FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter period ended May 28, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File No. 333-50981
MCMS, INC.
(Exact name of registrant as specified in its charter)
Idaho 82-0480109
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
16399 Franklin Road, Nampa, Idaho 83687
(Address of principal executive offices, Zip Code)
(208)898-2600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares of Class A Common Stock outstanding at May 28, 1998: 3,261,177
Shares of Class B Common Stock outstanding at May 28, 1998: 863,823
Shares of Class C Common Stock outstanding at May 28, 1998: 874,999
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MCMS, INC.
INDEX
Part I. Page
Item 1 Financial Information
Unaudited Consolidated Balance Sheets -
August 28, 1997 and May 28, 1998 3
Unaudited Consolidated Statements of Operations -
Three and Nine Months Ended May 29, 1997 and May 28, 1998 4
Unaudited Consolidated Statements of Cash Flows -
Nine Months Ended May 29, 1997 and May 28, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Certain Factors 12
Part II.
Other Information
Item 6 Exhibits 20
Signatures 21
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCMS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
August 28, May 28,
As of 1997 1998
ASSETS
Current Assets
Cash and cash equivalents $ 13,636 $ 10,050
Trade account receivable 33,715 35,287
Receivable from affiliates 4,247 2,032
Inventories 17,786 35,337
Deferred income taxes 1,600 1,835
Other current assets 63 507
----------- -------------
Total current assets 71,047 85,048
Property, plant and equipment, net 53,484 63,687
Deferred financing costs 331 7,620
----------- -------------
Total assets $ 124,862 $ 156,355
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current portion of long-term debt $ 1,049 $ 850
Accounts payable and accrued expenses 34,930 57,279
Payable to affiliates 5,978 1,363
Interest payable - 4,211
----------- -------------
Total current liabilities 41,957 63,703
Notes payable, net of current portion - 175,270
Deferred income taxes 4,208 3,781
Other liabilities 506 727
----------- -------------
Total liabilities 46,671 243,481
Redeemable preferred stock, no par
value, 750,000 shares authorized;
250,000 shares issued and outstanding;
mandatory redemption value of $25.0
million - 24,021
Commitments and contingencies - -
Common stock, par value $0.10 per
share, authorized 100,000 shares; 1,000
issued and outstanding as of August
28, 1997 - -
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 May 28,
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 May 28,
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 May 28,
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 May 28, 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 May 28, 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 May 28, 1998 - 1
Additional paid-in capital 35,813 64,950
Foreign currency translation adjustment (630) (2,383)
Retained earnings 43,008 (173,724)
----------- -------------
Total shareholders' equity (deficit) 78,191 (111,147)
----------- -------------
Total liabilities and shareholders'
equity (deficit) $ 124,862 $ 156,355
=========== =============
3
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MCMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three months ended Nine months ended
May 29, May 28, May 29, May 28,
1997 1998 1997 1998
Net sales $ 83,837 $ 88,565 $ 207,954 $ 234,246
Cost of goods sold 76,425 82,689 184,561 210,781
---------- ---------- --------- -----------
Gross profit 7,412 5,876 23,393 23,465
Selling, general and
administrative 3,334 4,405 9,275 11,331
---------- ---------- --------- -----------
Income from operations 4,078 1,471 14,118 12,134
Other expense (income):
Interest expense
(income), net 2 4,418 (257) 4,088
Transaction expenses - 142 - 8,455
---------- ---------- --------- -----------
Income (loss) before
taxes 4,076 (3,089) 14,375 (409)
Income tax provision
(benefit) 1,712 (1,052) 5,954 1,015
---------- ---------- --------- -----------
Net income (loss) $ 2,364 $ (2,037) $ 8,421 $ (1,424)
========== ========== ========= ===========
Net income (loss) per
share - basic and
diluted $ 2,364 $ (0.57) $ 8,421 $ (1.35)
========== ========== ========= ===========
Weighted average
common shares
outstanding - basic
and diluted 1,000 5,000,000 1,000 1,667,333
========== ========== ========= ===========
4
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MCMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine months ended
May 29, May 28,
1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 8,421 $ (1,424)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 6,260 9,026
