<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1998
REGISTRATION NO. 333-50981
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMENDMENT NO. 1
------------------------
MCMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
IDAHO 3679 82-0450118
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
16399 FRANKLIN ROAD
NAMPA, ID 83687
TELEPHONE: (208) 898-2600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
ANGELO NINIVAGGI
16399 FRANKLIN ROAD
NAMPA, ID 83687
TELEPHONE: (208) 898-2600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY TO:
FREDERICK A. TANNE
KIRKLAND & ELLIS
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
TELEPHONE: (212) 446-4800
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series B 9 3/4% Senior $1,000 principal
Subordinated Notes due 2008.... $145,000,000 amount $145,000,000 $42,775
Series B Floating Interest Rate
Subordinated Term Securities $1,000 principal
due 2008....................... $30,000,000 amount $30,000,000 $8,850
Series B 12 1/2% Senior
Exchangeable Preferred Stock... $47,500,000 $100 $25,000,000(2) $14,012.50
12 1/2% Subordinated Exchange
Debentures due 2010............ $47,500,000 (3) (3) None
Total.................. $222,500,000 $20,000,000 $65,637.50
=================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) based upon the book value of the securities
as of , 1998.
(2) The amount of Series B 12 1/2% Senior Exchangeable Preferred Stock being
registered is greater than the aggregate offering price because the Company
has the option to issue additional shares of Preferred Stock as dividends on
the outstanding Preferred Stock.
(3) No further fee is payable pursuant to Rule 457(i).
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
MCMS LOGO
OFFER TO EXCHANGE ITS SERIES B 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008 FOR ANY
AND ALL OF ITS OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008, ITS SERIES
B FLOATING INTEREST RATE SUBORDINATED TERM SECURITIES DUE 2008 (FIRSTS(SM*)) FOR
ANY AND ALL OF ITS OUTSTANDING FLOATING INTEREST RATE SUBORDINATED TERM
SECURITIES DUE 2008 (FIRSTS(SM*)) AND ITS SERIES B 12 1/2% SENIOR EXCHANGEABLE
PREFERRED STOCK FOR ANY AND ALL OF ITS OUTSTANDING 12 1/2% SENIOR EXCHANGEABLE
PREFERRED STOCK
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 A.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
MCMS, Inc., an Idaho corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange (i) $1,000 principal amount of its Series B 9 3/4%
Senior Subordinated Notes due 2008 (the "Fixed Rate Exchange Notes") for each
$1,000 principal amount of its outstanding 9 3/4% Senior Subordinated Notes due
2008 (the "Fixed Rate Notes"), of which $145,000,000 principal amount is
outstanding, (ii) $1,000 principal amount of its Series B Floating Interest Rate
Subordinated Term Securities due 2008 (the "Floating Rate Exchange Notes" and,
together with the Fixed Rate Exchange Notes, the "Exchange Notes") for each
$1,000 principal amount of its outstanding Floating Interest Rate Subordinated
Term Securities due 2008 (the "Floating Rate Notes" and, together with the Fixed
Rate Notes, the "Notes"), of which $30,000,000 principal amount is outstanding
and (iii) $100 liquidation preference of its Series B 12 1/2% Senior
Exchangeable Preferred Stock (the "Exchange Preferred Stock" and, together with
the Exchange Notes, the "Exchange Securities") for each $100 liquidation
preference of its outstanding 12 1/2% Senior Exchangeable Preferred Stock (the
"Preferred Stock" and together with the Notes, the "Securities"), of which
$25,000,000 aggregate liquidation preference is outstanding. The Exchange
Securities will have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
this Prospectus is a part. The form and terms of the Exchange Securities are the
same as the form and term of the Securities (which they replace) except that the
Exchange Securities will bear a Series B designation and will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and will not contain certain provisions relating to
an increase in the dividend rate and the interest rate which were included in
the terms of the Preferred Stock and Notes, respectively, in certain
circumstances relating to the timing of the Exchange Offer. The Exchange Notes
will evidence the same debt as the Notes (which they replace) and will be issued
under and be entitled to the benefits of the Indenture dated February 26, 1998
between the Company and the United States Trust Company of New York (the
"Indenture") governing the Notes. See "The Exchange Offer" and "Description of
Exchange Notes." The Exchange Preferred Stock will evidence the same equity as
the Preferred Stock (which they replace) and will be issued under and be
entitled to the benefits of the Certificate of Designation relating to the
Preferred Stock and the Exchange Preferred Stock (the "Certificate of
Designation"). See "The Exchange Offer" and "Description of Senior Preferred
Stock and Exchange Debentures."
Interest on the Exchange Notes will accrue, as interest on the Notes (which
they replace) accrues, and will be payable semi-annually in arrears on March 1
and September 1 of each year, commencing September 1, 1998 at the rate of 9 3/4%
per annum in the case of the Fixed Rate Exchange Notes, and at a rate per annum
equal to LIBOR (as defined) plus 4 5/8% in the case of the Floating Rate
Exchange Notes. Interest on the Floating Rate Exchange Notes will be reset
semi-annually. The Fixed Rate Exchange Notes will be redeemable, in whole or in
part, at the option of the Company on or after March 1, 2003, and the Floating
Rate Exchange Notes will be redeemable, in whole or in part, at the option of
the Company, at any time, in each case at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In addition,
at any time on or prior to March 1, 2001, the Company, at its option, may
redeem, with the net cash proceeds of one or more Public Equity Offerings by the
Company, up to 35% of the aggregate principal amount of the Fixed Rate Exchange
Notes originally issued, at the redemption price set forth herein, plus accrued
and unpaid interest to the date of redemption, provided that at least 65% of the
aggregate principal amount of the Fixed Rate Exchange Notes originally issued
plus any additional Fixed Rate Exchange Notes issued pursuant to the Indenture
remains outstanding immediately following any such redemption. Upon a Change of
Control, each holder of Exchange Notes will have the right to require the
Company to repurchase such holder's Exchange Notes at a price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. There can be no assurance, however, that in the event of a Change of
Control the Company will have or be able to acquire sufficient funds to
repurchase the Exchange Notes on such terms.
(continued on next page)
------------------------
SEE "RISK FACTORS" ON PAGE 18 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR SECURITIES IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ---------------
* FIRSTS is a service mark of BTAlex.Brown Incorporated.
BTALEX.BROWN
------------------------
The date of this Prospectus is , 1998
<PAGE> 3
(continued from previous page)
Dividends on the Exchange Preferred Stock will accumulate, as the dividends
on Preferred Stock (which they replace) accumulated, at the rate of 12 1/2% per
annum of the liquidation preference per share and will be payable quarterly,
commencing on June 1, 1998. Dividends on the Exchange Preferred Stock
accumulating on or prior to March 1, 2003, may, at the option of the Company, be
paid in cash or by issuing additional shares of Exchange Preferred Stock having
an aggregate liquidation preference equal to the amount of such dividends, or in
any combination thereof. Dividends on the Exchange Preferred Stock accumulating
after March 1, 2003 must be paid in cash. The Exchange Preferred Stock will have
a liquidation preference of $100 per share. The Exchange Preferred Stock is
subject to mandatory redemption on March 1, 2010, but will be redeemable at the
option of the Company, in whole or in part, on or after March 1, 2003, at the
redemption prices set forth herein, plus, without duplication, accumulated and
unpaid dividends to the date of redemption. There can be no assurance, however,
that in the event of a mandatory redemption the Company will have or be able to
acquire sufficient funds to repurchase the Exchange Notes on such terms. In
addition, prior to March 1, 2001, the Company may, at its option, use the net
cash proceeds of one or more Public Equity Offerings to redeem, in whole or in
part, the Exchange Preferred Stock at the redemption prices set forth herein,
plus, without duplication, accumulated and unpaid dividends to the date of
redemption. Upon a Change of Control, each holder of shares of Exchange
Preferred Stock may require the Company to purchase the holder's shares of
Exchange Preferred Stock at a price equal to 101% of the liquidation preference
thereof, plus accumulated and unpaid dividends to the date of purchase. There
can be no assurance, however, that in the event of a Change of Control the
Company will have or be able to acquire sufficient funds to repurchase the
Exchange Notes on such terms.
On any scheduled dividend payment date, the Company may, at its option,
exchange all, but not less than all, of the shares of Exchange Preferred Stock
then outstanding for the Company's 12 1/2% Subordinated Exchange Debentures due
2010 (including any securities issued from time to time in lieu of cash interest
thereon, the "Exchange Debentures"). The Exchange Debentures will bear interest
at a rate of 12 1/2% per annum, payable semiannually in arrears on March 1 and
September 1 of each year, commencing with the first such date to occur after the
date of the exchange. Interest on the Exchange Debentures accruing on or prior
to March 1, 2003, may, at the option of the Company, be paid in cash or by
issuing additional Exchange Debentures in an aggregate principal amount equal to
the amount of such interest, or any combination thereof. Interest on the
Exchange Debentures accruing after March 1, 2003 must be paid in cash. The
Exchange Debentures will mature on March 1, 2010. The Exchange Debentures will
be redeemable at the option of the Company, in whole or in part, at any time, at
the redemption prices set forth herein, plus accrued and unpaid interest to the
date of redemption. In addition, prior to March 1, 2001, the Company may, at its
option, use the net cash proceeds of one or more Public Equity Offerings to
redeem, in whole or in part, the aggregate principal amount of the Exchange
Debentures originally issued, at the redemption prices set forth herein, plus
accrued interest to the date of redemption. Upon a Change of Control, each
holder of Exchange Debentures may require the Company to repurchase the holder's
Exchange Debentures at 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase.
The Exchange Notes will be general unsecured obligations of the Company,
and will be subordinated in right of payment to existing and future Senior Debt
(as defined) of the Company. The Exchange Notes will rank pari passu in right of
payment with any future senior subordinated obligations of the Company and will
rank senior in right of payment to all other subordinated obligations of the
Company. The Exchange Debentures will be unsecured subordinated debt obligations
of the Company, and will be subordinated in right of payment to existing and
future Senior Debt of the Company, including the Exchange Notes. The Exchange
Debentures will rank pari passu in right of payment with all other unsecured and
subordinated indebtedness of the Company. As of May 28, 1998, there was
outstanding (i) no Senior Debt (the Company has $40.0 million of availability
under the New Revolving Credit Facility which is currently undrawn), (ii) $175.0
million of Notes, and (iii) $25.0 million of Preferred Stock. The Company also
conducts its foreign operations through its two subsidiaries, M.C.M.S. Sdn. Bhd.
("MCMS Malaysia") in Malaysia and M.C.M.S. Belgium, S.A. ("MCMS Belgium" and
together with MCMS Malaysia, the "Foreign Subsidiaries"). All indebtedness of
the Foreign Subsidiaries will be structurally senior in right of payment to the
indebtedness of the Company. As of May 28, 1998, the Foreign Subsidiaries have
no indebtedness other than intercompany debt payable to the Company and trade
payables in the amount of $868,000 for MCMS Malaysia and $3,526,000 for MCMS
Belgium. Under the New Revolving Credit Facility, the Company has pledged
substantially all of its tangible and intangible assets as collateral. See
"Description of New Revolving Credit Facility."
(continued on next page)
<PAGE> 4
(continued from previous page)
The Company will accept for exchange any and all Securities validly
tendered and not withdrawn prior to 12:00 p.m., New York City time, on
, 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). Notwithstanding the foregoing, the Company will not extend
the Expiration Date beyond , 1998. Tenders of Securities may be
withdrawn at any time prior to 12:00 a.m. on the Expiration Date. The Exchange
Offer is subject to certain customary conditions. The Securities were sold by
the Company on February 26, 1998 to the Initial Purchaser (as defined) in a
transaction not registered under the Securities Act in reliance upon an
exemption under the Securities Act. The Initial Purchaser subsequently placed
the Securities with qualified institutional buyers in reliance upon Rule 144A
under the Securities Act. Accordingly, the Securities may not be reoffered,
resold or otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Securities are
being offered hereunder in order to satisfy the obligations of the Company under
the Registration Rights Agreement entered into by the Company in connection with
the offering of the Securities. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Exchange Securities issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Securities are acquired in the ordinary course of such holder's
business and such holder has no arrangement or understanding with any person to
participate in the distribution of such Exchange Securities. See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer" and "The Exchange
Offer -- Resale of the Exchange Securities." Each broker-dealer (a
"Participating Broker-Dealer") that receives Exchange Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Securities received in
exchange for Securities where such Securities were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus available to any participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Securities not tendered and accepted in the Exchange Offer will
continue to hold such Securities and will be entitled to all the rights and
benefits, and will be subject to the limitations applicable thereto, under the
Indenture, and the Certificate of Designation, as the case may be, and under the
Securities Act. The Company will pay all the expenses incurred by it incident to
the Exchange Offer. See "The Exchange Offer."
The Securities are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. However, there
can be no assurance that an active market for the Exchange Securities will
develop. See "Risk Factors -- Absence of Public Market for the Exchange
Securities." Moreover, to the extent that the Securities are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Securities could be adversely affected.
There has not previously been any public market for the Securities or the
Exchange Securities. The Company does not intend to list the Exchange Securities
on any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active market for
the Exchange Securities will develop. See "Risk Factors -- Absence of Public
Market for Securities." Moreover, to the extent that some but not all of
Securities are tendered and accepted in the Exchange Offer, the trading market
for untendered and tendered but unaccepted Securities could be adversely
affected.
The Exchange Securities will be available initially only in book-entry
form. The Company expects that the Fixed Rate Exchange Notes, the Floating Rate
Exchange Notes and the Exchange Preferred Stock issued pursuant to this Exchange
Offer, respectively, will be issued in the form of a single permanent global
certificate for the Fixed Rate Exchange Notes (the "Fixed Rate Exchange Note
Global Security"), a single
(continued on next page)
<PAGE> 5
(continued from previous page)
permanent global certificate for the Floating Rate Exchange Notes (the "Floating
Rate Exchange Note Global Security" and, together with the Fixed Rate Exchange
Note Global Security, the "Exchange Note Global Security") and a single
permanent global certificate for the Exchange Preferred Stock (the "Exchange
Preferred Stock Global Security"), each of which will be deposited with, or on
behalf of, The Depository Trust Company ("DTC") and registered in its name or in
the name of Cede & Co., its nominee. Beneficial interests in the Exchange Note
Global Security representing the Exchange Notes and in the Exchange Preferred
Global Security representing the Exchange Preferred Stock will be shown on, and
transfers thereof will be effected through, records maintained by the DTC and
its participants. After the initial issuance of the Exchange Note Global
Security, Exchange Notes in certified form will be issued in exchange for the
Exchange Note Global Security only on the terms set forth in the Indenture.
<PAGE> 6
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the Exchange
Securities being offered hereby. This Prospectus does not contain all the
information set forth in the Exchange Offer Registration Statement. For further
information with respect to the Company and the Exchange Offer, reference is
made to the Exchange Offer Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices of
the commission at 75 Park Place, New York, New York 10007 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Additionally, the Commission maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will be required to file periodic reports and
other information with the Commission. The obligation of the Company to file
periodic reports and other information with the Commission will be suspended if
the Exchange Securities are held of record by fewer than 300 holders as of the
beginning of any fiscal year of the Company other than the fiscal year in which
the Exchange Offer Registration Statement is declared effective. The Company
will nevertheless be required to continue to file reports with the Commission if
the Exchange Securities are listed on a national securities exchange. In the
event the Company ceases to be subject to the informational requirements of the
Exchange Act, the Company will be required under the Indenture and the
Certificate of Designation to continue to file with the Commission the annual
and quarterly reports, information, documents or other reports, including,
without limitation, reports on Forms 10-K, 10-Q and 8-K, which would be required
pursuant to the informational requirements of the Exchange Act. Under the
Indenture and Certificate of Designation, the Company shall file with the
Trustee annual, quarterly and other reports within fifteen days after it files
such reports with the Commission. Further, to the extent that annual, quarterly
or other financial reports are furnished by the Company to stockholders
generally it will mail such reports to holders of Exchange Securities. The
Company will furnish annual and quarterly financial reports to stockholders of
the Company and will mail such reports to holders of Exchange Securities
pursuant to the Indenture, thus holders of the Exchange Securities will receive
financial reports every quarter. Annual reports delivered to the Trustee and the
holders of Exchange Securities will contain financial information that has been
examined and reported upon, with an opinion expressed by an independent public
or certified public accountant. The Company will also furnish such other reports
as may be required by law.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS". ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING
WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE "PROSPECTUS SUMMARY," "RISK
FACTORS," "THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN
REGARDING THE COMPANY'S OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY,
MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING
STATEMENTS GEN-
i
<PAGE> 7
ERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"MAY," "WILL," "EXPECT," "INTEND," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR
"CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO ASSURANCE
THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT
LIMITATION IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-
LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
------------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS.
ii
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Holders of the Securities should carefully consider the matters set forth under
the caption "Risk Factors." References herein to "MCMS" or the "Company" include
MCMS, Inc. and its subsidiaries, unless the context otherwise requires. The
Company's fiscal year ends on the Thursday closest to August 31. Capitalized
terms not defined in this "Prospectus Summary" and certain other technical terms
have the meanings assigned to them in the Glossary on page G-1 and in
"Description of Senior Subordinated Notes -- Certain Definition." Unless
otherwise indicated, references herein to "EBITDA" shall mean "EBITDA" as
defined in Note 1 to the "Summary Historical Consolidated Financial Data." All
historic and projected data for the electronics industry are derived from
Technology Forecasters, Inc., an independent research firm, unless otherwise
indicated.
THE COMPANY
MCMS is a leading electronics manufacturing services ("EMS") provider
serving original equipment manufacturers ("OEMs") in the networking,
telecommunications, computer systems and other rapidly growing sectors of the
electronics industry. The Company offers a full range of capabilities and
manufacturing management services, including product design and prototype
manufacturing; materials procurement and inventory management; the manufacture
and testing of printed circuit board assemblies ("PCBAs"), memory modules and
systems; quality assurance; and end-order fulfillment. By delivering this
comprehensive range of manufacturing and customer service capabilities through
its strategically located facilities in the United States, Asia and Europe, the
Company enables its OEM customers to focus their capital and resources on their
core competencies of research and product development, marketing and sales. The
Company forges long-term strategic relationships as a manufacturing and customer
service partner with leading OEMs such as Cisco Systems, Inc. ("Cisco"), FORE
Systems, Inc. ("Fore"), Alcatel Bell N.V. ("Alcatel") and Micron Technology,
Inc. ("MTI"). As evidence of its ability to partner successfully with its
customers, the Company is the sole source program provider for many of its
customers and has received numerous quality and service awards, including
Cisco's Supplier of the Year Award for Contract Manufacturing and Distribution
in 1997. For the latest twelve months ended February 26, 1998, the Company
generated net sales and pro forma EBITDA (as defined herein), and pro forma net
income of $313.9 million, $31.7 million and $3.5 million, respectively. From
fiscal 1993 through fiscal 1997, the Company's net sales, EBITDA and net income
increased at a compound annual growth rate ("CAGR") of 50.3%, 58.8% and 59.8%,
respectively.
THE INDUSTRY
The EMS industry is large and growing rapidly. The worldwide EMS industry
grew at a CAGR of 32.1% from 1992 to 1996 to approximately $60.0 billion and is
projected to grow at a CAGR of 24.6% from 1996 to 2001, to reach revenue of
approximately $178.0 billion. The table below illustrates the EMS industry's
projected growth by major geographic regions.
<TABLE>
<CAPTION>
% OF TOTAL
--------------
1996 2001 CAGR 1996 2001
-------- --------- ---- ----- -----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
US/Canada................................. $27.2 $104.2 30.8% 45.9% 58.5%
Western Europe............................ 10.5 29.8 23.2 17.7 16.7
Japan..................................... 13.0 24.0 13.1 21.9 13.5
Asia, excluding Japan..................... 6.4 16.5 20.9 10.8 9.3
Emerging Regions.......................... 2.2 3.5 9.7 3.7 2.0
----- ------ ---- ----- -----
Total................................ $59.3 $178.0 24.6% 100.0% 100.0%
</TABLE>
The drivers of growth in the EMS market include: (i) the underlying growth
of the electronics industry in general and of the networking and
telecommunications sectors in particular; (ii) the increasing global acceptance
of outsourcing as a manufacturing solution in the electronics industry; and
(iii) the growing
1
<PAGE> 9
breadth of manufacturing and distribution functions which are being outsourced
by OEMs in the electronics industry.
The worldwide EMS market is undergoing consolidation but remains highly
fragmented. According to the Institute for Interconnecting and Packaging
Electronic Circuits, of the over 1,000 EMS providers in the United States and
Canada, only 15 to 20 had revenues in excess of $300 million in 1997. The
Company believes that industry consolidation will continue as OEM customers
direct their outsourcing to EMS providers who offer a broad range of services,
sufficient capacity to provide sole source program production, advanced
technological capabilities, and domestic and international production
facilities.
SERVICES AND CAPABILITIES
The Company provides a comprehensive array of technologically advanced
services which require the Company and its OEM customers to make a substantial
investment of time and resources in their relationships. The Company's services,
which are provided on both a turnkey and consignment basis, include:
- PRE-PRODUCTION SERVICES. The Company's pre-production electronics
manufacturing services include product development, materials procurement
and inventory management.
- PCBA MANUFACTURING AND TEST SERVICES. PCBA manufacturing involves the
attachment to a printed circuit board ("PCB") of various electronic
components such as resistors, capacitors, diodes, connectors, and logic
and random access memory ("RAM") components.
- MEMORY MODULE ASSEMBLY. The Company is a leading provider of memory
modules which it primarily supplies to MTI, the largest manufacturer (in
terms of unit production) of dynamic random access memory ("DRAM") in the
United States. Memory modules are small PCBAs consisting of semiconductor
memory devices (such as DRAM) and related circuitry, and are critical
components of computer systems ranging from servers to workstations to
personal computers. The Company's memory modules are used in products
manufactured by market leaders such as Dell Computer Corporation
("Dell"), Compaq Computer Corporation ("Compaq"), Gateway 2000, Inc.
("Gateway"), Micron Electronics, Inc. ("MEI") and International Business
Machines Corporation ("IBM").
- SYSTEM LEVEL ASSEMBLY/BOX BUILD. System level assembly, or box build, is
the connection of two or more subassemblies (such as PCBAs) into a
finished enclosure.
- END-ORDER FULFILLMENT. The Company's relationship with several of its
OEM customers extends beyond manufacturing to encompass the shipment from
the Company's factory floor of finished products directly to the OEM's
customer.
COMPETITIVE ADVANTAGES
The Company attributes its leading position (in terms of sales) in the EMS
industry and its strong profitability to the following competitive advantages:
- STRONG RELATIONSHIPS WITH LEADING TECHNOLOGY OEMS. The Company has
established strong relationships with leading OEMs, such as Cisco and
Fore, in the high growth networking and telecommunications industries.
Many OEMs in these sectors are increasingly outsourcing their
manufacturing and distribution functions and require high value-added
products and comprehensive services from their EMS providers. The
Company's other customers include MTI, Comverse Technology, Inc.
("Comverse"), Tektronix, Inc. ("Tektronix"), Dell, Hewlett-Packard Co.
("HP"), IBM and Sequent Computer Systems, Inc. ("Sequent"). See
"Business -- Sales and Marketing -- Customer and Revenue Profile."
- MEMORY MODULE EXPERTISE. The Company has been a leading provider of
standard and custom memory modules since its inception in 1984. The
Company believes its memory module expertise is a
2
<PAGE> 10
competitive advantage since it is one of a limited number of EMS providers with
significant memory module design, assembly and test capabilities.
- BREADTH OF VALUE-ADDED SERVICES. OEMs are increasingly requiring a
broader range of manufacturing and value-added services from their EMS
providers as they seek to reduce their time-to-market and capital asset
and inventory costs. Building on its integrated engineering and
manufacturing capabilities, the Company offers its customers a full range
of pre-production and post-production services for the manufacture of
complex PCBAs, memory modules and systems.
- STATE-OF-THE-ART GLOBAL MANUFACTURING CAPABILITY. From September 1, 1994
through February 26, 1998, the Company made approximately $76.2 million
of capital expenditures principally to build and/or outfit and equip its
state-of-the-art facilities in Nampa, Idaho, Durham, North Carolina and
Penang, Malaysia and to purchase a facility from Alcatel in Colfontaine,
Belgium in November 1997 (the "Alcatel Acquisition"). The Company's
facilities are strategically located to serve its customers' global needs
and to capitalize on the increasing acceptance of EMS worldwide.
- EMPHASIS ON CUSTOMER SERVICE AND QUALITY. The Company places a strong
emphasis on customer service and quality, which it believes are key
factors to OEMs in their selection of EMS providers.
- EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY INCENTIVES. The
Company's senior management team has an average of 11 years of experience
in the electronics industry and has successfully managed the Company's
revenue and EBITDA growth while constructing new facilities and
diversifying into new markets.
GROWTH STRATEGIES
The Company's objective is to be a global supplier of a complete set of
advanced manufacturing solutions to a diverse group of leading OEMs operating in
the fastest growing segments of the electronics industry. In order to achieve
this objective, the Company has employed the following key strategies:
- TARGET LEADING OEMS IN HIGH GROWTH MARKETS. The Company seeks to develop
strategic relationships with leading OEMs in the networking,
telecommunications and other rapidly growing electronics industry
sectors.
- LEVERAGE MEMORY MODULE CAPABILITIES. MCMS has extensive expertise in
designing, assembling and testing memory modules. The Company has
utilized this expertise to develop relationships with new OEM customers.
The Company will continue to aggressively pursue these opportunities.
- OFFER A BROAD RANGE OF ADVANCED MANUFACTURING SERVICES. MCMS offers a
full spectrum of manufacturing services including product design and
prototype manufacturing, materials procurement and inventory management,
the manufacture and testing of PCBAs, memory modules and systems, quality
assurance and end-order fulfillment.
- MAINTAIN POSITION AS A MANUFACTURING TECHNOLOGY LEADER. The Company
believes that staying at the leading edge of production technology and
delivering excellence in manufacturing are critical to its success. MCMS
has invested a significant amount of capital in new facilities and
equipment over the last three years and has developed the manufacturing
infrastructure and expertise necessary to produce assemblies
incorporating new manufacturing technologies. The Company's customers
have recognized the Company for its commitment to delivering excellence
in production technology and manufacturing. As evidence, Cisco provided
the Company with its Supplier of the Year Award for Contract
Manufacturing and Distribution in 1997.
- LEVERAGE INTEGRATED GLOBAL PRESENCE. The Alcatel Acquisition provides
the Company with a European platform which complements its presence in
North America and Asia and positions the Company to serve multinational
and regional OEMs.
3
<PAGE> 11
RELATIONSHIP WITH MTI, MEI AND MEIC
Following the consummation of the Recapitalization (as defined below) and
through the date hereof, MEI's wholly owned subsidiary, MEI California, Inc.
("MEIC") owns 10.0% of the equity of the Company. MEI and MTI entered into
agreements (collectively, the "Transition Services Agreement") to provide the
Company with certain services, including payroll, accounting, human resources
and management information systems for periods ranging from 6 to 12 months after
the closing date of the Recapitalization. The Company may terminate the
provision of such services at any time upon 30 days written notice. See "Certain
Transactions -- Transition Services Agreement."
In connection with the Recapitalization, MTI and the Company entered into
the Memory Module Agreement whereby for a period of at least two years MTI has
committed to outsource to MCMS at least one half of its industry standard memory
module ("ISMM") requirements of up to 1,200,000 Equivalent Units per week. See
"Certain Transactions -- Memory Module Agreement." For the fiscal quarter ending
May 28, 1998, sales to MTI pursuant to the Memory Module Agreement amounted to
$4,510,000 or 5.1% of total sales for the period.
THE RECAPITALIZATION
On February 26, 1998, the Company consummated a recapitalization (the
"Recapitalization") pursuant to an Amended and Restated Recapitalization
Agreement dated as of February 1, 1998 (as amended, the "Recapitalization
Agreement") by and among MEI, MEIC, Cornerstone and the Company. Pursuant to the
Recapitalization, the Company redeemed from MEIC 90% of the Old Common Stock (as
defined herein) for (i) $249.2 million. The 10% of Old Common Stock retained by
MEIC was reclassified as part of the Recapitalization into Common Stock (as
defined herein) and Convertible Preferred Stock (as defined herein), which
represents 10.0% of the Company's fully-diluted Common Stock immediately after
giving effect to the Transactions but before issuance of options to management.
Upon redemption of the Old Common Stock, Cornerstone and certain other investors
(the "Other Investors" and, together with Cornerstone, the "Cornerstone Investor
Group") purchased from the Company shares of Common Stock and Convertible
Preferred Stock representing 90.0% of the Company's fully-diluted Common Stock
immediately after giving effect to the Transactions but before issuance of
options to management. See "Management -- Stock Option Plan." Following the
Recapitalization and through the date hereof, Cornerstone, the Other Investors
and MEIC own securities representing 49.0%, 41.0% and 10.0%, respectively, of
the voting power of the Company's outstanding capital stock.
The Company used approximately $271.3 million (including cash on hand of
approximately $3.3 million) to complete the Recapitalization, including a
payment of $249.2 million to MEIC, the repayment of approximately $0.3 million
of existing indebtedness and the payment of related estimated fees and expenses
of approximately $15.0 million. The remaining funds were to be used by the
Company for working capital purposes. In order to finance the Recapitalization,
the Company: (i) issued $175.0 million in aggregate principal amount of Notes in
the Offering; (ii) issued 250,000 shares of Preferred Stock ($25.0 million
liquidation preference) in the Offering; and (iii) received an equity
contribution of $68.0 million, consisting of $61.2 million in cash from
Cornerstone and the Other Investors and a rollover of equity held by MEIC having
an implied value of $6.8 million (the "Equity Contribution"). The implied value
of the Equity Contribution is based on the Cornerstone Investor Group's
investment of $61.2 million for 90.0% of the fully-diluted Common Stock of the
Company. In connection with the Recapitalization, the Company entered into a
$40.0 million revolving credit facility (the "New Revolving Credit Facility")
with Bankers Trust Company, which was undrawn as of February 26, 1998.
The foregoing transactions are collectively referred to herein as the
"Transactions."
------------------------
The Company's principal executive offices are located at 16399 Franklin
Road, Nampa, ID 83687. The telephone number is (208) 898-2600.
4
<PAGE> 12
THE SECURITIES OFFERING
NOTES...................... The Notes were sold by the Company on February 26,
1998 to BT Alex. Brown Incorporated (the "Initial
Purchaser") pursuant to a Purchase Agreement dated
February 19, 1998 (the "Purchase Agreement"). The
Initial Purchaser subsequently resold the Notes to
qualified institutional buyers pursuant to Rule
144A under the Securities Act.
PREFERRED STOCK............ The Preferred Stock was sold by the Company on
February 26, 1998 to the Initial Purchaser pursuant
to the Purchase Agreement. The Initial Purchaser
subsequently resold the Preferred Stock to
qualified institutional buyers pursuant to Rule
144A under the Securities Act.
REGISTRATION RIGHTS
AGREEMENT.................. Pursuant to the Purchase Agreement, the Company and
the Initial Purchaser entered into a Registration
Rights Agreement dated February 26, 1998 (the
"Registration Rights Agreement"), which grants the
holder of the Securities certain exchange and
registration rights. The Exchange Offer is intended
to satisfy such exchange rights which terminate
upon the consummation of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED......... $145,000,000 in aggregate principal amount of
Series B 9 3/4% Senior Subordinated Notes due March
1, 2008, $30,000,000 in aggregate principal amount
of Series B Floating Interest Rate Subordinated
Term Securities due March 1, 2008 and 250,000
shares ($25.0 million liquidation preference) of
Series B 12 1/2% Senior Exchangeable Preferred
Stock.
THE EXCHANGE OFFER......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $145,000,000 in aggregate
principal amount of Fixed Rate Notes and
$30,000,000 in aggregate principal amount of
Floating Rate Notes are outstanding. The Company
will issue the Exchange Notes to holders on or
promptly after the Expiration Date. $100
liquidation preference per share of the Exchange
Preferred Stock in exchange for each $100
liquidation preference per share of outstanding
Preferred Stock. As of the date hereof, $25,000,000
in aggregate liquidation preference of Preferred
Stock is outstanding. The Company will issue the
Exchange Preferred Stock to holders on or promptly
after the Expiration Date. The Company believes
that there will be no Federal income tax
consequences in connection with the Exchange Offer
from the exchange of the Securities for the
Exchange Securities. See "Certain Federal Income
Tax Consequences." Kirkland & Ellis, counsel to the
Company, will issue an opinion to such effect.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Securities issued pursuant to the Exchange Offer in
exchange for the Securities may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery
5
<PAGE> 13
provisions of the Securities Act, provided that
such Exchange Securities are acquired in the
ordinary course of such holder's business and that
such holder does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Securities.
Each Participating Broker-Dealer that receives
Exchange Securities for its own account pursuant to
the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale
of such Exchange Securities. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-
Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with
resales of Exchange Securities received in exchange
for Securities where such Securities were acquired
by such Participating Broker-Dealer as a result of
market-making activities or other trading
activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Securities could not rely on the position of the
staff of the Commission enunciated in no-action
letters and, in the absence of an exemption
therefrom, must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any resale transaction.
Failure to comply with such requirements in such
instance may result in such holder incurring
liability under the Securities Act for which the
holder will not be indemnified by the Company.
EXPIRATION DATE............ 12:00 a.m., New York City time, on ,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND
NOTES.................... Each Exchange Note will bear interest from its
issuance date. Holders of Notes that are accepted
for exchange will receive, in cash, accrued and
unpaid interest thereon to, but not including, the
issuance date of the Exchange Notes. Such interest
will be paid with the first interest payment on the
Exchange Notes. Interest on the Notes accepted for
exchange will cease to accrue upon issuance of the
Exchange Notes.
ACCRUED DIVIDENDS ON THE
EXCHANGE PREFERRED STOCK
AND THE PREFERRED
STOCK.................... Each share of Exchange Preferred Stock will accrue
dividends from its issuance date. Holders of the
Preferred Stock that are accepted for exchange will
receive accrued and unpaid dividends thereon to,
but not including, the issuance date of the
Exchange Preferred Stock. Such dividends will be
paid with the first dividend payment on the
Exchange Preferred Stock. Dividends on the
Preferred Stock accepted for ex-
6
<PAGE> 14
change will cease to accrue upon issuance of the
Exchange Preferred Stock.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, any or all of which may be waived by
the Company. See "Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING
SECURITIES............... Each holder of the Securities wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Securities and any
other required documentation to the Exchange Agent
(as defined) at the address set forth herein and
therein. By executing the Letter of Transmittal,
each holder will represent to the Company that,
among other things, the Exchange Securities
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the
person receiving such Exchange Securities, whether
or not such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Securities and that neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. See
"Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "-- Procedures for Tendering."
UNTENDERED SECURITIES...... Following the consummation of the Exchange Offer,
holders of Securities eligible to participate but
who do not tender their Securities will not have
any further exchange rights and such Securities
will continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the
market for such securities could be adversely
affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE................. The Securities that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Securities may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or (iv) pursuant
to an effective registration statement under the
Securities Act. See "Exchange Offer -- Consequences
of Failure to Exchange."
SHELF REGISTRATION
STATEMENT.................. If any holder of the Securities (other than any
such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) is not eligible under applicable securities
laws to participate in the Exchange Offer, and such
holder has provided information regarding such
holder and the distribution of such holder's
Securities to the Company for use therein, the
Company has agreed to register the Securities on a
shelf registration statement (the "Shelf
Registration Statement") and use its best efforts
to cause it to be declared effective by the
Commission as promptly as practical on or after the
consummation of the Exchange Offer. The Company has
agreed to maintain the
7
<PAGE> 15
effectiveness of the Shelf Registration Statement
for, under certain circumstances, a period of at
least 2 years from the date the Securities were
issued, to cover resales of the Securities held by
any such holders.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......... Any beneficial owner whose Securities are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering its Securities, either make
appropriate arrangements to register ownership of
the Securities in such owner's name or obtain a
properly completed securities power from the
registered holder. The transfer of registered
ownership may take considerable time and may not be
completed in time for the beneficial owner to
participate in the Exchange Offer. The Company will
keep the Exchange Offer open for not less than
twenty days in order to provide for the transfer of
registered ownership.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Securities who wish to tender their
Securities and whose Securities are not immediately
available or who cannot deliver their Securities,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Securities according to the
guaranteed delivery procedures set forth in
"Exchange Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 12:00
a.m., New York City time, on the Expiration Date.
ACCEPTANCE OF SECURITIES
AND DELIVERY OF EXCHANGE
SECURITIES............... The Company will accept for exchange any and all
Securities which are properly tendered in the
Exchange Offer prior to 12:00 a.m., New York City
time, on the Expiration Date. The Exchange
Securities issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration
Date. See "Exchange Offer -- Terms of the Exchange
Offer."
USE OF PROCEEDS............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT............. United States Trust Company of New York.
THE EXCHANGE NOTES
GENERAL.................... The form and terms of the Exchange Notes are the
same as the form and terms of the Notes (which they
replace) except that (i) the Exchange Notes bear a
Series B designation, (ii) the Exchange Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof and (iii) the holders of the
Exchange Notes will not be entitled to certain
rights under the Registration Rights
8
<PAGE> 16
Agreement, including the provisions providing for
an increase in the interest rate on the Notes in
certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer." The Exchange Notes will evidence
the same debt as the Notes and will be entitled to
the benefits of the Indenture. See "Description of
Senior Subordinated Notes." The Notes and the
Exchange Notes are referred to herein collectively
as the "Senior Subordinated Notes."
SECURITIES OFFERED......... $145,000,000 aggregate principal amount of Series B
9 3/4% Senior Subordinated Notes due 2008.
$30,000,000 aggregate principal amount of Series B
Floating Interest Rate Subordinated Term Securities
due 2008 (FIRSTS(SM)).
ISSUER..................... MCMS, Inc.
MATURITY DATE.............. March 1, 2008.
INTEREST RATE AND
PAYMENT DATES............ Interest on the Exchange Notes will accrue from the
date of original issuance and is payable
semi-annually on each March 1 and September 1,
commencing September 1, 1998. The Fixed Rate
Exchange Notes will bear interest at a rate of
9 3/4% per annum. The Floating Rate Exchange Notes
will bear interest at a rate per annum equal to
LIBOR plus 4 5/8%. As of May 28, 1998, the interest
rate of the Floating Rate Exchange Notes was
10.28125%. Interest on the Floating Rate Exchange
Notes will be reset semi-annually.
RANKING.................... The Exchange Notes will be subordinated in right of
payment to all existing and future Senior Debt of
the Company. The Exchange Notes will rank pari
passu in right of payment with any future senior
subordinated obligations of the Company and will
rank senior in right of payment to all other
subordinated obligations of the Company. As of
February 26, 1998, the Company had approximately
$1.6 million of Senior Debt outstanding for
purposes of the Exchange Notes (exclusive of unused
commitments of $40.0 million under the New
Revolving Credit Facility).
OPTIONAL REDEMPTION........ The Fixed Rate Exchange Notes will be redeemable,
in whole or in part, at the option of the Company
on or after March 1, 2003, and the Floating Rate
Exchange Notes will be redeemable, in whole or in
part, at the option of the Company, at any time, in
each case at the redemption prices set forth
herein, plus accrued and unpaid interest to the
date of redemption. In addition, at any time on or
prior to March 1, 2001, the Company, at its option,
may redeem up to 35% of the aggregate principal
amount of the Fixed Rate Exchange Notes issued with
the net cash proceeds of one or more Public Equity
Offerings, at the redemption price set forth
herein, plus accrued interest to the date of
redemption; provided that at least 65% of the
aggregate principal amount of Fixed Rate Exchange
Notes originally issued plus any additional Fixed
Rate Exchange Notes issued pursuant to the
Indenture remains outstanding immediately following
any such redemption.
CHANGE OF CONTROL.......... Upon a Change of Control, each holder of the
Exchange Notes will have the right to require the
Company to repurchase such holder's Exchange
9
<PAGE> 17
Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest to
the date of repurchase. There can be no assurance
that the Company will have sufficient funds to
purchase all of the Exchange Notes in the event of
a Change of Control or that the Company would be
able to obtain financing for such purpose on
favorable terms, if at all.
CERTAIN COVENANTS.......... The Indenture governing the Exchange Notes (the
"Indenture") contains certain covenants that, among
other things, limit the ability of the Company and
its subsidiaries to incur additional indebtedness,
pay dividends or make investments and certain other
restricted payments. consummate certain asset
sales, enter into certain transactions with
affiliates, incur liens, impose restrictions on the
ability of a subsidiary to pay dividends or make
certain payments to the Company and its
subsidiaries, or merge or consolidate with any
other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially
all of the assets of the Company.
For additional information regarding the Exchange Notes, see "Description of
Senior Subordinated Notes."
10
<PAGE> 18
THE EXCHANGE PREFERRED STOCK
GENERAL.................... The form and terms of the Exchange Preferred Stock
are the same as the form and terms of the Preferred
Stock (which they replace) except that (i) the
Exchange Preferred Stock bears a Series B
designation, (ii) the Exchange Preferred Stock has
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof and (iii) the holders of the
Exchange Preferred Stock will not be entitled to
certain rights under the Registration Rights
Agreement, including the provisions providing for
an increase in the dividend rate on the Preferred
Stock in certain circumstances relating to the
timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated.
See "Exchange Offer -- Purpose and Effect of the
Exchange Offer." The Preferred Stock and the
Exchange Preferred Stock are referred to herein
collectively as the "Senior Preferred Stock."
SECURITIES OFFERED......... 250,000 shares ($25.0 million liquidation
preference) of Series B 12 1/2% Senior Exchangeable
Preferred Stock, (including any additional shares
of such stock issued from time to time in lieu of
cash dividends).
LIQUIDATION PREFERENCE..... $100 per share.
OPTIONAL REDEMPTION........ The Exchange Preferred Stock is redeemable, at the
option of the Company, in whole or in part, at any
time on or after March 1, 2003, at the redemption
prices set forth herein, plus, without duplication,
accumulated and unpaid dividends to the date of
redemption. In addition, prior to March 1, 2001,
the Company may, at its option, use the net cash
proceeds of one or more Public Equity Offerings to
redeem, in whole or in part, the Exchange Preferred
Stock, at the redemption prices set forth herein,
plus, without duplication, all accumulated and
unpaid dividends to the date of redemption.
MANDATORY REDEMPTION....... The Company is required, subject to certain
conditions, to redeem all of the Exchange Preferred
Stock outstanding on March 1, 2010 at a redemption
price equal to 100% of the liquidation preference
thereof, plus, without duplication, accumulated and
unpaid dividends to the date of redemption. There
can be no assurance that the Company will have
sufficient funds to purchase all of the Exchange
Preferred Stock in the event of a mandatory
redemption or that the Company would be able to
obtain financing for such purpose on favorable
terms, if at all.
DIVIDENDS.................. Dividends on the Exchange Preferred Stock will
accumulate at a rate equal to 12 1/2% per annum of
the liquidation preference per share, accrued and,
when declared, payable quarterly beginning June 1,
1998 and accruing from the date of issuance.
Dividends accumulating on or before March 1, 2003
may be paid, at the option of the Company, in cash
or by issuing additional shares of Exchange
Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends,
or in any combination of the foregoing. Dividends
accumulating after March 1, 2003 must be paid in
cash.
DIVIDEND PAYMENT DATES..... March 1, June 1, September 1 and December 1,
commencing June 1, 1998.
VOTING..................... The Exchange Preferred Stock will be non-voting,
except as otherwise required by law and except in
certain circumstances described herein, including
(i) amending certain rights of the holders of the
Exchange
11
<PAGE> 19
Preferred Stock and (ii) the issuance of any class
of equity securities that ranks on a parity with or
senior to the Exchange Preferred Stock, other than
additional shares of Exchange Preferred Stock
issued in lieu of cash dividends or parity
securities issued to finance the redemption by the
Company of the Exchange Preferred Stock. In
addition, if (i) after March 1, 2003, cash
dividends are in arrears for six quarterly periods
(whether or not consecutive) or (ii) the Company
fails to make a mandatory redemption or a Change of
Control Offer as required or fails to pay pursuant
to such redemption or offer, holders of a majority
of the outstanding shares of Exchange Preferred
Stock, voting as a class, will be entitled to elect
the lesser of (i) two directors or (ii) that number
of directors constituting at least 25% of the
Company's board of directors.
EXCHANGE PROVISIONS........ The Exchange Preferred Stock is exchangeable into
the Exchange Debentures, at the Company's option,
subject to certain conditions, in whole, but not in
part, on any scheduled dividend payment date.
RANKING.................... The Exchange Preferred Stock will, with respect to
dividend rights and rights on liquidation,
winding-up and dissolution of the Company, rank
senior to all other classes of equity securities of
the Company outstanding upon consummation of the
Offering.
CHANGE OF CONTROL.......... In the event of a Change of Control, the Company
will, subject to certain conditions, offer to
purchase all outstanding shares of Exchange
Preferred Stock at a purchase price equal to 101%
of the then effective liquidation preference
thereof, plus, without duplication, accumulated and
unpaid dividends to the date of purchase. There can
be no assurance that the Company will have
sufficient funds to purchase all of the Exchange
Preferred Stock in the event of a Change of Control
or that the Company would be able to obtain
financing for such purpose on favorable terms, if
at all.
CERTAIN COVENANTS.......... The Certificate of Designation relating to the
Exchange Preferred Stock (the "Certificate of
Designation") contains certain restrictive
provisions that, among other things, limit the
ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends or
make investments and certain other restricted
payments, or merge or consolidate with or sell all
or substantially all of the assets of the Company.
12
<PAGE> 20
THE EXCHANGE DEBENTURES
ISSUE...................... 12 1/2% Subordinated Exchange Debentures due 2010
issuable in exchange for all, but not less than
all, of the Senior Preferred Stock in an aggregate
principal amount equal to the then effective
liquidation preference of the Senior Preferred
Stock, plus, without duplication, accumulated and
unpaid dividends to the date fixed for the exchange
thereof (the "Exchange Date"), plus any additional
Exchange Debentures issued in lieu of cash
interest.
MATURITY................... March 1, 2010.
INTEREST................... The Exchange Debentures will bear interest at a
rate of 12 1/2% per annum. Interest will accrue
from the date of issuance or from the most recent
interest payment date to which interest had been
paid or provided for or, if no interest has been
paid or provided for, from the Exchange Date.
Interest will be payable semi-annually in cash (or,
at the option of the Company, on or prior to March
1, 2003, in additional Exchange Debentures in
aggregate principal amount equal to the amount of
interest accrued and payable, or in any combination
thereof) in arrears on each March 1 and September
1, commencing with the first such date after the
Exchange Date.
OPTIONAL REDEMPTION........ The Exchange Debentures are redeemable, at the
option of the Company, in whole or in part, at any
time on or after March 1, 2003, at the redemption
prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition,
prior to March 1, 2001, the Company may, at its
option, use the net cash proceeds of one or more
Public Equity Offerings to redeem, in whole or in
part, the Exchange Debentures at the redemption
prices set forth herein, plus accrued and unpaid
interest to the date of redemption.
RANKING.................... The Exchange Debentures will be subordinated to all
existing and future Senior Debt of the Company,
including the Exchange Notes. The Exchange
Debentures will rank pari passu in right of payment
with any class or series of indebtedness that
expressly provides that it ranks pari passu to the
Exchange Debentures. As of February 26, 1998, the
Company had approximately $176.6 million of Senior
Debt outstanding for purposes of the Exchange
Debentures (exclusive of unused commitments of
$40.0 million under the New Revolving Credit
Facility). Under the terms of the New Revolving
Credit Facility and the Indenture, the Company is
not permitted to issue the Exchange Debentures
(i) in the case of the New Revolving Credit
Facility, without the consent of the requisite
lenders and (ii) in the case of the Indenture,
without the consent of the requisite holders of the
Exchange Notes or unless, after giving effect to
such issuance, the Company maintains a fixed charge
coverage ratio of 2.0 to 1.0. See "Description of
Senior Subordinated Notes -- Certain Covenants."
CHANGE OF CONTROL.......... In the event of a Change of Control, the Company
will, subject to certain conditions, be required to
offer to purchase all outstanding Exchange
Debentures at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest to the date of purchase. There can be no
assurance that the Company will have sufficient
funds to purchase all the Exchange Debentures in
the event of a Change of
13
<PAGE> 21
Control or that the Company would be able to obtain
financing for such purpose on favorable terms, if
at all.
CERTAIN COVENANTS.......... The Indenture governing the Exchange Debentures
(the "Exchange Indenture") contains certain
covenants that, among other things, limit the
ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends or
make investments and certain other restricted
payments, consummate certain asset sales, enter
into certain transactions with affiliates, impose
restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company
and its subsidiaries or merge or consolidate with
or sell all or substantially all of the assets of
the Company.
For additional information regarding the Exchange Preferred Stock and
Exchange Debentures, see "Description of Senior Preferred Stock and Exchange
Debentures."
RISK FACTORS
Holders of the Securities should carefully consider the specific matters
set forth under "Risk Factors" as well as the other information and data
included in this Prospectus prior to tendering any Securities in exchange for
the Exchange Securities.
14
<PAGE> 22
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary unaudited pro forma consolidated financial data of the Company
set forth below give effect, in the manner described under "Unaudited Pro Forma
Consolidated Financial Data" and the notes thereto, to the Transactions and the
other supplemental adjustments as if they had occurred on August 30, 1996 in the
case of the pro forma consolidated statements of operations data. The unaudited
pro forma consolidated statements of operations do not purport to represent what
the Company's results of operations would have been if the Transactions and the
other supplemental adjustments had occurred as of the date indicated or what
such results will be for future periods. The information contained in this table
should be read in conjunction with "Unaudited Pro Forma Consolidated Financial
Data," "Summary Historical Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited consolidated financial statements and the accompanying notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
LATEST
FISCAL TWELVE
YEAR SIX MONTHS ENDED MONTHS
ENDED ---------------------------- ENDED
AUGUST 28, FEBRUARY 27, FEBRUARY 26, FEBRUARY 26,
1997 1997 1998 1998(1)
---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales................................. $292,379 $124,117 $145,681 $313,943
Cost of goods sold........................ 258,982 108,136 128,091 278,937
-------- -------- -------- --------
Gross profit.............................. 33,397 15,981 17,590 35,006
Selling, general and administrative
expenses............................... 10,584 4,632 7,766 13,718
-------- -------- -------- --------
Operating income.......................... 22,813 11,349 9,824 21,288
Interest expense, net..................... 18,040 8,966 8,885 17,959
-------- -------- -------- --------
Income before taxes....................... 4,773 2,383 939 3,329
Income tax provision (benefit)............ 1,887 1,076 (1,013) (202)
-------- -------- -------- --------
Net income................................ $ 2,886 $ 1,307 $ 1,952 $ 3,531
======== ======== ======== ========
PRO FORMA CONSOLIDATED OTHER FINANCIAL DATA:
EBITDA(2)................................. $ 31,632 $ 15,254 $ 15,282 $ 31,660
Depreciation and amortization............. 8,819 3,905 5,458 10,372
Cash interest expense(3).................. 17,178 8,531 8,462 17,109
Capital expenditures, manufacturing
facilities(4).......................... 7,980 7,180 5,038 5,838
Total capital expenditures(4)............. 24,120 12,690 10,763 22,193
PRO FORMA CONSOLIDATED FINANCIAL RATIOS:
Ratio of net debt to EBITDA(5)........................................................ 5.2x
Ratio of net debt and redeemable Preferred Stock to EBITDA(6)......................... 5.9x
Ratio of EBITDA to cash interest expense.............................................. 1.9x
Ratio of earnings to fixed charges(7)................................................. --
</TABLE>
- ---------------
(1) Information for the pro forma twelve months ended February 26, 1998
represents the summation of the pro forma year ended August 28, 1997 and the
pro forma six months ended February 26, 1998, less the pro forma six months
ended February 27, 1997.
(2) "EBITDA" is defined in this "Summary Unaudited Pro Forma Consolidated
Financial Data" as income before income taxes, depreciation, amortization,
transaction expenses and net interest expense, as
15
<PAGE> 23
adjusted for certain pro forma adjustments. EBITDA is presented because the
Company believes it is frequently used by investors in the evaluation of
highly leveraged companies. However, EBITDA should not be used as an
alternative to net income as a measure of results of operations or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(3) Cash interest expense includes interest on existing indebtedness net of
repayment, interest on the $145,000,000 aggregate principal amount of Fixed
Rate Notes at an interest rate of 9.75%, interest on the $30,000,000
aggregate principal amount of Floating Rate Notes at an assumed interest
rate of 10.25% and a 0.5% commitment fee on the unused $40,000,000 under the
New Revolving Credit Facility, net of interest income as adjusted for cash
assumed to be used in the Recapitalization.
(4) Capital expenditures for manufacturing facilities includes expenditures
relating to the design, construction and improvement of facilities. Total
capital expenditures includes capital expenditures for manufacturing
facilities as well as capital expenditures for equipment and all other
capital items not related to the introduction of a manufacturing facility.
(5) The ratio of net debt to EBITDA represents total long-term debt, including
current maturities, less cash and cash equivalents divided by EBITDA.
(6) The ratio of net debt and redeemable Preferred Stock to EBITDA represents
total long-term debt, including current maturities, plus the redeemable
Preferred Stock, less cash and cash equivalents divided by EBITDA.
(7) For purposes of computing this ratio, earnings consist of income before
taxes plus fixed charges excluding dividends and amortization of deferred
financing costs on the redeemable Preferred Stock. Fixed charges consist of
interest on existing indebtedness, interest expense on the Notes,
amortization of deferred financing costs associated with the Notes and the
New Revolving Credit Facility, and dividends and amortization of deferred
financing costs on the redeemable Preferred Stock. For the fiscal year ended
August 28, 1997, the six months ended February 27, 1997 and February 26,
1998 and the latest twelve months ended February 26, 1998, earnings were
insufficient to cover fixed charges by $508,000, $178,000, $1,952,000 and
$2,282,000, respectively.
16
<PAGE> 24
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are summary historical consolidated financial data of the
Company at the dates and for the periods indicated. The summary historical
consolidated statements of operations data of the Company for the fiscal years
ended August 31, 1995, August 29, 1996 and August 28, 1997 and the summary
historical consolidated balance sheet data as of August 29, 1996 and August 28,
1997 were derived from the historical consolidated financial statements of the
Company that were audited by Coopers & Lybrand L.L.P., whose report appears
elsewhere in this Prospectus. The summary historical statement of operations
data of the Company for the fiscal year ended September 1, 1994 and the summary
historical balance sheet data as of August 31, 1995 were derived from audited
financial statements of the Company which are not included in this Prospectus.
The summary historical consolidated financial data of the Company as of
September 1, 1994, and as of and for the fiscal year ended September 2, 1993,
and as of and for the six month periods ended February 27, 1997 and February 26,
1998 are derived from unaudited consolidated financial statements of the Company
which, in the opinion of management, include all adjustments necessary for a
fair presentation. The summary historical consolidated financial data should be
read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited consolidated financial statements and accompanying notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------------------------------ ---------------------------
SEPTEMBER 2, SEPTEMBER 1, AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ---------- ---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................... $57,227 $117,313 $188,782 $374,116 $292,379 $124,117 $145,681
Cost of goods sold........... 50,588 104,857 169,758 341,110 258,982 108,136 128,091
------- -------- -------- -------- -------- -------- --------
Gross profit................. 6,639 12,456 19,024 33,006 33,397 15,981 17,590
Selling, general and
administrative expenses.... 3,537 5,129 6,464 9,303 12,560 5,941 6,927
------- -------- -------- -------- -------- -------- --------
Operating income............. 3,102 7,327 12,560 23,703 20,837 10,040 10,663
Interest income (expense),
net........................ (46) 163 613 482 380 260 329
Transaction expenses......... -- -- -- -- -- -- (8,312)
------- -------- -------- -------- -------- -------- --------
Income before taxes.......... 3,056 7,490 13,173 24,185 21,217 10,300 2,680
Income tax provision......... 1,099 2,869 5,142 9,190 8,465 4,243 2,067
------- -------- -------- -------- -------- -------- --------
Net income................... $ 1,957 $ 4,621 $ 8,031 $ 14,995 $ 12,752 $ 6,057 $ 613
======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1).................... $ 4,669 $ 9,763 $ 16,029 $ 29,128 $ 29,656 $ 13,945 $ 16,121
Depreciation and
amortization............... 1,567 2,436 3,469 5,425 8,819 3,905 5,458
Cash provided by (used in)
operating activities....... NM (2,016) 2,124 33,620 20,723 4,527 5,938
Cash used in investing
activities................. NM (4,837) (9,931) (25,643) (23,969) (12,593) (10,544)
Cash provided by (used in)
financing activities....... NM 2,368 22,114 (6,687) 592 (10) 4,434
Capital expenditures,
manufacturing
facilities(2).............. NM NM NM 16,193 7,980 7,180 5,038
Total capital
expenditures(2)............ 2,970 5,180 10,116 31,229 24,120 12,690 10,763
Ratio of earnings to fixed
charges(3)................. 7.4x 17.3x 25.9x 97.3x 71.0x 234.3x 45.0x
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents.... $ 5,178 $ 693 $ 15,000 $ 16,290 $ 13,636 $ 8,214 $ 13,263
Working capital, excluding
cash and cash
equivalents................ 4,956 13,999 25,218 10,065 15,454 17,688 12,265
Total assets................. 32,423 43,515 93,823 113,245 124,862 119,735 150,728
Total debt................... 9,318 7,660 6,671 -- 1,049 26 176,590
Total debt plus redeemable
preferred stock............ 9,318 7,660 6,671 -- 1,049 26 200,590
Shareholders' equity
(deficit)(4)............... 10,050 18,843 50,493 65,881 78,191 71,956 (109,241)
</TABLE>
- ---------------
(1) "EBITDA" is defined herein as income before income taxes, depreciation,
amortization, transaction expenses and net interest expense. EBITDA is
presented because the Company believes it is frequently used by investors in
the evaluation of companies. However, EBITDA should not be used as an
alternative to net income as a measure of results of operations or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(2) Capital expenditures for manufacturing facilities includes expenditures
relating to the design, construction and improvement of the facilities.
Total capital expenditures includes capital expenditures for manufacturing
facilities as well as capital expenditures for equipment and all other
capital items not related to the introduction of a manufacturing facility.
(3) For purposes of computing the ratio, earnings consist of income before taxes
and transaction expenses plus fixed charges. Fixed charges consist of
interest on the Company's indebtedness and amortization of deferred
financing costs. For the periods indicated, the Company had no preferred
stock dividend obligations.
(4) As of September 2, 1993, September 1, 1994 and August 31, 1995,
shareholders' equity amounts represent division equity.
17
<PAGE> 25
RISK FACTORS
Holders of the Securities should consider carefully the following factors
as well as the other information included in this Prospectus prior to tendering
their Securities in the Exchange Offer.
RISK FACTORS ASSOCIATED WITH FINANCIAL LEVERAGE AND THE SECURITIES
High Level of Indebtedness; Ability to Service Indebtedness and Satisfy
Preferred Stock Dividend Requirements
After giving effect to the Transactions, the Company is highly leveraged.
At February 26, 1998, the Company had approximately $176.6 million of total
indebtedness outstanding (exclusive of unused commitments of $40.0 million under
the New Revolving Credit Facility), Preferred Stock outstanding with an
aggregate liquidation preference of $25.0 million and Convertible Preferred
Stock outstanding with an aggregate liquidation preference of approximately
$56.7 million. Subject to certain restrictions in the Indenture, the Certificate
of Designation, the Exchange Indenture and the New Revolving Credit Facility,
the Company may incur additional indebtedness from time to time to provide for
working capital or capital expenditures or for other purposes.
The level of the Company's indebtedness could have important consequences
to holders of the Exchange Securities, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future, as
needed, may be limited; (iii) the Company's leveraged position and covenants
contained in the Indenture, the Certificate of Designation, the Exchange
Indenture and the New Revolving Credit Facility may limit its ability to grow
and make capital improvements and acquisitions; (iv) the Company's level of
indebtedness may make it more vulnerable to economic downturns; and (v) the
Company may be at a competitive disadvantage because some of the Company's
competitors are less leveraged, resulting in greater operational and financial
flexibility for such competitors.
The ability of the Company to pay cash dividends on, and to satisfy the
redemption obligations in respect of, the Exchange Preferred Stock and to
satisfy its debt obligations, including the Exchange Notes, will be primarily
dependent upon the future financial and operating performance of the Company.
Such performance is dependent upon financial, business and other general
economic factors, many of which are beyond the control of the Company. If the
Company is unable to generate sufficient cash flow to meet its debt service
obligations or provide adequate long-term liquidity, it will have to pursue one
or more alternatives, such as reducing or delaying capital expenditures,
refinancing debt, selling assets or raising equity capital. There can be no
assurance that such alternatives could be accomplished on satisfactory terms, if
at all, or in a timely manner. For fiscal years 1996 and 1997, cash flow from
operations (before cash flows from investing and financing activities) would
have been sufficient to meet the Company's pro forma debt service obligations.
For the six months ended February 26, 1998, cash flow from operations (excluding
transaction expenses) would also have been sufficient to meet the Company's pro
forma debt service obligations.
