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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER 000-23097
INTERNATIONAL MANUFACTURING SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0393609
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant (based on the last reported sales price of the
Company's Class A Common Stock reported on the Nasdaq National Market System on
July 10, 1998) was approximately $38,274,893.
The number of shares of Common Stock outstanding at June 30, 1998 was
18,564,329.
DOCUMENTS INCORPORATED BY REFERENCE
Sections of the Registrant's definitive Proxy Statement for the
Registrant's 1998 Annual Meeting of Stockholders to be held September 16, 1998
(the "1998 Proxy Statement"), which will be filed with the Securities and
Exchange Commission, are incorporated by reference into Part III of this Report
to the extent stated herein.
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PART I
ITEM 1 -- BUSINESS
THE COMPANY
This Annual Report to Shareholders on Form 10-K ("10-K") contains
forward-looking statements that involve risks and uncertainties. The statements
contained in this 10-K that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including without limitation statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The cautionary statements made in this 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear in this document. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Factors That May
Affect Future Operations Results" below and elsewhere in this document. In
evaluating the Company's business, stockholders and prospective investors should
consider carefully the following factors in addition to the other information
set forth in this document.
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
of the Company include Maxtor Corporation ("Maxtor"), Bay Networks, Inc. ("Bay
Networks"), Diamond Multimedia, Inc. ("Diamond"), and Polycom, Inc. ("Polycom).
SERVICES
The Company offers a broad range of integrated advanced electronic
manufacturing services to OEMs in the computer peripherals, data communications,
telecommunications and other industries.
Custom Design Services. The Company's custom design services include
initial PCB design, design for manufacturability and prototype production. The
objective of these services is to improve product manufacturability, decrease
time to market and reduce overall costs. The Company's design center located in
San Jose, California, together with its access to engineering resources in
Pakistan, offers twenty-four hour-a-day product design services. This center,
acquired by the Company in connection with the Pentagon Systems acquisition, has
over ten years of experience in assisting customers with initial circuit board
design and has expertise in 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 materials procurement function is located in
Hong Kong and San Jose, California, 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
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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 also 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 product 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 full turnkey distribution, order fulfillment, call center
management, 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 repairs of 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 "Factors That Affect Future Operating Results."
SALES AND MARKETING
The Company's customers consist of OEMs in the computer peripherals, data
communications, 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 many
additional OEM customers.
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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 Components Diamond Multimedia Systems, Inc. Multimedia Graphics Cards
Maxtor Corporation Hard Disk Drives
Number 9, Inc. Graphic Accelerator Cards
Symbios Logic, Inc. Scanner Controllers
Synaptics, Inc. Notebook Computer Touch Pad
Data Communications Alteon Networks, Inc. Networking Devices
Bay Networks, Inc. Networking Devices
Farallon Communications, Inc. Networking Devices
Telecommunications 3-M Corporation Telecommunications Conferencing Equipment
Advanced Fibre Communications, Inc. Telecommunications Switching Equipment
Polycom, Inc. Telecommunications Conferencing Equipment
Industrial Polaroid Corporation Scanners
SemiPower Systems, Inc. Motor Control Electronics
Tadiran Telematics, Ltd. Vehicle Locator Units
</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 April 30, 1998, the Company employed 67 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 a
manufacturer's representative 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, could have a material adverse
effect on the Company. There can be no assurance that Maxtor 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. In
addition, if the Company does not expand its business with Bay Networks into new
product lines, the Company expects revenues generated by sales to Bay Networks
to decline, which could materially adversely affect the Company's operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." 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 "Factors That Affect
Future Operating Results -- Customer Concentration; Dependence on Certain
Industries."
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
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indirect competition from the manufacturing operations of its current and
prospective customers, which continually evaluate the merits of manufacturing
products internally rather than using services the 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 either in overall demand for EMS
services or the demand for such services in a specific region of the world,
excess 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 April 30, 1998, the Company had 3,492 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 of its executive officers, could
have a material adverse effect on the Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of April 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert G. Behlman......................... 54 President & Chief Executive Officer
Nathan Kawaye............................. 45 Senior Vice President and Chief Financial
Officer
Neo Kia Quek.............................. 51 Senior Vice President, Manufacturing
Anthony Pham.............................. 38 Senior Vice President, Sales and Marketing
</TABLE>
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 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 Systems, Inc. ("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 Singapore,
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and held various 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.
Anthony Pham has served in various senior management capacities since the
Company's inception in November 1994, including most recently Senior Vice
President of Sales and Marketing. 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 State
University at Hayward.
ITEM 2 -- PROPERTIES
The Company has manufacturing facilities located in Thailand, China and the
United States. The Company also has an operation in Hong Kong which performs
materials procurement for its manufacturing operations, certain engineering and
quality management functions as well as regional administrative functions. All
of the Company's manufacturing facilities have been certified as meeting the ISO
9002 quality standards set by the International Organization for
Standardization. In July 1998, the Company signed an agreement to lease a
112,000 square foot facility in Monterrey, Mexico which will be constructed over
the next several months. The Company expects to occupy the facility and commence
operations in Mexico in early calendar 1999.
Certain additional information as of April 30, 1998 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>
<CAPTION>
APPROX. SMT NUMBER OF
LOCATION SQ. FEET SERVICES LINES EMPLOYEES
-------- -------- -------- ----- ---------
<S> <C> <C> <C> <C>
Changping, China....... 104,882 Complex PCB assembly, systems level 15 1,429
assembly, back plane assembly
Siracha, Thailand...... 259,000 Complex PCB assembly, systems level 8 1,713
assembly, distribution services
Hong Kong.............. 80,000 Engineering services, quality management, 0 188
materials procurement management, regional
administration functions
San Jose, California... 100,000 Full systems manufacturing, backplane 3 162
assembly, PCB assembly, design, prototype
and pre-production services, program
management, procurement and corporate
headquarters
</TABLE>
ITEM 3 -- LEGAL PROCEEDINGS
The Company either directly or indirectly is involved from time to time in
litigation that arises during the normal course of business. In the opinion of
management, the outcome of all such matters presently known to management will
not have a material adverse effect on the Company's business, financial position
or results of operations and will not disrupt the Company's normal business
operations.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the Nasdaq National Market
System under the symbol IMSX.
The high and low sales price of the Company's Class A Common Stock as
reported on the Nasdaq National Market System for each quarter of fiscal 1998
are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
High.................................... N/A $13.36 $11.50 $11.00
Low..................................... N/A $10.86 $ 5.75 $ 7.63
</TABLE>
The Company has not paid cash dividends on its Class A Common Stock and
does not intend to pay any cash dividends in the foreseeable future.
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ITEM 6 -- 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 in this report. The consolidated statement of operations data
set forth below with respect to the years ended March 31, 1996 and April 30,
1997 and 1998, and the consolidated balance sheet data at April 30, 1997 and
1998, are derived from, and are qualified by reference to the audited
consolidated financial statements included elsewhere in this report. The
consolidated statement of operations data for the year ended March 31, 1994 and
1995 and the consolidated balance sheet data at March 31, 1995 and 1996, are
derived from, and are qualified by reference to, audited financial statements
not included herein. The consolidated balance sheet data at March 31, 1994 are
derived from, and are qualified by reference to, unaudited consolidated
financial statements not included 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 year ended
April 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending April 30, 1999 or any other future period. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
FIVE-YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED (1)
---------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31, APRIL 30, APRIL 30,
1994 1995 1996 1997(2) 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from nonaffiliates........................ $ 254 $ 3,089 $ 68,361 $ 80,546 $178,637
Revenues from affiliates(3)........................ 42,093 36,284 340,487 89,149 133,874
Total revenues.............................. 42,347 39,373 408,848 169,695 312,511
Gross profit....................................... 6,553 5,578 13,374 14,667 28,990
Income from operations............................. 3,973 2,730 7,994 3,626 16,564
Net income (loss).................................. 3,114 1,996 6,137 (599) 11,068
Preferred stock dividends.......................... -- -- -- 883 472
Net income (loss) available for common
stockholders..................................... 3,114 1,996 6,137 (1,482) 10,596
Basic net income (loss) per share(4)............... 0.21 0.13 0.41 (0.18) 0.81
Diluted net income (loss) per share(4)............. 0.21 0.13 0.39 (0.18) 0.60
Shares used to compute basic net income (loss) per
share(4)......................................... 15,000 15,000 15,000 8,325 13,091
Shares used to compute diluted net income (loss)
per share(4)..................................... 15,000 15,000 15,578 8,325 18,448
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................... $ 7,583 $ 7,834 $ 10,716 $ 3,980 $ 33,749
Total assets................................ 21,764 24,943 83,687 60,471 126,637
Long-term debt, less current portion............... 1,845 708 -- 12,660 12,559
Long-term debt due Maxtor.......................... 8,469 8,469 4,300 20,000 --
Total stockholders' equity (deficit)........ 6,666 8,662 17,666 (10,367) 52,694
</TABLE>
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(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) In fiscal 1997, the Company recorded a restructuring charge of $3.0 million
associated with the relocation of its Hong Kong manufacturing operations to
China.
(3) 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 years subsequent to fiscal 1996.
(4) 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.
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ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This annual report on Form 10-K 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 the
report on Form 10-K. 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.
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.
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 amount 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 collectively referred to as the
"Recapitalization." For accounting purposes, the redemption of Maxtor's share in
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 electronic manufacturing service ("EMS") provider
to Maxtor to an independent EMS provider serving many customers. These customers
collectively represented approximately 58.5% of total revenues for the twelve
months ended April 30, 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 and 1998, Maxtor accounted for approximately
83.1%, 48.6% and 41.5 % of total revenues, respectively, and Bay Networks
accounted for approximately 1.6%, 31.3% and 36.5% of total revenues,
respectively. For the quarter ended April 30, 1998, Maxtor and Bay Networks
accounted for 38.0% and 21.0% of total revenues, respectively. Based on orders
to date and current forecasts, the Company expects revenues derived from sales
to Bay Networks to decline significantly both in absolute dollars and as a
percentage of total revenues for the quarter ending July 31, 1998. If the
Company does not expand its business with Bay Networks to new product lines,
revenues generated by sales to Bay Networks will continue to decline both in
absolute dollars and as a percentage of total revenues.
During fiscal 1997 and fiscal 1998, the Company expanded its manufacturing
operations and broadened the range of the manufacturing services it provides. In
fiscal 1997, 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
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facilities costs. The Company expects to significantly increase the size of its
manufacturing facility in Changping, China this year and to occupy the
additional space by August 1998. The Company also expanded its manufacturing
facilities in Thailand, over the last two years from 41,000 square feet to over
250,000 square feet. In May 1998, the Company established a wholly-owned
subsidiary in Mexico. 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 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. Backplane business has historically represented an insignificant
percentage of the Company's total revenues but is a strategically important area
over the longer term, as it broadens the Company's service offerings, allows the
Company to differentiate itself from many of its competitors and enhances the
Company's ability to attract new customers. 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 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's effective tax rate for fiscal 1998 was 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 revenues 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. 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 whose products are more
complex in the data communications and telecommunications industries. The
Company's percentage of sales to customers in the computer peripherals industry
in fiscal 1998 was approximately 46.0% and the Company expects this percentage
to grow significantly in fiscal 1999. Accordingly, although the Company expects
its operations in fiscal 1999 to increase, it expects gross margins to decline
significantly in the period due to a decline in sales to customers in the data
communications industry and an increase in sales to customers in the computer
peripherals industry. 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.
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<PAGE> 11
In October 1997, the Company completed its initial public offering and
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 $52.5 million, net of
underwriting discounts and commissions and estimated expenses (the "IPO").
RESULTS OF OPERATIONS
The following table presents the consolidated statements of operations for
the fiscal years indicated, with each line item valued as a percentage of total
revenues for the year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 30,
MARCH 31, --------------
1996 1997 1998
--------- ----- -----
<S> <C> <C> <C>
Revenues:
Other................................................... 16.7% 47.5% 57.2%
Affiliates.............................................. 83.3 52.5 42.8
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
Cost of revenues.......................................... 96.7 91.4 90.7
----- ----- -----
Gross profit.............................................. 3.3 8.6 9.3
----- ----- -----
Selling, general and administrative....................... 1.3 4.7 4.0
Restructuring charge...................................... -- 1.8 --
----- ----- -----
Total operating expenses........................ 1.3 6.5 4.0
----- ----- -----
Income from operations.................................... 2.0 2.1 5.3
Interest and other, net................................... (0.1) (2.3) (1.2)
----- ----- -----
Income (loss) before income taxes......................... 1.9 (0.2) 4.1
Provision for income taxes................................ 0.4 0.2 0.6
----- ----- -----
Net income (loss)......................................... 1.5 (0.4) 3.5
Dividends on convertible preferred stock.................. -- 0.5 0.1
----- ----- -----
Net income (loss) available for common stockholders....... 1.5 (0.9) 3.4
===== ===== =====
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1997
Total Revenues
The Company's total revenues decreased from $408.8 million in fiscal 1996
to $169.7 million in fiscal 1997. Revenues from Maxtor and affiliates declined
$251.4 million from fiscal 1996 to fiscal 1997 primarily due to a change in the
terms on which sales were made to Maxtor, from a full turnkey to a partial
turnkey arrangement as well as a decline in volume of units shipped to Maxtor of
approximately 12%. Revenues from other customers, which are derived primarily
from sales made on a full turnkey basis, increased $12.2 million from fiscal
1996 to fiscal 1997 primarily due to an increase in the volume of units shipped
which, in turn, reflected increases in the number of new customers in the data
communications industry, offset in part by decreased revenues from a previously
greater than 10% customer.
Gross Profit
Gross profit increased 9.7% from $13.4 million in fiscal 1996 to $14.7
million in fiscal 1997. The increase was primarily due to the relocation during
fiscal 1997 of the Company's Hong Kong manufacturing operations to China which
reduced the Company's direct labor costs by approximately $6.5 million compared
to fiscal 1996. This effect, however, was partially offset by an associated
reduction in selling prices, as the Company passed through certain cost savings
to its customers, and by a decline in unit volumes to Maxtor.
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<PAGE> 12
The Company's gross margins 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 because the 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 typically do not translate into a proportionate increase
in gross profits, which then result in relatively lower gross margins.
Gross margins increased from 3.3% in fiscal 1996 to 8.6% in fiscal 1997
primarily as a result of a shift in the terms of sales to Maxtor from full
turnkey to partial turnkey and a reduction in direct labor costs attributable to
the relocation of the Company's Hong Kong manufacturing operations to China.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 49.5% from $5.4
million in fiscal 1996 to $8.0 million in fiscal 1997. As a percentage of total
revenues, selling, general and administrative expenses were 1.3% and 4.7% in
fiscal 1996 and 1997, respectively. The increase in absolute dollars and as a
percentage of revenues was the result of increased personnel costs and marketing
expenses in the United States to support new customer development efforts
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
also recorded $163,000 of goodwill amortization resulting from the acquisition
of Pentagon Systems.
Restructuring Charge
During fiscal 1997, the company recorded a charge of $3.0 million
associated with the relocation of its Hong Kong manufacturing operations in
China. The Company has completed the restructuring activities associated with
the move of manufacturing from Hong Kong to China. See Note 6 of Notes to
Consolidated Statements.
Net Interest Expense
Net interest expense increased from $64,000 in fiscal 1996 to $4.0 million
in fiscal 1997 due to the indebtedness incurred in connection with the
Recapitalization.
Provision for Income Taxes
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. The Company's provision for income taxes for fiscal 1996
and 1997, consisting primarily of foreign income taxes related to its Hong Kong
operations, was $1.8 million and $253,000, respectively.
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 reversal of approximately $350,000 of
previously established employee bonus awards due to changes to awards made by
management.
11
<PAGE> 13
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1998
Total Revenues
Total revenues increased 84.2% from $169.7 million in fiscal 1997 to $312.5
million in fiscal 1998. The increase in total revenues for such period was
primarily due to an increase in the volume of units shipped to Bay Networks,
Maxtor and Polycom, as well as an increase in the material content of the units
shipped to Maxtor, offset in part by declining unit prices.
The Company's largest customers during both fiscal 1997 and fiscal 1998
were Maxtor and Bay Networks. Sales to Maxtor for fiscal 1997 and 1998 accounted
for approximately 48.6% and 41.5% respectively, of total revenues. Sales to Bay
Networks for fiscal 1997 and 1998 were 31.3% and 36.5% of total revenues,
respectively. The Company expects revenues derived from sales to Maxtor to
decline as a percentage of total revenues in fiscal 1999. Based on orders to
date and current forecasts, the Company expects revenues derived from sales to
Bay Networks to decline significantly both in absolute dollars and as a
percentage of total revenue for the quarter ending July 31, 1998. If the Company
does not expand its business with Bay Networks to new product lines, revenues
generated by sales to Bay Networks will continue to decline both in absolute
dollars and as a percentage of total revenues.
Gross Profit
Gross profit increased 97.7% from $14.7 million in fiscal 1997 to $29.0
million in fiscal 1998. Gross profit increased in 1998 principally as a result
of (i) increased volume of shipments to both new and existing customers,
including Maxtor and Bay Networks, (ii)lower manufacturing costs achieved by
transferring Hong Kong manufacturing operations to China, (iii) devaluation of
the Thai currency (which resulted in reduced overhead and labor expenses and
generated net currency gains of approximately $500,000), and (iv) the sale of
excess inventory to a customer which had previously been reserved, offset in
part by increased costs associated with the establishment of U.S. manufacturing
operations. Gross margin (gross profit as a percentage of total revenues)
increased from 8.6% in fiscal 1997 to 9.3% in fiscal 1998 primarily due to the
increase in gross profit for the reasons enumerated above. While the Company
expects its operations to grow in fiscal 1999, it expects gross margins to
decline significantly in the period due to a decline in sales to customers in
the data communications industry and an increase in sales to customers in the
computer peripherals industry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 56.8% from $8.0
million in fiscal 1997 to $12.6 million in fiscal 1998. As a percentage of total
revenues, selling, general and administrative expenses were 4.7% and 4.0%,
respectively, for the same periods. The increase in absolute dollars for fiscal
1998 from fiscal 1997 was a result of increased personnel costs of approximately
$1.4 million related to the support of new customers, the inclusion of
approximately $1.3 million of expenses (including goodwill amortization)
attributable to the operation of Pentagon Systems which was acquired in January
1997 and, to a lesser extent, increased administrative expenses associated with
expanding operations in China, Thailand and San Jose, California. The Company
expects its selling, general and administrative expenses to increase in absolute
dollars in the foreseeable future as it expands its operations to Mexico and
installs new enterprise-wide management information systems.
Net Interest Expense
Net interest expense decreased from $4.0 million for fiscal 1997 to $3.7
million for fiscal 1998. The decrease in net interest expense during fiscal 1998
was primarily due to the repayment of the Maxtor Notes in October of 1997,
offset in part by increased bank borrowings and a higher average interest rate
on those borrowings.
12
<PAGE> 14
Provision for Income Taxes
The Company's income tax provision for fiscal 1998 was computed using an
effective tax rate of 14.0%. This rate is lower than the United States Federal
statutory rate of 35.0% due primarily to the fact that income generated by
foreign operations is subject to lower or no foreign income taxes and the
Company's United States operations generated losses, for which the Company did
not record any tax benefit. At April 30, 1998, the Company had United States
federal net operating loss carryforwards of approximately $10.0 million, of
which approximately $4.4 million were subject to annual limitations on
utilization. As of such date, the Company had gross United States deferred tax
assets of approximately $4.6 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 be unable to realize its United States deferred tax assets.
Accordingly, a full valuation reserve for such assets has been recorded. The
income tax provision for fiscal 1997 consisted primarily of foreign income taxes
related to its Hong Kong 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 facilities and cash provided by operations. At April 30, 1998, the
Company's principal sources of liquidity consisted of cash provided by
operations, available borrowings under the Company's credit facilities, and net
proceeds from the IPO.
In fiscal 1996 and fiscal 1997 cash generated from operating activities was
$7.7 million and $6.8 million, respectively. In fiscal 1998 cash consumed by
operations aggregated $5.1 million. The use of cash from operations in fiscal
1998 was primarily attributable to increased levels of accounts receivable and
inventory.
Cash used in investing activities in fiscal 1996, 1997 and 1998 was $8.9
million, $12.1 million, and $22.6 million, respectively, and 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 fiscal 1997, the Company generated $7.2 million from financing
activities, including $12.1 million in net proceeds from sales of Common Stock
and Preferred Stock, $12.5 million from issuance 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.
