<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 000-23097
INTERNATIONAL MANUFACTURING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0393609
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2222 Qume Drive, San Jose, California 95131
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 953-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 1998, 16,054,904 shares of the Registrant's Class A Common Stock,
$.001 par value, and 2,509,425 shares of the Registrant's Class B Common Stock,
$.001 par value, were issued and outstanding.
<PAGE> 2
INTERNATIONAL MANUFACTURING SERVICES, INC.
INDEX TO FORM 10Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at July 31, 1998 and April 30,
1998
Condensed Consolidated Statements of Operations for the three months
ended July 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the three months
ended July 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE> 3
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
July 31, April 30,
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,395 $ 3,939
Accounts receivable, net 71,946 45,289
Inventories 34,132 41,378
Other current assets 2,596 2,563
--------- ---------
Total current assets 121,069 93,169
Property and equipment, net 30,687 29,026
Other assets 3,931 4,442
--------- ---------
Total assets $ 155,687 $ 126,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,855 $ 42,621
Accrued liabilities 9,385 10,713
Bank borrowings 10,500 6,000
Current portion of long term debts 87 86
--------- ---------
Total current liabilities 83,827 59,420
Long term debt 12,543 12,559
Deferred tax liabilities 2,254 1,964
Stockholders' equity:
Preferred Stock -- --
Common Stock 18 18
Additional paid-in capital 66,040 65,253
Distributions in excess of net book value (20,608) (20,608)
Retained earnings 11,613 8,031
--------- ---------
Total stockholders' equity 57,063 52,694
--------- ---------
Total liabilities and stockholders' equity $ 155,687 $ 126,637
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
July 31, July 31,
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Affiliates $ 32,008 $ 30,236
Other 86,050 34,500
Logistics services 12,056 --
-------- --------
Total revenues 130,114 64,736
Cost of revenues 121,331 58,397
-------- --------
Gross profit 8,783 6,339
-------- --------
Selling, general & administrative expenses 3,958 2,845
Restructuring charge -- (179)
-------- --------
Total operating expenses 3,958 2,666
-------- --------
Operating income 4,825 3,673
Interest expense, net 660 1,255
-------- --------
Income before income taxes 4,165 2,418
Provision for income taxes 583 337
-------- --------
Net income 3,582 2,081
Dividends on convertible preferred stock -- 250
-------- --------
Net income available for common stockholders $ 3,582 $ 1,831
======== ========
Basic net income per share $ 0.19 $ 0.25
======== ========
Diluted net income per share $ 0.17 0.14
======== ========
Shares used to compute basic net income per share 18,466 7,328
======== ========
Shares used to compute diluted net income per share 20,694 15,239
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 5
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
July 31, July 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,582 $ 2,081
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,380 1,983
Deferred Income Taxes 290 --
Changes in assets and liabilities:
Accounts receivable (26,049) 739
Accounts receivable from Maxtor and affiliates (608) (1,117)
Inventories 7,246 (11,849)
Other current assets (33) 833
Other assets 389 546
Accounts payable 21,355 8,368
Accounts payable to Maxtor (121) (274)
Accrued liabilities (1,632) 1,511
Income taxes payable 304 340
--------- ---------
Net cash provided by operating activities 7,103 3,161
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net (3,919) (2,488)
--------- ---------
Net cash used in investing activities (3,919) (2,488)
--------- ---------
Cash flows from financing activities:
Borrowings (repayments) under line of credit 4,500 (1,500)
Principal payments on debt and capital lease
obligations (15) (24)
Payment of dividends -- (164)
Proceeds from issuance of common stock 787 --
--------- ---------
Net cash provided by (used in) financing activities 5,272 (1,688)
--------- ---------
Net change in cash and cash equivalents 8,456 (1,015)
Cash and cash equivalents at beginning of period 3,939 2,828
--------- ---------
Cash and cash equivalents at end of period $ 12,395 $ 1,813
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 6
INTERNATIONAL MANUFACTURING SERVICES, INC.