Gain of sale of property, plant and
equipment (83) (57)
Write-off of deferred loan costs - 206
Changes in operating assets and
liabilities:
Receivables (6,165) (323)
Inventories (440) (17,831)
Other current assets 40 (564)
Accounts payable and accrued expenses (5,593) 17,460
Interest payable - 4,211
Deferred income taxes 1,256 (662)
Other liabilities 196 248
--------- -----------
Net cash provided by operating activities 3,892 10,290
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and
equipment (19,576) (17,548)
Proceeds from sales of property, plant and
equipment 97 376
--------- -----------
Net cash used by investing activities (19,479) (17,172)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions - 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 10,300 175,000
Repayments of debt (9,316) (1,513)
Payment of deferred debt issuance costs
(218) (7,809)
--------- -----------
Net cash provided by financing activities 766 3,517
Effect of exchange rate changes on cash
and cash equivalents - (221)
Net decrease in cash and cash equivalents (14,821) (3,365)
Cash and cash equivalents at beginning of
period 16,290 13,636
Cash and cash equivalents at end of period $ 1,469 $ 10,050
========= ===========
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
The information included in the accompanying consolidated
interim financial statements is unaudited and should be read in
conjunction with the annual audited financial statements and
notes thereto contained in the Company's registration statement
on Form S-4 filed with the Securities and Exchange Commission on
June 25, 1998, as amended, which became effective on June 26,
1998. All adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results of operations
for the interim periods presented have been reflected herein.
The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the
entire year.
2. Comprehensive Income
Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME (SFAS 130) establishes standards
for the presentation of comprehensive income in the financial
statements. Comprehensive income includes income and loss
components which are otherwise recorded directly to shareholders'
equity under generally accepted accounting principles. The
Company intends to adopt SFAS 130 at the end of fiscal 1998.
3. Inventories
Inventories consisted of the following, in thousands:
August 28, May 28,
1997 1998
Raw materials and supplies $ 11,885 $ 21,673
Work in progress 4,043 12,475
Finished goods 1,858 1,190
-------------- ------------
$ 17,786 $ 35,338
============== ============
4. Long-term Debt
On February 26, 1998, the Company issued $145.0 million in
9-3/4% Senior Subordinated Notes and $30.0 million in Floating
Interest Rate Subordinated Term Securities both due on March 1,
2008. The Floating Interest Rate Subordinated Term Securities
bear interest at a rate per annum equal to LIBOR plus 4-5/8%.
Interest on both securities is payable semi-annually on each
March 1 and September 1, commencing September 1, 1998.
On February 26, 1998, the Company also issued $25.0 million
in 12-1/2% Redeemable Preferred Stock due on March 1, 2010.
Dividends on the Redeemable Preferred Stock are payable in cash
or in-kind quarterly beginning June 1, 1998 at a rate equal to 12-
1/2% per annum. On June 1, 1998 the Company elected to pay its
first dividend in-kind.
5. Net Income (Loss) Per Share
During 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE
(SFAS 128), which is effective for financial statements issued
for fiscal periods ending after December 15, 1997. Under SFAS
128, basic loss per share is computed on the basis of weighted-
average common shares outstanding. Diluted loss per share
considers potential common stock instruments in the calculation,
and is the same as basic loss per share for the three and nine
months ended May 28, 1998 as all common stock equivalents were
6
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anti-dilutive. Diluted loss per share is the same as basic loss
per share for the three months and nine months ended May 29, 1997
as there were no common stock equivalents.
Had the Recapitalization, as described below, been in effect
during fiscal 1997, basic and diluted earnings per share would
have been $(0.21) and $(0.04) for the three months and nine
months ended May 29, 1997, respectively. This calculation
assumes increased interest expense of $4.3 million and $12.8
million, or $1.7 million and $5.0 million net of tax, for the
three months and nine months ended May 29, 1997, respectively and
a weighted average number of shares outstanding of 5 million.