During fiscal 1998, the Company generated $28.9 million from financing
activities, including net proceeds of $52.5 million from the IPO. During this
year, the Company repaid the Maxtor Notes in their entirety and also repaid $3.0
million under its bank line.
At March 31, 1998, a new committed line of credit was established with
Union Bank of California, N.A. and Bank Boston, N.A. that, subject to certain
limitations, provided for up to $30 million of borrowing capacity. Availability
under this line is restricted to a percentage of qualified accounts receivable.
The level of qualified accounts receivable at April 30, 1998 was sufficient to
allow for full usage of the line. This line is secured by a pledge of the stock
of certain indirect subsidiaries of the Company. This new line of credit expires
March 31, 2000. At April 30, 1998, borrowings under the new line of credit were
$6 million, compared to $9 million under the previous line of credit at April
30, 1997. At April 30, 1998, the effective interest rate under the line of
credit was approximately 7.2%.
The new line of credit requires the Company to comply with certain
financial conditions, including minimum levels of profitability and tangible net
worth, minimum financial ratios including a current assets to current
liabilities ratio, earnings before interest expense and income taxes 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,
dividend, employee loans, prepayment of other
13
<PAGE> 15
indebtedness, and capital expenditures. As of April 30, 1998, the Company was in
compliance with all such covenants and restrictions.
In July 1998, the Company increased the availability under the existing
line of credit from $30 million to $40 million.
The Company's future liquidity and cash requirements will depend upon many
factors, including the level of revenue generated from its operations, the
degree and pace of its expansion or acquisition of facilities and adoption of
new manufacturing technology, and the mix of revenue derived from consignment
and turnkey manufacturing. The Company anticipates that its planned purchases of
capital equipment for fiscal 1999 will require aggregate expenditures of
approximately $35 million. The Company believes that funds available under its
line of credit and any cash generated from operations will be sufficient to
satisfy its currently anticipated working capital, capital expenditures 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
assurances as to the availability of such financing or, if available, the terms
thereof.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
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
14
<PAGE> 16
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, among other things, to 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.
CUSTOMER CONCENTRATION; DEPENDENCE ON CERTAIN INDUSTRIES
For fiscal 1996, fiscal 1997 and fiscal 1998, Maxtor accounted for
approximately 83.1%, 48.6% and 41.5% of total revenues, respectively, and Bay
Networks accounted for approximately 1.6%, 31.3% and 36.5% of the Company's
total revenues, respectively. For the quarter ended April 30, 1998, Bay Networks
accounted for 21.0% of total revenues. Based on orders to date and current
forecasts, the Company expects revenue derived from sales to Bay Networks to
decline both in absolute dollars and as a percentage of total revenues for the
quarter ending July 31, 1998. If the Company does not expand its business with
Bay Networks to new product lines, revenues generated by sales to Bay Networks
will continue to decline both in absolute dollars and as a percentage 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. 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. The
Company has recently been notified by a customer of a manufacturing defect which
has been discovered in a product manufactured by the
15
<PAGE> 17
Company. Based on the Company's analysis performed so far, the Company currently
believes that the ultimate resolution of this issue will not have a material
adverse impact on its results of operations; however, the Company can give no
assurance of such a positive outcome.
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 levels which the Company had 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 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
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<PAGE> 18
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.
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 two years. 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
17
<PAGE> 19
leasing additional space in its China facility and entered into a new lease
agreement to establish a 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.
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. To
date, economic problems in Thailand and other parts of Asia have not had an
adverse
18
<PAGE> 20
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
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 34.0% respectively. The Company's
effective tax rate for fiscal 1998 was 14.0%.
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 fiscal 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.
19
<PAGE> 21
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 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 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
20
<PAGE> 22
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 $3 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 and it is currently unable to anticipate 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 June 30, 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 April 30, 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.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial statements:
Report of Independent Accountants......................... 25
Report of Independent Auditors............................ 26
Balance Sheets............................................ 27
Statements of operations.................................. 28
Statements of stockholders' equity........................ 29
Statements of cash flows.................................. 30
Notes to financial statements............................. 31
Financial Statement Schedule:
II. -- Valuation and Qualifying Accounts and Reserves..... 45
</TABLE>
All other schedules are omitted because they are not required or the
required information is shown in the consolidated financial statements or notes
thereto.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
21
<PAGE> 23
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 1998 Annual meeting of Stockholders, to be held on September 16, 1998
(the "1998 Proxy Statement") under the captions "Election of Directors" and
Security Ownership of Certain Beneficial Owners and Management -- Compliance
with the Reporting Requirements of Section 16(a)." For information regarding
executive officers of the Company, see Part I of this Form 10-K under the
caption "Business -- Executive Officers of the Registrant."
ITEM 11 -- EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from
the information contained in the 1998 Proxy Statement under the caption
"Executive Compensation."
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
the information contained in the 1998 Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K:
1. Financial Statements
See Index to Consolidated Financial Statements at Item 8 on page 21 of
this Report.
2. Financial Statement Schedule
See Index to Consolidated Financial Statements at Item 8 on page 21 of
this Report.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
2.1+ Recapitalization Agreement dated as of May 16, 1996 by and
among the Company, Maxtor and the Investors named therein.
2.2+ Redemption Agreement dated as of May 16, 1996 by and between
the Company and Maxtor.
3.1+ Amended and Restated Certificate of Incorporation of the
Company.
3.3+ Amended and Restated Bylaws of the Company.
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.
10.1+ Form of Indemnification Agreement entered into by and
between the Company and each of its directors and managers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1997 Stock Plan and related agreements.
10.4+ 1997 Employee Stock Purchase Plan and related agreements.
10.5+ 1997 Non-U.S. Employee Stock Purchase Plan and related
agreements.
10.6+ Summary of Management Incentive Plan.
10.7+ 1997 Director Option Plan and related agreements.
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.8+ Form of Common Stock Purchase Agreement dated June 1996 by
and between the Company and management.
10.9+ Stockholders Agreement dated June 16, 1996 by and among the
Company, 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 Company and the Stockholders named
therein.
10.11+ Senior Subordinated Promissory Note dated June 10, 1996
issued by the Company 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 Company and Maxtor.
10.15+ Manufacturing and Purchase Agreement dated as of January 1,
1996 and between the Company 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
Company and Robert G. Behlman.
10.21+ Credit Agreement dated as of June 13, 1996 by and among the
Company, the Lenders referred to therein and Chemical Bank,
as amended.
10.22+ Offer Letter dated October 14, 1994 by and between the
Company and N.K. Quek.
10.23+ Offer Letter dated June 1, 1996 by and between the Company
and Nathan Kawaye.
10.24 Lease Agreement dated June 29, 1998 by and between
Inmobiliaria Nuevo Aeropuerto, S.A. de C.V. and IMS
International Manufacturing Services de Monterrey, S. de
R.L. de C.V.
10.25 Offer Letter dated October 14, 1994 by and between the
Company and Anthony Pham.
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 PricewaterhouseCoopers LLP Independent
Accountants.
23.2 Consent of Ernst & Young LLP Independent Auditors.
24.1 Power of Attorney (See page 24).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ This document is incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-34557), as declared effective on October
22, 1997.
All other exhibits for which provision is made in Item 601 of Registration
S-K of the Securities Act of 1933, as amended, are either not required under the
instructions related thereto or are inapplicable, and therefore have been
omitted.
(b) Reports on Form 8-K:
Not Applicable.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized on this 31st day of July, 1998.
International Manufacturing Services,
Inc.
By: /s/ ROBERT G. BEHLMAN
------------------------------------
Robert G. Behlman
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert
G. Behlman and Nathan Kawaye and each of them, jointly and severally, as his
attorneys-in-fact, each with full power of substitution, for him in any
capacities, to sign any and all amendments to the Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorneys-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT G. BEHLMAN Chairman of the Board, President July 31, 1998
- ----------------------------------------------------- and Chief Executive Officer
Robert G. Behlman
/s/ NATHAN KAWAYE Chief Financial Officer and July 31, 1998
- ----------------------------------------------------- Senior Vice President
Nathan Kawaye
/s/ WILLIAM J. ALMON Director July 31, 1998
- -----------------------------------------------------
William J. Almon
/s/ DIXON R. DOLL Director July 31, 1998
- -----------------------------------------------------
Dixon R. Doll
/s/ JOHN A. DOWNER Director July 31, 1998
- -----------------------------------------------------
John A. Downer
/s/ FREDRIC W. HARMAN Director July 31, 1998
- -----------------------------------------------------
Fredric W. Harman
/s/ MARK ROSSI Director July 31, 1998
- -----------------------------------------------------
Mark Rossi
/s/ J. LARRY SMART Director July 31, 1998
- -----------------------------------------------------
J. Larry Smart
/s/ PAUL J. TUFANO Director July 31, 1998
- -----------------------------------------------------
Paul J. Tufano
</TABLE>
24
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
International Manufacturing Services, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index on page 21 present fairly, in all material respects, the
financial position of International Manufacturing Services, Inc. and its
subsidiaries at April 30, 1998 and 1997, and the results of their operations and
their cash flows for the two years then ended 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.
PricewaterhouseCoopers LLP
San Jose, California
May 22, 1998
25
<PAGE> 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of International Manufacturing
Services, Inc. (formerly the combination 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), for the year March 31, 1996. Our audit also included the
financial statement schedule listed in the index at Item 14(a). These
consolidated financial statements and schedules 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows for International Manufacturing Services, Inc. for the year ended
March 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
April 25, 1996
26
<PAGE> 28
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,828 $ 3,939
Accounts receivable, less allowance for doubtful accounts
of $210 and $827....................................... 10,976 34,980
Accounts receivable from Maxtor and affiliates............ 5,344 10,309
Inventories............................................... 20,242 41,378
Other current assets...................................... 2,612 2,563
-------- --------
Total current assets.............................. 42,002 93,169
Property and equipment, net................................. 13,936 29,026
Other assets................................................ 4,533 4,442
-------- --------
$ 60,471 $126,637
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 22,570 $ 42,375
Accounts payable to Maxtor................................ 358 246
Accrued liabilities....................................... 6,015 10,713
Bank borrowings........................................... 9,000 6,000
Current portion of long-term debt......................... 79 86
-------- --------
Total current liabilities......................... 38,022 59,420
Long-term debt, less current portion........................ 12,660 12,559
Long-term debt due to Maxtor................................ 20,000 --
Deferred tax liabilities.................................... 156 1,964
Commitments (Notes 7 and 8)
Stockholder's Equity (deficit):
Preferred stock $0.001 par value; 8,509,425 and 1,500,000
shares authorized; 6,000,000 and none shares issued and
outstanding............................................ 6 --
Common Stock $0.001 par value; 25,500,000 shares
authorized; 7,327,500 and 18,386,281 shares issued and
outstanding............................................ 7 18
Additional paid-in capital.................................. 12,793 65,253
Distributions in excess of net book value (Note 1).......... (20,608) (20,608)
Retained earnings (accumulated deficit)..................... (2,565) 8,031
-------- --------
Total stockholders' equity (deficit).............. (10,367) 52,694
-------- --------
$ 60,471 $126,637
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------
APRIL 30,
MARCH 31, --------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Other.................................................... $ 68,361 $ 80,546 $178,637
Affiliates............................................... 340,487 89,149 133,874
-------- -------- --------
Total revenues................................... 408,848 169,695 312,511
Cost of revenues........................................... 395,474 155,028 283,521
-------- -------- --------
Gross profit............................................... 13,374 14,667 28,990
-------- -------- --------
Selling, general and administrative........................ 5,380 8,041 12,605
Restructuring charge....................................... -- 3,000 (179)
-------- -------- --------
Total operating expenses......................... 5,380 11,041 12,426
-------- -------- --------
Income from operations..................................... 7,994 3,626 16,564
Interest expense........................................... (64) (4,048) (3,776)
Interest and other income.................................. -- 76 88
-------- -------- --------
Income (loss) before income taxes.......................... 7,930 (346) 12,876
Provision for income taxes................................. 1,793 253 1,808
-------- -------- --------
Net income (loss).......................................... 6,137 (599) 11,068
Dividends on convertible preferred stock................... -- 883 472
Net income (loss) available for common stockholders........ $ 6,137 $ (1,482) $ 10,596
======== ======== ========
Basic net income (loss) per share.......................... $ 0.41 $ (0.18) $ 0.81
======== ======== ========
Diluted net income (loss) per share........................ $ 0.39 $ (0.18) $ 0.60
======== ======== ========
Shares used to compute basic net income (loss) per share... 15,000 8,325 13,091
======== ======== ========
Shares used to compute diluted net income (loss) per
share.................................................... 15,578 8,325 18,448
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 30
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL DISTRIBUTIONS EARNINGS
------------------- -------------------- PAID-IN IN EXCESS OF NET (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL BOOK VALUE DEFICIT) TOTAL
---------- ------ ----------- ------ ---------- ---------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 April
1996 to reflect the
change in the
Company's fiscal
year end (Note
3)................. -- -- -- -- -- -- 1,343 1,343
Recapitalization and
redemption of
Maxtor stock....... -- -- (12,015,000) (12) (4,507) (20,608) (15,571) (40,698)
Issuance of common
stock net of
issuance costs..... -- -- 3,855,000 4 2,531 -- -- 2,535
Issuance of
convertible
preferred stock,
net of issuance
costs.............. 6,000,000 6 -- -- 9,530 -- -- 9,536
Issuance of common
stock on Pentagon
Acquisition........ -- -- 450,000 -- 705 -- -- 705
Issuance of common
stock upon exercise
of options......... -- -- 37,500 -- 28 -- -- 28
Net loss............. -- -- -- -- -- -- (599) (599)
Dividends on
convertible
preferred stock.... -- -- -- -- -- -- (883) (883)
---------- --- ----------- ---- ------- -------- -------- --------
Balance at April 30,
1997............... 6,000,000 6 7,327,500 7 12,793 (20,608) (2,565) (10,367)
Conversion of
Preferred Stock to
Common Stock....... (6,000,000) (6) 6,000,000 6 -- -- -- --
Issuance of Common
Stock in connection
with initial public
offering, less
issuance costs..... -- -- 5,000,000 5 52,373 -- -- 52,378
Issuance of Common
Stock upon exercise
of options......... -- -- 58,781 -- 46 -- -- 46
Amortization of
deferred
compensation....... -- -- -- -- 41 -- -- 41
Dividends on
Convertible
Preferred Stock.... -- -- -- -- -- -- (472) (472)
Net income........... -- -- -- -- -- -- 11,068 11,068
---------- --- ----------- ---- ------- -------- -------- --------
Balance at April
30,1998............ -- $-- 18,386,281 $ 18 $65,253 $(20,608) $ 8,031 $ 52,694
========== === =========== ==== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 31
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
APRIL 30,
MARCH 31, -------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)......................................... $ 6,137 $ (599) $ 11,068
Adjustments to reconcile net income (loss) to net cash
provided by (used) in operating activities:
Depreciation and amortization........................... 6,145 6,347 8,521
Deferred income taxes................................... 300 (144) 1,808
Other................................................... 12 -- 41
Changes in assets and liabilities:
Accounts receivable..................................... (12,682) 5,440 (24,004)
Accounts receivable from Maxtor and affiliates..... (4,676) 4,124 (4,965)
Inventories........................................ (43,577) 3,154 (21,136)
Other current assets............................... 985 (955) (432)
Other assets....................................... 321 (703) (397)
Accounts payable................................... 44,358 (5,561) 19,805
Accounts payable to Maxtor......................... 8,536 (4,565) (112)
Accrued liabilities................................ 1,029 805 4,698
Income taxes payable............................... 822 (600) --
-------- -------- --------
Net cash provided by (used in) operating
activities....................................... 7,710 6,743 (5,105)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net................... (8,980) (8,372) (22,642)
-------- -------- --------
Proceeds from disposal of property and equipment.......... 45 -- --
Acquisition of Pentagon Systems, net of cash acquired of
$700.................................................... -- (3,716) --
-------- -------- --------
Net cash used in investing activities..................... (8,935) (12,088) (22,642)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit.............. -- 9,000 (3,000)
Proceeds from issuance of notes........................... -- 12,500 --
Proceeds from issuance of convertible preferred stock..... -- 9,536 --
Recapitalization and distributions to Maxtor.............. -- (24,998) --
Principal payments on debt and capital lease
obligations............................................. (1,136) (606) (20,094)
Payment of dividends...................................... -- (797) (472)
Capital contribution...................................... 2,867 -- --
Proceeds from issuance of common stock.................... -- 2,563 52,424
-------- -------- --------
Net cash provided by financing activities.......... 1,731 7,198 28,858
-------- -------- --------
Net change in cash and cash equivalents..................... 506 1,853 1,111
Cash and cash equivalents at beginning of period............ 432 975 2,828
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 938 $ 2,828 $ 3,939
-------- -------- --------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest................................................ $ 100 $ 2,867 $ 3,412
Income taxes............................................ 672 832 50
NONCASH INVESTING AND FINANCING ACTIVITIES:
Items settled through accounts receivable from affiliates
Fixed assets transferred from affiliates................ $ (912) $ -- $ --
Offset of long-term debt to Maxtor receivable from
Maxtor................................................. (4,169) -- --
Issuance of note payable to Maxtor in connection with the
recapitalization........................................ -- (15,700) --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 32
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 on a turnkey basis. 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 with an emphasis on the OEMs based in the
United States. The Company conducts its business within one industry segment.
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. Results of operations for the month of
April 1996 were credited directly to retained earnings (see Note 3). 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.
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 three distinct wholly-owned subsidiaries incorporated in Delaware, Cayman
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 million ($24 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 note payable of $20 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 7 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
31
<PAGE> 33
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 April 30,
1997 and 1998, all of the Company's investments are classified as cash
equivalents on the balance sheet. At April 30, 1997 and 1998 the fair value of
the Company's investments approximated cost.
The Company classifies its investment securities as either held-to-maturity
or available-for-sale. At April 30, 1997 and 1998 the Company did not hold any
significant 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 for
equipment and fifteen years for buildings. 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.
The Company evaluates the realizability of long-term assets on an ongoing
basis in light of changes in business conditions, events or circumstances that
may indicate the potential impairment of long-term assets.
Goodwill
Goodwill, arising from the Pentagon Systems acquisition (see Note 5), has
been included in other assets and is being amortized over its estimated useful
life of seven years.
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. During fiscal 1998, sales to Maxtor were contracted
both on a full turnkey as well as a partial consignment basis and sales to other
customers were generally contracted for on a turnkey basis. During fiscal 1997,
sales to Maxtor were contracted for on a partial consignment basis and sales to
other customers were contracted for on a turnkey basis. However, during fiscal
1996, substantially all projects were contracted for on a turnkey basis.
Management believes that if the partial turnkey arrangement had been in place
with Maxtor during fiscal year 1996, the net impact of such arrangement on
reported gross profit and income from operations for fiscal year 1996 would not
have been material.
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 amounts have not been material. The
Company has not undertaken any material foreign currency hedging activities.
32
<PAGE> 34
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 quoted market price of the
Company's common stock 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 10).
Earnings per share
The Company has adopted Statement of Accounting Standard No. 128 ("FAS
128"), Earnings Per Share ("EPS"). FAS 128 requires presentation of both basic
and diluted EPS. For all periods presented, basic EPS as presented is computed
by dividing net income (loss available to common stockholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period. Diluted EPS is computed using the weighted average number of common and
dilutive potential common stock shares outstanding during the period. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk, consist principally of cash equivalents and
accounts receivable. The Company's investment policies limit the amount of
credit exposure to any one financial institution and restrict placement of these
investments to financial institutions evaluated as highly credit-worthy. The
Company's products are sold worldwide to OEMs with an emphasis on the United
States market. The Company performs ongoing credit evaluations of its customers'
financial condition and at times does require collateral for its receivables.
The Company maintains reserves for potential credit losses. As of April 30,
1997, three customers accounted for approximately 34%, 32% and 11% of the
accounts receivable balance. As of April 30, 1998, four customers accounted for
approximately 34%, 22%, 14% and 12% of the accounts receivable balance.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income." FAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
periods beginning after December 15, 1997. Comprehensive income as defined
included all changes in equity (net assets) during the period from non-owner
sources. Reclassifications of financial statements for earlier periods for
comparative purposes is required. The Company will adopt FAS 130 in its fiscal
1999 financial statements.
33
<PAGE> 35
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures About Segments
of An Enterprise and Related Information." FAS 131 revises information regarding
the reporting of certain operating segments for periods beginning after December
15, 1997. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company will adopt FAS
131 in its 1999 fiscal financial statements, although currently it is not
anticipated that it will have any significant impact on its financial statement
reporting requirements.