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position and results of operations for
each interim period shown. Interim results are not necessarily indicative of
results for a full year.
The condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (SEC) applicable to interim financial information. Certain
information and footnote disclosure included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
these interim statements pursuant to such SEC rules and regulations. The
information included in this Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto, for the year ended April
30, 1998, included in the Company's 1998 annual report on Form 10-K.
In the quarter ending July 31, 1998, the Company recognized logistics
revenue from one customer, which resulted from the purchase of products from the
customer's designated supplier. These products are tested, configured, packaged
and distributed to the end user or retailer. In addition, the Company's
logistics services consist of order management and call center support to the
end user or retailer.
For clarity of presentation, the Company has indicated its first fiscal
quarter as ending on July 31, and its fiscal year as ending on April 30, whereas
in fact, the Company's first quarter of fiscal 1999 and 1998 ended on August 1,
1998 and August 2, 1997, respectively, and its 1998 fiscal year ended on May 2,
1998.
2. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
July 31, April 30,
1998 1998
--------- ---------
<S> <C> <C>
Raw materials $ 27,119 $ 36,268
Work-in-process 3,801 3,666
Finished Goods 3,212 1,444
--------- ---------
Total $ 34,132 $ 41,378
========= =========
</TABLE>
3. INCOME TAXES
The effective tax rate for the three months ended July 31, 1998 was
approximately 14.0%. This rate is based on the Company's estimation of the
expected geographical mix of its fiscal 1999 income.
<PAGE> 7
4. NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted net income per
share includes potential common shares from convertible preferred stock
outstanding and from options outstanding using the treasury stock method except
if their effect is anti-dilutive. All net income per share amounts for all
periods have been presented and where necessary, restated to conform to the
requirements of SFAS 128.
SFAS No. 128 requires a reconciliation of the numerators and denominators
of the basic and diluted per share computations as follows:
<TABLE>
<CAPTION>
Three Months Ended
July 31, July 31,
1998 1997
--------- ---------
<S> <C> <C>
Numerator:
Net income available for common stockholders $ 3,582 $ 1,831
Add back dividends on convertible preferred stock -- 250
--------- ---------
Net income for diluted earnings per share calculation $ 3,582 $ 2,081
========= =========
Denominator:
Shares calculation
Weighted average common shares outstanding
during the period 18,466 7,328
Effect of dilutive securities:
Convertible preferred stock -- 6,000
Stock Options 2,228 1,911
--------- ---------
Average shares outstanding - assuming dilution 20,694 15,239
========= =========
Basic earnings per share $ 0.19 $ 0.25
========= =========
Diluted earnings per share $ 0.17 $ 0.14
========= =========
</TABLE>
Options to purchase 1,340,000 and 25,000 shares of common stock were outstanding
as of July 31, 1998 and July 31, 1997, but were not included in the computations
of diluted EPS because these options had an exercise price greater than the
average market price of the common shares outstanding during the three months
ended July 31, 1998 and July, 31, 1997.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). FAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the
corresponding derivative gains and losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. Adopting the provisions of SFAS 133
are not expected to have a material effect on the Company's consolidated
financial statements, which will be effective for the Company's fiscal year
ending April 30, 2001.
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements include expectations, beliefs, intentions or strategies regarding
future operating results, future expenditures, future cash requirements, and
future industry conditions and involve risks and uncertainties. The Company's
actual results could differ materially from those projected in such
forward-looking statements as a result of certain factors, including those set
forth under "Factors That May Affect Future Operating Results" below and
elsewhere in this report on Form 10-Q. A more detailed discussion of risks faced
by the Company is set forth in the Company's Registration Statement on Form S-1
(SEC File No. 333-34557) filed with the SEC in connection with the Company's
initial public offering and in the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1998. This analysis should be read in conjunction
with the Company's Management Discussion & Analysis of Financial Condition and
Results of Operations for fiscal year ended April 30, 1998 included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
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 Corporation ("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.
