<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 000-23097
INTERNATIONAL MANUFACTURING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0393609
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2071 Concourse Drive, San Jose, California 95131
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 953-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of January 31, 1998, 15,818,075 shares of the Registrant's Class A Common
Stock, $.001 par value, and 2,509,425 shares of the Registrant's Class B Common
Stock, $.001 par value, were issued and outstanding.
<PAGE> 2
INTERNATIONAL MANUFACTURING SERVICES, INC.
INDEX TO FORM 10Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at April 30, 1997 and January 31,
1998
Condensed Consolidated Statements of Operations for the three and nine
months ended January 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the nine months
ended January 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE> 3
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
January 31, April 30,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,161 $ 2,828
Accounts receivable, net 34,230 16,320
Inventories 38,248 20,242
Other current assets 3,105 2,612
--------- ---------
Total current assets 80,744 42,002
Property and equipment, net 20,263 13,936
Other assets 3,560 4,533
--------- ---------
Total assets $ 104,567 $ 60,471
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 31,594 $ 22,928
Accrued liabilities 8,803 5,484
Income tax payable 1,830 531
Bank borrowings -- 9,000
Current portion of long term debts 84 79
--------- ---------
Total current liabilities 42,311 38,022
Long term debt 12,587 32,660
Deferred tax liabilities 156 156
Stockholders' equity (deficit):
Preferred Stock -- 6
Common Stock 18 7
Additional paid-in capital 65,219 12,793
Distributions in excess of net book value (20,608) (20,608)
Retained earnings (Accumulated deficit) 4,884 (2,565)
--------- ---------
Total stockholders' equity (deficit) 49,513 (10,367)
--------- ---------
Total liabilities and stockholders'
equity $ 104,567 $ 60,471
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Affiliates $ 36,037 $ 18,806 $ 100,265 $ 65,791
Other 49,198 20,222 125,071 58,212
--------- --------- --------- ---------
Total revenues 85,235 39,028 225,336 124,003
Cost of revenues 77,599 34,841 203,955 114,634
--------- --------- --------- ---------
Gross profit 7,636 4,187 21,381 9,369
--------- --------- --------- ---------
Selling, general & administrative expenses 3,243 1,870 9,110 5,303
Restructuring charge -- -- -- 3,000
--------- --------- --------- ---------
Total operating expenses 3,243 1,870 9,110 8,303
Operating income 4,393 2,317 12,271 1,066
Interest expense, net 552 915 3,054 2,654
--------- --------- --------- ---------
Income (loss) before income taxes 3,841 1,402 9,217 (1,588)
Provision for income taxes 538 -- 1,296 --
--------- --------- --------- ---------
Net income (loss) 3,303 1,402 7,921 (1,588)
Dividends on convertible preferred stock -- 250 472 633
--------- --------- --------- ---------
Net income (loss) available for common
stockholders $ 3,303 $ 1,152 $ 7,449 $ (2,221)
========= ========= ========= =========
Basic net income (loss) per share $ 0.18 $ 0.16 $ 0.66 $ (0.28)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.16 $ 0.10 $ 0.45 $ (0.28)
========= ========= ========= =========
Shares used to compute basic net income (loss)
per share 18,328 7,028 11,368 7,805
========= ========= ========= =========
Shares used to compute diluted net income (loss)
per share 20,860 14,029 17,678 7,805
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
INTERNATIONAL MANUFACTURING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
January 31, January 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,921 $ (1,588)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 6,333 4,450
Changes in assets and liabilities:
Accounts receivable (15,729) 1,434
Accounts receivable from Maxtor and
affiliates (2,181) 2,388
Inventories (18,006) 7,509
Other current assets (561) (872)
Other assets 181 (2,557)
Accounts payable 8,916 (6,294)
Accounts payable to Maxtor and affiliates (250) (4,821)
Accrued liabilities 3,347 1,779
Income taxes payable 1,299 (931)
-------- --------
Net cash provided by (used in) operating
activities (8,730) 497
-------- --------
Cash flows from investing activities:
Purchase of property and equipment, net (11,800) (3,042)
-------- --------
Net cash used in investing activities (11,800) (3,042)
-------- --------
Cash flows from financing activities:
Borrowings (repayments) under line of credit (9,000) 8,500
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 (20,064) (502)
Payment of dividends (500) (547)
Proceeds from issuance of common stock 52,427 2,563
-------- --------
Net cash provided by financing activities 22,863 7,052
-------- --------
Net change in cash and cash equivalents 2,333 4,507
Cash and cash equivalents at beginning of
period 2,828 975
-------- --------
Cash and cash equivalents at end of period $ 5,161 $ 5,482
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
INTERNATIONAL MANUFACTURING SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of the Company and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position and results of operations for
each interim period shown. Interim results are not necessarily indicative of
results for a full year.
The condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (SEC) applicable to interim financial information. Certain
information and footnote disclosure included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
these interim statements pursuant to such SEC rules and regulations. The
information included in this form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto, for the year ended April
30, 1997, included 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.
2. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
January 31, April 30,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 32,000 $ 17,675
Work-in-process 4,247 2,359
Finished Goods 2,001 208
------------ ------------
Total $ 38,248 $ 20,242
============ ============
</TABLE>
3. INITIAL PUBLIC OFFERING
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. The Company received cash of approximately $52.5 million, net
of underwriting discounts and commissions and estimated offering expenses. Upon
the closing of the initial public offering, all outstanding shares of the
Company's then outstanding Convertible Preferred Stock were automatically
converted into shares of common stock.
4. INCOME TAXES
The effective tax rate for the nine months ended January 31, 1998 was
approximately 14.0%. This rate is based on the Company's estimation of the
expected geographical mix of its fiscal 1998 income.
<PAGE> 7
5. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share." The
Statement redefines earnings per share (EPS) under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. As required, the Company adopted the new standard in
the third quarter of fiscal 1998, and such standard has been applied to all
periods presented.
Basic net income (loss) per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income per share includes potential common shares from options outstanding using
the treasury stock method except if their effect is anti-dilutive.
SFAS No. 128 requires a reconciliation of the numerators and
denominators of the basic and diluted per share computations as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) available for common stockholders 3,303 1,152 7,449 (2,221)
Add back dividends on convertible preferred stock -- 250 472 633
Net income (loss) for diluted earnings per share
calculation $ 3,303 $ 1,402 $ 7,921 $ (1,588)
============ ============ ============ ============
Denominator:
Shares calculation
Weighted average common shares outstanding
during the period 18,328 7,028 11,368 7,805
Effect of dilutive securities:
Convertible preferred stock -- 6,000 3,796 --
Stock Options 2,532 1,002 2,514 --
------------ ------------ ------------ ------------
Average shares outstanding - assuming dilution 20,860 14,029 17,678 7,805
============ ============ ============ ============
Basic earnings per share $ 0.18 $ 0.16 $ 0.66 $ (0.28)
============ ============ ============ ============
Diluted earnings per share $ 0.16 $ 0.10 $ 0.45 $ (0.28)
============ ============ ============ ============
</TABLE>
Options to purchase 1,244,000 and 561,000 shares of common stock were
outstanding as of January 31, 1998, but were not included in the computations of
diluted EPS because these options had an exercise price greater than the average
market price of the common shares outstanding during the three and nine months
ended January 31, 1998. Options to purchase 125,000 shares of common stock were
outstanding as of January 31, 1997, but were not reflected in the computation of
diluted EPS because these options had an exercise price greater than the average
market price of common shares outstanding during the three months ended January
31, 1997. Options to purchase 1,983,000 shares of common stock were outstanding
as of January 31, 1997, but were not included in the computation of diluted EPS
because the Company was in a loss situation in the nine months ended January 31,
1997 and to do so would have been anti-dilutive.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS
130) and No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131). The Company does not believe that FAS 130 and 131 will
have any material impact on its financial reporting requirements.