NOTE 2 -- BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
APRIL 30,
---------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials........................................ $ 17,675 $ 36,268
Work-in-process...................................... 2,359 3,666
Finished Goods....................................... 208 1,444
-------- --------
Total inventories............................ $ 20,242 $ 41,378
-------- --------
Property and equipment:
Machinery and equipment.............................. $ 37,228 $ 52,194
Furniture and fixtures............................... 2,018 3,776
Building and leasehold improvements.................. 4,027 5,463
-------- --------
43,273 61,433
Less: Accumulated depreciation and amortization...... (29,337) (32,407)
-------- --------
Total property and equipment................. $ 13,936 $ 29,026
-------- --------
Accrued liabilities:
Accrued employee compensation........................ $ 1,197 $ 1,987
Other accrued liabilities............................ 4,818 8,726
-------- --------
Total accured liabilities.................... $ 6,015 $ 10,713
======== ========
</TABLE>
Machinery and equipment at April 30, 1997 and 1998 include approximately
$321,000 and $251,000 of assets under leases that have been capitalized.
Accumulated depreciation for such equipment at April 30, 1997 and 1998
approximated $84,000 and $89,000, 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.
34
<PAGE> 36
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated statement of operations and statement of cash flows data
for the one month ended April 30, 1996 are summarized below (in thousands).
<TABLE>
<CAPTION>
MONTH ENDED
APRIL 30,
1996
-----------
<S> <C>
CONSOLIDATED 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
========
CONSOLIDATED STATEMENT OF CASH FLOW DATA:
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>
35
<PAGE> 37
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- EARNINGS PER SHARE
FAS 28 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------- ------------------------------- ----------------------------
NET PER SHARE NET (LOSS) PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ---------- ------ --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) available for
common stockholders............ $6,137 15,000 $0.41 $(1,482) 8,325 $(0.18) $10,596 13,091 $0.81
===== ====== =====
Effects of dilutive securities:
Stock options.................... -- 578 -- -- -- 2,497
Preferred Stock.................. -- -- -- -- 472 2,860
------ ------ ------- ----- ------- ------
Diluted EPS:
Net income (loss)................ $6,137 15,578 $0.39 $(1,482) 8,325 $(0.18) $11,068 18,448 $0.60
====== ====== ===== ======= ===== ====== ======= ====== =====
</TABLE>
Options to purchase 589,000 shares of common stock were outstanding at
April 30, 1998 but were not included in the computation of diluted EPS as their
average exercise price was higher than the average market price of the stock.
Options to purchase 2,800,000 options of common stock were outstanding at April
30, 1997 but were not included in the computation of diluted EPS as the Company
was in a loss situation and to do so would have been anti-dilutive.
NOTE 5 -- 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 $652,000 at April 30, 1998.
NOTE 6 -- 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. All of the restructuring actions
were substantially completed by July 31, 1997 and the remainder of the
restructuring reserve of $179,000 was reversed in fiscal 1998.
36
<PAGE> 38
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- DEBT AND BANKING ARRANGEMENTS
<TABLE>
<CAPTION>
APRIL 30,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior subordinated notes due through 2002............... $20,000 $ --
12% junior subordinated notes due through 2005........... 12,500 12,500
Line of credit........................................... 9,000 6,000
Capital lease obligations................................ 239 145
------- -------
41,739 18,645
Current portion of capital lease obligations and
short-term borrowings.................................. (9,079) (6,086)
------- -------
Long-term debt and capital lease obligations............. $32,660 $12,559
======= =======
</TABLE>
The senior subordinated notes were repaid in fiscal 1998 upon the closing
of the initial public offering. The 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, 1998, management believes the fair values of the Company's
debt approximates book value based on prevailing interest rates.
At April 30, 1998, future minimum principal payments on long-term debt and
capitalized lease obligations were as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 30,
----------------------------
<S> <C>
1999............................................. $ 86
2000............................................. 59
2001............................................. --
2002............................................. --
2003............................................. --
Thereafter....................................... 12,500
-------
$12,645
=======
</TABLE>
In June 1996, the Company entered into a five year loan and security
agreement (the "Loan Agreement") with a U.S. bank which provided for borrowings
of up to $32 million. Borrowings under the Loan Agreement bore interest at LIBOR
plus 2.25% or an alternate base rate plus 1.25% and were secured by all of the
Company's assets. At April 30, 1997, borrowings under the Loan Agreement totaled
$9 million. In March 1998, the Company canceled the existing line and entered
into a two-year revolving line of credit (the "Line of Credit") with a group of
U.S. banks which provides for borrowings of up to $30 million. The Loan
Agreement expires March 31, 2000. The availability of borrowings under the Loan
Agreement is restricted based on levels of qualified accounts receivable. At
April 30, 1998, the Company incurred interest at either the prime rate or LIBOR
plus 1.25%. The effective interest rate for borrowings under the Loan Agreement
was approximately 7.2% as of April 30, 1998. At April 30, 1998, borrowings under
the Loan Agreement totaled $6.0 million and $24.0 million was available for
additional borrowings. The Loan Agreement requires the Company to maintain
certain financial ratios and covenants. The Company was in compliance with such
covenants as of April 30, 1998.
37
<PAGE> 39
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- 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, 1998 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR ENDING APRIL 30, LEASES LEASES
---------------------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999...................................................... $ 95 $ 2,830
2000...................................................... 62 2,137
2001...................................................... -- 2,116
2002...................................................... -- 1,712
2003...................................................... -- 1,473
Thereafter................................................ -- 6,154
---- -------
Total minimum lease payments.............................. 157 $16,422
=======
Less amount representing interest......................... 12
----
$145
====
</TABLE>
Rent expense for operating leases was $2,732,000, $3,158,000 and $2,615,000
during the years ended March 31, 1996, April 30, 1997, and April 30, 1998,
respectively.
NOTE 9 -- STOCKHOLDERS' EQUITY
Preferred Stock
At April 30, 1997, the aggregate authorized number of preferred shares was
8,509,425 of which 6,000,000 and 2,509,425 were designated as Series A and
Series B, respectively.
Each share of Series A and Series B was converted into one share of Common
Stock upon the completion of the underwritten public offering (IPO) of Common
Stock in October 1997 and the Company's authorized preferred share capital was
revised to 1,500,000 shares. The holders of Series A and Series B had voting
rights equal to Common Stock on an if-converted basis.
Common Stock
In conjunction with the recapitalization (Note 1), the Company issued
Maxtor warrants to purchase 300,000 shares of its Class A common stock at
approximately $6.67 per share. The warrants had a term of ten years but were
exercisable only in the event that the Company failed to repay the 7% senior
subordinated debt due to Maxtor by June 13,1998. The loan was repaid in October
1997 following the completion of the IPO and accordingly the warrants expired
without being exercised.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
Pursuant to the terms of the Company's 1996 Stock Option Plan ("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% for the first year and monthly thereafter. However,
2,136,000 options granted in June and July 1996 provided for 25% vesting
immediately upon grant. As of April 30, 1998, 492,986 shares were available for
issuance.
38
<PAGE> 40
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 Stock Option Plan
In August 1997, the Company adopted the 1997 Stock Option Plan ("1997
Plan") and reserved 1,750,000 shares of the Company's Common Stock for issuance
thereunder. The 1997 Plan provides for granting of stock options to employees,
directors and consultants with an exercise price of not less than the fair value
at the date of the grant. The plan provides that the options shall be
exercisable over a period not to exceed ten years. Options generally vest in
monthly increments over a four year period. At April 30, 1998, 549,250 shares
were available for issuance under the 1997 Plan.
1997 Director Option Plan
In August 1997, the Company adopted the 1997 Director Option Plan
("Director's Plan") and reserved 225,000 shares of the Company's Common Stock
for issuance thereunder. The plan provides that options may be granted at a
price not less than the fair value at the date of grant. The Director's Plan
provides for an initial option grant to purchase 25,000 shares of Common Stock
to each new nonemployee director of the Company at the date he or she becomes a
director. Each nonemployee director and Chairman of the Board of Directors will
annually be granted an option to purchase 10,000 shares of Common Stock,
respectively. An initial grant of 10,000 shares was made to each of the seven
nonemployee directors upon the effectiveness of the Company's initial public
offering at the initial public offering price of $11.50. At April 30, 1998,
approximately 155,000 shares were available for issuance under the Director's
Plan.
The following is a summary of activity under the 1996 Plan, 1997 Plan and
Director's Plan during the years ended April 30, 1997 and 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at beginning of year............ -- $ --
Options granted..................................... 2,901,750 $ 0.95
Options exercised................................... (37,500) $ 0.73
Option returned to plan............................. (36,750) $ 1.09
---------
Options outstanding at April 30, 1997............... 2,827,500 $ 0.95
Options granted..................................... 1,490,249 $10.47
Options exercised................................... (58,781) $ 0.79
Options returned to plan............................ (224,985) $ 2.92
---------
Options outstanding at April 30, 1998............... 4,033,983 $ 4.30
=========
</TABLE>
Significant option groups outstanding at April 30, 1998 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>
$0.74 - $ 2.00........................ 2,653,733 $ 0.90 1,792,079 $ 0.83 8.24
$4.00 - $ 8.00........................ 88,000 $ 4.59 14,813 $ 4.20 9.25
$8.25 - $11.50........................ 1,292,250 $11.25 21,385 $10.18 9.49
--------- ------ --------- ------
4,033,983 $ 4.30 1,828,277 $ 0.97 8.66
========= ====== ========= ======
</TABLE>
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan and 1997 Non-U.S. Employee
Stock Purchase Plan ("Purchase Plans") were approved by the Company in August
1997. Under the Purchase Plans a total of
39
<PAGE> 41
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
250,000 shares of Common Stock have been reserved for issuance. As of April 30,
1998, no shares have been purchased under the Purchase Plans.
Certain pro forma disclosures
Had compensation cost for the Company's stock option plans been determined
based on the fair value of such options at the grant dates as prescribed by FAS
No. 123, the Company's adjusted net income (loss) would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
APRIL 30,
-----------------
1997 1998
------ -------
<S> <C> <C>
Net income (loss):
As reported............................................. $ (599) $11,068
Pro forma............................................... (785) 10,030
Basic net income (loss) per share:
As reported............................................. $(0.18) $ 0.81
Pro forma............................................... (0.20) 0.73
Diluted net income (loss) per share:
As reported............................................. $(0.18) $ 0.60
Pro forma............................................... (0.20) 0.54
</TABLE>
No pro forma information was presented for the fiscal year ended March 31,
1996 since each of the Company's various stock option plans were adopted in
fiscal years 1997 or 1998 and, accordingly, no stock options were granted under
these stock option plans prior to 1997. For the year ended April 30, 1997, the
fair value of each option on the date of the grant was determined utilizing the
minimum value method as the Company was non-public. For the year ended April 30,
1998, the fair value of each option on the date of grant was determined
utilizing the Black-Scholes model. To determine the value of each option on the
date of grant the following assumptions were used for the year ended April 30:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Expected life (years)....................................... 4 4
Risk free interest rate..................................... 6.42% 5.89%
Dividend yield.............................................. 0.00% 0.00%
Volatility.................................................. 0.00% 70%
</TABLE>
The weighted-average estimated grant-date fair value for options granted
under the Company's various stock option plans during fiscal 1997 and 1998 were
$0.26 and $5.85, respectively.
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 and 1998 were not material.
NOTE 11 -- INCOME TAXES
The income (loss) before income taxes included $9,432,000, $5,710,000 and
$19,477,000 of income relating to the non U.S. operations of the Company for
fiscal 1996, 1997 and 1998, respectively.
40
<PAGE> 42
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
MARCH 31, ---------------
1996 1997 1998
--------- ----- ------
<S> <C> <C> <C>
Current:
Foreign......................................... $1,493 $ 397 $ --
Deferred:
Domestic........................................ -- -- 1,380
Foreign......................................... 300 (144) 428
------ ----- ------
$1,793 $ 253 $1,808
====== ===== ======
</TABLE>
A reconciliation of the tax provision to the amounts computed using the
statutory U.S. federal income tax rate of 35% is as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
MARCH 31, ------------------
1996 1997 1998
--------- ------- -------
<S> <C> <C> <C>
Tax (benefit) at U.S. federal statutory
rate........................................ $ 2,776 $ (121) $ 4,507
Tax savings from foreign operations........... (1,483) (1,746) (5,009)
Nondeductible interest, goodwill and other.... -- 320 110
Valuation allowance........................... 500 1,800 2,200
------- ------- -------
$ 1,793 $ 253 $ 1,808
======= ======= =======
</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>
APRIL 30,
------------------
1997 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards......................... $ 2,400 $ 4,600
Depreciation............................................. (156) (584)
Undistributed earnings of foreign subsidiaries........... -- (1,380)
------- -------
2,244 2,636
Valuation reserve........................................ (2,400) (4,600)
------- -------
$ (156) $(1,964)
======= =======
</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 ($0.05 per share), to decrease net loss by $1,800,000
($0.11 per share) in fiscal 1997 and an increase in net income of $5,422,000
($0.29 per share) in fiscal 1998.
At April 30, 1998, the Company has approximately $10,000,000 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, 1998, approximately $4,000,000 of the Company's net operating
losses were subject to annual limitations.
41
<PAGE> 43
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
As of April 30, 1998, no U.S. taxes had been provided with respect to
approximately $23,500,000 of earnings from foreign operations which are
considered to be permanently reinvested outside of the United States.
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 were estimated
based upon actual costs incurred, to the extent practical, and reasonable
estimations made by Maxtor management, when actual identification was not
possible. 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.
Prior to the Recapitalization, there were no terms of settlement or
interest charges associated with the intercompany account balance between the
Company and Maxtor. 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 1996 and the two months ended May 31,
1996 (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR TWO MONTHS
ENDED ENDED
APRIL 30, MAY 31,
1996 1996
----------- ----------
<S> <C> <C>
Beginning balance................................... $ 10,496 $ 11,368
Sales to Maxtor..................................... 339,577 42,103
Net receipts from Maxtor............................ (330,551) (54,498)
Cash disbursements made by Maxtor on behalf of the
Company........................................... (3,985) (126)
Settlement of loan to Maxtor........................ (4,169) --
--------- --------
Ending balance...................................... $ 11,368 $ (1,153)
========= ========
Average balance during the year..................... $ 7,999 $ 5,313
</TABLE>
Total sales to affiliates reflected on the consolidated statement of
operations for the fiscal year ended March 31, 1996 is $910,000 higher than the
reconciliation above due to sales made to another related party.
42
<PAGE> 44
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the
year ended March 31, 1996 and the two months ended May 31, 1996, follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR TWO MONTHS
ENDED ENDED
MARCH 31, MAY 31,
1996 1996
----------- ----------
<S> <C> <C>
Beginning balance.................................... $ 8,469 $4,300
Settlement of loan to Maxtor......................... (4,169) --
------- ------
Ending balance....................................... $ 4,300 $4,300
------- ------
Average balance during the year...................... $ 6,385 $4,300
======= ======
</TABLE>
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 with revenues of 10% or more:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR ENDED
ENDED APRIL 30,
MARCH 31, ------------------
1996 1997 1998
----------- ------ ------
<S> <C> <C> <C>
Maxtor.......................................... 83% 48% 41%
Diamond Multimedia.............................. 13% * *
Bay Networks.................................... * 31% 37%
</TABLE>
No other customer accounted for 10% or more the Company's total revenues
during 1996, 1997 and 1998.
43
<PAGE> 45
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's operations by geographical region were as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR ENDED
ENDED APRIL 30,
MARCH 31, --------------------
1996 1997 1998
----------- -------- --------
<S> <C> <C> <C>
Revenues:
Sales to unaffiliated customers:
United States......................................... $ -- $ 1,931 $ 20,500
Far East.............................................. 68,361 78,615 158,137
-------- -------- --------
68,361 80,546 178,637
Sales to affiliated customers:
Far East.............................................. 340,487 89,149 133,874
-------- -------- --------
Total revenues................................... $408,848 $169,695 $312,511
======== ======== ========
Income (loss) from operations:
United States......................................... $ (1,402) $ (3,332) $ (4,259)
Far East.............................................. 9,396 6,958 20,823
-------- -------- --------
Total operating income........................... $ 7,994 $ 3,626 $ 16,564
======== ======== ========
Identifiable assets at year end:
United States......................................... $ 6,753 $ 68,102
Far East.............................................. 53,718 58,535
-------- --------
Total identifiable assets........................ $ 60,471 $126,637
======== ========
</TABLE>
- ---------------
* Less than 10% of net revenues.
Revenues are designated as to the country which records the sale. Far East
is comprised of the Company's subsidiaries in Hong Kong, Thailand (commenced
operations at the end of fiscal 1995) and Peoples' Republic of China (commenced
operations in fiscal 1997).
44
<PAGE> 46
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SCHEDULE II
INTERNATIONAL MANUFACTURING SERVICES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COST BALANCE AT END
PERIOD AND EXPENSE DEDUCTIONS OF PERIOD
------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
Year end March 31, 1996, Allowance for doubtful
accounts..................................... $ -- $266 $(31) $235
Year ended April 30, 1997, Allowance for
doubtful accounts............................ $235 $ 46 $(71) $210
Year ended April 30, 1998, Allowance for
doubtful accounts............................ $210 $653 $(36) $827
</TABLE>
<PAGE> 47
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
-------- ------------------------------------------------------------ ------------
<S> <C> <C>
2.1+ Recapitalization Agreement dated as of May 16, 1996 by and
among the Company, Maxtor and the Investors named therein.
2.2+ Redemption Agreement dated as of May 16, 1996 by and between
the Company and Maxtor.
3.1+ Amended and Restated Certificate of Incorporation of the
Company.
3.3+ Amended and Restated Bylaws of the Company.
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.
10.1+ Form of Indemnification Agreement entered into by and
between the Company and each of its directors and managers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1997 Stock Plan and related agreements.
10.4+ 1997 Employee Stock Purchase Plan and related agreements.
10.5+ 1997 Non-U.S. Employee Stock Purchase Plan and related
agreements.
10.6+ Summary of Management Incentive Plan.
10.7+ 1997 Director Option Plan and related agreements.
10.8+ Form of Common Stock Purchase Agreement dated June 1996 by
and between the Company and management.
10.9+ Stockholders Agreement dated June 16, 1996 by and among the
Company, 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 Company and the Stockholders named
therein.
10.11+ Senior Subordinated Promissory Note dated June 10, 1996
issued by the Company 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 Company and Maxtor.
10.15+ Manufacturing and Purchase Agreement dated as of January 1,
1996 and between the Company 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.
</TABLE>
<PAGE> 48
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
-------- ------------------------------------------------------------ ------------
<S> <C> <C>
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
Company and Robert G. Behlman.
10.21+ Credit Agreement dated as of June 13, 1996 by and among the
Company, the Lenders referred to therein and Chemical Bank,
as amended.
10.22+ Offer Letter dated October 14, 1994 by and between the
Company and N.K. Quek.
10.23+ Offer Letter dated June 1, 1996 by and between the Company
and Nathan Kawaye.
10.24 Lease Agreement dated June 29, 1998 by and between
Inmobiliaria Nuevo Aeropuerto, S.A. de C.V. and IMS
International Manufacturing Services de Monterrey, S. de
R.L. de C.V.
10.25 Offer Letter dated October 14, 1994 by and between the
Company and Anthony Pham.
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 PricewaterhouseCoopers LLP Independent
Accountants.
23.2 Consent of Ernst & Young LLP Independent Auditors.
24.1 Power of Attorney (See page 24).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ This document is incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-34557), as declared effective on October
22, 1997.
All other exhibits for which provision is made in Item 601 of Registration
S-K of the Securities Act of 1933, as amended, are either not required under the
instructions related thereto or are inapplicable, and therefore have been
omitted.
<PAGE> 1
EXHIBIT 10.24
Final
LEASE
Lease Agreement (hereinafter referred to as the "Agreement") entered into this
29th day of June, 1998 by and between Inmobiliaria Nuevo Aeropuerto, S.A. de
C.V. represented by Adrian G. Gonzalez Lozano and Sergio G. Gonzalez Lozano in
their capacity as Legal Representatives ("Landlord") and IMS International
Manufacturing Services de Monterrey, S. de R. L. de C.V. represented herein by
Nathan Kawaye in his capacity as Legal Representative ("Tenant"), according to
the following recitals and sections of this Lease:
RECITALS
I. Landlord through its legal representatives hereby states that:
(A) Landlord is a mercantile corporation incorporated through Public
Deed Number 19,502 dated 27th of January 1983, issued by Fernando
Arechavaleta Palafox , Notary Public Number 27 for Monterrey, Nuevo Leon,
United Mexican States, and registered before the Public Register of
Monterrey, Nuevo Leon under No. 183, folio 141, Vol. 258, Book No. 3,
Second Auxiliary, on the 9th of march 1983.