6. Income Taxes
At the beginning of each fiscal year the Company establishes
an annual effective income tax rate that reflects the federal
statutory rate and the effect of state and foreign income taxes.
The effective income tax rate for the nine months ended May 29,
1997 was 41.4%. The Company had an income tax provision of $1.0
million and a loss before tax of $0.4 million during the nine
months ended May 28, 1998. The tax provision during the nine
months ended May 28, 1998, reflects an adjustment to income
before tax of $5.1 million for transaction expenses incurred as
part of the Recapitalization that were not deductible for tax
purposes, offset in part by certain changes in the accrued tax
liabilities and the receipt of Pioneer Tax status by the
Company's Malaysian subsidiary. Pioneer Tax status provides
the Malaysian subsidiary a tax holiday for five years beginning
January 1, 1997.
7. 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
Micron Electronics, Inc. ("MEI"), MEI California, Inc. ("MEIC"),
Cornerstone Equity Investors IV, L.P. ("Cornerstone") and the
Company. Pursuant to the Recapitalization, the Company redeemed
from MEIC 90% of the then outstanding common stock of the
Company. The Company used $271.3 million (including cash on hand
of $3.3 million) to complete the Recapitalization, including a
payment of $249.2 million to MEIC for the then outstanding common
stock, the repayment of $0.3 million of existing indebtedness and
the payment of related fees and expenses of $15.0 million. The
remaining funds were 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,
(ii) issued 250,000 shares of redeemable preferred stock ($25.0
million liquidation preference), and (iii) received an equity
contribution of $61.2 million in cash from Cornerstone and other
investors and a rollover of equity held by MEIC having an implied
value of $6.8 million.
8. Transaction Expenses
In connection with the Recapitalization, the Company
incurred transaction expenses of $8.5 million. Transaction
expenses included transaction fees paid to Cornerstone,
commitment fees paid to Bankers Trust, MEI employment agreement
termination fees paid to certain executives of the Company, MEI
and MTI option buyout fees paid to certain employees of the
Company, and accounting, legal and other transaction fees.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements contained in this Form 10-Q that are not purely
historical are forward-looking statements and are being provided
in reliance upon the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. All forward-looking
statements are made as of the date hereof and are based on
current management expectations and information available to the
Company as of such date. The Company assumes no obligation to
update any forward-looking statement. It is important to note
that actual results could differ materially from historical
results or those contemplated in the forward-looking statements.
Forward-looking statements involve a number of risks and
uncertainties, and include trend information. Factors that could
cause actual results to differ materially include, but are not
limited to, those identified in "Certain Factors" and in other
Company filings with the Securities and Exchange Commission. All
quarterly references are to the Company's fiscal periods ended
May 28, 1998, February 26, 1998 or May 29, 1997, unless otherwise
indicated.
MCMS is a leading electronics manufacturing service ("EMS")
provider serving OEMs in the networking, telecommunications,
computer systems and other sectors of the electronics industry.
The Company offers a broad 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.
MCMS provides services on both a turnkey and consignment
basis. Under a consignment arrangement, the OEM procures the
components and the Company assembles and tests them in exchange
for a process fee. Under a turnkey arrangement, the Company
assumes responsibility for both the procurement of components and
their assembly and test. 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 typically results in lower gross margins than
consignment manufacturing because the Company generally realizes
lower gross margins on material-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 5.8% and 7.4% of the Company's net sales for the
three months and nine months ended May 28, 1998, respectively.
Recent Developments
On February 26, 1998, the Company consummated the
Recapitalization pursuant to a Recapitalization Agreement by and
among MEI, MEIC, Cornerstone and the Company. Pursuant to the
Recapitalization, the Company redeemed from MEIC 90% of the then
outstanding common stock of the Company. See Footnote 7.