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements include expectations, beliefs, intentions or strategies regarding
future operating results, future expenditures, future cash requirements, and
future industry conditions and involve risks and uncertainties. The Company's
actual results could differ materially from those projected in such
forward-looking statements as a result of certain factors, including those set
forth under "Factors That May Affect Future Operating Results" below and
elsewhere in the report on Form 10-Q. A more detailed discussion of risks faced
by the Company is set forth in the Company's Registration Statement on Form S-1
(SEC File No. 333-34557) filed with the SEC in connection with the Company's
initial public offering.
OVERVIEW
International Manufacturing Services, Inc. provides product design,
prototyping, printed circuit board assembly, final system assembly, materials
procurement, inventory management, testing, packaging, distribution and depot
repair services to original equipment manufacturers in the electronics industry.
The Company's Hong Kong operations, which commenced business in 1983,
were acquired in 1990 by Maxtor Corporation ("Maxtor"), a manufacturer of hard
disk drives, along with other manufacturing operations and assets. International
Manufacturing Services, Inc. was formed in November 1994 as a wholly-owned
subsidiary of Maxtor. In June 1996 the Company was recapitalized as an
independent company.
To accomplish such recapitalization, the Company redeemed approximately
76.5% of Maxtor's share ownership with a combination of $25.0 million cash,
$20.0 million principal senior subordinated notes (the "Maxtor Notes") and a
warrant for 300,000 shares of Class A Common Stock. The Company raised the cash
portion of the redemption price by issuing to a group of investors a combination
of Common Stock, Preferred Stock and junior subordinated notes. The redemption
and share transactions are hereafter referred to as the "Recapitalization". For
accounting purposes, the redemption of Maxtor's share 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 EMS provider to Maxtor to an
independent EMS provider serving 15 additional customers. These customers
collectively represented approximately 58.0% of total revenues for the nine
months ended January 31, 1998. The Company typically enters into manufacturing
contracts with each of its customers, but has no long-term volume purchase
commitments from any customer other than Maxtor. The Company remains dependent
upon a relatively small number of customers for a significant percentage of its
revenues. For fiscal 1996 and 1997, and the nine months ended January 31, 1998,
Maxtor accounted for approximately 83.1%, 48.6% and 42.4 % of total revenues,
respectively, and Bay Networks, Inc. ("Bay Networks") accounted for
approximately 1.6%, 31.3% and 42.8% of total revenues, respectively.
During fiscal 1997, the Company took significant steps to expand its
manufacturing operations and to broaden the range of the manufacturing services
it provides. As part of its strategy to locate operations in low cost regions,
the Company transferred its Hong Kong manufacturing operations to China while
retaining its component procurement and regional administrative functions in
Hong Kong. In connection with the relocation, the Company recorded a charge of
$3.0 million associated with employee severance and excess facilities costs. The
Company also expanded its manufacturing facilities in Thailand from 41,000
square feet to 93,000 square feet. In January 1997, the Company acquired the
assets of Pentagon Systems, a design and prototype production company, for $4.4
million cash, 450,000 shares of Class A Common Stock and assumed certain
liabilities. The Company recorded goodwill of
<PAGE> 9
$3.4 million in connection with the acquisition, which is being amortized over
seven years on a straight line basis. In May 1997, the Company commenced
manufacturing operations in San Jose, California.
The Company has chosen to locate its manufacturing facilities in certain
countries in Asia to improve operational efficiencies and to take advantage of
generally lower income tax rates and the availability of tax incentives extended
to encourage foreign investment. The Company has operating subsidiaries located
in foreign countries, some of which enjoy multiple year tax holidays. As a
result, the Company estimates its effective tax rate for fiscal 1998 to be
approximately 14.0%.
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 total revenues and overall gross margin may
fluctuate significantly from period to period depending upon the mix of revenues
derived from turnkey and consignment manufacturing. Moreover, the Company's
agreement with Maxtor permits Maxtor to consign component parts to the Company
from time to time. The Company believes that Maxtor and other customers consider
various factors in choosing to allocate procurement responsibility to the
Company, including their relationships with key component suppliers and their
ability to obtain components at lower prices than obtainable by the Company.
Because none of the Company's customers, including Maxtor, is committed over the
long term to any particular manufacturing basis, the Company is unable to
predict the mix of revenues derived from turnkey and consignment manufacturing
for any future period.