(B) Landlord owns, free and clear of any mortgages, liens or
encumbrances the land (as defined below). In addition, the buildings
comprising the Premises which are going to be constructed as per this
Agreement (as defined in Section 1.01 of this Agreement), will be also free
and clear of any mortgages, liens and encumbrances.
(C) Landlord wishes to lease the Premises, and grant an option to
lease an adjacent land under the terms and conditions of this Agreement.
(D) Landlord and its legal representatives have the necessary
authority to enter into this Agreement, which authority has not been
limited or revoked in any manner whatsoever.
II. Tenant through its legal representative hereby states that:
(A) Tenant is a mercantile corporation incorporated through Public
Deed Number 76,193 dated 5Th, of May, 1998, issued
1
<PAGE> 2
by Lic. Francisco Javier Arce Gargollo , Notary Public Number 74 for
Distrito Federal, United Mexican States, and duly registered before the
Public Register of this same city.
(B) Tenant wishes to lease the Premises, and obtain an option to lease
the Adjacent Land, from the Landlord, under the terms and conditions of
this Lease.
(C) Tenant and its legal representative have the necessary authority
to execute this Lease, which authority has not been limited or revoked in
any manner whatsoever.
S E C T I O N S
1. CERTAIN DEFINITIONS
1.01. Premises: The Premises leased pursuant to this Agreement contain
approximately 200,000 square feet of land (the "Land"), to be improved with a
building ("Building") to be constructed thereon containing approximately 112,000
square feet of floor space, together with parking areas and landscaping, as
shown on the site plan ("Site Plan") attached hereto as EXHIBIT A and forming a
part hereof. The address of the Premises is: Ave. Stiva No. 300, Parque
Industrial Stiva-Aeropuerto, Apodaca, N.L. The Land as defined above, was
purchased by Landlord in accordance with public deed 19,734, dated June 9th,
1983, granted before Fernando Arechavaleta Palafox, Notary Public 27 of
Monterrey, Nuevo Leon, and registered at the Public Registry of Property and
Commerce of Monterrey, Nuevo Leon under number 539, volume 31, book 12, property
section, on August 19, 1983.
1.02. Lease Term: The Lease term shall commence upon the date of
Substantial Completion of Landlord's Work (as said phrase is defined below) and
delivery of possession of the Premises to Tenant ("Commencement Date") and end
seven (7) calendar years thereafter ("Lease Term"), unless terminated sooner
pursuant to any other provisions of this Lease or unless extended pursuant to
the relevant Section of the Agreement. The scheduled commencement date
("Scheduled Commencement Date") of the Lease Term is November 15th, 1998. If the
Landlord's Work is Substantially Completed before the Scheduled Commencement
Date, the Lease Term shall commence upon Substantial Completion and Landlord's
delivery to Tenant of possession thereof. Within five calendar days after the
Commencement Date, the parties shall each execute and deliver a commencement
date certificate ("Commencement Date Certificate") in the form attached as
EXHIBIT B to the Lease and forming a part hereof. The term "Lease Term" as used
in this
2
<PAGE> 3
Agreement, includes any extension established in this section, provided the
right to perform such extension is exercised.
Notwithstanding the above and provided Tenant is in compliance with all of
its obligations under this Agreement, Tenant shall have the right to extend the
Lease Term for two additional terms of seven (7) years each, by means of prior
written notice to Landlord with at least ninety (90) days in advance of the date
of termination of the initial or subsequent seven (7) year Lease Term.
In addition to the foregoing, in the event one of the parties hereto makes
a transfer in fraud of its creditors, makes a transfer for the benefit of its
creditors, is subject to bankruptcy proceedings, is adjudged bankrupt or
insolvent (Suspension de Pagos), in proceedings filed against it, a receiver,
trustee or custodian is appointed for all or substantially all of its assets,
fails generally to pay its debts as they become due, convenes a meeting of all
or a portion of its creditors, or performs any act of bankruptcy or insolvency,
including the selling of its assets to pay creditors, the other party hereto may
terminate the Lease Term and this Agreement by means of prior written notice
without any liability to either party (except for obligations accrued in favor
of one party prior to the date of termination).
1.03. Monthly Rent: The monthly rent shall be U.S. $49,800.00 Dollars
(FORTY NINE THOUSAND AND EIGHT HUNDRED DOLLARS OF THE UNITED STATES OF AMERICA
00/100) per month, plus the corresponding Value Added Tax (hereinafter together
with any increase as provided in this agreement shall be referred to as "Monthly
Rent"). The Monthly Rent shall remain fixed through the duration of the first
year of the Lease Term. Beginning the 13th month of the Lease Term, the Monthly
Rent shall be increased annually by the resulting average of the percentage
increase in the U.S. Consumer Price Index ("CPI") corresponding to the
applicable one year period, This increase can not be lower than three percent
(3.0%) or higher than eight percent (8.0%). These annual rent increases will
begin at the completion of each twelve month lease period, per the beginning
dates noted above, dating from the first day of Tenant's occupancy for which
rent shall be paid.
1.04. Delivery of Possession: Landlord shall deliver possession of the
Premises to Tenant in a Substantially Completed (as such term is defined below)
condition by the Scheduled Commencement Date, or on such other date as may be
determined as expressly provided in this Agreement.
1.05. Substantial Completion: Landlord shall deliver possession of the
Premises to Tenant ready for installation and operation manufacturing equipment,
as well as for use of office space, including without limitation readiness for
installation of communication and computer systems
3
<PAGE> 4
("Substantially Completed") in accordance with Final Plans and Final
Specifications including approved changes, and Tenant must approve said
completion in writing, upon the occurrence of all of the following:
1. Construction by Landlord of the Premises in accordance with the Final
Plans and Final Specifications ("Landlord's Work") and delivery of a
certificate to that effect to Tenant by Landlord's engineer. 'Whenever the
expression Final Plans and Final Specifications is referred to herein it
shall mean the Final Plans and Final Specifications described in EXHIBIT C
attached hereto and forming a part hereof, including any changes approved
in writing by the parties.
2. Acceptance by Tenant that the utility services for the Building
specified in Exhibit "G" attached hereto and made a part hereof and in the
Final Plans and Final Specifications including storm and sanitary sewer,
water and electricity, and telecommunications lines (but expressly
excluding any treatment of residual water required prior to its disposal by
Tenant into the park's sewer system in accordance with the provisions of
section 7.02 below) have been fully installed and are operational for use
by Tenant. Tenant shall at its cost, execute directly with the suppliers of
such services their respective contracts for the supplying of such
services, provided, however, that any payment or contribution required by
any utility company (i.e. electricity, telephone, water) for the supply of
the corresponding utility service other than standard hook-up and
consumption fees shall be paid by Landlord in order for the Premises to be
considered Substantially Completed. The foregoing in the understanding
that, with respect to the water supply to the Premises for use by the
Tenant, the Landlord will at its own cost and expense drill and equip a
water well in accordance with the Final Plans and Final Specifications, and
the Landlord represents and warrants that it has and it will maintain for
the duration of this Agreement the required concession or permit for the
extraction of water from such well for its use by the Tenant.
3. All proposed means of ingress, egress, parking, loading, manufacturing
and office areas are available for use by Tenant, as specified in EXHIBITS
A AND C.
4. All legally required permits or certificates have been issued by all
required governmental authorities and obtained by Landlord (including
without limitation the permits to be obtained by Landlord referred on
section 7.02 below) as well as the applicable construction licences,
electrical installation and occupancy permits, except as to any permit to
be obtained from the Federal and State environmental authorities not
relating to the construction of the Premises or the development of the
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industrial park where they are located, but related to the specific
operation of Tenants Intended Uses as hereinafter defined.
5. Remaining work to be done to render the Premises fully completed shall
consist solely of minor details of construction, mechanical adjustments, or
decoration, which will not interfere with Tenant's use and enjoyment of the
Premises. When such remaining work is finally completed by Landlord and
accepted by Tenant, Landlord's Work and the Premises shall be considered as
"Finally Completed". To this effect, whenever the Premises and Landlord's
Work is finally completed the parties hereto shall execute and deliver a
Final Completion Certificate in the form of EXHIBIT D attached hereto and
made a part hereof.
6. If there is any dispute during the performance of Landlord's Work to be
executed under this Lease or at the time of Substantial Completion, the
parties herein agree to be subject to the procedure described in EXHIBIT E
attached herein and forming a part hereof.
1.06. Parking: Tenant shall have the exclusive right to use all available
vehicle parking spaces at the Premises.
1.07. Tenant's Work: Intentionally omitted.
1.08. Landlord's Work: Landlord's Work shall mean all works and services to
be performed by Landlord in accordance with this Agreement (including the Final
Plans and Final Specifications), which shall be performed by Landlord at
Landlord's expense in a good and workmanlike manner. Upon Substantial Completion
of Landlord's Work, Landlord shall deliver to Tenant a certificate of
substantial completion ("Certificate of Substantial Completion").
1.09. Days: Whenever the term "days" is used in this agreement, it shall
mean calendar days, except as otherwise provided herein.
2. DEMISE AND POSSESSION
2.01. Landlord leases to Tenant, and Tenant leases from Landlord, the
Premises described in Section 1.01 of this Agreement. In reliance on the
Landlord's representations and warranties contained in this Lease, Tenant agrees
that it will accept the Premises as of the date of delivery by Landlord of the
Certificate of Substantial Completion, provided that the Landlord has by then
Substantially Completed Landlord's Work, the conditions set forth on section
1.05 above have been met and subject to Landlord's Work being Finally Completed
in accordance with this Agreement.
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2.02. If for any reason Landlord has not Substantially Completed the
Landlord's Work and delivered possession of the Premises to Tenant by the
Scheduled Commencement Date, except for delays resulting from an event of Force
Majeure (as such term is hereinafter defined) (in which case the parties shall
agree on an extension of the Scheduled Commencement Date), the validity of this
Agreement shall not be affected nor shall either party have the right to
terminate this Agreement except as expressly provided in this section 2 and in
Sections 13 and 15 herein below; provided, however, that if the delay is not
attributable to Tenant, Tenant shall be entitled to a reduction of the Monthly
Rent applicable to the first month of the Lease Term (and successive months if
necessary) in the amount of US$1,112.00 (ONE THOUSAND ONE HUNDRED AND TWELVE
UNITED STATES DOLLARS) per month.
2.03. Landlord represents and warrants that as of the date of the execution
of the Lease, it will hold a good and marketable title to the land, free and
clear of all tenancies, liens, claims, easements, and other encumbrances.
Landlord will furnish evidence of its title satisfactory to Tenant prior to the
execution of the Lease.
3. MONTHLY RENT
3.01. Tenant shall pay the Monthly Rent as rent for the Premises during the
Lease Term in legal currency of the United States of America.
3.02. The Monthly Rent shall be paid monthly, without deduction or offset
(except in the case of occurrence of any one of the events provided in this
Agreement), in advance on the first five business days of each month to Landlord
at the place indicated in Section 1.03, or to whomever Landlord shall designate
by notice to Tenant in writing, during the Lease Term, at the domicile of the
Landlord, or at any such other place in the U.S.A. as Landlord may designate by
notice to Tenant.
3.03. Except as expressly provided in this Agreement, Tenant shall not for
any reason whatsoever, withhold the Monthly Rent to be paid to Landlord.
3.04. Landlord shall provide to Tenant the respective rental receipt in the
form of an invoice complying with all fiscal requirements (including the Value
Added Tax), upon the corresponding monthly rent being paid by Tenant.
4. USE OF PREMISES
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4.01. Tenant may use the Premises for any and all lawful purposes;
provided, however, any use of the Premises by Tenant other than for Tenant's
Intended Uses (as defined below) shall be subject to the prior approval in
writing of Landlord, which approval shall not be unreasonably withheld or
delayed. Landlord represents and warrants that: (i) as of the date of execution
of this Agreement the Premises are located in an area of the City of Apodaca in
which the Tenant may lawfully under applicable zoning, Stiva Airport Industrial
Park Bylaws attached hereto and forming a part hereof as EXHIBIT F and other
laws, regulations, and ordinances use the Premises for the manufacturing,
distribution, storage, warehousing or sale of electronic products and other
related products, and for offices in connection with the foregoing
(collectively, "Tenant's Intended Uses"), and (ii) adequate water (including one
water well) and utility services sufficient to permit Tenant to use the Premises
for Tenant's Intended Uses in a manner reasonably satisfactory to Tenant will,
at Landlord's sole expense, be made available at the boundary limits
(considering that such requirements will be available to Tenant for use in the
manufacturing areas) of the Premises no later than the Commencement Date. For
this purpose Tenant utility requirements are attached hereto as EXHIBIT G
forming a part hereof.
4.02. Tenant is authorized to place its name on the Building and on the
grounds and in any other customary location in conformity with applicable laws,
regulations and the Stiva Airport Industrial Park Bylaws.
5. TAXES AND UTILITIES
5.01. Tenant shall pay the value added tax due with respect to the Monthly
Rent. Landlord shall pay any other taxes related to the land and buildings
comprising the Premises (collectively, "Taxes") assessed against the Premises
during the Lease Term or assessed against Landlord with respect to this
Agreement. If under Mexican Law there is an obligation of Tenant to withhold any
income taxes out of the payment of the Monthly Rent, Tenant shall be entitled to
do so.
5.02. Landlord shall at its sole cost and expense, prosecute any proceeding
to contest any Tax with respect to the Premises. Each party shall cooperate with
the other with respect to such proceedings. The net amount of any Taxes
recovered (after payment of fees and costs incurred in connection with such
proceeding) will be payable or credited, as applicable, to Landlord. Any
expenses incurred by Tenant if requested to cooperate with Landlord in any such
proceedings will be reimbursed by Landlord to Tenant.
5.03. Subject to Section 4.01(ii) of this Agreement, Tenant shall contract
directly with, and pay all amounts due to utility companies for utility services
which Tenant may require for its use of the Premises, arising out of
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such contracts executed by Tenant. Provided that Landlord Substantially
Completes Landlord's Work and subject to Landlord's representation and warranty
set forth in Section 4.01 (i) and (ii) of this Lease, Landlord shall not be
liable to Tenant, and Tenant shall not have the right to terminate this Lease,
for failure by utility companies to provide the corresponding utilities (except
for water supply).
6. MAINTENANCE AND REPAIR
6.01. Tenant shall, at its own cost and expense, make all necessary repairs
to the Premises, except as to any structural (e.g., floor slab and steel
structure repairs) or any repair during the warranty period, which shall be the
responsibility of Landlord, except if such repairs are required as a result of
negligence or misuse by Tenant in which case Tenant shall be responsible.
6.02. Neither party shall be obligated to repair damage to the Premises
caused by a Casualty Loss (as defined in Section 9 of the Lease) except to the
extent provided in Section 9 of this Lease and neither party shall be obligated
with respect to any cleanup or remediation of any Hazardous Substances (as
defined in Section 7 of this Lease) except to the extent provided in Section 7
of this Lease.
6.03. Starting on the Commencement Date and for the rest of the duration of
the Lease Term, Tenant will be responsible for its pro rata share of the
maintenance fee as charged by Landlord which has been quoted by Landlord at U.S.
$0.025 Dollars per square foot of land area (plus value added tax). Based on
EXHIBIT A the total land area will be 200,000 square feet, which will result in
an annual park maintenance fee of U.S. $5,000.00 (Five thousand United States
dollars and 00/100). This fee will be paid in monthly installments of US$416.66
(Four hundred and sixteen dollars and 66/100) (plus value added tax) each within
the first five days of each month and will be made in US currency. The first
park maintenance fee charge will be paid by Tenant to Landlord on the
Commencement Date. The maintenance services to be rendered by Landlord will be
the following: i) Private guards for the park and the areas surrounding the
Premises, 24 hours a day ; ii) Maintenance and cleaning of streets all year
long; iii) Maintenance of common parks and garden; iv) Street lighting
maintenance; and, v) a representative of Landlord before the State and Municipal
authorities for authorizations or problems common to the owners and/or lessees
of premises within the industrial park.
7. ENVIRONMENTAL
7.01. Landlord represents and warrants that any handling, transportation,
storage, treatment or use of hazardous or toxic substances that
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have occurred on the land prior to the date hereof have been in compliance with
all applicable federal, state and local laws, regulations and ordinances, that
no leak, spill, release, discharge, emission or disposal of hazardous and toxic
substances has occurred on the proposed sites to date, and that the soil, ground
water, and soil vapor on or under the Premises are free of toxic or hazardous
substances as of the date of execution of this Agreement.
7.02. In addition, the parties also agree to the following:
(i) Landlord represents and warrants that as of the Commencement Date, the
Premises will not contain any asbestos or PCB's, any underground
storage tanks and any other kind of contaminated material as per the
applicable environmental laws and regulations. For this purpose,
within thirty (30) days after the Commencement Date, Tenant shall
contract a private testing laboratory to test the environmental
quality of the soil, water and air. This consultant will be paid by
Tenant. If the results of such test show that the Premises contain any
asbestos or PCB's or that the Premises contain any underground storage
tanks and in general any other contaminating material, Landlord shall
have a period of 60 calendar days to clean up the Premises, without
the right to the cure period stated in this Agreement. If at the end
of such term, Landlord shall not comply with such obligation, Tenant
shall have the right to terminate this lease without incurring any
responsibility.
(ii) That the Parque Industrial Stiva Aeropuerto (which is owned by
Landlord) where the Premises are located has an internal sewer system,
into which residual water generated by Tenant's manufacturing process
will be discharged. In connection herewith Tenant shall have the
obligation to treat such water (excluding water from sanitary
services) in order for the same not to contain metals, corrosive
elements, or radioactive or toxic wastes in excess of the applicable
Mexican Official Norm.
(iii) Landlord shall treat residual water discharged by Tenant to the
internal sewerage system (including water from sanitary services) and
will reuse the same for purposes of irrigating green areas within the
park, for which purpose it represents and warrants it has and it will
maintain in effect the permit for discharge or residual waters from
the National Water Commission. Furthermore, the water treated by
Landlord shall comply with all applicable Mexican official norms and
with the specific conditions for discharge imposed by the National
Water Commission.
(iv) In order to evidence compliance with the provisions of items (ii) and
(iii) above, Tenant shall furnish to Landlord every two months a copy
of the results of the tests made to the water discharged by it, and
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Landlord shall furnish to Tenant a copy of the results of the tests
made to the water used for irrigation as filed before the National
Water Commission in compliance with the applicable Mexican official
norms and the corresponding discharge permit. In any event, Tenant
shall be entitled to instruct Landlord to analyze its water after
treated by Landlord in order to evidence compliance with such
provisions.
7.03. Tenant is obligated to use the Premises in compliance with all
applicable environmental laws and regulations and shall not use, generate,
transport, refine, produce, process, store or dispose of any hazardous
substances on, under the Premises, except in compliance with the applicable
environmental laws and regulations. If any claim is ever made against Landlord
by any person or entity relating to any pollution or contamination from toxic or
hazardous substances, asbestos, or any other chemicals or substances in amounts
which exceed standards for public health or welfare as established and regulated
by any local, state, or federal governmental authority (herein collectively
referred to as "Hazardous Substances") present at or about the Premises during
the Lease Term or from non-compliance by Tenant of its obligations under Section
7.02 above, all costs of removal incurred by, all liabilities imposed upon, and
losses and damages suffered by Landlord because of the same shall be borne by
Tenant, provided that such environmental contingencies herein referred results
out of acts or omissions derived from Tenant's occupancy of the Premises, and
Tenant hereby agrees to indemnify, defend, and hold Landlord harmless from and
against all such costs, liabilities, losses, and damages, including, without
limitation, with respect to all third-party and/or authorities claims (including
sums paid in settlement thereof and approved by Tenant in writing, with or
without legal proceedings) for personal injury or property damage and other
claims, actions, administrative proceedings, judgments, compensatory and
punitive damages, lost profits, penalties, fines, costs, losses, attorneys' fees
and expenses (through all levels or proceedings), consultants or experts fees,
and all costs incurred in enforcing this indemnity. Landlord shall have the
right at any moment, after reasonable notice, to take samples of the discharges
generated by Tenant to be analyzed by Landlord's environmental expert. The
foregoing does not free Tenant from its responsibilities and obligations towards
any governmental authorities with respect to the discharging and reporting of
its residual waters.