Subordination of the Exchange Notes and Exchange Debentures; Ranking of the
Exchange Preferred Stock
The Exchange Notes will be senior subordinated unsecured obligations of the
Company, subordinated in right of payment to all existing and future Senior Debt
of the Company. The Exchange Notes will be effectively subordinated in right of
payment to all existing and future secured indebtedness of the Company,
including indebtedness under the New Revolving Credit Facility, to the extent of
the liquidation value of the assets securing such indebtedness. The Exchange
Preferred Stock will rank junior in right of payment upon liquidation to all
existing and future indebtedness of the Company, including, without limitation,
indebtedness under the New Revolving Credit Facility and the Exchange Notes. The
Exchange Preferred Stock will rank senior in right of payment upon liquidation
to the Convertible Preferred Stock, the Common Stock and any other class or
series of common stock issued by the Company. As of February 26, 1998, the
Company had approximately $1.6 million of Senior Debt outstanding for purposes
of the Exchange Notes (exclusive of unused commitments of $40.0 million under
the New Revolving Credit Facility). The Indenture, the Certificate of
Designation, the Exchange Indenture and the New Revolving Credit Facility limit,
but do not prohibit, the incurrence of additional indebtedness by the Company.
See "Description of Senior Subordinated Notes -- Subordination," "Description of
the Senior Preferred Stock and Exchange Debentures -- Exchange Preferred
Stock -- Ranking" and "-- Exchange Debentures -- Subordination" and "Description
of
18
<PAGE> 26
New Revolving Credit Facility." The Exchange Debentures, if issued, will be
subordinated to the prior payment in full of all existing and future Senior Debt
of the Company, including indebtedness under the New Revolving Credit Facility
and the Exchange Notes. As of February 26, 1998, approximately $176.6 million of
Senior Debt was outstanding for purposes of the Exchange Debentures (exclusive
of unused commitments of $40.0 million under the New Revolving Credit Facility).
In the event of the bankruptcy, liquidation, dissolution, reorganization or
other winding up of the Company, the assets of the Company will be available to
pay obligations on the Exchange Notes and the Exchange Debentures only after all
Senior Debt, as the case may be, has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Exchange
Notes or the Exchange Debentures, as the case may be. In addition, under certain
circumstances, the Company may not pay principal of, premium, if any, or
interest on, or any other amounts owing in respect of, the Exchange Notes or the
Exchange Debentures, as the case may be, or purchase, redeem or otherwise retire
the Exchange Notes or the Exchange Debentures, as the case may be, if a payment
default or a non-payment default exists with respect to certain Senior Debt and,
in the case of a non-payment default, if a payment blockage notice has been
received by the applicable trustee.
Possible Effects of Fraudulent Conveyance Laws
The Company believes that the indebtedness represented by the Notes was
and, if issued the Exchange Debentures will be, incurred for proper purposes and
in good faith, and that, based on present forecasts and other financial
information, the Company, as of the date hereof, is solvent, has sufficient
capital for carrying on its business and will be able to pay its debts as they
mature and become due. Notwithstanding management's belief, if a court of
competent jurisdiction in a suit by an unpaid creditor or a representative of
creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to
find that, at the time the Company consummated the Transactions, the Company (i)
intended to hinder, delay or defraud any existing or future creditor or
contemplated insolvency with a design to prefer one or more creditors to the
exclusion in whole or in part of others or (ii) did not receive fair
consideration or reasonably equivalent value for issuing the Notes or, if
issued, the Exchange Debentures, and the Company (a) was insolvent, (b) was
rendered insolvent by reason of the Transactions, (c) was engaged or about to
engage in a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business or (d) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, such court could avoid such indebtedness. A possible consequence of
such avoidance would be that a court could void the Company's obligations under
the Notes (or the Exchange Notes upon consummation of the Exchange Offer) and,
if issued, the Exchange Debentures or alternatively subordinate the indebtedness
represented by the Notes (or the Exchange Notes upon consummation of the
Exchange Offer) and, if issued, the Exchange Debentures to claims of other
creditors to the Company.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, a company would
be considered insolvent for purposes of the foregoing if the present fair
salable value of such company's assets is less than the amount that will be
required to pay its probable liability on existing debts as they become absolute
and mature. In rendering its opinion on the validity of the Notes and, if
issued, the Exchange Debentures, counsel for the Company expressed, and in
rendering its opinion on the validity of the Exchange Notes will express, no
opinion as to federal or state laws relating to fraudulent transfers.
Change of Control
Upon the occurrence of a Change of Control, the Company will, subject to
certain conditions, be required to offer to purchase all of the Exchange Notes
and Exchange Debentures then outstanding at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest to the purchase
date, and all of the shares of the Exchange Preferred Stock then outstanding at
a purchase price equal to 101% of the liquidation preference thereof, plus,
without duplication, accumulated and unpaid dividends to the purchase date. See
"Description of Senior Subordinated Notes -- Change of Control" and "Description
of Senior Preferred Stock and Exchange Debentures -- Senior Preferred
Stock -- Change of Control" and "-- Exchange Debentures -- Change of Control."
If a Change of Control were to occur, there can be no assurance that the Company
would have sufficient funds to pay the purchase price for all of the Exchange
Notes, all of the shares of the Exchange Preferred Stock and, if issued, the
Exchange Debentures that the Company might be required to purchase. The exercise
by the respective holders of the Exchange
19
<PAGE> 27
Notes, the Exchange Preferred Stock and, if issued, the Exchange Debentures of
their right to require the Company to repurchase the Exchange Notes and the
Exchange Preferred Stock and, if issued, the Exchange Debentures upon the
occurrence of a Change of Control could also cause a default under other
indebtedness of the Company including any then outstanding indebtedness under
the New Revolving Credit Facility, even if the Change of Control itself does
not, because of the financial effect of such repurchase on the Company.
Additionally, there can be no assurance that, in the event of a Change of
Control, the Company will be contractually permitted under the terms of other
outstanding indebtedness and obligations, including the New Revolving Credit
Facility, to pay the required purchase price for all of the Exchange Notes, and
Exchange Preferred Stock and, if issued, the Exchange Debentures tendered by
holders thereof upon the occurrence of a Change of Control. In addition, the
Indenture and the Exchange Indenture restricts the Company's ability to
repurchase the shares of the Exchange Preferred Stock and, if issued, the
Exchange Debentures, including pursuant to a Change of Control.
Limitations on Ability to Pay Dividends
The Indenture and the New Revolving Credit Facility restrict the Company
from paying cash dividends on the Exchange Preferred Stock other than in certain
circumstances. "See "Description of Exchange Notes -- Covenants -- Limitation on
Restricted Payments," and "Description of the New Revolving Credit Facility."
However, for all dividend payment dates through and including March 1, 2003, the
Company may, at its option, pay dividends in additional shares of Exchange
Preferred Stock in lieu of paying cash dividends.
The Company's payment of dividends on the Exchange Preferred Stock may also
be restricted by the Idaho Business Corporation Act. Under Idaho law, the
Company cannot pay any distribution to its stockholders, including the payment
of dividends on the Exchange Preferred Stock, if such payment would render the
Company unable to pay its debts as they become due in the usual course of
business or if, at the time of the distribution, the total assets of the Company
would be less than the Company's total liabilities plus the amount necessary to
satisfy preferential rights associated with securities ranking senior to the
Exchange Preferred Stock, if any.
In determining the Company's ability to pay dividends, Idaho law permits
the Company's board of directors, as appropriate and if reasonable under the
circumstances, to revalue the Company's assets and liabilities to their fair
market value. The Company cannot predict what the value of its assets or the
amount of its liabilities will be in the future and, accordingly, there can be
no assurance that the Company will be able to pay cash dividends on the Exchange
Preferred Stock.
Restrictions Imposed by Terms of Indebtedness and Exchange Preferred Stock
The Indenture, the Certificate of Designation, the Exchange Indenture and
the New Revolving Credit Facility contain certain covenants that restrict, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, issue preferred stock, incur liens, pay dividends or
make certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company and its subsidiaries. A breach of
any of these covenants could result in a default under the New Revolving Credit
Facility, the Indenture and the Exchange Indenture and would violate certain
provisions of the Certificate of Designation. See "Description of Senior
Subordinated Notes -- Certain Covenants," "Description of Senior Preferred Stock
and Exchange Debentures -- Exchange Debentures -- Certain Covenants" and
"Description of New Revolving Credit Facility." The New Revolving Credit
Facility also requires the Company to maintain specified financial ratios and to
satisfy certain financial condition tests. The ability of the Company to meet
those financial ratios and financial condition tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those ratios and tests.
In the event the Company does not meet such tests, the availability of
capital from bank borrowings, including but not limited to the ability to access
the New Revolving Credit Facility, could be adversely affected. The inability to
borrow under the New Revolving Credit Facility could have a material adverse
effect on the Company's business, financial condition and results of operations.
Upon an event of default under the New Revolving Credit Facility, the
Indenture or the Exchange Indenture, the lenders thereunder could elect to
declare all amounts outstanding thereunder, together with accrued interest, to
be
20
<PAGE> 28
immediately due and payable. In the case of the New Revolving Credit Facility,
if the Company were unable to repay those amounts, the lenders thereunder could
proceed against the collateral granted to them to secure that indebtedness. Such
collateral is comprised of substantially all of the tangible and intangible
assets of the Company, including the capital stock of its subsidiaries (limited
to no more than 65% of the capital stock of its foreign subsidiaries), real
property, accounts receivable, contracts, inventory, equipment, marks, patents,
copyrights and other intellectual property.
On May 20, 1998, the Company and its lenders under the New Revolving Credit
Facility amended certain financial covenants under the New Revolving Credit
Facility. As of May 28, 1998, the Company was in compliance with such financial
covenants, as amended.
Absence of Public Market for the Exchange Securities
Prior to the Exchange Offer, there has not been any public market for the
Securities. The Securities have not been registered under the Securities Act and
will be subject to restrictions on transferability to the extent that they are
not exchanged for Exchange Securities by holders who are entitled to participate
in this Exchange Offer. The holders of Securities (other than any such holder
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who are not eligible to participate in the Exchange Offer are
entitled to certain registration rights, and the Company is required to file a
Shelf Registration Statement with respect to such Securities. The Exchange
Securities will constitute new issues of securities with no established trading
market. The Company does not intend to list the Exchange Securities on any
national securities exchange or seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. The
Company has been advised by the Initial Purchaser that following the completion
of the Exchange Offer, the Initial Purchaser currently intends to make a market
in the Exchange Securities. However, they are not obligated to do so and any
market-making activities with respect to the Exchange Securities may be
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act, and may be limited during the Exchange Offer and the pendency of
any Shelf Registration Statement (as defined herein). There can be no assurance
that an active trading market for the Exchange Securities will develop or as to
the liquidity of the trading market for the Exchange Securities. If a trading
market does not develop or is not maintained, holders of the Exchange Securities
may experience difficulty in reselling the Exchange Securities or may be unable
to sell them at all. If a market were to exist, the Exchange Securities could
trade at prices that may be lower than the initial offering price thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities, general economic conditions and the financial condition
and performance of, and prospects for, the Company. See "Exchange Offer."
Issuance of the Exchange Securities in exchange for the Securities pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Securities, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of Securities desiring to
tender such Securities in exchange for Exchange Securities should allow
sufficient time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of
Securities for exchange. Securities that are not tendered or are tendered but
not accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of
Securities who tenders in the Exchange Offer for the purpose of participating in
a distribution of the Exchange Securities may be deemed to have received
restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transactions. Each Participating Broker-Dealer that
receives Exchange Securities for its own account in exchange for Securities,
where such Securities were acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Securities. See "Plan of Distribution." To the extent that some but not all of
the Securities are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Securities could be adversely
affected. See "Exchange Offer."
21
<PAGE> 29
RISK FACTORS ASSOCIATED WITH THE BUSINESS
Absence of Independent Operating History; Dependence on MTI and MEI
Prior to the consummation of the Recapitalization, the Company had not
operated as an independent entity, and there can be no assurance that it will be
able to operate effectively as an independent company following the
Recapitalization. The principal operations of the Company were established in
1984 as the Memory Applications Group of MTI. In 1995, as part of a corporate
reorganization, MCMS was formed as a wholly-owned subsidiary of MEI. Following
the Recapitalization and through the date hereof, MEI's wholly owned subsidiary,
MEIC, continues to hold 10.0% of the capital stock (other than the Senior
Preferred Stock) of the Company, but does not have a representative on the
Company's board of directors. Moreover, management of the Company is independent
from the board of directors and management of MEI. The Company has historically
been dependent on MEI and MTI for certain financial and administrative systems
and services. As part of the Recapitalization, the Company, MEI and MTI entered
into the Transition Services Agreement pursuant to which MEI and MTI will
continue to provide the Company with certain of such systems and services for
transitional periods ranging from 6 to 12 months after the closing of the
Recapitalization. See "Certain Transactions -- Transition Services Agreement."
In addition, the Company has benefited in the past from MEI's procurement
leverage in the purchase of memory components from MTI. MTI has provided
full-specification RAM components to MEI and MCMS on a purchase order basis at
prices generally equal to the best prices offered by MTI to customers purchasing
comparable volumes. Such purchases accounted for approximately 30% of the
Company's purchased memory components in fiscal 1997. Exclusive of the supply of
components under the Memory Module Agreement, no long-term agreement exists or
is contemplated between MTI and the Company for the supply of such components
subsequent to consummation of the Recapitalization. There can be no assurance
that the Company will be able to procure adequate quantities of RAM components
from MTI or other memory suppliers in the future or that, if obtained, such
components will be obtained at favorable prices.
Customer Concentration; Dependence on Certain Industries
At any given time, certain customers may account for significant portions
of the Company's net sales. In fiscal 1997, approximately 59% of net sales were
derived from networking and telecommunications customers. For fiscal 1997, the
Company's ten largest customers accounted for approximately 91.8% of net sales.
The Company's top two customers, Cisco and Fore, accounted for approximately
32.4% and 20.1% of net sales, respectively, during fiscal 1997. In addition,
another of the Company's customers, while accounting for less than 10% of net
sales for fiscal 1997, is important to the Company because the products sold to
such customer contribute significantly to the Company's margins. Decreases in
sales to these or any other key customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company expects to continue to depend upon a relatively small number of
customers for a significant percentage of its net sales. There can be no
assurance that the Company's principal customers will continue to purchase
services at current levels, if at all. The percentage of the Company's sales to
such major customers may fluctuate from period to period. Significant reductions
in sales to any of the Company's major customers as well as period-to-period
fluctuations in sales and changes in product mix ordered by such customers could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, customer orders can be canceled and
volume levels can be changed or delayed. From time to time, some of the
Company's customers have terminated their manufacturing arrangements with the
Company, and other customers have reduced or delayed the volume of design and
manufacturing services performed by the Company. Such terminations, reductions
or delays expose the Company to the risk of being unable to terminate, reduce or
delay purchase orders with its suppliers and to market risks for raw materials,
work in progress and finished goods. The replacement of canceled, delayed or
reduced contracts with new business cannot be assured, and termination of a
manufacturing relationship or changes, reductions or delays in orders could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In addition, the Company is dependent upon the continued growth, viability
and financial stability of its OEM customers, which are in turn substantially
dependent on the growth of the networking, telecommunications, computer systems
and other industries. These industries are subject to rapid technological
change, product obsolescence and
22
<PAGE> 30
price competition. In addition, many of the Company's customers in these
industries are affected by general economic conditions. Recent currency
devaluations and economic slowdowns in various Asian economies may have an
adverse effect on the results of operations of certain of the Company's OEM
customers, and in turn, their orders from the Company. These and other
competitive factors affecting the networking, telecommunications and computer
system industries in general, and the Company's OEM customers in particular,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, any further volatility in the
market for DRAM components caused by, among other things, the turmoil in the
Asian economies, could have a material adverse effect on MTI, which has
historically been one of the Company's major customers, and consequently the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "Business -- Sales and
Marketing -- Customers and Revenue Profile."
Variability of Results of Operations
The Company's results of operations may be affected by a number of factors
including economic conditions; price competition; the level of volume and the
timing of customer orders; product mix; management of manufacturing processes;
materials procurement and inventory management; fixed asset utilization; the
level of experience in manufacturing a particular product; customer product
delivery requirements; availability and pricing of components; availability of
experienced labor; the integration of acquired businesses; start-up costs
associated with adding new geographical locations; research and development
costs; and failure to introduce, or lack of market acceptance, of new processes,
services, technologies and products. In addition, the level of net sales and
gross margin can greatly shift based on whether certain projects are contracted
on a turnkey basis where the Company purchases materials, versus on a
consignment basis, where materials are provided by the customer (turnkey
manufacturing tends to result in higher net sales and lower gross margins than
consignment manufacturing). There can be no assurance that such decreases will
not continue in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discussion of Certain
Historical Financial Performance." An adverse change in one or more of these
factors could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Management of Growth
The Company opened a new manufacturing facility in Penang, Malaysia in
October 1996 and completed the Alcatel Acquisition in November 1997. Expansion
has caused, and is expected to cause, strain on the Company's infrastructure,
including its managerial, technical, financial, information systems and other
resources. To manage further growth, the Company must continue to enhance
financial and operational controls, develop or hire additional executive
officers and other qualified personnel. Continued growth will also require
increased investments to add manufacturing capacity and to enhance management
information systems. In October 1997, the Company began implementation of an
enterprise resource planning software provided by Baan U.S.A., Inc. (the "Baan
ERP System") to, among other things, accommodate the future growth and
requirements of the Company and ensure that the Company's business management
system is Year 2000 compliant. There can be no assurance that the Company will
be able to implement the Baan ERP System successfully and on a timely basis and
the failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
Since the end of fiscal 1997, the Company has incurred increased operating
expenses as the Company has increased the number of prototype and new product
introductions. The Company expects to continue to 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 and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments."
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
that the Company will be successful in generating revenue to recover start-up
and operating costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Growth Strategies."
23
<PAGE> 31
Competition
The electronics manufacturing services industry is intensely competitive
and subject to rapid change, and includes numerous regional, 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 manufacturing technology, product quality, responsiveness and
flexibility, consistency of performance, range of services provided, the
location of facilities and price. To be competitive, the Company must provide
technologically advanced manufacturing services, high quality products, 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
Jabil Circuits, Inc., Solectron Corporation, Flextronics International, Ltd.,
SCI Systems, Inc. and Celestica International Holdings, Inc. The Company also
faces indirect competition from the captive 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 procurement, research and development, and capital 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 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 and results of operations. See "Business -- Competition."
Availability of Components and Material Cost Fluctuations
A substantial portion of the Company's net sales is derived from turnkey
manufacturing in which the Company provides both materials procurement and
assembly and bears the risk of component price increases. Almost all of the
Company's products require one or more components that are available from a
limited number of sources. Some of these materials are allocated by such single
or sole sources in response to supply shortages. Such shortages may cause the
Company to curtail the production of assemblies using a particular component. In
the past, there have been industry-wide supply shortages of electronic
components such as DRAM and microprocessors. There can be no assurance that such
shortages will not have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, historical
fluctuations in materials costs, such as DRAM costs, have had adverse effects on
the Company's results of operations in the past. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations." Moreover, there can be no assurance that the recent volatility in
the Korean economy will not affect DRAM pricing or demand in world markets. Such
volatility could adversely affect the Company's business, financial condition
and results of operations.
Capital Requirements
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 manufacturing facilities, management
information systems, working capital and debt service. The Company has added
significant manufacturing capacity and increased capital expenditures since
1995. In April 1995, it opened its Durham, North Carolina facility. In October
1996, it opened its first international facility in Penang, Malaysia and moved
from its former Boise, Idaho facility to a new facility in Nampa, Idaho. In
November 1997, it purchased its first European facility in Colfontaine, Belgium
from Alcatel. The Company anticipates that its capital expenditures will
continue to increase as the Company expands its facilities in Asia and Europe,
invests in necessary equipment to continue new product production, and continues
to invest in new technologies and equipment to increase the performance and the
cost efficiency of its manufacturing operations. The 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 reduce or delay its
capital expenditures and facilities expansion, which
24
<PAGE> 32
could materially adversely affect the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
International Operations
The Company currently offers EMS capabilities in North America, Asia and
Europe. Management believes that the percentage of the Company's revenue derived
from international sales will increase in the future as international OEMs
increasingly adopt the outsourcing model as a manufacturing solution.
International sales accounted for 7.1% of the Company's net sales in fiscal
1997. 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 fluctuations in the value of currencies, 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, cost and risk of compliance with a variety of foreign laws, and, in
certain parts of the world, political and economic instability. 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. 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 Belgian operations
are subject to labor union agreements covering both white-collar and blue-collar
employees, which set standards for, among other things, the maximum number of
working hours and minimum compensation levels. The Company's Malaysian
operations and assets are subject to significant political, economic, legal and
other uncertainties customary for businesses located in Southeast Asia.
The Company's international operations are based in Belgium and Malaysia.
The functional currencies of the Company's international operations are the
Belgian Franc and the Malaysian Ringgit. The Company's financial performance may
be adversely impacted by changes in exchange rates between these currencies and
the U.S. dollar. The exchange rate between the Malaysian Ringgit and U.S. dollar
has been extremely volatile over the last year. The Company attempts to minimize
the impact of exchange rate volatility by entering into U.S. dollar denominated
transactions whenever possible for purchases of raw materials and capital
equipment and by keeping minimal cash balances of foreign currencies. Sales to
the Belgian operation's largest customer, however, are denominated in Belgian
Francs. Direct labor, manufacturing overhead, and selling, general and
administrative costs of the international operations are also denominated in the
local currency.
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 attracting and retaining
key managerial and technical employees to date, the loss of services of certain
key employees, in particular any of its four executive officers, or the
Company's failure to continue to attract and retain other key managerial and
technical employees could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management --
Employment Agreements."
Year 2000 Compliance
The Company has conducted a comprehensive review of its information systems
that could be affected by Year 2000 compliance issues and has determined that a
substantial portion of such systems are not Year 2000 compliant. The Company is
developing a plan to resolve the issue which includes, among other things,
implementing the Baan ERP System. The implementation of the Baan ERP System is
anticipated to be completed by the end of 1998 at an estimated cost of $8.4
million. The Company presently believes that by modifying existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's information systems. However, if such
modifications and conversions are not timely or not properly implemented, the
Year 2000 problem could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company has been reviewing the Year 2000 compliance of the products or services
provided by and the
25
<PAGE> 33
systems of, its material suppliers and, in some cases, will ask such suppliers
to warrant to the Company that they are Year 2000 compliant. The Company
believes that many of such suppliers are providing products or services to the
Company or have internal systems that are not Year 2000 compliant. The failure
of such suppliers to become Year 2000 compliant on a timely basis could impair
the timely sourcing of components, raw materials or services to the Company or
the functionality of such components or raw materials, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Environmental Regulations
The Company is subject to a variety of environmental laws and regulations
governing, among other things, air emissions, waste water discharge, waste
storage, treatment and disposal, and remediation of releases of hazardous
materials. While the Company believes that it is currently in material
compliance with all such environmental requirements, any failure to comply with
present and future requirements could have a material adverse effect on the
Company's business, financial conditions and results of operations. Such
requirements could require the Company to acquire costly equipment or to incur
other significant expenses to comply with environmental regulations. The
imposition of additional or more stringent environmental requirements, the
results of future testing at the Company's facilities, or a determination that
the Company is potentially responsible for remediation at other sites where
problems are not presently known, could result in expenditures in excess of
amounts currently estimated to be required for such matters. See "Management's
Discussion and Analysis of Financial Condition and Result of
Operations -- Liquidity and Capital Resources" and "Business -- Environmental."
Concentration of Ownership
Upon consummation of the Recapitalization, Cornerstone and the Other
Investors beneficially owned in the aggregate approximately 90.0% of the
outstanding capital stock (other than the Senior Preferred Stock) of the
Company. As a result, although no single investor has more than 49.0% of the
voting power of the Company's outstanding securities or the ability to appoint a
majority of the directors, the aggregate votes of these investors could
determine the composition of a majority of the board of directors and,
therefore, influence the management and policies of the Company. The interests
of Cornerstone or the Other Investors may, in certain circumstances, differ from
the interests of holders of the Exchange Securities. See "Management" and
"Principal Stockholders."
26
<PAGE> 34
THE RECAPITALIZATION
On February 26, 1998, the Company effected the Recapitalization pursuant to
the Recapitalization Agreement. Prior to the Recapitalization, all of the
Company's capital stock was held by MEI. The Recapitalization was undertaken to
permit MEI, through its wholly-owned subsidiary MEIC, to divest 90% of its
equity interest in the Company in order to focus on its core business of DRAM
manufacturing. Pursuant to the Recapitalization, the Company redeemed from MEIC
90% of the Company's existing shares of common stock, par value $.01 per share
(the "Old Common Stock") for $249.2 million. The 10% of Old Common Stock
retained by MEIC was reclassified as part of the Recapitalization into Common
Stock (as defined below) and Convertible Preferred Stock (as defined below),
representing 10.0% of the Company's fully-diluted Common Stock immediately after
giving effect to the Transactions but before issuance of options to management.
Upon redemption of the Old Common Stock, the Cornerstone Investor Group
purchased from the Company shares of Class A Common Stock ("Class A Common"),
Class B Common Stock ("Class B Common"), Class C Common Stock ("Class C Common,"
and together with the Class A Common and Class B Common, the "Common Stock"),
Series A Convertible Preferred Stock ("Series A Preferred"), Series B
Convertible Preferred Stock ("Series B Preferred"), and Series C Convertible
Preferred Stock ("Series C Preferred," and together with the Series A Preferred
and the Series B Preferred, the "Convertible Preferred Stock"), representing, in
the aggregate, 90.0% of the Company's fully-diluted Common Stock immediately
after giving effect to the Transactions but before issuance of options to
management. See "Management -- Stock Option Plan." Following the
Recapitalization, Cornerstone, the Other Investors and MEIC owned securities
representing 49.0%, 41.0% and 10.0%, respectively, of the voting power of the
Company's outstanding capital stock.
The Company used approximately $271.3 million (including cash on hand of
approximately $3.3 million) to complete the Recapitalization, including a
payment of $249.2 million to MEIC, the repayment of approximately $0.3 million
of existing indebtedness and the payment of related estimated fees and expenses
of approximately $15.0 million. The remaining funds were to be used by the
Company for working capital purposes. In order to finance the Recapitalization,
the Company (i) issued $175.0 million in aggregate principal amount of Notes in
the Offering; (ii) issued 250,000 shares of Preferred Stock ($25.0 million
liquidation preference) in the Offering; and (iii) received an equity
contribution (the "Equity Contribution") of $68.0 million, consisting of $61.2
million in cash from Cornerstone and the Other Investors and a rollover of
equity held by MEIC having an implied value of $6.8 million (based on the equity
contribution of Cornerstone Investor Group of $61.2 million for 90.0% of the
Company's fully-diluted Common Stock). In connection with the Recapitalization,
the Company entered into the $40.0 million New Revolving Credit Facility with
Bankers Trust Company, which was undrawn as of February 26, 1998.
27
<PAGE> 35
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Securities in the
Exchange Offer. In consideration for issuing the Exchange Securities
contemplated in this Prospectus, the Company will receive the Securities, the
forms and terms of which are the same as the form and terms of the Exchange
Securities (which replace the Securities), except as described herein. The gross
proceeds of $200.0 million from the issuance of the Notes and the Preferred
Stock together with the Equity Contribution and cash on hand, were used to
consummate the Recapitalization and pay the related estimated fees and expenses.
See "The Recapitalization."
28
<PAGE> 36
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis as of February 26, 1998. This table should be read in
conjunction with the "Selected Historical Consolidated Financial Data" and
"Unaudited Pro Forma Consolidated Financial Data" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
ACTUAL
----------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C>
Cash and cash equivalents................................... $ 13,263
=========
Long-term debt (including current maturities):
Existing debt............................................. $ 1,590
Notes..................................................... 175,000
---------
Total long-term debt.............................. 176,590
Preferred Stock............................................. 24,000(1)
Shareholders' equity (deficiency):
Common Stock, Convertible Preferred Stock and retained
earnings (deficiency).................................. (109,241)
---------
Total capitalization.............................. $ 91,349
=========
</TABLE>
- ---------------
(1) Reflects the gross proceeds of $25,000,000, net of $1,000,000 of financing
costs, from the issuance of the Preferred Stock.
29
<PAGE> 37
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data of
the Company (the "Pro Forma Consolidated Financial Data") has been prepared to
give effect to the Transactions and to reflect certain of the Company's
corporate overhead charges on a separate company basis. The pro forma
adjustments presented are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma condensed consolidated statement of operations of
the Company for the year ended August 28, 1997 and the unaudited pro forma
condensed consolidated statements of operations for the six months ended
February 27, 1997 and February 26, 1998 and for the latest twelve months ended
February 26, 1998 (the "Pro Forma Statements of Operations") give effect to the
Transactions as if they had occurred as of August 30, 1996.
The Recapitalization has been accounted for as a leveraged recapitalization
which will have no impact on the historical basis of the Company's assets and
liabilities. The Pro Forma Consolidated Financial Data should be read in
conjunction with "Use of Proceeds," "Selected Historical Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the audited consolidated financial statements of the Company
and notes thereto all included elsewhere in the Prospectus. The Pro Forma
Consolidated Financial Data and related notes are provided for informational
purposes only and do not purport to be indicative of the Company's financial
condition or results of operations that would have actually been obtained had
the Transactions been consummated as of the assumed dates and for the periods
presented, nor are they indicative of the Company's financial condition or
results of operations for any future period.
30
<PAGE> 38
MCMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED AUGUST 28, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $292,379 $ -- $292,379
Cost of goods sold.......................................... 258,982 -- 258,982
-------- -------- --------
Gross profit................................................ 33,397 -- 33,397
Selling, general and administrative expenses................ 12,560 (1,976)(a) 10,584
-------- -------- --------
Operating income............................................ 20,837 1,976 22,813
Interest income (expense), net.............................. 380 (18,420)(b) (18,040)
-------- -------- --------
Income before taxes(e)...................................... 21,217 (16,444) 4,773
Income tax provision........................................ 8,465 (6,578)(d) 1,887
-------- -------- --------
Net income.................................................. $ 12,752 $ (9,866) $ 2,886
======== ======== ========
OTHER DATA:
EBITDA(f)................................................... $ 29,656 $ 31,632
Depreciation and amortization............................... 8,819 8,819
Ratio of earnings to fixed charges(g)....................... 71.0x --
</TABLE>
31
<PAGE> 39
MCMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 27, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $124,117 $ -- $124,117
Cost of goods sold.......................................... 108,136 -- 108,136
-------- -------- --------
Gross profit................................................ 15,981 -- 15,981
Selling, general and administrative expenses................ 5,941 (1,309)(a) 4,632
-------- -------- --------
Operating income............................................ 10,040 1,309 11,349
Interest income (expense), net.............................. 260 (9,226)(b) (8,966)
-------- -------- --------
Income before taxes(e)...................................... 10,300 (7,917) 2,383
Income tax provision........................................ 4,243 (3,167)(d) 1,076
-------- -------- --------
Net income.................................................. $ 6,057 $ (4,750) $ 1,307
======== ======== ========
OTHER DATA:
EBITDA(f)................................................... $ 13,945 $ 15,254
Depreciation and amortization............................... 3,905 3,905
Ratio of earnings to fixed charges(g)....................... 234.3x --
</TABLE>
32
<PAGE> 40
MCMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 26, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS(a) PRO FORMA
---------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................... $145,681 $ -- $145,681
Cost of goods sold...................................... 128,091 -- 128,091
-------- ------- --------
Gross profit............................................ 17,590 -- 17,590
Selling, general and administrative expenses............ 6,927 839(a) 7,766
-------- ------- --------
Operating income........................................ 10,663 (839) 9,824
Interest income (expense), net.......................... 329 (9,214)(b) (8,885)
Transactions expense.................................... (8,312) 8,312(c) --
-------- ------- --------
Income before taxes(e).................................. 2,680 (1,741) 939
Income tax provision (benefit).......................... 2,067 (3,080)(d) (1,013)
-------- ------- --------
Net income.............................................. $ 613 $ 1,339 $ 1,952
======== ======= ========
OTHER DATA:
EBITDA(f)............................................... $ 16,121 $ 15,282
Depreciation and amortization........................... 5,458 5,458
Ratio of earnings to fixed charges(g)................... 45.0x --
</TABLE>
33
<PAGE> 41
MCMS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE LATEST TWELVE MONTHS ENDED FEBRUARY 26, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $313,943 $ -- $313,943
Cost of goods sold.......................................... 278,937 -- 278,937
-------- -------- --------
Gross profit................................................ 35,006 -- 35,006
Selling, general and administrative expenses................ 13,546 172(a) 13,718
-------- -------- --------
Operating income............................................ 21,460 (172) 21,288
Interest income (expense), net.............................. 449 (18,408)(b) (17,959)
Transactions expense........................................ (8,312) 8,312(c) --
-------- -------- --------
Income before taxes(e)...................................... 13,597 (10,268) 3,329
Income tax provision (benefit).............................. 6,289 (6,491)(d) (202)
-------- -------- --------
Net income.................................................. $ 7,308 $ (3,777) $ 3,531
======== ======== ========
OTHER DATA:
EBITDA(f)................................................... $ 31,832 $ 31,660
Depreciation and amortization............................... 10,372 10,372
Ratio of earnings to fixed charges(g)....................... 43.9x --
</TABLE>
34
<PAGE> 42
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Pro forma adjustments to selling, general and administrative expenses are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED LATEST TWELVE
YEAR ENDED ---------------------------- MONTHS ENDED
AUGUST 28, FEBRUARY 27, FEBRUARY 26, FEBRUARY 26,
1997 1997 1998 1998
---------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Management fee.......................... $ 250 $ 125 $ 125 $ 250
Increase (decrease) in employee bonus
and profit-sharing expense(1)......... (1,820) (1,230) 1,093 503
Other, net(1)........................... (406) (204) (379) (581)
------- ------- ------ -----
Net adjustments....................... $(1,976) $(1,309) $ 839 $ 172
======= ======= ====== =====
</TABLE>
- ---------------
(1) Reflects an adjustment to record the Company's employee bonus and
profit-sharing expense on a separate company basis. Other, net includes
adjustments to reflect certain corporate charges on a separate company
basis: (i) management's estimates of increased insurance costs based on
policies and coverages which will be in effect immediately after the
Transactions; (ii) reduction of stock based compensation to executives
based on revisions to the Company's stock option program which will be
in effect immediately after the Transactions; (iii) management's
estimates of the net increase in the Company's telecommunications costs
which will be in effect immediately after the Transactions; (iv)
management's estimate of the changes in the Company's third party
payroll provider costs which will be in effect immediately after the
Transactions; and (v) an adjustment to reflect the termination of
corporate services relationships among MEI, MTI and the Company and to
record the Company's anticipated costs of replacing these services on a
separate company basis.
(b) The increase to pro forma interest expense as a result of the Transactions
is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED LATEST TWELVE
YEAR ENDED ---------------------------- MONTHS ENDED
AUGUST 28, FEBRUARY 27, FEBRUARY 26, FEBRUARY 26,
1997 1997 1998 1998
---------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest on the Fixed Rate Notes (9.75% on
$145.0 million)........................... $14,138 $7,069 $7,069 $14,138
Interest on the Floating Rate Notes (assumed
10.25% on $30.0 million).................. 3,075 1,538 1,538 3,075
Amortization of assumed financing costs on
Notes..................................... 629 315 315 629
Amortization of assumed financing costs on
New Revolving Credit Facility............. 240 120 120 240
Commitment fee on New Revolving Credit
Facility (assumed 0.5% on unused
portion).................................. 200 100 100 200
Elimination of interest expense and
financing cost amortization related to the
assumed repayment of the Company's
existing indebtedness..................... (29) -- (12) (41)
Elimination of interest income
on cash used for
the Transactions.......................... 167 84 84 167
------- ------ ------ -------
Net adjustment............................ $18,420 $9,226 $9,214 $18,408
======= ====== ====== =======
</TABLE>
35
<PAGE> 43
A 1/8% variance in interest rates for the Floating Rate Notes would change
annual interest expense by approximately $38,000.
(c) Reflects the elimination of non-recurring transaction fees and expenses and
other considerations incurred in connection with the Transactions.
(d) Reflects the income tax effect of the pro forma adjustments at an assumed
statutory tax rate of 40.0%.
(e) In connection with the Recapitalization, the Company executed a new
incentive stock option plan. The Company measures compensation expense for
its stock-based employee compensation plan using the intrinsic value method
prescribed by APB No. 25, "Accounting for Stock Issued to Employees." Stock
based compensation expense would have reduced pretax income by $275,000
($165,000 net of taxes) for the fiscal year ended August 28, 1997 and the
latest twelve months ended February 26, 1998, and $138,000 ($83,000 net of
taxes) for the six months ended February 27, 1997 and February 26, 1998, if
the fair values of all options granted to the Company's employees had been
recognized as a compensation expense on a straight-line basis over the
vesting period of the grants.
(f) EBITDA, as presented, represents operating income plus depreciation and
amortization. EBITDA is included because management understands that such
information is considered by certain investors to be an additional basis on
which to evaluate the Company's ability to pay interest expense, repay debt
and make capital expenditures. Excluded from EBITDA are interest expense,
interest income, income taxes, and depreciation and amortization, each of
which can significantly affect the Company's results of operations and
liquidity and should be considered in evaluating the Company's financial
performance. EBITDA is not intended to represent and should not be
considered more meaningful than, or an alternative to, measures of operating
performance as determined in accordance with generally accepted accounting
principles.
(g) For purposes of computing this ratio, earnings consist of income before
taxes plus fixed charges excluding dividends and amortization of deferred
financing costs on the redeemable Preferred Stock. Fixed charges consist of
interest on existing indebtedness, interest expense on the Notes,
amortization of deferred financing costs associated with the Notes and the
New Revolving Credit Facility, and dividends and amortization of deferred
financing costs on the redeemable Preferred Stock. For the fiscal year ended
August 28, 1997, the six months ended February 27, 1997 and February 26,
1998 and the latest twelve months ended February 26, 1998, earnings were
insufficient to cover fixed charges by $508,000, $178,000, $1,952,000 and
$2,282,000, respectively.
36
<PAGE> 44
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of the
Company at the dates and for the periods indicated. The selected historical
consolidated statements of operations data of the Company for the fiscal years
ended August 31, 1995, August 29, 1996 and August 28, 1997 and the selected
historical consolidated balance sheet data as of August 29, 1996 and August 28,
1997 were derived from the historical consolidated financial statements of the
Company that were audited by Coopers & Lybrand L.L.P., whose report appears
elsewhere in this Prospectus. The summary historical statement of operations
data of the Company for the fiscal year ended September 1, 1994 and the summary
historical balance sheet data as of August 31, 1995 were derived from audited
financial statements of the Company which are not included in this Prospectus.
The selected historical consolidated financial data of the Company as of
September 1, 1994, and as of and for the fiscal year ended September 2, 1993 and
as of and for the six month periods ended February 27, 1997 and February 26,
1998 are derived from unaudited consolidated financial statements of the Company
which, in the opinion of management, include all adjustments necessary for a
fair presentation. The selected historical consolidated financial data set forth
below should be read in conjunction with, and is qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and accompanying
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------------------------------ ---------------------------
SEPTEMBER 2, SEPTEMBER 1, AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ---------- ---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................... $57,227 $117,313 $188,782 $374,116 $292,379 $124,117 $145,681
Cost of goods sold........... 50,588 104,857 169,758 341,110 258,982 108,136 128,091
------- -------- -------- -------- -------- -------- --------
Gross profit................. 6,639 12,456 19,024 33,006 33,397 15,981 17,590
Selling, general and
administrative expenses.... 3,537 5,129 6,464 9,303 12,560 5,941 6,927
------- -------- -------- -------- -------- -------- --------
Operating income............. 3,102 7,327 12,560 23,703 20,837 10,040 10,663
Interest income (expense),
net........................ (46) 163 613 482 380 260 329
Transaction expenses......... -- -- -- -- -- -- (8,312)
------- -------- -------- -------- -------- -------- --------
Income before taxes.......... 3,056 7,490 13,173 24,185 21,217 10,300 2,680
Income tax provision......... 1,099 2,869 5,142 9,190 8,465 4,243 2,067
------- -------- -------- -------- -------- -------- --------
Net income................... $ 1,957 $ 4,621 $ 8,031 $ 14,995 $ 12,752 $ 6,057 $ 613
======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1).................... $ 4,669 $ 9,763 $ 16,029 $ 29,128 $ 29,656 $ 13,945 $ 16,121
Depreciation and
amortization............... 1,567 2,436 3,469 5,425 8,819 3,905 5,458
Cash provided by (used in)
operating activities....... NM (2,016) 2,124 33,620 20,723 4,527 5,938
Cash used in investing
activities................. NM (4,837) (9,931) (25,643) (23,969) (12,593) (10,544)
Cash provided by (used in)
financing activities....... NM 2,368 22,114 (6,687) 592 (10) 4,434
Capital expenditures,
manufacturing
facilities(2).............. NM NM NM 16,193 7,980 7,180 5,038
Total capital
expenditures(2)............ 2,970 5,180 10,116 31,229 24,120 12,690 10,763
Ratio of earnings to fixed
charges(3)................. 7.4x 17.3x 25.9x 97.3x 71.0x 234.3x 45.0x
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents.... $ 5,178 $ 693 $ 15,000 $ 16,290 $ 13,636 $ 8,214 $ 13,263
Working capital, excluding
cash and cash
equivalents................ 4,956 13,999 25,218 10,065 15,454 17,688 12,265
Total assets................. 32,423 43,515 93,823 113,245 124,862 119,735 150,728
Total debt................... 9,318 7,660 6,671 -- 1,049 26 176,590
Total debt plus redeemable
preferred stock............ 9,318 7,660 6,671 -- 1,049 26 200,590
Shareholders' equity
(deficit)(4)............... 10,050 18,843 50,493 65,881 78,191 71,956 (109,241)
</TABLE>
- ---------------
(1) "EBITDA" is defined herein as income before income taxes, depreciation,
amortization, transaction expenses and net interest expense. EBITDA is
presented because the Company believes it is frequently used by investors in
the evaluation of highly leveraged companies. However, EBITDA should not be
used as an alternative to net income as a measure of results of operations
or to cash flows as a measure of liquidity in accordance with generally
accepted accounting principles.
(2) Capital expenditures for manufacturing facilities includes expenditures
relating to the design, construction and improvement of the facilities.
Total capital expenditures includes capital expenditures for manufacturing
facilities as well as capital expenditures for equipment and all other
capital items not related to the introduction of a manufacturing facility.
(3) For purposes of computing the ratio, earnings consist of income before taxes
and transaction expenses plus fixed charges. Fixed charges consist of
interest on the Company's indebtedness and amortization of deferred
financing costs. For the periods indicated, the Company had no preferred
stock dividend obligations.
(4) As of September 2, 1993, September 1, 1994 and August 31, 1995,
shareholders' equity amounts represent division equity.
37
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Many of the statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking in nature and,
accordingly, whether they prove to be accurate is subject to many risks and
uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations. See "Risk
Factors."
MCMS is a leading EMS provider serving OEMs in the networking,
telecommunications, computer systems and other rapidly growing sectors of the
electronics industry. The Company offers a full range of capabilities and
manufacturing management services, including product design and prototype
manufacturing; materials procurement and inventory management; the manufacture
and testing of PCBAs, memory modules and systems; quality assurance; and
end-order fulfillment.
MCMS provides services on both a turnkey and consignment basis. Under a
consignment arrangement, the OEM procures the components and the Company
assembles them in exchange for a process fee. Under a turnkey arrangement, the
Company assumes responsibility for both the procurement of components and their
assembly. Turnkey manufacturing generates higher net sales than consignment
manufacturing due to the generation of revenue from materials as well as labor
and manufacturing overhead, but also results in lower gross margins than
consignment manufacturing because the Company generally realizes lower gross
margins on materials-based revenue than on manufacturing-based revenue. The
Company also provides services on a partial consignment basis, whereby the OEM
procures certain materials and the Company procures the remaining materials.
Consignment revenues (excluding partial consignment revenues) accounted for 5.2%
of the Company's fiscal 1997 net sales.
In fiscal 1997, approximately 7.0% of the Company's net sales were foreign,
with less than 3.6% direct into the Southeast Asian market, which is currently
experiencing unfavorable currency and economic conditions. Certain of the
Company's major customers sell products into the Southeast Asian market although
the Company estimates, based on conversations with its customers, that less than
5.0% of its sales in fiscal 1997 were directly or indirectly into the Southeast
Asian market. These and other factors which affect the industries or the markets
that the Company serves, and which affect any of the Company's major customers
in particular, could have a material adverse effect on the Company's results of
operations.
RECENT DEVELOPMENTS
Due to a decrease in demand for the products of two of the Company's major
customers, in addition to a shift in mix from higher to lower margin products
for another significant customer, the Company expects net sales for the three
months ending May 28, 1998 to be lower than originally expected. Moreover, the
Company expects operating and selling, general and administrative ("SG&A")
expenses to increase as a percentage of sales for the same period, primarily due
to increased staffing expenses incurred in anticipation of increased production
requirements that did not materialize as scheduled, as well as to integration of
new products and prototypes. As a result of the foregoing, the Company laid off
a portion of its workforce at both its Nampa and Durham operations in the fiscal
quarter ended May 28, 1998. Despite this reduction in staffing expenses, the
Company expects EBITDA and cash flow from operations for the nine months ending
May 28, 1998 to be lower than originally anticipated, or in the case of net loss
for the same period, greater than originally anticipated, which could require
the Company to borrow under the New Revolving Credit Facility. Furthermore,
because of the cyclical nature of the technology sector, there can be no
assurance that net sales results will improve for the remainder of fiscal 1998,
nor that operating and SG&A expenses as a percentage of net sales can be reduced
for the remainder of fiscal 1998. Consequently, EBITDA, cash flows from
operations and net income for the remainder of fiscal 1998 may fall below
EBITDA, cash flows from operations and net income for fiscal 1997. See "Risk
Factors -- Risk Factors Associated with the Business."
In recent months, the Company has become aware of certain published reports
regarding the future financial results of the Company as well as possible
acquisition plans. The Company believes such reports to
38
<PAGE> 46
be inaccurate and do not reflect the Company's own financial projections which
are confidential. While the Company is continually evaluating possible
acquisitions to broaden the geographical scope of its services, no particular
acquisitions are currently contemplated.
DISCUSSION OF CERTAIN HISTORICAL FINANCIAL PERFORMANCE
From fiscal 1993 to fiscal 1996, the Company's net sales, EBITDA and net
income increased at CAGRs of 87.0%, 84.1% and 97.1%, respectively. In fiscal
1997, however, the Company's net sales declined by $81.7 million from fiscal
1996. The decline was primarily attributable to a $155.2 million decrease in
turnkey memory module net sales caused by the substantial decline in the price
of DRAM, the major cost component of a memory module, despite an increase in
memory modules shipped. In addition, net sales for fiscal 1997 from memory
modules produced on a consignment basis declined by $16.5 million from fiscal
1996 primarily as a result of price decreases negotiated with MTI. These
decreases were partially offset by an increase of $93.5 million in net sales
primarily related to increased sales of complex PCBAs and system level
manufacturing services. Fiscal 1997 EBITDA was $29.7 million, a slight increase
compared to $29.1 million in fiscal 1996. EBITDA as a percentage of net sales
increased to 10.1% in fiscal 1997 from 7.8% in fiscal 1996 as a result of the
reduced net sales due to the DRAM price decline, an increase in consignment and
partial consignment net sales, and improved capacity utilization. For the
reasons stated above, cash flows from operations declined from $33.6 million to
$20.7 million and net income declined from $15.0 million to $12.8 million from
fiscal 1996 to fiscal 1997 primarily as a result of a decline in net sales
during this period.
The Company believes that its efforts to expand its OEM customer base to
include networking and telecommunications OEMs and to broaden its services to
include PCBA and system level manufacturing have been successful. Sales to
computer systems OEMs represented approximately 37% of net sales in fiscal 1997
compared to approximately 82% of net sales in fiscal 1996 while sales to
networking and telecommunications OEMs represented approximately 59% of net
sales in fiscal 1997 compared to approximately 10% of net sales in fiscal 1996.
By diversifying its product and customer base, the Company believes it has been
able to reduce its exposure to the volatility in DRAM pricing.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ----------------------------
AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
1995 1996 1997 1997 1998
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 89.9 91.2 88.6 87.1 87.9
----- ----- ----- ----- -----
Gross margin...................... 10.1 8.8 11.4 12.9 12.1
Selling, general and
administrative expenses......... 3.4 2.5 4.3 4.8 4.8
----- ----- ----- ----- -----
Operating income.................. 6.7 6.3 7.1 8.1 7.3
Interest income, net.............. 0.3 0.1 0.1 0.2 0.2
Transaction expenses.............. -- -- -- -- 5.7
----- ----- ----- ----- -----
Income before taxes............... 7.0 6.4 7.2 8.3 1.8
Provision for taxes............... 2.7 2.4 2.8 3.4 1.4
----- ----- ----- ----- -----
Net income........................ 4.3% 4.0% 4.4% 4.9% 0.4%
===== ===== ===== ===== =====
Depreciation and amortization..... 1.8% 1.5% 3.0% 3.1% 3.7%
</TABLE>
SIX MONTHS ENDED FEBRUARY 26, 1998 COMPARED TO SIX MONTHS ENDED FEBRUARY 27,
1997
Net Sales. Net sales for the six months ended February 26, 1998 increased
by $21.6 million, or 17.4%, to $145.7 million from $124.1 million for the six
months ended February 27, 1997. The increase in net sales was primarily
attributable to an increase in the number of PCBAs and system assemblies shipped
to the Company's two largest customers and, to a lesser extent, an increase in
sales of consigned memory modules.
39
<PAGE> 47
The Company's ability to meet demand for increased shipments was the result of
an expansion of manufacturing capacity at its Nampa and Durham facilities as
well as the continued ramp-up of the Malaysian facility which began operations
in the second quarter of fiscal 1997. The increase in net sales was partially
offset by a decline in net sales derived from turnkey memory modules as a result
of lower DRAM prices and also as a result of a shift in the mix of revenue
toward consignment or partial consignment sales compared to the six months ended
February 27, 1997.
Gross Profit. Gross profit for the six months ended February 26, 1998
increased by $1.6 million, or 10.1%, to $17.6 million from $16.0 million for the
six months ended February 27, 1997 as a result of increased unit sales of PCBAs
and consigned memory modules. Gross margin for the six months ended February 26,
1998 decreased to 12.1% of net sales from 12.9% for the comparable period ended
February 27, 1997. The decrease in gross margin was principally attributable to
increased staffing expenses incurred in anticipation of increased production
requirements that did not materialize as scheduled and, to a lesser extent,
start-up costs in the Company's Belgian operation. The gross margin decrease was
partially offset by a shift in mix toward consignment or partial consignment
sales as well as the increased utilization of manufacturing capacity in
Malaysia.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the six months ended February 26, 1998
increased by $1.0 million, or 16.6%, to $6.9 million from $5.9 million for the
six months ended February 27, 1997. This increase for the six months ended
February 26, 1998 was the result of additional headcount in senior management,
finance and administration, sales and marketing, and information technology
which collectively amounted to $0.9 million, as well as additional SG&A in the
Malaysian and Belgian operations in the amount of $0.1 million. This increase in
SG&A was partially offset by a favorable foreign currency adjustment of $0.3
million that resulted from the strengthening of the U.S. dollar relative to the
Malaysian Ringgit. As a percentage of net sales, SG&A was 4.8% during both
periods.
EBITDA. For the reasons stated above, EBITDA for the six months ended
February 26, 1998 increased by $2.2 million, or 15.6%, to $16.1 million from
$13.9 million for the six months ended February 27, 1997. As a percentage of net
sales, EBITDA for the six months ended February 26, 1998 decreased to 11.1% from
11.2% for the comparable period ended February 27, 1997.
Transaction Expenses. In connection with the Recapitalization, the Company
incurred transaction expenses of $8.3 million. Of this amount, $2.7 million was
attributable to a transaction fee payable to Cornerstone, $2.2 million to
commitment fees to Bankers Trust, $1.4 million was related to termination
agreements of certain executives of the Company from employment contracts with
MEI, $0.7 million was paid in connection with the buyout of certain MTI and MEI
options held by certain executives and $1.4 million was payable in respect of
accounting fees, legal fees and other transaction costs.
Provisions for Income Taxes. Income taxes for the six months ended
February 26, 1998 decreased by $2.1 million, or 51.3%, to $2.1 million from $4.2
million for the six months ended February 27, 1997. The Company's effective
income tax rate for the six months ended February 26, 1998 increased to 77.1%
from 41.2% for the comparable period in 1997 principally as a result of certain
transaction expenses for which no tax deduction is allowed, offset in part, by
certain changes in estimates for accrued tax liabilities. The Company's
effective income tax rate is a function of the mix of income in the various
countries and states in which it operates and the applicable income tax rates in
such countries and states. During the six months ended February 26, 1998,
$1.8 million of the Company's taxable income was attributable to its Malaysian
subsidiary for which the Company provided income taxes at an effective tax rate
of 27.8%. The Company's Malaysian subsidiary was not profitable during the six
months ended February 27, 1997.
Net Income. For the reasons stated above, net income for the six months
ended February 26, 1998 decreased by $5.5 million, or 89.9%, to $0.6 million
from $6.1 million for the six months ended February 27, 1997. As a percentage of
net sales, net income for the six month period ended February 26, 1998 decreased
to 0.4% from 4.9% for the six months ended February 27, 1997.
40
<PAGE> 48
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales for fiscal 1997 decreased by $81.7 million, or 21.8%,
to $292.4 million from $374.1 million for fiscal 1996. As previously discussed,
this decline was primarily attributable to the substantial decline in the price
of DRAM, which resulted in a $155.2 million decrease in turnkey memory module
net sales, despite an increase in volume. In addition, $16.5 million of the net
sales decline was attributable to a price decrease in consignment memory
modules. These decreases were partially offset by an increase of $93.5 million
in net sales primarily related to increased revenue from complex PCBA and system
level manufacturing. This increase was attributable to an increase in volume in
complex PCBAs and system level manufacturing.
Gross Profit. Gross profit for fiscal 1997 increased by $0.4 million, or
1.2% to $33.4 million from $33.0 million for fiscal 1996. Gross profit increased
slightly despite a decline in net sales as a result of increased unit volumes of
complex PCBAs, partially offset by declines related to turnkey memory modules.
Gross margin for fiscal 1997 increased to 11.4% of net sales from 8.8% in fiscal
1996 primarily as a result of the reduced revenue base from the DRAM price
decline and shift in revenues towards consignment and partial consignment sales.
In addition, gross margins improved as a result of increased utilization at the
Durham and Nampa facilities for fiscal 1997.
Selling, General and Administrative Expenses. SG&A for fiscal 1997
increased by $3.3 million, or 35.0%, to $12.6 million from $9.3 million in
fiscal 1996. This increase was principally attributable to increased head count
in senior management, finance and administration, and sales and marketing, and
information technology which collectively amounted to $2.8 million, as well as
start-up costs associated with the Malaysian facility in the amount of
$0.5 million. As a percentage of net sales, SG&A increased to 4.3% for fiscal
1997 from 2.5% for fiscal 1996. The increase in SG&A as a percentage of net
sales was primarily attributable to factors noted above as well as the decreased
absorption of fixed costs.
EBITDA. For the reasons stated above, EBITDA for fiscal 1997 increased by
$0.6 million, or 1.8%, to $29.7 million from $29.1 million for fiscal 1996. As a
percentage of net sales, EBITDA for fiscal 1997 increased to 10.1% from 7.8% for
fiscal 1996.
Provision for Income Taxes. Income taxes for fiscal 1997 decreased by $0.7
million, or 7.9%, to $8.5 million from $9.2 million for fiscal 1996. The
Company's effective income tax rate for fiscal 1997 increased to 39.9% from
38.0% for fiscal 1996. For fiscal 1997, the Company is included in the U.S.
federal income tax return of MEI. Income tax expenses for all years were
computed as if the Company were a separate taxpayer. The increase in effective
tax rate is principally due to operating losses of the Malaysian facility for
which related deferred tax assets were fully reserved.
Net Income. For the reasons stated above, net income for fiscal 1997
decreased by $2.2 million, or 15.0%, to $12.8 million, compared to $15.0 million
for fiscal 1996. As a percentage of net sales, net income for fiscal 1997
increased to 4.4% from 4.0% for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales for fiscal 1996 increased by $185.3 million, or
98.2%, to $374.1 million from $188.8 million in fiscal 1995. The increase in net
sales was due primarily to an increase in volume of turnkey memory modules,
partially offset by substantial declines in DRAM pricing in the second half of
fiscal 1996.
Gross Profit. Gross profit for fiscal 1996 increased $14.0 million, or
73.5% to $33.0 million from $19.0 million in fiscal 1995 primarily due to an
increase in the volume of memory modules shipped in fiscal 1996. Gross margin
for fiscal 1996 decreased to 8.8% from 10.1% in fiscal 1995 primarily as a
result of the Company's investment in additional labor and infrastructure to
support its product mix transition from relatively simple memory intensive
products to more complex PCBAs and system level manufacturing.
Selling, General and Administrative Expenses. SG&A for fiscal 1996
increased $2.8 million, or 43.9%, to $9.3 million from $6.5 million in fiscal
1995. Such increase was attributable to increased expenses associated with the
Company's shift to complex PCBA manufacturing. As a percentage of net sales for
fiscal
41
<PAGE> 49
1996, SG&A decreased to 2.5% from 3.4% for fiscal 1995 as a result of the
increased leverage of the fixed component of these costs.
EBITDA. For the reasons stated above, EBITDA for fiscal 1996 increased by
$13.1 million, or 81.7%, to $29.1 million from $16.0 million for fiscal 1995. As
a percentage of net sales, EBITDA for fiscal 1996 decreased to 7.8% from 8.5%
for fiscal 1995.
Provision for Income Taxes. Income taxes for fiscal 1996 increased $4.1
million, or 78.7%, to $9.2 million from $5.1 million in fiscal 1995. The
Company's effective income tax rate for fiscal 1996 decreased to 38.0% from
39.0% for fiscal 1995. For fiscal 1996, the Company is included in the U.S.
federal income tax return of its parent. Income tax expenses for all years were
computed as if the Company were a separate taxpayer.
Net Income. For the reasons stated above, net income for fiscal 1996
increased by $7.0 million, or 86.7%, to $15.0 million, compared to $8.0 million
for fiscal 1995. As a percentage of net sales, net income for fiscal 1996
decreased to 4.0% from 4.3% for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations through cash generated
from operations, capital contributions from MEI and bank borrowings. During the
fiscal year ended August 28, 1997, the Company's net decrease of cash and cash
equivalents of $2.7 million was composed of cash flow generated from operating
activities of $20.7 million, cash used in investing activities of $24.0 million
and cash provided by financing activities of $0.6 million. Cash generated from
operations primarily consisted of earnings before depreciation and amortization
of $21.6 million offset principally by a net increase in working capital. Cash
used in investing activities during the fiscal year ended August 27, 1997 was
primarily attributable to capital expenditures. Cash generated from financing
activities principally resulted from net borrowings under the Company's existing
credit facilities.
For the six months ended February 26, 1998, the Company's net decrease of
cash and cash equivalents of $0.2 million was composed of cash flow generated
from operating activities of $5.9 million, cash used in investing activities of
$10.5 million and cash provided by financing activities of $4.4 million. For the
fiscal years 1996 and 1997, the Company had sufficient cash flows from
operations to meet its pro forma debt service obligations. For the six months
ended February 28, 1998, such cash flows (excluding transaction expenses) would
also have been sufficient to meet such pro forma debt service obligations.
During this same period, receivables, inventory, accounts payable, and
accrued expenses decreased by $0.6 million. The average collection period for
accounts receivable was 50.8 days and the average inventory turns was 12.4.
From September 1, 1994 through August 28, 1997, the Company has made
approximately $65.4 million of capital expenditures principally to build and/or
outfit and equip its facilities in Nampa, Idaho, Durham, North Carolina and
Penang, Malaysia. The Company commenced operations in its Nampa, Durham and
Malaysian facilities in September 1996, April 1995 and December 1996,
respectively. Capital expenditures during the six months ended February 26, 1998
were $10.8 million of which $6.1 million related to the Alcatel Acquisition. The
Company expects to make additional capital expenditures of approximately $15.8
million during the remainder of the fiscal year ending September 3, 1998.
Approximately $7.8 million of the Company's total anticipated capital
expenditures during the fiscal year ending September 3, 1998 are related to the
implementation of the Baan ERP System which, among other things, is being
implemented to address any Year 2000 compliance issues with the remaining
expenditures principally related to new equipment purchases. See "Risk
Factors -- Risk Factors Associated with the Business -- Management Growth" and
"-- Year 2000 Compliance."
In conjunction with the Recapitalization, the Company entered into the New
Revolving Credit Facility with Bankers Trust Company, which provides for
borrowings of up to $40.0 million for working capital, capital expenditures and
other general corporate purposes. The Company did not draw upon the New
Revolving
42
<PAGE> 50
Credit Facility in connection with consummation of the Transactions. As of
February 26, 1998, the Company's total debt was approximately $176.6 million and
the Company had a shareholders' deficit of $109.2 million.
For the second half of fiscal 1998, the Company's interest obligations will
be $9.5 million and its dividend obligations would be $1.6 million if the
Company elects to pay the dividends on the Preferred Stock in cash. On June 1,
1998, the Company elected to pay its first quarterly dividend on the Preferred
Stock in-kind. The Company has not definitively determined if it will pay future
dividends in cash or in-kind.
The Company's principal sources of funds following the Transactions are
anticipated to be cash flows from operating activities and borrowings under the
New Revolving Credit Facility. The Company believes that these funds should
provide sufficient liquidity and capital resources to meet its current and
future obligations, including payment of interest on the Notes, dividends on the
Preferred Stock, as well as to provide funds for the Company's working capital,
capital expenditures and other needs. No assurance can be given, however, that
this will be the case. Depending upon rate of growth and profitability and the
ability of the Company to manage its working capital effectively, including its
inventory turns and accounts receivable collection period, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required or, if available, will be
on terms satisfactory to the Company. The Company's future operating performance
and ability to service or refinance the Notes and to repay, extend or refinance
the New Revolving Credit Facility will be subject to future economic conditions
and to financial, business and other factors, many of which are beyond the
Company's control. See "Risk Factors -- Risk Factors Associated with Financial
Leverage and the Securities."