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").
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Affiliates 42.3% 48.2% 44.5% 53.1 %
Other 57.7 51.8 55.5 46.9
---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues 91.0 89.3 90.5 92.4
---------- ---------- ---------- ----------
Gross profit 9.0 10.7 9.5 7.6
---------- ---------- ---------- ----------
Selling, general & administrative
expenses 3.8 4.8 4.0 4.3
Restructuring charge -- -- -- 2.4
---------- ---------- ---------- ----------
Total operating expenses 3.8 4.8 4.0 6.7
Operating income (loss) 5.2 5.9 5.4 0.9
Interest expense, net 0.6 2.3 1.4 2.1
---------- ---------- ---------- ----------
Income (loss) before income taxes 4.5 3.6 4.1 (1.3)
Provision for income taxes 0.6 -- 0.6 --
---------- ---------- ---------- ----------
Net income (loss) 3.9 3.6 3.5 (1.3)
========== ========== ========== ==========
</TABLE>
Total Revenues
Total revenues increased 118.4% from $39.0 million for the three months
ended January 31, 1997 to $85.2 million for the three months ended January 31,
1998. Total revenues increased 81.7% from $124.0 million for the nine months
ended January 31, 1997 to $225.3 million for the nine months ended January 31,
1998. The increase in total revenues for each of the three and nine month
periods was primarily due to an increase in the volume of units shipped to
Maxtor, Bay Networks and to a lesser extent, new customers in the data
communications and telecommunications industries. Additionally, revenues were
affected by a favorable mix of revenues derived from sales made on a turnkey
basis and the addition of revenue derived from design services.
The Company's largest customers during both the three and nine month
periods ending January 31, 1998 were Maxtor and Bay Networks. Sales to Maxtor
for the three and nine months ending January 31,1998 accounted for approximately
41.5% and 42.4%, respectively, of total revenues. Sales to Bay Networks for the
three months and nine months ended January 31, 1998 were 42.5% and 42.8% of
total revenues respectively.
Gross Profit
Gross profit for the three months ended January 31, 1998 increased to
$7.6 million from $4.2 million for the three months ended January 31, 1997.
Gross margin (gross profit as a percentage of total revenues) decreased to 9.0%
from 10.7% for the same periods. The reduction in gross margin in the three
months ended January 31, 1998 was primarily attributed to intense price pressure
in the computer peripherals industry segment and to an increase in turnkey and
box build revenue, which typically generates lower margins, offset in part by a
reduction in certain labor and overhead expenses resulting from the devaluation
of the Thai Baht. Gross profit for nine months ended January 31, 1998 increased
to $21.4 million from $9.4 million for the nine months ended January 31, 1997.
Gross margin increased to 9.5% from 7.6% for the same periods. Gross profit and
gross margin for the nine months ended January 31, 1997 were adversely affected
by a $2.0 million inventory charge associated with a financially troubled
customer's cancellation of orders. Increases in gross profit and gross margin
for the nine months ended January 31, 1998 were attributable to direct labor
savings of approximately $4.5 million resulting from the
<PAGE> 11
relocation of the Company's Hong Kong manufacturing facility to China, where
direct labor hourly rates are significantly lower and the utilization rate of
the Company's manufacturing facilities is higher than in Hong Kong. This effect,
however, was partially offset by associated reductions in selling prices, as the
Company passed through certain cost savings to its customers. The Company
expects the intense price pressure in the computer peripherals industry segment
to continue into the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 73.4% from $1.9
million for the three months ended January 31, 1997 to $3.2 million for the
three months ended January 31, 1998. As a percentage of total revenues, selling,
general and administrative expenses decreased to 3.8% for the three months ended
January 31, 1998 from 4.8% for the three months ended January 31, 1997.