To accomplish such recapitalization, the Company redeemed approximately
76.5% of Maxtor's share ownership with a combination of $25.0 million cash,
$20.0 million principal senior subordinated notes (the "Maxtor Notes") and a
warrant for 300,000 shares of Class A Common Stock. 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. The redemption
and share transactions are hereafter referred to 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. After the closing of the Company's initial public
offering in October 1997, the Company repaid the Maxtor Notes, and the warrant
was automatically terminated in accordance with its terms.
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
basis 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 many customers. These customers collectively represented
approximately 75.4% of total revenues for the three months ended July 31, 1998.
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,
1997, 1998 and the three months ended July 31, 1998, Maxtor accounted for
approximately 83.1%, 48.6%, 41.5% and 24.6% of total revenues, respectively, and
Bay Networks, Inc. ("Bay Networks") accounted for approximately 1.6%, 31.3%,
36.5% and 19.4% of total revenues, respectively. For the three months ended July
31, 1998 of the 19.4% of total revenues derived from sales to Bay Networks,
52.1% consisted of manufacturing revenues and 47.9% consisted of logistics
service revenue.
During fiscal 1997, the Company took significant steps to expand its
manufacturing operations and to broaden the range of the manufacturing services
it provides to its customers. As part of its strategy to locate operations in
low cost regions, the Company transferred its Hong Kong manufacturing operations
to China while
<PAGE> 9
retaining its component procurement and regional administrative functions in
Hong Kong. In connection with this 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 over the last two
years from 41,000 square feet to 250,000 square feet. Moreover, in July 1998,
the Company signed an agreement to lease a 112,000 square foot facility in
Monterrey, Mexico, which is being constructed over the next several months. The
Company has established a wholly-owned subsidiary in Mexico and expects to
occupy the Mexico facility and commence operations, including printed circuit
board and final box build assembly, in early calendar 1999.
In order to broaden the range of services the Company offers, 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. In March 1998, the Company relocated its
United States operations to a new 80,000 square foot facility combining the
Company's full systems manufacturing operations with its design and prototype
production activities. Recently, the Company was qualified by and received
orders from three significant telecommunications companies for backplane
assembly. Although, backplane business has historically represented an
insignificant percentage of the Company's total revenues, the Company believes
it is strategically important over the longer term, as it broadens the Company's
service offerings and allows the Company to differentiate itself from certain of
its competitors. In May 1998, the Company began providing full distribution
services for the Netgear division of Bay Networks from both its Hong Kong and
San Jose facilities. The revenue from such services had been reported as
logistics services revenue in the accompanying condensed consolidated
statements.
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 1999 to be
approximately 14.0%. The Company does not expect to receive any tax benefits
associated with conducting business in Mexico and, if the Company's Mexican
operations become profitable, the Company would likely experience a higher
worldwide effective tax rate.
The Company's total revenues and overall gross margins may fluctuate
significantly from period to period depending upon the mix of revenues derived
from turnkey and consignment manufacturing. Gross margins may also be impacted
by the mix of sales to customers in each industry segment. 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 revenue and gross margins. For
revenues generated on a turnkey basis, the Company generally 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 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. Furthermore, gross margins on revenues generated
from sales to companies in the computer peripherals industry tend to be lower
than gross margins on revenues generated from sales to companies in the data
communications and telecommunications industries whose products are often more
complex. The Company's percentage of sales to customers in the computer
peripherals industry in fiscal 1998, and the three months ended July 31, 1998
was approximately 46.0% and 59.0% of total revenues, respectively. 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.