Net sales of consigned memory modules declined by $1.1
million from the second quarter of fiscal 1998 to the third
quarter of fiscal 1998 primarily as a result of reduced demand
and to a lesser extent reduced prices. In addition, the Company
further reduced prices on consigned memory modules at the
beginning of the fourth fiscal quarter and anticipates that
demand may still continue to decline. Worldwide memory demand
and pricing has shown weakness over the last several quarters and
there can be no assurance that memory module demand and pricing
may not continue to decline in the near future, which could have
a material adverse effect on the Company's financial position and
results of operations. See "Certain Factors - Variability of
Results of Operations."
8
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Net sales of networking and telecommunications products
increased by $20.7 million from the second quarter of fiscal 1998
to the third quarter of fiscal 1998 as a result of the
commencement of a new program, the ramp-up of the recently
established Belgian operation, and the initiation of prototype
production on other new programs. Profit margins were adversely
affected by these new programs during the third fiscal quarter
due to pricing and manufacturing inefficiencies associated with
ramping to volume production. It is anticipated that these new
programs will continue to have an adverse effect on profit
margins during the fourth fiscal quarter. In addition, there was
a decline in net sales of $1.3 million on an existing program
late in the third fiscal quarter which had a negative effect on
profit margins and may continue to have a negative effect on
profit margins during the fourth fiscal quarter.
Results of Operations
Three months ended Nine months ended
May 29, May 28, May 29, May 28,
1997 1998 1997 1998
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of sales 91.2 93.4 88.7 90.0
----- ----- ----- -----
Gross margin 8.8 6.6 11.3 10.0
Selling, general and
administrative expenses 4.0 4.9 4.5 4.8
----- ----- ----- -----
Operating income 4.8 1.7 6.8 5.2
Interest expense (income), net - 5.0 (0.1) 1.8
Transaction expenses - 0.2 - 3.6
----- ----- ----- -----
Income (loss) before taxes 4.8 (3.5) 6.9 (0.2)
Income tax provision (benefit) 2.0 (1.2) 2.9 0.4
Net income (loss) 2.8% (2.3%) 4.0% (0.6%)
====== ===== ====== ======
Depreciation and amortization 2.8% 4.0% 3.0% 3.9%
====== ===== ====== ======
Three months ended May 28, 1998 Compared to Three Months Ended May 29, 1997
Net Sales. Net sales for the three months ended May 28,
1998 increased by $4.7 million, or 5.6%, to $88.5 million from
$83.8 million for the three months ended May 29, 1997. The
increase in net sales is primarily the result of a higher volume
of shipments of PCBAs and system level products to customers in
the networking and telecommunications industries partially offset
by a decrease in volume of custom turnkey memory modules. Net
sales from the Company's foreign subsidiaries totaled $6.0
million for the three months ended May 28, 1998 compared to $1.2
million for the corresponding period of fiscal 1997. The growth
in foreign subsidiary net sales is primarily the result of
additional sales at the Company's Belgian operation.
Gross Profit. Gross profit for the three months ended May
28, 1998 decreased by $1.5 million, or 20.7%, to $5.9 million
from $7.4 million for the three months ended May 29, 1997. Gross
margin for the three months ended May 28, 1998 decreased to 6.6%
of net sales from 8.8% for the comparable period ended May 29,
1997. Gross profit decreased primarily as a result of increased
manufacturing costs to support additional new products and
programs, lower volumes of custom modules, and a shift in product
mix to lower value added programs. In addition, gross margins
during the three months ended May 28, 1998 were adversely
affected by start-up costs associated with the Company's recently
established Belgian operation.
9
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Selling, General and Administrative Expenses. Selling,
general and administrative expenses ("SG&A") for the three months
ended May 28, 1998 increased by $1.1 million, or 32.1%, to $4.4
million from $3.3 million for the three months ended May 29,
1997. This increase for the three months ended May 28, 1998 was
the result of additional headcount in senior management, finance
and administration, sales and marketing, and information
technology which collectively amounted to $0.5 million, as well
as additional SG&A associated with the Company's foreign
subsidiaries in the amount of $0.6 million.
Interest Expense. Interest expense for the three months
ended May 28, 1998 increased to $4.4 million from $0.0 million
for the three months ended May 29, 1997. The interest expense
increased due to the addition of $175 million in long-term debt
in conjunction with the Recapitalizaton.
