shall not subcontract any of its rights or obligations
hereunder to any third party without Maxtor's prior written approval, which
shall not be unreasonably withheld.
19.5 Force Majeure. Except for Maxtor's payment obligations,
neither party shall be liable to the other party arising out of delays or
failures to perform under the Agreement to the extent that any such delays or
failures result from any cause beyond the reasonable control of the party
affected by a force majeure event; provided, that the party affected by any such
cause shall promptly inform the other of all relevant information. If any such
force majeure event extends beyond ninety (90) days, either party shall have the
right to terminate this Agreement upon written notice to the other party.
-11-
<PAGE> 12
19.6 Governing Law. This Agreement shall be governed by the laws
of the State of California, without reference to conflict of laws principles.
The United Nations Convention on Contracts for the International Sale of Goods
is specifically excluded from application to this Agreement.
19.7 Venue. All disputes arising under this Agreement shall be
brought in the Superior Court of the State of California in Santa Clara County
or the Federal District Court of San Jose, California, as permitted by law. The
Superior Court of Santa Clara County and the Federal District Court of San Jose
shall each have exclusive jurisdiction over disputes under this Agreement. IMS
consents to the personal jurisdiction of the above courts.
19.8 English Language. This Agreement is executed in the English
language only, and any translations hereof are of no force and effect.
19.9 Invalidity. If any provisions or portion thereof of this
Agreement is held to be unenforceable or invalid, the remaining provisions and
portions thereof shall nevertheless be given full force and effect.
19.10 No Waiver. No failure to delay on the part of either party
in exercising any right or remedy hereunder shall operate as a waiver thereof;
nor shall any single or partial exercise of any such right or remedy preclude
any other or further exercise thereof or of any other right or remedy. No
provision of this Agreement may be waived except in a writing signed by the
party granting such waiver.
19.11 No Licenses Created. Nothing contained in this Agreement
shall be construed as conferring any license, right to use or other right with
respect to information, trademark or tradenames of either party.
19.12 Counterparts. This Agreement may be executed in
counterparts, all of which taken together shall constitute one single agreement
between the parties.
19.13 Limitation of Action. No action, regardless of form,
arising out of this Agreement, may be brought by either party more than one year
after the cause of action has arisen, or in the case of nonpayment, one year
from the date the last payment was due.
19.14 Survival. Sections 10, 11, 12, 15, 17, 18 and 19 shall
survive any expiration or termination of this Agreement.
19.15 Construction. This Agreement has been negotiated by the
parties and their respective counsel. This Agreement will be fairly interpreted
in accordance with its terms and without any strict construction in favor of or
against any party. Any ambiguity will not be interpreted against the drafting
party.
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<PAGE> 13
IN WITNESS WHEREOF, Maxtor and IMS have caused this Manufacturing
Services Agreement to be executed by their respective officers, duly authorized.
MAXTOR: IMS:
Maxtor Corporation International Manufacturing Services, Inc.
By: ___________________________ By: ______________________________________
Name: _________________________ Name: ____________________________________
Title: ________________________ Title: ___________________________________
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<PAGE> 14
EXHIBIT A
PRODUCTS AND PRICES
Maxtor and IMS have agreed that in calendar 1996, Maxtor will give IMS
first right of refusal to manufacture units up to 1.924 million each quarter.
The forgoing does not constitute a purchase order.
<TABLE>
<CAPTION>
CQ2 96 CQ3 96 CQ4 96 CQ1 96
BOM NO. DESCRIPTION PRICE PRICE PRICE PRICE
------- ----------- ----- ----- ----- -----
US$ US$ US$ US$
<S> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*]
</TABLE>
REWORK*
1" REWORK (NORMAL)
1" REWORK (FIELD)
2.5 REWORK
MXT REWORK
* Rework charges above are for full rework completed by IMS. Partial rework
charges will be negotiated in good faith between the parties.
Note:
1. The price for CQ296 is confirmed while the price for the rest of three
quarters is for reference only.
2. The selling price for 2.5" is full turnkey and sales is from IMS to HSD.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 15
EXHIBIT A
(Continued)
CONSIGNED PARTS LIST
<TABLE>
<CAPTION>
PART NO. DESCRIPTION
- --------------- ----------------------------------------------------
<S> <C>
[*] [*]
</TABLE>
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
-2-
<PAGE> 16
EXHIBIT B
THIS EXHIBIT IS INTENTIONALLY OMITTED
<PAGE> 17
EXHIBIT C
CANCELLATION WINDOWS
<TABLE>
<CAPTION>
CANCELLATION
COMMODITY (NOT-TO-EXCEED)
---------------- ---------------
<S> <C>
ASICx* [*] Days
Memory * [*] Days
Osc. Custom [*] Days
Transistors [*] Days
Diodes [*] Days
Caps (Tant.) [*] Days
Resistor [*] Days
PCB [*] Days
Ferrite [*] Days
Connector/Socket [*] Days
Cap Cer [*] Days
Inductor [*] Days
</TABLE>
* Per supplier cancellation window plus [*] worth of raw and WIP in IMS.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
- -----------------------
<PAGE> 18
EXHIBIT D
Hyundai Storage Division
<PAGE> 19
APPENDIX E
<TABLE>
<CAPTION>
# CRITERIA MAX. POINT WEIGHT AGE MAX. WEIGHT
<S> <C> <C> <C>
1. Quality 5 X2 10
2. Total Cost 5 X2 10
3. Capacity 5 X2 10
4. Time To Market 5 X2 10
5. Joint Profit Program 5 X1 5
6. Delivery Performance 5 X1 5
7. Technology Leadership 5 X1 5
8. Finance 5 X1 5
9. History/Flexibility 5 X1 5
10. Fit for Application 5 X1 5
</TABLE>
The Maximum Total Weighted Score is 70 and Minimum is 35.
We can assign the following grading:
<TABLE>
<CAPTION>
WEIGHT SCORE GRADING
- ----------------------- --------------------------
<S> <C>
35-49 Pass/Average
50-59 Good
60-70 Very Good/Excellent
</TABLE>
<PAGE> 1
Exhibit 16.1
[ERNST & YOUNG LLP LETTERHEAD]
October 20, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the section captioned "Change of Accountants" included in Amendment
No. 3 to the Registration Statement (Form S-1) of International Manufacturing
Services, Inc. for the registration of 5,750,000 shares of its Class A Common
Stock and are in agreement with the statements contained in the second sentence
of the first paragraph and in the second and third paragraphs therein. We have
no basis to agree or disagree with other statements of the registrant contained
therein.
Very truly yours,
/s/ ERNST & YOUNG LLP
<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
October 20, 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
October 20, 1997