The Company is currently holding accounts receivable and inventory balances
for a customer which is undergoing significant financial difficulties. In its
most recent SEC filing, this customer indicated that if it does not
<PAGE> 10
immediately raise additional working capital it will not be able to finance its
operations beyond September 30, 1998. Recent discussions by the Company's
management with this customer indicate that the customers efforts to obtain
additional financing is proceeding on schedule; however, if this customer is not
successful in raising additional working capital, the Company could be required
to write-off these asset balances, which would have a material adverse effect on
the Company's results of operations.
In October 1997, the Company completed its initial public offering,
pursuant to which the Company issued 5,000,000 shares of its Class A Common
Stock to the public at a price of $11.50 per share and received cash of
approximately $52.4 million, net of underwriting discounts and commissions and
estimated expenses (the "IPO").
The Company is currently in the process of updating its information systems
to be Year 2000 compliant and, in this connection, has spent approximately $1.8
million as of July 31, 1998, of which $1.5 million was capitalized for hardware
and software, and $0.3 million was expensed for consulting and training. The
Company expects its information systems to be Year 2000 compliant by the end of
fiscal 1999 and expects to spend an additional $2.0 to $3.0 million on the
project. To date the Company has not assessed any third party Year 2000 issues
with its customers and vendors but intends to do so over the next few months.
Once this assessment is completed, the Company does not anticipate any
disruption in manufacturing services provided to its customers resulting from
third party Year 2000 issues which would result in any material adverse effect
to the results of its operations, however, no assurance can be given that such
disruption will not result from any third party Year 2000 issues.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended
July 31, July 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Affiliates 24.6% 46.7%
Other 66.1 53.3
Logistics services 9.3 --
--------- ---------
Total revenues 100.0 100.0
Cost of revenues 93.2 90.2
--------- ---------
Gross profit 6.8 9.8
--------- ---------
Selling, general & administrative expenses 3.0 4.4
Restructuring charge -- (0.3)
--------- ---------
Total operating expenses 3.0 4.1
Operating income 3.8 5.7
Interest expense, net 0.5 2.0
--------- ---------
Income before income taxes 3.3 3.7
Provision for income taxes 0.5 0.5
--------- ---------
Net income 2.8 3.2
========= =========
</TABLE>
Total Revenues
Total revenues increased 101.0% from $64.7 million for the three months
ended July 31, 1997 to $130.1 million for the three months ended July 31, 1998.
This increase in total revenues was primarily due to an increase in sales volume
from existing, and to a lesser extent, new customers. Further, revenues were
also positively impacted by a favorable mix of revenues derived from sales made
on a turnkey basis and the addition of $12.1 million of revenue derived from the
provision of logistics services to Netgear (a division of Bay Networks).
Logistics services
<PAGE> 11
revenue consists of sales to customers of product which is purchased from a
supplier (often designated by such customer), and then is tested, configured and
packaged for distribution to the end user or retailer. In addition, IMS'
logistics services consists of order management and call center support to the
end user or retailer on behalf of a customer.
The Company's largest customers during the three months ended July 31, 1998
were Diamond Multimedia, Maxtor, Bay Networks and Polycom, with sales accounting
for approximately 30.6%, 24.6%, 19.4% and 15.1% of total revenues, respectively.
Due to demand volatility for some of these customers' products, particularly
those in the computer peripherals industry, there can be no assurance that
continued levels of volumes and associated revenues will continue in the
foreseeable future.
Gross Profit
Gross profit for the three months ended July 31, 1998 increased to $8.8
million from $6.3 million for the three months ended July 31, 1997. Gross margin
(gross profit as a percentage of total revenues) decreased to 6.8% from 9.8% for
the same periods. The downturn in the Asian economic condition in recent months
has resulted in significant excess capacity in many Asian based contract
manufacturers. Such excess capacity has resulted in increased pricing pressures
and a correlative negative impact on gross margins. The Company expects this
situation to continue over the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 39.1% from $2.8
million for the three months ended July 31, 1997 to $4.0 million for the three
months ended July 31, 1998. The increase in absolute dollars for the three
months ended July 31, 1998 was the result of increased personnel costs and
marketing expenses of approximately $269,000 and $200,000, respectively, related
to the support of new customer development, and increased administrative
expenses of approximately $402,000 related to expanding operations in Hong Kong
and Thailand and expenses related to the implementation of a new enterprise
resource planning system.