43
<PAGE> 51
INDUSTRY
The electronics manufacturing industry consists of two major sectors: the
first is the manufacture of PCBs and the second primarily involves the
attachment to PCBs of semiconductors, resistors, capacitors, diodes and other
electronic components. The latter category is referred to as contract
manufacturing or EMS and is the primary market served by MCMS.
The EMS industry is large and growing rapidly. The worldwide EMS industry
grew at a CAGR of 32.1% from 1992 to 1996 to approximately $60.0 billion and is
projected to grow at a CAGR of 24.6% from 1996 to 2001, to reach revenue of
approximately $178.0 billion. The table below illustrates the EMS industry's
projected growth by major geographic regions:
<TABLE>
<CAPTION>
% OF TOTAL
--------------
1996 2001 CAGR 1996 2001
-------- --------- ---- ----- -----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
US/Canada................................. $27.2 $104.2 30.8% 45.9% 58.5%
Western Europe............................ 10.5 29.8 23.2 17.7 16.7
Japan..................................... 13.0 24.0 13.1 21.9 13.5
Asia, excluding Japan..................... 6.4 16.5 20.9 10.8 9.3
Emerging Regions.......................... 2.2 3.5 9.7 3.7 2.0
----- ------ ---- ----- -----
Total..................................... $59.3 $178.0 24.6% 100.0% 100.0%
</TABLE>
Growth in the EMS market is being driven by three factors. The first factor
is the underlying growth of the electronics industry in general and of the
networking and telecommunications sectors in particular. The second factor is
the increasing global acceptance of outsourcing as a manufacturing solution in
the electronics industry. The third factor is the trend by OEMs to outsource a
broader array of manufacturing and distribution functions. EMS revenues as a
percentage of the electronics estimated cost of goods sold of OEMs in the
electronics industry was 12.4% in 1996 and is projected to increase to 26.1% in
2001.
INDUSTRY HISTORY
Growth in the EMS industry was initially driven by the dependence of
electronics OEMs with large, captive production facilities on EMS providers as a
source of additional or overflow manufacturing capacity. Initially, OEMs
contracted with outsourcing providers on a consignment basis, and primarily
outsourced only the manufacture of simple PCBAs used in consumer electronic
goods and personal computers. In the mid-1980s, the relationship between
electronics OEMs and EMS providers underwent a fundamental, strategic shift with
the evolution from pin-through-hole ("PTH") technology to SMT. PTH technology is
heavily dependent upon manual labor and involves the insertion of pins, or
leads, into pre-drilled holes in PCBs with the leads then connected to the
circuitry through soldering. Using automated SMT equipment, components are
attached directly to both sides of the PCB without leads. SMT facilitates the
placement of more components on a single PCB, resulting in significant
advancements in functionality and miniaturization of electronic products. Due to
the high cost of SMT, economies of scale and asset utilization became critical
to the manufacturing process causing OEMs to increase their level of outsourcing
to EMS providers. This increased demand for outsourced manufacturing services
made investment in SMT equipment and subsequent upgrades economical for EMS
providers with sufficient volume. In the early 1990s, as the relationship
between OEMs and EMS providers further evolved, OEMs began to rely on their EMS
providers to procure and manage materials on a turnkey basis. In recent years,
heightened competition, greater product complexity, rapid technological
advancement and shorter product lifecycles have required electronics OEMs to
outsource an even broader array of manufacturing and distribution functions in
order to focus their capital and resources on their core competencies of
research and product development, marketing and sales. An increasing number of
OEMs are adopting a "virtual" manufacturing strategy in which they maintain no
internal production capabilities and rely solely on EMS providers for a
comprehensive array of manufacturing services. Many OEMS have divested their
captive manufacturing facilities and others have outsourced their EMS
requirements from inception.
44
<PAGE> 52
SERVICES AND CAPABILITIES
EMS providers offer the services and capabilities described below. Large,
sophisticated EMS providers generally are differentiated from smaller EMS
providers in that they are able to provide the full range of these services
because of their technological expertise, greater capital resources and
state-of-the-art equipment.
- - PRODUCT DESIGN AND ENGINEERING. EMS providers have product development
groups, consisting of design, product and test engineering personnel, which
work with customers on initial product design in order to reduce the time from
design to prototype, improve product manufacturability and reliability and
reduce product costs through both manufacturing and purchasing efficiencies.
- - MATERIALS PROCUREMENT AND INVENTORY MANAGEMENT. Turnkey EMS providers provide
a full range of materials management services including procurement, planning,
expediting, incoming quality inspection and warehousing to promote continuous
supplier improvement and to reduce costs.
- - PCBA MANUFACTURING SERVICES. The manufacture of PCBAs involves the attachment
of various electronic components such as resistors, diodes, connectors, logic
and RAM components and processors to a PCB through various interconnect
technologies including SMT, PTH, and BGA.
- - SYSTEM LEVEL ASSEMBLY/BOX BUILD SERVICES. System level assembly, or box
build, is the connection of two or more subsystems (such as PCBAs) into a
finished enclosure that is sold in its completed form. System level assembly
requires engineering, materials sourcing, manufacturing capabilities and
capacity beyond those needed for manufacturing PCBAs. OEMs entrust box build
activities to selected EMS providers with the requisite expertise,
technological capabilities and available capacity.
- - TEST SERVICES. In-circuit testing is used to verify that the PCBA has been
correctly assembled and that all electrical components are connected
appropriately. Functional and environmental tests verify that the PCBA
performs to customer specifications and maintains its integrity in varying
conditions. Only those EMS providers with comprehensive test service
capabilities can also provide end-order fulfillment.
- - END-ORDER FULFILLMENT. End-order fulfillment encompasses the shipment of
finished products directly to the OEM's end-user customers from the EMS
provider's factory floor. End-order fulfillment requires a high level of trust
and coordination between the OEM and its EMS provider. The EMS provider
performs all quality and testing functions without the OEM's direct
involvement, and is charged with ensuring that the products conform to the
OEM's standards of functionality, performance and durability. In addition, in
order to provide end-order fulfillment, the EMS provider must possess the
flexibility and manufacturing expertise to reconfigure its production to
manufacture custom orders.
- - MEMORY MODULE ASSEMBLY. A limited number of EMS providers have significant
memory module design, assembly and test capabilities. Memory modules are
compact PCBAs consisting of semiconductor memory devices (such as DRAM) and
related circuitry. EMS providers who assemble memory modules obtain memory
components from semiconductor manufacturers and attach them to PCBs. Memory
modules are most commonly used in desktop personal computers, laptop
computers, workstations, printers and telecommunications devices. There has
been significant growth in memory module production over the last several
years due to the demand for enhanced electronic system performance, the
overall growth in computer, workstation and server sales volumes as well as
the increased memory requirements (measured in megabytes) per system. Similar
to other types of PCBA manufacturing, memory module manufacturing is
increasing in technological complexity and capital intensiveness. As a result,
many OEMs are outsourcing their memory module requirements.
45
<PAGE> 53
BENEFITS TO OEMS OF OUTSOURCING
OEMs are increasingly outsourcing their manufacturing requirements in order
to realize the following benefits:
- - FOCUS ON CORE COMPETENCIES. As competition in the electronics industry has
intensified, OEMs have sought to concentrate their limited resources on the
activities which enable them to maximize value, including research and product
development, marketing and sales. Large, sophisticated EMS providers offer
comprehensive turnkey services which better enable OEMs to focus on their core
competencies.
- - ACCESS TO LEADING TECHNOLOGIES WITH LOWER INVESTMENT AND OVERALL
COSTS. Outsourcing to EMS providers enables OEMs to access high volume
manufacturing technologies with lowered costs and increased responsiveness
without large capital investments.
- - ENHANCED INVENTORY MANAGEMENT AND IMPROVED PURCHASING POWER. EMS providers'
volume procurement and inventory management capabilities allow OEMs to control
inventory levels and costs which both enhances OEMs' ability to respond to
competitive pressures and increases their return on assets.
- - SHORTER TIME-TO-MARKET. The electronics industry is increasingly
characterized by rapid technological change, shorter product lifecycles and a
critical need to reduce time-to-market. OEMs can shorten their product
introduction and time-to-volume cycles by utilizing EMS providers' design,
engineering and prototyping services, established infrastructure and advanced
manufacturing capabilities.
- - VOLUME FLEXIBILITY. EMS providers can efficiently manage short production
runs for lower volume products and ramp up to higher volume production quickly
because of their manufacturing expertise and the quality of their equipment.
This flexibility enables OEMs to pursue opportunities in niche markets, to
produce profitably products with shorter lifecycles and to exploit products at
the end of their lifecycles.
INDUSTRY CONSOLIDATION
The worldwide EMS market is undergoing consolidation but remains highly
fragmented. According to the Institute for Interconnecting and Packaging
Electronic Circuits, of the over 1,000 EMS providers in the United States and
Canada, only 15 to 20 had revenues in excess of $300 million in 1997. The
Company believes that industry consolidation will continue as OEM customers
direct their outsourcing to EMS providers who offer a broad range of services,
sufficient capacity to provide sole source program production, advanced
technological capabilities, and domestic and international production
facilities.
46
<PAGE> 54
BUSINESS
MCMS is a leading EMS provider serving OEMs in the networking,
telecommunications, computer systems and other rapidly growing sectors of the
electronics industry. The Company offers a full range of capabilities and
manufacturing management services, including product design and prototype
manufacturing; materials procurement and inventory management; the manufacturing
and testing of PCBAs, memory modules and systems; quality assurance; and
end-order fulfillment. By delivering this comprehensive range of manufacturing
and customer service capabilities through its strategically located facilities
in the United States, Asia and Europe, the Company enables its OEM customers to
focus their capital and resources on their core competencies of research and
product development, marketing and sales. The Company forges long-term strategic
relationships as a manufacturing and customer service partner for leading OEMs
such as Cisco, Fore, Alcatel and MTI. As evidence of its ability to partner
successfully with its customers, the Company served as the sole source program
provider for many of its customers and has received numerous quality and service
awards, including Cisco's Supplier of the Year Award for Contract Manufacturing
and Distribution in 1997. For the latest twelve months ended February 26, 1998,
the Company generated net sales, pro forma EBITDA and net income of $313.9
million, $31.7 million and $3.5 million, respectively. From fiscal 1993 through
fiscal 1997, the Company's net sales, EBITDA and net income increased at CAGR of
50.3%, 58.8% and 59.8%, respectively.
The Company's principal operations were established in 1984 as the Memory
Applications Group of MTI. The Company began providing electronic manufacturing
services to external customers in 1989, was incorporated as a wholly owned
subsidiary of MTI in 1992 and became a wholly owned subsidiary of MEI, which is
a majority owned subsidiary of MTI, in 1995. Initially, the Company established
itself as a leading EMS provider by developing an expertise in custom memory
module design, assembly and testing for computer systems customers. In recent
years, management has broadened the Company's market focus to include networking
and telecommunications customers, and has expanded its services to offer design,
materials procurement, inventory management, the manufacture and testing of
complex PCBAs and systems, and end-order fulfillment.
COMPETITIVE ADVANTAGES
The Company attributes its leading position in the EMS industry and its
strong profitability to the following competitive advantages:
- STRONG RELATIONSHIPS WITH LEADING TECHNOLOGY OEMS. The Company has
established strong relationships with leading OEMs, such as Cisco and
Fore, in the high growth networking and telecommunications industries.
Many OEMs in these sectors are increasingly outsourcing their
manufacturing and distribution functions and require high value-added
products and comprehensive services from their EMS providers. The Company
has increased the percentage of its net sales generated by networking and
telecommunications OEMs from approximately 10% in fiscal 1996 to
approximately 59% in fiscal 1997. This percentage increase in net sales
to networking and telecommunications OEMs was attributable both to an
increase in volume sales to such OEMs as well as a decrease in memory
module sales to computer systems manufacturers primarily due to a
significant decrease in DRAM pricing. In addition, in connection with its
acquisition of a European manufacturing facility, the Company recently
entered into a three-year supply agreement with Alcatel, a leading
supplier of telecommunications services. The terms of the agreement
provide for two years of production load spread over three years. The
production load is defined in direct labor hours and is priced at a fixed
rate per direct labor hour. The hourly rate reflects market conditions at
the time of execution. The Company's other customers include MTI,
Comverse, Tektronix, Dell, HP, IBM and Sequent. The Company has also
established relationships with smaller companies whom it believes have
superior and innovative products with high growth potential. See
"Business -- Sales and Marketing -- Customer and Revenue Profile."
- MEMORY MODULE EXPERTISE. The Company has been a leading provider of
standard and custom memory modules since its inception in 1984. Semico
Research Corp. estimates that the overall market for DRAM memory modules
was $21.0 billion in 1997 and projects that the market will grow at a
CAGR of 25.0% to $41.0 billion in 2000. The Company believes its memory
module expertise is a
47
<PAGE> 55
competitive advantage because it is one of a limited number of EMS
providers with significant memory module design, assembly and test
capabilities. The Company uses its distinct memory module capabilities as
a means of obtaining new OEM customers in the networking,
telecommunications and computer systems segments. Once established as an
OEM's memory module assembler, the Company strives to expand the services
and programs it provides for that customer. In addition, the Company is
the primary outside memory module supplier for MTI (which also produces
memory modules internally), the largest DRAM manufacturer in the United
States. See "Certain Transactions -- Memory Module Agreement."
- BREADTH OF VALUE-ADDED SERVICES. OEMs are increasingly requiring a
broader range of manufacturing and value-added services from their EMS
providers as they seek to reduce their time-to-market and capital asset
and inventory costs. Building on its integrated engineering and
manufacturing capabilities, the Company offers its customers a full range
of pre-production and post-production services for the manufacture of
complex PCBAs, memory modules and systems. The Company believes that its
range of services: (i) provides greater control over quality and
delivery; (ii) offers customers complete and cost-effective manufacturing
solutions; (iii) increases the Company's integration into the
manufacturing processes of its customers; (iv) positions the Company to
be a leading provider of its customers' next generation products; and (v)
increases customers' switching costs.
- STATE-OF-THE-ART GLOBAL MANUFACTURING CAPABILITY. From September 1, 1994
through February 26, 1998, the Company made approximately $76.2 million
of capital expenditures principally to build and/or outfit and equip its
state-of-the-art facilities in Nampa, Idaho, Durham, North Carolina and
Penang, Malaysia, and to purchase a facility from Alcatel in Colfontaine,
Belgium. The Company's facilities are strategically located to serve its
customers' global needs and to capitalize on the increasing acceptance of
EMS worldwide. In addition, the Company has the ability to expand
capacity by adding new SMT lines in certain of its existing facilities
and shifting production among its facilities. Each of its four facilities
utilizes SMT manufacturing, which requires sophisticated capital
equipment and expertise, and is the dominant PCBA manufacturing process
technology worldwide. The Company maintains standard manufacturing
equipment, processes and techniques across its facilities and integrates
its operations through information systems and operational infrastructure
allowing it to provide its OEM customers with seamless, flexible and
responsive manufacturing services.
- EMPHASIS ON CUSTOMER SERVICE AND QUALITY. The Company places a strong
emphasis on customer service and quality, which it believes are key
factors to OEMs in their selection of EMS providers. The Company has
received numerous awards in the areas of manufacturing quality,
technology, dependability and timely delivery, including Cisco's Supplier
of the Year Award for Contract Manufacturing and Distribution in 1997 and
Fore's highest award for supplier performance in 1997. As evidence of its
high quality customer service, the Company has been selected as the sole
EMS provider in selected programs for many of its customers, including
MTI, Cisco, Fore and several other OEMs, and believes it will continue to
be a preferred supplier to such customers. The Company's facilities in
Nampa, Idaho, Durham, North Carolina and Penang, Malaysia are ISO 9001
certified, and the Company intends to seek ISO 9001 certification for its
newly acquired Colfontaine, Belgium facility.
- EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY INCENTIVES. The
Company's senior management team has an average of 11 years of experience
in the electronics industry and has successfully managed the Company's
revenue and EBITDA growth while constructing new facilities and
diversifying into new markets. Following the Recapitalization, the senior
management team will have a substantial financial interest in the
Company's continued success through its participation in an incentive
option program constituting up to 15.0% of the Company's equity
ownership.
48
<PAGE> 56
GROWTH STRATEGIES
The Company's objective is to be a global supplier of a complete set of
advanced manufacturing solutions to a diverse group of leading OEMs operating in
the fastest growing segments of the electronics industry. In order to achieve
this objective, the Company has employed the following key strategies:
- TARGET LEADING OEMS IN HIGH GROWTH MARKETS. The Company seeks to develop
strategic relationships with leading OEMs in the networking,
telecommunications and other rapidly growing electronics industry
sectors. Certain of these OEMs are reducing their base of EMS providers
and are focusing each provider on specific programs and requiring each to
provide a broader range of services. The Company seeks to develop strong
ties with its customers through its design capabilities, engineering and
manufacturing expertise, strong service record and breadth of
capabilities. In addition to current market leaders, the Company targets
OEMs with emerging technologies or products that have the potential to
make these OEMs market leaders in the future.
- LEVERAGE MEMORY MODULE CAPABILITIES. MCMS has extensive expertise in
designing, assembling and testing memory modules. The Company has
utilized this expertise to develop relationships with new OEM customers.
The Company will continue to aggressively pursue these opportunities.
Once an OEM has selected the Company as a provider of these services, the
Company seeks to leverage and expand the relationship to include a
broader array of services. For example, the Company's relationship with
Cisco began in 1995 and has evolved from producing a modest volume of
custom memory modules to providing a range of services from memory
modules to prototype and volume production of highly complex PCBAs. The
Company anticipates that its ability to grow its memory module business
will improve as a result of the elimination of control of the Company by
MEI, which is a competitor of many of the Company's targeted personal
computer memory module customers.
- OFFER A BROAD RANGE OF ADVANCED MANUFACTURING SERVICES. MCMS offers a
full spectrum of manufacturing services including product design and
prototype manufacturing, materials procurement and inventory management,
the manufacture and testing of PCBAs, memory modules and systems, quality
assurance and end-order fulfillment. The Company's ability to manage the
complete manufacturing process from design through end-order fulfillment
reduces a product's time-to-market and enables OEMs to concentrate on
their core competencies of research and product development, marketing
and sales.
- MAINTAIN POSITION AS A MANUFACTURING TECHNOLOGY LEADER. The Company
believes that staying at the leading edge of production technology and
delivering excellence in manufacturing are critical success factors in
providing electronics manufacturing services to networking,
telecommunications and computer systems OEMs. MCMS has invested a
significant amount of capital in new facilities and equipment over the
last three years and has developed the manufacturing infrastructure and
expertise necessary to produce assemblies incorporating complex, high
density chip packages including BGA, COB and MCM. Additionally, the
Company is developing new manufacturing technologies including PC100
testing for SDRAM modules, expanded design-from-concept capabilities,
no-clean wave soldering, micro-BGA, and flip chip assembly.
- LEVERAGE INTEGRATED GLOBAL PRESENCE. The Alcatel Acquisition provides
the Company with a European platform which complements its presence in
North America and Asia and positions the Company to serve multinational
and regional OEMs. By maintaining a standard manufacturing platform and
integrated operations, the Company seeks to provide its OEM customers
with seamless, flexible and responsive manufacturing services. MCMS
intends to continue to broaden its engineering and manufacturing
capabilities worldwide through the expansion of existing facilities,
development of manufacturing sites in other strategic locations and
through strategic acquisitions.
SERVICES AND CAPABILITIES
The Company provides a comprehensive array of technologically advanced
services which require the Company and its OEM customers to make a substantial
investment of time and resources in their
49
<PAGE> 57
relationships. The Company becomes an integral partner with OEMs who are
evolving toward a new paradigm of "virtual" manufacturing in which the OEMs
maintain no internal production capabilities and rely solely on EMS providers
for a comprehensive array of manufacturing services. The Company's two largest
customers, Cisco and Fore, perform some final system level assembly and test,
but the majority of their manufacturing requirements are now outsourced to EMS
providers. The Company believes that this trend in which OEMs outsource
increasing levels of their manufacturing requirements to EMS providers should
continue, as OEMs realize the benefits of focusing on their core competencies of
research and development, and sales and marketing. The Company's services, which
are provided on both a turnkey and consignment basis, include:
Pre-production Services
The Company's pre-production electronics manufacturing services include
product development and materials procurement and inventory management.
- Product Development. The Company's product development group interacts
frequently with OEM customers early in the design process to optimize
product design and product manufacturability. For each project, MCMS
creates a design strategy based on a particular customer's requirements,
product attributes, design guidelines and previous experience with similar
products. After design, the Company often provides quick-turn prototype
assembly. By participating in product design and prototype development,
the Company reduces an OEM's manufacturing costs, accelerates
time-to-volume production and ensures that new designs can be properly
tested at a reasonable cost.
- Materials Procurement and Inventory Management. Because MCMS provides
full turnkey services to the majority of its customers, procurement is
one of the key factors contributing to the Company's competitive and
financial success. The Company provides a full range of materials
management services and works in partnership with a variety of key
component manufacturers and distributors through the deployment of
programs such as schedule sharing, electronic data interface and Internet
links as well as a comprehensive supplier review and ratings program.
Component manufacturers and distributors are either specified by
customers or qualified by the Company. In general, the Company has been
able to source the raw materials and components it needs. However, almost
all of the Company's products require at least one or more components
that are available from only a limited number of sources. Some of these
materials are allocated by such single or sole sources in response to
supply shortages. Such shortages may cause the Company to curtail the
production of assemblies using a particular component. In order to
protect itself from fluctuations in materials costs, MCMS purchases
material and components, including long lead time items, based either on
purchase orders received and accepted from customers or through
manufacturing services agreements with its customers. The Company manages
its inventory through automated materials handling processes including
bar coding and automated, vertical carousel storage systems that both
reduce the amount of floor space required to store inventory and minimize
errors in inventory handling. In addition, the Company has consignment
and other just-in-time inventory programs in place with a number of its
suppliers pursuant to which such suppliers consign or deliver materials
and components to the Company for purchase by the Company as and if
necessary to meet manufacturing requirements.
PCBA Manufacturing and Test Services
The majority of the products assembled by MCMS utilize SMT interconnection
technology or a combination of SMT and PTH interconnection technologies. In
addition, the Company has expertise in such advanced technologies as COB, MCM
and BGA. The Company employs a standard manufacturing platform, which
incorporates "pick and place" equipment manufactured by Fuji Corporation, at its
Nampa, Durham, Penang and Colfontaine facilities. This standardization allows
the Company to deliver uniform products on a worldwide basis to its OEM
customers. The Company also offers a comprehensive range of test services,
including automated in-circuit testing of PCBAs, as well as functional and
environmental stress testing of both PCBAs and system level assemblies. MCMS, in
conjunction with its customers, either fabricates or procures test hardware and
develops application-specific test software.
50
<PAGE> 58
Memory Module Assembly
The Company is a leading provider of memory modules which it primarily
supplies to MTI, the largest manufacturer of DRAM in the United States. MCMS
manufactures standard and custom memory modules for MTI on a consignment basis
and for other customers on a turnkey basis. The Company has its roots in memory
module production, and is one of a limited number of EMS providers with
significant memory module design, assembly and test capabilities. The Company
has used its expertise in memory modules to gain access to new customers. Once
the Company has been selected as a provider of memory modules to an OEM, it
seeks to leverage and expand the relationship to include a broader set of
services.
System Level Assembly/Box Build
System level assembly, or box build, is the connection of two or more
sub-assemblies (such as PCBAs) into a finished enclosure. The Company
specializes in the system level assembly of Internet Protocol switches, color
Laserjet printers, network printers and Internet servers. The Company's system
level assembly operations are staffed with dedicated personnel from various
functional areas including engineering, manufacturing management, debug and
training. The Company offers both prototype and production volume system level
assembly capabilities. MCMS can produce small quantity production runs and
prototypes within two weeks of receipt of materials and specification
documentation and can transition to volume production as soon as one week later.
End-Order Fulfillment
The Company's relationship with several of its OEM customers extends beyond
manufacturing to encompass the shipment from the Company's factory floor of
finished products directly to the OEM's customers. Prior to shipment, the
Company performs all quality and testing functions to ensure that the products
conform to the customer's standards of functionality, performance and
durability. In addition, the Company possesses the flexibility, manufacturing
expertise and information systems necessary to custom configure assemblies to
meet the customer's unique requirements. The Company currently provides
end-order fulfillment services for customers such as Fore and Sequent.
OPERATIONS AND FACILITIES
The Company's strategy is to standardize its worldwide operations around
common equipment, information systems, procedures and information technology.
Such standardization reduces the complexity of the Company's operations, permits
the Company to shift production from facility to facility to maximize capacity
without significant equipment modification and enables the Company to
accommodate its customers' choice of facilities.
The Company currently operates 21 high-speed, fully-automated SMT assembly
lines at its Nampa, Durham and Penang facilities. Each of these facilities is
ISO 9001 certified and employs standard hardware platforms with Fuji front-end
placement and Hewlett-Packard back-end test systems. The Company's newly
acquired Colfontaine, Belgium facility contains four SMT assembly lines and
utilizes Fuji front-end placement systems. The Company intends to conform the
other equipment and processes in Colfontaine to those in place at the Company's
other three facilities.
51
<PAGE> 59
The following table sets forth certain information regarding the Company's
facilities as of February 26, 1998:
<TABLE>
<CAPTION>
APPROX. SMT OWNED/ COMMENCED CAPACITY
LOCATION SQ. FT. LINES LEASED(1) OPERATIONS UTILIZATION SERVICES
- -------- ------- ----- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Nampa, Idaho............... 216,000 13(2) Owned Sept. 96 78% Complex PCBA, memory
module and system
level assembly,
quick-turn
prototyping and
end-order
fulfillment
Durham, North Carolina..... 110,000 6 Leased Apr. 95 90% Complex PCBA, memory
module and system
level assembly and
end-order
fulfillment
Penang, Malaysia........... 20,000 2 Leased Dec. 96 50% Memory module
assembly
Colfontaine, Belgium(3).... 85,000 5 Owned Dec. 97 65% Complex PCBA and
memory module
assembly
------- --
Total................. 381,000 26
</TABLE>
- ---------------
(1) The Durham lease expires in December 2005. The Penang lease expires in
October 1998. The Company believes it will be able to renew the Penang lease
or obtain an alternative facility on terms no less favorable to the Company.
(2) Includes one line dedicated to quick-turn prototypes.
(3) Acquired from Alcatel in November 1997.
The Company maintains an integrated information technology system with
enterprise resource planning and shop floor and defect tracking. In October
1997, the Company began implementation of the Baan ERP System to, among other
things, accommodate the future growth and requirements of the Company and to
ensure that the Company's business management system is Year 2000 compliant.
SALES AND MARKETING
Customer and Revenue Profile
The Company targets customers who: (i) command a position of technology
leadership; (ii) focus on the high-end of their respective markets; (iii) share
MCMS' commitment to quality; (iv) possess significant volume growth
opportunities; (v) offer the possibility of multiple project or product
prospects for MCMS and (vi) are interested in a long-term, strategic
partnership.
During fiscal 1997 the Company made considerable advances toward its
objective of increasing the percentage of its net sales attributable to
telecommunications and networking OEMs. Such customers accounted for
approximately 59% of fiscal 1997 net sales versus approximately 10% in fiscal
1996. In fiscal 1997, the Company provided manufacturing services for 22 active
customers. As is typical for an EMS provider, a few of the Company's major
customers represent a significant percentage of its net sales. During fiscal
1997, the Company had two customers which accounted for over 10% of the
Company's net sales. Cisco represented 32.4% and Fore represented 20.1% of the
Company's net sales, respectively, in fiscal 1997. No other customer accounted
for more than 10% of the Company's net sales in 1997. International net sales
were approximately $13.5 million, $54.2 million and $20.8 million, or
approximately 7%, 15% and 7% of total net sales, in fiscal 1995, 1996 and 1997,
respectively. The Company had no sales attributable to foreign operations for
the fiscal years 1995 and 1996. In fiscal 1997, net sales attributable to
Foreign Subsidiaries totaled $6.0 million or 2% of total net sales.
International sales are primarily denominated in United States dollars.
52
<PAGE> 60
The following table illustrates several of the Company's OEM customers and
the services performed by MCMS.
<TABLE>
<CAPTION>
CUSTOMER'S SERVICES PROVIDED
CUSTOMER NAME INDUSTRY SEGMENT BY MCMS CUSTOMER END USES
- ------------- ------------------ --------------------- --------------------------------
<S> <C> <C> <C>
Cisco Data Networking Complex PCBAs Network Routers, Port Adapters
and Flash Modules
Fore Data Networking Complex PCBAs, Box ATM Switches, LAN/WAN Products
Build and
End-Order Fulfillment
Tektronix Graphics Systems Complex PCBAs Video Production Systems
MTI Memory Components Memory Modules Personal Computer Systems
Sequent Computer Systems Box Build and Front-end Control Systems
End-Order Fulfillment
Alcatel Telecommunications Complex PCBAs Telecommunications Devices
</TABLE>
The Company's backlog as of February 26, 1998 was approximately $86.7
million. Backlog consists of purchase orders believed to be firm and that are
expected to be filled within the next three months. Because of variations in the
timing of orders, delivery intervals, customer and product mix and delivery
schedules, the Company's backlog as of any particular date may not be
representative of actual sales for any subsequent period.
Commitment to Customer Quality
MCMS is committed to delivering value-added solutions to its OEM customers'
needs at a standard that meets or exceeds their requirements. The Company's
quality philosophy stresses the achievement of excellence through a process of
continuous improvement. MCMS makes each functional area responsible for its own
quality control and for initiating corrective action if needed. The Company's
comprehensive quality assurance procedures include emulating the customer's
requirements with respect to electrical and mechanical specifications,
workmanship and packaging.
Sales and Marketing Organization
The Company markets its contract manufacturing services through a direct
sales force as well as independent manufacturers' sales representatives
throughout the world. The Company believes that this combination provides a
cost-effective means for the Company to market its services, as compensation to
its representatives is commission-based. The Company's marketing and sales
organization consists of five marketing employees, nine regional managers and 25
program managers. Regional managers have primary responsibility for identifying
and developing new customer accounts. They manage the Company's independent
sales representatives in their respective territories, working closely with
representatives to define effective account development strategies. In addition,
the Company sells its services through independent manufacturing representatives
located in the United States, Europe and Asia.
Once a new account is brought in, a program manager is assigned to each
customer and is responsible for monitoring the progress of existing projects.
Because the Company's execution to customers' expectations has been its most
effective marketing tool, the program manager plays a critical role, using his
or her daily interface with the customer to identify and pursue additional
revenue opportunities within the existing customer base.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company concentrates its engineering, research and development efforts
principally on developing manufacturing process technologies to meet specific
customer needs. The Company also conducts research and development in response
to general technology trends in the EMS market, realizing these developments
will likely become specific customer requirements in the future. As of February
26, 1998, the Company had approximately 194 employees engaged in PCBA design,
process, product and test engineering and product and equipment technical
support.
53
<PAGE> 61
The Company's leading-edge volume production technologies include COB, MCM,
BGA, highly accelerated life testing ("HALT") and highly accelerated stress
screening ("HASS"). COB technology utilizes an unpackaged semiconductor die that
is attached directly onto a PCB and then sealed with epoxy. BGA technology is a
manufacturing technique by which a component supplier attaches an array of
"solder balls" in a matrix across the bottom of unpackaged die rather than
attaching leads around the perimeter of the die. HALT stresses the PCBAs in
regards to temperature and vibration in order to determine their field
environment failure limits. HASS takes the HALT processes' determined limits and
establishes a lower level of environmental stress for simulating the PCBAs'
durability and performance in the field. Current technologies under development
include no-clean wave soldering, micro-BGA, flip chip assembly and high speed
testing and electrical design simulation of memory modules.
INTELLECTUAL PROPERTY
As of February 26, 1998, MEI held (on behalf of the Company) 11 patents and
43 patent applications on file with the U.S. Patent and Trademark Office.
Pursuant to the Patent Agreement (as defined), MEI has agreed to assign these
patents and patent applications to the Company prior to the closing date of the
Recapitalization. See "Certain Transactions -- Patent and Invention Disclosure
Assignment and License Agreement." Though the Company considers these patents
and patent applications important to its business, no patent or patent
application is material to the operation of the business. With the exception of
software, the Company does not license intellectual property rights from any
third party. MCMS and the Company's logo are trademarks of the Company.
COMPETITION
The EMS industry is intensely competitive and highly fragmented.
Competition consists of numerous regional, national and international
participants as well as, indirectly, the manufacturing operations of a large
number of OEMs who elect to perform their manufacturing internally rather than
through an outside EMS firm. Competition is based principally on customer
service, quality, dependability and price. MCMS competes directly with a number
of EMS firms, including Jabil Circuits, Inc., Solectron Corporation, Flextronics
International, Ltd., SCI Systems, Inc. and Celestica International Holdings Inc.
ENVIRONMENTAL
The Company's operations are subject to regulatory requirements and
potential liabilities arising under certain federal, state, local and foreign
environmental laws and regulations governing, among other things, air emissions,
waste water discharge, waste storage, treatment and disposal, and remediation of
releases of hazardous materials. In the course of its operations, MCMS handles
limited amounts of materials that are considered hazardous under applicable law.
The Company believes that it is in substantial compliance with all applicable
environmental requirements, including without limitation, those governing the
handling, storage and disposal of such materials and is aware of no outstanding
legal proceedings against it arising under such laws. Environmental capital
expenditures during 1996 and 1997 have not been material and are not expected to
increase significantly in 1998.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of its business. The Company does not expect that
these matters will have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of February 26, 1998, the Company had 1,547 full-time employees. Except
for employees at its Colfontaine facility, none of the Company's employees are
represented by a labor union or any collective bargaining agreement. The
Company's Belgian operations are subject to labor union agreements covering both
white-collar and blue-collar employees that set standards for, among other
things, the maximum number of working hours and compensation levels. The Company
believes that its employee relations are satisfactory.
54
<PAGE> 62
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages as of April 1, 1998 and a
brief account of each person who is a director or executive officer of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert F. Subia................................. 35 President, Chief Executive Officer and
Director
Chris J. Anton.................................. 35 Vice President, Finance and Chief Financial
Officer
Jess Asla....................................... 35 Vice President, Operations
John P. McCarvel................................ 41 Vice President, Strategic Business
Development
R. Stephen Cheheyl.............................. 52 Director
Finis F. Conner................................. 54 Director
John A. Downer.................................. 40 Director
C. Nicholas Keating............................. 56 Director
Michael E. Najjar............................... 31 Director
Mark Rossi...................................... 41 Director
</TABLE>
ROBERT F. SUBIA joined MTI in 1986 in the Production Control department. He
served as a Regional Sales Manager for MTI from 1989 until February 1993. In
February 1993, Mr. Subia joined MCMS as Director of Sales and held this position
until August 1994, when he was appointed Vice President, Sales. In April 1995,
Mr. Subia was appointed Chairman of the Board of Directors, President and Chief
Executive Officer of MCMS. Mr. Subia was appointed a director of MEI in October
1995. Mr. Subia holds a Bachelor of Science in Business Administration with an
emphasis in Marketing from Boise State University.
CHRIS J. ANTON joined MCMS in July 1996 from Futura Corporation where he was
Chief Financial Officer and now serves as Vice President, Finance and Chief
Financial Officer of the Company. Prior to joining MCMS, Mr. Anton also held the
positions of President and General Manager of Image National, Inc., and Vice
President of Engineering and New Product Development at Morrison Knudsen
Corporation. Mr. Anton's background also includes five years of industry
experience in financial and technical positions with Hewlett Packard Company and
MTI. Mr. Anton received a Bachelor of Science degree in Chemistry from the
University of Idaho and an M.B.A. from the Columbia University School of
Business.
JESS ASLA joined MTI in June 1984 in the Quality Assurance Department. He worked
as a Process Engineer for MTI in the clean room assembly area for two years. He
later served as the Process Engineer Manager for MTI's Memory Applications Group
from 1988 until July 1994 when he was named Director of Engineering for MCMS. In
April 1995, Mr. Asla was appointed Vice President, Operations and a member of
the Board of Directors of MCMS. Mr. Asla holds a Bachelor of Mechanical
Engineering from the University of Notre Dame.
JOHN P. MCCARVEL joined MCMS in March 1996 from Anthem Electronics Inc., where
he was Central Region Manager for Value Added Programs. Prior to Anthem, he
spent five years at Dovatron International, Inc. where he held various senior
management positions, including President of Western Operations, Vice President
of Sales, Vice President of Sales and Marketing for Europe, and Vice President
of Far East Operations. Mr. McCarvel also spent six years at Adaptec Inc.
holding various management positions, the last being Director of Singapore
Operations. Mr. McCarvel holds a Bachelor of Science degree in Business from
Carroll College in Helena, Montana.
R. STEPHEN CHEHEYL became a Director of the Company in connection with the
Recapitalization. Mr. Cheheyl served until December 1995 as an Executive Vice
President of Bay Networks, Inc. ("Bay Networks"), when Bay Networks was formed
through the merger of Wellfleet Communications, Inc. ("Wellfleet") and Synoptics
Communications, Inc. From December 1990 to October 1994, Mr. Cheheyl served as
Senior Vice President of Finance and Administration of Wellfleet. He also serves
as a director of Auspex Systems, Inc.,
55
<PAGE> 63
ON Technology Corporation, Infinium Software, Inc., and Sapient Corporation. Mr.
Cheheyl received an A.B. from Dartmouth College and an M.B.A. from Northwestern
University.
FINIS F. CONNER became a Director of the Company in connection with the
Recapitalization. Until 1996, Mr. Conner was Chairman of the Board and Chief
Executive Officer of Conner Peripherals, Inc. which he founded in 1986. A
leading manufacturer of 3 1/2" Winchester disk drives used in personal
computers, Conner Peripherals was merged with Seagate Technology, Inc.
("Seagate") in February 1996. Mr. Conner was a co-founder of Seagate, and served
as its Vice-Chairman from 1979 to 1985. Mr. Conner has been Chairman of the
Board of Golf Media, Inc., a company engaged in the design of Internet web sites
for the promotion of golf products, and since February 1996, Mr. Conner has been
a principal of the Conner Group, an independent consulting organization. Mr.
Conner is also a director of BoxHill Systems Corporation.
JOHN A. DOWNER became a Director of the Company in connection with the
Recapitalization. Since December 1996, Mr. Downer has served as a Managing
Director of Cornerstone. From 1989 to December 1996, Mr. Downer was a partner of
various venture capital funds managed by Prudential Equity Investors, Inc.
("Prudential"). Mr. Downer is also a director of StorMedia Incorporated and
International Manufacturing Services, Inc. Mr. Downer received an A.B., M.B.A.
and J.D. from Harvard University.
C. NICHOLAS KEATING became a Director of the Company in connection with the
Recapitalization. Mr. Keating has been an independent business advisor since
1993 to a number of companies principally in the networking, software,
semiconductor and imaging industries. From 1987 to 1993, Mr. Keating was Vice
President of Network Equipment Technologies, a wide-area networking company. Mr.
Keating currently serves on the Boards of Directors of E-Net Corporation, an
enterprise software supplier to the financial services industry, and LIC Energy,
a European simulation systems company serving the oil and gas transmission
market. Mr. Keating holds a B.A. and an M.A. from American University and was a
former Fulbright Scholar.
MICHAEL E. NAJJAR became a Director of the Company in connection with the
Recapitalization. Mr. Najjar has served as a Managing Director of Cornerstone
since February 1997. From 1996 to 1997, Mr. Najjar was a partner at Advanta
Partners LP, a private equity firm. Prior to 1996, Mr. Najjar worked in the
Corporate Finance Department of Donaldson, Lufkin & Jenrette Securities
Corporation. Mr. Najjar received a B.A. from Cornell University and an M.B.A.
from The Wharton School at The University of Pennsylvania.
MARK ROSSI became a director of the Company in connection with the
Recapitalization. Mr. Rossi has served as a Senior Managing Director of
Cornerstone since December 1996. From 1984 to 1996, Mr. Rossi was a partner of
various venture capital funds managed by Prudential. Mr. Rossi is also a
director of StorMedia Incorporated, Maxwell Technology, Inc. and International
Manufacturing Services, Inc. Mr. Rossi holds a B.A. from Saint Vincent College
and an M.B.A. from Northwestern University.
56
<PAGE> 64
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation for
fiscal 1997 for the Chief Executive Officer and the other executive officers of
the Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS/SARS(#)(2) COMPENSATION(3)
--------- -------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert F. Subia............... 206,538 172,082 12,428 35,000 4,500
President and Chief
Executive Officer
Chris J. Anton................ 90,000 18,005 -- 22,500 2,262
Vice President, Finance and
Chief Financial Officer
Jess Asla..................... 153,269 132,697 7,752 20,000 4,154
Vice President, Operations
John P. McCarvel.............. 125,288 47,339 -- 20,000 3,154
Vice President, Strategic
Business Development
</TABLE>
- ---------------
(1) Represents amounts paid to Named Executive Officers for accrued vacation
time.
(2) Represents options issued pursuant to the MEI Plan (as defined below).
(3) Represents amounts paid on behalf of each of the Named Executive Officers in
respect of MEI's defined contribution plan.
The following table sets forth certain information regarding the options
granted to the Named Executive Officers during fiscal 1997 pursuant to MEI's
1995 Stock Option Plan (the "MEI Plan"). Although Messrs. Subia and Asla have
been granted options pursuant to MTI's 1985 and 1994 Incentive Stock Option
Plans (the "MTI Plans") in the past, no options were granted pursuant to the MTI
Plans to any of the Named Executive Officers in fiscal 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
MEI PLAN(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(3)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
---- ------------ -------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Subia.............. 30,447 1.6 18.67 1/28/03 308,790 591,339
4,553 0.2 21.96 1/28/03 31,177 73,429
Chris J. Anton............... 7,500 0.4 19.88 10/28/02 -- 45,338
14,808 0.8 21.96 1/28/03 101,398 238,816
192 * 18.67 1/28/03 1,947 3,729
Jess Asla.................... 13,896 0.7 21.96 1/28/03 95,153 224,108
6,104 0.3 18.67 1/28/03 61,906 118,551
John P. McCarvel............. 13,980 0.7 21.96 1/28/03 95,728 225,462
6,020 0.3 18.67 1/28/03 61,054 116,920
</TABLE>
- ---------------
* Indicates grant of less than 0.1% of total options granted under the MEI
Plan in fiscal 1997.
(1) Options issued pursuant to the MEI Plan vest in an amount of 20% per year on
each of the first five anniversaries of the date of grant of such options.
(2) Represents percentage of options granted to employees of both MEI and the
Company.
(3) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Commission and are not intended to be a
forecast of MEI's stock price. Actual gains, if any, on stock option
exercises are dependent on the future performance of the MEI stock. There
can be no assurance that the amounts reflected in this table will be
achieved. In accordance with rules promulgated by the Commission, Potential
Realizable Value is based upon the exercise price of the options.
57
<PAGE> 65
The following table sets forth certain information regarding options
exercised and the number and value of unexercised options issued pursuant to the
MTI Plans and the MEI Plan which were held by the Named Executive Officers at
August 28, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
MTI PLANS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT AUGUST 28, 1997 AT AUGUST 28, 1997
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert F. Subia........ 2,176 $29,964 3,000/7,356 $123,007/$269,945
Jess Asla.............. -- -- 12,890/6,496 $499,284/$235,284
</TABLE>
MEI PLAN
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT AUGUST 28, 1997 AT AUGUST 28, 1997
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert F. Subia........ -- -- 13,000/77,000 $51,926/$184,025
Chris J. Anton......... -- -- 500/24,500 $3,019/$12,075
Jess Asla.............. -- -- 3,000/32,000 $12,825/$51,300
John P. McCarvel....... -- -- 4,000/36,000 $21,700/$86,800
</TABLE>
In connection with the Recapitalization, Messrs. Subia and Asla were
entitled to exercise vested options to purchase MTI common stock (the "MTI
Options") issued pursuant to the MTI Plans within 30 days of the closing of the
Recapitalization. Messrs. Subia and Asla exercised 8,174 and 17,204 MTI Options,
respectively (with a value of $210,502 and $456,231, respectively) within such
30-day period, representing the vested MTI Options held by Messrs. Subia and
Asla. All unvested MTI Options held by Messrs. Subia and Asla were purchased by
MEI on or about the 31st day after the closing of the Recapitalization (the
"Purchase Date") at an aggregate purchase price of $28,410 for each of Messrs.
Subia and Asla, representing the difference between (a) $25.00 multiplied by the
number of unvested MTI Options held by each and (b) the aggregate exercise price
for all such unvested MTI Options. The Named Executive Officers also held as of
the closing of the Recapitalization, certain options to purchase MEI common
stock (the "MEI Options") issued pursuant to the MEI Plan. In connection with
the Recapitalization, the Named Executive Officers were entitled to exercise
vested MEI Options within 30 days of the closing of the Recapitalization.
Messrs. Subia, Anton and McCarvel exercised 7,203, 500 and 2,000 MEI Options,
respectively, within such 30-day period. Unvested MEI Options were purchased
from Messrs. Subia and Asla by MEI following the Recapitalization for $200,000
and $70,000, respectively. Vested MEI options not exercised within such 30-day
period were cancelled in their entirety.
EMPLOYMENT AGREEMENTS
In connection with the Recapitalization, the Company entered into
employment agreements with each of its Named Executive Officers (the "Employment
Agreements"). The terms of the Employment Agreements provide that (i) Robert F.
Subia will serve as the President and Chief Executive Officer; (ii) Chris J.
Anton will serve as Vice President, Finance and Chief Financial Officer; (iii)
Jess Asla will serve as Vice President, Operations; and (iv) John P. McCarvel
will serve as Vice President, Strategic Business Development, all for a period
that will end on the third anniversary of the closing of the Recapitalization
(the "Employment Period"); provided that the Employment Period will
automatically terminate upon the Named Executive Officer's resignation
(including if the Company Constructively Terminates Executive), death or
permanent disability or incapacity, or upon termination by the Company, with or
without Cause. Under the Employment Agreements, the Named Executive Officers
will: (i) receive an annual base salary (as set by the Board or compensation
committee thereof but subject to a minimum amount); (ii) be eligible to
participate in all of the Company's employee benefit programs for which senior
executive employees of the Company and its
58
<PAGE> 66
subsidiaries are generally eligible, including the Company's 1998 Stock Option
Plan, with any awards under such plans to be set by the Board or compensation
committee; and (iii) will receive certain other employee benefits. Under the
terms of the Employment Agreements, the base salaries for Messrs. Subia, Asla,
Anton and McCarvel are $250,000, $175,000, $150,000 and $150,000, respectively.
If the Employment Period is terminated by the Company without Cause or the
Company Constructively Terminates Executive, the Named Executive Officer is
entitled to receive his base salary plus all employee benefits which the Named
Executive Officer is receiving on the termination date for 18 months following
such termination in the case of Robert F. Subia, and 12 months following such
termination for the other Named Executive Officers. If the Employment Period
terminates upon the Named Executive Officer's death or permanent disability, the
Named Executive Officer (or his spouse or other beneficiary) will be entitled to
receive his base salary for 12 months following such termination. If the
Employment Period terminates upon the Named Executive Officer's resignation or
incapacity, or is terminated by the Company for Cause, the Executive Officer
will be entitled to receive his base salary through the date of termination.
Under the Employment Agreements, the Named Executive Officers will agree not to
(i) compete with the Company during the period in which he is employed by the
Company and for 18 months thereafter in the case of Robert F. Subia, and 12
months thereafter for the other Named Executive Officers (the "Noncompete
Period"); (ii) disclose any confidential information unless and to the extent
such information becomes generally known to and available for use by the public
other than as a result of the Named Executive Officer's acts or omissions; (iii)
solicit or hire any employee of the Company or its subsidiary during the
Noncompete Period; and (iv) induce or attempt to induce any customer, supplier,
licensee, licensor, franchisee or other business relation of the Company or any
subsidiary to cease doing business with the Company or its subsidiaries during
the Noncompete Period. In addition, the Named Executive Officers will agree to
disclose to the Company any and all Work Product and to acknowledge that such
Work Product will be the property of the Company and its subsidiaries.
In connection with the Recapitalization, each of Robert F. Subia and Jess
Asla entered into an agreement with MEI (together, the "Termination
Agreements"), effective as of the closing date of the Recapitalization,
terminating his employment relationship with MEI. Pursuant to the Termination
Agreements, Messrs. Subia and Asla received lump-sum payments of $1,026,223 and
$373,320, respectively. In consideration for such payments, Messrs. Subia and
Asla (i) forfeited all of their unvested options to purchase MEI stock which
were granted under the MEI Plan, (ii) released MEI from any future claims
relating to their employment with MEI, (iii) agreed to comply with certain
non-disclosure obligations, (iv) agreed to comply with the noncompetition and
nonsolicitation provisions of the Recapitalization Agreement and (v) agreed that
in the event his employment with the Company is terminated, he will comply until
December 21, 1999 with the noncompetition and nonsolicitation obligations set
forth in the Termination Agreements.
STOCK OPTION PLAN
In order to provide financial incentives for certain of the Company's or
its subsidiaries' senior executives and other employees, the Company will adopt
a stock option plan pursuant to which it will be able to grant options to
purchase Class A Common to senior executives and other employees of the Company
and its subsidiaries. Under the stock option plan, the Company will also be able
to grant options to purchase Class A Common to the Company's Consultants. Such
options are expected to be granted periodically and to vest and become
exercisable (i) upon certain threshold dates and/or (ii) once certain financial
performance thresholds of the Company have been reached. Upon an employee's
termination with the Company, all of the employee's unvested options will
expire, the exercise period of all the employee's vested options will be reduced
to a period ending no later than 30 days after such employee's termination, and
if such termination occurs prior to an initial public offering of the Company's
Class A Common, the Company shall have the right to repurchase the Class A
Common of the Company held by the employee.
59
<PAGE> 67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 26, 1998
regarding the beneficial ownership of (i) capital stock (other than Senior
Preferred Stock) held by each person (other than directors and executive
officers of the Company) known to the Company to own more than 5% of the
outstanding capital stock (other than the Senior Preferred Stock) of the
Company, (ii) capital stock held by each director and executive officer of the
Company and (iii) capital stock held by all directors and executive officers as
a group. To the knowledge of the Company, each of such stockholders has sole
voting and investment power as to the shares shown unless otherwise noted.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED(1)
--------------------------------------------------------------------
CLASS A PERCENT OF CLASS B PERCENT OF CLASS C PERCENT OF
NAME COMMON CLASS A COMMON CLASS B COMMON CLASS C
---- --------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cornerstone Equity Investors IV,
L.P............................ 2,450,000 75.1% 123,529 14.3% -- --
c/o Cornerstone Equity
Investors, L.L.C.
717 Fifth Avenue (Suite 1100)
New York, New York 10022
August Capital.................. -- -- -- -- 424,632 48.5%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
BT Investment Partners.......... 245,000 7.5 740,294 85.7 -- --
130 Liberty Street
New York, New York 10006
MEI California, Inc.(2)......... 500,000 15.3 -- -- -- --
c/o Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Oak Investment Funds(3)......... -- -- -- -- 424,632 48.5
c/o Oak Investment Partners
525 University Avenue, Suite
1300
Palo Alto, California 94301
EXECUTIVE OFFICERS AND DIRECTORS
Robert F. Subia................. 14,706 * -- -- -- --
Chris J. Anton.................. 7,353 * -- -- -- --
Jess Asla....................... 11,030 * -- -- -- --
John P. McCarvel................ 3,676 * -- -- -- --
R. Stephen Cheheyl.............. -- -- -- -- 7,353 *
Finis F. Conner................. -- -- -- -- 14,706 1.7
John A. Downer(4)............... 2,450,000 75.1 123,529 14.3 -- --
C. Nicholas Keating............. -- -- -- -- 3,676 *
Michael E. Najjar(4)............ 2,450,000 75.1 123,529 14.3 -- --
Mark Rossi(4)................... 2,450,000 75.1 123,529 14.3 -- --
Directors and executive officers
as a group(4).................. 2,486,765 76.2 123,529 14.3 25,735 2.9
<CAPTION>
SHARES OF PREFERRED STOCK BENEFICIALLY OWNED(1)
------------------------------------------------------------------------
SERIES A PERCENT OF SERIES B PERCENT OF SERIES C PERCENT OF
NAME PREFERRED SERIES A PREFERRED SERIES B PREFERRED SERIES C
---- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cornerstone Equity Investors IV,
L.P............................ 2,450,000 75.1% 123,529 14.3% -- --
c/o Cornerstone Equity
Investors, L.L.C.
717 Fifth Avenue (Suite 1100)
New York, New York 10022
August Capital.................. -- -- -- -- 424,632 48.5%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
BT Investment Partners.......... 245,000 7.5 740,294 85.7 -- --
130 Liberty Street
New York, New York 10006
MEI California, Inc.(2)......... 500,000 15.3 -- -- -- --
c/o Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Oak Investment Funds(3)......... -- -- -- -- 424,632 48.5
c/o Oak Investment Partners
525 University Avenue, Suite
1300
Palo Alto, California 94301
EXECUTIVE OFFICERS AND DIRECTORS
Robert F. Subia................. 14,706 * -- -- -- --
Chris J. Anton.................. 7,353 * -- -- -- --
Jess Asla....................... 11,030 * -- -- -- --
John P. McCarvel................ 3,676 * -- -- -- --
R. Stephen Cheheyl.............. -- -- -- -- 7,353 *
Finis F. Conner................. -- -- -- -- 14,706 1.7
John A. Downer(4)............... 2,450,000 75.1 123,529 14.3 -- --
C. Nicholas Keating............. -- -- -- -- 3,676 *
Michael E. Najjar(4)............ 2,450,000 75.1 123,529 14.3 -- --
Mark Rossi(4)................... 2,450,000 75.1 123,529 14.3 -- --
Directors and executive officers
as a group(4).................. 2,486,765 76.2 123,529 14.3 25,735 2.9
</TABLE>
- ---------------
* Indicates ownership of less than one percent.
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. The Class A
Common entitles the holder to one vote per share and the Class C Common
entitles the holder to two votes per share. The Class B Common is nonvoting.
The Series A Preferred and the Series C Preferred entitle the holder to the
number of votes per share they would be entitled if they had been converted
into Common Stock. The Series B Preferred is nonvoting. See "Description of
Capital Stock."
(2) MEIC is a wholly owned subsidiary of MEI, and MEI is a majority owned
subsidiary of MTI. Accordingly, MEI and MTI may be deemed to beneficially
own shares owned by MEIC.
(3) Amounts shown reflect the aggregate number of shares of capital stock of the
Company held by Oak Investment Partners VII, Limited Partnership, Oak VII
Affiliate Fund, Limited Partnership and Norman Nie.
(4) Messrs. Downer and Najjar are each Managing Directors and Mr. Rossi is a
Senior Managing Director of CEI, the sole general partner of Cornerstone.
Accordingly, Messrs. Downer, Najjar and Rossi may be deemed to beneficially
own shares owned by Cornerstone. Each such person disclaims beneficial
ownership of any such shares in which he does not have a pecuniary interest.
60
<PAGE> 68
CERTAIN TRANSACTIONS
RECAPITALIZATION AGREEMENT
The Recapitalization Agreement contains customary provisions for such
agreements, including representations and warranties with respect to the
condition and operations of the business, covenants with respect to the conduct
of the business prior to the closing date of the Recapitalization and various
closing conditions, including the execution of a transitional services
agreement, registration rights agreement and stockholders agreement, the
obtaining of financing, the expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the continued accuracy of the representations and warranties.
Pursuant to the Recapitalization Agreement, MEI and MEIC agreed to
indemnify Cornerstone against any and all damages resulting from any
misrepresentation or breach of warranty of MEI, MEIC or the Company contained in
the Recapitalization Agreement, a claim for which is made (in most cases) no
later than one year after the closing date of the Recapitalization. The
indemnification obligations of MEI and MEIC under the Recapitalization Agreement
are generally subject to a $1.0 million minimum aggregate threshold amount and
limited to an aggregate payment of no more than $13.6 million.
In addition, MEI and MEIC have agreed for a period of two years after the
closing date of the Recapitalization not to compete with the Company in the
business of design, assembly and testing of (i) complex PCBAs for third-party
electronics OEMs, or (ii) system level assembly when acting solely and strictly
in the capacity of a subcontractor of an OEM. Notwithstanding the foregoing,
MEI's advanced engineering group is not prohibited from conducting activities
consistent with the activities that it conducted on or prior to December 21,
1997. MEI and MEIC have also agreed for a period of two years after the closing
date of the Recapitalization not to solicit the employment of employees of the
Company. Similarly, except as to certain agreed upon individuals, the Company
has agreed not to solicit the employment of employees of MEI for the same
two-year period.
MEMORY MODULE AGREEMENT
MTI has entered into an agreement with the Company, effective as of the
closing of the Recapitalization, to purchase from the Company for a period of
two years after the closing date of the Recapitalization at least 50% of its
ISMM requirements of up to 1,200,000 Equivalent Units per week. In addition, MTI
has agreed for a period of one year from the closing date of the
Recapitalization not to engage in a business the primary purpose of which is to
provide contract manufacturing services for the assembly of custom printed
circuit assemblies for OEMs or third parties without the written consent of the
Company. In exchange, the Company has agreed to charge MTI the lesser of (i) the
lowest price it charges to its other customers for equivalent products under
similar circumstances, or (ii) the average price quoted by other manufacturers
for equivalent products under similar circumstances. It is contemplated that MTI
will provide nonbinding forecasts of the upcoming requirements for a 13 week
rolling period. Under the terms of the Memory Module Agreement, MTI will consign
sufficient raw materials to the Company to support MTI's memory module
requirements. This consignment relationship should insulate the Company from
fluctuations in the pricing of such raw materials, including DRAM. The Memory
Module Agreement automatically renews for successive one-year periods after the
initial two-year term unless either party provides written notice of its
intention to terminate the contract. The Memory Module Agreement does not
require MTI to purchase memory modules exclusively from the Company.
PATENT AND INVENTION DISCLOSURE ASSIGNMENT AND LICENSE AGREEMENT
In connection with the Recapitalization Agreement, MCMS and MEI entered
into a Patent and Invention Disclosure Assignment and License Agreement (the
"Patent Agreement"). Pursuant to the Patent Agreement, MEI assigned certain
patents, patent applications and invention disclosures to MCMS, and MCMS has
granted MEI and its affiliates a non-exclusive, paid-up, worldwide license to
practice the inventions covered by the patents, patent applications and
invention disclosures, including the right to make,
61
<PAGE> 69
have made, use, offer for sale, sell and lease products that would otherwise
infringe the patents. The Patent Agreement is perpetual but may be terminated by
either party on 90 days written notice in the event the other party is in
material breach and does not cure the breach within such 90 day period.
KNOW-HOW LICENSE AGREEMENT
In connection with the Recapitalization Agreement, MCMS and MEI entered
into an agreement (the "Know-How Agreement") pursuant to which MEI granted to
MCMS a non-exclusive, paid-up, worldwide license to use in its business any
trade secrets and know-how conceived by MCMS prior to the closing or utilized by
MCMS as of the closing which relate to its business. The Know-How Agreement will
be perpetual but may be terminated by either party on 90 days written notice in
the event the other party is in material breach and does not cure the breach
within such 90 day period.
FORBEARANCE AGREEMENT
In connection with the Recapitalization Agreement, MCMS and MTI entered
into an agreement (the "Forbearance Agreement") pursuant to which MTI agreed to
forbear from taking any action or instituting any claim or other legal
proceeding against MCMS or its subsidiaries with respect to their use of any MTI
trade secrets, know-how or technology that was developed in conjunction with,
with the input of or at the request of MCMS and which is used by MCMS as of the
closing in the conduct of its business. The Forebearance Agreement does not
apply to (i) semiconductor manufacturing, processing and packaging technology
(including BGA or KGD technology), (ii) the testing or assembly of semiconductor
components for sale by MCMS of such components other than as part of a memory
module and (iii) technology developed by MCMS at MTI's request and expense for
use in association with the design, assembly and testing of products
manufactured by MCMS for MTI. The Forebearance Agreement shall remain in effect
until terminated by both MTI and MCMS.
MANAGEMENT SERVICES AGREEMENT
In connection with the Recapitalization, the Company entered into a
Management Services Agreement with CEI pursuant to which CEI agreed to provide:
(i) general management services; (ii) assistance with the identification,
negotiation and analysis of acquisitions and dispositions; (iii) assistance with
the negotiation and analysis of financial alternatives; and (iv) other services
agreed upon by the Company and CEI. In exchange for such services, CEI will
receive: (i) an annual management fee of $250,000, plus reasonable out-
of-pocket expenses (payable quarterly); (ii) a transaction fee in an amount
equal to 1.0% of the aggregate transaction value in connection with the
consummation of any material acquisition, divestiture, financing or refinancing
by the Company or any of its subsidiaries; and (iii) a one-time transaction fee
of $2,710,000 upon the consummation of the Recapitalization. The Management
Services Agreement has an initial term of five years, subject to automatic
one-year extensions unless the Company or CEI provides written notice of
termination.
TRANSITION SERVICES AGREEMENT
In connection with the Recapitalization, the Company entered into the
Transition Services Agreement with MTI and MEI. Pursuant to the Transition
Services Agreement, MTI and MEI agreed to provide a variety of services
(including payroll, financial accounting and benefits, among others) at prices
set forth in the Transition Services Agreement for a period of six months after
the Closing Date, except that MTI agreed to provide the Company with services in
connection with certain proprietary MTI software for a period of 12 months.