Provision for Income Taxes. Income taxes for the three
months ended May 28, 1998 decreased by $2.8 million, or 161.4%,
to a credit of $1.1 million from an expense of $1.7 million for
the three months ended May 29, 1997. The Company's effective
income tax rate for the three months ended May 28, 1998 decreased
to 34.1% from 42.0% for the comparable period in 1997 as a result
of the Malaysia subsidiary receiving Pioneer Tax status.
Net Income. For the reasons stated above, net income for
the three months ended May 28, 1998 decreased by $4.4 million to
a loss of $2.0 million from income of $2.4 million for the three
months ended May 29, 1997. As a percentage of net sales, net
income for the three months ended May 28, 1998 decreased to a
negative 2.3% from 2.8% for the three months ended May 29, 1997.
Nine Months Ended May 28, 1998 Compared to Nine Months Ended May
29, 1997
Net Sales. Net sales for the nine months ended May 28, 1998
increased by $26.3 million, or 12.6%, to $234.3 million from
$208.0 million for the nine months ended May 29, 1997. The
increase in net sales is primarily the result of a higher volume
of shipments of PCBAs and system level products to customers in
the networking and telecommunications industries, and to a lesser
extent, an increase in the volume of consigned memory modules,
partially offset by a decrease in the volume of custom turnkey
memory modules. Net sales from the Company's foreign
subsidiaries totaled $15.1 million for the nine months ended May
28, 1998 compared to $1.2 million for the comparable periods of
fiscal 1997 reflecting growth in both the Malaysian and Belgian
operations.
Gross Profit. Gross profit for the nine months ended May
28, 1998 increased by $0.1 million, or 0.3%, to $23.5 million
from $23.4 million for the nine months ended May 29, 1997. Gross
margin for the nine months ended May 28, 1998 decreased to 10.0%
of net sales from 11.3% for the comparable period ended May 29,
1997. Gross margin and gross profit decreased primarily as a
result of more aggressive pricing on PCBAs and lower volumes of
custom turnkey memory modules. These decreases were partially
offset by higher volumes of consigned modules.
Selling, General and Administrative Expenses. SG&A for the
nine months ended May 28, 1998 increased by $2.0 million, or
22.2%, to $11.3 million from $9.3 million for the nine months
ended May 29, 1997. The increase for the nine months ended May
28, 1998 was the result of additional headcount in senior
management, finance and administration, sales and marketing, and
information technology which collectively amounted to $1.2
million, as well as additional SG&A in the Company's foreign
subsidiaries in the amount of $0.7 million.
Interest Expense. Interest expense for the nine months
ended May 28, 1998 increased by $4.4 million to $4.1 million from
interest income of $0.3 million for the nine months ended May 29,
1997. The interest expense increased due to the addition of $175
million in long-term debt in conjunction with the
Recapitalizaton.
10
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Transaction Expenses. In connection with the Recapitalization,
the Company incurred transaction expenses of $8.5 million. See Footnote 8.
Provision for Income Taxes. Income taxes for the nine
months ended May 28, 1998 decreased by $5.0 million, or 83.0%, to
$1.0 million from $6.0 million for the nine months ended May 29,
1997. The Company's effective income tax rate for the nine
months ended May 29, 1997 was 41.4%. The Company had an income
tax provision of $1.0 million and a loss before tax of $0.4
million for the nine months ended May 28, 1998. The tax
provision during the nine months ended May 28, 1998, reflects an
adjustment to income before tax of $5.1 million for transaction
expenses incurred as part of the Recapitalization that were not
deductible for tax purposes, offset in part by certain changes in
the accrued tax liabilities and the receipt of Pioneer Tax status
by the Company's Malaysian subsidiary. Pioneer Tax status
provides the Malaysian subsidiary a tax holiday for five years
beginning January 1, 1997.