As a percentage of total revenues, selling, general and administrative
expenses decreased to 3.0% for the three months ended July 31, 1998 from 4.4%
for the three months ended July 31, 1997. The decrease of selling, general and
administrative expenses as a percentage of net sales in the three months ended
July 31, 1998 was primarily a result of the significant revenue growth in the
quarter ended July 31, 1998.
Net Interest Expense
Net interest expense decreased from $1,255,000 in the three months ended
July 31, 1997 to $660,000 in the three months ended July 31, 1998. The decrease
in net interest expense during the three months ended July 31, 1998 was
primarily due to the repayment of the Maxtor Notes and a reduction in financing
related interest expense, offset in part by increased bank borrowings.
Provision for Income Taxes
The Company's income tax provision for the three months ended July 31, 1998
was computed using an effective tax rate of 14.0%. This rate is based upon the
Company's estimation of its geographic distribution of income for fiscal 1999.
This rate is lower than the United States Federal statutory rate of 35.0% due
primarily to the fact that income generated by the Company's foreign operations
is subject to lower or no foreign income taxes.
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 proceeds of the
initial public
<PAGE> 12
offering, borrowings under its credit facility and cash provided by operations.
At July 31, 1998, the Company's principal sources of liquidity consisted of its
cash and cash equivalents provided by operations and available borrowings under
the Company's credit facilities.
During the three months ended July 31, 1997 and July 31, 1998, cash
generated by operating activities was $3.2 million and $7.1 million,
respectively. Cash generated from operations in the three months ended July 31,
1998 was primarily attributable to increases in accounts payable and decreases
in inventory, offset by increased levels of accounts receivable.
Cash used in investing activities for the three months ended July 31, 1998
was $3.9 million which was related primarily to the purchase of equipment and
leasehold improvements associated with expanding the Company's operations in
Thailand, China and the United States.
During the three months ended July 31, 1998, the Company generated $5.3
million from financing activities. This includes $0.8 million of net proceeds
from the issuance of Class A Common Stock under the Company's various employee
stock benefit plans during the quarter and $4.5 million in additional borrowings
from its line of credit.
At March 31, 1998, the Company established a new committed line of credit
with Union Bank of California, N.A. and The First National Bank of Boston, N.A.,
that, subject to certain limitations, provides up to $30.0 million of borrowing
capacity to fund working capital and capital expenditures. In July 1998, the
Company increased the availability under the line from $30 million to $40
million. Availability under this line is restricted to a percentage of qualified
accounts receivable. The level of qualified accounts receivable at July 31, 1998
was sufficient to allow full usage of the line. This line is secured by a pledge
of the stock of certain indirect subsidiaries of the Company. This line of
credit expires March 31, 2000. At July 31, 1998, borrowings under the line of
credit were $10.5 million, compared to $6.0 million at April 30, 1998. At July
31, 1998 the effective interest rate under the line of credit was approximately
7.3%.
The line of credit requires the Company to comply with certain financial
conditions, including minimum level of profitability and tangible net worth,
minimum financial ratios including a current assets to current liabilities
ratio, earnings before interest expense and income tax to interest expense
ratios, and a maximum ratio of funded debt to earnings before interest expense,
income taxes, depreciation and amortization expenses. The line of credit also
imposes certain restrictions, including limits on amounts attributable to
capital leases, performance bonds, permitted investments, dividends, employee
loans, prepayments of other indebtedness, and capital expenditures. As of July
31, 1998, the Company was in compliance with all such financial 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 expansion
or acquisition of facilities and adoption of new manufacturing technology, and
the mix of revenues derived from consignment and turnkey operations. The Company
anticipates that its planned purchases of capital equipment for fiscal 1999 will
aggregate approximately $35.0 million, of which approximately $3.9 million have
been made as of July 31, 1998. The Company believes that funds available under
its line of credit and any cash generated from operations will be sufficient to
fund its currently anticipated working capital, capital expenditure and debt
service requirements for fiscal 1999. 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 debt or equity securities. There can be no assurance as to
the availability of such financing or, if available, the terms thereof.