Pursuant to the Transition Services Agreement, the Company has agreed to provide
certain accounting and software support services to MEI at prices set forth in
the Transition Services Agreement for a period of six months after the Closing
Date. In connection with the Transition Services Agreement, MTI and MEI have
each granted MCMS a perpetual, royalty-free license to use certain of their
proprietary software and customized software applications in the operation of
the Company's business.
62
<PAGE> 70
STOCKHOLDERS AGREEMENT
Upon the consummation of the Recapitalization, the Company and all of its
stockholders (other than holders of the Preferred Stock), including Cornerstone
and MEIC (collectively, the "Stockholders") entered into a stockholders
agreement (the "Stockholders Agreement"). The Stockholders Agreement: (i)
requires that each of the parties thereto vote all of its voting securities of
the Company and take all other necessary or desirable actions to cause the size
of the Board of Directors of the Company to be established at seven members and
to cause three designees of Cornerstone to be elected to the Board of Directors
of the Company; (ii) grants the Company and Cornerstone a right of first refusal
on any proposed transfer of shares of capital stock of the Company held by MEIC
and any of the other Stockholders; (iii) grants tag-along rights on certain
transfers of shares of capital stock of the Company; (iv) requires the
Stockholders to consent to a sale of the Company to an independent third party
if such sale is approved by certain holders of the then outstanding shares of
voting common stock of the Company; and (v) except in certain instances,
prohibits MEIC from transferring any shares of capital stock of the Company
until the second anniversary of the date of the consummation of the
Recapitalization. Certain of the foregoing provisions of the Stockholders
Agreement will terminate upon the consummation of an initial Public Offering, a
Qualified Public Offering or an Approved Sale.
INVESTOR REGISTRATION RIGHTS AGREEMENT
Upon the consummation of the Recapitalization, the Company and all of its
stockholders (other than holders of the Preferred Stock), including Cornerstone
and MEIC, entered into a registration rights agreement (the "Investor
Registration Rights Agreement"). Under the Investor Registration Rights
Agreement, the holders of a majority of the Cornerstone Investor Registrable
Securities or BT Investment Partners, Inc. and/or its affiliates have the right,
subject to certain conditions, to require the Company to register any or all of
their shares of Common Stock of the Company under the Securities Act at the
Company's expense. In addition, all holders of Registrable Securities are
entitled to request the inclusion of any shares of Common Stock of the Company
subject to the Investor Registration Rights Agreement in any registration
statement at the Company's expense whenever the Company proposes to register any
of its common stock under the Securities Act. In connection with all such
registrations, the Company agreed to indemnify all holders of Registrable
Securities against certain liabilities, including liabilities under the
Securities Act.
OFFICE LEASE
In connection with the Recapitalization Agreement, MEI and the Company
amended the lease, dated as of November 1, 1996 (the "Office Lease"), to provide
MEI the right to occupy approximately 32,000 square feet of the Premises (as
defined in the Office Lease) at the Nampa, Idaho facility until December 31,
1998, unless MEI terminates the lease prior to such time by providing 30 days
written notice to the Company. During the term of the lease, MEI shall pay rent
to the Company for the Premises in an amount of $40,000 per month. Following the
closing of the Recapitalization, MEI vacated approximately 3,625 square feet of
the Premises, and, on April 17, 1998, the Company received written notice from
MEI of MEI's intention to vacate approximately 26,000 square feet of the
Premises, effective May 18, 1998. In addition, upon 60 days written notice to
MEI, the Company shall be entitled to occupy approximately 24,000 square feet of
space currently leased by MEI at the Shilo Property (as defined in the Office
Lease) at a cost to the Company which is no greater than that currently paid by
MEI.
POWER SUBSTATION AGREEMENT
Pursuant to the Recapitalization Agreement, MEI has granted the Company the
ability to draw power from the power substation located on MEI's real property
in Nampa, Idaho. In furtherance thereof, MEI, the Company and Idaho Power
Company ("Idaho Power") have executed an agreement (the "Power Substation
Agreement"), whereby Idaho Power will install the necessary Interconnecting
Facilities (as defined in the Power Substation Agreement) to allow the Company,
for its own account, to be connected to the existing power substation located on
MEI's property. The Company's cost for installing the Interconnecting Facilities
will be in accordance with Rule H (Idaho Power's tariff governing line
installations). In addition, it is
63
<PAGE> 71
anticipated that the Power Substation Agreement will require the Company to pay
a one time fee of up to $300,000 to Idaho Power for acquiring 6,000 kW of
capacity in the power substation, and Idaho Power, in turn, will pay such amount
to MEI. Except for such one time fee, the Company anticipates that its costs for
electrical power will be approximately the same as they were prior to the
Recapitalization.
PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Purchase Agreement with the Initial Purchaser, whereby the Initial Purchaser
agreed to purchase the Notes at 97% of their principal amount and the Preferred
Stock at 96% of their liquidation preference from the Company. Under the terms
of the Registration Rights Agreement between the Company and the Initial
Purchaser, the Company agreed to file a registration statement (the "Exchange
Offer Registration Statement") by April 27, 1998 in connection with an offer to
exchange the Notes for Exchange Notes and Preferred Stock for Exchange Preferred
Stock of the Company. The Company also agreed to use its best efforts to cause
the Exchange Offer Registration Statement to become effective under the
Securities Act by June 26, 1998. Once the Exchange Offer Registration Statement
is declared effective, the Exchange Securities will be offered by the Company in
exchange for the Securities. In the event that applicable law or interpretations
of the staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any other reason the Exchange Offer is not consummated, or if
certain holders of the Securities are not permitted to participate in, or do not
receive the benefit of, the Exchange Offer, the Company will use its best
efforts to cause to become effective a shelf registration statement with respect
to the resale of the Securities and to keep such shelf registration statement
effective until February 26, 2000 or such shorter period ending when all the
Securities have been sold thereunder. The interest rate on the Notes and the
dividend rate on the Preferred Stock are subject to increase under certain
circumstances if the Company is not in compliance with its obligations under the
Registration Rights Agreement.
64
<PAGE> 72
DESCRIPTION OF NEW REVOLVING CREDIT FACILITY
On February 26, 1998, the Company entered into the New Revolving Credit
Facility with various lending institutions and Bankers Trust Company, as agent
(the "Agent"). The New Revolving Credit Facility provides for a revolving credit
facility of $40.0 million, which was undrawn on the closing date of the
Recapitalization (the "Closing Date"). The Company may borrow amounts under the
New Revolving Credit Facility after the Closing Date to finance its working
capital requirements and other general corporate purposes. All commitments will
terminate, and all revolving loans incurred under the New Revolving Credit
Facility will mature, on the fifth anniversary of the Closing Date.
Indebtedness of the Company under the New Revolving Credit Facility is
unconditionally and irrevocably guaranteed by each of the Company's domestic
subsidiaries and is secured by a first priority perfected security interest in:
(i) all capital stock of each direct and indirect subsidiary of the Company
(provided that no more than 65% of the stock of, or other equity interests in,
foreign subsidiaries of the Company shall have to be pledged) and (ii) all other
tangible and intangible assets of the Company and each of its domestic
subsidiaries.
The Company's borrowings under the New Revolving Credit Facility bears
interest, at the Company's option, at: (a) the Base Rate plus 1.75% or (b)
beginning 45 days after the Closing Date (or earlier upon syndication) at the
applicable Eurodollar Rate plus 2.75%.
Amounts borrowed under the New Revolving Credit Facility may be repaid and
reborrowed prior to the final maturity date. The Company is required to pay to
the lenders under the New Revolving Credit Facility a commitment fee equal to
1/2 of 1% per annum, payable in arrears on a quarterly basis, on the daily
average unused portion of the New Revolving Credit Facility. The Company also is
required to pay to such lenders a letter of credit fee with respect to each
letter of credit outstanding equal to 2.75% per annum of the daily stated amount
of such letter of credit, and to each lender issuing a letter of credit, a
facing fee of 1/4 of 1% on the daily stated amount of such letter of credit
(subject to certain minimum amounts) as well as its customary charges in
connection with the issuance of, payment under, or amendment of, such letter of
credit. The Agent and the lenders will receive and continue to receive such
other fees as have been separately agreed upon with the Agent.
The New Revolving Credit Facility requires the Company to meet certain
financial tests, including, without limitation, minimum levels of cash flow (as
defined in the New Revolving Credit Facility), minimum interest coverage and
maximum leverage ratios. The New Revolving Credit Facility also contains certain
covenants which, among other things, limit the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, capital expenditures, prepayments of
other indebtedness (including the Notes and the Exchange Debentures), liens and
encumbrances and other matters customarily restricted in such agreements.
The New Revolving Credit Facility contains customary events of default,
including without limitation, payment defaults, material breaches of
representations and warranties, covenant defaults, cross-defaults, certain
events of bankruptcy and insolvency, judgment defaults, failure of any guaranty
or security document supporting the New Revolving Credit Facility to be in full
force and effect and a change of control of the Company.
65
<PAGE> 73
DESCRIPTION OF SENIOR SUBORDINATED NOTES
The Notes are, and the Exchange Notes will be, issued under the indenture
(the "Indenture"), dated as of February 26, 1998 by and between the Company and
United States Trust Company of New York, as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the TIA as in
effect on the date of the Indenture. A copy of the Indenture may be obtained
from the Company. The definitions of certain capitalized terms used in the
following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to the "Company" include only MCMS, Inc.
and not its Subsidiaries and references to the "Senior Subordinated Notes"
include the Notes and the Exchange Notes.
The Notes are, and the Exchange Notes will be, unsecured obligations of the
Company, ranking subordinate in right of payment to all Senior Debt of the
Company.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Exchange Notes. The
Exchange Notes may be presented for registration or transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate trust
office. The Company may change any Paying Agent and Registrar without notice to
holders of the Exchange Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Exchange Notes at the Trustee's corporate office in
New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
Holders. Any Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes (which they replace) except that (i) the Exchange Notes bear a
Series B designation, (ii) the Exchange Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof and (iii) the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement, including the provision
providing for an increase in interest rate on the Notes in certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes are limited in aggregate principal amount to
$275 million, $145 million of which will be issued as Fixed Rate Notes or Fixed
Rate Exchange Notes, as the case may be, and $30 million of which will be issued
as Floating Rate Notes or Floating Rate Exchange Notes, as the case may be, and
all of which will mature on March 1, 2008. Additional amounts of Senior
Subordinated Notes may be issued in one or more series from time to time,
subject to the limitations set forth under "Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness." Interest on the Senior Subordinated
Notes will be payable semiannually in cash on each March 1 and September 1,
commencing on September 1, 1998, for the period commencing on and including the
immediately preceding Interest Payment Date and ending on and including the day
next preceding the Interest Payment Date (an "Interest Period"), with the
exception that the first Interest Period on the Notes shall commence on and
include February 26, 1998 and end on and include the date the Notes are
exchanged for Exchange Notes (the "Exchange Date") or August 31, 1998 if the
Notes have not been exchanged, and with the exception that the first Interest
Period on the Exchange Notes shall commence on the Exchange Date and end on and
include August 31, 1998. Interest is payable to the persons who are registered
Holders at the close of business on the February 15 and August 15 immediately
preceding the applicable Interest Payment Date.
66
<PAGE> 74
Fixed Rate Notes and Fixed Rate Exchange Notes
Interest on the Fixed Rate Notes accrues, and interest on the Fixed Rate
Exchange Notes will accrue, at the rate of 9 3/4% per annum.
Floating Rate Notes and Floating Rate Exchange Notes
The Floating Rate Notes bear, and the Floating Rate Exchange Notes will
bear, interest at a rate per annum, reset semi-annually, equal to LIBOR (as
defined) plus 4 5/8%, as determined by the Calculation Agent (the "Calculation
Agent"), which shall initially be the Trustee.
"LIBOR," with respect to an Interest Period, shall be the rate (expressed
as a percentage per annum) for deposits in United States dollars for a six-month
period beginning on the second London Banking Day (as defined) after the
Determination Date (as defined) that appears on Telerate Page 3750 (as defined)
as of 11:00 a.m., London time, on the Determination Date. If Telerate Page 3750
does not include such a rate or is unavailable on a Determination Date, LIBOR
for the Interest Period shall be the arithmetic mean of the rates (expressed as
a percentage per annum) for deposits in a Representative Amount (as defined) in
United States dollars for a six-month period beginning on the second London
Banking Day after the Determination Date that appears on Reuters Screen LIBO
Page (as defined) as of 11:00 a.m., London time, on the Determination Date. If
Reuters Screen LIBO Page does not include two or more rates or is unavailable on
a Determination Date, the Calculation Agent will request the principal London
office of each of four major banks in the London interbank market, as selected
by the Calculation Agent, to provide such bank's offered quotation (expressed as
a percentage per annum), as of approximately 11:00 a.m., London time, on such
Determination Date, to prime banks in the London interbank market for deposits
in a Representative Amount in United States dollars for a six-month period
beginning on the second London Banking Day after the Determination Date. If at
least two such offered quotations are so provided, LIBOR for the Interest Period
will be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, the Calculation Agent will request each of three
major banks in New York City, as selected by the Calculation Agent, to provide
such bank's rate (expressed as a percentage per annum), as of approximately
11:00 a.m., New York City time, on such Determination Date, for loans in a
Representative Amount in United States dollars to leading European banks for a
six-month period beginning on the second London Banking Day after the
Determination Date. If at least two such rates are so provided, LIBOR for the
Interest Period will be the arithmetic mean of such rates. If fewer than two
such rates are so provided, then LIBOR for the Interest Period will be LIBOR in
effect with respect to the immediately preceding Interest Period.
"Determination Date," with respect to an Interest Period, will be the
second London Banking Day preceding the first day of the Interest Period.
"London Banking Day" is any day in which dealings in United States dollars
are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
"Representative Amount" means a principal amount of not less than U.S.
$1,000,000 for a single transaction in the relevant market at the relevant time.
"Telerate Page 3750" means the display designated as "Page 3750" on the Dow
Jones Telerate Service (or such other page as may replace Page 3750 on that
service).
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
The Reuters Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service).
The amount of interest for each day that the Floating Rate Notes and
Floating Rate Exchange Notes are outstanding (the "Daily Interest Amount") will
be calculated by dividing the interest rate in effect for such day by 360 and
multiplying the result by the principal amount of the Floating Rate Notes and
Floating Rate Exchange Notes. The amount of interest to be paid on the Floating
Rate Notes and Floating Rate Exchange Notes for each Interest Period will be
calculated by adding the Daily Interest Amounts for each day in the Interest
Paid.
67
<PAGE> 75
All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point rounded upwards (e.g.,
9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)) and all dollar
amounts used in or resulting from such calculations will be rounded to the
nearest cent (with one-half cent being rounded upwards).
The interest rate on the Floating Rate Notes and Floating Rate Exchange
Notes will in no event be higher than the maximum rate permitted by New York law
as the same may be modified by United States law of general application. Under
current New York law, the maximum rate of interest is 25% per annum on a simple
interest basis. This limit may not apply to Floating Rate Notes and Floating
Rate Exchange Notes in which $2,500,000 or more has been invested.
The Calculation Agent will, upon the request of the holder of any Floating
Rate Note or Floating Rate Exchange Note, provide the interest rate then in
effect with respect to the Floating Rate Notes and Floating Rate Exchange Notes.
All calculations made by the Calculation Agent in the absence of manifest error
shall be conclusive for all purposes and binding on the Company and the Holders
of the Floating Rate Notes and Floating Rate Exchange Notes.
REDEMPTION
Optional Redemption. The Fixed Rate Notes are, and the Fixed Rate Exchange
Notes will be, redeemable, at the Company's option, in whole at any time or in
part from time to time, on and after March 1, 2003, upon not less than 30 nor
more than 60 days notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-month
period commencing on March 1 of the year set forth below, plus, in each case,
accrued and unpaid interest thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.............................................. 104.875%
2004.............................................. 103.250%
2005.............................................. 101.625%
2006 and thereafter............................... 100.000%
</TABLE>
The Floating Rate Notes are, and the Floating Rate Exchange Notes will be,
redeemable, at the Company's option, in whole at any time or in part from time
to time, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on March 1 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1998.............................................. 105.000%
1999.............................................. 104.000%
2000.............................................. 103.000%
2001.............................................. 102.000%
2002.............................................. 101.000%
2003 and thereafter............................... 100.000%
</TABLE>
Optional Redemption of Fixed Rate Notes and the Fixed Rate Exchange Notes
upon Public Equity Offerings. At any time, or from time to time, on or prior to
March 1, 2001, the Company may, at its option, use the net cash proceeds of one
or more Public Equity Offerings (as defined below) to redeem the Fixed Rate
Notes and the Fixed Rate Exchange Notes at a redemption price equal to 109.750%
of the principal amount thereof plus accrued and unpaid interest thereon, if
any, to the date of redemption; provided that at least 65% of (x) the principal
amount of Fixed Rate Notes and the Fixed Rate Exchange Notes either originally
issued in the Offering or the Exchange Offer plus (y) any additional Fixed Rate
Notes and the Fixed Rate Exchange Notes issued after the date the Exchange Offer
is consummated pursuant to the Indenture remains
68
<PAGE> 76
outstanding immediately after any such redemption. In order to effect the
foregoing redemption with the proceeds of any Public Equity Offering, the
Company shall make such redemption not more than 120 days after the consummation
of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
The Senior Subordinated Notes will not be entitled to the benefit of any
mandatory sinking fund.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Senior Subordinated Notes are to be
redeemed at any time, selection of such Senior Subordinated Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such Senior Subordinated Notes
are listed or, if such Senior Subordinated Notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Senior
Subordinated Notes of a principal amount of $1,000 or less shall be redeemed in
part; provided, further, that if a partial redemption is made with the proceeds
of a Public Equity Offering, selection of the Fixed Rate Notes or Fixed Rate
Exchange Notes or portions thereof for redemption shall be made by the Trustee
only on a pro rata basis or on as nearly a pro rata basis as is practicable
(subject to DTC procedures), unless such method is otherwise prohibited. Notice
of redemption shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each Holder of Senior Subordinated Notes
to be redeemed at its registered address. If any Senior Subordinated Note is to
be redeemed in part only, the notice of redemption that relates to such Senior
Subordinated Note shall state the portion of the principal amount thereof to be
redeemed. A new Senior Subordinated Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Subordinated Note. On and after the
redemption date, interest will cease to accrue on Senior Subordinated Notes or
portions thereof called for redemption as long as the Company has deposited with
the Paying Agent funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Senior Subordinated Notes is
subordinated in right of payment to the prior payment in full in cash or Cash
Equivalents of all Obligations on Senior Debt. Upon any payment or distribution
of assets of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors or marshaling of assets
of the Company or in a bankruptcy, reorganization, insolvency, receivership or
other similar proceeding relating to the Company or its property, whether
voluntary or involuntary, all Obligations due or to become due upon all Senior
Debt shall first be paid in full in cash or Cash Equivalents, or such payment
duly provided for to the satisfaction of the holders of Senior Debt, before any
payment or distribution of any kind or character is made on account of any
Obligations on the Senior Subordinated Notes, or for the acquisition of any of
the Senior Subordinated Notes for cash or property or otherwise. If any default
occurs and is continuing in the payment when due, whether at maturity, upon any
redemption, by declaration or otherwise, of any principal of, interest on,
unpaid drawings for letters of credit issued in respect of, or regularly
accruing fees with respect to, any Senior Debt, no payment of any kind or
character shall be made by or on behalf of the Company or any other Person on
its or their behalf with respect to any Obligations on the Senior Subordinated
Notes or to acquire any of the Senior Subordinated Notes for cash or property or
otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default have
been cured or waived or have ceased to exist or the Trustee receives notice from
the Representative for the
69
<PAGE> 77
respective issue of Designated Senior Debt terminating the Blockage Period (as
defined below), during the 180 days after the delivery of such Default Notice
(the "Blockage Period"), neither the Company nor any other Person on its behalf
shall (x) make any payment of any kind or character with respect to any
Obligations on the Senior Subordinated Notes or (y) acquire any of the Senior
Subordinated Notes for cash or property or otherwise. Notwithstanding anything
herein to the contrary, in no event will a Blockage Period extend beyond 180
days from the date the payment on the Senior Subordinated Notes was due and only
one such Blockage Period may be commenced within any 360 consecutive days. No
event of default which existed or was continuing on the date of the commencement
of any Blockage Period with respect to the Designated Senior Debt shall be, or
be made, the basis for commencement of a second Blockage Period by the
Representative of such Designated Senior Debt whether or not within a period of
360 consecutive days, unless such event of default shall have been cured or
waived for a period of not less than 90 consecutive days (it being acknowledged
that any subsequent action, or any breach of any financial covenants for a
period commencing after the date of commencement of such Blockage Period that,
in either case, would give rise to an event of default pursuant to any
provisions under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Senior Subordinated Notes, may recover less, ratably, than
holders of Senior Debt.
As of February 26, 1998, the Company had approximately $1.6 million of
Senior Debt outstanding with respect to the Senior Subordinated Notes (exclusive
of unused commitments of $40.0 million under the New Revolving Credit Facility).
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Senior Subordinated Notes pursuant to the offer
described below (the "Change of Control Offer"), at a purchase price equal to
101% of the principal amount thereof plus accrued interest to the date of
purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to either (i) repay in full and terminate all commitments
under all Indebtedness under the New Revolving Credit Facility and all other
Senior Debt the terms of which require repayment upon a Change of Control or
offer to repay in full and terminate all commitments under all Indebtedness
under the New Revolving Credit Facility and all other such Senior Debt and to
repay the Indebtedness owed to each lender which has accepted such offer or (ii)
obtain the requisite consents under the New Revolving Credit Facility and all
other Senior Debt to permit the repurchase of the Senior Subordinated Notes as
provided below. The Company shall first comply with the covenant in the
immediately preceding sentence before it shall be required to repurchase Senior
Subordinated Notes pursuant to the provisions described below. The Company's
failure to comply with the immediately preceding sentence shall constitute an
Event of Default described in clause (iii) and not in clause (ii) under
"-- Events of Default."
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Senior Subordinated Note purchased
pursuant to a Change of Control Offer will be required to surrender the Senior
Subordinated Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Senior Subordinated Note completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Senior Subordinated Notes that might
70
<PAGE> 78
be delivered by Holders seeking to accept the Change of Control Offer. In the
event the Company is required to purchase outstanding Senior Subordinated Notes
pursuant to a Change of Control Offer, the Company expects that it would seek
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Company would
be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Senior
Subordinated Notes, and there can be no assurance that the Company or the
acquiring party will have sufficient financial resources to effect such
redemption or repurchase. Such restrictions and the restrictions on transactions
with Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the management
of the Company. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Senior Subordinated Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Senior Subordinated Notes pursuant to a Change of Control Offer.
To the extent that the provisions of any securities laws or regulations conflict
with the "Change of Control" provisions of the Indenture, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Change of Control" provisions
of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Senior Subordinated Notes or (d) make any
Investment (other than Permitted Investments) (each of the foregoing actions set
forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or
71
<PAGE> 79
(ii) the Company is not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant or (iii) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made subsequent
to the Issue Date (the amount expended for such purposes, if other than in cash,
being the fair market value of such property as determined reasonably and in
good faith by the Board of Directors of the Company) shall exceed the sum of:
(w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to February 26, 1998 and on or prior to the date the Restricted
Payment occurs (the "Reference Date") (treating such period as a single
accounting period); plus (x) 100% of the aggregate net cash proceeds received by
the Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company; plus (y) without duplication of
any amounts included in clause (iii)(x) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any
net cash proceeds from a Public Equity Offering to the extent used to redeem the
Fixed Rate Notes or Fixed Rate Exchange Notes in accordance with the provisions
under the caption entitled "Redemption -- Optional Redemption upon Public Equity
Offerings"); plus (z) without duplication, the sum of (1) the aggregate amount
returned in cash on or with respect to Investments (other than Permitted
Investments) made subsequent to the Issue Date whether through interest
payments, principal payments, dividends or other distributions or payments, (2)
the net cash proceeds received by the Company or any of its Restricted
Subsidiaries from the disposition of all or any portion of such Investments
(other than to a Subsidiary of the Company) and (3) upon redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary, the fair market value of
such Subsidiary; provided, however, that the sum of clauses (1), (2) and (3)
above shall not exceed the aggregate amount of all such Investments made
subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or the
consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or notice of such redemption if the dividend or the
payment of the redemption price, as the case may be, would have been permitted
on the date of declaration or notice; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any Indebtedness of the Company that is subordinate or junior in right of
payment to the Senior Subordinated Notes either (i) solely in exchange for
shares of Qualified Capital Stock of the Company, or (ii) through the
application of net proceeds of a substantially concurrent sale for cash (other
than to a Subsidiary of the Company) of (A) shares of Qualified Capital Stock of
the Company or (B) Refinancing Indebtedness; (4) payments for the purpose of and
in an amount equal to the amount required to permit the Company to redeem or
repurchase its equity or options in respect thereof, in each case in connection
with the terms of any employee stock option or stock purchase agreements or
other agreements to compensate management or other employees; provided that such
redemptions or repurchases pursuant to this clause (4) shall not exceed $3.0
million (which amount shall be increased by the amount of any net cash proceeds
to the Company from (x) sales of Capital Stock of the Company to management or
other employees subsequent to the Issue Date to the extent such amounts have not
been included in clause (iii) in the foregoing paragraph and (y) any "key-man"
life insurance policies which are used to make such redemptions or repurchases)
in the aggregate; provided, further, that the cancellation of Indebtedness owing
to the Company from management or other employees of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Capital Stock of the
Company will not be deemed to constitute a Restricted Payment under the
Indenture; (5) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise price
thereof; (6) so long as no Default or Event of Default shall have occurred and
be continuing, payments not to exceed $500,000 in the aggregate to enable the
Company to make payments to holders of its Capital Stock in lieu of issuance of
fractional shares of its Capital Stock; (7) payments or other distributions made
in
72
<PAGE> 80
connection with the Recapitalization; (8) if no Default or Event of Default
shall have occurred and be continuing, the declaration and payment of cash
dividends to holders of the Senior Preferred Stock commencing with the first
scheduled dividend payment due subsequent to March 1, 2003; (9) prior to March
1, 2003, the Company's withholding and payment to any taxing authority of any
cash amounts required to be withheld with respect to dividends paid to foreign
holders of the Preferred Stock to the extent required by law; (10) the exchange
of the Senior Preferred Stock for the Exchange Debentures, provided that such
exchange is permitted by the "Limitation on Incurrence of Additional
Indebtedness" covenant; and (11) if no Default or Event of Default shall have
occurred and be continuing, other Restricted Payments in an aggregate amount not
to exceed $10.0 million. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, (a) amounts expended (to the extent such
expenditure is in the form of cash) pursuant to clauses (1), (2)(ii), (4), (8),
(9) and (11) shall be included in such calculation; provided that such
expenditures pursuant to clause (4) shall not be included to the extent of cash
proceeds received by the Company from any "key-man" life insurance policies and
(b) amounts expended pursuant to clauses (2)(i), (3), (5), (6), (7) and (10)
shall be excluded from such calculation.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof
either (A) to prepay any Senior Debt (and, in the case of any Senior Debt under
any revolving credit facility, including the New Revolving Credit Facility,
effect a permanent reduction in the availability under such revolving credit
facility), (B) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in properties
and assets of a kind used or usable in the business of the Company and its
Restricted Subsidiaries as conducted in accordance with the "Conduct of
Business" covenant ("Replacement Assets"), or (C) a combination of prepayment
and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
366th day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 60 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that amount of Senior Subordinated Notes equal
to the Net Proceeds Offer Amount at a price equal to 100% of the principal
amount of the Senior Subordinated Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however, that if at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary of the Company, as the case may be, in connection with any Asset Sale
is converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $7.5 million resulting from
one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $7.5 million, shall be applied as
required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and
73
<PAGE> 81
assets of the Company and its Restricted Subsidiaries not so transferred for
purposes of this covenant, and shall comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale. In addition, the
fair market value of such properties and assets of the Company or its Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date (or if the Net Proceeds Offer has been deferred as described in the first
paragraph of this covenant, the date that the aggregate unutilized Net Proceeds
Offer Amount equals or exceeds $7.5 million), with a copy to the Trustee, and
shall comply with the procedures set forth in the Indenture. Upon receiving
notice of the Net Proceeds Offer, Holders may elect to tender their Senior
Subordinated Notes in whole or in part in integral multiples of $1,000 in
exchange for cash. To the extent Holders properly tender Senior Subordinated
Notes in an amount exceeding the Net Proceeds Offer Amount, Senior Subordinated
Notes of tendering Holders will be purchased on a pro rata basis (based on
amounts tendered). A Net Proceeds Offer shall remain open for a period of at
least 20 and not more than 30 business days or such longer period as may be
required by law. To the extent that the aggregate amount of Senior Subordinated
Notes tendered pursuant to a Net Proceeds Offer is less than the Net Proceeds
Offer Amount, the Company may use any remaining Net Proceeds Offer Amount for
general corporate purposes. Upon completion of any such Net Proceeds Offer, the
Net Proceeds Offer Amount shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Senior Subordinated Notes pursuant to a Net Proceeds Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture and the New Revolving Credit
Facility; (3) non-assignment provisions of any contract or any lease; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (5)
agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (6) restrictions on the transfer of
assets subject to any Lien permitted under the Indenture imposed by the holder
of such Lien; (7) restrictions imposed by any agreement to sell assets or
Capital Stock permitted under the Indenture to any Person pending the closing of
such sale; (8) any agreement or instrument governing Capital Stock of any Person
that is acquired; (9) any agreement or instrument governing Indebtedness
(whether or not outstanding) of foreign Restricted Subsidiaries of the Company
permitted to be incurred pursuant to the Indenture; (10) other Indebtedness
permitted to be incurred subsequent to the Issue Date pursuant to the provisions
of the covenant described under "Limitation on Incurrence of Additional
Indebtedness"; provided that any such restrictions are ordinary and customary
with respect to the type of Indebtedness being incurred (under the relevant
circumstances); (11) restrictions on cash or other deposits or net worth imposed
by customers under contracts entered into in the ordinary course of business;
and (12) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (2) through (11) above; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the Company's
Board of Directors, no more restrictive with respect to such dividend and other
payment
74
<PAGE> 82
restrictions than those contained in the dividend or other payment restrictions
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any preferred stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any preferred stock of any
Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Senior Subordinated
Notes, the Senior Subordinated Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Liens and (ii) in all
other cases, the Senior Subordinated Notes are equally and ratably secured,
except for (A) Liens existing as of the Issue Date and any extensions, renewals
or replacements thereof; (B) Liens securing Senior Debt and Liens on assets of
Restricted Subsidiaries of the Company securing guarantees of Senior Debt; (C)
Liens of the Company or a Wholly Owned Restricted Subsidiary of the Company on
assets of any Restricted Subsidiary of the Company; (D) Liens securing the
Senior Subordinated Notes; (E) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens (i) are no less
favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (ii) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (F) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will
not incur or suffer to exist Indebtedness that is senior in right of payment to
the Senior Subordinated Notes and subordinate in right of payment to any other
Indebtedness of the Company.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and of
the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the Trustee,
the due and punctual payment of the principal of, and premium, if any, and
interest on all of the Senior Subordinated Notes and the performance of every
covenant of the Senior Subordinated Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
75
<PAGE> 83
respect of the transaction), no Default or Event of Default shall have occurred
or be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied. Notwithstanding
clause (ii) of the preceding sentence, (a) any Restricted Subsidiary of the
Company may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another jurisdiction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Senior Subordinated Notes with the same
effect as if such surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are not materially less favorable than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $1.0 million
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management (including, without limitation, fees and
compensation under the Management Services Agreement with the Principal as in
effect on the Issue Date); (ii) transactions exclusively between or among the
Company and any of its Restricted Subsidiaries or exclusively between or among
such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture; (iii) any agreement as in effect as of the Issue
Date or any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) in any replacement agreement thereto so long
as any such amendment or replacement agreement is not more disadvantageous to
the Holders in any material respect than the original agreement as in effect on
the Issue Date; (iv) Restricted Payments permitted by the Indenture; (v) the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of its obligations under the terms of, any stockholders agreement
(including any registration rights agreement or purchase agreement
76
<PAGE> 84
related thereto) to which it is a party as of the Issue Date and any similar
agreements which it may enter into thereafter; provided, however, that the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under, any future amendment to any such existing
agreement or under any similar agreement entered into after the Issue Date shall
only be permitted by this clause (v) to the extent that the terms of any such
amendment or new agreement are not otherwise disadvantageous to the Holders of
the Senior Subordinated Notes in any material respect; (vi) transactions
permitted by, and complying with, the provisions of the covenant described under
"-- Merger, Consolidation and Sale of Assets"; (vii) the Recapitalization and
the transactions contemplated by the Recapitalization Agreement; and (viii)
transactions with customers, clients, suppliers, joint venture partners or
purchasers or sellers of goods or services, in each case in the ordinary course
of business (including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the Indenture, which
are fair to the Company or its Restricted Subsidiaries, in the reasonable
determination of the Board of Directors of the Company or the senior management
thereof, or are on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party.
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any of its domestic Restricted Subsidiaries, directly or indirectly, by
way of the pledge of any intercompany note or otherwise, to guarantee any
Indebtedness of the Company or any other Restricted Subsidiary of the Company
(other than (A) Indebtedness under Currency Agreements in reliance on clause (v)
of the definition of Permitted Indebtedness, or (B) Interest Swap Obligations
incurred in reliance on clause (iv) of the definition of Permitted
Indebtedness), unless, in any such case, (a) such Restricted Subsidiary executes
and delivers a supplemental indenture to the Indenture providing a guarantee of
payment of the Senior Subordinated Notes by such Restricted Subsidiary (the
"Guarantee") and (b) (x) if any such guarantee of such Restricted Subsidiary is
provided in respect of Senior Debt, the guarantee or other instrument provided
by such Restricted Subsidiary in respect of such Senior Debt may be superior to
the Guarantee pursuant to subordination provisions no less favorable to the
Holders of the Senior Subordinated Notes than those contained in the Indenture
and (y) if any such guarantee of such Restricted Subsidiary is provided in
respect of Indebtedness that is expressly subordinated to the Senior
Subordinated Notes, the guarantee or other instrument provided by such
Restricted Subsidiary in respect of such subordinated Indebtedness shall be
subordinated to the Guarantee pursuant to subordination provisions no less
favorable to the Holders of the Senior Subordinated Notes than those contained
in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Senior Subordinated Notes shall provide by its terms that it
shall be automatically and unconditionally released and discharged, without any
further action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided that
(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee or
other liability of such Restricted Subsidiary has been released by the holders
of the other Indebtedness so guaranteed.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar, reasonably related,
ancillary or complementary to the businesses in which the Company and its
Restricted Subsidiaries are engaged on the Issue Date.
Reports to Holders. The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, following the
effectiveness of the Exchange Offer Registration Statement, the Company will
file with the Commission, to the extent permitted, and provide the Trustee and
Holders with such annual reports and such
77
<PAGE> 85
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of TIA
sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Senior Subordinated Notes when
the same becomes due and payable and the default continues for a period of
30 days (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture);
(ii) the failure to pay the principal on any Senior Subordinated
Notes, when such principal becomes due and payable, at maturity, upon
redemption or otherwise (including the failure to make a payment to
purchase Senior Subordinated Notes tendered pursuant to a Change of Control
Offer or a Net Proceeds Offer) (whether or not such payment shall be
prohibited by the subordination provisions of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Senior Subordinated Notes (except in the case of a default with respect to
the "Merger, Consolidation and Sale of Assets" covenant, which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness for borrowed money of the Company or any Restricted
Subsidiary of the Company and such failure continues for a period of 20
days or more, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise
cured within 20 days of receipt by the Company or such Restricted
Subsidiary of notice of any such acceleration) if the aggregate principal
amount of such Indebtedness, together with the principal amount of any
other such Indebtedness in default for failure to pay principal at final
stated maturity or which has been accelerated, in each case with respect to
which the 20-day period described above has passed, aggregates $10.0
million or more at any time;
(v) one or more judgments for the payment of money in an aggregate
amount in excess of $10.0 million shall have been rendered against the
Company or any of its Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Senior
Subordinated Notes may declare the principal of and accrued interest on all the
Senior Subordinated Notes to be due and payable by notice in writing to the
Company and the Trustee specifying the respective Event of Default and that it
is a "notice of acceleration" (the "Acceleration Notice"), and the same (i)
shall become immediately due and payable or (ii) if there are any amounts
outstanding under the New Revolving Credit Facility, shall become due and
payable upon the first to occur of an acceleration under the New Revolving
Credit Facility or 5 business days after receipt by the Company and the
Representative under the New Revolving Credit Facility of such Acceleration
Notice but only if such Event of Default is then continuing. If an Event of
Default specified in clause (vi) above occurs with respect to the Company and is
continuing, then all unpaid principal of, and premium, if any, and accrued and
unpaid interest on all of the outstanding Senior Subordinated Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Senior Subordinated Notes as described in the
preceding paragraph, the Holders of a majority in principal amount of
78
<PAGE> 86
the outstanding Senior Subordinated Notes may, on behalf of the Holders of all
of the Senior Subordinated Notes, rescind and cancel such declaration and its
consequences (i) if the rescission would not conflict with any judgment or
decree, (ii) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration, (iii) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, has been paid,
(iv) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances and (v) in
the event of the cure or waiver of an Event of Default of the type described in
clause (vi) of the description above of Events of Default, the Trustee shall
have received an officers' certificate and an opinion of counsel that such Event
of Default has been cured or waived. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the Senior Subordinated
Notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Senior Subordinated Notes.
Holders of the Senior Subordinated Notes may not enforce the Indenture or
the Senior Subordinated Notes except as provided in the Indenture and under the
TIA. Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable indemnity.
Subject to all provisions of the Indenture and applicable law, the Holders of a
majority in aggregate principal amount of the then outstanding Senior
Subordinated Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Senior Subordinated Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Senior Subordinated Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Senior Subordinated Notes when such payments are due, (ii) the Company's
obligations with respect to the Senior Subordinated Notes concerning issuing
temporary Senior Subordinated Notes, registration of Senior Subordinated Notes,
mutilated, destroyed, lost or stolen Senior Subordinated Notes and the
maintenance of an office or agency for payments, (iii) the rights, powers,
trust, duties and immunities of the Trustee and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Senior Subordinated Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Senior Subordinated Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Senior Subordinated Notes on
the stated date for payment thereof or on the applicable redemption date, as the
case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered
79
<PAGE> 87
to the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default under the Indenture resulting from the incurrence of
Indebtedness, all or a portion of which will be used to defease the Senior
Subordinated Notes concurrently with such incurrence); (v) such Legal Defeasance
or Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Company with the intent of preferring the Holders over any
other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; (vii) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with; (viii) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that (A) the trust funds will not be subject to any rights
of holders of Senior Debt, including, without limitation, those arising under
the Indenture and (B) assuming no intervening bankruptcy or insolvency of the
Company between the date of deposit and the 91st day following the date of
deposit and that no Holder is an insider of the Company, after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied. Notwithstanding the foregoing, the Opinion of Counsel
required by clause (ii) above with respect to a Legal Defeasance need not be
delivered if all Senior Subordinated Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable on the maturity date within one year or (z) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Senior Subordinated Notes, as expressly provided for in the Indenture) as to all
outstanding Senior Subordinated Notes when (i) either (a) all the Senior
Subordinated Notes theretofore authenticated and delivered (except lost, stolen
or destroyed Senior Subordinated Notes which have been replaced or paid and
Senior Subordinated Notes for whose payment money has theretofore been deposited
in trust or segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust) have been delivered to the Trustee
for cancellation or (b) all Senior Subordinated Notes not theretofore delivered
to the Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Senior
Subordinated Notes not theretofore delivered to the Trustee for cancellation,
for principal of, premium, if any, and interest on the Senior Subordinated Notes
to the date of deposit together with irrevocable instructions from the Company
directing the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company has paid all other sums payable
under the Indenture by the Company; and (iii) the Company has delivered to the
Trustee an officers' certificate and an opinion of counsel stating that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
80
<PAGE> 88
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Senior Subordinated Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Senior Subordinated
Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Senior Subordinated Notes; (iii) reduce the
principal of or change or have the effect of changing the fixed maturity of any
Senior Subordinated Notes, or change the date on which any Senior Subordinated
Notes may be subject to redemption or repurchase, or reduce the redemption or
repurchase price therefor; (iv) make any Senior Subordinated Notes payable in
money other than that stated in the Senior Subordinated Notes; (v) make any
change in provisions of the Indenture protecting the right of each Holder to
receive payment of principal of and interest on such Senior Subordinated Note on
or after the due date thereof or to bring suit to enforce such payment, or
permitting Holders of a majority in principal amount of Senior Subordinated
Notes to waive Defaults or Events of Default; (vi) amend, change or modify in
any material respect the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect thereto
after a Change of Control has occurred or the subject Asset Sale has been
consummated; or (vii) modify or change any provision of the Indenture or the
related definitions affecting the subordination or ranking of the Senior
Subordinated Notes in a manner which adversely affects the Holders in any
material respect.
GOVERNING LAW
The Indenture provides that it and the Senior Subordinated Notes will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture, the Certificate of Designation, the Exchange Indenture, the New
Revolving Credit Facility, the Employment Agreements, the Stockholders Agreement
and the Investor Registration Rights Agreement. Reference is made to the
applicable document for the full definition of all such terms, as well as any
other terms used herein for which no definition is provided. The definitions
below are qualified in their entirety by the definitions set forth in the
applicable document.
81
<PAGE> 89
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
For purposes of the Indenture, the Certificate of Designation and the Exchange
Indenture, BT Alex. Brown Incorporated, Bankers Trust Company and their
Affiliates shall not be deemed to be Affiliates of the Company or its Restricted
Subsidiaries.
"Approved Sale" means that a majority of the shares of voting Stockholder
Shares then outstanding, voting together as if a single class approve a sale of
all or substantially all of the Company's assets determined on a consolidated
basis or a sale of all (or, for accounting, tax or other reasons, substantially
all) of the Company's outstanding capital stock (whether by merger,
recapitalization, consolidation, reorganization, combination or otherwise) to an
unaffiliated third party or group of unaffiliated third parties. As defined
herein, "Stockholder Shares" means (i) all shares of common stock held, directly
or indirectly, by Cornerstone, BT and certain other investors party to the
Company's Shareholders Agreement dated February 26, 1998 (collectively, the
"Stockholders"), (ii) all shares of convertible preferred stock held, directly
or indirectly, by the Stockholders, and (iii) all equity securities issued or
issuable directly or indirectly with respect to the securities in (i) and (ii)
above, in each case, by way of stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprise any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; provided, however,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $500,000, (ii) the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of the
Company as permitted under "Merger, Consolidation and Sale of Assets" or any
disposition that constitutes a Change of Control, (iii) the sale or discount, in
each case without recourse, of accounts receivable arising in the ordinary
course of business, but only in connection with the compromise or collection
thereof, (iv) the factoring of accounts receivable arising in the ordinary
course of business pursuant to arrangements customary in the region, (v) the
licensing of intellectual property, (vi) disposals or replacements of obsolete
equipment in the ordinary course of business, and (vii) the sale, lease,
conveyance, disposition or other transfer by the Company or any Restricted
Subsidiary of the Company of assets or property in connection with Restricted
Payments permitted under the "Limitation on Restricted Payments" covenant.
"Base Rate" at any time shall mean the highest of (x) the rate which is
1/2 of 1% in excess of the Adjusted Certificate of Deposit Rate, (y) the rate
which is 1/2 of 1% in excess of the federal funds rate and (z) the prime
82
<PAGE> 90
lending rate of Bankers Trust Company. As used herein, "Adjusted Certificate of
Deposit Rate" shall mean, on any day, the sum (rounded to the nearest 1/100 of
1%) of (1) the rate obtained by dividing (x) the most recent weekly average
dealer offering rate for negotiable certificates of deposit with a three-month
maturity by (y) a percentage equal to 100% minus the stated maximum rate of all
reserve requirements as specified in Regulation D, plus (2) the then daily net
annual assessment rate as estimated by Bankers Trust Company for determining the
current annual assessment payable by Bankers Trust Company to the Federal
Deposit Insurance Corporation for insuring three month certificates of deposit.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and preferred stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Cause" shall mean (i) the commission of a felony or a crime involving
moral turpitude or the commission of any other act or omission involving
dishonesty, disloyalty or fraud with respect to the Company or any of its
subsidiaries, or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties as
reasonably directed by the Board of Directors, provided that such failure has
continued for more than 15 days after the Company has given written notice to
the Named Executive Officer of such failure and of the Company's intention to
terminate the Named Executive Officer's employment because of such failure, (iv)
gross negligence or willful misconduct with respect to the Company or any of its
subsidiaries or (v) any other material breach of this letter agreement which is
not cured within 15 days after written notice thereof to the Named Executive
Officer.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the
83
<PAGE> 91
Exchange Act (a "Group"), together with any Affiliates thereof (whether or not
otherwise in compliance with the provisions of the Indenture, the Certificate of
Designation or the Exchange Indenture, as the case may be) other than to the
Permitted Holders; (ii) the approval by the holders of Capital Stock of the
Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture, the Certificate of Designation or the Exchange Indenture, as the case
may be); (iii) any Person or Group (other than the Permitted Holders) shall
become the owner, directly or indirectly, beneficially, of shares representing
more than 50% of the aggregate ordinary voting power represented by the issued
and outstanding Capital Stock of the Company; or (iv) the first day on which a
majority of the members of the Board of Directors of the Company during the two
year period immediately preceding such date are not Continuing Directors.
Notwithstanding anything to the contrary contained in the foregoing, a "Change
of Control" shall not be deemed to occur upon consummation of (A) the
Recapitalization, (B) the merger of the Company with an Affiliate incorporated
solely for the purpose of reincorporating the Company in another jurisdiction or
(C) any transaction described in clauses (i) or (iii) of the immediately
preceding sentence if, after giving effect to such transaction, (1) the
Permitted Holders shall beneficially own, directly or indirectly, shares of
Capital Stock representing at least 35% of the aggregate ordinary voting power
represented by the issued and outstanding Capital Stock of the Company and (2)
no Person or Group shall beneficially own, directly or indirectly, a greater
percentage of such voting power than the Permitted Holders.
"Change of Control Offer" means the offer to purchase, upon a Change of
Control, all outstanding Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued interest, if any, to the date of purchase.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
and foreign withholding taxes of such Person and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other than income taxes
attributable to extraordinary, unusual or nonrecurring gains or losses or taxes
attributable to sales or dispositions outside the ordinary course of business),
(B) Consolidated Interest Expense and (C) Consolidated Non-cash Charges less, to
the extent Consolidated Net Income has been increased thereby, any non-cash
items increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in accordance
with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also
84
<PAGE> 92
including any Consolidated EBITDA (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) attributable to the assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period) occurring during the
Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; and (2) notwithstanding
clause (1) above, interest on Indebtedness determined on a fluctuating basis, to
the extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the amount of all dividend payments on any series of preferred stock of
such Person (other than dividends paid in Qualified Capital Stock or the
amortization of deferred financing costs relating to the issuance of the Senior
Preferred Stock) paid, accrued or scheduled to be paid or accrued during such
period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including, without
limitation, (a) any amortization of debt discount and (b) the net costs under
Interest Swap Obligations, but excluding any amortization or write-off of
deferred financing costs; and (ii) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
and losses from Asset Sales (without giving effect to the proviso therein) or
abandonments or reserves relating thereto, (b) after-tax items classified as
extraordinary or nonrecurring gains and losses, (c) the net income or loss of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net loss of any Person
other than a Restricted Subsidiary of the Company, (f) the net income of any
Person, other than a Restricted Subsidiary of the referent Person, except to the
extent of cash dividends or distributions paid to the referent Person or to a
Wholly Owned Restricted Subsidiary of the referent Person by such Person, (g)
income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued), (h) in the case of a successor to
the referent Person by consolidation or merger or as a transferee of the
referent Person's assets, any earnings of the successor corporation prior to
such consolidation, merger or transfer of assets, (i) non-cash, non-recurring
charges reducing Consolidated Net Income (excluding any such non-cash charge to
the extent it represents an accrual of or reserve for cash charges in any future
period or amortization of prepaid cash expense that was paid in a prior period
not included in the calculation), (j) non-cash compensation charges, including
any arising from stock options, (k) gains and losses due solely to fluctuations
in currency values and the related tax effects according to GAAP, (l) start-up
costs and duplicative costs incurred in
85
<PAGE> 93
connection with the transition services agreements in effect on the Issue Date
(as the same may be amended from time to time), not to exceed $200,000, (m)
costs relating to the implementation of the Baan information technology system
which have not been capitalized and (n) expenses related to the
Recapitalization.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Consolidated Tangible Assets" means, with respect to any Person, as of any
date of determination, the total assets, less goodwill, deferred financing costs
and other intangibles and less accumulated amortization, shown on the most
recent balance sheet of such Person, determined on a consolidated basis in
accordance with GAAP.
"Constructive Termination" shall mean, without the Named Executive
Officer's express written consent: (i) the Company materially reduces the
nature, scope, level or extent of the Named Executive Officer's responsibilities
from the nature, scope, level or extent of such responsibilities as of the
effectiveness of the Employment Agreement, or fails to provide the Named
Executive Officer with adequate office facilities and support services to
perform such responsibilities; (ii) the Company requires the Named Executive
Officer to relocate his principal business office or his principal place of
residence outside the geographical employment area, or assigns to the Named
Executive Officer duties that would reasonable require such relocation; or (iii)
the Company requires the Named Executive Officer, or assigns duties to the Named
Executive Officer that would reasonably require the Named Executive Officer, to
spend more than one hundred (100) normal working days away from the geographical
employment area during any consecutive twelve-month period.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the first day of the two-year period immediately preceding such
date of determination or (ii) was nominated for election or elected to such
Board of Directors with, or whose election to such Board of Directors was
approved by, the affirmative vote of a majority of the Continuing Directors who
were members of such Board of Directors at the time of such nomination or
election or (iii) is any designee of the Principal or its Affiliates or was
nominated by the Principal or its Affiliates or any designees of the Principal
or its Affiliates on the Board of Directors.
"Cornerstone Investors Registrable Securities" means (i) all common stock
acquired by, or issued or issuable to, Cornerstone, certain other investors or
any of their respective affiliates on or after the date hereof and (ii) all
equity securities issued or issuable directly or indirectly with respect to any
common stock described in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular Cornerstone
Investors Registrable Securities, such securities shall cease to be Cornerstone
Investors Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or sold to the
public in compliance with Rule 144. For purposes of this Agreement, a Person
will be deemed to be a holder of Cornerstone Investors Registrable Securities
whenever such Person has the right to acquire directly or indirectly such
Cornerstone Investors Registrable Securities (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
New Revolving Credit Facility and (ii) any other Indebtedness constituting
Senior Debt which, at the time of determination, has an
86
<PAGE> 94
aggregate principal amount of at least $25.0 million and is specifically
designated in the instrument evidencing such Senior Debt as "Designated Senior
Debt" by the Company.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking (other than upon the occurrence of
a Change of Control) fund obligation or otherwise, or is redeemable at the sole
option of the holder thereof on or prior to the final maturity date of the
Senior Subordinated Notes or the Exchange Debentures, as the case may be, or the
date of the mandatory redemption of the Senior Preferred Stock, as the case may
be.
"Eurodollar Rate" shall mean, with respect to each interest period for a
Eurodollar loan, (i) the arithmetic average (rounded to the nearest 1/100 of 1%)
of the offered quotation to first-class banks in the interbank Eurodollar market
by Bankers Trust Company for U.S. dollar deposits of amounts in same day funds
comparable to the outstanding principal amount of the Eurodollar loan of Bankers
Trust Company for which an interest rate is then being determined with
maturities comparable to the interest period to be applicable to such Eurodollar
loan, determined as of 10:00 A.M. (New York time) on the date which is two
business days prior to the commencement of such interest period divided (and
rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage
equal to 100% minus the then stated maximum rate of all reserve requirements
(including, without limitation, any marginal, emergency, supplemental, special
or other reserves) applicable to any member bank of the Federal Reserve System
in respect of Eurocurrency liabilities as defined in Regulation D (or any
successor category of liabilities under Regulation D).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
Except as otherwise set forth herein, all ratios and computations based on GAAP
contained in the Indenture, the Certificate of Designation or the Exchange
Indenture, as the case may be, shall be computed in conformity with GAAP applied
on a consistent basis.
"Indebtedness" means with respect to any Person, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business), (v) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction, (vi) guarantees and other contingent
obligations of such Person in respect of Indebtedness referred to in clauses (i)
through (v) above and clause (viii) below, (vii) all obligations of any other
Person of the type referred to in clauses (i) through (vi) which are secured by
any lien on any property or asset of such Person, the amount of such obligation
being deemed to be the lesser of the fair market value of such property or asset
or the amount of the obligation so secured, (viii) all obligations under
currency agreements and interest swap agreements of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such
87
<PAGE> 95
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture or the Exchange
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of any
direct or indirect Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, the Company no longer owns, directly or
indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means February 26, 1998, the date of original issuance of the
Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) out-of-pocket expenses and fees relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees and sales
commissions), (b) taxes paid or payable after taking into account any reduction
in consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements, (c) repayment of Indebtedness that is required to be
repaid in connection with such Asset Sale and (d) appropriate amounts to
88
<PAGE> 96
be provided by the Company or any Restricted Subsidiary, as the case may be, as
a reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, post-closing
adjustments, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"New Revolving Credit Facility" means the Credit Agreement dated as of the
Issue Date, among the Company, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as agent, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including,
without limitation, increasing the amount of available borrowings thereunder or
adding Subsidiaries of the Company as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holders" means the Principal and its Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes issued in the Offering and the
Exchange Notes issued in exchange therefor;
(ii) Indebtedness incurred pursuant to the New Revolving Credit
Facility in an aggregate principal amount at any time outstanding not to
exceed the greater of (a) $40.0 million and (b) the excess of (1) the sum
of 50% of the book value of the inventory of the Company and its Restricted
Subsidiaries and 65% of the book value of the accounts receivable of the
Company and its Restricted Subsidiaries over (2) the amount of Indebtedness
of foreign Restricted Subsidiaries of the Company outstanding pursuant to
clause (xiv) below;
(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company or any of its Restricted
Subsidiaries covering Indebtedness of the Company or any of its Restricted
Subsidiaries; provided, however, that such Interest Swap Obligations are
entered into to protect the Company and its Restricted Subsidiaries from
fluctuations in interest rates on Indebtedness incurred in accordance with
the Indenture, the Certificate of Designation or the Exchange Indenture, as
the case may be, to the extent the notional principal amount of such
Interest Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no Lien
(other than Liens permitted under the Indenture) held by a Person other
than the Company or a Wholly Owned Restricted Subsidiary of the Company;
provided that if as of any date any Person other than the Company or a
Wholly Owned Restricted Subsidiary of the Company owns or holds any such
Indebtedness or holds a Lien (other than Liens permitted under the
Indenture) in respect of such
89
<PAGE> 97
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary of the Company; provided that (a) any
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of
the Company is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Indenture and the Senior
Subordinated Notes and (b) if as of any date any Person other than a Wholly
Owned Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person holds a Lien (other than Liens permitted under
the Indenture) in respect of such Indebtedness, such date shall be deemed
the incurrence of Indebtedness not constituting Permitted Indebtedness by
the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed the greater of
$7.5 million and 5% of Consolidated Tangible Assets of the Company at any
one time outstanding;
(xi) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary of the Company providing for indemnification,
adjustment of purchase price, earn out or other similar obligations, in
each case incurred or assumed in connection with the disposition of any
business, assets or a Restricted Subsidiary of the Company in a principal
amount not to exceed the gross proceeds actually received by the Company or
any of its Restricted Subsidiaries in connection with such disposition;
(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business;
(xiii) guarantees by the Company and its Wholly Owned Restricted
Subsidiaries of each other's Indebtedness; provided that such Indebtedness
is permitted to be incurred under the Indenture, the Certificate of
Designation or the Exchange Indenture, as the case may be, including with
respect to Wholly Owned Restricted Subsidiaries of the Company, the
"Limitation of Guarantees by Restricted Subsidiaries" covenant;
(xiv) Indebtedness of foreign Restricted Subsidiaries of the Company
incurred to finance working capital of such foreign Restricted Subsidiaries
in an aggregate principal amount at any time outstanding not to exceed the
sum of 50% of the book value of the inventory of such foreign Restricted
Subsidiaries and 65% of the book value of the accounts receivable of such
foreign Restricted Subsidiaries;
(xv) Refinancing Indebtedness; and
(xvi) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $20.0 million
at any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the New Revolving Credit Facility).
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company, (ii) Investments in the Company by any
Restricted Subsidiary of the Company; provided that any Indebtedness evidencing
such Investment is unsecured and subordinated, pursuant to a
90
<PAGE> 98
written agreement, to the Company's obligations under the Senior Subordinated
Notes and the Indenture; (iii) investments in cash and Cash Equivalents; (iv)
loans and advances to employees and officers of the Company and its Restricted
Subsidiaries in the ordinary course of business for bona fide business purposes
not in excess of $500,000 at any one time outstanding; (v) Currency Agreements
and Interest Swap Obligations entered into in the ordinary course of the
Company's or its Restricted Subsidiaries' businesses and otherwise in compliance
with the Indenture, the Certificate of Designation or the Exchange Indenture, as
the case may be; (vi) Investments not to exceed the greater of $7.5 million and
5% of Consolidated Tangible Assets of the Company at the time of such Investment
at any one time outstanding; (vii) Investments in securities of trade creditors
or customers received pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (viii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant; (ix) accounts
receivable created or acquired in the ordinary course of business; (x)
guarantees (a) by the Company of Indebtedness otherwise permitted to be incurred
by Restricted Subsidiaries of the Company under the Indenture, the Certificate
of Designation or the Exchange Indenture, as the case may be, or (b) permitted
by the "Limitation of Guarantees by Restricted Subsidiaries" covenant; and (xi)
Investments the payment for which consists exclusively of Qualified Capital
Stock of the Company.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of the real property not interfering in
any material respect with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(viii) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(ix) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
91
<PAGE> 99
(x) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xi) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted pursuant to clause (x) of the definition of
"Permitted Indebtedness"; provided, however, that in the case of Purchase
Money Indebtedness (A) the Indebtedness shall not exceed the cost of such
property or assets and shall not be secured by any property or assets of
the Company or any Restricted Subsidiary of the Company other than the
property and assets so acquired or constructed and (B) the Lien securing
such Indebtedness shall be created within 180 days of such acquisition or
construction or, in the case of a refinancing of any Purchase Money
Indebtedness, within 180 days of such refinancing;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;
(xiv) Liens securing Indebtedness of foreign Restricted Subsidiaries
of the Company which Indebtedness is permitted to be incurred pursuant to
the Indenture;
(xv) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations
that do not in the aggregate exceed $2.0 million at any one time
outstanding;
(xvi) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xvii) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xviii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods; and
(xix) Liens existing on the Issue Date, together with any Liens
securing Refinancing Indebtedness incurred in order to refinance the
Indebtedness secured by Liens existing on the Issue Date; provided that the
Liens securing the Refinancing Indebtedness shall not extend to property
other than that pledged under the Liens securing the Indebtedness being
refinanced.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"preferred stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Principal" means Cornerstone Equity Investors, L.L.C.
"Public Equity Offering" means an underwritten public offering of capital
stock of the Company (other than capital stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than upon the
occurrence of a Change of Control), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole
option of the holder thereof on or prior to the final maturity date of the
Notes.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
92
<PAGE> 100
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of (A) for purposes of clause (xv) of the
definition of Permitted Indebtedness, Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii),
(xiii), (xiv) or (xvi) of the definition of Permitted Indebtedness) or (B) for
any other purpose, Indebtedness issued in accordance with the "Limitation on
Incurrence of Additional Indebtedness" covenant, in each case that does not (1)
result in an increase in the aggregate principal amount of Indebtedness of such
Person as of the date of such proposed Refinancing (plus the amount of any
premium required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) except to the extent such increase is
otherwise permitted to be incurred under the Indenture, the Certificate of
Designation or the Exchange Indenture, as the case may be, or (2) create
Indebtedness with a Weighted Average Life to Maturity that is less than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced; provided
that (x) if such Indebtedness being Refinanced is Indebtedness solely of the
Company, then such Refinancing Indebtedness shall be Indebtedness solely of the
Company and (y) if such Indebtedness being Refinanced is subordinate or junior
to the Senior Subordinated Notes, then such Refinancing Indebtedness shall be
subordinate or junior to the Senior Subordinated Notes at least to the same
extent and in the same manner as the Indebtedness being Refinanced.