Selling, general and administrative expenses increased 71.8% from $5.3 million
for the nine months ended January 31, 1997 to $9.1 million for the nine months
ended January 31, 1998 and decreased as a percentage of total revenues from 4.3%
for the nine months ended January 31, 1997 to 4.0% for the nine months ended
January 31, 1998. The increase in absolute dollars for the three months ended
January 31, 1998 and the nine months ended January 31, 1998 was the result of
increased personnel costs and marketing expenses of approximately $334,000 and
$846,000 respectively, related to the support of new customer development; the
inclusion of approximately $411,000 and $1.4 million, respectively, of expenses
attributable to the acquisition of Pentagon Systems in January 1997; and, to a
lesser extent, increased administrative expenses associated with relocating
manufacturing facilities from Hong Kong to China and expanding operations in
Thailand.
Net Interest Expense
Net interest expense decreased from $915,000 in the three months ended
January 31, 1997 to $552,000 in the three months ended January 31, 1998 and
increased from $2.7 million in the nine months ended January 31, 1997 to $3.1
million for the nine months ended January 31, 1998. The decrease in net interest
expense during the three months ended January 31, 1998 was primarily due to the
repayment of the Maxtor Notes offset in part by increased bank borrowings and a
higher average interest rate. The increase in net interest expense during the
nine months ended January 31, 1998 was primarily due to an increased level of
borrowings outstanding during the same period and, to a lesser extent, a
slightly higher interest rate applicable to these higher levels of borrowings
offset in part by the repayment of the Maxtor Notes.
Provision for Income Taxes
The Company's income tax provision for the three months and nine months
ended January 31, 1998 was computed using an effective tax rate of 14.0%. This
rate is based upon the Company's estimation of its geographic distribution of
income for fiscal 1998. 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. No income tax
provision was made for the nine months ended January 31, 1997 due to the fact
that the Company was in a loss position for this period.
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 in June 1996 but prior
to the IPO, the Company funded its working capital needs and capital
expenditures through borrowings under its credit facility and cash provided by
operations. At January 31, 1998, the Company's principal sources of liquidity
consisted of borrowings under its credit facility and cash provided by
operations.
During the nine months ended January 31, 1998 cash consumed by operating
activities aggregated $8.7 million. During the nine months ended January 31,
1997 cash generated by operations aggregated $497,000. The
<PAGE> 12
use of cash from operations in the nine months ended January 31, 1998 was
primarily attributable to growth in accounts receivable and inventory balances.
Cash used in investing activities for the nine months ended January 31,
1998 and the nine months ended January 31, 1997 was $11.8 million and $3.0
million, respectively. The investing activity in both periods was related
primarily to the purchase of capital equipment for expansion and upgrading of
manufacturing operations.
During the nine months ended January 31, 1998, the Company generated
$22.9 million from financing activities. This includes $52.4 million of net
proceeds from the issuance of Class A Common Stock in the IPO offset in part by
a repayment of $20.0 million of subordinated debt owed to Maxtor and $9.0
million owed to Chase Manhattan Bank. During the nine months ended January 31,
1997, the Company generated $7.1 million from financing activities including
$12.0 million in net proceeds from the sale of Common Stock and Preferred Stock,
$12.5 million from issuance of 12.0% junior subordinated notes, and $8.5 million
from borrowings under its line of credit with Chase Manhattan Bank.
Approximately $25.0 million of these amounts was used to redeem a portion of
Maxtor's share ownership in the Company.
The Company has a committed line of credit with Chase Manhattan Bank
that, subject to certain limitations, provides up to $22.0 million of borrowing
capacity to fund working capital and capital expenditures. At January 31, 1998
there were no borrowings outstanding under the line of credit compared to $9.0
million of borrowings outstanding at April 30, 1997. The line of credit requires
that the Company maintain compliance with certain financial minimums, including
with respect to earnings before income interest expense, income tax,
depreciation and amortization ("EBITDA"), and certain financial ratios,
including EBITDA to interest expense, EBITDA less capital expenditures to
interest expense, and total debt to EBITDA. The line of credit also imposes
certain restrictions, including limits on amounts attributable to capital
leases, performance bonds, permitted investments, dividends, employee loans,
amendments to certain existing agreements and instruments, prepayments of other
indebtedness, and capital expenditures. As of January 31, 1998, the Company was
in compliance with all such financial covenants and restrictions.