<PAGE> 13
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this report on Form 10-Q, the
following are important factors that should be carefully considered in
evaluating the Company and its business.
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.
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 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.
The Company's business has experienced and is expected to continue to
experience significant seasonality due to, among other things, the slowdown
during the summer months which historically has occurred in the electronics
industry. 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.
<PAGE> 14
Customer Concentration; Dependence on Certain Industries
For fiscal 1996, fiscal 1997, fiscal 1998 and for the three months ended
July 31, 1998, Maxtor accounted for approximately 83.1%, 48.6%, 41.5% and 24.6%
of total revenues, respectively, and Bay Networks accounted for approximately
1.6%, 31.3%, 36.5% and 19.4% of the Company's total revenues, respectively. 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. The
industry is cyclical and has historically experienced periods of oversupply and
varying growth rates resulting in reduced demand and pricing pressures on
computer peripherals products. 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.
Risk of Defects
The electronics products manufactured for customers by the Company are
highly complex and at times may contain design or manufacturing defects which
cannot be detected by product acceptance test procedures. Such defects have been
discovered in the past, and there can be no assurance that, despite the
Company's quality control and quality assurance efforts, such defects will not
occur in the future. In the event such defects occur, the Company could be
forced to devote significant resources to remedy the defect, which could have a
material adverse effect on the Company's business and operating results.
Maxtor Corporation- Business Risks; Affiliation
Maxtor 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
stockholder, 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
<PAGE> 15
Manufacturing Agreement, the Company has agreed to provide certain products and
services to Maxtor at competitive 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
that products are not price or quality competitive. 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.
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.
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.
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 types 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. Further, the Company relies on a variety of common
carriers for materials transportation and routes its materials through various
world ports. Any disruption in a common carrier for reason of work stoppage or
strike or the shutdown of a major port or airport could result in manufacturing
and shipping delays or expediting charges which could have a material adverse
effect on the Company's business, financial condition or results of operations.
<PAGE> 16
Competition
The electronics assembly and manufacturing industry is intensely
competitive and includes numerous local, national and international companies, a
number of which have achieved substantial market share. The Company believes
that the primary competitive factors in its targeted markets are cost,
manufacturing technology, product quality, responsiveness and flexibility, the
range of services provided and the location of facilities. To be competitive,
the Company must provide technologically advanced manufacturing services, high
product quality levels, flexible production schedules and reliable delivery of
finished products on a timely and price competitive basis. Failure to satisfy
any of the foregoing requirements could materially and adversely affect the
Company's competitive position. The Company competes against numerous domestic
and foreign manufacturers, including Flextronics International Ltd., Jabil
Circuits, Inc., Sanmina Corporation, SCI Systems, Inc. ("SCI") and Solectron
Corporation, as well as certain large Asia entities. The Company also faces
indirect competition from the manufacturing operations of its current and
prospective customers, which continually evaluate the merits of manufacturing
products internally rather than using the services of EMS providers. Many of the
Company's competitors have more geographically diversified international
operations, as well as substantially greater manufacturing, financial, volume
procurement, research and development, and 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.
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 established a design and prototype production
operation in San Jose. Recently the Company committed to leasing additional
space in its China facility and entered into a new lease agreement to establish
a new manufacturing facility in Mexico, both of which will require additional
leasehold improvements and manufacturing equipment. 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 and North America, invests in
necessary manufacturing equipment and continues to invest in new technologies
and equipment to increase the performance and the cost efficiency of its
manufacturing operations. Currently the Company has 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.