7.04. Notwithstanding the foregoing and anything herein to the contrary,
if any claim is ever made against Tenant by any person or entity (including any
governmental authority) relating to any pollution or contamination from
Hazardous Substances present at the Premises due to Landlord's negligence, or
because of Landlord's failure to comply with its obligations under items (i),
(ii), (iii) and (iv) of section 7.02 above, all costs of removal incurred by,
all liabilities imposed upon, and losses and damages suffered by Tenant because
of the same shall be borne by Landlord, and
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Landlord hereby agrees to indemnify, defend and hold Tenant harmless from and
against such costs, liabilities, losses and damages, including without
limitation, with respect to any third-party and/or authority claim for personal
injury or property damage and other claims, actions, administrative proceedings,
judgments, compensatory and punitive damages, lost profits, penalties, fines,
costs, losses, attorneys' fees and expenses (through all levels or proceedings),
consultants or experts fees, and all costs incurred in enforcing this indemnity.
7.05. Section 7 of this Lease and the indemnity obligations contained in
said section shall survive the termination of this Lease. Claims by either
party against the other pursuant to Section 7 shall be made in accordance with
the requirements of Section 19.03.
7.06. Subject to Section 7.02 above, Tenant agrees that its operations at
the Premises shall be in compliance with all applicable laws, regulations, and
ordinances including, without limitation, laws, regulations, ordinances and the
Stiva Airport Industrial Park Bylaws relating to Hazardous Substances.
8. ALTERATION OF PREMISES
8.01. So long as no default by Tenant under this Agreement exists, Tenant
shall have the right to make non-structural alterations affixed to the Building
costing up to an amount of US$100,000.00 dollars, without the written consent of
Landlord. Any other alterations to the Premises shall require the prior written
consent of Landlord, which consent shall not be unreasonably withheld.
8.02. No alterations of the Premises by Tenant (whether structural or
non-structural) shall reduce the value or structural integrity of the Premises.
All such alterations of the Premises by Tenant shall be at Tenant's own cost and
expense and shall be accomplished in compliance with all applicable laws,
regulations, and ordinances. Tenant shall be responsible to pay all obligations
necessary to keep the Premises free from any mechanics' and materialmen's liens
on account of alterations of the Premises by Tenant.
8.03. All machinery and equipment or other tangible personal property of
whatsoever nature installed at the Premises by Tenant during the Lease Term
(excluding property affixed or other type of, property which removal may cause
damage to the Premises in which case shall be kept at the Premises at no cost to
Landlord), shall continue to be the property of Tenant and shall be removed by
Tenant at the expiration of the Lease Term.
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9. DESTRUCTION
9.01. If during the Lease Term the Premises or any improvements thereof are
damaged or destroyed by fire, earthquake, flood, or other casualty insured
against pursuant to Section 10 (collectively, "Casualty Loss"), Tenant shall
give Landlord prompt written notice thereof ("Notice of Casualty").
9.02. Landlord shall, within thirty (30) days of receiving such notice,
determine and notify Tenant in writing, the time ("Repair Time") in which the
Premises can reasonably be repaired by Landlord to the condition they were in
immediately prior to the occurrence of a Casualty Loss. Within fifteen (15) days
after Tenant receives such notice, Tenant shall (i) instruct Landlord in writing
to proceed with the repairs ("Repair Notice") or (ii) notify to Landlord that
this Agreement has been terminated ("Notice of Termination"), in the
understanding that Tenant may only terminate this Agreement in accordance with
this provision if the time determined by Landlord to be necessary for the
repairs is more than ninety (90) days or if Landlord fails to notify Tenant on
time required to make repairs. Promptly after receiving a Repair Notice from
Tenant, Landlord shall diligently repair the Premises, in the understanding that
if the Premises are not repaired or rebuilt to the conditions they were in
immediately prior to the occurrence of the Casualty Loss, within the Repair
Term, then Tenant may terminate this Agreement by means of written notice to
Landlord without incurring in any liability.
9.03. If such notice of termination is delivered by Tenant to Landlord, this
Agreement shall terminate on the date of such notice of termination and Landlord
shall be entitled to payment of, or assignment of rights with respect to, all
insurance proceeds recoverable on account of loss or damage to the Premises
caused by such Casualty Loss (except any insurance proceeds recoverable on
account of loss or damage to Tenant's equipment, machinery, inventory, and
other Tenant's property at the Premises). So long as Landlord does not receive a
Notice of Termination from Tenant as provided above, Landlord shall continue to
repair or rebuild the Premises or any improvements thereof, irrespective of the
adequacy of the insurance proceeds to cover fully the costs of such repair or
rebuilding.
9.04. All insurance proceeds payable under any fire or other casualty
insurance policy maintained by Tenant and covering Tenant's personal property at
the Premises including, without limitation, Tenant's inventory, furniture, trade
fixtures, and equipment shall be payable solely to Tenant, and Landlord shall
have no interest therein. Except to the extent provided for in this Section 9 or
otherwise in this Agreement, the obligations of Tenant (including rent payments)
and Landlord under this Agreement shall not be affected by the occurrence of any
Casualty Loss.
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10. INSURANCE
10.01. From the date hereof and until the Commencement Date, Landlord shall
carry "Builder's Risk" insurance which consist of risks inherent to the
construction of the Premises, including without limitation civil liability and
damages to the Premises, in amounts and with companies satisfactory to Tenant.
Certificates of such insurance shall be delivered to Tenant prior to execution
of this Agreement, and shall include in its specifications that the Building
will be built to a Light Hazard standard.
10.02. Tenant shall purchase and maintain fire and extended coverage
insurance that covers any loss or damage to the Premises during the Lease Term
caused by flood, fire, and any other type of loss from Tenant, it's employees or
agents, which shall be covered under Tenant's holding company insurance policy
covering all risks, international property coverage at its current carrier,
Zurich, in amounts sufficient to prevent the Landlord or the Tenant from
becoming a co-insurer, under the terms of the applicable policies, but in any
event and at all times in amounts not less than one hundred percent (100%) of
the full insurable value of the Building, which for purposes hereof will be
considered the full replacement cost of the Building. Tenant's underwriter will
provide a certificate of insurance at an initial amount of US$4,000,000.00 (FOUR
MILLION UNITED STATES DOLLARS 00/100) (hereinafter Initial Amount Coverage) for
the Building and Building upgrades and improvements. The certificate of
insurance will be underwritten by the Insurance Company contracted by Tenant's
holding company to cover all policies of the whole group to which Tenants
belong.
10.03. Tenant shall, at its cost and expense, also purchase and maintain
general public liability insurance to cover claims for bodily injury or death or
property damage for a minimum of US$1,000,000.00 (ONE MILLION UNITES STATES
DOLLARS) per occurrence and in the annual aggregate.
10.04. Landlord's insurance to be maintained pursuant to this section of
the Lease shall be obtained and evidenced under valid and enforceable insurance
policies issued by the A.M. Best Guide as AVIII or better or its equivalent by
another rating agency.
10.05. Intentionally omitted.
10.06. All such insurance policies shall provide that the insurer may not
cancel such policies without at least thirty (30) days prior notice in writing
to Landlord and Tenant. Landlord shall have the right but not the obligation to
pay any insurance policy which is due and not paid by Tenant. In such case,
Tenant shall reimburse Landlord the amounts paid plus interest at
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the Prime Rate determined by City Bank, New York plus three. Such Prime Rate
shall be up dated every 180 days an shall apply until reimbursement is
effectively made and shall be payable by Tenant to Landlord within three (3)
days after demand therefor.
10.07. Tenant shall be responsible for insuring all of Tenant's tangible
personal property located at the Premises.
10.08. To the extent that insurance proceeds are actually received in
satisfaction of a loss which is required to be covered by insurance hereunder
(with the deductible under any policy being deemed to be insurance proceeds),
each of Landlord and Tenant hereby waives any and all rights of recovery against
each other for any loss or damage including, without limitation, loss or damage
to the Premises or the contents contained therein, loss of rent or income on
account of fire or other casualty, or injury sustained on the Premises. Each
party's aforesaid policies of insurance shall contain appropriate provisions
recognizing this mutual release and waiving all rights of subrogation by the
respective insurance carriers. The deductible payable under any insurance policy
shall be paid by the party who is obligated to maintain such insurance policy in
accordance with this Agreement, except for deductibles to be paid in case of
damages to the structure of the building not caused by Tenant, which will be
paid by Landlord.
11. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS
11.01. If at any time during the Lease Term, Tenant fails to perform one or
more of its obligations under this Agreement, Landlord, after twenty (20) days
written notice to Tenant (or without notice in the case of emergency), and
without waiving or releasing Tenant from any of its obligations under this
Agreement, may, but shall be under no obligation to, perform acts which Tenant
is required to perform under this Agreement and may enter the Premises for such
purpose to perform all such actions as may be necessary. Tenant shall reimburse
to Landlord all sums reasonably paid by Landlord and all reasonable costs and
expenses incurred by Landlord in connection with the performance of any such
obligations of Tenant, together with interest at the Prime Rate determined by
Citibank, New York. Such Prime Rate shall be up dated every 180 days and shall
apply until payment is effectively made, shall be payable by Tenant to Landlord
within ten (10) days after demand therefor. For purposes of this Lease,
"emergency" shall mean an event in which if immediate action is not taken,
damages could be caused to the Premises, Tenant's property, or third parties
properties, or injury could be caused to any person.
12. TENANT'S RIGHT TO PERFORM LANDLORD'S OBLIGATIONS
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12.01 If at any time during the Lease Term Landlord fails to perform one or
more of its obligations under this Agreement, Tenant after twenty (20) days
written notice to Landlord (or without notice in the case of an emergency) and
obligations under this Agreement, may, but shall be under no obligation to,
perform any act which Landlord is required to perform in accordance with this
Agreement and may take all such actions thereon as may be necessary. Landlord
shall reimburse to Tenant all sums reasonably paid by Tenant and all reasonable
costs and expenses incurred by Tenant in connection with the performance of any
such obligations of Landlord, together with interest at the Prime Rate
determined by City Bank, New York. Such Prime Rate shall be updated every 180
days and shall apply until payment is effectively made and shall be payable by
Landlord to Tenant within ten (10) days after demand therefor.
13. DEFAULT BY TENANT
13.01. Tenant shall be in default of this Lease if at any time during the
Lease Term (and regardless of the pendency of any bankruptcy, reorganization,
receivership, insolvency, or other proceedings in law, or before any
administrative tribunal which have or might have the effect of preventing Tenant
from complying with the terms of this Lease):
(i). Tenant fails to make payment of any installment of Monthly Rent, or of
any other sum herein specified to be paid by Tenant, within ten (10) days
of delivery of Landlord's written notice to Tenant of such failure;
provided, however, Landlord shall be obligated to give Tenant only three
(3) notices in any calendar year during the Lease Term and thereafter
during said calendar year Tenant shall be in default if Tenant fails to
make payment when due, it being understood that whether or not notice is
given and notwithstanding anything herein to the contrary, all payments of
monies past due shall accrue interest at the Prime Rate determined by City
Bank, New York, plus three. Such Prime Rate shall be updated every 180
days and shall apply until payment is effectively made; or
(ii). Tenant fails to observe or perform any of its other covenants,
agreements, or obligations hereunder, and such failure is not cured within
thirty (30) days after Landlord's written notice to Tenant of such
failure; provided, however, that if the nature of Tenant's obligation is
such that more than thirty (30) days are required for performance,, then
Tenant will not be in default if Tenant commences performance within such
thirty (30) day period and thereafter diligently prosecutes the same to
completion within ninety (90) days thereafter;
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(iii). Tenant makes a transfer in fraud of its creditors, makes a transfer
for the benefit of its creditors, is the subject of a bankruptcy petition,
is adjudged bankrupt or insolvent (suspension de pagos) in proceedings
filed against Tenant, a receiver , trustee, or custodian is appointed for
all of substantially all of Tenant's Assets, fails to pay its debts as they
become due, convenes a meeting of all or a portion of its creditors, or
performs any act of bankruptcy or insolvency, including the selling of its
assets to pay creditors; or
(iv). Tenant has abandoned the Premises for thirty (30) days
14. REMEDIES OF LANDLORD
14.01. In the event of default by Tenant, subject to the provisions of
Section 13 of this Agreement, Landlord, at its sole option, shall have the
following rights:
(i). The right to declare the term of this Lease ended and re-enter the
Premises and take possession thereof, and to terminate all of the rights of
Tenant in and to the Premises; or
(ii). The right to continue this Agreement in full force and effect,
without terminating Tenant's right to possession of the Premises, in which
event Landlord shall have the right to collect the Monthly Rent and other
charges when due, including any sums due for any option period for which an
option to extend has been exercised.
14.02. If Tenant defaults under this Lease and abandons the Premises before
the end of the Lease Term, or if its right of possession is terminated by
Landlord because of Tenant's default under this Agreement, then this Lease may
be terminated by Landlord at its option by written notice to Tenant. On such
termination Landlord may recover from Tenant any obligation which has accrued
and not been paid prior to the time this Agreement is terminated, plus
reasonable attorneys fees relating to the enforcement of these provisions by
Landlord and an indemnification from Tenant in the amount of the unpaid rents
for the balance of the Lease Term from the date of such termination notice
payable upon demand.
14.03. The waiver by Landlord of any breach or default of Tenant hereunder
shall not be a waiver of any preceding or subsequent breach of the same or any
other term. Acceptance of any rent payment shall not be construed to be a waiver
by the Landlord of any preceding breach by Tenant.
14.04. All past due amounts owed by Tenant under the terms of this Lease
shall bear interest at the Prime Rate determined by Citibank, New
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York, plus three. Such Prime Rate shall be updated every 180 days and shall
apply until payment is effectively made and shall be payable by Landlord to
Tenant within ten (10) days after demand therefor.
14.05. Notwithstanding anything contained herein to the contrary, in the
event Tenant defaults under any of the terms of this Lease and the Lease is
terminated by Landlord, in addition to Landlord's other remedies, set forth
herein, Landlord shall not be obligated to complete the Landlord's Work as set
forth in this Lease.
15. DEFAULT OF LANDLORD AND TENANT'S REMEDIES
15.01. In the event of any default by Landlord hereunder, Tenant shall give
Landlord notice of such defaults and Landlord shall have thirty (30) days after
such notice to cure such default, provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
performance, then Landlord will not be in default if Landlord commences
performance within such thirty (30) day period and thereafter diligently
prosecutes the same to completion within ninety (90) days thereafter. In the
event of a default by Landlord under this Agreement and the expiration of the
aforesaid period during which Landlord may cure such default, in addition to any
other rights or remedies provided for herein or at law, including any brokerage
fees and court costs and reasonable attorneys fees, Tenant, at its sole option,
may terminate this Lease upon notice by Tenant to Landlord and all rental
obligations shall be thereby terminated.
Should Landlord fail to perform in a timely manner in accordance herewith
its obligation to deliver possession of the Premises to Tenant in a
Substantially Completed condition, and provided Tenant elects to terminate this
Agreement in accordance with the preceding paragraph, Landlord shall (i)
reimburse to tenant the amounts of money delivered by Tenant to Landlord in
accordance with Section 22.01 of this Agreement and (ii) pay as penalty to
Tenant the amount of US$300,000.00 (three hundred thousand US. Dollars 00/100)
upon demand.
16. CERTIFICATE
16.01. The parties shall execute and deliver, within ten (10) business days
after written demand by any of them to the other therefor, a statement in
writing certifying, if true, that this Agreement is in full force and effect,
and that the Monthly Rent payable hereunder is unmodified and in full force and
effect (or, if modified pursuant to this Agreement, stating the nature of such
modification), the date to which rent and other charges are paid, if any,
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and acknowledging that there are not any uncured defaults of the parties
hereunder (or specifying such defaults if they are claimed).
17. OPTION OVER THE ADJACENT LAND AND FOR FUTURE PROJECTS
17.01. Provided no default of any of Tenant's obligations under this Agreement
exists, Tenant shall have the option for a period of three years from the
Commencement Date to lease the adjacent land (as such piece of land is described
in EXHIBIT H attached hereto and made a part hereof, hereinafter the "Adjacent
Land") from Landlord substantially in the, same terms as those contained in this
Agreement with the corresponding adjustment in the Monthly Rent and the Security
Deposit mentioned in 22.01 (including construction of a facility as per Tenant's
specifications), and thereafter and for the duration of the Lease Term hereof
Tenant shall have a right of first refusal to be preferred over any third party
to lease the Adjacent Land in terms no less favorable than those offered to such
third party. Tenant shall have a period of 30 calendar days after receiving
notice from Landlord of its intent to lease the Adjacent Land (which notice
shall identify the third party to whom it intends to lease the Adjacent Land,
and include all of the terms and conditions of the proposed lease agreement) to
respond Landlord in writing as to whether Tenant wants to exercise such right.
17.2. In the event Tenant does not exercise its right of first refusal as
provided above, Landlord shall be free to lease the Adjacent Land to the third
party identified in Landlord's notice to Tenant, under no more favorable terms
to the lessee than those contained in such notice, otherwise Tenant shall again
have the right of first refusal to lease the Adjacent Land as provided herein.
17.3. Provided that Landlord delivers possession of the Premises prior to the
Scheduled Commencement Date, Tenant hereby grants Landlord the right of first
refusal to be preferred over any third party to lease and/or perform
construction services for Tenant in Tenant's future projects in the United
Mexican States, as long as such services are competitive in all respects to the
third party. This right of first refusal will not be effective is the Lease is
terminated as a result of Landlord's default under this Agreement.
18. ACCESS OF LANDLORD TO THE PREMISES
18.01. Tenant shall permit Landlord and its authorized representatives
access to the Premises during reasonable hours with reasonable prior notice to
inspect the Premises and to perform those repairs that are the responsibility of
Landlord under the Lease. Landlord will have the right to enter the Premises at
any reasonable time with reasonable prior notice during usual business hours at
any time within six (6) months prior to the
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termination of the Lease Term in order to show the Premises to prospective
future tenants. Notwithstanding the foregoing, Landlord, its employees, or
agents shall have the right to enter the Premises at all times without notice to
Tenant in the event of an emergency.
19. INDEMNIFICATION
19.01. Except to the extent that there is a written waiver of rights of
recovery by Tenant against Landlord and except that Tenant's rights against
Landlord with respect to Hazardous Substances at the Premises shall be
exclusively governed by the provisions of Section 7 of this Lease, Landlord
shall indemnify and defend Tenant from and against any liabilities, damages,
judgments, expenses, and costs (including, without limitation, legal fees) for
which Tenant is held responsible, or which are incurred by Tenant, in connection
with third party claims against Tenant as a result of any act or omission of
Landlord, its agents, or employees or any breach by Landlord of Landlord's
obligations under this Lease; provided, however, the foregoing obligation of
Landlord to indemnify and defend Tenant shall be inapplicable to the extent that
any liabilities, damages, judgments, expenses, and costs (including, without
limitation, legal fees) for which Tenant is held responsible, or which are
incurred by Tenant, result from the negligent or unlawful acts of Tenant, its
agents, or employees.
19.02. Except to the extent that there is a written waiver of rights of
recovery by Landlord against Tenant and except that Landlord's rights against
Tenant with respect to Hazardous Substance at the Premises shall be exclusively
governed by the provisions of Section 7 of this Lease, Tenant shall indemnify
and defend Landlord from and against any liabilities, damages, judgments,
expenses, and costs (including, without limitation, legal fees) for which
Landlord is held responsible, or which are incurred by Landlord, in connection
with third party claims against Landlord as a result of any act or omission of
Tenant, its agents, employees or any breach by Tenant of Tenant's obligations
under this Lease; provided, however, the foregoing obligation of Tenant to
indemnify and defend Landlord shall be inapplicable to the extent that any
liabilities, damages, judgments, expenses, and costs (including, without
limitation, legal fees) for which Landlord is held responsible, or which are
incurred by Landlord, result from the negligent or unlawful acts of Landlord,
its agents, or employees.
19.03. A party ("Indemnified Party") entitled to be indemnified by the
other party ("Indemnifying Party") pursuant to Section 19.01 or Section 19.02 of
the Lease shall promptly and in writing notify the Indemnifying Party of such
claim for indemnification specifying in such notice the nature of such claim.