The Company's future liquidity and cash requirements will depend upon
many factors, including the level of its operations, the degree and pace of
expansion or acquisition of facilities and adoption of new manufacturing
technology, and the mix of revenues derived from consignment and turnkey
operations. The Company anticipates that its planned purchases of capital
equipment for fiscal 1998 will aggregate expenditures of approximately $22.0
million, of which approximately $11.8 million have been made as of January 31,
1998. The Company believes that its existing cash balances, cash generated from
operations, and funds available under its line of credit or alternate financings
if available to the Company will be sufficient to fund its currently anticipated
working capital, capital expenditure and debt service requirements for 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 debt or equity securities. There can be no assurance as to the
availability of such financing or, if available, the terms thereof.
<PAGE> 13
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this report on Form 10-Q, the
following are important factors that should be carefully considered in
evaluating the Company and its business.
Short Period of Independent Operations; No Assurance of Future Profitability
The Company's Hong Kong operations, which commenced business in 1983,
were acquired in 1990 by Maxtor, a manufacturer of hard disk drives, along with
other manufacturing operations and assets. International Manufacturing Services,
Inc. was formed in November 1994 as a wholly-owned subsidiary of Maxtor. In June
1996, the Company was recapitalized as an independent company. Through December
1996, the Company was dependent upon Maxtor for certain financial and
administrative services. The Company has limited experience operating as an
independent entity, and there can be no assurance that it will be able to
operate effectively as an independent company. The Company only began
implementing independent financial and consolidated reporting systems and
procedures in June 1996. The Company believes that continued enhancements in
financial, management and operational information systems will be needed to
manage any expansion of the Company's operations. The failure to implement such
enhancements could have a material adverse effect upon the Company's business,
financial condition and operating results.
The Company's limited history of operations as an independent entity
make reliable predictions of future operating results difficult. In particular,
the Company's performance to date should not be considered indicative of future
results. There can be no assurance that any of the Company's business strategies
will be successful or that the Company will be able to sustain growth or
profitability on an annual or quarterly basis.
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
<PAGE> 14
deferred in certain cases. On other occasions, customers have required rapid
increases in production which have placed a significant burden on the Company's
resources. Such customer order fluctuations and deferrals have had a material
adverse effect on the Company's results of operations in the past, and there can
be no assurance that the Company will not experience such effects in the future.
In addition, the Company's customers have the ability to request that
manufacturing be performed on a consignment, turnkey or partial turnkey basis,
which can cause significant fluctuations in the Company's revenues and gross
margins.
The Company's business has experienced and is expected to continue to
experience significant seasonality due, among other things, to the slowdown
during the summer months which historically has occurred in the electronics
industry. Typically, the Company's revenues are lowest during the first half of
a fiscal year and highest during the second half of the fiscal year, which ends
in April. In addition, the market segments served by the Company are subject to
economic cycles and have in the past experienced, and are likely in the future
to experience, recessionary periods. A recessionary period affecting the
industry segments served by the Company could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company occasionally experiences constraints in production capacity around
national holidays in Thailand and China. Results of operations in any period
should not be considered indicative of the results to be expected for any future
period, and fluctuations in operating results may also result in variations in
the price of the Class A Common Stock. In future periods, the Company's total
revenues or results of operations may be below the expectations of public market
analysts and investors; in such event, the price of the Class A Common Stock
would likely be materially adversely affected.
Customer Concentration; Dependence on Certain Industries
For fiscal 1996 and fiscal 1997, and for the nine months ended January
31, 1998, Maxtor accounted for approximately 83.1%, 48.6% and 42.4% of total
revenues, respectively, and Bay Networks accounted for approximately 1.6%, 31.3%
and 42.8% of the Company's total revenues, respectively. The Company expects to
continue to depend upon a relatively small number of customers for a significant
percentage of its total revenues. There can be no assurance that the Company's
principal customers will continue to purchase services from the Company at
current levels, or at all. In the past, certain of the Company's customers have
significantly reduced or delayed the volume of manufacturing services ordered
from the Company. There can be no assurance that present or future customers
will not terminate their manufacturing arrangements with the Company or
significantly change, reduce or delay the manufacturing services ordered from
the Company. Significant reductions in sales to any of the Company's principal
customers, or the loss of any one or more major customers, would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has no long-term volume purchase commitments from any
customers other than Maxtor. The timely replacement of canceled, delayed or
reduced contracts with new business cannot be assured. These risks are
accentuated because a majority of the Company's sales are to customers in the
electronics industry, which is subject to rapid technological change and product
obsolescence. Accordingly, the Company is dependent upon the continued growth,
viability and financial stability of its customers, which are in turn
substantially dependent on the growth of the computer peripherals, data
communications and telecommunication markets. The disk drive industry is
cyclical and has historically experienced periods of oversupply and varying
growth rates resulting in reduced demand and pricing pressures on disk drives.