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.
<PAGE> 17
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 Hong Kong, 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.
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
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 and Mexico may
also increase its effective tax rate. The current maximum United States and
Mexico federal income tax rates are 35.0% and 34% respectively. The Company's
effective tax rate for the three months ended July 31, 1998 was approximately
14.0%, and the Company currently expects its effective income tax rate for
fiscal 1999 to be 14.0%.
<PAGE> 18
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, fiscal 1998 and through the three months ended July 31,
1998, 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.
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 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.
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
<PAGE> 19
debt; reduction of existing cash balances; amortization expenses related to
goodwill and other intangible assets; and other charges to operations that may
have a material adverse effect on the Company's business, financial condition or
results of operations. Moreover, there can be no assurance that any equity or
debt financings proposed in connection with any acquisition would be available
to the Company on acceptable terms, or at all, if suitable strategic acquisition
opportunities were to arise. Although the Company expects to analyze any
opportunity before committing its resources, there can be no assurance that any
acquisition that is completed will result in long-term benefits to the Company
or that it will be able to manage the resulting business effectively.
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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The Company has preliminarily evaluated its
level of exposure to the risks and costs associated with Year 2000 problems and
is currently in the process of updating its information systems to be Year 2000
compliant. The Company expects its information systems to be Year 2000 compliant
by the end of fiscal 1999 and expects to spend a total of $4 to $5 million on
the project, a portion of which would relate to newly purchased systems and
would be capitalized. Once the project is successfully completed the Company
anticipates no disruptions in the manufacturing services it provides to its
customers as a result of Year 2000 problems; however, no assurance can be given
that such updates will be fully completed in a timely manner, that the cost will
not become material or that such disruptions will not occur. Moreover, the
Company could be adversely impacted by Year 2000 issues faced by major
distributors, suppliers, customers, vendors and financial service organizations
with which the Company interacts. To date the Company has not assessed the
magnitude, if any, of these issues. Any disruption in manufacturing services
provided by the Company as a result of Year 2000 noncompliance by the Company or
its major suppliers, customers and vendors could materially adversely affect the
Company's business, financial condition and results of operations.
Concentration of Stock Ownership
As of July 31, 1998, the current directors and executive officers of the
Company and their respective affiliates beneficially owned in the aggregate
approximately 80.0% 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, 1998). As a result, such persons, acting together,
would have the ability to approve or disapprove significant corporate
transactions. In addition, the Company's board of directors has 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.
<PAGE> 20
INTERNATIONAL MANUFACTURING SERVICES, INC.
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report
27.01 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the
quarter ended July 31, 1998.
INTERNATIONAL MANUFACTURING SERVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: 9-14-1998 INTERNATIONAL MANUFACTURING SERVICES, INC.
(Registrant)
By: /s/ Nathan Kawaye
----------------------------------------------
Nathan Kawaye
Senior Vice President, Chief Financial Officer
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 12,395
<SECURITIES> 0
<RECEIVABLES> 73,132
<ALLOWANCES> 1,186
<INVENTORY> 34,132
<CURRENT-ASSETS> 121,069
<PP&E> 65,275
<DEPRECIATION> 34,588
<TOTAL-ASSETS> 155,687
<CURRENT-LIABILITIES> 83,827
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 57,045
<TOTAL-LIABILITY-AND-EQUITY> 155,687
<SALES> 130,114
<TOTAL-REVENUES> 130,114
<CGS> 121,331
<TOTAL-COSTS> 121,331
<OTHER-EXPENSES> 3,603
<LOSS-PROVISION> 355
<INTEREST-EXPENSE> 660
<INCOME-PRETAX> 4,165
<INCOME-TAX> 583
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,582
<EPS-PRIMARY> .19<F1>
<EPS-DILUTED> .17
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