Also, in the event that any legal proceeding shall be instituted or any claim or
demand shall be asserted by a third party in respect of which an
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Indemnifying Party is obligated pursuant to the provisions of Section 19.01 or
Section 19.02 of the Lease or of Section 7 of the Lease to indemnify and hold
harmless an Indemnified Party, the Indemnified Party shall with reasonable
promptness after obtaining knowledge of such proceeding, claim, or demand give
written notice thereof to the Indemnifying Party who shall then have the right
at the Indemnifying Party's option and expense to be represented by counsel of
such party's choice in connection with such matter to defend against, negotiate,
settle, or otherwise deal with any such proceeding, claim, or demand; provided,
however, that without the prior written consent of the Indemnified Party (whose
consent shall not be unreasonably withheld or delayed) the Indemnifying Party
shall not consent to the entry of any judgment in or agree to any settlement of
any such matter; and provided further that, in addition to legal counsel
retained and paid for by the Indemnifying Party, the Indemnified Party may
retain separate counsel at such party's own expense to represent such party in
connection with any such proceeding, claim, or demand. Failure by the
Indemnifying Party to notify the Indemnified Party of the former's election to
defend any proceeding, claim, or demand with respect to which indemnity is
sought within thirty (30) days after notice thereof shall have been given to the
Indemnifying Party by the Indemnified Party shall be deemed a waiver by the
Indemnifying Party of such party's right to defend against any such matter. If
the Indemnifying Party assumes the defense of any such proceeding, claim, or
demand against the Indemnified Party, the Indemnifying Party shall take or cause
to be taken all steps necessary in connection with such defense, and the
Indemnified Party shall in all events be entitled to indemnity with respect to
such matter as provided in this Section 19. In the event that any legal
proceeding shall be instituted or any claim or demand shall be asserted by a
third party in respect of which an Indemnifying Party is obligated to indemnify
and hold an Indemnified Party harmless and in the event that the Indemnifying
Party does not elect to defend any such proceeding, claim, or demand, the
Indemnified Party may defend against, settle, or otherwise deal with any such
proceeding, claims, or demand in such manner as the Indemnified Party in
good-faith deems appropriate, and the Indemnifying Party shall be liable for
indemnification with respect to such matter including, without limitation, the
costs of such defense except that the Indemnified Party shall not settle any
such legal proceeding without the Indemnifying Party's prior written consent,
which consent shall not be unreasonably withheld or delayed. In the event of any
proceeding, claims, or demand by a third party with respect to which a claim for
indemnification is made hereunder, the parties hereto agree that they will
cooperate fully with each other in connection with the defense or settlement of
such matter.
20. LABOR RESPONSIBILITIES
20.01. Tenant agrees that all obligations to Tenant's employees under
applicable Mexican laws and regulations arising out of use of the
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Premises by Tenant during the Lease Term shall be the sole and exclusive
responsibility of Tenant, including, without limitation, such legal obligations,
if any, to all personnel employed by Tenant at the Premises, whether unionized
or not, temporary or other (including any subcontractors), and payment or fees
to the Mexican Social Security Institute, Sistema de Ahorro para el Retiro
(SAR), INFONAVIT or any other applicable taxes, fees or duties.
20.02. Landlord agrees that all obligations to Landlord's employees under
applicable Mexican laws and regulations arising out Landlord's Work and the
performance of Landlord's obligations, shall be the sole and exclusive
responsibility of Landlord, including, without limitation, such legal
obligations, if any, to all personnel employed by Landlord at the Premises,
whether unionized or not, temporary or other (including any subcontractors), and
payment or fees to the Mexican Social Security Institute, Sistema de Ahorro para
el Retiro (SAR), INFONAVIT or any other applicable taxes, fees or duties.
21. CONSTRUCTION OF THE BUILDING.
21.01. Landlord represents and warrants that the Building will conform to
the Final Plans and Final Specifications and shall be in compliance with all
applicable laws, regulations, ordinances, administrative orders and Stiva's
Airport Industrial Park Bylaws in existence and in force as of the Commencement
Date. Landlord represents and warrants that the Premises, including the Building
and the equipment supplied as described in the Final Plans and Specifications,
will be free from defects in design, workmanship and materials for a period of
one (1) year from the Commencement Date (except for the steel structure and the
roof which the warranty period is hereby extended throughout the initial Term of
the Lease or throughout any extension thereof) and agrees to make, at its sole
cost and expense all repair and replacements required to remedy such defects
should they occur within the appropriate warranty period, except for ordinary
wear and use.
21.02. All warranties to equipment and systems installed in the Premises,
other than equipment forming part of Tenant's personal property, will be vested
in both Landlord and Tenant.
21.03. In addition to the foregoing, Landlord represents and warrants that
Landlord's Work and the Premises will be Finally Completed, conforming to the
Final Plans and Final Specifications, within ninety (90) days after the
Commencement Date. In the event Landlord's Work and the Premises are not Finally
Completed at Tenant's satisfaction by the date above mentioned, then Tenant, in
addition to any other remedies it may have in accordance with this Agreement and
any applicable law, shall be entitled to do by itself or through the third party
of its choice any works necessary to complete
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Landlord's Work and to offset from the rents payable to Landlord the actual cost
of such works.
22. SECURITY DEPOSIT
22.01. Landlord acknowledges the receipt prior to the execution of this
Agreement of three (3) month's rent in the aggregate amount of US$149,400.00
(ONE HUNDRED FORTY NINE THOUSAND AND FOUR HUNDRED UNITED STATES DOLLARS), out of
which two months rent shall be kept as deposit and the other portion of said
deposit shall apply to the payment of the first month of rent.
22.02. The deposit referred to in 22.01 above, shall be allocated as a
security deposit and returned to Tenant with no interest upon the expiration
date of the Lease Term.
23. PERFORMANCE AND GUARANTEE
23.01. Landlord shall deliver to Tenant at the sole cost of Landlord a
performance and guarantee bond in an amount of US$300,000.00 (THREE HUNDRED
THOUSAND UNITED STATES DOLLARS), in a form and substance which encompasses the
construction of the Premises, to insure Landlord's obligation to construct and
perform under this Agreement and to guarantee that for one year after the
Commencement Date, Landlord will make any repairs or replacement of the
Premises or any part thereof needed due to any hidden or latent defect. The
basic terms and conditions of such bond are described in EXHIBIT I attached
herein and forming a part hereof
23.02. Tenant hereby shall provide to Landlord a corporate guarantee issued
by its parent company acceptable to Landlord not later than the 10th. of 1998 to
guarantee the compliance of Tenant's obligations under this Agreement. If such
guarantee is not deliver, this agreement will be null and void.
24. ATTORNEYS' FEES/COLLECTION CHARGES
24.01. In the event of any legal action or proceeding between the parties
hereto, reasonable attorneys' fees and expenses of the prevailing party in any
such action or proceeding will be added to the judgment thereon. All past due
amounts owed by either party to the other under the terms of this Lease shall
bear interest at the Prime Rate determined by Citibank, New York, multiplied by
two. Such Prime Rate shall be up dated every 180 days and shall apply until
payment is effectively made.
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25. SEVERABILITY
25.01. If any provisions of this Lease is found to be unenforceable, all
other provisions shall remain in full force and effect to the extent permissible
under applicable law.
26. WAIVER
26.01. The failure of either party hereto to insist in any one or more
cases upon the strict performance of any term, covenant, or condition of the
Lease by the other party hereto shall not be construed as a waiver of a
subsequent breach of the same or any other covenant, term, or condition, and no
delay or omission by either party to seek a remedy for any breach of this Lease
by the other party shall be deemed a waiver by such party of its remedies or
rights with respect to such a breach by the other party.
26.02. Except as expressly provided in this Lease and without prejudice of
Tenant's rights hereunder, Tenant hereby expressly waives and relinquishes any
implied or statutory rights provided in Articles 2306 paragraph II, 2310, 2315,
2317, 2318, 2339, 2341, 2379, 2380, 2381, 2384 and 2386 of the Civil Code for
the State of Nuevo Leon, Mexico.
27. AMENDMENT OF LEASE, RIGHT TO SUBLEASE, ASSIGNMENT
27.01. No amendment or modification of this Lease shall be valid or
effective unless made pursuant to a written amendment of this Lease signed by
duly authorized representatives of both Landlord and Tenant.
27.02. Tenant shall have not have the right to sublease all or any part of
the Premises to any third party without the consent of Landlord.
27.03. Tenant may assign all of its rights and obligations under this
Agreement to a qualified tenant if the prior written consent of Landlord is
obtained, in which case Tenant (and the guarantor under the corporate guarantee
to be granted in the form of EXHIBIT J attached hereto) shall not have any
further obligation towards Landlord after the date such assignment becomes
effective.
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27.04. Landlord may assign all of its rights under this Agreement without
limitation. Landlord may assign all of its obligations under this Agreement with
prior written approval of Tenant which approval shall not be unreasonably
withheld.
28. NOTICES
28.01. All notices permitted or required by this Lease shall be in writing,
sent by recognized overnight courier or hand delivered or by facsimile
transmission provided that there is electronic confirmation of receipt by the
sender's telecopier, and shall be deemed duly given when actually received by
the party to whom it is sent, addressed as follows:
IF TO LANDLORD:
Ave. Felix U. Gomez 125 sur
Monterrey, N.L. CP 64000
Mexico
Fax (8) 340-0818
IF TO TENANT:
Prior to Commencement Date:
2222 Kume Drive,
San Jose California, 95131 U.S.A.
After the Commencement Date:
at the Premises
Either party may change its address by means of prior written notice to the
other party as provided above.
29. CONFIDENTIALITY
29.01. Landlord shall not make any public announcement or press release
concerning a future lease transaction unless it has received Tenant's written
consent and shall maintain in confidence and not disclose to other any
information, data or material which Tenant furnishes to Landlord under a
confidentiality obligation.
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30. APPLICABLE LAW, COURTS AND-ARBITRATION
30.01. This Lease shall be governed by and subject to the laws of the State
of Nuevo Leon, Mexico.
30.02. Except to the extent that the parties have specifically selected a
specific procedure as provided in EXHIBIT E, the parties hereto expressly submit
any dispute, difference or claim arising out of or relating to or affecting any
of the obligations of any party hereto to be performed (or the breach,
termination or invalidity thereof) prior to the earliest of (i) the Commencement
Date as stated in the Commencement Date Certificate issued by the parties, or
(ii) the date an arbitral award under the provisions herein is issued declaring
that Substantial Completion of Landlord's Work has occurred and that the
Premises are available for Tenant to occupy them, or (iii) the date in which
Tenant actually takes possession of the Premises (not including occupancy of the
Manufacturing Areas prior to Substantial Completion of Landlord's Work) to
settlement by the binding arbitration procedures set forth herein, in accordance
with the Rules of Arbitration of the International Chamber of Commerce ("ICC"),
which arbitration shall be conducted as provided in the following:
30.02.01. Request for Arbitration: A party hereto may serve notice upon the
other party in the event that there has been a breach of this agreement which
has not been cured as provided herein. Such notice shall formally request
arbitration and shall specify in detail the reasons therefor (the "Request for
Arbitration").
30.02.02. Place of Arbitration: Unless otherwise agreed by the parties, all
arbitrations shall be held in Mexico, Distrito Federal United Mexican States and
conducted in the Spanish language.
30.02.03. Arbitration Court: Three (3) arbitrators who shall be members of
the ICC, provided at least two (2) arbitrators shall be members of the Mexican
Chapter of the International Chamber of Commerce shall be named as follows:
30.02.03.01. one, by Landlord, and the second by Tenant, with the
understanding that said nomination must occur no later than seven (7) calendar
days following the receipt by one party of the others Request for Arbitration;
30.02.03.02. if, however, Landlord or Tenant failed to appoint an
arbitrator, either party may request ICC to appoint the necessary arbitrator
pursuant ICC rules;
30.02.03.03 the third arbitrator shall be selected by mutual agreement of
the two (2) arbitrators within a seven (7) calendar day period following the
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appointment of the first two arbitrators. If those arbitrators do not reach
agreement on the third arbitrator within such seven calendar day period, then
either Landlord or Tenant may apply to ICC to have it appoint such third
arbitrator pursuant to the rules of such organization.
30.02.03.04. in any event, the third arbitrator shall preside over the
Court.
30.02.04. Arbitrators' Fees: Arbitrators shall be compensated for their
services at the standard hourly rate charged by arbitrators appointed by ICC.
30.02.05. Award: The Arbitration Court shall make its award in strict
conformity with this Agreement and shall have no power to depart from or change
any of the provisions of this Agreement.
30.02.06. Performance of the parties' obligations: Landlord and Tenant
agree to continue performing their respective obligations under this agreement
while the dispute is being resolved, unless this Agreement has been terminated
in accordance with its terms.
30.02.07. General: Unless otherwise agreed by the parties or provided in
the Arbitration Award, the prevailing party at the Arbitration settlement shall
be entitled to recover from the non-prevailing party all fees and expenses paid
or incurred by the prevailing party in connection with the Arbitration herein. A
party who successfully brings a judicial action to compel the Arbitration
described herein, shall be entitled to recover its reasonable attorneys' fees,
court costs and expenses from the other party.
30.03. With regard to any dispute, claim or controversy arising out of or
in connection with this Agreement from the earliest of (i) The Commencement Date
as stated in the Commencement Date Certificate issued by the parties, (ii) The
date an arbitral award under the provisions herein is issued declaring that
Substantial Completion of Landlord's Work has occurred and that the Premises are
available for Tenant to occupy them, or (iii) the date in which Tenant actually
takes possession of the Premises (not including occupancy of the Manufacturing
Areas prior to Substantial Completion of Landlord's Work), the parties hereto
irrevocably submit it to the competent courts sitting in Monterrey, N.L. Mexico,
waiving any rights they may have to any other jurisdiction by reason of their
present or future domiciles.
31. MISCELLANEOUS PROVISIONS
31.01. Whenever the singular number is used in this Lease and when required
by the context, the same will include the plural, and the masculine gender will
include the feminine and neuter genders, and the word
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"person" will include any corporation, firm, partnership, or association. All
monetary payments due and paid hereunder shall be paid in United States currency
(as per section 3.01) at Landlord's address or at such other address as may be
designated in writing by Landlord by notice to Tenant.
31.02. The headings or titles to sections of this Lease are not a part of
this Lease and will not affect the construction or interpretation of any part of
this Lease.
31.03. Time is of essence of each term and provision of this Lease.
31.04. Subject to Section 10 of the Lease, the terms and provisions of this
Lease are binding upon and inure to the benefit of the respective successors and
assigns of Landlord and Tenant.
31.05. Except as otherwise expressly provided in this Lease, all covenants
and agreements to be performed by either party under any of the terms of this
Lease will be performed by such party at such party's sole cost and expense.
31.06. In the event that Landlord or Tenant shall be delayed or hindered
in, or prevented from, the performance of any act required hereunder by reason
of strikes, lockouts, labor troubles, unavailability of materials, delay by the
other party, new or unexpected governmental regulations, delays by governmental
authorities, failure of power or unexpected unavailability of utilities, riots,
insurrection, war, or other reason of a like nature not the fault of such party
or not within its control (collectively "Force Majeure"), then performance of
such act shall be excused for the period of delay, and the period for the
performance of any such act shall be extended for a period equivalent to the
period of such delay. Nothing contained herein shall excuse either party from
the performance of its payment obligations hereunder.
31.07. Tenant agrees that at the expiration of the Lease Term, it will
deliver to Landlord peaceable possession of the Premises. Except as provided in
Section 1.02, no holding over by Tenant nor acceptance of the Monthly Rent or
other charges by Landlord shall operate as a renewal or extension of the Lease
without the written consent of Landlord and Tenant. Should Tenant hold over
without the consent of Landlord, this Lease shall continue in force from month
to month, subject to all of the provisions hereof and at fifty percent (50%)
increase on a monthly basis of the Monthly Rent which Tenant had been paying
during the preceding Lease year.
31.08. Nothing contained in this Lease shall be deemed or construed by the
parties hereto or by any third party to create the relationship of principal and
agent, partnership, joint venture, or any other association
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between Landlord and Tenant other than the landlord-tenant relationship
described herein.
31.09. Whenever the term Premises is referred to in this Lease, it shall
mean the land, the Building and any improvements thereon.
31.10. The parties agree that any monies due to one party by the other
under this Agreement shall be paid in United States Dollars.
31.11. This Agreement is executed in both English and Spanish versions. In
case there is a discrepancy between the two versions, the Spanish version shall
prevail. Such Spanish version will be registered by Tenant at Tenant's cost
before the Public Registry of Propriety and Commerce for the city of Monterrey,
N.L. Mexico.
IN WITNESS WHEREOF, duly authorized agents respectively of Landlord and
Tenant have executed this Lease in multiple original counterparts as of the day
and year first written above.
INMOBILIARIA NUEVO AEROPUERTO, S.A.
de C.V.
(LANDLORD)
/s/ ADRIAN G. GONZALEZ LOZANO
------------------------------------
By: ADRIAN G. GONZALEZ LOZANO
Legal Representative
/s/ SERGIO G. GONZALEZ LOZANO
---------------------------------------
By: SERGIO G. GONZALEZ LOZANO
Legal Representative
28
<PAGE> 29
---------------------------------------
INTERNATIONAL MANUFACTURING SERVICES DE
MONTERREY, S. DE R.L. DE C.V.
(TENANT)
By: [SIG]
---------------------------------
Legal Representative
29
<PAGE> 30
EXHIBIT A
(DRAWING OF IMS FACILITY LAYOUT)
<PAGE> 31
EXHIBIT B
COMMENCEMENT DATE CERTIFICATE
Tenant hereby agrees and accepts possession of the Premises, the building and
any other improvements together with parking areas and landscaping as shown on
the Site Plan. Therefore Tenant acknowledges receipt hereof and recognizes that
the Substantial Completion of Landlord's Work has been fulfilled and completed
as agreed in the Final Plans and Final Specifications on ________________ 1998,
the Commencement Date.
The parties have executed this Commencement Date Certificate the ____ of
______________, 1998, in connection with the Lease Agreement Executed by them on
______________, 1998.
INMOBILIARIA NUEVO AEROPUERTO, S.A. DE C.V.
By:
----------------------------------
Legal Representative
INTERNATIONAL MANUFACTURING SERVICES
DE MONTERREY, S. DE R.L. DE C.V.
By:
----------------------------------
Legal Representative
<PAGE> 32
EXHIBIT C
SPECIFICATIONS FOR IMS PROJECT
CONTENT
1. Permits and Licenses
2. Laboratory
3. Concrete
4. Floors and Slabs
5. Walls
6. Steel Structure
7. Roofing
8. Masonry and Finishes
9. Dock Levelers
10. Doors, Hardware and Windows
11. Civil Works
12. Fences
13. Landscaping
14. Plumbing
15. Sanitary Services and Fixtures
16. Heat Ventilation and Air Conditioning System
17. Hydropneumatic System
18. Electricity
19. Telephone Distribution System
20. Fire Protection System
21. Fire Alarm System
22. Elevators
23. Kitchen Equipment
<PAGE> 33
1. PERMITS AND LICENSES.
o Permits and license related to the construction are included in the
contract and they are Contractors's responsibility.
o CFE, Agua y Drenaje and TELMEX payments are not included in the
contact.
o IMS shall give the necessary assistance for the documents development
which their manufacturing process could be involved.
2. LABORATORY.
o The cost of the soil analysis and concrete testing are included in the
proposal, but IMS has the right to request another kind of testing, if
the result is negative. The Contractor will pay for the cost of the
test and the corrections. If the result is positive the charge will be
to IMS.
3. CONCRETE.
o All structural concrete will be 2,850 psi (200 Kg/Cm2) except for
those elements that the design asks it. All concrete will be ready mix
and meet the Mexican Norm NOM C-155, Clase "A".
o Concrete for minor work might be mixed at the site in power mixer.
o The concrete will be tested periodically according to the ACI 318-83
(Spanish version) section 4.7 "Evaluation and Acceptance of the
Concrete", part 4.71 "Testing Frequency" (For English version see ACI
301-84, Chapter 16).
o The steel reinforcement will be 47,000 psi (4,200 Kg/Cm2). Everything
under this section will be performed according to the drawings for
this work.
4. FLOORS AND SLABS.
o For the Plant area, the floor slab will be 4" thickness with welded
wire mesh 66/10-10 design load capacity shall be 2,500 K/sm, diamonds
40 x 40 inches on every column with all construction and expansion
joints according to the design and with a tolerance of 1/8" every 10'.
The final finish considered is polish. (The poliurethane sealer is not
considered)
5. WALLS
o Perimeter walls will be 12 cm insulated precast concrete walls R-11.