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.
Maxtor Corporation- Business Risks; Affiliation
Maxtor is a wholly-owned subsidiary of Hyundai Electronics America and
historically has been the Company's largest customer. Maxtor develops,
manufactures and markets hard disk drive storage products for personal computer
systems. Maxtor's business depends in large part upon its ability to continue to
develop and market new hard disk drive products successfully. Any adverse
developments affecting Maxtor could adversely affect its demand for the
Company's services. Maxtor has experienced losses in each of the past five
fiscal years. During the first half of fiscal 1997, orders from Maxtor were
reduced significantly below what the Company expected, and the Company's
operating results were adversely affected. The loss of Maxtor's sales volume or
a
<PAGE> 15
significant portion thereof would have a material adverse effect on the
Company's business, financial condition and results of operations.
Maxtor is contractually entitled to one representative on the Company's
Board of Directors. Although Maxtor and the Company have separate managements
and boards of directors, Maxtor is a major customer of the Company, a major
shareholder, and an executive officer of Maxtor is a member of the Company's
board of directors. This creates the risk that the Company may give preference
to Maxtor over other customers in the allocation of components in short supply
or production capacity or in the pricing of manufacturing services. Concern over
such risks could affect the willingness of customers and potential customers of
the Company to conduct business with the Company. In an attempt to reduce
potential pricing and other conflicts, in June 1996, the Company and Maxtor
executed a three-year manufacturing services agreement (the "Manufacturing
Agreement"), the terms of which the Company believes are no less favorable to
the Company and no more favorable to Maxtor than arrangements that either
company could negotiate with others in an arm's-length transaction. Pursuant to
the Manufacturing Agreement, the Company has agreed to provide certain products
and services to Maxtor at 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.
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.
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
<PAGE> 16
competitors have more geographically diversified international operations, as
well as substantially greater manufacturing, financial, volume procurement,
research and development, and marketing resources than the Company. In recent
years, the EMS industry has attracted new entrants, including large OEMs with
excess manufacturing capacity, and many existing participants have substantially
expanded their manufacturing capacity by expanding their facilities and adding
new facilities through both internal expansion and acquisitions. In the event of
a decrease in overall demand for EMS services, this increased capacity could
result in substantial pricing pressures, which could have a material adverse
effect on the Company's business, financial condition or operating results.
Future Capital Needs
The Company believes that, in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
significant financial resources over the next several years for capital
expenditures including investments in management information systems, working
capital and debt service. The Company has added significant manufacturing
capacity and increased capital expenditures over the past year. It has relocated
its Hong Kong manufacturing facilities to China, expanded its facilities in
Thailand, established a manufacturing facility in San Jose and, through the
acquisition of Pentagon Systems established a design and prototype production
operation in San Jose. The Company also continues to invest in manufacturing
equipment and management information systems. The Company anticipates that its
capital expenditures will continue to increase as the Company expands its
facilities in Asia, invests in necessary equipment to continue new product
production, and continues to invest in new technologies and equipment to
increase the performance and the cost efficiency of its manufacturing
operations. 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.
<PAGE> 17
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 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 may also
increase its effective tax rate. The current maximum United States federal
income tax rate is 35.0%. The Company's effective tax rate for the nine months
ended January 31, 1998 was approximately 14.0%, and the Company currently
expects its effective income tax rate for fiscal 1998 to be 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
<PAGE> 18
activities, although to date such hedging activities have not been material.