"Regulatory Problem" shall mean, with respect to any shareholder, any set
of facts, events or circumstances the existence of which would cause such
shareholder to believe that there is a substantial risk of assertion by a
governmental entity (which belief shall be reasonable in connection with the
prevailing regulatory environment) that such shareholder is or would be in
violation of any law, regulation, rule or other requirement of any governmental
authority.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Senior Subordinated Notes or the
Exchange Debentures, as the case may be. Without limiting the generality of the
foregoing, "Senior Debt" shall also include the principal of, premium, if any,
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on, and all other amounts owing in respect of, (x) all monetary obligations
(including guarantees thereof) of every nature of the Company under the New
Revolving Credit Facility, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit, fees,
expenses and indemnities,
93
<PAGE> 101
and, in the case of the Exchange Indenture, all obligations under the Indenture,
(y) all Interest Swap Obligations (including guarantees thereof) and (z) all
obligations (including guarantees thereof) under Currency Agreements, in each
case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company or any Affiliate of
the Company or any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or
guaranteed on behalf of, any shareholder, director, officer or employee of the
Company or any Subsidiary of the Company (including, without limitation, amounts
owed for compensation), (iii) Indebtedness to trade creditors and other amounts
incurred in connection with obtaining goods, materials or services, (iv)
Indebtedness represented by Disqualified Capital Stock, (v) any liability for
federal, state, local or other taxes owed or owing by the Company, (vi) that
portion of any Indebtedness incurred in violation of the Indenture or Exchange
Indenture provisions, as the case may be, set forth under "Limitation on
Incurrence of Additional Indebtedness" (but, as to any such obligation, no such
violation shall be deemed to exist for purposes of this clause (vi) if the
holder(s) of such obligation or their representative and the Trustee shall have
received an officers' certificate of the Company to the effect that the
incurrence of such Indebtedness does not (or, in the case of revolving credit
indebtedness, that the incurrence of the entire committed amount thereof at the
date on which the initial borrowing thereunder is made would not) violate such
provisions of the Indenture), (vii) Indebtedness which, when incurred and
without respect to any election under Section 1111(b) of Title 11, United States
Code, is without recourse to the Company and (viii) any Indebtedness which is,
by its express terms, subordinated in right of payment to any other Indebtedness
of the Company, including, in the case of the Indenture, the Exchange
Debentures.
"Significant Subsidiary", with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final
94
<PAGE> 102
maturity, in respect thereof, by (ii) the number of years (calculated to the
nearest one-twelfth) which will elapse between such date and the making of such
payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
"Work Product" means all inventions, innovations, improvements,
developments, methods, designs, analyses, drawings, reports and all similar or
related information (whether or not patentable) which related to the Company's
or any of its subsidiaries' actual or anticipated business, research and
development or existing or future products or services and which are conceived,
developed or made by Named Executive Officer while employed by the Company and
its subsidiaries.
95
<PAGE> 103
DESCRIPTION OF THE SENIOR
PREFERRED STOCK AND EXCHANGE DEBENTURES
SENIOR PREFERRED STOCK
The summary contained herein of certain provisions of the Senior Preferred
Stock does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the certificate of
designation creating the Senior Preferred Stock (the "Certificate of
Designation"), copies of which may be obtained from the Company upon request.
The definitions of certain capitalized terms used in the following summary are
set forth under "Description of Senior Subordinated Notes -- Certain
Definitions" below. For purposes of this section, reference to the "Senior
Preferred Stock" includes the Preferred Stock and the Exchange Preferred Stock.
The form and terms of the Exchange Preferred Stock are the same as the form
and terms of the Preferred Stock (which they replace) except that (i) the
Exchange Preferred Stock bear a Series B designation, (ii) the Exchange
Preferred Stock have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof and (iii) the holders of
the Exchange Preferred Stock will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for an
increase in the dividend rate on the Preferred Stock in certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "Exchange Offer -- Purpose and Effect of
the Exchange Offer."
GENERAL
The Board of Directors of the Company adopted resolutions creating a
maximum of 750,000 shares of Senior Preferred Stock outstanding at any one time,
which consists of 250,000 shares of Preferred Stock issued in the Offering plus
500,000 additional shares of Senior Preferred Stock which, among other things,
may be used to pay certain dividends on outstanding shares of Senior Preferred
Stock. The liquidation preference of the Senior Preferred Stock is $100.00 per
share. Subject to certain conditions, the Senior Preferred Stock will be
exchangeable for the Exchange Debentures at the option of the Company on any
dividend payment date on or after the Issue Date. The Senior Preferred Stock
will be fully paid and nonassessable and the holders thereof will not have any
subscription or preemptive rights in connection therewith.
RANKING
The Senior Preferred Stock, with respect to dividend rights and rights upon
the liquidation, winding-up and dissolution of the Company, ranks (i) senior to
all classes of Common Stock and to each other class or series of Capital Stock
established after the Issue Date by the Board of Directors of the Company the
terms of which do not expressly provide that it ranks senior or on a parity with
the Senior Preferred Stock as to dividend rights and rights upon the
liquidation, winding-up and dissolution of the Company (collectively referred
to, together with all classes of Common Stock of the Company, as "Junior
Stock"); (ii) subject to certain conditions, on a parity with each other class
or series of Capital Stock established after the Issue Date by the Board of
Directors of the Company the terms of which expressly provide that such class or
series will rank on a parity with the Senior Preferred Stock as to dividend
rights and rights upon liquidation, winding-up and dissolution (collectively
referred to as "Parity Stock"); and (iii) subject to certain conditions, junior
to each class or series of Capital Stock established after the Issue Date by the
Board of Directors of the Company the terms of which expressly provide that such
class will rank senior to the Senior Preferred Stock as to dividend rights and
rights upon liquidation, winding-up and dissolution of the Company (collectively
referred to as the "Senior Stock"). The Company may not authorize any new class
of Parity Stock or Senior Stock without the approval of the holders of at least
a majority of the shares of Senior Preferred Stock then outstanding, voting or
consenting, as the case may be, as one class; provided, however, that prior to
March 1, 2003, the Company can issue additional shares of Senior Preferred Stock
to satisfy dividend payments on outstanding shares of Senior Preferred Stock.
96
<PAGE> 104
DIVIDENDS
Holders of the outstanding shares of Senior Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company, out of funds legally available therefor, cash dividends on the Senior
Preferred Stock at a rate per annum equal to 12 1/2% of the liquidation
preference per share of Senior Preferred Stock, payable quarterly. In the event
that, after March 1, 2003, dividends on the Senior Preferred Stock are in
arrears and unpaid for six or more quarterly dividend periods (whether or not
consecutive), holders of Senior Preferred Stock will be entitled to certain
voting rights. See "-- Voting Rights" below. All dividends will be cumulative,
whether or not declared, from the Issue Date and will be payable quarterly in
arrears on March 1, June 1, September 1 and December 1 of each year (each a
"Dividend Payment Date"), commencing on June 1, 1998, to holders of record on
the February 15, May 15, August 15 and November 15 immediately preceding the
relevant Dividend Payment Date. Dividends may be paid, at the Company's option,
on any Dividend Payment Date occurring on or prior to March 1, 2003 either in
cash or by the issuance of additional shares of Senior Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such dividends. In the event that on or prior to March 1, 2003
dividends are declared and paid through the issuance of additional shares of
Senior Preferred Stock, as provided in the previous sentence, such dividends
shall be deemed paid in full and will not accumulate. After March 1, 2003,
dividends must be paid in cash. The Indenture and the New Revolving Credit
Facility restrict the Company's ability to pay cash dividends on its Capital
Stock, including the Senior Preferred Stock. Other future agreements may provide
the same. See "Description of New Revolving Credit Facility" and "Description of
Senior Subordinated Notes." While the Company is not permitted to pay cash
dividends on the Senior Preferred Stock under the Indenture and the New
Revolving Credit Facility, it is permitted to pay in-kind dividends in the form
of additional shares of Senior Preferred Stock. The Company also has the right
to reduce the amount of any dividends, whether paid in cash or in additional
shares of Senior Preferred Stock, by the amount of any taxes it is required to
withhold and pay to any taxing authorities under applicable law and the amounts
so withheld shall be deemed to have been paid to the applicable holder of shares
of Senior Preferred Stock.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Stock for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment is set apart for such payment on the Senior
Preferred Stock. If full dividends are not so paid, the Senior Preferred Stock
will share dividends pro rata with the Parity Stock. No dividends may be paid or
set apart for such payment on Junior Stock (except dividends on Junior Stock
payable in additional shares of Junior Stock) and no Junior Stock or Parity
Stock may be repurchased, redeemed or otherwise retired nor may funds be set
apart for payment with respect thereto, if full cumulative dividends have not
been paid in full (or deemed paid) on the Senior Preferred Stock.
Dividends on account of arrears for any past Dividend Payment Date and
dividends in connection with any optional redemption may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to holders of
record on such date, not more than 45 days prior to the payment thereof, as may
be fixed by the Board of Directors of the Company. So long as any shares of the
Senior Preferred Stock are outstanding, the Company shall not make any payment
on account of, or set apart for payment money for a sinking or other similar
fund for, the purchase, redemption or other retirement of, any of the Parity
Stock or Junior Stock or any warrants, rights, calls or options exercisable for
or convertible into any of the Parity Stock or Junior Stock, and shall not
permit any corporation or other entity directly or indirectly controlled by the
Company to purchase or redeem any of the Parity Stock or Junior Stock or any
such warrants, rights, calls or options unless full cumulative dividends
determined in accordance herewith on the Senior Preferred Stock have been paid
(or are deemed paid) in full.
OPTIONAL REDEMPTION
The Senior Preferred Stock may be redeemed (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after March 1, 2003, in whole or in
97
<PAGE> 105
part, at the option of the Company, at the redemption prices (expressed in
percentages of the liquidation preference thereof) set forth below, plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends to the redemption date (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the redemption date to the redemption date), if redeemed during the
twelve-month period commencing on March 1 of each of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003............................................ 106.250%
2004............................................ 104.167%
2005............................................ 102.083%
2006 and thereafter............................. 100.000%
</TABLE>
In addition, prior to March 1, 2001, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem, in whole or in part, the Senior Preferred Stock, at a redemption
price of 112.5% of the then effective liquidation preference thereof plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends to the redemption date including an amount in cash equal to a prorated
dividend for the period from the Dividend Payment Date immediately prior to the
redemption date to the redemption date. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
The Indenture and the New Revolving Credit Facility restrict the ability of
the Company to redeem the Senior Preferred Stock. See "Description of the New
Revolving Credit Facility" and "Description of Senior Subordinated Notes."
MANDATORY REDEMPTION
The Senior Preferred Stock will also be subject to mandatory redemption
(subject to the legal availability of funds therefor) in whole on March 1, 2010
at a price equal to 100% of the liquidation preference thereof, plus, without
duplication, all accumulated and unpaid dividends to the date of redemption.
Future agreements or certificates of designation of the Company may restrict or
prohibit the Company from redeeming the Senior Preferred Stock.
PROCEDURE FOR REDEMPTION
On and after the redemption date, unless the Company defaults in the
payment of the applicable redemption price, dividends will cease to accumulate
on shares of Senior Preferred Stock called for redemption and all rights of
holders of such shares will terminate except for the right to receive the
redemption price, without interest; provided, however, that if a notice of
redemption shall have been given as provided in the succeeding sentence and the
funds necessary for redemption (including an amount in respect of all dividends
that will accumulate to the redemption date) shall have been segregated and
irrevocably set apart by the Company, in trust for the benefit of the holders of
the shares called for redemption, then dividends shall cease to accumulate on
the redemption date on the shares to be redeemed and, at the close of business
on the day when such funds are segregated and set apart, the holders of the
shares to be redeemed shall cease to be stockholders of the Company and shall be
entitled only to receive the redemption price for such shares. The Company will
send a written notice of redemption by first class mail to each holder of record
of shares of Senior Preferred Stock not fewer than 30 days nor more than 60 days
prior to the date fixed for such redemption at its registered address. Shares of
Senior Preferred Stock issued and reacquired will, upon compliance with the
applicable requirements of Idaho law, have the status of authorized but unissued
shares of Senior Preferred Stock of the Company undesignated as to series and
may, with any and all other authorized but unissued shares of preferred stock of
the Company, be designated or redesignated and issued or
98
<PAGE> 106
reissued, as the case may be, as part of any series of preferred stock of the
Company, except that any issuance or reissuance of shares of Senior Preferred
Stock must be in compliance with the Certificate of Designation.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date occurring on or after the Issue Date, exchange
the Senior Preferred Stock, in whole but not in part, for the Exchange
Debentures (the date of original issuance of the Exchange Debentures is
hereinafter referred to as the "Exchange Date"); provided that (i) on the
Exchange Date there are no accumulated and unpaid dividends on the Senior
Preferred Stock (including the dividend payable on such date) or other
contractual impediments to such exchange; (ii) there shall be funds legally
available sufficient therefor; (iii) immediately after giving effect to such
exchange, no Default or Event of Default (each as defined in the Exchange
Indenture) would exist under the Exchange Indenture, no Default or Event of
Default (each as defined in the Indenture) would exist under the Indenture, no
default or event of default would exist under the New Revolving Credit Facility
and no default or event of default under any other material instrument governing
Indebtedness outstanding at the time would be caused thereby; and (iv) the
Exchange Indenture has been qualified under the TIA, if such qualification is
required at the time of exchange. As of the date hereof, the exchange of the
Senior Preferred Stock into Exchange Debentures is restricted by covenants
contained in the Indenture and the New Revolving Credit Facility, in each case,
relating, among other things, to the incurrence of Indebtedness.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding shares of Senior Preferred Stock will be entitled to receive,
subject to the second succeeding sentence, $1.00 principal amount of Exchange
Debentures for each $1.00 liquidation preference of Senior Preferred Stock held
by them. The Exchange Debentures will be issued in registered form, without
coupons. Exchange Debentures issued in exchange for Senior Preferred Stock will
be issued in principal amounts of $1,000 and integral multiples thereof to the
extent possible and also will be issued in principal amounts less than $1,000 so
that each holder of Senior Preferred Stock will receive certificates
representing the entire amount of Exchange Debentures to which such holder's
shares of Senior Preferred Stock entitle such holder; provided that the Company
may pay cash in lieu of issuing an Exchange Debenture in a principal amount less
than $1,000. The Company will send a written notice of exchange by mail to each
holder of record of shares of Senior Preferred Stock not fewer than 30 days nor
more than 60 days before the date fixed for such exchange. On and after the date
of exchange, dividends will cease to accumulate on the outstanding shares of
Senior Preferred Stock, and all rights of the holder of Senior Preferred Stock
(except the right to receive the Exchange Debentures, an amount in cash, to the
extent applicable, equal to the accumulated and unpaid dividends to the exchange
date and, if the Company so elects, cash in lieu of any Exchange Debenture that
is in a principal amount that is not an integral multiple of $1,000) will
terminate. The person entitled to receive the Exchange Debentures issuable upon
such exchange will be treated for all purposes as the registered holder of such
Exchange Debentures. See "-- Exchange Debentures."
The Company will comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Senior Preferred Stock will be entitled to be paid, out
of the assets of the Company available for distribution to stockholders, the
liquidation preference per share of Senior Preferred Stock, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last Dividend
Payment Date to the date fixed for liquidation, dissolution or winding-up),
before any distribution is made on any Junior Stock, including, without
limitation, Common Stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Senior Preferred Stock and all other Parity Stock are not paid in
full, the holders of the Senior Preferred Stock and the Parity Stock will share
equally and ratably in any distribution of assets of the
99
<PAGE> 107
Company in proportion to the full liquidation preference to which each is
entitled until such preferences are paid in full, and then in proportion to
their respective amounts of accumulated but unpaid dividends. After payment of
the full amount of the liquidation preference and accumulated and unpaid
dividends to which they are entitled, the holders of shares of Senior Preferred
Stock will not be entitled to any further participation in any distribution of
assets of the Company. However, neither the sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with one or more entities shall be deemed
to be a liquidation, dissolution or winding-up of the Company.
The Certificate of Designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Senior
Preferred Stock, although such liquidation preference will be substantially in
excess of the par value of such shares of Senior Preferred Stock. In addition,
the Company is not aware of any provision of Idaho law or any controlling
decision of the courts of the State of Idaho (the state of incorporation of the
Company) that requires a restriction upon the surplus of the Company solely
because the liquidation preference of the Senior Preferred Stock will exceed its
par value. Consequently, there is no restriction upon the surplus of the Company
solely because the liquidation preference of the Senior Preferred Stock will
exceed its par value and there are no remedies available to holders of the
Senior Preferred Stock before or after the payment of any dividend on any
Capital Stock, other than in connection with the liquidation of the Company,
solely by reason of the fact that such dividend would reduce the surplus of the
Company to an amount less than the difference between the liquidation preference
of the Senior Preferred Stock and its par value.
VOTING RIGHTS
The holders of Senior Preferred Stock, except as otherwise required under
Idaho law or as set forth in the Certificate of Incorporation, shall not be
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.
The Certificate of Designation provides that if (i) after March 1, 2003,
cash dividends on the Senior Preferred Stock are in arrears and unpaid for six
or more quarterly dividend periods (whether or not consecutive); (ii) the
Company fails to redeem the Senior Preferred Stock on March 1, 2010; (iii) the
Company fails to make a Change of Control Offer if such offer is required by the
provisions set forth under "-- Change of Control" below or fails to purchase
shares of Senior Preferred Stock from holders who elect to have such shares
purchased pursuant to the Change of Control Offer; (iv) a breach or violation of
any of the provisions described under the caption "-- Certain Covenants" occurs
and the breach or violation continues for a period of 30 days or more after the
Company receives notice thereof specifying the default from the holders of at
least 25% of the shares of Senior Preferred Stock then outstanding; or (v) the
Company fails to pay at the final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of any
Indebtedness for borrowed money of the Company or any Restricted Subsidiary of
the Company, or the final stated maturity of any such Indebtedness is
accelerated, if the aggregate principal amount of such Indebtedness, together
with the aggregate principal amount of any other such Indebtedness in default
for failure to pay principal at the final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) or which has been
accelerated, aggregates $10.0 million or more at any time, in each case, after a
20-day period during which such default shall not have been cured or such
acceleration rescinded, then the number of directors constituting the Board of
Directors will be adjusted to permit the holders of a majority of the then
outstanding shares of Senior Preferred Stock, voting separately and as a class
(together with the holders of any Parity Stock having similar voting rights), to
elect the lesser of two directors and that number of directors constituting at
least 25% of the members of the Board of Directors of the Company. Such voting
rights will continue until such time as, in the case of a dividend default, all
dividends in arrears on the Senior Preferred Stock are paid in full in cash and,
in all other cases, any failure, breach or default giving rise to such voting
rights is remedied or waived by the holders of at least a majority of the shares
of Senior Preferred Stock then outstanding, at which time the term of any
directors elected pursuant to the provisions of this paragraph shall terminate.
Each such event described in clauses (i) through (v) above is referred to
100
<PAGE> 108
herein as a "Voting Rights Triggering Event." The voting rights provided herein
shall be the holder's exclusive remedy at law or in equity.
The Certificate of Designation provides that the Company will not authorize
any class of Senior Stock or Parity Stock (other than the Senior Preferred
Stock, plus dividends thereon payable in additional shares of Senior Preferred
Stock in lieu of cash dividends) without the affirmative vote or consent of
holders of at least a majority of the shares of Senior Preferred Stock then
outstanding, voting or consenting, as the case may be, as one class. The
Certificate of Designation also provides that, except as set forth above, the
Company may not amend the Certificate of Designation so as to affect materially
and adversely the specified rights, preferences, privileges or voting rights of
the then outstanding shares of Senior Preferred Stock, without the affirmative
vote or consent of the holders of at least a majority of the then outstanding
shares of Senior Preferred Stock, voting or consenting, as the case may be, as
one class.
Under Idaho law, holders of preferred stock are entitled to vote as a class
upon a proposed amendment to the certificate of incorporation, whether or not
entitled to vote thereon by the certificate of incorporation if the amendment
would alter or change the powers, preferences or special rights of the shares of
such class so as to affect them adversely.
CHANGE OF CONTROL
The Certificate of Designation provides that upon the occurrence of a
Change of Control, each holder will have the right to require that the Company
purchase all or a portion of such holder's Senior Preferred Stock in cash
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the liquidation preference thereof, plus,
without duplication, all accumulated and unpaid dividends per share to the
Change of Control Payment Date (as defined herein) (including an amount in cash
equal to a prorated dividend for the period from the Dividend Payment Date
immediately prior to the Change of Control Payment Date to the Change of Control
Payment Date).
The Certificate of Designation provides that, prior to the mailing of the
notice referred to below, but in any event within 60 days following the date on
which the Company becomes aware that a Change of Control has occurred, the
Company covenants that if the purchase of the Senior Preferred Stock would
violate or constitute a default under the Indenture, the New Revolving Credit
Facility or any other Indebtedness of the Company, then the Company shall, to
the extent needed to permit such purchase of the Senior Preferred Stock, either
(i) repay all such Indebtedness and terminate all commitments outstanding
thereunder or (ii) obtain the requisite consents, if any, under such
Indebtedness required to permit the purchase of the Senior Preferred Stock as
provided below. The Company will first comply with the covenant in the preceding
sentence before it will be required to make the Change of Control Offer or
purchase the Senior Preferred Stock pursuant to the provisions described below.
Within 60 days following the date upon which a Change of Control occurred,
the Company must send, by first-class mail, a notice to each holder of Senior
Preferred Stock, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 60 days nor later than 90 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have any shares of Senior Preferred Stock purchased
pursuant to a Change of Control Offer will be required to surrender such shares
of Senior Preferred Stock to the Paying Agent and Registrar for the Senior
Preferred Stock at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company would have available funds sufficient to pay the Change of Control
purchase price for all shares of Senior Preferred Stock that the Company might
be required to purchase. In the event the Company is required to purchase
outstanding shares of Senior Preferred Stock pursuant to a Change of Control
Offer, the Company expects that it would need to seek third-party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all. In addition, the Indenture and the New
Revolving Credit Facility restrict the Company's
101
<PAGE> 109
ability to purchase the Senior Preferred Stock, including pursuant to a Change
of Control Offer. See "Description of New Revolving Credit Facility" and
"Description of Senior Subordinated Notes."
Restrictions in the Certificate of Designation described herein on the
ability of the Company and its Restricted Subsidiaries to incur additional
Indebtedness and to make Restricted Payments may also make more difficult or
discourage a takeover of the Company, whether favored or opposed by the
management of the Company. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the Senior Preferred
Stock, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company. While such restrictions cover a wide variety of arrangements which
have traditionally been used to effect highly leveraged transactions, the
Certificate of Designation may not afford the holders of Senior Preferred Stock
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
None of the provisions in the Certificate of Designation relating to a
purchase of Senior Preferred Stock upon a Change of Control is waivable by the
Board of Directors of the Company. Without the consent of each holder of Senior
Preferred Stock affected thereby, after the mailing of the notice of a Change of
Control Offer, no amendment to the Certificate of Designation may, directly or
indirectly, affect the Company's obligation to purchase the outstanding Senior
Preferred Stock or amend, modify or change the obligation of the Company to
consummate a Change of Control Offer or waive any default in the performance
thereof or modify any of the provisions of the definitions with respect to any
such offer.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations-thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of the shares of Senior Preferred Stock pursuant to a Change of Control Offer.
To the extent that the provisions of any securities laws or regulations conflict
with the "Change of Control" provisions of the Certificate of Designation, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Certificate of Designation by virtue thereof.
CERTAIN COVENANTS
The Certificate of Designation contains the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Voting Rights Triggering Event
shall have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Junior Stock to holders of such Junior Stock,
(b) purchase, redeem or otherwise acquire or retire for value any Junior Stock
of the Company or any warrants, rights or options to purchase or acquire shares
of any class of such Junior Stock, or (c) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses (a),
(b) and (c) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto, (i) a Voting
Rights Triggering Event shall have occurred and be continuing or (ii) the
Company is not able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the
102
<PAGE> 110
"Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date (the amount expended for such
purposes, if other than in cash, being the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company earned subsequent to February 26, 1998 and on or prior
to the date the Restricted Payment occurs (the "Reference Date") (treating such
period as a single accounting period); plus (x) 100% of the aggregate net cash
proceeds received by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and on or prior
to the Reference Date of Qualified Capital Stock of the Company; plus (y)
without duplication of any amounts included in clause (iii)(x) above, 100% of
the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock; plus (z) without
duplication, the sum of (1) the aggregate amount returned in cash on or with
respect to Investments (other than Permitted Investments) made subsequent to the
Issue Date whether through interest payments, principal payments, dividends or
other distributions or payments, (2) the net cash proceeds received by the
Company or any of its Restricted Subsidiaries from the disposition of all or any
portion of such Investments (other than to a Subsidiary of the Company) and (3)
upon redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the
fair market value of such Subsidiary; provided, however, that the sum of clauses
(1), (2) and (3) above shall not exceed the aggregate amount of all such
Investments made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or the
consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or notice of such redemption if the dividend or the
payment of the redemption price, as the case may be, would have been permitted
on the date of declaration or notice; (2) if no Voting Rights Triggering Event
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) payments for
the purpose of and in an amount equal to the amount required to permit the
Company to redeem or repurchase its equity or options in respect thereof, in
each case in connection with the terms of any employee stock option or stock
purchase agreements or other agreements to compensate management or other
employees; provided that such redemptions or repurchases pursuant to this clause
(3) shall not exceed $3.0 million (which amount shall be increased by the amount
of any net cash proceeds to the Company from (x) sales of Capital Stock of the
Company to management or other employees subsequent to the Issue Date to the
extent such amounts have not been included in clause (iii) in the foregoing
paragraph and (y) any "key-man" life insurance policies which are used to make
such redemptions or repurchases) in the aggregate; provided, further, that the
cancellation of Indebtedness owing to the Company from management or other
employees of the Company or any of its Restricted Subsidiaries in connection
with a repurchase of Capital Stock of the Company will not be deemed to
constitute a Restricted Payment under the Certificate of Designation; (4)
repurchases of Capital Stock deemed to occur upon the exercise of stock options
if such Capital Stock represents a portion of the exercise price thereof; (5) so
long as no Voting Rights Triggering Event shall have occurred and be continuing,
payments not to exceed $500,000 in the aggregate to enable the Company to make
payments to holders of its Capital Stock in lieu of issuance of fractional
shares of its Capital Stock; (6) payments or other distributions made in
connection with the Recapitalization; and (7) if no Voting Rights Triggering
Event shall have occurred and be continuing, other Restricted Payments in an
aggregate amount not to exceed $10.0 million. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, (a) amounts expended
(to the extent such expenditure is in the form of cash) pursuant to clauses (1),
(2)(ii), (3) and (7) shall be included in such calculation; provided that such
expenditures pursuant to clause (3) shall not be included to the extent of cash
proceeds received by the Company from any "key-man" life insurance policies and
(b) amounts expended pursuant to clauses (2)(i), (4), (5) and (6) shall be
excluded from such calculation.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any preferred stock
(other than to the Company or to a Wholly Owned
103
<PAGE> 111
Restricted Subsidiary of the Company) or permit any Person (other than the
Company or a Wholly Owned Restricted Subsidiary of the Company) to own any
preferred stock of any Restricted Subsidiary of the Company.
Merger, Consolidation and Sale of Assets. Without the affirmative vote of
the holders of a majority of the issued and outstanding shares of Senior
Preferred Stock, voting or consenting, as the case may be, the Company will not,
in a single transaction or series of related transactions, consolidate or merge
with or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person or adopt a plan of liquidation unless
(i) either (1) the Company is the surviving or continuing person or (2) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets of
the Company and of the Company's Restricted Subsidiaries substantially as an
entirety or, in the case of a plan of liquidation, the Person to which assets of
the Company have been transferred, shall be a corporation existing under the
laws of the United States or any State thereof or the District of Columbia; (ii)
if the Company is not the surviving or continuing Person, the Senior Preferred
Stock shall be converted into or exchanged for and shall become shares of such
successor, transferee or resulting person, having in respect of such successor,
transferee or resulting person the same powers, preferences and relative
participating, optional or other special rights and the qualifications,
limitations or restrictions thereon that the Senior Preferred Stock had
immediately prior to such transaction; (iii) immediately after giving effect to
such transaction and the use of the proceeds therefrom (on a pro forma basis,
including giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred in connection with such transaction), the Company
(in the case of clause (1) of the foregoing clause (i)) or such Person (in the
case of clause (2) of the foregoing clause (i)) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness"
covenant; and (iv) immediately after giving effect to such transactions, no
Voting Rights Triggering Event shall have occurred or be continuing.
Notwithstanding clause (iii) of the preceding sentence, (a) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (b) the Company may merge
with an Affiliate incorporated solely for the purpose of reincorporating the
Company in another jurisdiction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
Reports. The Certificate of Designation provides that the Company will
file with the Commission, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Company is required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
The Certificate of Designation further provides that, notwithstanding that the
Company may not be subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, following the effectiveness of the Exchange Offer
Registration Statement, the Company will file with the Commission, to the extent
permitted, and provide the holders of the Senior Preferred Stock with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. Prior to the effectiveness of the
Exchange Offer Registration Statement, the Company will provide, upon request
from holders of the Senior Preferred Stock or prospective holders the
information required by Rule 144A(d)(4) under the Securities Act.
TRANSFER AGENT AND REGISTRAR
United States Trust Company of New York will be the transfer agent and
registrar for the Senior Preferred Stock.
104
<PAGE> 112
EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under the indenture (the
"Exchange Indenture"), dated as of February 26, 1998, by and between the Company
and United States Trust Company of New York, as trustee (the "Debenture
Trustee"). A copy of the Exchange Indenture is available from the Company upon
request. The following summary of certain provisions of the Exchange Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the TIA and to all of the provisions of the Exchange
Indenture, including the definitions of certain terms therein and those terms
made a part of the Exchange Indenture by reference to the TIA as in effect on
the date of the Exchange Indenture. The definitions of certain terms used in the
following summary are set forth below under "Description of Senior Subordinated
Notes -- Certain Definitions." The New Revolving Credit Facility and the
Indenture limit the Company's ability to issue the Exchange Debentures. See
"Description of New Revolving Credit Facility" and "Description of Senior
Subordinated Notes."
The Exchange Debentures will be general unsecured obligations of the
Company and will be limited in aggregate principal amount to the liquidation
preference of the Senior Preferred Stock, plus, without duplication, accumulated
and unpaid dividends, on the Exchange Date of the Senior Preferred Stock into
Exchange Debentures (plus any additional Exchange Debentures issued in lieu of
cash interest as described herein). The Exchange Debentures will be issued in
fully registered form only in denominations of $1,000 and integral multiples
thereof (other than as described in "-- Senior Preferred Stock -- Exchange" or
with respect to additional Exchange Debentures issued in lieu of cash interest
as described herein). The Exchange Debentures will be subordinated to all
existing and future Senior Debt of the Company, including the Senior
Subordinated Notes.
PRINCIPAL, MATURITY AND INTEREST
Principal of, premium, if any, and interest on the Exchange Debentures will
be payable, and the Exchange Debentures may be presented for registration of
transfer or exchange, at the office of the Paying Agent and Registrar in New
York, New York. At the Company's option, interest, to the extent paid in cash,
may be paid at the Debenture Trustee's corporate office or by check mailed to
the registered address of holders of the Exchange Debentures as shown on the
register for the Exchange Debentures. The Debenture Trustee will initially act
as Paying Agent and Registrar. The Company may change any Paying Agent and
Registrar without prior notice to holders of the Exchange Debentures. Holders of
the Exchange Debentures must surrender Exchange Debentures to the Paying Agent
to collect principal payments.
The Exchange Debentures will mature on March 1, 2010. Each Exchange
Debenture will bear interest at the rate of 12 1/2% per annum from the Exchange
Date or from the most recent interest payment date to which interest has been
paid or provided. Interest will be payable semi-annually in cash (or, on or
prior to March 1, 2003, in additional Exchange Debentures, at the option of the
Company) in arrears on each March 1 and September 1, commencing with the first
such date after the Exchange Date to the persons who are registered holders
thereof at the close of business on the February 15 and August 15 immediately
preceding such date. Interest on the Exchange Debentures will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
The Exchange Debentures will not be entitled to the benefit of any
mandatory sinking fund.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after March 1, 2003, upon
not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during
105
<PAGE> 113
the twelve-month period commencing on March 1 of each of the years set forth
below, plus, without duplication, in each case, accrued and unpaid interest
thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.............................................. 106.250%
2004.............................................. 104.167%
2005.............................................. 102.083%
2006 and thereafter............................... 100.000%
</TABLE>
In addition, prior to March 1, 2001, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem, in whole or in part, the Exchange Debentures, at a redemption price
of 112.5% of the principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of redemption. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
The Indenture and the New Revolving Credit Facility restrict the ability of
the Company to optionally redeem the Exchange Debentures. See "Description of
the New Revolving Credit Facility" and "Description of Senior Subordinated
Notes."
CHANGE OF CONTROL
The Exchange Indenture provides that upon the occurrence of a Change of
Control, each holder will have the right to require that the Company repurchase
all or a portion of such holder's Exchange Debentures pursuant to the offer
described below (the "Debenture Change of Control Offer"), at a purchase price
equal to 101% of the principal amount thereof plus, accrued interest, if any, to
the date of repurchase.
The Exchange Indenture provides that, prior to the mailing of the notice
referred to below, but in any event within 60 days following any Change of
Control, the Company covenants to either (i) repay in full and terminate all
commitments under all Indebtedness under the Indenture, the New Revolving Credit
Facility and all other Senior Debt the terms of which require repayment upon a
Change of Control or offer to repay in full and terminate all commitments under
all Indebtedness under the Indenture, the New Revolving Credit Facility and all
such other Senior Debt and repay the Indebtedness owed to each lender which has
accepted such offer or (ii) obtain the requisite consents under the Indenture,
the New Revolving Credit Facility and all such other Senior Debt to permit the
repurchase of the Exchange Debentures as provided below. The Company will first
comply with the covenant in the preceding sentence before it will be required to
repurchase Exchange Debentures pursuant to the provisions described below. The
Company's failure to comply with the immediately preceding sentence shall
constitute an Event of Default described in clause (iii) and not in clause (ii)
under "-- Events of Default" below.
Within 60 days following the date upon which a Change of Control has
occurred, the Company must send, by first class mail, a notice to each holder of
Exchange Debentures, with a copy to the Debenture Trustee, which notice shall
govern the terms of the Debenture Change of Control Offer. Such notice will
state, among other things, the purchase date, which must be no earlier than 60
days nor later than 90 days from the date such notice is mailed, other than as
may be required by law (the "Debenture Change of Control Payment Date"). Holders
electing to have an Exchange Debenture purchased pursuant to a Debenture Change
of Control Offer will be required to surrender the Exchange Debenture, properly
endorsed for transfer together with such other customary documents as the
Company may reasonably request, to the Paying Agent at the address specified in
the notice prior to the close of business on the business day prior to the
Debenture Change of Control Payment Date.
If a Debenture Change of Control Offer is made, there can be no assurance
that the Company would have available funds sufficient to pay the purchase price
for all Exchange Debentures that the Company might be required to purchase. In
the event the Company is required to purchase Exchange Debentures pursuant to a
106
<PAGE> 114
Debenture Change of Control Offer, the Company expects that it would need to
seek third-party financing to the extent it does not have available funds to
meet its purchase obligations. There can be no assurance, however, that the
Company would be able to obtain such financing on favorable terms, if at all. In
addition, the Indenture and the New Revolving Credit Facility restrict the
Company's ability to purchase the Exchange Debentures, including pursuant to a
Debenture Change of Control Offer. See "Description of the New Revolving Credit
Facility" and "Description of Senior Subordinated Notes."
Neither the Board of Directors of the Company nor the Debenture Trustee may
waive the covenant relating to a Holder's right to redemption upon a Change of
Control. Restrictions in the Exchange Indenture described herein on the ability
of the Company and its Restricted Subsidiaries to incur additional Indebtedness,
to grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain circumstances may require redemption or repurchase
of the Exchange Debentures, and there can be no assurance that the Company or
the acquiring party will have sufficient financial resources to effect such
redemption or repurchase. Such restrictions and the restrictions on transactions
with Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the management
of the Company. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Exchange Indenture may not afford the holders of Exchange Debentures protection
in all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Debentures pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Change of Control" provisions of the Exchange Indenture, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Change of Control" provisions
of the Exchange Indenture by virtue thereof.
SUBORDINATION
The payment of all Obligations on the Exchange Debentures is subordinated
in right of payment to the prior payment in full in cash or Cash Equivalents of
all Obligations on Senior Debt. Upon any payment or distribution of assets of
the Company of any kind or character, whether in cash, property or securities,
to creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt will
first be paid in full in cash or Cash Equivalents, or such payment duly provided
for to the satisfaction of the holders of Senior Debt, before any payment or
distribution of any kind or character is made on account of any Obligations on
the Exchange Debentures, or for the acquisition of any of the Exchange
Debentures for cash or property or otherwise. If any default occurs and is
continuing in the payment when due, whether at maturity, upon any redemption, by
declaration or otherwise, of any principal of, or interest on, unpaid drawings
for letters of credit issued in respect of, or regularly accruing fees with
respect to, any Senior Debt, no payment of any kind or character (except in
securities substantially identical to the Exchange Debentures issued by the
Company in payment of interest accrued thereon) shall be made by or on behalf of
the Company or any other Person on its or their behalf with respect to any
Obligations on the Exchange Debentures or to acquire any of the Exchange
Debentures for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt permitting the
holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Debenture Trustee (a "Default Notice"), then, unless and until all such events
of default have been cured or waived or have ceased to exist or the Debenture
Trustee receives notice from the Representative
107
<PAGE> 115
for the respective issue of Designated Senior Debt terminating the Blockage
Period (as defined below), during the 180 days after the delivery of such
Default Notice (the "Blockage Period"), neither the Company nor any other Person
on behalf of the Company shall (x) make any payment of any kind or character
(except in securities substantially identical to the Exchange Debentures issued
by the Company in payment of interest accrued thereon) with respect to any
Obligations on the Exchange Debentures or (y) acquire any of the Exchange
Debentures for cash or property or otherwise. Notwithstanding anything herein to
the contrary, in no event will a Blockage Period extend beyond 180 days from the
date the payment on the Exchange Debentures was due and only one such Blockage
Period may be commenced within any 360 consecutive days. No event of default
which existed or was continuing on the date of the commencement of any Blockage
Period with respect to the Designated Senior Debt shall be, or be made, the
basis for commencement of a second Blockage Period by the Representative of such
Designated Senior Debt, whether or not within a period of 360 consecutive days,
unless such event of default has been cured or waived for a period of not less
than 90 consecutive days (it being acknowledged that any subsequent action or
any breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provision under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the holders of the Exchange Debentures, may recover less, ratably, than holders
of Senior Debt.
As of February 26, 1998, the Company had approximately $176.6 million of
Senior Debt outstanding with respect to the Exchange Debentures (exclusive of
unused commitments of $40.0 million under the New Revolving Credit Facility).
CERTAIN COVENANTS
The Exchange Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Exchange Debentures or (d) make any Investment
(other than Permitted Investments) (each of the foregoing actions set forth in
clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if
at the time of such Restricted Payment or immediately after giving effect
thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date (the amount expended for such
purposes, if other than in cash, being the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company) shall exceed
108
<PAGE> 116
the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company
earned subsequent to the February 26, 1998 and on or prior to the date the
Restricted Payment occurs (the "Reference Date") (treating such period as a
single accounting period); plus (x) 100% of the aggregate net cash proceeds
received by the Company from any Person (other than a Subsidiary of the Company)
from the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company; plus (y) without
duplication of any amounts included in clause (iii)(x) above, 100% of the
aggregate net cash proceeds of any equity contribution received by the Company
from a holder of the Company's Capital Stock; plus (z) without duplication, the
sum of (1) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to the Issue Date
whether through interest payments, principal payments, dividends or other
distributions or payments, (2) the net cash proceeds received by the Company or
any of its Restricted Subsidiaries from the disposition of all or any portion of
such Investments (other than to a Subsidiary of the Company) and (3) upon
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the fair
market value of such Subsidiary; provided, however, that the sum of clauses (1),
(2) and (3) above shall not exceed the aggregate amount of all such Investments
made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or the
consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or notice of such redemption if the dividend or the
payment of the redemption price, as the case may be, would have been permitted
on the date of declaration or notice; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any Indebtedness of the Company that is subordinate or junior in right of
payment to the Exchange Debentures either (i) solely in exchange for shares of
Qualified Capital Stock of the Company, or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of (A) shares of Qualified Capital Stock of the Company or (B)
Refinancing Indebtedness; (4) payments for the purpose of and in an amount equal
to the amount required to permit the Company to redeem or repurchase its equity
or options in respect thereof, in each case in connection with the terms of any
employee stock option or stock purchase agreements or other agreements to
compensate management or other employees; provided that such redemptions or
repurchases pursuant to this clause (4) shall not exceed $3.0 million (which
amount shall be increased by the amount of any net cash proceeds to the Company
from (x) sales of Capital Stock of the Company to management or other employees
subsequent to the Issue Date to the extent such amounts have not been included
in clause (iii) in the foregoing paragraph and (y) any "key-man" life insurance
policies which are used to make such redemptions or repurchases) in the
aggregate; provided, further, that the cancellation of Indebtedness owing to the
Company from management or other employees of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Capital Stock of the
Company will not be deemed to constitute a Restricted Payment under the Exchange
Indenture; (5) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise price
thereof; (6) so long as no Default or Event of Default shall have occurred and
be continuing, payments not to exceed $500,000 in the aggregate to enable the
Company to make payments to holders of its Capital Stock in lieu of issuance of
fractional shares of its Capital Stock; (7) payments or other distributions made
in connection with the Recapitalization; and (8) if no Default or Event of
Default shall have occurred and be continuing, other Restricted Payments in an
aggregate amount not to exceed $10.0 million. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, (a) amounts expended
(to the extent such expenditure is in the form of cash) pursuant to clauses (1),
(2)(ii), (4) and (8) shall be included in such calculation; provided that such
expenditures pursuant to clause (4) shall not be included to the extent of cash
proceeds received by the Company from any "key-man" life insurance policies and
(b) amounts expended pursuant to clauses (2)(i), (3), (5), (6) and (7) shall be
excluded from such calculation.
109
<PAGE> 117
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof
either (A) to prepay any Senior Debt (and, in the case of any Senior Debt under
any revolving credit facility, including the New Revolving Credit Facility,
effect a permanent reduction in the availability under such revolving credit
facility), (B) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in properties
and assets of a kind used or usable in the business of the Company and its
Restricted Subsidiaries ("Replacement Assets"), or (C) a combination of
prepayment and investment permitted by the foregoing clauses (iii)(A) and
(iii)(B). On the 366th day after an Asset Sale or such earlier date, if any, as
the Board of Directors of the Company or of such Restricted Subsidiary
determines not to apply the Net Cash Proceeds relating to such Asset Sale as set
forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence
(each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash
Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than
30 nor more than 60 days following the applicable Net Proceeds Offer Trigger
Date, from all Holders on a pro rata basis, that amount of Exchange Debentures
equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal
amount of the Exchange Debentures to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however, that if at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary of the Company, as the case may be, in connection with any Asset Sale
is converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $7.5 million resulting from
one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $7.5 million, shall be applied as
required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date (or if the Net Proceeds Offer has been deferred as described in the first
paragraph of this covenant, the date that the aggregate unutilized Net Proceeds
Offer Amount equals or exceeds $7.5 million), with a copy to the Debenture
Trustee, and shall comply with the procedures set forth in the Exchange
Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to
tender their Exchange Debentures in whole or in part in integral multiples of
$1,000 in exchange for cash. To the extent Holders properly tender Exchange
Debentures in an amount exceeding the Net Proceeds Offer Amount, Exchange
Debentures of tendering Holders will be purchased on a pro rata basis (based on
amounts tendered). A Net Proceeds Offer shall remain open for a period of at
least 20 and not more than 30 business days or such longer period as may be
required by law. To the extent that the aggregate amount of Exchange Debentures
tendered pursuant to a Net Proceeds Offer is less than the Net Proceeds Offer
Amount, the Company may use any remaining Net Proceeds Offer Amount for general
corporate
110
<PAGE> 118
purposes. Upon completion of any such Net Proceeds Offer, the Net Proceeds Offer
Amount shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Debentures pursuant to a Net Proceeds Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Asset Sale" provisions of the Exchange Indenture, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the "Asset Sale" provisions of the Exchange
Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Exchange Indenture, the Indenture and the
New Revolving Credit Facility; (3) non-assignment provisions of any contract or
any lease; (4) any instrument governing Acquired Indebtedness, which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person or the properties or assets of the Person so
acquired; (5) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date; (6) restrictions on the
transfer of assets subject to any Lien imposed by the holder of such Lien; (7)
restrictions imposed by any agreement to sell assets or Capital Stock permitted
under the Exchange Indenture to any Person pending the closing of such sale; (8)
any agreement or instrument governing Capital Stock of any Person that is
acquired; (9) any agreement or instrument governing Indebtedness (whether or not
outstanding) of foreign Restricted Subsidiaries of the Company permitted to be
incurred pursuant to the Exchange Indenture; (10) other Indebtedness permitted
to be incurred subsequent to the Issue Date pursuant to the provisions of the
covenant described under "Limitation on Incurrence of Additional Indebtedness";
provided that any such restrictions are ordinary and customary with respect to
the type of Indebtedness being incurred (under the relevant circumstances); (11)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business; and (12) any
encumbrances or restrictions imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in clauses
(2) through (11) above; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are, in the good faith judgment of the Company's Board of
Directors, no more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment restrictions
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any preferred stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any preferred stock of any
Restricted Subsidiary of the Company.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and of
the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
111
<PAGE> 119
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Debenture Trustee) executed and delivered to the
Debenture Trustee, the due and punctual payment of the principal of, and
premium, if any, and interest on all of the Exchange Debentures and the
performance of every covenant of the Exchange Debentures, the Exchange Indenture
and the Registration Rights Agreement on the part of the Company to be performed
or observed; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, shall be able to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (iv) the Company or the Surviving Entity shall have delivered to
the Debenture Trustee an officers' certificate and an opinion of counsel, each
stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Exchange Indenture and that all conditions
precedent in the Exchange Indenture relating to such transaction have been
satisfied. Notwithstanding clause (ii) of the preceding sentence, (a) any
Restricted Subsidiary of the Company may consolidate with, merge into or
transfer all or part of its properties and assets to the Company and (b) the
Company may merge with an Affiliate incorporated solely for the purpose of
reincorporating the Company in another jurisdiction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Exchange Indenture will provide that upon any consolidation,
combination or merger or any transfer of all or substantially all of the assets
of the Company in accordance with the foregoing, in which the Company is not the
continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or transfer
is made shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Exchange Indenture and the Exchange
Debentures with the same effect as if such surviving entity had been named as
such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are not materially less favorable than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $1.0 million
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Debenture Trustee.
112
<PAGE> 120
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management (including, without limitation, fees and
compensation under the Management Services Agreement with the Principal as in
effect on the Issue Date); (ii) transactions exclusively between or among the
Company and any of its Restricted Subsidiaries or exclusively between or among
such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Exchange Indenture; (iii) any agreement as in effect as of the
Issue Date or any amendment thereto or any transaction contemplated thereby
(including pursuant to any amendment thereto) in any replacement agreement
thereto so long as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the original
agreement as in effect on the Issue Date; (iv) Restricted Payments permitted by
the Exchange Indenture; (v) the existence of, or the performance by the Company
or any of its Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or purchase
agreement related thereto) to which it is a party as of the Issue Date and any
similar agreements which it may enter into thereafter; provided, however, that
the existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under, any future amendment to any such existing
agreement or under any similar agreement entered into after the Issue Date shall
only be permitted by this clause (v) to the extent that the terms of any such
amendment or new agreement are not otherwise disadvantageous to the Holders of
the Exchange Debentures in any material respect; (vi) transactions permitted by,
and complying with, the provisions of the covenant described under "-- Merger,
Consolidation and Sale of Assets"; (vii) the Recapitalization and the
transactions contemplated by the Recapitalization Agreement; and (viii)
transactions with customers, clients, suppliers, joint venture partners or
purchasers or sellers of goods or services, in each case in the ordinary course
of business (including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the Exchange
Indenture, which are fair to the Company or its Restricted Subsidiaries, in the
reasonable determination of the Board of Directors of the Company or the senior
management thereof, or are on terms at least as favorable as might reasonably
have been obtained at such time from an unaffiliated party.
Reports. The Exchange Indenture provides that the Company will deliver to
the Debenture Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Exchange
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, following the effectiveness of the Exchange Offer Registration Statement,
the Company will file with the Commission, to the extent permitted, and provide
the Debenture Trustee and holders of Exchange Debentures with such annual
reports and such information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act. Prior to the effectiveness of the Exchange
Offer Registration Statement, the Company will provide, upon request from the
Holders of the Exchange Debentures or prospective Holders, the information
required by Rule 144A(d)(4) under the Securities Act. The Company will also
comply with the other provisions of TIA sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Exchange Indenture as "Events of
Default":
(i) the failure to pay interest on any Exchange Debentures when the
same becomes due and payable and the Default continues for a period of 30
days (whether or not such payment shall be prohibited by the subordination
provisions of the Exchange Indenture);
(ii) the failure to pay the principal on any Exchange Debentures when
such principal, if any, becomes due and payable, at maturity, upon
redemption or otherwise (including the failure to make a payment to
purchase Exchange Debentures tendered pursuant to a Debenture Change of
Control Offer or a Net Proceeds Offer) (whether or not such payment shall
be prohibited by the subordination provisions of the Exchange Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Exchange Indenture, which default continues
for a period of 30 days after the Company receives written notice
specifying the default (and demanding that such default be remedied) from
the Debenture
113
<PAGE> 121
Trustee or holders of at least 25% of the outstanding principal amount of
the Exchange Debentures (except in the case of a default with respect to
the "Merger, Consolidation and Sale of Assets" covenant, which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness for borrowed money of the Company or any Restricted
Subsidiary of the Company and such failure continues for a period of 20
days or more, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise
cured within 20 days of receipt by the Company or such Restricted
Subsidiary of notice of any such acceleration) if the aggregate principal
amount of such Indebtedness, together with the principal amount of any
other such Indebtedness in default for failure to pay principal at final
stated maturity or which has been accelerated, in each case with respect to
which the 20-day period described above has passed, aggregates $10.0
million or more at any time;
(v) one or more judgments for the payment of money in an aggregate
amount in excess of $10.0 million shall have been rendered against the
Company or any of its Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Debenture Trustee or the holders of at least 25% in principal amount of
outstanding Exchange Debentures may declare the principal of and accrued
interest on all the Exchange Debentures to be due and payable by notice in
writing to the Company and the Debenture Trustee specifying the respective Event
of Default and that it is a "notice of acceleration" (the "Acceleration
Notice"), and the same (i) shall become immediately due and payable or (ii) if
there are any amounts outstanding under the New Revolving Credit Facility, shall
become due and payable upon the first to occur of an acceleration under the New
Revolving Credit Facility or 5 business days after receipt by the Company and
the Representative under the New Revolving Credit Facility of such Acceleration
Notice but only if such Event of Default is then continuing. If an Event of
Default specified in clause (vi) above occurs with respect to the Company and is
continuing, then all unpaid principal of, and premium, if any, and accrued and
unpaid interest on all of the outstanding Exchange Debentures shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Debenture Trustee or any Holder.
The Exchange Indenture provides that, at any time after a declaration of
acceleration with respect to the Exchange Debentures as described in the
preceding paragraph, the holders of a majority in principal amount of the
Exchange Debentures may, on behalf of the Holders of all of the Exchange
Debentures, rescind and cancel such declaration and its consequences (i) if the
rescission would not conflict with any judgment or decree, (ii) if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of the acceleration, (iii) to the
extent the payment of such interest is lawful, interest on overdue installments
of interest and overdue principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (iv) if the Company has paid the
Debenture Trustee its reasonable compensation and reimbursed the Debenture
Trustee for its expenses, disbursements and advances and (v) in the event of the
cure or waiver of an Event of Default of the type described in clause (vi) of
the description above of Events of Default, the Debenture Trustee shall have
received an officers' certificate and an opinion of counsel that such Event of
Default has been cured or waived. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
The holders of a majority in principal amount of the Exchange Debentures
may waive any existing Default or Event of Default under the Exchange Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Exchange Debentures.
Holders of the Exchange Debentures may not enforce the Exchange Indenture
or the Exchange Debentures except as provided in the Exchange Indenture and
under the TIA. Subject to the provisions of the Exchange Indenture relating to
the duties of the Debenture Trustee, the Debenture Trustee is under no
obligation to exercise any of its rights or powers under the Exchange Indenture
at the request, order or direction of any of the holders, unless such holders
have offered to the Debenture Trustee reasonable
114
<PAGE> 122
indemnity. Subject to all provisions of the Exchange Indenture and applicable
law, the holders of a majority in aggregate principal amount of the then
outstanding Exchange Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or exercising any trust or power conferred on the Debenture Trustee.
Under the Exchange Indenture, the Company is required to provide an
officers' certificate to the Debenture Trustee promptly upon any such officer
obtaining knowledge of any Default or Event of Default (provided that such
officers shall provide such certification at least annually whether or not they
know of any Default or Event of Default) that has occurred and, if applicable,
describe such Default or Event of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Exchange Debentures
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Exchange Debentures, except for (i) the rights of holders to receive
payments in respect of the principal of, premium, if any, and interest on the
Exchange Debentures when such payments are due, (ii) the Company's obligations
with respect to the Exchange Debentures concerning issuing temporary Exchange
Debentures, registration of Exchange Debentures, mutilated, destroyed, lost or
stolen Exchange Debentures and the maintenance of an office or agency for
payments, (iii) the rights, powers, trust, duties and immunities of the
Debenture Trustee and the Company's obligations in connection therewith and (iv)
the Legal Defeasance provisions of the Exchange Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Exchange Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Exchange Debentures. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Exchange
Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Debenture Trustee, in trust, for
the benefit of the holders cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding
Exchange Debentures on the stated date for payment thereof or on the applicable
redemption date, as the case may be; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Debenture Trustee an opinion of counsel in
the United States reasonably acceptable to the Debenture Trustee confirming that
(A) the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Exchange Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Debenture
Trustee an opinion of counsel in the United States reasonably acceptable to the
Debenture Trustee confirming that the holders will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
under the Exchange Indenture resulting from the incurrence of Indebtedness, all
or a portion of which will be used to defease the Exchange Debentures
concurrently with such incurrence); (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under the Exchange Indenture or any other material agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound; (vi) the Company shall have delivered to
the Debenture Trustee an officers' certificate stating that the deposit was not
made by the Company with the intent of preferring the holders over any other
creditors of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; (vii) the Company shall
have
115
<PAGE> 123
delivered to the Debenture Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance have been complied with; (viii)
the Company shall have delivered to the Debenture Trustee an opinion of counsel
to the effect that (A) the trust funds will not be subject to any rights of
holders of Senior Debt, including, without limitation, those arising under the
Exchange Indenture and (B) assuming no intervening bankruptcy or insolvency of
the Company between the date of deposit and the 91st day following the deposit
and that no holder of an Exchange Debenture is an insider of the Company, after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied. Notwithstanding the foregoing, the Opinion
of Counsel required by clause (ii) above with respect to a Legal Defeasance need
not be delivered if all Exchange Debentures not theretofore delivered to the
Debenture Trustee for cancellation (x) have become due and payable, (y) will
become due and payable on the maturity date within one year or (z) are to be
called for redemption within one year under arrangements satisfactory to the
Debenture Trustee for the giving of notice of redemption by the Debenture
Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Exchange Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
the Exchange Debentures, as expressly provided for in the Exchange Indenture) as
to all outstanding Exchange Debentures when (i) either (a) all the Exchange
Debentures theretofore authenticated and delivered (except lost, stolen or
destroyed Exchange Debentures which have been replaced or paid and Exchange
Debentures for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Debenture Trustee for
cancellation or (b) all Exchange Debentures not theretofore delivered to the
Debenture Trustee for cancellation have become due and payable and the Company
has irrevocably deposited or caused to be deposited with the Debenture Trustee
funds in an amount sufficient to pay and discharge the entire Indebtedness on
the Exchange Debentures not theretofore delivered to the Debenture Trustee for
cancellation, for principal of, premium, if any, and interest on the Exchange
Debentures to the date of deposit together with irrevocable instructions from
the Company directing the Debenture Trustee to apply such funds to the payment
thereof at maturity or redemption, as the case may be; (ii) the Company has paid
all other sums payable under the Exchange Indenture by the Company; and (iii)
the Company has delivered to the Debenture Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Exchange
Indenture relating to the satisfaction and discharge of the Exchange Indenture
have been complied with.
MODIFICATION OF THE EXCHANGE INDENTURE
From time to time, the Company and the Debenture Trustee, without the
consent of the holders, may amend the Exchange Indenture for certain specified
purposes, including curing ambiguities, defects or inconsistencies, so long as
such change does not, in the opinion of the Debenture Trustee, adversely affect
the rights of any of the holders in any material respect. In formulating its
opinion on such matters, the Debenture Trustee will be entitled to rely on such
evidence as it deems appropriate, including, without limitation, solely on an
opinion of counsel. Other modifications and amendments of the Exchange Indenture
may be made with the consent of the holders of a majority in principal amount of
the then outstanding Exchange Debentures issued under the Exchange Indenture,
except that, without the consent of each holder affected thereby, no amendment
may: (i) reduce the amount of Exchange Debentures whose holders must consent to
an amendment; (ii) reduce the rate of or change or have the effect of changing
the time for payment of interest, including defaulted interest, on any Exchange
Debentures; (iii) reduce the principal of or change or have the effect of
changing the fixed maturity of any Exchange Debentures, or change the date on
which any Exchange Debentures may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor; (iv) make any Exchange
Debentures payable in money other than that stated in the Exchange Debentures;
(v) make any change in provisions of the Exchange Indenture protecting the right
of each holder of an Exchange Debenture to receive payment of principal of and
interest on such Exchange Debenture on or after the due date thereof or to bring
suit to enforce such payment, or permitting holders of a majority in principal
amount of Exchange Debentures to waive Defaults or Events of Default; (vi)
amend, change or modify in any material respect the obligation of the Company to
make and consummate a Debenture Change
116
<PAGE> 124
of Control Offer in the event of a Change of Control or make and consummate a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto after a Change
of Control has occurred or the subject Asset Sale has been consummated; or (vii)
modify or change any provision of the Exchange Indenture or the related
definitions affecting the subordination or ranking of the Exchange Debentures in
a manner which adversely affects the Holders in any material respect.
GOVERNING LAW
The Exchange Indenture provides that it and the Exchange Debentures will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE DEBENTURE TRUSTEE
The Exchange Indenture provides that, except during the continuance of an
Event of Default, the Debenture Trustee will perform only such duties as are
specifically set forth in the Exchange Indenture. During the existence of an
Event of Default, the Debenture Trustee will exercise such rights and powers
vested in it by the Exchange Indenture, and use the same degree of care and
skill in its exercise as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs.
The Exchange Indenture and the provisions of the TIA contain certain
limitations on the rights of the Debenture Trustee, should it become a creditor
of the Company, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Debenture Trustee will be permitted to engage in other
transactions; provided that if the Debenture Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
117
<PAGE> 125
DESCRIPTION OF CAPITAL STOCK
The issued and outstanding capital stock of the Company (other than the
Senior Preferred Stock) consists of Class A Common, Class B Common, Class C
Common, Series A Preferred, Series B Preferred and Series C Preferred. The
Company has outstanding 3,261,176 shares of Class A Common, 863,824 shares of
Class B Common and 875,000 shares of Class C Common. The Company also has
outstanding 3,261,176 shares of Series A Preferred, 863,824 shares of Series B
Preferred and 875,000 shares of Series C Preferred. See "Security Ownership of
Certain Beneficial Owners and Management."
Each share of Series A Preferred, Series B Preferred and Series C Preferred
is convertible, at any time, into one share of Class A Common, Class B Common
and Class C Common, respectively. Each share of Class B Common and Series B
Preferred is convertible, at any time, into one share of Class A Common and
Series A Preferred, respectively; provided, however, that no holder of Class B
Common or Series B Preferred is entitled to convert such holder's shares of
Class B Common or Series B Preferred into shares of Class A Common or Series A
Preferred, as the case may be, if as a result of such conversion such holder or
a group of persons (within the meaning of the Exchange Act) which includes such
holder would own shares of capital stock of the Company representing more than
49.0% of the voting power of the then outstanding capital stock of the Company;
and provided further, that no holder of Class B Common or Series B Preferred
that is subject to the Bank Holding Company Act of 1956 (a "Regulated
Shareholder") or any such Regulated Shareholder's transferees are entitled to
convert such holder's shares of Class B Common or Series B Preferred into shares
of Class A Common or Series A Preferred, as the case may be, to the extent that
immediately prior to, or as a result of, such conversion such Regulated
Shareholder reasonably determines that the issuance of shares of Class A Common
or Series A Preferred, as the case may be, would result in a Regulatory Problem
(as defined in the Company's Articles of Incorporation) for such Regulated
Shareholder. The conversion ratios are subject to anti-dilution protection.
Holders of Class B Common and Series B Preferred have no voting rights,
except as required by law. The holders of Class A Common are entitled to one
vote per share on all matters to be voted upon by the stockholders of the
Company, including the election of directors. The holders of Class C Common are
entitled to two votes per share on all matters to be voted upon by the
stockholders of the Company, including the election of directors. The holders of
Series A Preferred and Series C Preferred are entitled to the number of votes
per share they would have been entitled to vote if they had converted into
Common Stock on all matters to be voted upon by the stockholders of the Company,
including the election of directors. The holders of all classes of Common Stock
and all series of Convertible Preferred Stock entitled to vote on a particular
matter will vote as a single class on such matter except as required by law.
As, if and when declared by the Company's Board of Directors, the Company
shall pay dividends to holders of Convertible Preferred Stock on each share of
Convertible Preferred Stock at a rate of 10% per annum on the liquidation value
per share plus all declared and unpaid dividends thereon. The shares of
Convertible Preferred Stock also will participate together with the shares of
Common Stock as if such shares of Convertible Preferred Stock had been converted
into shares of Common Stock in all dividends paid with respect to the Common
Stock (other than dividends payable solely in shares of Common Stock) as, if and
when such dividends are declared by the Company's Board of Directors.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Convertible Preferred Stock will be entitled to be paid,
out of the assets of the Company available for distribution to shareholders
after payment of amounts owed with respect to any stock senior to the
Convertible Preferred Stock (including the Senior Preferred Stock), the
liquidation preference per share of Convertible Preferred Stock, plus, without
duplication, an amount in cash equal to all declared and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding up before any
distribution is made on any stock junior to the Convertible Preferred Stock,
including, without limitation, the Common Stock. The aggregate liquidation
preference of the Convertible Preferred Stock is approximately $56.7 million.