(200 kg/cm2) panels with steel reinforcing bar designed to support a
wind load of 90 miles/hour.
o For the interior partitions in offices, the walls are sheetrock with
1/2" gypsum board on each side of a 3 5/8" 26 gauge galvanized metal
stud at 24" on center and metal corner beads an all outside corners.
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<PAGE> 34
o For the inside of the exterior walls in office area, the walls are
sheetrock with 1/2" gypsum board on 7/8" furring channels on center
over concrete or masonry walls.
o For the bathrooms and kitchen area the walls are sheet rock walls with
1/2" water resistant gypsum board on each side of a 3 5/8", 26 gauge
galvanized metal stud at 24" on center.
o 10' high full thickness fiberglass bat insulation in wall cavities.
o The masonry walls should be 8"x 8"x 16" concrete block reinforcing as
per drawings.
6. STEEL STRUCTURE.
o Steel trusses and joist, fabrication in accordance to AISC
Specifications and as indicated in the drawings.
o All structural steel will have shop primer paint (gray). o The clear
minimum height to bottom of truss will be 24' in warehouse o The clear
minimum height in offices and manufacturing area will be 15'.
o The bay spacing will be 79' x 39.5'.
o The fabrication, erection, welding, etc., will be according to the
AISC.
7. ROOFING.
o Roof system will consist of a 24 gauge galvanized steel deck section
R-101
o Board Insulation: Aislakor and celotex Board thickness: 1 1/2" Thermal
resistance: R 11 Water absortion in accordance to ASTM D2842; 4
percent by volume maximum. Compressive Strength: minimum 25 PSI Board
edges: square edges
Rigid roof insulation:
Aislakor and celotex
Roof insulation polyisocyanurate foam core bonded to glass
fiber facer on one side and fiberboard on the other side.
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<PAGE> 35
o Built-Up roof:
Base sheets: Two plies of fiberglass, meeting ASTM D217.
Asphalt: Steep meeting ASTM 312, Type III
Flashing: Polyester reinforced modified asphalt flashing material.
o The roof shall have a ten (10) years factory guarantee.
o Storm water will be channeled to the streets and then by gravity
outside the property.
o The slope considered is 3%.
o Roof curbs:
Around all mechanical units and exhaust fans as indicated on drawings
o Roof Drainage: Use 1/2" plywood to form crickets to slope 3% roof
toward roof drains.
8. MASONRY AND FINISHES.
o The perimeter walls will be latex paint
o The following are the main finishes considered for the project.
<TABLE>
<CAPTION>
FINISH AREA
- ------------------------------------ ------------------------------------
<S> <C>
FLOORS
Ceramic tile Daltile Bathrooms and Cafeteria
Marble Lobby
Carpet: Terza model Trend Offices area
</TABLE>
-4-
<PAGE> 36
<TABLE>
<CAPTION>
FINISH AREA
- ------------------------------------ ------------------------------------
<S> <C>
Concrete polish finish Warehouse
Vinyl Conductive tile: Production area
VPI
1/8" gauge
12" x 12"
Electric Resistance
(Average of 5 of more readings
per NFPA 99 or ASTM f-150
between two electrodes
25,000 to 1,000,000 ohms.
Floor to ground greater than
25,000 ohms.
Static generation:
Less than 100 volts with conductive
footwear per AATCc-134 at
20% relativy humidity.
Static Decay
5,000 volts to zero to less than
0.03 seconds per Federal Test
Method 4046 at 15% relativy humidity
Federal Specifications:
Conforms to Federal Specification
SS-t-312b Type III. Vinyl tile.
Fire resistance:
Critical Radiant Flux (ASTM E-648
or NFPA 253)>1.08W/cm2
(Class I
interior floor finish. NFPA
Life Safety Code 101)
Flame spread (ASTM E-84 or
NFPA 255)>75
Abrasion Resistance:
ASTM D-1044 cd-10-f Wheel 500
Gm Weight
Cycles % Gauge loss
2,500 0.4
5,000 0.8
7,500 1.2
10,000 1.6
Conforms to the requirements of
NFPA 99
in effect of the time of installation
UL 779
</TABLE>
-5-
<PAGE> 37
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------
| WALL BASE | |
| 4" Rubber or vinyl base Johnsonsite or similar | Offices & Cafeteria |
- ---------------------------------------------------------------------------------------
| WALLS | |
| Sherwin Williams Latex paint | General Offices |
| Epoxy paint | Interior walls of production area |
| Unpainted exposed concrete | Exterior walls |
- ---------------------------------------------------------------------------------------
| CEILINGS | |
| Armstrong model Minaboard Fissured 755B | Offices and production area |
| 21'x4' or similar. | |
| Liner panel 2'x4' | kitchen area |
- ---------------------------------------------------------------------------------------
</TABLE>
9. DOCK LEVELERS.
o 6 (six) Dock levelers 6'x6' 20,000 Lb capacity, Blue Giant model A788
or equal approved. Operating range 12" above/below dock level counter
balance springs with solid steel positioning roller & roller bearings,
55,000 PSI high yield steel platform & structure, continuous piano
type hinge with front header plate boxed structure with "c" channels
gusseted at front and rear headers, and bumpers included.
10. DOORS, HARDWARE AND WINDOWS.
o Hollow metal personnel doors, 3' x 7', for dock service and fire exit
includes: 20 Ga. steel door, 16Ga. steel frame, MONARCH 19-R-BA exit
only panic bar with 3 Hager hinges 4"x4" model 700 in each door.
o Roll-up doors, galvanized, Electric operation, 8' x 10'.
o Solid Wood doors with Republic metallic frames in the interior offices
with 3 Hagger hinges 4"x 4? model 700 in each door.
o Doorlock Schlage model Orbit A53PD/626.
o Door anodized bronze aluminum.
o Fixed Windows frames complete with perimeter subframe and sill trim
o Window wall glazing: mirror glass reflective silver. o Door closers
1460 P LCN closers o Push plates Hagger stainless steel, Model 30 S,
beveled o Door pulls stainless steel round 3/4" dia., base / 2 1/4",
protection 1 1/2" clearance o Two doors should have electric strikes
that are controlled by reception desk.
11. CIVIL WORKS.
o Access roads an Parking lots will be compacted backfilling 95%
proctor, 6" gravel base compacted 95% proctor, asphalt coating on top
1t/M2 asphalt concrete 2" as finish.
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<PAGE> 38
o For the pavements it is considered the following criteria:
o Auto parking 2" (5 Cm) asphalt concrete plus 6" base.
o Dock area 6" concrete pavement, for trailers, concrete 2,850 psi
(200 K/Cm2), reinforcement as per drawings.
o The sidewalks will be 4' wide (1.20 M) 4" (10 Cm) thickness concrete
2143 psi (150 K/Cm2). Curbs and painting are also include.
o Grading will be done in accordance with the drawings.
12. FENCES.
o Chain link fence 2.10 m (7') height and barbed wire with automatic
door gate at the principal entrance.
13. LANDSCAPING.
o For landscaping it has been considered San Agustin grass, ornamental
bushes and trees, as per shown in final design, with irrigation system
with automatic controller. Landscaping.
14. PLUMBING.
o For sanitary work below the floor, it will be provided service P.V.C.
pipe and fittings schedule std. For exterior work concrete pipe will
be used with the protection norms required.
o For water will be PVC schedule 80.
o Deep well and cistern is included in the cost
o Nitrogen line of cooper is included de diameter will be 1"
o Chilled water PVC pipe is included de diameter will be 1"
o Softened water PVC pipe is included de diameter will be 1"
o Compressor air PVC line is included de diameter will be 1"
o Vacuum PVC pipe is included de diameter will be 1"
15. SANITARY SERVICES AND FIXTURES.
o Sanitary fixtures will be Ideal Standard or equal. All toilets will be
white color and floor mounted, and the urinals, also white, will be
flush valve operated. All accessories will be Urrea or equal.
o The toilet partitions will be stainless steel in accordance to
drawings.
o The fixtures considered are:
FIXTURE
- -----------------------------------------
Water closets Ideal standard Cadet model
Urinals Lamosa model Austral
-7-
<PAGE> 39
Lavatories undermount
Lavatories faucets MOEN LEGEND 4420
Coffe bar sink MOEN 22827
Cleaning sink
Mirrors BOBRICK B-165
Soap dispenser Bobrick B
Paper towel dispenser Bobrick B-262
Toilet tissue dispenser Bobrick B-288
16. HEAT VENTILATION AND AIR CONDITIONING SYSTEM.
o Air package units system by York manufacturer for all the area.
o Design temperatures as follows: 72(degree)F Office areas and
manufacturing 80(degree)F Warehouse area. Designed cooling capacity
o Offices and Cafeteria ductwork is galv, steel and insulated with
fiberglass 1" blanket.
o Exhaust air systems will be provided and installed as required in
toilet rooms.
o All grills and diffusers will be aluminum, Titus or similar,
thermostats and controls are included. Exhaust system for 10,000 CFM.
17. HYDROPNEUMATIC SYSTEM.
o It has been considered for giving pressure to the piping water of
domestic usage, (not for process water) and the system includes:
Galvanized steel tank cap 109 gals., two pumps 5HP, and a 7.5 HP
motor.
o The work pressure is 40 PSI to 60 PSI.
o Electrical controls for automatic control of the system including
magnetic starter at full voltage combined with thermomagnetic switch
for control and protection of the motors connected at 480 volts.
18. ELECTRICITY.
o The main service will be 34,500 volts, as determined by CFE with
provision for CFE metering equipment going underground with
3-35kv-100% insulation XLP 1/0 XLPE cables from the CFE connection at
the property limit to the primary switchgear.
o The primary switchgear, including lightning arrestors, cooper bus
work, connections to ground loop high voltage cable terminations.
Switchgear to have covers and doors and windows for visual examination
of switch position with external switch operators.
o One (1) 1500 KVA 480/277 volts oil filled transformers close coupled
to switchgear and connected to the main low voltage panels by conduit
in pad.
o Transformers shall have oil level gauge, temperature gauge, two 2 1/2%
taps (full capacity) above and below rated primary voltage and
standard pipe connections for sampling, filterinf etc. connect each to
ground loop.
-8-
<PAGE> 40
o The transformers of the substation are going to be mounted in a
concrete pad just outside the building.
o Transformers brands will be PROLEC.
o The main low voltage panel will be Square D and shall be 480 volts, 3
phases, 4 wire and ground 60 hz NEMA-1. (See impedances diagrams)
o The lighting panels will be Square D.
o All wire shall to be THHN/THW copper, all conduit exposed to forklift
damage to be rigid. Ground wire in all conduits runs sized per table
250-95 of NEC. All conduits run except main service to be overhead.
o Bus duct will be Square D.
LIGHTING
o There will be 120 V. lay-in fluorescent fixtures in all offices, to
provide 100 FC at work surfaces, and for manufacturing area.
o Illumination of 400 W high pressure sodium for the warehouse area
there will be.
o Fluorescent lamps manufacturers will be cooper.
o High pressure sodium in warehouse fixtures and lamps manufactured by
Lumisistemas, including flexible wiring.
o Outside lighting on plant and parking lot 1.5 f.c. level with high
pressure sodium vapor, 175 W. "Wallpacks", fixtures and lamps
manufactured by Lithonia.
o Exit lights above doors will be provided. Also installed one 40W
fluorescent emergency night light battery emergency lighting for
manufacturing and offices areas.
o Duplex receptacles for all offices, meeting, conference, training and
demo area walls, also dedicated split duplex receptacles in all coffee
stations will be as shown on drawings.
BUS DUCT.
160 ml electrical bus duct 1000 amps 480 v, 3phases are included.
336 ml electrical bus duct 225 amps 480 v 3 phases are included.
OTHER APPROVED BRANDS.
<TABLE>
<S> <C> <C>
a. Cable: Conductores Monterrey, or equal approved.
b. Conduit piping: "Conduit de Mexico"
c. Cable Trays: Crouse Hinds.
d. Outlets, Switches Bryant
e. Juntion boxes Racco
f. Piping jupiter
g. Bus duct Square "D"
</TABLE>
19. TELEPHONE DISTRIBUTION SYSTEM.
o NOT included.
-9-
<PAGE> 41
20. FIRE PROTECTION SYSTEM.
This includes:
o Manufacturing and warehouse area density 0.45 GPM/2500 SQF (Extra
Hazard)
o Offices area density 0.10 GPM/1500 SQF (Light Hazard)
o Sprinklers in roof manufacturing area.
o Sprinklers in offices area.
o ESFR Sprinklers in Warehouse area.
o Interior hose stations.
o Diesel Engine Fire pump 1500 GPM 125 PSI &jockey.
o 150,000 gallons bolted tank.
The contractor will be responsible to coordinate and obtain approval
on design by the owners insurance company.
21. FIRE ALARM SYSTEM.
The fire alarm panel and the smoke detectors will be Notiffier as
indicated in the drawings.
22. ELEVATORS.
Not Included.
23. KITCHEN EQUIPMENT
This includes the following equipment:
<TABLE>
<CAPTION>
ITEM BRAND MODEL
- ------------------------------------ -------------- ------------------
<S> <C> <C>
A1 STOCK POT STOVES FERRO ESPECIAL
A2 SCALE NUEVO LEON 500
A3 WIRE SHELVING METRO 1848 NC 74P
A4 WIRE SHELVING METRO 1842 NC 74P
A5 WIRE SHELVING METRO 1836 NC 74P
A6 FREEZE ROOM FERRO ESPECIAL
A7 STORAGE SYSTEM METRO Q2448G Q74PE
A8 STORAGE SYSTEM METRO Q2442G Q74PE
A9 STORAGE SYSTEM METRO Q2448G Q74PE
A10 STAINLESSSPLIT CONTAINER FERRO ESPECIAL
A11 CUBE ICE MAKER CRISTAL 802-CAS-161BRS725
B1 STORAGE SYSTEM METRO Q2442GQ74PE
B2 STAINLESS STEEL TABLE WITH
DOBLE SINK FERRO ESPECIAL
B3 WIRE SHELVING FERRO ESPECIAL
B4 STAINLESS STEEL TABLE FIT FERRO ESPECIAL
B5 STAINLESS STEEL TABLE FERRO ESPECIAL
</TABLE>
-10-
<PAGE> 42
<TABLE>
<CAPTION>
ITEM BRAND MODEL
- ------------------------------------ -------------- ------------------
<S> <C> <C>
B6 WIRE SHELVING FERRO ESPECIAL
C1 CONVECTION OVEN SOUTHBEND GS12SC
C2 GAS FIRED TRI-LEG TILTING 2/3
JACKETED KETTLE InterTecnica MGV60
C3 OPEN BURNER HEAVY-DUTY GAS
RANGE CORIAT EC1T
C4 STAINLESS STEEL EXHAUST FAN FERRO ESPECIAL
C5 STAINLESS STEEL SPLIT
CONTAINER FERRO ESPECIAL
D1 STAINLESS STEEL POT SINK FERRO ESPECIAL
D2 PRE-RINSE ENCORE K501000BR
D3 POT RACK FERRO ESPECIAL
D4 STAINLESS STELL SPLIT
CONTAINER FERRO ESPECIAL
D5 STORAGE SYSTEM METRO Q2436G Q74PE
D6 STORAGE SYSTEM METRO Q2442G Q74PE
D7 GREASE TRAMP FERRO ESPECIAL
E1 OPEN BURNER HEAVY DUTY GAS
RANGE CORIAT H1014
E2 STAINLESS STEEL TABLE FIT FERRO ESPECIAL
E3 FRYER CORIAT FC50
E4 GRIDDLE TOP HEAVY-DUTY GAS
RANGE CORIAT 201
E5 STAINLESS STEEL EXHAUST FAN FERRO ESPECIAL
E6 STAINLESS STEEL SPLIT
CONTAINER FERRO ESPECIAL
E7 STAINLESS STELL WORK TABLE FERRO ESPECIAL
E8 WIRE SHELF FERRO ESPECIAL
E9 REFRIGERATORS VICTORY RSA2DS7PT
E10 REFRIGERATOR VICTORY HSA 2DTPT
E11 STAINLESS STEEL DOUBLE SINK FERRO ESPECIAL
E12 WIRE SHEFL FERRO ESPECIAL
F1 STAINLESS STEEL TRAY CABINET FERRO ESPECIAL
F2 COOL ICE TABLE FERRO ESPECIAL
F3 BREAD AND TORTILLAS STORAGE FERRO ESPECIAL
F4 HOT FOOD WELLS FERRO ESPECIAL
F5 CASHER CABINET FERRO ESPECIAL
F6 DESSERTS EXPOSURE CABINET FERRO ESPECIAL
F7 SOFT DRINKS DISPENSER FERRO ESPECIAL
F8 CASH MACHINE FERRO ESPECIAL
F9 TRAY CONVEYOR FERRO ESPECIAL
F10 STAINLESS STEEL HAND RAIL FERRO ESPECIAL
</TABLE>
-11-
<PAGE> 43
<TABLE>
<CAPTION>
ITEM BRAND MODEL
- ------------------------------------ -------------- ------------------
<S> <C> <C>
F11 CABINET FERRO ESPECIAL
F12 SHELF WALL FERRO ESPECIAL
F13 DISH WASHER FERRO ESPECIAL
F14 SHELF PASS THRU FERRO ESPECIAL
F15 DIRTY DISHES RECEIVER TABLE FERRO ESPECIAL
G1 SHELF PASS THRU FERRO ESPECIAL
G2 DIRTY DISHES RECIVER TABLE FERRO ESPECIAL
G3 STAINLESS STELL SELECTION
SHELF FERRO ESPECIAL
G4 PRE-RINSE ASSEMBLIES ENCORE K501000BR
G5 DISPOSER BUS BOY BB2000
G6 DISH WASHER HOBART ESPECIAL
G7 STAINLESS STELL CONDENSATE
CONTAINER FERRO ESPECIAL
G8 STAINLESS STEEL DISH
RECEIVING TABLE FERRO ESPECIAL
G9 SHELF STORAGE FERRO ESPECIAL
G10 STORAGE SYSTEM METRO Q2442G Q74PE
G11 GARBAGE CAN FERRO ESPECIAL
G12 GREASE INTERCEPTOR FERRO ESPECIAL
</TABLE>
-12-
<PAGE> 44
EXHIBIT "D"
FINAL COMPLETION CERTIFICATE
Tenant acknowledges that Final Completion of Landlord's Work has been
fulfilled and completed as agreed in the Final Plans and Final Specifications on
____________1998.
The parties have executed this Final Completion Certificate the ___ of ___
1998, in connection with the Lease Agreement executed by them on _________,
1998.
INMOBILIARIA NUEVO AEROPUERTO, S.A. DE C.V.
By:
----------------------------------
Legal Representative
INTERNATIONAL MANUFACTURING SERVICES
DE MONTERREY, S. DE R.L. DE C.V.
By:
----------------------------------
Legal Representative
<PAGE> 45
EXHIBIT "E"
AMICABLE RESOLUTION PROCEDURES
1. Landlord and Tenant shall seek friendly resolution to any bona fide
disagreement arising out of the Landlord's Work (hereinafter a "Disagreement"),
in accordance with this exhibit. Landlord and Tenant shall try to accommodate
the Disagreement to a friendly, fast tract, business oriented procedure (the
"ARP"). To the extent possible and practicable, Landlord shall continue with all
Landlord's Work in accordance with the Final Plans and Final Specifications
during any pending ARP. If the Disagreement involves the performance of certain
portion of the Landlord's Work that would make the continuation of such portions
of the Landlord's Work impracticable, then Landlord shall continue with all
Landlord's Work not affected by the Disagreement. The ARP shall be carried out
as provided hereunder and any failure to reach resolution under the ARP shall
entitle either Landlord and/or Tenant to cause the dispute to be submitted to
binding arbitration under the terms of Clause Thirty of the Agreement.
2. Should any Disagreement arise, Landlord and Tenant shall commence the
ARP by notifying the other party in writing of the Disagreement and by
appointing their respective representatives (the "Management Representatives"),
who shall have authority to negotiate a settlement on behalf of Landlord and
Tenant, respectively. The Management Representatives shall be appointed within
three (3) calendar days of the original notice of the Disagreement.
3. No later than five (5) business days following their appointment the
Management Representatives will mutually select and appoint to act as a neutral
mediator, a mutually acceptable engineer or architect, duly licensed in Mexico,
who shall have the qualifications and who shall perform the functions stated in
this ARP (the "Neutral Mediator"). If by the aforementioned date, the Management
Representatives have not agreed on who will act as Neutral Mediator, then
Landlord and Tenant shall submit the Disagreement to the Chamber of Construction
Industry located in Monterrey, N.L. who shall appoint such Neutral Mediator
within a period of five business days from the date a request is made by either
of the parties.