Net Income. For the reasons stated above, net income for
the nine months ended May 28, 1998 decreased by $9.8 million, or
116.9%, resulting in a loss of $1.4 million from income of $8.4
million for the nine months ended May 29, 1997. As a percentage
of net sales, net income for the nine months ended May 28, 1998
decreased to (0.6%) from 4.1% for the nine months ended May 29,
1997.
Liquidity and Capital Resources
At May 28, 1998, the Company's principal sources of
liquidity consisted of $10.1 million in cash and a $40.0 million
bank Revolving Credit Facility. The bank Revolving Credit
Facility allows the Company to borrow to fund working capital,
capital expenditures and other general corporate purposes. As of
July 10, 1998, the Company had drawn $3.5 million against the
bank Revolving Credit Facility.
The Company generated $10.3 million of cash from operating
activities for the nine months ended May 28, 1998. The
generation of cash was primarily due to non-cash depreciation and
amortization expenses of $9.0 million, an increase in accounts
payable and accrued expenses of $17.5 million, and an increase in
interest payable of $4.2 million, offset by a net loss of $1.4
million and an increase in inventory of $17.8 million. Cash from
operating activities was adversely affected by $8.5 million of
transaction expenses incurred as part of the Recapitalization.
Net cash used for investing activities of $17.2 million for
the nine months ended May 28, 1998 was primarily the result of
the Company's capital expenditures related to its new operation
in Belgium, the implementation to-date of a new enterprise-wide
information system and additional manufacturing and test
equipment to support increased manufacturing activities.
Net cash from financing activities of $3.5 million for the
nine months ended May 28, 1998 resulted from the
Recapitalization.
The Company believes that cash on hand, funds provided by
operations and available for borrowing under the Revolving Credit
Facility will be sufficient to satisfy its currently anticipated
working capital and capital expenditure requirements for the next
twelve months. However, in the event the Company is unable to
comply with certain covenants, financial ratios and financial
condition tests set forth in the Revolving Credit Facility, the
ability of the Company to borrow under the Revolving Credit
Facility, among other things, could be adversely affected, which
could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Certain
Factors - Restrictions Imposed by Terms of Indebtedness and
Redeemable Preferred Stock."
11
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CERTAIN FACTORS
In addition to factors discussed elsewhere in this Form 10-Q
and in other Company filings with the Securities and Exchange
Commission, the following are important factors which could cause
actual results or events to differ materially from the historical
results of the Company's operations or those results or events
contemplated in any forward-looking statements made by or on
behalf of the Company.
High Level of Indebtedness; Ability to Service Indebtedness and
Satisfy Preferred Stock Dividend Requirements
The Company is highly leveraged. At May 28, 1998, the
Company had approximately $176.1 million of total indebtedness
outstanding (exclusive of unused commitments of $40.0 million
under the Revolving Credit Facility, dated as of February 26,
1998, among the Company, various lending institutions named
therein, and Bankers Trust Company, as agent (as amended, the
"Revolving Credit Facility")), Series B 12-1/2% Senior Preferred
Stock (the "Redeemable 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. As of
July 10, 1998 the Company had drawn $3.5 million against the bank
Revolving Credit Facility. Subject to certain restrictions in
the (i) Indenture (the "Indenture") governing the Series B 9-3/4%
Senior Subordinated Notes due 2008 and the Series B Floating
Interest Rate Subordinated Term Securities due 2008
(collectively, the "Notes"), (ii) the Certificate of Designation
relating to the Redeemable Preferred Stock (the "Certificate of
Designation"), (iii) the Indenture governing the 12-1/2%
Subordinated Exchange Debentures (the "Exchange Debentures") due
2010 issuable in exchange for the Redeemable Preferred Stock (the
"Exchange Indenture"), and (iv) the 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 the Company and the holders of the Company's
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 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 Redeemable
Preferred Stock and to satisfy its debt obligations, including
the 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.
12
<PAGE>
Restrictions Imposed by Terms of Indebtedness and Redeemable
Preferred Stock
The Indenture, the Certificate of Designation, the Exchange
Indenture and the 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 Revolving Credit
Facility, the Indenture and the Exchange Indenture and would
violate certain provisions of the Certificate of Designation.