118
<PAGE> 126
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain material United States Federal
income tax considerations of the acquisition, ownership and disposition of the
Exchange Securities. Unless otherwise stated, this discussion is limited to the
United States Federal income tax consequences to those persons who are original
purchasers of the Securities and who hold such Securities and Exchange
Securities as capital assets within the meaning of Section 1221 of the Code
(each a "Holder"). The discussion does not purport to address specific tax
consequences that may be relevant to particular persons (including, for example,
financial institutions, broker-dealers, insurance companies, tax-exempt
organizations, and persons in special situations, such as those who hold the
Securities or Exchange Securities as part of a straddle, hedge, conversion
transaction, or other integrated investment). In addition, this discussion does
not address U.S. Federal alternative minimum tax consequences or any aspect of
state, local or foreign taxation. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury Department
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, possibly on a
retroactive basis. There can be no assurance that the Internal Revenue Service
(the "IRS") will not take a contrary view and no ruling from the Service has
been or will be sought.
HOLDERS OF THE SECURITIES OR THE EXCHANGE SECURITIES ARE URGED TO CONSULT
THEIR TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO THEM TO ACQUIRING, OWNING AND DISPOSING OF THE SECURITIES OR THE EXCHANGE
SECURITIES, AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
THE EXCHANGE
The Company believes that the exchange of the Securities for Exchange
Securities pursuant to the Exchange Offer will not be treated as an "exchange"
for Federal income tax purposes because the Exchange Securities will not be
considered to differ materially in kind or extent from the Securities. Rather,
the Exchange Securities received by a Holder will be treated as a continuation
of the Securities in the hands of such Holder. As a result, there will be no
Federal income tax consequences to a Holder from the exchange of Securities for
Exchange Securities pursuant to the Exchange Offer. Kirkland & Ellis, counsel to
the Company, will issue an opinion to such effect.
TAX CONSEQUENCES TO U.S. HOLDERS
For purposes of this discussion, a "U.S. Holder" is a Holder who is (i) an
individual who is a citizen or resident of the United States; (ii) a
corporation, limited liability company, partnership or other business entity
created in, or organized under, the laws of the United States or any state or
political subdivision thereof; (iii) an estate the income of which is subject to
United States Federal income taxation regardless of its source; or (iv) a trust
if a court within the United States is able to exercise primary jurisdiction
over its administration and one or more United States persons have the authority
to control all of its substantial decisions.
SENIOR PREFERRED STOCK
Stock Characterization. Although the characterization of an instrument as
debt or equity is a facts and circumstances determination that cannot be
predicted with certainty, the Company intends to treat the Senior Preferred
Stock as stock for Federal income tax purposes, and the remainder of the
discussion assumes that such treatment will be respected.
Distributions on Senior Preferred Stock. Distributions on Senior Preferred
Stock, whether paid in cash or in additional shares of Senior Preferred Stock
("Dividend Shares"), will be taxable as ordinary dividend income to the extent
that the amount of cash or the fair market value of any Senior Preferred Stock
distributed on the Senior Preferred Stock does not exceed the Company's current
and accumulated earnings and profits (as determined for Federal income tax
purposes). To the extent that the amount of any distribution paid on the Senior
Preferred Stock exceeds the Company's current and accumulated earnings and
profits, the distribution will be treated as a return of capital, thereby
reducing the U.S. Holder's basis in the Senior Preferred Stock. The amount of
any excess distribution that is greater than the U.S. Holder's basis in the
Senior Preferred Stock will be taxed as a capital gain, long-term or short-term
depending upon whether the
119
<PAGE> 127
U.S. Holder has held the stock for more than one year. In addition, a U.S.
Holder who is an individual will qualify for a lower tax rate on any capital
gain recognized with respect to Senior Preferred Stock held more than 18 months.
There can be no assurance that the Company will have sufficient earnings and
profits (as determined for Federal income tax purposes) to cause distributions
on the Senior Preferred Stock to be treated as dividends.
The Holder's initial basis in any Dividend Shares distributed by the
Company will be equal to the fair market value of such additional shares on
their date of distribution. The Holder's holding period for such additional
shares will commence with the distribution of the additional shares, and will
not include the Holder's holding period for the shares of Senior Preferred Stock
with respect to which the additional shares were distributed.
Dividends received by a corporate U.S. Holder who owns less than 20 percent
of the Company (by vote or value) will be eligible for the 70%
dividends-received deduction, subject to the limitations generally applicable to
the dividends-received deduction, including those contained in Sections 246 and
246A of the Code. Under Section 246(c) of the Code, a corporate U.S. Holder will
not be entitled to claim the 70% dividends-received deduction with respect to a
dividend on Senior Preferred Stock which such Holder holds for 45 days or less
during the 90-day period beginning 45 days before the Senior Preferred Stock
becomes ex-dividend with respect to such dividend. In addition, if the dividend
is attributable to a period aggregating more than 366 days, then the corporate
U.S. Holder will not be entitled to the 70% dividends-received deduction if it
has held the Senior Preferred Stock for 90 days or less during the 180-day
period beginning 90 days before the Senior Preferred Stock becomes ex-dividend
with respect to such dividend. The length of time that a corporate U.S. Holder
is deemed to have held stock for these purposes is reduced for periods during
which that Holder's risk of loss with respect to the stock is diminished by
reason of certain options, contracts to sell, short sales, or other similar
transactions. Section 246(c) also denies the dividends-received deduction to the
extent that the corporate U.S. Holder is under an obligation to make payments
with respect to substantially similar or related property corresponding to the
dividend received. Section 246A of the Code provides that the 70%
dividends-received deduction may be reduced if the corporate U.S. Holder's
shares of Senior Preferred Stock are debt financed.
Under Section 1059 of the Code, if a corporate U.S. Holder receives an
"extraordinary dividend" with respect to the Senior Preferred Stock that the
U.S. Holder has held for two years or less (ending on the date on which the
Company declares, announces or agrees to, the amount of payment of such
dividend, whichever is the earliest), the tax basis of the Senior Preferred
Stock must be reduced (but not below zero) by the non-taxed portion of the
dividend. To the extent that the U.S. Holder's tax basis would have been reduced
below zero but for the above limitation, such excess will be treated as gain
from the sale or exchange of stock taxable in the year in which the
extraordinary dividend was received. Generally, an "extraordinary dividend" is a
dividend that (i) equals or exceeds 5% of the U.S. Holder's basis in the Senior
Preferred Stock (treating all dividends having ex-dividend dates within an
85-day period as a single dividend), or (ii) exceeds 20% of the U.S. Holder's
adjusted basis in the Senior Preferred Stock, where all dividends having
ex-dividend dates within a 365-day period are treated as a single dividend.
Furthermore, certain redemptions (i.e., non-pro rata redemptions and redemptions
in partial liquidation of the Company) of Senior Preferred Stock will be treated
as extraordinary dividends. Special rules apply to "qualified preferred
dividends," which are any fixed dividends payable with respect to any share of
stock that (i) provides for fixed preferred dividends payable not less
frequently than annually and (ii) is not in arrears as to dividends at the time
the holder acquires such stock. The term qualified preferred dividend does not
include any dividend payable with respect to any share if the actual rate of
return for the period the stock has been held by the holder receiving the
dividend exceeds 15%.
Redemption Premium on Senior Preferred Stock. The Senior Preferred Stock
is subject to a mandatory redemption on March 1, 2010. If the redemption price
of the Senior Preferred Stock exceeds its issue price by more than a de minimis
amount, such excess ("Preferred OID") may be treated as a constructive
distribution of additional stock on the Senior Preferred Stock. An amount
generally will be considered de minimis as long as the amount is less than the
redemption price of the preferred stock multiplied by 1/4 of 1% multiplied by
the number of years until the issuer must redeem the preferred stock. The Senior
Preferred Stock issued pursuant
120
<PAGE> 128
to this offering will not have any Preferred OID. However, because the issue
price of a Dividend Share will be equal to its fair market value at the time of
distribution, a Dividend Share may be issued with Preferred OID. In this case,
the U.S. Holder of a Dividend Share will be required to include such Preferred
OID in income as a distribution in advance of receiving the cash attributable to
such income. If the Dividend Shares bear Preferred OID, such shares generally
will have different tax characteristics from other Senior Preferred Stock
(including other Dividend Shares) and might trade separately, which might
adversely affect the liquidity of such shares.
In addition to the mandatory redemption feature, as described in more
detail under the heading "Description of the Senior Preferred Stock and Exchange
Debentures," the Senior Preferred Stock is redeemable, either in whole or in
part, at the option of the Company (i) before March 1, 2001, at a fixed premium
upon the occurrence of certain events, and (ii) from March 1, 2003 through
February 28, 2006, at premiums declining to par on March 1, 2006. Furthermore,
each Holder of the Senior Preferred Stock has the right to require the Company
to repurchase the Holder's Senior Preferred Stock in cash upon the occurrence of
a Change of Control. Although the optional redemption and the U.S. Holder's put
may result in constructive distributions to the U.S. Holder under certain
circumstances, the Company believes that neither the optional redemption nor the
U.S. Holder's put of the Senior Preferred Stock would trigger those rules.
Redemption, Sale or Exchange of Senior Preferred Stock. A redemption of
shares of Senior Preferred Stock for Exchange Debentures or for cash, or a sale
of Senior Preferred Stock, will be taxable events.
A redemption of shares of Senior Preferred Stock for cash will generally be
treated as a sale or exchange if the U.S. Holder does not own, actually or
constructively within the meaning of Section 318 of the Code, any stock of the
Company other than the stock redeemed. If the U.S. Holder does own, actually or
constructively, such other stock (including Senior Preferred Stock not
redeemed), a redemption of Senior Preferred Stock may be treated as a dividend
to the extent of the Company's current and accumulated earnings and profits.
Such dividend treatment, however, would not apply if the redemption is
"substantially disproportionate" with respect to the Holder under Section
302(b)(2) of the Code or is "not essentially equivalent to a dividend" with
respect to the Holder under Section 302(b)(1) of the Code. A distribution to a
holder will be "not essentially equivalent to a dividend" if it results in a
"meaningful reduction" of the U.S. Holder's stock in the Company. For these
purposes, a redemption of Senior Preferred Stock for cash that results in a
reduction in the proportionate interest in the Company (taking into account any
constructive ownership) of a U.S. Holder whose relative stock interest in the
Company is minimal and who exercises no control over corporate affairs should be
regarded as a meaningful reduction in the U.S. Holder's stock interest in the
Company.
If the redemption of Senior Preferred Stock were not treated as a
distribution taxable as a dividend or if the Senior Preferred Stock were sold,
the redemption or sale would result in capital gain or loss equal to the
difference between the (i) amount of cash and the fair market value of other
property received in the redemption or sale and (ii) the U.S. Holder's adjusted
tax basis in the Senior Preferred Stock redeemed or sold. A redemption of Senior
Preferred Stock for Exchange Debentures will be subject to the same rules as a
redemption for cash, except that the U.S. Holder would recognize capital gain or
loss equal to the difference between the issue price of the Exchange Debentures
received and the U.S. Holder's adjusted tax basis in the Senior Preferred Stock
redeemed. In either of these cases, the gain or loss will be long-term capital
gain or loss if the U.S. Holder has held the Senior Preferred Stock for more
than one year; preferential rates of tax may apply to gains recognized upon the
disposition of shares of Senior Preferred Stock held for more than 18 months.
The deductibility of capital losses by U.S. Holders is subject to limitations.
If the redemption of Senior Preferred Stock were treated as a distribution
that is taxable as a dividend, the distribution would be measured by the amount
of cash or issue price of the Exchange Debentures received by the U.S. Holder in
the redemption. As described above, the distribution will be taxable as a
dividend to the extent of the Company's earnings and profits. The amount of the
distribution in excess of the Company's earnings and profits will reduce the
U.S. Holder's basis in the redeemed shares, and, to the extent the amount of the
distribution exceeds such basis, will result in capital gain. The U.S. Holder's
adjusted tax basis in the Senior Preferred Stock would be transferred to any
remaining stock of the U.S. Holder in the Company. If the U.S. Holder does not
retain any stock ownership in the Company, the U.S. Holder may lose such basis.
121
<PAGE> 129
EXCHANGE DEBENTURES
Original Issue Discount on Exchange Debentures. If the Senior Preferred
Stock is exchanged for Exchange Debentures at a time when the stated redemption
price at maturity of the Exchange Debentures exceeds their issue price by more
than a de minimis amount, the Exchange Debentures will be treated as having
original issue discount ("OID") equal to the entire amount of such excess. OID
will generally be considered de minimis as long as it is less than the stated
redemption price at maturity of the Exchange Debentures multiplied by 1/4 of 1%
multiplied by the number of years to maturity. If the Exchange Debentures are
deemed to be traded on an established securities market at any time during the
60-day period ending 30 days after their issue date, the issue price of the
Exchange Debentures will be their fair market value as determined as of the
issue date. Subject to certain limitations described in the regulations, the
Exchange Debentures will be deemed to be traded on an established securities
market if, among other things, price quotations are readily available from
dealers, brokers or traders. Similarly, if the Senior Preferred Stock, but not
the Exchange Debentures issued and exchanged therefor, is deemed to be traded on
an established securities market at the time of the exchange, then the issue
price of each Exchange Debenture should be the fair market value of the Senior
Preferred Stock exchanged therefor at the time of the exchange. The Senior
Preferred Stock will generally be deemed to be traded on an established
securities market if it appears on a system of general circulation that provides
a reasonable basis to determine fair market value based either on recent price
quotations or recent sales transactions. In the event that neither the Senior
Preferred Stock nor the Exchange Debentures are deemed to be traded on an
established securities market, the issue price of the Exchange Debentures will
be their stated principal amount or, in the event the Exchange Debentures do not
bear "adequate stated interest" within the meaning of Section 1274 of the Code,
their "imputed principal amount," which is generally the sum of the present
values of all payments due under the Exchange Debentures, discounted from the
date of payment to their issue date at the "applicable federal rate."
The stated redemption price at maturity of the Exchange Debentures will
equal the total of all payments required to be made thereon, other than payments
of qualified stated interest. Qualified stated interest generally is stated
interest that is unconditionally payable in cash or other property (other than
debt instruments of the issuer) at least annually at a single fixed rate.
Therefore, Exchange Debentures that are issued when the Company has the option
to pay interest thereon for certain periods in additional Exchange Debentures
should be treated as having been issued without any qualified stated interest.
Accordingly, the sum of all interest payable pursuant to the stated interest
rate on such Exchange Debentures over the entire term should be treated as OID
and accrued into income under a constant yield method by the U.S. Holder, and
the U.S. Holder should not treat the receipt of stated interest on the
Debentures as interest for Federal income tax purposes.
In general, the amount of OID that a Holder of a debt instrument with OID
must include in gross income will be the sum of the "daily portions" of OID with
respect to such debt instrument for each day during the taxable year or portion
of a taxable year on which such Holder holds the debt instrument. The daily
portion is determined under a constant yield method by allocating to each day of
an accrual period (generally, a six-month period) a pro rata portion of an
amount equal to the "adjusted issue price" of the debt instrument at the
beginning of the accrual period multiplied by the yield to maturity of the debt
instrument. The yield to maturity of a debt instrument is the discount rate
that, when applied to all payments due under the debt instrument, produces a
present value equal to the issue price of the debt instrument. The "adjusted
issue price" is the issue price of the debt instrument increased by the accrued
OID for all prior accrual periods (and decreased by the amount of cash payments
made in all prior accrual periods, other than qualified stated interest
payments).
An additional Exchange Debenture (a "Secondary Debenture") issued in
payment of interest with respect to an initially issued Exchange Debenture (an
"Initial Debenture") will not be considered as payment made on the Initial
Debenture and will be aggregated with the Initial Debenture for purposes of
computing and accruing OID on the Initial Debenture. The Company will allocate
the adjusted issue price of the Initial Debenture between the Initial Debenture
and the Secondary Debenture in proportion to their respective principal amounts.
That is, upon its issuance of a Secondary Debenture with respect to an Initial
Debenture, the Company intends to treat the Initial Debenture and the Secondary
Debenture derived from the Initial
122
<PAGE> 130
Debenture as initially having the same adjusted issue price and inherent amount
of OID per dollar of principal amount. The Initial Debenture and the Secondary
Debenture derived therefrom will be treated as having the same yield to
maturity. Similar treatment will be applied when additional Exchange Debentures
are issued on Secondary Debentures.
In the event the Exchange Debentures are not issued with OID, because they
are issued at a time when the Company does not have the option to pay interest
thereon in additional Exchange Debentures and the redemption price of the
Exchange Debentures does not exceed their issue price by more than a de minimis
amount, stated interest should be included in income by a U.S. Holder in
accordance with such Holder's method of accounting.
Tax Basis of Exchange Debentures. A Holder's initial tax basis in the
Exchange Debentures will be equal to the Holder's tax basis in the Senior
Preferred Stock exchanged therefor plus the amount of gain, if any, recognized
upon such exchange. The tax basis of the Exchange Debentures in the hands of
each Holder will be increased by the amount of OID, if any, on such Exchange
Debentures that is included in the Holder's gross income and will be decreased
by the amount of any cash payments received with respect to the debt instrument
(other than payments of qualified stated interest), whether such payments are
denominated as principal or interest.
Election. A Holder of Exchange Debentures, subject to certain limitations,
may elect to include all interest and discount on the Exchange Debentures in
gross income under the constant yield method. For this purpose, interest
includes stated and unstated interest, acquisition discount and OID, as adjusted
by any amortizable bond premium.
Bond Premium on Exchange Debentures. If the Senior Preferred Stock is
exchanged for Exchange Debentures when the Company no longer has the option to
pay interest thereon in additional Exchange Debentures and the issue price of
the Exchange Debentures exceeds the amount payable at the maturity date (or
earlier call date, if appropriate) of the Exchange Debentures, such excess will
be deductible by the holder of the Exchange Debentures as amortizable bond
premium over the term of the Exchange Debentures (taking into account earlier
call dates, as appropriate) under a yield-to-maturity formula if an election by
the U.S. Holder under Section 171 of the Code is made or is already in effect.
However, under recently promulgated final regulations, the amount of amortized
bond premium that a U.S. Holder may deduct in any accrual period is limited to
the excess of (a) the interest includible in such U.S. Holder's taxable income
in such accrual period and prior periods over (b) the total amount treated by
the U.S. Holder as a bond premium deduction on the Exchange Debenture in prior
accrual periods. If any of the excess bond premium is not deductible under
Section 171, that amount is carried forward to the next accrual period and is
treated as bond premium allocable to that period. The final regulations relating
to bond premium are effective for Exchange Debentures acquired on or after March
2, 1998; however, if a U.S. Holder makes the election to amortize bond premium
for the taxable year containing March 2, 1998, or any subsequent taxable year,
this regulation applies to Exchange Debentures held on or after the first day of
the taxable year in which the election is made.
An election under Section 171 is available only if the Exchange Debentures
are held as capital assets. This election is revocable only with the consent of
the Internal Revenue Service ("IRS") and applies to all obligations owned or
subsequently acquired by the U.S. Holder. To the extent the excess is deducted
as amortizable bond premium, the U.S. Holder's tax basis in the Exchange
Debentures will be reduced.
Redemption or Sale of Exchange Debentures. Generally, any redemption or
sale of Exchange Debentures by a U.S. Holder would result in taxable gain or
loss equal to the difference between the amount of cash received (except to the
extent that cash received is attributable to accrued, but previously untaxed,
interest) and the Holder's tax basis in the Exchange Debentures. The tax basis
of a U.S. Holder who receives an Exchange Debenture in exchange for Senior
Preferred Stock will generally be equal to the issue price of the Exchange
Debenture on the date the Exchange Debenture is issued plus any OID on the
Exchange Debenture included in the U.S. Holder's income prior to sale or
redemption of the Exchange Debenture, reduced by any amortizable bond premium
applied against the U.S. Holder's income prior to sale or redemption of the
Exchange Debenture and payments other than payments of "qualified stated
interest." Subject to the market discount rules, such gain or loss would be
long-term capital gain or loss if the Exchange Debentures have been held by the
U.S. Holder for more than one year; preferential rates of tax may apply to gains
recognized upon
123
<PAGE> 131
the disposition of Exchange Debentures held for more than 18 months. The
deductibility of capital losses by U.S. Holders is subject to limitations.
Applied High Yield Discount Obligations. Pursuant to Section 163 of the
Code, the "disqualified portion" of the OID accruing on certain debt instruments
may be treated as a dividend eligible for the dividends-received deduction. The
corporation issuing such debt instrument is not entitled to deduct this
"disqualified portion" of the OID accruing on such debt instrument and is
allowed to deduct the remainder of the OID only when paid.
This treatment would apply to "applicable high yield discount obligations"
("AHYDO"), which generally are debt instruments that have a term of more than
five years, have a yield to maturity that equals or exceeds five percentage
points over the "applicable federal rate" and have "significant" OID. A debt
instrument is treated as having "significant" OID if the aggregate amount that
would be includible in gross income with respect to such debt instrument for
periods before the close of any accrual period ending five years or more after
the date of issue exceeds the sum of (i) the aggregate amount of interest to be
paid in cash under the debt instrument before the close of such accrual period
and (ii) the product of the initial issue price of such debt instrument and its
yield to maturity. For purposes of determining whether an Exchange Debenture is
an AHYDO, holders are bound by the issuer's determination of the appropriate
accrual period. It is impossible to determine at the present time whether an
Exchange Debenture will be treated as an AHYDO.
If an Exchange Debenture is treated as an AHYDO, a corporate holder would
be treated as receiving dividend income (to the extent of the Company's current
and accumulated earnings and profits), solely for purposes of the
dividends-received deduction, in an amount equal to the "dividend equivalent
portion" of the "disqualified portion" of the OID of such AHYDO. The
"disqualified portion" of the OID is equal to the lesser of (i) the amount of
the OID or (ii) the portion of the "total return" (the excess of all payments to
be made with respect to such obligation over its issue price) on such obligation
that bears the same ratio to the obligation's total return as the "disqualified
yield" (the extent to which the yield exceeds the applicable federal rate plus
6%) bears to the obligation's yield to maturity. The dividend equivalent portion
of the disqualified portion is the amount that would have been treated as a
dividend if it had been distributed by the issuer with respect to its stock. The
Company's deduction for OID will be substantially deferred with respect to an
Exchange Debenture that is treated as an AHYDO. In addition, such deduction will
be disallowed if and to the extent that the yield on such AHYDO exceeds the
applicable federal rate by more than 6%.
FIXED RATE EXCHANGE NOTES AND FLOATING RATE EXCHANGE NOTES
Debt Characterization. The Company and each Holder will agree to treat the
Senior Subordinated Notes as indebtedness for Federal income tax purposes, and
the following discussion assumes that such treatment is correct. If the Senior
Subordinated Notes were not respected as debt, they likely would be treated as
equity ownership interests in the Company. In such event, the Company would not
be entitled to claim a deduction for interest payable on the Senior Subordinated
Notes. As a result, the Company's after-tax cash flow and, consequently, its
ability to make payments with respect to the Senior Subordinated Notes could be
reduced.
Taxation of Interest. Interest paid on the Senior Subordinated Notes will
be includible in the income of a U.S. Holder as ordinary interest income at the
time the interest is received or when it accrues in accordance with the U.S.
Holder's regular method of tax accounting. A U.S. Holder may be entitled to
treat interest income on the Senior Subordinated Notes as "investment income"
for purposes of computing certain limitations concerning the deductibility of
investment interest expense.
The Senior Subordinated Notes are not expected to be issued with OID. A
U.S. person who purchases a Senior Subordinated Note after the initial
distribution thereof at a discount that exceeds a statutorily defined de minimis
amount will be subject to the "market discount" rules of the Code, and a U.S.
person who purchases a Senior Subordinated Note at a premium will be subject to
the bond premium amortization rules of the Code.
Change of Control. In the event of a Change of Control, the Holders of the
Senior Subordinated Notes will have the right to require the Company to
repurchase the Holder's Senior Subordinated Notes at a price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. The
124
<PAGE> 132
Treasury Department regulations provide that the right of a Holder to require
redemption of the Senior Subordinated Notes upon the occurrence of a Change of
Control will not affect the yield or maturity date of the Senior Subordinated
Notes if either the probability of such a redemption is remote or the effect of
such a redemption is incidental. The Company intends to treat the redemption of
the Senior Subordinated Notes following a Change of Control as a remote or
incidental contingency.
Redemption of Senior Subordinated Notes. The Company may redeem the Senior
Subordinated Notes prior to March 1, 2008 under circumstances described under
the heading "Description of Senior Subordinated Notes." Under the Treasury
Department regulations, the Company is deemed to exercise any option to redeem
if the exercise of such option would lower the yield of the debt instrument. The
Company believes that it will not be treated as having exercised an option to
redeem under these rules.
Sale, Exchange or Retirement of the Senior Subordinated Notes. Except as
noted above in connection with the Exchange Offer, a U.S. Holder will recognize
taxable gain or loss on the sale, exchange, redemption, retirement or other
disposition of a Senior Subordinated Note in an amount equal to the difference
between the amount realized from such disposition and the Holder's adjusted tax
basis in the Senior Subordinated Note. A Holder's adjusted tax basis in a Senior
Subordinated Note will be equal to the Holder's cost of the Senior Subordinated
Note, (i) increased by any interest that has accrued on the Senior Subordinated
Note since the last interest payment date, as well as any OID, market discount
and gain previously included by such Holder in income with respect to the Senior
Subordinated Note, and (ii) decreased by any bond premium previously amortized
and any principal payments previously received by such Holder with respect to
such Senior Subordinated Note. Subject to the market discount rules, such gain
or loss generally will be capital gain or loss, and will be long-term capital
gain or loss if the U.S. Holder has held the Senior Subordinated Note for more
than one year at the time of disposition; preferential rates of tax may apply to
gains recognized by a Holder that is an individual upon the disposition of
Senior Subordinated Notes held for more than 18 months. The deductibility of
capital losses by U.S. Holders is subject to limitations. A cash basis Holder
that sells a Senior Subordinated Note between interest payment dates will be
required to treat an amount equal to accrued but unpaid interest through the
date of sale as ordinary interest income, and, as noted above, to add such
amount to its basis in the Senior Subordinated Note. A U.S. Holder will not
recognize any taxable gain or loss upon the exchange of a Note for an Exchange
Note pursuant to the Exchange Offer.
TAX CONSEQUENCES TO FOREIGN HOLDERS
For purposes of this discussion, a "Foreign Holder" is any person other
than a U.S. Holder.
SENIOR SUBORDINATED NOTES
Interest. Payments of interest on the Senior Subordinated Notes to a
Foreign Holder will generally not be subject to U.S. Federal income tax or
withholding, provided that (1) the Foreign Holder is not (i) a direct or
indirect owner of 10 percent or more of the total voting power of all voting
stock of the Company or (ii) a controlled foreign corporation related to the
Company within the meaning of Section 864(d)(4) of the Code, (2) such interest
is not effectively connected with the conduct by the Foreign Holder of a trade
or business within the United States, and (3) the Company or its paying agent
receives (i) from the Foreign Holder, a properly completed Form W-8 (or
substitute Form W-8) or successor thereto (including any required renewals
thereof), signed under penalties of perjury, which provides the Foreign Holder's
name, address and taxpayer identification number, if any, and certifies that the
Holder of the Senior Subordinated Note is a Foreign Holder or (ii) from a
securities clearing organization, bank or other financial institution that holds
the Senior Subordinated Notes in the ordinary course of its trade or business (a
"financial institution") on behalf of the Foreign Holder, a statement certifying
under penalties of perjury that it has received such a Form W-8 (or substitute
Form W-8) from the Foreign Holder, or that it has received from another
financial institution a statement that it has received a Form W-8 (or substitute
Form W-8) from the Foreign Holder, and a copy of such Form W-8 of the Foreign
Holder is furnished to the payor. The statement described in clause (3) of this
paragraph generally must be provided in the year a payment occurs or in either
of the two preceding calendar years. If the information provided in such
statement changes, the Foreign Holder must so inform the Company, in writing,
within 30 days of such change. If the foregoing conditions are not satisfied,
then interest
125
<PAGE> 133
paid on the Senior Subordinated Notes will be subject to United States
withholding at a rate of 30 percent, unless such rate is reduced or eliminated
pursuant to an applicable tax treaty.
Disposition. A Foreign Holder will not be subject to U.S. Federal income
tax or withholding with respect to gain recognized on a disposition of the
Senior Subordinated Notes unless (i) the gain is effectively connected with the
conduct by the Foreign Holder of a trade or business in the United States or
(ii) in the case of a Foreign Holder that is an individual, such Holder is
present in the United States for 183 or more days in the taxable year of the
disposition and such Holder (a) has a "tax home" (within the meaning of Section
911(d)(3) of the Code) in the United States or (b) maintains an office or fixed
place of business in the United States to which such gain is attributable.
If the interest, gain or other income a Foreign Holder recognizes on a
Senior Subordinated Note is effectively connected with the Foreign Holder's
conduct of a trade or business in the United States, such interest, gain or
other income (although exempt from withholding as previously discussed if an
appropriate statement is furnished) generally will be subject to United States
Federal income tax on a net basis at the rates applicable to U.S. Holders. In
addition, if the Foreign Holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% of its "effectively connected earnings and
profits," as adjusted for certain items, unless it qualifies for a lower rate
under an applicable tax treaty.
On October 7, 1997, the Treasury Department issued new regulations
governing the certification procedures applicable to certain amounts paid to
non-U.S. persons, effective for payments made after December 31, 1999. In
general, these new regulations do not alter the treatment described herein of
Foreign Holders who satisfy the current reporting requirements applicable to
them. The new regulations alter the procedures for claiming benefits of an
income tax treaty and may change certain procedures relating to intermediaries
receiving payments on behalf of a beneficial owner of a Senior Subordinated
Note. Foreign Holders should consult their tax advisors concerning the effect,
if any, of these new regulations on an investment in the Senior Subordinated
Notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Senior Preferred Stock, Senior
Subordinated Notes or Exchange Debentures are outstanding, the Company will be
required to provide the Internal Revenue Service ("IRS") with certain
information with respect to the Holders of the Senior Preferred Stock, Senior
Subordinated Notes and Exchange Debentures, including each Holder's name,
address and taxpayer identification number, the aggregate amount of principal,
interest and dividends paid to that Holder during the calendar year and the
amount of tax withheld, if any. This reporting obligation does not apply with
respect to payments to certain Holders, including corporations, tax-exempt
organizations, qualified pension and profit sharing trusts, individual
retirement accounts and nonresident aliens who provide certification as to their
status.
A Holder may, under certain circumstances, be subject to "backup
withholding" unless such Holder (i) is not subject to the reporting requirements
described above and, when required, demonstrates this fact, or (ii) provides to
the Company a correct taxpayer identification number, certifies that the Holder
is not subject to backup withholding due to "notified payee under-reporting" and
otherwise complies with applicable requirements of the backup withholding rules.
In addition, a Holder will be subject to backup withholding if the Company has
been notified by the IRS that backup withholding is required for such Holder due
to payee under-reporting. The backup withholding rate is 31% of "reportable
payments," which include dividends, interest and, under certain circumstances,
principal payments. If a Holder is subject to backup withholding due to such
Holder's failure to furnish a correct taxpayer identification number, the backup
withholding will continue until the Holder furnishes the Company with a correct
taxpayer identification number. In addition to backup withholding, a Holder who
does not provide the Company with the correct taxpayer identification number may
be subject to penalties imposed by the IRS. Backup withholding is not an
additional tax. The amount of any backup withholding will be allowed as a credit
against the Holder's federal income tax liability and may entitle such Holder to
a refund, provided that the required information has been furnished to the IRS.
Information reporting and backup withholding will not apply to payments to
Foreign Holders outside the United States of principal or interest on a Senior
Subordinated Note. In order to avoid backup withholding on
126
<PAGE> 134
payments of interest made in the United States, a Foreign Holder of the Senior
Subordinated Notes must generally complete and provide the payor with a Form W-8
or other documentary evidence certifying that such Foreign Holder is an exempt
foreign person. Payments of the proceeds from the sale by a Foreign Holder of a
Senior Subordinated Note made to or through a foreign office of a broker will
not be subject to information reporting or backup withholding, except that if
the broker is a U.S. person, a controlled foreign corporation, or a foreign
person 50% or more of whose gross income is effectively connected with a U.S.
trade or business for a specified three-year period, information reporting
requirements may apply to such payments. Payments of the proceeds from the sale
by a Foreign Holder of a Senior Subordinated Note made to or through the United
States office of a broker will be subject to information reporting and backup
withholding unless the Foreign Holder or beneficial owner certifies its status
as such or otherwise establishes an exemption from information reporting and
backup withholding and the broker has documentary evidence in its records as to
such status or exemption.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules relating to Foreign Holders
discussed above. In general, the final regulations do not significantly alter
the substantive withholding and information reporting requirements, but rather
unify current certification procedures and forms and clarify reliance standards.
The final regulations are generally effective for payments made after December
31, 1999 subject to certain transition rules. FOREIGN HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW FINAL
REGULATIONS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Securities for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange
Securities received in exchange for Securities where such Securities were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that for a period of 180 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale. In
addition, until 1998, all dealers effecting transactions in the
Exchange Securities may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Securities by Participating Broker-Dealers. Exchange Securities received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Securities or a combination of such methods of resale,
at market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to a purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such Exchange
Securities. Any Participating Broker-Dealer that resells the Exchange Securities
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such Exchange
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Securities and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For the period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
127
<PAGE> 135
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Securities were originally sold by the Company on February 26, 1998 to
the Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Securities to qualified institutional buyers in reliance
on Rule 144A under the Securities Act. As a condition to the Purchase Agreement,
the Company entered into the Registration Rights Agreement with the Initial
Purchaser pursuant to which the Company has agreed that it will, at its cost,
for the benefit of the Holders, (i) within 60 days after the Issue Date (the
"Filing Date"), file the Exchange Offer Registration Statement with respect to a
registered offer (the "Exchange Offer") to exchange the Notes for the Exchange
Notes and the Preferred Stock for the Exchange Preferred Stock of the Company,
which Exchange Securities will have terms substantially identical in all
material respects to the Notes and Preferred Stock, respectively, (except that
the Exchange Securities will not contain terms with respect to transfer
restrictions) and (ii) use its best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act within
120 days after the Issue Date. Upon the Exchange Offer Registration Statement
being declared effective, the Company will offer the Exchange Securities in
exchange for surrender of the Securities. The Company will keep the Exchange
Offer open for not less than 20 business days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
Holders. For each of the Securities surrendered to the Company pursuant to the
Exchange Offer, the Holder who surrendered such Securities will receive the
applicable Exchange Securities having a principal amount, or liquidation
preference, as the case may be, equal to that of the surrendered Securities.
Interest on each Exchange Note will accrue (A) from the later of (i) the last
interest payment date on which interest was paid on the Note surrendered in
exchange therefor, or (ii) if the Note is surrendered for exchange on a date in
a period which includes the record date for an interest payment date to occur on
or after the date of such exchange and as to which interest will be paid, the
date of such interest payment date or (B) if no interest has been paid on the
Notes, from the Issue Date. Dividends on the Preferred Stock will accumulate (A)
from the later of (i) the last dividend payment date on which dividends were
paid on the Preferred Stock surrendered in exchange therefor, or (ii) if the
Preferred Stock is surrendered for exchange on a date in a period which includes
the record date for a dividend payment to occur on or after the date of such
exchange and as to which a dividend will be paid, the date of such dividend
payment date or (B) if no dividend has been paid on the Preferred Stock, from
the Issue Date.
Under existing interpretations of the Commission contained in several
no-action letters to third parties, the Exchange Securities will, in general, be
freely transferable by holders thereof after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Securities (i) will not be able to
rely on the interpretation of the staff of the Commission, (ii) will not be able
to tender its Securities in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Securities, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Securities are to
be acquired by the holder or the person receiving such Exchange Securities,
whether or not such person is the holder, in the ordinary course of business,
(ii) the holder or any such other person (other than a broker-dealer referred to
in the next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Securities, (iii) the holder or any such other
person has no arrangement or understanding with any person to participate in the
distribution of the Exchange Securities, (iv) neither the holder nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, and (v) the holder or any such other person
acknowledges that if such holder or other person participates in the Exchange
Offer for the purpose of distributing the Exchange Securities it must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Securities and cannot rely on
those no-action letters. As indicated above, each Participating Broker-Dealer
that receives Exchange Securities for its own account in exchange for
128
<PAGE> 136
Securities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Securities. For a description of the procedures for
such resales by Participating Broker-Dealers, see "Plan of Distribution."
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted to
effect an Exchange Offer, (ii) the Exchange Offer is not consummated within 180
days of the Issue Date, (iii) in certain circumstances, certain holders of
unregistered Exchange Securities so request, or (iv) in the case of any Holder
that participates in the Exchange Offer, such Holder does not receive Exchange
Securities on the date of the exchange that may be sold without restriction
under state and federal securities laws (other than due solely to the status of
such Holder as an affiliate of the Company within the meaning of the Securities
Act), then in each case, the Company will (x) promptly deliver to the Holders
and the Trustee written notice thereof and (y) at its sole expense, (a) as
promptly as practicable, file a shelf registration statement covering resales of
the Securities (the "Shelf Registration Statement"), (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after the Issue Date or
such time as all of the applicable Securities have been sold thereunder. The
Company will, in the event that a Shelf Registration Statement is filed, provide
to each Holder copies of the prospectus that is a part of the Shelf Registration
Statement, notify each such Holder when the Shelf Registration Statement for the
Securities has become effective and take certain other actions as are required
to permit unrestricted resales of the Securities. A Holder that sells Securities
pursuant to the Shelf Registration Statement will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
Holder (including certain indemnification rights and obligations). In addition,
each Holder that sells Securities pursuant to the Shelf Registration Statement
will be required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have their Securities included in the Shelf Registration Statement
and to benefit from the provisions set forth in the following paragraph.
If the Company fails to comply with the above provisions or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") pursuant to provisions of the Notes or additional dividends (the
"Additional Dividends") pursuant to provisions of the Preferred Stock, as
applicable, shall become payable in respect of the Securities as follows:
(i) if (A) neither the Exchange Offer Registration Statement nor Shelf
Registration Statement is filed with the Commission on or prior to 60 days
after the Issue Date or (B) notwithstanding that the Company has
consummated or will consummate an Exchange Offer, the Company is required
to file a Shelf Registration Statement and such Shelf Registration
Statement is not filed on or prior to the date required by the Registration
Rights Agreement, then commencing on the day after either such required
filing date, Additional Interest or Additional Dividends, as applicable,
shall accrue on the principal amount of the Notes or accumulate on the then
effective liquidation preference of the Preferred Stock, as applicable, at
a rate of .25% per annum for the first 90 days immediately following each
such filing date, such Additional Interest or Additional Dividends, as
applicable, increasing by an additional .25% per annum at the beginning of
each subsequent 90-day period; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a
Shelf Registration Statement is declared effective by the Commission on or
prior to 120 days after the Issue Date or (B) notwithstanding that the
Company has consummated or will consummate an Exchange Offer, the Company
is required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the Commission on or
prior to the 60th day following the date such Shelf Registration Statement
was filed, then, commencing on the day after the 120th day in the case of
(A) above, or the day after the 60th day in the case of (B) above,
Additional Interest or Additional Dividends, as applicable, shall accrue on
the principal amount of the Notes or accumulate on the then effective
liquidation preference of the Preferred
129
<PAGE> 137
Stock, as applicable, at a rate of .25% per annum for the first 90 days
immediately following such date, such Additional Interest or Additional
Dividends, as applicable, increasing by an additional .25% per annum at the
beginning of each subsequent 90-day period; or
(iii) if (A) the Company has not exchanged Exchange Securities for all
Securities validly tendered in accordance with the terms of the Exchange
Offer on or prior to the 45th day after the date on which the Exchange
Offer Registration Statement was declared effective or (B) if applicable,
the Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the Issue Date (other than after such time as all
Securities have been disposed of thereunder), then Additional Interest or
Additional Dividends, as applicable, shall accrue on the principal amount
of the Notes or accumulate on the then effective liquidation preference of
the Preferred Stock, as applicable, at a rate of .25% per annum for the
first 90 days commencing on (x) the 46th day after such effective date, in
the case of (A) above, or (y) the day such Shelf Registration Statement
ceases to be effective in the case of (B) above, such Additional Interest
or Additional Dividends, as applicable, increasing by an additional .25%
per annum at the beginning of each subsequent 90-day period;
provided, however, that the rate of Additional Interest that shall accrue on the
Notes or Additional Dividends that shall accumulate on the then effective
liquidation preference of the Preferred Stock, as applicable, may not exceed in
the aggregate 1.0% per annum; provided, further, however, that (1) upon the
filing of the Exchange Offer Registration Statement or a Shelf Registration
Statement (in the case of clause (i) above), (2) upon the effectiveness of the
Exchange Offer Registration Statement or a Shelf Registration Statement (in the
case of clause (ii) above), or (3) upon the exchange of Exchange Securities for
all Securities tendered (in the case of clause (iii)(A) above), or upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii)(B) above), Additional Interest or
Additional Dividends, as applicable, on the Securities as a result of such
clause (or the relevant subclause thereof), as the case may be, shall cease to
accrue or accumulate, as the case may be.
Any amounts of Additional Interest or Additional Dividends, as applicable,
due pursuant to clauses (i), (ii) or (iii) above will be payable in cash, on the
same original interest payment dates as the Notes or dividend payment dates as
the Preferred Stock, as applicable. The amount of Additional Interest or
Additional Dividends, as applicable, will be determined by multiplying the
applicable rate of Additional Interest or Additional Dividends, as applicable,
by the principal amount of the Notes or liquidation preference of the Preferred
Stock, as applicable, multiplied by a fraction, the numerator of which is the
number of days such rate of Additional Interest or Additional Dividends was
applicable during such period (determined on the basis of a 360-day year
comprised of twelve 30-day months), and the denominator of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Exchange Offer Registration Statement of
which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Preferred
Stock who were eligible to participate in the Exchange Offer but who did not
tender their Preferred Stock will not have any further registration rights and
such Preferred Stock will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Preferred Stock
could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Securities
validly tendered and not withdrawn prior to 12:00 a.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Fixed
Rate Exchange Notes in exchange for each $1,000 principal amount of outstanding
Fixed Rate Notes and $1,000 principal amount of Floating Rate Exchange Notes in
exchange for each $1,000 principal amount of outstanding Floating Rate Notes
accepted in the Exchange Offer. Holders may tender some or all of their Notes
pursuant to the Exchange Offer. However, Notes may be tendered only in integral
multiples of $1,000.
130
<PAGE> 138
In addition, the Company will issue $100 liquidation preference of Exchange
Preferred Stock in exchange for each $100 liquidation preference of outstanding
Preferred Stock accepted in the Exchange Offer. Holders may tender some or all
of their Preferred Stock pursuant to the Exchange Offer. However, Preferred
Stock may be tendered only in integral multiples of $100, unless Holders tender
all of their Preferred Stock.
The form and terms of the Exchange Securities are the same as the form and
terms of the Securities except that (i) the Exchange Securities bear a Series B
designation and a different CUSIP Number from the Securities, (ii) the Exchange
Securities have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the Exchange
Securities will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for liquidated damages in the form
of additional interest in the case of Notes and in the form of additional
dividends in the case of the Preferred Stock, in certain circumstances relating
to the timing of the Exchange Offer, all of which rights will terminate when the
Exchange Offer is consummated. The Exchange Notes will evidence the same debt as
the Notes and will be entitled to the benefits of the Indenture and the Exchange
Preferred Stock will evidence the same equity as the Preferred Stock and will be
entitled to the benefits of the Certificate of Designation.
As of the date of this Prospectus, $145,000,000 aggregate principal amount
of Fixed Rate Notes, $30,000,000 aggregate principal amount of Floating Rate
Notes and $25,000,000 aggregate liquidation preference of Preferred Stock were
outstanding. The Company has fixed the close of business on , 1998
as the record date for the Exchange Offer for purposes of determining the
persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially.
Holders of Securities do not have any appraisal or dissenters' rights under
the Idaho Business Corporations Act, or the Certificate of Designation in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Securities
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Securities from the Company.
If any tendered Securities are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Securities will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Securities in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Securities
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 a.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Notwithstanding the
foregoing, the Company will not extend the Expiration Date beyond ,
1998.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Securities, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any
131
<PAGE> 139
such delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice thereof to the registered
holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the Exchange Notes. Such
interest will be paid with the first interest payment on the Exchange Notes on
September 1, 1998. Interest on the Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes. Interest on the Exchange Notes is
payable semi-annually on each March 1 and September 1, commencing on September
1, 1998.
DIVIDENDS ON THE EXCHANGE PREFERRED STOCK
The Exchange Preferred Stock will accrue dividends from their date of
issuance. Holders of Preferred Stock that are accepted for exchange will accrue
dividends thereon to, but not including, the date of issuance of the Exchange
Preferred Stock. Such dividends will be paid with the first dividend payment on
the Exchange Preferred Stock on June 1, 1998. Accruals of dividends on the
Preferred Stock accepted for exchange will cease to accrue upon issuance of the
Exchange Preferred Stock. Dividends on the Exchange Preferred Stock are payable
quarterly on each March 1, June 1, September 1 and December 1, commencing on
June 1, 1998.
PROCEDURES FOR TENDERING
Only a holder of Securities may tender such Securities in the Exchange
Offer. To tender in the Exchange Offer, a holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the
Securities and any other required documents, to the Exchange Agent prior to
12:00 a.m., New York City time, on the Expiration Date. To be tendered
effectively, the Securities, Letter of Transmittal and other required documents
must be completed and received by the Exchange Agent at the address set forth
below under "Exchange Agent" prior to 12:00 a.m., New York City time, on the
Expiration Date. Delivery of the Securities may be made by book-entry transfer
in accordance with the procedures described below. Confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF SECURITIES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR SECURITIES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Securities are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder" included with the Letter of Transmittal.
132
<PAGE> 140
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Securities tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Securities listed therein, such Securities must be
endorsed or accompanied by a properly completed securities power, signed by such
registered holder as such registered holder's name appears on such Securities
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Securities or securities powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to the Company of their authority to so act must be submitted with
the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Securities at the book-entry transfer facility, the DTC (the "Book-Entry
Transfer Facility"), for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the Book-Entry Transfer Facility's system may make book-entry
delivery of Securities by causing such Book-Entry Transfer Facility to transfer
such Securities into the Exchange Agent's account with respect to the Securities
in accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Securities may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Securities to the Exchange Agent in accordance with
DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the
Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from the
participant in DTC tendering Securities which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against such participant. In the case of an Agent's Message relating
to guaranteed delivery, the term means a message transmitted by DTC and received
by the Exchange Agent, which states that DTC has received an express
acknowledgment from the participant in DTC tendering Securities that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Securities and withdrawal of tendered
Securities will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Securities not properly tendered or any Securities the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Securities.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be
133
<PAGE> 141
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Securities must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Securities, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Securities will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Securities received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Securities and (i) whose Securities are
not immediately available, (ii) who cannot deliver their Securities, the Letter
of Transmittal or any other required documents to the Exchange Agent or (iii)
who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Securities and the principal amount and/or liquidation preference
of Securities tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Securities (or a
confirmation of book-entry transfer of such Securities into the Exchange
Agent's account at the Book-Entry Transfer Facility), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Securities in proper form for transfer (or a confirmation of book-entry
transfer of such Securities into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Securities according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Securities may be withdrawn
at any time prior to 12:00 a.m., New York City time, on the Expiration Date.
To withdraw a tender of Securities in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 12:00 a.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Securities to be withdrawn
(the "Depositor"); (ii) identify the Securities to be withdrawn (including the
certificate number(s) and principal amount and/or liquidation preference of such
Securities, or, in the case of Securities transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited); (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Securities were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Securities register
the transfer of such Securities into the name of the person withdrawing the
tender and (iv) specify the name in which any such Securities are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties.
134
<PAGE> 142
Any Securities so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Securities will be issued with
respect thereto unless the Securities so withdrawn are validly retendered. Any
Securities which have been tendered but which are not accepted for exchange will
be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Securities may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Securities for, any
Securities, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Securities, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Securities and
return all tendered Securities to the tendering holders, (ii) extend the
Exchange Offer and retain all Securities tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such
Securities (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Securities which have not been withdrawn.
135
<PAGE> 143
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier and By Hand after 4:30
p.m. on the Expiration Date only:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 843 Cooper Station 770 Broadway Avenue-13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust Operations Attention: Corporate Trust Services
(registered or certified mail recommended)
By Hand before 4:30 p.m.: Facsimile Transmission: (212) 780-0592
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level Corporate Trust Confirm by Telephone: (800) 548-6565
Window
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent, Registrar and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Securities will be recorded at the same carrying value as the
Securities, which is face value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
will be expensed over the term of the Exchange Securities.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Securities that are not exchanged for Exchange Securities pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Securities may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Securities are eligible for resale pursuant to
Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the
136
<PAGE> 144
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), (iii) outside the United States
to a foreign person in a transaction meeting the requirements of Rule 904 under
the Securities Act, or (iv) pursuant to an effective registration statement
under the Securities Act, in each case in accordance with any applicable
securities laws of any state of the United States.
RESALE OF THE EXCHANGE SECURITIES
With respect to resales of Exchange Securities, based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Securities, whether or not such person is the holder (other than a
person that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), who receives Exchange Securities in exchange for
Securities in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the Exchange Securities, will be
allowed to resell the Exchange Securities to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Exchange Securities a prospectus that satisfies the requirements of
Section 10 of the Securities Act. However, if any holder acquires Exchange
Securities in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Securities, such holder cannot
rely on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Securities for its own account in exchange for Securities, where such
Securities were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Securities.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Securities are to
be acquired by the holder or the person receiving such Exchange Securities,
whether or not such person is the holder, in the ordinary course of business,
(ii) the holder or any such other person (other than a broker-dealer referred to
in the next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Securities, (iii) the holder or any such other
person has no arrangement or understanding with any person to participate in the
distribution of the Exchange Securities, (iv) neither the holder nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, and (v) the holder or any such other person
acknowledges that if such holder or other person participates in the Exchange
Offer for the purpose of distributing the Exchange Securities it must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Securities and cannot rely on
those no-action letters. As indicated above, each Participating Broker-Dealer
that receives Exchange Securities for its own account in exchange for Securities
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Securities. For a description of the procedures for such
resales by Participating Broker-Dealers, see "Plan of Distribution."
137
<PAGE> 145
EXPERTS
The consolidated balance sheets of MCMS, Inc., formerly Micron Custom
Manufacturing Services, Inc., as of August 29, 1996 and August 28, 1997 and the
related consolidated statements of operations, shareholder's and division equity
and cash flows for each of the three years in the period ended August 28, 1997,
included in this Prospectus, have been included herein in reliance on the report
of Coopers & Lybrand, L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
CHANGE OF ACCOUNTANTS
In connection with the Recapitalization, the Company replaced Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") with KPMG Peat Marwick LLP as its
independent public accountants. The decision to change accountants was approved
by the Company's board of directors. Coopers & Lybrand's report on the Company's
consolidated financial statements for the fiscal years ended August 29, 1996 and
August 28, 1997 did not contain an adverse opinion or disclaimer of opinion, nor
was it qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal years ended August 29, 1996 and August 28, 1997
and the subsequent interim period immediately preceding the date of this
Prospectus, the Company had no disagreements with Coopers & Lybrand on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of Coopers & Lybrand, would have caused Coopers & Lybrand to make
reference to the subject matter of the disagreements in its report. In addition,
there were no instances that are reportable under Item 304(a)(1)(v) of
Regulation S-K.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Exchange Securities
will be passed upon for the Company by Kirkland & Ellis, New York, New York.
Certain partners of Kirkland & Ellis are partners in Randolph Street Partners
II, which purchased $400,000 of Class A Common and Series A Preferred in
connection with the Recapitalization. In addition, certain legal matters under
the Idaho Business Corporation Act relating to the issuance of the Preferred
Stock will be passed upon for the Company by Evans, Keane LLP, Boise, Idaho.
138
<PAGE> 146
GLOSSARY
Ball grid array (BGA)...... A semiconductor device packaging technology which
utilizes an array of solder bumps across the
underside of the package to connect the chip to the
PCBA circuitry. BGA allows the effective use of
existing SMT equipment (with modifications) while
providing improved electrical performance, higher
input/output capabilities, better assembly yields
and lower cost.
Chip-on-board (COB)........ A manufacturing technology that utilizes unpackaged
or "bare" semiconductor die which are wire bonded
onto the surface of the printed circuit board and
sealed with epoxy.
Consignment................ Under a consignment arrangement, the OEM procures
the components and supplies them to the EMS
provider. The EMS provider does not record revenues
or cost of goods sold related to procured materials
and instead records revenues and costs relating
only to assembly services.
Diode...................... A two-terminal semiconductor device that exhibits a
non-linear current voltage characteristic and
allows current to flow in one direction, but blocks
it in the opposite direction.
Dynamic random access
memory (DRAM).............. A type of memory used in most personal computers.
DRAMs are the most commonly used memory devices for
storage and retrieval of data during a system's
operation. The development of more powerful
personal computers and workstations and the
increasing emphasis on high-throughput networking
and telecommunications products have resulted in
the need for higher volumes and greater varieties
of DRAM memory in electronic systems. A variety of
architectures and features, including SDRAM,
Synchronous Graphics RAM ("SGRAM"), RAMBUS, and
others, have been introduced to address different
applications and performance requirements.
Equivalent Unit............ Term used in the Memory Module Agreement between
the Company and MTI as a unit of measure for a
memory module where each such unit is equivalent to
the time required to place all components on one
8D132 memory module or as otherwise agreed to by
MTI and the Company.
Highly accelerated life
testing (HALT)............. An environmental test that places stress on the
PCBAs in regards to temperature and vibration in
order to determine their field environment failure
limits.
Highly accelerated stress
screening (HASS)......... An environmental test that takes the HALT process'
determined limits and establishes a lower level of
environmental stress for simulating the PCBA's
durability and performance in the field.
Integrated circuit......... A monolithic semiconductor device that contains
many active components (e.g., diodes and
transistors) and passive components (e.g.,
resistors and capacitors) which function as a
complete circuit.
Multi-chip modules (MCM)... Semiconductor components containing more than one
silicon chip. MCMs are used for high performance
applications or those that demand small size and
weight, simpler system design and lower overall
system cost. An MCM is a set of bare die mounted on
a substrate and packaged
G-1
<PAGE> 147
to resemble a single component that is assembled
onto a printed circuit board. Choosing the most
cost-effective type of MCM for an application
depends on the system's clock rate, interconnect
density, and power consumption.
Printed circuit board
(PCB)...................... The basic platform used to interconnect
microprocessors, integrated circuits, and other
components essential to the functioning of
virtually all electronic products.
Printed circuit board
assembly (PCBA)............ The attachment of various electronic components
such as resistors, capacitors, diodes and logic and
RAM components by way of SMT or PTH interconnection
technologies to a PCB. PCBA also refers to a fully
assembled PCB.
Pin-through-hole (PTH)..... A method of assembling PCBs whereby components
connected to the circuitry by pins, or leads, which
are inserted into holes in the PCB.
Ramdom access memory
(RAM).................... A volatile memory product that is used in
electronic systems to store data and program
instructions.
Synchronous DRAM
(SDRAM).................. A relatively new and different kind of RAM,
Synchronous DRAM differs from earlier types in that
it does not run asynchronously to the system clock
the way other types of memory do. SDRAM is tied to
the system clock and is designed to be able to read
or write from memory in burst mode (after the
initial read or write latency). Its synchronized
design permits support for much higher bus speeds.
Semiconductor.............. A material such as silicon with electrical
conducting properties in between those of metals
and insulators. Essentially, semiconductors
transmit electricity only under certain
circumstances, such as when given a positive or
negative electric charge. Therefore, a
semiconductor's ability to conduct can be turned on
or off by manipulating those charges, allowing the
semiconductor to act as a switch.
Surface mount technology
(SMT).................... A method of assembling PCBs whereby components are
soldered directly onto the surface of the board.
SMT facilitates the placement of more components on
a single PCB than does PTH technology, and thus
permits a reduction in the size of the PCB.
Transistor................. An individual circuit that can amplify or switch
electric currents. This is the building block of
all integrated circuits and semiconductors.
Turnkey.................... Under a turnkey arrangement, full component
procurement responsibilities are delegated to the
EMS provider. Revenues from turnkey arrangements
include the cost plus markup of procured materials,
and cost of goods sold includes the cost of the
materials.
G-2
<PAGE> 148
MCMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of independent accountants........................... F-2
Consolidated balance sheets as of August 29, 1996, August
28, 1997 and February 26, 1998 (unaudited)................ F-3
Consolidated statements of operations for the fiscal years
ended August 31, 1995, August 29, 1996 and August 28, 1997
and for the six months ended February 27, 1997 (unaudited)
and February 26, 1998 (unaudited)......................... F-4
Consolidated statements of shareholders' and division equity
for the fiscal years ended August 31, 1995, August 29,
1996 and August 28, 1997 and for the six months ended
February 26, 1998 (unaudited)............................. F-5
Consolidated statements of cash flows for the fiscal years
ended August 31, 1995, August 29, 1996 and August 28, 1997
and for the six months ended February 27, 1997 (unaudited)
and February 26, 1998 (unaudited)......................... F-6
Notes to consolidated financial statements.................. F-7
</TABLE>
F-1
<PAGE> 149
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholder and Board of Directors
Micron Custom Manufacturing Services, Inc.