4. Within a ten (10) business day immediately following the appointment of
the Neutral Mediator, a formal meeting (the "Formal Meeting") will be held
before a panel consisting of the Neutral Mediator and the Management
Representatives. The Formal Meeting shall be held at the place and time selected
by mutual agreement of the Management Representatives within such ten (10)
business days of the appointment of the Neutral Mediator, and if the Management
Representatives cannot agree upon the place, then the place will be selected by
the Neutral Mediator. The Formal Meeting shall be supervised and conducted by
the Neutral Mediator, and shall have a duration of not more than forty-eight
(48) hours.
5. No later than five (5) business days prior to the Formal Meeting, the
Landlord and Tenant shall exchange, through their Management Representatives,
and shall submit to the Neutral Mediator, concise memoranda stating the issues
in disagreement and their position in such respect, as
-1-
<PAGE> 46
well as all documents and exhibits on which the parties intend to rely during
the Formal Meeting. Such memoranda documents and exhibits shall be in either
English or Spanish Language; nevertheless, such memoranda, documents and
exhibits shall be accompanied by an official Spanish translation if they are in
English, and by an official English translation if they are in Spanish.
6. During the Formal Meeting, each Management Representative will make an
oral presentation of its case, and each Management Representative shall be
entitled to a reply. The presentations and replies may be made in any form, and
by any individuals, other than the Management Representatives, as desired by
Landlord and/or Tenant, and may be supported by any of, but only, the memoranda,
documents and other exhibits submitted in accordance with Section 5. hereof. The
use of witnesses and experts shall be permitted. Presentations may not be
interrupted, except that the Neutral Mediator and the Management Representatives
may ask clarifying questions. The meeting shall not be recorded, however,
persons attending may take notes. Each Management Representative may have not
more than two (2) advisors (plus one interpreter, if applicable) in attendance.
7. During the Formal Meeting, the Management Representatives shall make all
reasonable efforts in good faith to seek a resolution to the Disagreement, to
which effect they shall meet one or more times, as necessary, within the
forty-eight (48) hour period set forth hereinabove. By mutual agreement, other
representatives representing either side may be invited to attend the
negotiations. The Neutral Mediator will attend the negotiations and will give an
oral opinion as to the issues raised during the Formal Meeting.
8. Should the Management Representatives not reach a resolution on the
Disagreement, then within a term of forty-eight hours following the conclusion
of the Formal Meeting, the Neutral Mediator shall submit to the Management
Representatives a written proposal which shall contain an opinion on the issues
involved in the Disagreement and a bona fide, proposed, amicable resolution,
settlement and/or compromise of the Disagreement.
9. Should the Management Representatives finally reach a resolution to the
Disagreement, then the terms of any settlement thereof shall be set forth in a
written agreement (the Resolution Agreement), which shall be executed by the
Management Representatives not later than twenty-four hours after the later to
occur of (i) the conclusion of the Formal Meeting, or (ii) the submitting of the
Neutral Mediator's written proposal mentioned in Section 8 hereinabove (or if no
written proposal is submitted by the Neutral Mediator within 48 hours of the
conclusion of the Formal Meeting, then upon the expiration of such 48 hours
period after the Formal Meeting). If the Management Representatives fail to sign
a Resolution Agreement within the time period in this Section 9, then the
Disagreement will be submitted to the arbitration provisions of Clause Thirty of
the Agreement. The Resolution Agreement shall be final, and legally binding on
Landlord and Tenant.
10. The ARP is not intended to last more than twenty (20) business days
from start to finish and any Disagreement that has not resulted in a Resolution
Agreement within twenty (20) business days, may be submitted by either party to
binding arbitration under Caluse Thirty of the
-2-
<PAGE> 47
Agreement. Further, if three (3) or more consecutive Disagreements fail to
result in a Resolution Agreement, then, in such event, either party can avoid
the ARP and submit the Disagreement directly to arbitration under Clause Thirty
of the Agreement and thereafter, no further ARP shall be conducted, unless by
the mutual consent of the parties.
-3-
<PAGE> 48
EXHIBIT F
PROTECTIVE COVENANTS AND
RESTRICTION BYLAWS
With the only intention and purpose to create, develop and maintain a world
class industrial development, with a healthy, efficient labor atmosphere, an
orderly neat, clean work environment with an attractive image and appearance,
the following protective covenants and restriction bylaws are established same
that are binding and of strict observance for all present and future owners,
lessees or tenants of any property, land or building within the limits of the
"STIVA AIRPORT INDUSTRIAL PARK", (from here on, stated as "THE PARK") a
development authorized and officially recognized by the Secretary of Urban
Development of the State of Nuevo Leon, Mexico.
BYLAWS
FIRST:
All bylaws here stated are recognized and accepted of conformity by all
owners and tenants of "THE PARK" and form part of their legal documents of
property or lease. All modifications or changes made to the original Bylaws by
this document will substitute and take the place of the previous one.
SECOND:
The "owners, tenants and neighbors committee" (from hereon stated as "The
Committee") is constituted with the objective to supervise and assure the strict
compliance of "THE PARK" protective covenants and restriction bylaws as well as
to cooperate and actively participate in creating and maintaining an industrial
environment suitable for world class operations for which "THE PARK" was
developed.
All actual or future owners and tenants of "THE PARK" have to become and
form part as active members of "The Committee" and have the obligation to assist
and participate in all meetings that "The Committee" convenes to.
THIRD:
The subscribers of the present bylaws that have the status of owner in the
park, must subscribe to a Civil Association which main purpose is to manage and
to pay the maintenance of the common areas in the park, as well as the tax
payments required from the Federation, the State and the Municipality. Renuncing
to what is established in the Article 2573 and have the obligation to form part
and to participate in this association the longest they remain owners of the
real estate property in the park.
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<PAGE> 49
FOURTH:
The subscribers of the present bylaws are obligated to make known the
bylaws, and the obligation to form part of the Civil Association to the new
owners in the case of transferring the real estate property by any mean or
title.
FIFTH:
Under no conditions whatsoever must the industrial operations in the field
of basic chemical industry, heavy industry or similar be located within the
subdivision. Only the location of light and clean industrial operations which
are capable of carrying out their manufacturing, management, warehousing,
engineering, research, loading, unloading, handling and other functions with the
limits established by these protective covenants and restrictions.
SIXTH:
No buildings or industrial installations shall be constructed at least
(6.00) meters from the street line where the property adjoins a street if the
depth of lot is less than (8.00) meters, and (10.00) meters if more than (80.00)
meters or five (1.00) meters from any other adjacent property, on the boundary
of the lots with streets and avenues, sidewalks shall be built of concrete or an
equivalent material and in no case its width will be less than one meter.
Land utilization shall not be more than 80% of the total area of the
property land for actual or future buildings. The total constructed, under roof
covered areas of the buildings shall not be less than a 10% of the size of the
lot.
SEVENTH:
The part of land left in front of the buildings, between the buildings
itself and the street, shall be developed and kept in such a way as necessary to
present a clean and attractive appearance. Such areas shall be covered entirely
by sidewalks, paved areas for the circulation of vehicles, landscaping,
decorative fillings of gravel or similar materials, or decorative constructions
compatible with the overall architectural style of the facade of the building,
provided that the design for such decorative construction is previously approved
by "THE PARK".
The land left behind or to the sides of the building shall be kept clean of
any litter, waste, weeds or any other articles, and/or materials and shall be
leveled free of ditches, excavations or mounds, unless they serve a decorative
purpose previously approved by "THE PARK".
EIGHT:
The parking of trucks, buses or industrial vehicles in front of buildings
is forbidden. Vehicles of this type shall be parked invariably to the rear or to
the sides of the buildings.
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<PAGE> 50
NINTH:
Open air storage of buildings is forbidden whether it be of merchandise,
products, machinery, parking material or any other items, unless such storage is
perfectly covered in all directions by panels, grills or screen of appearance
previously approved by "THE PARK".
TENTH:
It is forbidden to use the land or buildings located within "THE PARK" to
conducted activities that have as a result the following consequences, in
amounts or levels that can be detected at the limits of the lot used by that
industry and are in violation of the regulations of S.E.D.U.E. (The Secretariat
of Urban Development and Ecology) or any local municipal rule:
A. The emission of dust and/or objectionable smoke.
B The generation of gases, vapors, and odors which either are hazardous
to health or create a public nuisance problem.
C. The production of noises, vibrations and/or radiation that create
either hazards to health or public nuisances.
ELEVENTH:
It is forbidden to conduct within "THE PARK" any operations generating
luminosity of high intensity, unless they are insulated in such a way as to
avoid any discomfort to anybody who could see them from any point where such
operation is located.
TWELFTH:
It is forbidden to discharge to the sewage lines within "THE PARK" any
substances, wastes or effluents in amounts in excess of limits established by
regulations issued by S.E.D.U.E. (The Secretariat of Urban Development and
Ecology), or any other which may be issued by any local municipal sewer
authority.
THIRTEENTH:
If considered necessary by "THE PARK" to follow and comply with the
regulations above mentioned, a water treatment process should be installed
before disposing the wastes or effluents into the park's sewer lines by the
company involved in such situation, covering by the same all expenses and
permits.
-3-
<PAGE> 51
FOURTEENTH:
When judged necessary and to protect all the workers and personnel against
the spread of any infection or plague, "THE PARK" will urge any of its members
to disinfect and/or fumigate the insides and outsides of its land, building and
installations as determined by each case.
FIFTEENTH:
The placement of signs, displays or advertisements on the lots of land or
buildings, within "THE PARK" will be allowed only if such signs, displays or
advertisements have the exclusive purpose of identifying the corporation using
such lot or building, either through lease or ownership. Such signs, displays
and advertisements shall be only of the general specifications established by
"THE PARK" accepting also the emblems, logos, monograms or trademarks generally
used by the corporations located in "THE PARK" it is forbidden to paint any
signs of the roof of buildings, or to place signs which may exceed the height of
the main facade in a building.
SIXTEENTH:
In no case, the construction, expansion, or demolition of a building or any
other installation, shall be started if "THE PARK" has not previously granted
its authorization in writing to do so, however, such authorization shall not be
unreasonably withheld, nor may authorization be denied if the landowner is in
compliance with the other clauses herein.
SEVENTEENTH:
The overall external appearance of buildings shall be kept in a clean,
orderly condition. The exterior painted surfaces shall be repainted at least
every three (3) years.
EIGHTEENTH:
Absolutely all members of "THE PARK" and of "THE COMMITTEE" that have an
economical activity within the limits of "THE PARK", shall seriously commit
themselves to avoid to hire or contract any person that had previously worked
with any other company of "THE PARK" or member of "THE COMMITTEE" during the
past six months and to report the situation to the committee and/or to the other
company involved.
This bylaw shall be taken as an internal obligatory policy of the hiring
procedure with the objective to avoid as possible any situation that would
negatively affect the turnover rate of any or all of the members of "THE
COMMITTEE" of "THE PARK".
NINETEENTH:
The company or the property owner that has acquired a lot in this park and
specially those who are located in the perimetral area, will be obligated
through this document to not allow or
-4-
<PAGE> 52
authorize other land neighbors different from the tenants of the "STIVA AIRPORT
INDUSTRIAL PARK" to connect to its infrastructure net and utilities service,
under any reason or circumstance. If the tenant fails to observe this clause, a
penalty from The Committee of owners and neighbors of the STIVA AIRPORT
INDUSTRIAL PARK will be imposed and, independently of the procedure of legal
action that will be executed against that or those who allow such connections
over the STIVA AIRPORT INDUSTRIAL PARK or The Committee.
TWENTIETH:
An annual maintenance fee is established for all members of "The Committee"
the quantity established is to be contributed per advance during the first two
weeks of January of the same year. These contributions are to be administrated
and managed by The Civil Association the use of these contributions are strictly
for the maintenance of the public service infrastructure and the good keeping of
streets, lawns and sidewalks as well as to maintain and improve the security,
safety and good appearance of "THE PARK".
TWENTY-FIRST:
The subscribers of the present bylaws that have the status of owners,
lessee, or other similar title, are obligated to pay to the Civil Association
mentioned in bylaw Third, by way of conventional penalties, the followings which
amount at the time to be charged will integrate to the maintenance fund of the
park.
a) for delay, in case of failure to pay on time the annual maintenance
fee that is eferred in bylaw twentieth, interest on the due balance at
a rate of two times the CPP (Percentage Cost Average) published every
month by Banco de Mexico.
b) the nonobservance of any of the other dispositions or bylaws that
contains the obligation of do or not to do and not just ordinary
facultatives, will raise a fine that will be calculated at a rate of
$1.00 (one peso 00/100 M.N.) daily, for every square meter of land
surface of a lot owned or used by the infractor, during all the time
that runs without solving satisfactorily the nonfulfillment.
TWENTY-SECOND:
The subscribers of the present bylaws that have the status of owners, in
"THE PARK", are obligated to the following: In case that the Federal
Authorities, the State of Nuevo Leon and the City, decree or enact any type of
tax as obligatory for the execution of development works in the nearby or
adjacent areas to "THE PARK" or that by any title turn out obligatory for the
property owners situated in the territorial limits involving total or partially
the location of "THE PARK"; are obliged to pay in proportion the respective tax
in correspondence to the land surface owned from the total extension of "THE
PARK".
"THE COMMITTEE" expressly reserves for itself the right to change these
protective convenants and restrictions at any time, in regards to the land that
"THE PARK" owns at the date,
-5-
<PAGE> 53
provided that such changes do not result in harm or damage to the industries
previously located within the park limits, if such changes or modifications may
in any form affect the operations of companies previously located in "THE PARK"
will be implemented only if the affected companies grant their approval in
writing to those changes.
In all cases in which (according to these protective convenants and
restrictions): "THE COMMITTEE" reserves for itself the right to authorize,
approve and/or accept, it is specifically agreed that such authorizations,
approvals and/or acceptances will be valid only if they are granted in writing
by persons with specific power of attorney from the "THE COMMITTEE", such
authorizations, approvals and/or acceptances shall not be unreasonably defined.
In case "THE COMMITTEE" does not deliver a negative answer to the request
for authorization, approval or acceptance within 30 calendar days after
receiving such a request in writing, the request for authorization, approval or
acceptance shall be considered as granted. The application and interpretation of
these protective convenants and restrictions will be regulated by the laws of
the State of Nuevo Leon, supplemental to the different federal laws and
regulations as pertaining to specific aspects of industrial operations,
including but not limited to the laws and regulations of safety and industrial
health, pollution, public roads and similar provisions.
Pertaining to construction matters, it is specifically understood that
these protective convenants and restrictions surpass the requirements of the
constructions code for the city of Monterrey, but all requirements of such
construction code shall have to be complied with, in case of any controversy on
the content, interpretation and/or application of these protective convenants
and restrictions, the parties agree to submit to the jurisdiction of the courts
in the city Monterrey state of Nuevo Leon.
These protective convenants and restrictions will remain in effect
indefinitely and can only be canceled or modified by "THE PARK" or by a group of
individuals or entities owning at least seventy-five percent of the total area
of "THE PARK".
-6-
<PAGE> 54
EXHIBIT "G"
UTILITIES
<TABLE>
<S> <C>
WATER: 1.0 a 1.5 liters/sec. Capacity
POWER: 2,500 KVA
TELEPHONE: 30 lines (fiber optics)
</TABLE>
-7-
<PAGE> 55
EXHIBIT H
(Aerial Drawing of Adjacent Land)
<PAGE> 56
EXHIBIT "I"
BASIC TERMS OF PERFORMANCE AND GUARANTY BOND
BONDING INSTITUTION: ______________, S.A.
TYPE: Irrevocable.
AMOUNT: In Mexican Pesos equivalent to US$300,000.00 Dollars
EFFECTIVENESS: From the date of signing the Lease through one year after
Commencement Date Certificate.
PAYMENT: Shall be made following the standard payment procedures applicable to
the Bonding Institution following the request in writing of Tenant, with the
understanding, however, that the bond policy shall include expressly a waiver by
the bonding institution to the benefits of "orden y excusion".
-2-
<PAGE> 1
EXHIBIT 10.25
[MAXTOR LETTERHEAD]
IMS CONFIDENTIAL
October 14, 1994
Mr. Anthony Pham
4932 Antioch Loop
Union City, CA 94587
Dear Mr. Pham:
We are pleased to offer you the position of Vice President-Marketing and Sales
of International Manufacturing Services Inc. (the Company), reporting to the
President. Your employment shall be contingent upon and subject to the following
terms and conditions.
Base Compensation.
Your annual salary will be U.S. $112,000, less regular payroll deductions,
payable in increments in accordance with the Company's salary payment practices
in effect from time to time. You will also be eligible to participate in the
Company's Management Incentive Plan ("MIP"), which has yet to be finalized but
will be patterned after Maxtor Corporation's Management Incentive Plan. Your
annual target under the MIP will be fifty percent (50%) of base earnings upon
achievement of specified objectives.
You will also be eligible to participate in any employee benefit plans
maintained from time to time by the Company during your employment, subject in
each case to the general applicable terms and conditions of the plan or program
in question. The Company will maintain employee benefit plans for its employees
as its Board of Directors elects.
Management Equity Participation Plan.
You will be entitled to participate in the Company's Management Equity
Participation Plan ("Plan") which the Company plans to establish as outlined in
Attachment A to this letter.
<PAGE> 2
Mr. Anthony Pham
October 14,1994
Page 2
Nondisclosure of Confidential Information.
As a condition of employment with the Company, it will be necessary for you to
complete, sign and return with this offer of employment, the attached Employee
Agreement Regarding Confidentiality and Inventions.
Other Conditions.
It is understood that you will not have an employment contract, and either you
or the Company can terminate the employment relationship with or without cause
at any time. At the end of your initial six-month probationary period, you will
receive a written performance review.
We are looking forward to having you as a team member and are confident that you
will make signification contributions to the Company's future.
Please sign below to signify your acceptance of this position and the conditions
described above and return the enclosed copy of this letter to Sandy Taylor by
Friday, October 21, 1994.
Sincerely,
/s/ROBERT BEHLMAN
- --------------------
Robert Behlman
President
ACCEPTED: [SIG] DATE: 11-1, 1994
-------------------------
EXPECTED START DATE: 11-1, 1994
IMS Confidential
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ------------------------------------------------------------- -----------------------------
<S> <C>
IMS Industries Inc. (formerly IMS Borrower, Inc.) Delaware
IMS Moldco, Inc. Delaware
IMS International Manufacturing Services (Hong Kong) Limited Hong Kong
(formerly Maxtor (Hong Kong) Limited)
IMS International Manufacturing Services, Limited Cayman Islands
IMS International Manufacturing Services (Thailand) Limited Thailand
Dongguan IMS Electronics Ltd. China
IMS International Manufacturing Services de Monterrey, Mexico
S. de R.L. de C.V.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-40105) of International Manufacturing Services,
Inc. of our report dated May 22, 1998 appearing on page 25 of this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
July 29, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1996 Stock Option Plan, the 1997 Employee Stock Purchase
Plan, the 1997 Non-U.S. Employee Stock Purchase Plan and the 1997 Director
Option Plan of International Manufacturing Services, Inc. of our report dated
April 25, 1996 with respect to the consolidated financial statements and
schedule of International Manufacturing Services, Inc. included in its Annual
Report (Form 10-K) for the year ended April 30, 1998.
ERNST & YOUNG LLP
San Jose, California
July 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 3,939,000
<SECURITIES> 0
<RECEIVABLES> 46,116,000
<ALLOWANCES> 827,000
<INVENTORY> 41,378,000
<CURRENT-ASSETS> 93,169,000
<PP&E> 61,433,000
<DEPRECIATION> 32,407,000
<TOTAL-ASSETS> 126,637,000
<CURRENT-LIABILITIES> 59,420,000
<BONDS> 18,500,000
0
0
<COMMON> 18,000
<OTHER-SE> 52,676,000
<TOTAL-LIABILITY-AND-EQUITY> 126,637,000
<SALES> 312,511,000
<TOTAL-REVENUES> 312,511,000
<CGS> 283,521,000
<TOTAL-COSTS> 283,521,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 653,000
<INTEREST-EXPENSE> 3,776,000
<INCOME-PRETAX> 12,876,000
<INCOME-TAX> 1,808,000
<INCOME-CONTINUING> 11,068,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,068,000
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.60
</TABLE>