The 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 Revolving Credit Facility,
could be adversely affected. The inability to borrow under the
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 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 immediately due
and payable. In the case of the 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
Revolving Credit Facility amended certain financial covenants
under the Revolving Credit Facility. Had the Revolving Credit
Facility not been amended, the Company would not have been in
compliance as of May 28, 1998 with certain of the financial
covenants contained therein. As of May 28, 1998, the Company was
in compliance with such financial covenants, as amended.
Absence of Established Trading Market
Although the Notes, Redeemable Preferred Stock, and Exchange
Debentures (collectively, the "Securities"), have been registered
under the Securities Act of 1933, as amended (the "Securities
Act"), there is no established trading market for the Securities.
The Company does not intend to list the 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 BT
Alex. Brown Incorporated that it currently intends to make a
market in the Securities. However, BT Alex. Brown is not
obligated to do so and any market-making activities with respect
to the 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 Securities Exchange
Act of 1934, as amended, and may be limited during the pendency
of any registration statement subsequently filed by the Company.
There can be no assurance that an active trading market for the
Securities will develop or as to the liquidity of the trading
market for the Securities. If a trading market does not develop
or is not maintained, holders of the Securities may experience
difficulty in reselling the Securities or may be unable to sell
them at all. If a market were to exist, the 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.
13
<PAGE>
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 and was later incorporated as a wholly
owned subsidiary of MTI in 1992. 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.
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. For the nine
months ended May 28, 1998, approximately 71% of net sales were
derived from networking and telecommunications customers. For the
nine months ended May 28, 1998, the Company's ten largest
customers accounted for approximately 88.4% of net sales. The
Company's top two customers, Cisco and Fore, accounted for
approximately 31.5% and 28.6% of net sales, respectively, for the
nine months ended May 28, 1998. In addition, the Company has
another major customer that operates under a consignment
manufacturing model and, while sales are less than 10% of total
revenue, the customer makes an important contribution to the
Company's overall financial performance. Decreases in sales to or
margins with these or any other key customers 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."
14
<PAGE>
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 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."
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; foreign currency fluctuations; 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). At the beginning of the
fourth quarter of fiscal 1998, the Company further reduced prices
on consigned memory modules and anticipates that demand may
continue to decline during such quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Recent Developments." 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.
15
<PAGE>
Management of Growth
The Company opened a new manufacturing facility in Penang,
Malaysia in October 1996 and completed the acquisition of an
Alcatel Bell N.V. facility and related assets 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.
Profit margins were adversely affected by certain new
programs during the third fiscal quarter due to pricing and
manufacturing inefficiencies associated with ramping to volume
production. It is anticipated that these new programs will
continue to have an adverse affect on profit margins during the
fourth fiscal quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Recent
Developments." The Company expects to continue to experience
certain inefficiencies as it integrates new product introductions
and manages expansion and geographically dispersed operations,
which could have a material adverse effect on the Company's
business, financial condition and results of operations.
New operations, whether foreign or domestic, can require
significant start-up costs and capital expenditures. In the event
that the Company continues to expand its domestic or
international operations, there can be no assurance 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--
Results of Operations."
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 addition, the Company may be at a
competitive disadvantage because some of the Company's
competitors are less leveraged, resulting in, among other things,
greater operational and financial flexibility for such
competitors. See "Certain Factors--High Level of Indebtedness;
Ability to Service Indebtedness and Satisfy Preferred Stock
Dividend Requirements." 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.
16
<PAGE>
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 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."
17
<PAGE>
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. Fixed assets for the Belgian and Malaysian
operations are denominated in each entity's functional currency
and translation gains or losses will occur as the exchange rate
between the local functional currency and the U.S. dollar
fluctuates on each balance sheet reporting date. The Company's
investments in fixed assets as of May 28, 1998 were $8.8 million
(13.7% of total fixed assets) and $2.6 million (4.0% of total
fixed assets) in Belgium and Malaysia, respectively. The
Company's cumulative translation losses as of May 28, 1998 were
$0.0 million and $2.3 million for the Belgian and Malaysian
operations, respectively. The Company's investments in Belgium
and Malaysia are long-term in nature and, therefore, the
translations adjustments are shown as a separate component of
shareholders' equity and do not effect the Company's net income.