We have audited the accompanying consolidated balance sheets of Micron
Custom Manufacturing Services, Inc. as of August 29, 1996 and August 28, 1997,
and the related consolidated statements of operations, shareholder's and
division equity and cash flows for each of the three years in the period ended
August 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Micron Custom Manufacturing Services, Inc. as of August 29, 1996 and August 28,
1997, and their consolidated results of operations and cash flows for each of
the three years in the period ended August 28, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boise, Idaho
October 29, 1997
F-2
<PAGE> 150
MCMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28, FEBRUARY 26,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 16,290 $ 13,636 $ 13,263
Receivables:
Trade................................................... 29,885 34,469 36,303
Affiliates.............................................. 2,579 3,493 6,776
Inventories................................................. 21,668 17,786 23,384
Deferred income taxes....................................... 1,600 1,600 1,906
Other current assets........................................ 42 63 295
-------- -------- --------
Total current assets............................... 72,064 71,047 81,927
Property, plant and equipment, net.......................... 40,771 53,484 61,257
Other assets................................................ 410 331 7,544
-------- -------- --------
Total assets....................................... $113,245 $124,862 $150,728
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt........................... $ -- $ 1,049 $ 1,278
Accounts payable and accrued expenses:
Trade................................................... 27,073 34,930 50,871
Affiliates.............................................. 18,636 5,978 4,250
Total current liabilities.......................... 45,709 41,957 56,399
Long-term debt.............................................. -- -- 175,312
Deferred income taxes....................................... 1,323 4,208 3,597
Other liabilities........................................... 332 506 661
-------- -------- --------
Total liabilities.................................. 47,364 46,671 235,969
-------- -------- --------
Redeemable preferred stock, no par value, 750,000 shares
authorized; 250,000 shares issued and outstanding as of
February 26, 1998; mandatory redemption value of $25.0
million................................................... -- -- 24,000
-------- -------- --------
Commitments and contingencies
Common stock, par value $0.10 per share, 100,000 shares
authorized; 1,000 shares issued and outstanding as of
August 28, 1997 and August 29, 1996....................... -- -- --
Series A convertible preferred stock, par value $0.001 per
share, 6,000,000 shares authorized; 3,261,177 shares
issued and outstanding as of February 26, 1998, aggregate
liquidation preference of $36,949,135..................... -- -- 3
Series B convertible preferred stock, par value $0.001 per
share, 6,000,000 shares authorized; 863,823 shares issued
and outstanding as of February 26, 1998, aggregate
liquidation preference of $9,787,115...................... -- -- 1
Series C convertible preferred stock, par value $0.001 per
share, 1,000,000 shares authorized; 874,999 shares issued
and outstanding as of February 26, 1998, aggregate
liquidation preference of $9,913,739...................... -- -- 1
Class A common stock, par value $0.001 per share, 30,000,000
shares authorized; 3,261,177 shares issued and outstanding
as of February 26, 1998................................... -- -- 3
Class B common stock, par value $0.001 per share, 12,000,000
shares authorized; 863,823 shares issued and outstanding
as of February 26, 1998................................... -- -- 1
Class C common stock, par value $0.001 per share, 2,000,000
shares authorized; 874,999 shares issued and outstanding
as of February 26, 1998................................... -- -- 1
Additional paid-in capital.................................. 35,625 35,813 64,950
Foreign currency translation adjustment..................... -- (630) (2,514)
Retained earnings (deficit)................................. 30,256 43,008 (171,687)
-------- -------- --------
Total shareholders' equity (deficit)............... 65,881 78,191 (109,241)
-------- -------- --------
Total liabilities and shareholders' equity
(deficit)........................................ $113,245 $124,862 $150,728
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 151
MCMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ----------------------------
AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
1995 1996 1997 1997 1998
---------- ---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales......................... $188,782 $374,116 $292,379 $124,117 $145,681
Cost of goods sold................ 169,758 341,110 258,982 108,136 128,091
-------- -------- -------- -------- --------
Gross profit...................... 19,024 33,006 33,397 15,981 17,590
Selling, general and
administrative.................. 6,464 9,303 12,560 5,941 6,927
-------- -------- -------- -------- --------
Operating income.................. 12,560 23,703 20,837 10,040 10,663
Interest income, net.............. 613 482 380 260 329
Transaction expenses.............. -- -- -- -- 8,312
-------- -------- -------- -------- --------
Income before taxes............... 13,173 24,185 21,217 10,300 2,680
Income tax provision.............. 5,142 9,190 8,465 4,243 2,067
-------- -------- -------- -------- --------
Net income........................ $ 8,031 $ 14,995 $ 12,752 $ 6,057 $ 613
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 152
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' AND DIVISION EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT) DIVISION EQUITY PREFERRED STOCK
- --------------------------------------------- -------------------- -----------------------------------------------------
SERIES A SERIES B SERIES C
($0.001 PAR) ($0.001 PAR) ($0.001 PAR)
----------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- --------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of September 1, 1994.............. -- $ 18,843 -- -- -- -- -- --
Issuance of Shares........................... -- -- -- -- -- -- -- --
Capital contribution......................... -- 23,102 -- -- -- -- -- --
Tax effect of stock plans.................... -- 517 -- -- -- -- -- --
Net income................................... -- 8,031 -- -- -- -- -- --
Transfer from division equity................ -- (50,493) -- -- -- -- -- --
------- ---------- --------- -- ------- -- ------- --
Balance as of August 31, 1995................ -- -- -- -- -- -- -- --
Tax effect of stock plans.................... -- -- -- -- -- -- -- --
Net income................................... -- -- -- -- -- -- -- --
------- ---------- --------- -- ------- -- ------- --
Balance at August 28, 1996................... -- -- -- -- -- -- -- --
Capital contribution......................... -- -- -- -- -- -- -- --
Net income................................... -- -- -- -- -- -- -- --
Translation loss............................. -- -- -- -- -- -- -- --
------- ---------- --------- -- ------- -- ------- --
Balance as of August 29, 1997................ -- -- -- -- -- -- -- --
Capital contribution......................... -- -- -- -- -- -- -- --
Redemption of common stock and
recapitalization............................ -- -- 500,000 $1 -- -- -- --
Issuance of Series A and B and C preferred
stock....................................... -- -- 2,761,177 2 863,823 $1 874,999 $1
Issuance of Class A and B and C common
stock....................................... -- -- -- -- -- -- -- --
Net income................................... -- -- -- -- -- -- -- --
Translation loss............................. -- -- -- -- -- -- -- --
------- ---------- --------- -- ------- -- ------- --
Balance as of February 26, 1998
(unaudited)................................. -- -- 3,261,177 $3 863,823 $1 874,999 $1
======= ========== ========= == ======= == ======= ==
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT) COMMON STOCK
- --------------------------------------------- ----------------------------------------------------------------------
CLASS A CLASS B CLASS C
($0.001 PAR) ($0.001 PAR) ($0.001 PAR) ($0.001 PAR)
--------------- ----------------- --------------- -------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ --------- ------ ------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of September 1, 1994.............. -- -- -- -- -- -- -- -- --
Issuance of Shares........................... 1,000 -- -- -- -- -- -- -- --
Capital contribution......................... -- -- -- -- -- -- -- -- --
Tax effect of stock plans.................... -- -- -- -- -- -- -- -- --
Net income................................... -- -- -- -- -- -- -- -- --
Transfer from division equity................ -- -- -- -- -- -- -- -- $ 35,232
------ -- --------- -- ------- -- ------ -- --------
Balance as of August 31, 1995................ 1,000 -- -- -- -- -- -- -- 35,232
Tax effect of stock plans.................... -- -- -- -- -- -- -- -- 393
Net income................................... -- -- -- -- -- -- -- -- --
------ -- --------- -- ------- -- ------ -- --------
Balance at August 28, 1996................... 1,000 -- -- -- -- -- -- -- 35,625
Capital contribution......................... -- -- -- -- -- -- -- -- 188
Net income................................... -- -- -- -- -- -- -- -- --
Translation loss............................. -- -- -- -- -- -- -- -- --
------ -- --------- -- ------- -- ------ -- --------
Balance as of August 29, 1997................ 1,000 -- -- -- -- -- -- -- 35,813
Capital contribution......................... -- -- -- -- -- -- -- -- 1,786
Redemption of common stock and
recapitalization............................ (1,000) -- 500,000 $1 -- -- -- -- (33,841)
Issuance of Series A and B and C preferred
stock....................................... -- -- -- -- -- -- -- -- 50,996
Issuance of Class A and B and C common
stock....................................... -- -- 2,761,177 2 863,823 $1 874,999 $1 10,196
Net income................................... -- -- -- -- -- -- -- -- --
Translation loss............................. -- -- -- -- -- -- -- -- --
------ -- --------- -- ------- -- ------ -- --------
Balance as of February 26, 1998
(unaudited)................................. -- -- 3,261,177 $3 863,823 $1 874,999 $1 $ 64,950
====== == ========= == ======= == ====== == ========
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------
TOTAL
FOREIGN RETAINED SHAREHOLDERS'
CURRENCY EARNINGS EQUITY
TRANSLATION (DEFICIT) (DEFICIT)
----------- ------------- -------------
<S> <C> <C> <C>
Balance as of September 1, 1994.............. -- -- $ 18,843
Issuance of Shares........................... -- -- --
Capital contribution......................... -- -- 23,102
Tax effect of stock plans.................... -- -- 517
Net income................................... -- -- 8,031
Transfer from division equity................ -- $ 15,261 --
------- --------- ---------
Balance as of August 31, 1995................ -- 15,261 50,493
Tax effect of stock plans.................... -- -- 393
Net income................................... -- 14,995 14,995
------- --------- ---------
Balance at August 28, 1996................... -- 30,256 65,881
Capital contribution......................... -- -- 188
Net income................................... -- 12,752 12,752
Translation loss............................. (630) -- (630)
------- --------- ---------
Balance as of August 29, 1997................ (630) 43,008 78,191
Capital contribution......................... -- -- 1,786
Redemption of common stock and
recapitalization............................ -- (215,308) (249,147)
Issuance of Series A and B and C preferred
stock....................................... -- -- 51,000
Issuance of Class A and B and C common
stock....................................... -- -- 10,200
Net income................................... -- 613 613
Translation loss............................. (1,884) -- (1,884)
------- --------- ---------
Balance as of February 26, 1998
(unaudited)................................. $(2,514) $(171,687) $(109,241)
======= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 153
MCMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------ ---------------------------
AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
1995 1996 1997 1997 1998
---------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 8,031 $14,995 $ 12,752 $ 6,057 $ 613
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization........................... 3,469 5,425 8,819 3,905 5,458
Loss (gain) on sale of property, plant and equipment.... 15 98 (72) (83) (2)
Write-off of deferred loan costs........................ -- -- -- -- 206
Changes in assets and liabilities:
Receivables........................................... (17,846) 6,003 (5,498) (244) (5,933)
Inventories........................................... (12,589) 279 3,881 (6,751) (5,879)
Other current assets.................................. 141 22 -- (13) (217)
Accounts payable and accrued expenses................. 20,282 7,356 (2,173) 736 12,453
Deferred income taxes................................. 617 (536) 2,886 771 (917)
Other................................................. 4 (22) 128 149 156
-------- ------- -------- -------- --------
Net cash provided by operating activities................... 2,124 33,620 20,723 4,527 5,938
-------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment.............. (10,116) (31,229) (24,120) (12,690) (10,763)
Proceeds from sales of property, plant and equipment........ 215 5,597 151 97 219
Other....................................................... (30) (11) -- -- --
-------- ------- -------- -------- --------
Net cash used for investing activities...................... (9,931) (25,643) (23,969) (12,593) (10,544)
-------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions....................................... 23,102 -- -- -- 1,786
Repurchase of common stock and recapitalization............. -- -- -- -- (249,147)
Proceeds from issuance of common stock...................... -- -- -- -- 10,200
Proceeds from issuance of convertible preferred stock....... -- -- -- -- 51,000
Proceeds from issuance of redeemable preferred stock........ -- -- -- -- 24,000
Proceeds from borrowings.................................... -- -- 12,300 -- 175,000
Repayments of debt.......................................... (988) (6,687) (11,487) (10) (916)
Payment of deferred debt issuance costs..................... -- -- -- -- (7,489)
Other....................................................... -- -- (221) -- --
-------- ------- -------- -------- --------
Net cash provided by (used for) financing activities........ 22,114 (6,687) 592 (10) 4,434
-------- ------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 14,307 1,290 (2,654) (8,076) (172)
Effect of exchange rate changes on cash and equivalents..... -- -- -- -- (201)
Cash and cash equivalents at beginning of year.............. 693 15,000 16,290 16,290 13,636
-------- ------- -------- -------- --------
Cash and cash equivalents at end of period.................. $ 15,000 $16,290 $ 13,636 $ 8,214 $ 13,263
======== ======= ======== ======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid........................................... $ 4,479 $ 9,293 $ 9,962 $ 5,615 $ 18
Interest paid, net of amounts capitalized................... 510 360 21 2 4
Noncash investing activities:
Foreign currency translation adjustment..................... -- -- 630 -- 1,884
Contracts payable and notes payable incurred for capitalized
software.................................................. -- -- -- -- 1,659
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 154
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: MCMS, Inc. (the "Company"), is an electronics manufacturing
services provider serving OEMs. The Company provides product design and
prototype manufacturing; materials procurement and inventory management; the
manufacture and testing of PCBAs, memory modules and systems; quality assurance;
and end-order fulfillment. The Company markets and sells products and services
primarily to original equipment manufacturers in diverse electronic industries
including computers, peripherals, networking and telecommunications. The Company
operates two sites in the United States and one site in Asia and acquired a site
in Colfontaine, Belgium in November 1997.
On February 26, 1998 the Company completed a Recapitalization. Prior to the
closing of the Recapitalization, the Company was a wholly owned subsidiary of
MEI California, Inc. ("MEIC"), a wholly owned subsidiary of Micron Electronics,
Inc. ("MEI"). Under the terms of the amended and restated Recapitalization
Agreement, certain unrelated investors (the "Investors") acquired an equity
interest in the Company. In order to complete the Recapitalization, the Company
arranged for additional financing in the form of notes and redeemable preferred
stock totaling $200.0 million. The Company used the proceeds from the Investors'
equity investment and the issuance of notes and redeemable preferred stock to
redeem a portion of MEIC's outstanding equity interest for approximately $249.2
million. Subsequent to the Recapitalization, MEIC will continue to hold a 10%
equity interest in the Company. In connection with the Recapitalization, the
Company's name was changed from Micron Custom Manufacturing Services, Inc. to
MCMS, Inc.
BASIS OF PRESENTATION: The financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company's fiscal year is the 52 or 53
week period ending on the Thursday closest to August 31. As of February 26, 1998
the Company was 10% owned by MEIC which is indirectly majority owned by Micron
Technology, Inc. ("MTI").
The consolidated financial statements as of and for the six months ended
February 27, 1997 and February 26, 1998, including disclosures in the notes to
the financial statements, are unaudited. In the opinion of management, such
unaudited consolidated financial statements contain all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly the
financial position of the Company and its results of operations and cash flows.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Although, actual results could differ from those estimates,
management believes its estimates are reasonable.
REVENUE RECOGNITION: Revenue from product sales to customers is generally
recognized upon shipment. A provision for estimated sales returns is recorded in
the period in which the sales are recognized.
FINANCIAL INSTRUMENTS: Prior to the Recapitalization, the Company invested
its excess cash in an investment pool administered by MEI. The investment pool
included highly liquid short-term investments with original maturities of three
months or less. The investment pool was readily convertible to known amounts of
cash and generally consisted of commercial paper, state and local government
agency securities, bankers' acceptances, and U.S. Government agency securities.
The interest earned on the Company's investment was based on a pro rata share of
MEI's total investments. Prior to the Recapitalization, the Company's cash held
in the MEI investment pool was transferred into the Company's interest bearing
cash management account.
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. Prior to the recapitalization, the investment pool included
credit instruments of highly rated financial institutions. MEI performed
periodic evaluations of the credit standing of these financial institutions.
MEI, by policy, limited the concentration of
F-7
<PAGE> 155
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
credit exposure by restricting investments with any single obligor, instrument,
or geographic area. A concentration of credit risk may exist with respect to
trade receivables, as many of the Company's customers are affiliated with the
computer, peripheral, networking and telecommunications industries. The Company
performs ongoing credit evaluations on its customers and generally does not
require collateral. Historically, the Company has not experienced significant
losses related to receivables from individual customers or groups of customers
in any particular industry or geographic area.
The amounts reported as cash equivalents, receivables, other assets and
accounts payable and accrued expenses and debt are considered by the Company to
be reasonable approximations of their fair values, based on market information
available to management as of August 28, 1997. The use of different market
assumptions and estimation methodologies could have a material effect on the
estimated fair value amounts. The reported fair values do not take into
consideration potential taxes or other expenses that would be incurred in an
actual settlement.
INVENTORIES: Inventories are stated at the lower of average cost or
market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of 5 to 30 years for buildings and 2 to 5 years for software and
equipment.
PRODUCT AND PROCESS TECHNOLOGY: Costs related to the conceptual
formulation and design of products and processes are expensed as research and
development. Research and development expense was approximately $138,000,
$88,000, and $138,000 in the fiscal years ended August 31, 1995, August 29, 1996
and August 28, 1997, and $60,000 and $83,000 in the six months periods ended
February 27, 1997 and February 26, 1998, respectively.
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's
international subsidiaries are the Malaysian Ringgit and the Belgian Franc.
Financial statements of the international subsidiaries are translated into U.S.
dollars for consolidated financial reporting using the exchange rate in effect
at each balance sheet date for assets and liabilities. The resulting translation
adjustments are recorded as a separate component of shareholders' equity and,
accordingly, have no effect on income. Revenues, expenses, gains and losses are
translated using a weighted average exchange rate for each period. Transaction
gains and losses are included in the determination of net income. For the fiscal
year ended August 28, 1997 and the six months ended February 27, 1997 and
February 26, 1998 the Company incurred net transaction gains of $159,000, $0 and
$442,000, respectively. There were no transaction gains or losses in 1996 or
1995.
CARVE OUT METHODOLOGY
The financial statements for 1995 present the results of operations and
cash flows of the carved out contract manufacturing operation, exclusive of a
component recovery operation which the Company operated prior to September 1,
1995. Receivables, inventories, property, plant and equipment, income tax assets
and liabilities, accounts payable, net sales, cost of goods sold and research
and development were specifically identified for each operation. Liabilities
related to employee compensation were allocated to each operation based upon
employee headcount or other appropriate methods. Long term and current debt and
the related interest expense were allocated to the contract manufacturing
operation. Equity balances were established based upon originally contributed
amounts and historical earnings. Selling, general and administrative expenses
were allocated to each operation primarily based on net sales or headcount.
Income taxes were computed as if the Company were a separate tax paying entity.
Management believes the allocations are reasonable.
F-8
<PAGE> 156
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RECEIVABLES
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28, FEBRUARY 26,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables........................... $31,106 $35,290 $37,756
Income taxes recoverable from MEI........... -- 754 --
Other....................................... 209 160 382
Allowance for doubtful accounts............. (974) (881) (457)
Allowance for returns and discounts......... (456) (854) (1,378)
------- ------- -------
$29,895 $34,469 $36,303
======= ======= =======
</TABLE>
INVENTORIES
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28, FEBRUARY 26,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and supplies.................. $16,505 $11,885 $15,365
Work in progress............................ 4,843 4,043 6,676
Finished goods.............................. 320 1,858 1,343
------- ------- -------
$21,668 $17,786 $23,384
======= ======= =======
</TABLE>
In the second quarter of fiscal 1998, the Company recorded a change in
estimate in its inventory reserves resulting in an increase to pre-tax income of
$585,000.
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28, FEBRUARY 26,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Land...................................... $ 751 $ 751 $ 1,304
Buildings................................. 1,430 24,577 28,378
Equipment and software.................... 33,817 48,609 51,212
Construction in progress.................. 17,665 62 5,990
-------- -------- --------
53,663 73,999 86,884
Less accumulated depreciation and
amortization............................ (12,892) (20,515) (25,627)
-------- -------- --------
$ 40,771 $ 53,484 $ 61,257
======== ======== ========
</TABLE>
OTHER ASSETS
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28, FEBRUARY 26,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred financing costs.................. $ -- $215 $7,489
Equipment deposits........................ 341 50 --
Deferred patents costs.................... 69 66 55
---- ---- ------
$410 $331 $7,544
==== ==== ======
</TABLE>
F-9
<PAGE> 157
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28, FEBRUARY 26,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts payable.................... $ 23,697 $ 29,248 $ 42,922
Short-term equipment contracts............ -- 1,307 2,809
Salaries, wages and benefits.............. 2,727 3,521 4,063
Other..................................... 649 854 1,077
-------- -------- --------
$ 27,073 $ 34,930 $ 50,871
======== ======== ========
</TABLE>
DEBT
<TABLE>
<CAPTION>
AUGUST 28, FEBRUARY 26,
1997 1998
---------- ------------
<S> <C> <C>
Revolving loan, monthly installments through May 3, 1998,
interest rate 7.70% at August 28, 1997.................... $ 833 $ --
Note payable, matures on August 15, 1998, interest due at
maturity, weighted average interest rate equal to interest
earned on the Company's cash investments (5.84% and 5.68%
at August 28, 1997 and February 26, 1998, respectively)... 216 210
Senior subordinated notes (the "Fixed Rate Notes"),
unsecured, interest due semiannually, matures on March 1,
2008, interest rate of 9.75%.............................. -- 145,000
Floating interest rate subordinated term securities, (the
"Floating Rate Notes") unsecured, interest due
semiannually, matures on March 1, 2008, variable interest
rate equal to LIBOR plus 4.63%............................ -- 30,000
Note payable, semi-annual installments through September 23,
1998, interest rate of 8.00%.............................. -- 797
Note payable, quarterly installments through October 1,
2000, interest rate of 2.71%.............................. -- 583
------- --------
Debt........................................................ 1,049 176,590
Less current portion........................................ (1,049) (1,278)
------- --------
$ -- $175,312
======= ========
</TABLE>
Maturities of debt as of February 26, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NOTES PAYABLE
----------- -------------
<S> <C>
1998 (remainder of fiscal year)............................. $ 1,146
1999........................................................ 211
2000........................................................ 185
2001........................................................ 48
2002........................................................ --
2003 and thereafter......................................... 175,000
--------
$176,590
========
</TABLE>
The Fixed Rate Notes are redeemable at the Company's option, in whole any
time or in part from time to time, on and after March 1, 2003, upon not less
than 30 nor more than 60 days notice. The redemption rate, if redeemed during
the twelve month period commencing on March 1, decreases from 104.875% in 2003
to 100.000% in 2006 and thereafter (expressed as percentages of the principal
amount thereof). At any time, or from time to time, on or prior to March 1,
2001, the Company may use the net cash proceeds of one or more Public Equity
Offerings to redeem the Fixed Rate Notes at a redemption price equal to 109.750%
of the
F-10
<PAGE> 158
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
principal amount thereof if certain restrictions regarding principal amount and
additional fixed rate notes are met.
The Floating Rate Notes are redeemable, at the Company's option, in whole
at any time or in part from time to time, upon not less than 30 nor more than 60
days notice. The redemption price, if redeemed during the twelve month period
commencing on March 1, decreases from 105% in 1998 to 100% in 2003 and
thereafter (expressed as percentages of the principal amount thereof).
Among other restrictions, the Notes described above contain covenants
relating to limitation on incurrence of additional indebtedness, limitation on
restricted payments, limitation on asset sales and limitation on dividends.
On February 26, 1998, the Company entered into a $40,000,000 New Revolving
Credit Facility (the "Revolving Facility") with various lending institutions.
The line of credit carries interest at the lesser of the applicable Eurodollar
Rate plus 2.75% or the Base Rate plus 1.75%, as defined in the Revolving
Facility. The Company is required to pay a commitment fee of 0.5% per annum
based upon the average unused portion. Within the Revolving Facility, reduction
discount clauses are offered if certain leverage ratio tests are met. There were
no outstanding borrowings against this line of credit as of February 26, 1998.
The Revolving Facility matures on February 26, 2003 and contains various
covenants including minimum levels of EBITDA, minimum interest coverage, maximum
leverage ratios, restrictions on capital expenditures and additional
indebtedness as well as restrictions on payment of dividends. The Revolving
Facility contains customary events of default. In the event any default or
breach of covenant under the Revolving Facility occurs, the default could result
in events of default for the Notes and Redeemable Preferred Stock.
On April 15, 1997, the Company entered into a Revolving Loan Agreement (the
"Agreement") with a financial institution that provides for borrowings up to
$15,000,000. Under the terms of the Agreement, the amount available to borrow
decreases by $1,000,000 annually. The interest rate on the borrowed funds is
based on the 30 day commercial paper rate plus 2.15% (7.70% as of August 28,
1997). The Agreement expires in May 2007 and borrowings are collaterized by the
Company's real property located in Nampa, Idaho. Under the Agreement, the
Company is subject to certain financial ratios and covenants including
limitations on the amount of dividends. As of August 28, 1997, $833,000 was
outstanding under the Agreement. In conjunction with the Recapitalization
Agreement the balance of $333,000 was paid off and the Agreement was cancelled
on February 26, 1998.
On March 17, 1997, the Company entered into an unsecured Revolving Credit
Facility with MEI that provides for borrowings up to $20,000,000, based upon the
Company's net worth. As of August 28, 1997 the Company was eligible to borrow up
to $17,000,000 pursuant to the agreement but had no borrowings outstanding. The
interest rate on borrowed funds is based upon the 90 day LIBOR rate plus 1.00%.
In conjunction with the Recapitalization Agreement the above agreement was
cancelled on February 26, 1998.
Interest income is net of $524,000, $233,000 and $65,000 of interest
expense in fiscal years ended August 31, 1995, August 29, 1996 and August 28,
1997, respectively and $2,000 and $0 for the six month periods ended February
27, 1997 and February 26, 1998, respectively. Construction period interest of
$5,000, $18,000, and $228,000 was capitalized in fiscal years ended August 31,
1995, August 29, 1996 and August 28, 1997, respectively and $35,000 and $34,000
for the six month periods ended February 27, 1997 and February 26, 1998,
respectively.
REDEEMABLE PREFERRED STOCK
The Redeemable Preferred Stock is redeemable at the Company's option, in
whole or in part, at any time on or after March 1, 2003. The redemption rate, if
redeemed during the twelve month period commencing on March 1, decreases from
106.25% in 2003 to 100.00% in 2006 and thereafter (expressed in percentages of
the liquidation preference thereof). At any time, or from time to time, prior to
March 1, 2001, the Company may use the net cash proceeds of one or more Public
Equity Offerings to redeem the preferred stock at a
F-11
<PAGE> 159
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
redemption price of 112.50% of the then effective liquidation preference thereof
plus, without duplication, an amount equal to all accumulated and unpaid
dividends to the redemption date including an amount equal to the prorated
dividend for the period from the dividend payment date immediately prior to the
redemption date to the redemption date.
The Preferred Stock will be subject to mandatory redemption in whole on
March 1, 2010 at a price equal to 100% of the liquidation preference thereof
plus all accumulated and unpaid dividends to the date of redemption.
The Redeemable Preferred Stock, subject to certain restrictions, is
exchangeable for the Exchange Debentures at the option of the Company on any
dividend payment date on or after the issue date. The Redeemable Preferred Stock
has liquidation preferences over Common Stock and has a liquidation value of
$100 per share plus cumulative unpaid dividends thereon. Redeemable Preferred
Stockholders are entitled to a cumulative 12 1/2% annual dividend based upon the
liquidation preference per share of Redeemable Preferred Stock, payable
quarterly.
Accrued dividends on the Redeemable Preferred Stock are payable upon
certain defined events which include: any voluntary or involuntary liquidation,
dissolution or winding up of the Company. At the Company's option, dividends
through March 1, 2003 may be paid by issuing additional shares of Redeemable
Preferred Stock. The holders of Redeemable Preferred Stock are not entitled to
vote on any matter required or permitted to be voted upon by the shareholders of
the Company.
SHAREHOLDERS' EQUITY
Each share of Series A, Series B, and Series C preferred stock (hereinafter
called the "Convertible Preferred Stock") is convertible into one share of Class
A, Class B and Class C common stock (hereinafter called the "Common Stock"),
respectively. Holders of Series A preferred stock and Class A common stock are
entitled to one vote per share. Holders of Series B preferred stock and Class B
common stock do not have any voting rights. Holders of Series C preferred stock
and Class C common stock are entitled to two votes per share. The holders of all
voting series of Convertible Preferred Stock and classes of Common Stock will
vote as a single class on all matters.
Holders of Convertible Preferred Stock will be paid dividends, when and if
declared by the Company, on each share of Convertible Preferred Stock at an
annual rate of 10% on the liquidation value per share plus all declared and
unpaid dividends. Holders of Convertible Preferred Stock will participate
together with the shares of Common Stock as if such shares of Convertible
Preferred Stock had been converted into shares of Common Stock in all dividends
paid with respect to the Common Stock.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Convertible Preferred Stock will be entitled to be paid,
out of the assets of the Company available for distribution to shareholders
after payment of amounts owed with respect to any stock senior to the
Convertible Preferred Stock (including the Redeemable Preferred Stock), the
liquidation preference per share of Convertible Preferred Stock, plus, without
duplication, an amount in cash equal to all declared and unpaid dividends
thereon before any distribution is made on the Common Stock. The aggregate
liquidation preference of the Convertible Preferred Stock is approximately $56.7
million.
F-12
<PAGE> 160
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TRANSACTION EXPENSES
Transaction expenses associated with the Recapitalization Agreement are
comprised of the following items:
<TABLE>
<S> <C>
Transaction agreement....................................... $2,710
Commitment fees............................................. 2,150
Termination agreements...................................... 1,400
MEI/MTI option buyback...................................... 662
Other....................................................... 1,390
------
$8,312
======
</TABLE>
STOCK PURCHASE AND INCENTIVE PLANS
MEI's 1995 Stock Option Plan provides for the granting of incentive and
nonstatutory stock options to eligible employees of both MEI and the Company. As
of August 28, 1997, there were 5,000,000 shares of MEI's common stock reserved
for issuance under the plan. MEI's Board of Directors has approved reserving an
additional 5,000,000 shares of common stock for the plan, subject to shareholder
approval. Exercise prices of the incentive and nonstatutory stock options have
generally been 100% and 85%, respectively, of the fair market value of MEI's
stock on the date of grant. Options are granted subject to terms and conditions
determined by MEI's Board of Directors, and generally are exercisable in
increments of 20% for each year of employment beginning one year from date of
grant and generally expire six years from date of grant.
MEI's 1995 Employee Stock Purchase Plan allows eligible employees of both
MEI and the Company to purchase shares of MEI common stock through payroll
deductions. The shares can be purchased for 85% of the lower of the beginning or
ending fair market value of each six month offering period and are restricted
from resale for a period of one year from the date of purchase. Purchases are
limited to 20% of an employee's eligible compensation. A total of 2,500,000
shares of MEI common stock are reserved for issuance under the plan, of which
approximately 271,000 shares had been issued to employees of both MEI and the
Company as of August 28, 1997.
Option activity for the Company's portion of MEI's option plan is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AUGUST 31, AVERAGE AUGUST 29, AVERAGE AUGUST 28, AVERAGE
FISCAL YEAR ENDED 1995 PRICE 1996 PRICE 1997 PRICE
----------------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... -- $ -- 126 $18.71 379 $14.14
Granted............................. 126 18.71 259 11.97 316 20.60
Exercised........................... -- -- -- -- (8) 14.36
Terminated or canceled.............. -- -- (6) 16.21 (20) 18.18
----- ----- -----
Outstanding at end of year.......... 126 18.71 379 14.14 667 17.08
===== ====== ===== ====== ===== ======
Exercisable at the end of year...... -- $ -- 25 $18.71 90 $15.22
===== ====== ===== ====== ===== ======
Options available for future grants
to employees of both MEI and the
Company........................... 4,253 3,141 1,416
===== ===== =====
</TABLE>
F-13
<PAGE> 161
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about the Company's portion of
MEI's stock options outstanding as of August 28, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------------------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$10.01-$15.00..................... 245 4.63 years 11.85 45 11.74
$15.01-$20.00..................... 271 4.89 years 19.07 44 18.71
above $20.00...................... 151 5.40 years 21.97 1 23.83
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The Company continues to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, "Accounting for Stock Issued to
Employees."
The fair value of options at date of grant was estimated using the
Black-Scholes options pricing model. The assumptions and resulting fair values
at date of grant for options granted during the fiscal years ended August 29,
1996 and August 28, 1997 follow:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
STOCK OPTION PLAN SHARES PURCHASE PLAN SHARES
--------------------------------- ---------------------------------
FISCAL YEAR ENDED AUGUST 29, 1996 AUGUST 28, 1997 AUGUST 29, 1996 AUGUST 28, 1997
----------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assumptions:
Expected life................. 3.5 years 3.5 years 0.5 years 0.5 years
Risk-free interest rate....... 5.9% 6.2% 5.1% 5.0%
Expected volatility........... 70.0% 70.0% 70.0% 70.0%
Dividend yield................ 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market
price...................... $6.33 $11.00 -- --
Exercise price less than
market price............... 6.50 11.78 $3.67 $5.37
</TABLE>
Stock based compensation costs would have reduced pretax income by $326,000
and $1,399,000 in the fiscal years ended August 29, 1996 and August 28, 1997,
respectively ($202,000 and $841,000, respectively, net of taxes), if the fair
values of all options granted to the Company's employees had been recognized as
a compensation expense on a straight-line basis over the vesting period of the
grants. The pro forma effect on net income for the fiscal years ended August 29,
1996 and August 28, 1997 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro forma
compensation expense related to grants prior to the fiscal year ended August 29,
1996.
As a result of the Recapitalization Agreement, employees of the Company no
longer participate in the MEI stock option plan. In accordance with the MEI
option plan, employees have 30 days from the date of Recapitalization to
exercise any vested options. The Company has elected to pay employees who
maintain continuous employment with the Company for six months after the
Recapitalization date $2.00 per option for any options not exercised 30 days
subsequent to the Recapitalization in return for cancellation of those options.
F-14
<PAGE> 162
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EMPLOYEE SAVINGS PLAN
MEI has a 401(k) profit-sharing plan (the "RAM Plan") in which eligible
employees of the Company may participate. Under the RAM Plan, which is
administered by MTI, employees may contribute from 2% to 16% of eligible pay to
various savings alternatives. The RAM Plan provides for an annual match by the
Company of the first $1,500 of eligible employee contributions, and for
additional contributions by the Company based upon MEI's financial performance.
The Company's expense pursuant to the plan was approximately $477,000, $744,000,
and $621,000 in the fiscal years ended August 31, 1995, August 29, 1996 and
August 28, 1997, respectively. In connection with the Recapitalization Agreement
the RAM plan has been modified to become a multi-employer plan. Employees of the
Company will continue to participate in the RAM plan during the periods covered
by the Transition Service Agreement with MEI and MTI.
TRANSACTIONS WITH AFFILIATES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ----------------------------
AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
1995 1996 1997 1997 1998
---------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales......................... $28,787 $42,003 $25,864 $13,676 $16,582
Inventory purchases............... 63,258 66,568 28,076 11,505 5,524
Administrative service expenses... 991 1,181 1,938 1,031 1,081
Property, plant and equipment
purchases....................... 1,111 543 1,493 355 489
Property, plant and equipment
sales........................... 153 69 886 870 180
Construction management
services........................ -- 437 118 60 --
Rental income..................... -- -- 400 160 240
</TABLE>
Net sales to affiliates include approximately $3,797,000, $10,928,000, and
$9,682,000, in the fiscal years ended August 31, 1995, August 29, 1996 and
August 28, 1997, and $6,484,000 and $3,679,000 the six month periods ended
February 27, 1997 and February 26, 1998, respectively, to an affiliate acting as
a distributor to an end customer of the Company. Administrative service expenses
include items such as corporate administration, investor relations, benefit
administration, finance, treasury, tax, information technology and legal
expenses.
As part of the Recapitalization Agreement, the Company entered into a
Transition Service Agreement with both MEI and MTI to provide support services
similar to those historically provided. The services will be provided for a
period of up to six months after the closing of the Recapitalization. Expenses
associated with these services are anticipated to decline during the period of
service as a result of the Company's effort to bring these functions in house.
A tax payable to affiliates of $2,557,000 at August 29, 1996 is included in
accounts payable and accrued expenses.
COMMITMENTS
As of August 28, 1997, the Company had commitments of $7,497,000 for
equipment purchases and $182,000 for construction of a building. As of February
26, 1998, the Company had commitments of $9,225,000 for equipment and software.
The Company's facilities in North Carolina and Malaysia, and certain other
property and equipment, are leased under operating lease agreements with
non-cancellable terms expiring through 2001, with renewals
F-15
<PAGE> 163
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
thereafter at the option of the Company. Future minimum lease payments total
approximately $2,178,000 and are as follows: $747,000 in fiscal 1998, $610,000
in fiscal 1999, $614,000 in fiscal 2000, $207,000 in fiscal 2001.
Rental expense was approximately $301,000, $661,000, and $667,000 in the
fiscal years ended August 31, 1995, August 29, 1996 and August 28, 1997, and
$352,000 and $411,000 in the six month periods ended February 27, 1997 and
February 26, 1998, respectively.
INCOME TAXES
Prior to the Recapitalization, the Company was included in the consolidated
U.S. federal income tax return of its parent. The provision for income taxes is
computed as if the Company were a separate taxpayer, and consists of the
following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
AUGUST 31, AUGUST 29, AUGUST 28,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
U.S. federal.................................. $3,901 $8,236 $4,357
State......................................... 624 1,490 1,222
------ ------ ------
4,525 9,726 5,579
------ ------ ------
Deferred:
U.S. federal.................................. 512 (312) 2,703
State......................................... 105 (224) 183
------ ------ ------
617 (536) 2,886
------ ------ ------
Income tax provision............................ $5,142 $9,190 $8,465
====== ====== ======
</TABLE>
The tax benefit associated with nonstatutory stock options and
disqualifying dispositions by employees of shares issued under MTI's Plans
reduced taxes payable by $517,000, $393,000, and $0 in fiscal years ended August
31, 1995, August 29, 1996 and August 28, 1997, respectively. Such benefits were
credited to capital. Income taxes paid to the Parent during the fiscal years
ended August 31, 1995, August 29, 1996 and August 28, 1997 were $4,479,000,
$9,293,000 and $9,530,000, respectively.
A reconciliation between the income tax provision and income tax computed
using the federal statutory rate follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
AUGUST 31, AUGUST 29, AUGUST 28,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate....... $4,611 $8,465 $7,426
State taxes, net of federal benefit............. 482 934 733
Other........................................... 49 (209) 306
------ ------ ------
$5,142 $9,190 $8,465
====== ====== ======
</TABLE>
The effective income tax rate for the six months ended February 27, 1997
and February 26, 1998 was 41.2% and 77.1%, respectively. These effective income
tax rates principally reflect the federal statutory rate and the net effect of
state and foreign income taxes, as well as certain transaction expenses for the
six months ended February 26, 1998 which are not deductible for tax purposes,
offset in part, by certain changes in accrued tax liabilities.
F-16
<PAGE> 164
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes at enacted tax rates.
Deferred income tax assets totaled $2,286,000 and $2,653,000, and liabilities
totaled $2,009,000 and $5,261,000, at August 29, 1996 and August 28, 1997,
respectively. The tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
AS OF
-----------------------
AUGUST 29, AUGUST 28,
1996 1997
---------- ----------
<S> <C> <C>
Current deferred tax asset:
Receivables............................................ $ 381 $ 404
Inventories............................................ 780 800
State taxes............................................ 96 80
Accrued compensation................................... 283 324
Other.................................................. 60 (8)
------- -------
1,600 1,600
------- -------
Noncurrent deferred tax asset (liability):
Property, plant and equipment.......................... (1,290) (2,920)
Accrued compensation................................... 124 194
Investment tax credits................................. 120 243
Other.................................................. (277) (1,725)
------- -------
(1,323) (4,208)
------- -------
Total net deferred tax asset (liability)....... $ 277 $(2,608)
======= =======
</TABLE>
In the second quarter of 1998, the Company revised its estimate in the
accrual for prior years' tax matters and recorded a decrease in such estimated
accrued taxes of $1,130,000.
EXPORT SALES AND SIGNIFICANT CUSTOMERS
Export sales were approximately $13,470,000, $54,187,000, and $20,785,000
in the fiscal years ended August 31, 1995, August 29, 1996 and August 28, 1997
and $10,248,000 and $20,727,000 in the six months period ended February 27, 1997
and February 26, 1998, respectively. The Company had the following customers
which comprised more than 10% of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ----------------------------
AUGUST 31, AUGUST 29, AUGUST 28, FEBRUARY 27, FEBRUARY 26,
SIGNIFICANT CUSTOMERS 1995 1996 1997 1997 1998
--------------------- ---------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Largest customer.................. 19.5% 29.5% 32.4% 30.7% 30.8%
Second largest customer........... 14.9% 13.4% 20.1% 17.8% 27.3%
Third largest customer............ 13.9% 12.9% -- 11.0% --
</TABLE>
F-17
<PAGE> 165
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 18
The Recapitalization....................... 27
Use of Proceeds............................ 28
Capitalization............................. 29
Unaudited Pro Forma Consolidated Financial
Data..................................... 30
Selected Historical Consolidated Financial
Data..................................... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 38
Industry................................... 44
Business................................... 47
Management................................. 55
Security Ownership of Certain Beneficial
Owners and Management.................... 60
Certain Transactions....................... 61
Description of New Revolving Credit
Facility................................. 65
Description of Senior Subordinated Notes... 66
Description of the Senior Preferred Stock
and Exchange Debentures.................. 96
Description of Capital Stock............... 118
Certain Federal Income Tax
Considerations........................... 119
Plan of Distribution....................... 127
Exchange Offer............................. 128
Experts.................................... 138
Change in Accountants...................... 138
Legal Matters.............................. 138
Glossary................................... G-1
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
============================================================
============================================================
[MCMS LOGO]
OFFER TO EXCHANGE ITS SERIES B 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008 FOR ANY
AND ALL OF ITS OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008, ITS SERIES
B FLOATING INTEREST RATE TERM SECURITIES DUE 2008 (FIRSTS(SM)) FOR ANY AND ALL
OF ITS OUTSTANDING FLOATING INTEREST RATE SUBORDINATED TERM SECURITIES DUE 2008
(FIRSTS(SM)) AND ITS SERIES B 12 1/2% SENIOR EXCHANGEABLE PREFERRED STOCK FOR
ANY AND ALL OF ITS OUTSTANDING 12 1/2% SENIOR EXCHANGEABLE PREFERRED STOCK.
BTALEX.BROWN
, 1998
============================================================
<PAGE> 166
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Idaho. Sections
30-1-851 and 30-1-856 of the Idaho Business Corporation Act ("Sections 851 and
856") provide, inter alia, that an Idaho corporation may indemnify any person
who was or is a party to a proceeding, by reason of the fact he is or was a
director or officer of the corporation, if (i) he conducted himself in good
faith and reasonably believed that his conduct was in the best interests of the
corporation, (ii) his conduct was not opposed to the best interests of the
corporation and (iii) with respect to any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. Notwithstanding the
foregoing, Sections 851 and 856 prevent a corporation from indemnifying a
director in a proceeding brought by or in the right of a corporation that
results in a settlement or judgment against the director (other than reasonable
expenses incurred in connection with the proceeding), or a proceeding in which
the director received an improper financial benefit as a result of his conduct.
Furthermore, Section 856 prevents a corporation from indemnifying an officer for
conduct that constitutes either an intentional infliction of harm on the
corporation or shareholders, or an intentional violation of criminal law. Where
a director or officer is successful on the merits or otherwise in the defense of
any proceeding referred to above, the corporation must indemnify him against
reasonable expenses incurred by him in connection with the proceeding. A
director or officer who is a party to a proceeding may also apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction. The court may order indemnification if it determines
that indemnification is (i) required by the Idaho Business Corporation Act or
(ii) fair and reasonable under the relevant circumstances.
Furthermore, Section 851 authorizes a corporation to provide a broader
indemnification to its directors under its articles of incorporation. The
Company's Articles of Incorporation provides that the Company must indemnify to
the fullest extent authorized by the Idaho Business Corporation Act any person
who was or is a party, or is threatened to be made a party, to any proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
he is or was a director or officer of the Company, or while a director or
officer, is or was serving at the request of the Company as a director, officer
or agent of another corporation, or a partnership, joint venture, trust, or
other enterprise, including service with respect to an employee benefit plan.
The indemnity includes all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
In addition, the Company has entered into indemnification agreements with
its officers and other key personnel ("Indemnitee") that requires the Company to
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact the
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, be reason of any action or inaction on the part
of the Indemnitee while a director, officer, employee or agent or by reason of
the fact that the Indemnitee is or was serving at the request of the Company as
a director, officer, employee or agent of another corporation, or a partnership,
joint venture, trust, or other enterprise, against judgments, penalties, fines
(including, without limitation, excise taxes assessed against Indemnitee with
respect to an employee benefit plan), settlements and reasonable expenses
incurred by Indemnitee in connection with such action, suit or proceeding;
provided, however, the Company may not indemnify Indemnitee: (1) if Indemnitee
has been indemnified by another organization or employee benefit plan for the
same judgments, penalties, fines (including, without limitation, excise taxes
assessed against the person with respect to an employee benefit plan),
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions; (2) for any breach of the Indemnitee's
duty of loyalty to the Company or its stockholders; (3) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law; (4) for the liability of Indemnitee provided
II-1
<PAGE> 167
for under Section 30-1-833 of the Idaho Business Corporation Act; and (5) for
any transaction from which the Indemnitee derived an improper personal benefit.
Section 30-1-857 authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another domestic or
foreign corporation, partnership, joint venture, trust, employee benefit plan or
other entity, against any liability asserted against or incurred by him in that
capacity or arising from his status as a director or officer, whether or not the
corporation would have the power to indemnify him under the Idaho Business
Corporation Act. The Articles of Incorporation provides that the Company may
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Company or any other corporation, partnership, joint
venture, trust, or other enterprise against any expense, liability or loss. The
Company maintains and has in effect insurance policies covering all of the
Company's directors and officers against certain liabilities for actions taken
in such capacities, including liabilities under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<C> <S>
2.1 Recapitalization Agreement, dated as of December 21, 1997,
by and among MCMS, Inc., Micron Electronics, Inc. and
Cornerstone Equity Investors IV, L.P.*
2.2 Amended and Restated Recapitalization Agreement, dated as of
February 1, 1998, by and among MCMS, Inc., Micron
Electronics, Inc., MEI California, Inc. and Cornerstone
Equity Investors IV, L.P.*
2.3 First Amendment to the Amended and Restated Recapitalization
Agreement, dated as of February 26, 1998, by and among MCMS,
Inc., Micron Electronics, Inc., MEI California, Inc. and
Cornerstone Equity Investors IV, L.P.*
3.1 Amended and Restated Articles of Incorporation of MCMS,
Inc.*
3.2 Amended and Restated By-laws of MCMS, Inc.*
3.3 Articles of Amendment to the Amended and Restated Articles
of Incorporation of MCMS, Inc.**
4.1 Indenture, dated as of February 26, 1998, by and between
MCMS, Inc. and United States Trust Company of New York, as
trustee, paying agent and registrar, with respect to 9 3/4%
Senior Subordinated Notes due 2008 and the Floating Interest
Rate Subordinated Term Securities due 2008.*
4.2 Exchange Indenture, dated as of February 26, 1998, by and
between MCMS, Inc. and United States Trust Company of New
York, as paying agent and registrar, with respect to the
12 1/2% Subordinated Exchange Debentures due 2010.*
4.3 Certificate of Designation, dated as of February 26, 1998,
with respect to the 12 1/2% Senior Exchangeable Preferred
Stock and 12 1/2% Series B Senior Exchangeable Preferred
Stock.*
4.4 First Supplemental Indenture, dated as of April 23, 1998 by
and between MCMS, Inc. and United States Trust Company of
New York, as trustee, with respect to 9 3/4% Senior
Subordinated Notes due 2008 and the Floating Interest Rate
Subordinated Term Securities due 2008.**
5.1 Opinion and consent of Kirkland & Ellis.**
5.2 Opinion and consent of Evans, Keane LLP.**
8.1 Opinion of Kirkland & Ellis regarding tax consequences.**
10.1 Management Services Agreement, dated as of February 26,
1998, by and between MCMS, Inc. and Cornerstone Equity
Investors, LLC.*
10.2 Purchase Agreement, dated February 19, 1998, by and between
MCMS, Inc. and BT Alex. Brown Incorporated.*
10.3 Registration Rights Agreement, dated as of February 26,
1998, by and between MCMS, Inc. and BT Alex. Brown
Incorporated.*
10.4 Credit Agreement, dated as of February 26, 1998, among MCMS,
Inc., Bankers Trust Company, as agent, and the other
institutions named therein.*
10.5 Pledge Agreement, dated as of February 26, 1998, by and
between MCMS, Inc., and Bankers Trust Company, as collateral
agent.*
10.6 Security Agreement, dated as of February 26, 1998, among
MCMS, Inc., certain subsidiaries of MCMS, Inc. and Bankers
Trust Company, as collateral agent.*
</TABLE>
II-2
<PAGE> 168
<TABLE>
<C> <S>
10.7 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Robert F. Subia.*
10.8 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Chris Anton.*
10.9 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Jess Asla.*
10.10 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and John P. McCarvel.*
10.11 Shareholders Agreement, dated as of February 26, 1998, by
and among MCMS, Inc., Cornerstone Equity Investors IV, L.P.,
MEI California, Inc., Randolph Street Partners II, BT
Investment Partners, Inc. and the other investors named
therein.*
10.12 Registration Rights Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Cornerstone Equity Investors
IV, L.P., MEI California, Inc., Randolph Street Partners II,
BT Investment Partners, Inc. and the other investors named
therein.*
10.13 MCMS Agreement, dated as of December 21, 1997, by and
between MCMS, Inc. and Micron Technology, Inc.*
10.14 Transition Services Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Micron Electronics, Inc. and
Micron Technology, Inc.*
10.15 Interim Agreement to Provide Electric Service Agreement,
dated as of February 26, 1998, by and among MCMS, Inc.,
Micron Electronics, Inc. and Idaho Power.*
10.16 Office Lease, dated as of November 1, 1996, by and between
MCMS, Inc. and Micron Electronics, Inc., as amended.*
10.17 Tenancy Agreement, dated as of October 1, 1996, by and
between MCMS, Sdn. Bhd. and R.S. Roadstar Electronics, Sdn.
Bhd., as amended.*
10.18 Lease, dated as of December 1994, by and between MCMS, Inc.
and Tri-Center South Limited Partnership, as amended.*
10.19 Frame Manufacturing Agreement, dated as of November 18,
1997, by and between Alcatel Bell N.V. and MCMS Belgium
S.A.*
10.20 Stock Option Plan.**
10.21 Form of Indemnification Agreement.*
10.22 Patent and Invention Disclosure Assignment and License
Agreement, dated as of February 26, 1998, by and between
Micron Electronics, Inc. and MCMS, Inc.**
10.23 Know-How License Agreement, dated as of February 26, 1998,
by and between Micron Electronics, Inc. and MCMS, Inc.**
10.24 Forbearance Agreement, dated as of February 26, 1998, by and
between Micron Electronics, Inc. and MCMS, Inc.**
21.1 Subsidiaries of MCMS, Inc.*
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
23.3 Consent of Evans, Keane LLP (included in Exhibit 5.2).
24.1 Powers of Attorney (included on page II-5).*
25.1 Statement of Eligibility of Trustee.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
* Previously filed.
** Filed with Amendment No. 1.
(b) FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules of the Company for which provision is made in
the applicable accounting regulations of the Commission are not required, are
inapplicable or have been disclosed in the notes to the financial statements and
therefore have been omitted.
II-3
<PAGE> 169
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering; and
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nampa, State of Idaho, on
April 24, 1998.
MCMS, Inc.
By: /s/ ROBERT F. SUBIA
------------------------------------
Name: Robert F. Subia
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints any of Robert F. Subia or Chris Anton, his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of MCMS, Inc.),
to sign any or all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ ROBERT F. SUBIA President, Chief Executive Officer April 24, 1998
- --------------------------------------------------- and President (Principal
Robert F. Subia Executive Officer)
/s/ CHRIS J. ANTON Vice President, Finance and Chief April 24, 1998
- --------------------------------------------------- Financial Officer (Principal
Chris J. Anton Financial Officer and Accounting
Officer)
/s/ JESS ASLA Vice President, Operations April 24, 1998
- ---------------------------------------------------
Jess Asla
/s/ JOHN P. MCCARVEL Vice President, Strategic Business April 24, 1998
- --------------------------------------------------- Development
John P. McCarvel
/s/ R. STEPHEN CHEHEYL Director April 24, 1998
- ---------------------------------------------------
R. Stephen Cheheyl
</TABLE>
II-5
<PAGE> 171
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ FINIS F. CONNER Director April 24, 1998
- ---------------------------------------------------
Finis F. Conner
/s/ JOHN A. DOWNER Director April 24, 1998
- ---------------------------------------------------
John A. Downer
/s/ C. NICHOLAS KEATING Director April 24, 1998
- ---------------------------------------------------
C. Nicholas Keating
/s/ MICHAEL E. NAJJAR Director April 24, 1998
- ---------------------------------------------------
Michael E. Najjar
/s/ MARK ROSSI Director April 24, 1998
- ---------------------------------------------------
Mark Rossi
</TABLE>
II-6
<PAGE> 172
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
2.1 Recapitalization Agreement, dated as of December 21, 1997,
by and among MCMS, Inc., Micron Electronics, Inc. and
Cornerstone Equity Investors IV, L.P.*
2.2 Amended and Restated Recapitalization Agreement, dated as of
February 1, 1998, by and among MCMS, Inc., Micron
Electronics, Inc., MEI California, Inc. and Cornerstone
Equity Investors IV, L.P.*
2.3 First Amendment to the Amended and Restated Recapitalization
Agreement, dated as of February 26, 1998, by and among MCMS,
Inc., Micron Electronics, Inc., MEI California, Inc. and
Cornerstone Equity Investors IV, L.P.*
3.1 Amended and Restated Articles of Incorporation of MCMS,
Inc.*
3.2 Amended and Restated By-laws of MCMS, Inc.*
3.3 Articles of Amendment to the Amended and Restated Articles
of Incorporation of MCMS, Inc.**
4.1 Indenture, dated as of February 26, 1998, by and between
MCMS, Inc. and United States Trust Company of New York, as
trustee, paying agent and registrar, with respect to 9 3/4%
Senior Subordinated Notes due 2008 and the Floating Interest
Rate Subordinated Term Securities due 2008.*
4.2 Exchange Indenture, dated as of February 26, 1998, by and
between MCMS, Inc. and United States Trust Company of New
York, as paying agent and registrar, with respect to the
12 1/2% Subordinated Exchange Debentures due 2010.*
4.3 Certificate of Designation, dated as of February 26, 1998,
with respect to the 12 1/2% Senior Exchangeable Preferred
Stock and 12 1/2% Series B Senior Exchangeable Preferred
Stock.*
4.4 First Supplemental Indenture, dated as of April 23, 1998 by
and between MCMS, Inc. and United States Trust Company of
New York, as trustee, with respect to 9 3/4% Senior
Subordinated Notes due 2008 and the Floating Interest Rate
Subordinated Term Securities due 2008.**
5.1 Opinion and consent of Kirkland & Ellis.**
5.2 Opinion and consent of Evans, Keane LLP.**
8.1 Opinion of Kirkland & Ellis regarding tax consequences.**
10.1 Management Services Agreement, dated as of February 26,
1998, by and between MCMS, Inc. and Cornerstone Equity
Investors, LLC.*
10.2 Purchase Agreement, dated February 19, 1998, by and between
MCMS, Inc. and BT Alex. Brown Incorporated.*
10.3 Registration Rights Agreement, dated as of February 26,
1998, by and between MCMS, Inc. and BT Alex. Brown
Incorporated.*
10.4 Credit Agreement, dated as of February 26, 1998, among MCMS,
Inc., Bankers Trust Company, as agent, and the other
institutions named therein.*
10.5 Pledge Agreement, dated as of February 26, 1998, by and
between MCMS, Inc., and Bankers Trust Company, as collateral
agent.*
10.6 Security Agreement, dated as of February 26, 1998, among
MCMS, Inc., certain subsidiaries of MCMS, Inc. and Bankers
Trust Company, as collateral agent.*
10.7 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Robert F. Subia.*
10.8 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Chris Anton.*
10.9 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Jess Asla.*
10.10 Employment Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and John P. McCarvel.*
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
10.11 Shareholders Agreement, dated as of February 26, 1998, by
and among MCMS, Inc., Cornerstone Equity Investors IV, L.P.,
MEI California, Inc., Randolph Street Partners II, BT
Investment Partners, Inc. and the other investors named
therein.*
10.12 Registration Rights Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Cornerstone Equity Investors
IV, L.P., MEI California, Inc., Randolph Street Partners II,
BT Investment Partners, Inc. and the other investors named
therein.*
10.13 MCMS Agreement, dated as of December 21, 1997, by and
between MCMS, Inc. and Micron Technology, Inc.*
10.14 Transition Services Agreement, dated as of February 26,
1998, by and among MCMS, Inc., Micron Electronics, Inc. and
Micron Technology, Inc.*
10.15 Interim Agreement to Provide Electric Service Agreement,
dated as of February 26, 1998, by and among MCMS, Inc.,
Micron Electronics, Inc. and Idaho Power.*
10.16 Office Lease, dated as of November 1, 1996, by and between
MCMS, Inc. and Micron Electronics, Inc., as amended.*
10.17 Tenancy Agreement, dated as of October 1, 1996, by and
between MCMS, Sdn. Bhd. and R.S. Roadstar Electronics, Sdn.
Bhd., as amended.*
10.18 Lease, dated as of December 1994, by and between MCMS, Inc.
and Tri-Center South Limited Partnership, as amended.*
10.19 Frame Manufacturing Agreement, dated as of November 18,
1997, by and between Alcatel Bell N.V. and MCMS Belgium
S.A.*
10.20 Stock Option Plan.**
10.21 Form of Indemnification Agreement.*
10.22 Patent and Invention Disclosure Assignment and License
Agreement, dated as of February 26, 1998, by and between
Micron Electronics, Inc. and MCMS, Inc.**
10.23 Know-How License Agreement, dated as of February 26, 1998,
by and between Micron Electronics, Inc. and MCMS, Inc.**
10.24 Forbearance Agreement, dated as of February 26, 1998, by and
between Micron Electronics, Inc. and MCMS, Inc.**
21.1 Subsidiaries of MCMS, Inc.*
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
23.3 Consent of Evans, Keane LLP (included in Exhibit 5.2).
24.1 Powers of Attorney (included on page II-5).*
25.1 Statement of Eligibility of Trustee.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
* Previously filed.
** Filed with Amendment No. 1.
<PAGE> 1
Exhibit 3.3
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF MCMS, INC.
The undersigned officer of MCMS, INC., an Idaho corporation (the
"Company") hereby submits these Articles of Amendment to the Amended and
Restated Articles of Incorporation of the Company for filing with the Secretary
of State of the State of Idaho. These Articles of Amendment have been adopted by
the unanimous written consent of the Directors of the Company, pursuant to Idaho
Code Sections 30-1-631 and 30-1-1002.
The purpose of these Articles of Amendment (the "Amendment") is to
cancel the Company's authorized shares of Old Common Stock (as defined
in the Amended and Restated Articles of Incorporation of the Company).
All of the authorized shares of Old Common Stock have been issued and
all were redeemed by the Company. Pursuant to the Company's Amended and
Restated Articles of Incorporation, the Company is prohibited from
reissuing the Old Common Stock. On the effective date of this
Amendment, the Company will have no authorized shares of Old Common
Stock.
2. The following information is provided pursuant to Idaho Code
Section 30-1-631.
A. The name of the Company is MCMS, INC.
B. The authorized number of shares of Old Common Stock, as
defined in the Amended and Restated Articles of Incorporation of MCMS,
Inc., filed with the Idaho Secretary of State on February 24, 1998 is
hereby reduced to zero (0). As a result of this Amendment, the Company
shall have no authorized shares of Old Common Stock.
C. The total number of authorized shares of the Company,
itemized by class and series, remaining after the reduction of the
shares of Old Common Stock is as follows:
Designation Authorized Shares
(i) Series A Convertible Preferred 6,000,000
Stock, par value $0.001 per share
(ii) Series B Convertible Preferred 6,000,000
Stock, par value $0.001 per share
(iii) Series C Convertible Preferred 1,000,000
Stock par value $0.001 per share
(iv) Class A Common Stock, 30,000,000
par value $0.001 per share
(v) Class B Common Stock, 12,000,000
par value $0.001 per share
<PAGE> 2
(vi) Class C Common Stock, 2,000,000
par value $0.001 per share
(vii) 12 1/2% Senior Exchangeable 750,000 aggregate
Preferred Stock and 12 1/2% Series
B Senior Exchangeable Preferred Stock
On the effective date of these Articles of Amendment, except for the
elimination of the Old Common Stock, the Amended and Restated Articles
of Incorporation of the Company, as amended by that certain Certificate
of Designation of the Powers, Preferences and Relative, Participating,
Optional and Other Special Rights of 12 1/2% Senior Exchangeable
Preferred Stock and 12 1/2% Series B Senior Exchangeable Preferred
Stock and Qualification, Limitations and Restrictions thereof, filed on
February 24, 1998, shall remain in full force and effect.
Dated: May 6, 1998.
/s/ Chris Anton
------------------------------------
Chris Anton, Vice President Finance and
Chief Financial Officer
<PAGE> 1
Exhibit 4.4
MCMS, INC.
as Issuer
and
UNITED STATES TRUST COMPANY OF NEW YORK
as Trustee
-----------------
FIRST
SUPPLEMENTAL INDENTURE
Dated as of April 23, 1998
to the
INDENTURE
Dated as of February 26, 1998
-----------------
up to $275,000,000 aggregate principal amount of
9 3/4% Senior Subordinated Notes due 2008
and
Floating Interest Rate Subordinated Term Securities
("FIRSTS"(SM)*) due 2008
---------------------------------------------------
* FIRSTS is a service mark of BT Alex. Brown Incorporated
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE dated as of April 23, 1998
between MCMS, Inc., an Idaho corporation (the "Company"), as issuer and United
States Trust Company of New York, as trustee (the "Trustee"), to the INDENTURE,
dated as of February 26, 1998, between the Company and the Trustee (the
"Indenture"), relating to up to $275,000,000 aggregate principal amount of the
Company's 9 3/4% Senior Subordinated Notes due 2008, Floating Interest Rate
Subordinated Term due 2008, Series B 9 3/4% Senior Subordinated Notes due 2008
and Series B Floating Interest Rate Subordinated Term due 2008, (the "Notes")
are outstanding. Each capitalized term not otherwise defined herein shall have
the meaning assigned to it in the Indenture.
WHEREAS, the Company and the Trustee desire to correct a
defect in the definition of Preferred Stock in Section 1.01 of the Indenture;
WHEREAS, the execution and delivery of this First Supplemental
Indenture has been authorized by a resolution of the Board of Directors of the
Company;
WHEREAS, concurrent with the execution hereof, the Company has
delivered an Officers' Certificate and has caused its special counsel, Kirkland
& Ellis, to deliver to the Trustee an Opinion of Counsel, each to the effect
that this First Supplemental Indenture complies with Article 9 and, more
specifically, Section 9.01 of the Indenture and that all conditions precedent
provided for in the Indenture relating to this First Supplemental Indenture have
been complied with; and
WHEREAS, all conditions and requirements of the Indenture
necessary to make this First Supplemental Indenture a valid, binding and legal
instrument in accordance with its terms have been performed and fulfilled by the
parties hereto and the execution and delivery thereof have been in all respects
duly authorized by the parties hereto.
NOW, THEREFORE, in consideration of the above premises, each
party agrees, for the benefit of the other and for the equal and ratable benefit
of the Holders of the Notes, as follows:
1. The definition of Preferred Stock in Section 1.01 of the
Indenture is hereby amended by adding the following after the word Stock: "and
the Company's 12 1/2% Series B Senior Exchangeable Preferred Stock issued in
accordance with the Certificate of Designation relating thereto."
2. This First Supplemental Indenture may be executed in one
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same agreement.
3. Except as amended hereby, the Indenture remains in full
force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be executed as of the day and year first above
written.
Issuer:
MCMS, INC.
By: /s/ Chris Anton
-----------------------------------
Its: Chief Financial Officer
Trustee:
UNITED STATES TRUST COMPANY OF NEW YORK
as Trustee
By: /s/
-----------------------------------
Its:
2
<PAGE> 1
Exhibit 5.1
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
212 446-4800
Facsimile:
212 446-4900
June 11, 1998
MCMS, Inc.