There can be no assurance that any hedging techniques implemented by the Company
will be successful.
Management of Growth and Expanded Operations
During fiscal 1997 and through the nine months ended January 31, 1998,
the Company experienced a period of rapid expansion through both internal growth
and acquisition. Expansion has caused, and is expected to continue to cause,
strain on the Company's infrastructure, including its managerial, technical,
financial and other resources. To manage further growth, the Company must
continue to enhance financial and operational controls, develop additional
executive officers and hire qualified personnel. Continued growth will also
require increased investments to add manufacturing capacity and to enhance
management information systems. The Company may experience certain
inefficiencies as it integrates new operations and manages geographically
dispersed operations. There can be no assurance that the Company will be able to
manage its expansion effectively, and a failure to do so could have a material
adverse effect on the Company's business, financial condition or results of
operations.
New operations, whether foreign or domestic, can require significant
start-up costs and capital expenditures. In the event that the Company continues
to expand its domestic or international operations, there can be no assurance
the Company will be successful in generating revenue to recover start-up and
operating costs.
Dependence on Key Personnel
The Company's continued success depends to a large extent upon the
efforts and abilities of key managerial and technical employees. The Company's
business will also depend upon its ability to continue to attract and retain
qualified employees. Although the Company has been successful in retaining key
managerial and technical employees to date, the loss of services of certain key
employees, in particular any of its three executive officers, could have a
material adverse effect on the Company's business, financial condition or
results of operations. None of the Company's key employees is party to an
agreement that provides the Company with assurance as to his or her continued
employment. Moreover, the Company does not maintain key-man life insurance on
any of its personnel.
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
<PAGE> 19
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 compliant. The
Company expects its information systems to be Year 2000 compliant by the end of
fiscal 1999, and 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 or that such disruptions will not occur. Any disruption in manufacturing
services provided by the Company as a result of Year 2000 noncompliance would
materially adversely affect the Company's business, financial condition and
results of operations. 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.
Concentration of Stock Ownership
As of January 31, 1998, the current directors and executive officers of
the Company and their respective affiliates beneficially owned in the aggregate
approximately 75.8% of the Company's outstanding shares of Common Stock
(including shares issuable pursuant to stock options which may be exercised
within 60 days of January 31, 1998). As a result, such persons, acting together,
would have the ability to approve or disapprove significant corporate
transactions. In addition, the Company's board of directors has the authority to
issue up to 10,000,000 shares of undesignated preferred stock, to determine the
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any unissued series of undesignated
preferred stock, and to fix the number of shares constituting any series and the
designation of such series, without any further vote or action by the Company's
stockholders. The preferred stock could be issued with voting, liquidation,
dividend and other rights superior to the rights of the Common Stock. The
concentration of ownership and the issuance of preferred stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.
<PAGE> 20
INTERNATIONAL MANUFACTURING SERVICES, INC.
Part II.OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report
27.01 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the
quarter ended January 31, 1998.
INTERNATIONAL MANUFACTURING SERVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: 3-16-1998
_____________ INTERNATIONAL MANUFACTURING SERVICES, INC.
(Registrant)
By: /s/ Nathan Kawaye
Nathan Kawaye
Senior Vice President, Chief Financial
Officer
<PAGE> 21
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.01 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 5,161
<SECURITIES> 0
<RECEIVABLES> 34,706
<ALLOWANCES> 476
<INVENTORY> 38,248
<CURRENT-ASSETS> 80,744
<PP&E> 51,751
<DEPRECIATION> 31,488
<TOTAL-ASSETS> 104,567
<CURRENT-LIABILITIES> 42,311
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 49,495
<TOTAL-LIABILITY-AND-EQUITY> 104,567
<SALES> 225,336
<TOTAL-REVENUES> 225,336
<CGS> 203,955
<TOTAL-COSTS> 203,955
<OTHER-EXPENSES> 8,760
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 3,054
<INCOME-PRETAX> 9,217
<INCOME-TAX> 1,296
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,921
<EPS-PRIMARY> 0.66<F1>
<EPS-DILUTED> 0.45
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