16399 Franklin Road
Nampa, Idaho 83687
Re: Offer by MCMS, Inc. to Exchange its (i) Series B 9 3/4% Senior
Subordinated Notes due 2008 for any and all of its 9 3/4%
Senior Subordinated Notes due 2008, (ii) Series B Floating
Interest Rate Subordinated Term Securities due 2008 for any
and all of its Floating Interest Rate Subordinated Term
Securities due 2008 and (iii) Series B 12 1/2% Senior
Exchangeable Preferred Stock for any and all of its 12 1/2%
Senior Exchangeable Preferred Stock
Ladies and Gentlemen:
We are acting as special counsel to MCMS, Inc., an Idaho corporation
(the "Company"), in connection with the proposed registration by the Company of
(i) up to $145,000,000 in aggregate principal amount of the Company's Series B
9 3/4% Senior Subordinated Notes due 2008 (the "Fixed Rate Exchange Notes"),
(ii) up to $30,000,000 in aggregate principal amount of the Company's Series B
Floating Interest Rate Subordinated Term Securities due 2008 (the "Floating Rate
Exchange Notes" and, together with the Fixed Rate Exchange Notes, the "Exchange
Notes"), (iii) up to $47,500,000 of the Company's Series B 12 1/2% Senior
Exchangeable Preferred Stock (the "Exchange Preferred Stock" and together with
the Exchange Notes, the "Exchange Securities") and (iv) $47,500,000 of 12 1/2%
Subordinated Exchange Debentures due 2010, pursuant to a Registration Statement
on Form S-4 originally filed with the Securities and Exchange Commission (the
"Commission") on April 24, 1998 under the Securities Act of 1933, as amended
(the "Securities Act") (such Registration Statement, as amended or supplemented,
is hereinafter referred to as the "Registration Statement"), for the purpose of
effecting an exchange offer (the "Exchange Offer") for
<PAGE> 2
(i) the Company's 9 3/4% Senior Subordinated Notes due 2008 (the "Fixed Rate
Notes"), (ii) the Company's Floating Interest Rate Subordinated Term Securities
due 2008 (the "Floating Rate Notes" and, together with the Fixed Rate Notes, the
"Notes") and (iii) the Company's 12 1/2% Senior Exchangeable Preferred Stock
(the "Preferred Stock" and together with the Notes, the "Securities"),
respectively. The Fixed Rate Exchange Notes are to be issued pursuant to the
Indenture (the "Indenture"), dated as of February 26, 1998, between the Company
and United State Trust Company of New York, as Trustee (the "Trustee"), in
exchange for and in replacement of the Company's outstanding Fixed Rate Notes,
of which $145,000,000 in aggregate principal amount is outstanding. The Floating
Rate Notes are to be issued pursuant to the Indenture, in exchange for and in
replacement of the Company's outstanding Floating Rate Notes, of which
$30,000,000 in aggregate principal amount is outstanding. The Exchange Preferred
Stock are to be issued pursuant to the Certificate of Designation (the
"Certificate of Designation), dated as of February 24, 1998, in exchange for and
in replacement of the Company's outstanding Preferred Stock, of which
$25,000,000 in liquidation preference is outstanding.
In connection with the Exchange Offer, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of this opinion, including (i) the corporate and organizational
documents of the Company, (ii) minutes and records of the corporate proceedings
of the Company with respect to the issuance of the Exchange Securities, (iii)
the Registration Statement and exhibits thereto and (iv) the Registration Rights
Agreement, dated as of February 26, 1998, by and between the Company and BT
Alex. Brown.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company, and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. As to
any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that:
(1) The Company is a corporation existing and in good standing under
the General Corporation Law of the State of Idaho.
<PAGE> 3
(2) The issuance of the Exchange Securities has been duly authorized by
the Company.
(3) When, as and if (i) the Registration Statement shall have become
effective pursuant to the provisions of the Securities Act, (ii) the Indenture
shall have been qualified pursuant to the provisions of the Trust Indenture Act
of 1939, as amended, (iii) the Securities shall have been validly tendered to
the Company, (iv) the Exchange Securities shall have been issued in the form and
containing the terms described in the Registration Statement, the Indenture, the
Certificate of Designation, the resolutions of the Company's Board of Directors
(or authorized committee thereof) authorizing the foregoing and any legally
required consents, approvals, authorizations and other order of the Commission
and any other regulatory authorities to be obtained, the Exchange Securities
when issued pursuant to the Exchange Offer will be legally issued and will
constitute valid and binding obligations of the Company under the terms and
conditions described in the Registration Statement, the Indentures, the
Certificate of Designation, and any legally required consents, approvals,
authorizations and other order of the Commission and any other regulatory
authorities to be obtained.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the laws of the State of New York. We
advise you that issues addressed by this letter may be governed in whole or in
part by other laws, but we express no opinion as to whether any relevant
difference exists between the laws upon which our opinions are based and any
other laws which may actually govern. For purposes of the opinion in paragraph
1, we have relied exclusively upon recent certificates issued by the Idaho
Secretary of State with respect to the Company, and such opinion is not intended
to provide any conclusion or assurance beyond that conveyed by such
certificates. We have assumed without investigation that there has been no
relevant change or development between the respective dates of such certificates
and the date of this letter.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of the rules and regulations of
the Commission.
<PAGE> 4
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange
Securities.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York be changed by legislative action, judicial
decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Yours very truly,
/s/ Kirkland & Ellis
-------------------------
KIRKLAND & ELLIS
<PAGE> 1
EXHIBIT 5.2
[EVANS, KEANE LLP LETTERHEAD]
June 11, 1998
MCMS, Inc.
16399 Franklin Road
Nampa, Idaho 83687
RE: Offer by MCMS, Inc. to Exchange its (i) Series B 9 3/4% Senior
Subordinated Notes due 2008 for any and all of its 9 3/4%
Senior Subordinated Notes due 2008 (ii) Series B Floating
Interest Rate Subordinated Term Securities due 2008 for any
and all of its Floating Interest Rate Subordinated Term
Securities due 2008 and (iii) Series B 12 1/2% Senior
Exchangeable Preferred Stock for any and all of its 12 1/2%
Senior Exchangeable Preferred Stock
Ladies and Gentlemen:
We are acting as special counsel to MCMS, Inc., an Idaho corporation
(the "Company"), in connection with the proposed registration of up to
$47,500,000 (475,000 shares) of the Company's Series B 12 1/2% Senior
Exchangeable Preferred Stock (the "Exchange Preferred Stock"). The Exchange
Preferred Stock is being registered pursuant to a Registration Statement on Form
S-4, Registration No. 333-50981, originally filed with the Securities and
Exchange Commission (the "Commission") on April 24, 1998 under the Securities
Act of 1933, as amended (the "Securities Act") (such Registration Statement, as
amended or supplemented, is hereinafter referred to as the "Registration
Statement"), for the purpose, inter alia, of effecting an exchange offer (the
"Exchange Offer") for the Company's 12 1/2% Senior Exchangeable Preferred Stock
(the "Preferred Stock"). The Exchange Preferred Stock are to be issued pursuant
to the Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12 1/2% Senior Exchangeable
Preferred Stock and 12 1/2% Series B Senior Exchangeable Preferred Stock and
Qualifications, Limitations and Restrictions Thereof, as filed with the Idaho
Secretary of State on February 24, 1998 (the "Certificate of Designation"), in
exchange for and in replacement of the Company's outstanding Preferred Stock, of
which $25,000,000 in liquidation preference is outstanding.
<PAGE> 2
MCMS, Inc.
June 11, 1998
Page 2
In connection with the Exchange Offer, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of this opinion, including (i) the corporate and organizational
documents of the Company, (ii) minutes and records of the corporate proceedings
of the Company with respect to the issuance of the Exchange Preferred Stock,
(iii) the Registration Statement and exhibits thereto, and (iv) the Certificate
of Designation.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto, and the due authorization, execution and delivery of all
documents by the parties thereto. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Company and others.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that the Exchange Preferred Stock has been duly authorized and when, as and if
(i) the Registration Statement shall have become effective pursuant to the
provisions of the Securities Act, (ii) the Company's Preferred Stock shall have
been validly tendered to the Company; and (iii) the Exchange Preferred Stock
shall have been issued in the form and containing the terms described in the
Registration Statement, the Certificate of Designation, the resolutions of the
Company's Board of Directors (or authorized committee thereof) authorizing the
foregoing and any legally required consents, approvals, authorizations and other
order of the Commission and any other regulatory authorities to be obtained, the
Exchange Preferred Stock will be validly issued, fully paid and non-assessable.
Our opinion expressed above is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies; and (iv) any laws except the Idaho Business Corporation Act as
in effect in the State of Idaho. Without limiting the generality of the
foregoing, we specifically express no opinion as to the application of ,
compliance with or effect of (a) application of the laws of the United States of
America, including without limitation the Securities Act of 1933, as amended,
and rules, regulations and interpretations thereunder and the Securities
Exchange Act of 1934, as amended, and rules, regulations and interpretations
thereunder; and (b) blue sky laws of any state (including Idaho). We express no
opinion as to matters contained
<PAGE> 3
MCMS, Inc.
June 11, 1998
Page 3
in the Registration Statement other than the issuance by the Company of the
Exchange Preferred Stock. We advise you that issues addressed by this letter may
be governed in whole or in part by other laws, but we express no opinion as to
whether any relevant difference exists between the laws upon which our opinions
are based and any other laws which may actually govern. For purposes of this
opinion we have relied upon recent certificates issued by the Idaho Secretary of
State with respect to the Company, and such opinion is not intended to provide
any conclusion or assurance beyond that conveyed by such certificates. We have
assumed without investigation that there has been no relevant change or
development between the respective dates of such certificates and the date of
this letter.
We hereby consent to the filing of this opinion as Exhibit 5.2 to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the prospectus constituting a part of the Registration
Statement. In giving this consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission.
This opinion is limited to the specific issues addressed herein, and no
opinion is implied or may be inferred beyond the matters expressly stated
herein. This opinion is delivered and is effective as of the date of this
opinion first shown above. Accordingly, this opinion is based on matters
existing on such date and we undertake no, and hereby disclaim any, obligation
after the date of this opinion to advise you of any change in any of the
opinions rendered herein or any change in any of the facts upon which any such
opinions may be based, and we assume no obligation to revise or supplement this
opinion should the present Idaho Business Corporation Act be changed by
legislative action, judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Very truly yours,
EVANS, KEANE LLP
<PAGE> 1
Exhibit 8.1
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
212 446-4800
Facsimile:
June 11, 1998 212 446-4900
MCMS, Inc.
16399 Franklin Road
Nampa, Idaho 83687
Re: Offer by MCMS, Inc. to Exchange its (i) Series B 9 3/4% Senior
Subordinated Notes due 2008 for any and all of its 9 3/4%
Senior Subordinated Notes due 2008, (ii) Series B Floating
Interest Rate Subordinated Term Securities due 2008 for any
and all of its Floating Interest Rate Subordinated Term
Securities due 2008 and (iii) Series B 12 1/2% Senior
Exchangeable Preferred Stock for any and all of its 12 1/2%
Senior Exchangeable Preferred Stock
Ladies and Gentlemen:
We are acting as special counsel to MCMS, Inc., an Idaho corporation
(the "Company"), in connection with the proposed registration by the Company of
(i) up to $145,000,000 in aggregate principal amount of the Company's Series B
9 3/4% Senior Subordinated Notes due 2008 (the "Fixed Rate Exchange Notes"),
(ii) up to $30,000,000 in aggregate principal amount of the Company's Series B
Floating Interest Rate Subordinated Term Securities due 2008 (the "Floating Rate
Exchange Notes" and, together with the Fixed Rate Exchange Notes, the "Exchange
Notes"), (iii) up to $47,500,000 of the Company's Series B 12 1/2% Senior
Exchangeable Preferred Stock (the "Exchange Preferred Stock" and together with
the Exchange Notes, the "Exchange Securities") and (iv) $47,500,000 of 12 1/2%
Subordinated Exchange Debentures due 2010, pursuant to a Registration Statement
on Form S-4 originally filed with the Securities and Exchange Commission (the
"Commission") on April 24, 1998 under the Securities Act of 1933, as amended
(the "Securities Act") (such Registration Statement, as amended or supplemented,
is hereinafter referred to as the "Registration Statement"), for the purpose of
effecting an exchange offer (the "Exchange Offer") for (i) the Company's 9 3/4%
Senior Subordinated Notes due 2008 (the "Fixed Rate Notes"), (ii) the Company's
Floating Interest Rate Subordinated Term Securities due 2008 (the "Floating Rate
Notes" and, together with the Fixed Rate Notes, the "Notes") and (iii) the
Company's 12 1/2% Senior Exchangeable Preferred Stock (the "Preferred Stock" and
together with the Notes, the "Securities"), respectively.
<PAGE> 2
You have requested our opinion as to certain United States federal
income tax consequences of the Exchange Offer. In preparing our opinion, we have
reviewed and relied upon the Company's Registration Statement on Form S-4 (File
No. 333-50981), filed with the Securities and Exchange Commission on April 24,
1998 (the "Registration Statement"), and such other documents as we deemed
necessary.
On the basis of the foregoing, it is our opinion that the exchange of
the Exchange Securities for Securities pursuant to the Exchange Offer will not
be treated as an "exchange" for United States federal income tax purposes.
The opinions set forth above are based upon the applicable provisions
of the Internal Revenue Code of 1986, as amended; the Treasury Regulations
promulgated or proposed thereunder; current positions of the Internal Revenue
Service (the "IRS") contained in published revenue rulings, revenue procedures,
and announcements; existing judicial decisions; and other applicable
authorities. No tax rulings have been sought from the IRS with respect to any of
the matters discussed herein. Unlike a ruling from the IRS, opinions of counsel
are not binding on the IRS. Hence, no assurance can be given that the opinion
stated in this letter will not be successfully challenged by the IRS or by a
court. We express no opinion concerning any United States federal income tax
consequences of the Exchange Offer except as expressly set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm and the summarization
of this opinion under the section titled "Certain Federal Income Tax
Considerations" in the Registration Statement.
Very truly yours,
/s/ Kirkland & Ellis
-----------------
Kirkland & Ellis
<PAGE> 1
Exhibit 10.20
MCMS, INC.
1998 STOCK OPTION PLAN
<PAGE> 2
MCMS, INC.
1998 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF PLAN OF PLAN
The 1998 Stock Option Plan (the "Plan") of MCMS, Inc. (the "Company"),
adopted by the Board of Directors and shareholders of the Company effective May
14, 1998, is intended to advance the best interests of the Company by providing
executives, key employees and certain advisors of the Company or any Subsidiary
(as defined below) who have substantial responsibility for the management and
growth of the Company or any Subsidiary with additional incentives by allowing
such employees to acquire an ownership interest in the Company. The Plan is a
compensatory benefit plan within the meaning of Rule 701 under the Securities
Act of 1933, as amended (the "Securities Act") and, unless and until the Common
Stock (as defined below) is publicly traded, the issuance pursuant to the Plan
of stock purchase options to purchase shares of Common Stock ("Options"), and
the issuance of Common Stock upon the exercise of Options issued pursuant to the
Plan, are each intended to qualify for the exemption from registration under the
Securities Act provided by Rule 701.
ARTICLE II
DEFINITIONS
For purposes of the Plan the following terms have the indicated
meanings:
"Authorization Date" has the meaning ascribed thereto in Section 5.9(a)
hereof.
"Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by, or is under common control with, such specified Person. For
purposes of this definition, "control" (including the terms "controlled by" and
"under common control with"), with respect to the relationship between or among
two or more Persons, means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the affairs or
management of a Person, whether through the ownership of voting securities, as
trustee or executor, by contract or otherwise, including, without limitation,
the ownership, directly or indirectly, of securities having the power to elect a
majority of the board of directors or similar body governing the affairs of such
Person.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Committee" means the Compensation Committee or such other committee of
the Board as the Board may designate to administer the Plan or, if for any
reason the Board has not designated such a
<PAGE> 3
committee, the Board. The Committee, if other than the Board, shall be composed
of two or more directors as appointed from time to time by the Board.
"Common Stock" means the Class A Common Stock, $0.001 par value per
share, of MCMS, Inc., an Idaho corporation.
"Election Notice" has the meaning ascribed thereto in Section 5.9(b)
hereof.
"Fair Market Value" per share on any given date means the average of
the closing prices of the sales of the Common Stock on all securities exchanges
on which such stock may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
stock is not so listed, the average of the representative bid and asked prices
quoted on the Nasdaq Stock Market as of 4:00 P.M., New York time, or, if on any
day such stock is not quoted on the Nasdaq Stock Market, the average of the
highest bid and lowest asked prices on such day in the domestic over-the-counter
market as reported by the National Quotation Bureau, Incorporated, or any
similar successor organization. If at any time the Common Stock is not listed or
quoted, the Fair Market Value per share shall be determined by the Committee or
the Board based on such factors as the members thereof in the exercise of their
business judgment, consider relevant.
"Measurement Date" means the date on which any taxable income resulting
from the exercise of an Option is determined under applicable federal income tax
law.
"Option Agreement" has the meaning set forth in Section 6.1 hereof.
"Option Shares" shall mean (i) all shares of Common Stock issued or
issuable upon the exercise of an Option and (ii) all shares of Common Stock
issued with respect to the Common Stock referred to in clause (i) above by way
of stock dividend or stock split or in connection with any conversion, merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock. Unless provided otherwise herein or in the Participant's Option
Agreement, Option Shares will continue to be Option Shares in the hands of any
holder other than the Participant (except for the Company), and each such
transferee thereof will succeed to the rights and obligations of a holder of
Option Shares hereunder.
"Options" has the meaning set forth in the preamble hereof.
"Participant" means (i) any employee of the Company or any Subsidiary
or (ii) any person, including an advisor, engaged by the Company or a Parent or
Subsidiary to render services to such entity who has been selected to
participate in the Plan by the Committee or the Board.
"Permitted Transferee" means those persons to whom the Participant is
authorized (1) pursuant to Section 5.9, to transfer Option Shares, or (2)
pursuant to Section 6.3, to transfer Options.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated
-3-
<PAGE> 4
organization or other entity.
"Plan" has the meaning set forth in the preamble hereof.
"Qualified Initial Public Offering" means an offering by the
Corporation of its capital stock or equity securities to the public pursuant to
an effective registration statement under the Securities Act of 1933, as then in
effect, or any comparable statement under any similar federal statute then in
force pursuant to which the public offering price per share of which is not less
than $14.00 (adjusted to reflect stock dividends, stock splits or
recapitalizations) after the date hereof and results in aggregate gross cash
proceeds to the Corporation of at least $30,000,000 (before deduction of
underwriting discounts and expenses).
"Repurchase Notice" has the meaning ascribed thereto in Section 5.8(b)
hereof.
"Repurchase Option" has the meaning ascribed thereto in Section 5.8(a)
hereof.
"Right of First Refusal" has the meaning ascribed thereto in Section
5.9(b) hereof.
"Sale Notice" has the meaning ascribed thereto in Section 5.9(a)
hereof.
"Sale of the Company" means the sale of the Company to any Third Party
or Parties pursuant to which such party or parties acquire (i) capital stock of
the Company possessing the voting power under normal circumstances necessary to
elect a majority of the Board (whether by merger, consolidation or sale or
transfer of the Company's capital stock) or (ii) all or substantially all of the
Company's assets determined on a consolidated basis.
"Securities Act" has the meaning ascribed thereto in Article 1 hereof.
"Shareholders Agreement" means the Shareholders Agreement dated as of
February 26, 1998 by and among the Company, Cornerstone Equity Investors IV,
L.P., MEI California, Inc., Randolph Street Partners II, BT Investment Partners,
Inc. and the other investors listed in Appendix A thereto.
"Subsidiary" means any subsidiary corporation (as such term is defined
in Section 424(f) of the Code) of the Company.
"Termination Date" shall mean the date upon which such Participant's
employment or engagement, as the case may be, with the Company terminated.
"Third Party" means any Person which is not an Affiliate of the
Company.
-4-
<PAGE> 5
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. Subject to the
limitations of the Plan, the Committee shall have the sole and complete
authority to: (i) select Participants, (ii) grant Options to Participants in
such forms and amounts as it shall determine, (iii) impose such limitations,
restrictions and conditions upon such Options as it shall deem appropriate, (iv)
interpret the Plan and adopt, amend and rescind administrative guidelines and
other rules and regulations relating to the Plan, (v) correct any defect or
omission or reconcile any inconsistency in the Plan or in any Options granted
under the Plan and (vi) make all other determinations and take all other actions
necessary or advisable for the implementation and administration of the Plan.
The Committee's determinations on matters within its authority shall be
conclusive and binding upon the Participants, the Company and all other persons.
All expenses associated with the administration of the Plan shall be borne by
the Company. The Committee may, as approved by the Board and to the extent
permissible by law, delegate any of its authority hereunder to such persons or
entities as it deems appropriate.
ARTICLE IV
LIMITATION ON AGGREGATE SHARES
The number of shares of Common Stock with respect to which Options may
be granted under the Plan shall not exceed, in the aggregate, 2,500,000 shares,
subject to adjustment in accordance with Section 6.4. To the extent any Options
expire unexercised or are canceled, terminated or forfeited in any manner
without the issuance of Common Stock thereunder, such shares shall again be
available under the Plan. The shares of Common Stock available under the Plan
may consist of authorized and unissued shares, treasury shares or a combination
thereof, as the Committee shall determine.
ARTICLE V
AWARDS
5.1 GRANT OF OPTIONS. The Committee may grant Options to Participants
from time to time in accordance with this Article V. Options granted under the
Plan may be nonqualified stock options or "incentive stock options" within the
meaning of Section 422 of the Code or any successor provision as specified by
the Committee; provided, however, that no incentive stock option may be granted
to any Participant who, at the time of grant, owns stock of the Company (or any
Subsidiary) representing more than 10% of the total combined voting power of all
classes of stock of the Company (or any Subsidiary), unless such incentive stock
option shall at the time of grant (a) have a termination date not later than the
fifth anniversary of the issuance date and (b) have an exercise price per share
equal to at least 110% of the Fair Market Value of a share of Common Stock on
the date of grant. The exercise price per share of Common Stock under each
Option shall be determined by the Committee or the
-5-
<PAGE> 6
Board at the time of grant; provided, however, that the exercise price per share
of Common Stock under each incentive stock option shall be fixed by the
Committee at the time of grant of the Option and shall equal at least 100% of
the Fair Market Value of a share of Common Stock on the date of grant, but not
less than the par value per share (as adjusted pursuant to Section 6.4). Subject
to Section 5.6, Options shall be exercisable at such time or times as the
Committee shall determine; provided, however, that any option intended to be an
incentive stock option shall be treated as an incentive stock option only to the
extent that the aggregate Fair Market Value of the Common Stock (determined as
of the date of Option grant) with respect to which incentive stock options (but
not nonqualified options) are exercisable for the first time by any Participant
during any calendar year (under all stock option plans of the Company and its
Subsidiaries) does not exceed $100,000. The Committee shall determine the term
of each Option, which term shall not exceed ten years from the date of grant of
the Option.
5.2 EXERCISE PROCEDURE. Options shall be exercisable, to the extent
they are vested, by written notice to the Company (to the attention of the
Company's Secretary) accompanied by payment in full of the applicable exercise
price. Payment of such exercise price may be made (i) in cash (including check,
bank draft, money order or wire transfer of immediately available funds), (ii)
if approved by the Committee prior to exercise (or in the case of an incentive
stock option, if approved by the Committee and set forth in the Option
Agreement) by delivery of a full recourse promissory note of the Participant
bearing interest at a rate not less than the applicable federal rate determined
pursuant to Section 1274 of the Code, (iii) in shares of Common Stock valued at
their Fair Market Value as of the date of exercise as provided in Section 5.3
below, (iv) in the consideration received by the Company pursuant to a cashless
exercise program implemented by the Company in connection with the Plan, or (v)
in a combination of the foregoing.
5.3 EXCHANGE OF PREVIOUSLY ACQUIRED STOCK. The Committee, in its
discretion and subject to such conditions as the Committee may determine, may
permit the exercise price for the shares being acquired upon the exercise of an
Option to be paid, in full or in part, by the delivery to the Company of Common
Stock. Any Common Stock so delivered shall be treated as the payment of cash
equal to the aggregate Fair Market Value on the date of delivery of such Common
Stock. In the case of incentive stock options, the Committee shall specify in
the Option Agreement whether the option holder may satisfy the exercise price
with respect to shares of Common Stock purchased upon exercise of such Option by
delivering to the Company shares of previously acquired Common Stock. In the
case of shares of Common Stock acquired upon exercise of an Option, such shares
shall have been owned by the optionee for more than six months on the date of
surrender, and have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the shares of Common Stock as to which said Option
shall be exercised.
5.4 WITHHOLDING TAX REQUIREMENTS.
(a) AMOUNT OF WITHHOLDING. It shall be a condition of the exercise of
any Option that the Participant exercising the Option make appropriate payment
or other provision acceptable to the Company with respect to any withholding tax
requirement arising from such exercise. The amount of withholding tax required,
if any, with respect to any Option exercise (the "Withholding Amount") shall be
determined by the Treasurer or other appropriate officer of the Company, and the
Participant
-6-
<PAGE> 7
shall furnish such information and make such representations as such officer
requires to make such determination.
(b) WITHHOLDING PROCEDURE. If the Company determines that
withholding tax is required with respect to any Option exercise, the Company
shall notify the Participant of the Withholding Amount, and the Participant
shall pay to the Company an amount not less than the Withholding Amount. In lieu
of making such payment and at the discretion of the Company, the Participant may
elect to pay the Withholding Amount by either (i) delivering to the Company a
number of shares of Common Stock having an aggregate Fair Market Value as of the
Measurement Date not less than the Withholding Amount or (ii) directing the
Company to withhold (and not to deliver or issue to the Participant) a number of
shares of Common Stock, otherwise issuable upon the exercise of an Option,
having an aggregate Fair Market Value as of the Measurement Date not less than
the Withholding Amount. In addition, if the Committee approves, a Participant
may elect pursuant to the prior sentence to deliver or direct the withholding of
shares of Common Stock having an aggregate Fair Market Value in excess of the
minimum Withholding Amount but not in excess of the Participant's applicable
highest marginal combined federal income and state income tax rate, as estimated
in good faith by such Participant. Any fractional share interests resulting from
the delivery or withholding of shares of Common Stock to meet withholding tax
requirements shall be settled in cash. All amounts paid to or withheld by the
Company and the value of all shares of Common Stock delivered to or withheld by
the Company pursuant to this Section 5.4 shall be deposited in accordance with
applicable law by the Company as withholding tax for the Participant's account.
If the Treasurer or other appropriate officer of the Company determines that no
withholding tax is required with respect to the exercise of any Option (because
such option is an incentive stock option or otherwise), but subsequently it is
determined that the exercise resulted in taxable income as to which withholding
is required (as a result of a disposition of shares or otherwise), the
Participant shall promptly, upon being notified of the withholding requirement,
pay to the Company, by means acceptable to the Company, the amount required to
be withheld; and at its election the Company may condition the transfer of any
shares issued upon exercise of an incentive stock option upon receipt of such
payment.
5.5 NOTIFICATION OF INQUIRIES AND AGREEMENTS. Each Participant and each
Permitted Transferee shall notify the Company in writing within 10 days after
the date such Participant or Permitted Transferee (i) first obtains knowledge of
any Internal Revenue Service inquiry, audit, assertion, determination,
investigation, or question relating in any manner to the value of Options
granted hereunder; (ii) includes or agrees (including, without limitation, in
any settlement, closing or other similar agreement) to include in gross income
with respect to any Option granted under this Plan (A) any amount in excess of
the amount reported on Form 1099 or Form W-2 to such Participant by the Company,
or (B) if no such Form was received, any amount; and/or (iii) exercises, sells,
disposes of, or otherwise transfers an Option acquired pursuant to this Plan.
Upon request, a Participant or Permitted Transferee shall provide to the Company
any information or document relating to any event described in the preceding
sentence which the Company (in its sole discretion) requires in order to
calculate and substantiate any change in the Company's tax liability as a result
of such event.
-7-
<PAGE> 8
5.6 CONDITIONS AND LIMITATIONS ON EXERCISE. At the discretion of the
Committee, exercised at the time of grant, Options may vest, in one or more
installments, upon (i) the fulfillment of certain conditions, (ii) the passage
of a specified period of time, and/or (iii) the achievement by the Company or
any Subsidiary of certain performance goals.
5.7 EXPIRATION OF OPTIONS.
(a) NORMAL EXPIRATION. In no event shall any part of any
Option be exercisable after the stated date of expiration thereof.
(b) EARLY EXPIRATION UPON TERMINATION OF EMPLOYMENT. Any part
of any Option that was not vested on a Participant's Termination Date shall
expire and be forfeited on such date, and any part of any Option that was vested
on the Termination Date shall also expire and be forfeited to the extent not
theretofore exercised on the thirtieth (30th) day (one year, if termination is
caused by the Participant's death or disability) following the Termination Date,
but in no event after the stated date of expiration thereof.
5.8 RIGHT TO PURCHASE OPTION SHARES UPON TERMINATION OF EMPLOYMENT.
(a) REPURCHASE RIGHT. In the event a Participant's employment
with the Company is terminated for any reason, the Option Shares (whether held
by such Participant or one or more transferees and including any Option Shares
acquired subsequent to such termination of employment) will be subject to
repurchase by the Company pursuant to the terms and conditions set forth in this
Section 5.8 (the "Repurchase Option") at a price per share equal to the Fair
Market Value thereof determined as of the Termination Date.
(b) REPURCHASE NOTICE. The Board may elect to purchase all or
any portion of the Option Shares by delivery of written notice (the "Repurchase
Notice") to the holder or holders of the Option Shares within 180 days after the
Termination Date (or if termination is caused by the Participant's death or
disability, 180 days after the expiration of the Options held by such
Participant). The Repurchase Notice will set forth the number of Option Shares
to be acquired from such holder, the aggregate consideration to be paid for such
shares and the time and place for the closing of the transaction.
(c) CLOSING OF REPURCHASE. The closing of the repurchase
transaction will take place on the date designated by the Company in the
Repurchase Notice, which date will not be more than 45 days nor less than 10
days after the delivery of such notice. The Company will pay for the Option
Shares to be purchased pursuant to the Repurchase Option by delivering, at the
option of the Company to such Participant and/or the other holder(s), (1) a
check in the amount of the aggregate sale price of the Option Shares to be
repurchased or (2) if the aggregate consideration to be paid to such holder(s)
of Option Shares exceeds $50,000, a check in the amount of 20% of the aggregate
sale price of the Option Shares to be repurchased (except to the extent not
permitted under that certain revolving credit facility with various lending
institutions and Bankers Trust Company of up to $40 million, a note in
compliance therewith) and a subordinated promissory note in a principal amount
equal to the
-8-
<PAGE> 9
remainder of the aggregate sale price, bearing interest at a floating rate of
interest equal to the prime rate as stated from time to time by Chase Manhattan
Bank or any successor thereto, and payable, as to principal and interest, in
four equal annual installments on the first four anniversaries of the closing of
such repurchase; provided that if the Company determines that withholding tax is
required with respect to the exercise of a Repurchase Option, the Company shall
withhold an amount equal to such withholding tax from the purchase price. At the
closing, the Participant and each other seller will deliver the certificates
representing the Option Shares to be sold duly endorsed in form for transfer to
the Company or its designee, and the Company will be entitled to receive
customary representations and warranties from the Participant and the other
sellers regarding title to the Option Shares.
5.9 RESTRICTIONS ON TRANSFER.
(a) RESTRICTIONS. A Participant may not sell, pledge or
otherwise transfer any interest in any Option Shares except pursuant to the
provisions of this Section 5.9. At least 60 days prior to making any transfer,
the Participant proposing such transfer shall deliver a written notice (the
"Sale Notice") to the Company. The Sale Notice will disclose in reasonable
detail the identity of the prospective transferee(s) and the terms and
conditions of the proposed transfer. Such Participant (and such Participant's
transferees) shall not consummate any such transfer until 60 days after the Sale
Notice has been delivered to the Company, unless the Company has notified such
Participant in writing that it will not exercise its rights under this Section
5.9. (The date of the first to occur of such events is referred to herein as the
"Authorization Date").
(b) REPURCHASE OPTION. The Company may elect to purchase all
or any portion of the Option Shares to be transferred upon the same terms and
conditions as those set forth in the Sale Notice (the "Right of First Refusal")
by delivering a written notice of such election to such Participant within 30
days after the receipt of the Sale Notice by the Company (the "Election
Notice"). If the Company has not elected to purchase all of the Option Shares
specified in the Sale Notice, such Participant may transfer the Option Shares
not purchased by the Company to the prospective transferee(s) as specified in
the Sale Notice at a price and on terms no more favorable to the transferee(s)
thereof than specified in the Sale Notice during the 60-day period immediately
following the Authorization Date. Any Option Shares not so transferred within
such 60-day period must be reoffered to the Company in accordance with the
provisions of this Section 5.9 in connection with any subsequent proposed
transfer.
(c) EXCEPTIONS. The restrictions contained in this Section 5.9
will not apply with respect to transfers of Option Shares (1) pursuant to
applicable laws of descent and distribution, (2) pursuant to the Shareholders
Agreement or (3) among the Participant's family group; provided that the
restrictions contained in this paragraph will continue to be applicable to the
Option Shares after any such transfer and the transferees of such Option Shares
have agreed in writing to be bound by the terms and provisions of this Plan and
the Option grant, as amended from time to time. The Participant's "family group"
means the Participant's spouse and descendants (whether natural or adopted) and
any trust solely for the benefit of the Participant and/or the Participant's
spouse and/or descendants.
5.10 TERMINATION OF RESTRICTIONS. The rights and obligations set forth
in Sections 5.8 and
-9-
<PAGE> 10
5.9 hereof will terminate upon the earlier of (A) the consummation by the
Company of a Qualified Initial Public Offering or (B) the sale of Option Shares
in accordance with the terms and conditions of Section 5.9 (except for a
transfer pursuant to Section 5.9 (c)); provided that with respect to clause (B)
above, such rights and obligations shall terminate only with respect to those
Option Shares sold.
ARTICLE VI
GENERAL PROVISIONS
6.1 WRITTEN AGREEMENT. Each Option granted hereunder shall be embodied
in a written agreement (the "Option Agreement") which shall be signed by the
Participant to whom the Option is granted and shall be subject to the terms and
conditions set forth herein.
6.2 LISTING, REGISTRATION AND LEGAL COMPLIANCE. If at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the Company
with such certificates, representations and information as the Company shall
request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. In the case of
officers and other persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may at any time impose any limitations
upon the exercise of Options that, in the Committee's discretion, are necessary
or desirable in order to comply with such Section 16(b) and the rules and
regulations thereunder. If the Company, as part of an offering of securities or
otherwise, finds it desirable because of federal or state regulatory
requirements to reduce the period during which any Options may be exercised, the
Committee may, in its discretion and without the Participant's consent, so
reduce such period on not less than 15 days' written notice to the holders
thereof.
6.3 OPTIONS NOT TRANSFERRABLE. Options may not be transferred other
than by will or the laws of descent and distribution and, during the lifetime of
the Participant to whom they were granted, may be exercised only by such
Participant (or, if such Participant is incapacitated, by such Participant's
legal guardian or legal representative). In the event of the death of a
Participant, Options which are not vested on the date of death shall terminate;
exercise of Options granted hereunder to such Participant, which are vested as
of the date of death, may be made only by the executor or administrator of such
Participant's estate or the person or persons to whom such Participant's rights
under the Options will pass by will or the laws of descent and distribution.
6.4 ADJUSTMENTS. In the event of a reorganization, recapitalization,
stock dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee may, in order to prevent the dilution
or enlargement of rights under the Plan or outstanding Options, adjust
-10-
<PAGE> 11
(1) the number and type of shares as to which options may be granted under the
Plan, (2) the number and type of shares covered by outstanding Options, (3) the
exercise prices specified therein and (4) other provisions of this Plan which
specify a number of shares, all as such Board or Committee determines to be
appropriate and equitable.
6.5 RIGHTS OF PARTICIPANTS. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to terminate any
Participant's employment at any time (with or without cause), or confer upon any
Participant any right to continue in the employ of the Company or any Subsidiary
for any period of time or to continue to receive such Participant's current (or
other) rate of compensation. No employee shall have a right to be selected as a
Participant or, having been so selected, to be selected again as a Participant.
6.6 FAIR MARKET VALUE DETERMINATION. Until the Common Stock is listed
on a security exchange or quoted on the Nasdaq Stock Market, the Board or the
Committee will determine the Fair Market Value per share of Common Stock based
on such factors as the members thereof in the exercise of their business
judgment consider relevant as necessary and any Participant may receive upon
termination of his or her employment with the Company the most recent Fair
Market Value determination for the Common Stock upon written request to the
Board.
6.7 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
made without shareholder approval to the extent such approval is required by
law, agreement or the rules of any exchange or national market system upon which
the Common Stock is listed, and no such amendment, suspension or termination
shall impair the rights of Participants under outstanding Options without the
written consent of the Participants affected thereby, except as provided below.
No Options shall be granted hereunder after the tenth anniversary of the
adoption of the Plan.
6.8 AMENDMENT OF OUTSTANDING OPTIONS. The Committee may amend or modify
any Option in any manner to the extent that the Committee would have had the
authority under the Plan initially to grant such Option; provided that, except
as expressly contemplated elsewhere herein or in any agreement evidencing such
Option, no such amendment or modification shall impair the rights of any
Participant under any outstanding Option without the written consent of such
Participant.
6.9 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or the Committee, the
members of the Committee shall be indemnified by the Company against (i) all
costs and expenses reasonably incurred by them in connection with any action,
suit or proceeding to which they or any of them may be party by reason of any
action taken or failure to act under or in connection with the Plan or any
Option granted under the Plan, and (ii) all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding; provided, however, that any such Committee
member shall be entitled to the indemnification rights set forth in this Section
6.9 only if such member (1) acted in good faith and in a
-11-
<PAGE> 12
manner that such member reasonably believed to be in, and not opposed to, the
best interests of the Company, and (2) with respect to any criminal action or
proceeding, (A) had no reasonable cause to believe that such conduct was
unlawful, and (B) upon the institution of any such action, suit or proceeding a
Committee member shall give the Company written notice thereof and an
opportunity to handle and defend the same before such Committee member
undertakes to handle and defend it on his own behalf.
6.10 RESTRICTED SECURITIES. Unless registered as described in Section
6.2 hereof, all Common Stock issued pursuant to the terms of this Plan shall
constitute "restricted securities," as that term is defined in Rule 144
promulgated by the Securities and Exchange Commission pursuant to the Securities
Act, and may not be transferred except in compliance with the registration
requirements of the Securities Act or an exemption therefrom.
-12-
<PAGE> 1
Exhibit 10.22
EXHIBIT D
PATENT AND INVENTION DISCLOSURE
ASSIGNMENT AND LICENSE AGREEMENT
This Agreement is made effective as of February 26, 1998 ("Effective
Date"), between Micron Electronics, Inc. ("MEI"), a corporation having an office
at 900 East Karcher Road, Nampa, Idaho 83687, and MCMS, Inc. (f/k/a Micron
Custom Manufacturing Services) ("MCMS"), a corporation having a place of
business at 16399 Franklin Road, Nampa, Idaho 83687.
Whereas, this Agreement is made pursuant to, and is attached as a
Exhibit to, that Recapitalization Agreement dated December 21, 1997 by and among
MCMS, MEI, and Cornerstone Equity Investors IV, L.P.;
Whereas MEI is the owner of certain United States patents, patent
applications, and invention disclosures; and
Whereas MCMS desires to acquire MEI's entire right, title and interest
in and to the Patents, as defined below; and
Whereas MEI is willing to assign the Patents to MCMS for good and
valuable consideration, the adequacy and receipt of which is hereby
acknowledged, and on the terms and conditions set forth in this Agreement;
Now, therefore, MEI and MCMS hereby agree to the following:
1. Definitions
1.1. "Affiliates" shall mean MEI's Subsidiaries, MEI's
Parent, and the Subsidiaries of MEI's Parent.
1.2. "Subsidiary" shall mean a corporation, company, or other legal
entity (i) more than fifty percent (50%) of whose outstanding
shares or securities (representing the right to vote for the
election of directors or other managing authority) are, now or
hereafter, owned or controlled, directly or indirectly, by MEI
or Micron Technology, Inc.; or (ii) which does not have
outstanding shares or securities, but more than fifty percent
(50%) of whose ownership interest representing the right to
make the decisions for such corporation, company, or other
entity is, now or hereafter, owned or controlled, directly or
indirectly, by MEI or Micron Technology, Inc.
1.3. "Parent" shall mean a corporation, company, or other legal
entity (i) owning or controlling, directly or indirectly, now
or hereafter, more than fifty percent (50%) of the outstanding
shares or securities (representing the
Patent and Invention Disclosure Page 1
Assignment and License Agreement
<PAGE> 2
right to vote for the election of directors or other
managing authority) of MEI; or (ii) owning or
controlling, now or hereafter, directly or
indirectly, more than fifty percent (50%) of the
ownership interest that represents the right to make
decisions for MEI.
1.4. "Patents" shall mean United States patents listed in
Exhibit A, United States patent applications listed
in Exhibit B, and MEI invention disclosures listed in
Exhibit C, including all divisionals, continuations,
continuations-in-part, reissues, reexaminations,
extensions, foreign counterparts or equivalents
thereof, and all inventions claimed or disclosed
within the foregoing.
2. Warranties
2.1. MEI warrants that it is the sole owner of the
Patents, that MEI has not previously granted any
assignment or exclusive license in or to the Patents
to any third party, and that MEI has the full right
and capacity to assign the Patents to MCMS, and to
enter into and carry out its obligations under this
Agreement, without conflicting with any other
obligation of MEI.
3. Assignment and Grant Back License
3.1. MEI agrees to assign, and hereby does assign, to
MCMS, MEI's entire right, title and interest in and
to the Patents, including without limitation, damages
and payments for past or future infringements
thereof, if any, and the right to bring suit and
recover against any third party for acts of
infringement occurring before the date of this
Agreement, if any. MEI agrees to execute,
concurrently herewith, a formal assignment document
(the "Assignment") for the Patents in the form
attached hereto. In the event of any conflict between
the provisions of this Agreement and the Assignment,
the provisions of this Agreement shall take
precedence.
3.2. Within thirty (30) days after the date of this
Agreement, MEI will deliver to MCMS all documentation
in MEI's possession or control relating to the
Patents. MEI may, at its discretion, retain a copy of
any documentation provided to MCMS pursuant to this
subparagraph.
3.3. MCMS hereby grants MEI and MEI's Affiliates, an
irrevocable (except as set forth in Section 3.6),
non-transferable, fully paid up, worldwide,
non-exclusive license to practice all inventions
covered by the Patents, and to make and have made,
use, offer for sale, sell, and lease products, which,
without the license granted hereunder, would
constitute an infringement of the Patents. MEI shall
have no right to sublicense the Patents to any third
party without the prior written consent of MCMS,
which consent shall not
Patent and Invention Disclosure Page 2
Assignment and License Agreement
<PAGE> 3
be unreasonably withheld, provided, however, that
MCMS's failure to consent to MEI's grant of a
sublicense to an MCMS competitor shall not be deemed
to be unreasonable.
3.4. MEI and MEI's Affiliates shall not assign or transfer
any of its rights granted hereunder without the prior
written consent of MCMS. Notwithstanding the
foregoing, an assignment or transfer of the Agreement
and the licenses granted therein may be effected by
operation of law, such as for example, by merger,
consolidation, sale of the business or assets,
reincorporation, or nonbankruptcy reorganization.
3.5. Neither MCMS nor MEI shall be required to disclose or
to license to the other any inventions and
improvements relating to the Patents which are first
conceived after the Effective Date.
3.6. This Agreement shall commence on the Effective Date
and shall continue thereafter in perpetuity;
provided, however, that either party may, upon ninety
(90) days written notice to the other party,
terminate this Agreement in the event of a material
breach thereof by such party; provided, further, that
if such breach is cured within such ninety (90) day
period, this Agreement shall not be so terminated.
4. Miscellaneous
4.1. Except as set forth in the Recapitalization
Agreement, both MEI and MCMS neither warrant nor
represent that the use of the Patents will not result
in infringement of any patents of any third party.
4.2. MEI shall indemnify and hold MCMS and its Affiliates
and their respective officers, directors, employees,
agents, shareholders, principals, successors and
assigns harmless from and against any claims,
judgments, damages, costs (including attorneys' fees)
and expenses arising out of MEI's and MEI's
Affiliates' practice of the Patents under this
Agreement, including without limitation any claim
alleging infringement or misappropriation of third
party intellectual property rights.
4.3. MEI shall, at MCMS' expense, cooperate with and
assist MCMS in the provision of documents and
information in connection with the Patents as
reasonably necessary to effectuate the procurement
and maintenance of the Patents. MCMS shall have the
exclusive right, but shall not be obligated, to take
appropriate legal action against any third party that
to its knowledge infringes the Patents.
4.4. No modification of or amendment to this Agreement
shall be valid unless in a writing signed by the
parties hereto referring specifically to this
Patent and Invention Disclosure Page 3
Assignment and License Agreement
<PAGE> 4
Agreement and stating the parties' intention to modify or amend
the same. Any waiver of any term or condition of this Agreement
must be in a writing signed by the party hereto sought to be
charged with such waiver referring specifically to the term or
condition to be waived, and no such waiver shall be deemed to
constitute the waiver of any other breach of the same or of any
other term or condition of this Agreement.
4.5. All notices and other communications hereunder shall be
sufficiently given for all purposes hereunder if in writing and
delivered personally, sent by documented overnight delivery
service or, to the extent receipt is confirmed, telecopy,
telefax or other electronic transmission service to the
appropriate address or number as set forth below or to such
other address or to the attention of such other person as one
party may designate by written notice to the other party
hereto.
NOTICES TO MEI SHALL BE ADDRESSED TO:
Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Attention: General Counsel
Telecopy No: (208) 893-8711
WITH A COPY TO:
(which shall not constitute notice to MEI)
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Barry A. Bryer
Telecopy No: (212) 403-2000
NOTICES TO MCMS SHALL BE ADDRESSED TO:
MCMS, Inc.
16399 Franklin Road
Nampa, Idaho 83687
Attention: President
Telecopy No: (208) 898-2789
WITH A COPY TO:
(which shall not constitute notice to MCMS)
Cornerstone Equity Investors, L.L.C.
717 Fifth Avenue
Patent and Invention Disclosure Page 4
Assignment and License Agreement
<PAGE> 5
Suite 1100
New York, New York 10022
Attention: Tony Downer
Michael E. Najjar
Telecopy No: (212) 826-6798
and
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Attention: Frederick Tanne
Telecopy No: (212) 446-4900
4.6 The headings and captions contained in this Agreement are for
reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. The use of the
word "including" herein shall mean "including without
limitation."
4.7 The language used in this Agreement shall be deemed to be the
language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied
against any person.
4.8 This Agreement and the Recapitalization Agreement contain the
entire agreement and understanding between the parties hereto
with respect to the subject matter hereof and supersede all
prior agreements and understandings, whether written or oral,
relating to such subject matter.
4.9 Any provision of this Agreement which is invalid or
unenforceable shall be ineffective to the extent of such
invalidity or unenforceability, without affecting in any way
the remaining provisions hereof.
4.10 Except as specifically provided herein, neither MEI nor MCMS
shall act or represent or hold itself out as having authority
to act as an agent or partner of the other party, or in any
way bind or commit the other party to any obligations. The
rights, duties, obligations and liabilities of the parties
shall be several and not joint or collective, and nothing
contained in this Agreement shall be construed as creating a
partnership, joint venture, agency, trust or other association
of any kind, each party being individually responsible only
for its obligations as set forth in this Agreement.
4.11 The terms and conditions of this Agreement shall be governed
by and interpreted under the laws of the State of Idaho, and
may not be superseded, amended or modified except by written
agreement between
Patent and Invention Disclosure Page 5
Assignment and License Agreement
<PAGE> 6
the parties. Any litigation brought by a party to this
agreement shall be brought exclusively in the state or federal
courts located in Idaho.
In witness whereof, this Agreement has been executed by duly
authorized representatives of the parties on the date below.
Micron Electronics, Inc. MCMS, Inc.
By: /s/ T. Erik Oaas By: /s/ Robert F. Subia
--------------------------------- ---------------------------------
T. Erik Oaas Robert F. Subia
Executive Vice President, President and Chief Executive
Finance and Chief Financial Officer Officer
Date: February 26, 1998 Date: February 26, 1998
Patent and Invention Disclosure Page 6
Assignment and License Agreement
<PAGE> 1
Exhibit 10.23
KNOW-HOW LICENSE AGREEMENT
This Agreement is made effective as of February 26, 1998 ("Effective
Date"), between Micron Electronics, Inc. ("MEI"), a corporation having an office
at 900 East Karcher Road, Nampa, Idaho 83687, and MCMS, Inc. (f/k/a Micron
Custom Manufacturing Services, Inc.) ("MCMS"), a corporation having a place of
business at 16399 Franklin Road, Nampa, Idaho 83687.
Whereas, this Agreement is made pursuant to, and is attached as a
Exhibit to, that Recapitalization Agreement dated December 21, 1997 by and among
MCMS, MEI, and Cornerstone Equity Investors, IV, L.P.;
Whereas MEI is the owner of certain Know-How, as defined below; and
Whereas MCMS desires to acquire a license to the Know-How; and
Whereas MEI is willing to grant a non-exclusive license to the Know-How
to MCMS for good and valuable consideration, the adequacy and receipt of which
is hereby acknowledged, and on the terms and conditions set forth in this
Agreement;
Now, therefore, MEI and MCMS hereby agree to the following:
1. Definitions
1.1. "MCMS" means MCMS and its Subsidiaries.
1.2. "Subsidiary" shall mean a corporation, company, or other legal
entity (i) more than fifty percent (50%) of whose outstanding
shares or securities (representing the right to vote for the
election of directors or other managing authority) are, now or
hereafter, owned or controlled, directly or indirectly, by
MCMS; or (ii) which does not have outstanding shares or
securities, but more than fifty percent (50%) of whose
ownership interest representing the right to make the
decisions for such corporation, company, or other entity is,
now or hereafter, owned or controlled, directly or indirectly,
by MCMS.
1.3. "Know-How" shall mean: scientific and engineering information,
trade secrets, specifications, manufacturing and production
processes and techniques, research and development
information, designs, plans, proposals, technical data and
other technical know-how that was conceived by MCMS prior to
the Effective Date or utilized by MCMS as of the Effective
Date and that relates to the Business, provided, however, that
Know-How shall not include any MEI patents, patent
applications, or any invention disclosures (or the inventions
disclosed within the aforementioned patents, patent
applications, or invention disclosures) not
Know-How License Agreement Page 1
<PAGE> 2
otherwise assigned to MCMS in the PATENT AND INVENTION
DISCLOSURE ASSIGNMENT AND LICENSE AGREEMENT executed on the
Effective Date.
1.4. "Business" shall mean the design, assembly, or testing of
custom complex printed circuit boards, memory intensive
products and system level assemblies for third party
electronics original equipment manufacturers.
2. Warranties
2.1. MEI warrants that it has not previously granted any assignment
or exclusive license in or to the Know-How to any third party,
and that MEI has the full right and capacity to license the
Know-How to MCMS, and to enter into and carry out its
obligations under this Agreement, without conflicting with any
other obligation of MEI.
3. Know-How License
3.1. MEI hereby grants to MCMS an irrevocable (except as set forth
in Section 3.3), non-transferable, fully paid up, worldwide,
non-exclusive license to utilize the Know-How solely in
connection with the Business. MCMS shall have no right to
sublicense its rights granted hereunder to any third party
without the prior written consent of MEI, which consent shall
not be unreasonably withheld, provided, however, that MEI's
refusal to consent to MCMS' grant of a sublicense to an MEI
competitor shall not be deemed to be unreasonable.
3.2. MCMS shall not assign or transfer any of its rights granted
hereunder without the prior written consent of MEI.
Notwithstanding the foregoing, an assignment or transfer of
the Agreement and the licenses granted therein may be effected
by operation of law, such as for example, by merger,
consolidation, sale of the business or assets,
reincorporation, or nonbankruptcy reorganization.
3.3. This Agreement shall commence on the Effective Date and shall
continue thereafter in perpetuity; provided, however, that
either party may, upon ninety (90) days written notice to the
other party, terminate this Agreement in the event of a
material breach thereof by such party; provided, further, that
if such breach is cured within such ninety (90) day period,
this Agreement shall not be so terminated.
Know-How License Agreement Page 2
<PAGE> 3
4. Miscellaneous
4.1. Except as set forth in the Recapitalization Agreement, MEI
neither warrants nor represents that the use of the Know-How
will not result in infringement of any patents of any third
party.
4.2. No modification of or amendment to this Agreement shall be
valid unless in a writing signed by the parties hereto
referring specifically to this Agreement and stating the
parties' intention to modify or amend the same. Any waiver of
any term or condition of this Agreement must be in a writing
signed by the party hereto sought to be charged with such
waiver referring specifically to the term or condition to be
waived, and no such waiver shall be deemed to constitute the
waiver of any other breach of the same or of any other term or
condition of this Agreement.
4.3. For a period of ten (10) years from the Effective Date, MCMS
and its sublicensees shall hold and keep as confidential and
secret all Know-How. During such ten (10) year period, MCMS
and its sublicensees shall take reasonable precautions to
prevent unauthorized disclosure and to safeguard the
confidentiality and secrecy of the Know-How, provided,
however, that MCMS and its sublicensees shall have the right
to disclose such Know-How to third parties to whom disclosure
is made in the ordinary course of the Business under
reasonable obligations of confidentiality.
MCMS and its sublicensees shall not be required to keep secret
and confidential any Know-How which they can demonstrate:
(i) has become generally available to the public through
no fault, negligence, unauthorized act or omission of
MCMS or its sublicensees and not as a result of a
breach of this Agreement; or
(ii) is lawfully disclosed to MCMS or its sublicensees by
an independent third party not previously employed by
MCMS or its sublicensees and that lawfully acquired
such information through no breach of any direct or
indirect obligation to MEI.
4.4 All notices and other communications hereunder shall be
sufficiently given for all purposes hereunder if in writing
and delivered personally, sent by documented overnight
delivery service or, to the extent receipt is confirmed,
telecopy, telefax or other electronic transmission service to
the appropriate address or number as set forth below or to
such other address or to the attention of such other person as
one party may designate by written notice to the other party
hereto.
Know-How License Agreement Page 3
<PAGE> 4
NOTICES TO MEI SHALL BE ADDRESSED TO:
Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Attention: General Counsel
Telecopy No: (208) 893-8711
WITH A COPY TO:
(which shall not constitute notice to MEI)
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Barry A. Bryer
Telecopy No: (212) 403-2000
NOTICES TO MCMS SHALL BE ADDRESSED TO:
MCMS, Inc.
16399 Franklin Road
Nampa, Idaho 83687
Attention: President
Telecopy No: (208) 898-2789
WITH A COPY TO:
(which shall not constitute notice to MCMS)
Cornerstone Equity Investors, L.L.C.
717 Fifth Avenue
Suite 1100
New York, New York 10022
Attention: Tony Downer
Michael E. Najjar
Telecopy No: (212) 826-6798
and
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Attention: Frederick Tanne
Telecopy No: (212) 446-4900
Know-How License Agreement Page 4
<PAGE> 5
4.5 The headings and captions contained in this Agreement are for
reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. The use of the
word "including" herein shall mean "including without
limitation."
4.6 The language used in this Agreement shall be deemed to be the
language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied
against any person.
4.7 This Agreement and the Recapitalization Agreement contain the
entire agreement and understanding between the parties hereto
with respect to the subject matter hereof and supersede all
prior agreements and understandings, whether written or oral,
relating to such subject matter.
4.8 Any provision of this Agreement which is invalid or
unenforceable shall be ineffective to the extent of such
invalidity or unenforceability, without affecting in any way
the remaining provisions hereof.
4.9 Except as specifically provided herein, neither MEI nor MCMS
shall act or represent or hold itself out as having authority
to act as an agent or partner of the other party, or in any
way bind or commit the other party to any obligations. The
rights, duties, obligations and liabilities of the parties
shall be several and not joint or collective, and nothing
contained in this Agreement shall be construed as creating a
partnership, joint venture, agency, trust or other association
of any kind, each party being individually responsible only
for its obligations as set forth in this Agreement.
4.10 The terms and conditions of this Agreement shall be governed
by and interpreted under the laws of the State of Idaho, and
may not be superseded, amended or modified except by written
agreement between the parties. Any litigation brought by a
party to this agreement shall be brought exclusively in the
state or federal courts located in Idaho.
Know-How License Agreement Page 5
<PAGE> 6
In witness whereof, this Agreement has been executed by duly
authorized representatives of the parties on the date below.
Micron Electronics, Inc. MCMS, Inc.
By: /s/ T. Erik Oaas By: /s/ Robert F. Subia
---------------------------------- ------------------------------
T. Erik Oaas Robert F. Subia
Executive Vice President, President and Chief Executive
Finance and Chief Financial Officer Officer
Date: February 26, 1998 Date: February 26, 1998
Know-How License Agreement Page 6
<PAGE> 1
Exhibit 10.24
FORM OF MTI AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of February 26, 1998 (the
"Effective Date"), by and between Micron Technology, Inc., a Delaware
corporation ("MTI") and MCMS, Inc. (f/k/a Micron Custom Manufacturing Services,
Inc.), an Idaho corporation ("MCMS").
W I T N E S S E T H:
WHEREAS, this Agreement is made pursuant to, and is attached as an
Exhibit to, that certain Recapitalization Agreement dated as of December 21,
1997, by and among MCMS, Micron Electronics, Inc. ("MEI") and Cornerstone Equity
Investors IV, L.P. ("Investor") (the "Recapitalization Agreement");
WHEREAS, MEI, a majority-owned subsidiary of MTI, has conducted the
Business (as defined below) through MCMS and the Transferred Subsidiaries (as
defined in the Recapitalization Agreement);
WHEREAS, MTI is the owner of certain know-how that has been developed
in conjunction with, with the input of, or at the request of MCMS and which is
used by MCMS in the conduct of the Business;
WHEREAS, in connection with the transaction contemplated by the
Recapitalization Agreement, MCMS and MTI desire to enter into a mutually
acceptable agreement concerning such know-how; and
WHEREAS, the execution and delivery of this Agreement are conditions to
the obligations of MEI and Investor under the Recapitalization Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree and declare as follows:
1. The following terms when used herein with initial capital letter
(whether used in the singular or plural form) shall have the meaning set forth
in this Section 1. All other capitalized terms used but not otherwise defined
herein shall have the respective meanings assigned to them in the
Recapitalization Agreement.
(a) Know-How. The term "Know-How" shall mean all scientific
and engineering information, trade secrets, specifications, manufacturing and
production processes and techniques, research and development information,
designs, plans, proposals, technical data, and other technical know-how
developed by MTI as of the Effective Date in conjunction with, with the input
of, or at the request of MCMS and which is used by MCMS or its Affiliates as of
the Effective Date in the conduct of the Business. Know-How shall be owned by
MTI and shall be subject to the terms of this Agreement. Know-How shall not
include any of the foregoing
<PAGE> 2
relating to (i) semiconductor manufacturing, processing or packaging technology
(including BGA or KGD technology), (ii) the testing or assembly of semiconductor
components for sale by MCMS of such components other than as part of a memory
module, or (iii) technology developed by MCMS at MTI's request and expense for
use in association with the design, assembly and testing of products
manufactured by MCMS for MTI. Items (i), (ii) and (iii) above shall be owned by
MTI.
(b) Patent. The term "Patent" shall mean any United States or
foreign patent issued with respect to Know-How as of the Effective Date.
(c) Business. The term "Business" shall mean the design,
assembly and testing of custom complex printed circuit boards (including memory
intensive module products) and system level assemblies for third party
electronics original equipment manufacturers primarily in the networking,
telecommunications and computer systems industries, in which MCMS is engaged as
of the Effective Date.
2. MTI hereby agrees to forbear from taking any action or instituting
any claim or legal or other proceeding against MCMS or any Subsidiary of MCMS
existing as such as of the Effective Date before any court or administrative
body of competent jurisdiction with respect to the use of the Know-How by MCMS
or any Subsidiary of MCMS existing as such as of the Effective Date in the
conduct of the Business. MTI and MCMS agree that MTI's forbearance described
herein shall not inure to the benefit of (i) any successor in interest to the
Business of MCMS without MTI's prior written consent, which consent shall not be
unreasonably withheld, or (ii) to any third party who purchases products or
services from MCMS.
3. Notwithstanding anything in this Agreement to the contrary, it is
understood and agreed between the parties that this Agreement does not grant
MCMS or its Subsidiaries any rights with respect to any patent or patent
application now or hereafter owned by MTI. MTI does, however, represent and
warrant to MCMS that to its knowledge, without further inquiry, the operation of
the Business by MCMS and its Subsidiaries as of the Effective Date does not
infringe any Patent(s) owned by MTI. This representation and warranty is
personal to MCMS and shall not operate to shield or protect any third party
purchaser from MCMS for infringement liability to MTI with respect to any patent
or other forms of intellectual property.
4. Neither MTI nor MCMS shall be required to disclose to or grant the
other party any rights with respect to any inventions or improvements relating
to the Know-How which are first conceived after the Effective Date.
5. The parties agree that this Agreement shall be effective as of the
Effective Date and shall continue in effect unless and until the parties
terminate it in a writing signed by both of them.
6. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof, and all prior agreements,
negotiations and understandings with respect to the subject matter hereof are
superseded by this Agreement, except that,
<PAGE> 3
notwithstanding the foregoing, the Patent License Agreement entered into by and
between MTI and MCMS effective August 31, 1992 shall be terminated according to
its terms on or after the Effective Date, with all other rights, privileges and
obligations of the Patent License Agreement remaining in full force and effect.
7. Each provision of this Agreement shall be interpreted in such a
manner as to be effective and valid under applicable law, but if any provision
of this Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
8. This Agreement may not be varied in its terms by any oral agreement
or representation or otherwise except by an instrument in writing subsequent to
the Effective Date executed by both parties. No breach of any provision hereof
can be waived unless in writing.
9. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Idaho without reference to the choice
of law principles thereof.
IN WITNESS HEREOF, each of the parties, by its duly authorized
representative, has executed this Agreement as of the Effective Date.
MCMS, INC.
By:___________________________________
Title:________________________________
MICRON TECHNOLOGY, INC.
By:___________________________________
Title:________________________________