An additional risk is that certain working capital accounts such
as accounts receivable and accounts payable are denominated in
currencies other than the functional currency and may give rise
to exchange gains or losses upon settlement or at the financial
statement reporting date. Sales in currencies other than the
functional currency were approximately 2.4% and 4.3% of
consolidated sales for the nine months ended May 28, 1998 for
Belgium and Malaysia, respectively. The Company's transaction
gains for the nine months ended May 28, 1998 were $0.0 million
and $0.3 million for the Belgian and Malaysian operations,
respectively. 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. Direct labor, manufacturing overhead, and selling,
general and administrative costs of the international operations
are also denominated in the local currencies. Transaction losses
are reflected in the Company's net income. As exchange rates
fluctuate, the Company will continue to experience translation
and transaction adjustments related to its investments in Belgium
and Malaysia.
18
<PAGE>
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.
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
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.
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.
19
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits
(a) The following are filed as part of this report:
Exhibit Description
3.1 Articles of Amendment to the Amended and Restated
Articles of Incorporation of the Company and
Amended and Restated Article of Incorporation of
the Company (incorporated by reference from
exhibit of like number to the Company's
Registration Statement on Form S-4 (Registration
No. 333-50981) ("Registration No. 333-50981")).
3.3 Amendment One to Amended and Restated By-laws of
the Company.
4.4 First Supplemental Indenture, dated as of April
23, 1998, by and between the Company 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
(incorporated by reference from the exhibit of
like number to Registration No. 333-50981).
10.4 (a) First Amendment, dated as of May 20, 1998, to
Credit Agreement, dated as of February 26, 1998,
among the Company, Bankers Trust Company, as
agent, and other institutions named therein.
11 MCMS, Inc. Basic and Diluted Earnings Per Share.
27 Financial Data Schedules.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed on behalf of the registrant
by the following duly authorized person.
MCMS, Inc.
(Registrant)
Date: July 10, 1998 By: /s/ Chris J. Anton
Vice President, Finance and Chief
Financial Officer (Principal Financial
Officer and Accounting Officer)
21
Exhibit 3.3
AMENDMENT ONE
TO THE
BYLAWS
OF
MCMS, INC.
Section 10 of Article IV of the Bylaws of MCMS, Inc. shall be
deleted in its entirety and replaced with the following:
"Section 10. The Chief Financial Officer. The chief
financial officer shall have such powers and perform such duties
as the board of directors, the president or these bylaws may
prescribe from time to time, including those duties related to
the performance of the functions of a corporate treasurer."
22
Exhibit 10.4 (a)
FIRST AMENDMENT
FIRST AMENDMENT (this "Amendment"), dated as of May
20, 1998, among MCMS, Inc. (the "Borrower"), the lending
institutions party to the Credit Agreement referred to below
(each a "Bank" and, collectively, the "Banks"), and Bankers Trust
Company, as Agent (the "Agent"). All capitalized terms used
herein and not otherwise defined herein shall have the respective
meanings provided such terms in the Credit Agreement.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Agent are
party to a Credit Agreement, dated as of February 26, 1998 (the
"Credit Agreement"); and
WHEREAS, the Borrower has requested that the Banks
provide the amendment provided for herein and the Banks have
agreed to provide such amendment on the terms and conditions set
forth herein;
NOW, THEREFORE, it is agreed:
1. Section 8.09 of the Credit Agreement is hereby
amended by deleting the first six lines of the table therein and
inserting in lieu thereof the following:
Fiscal Quarter
Ending on or about Amount
May 31, 1998 $30,100,000
August 31, 1998 $23,900,000
November 30, 1998 $20,500,000
February 28, 1999 $20,500,000
May 31, 1999 $24,000,000
August 31, 1999 $28,500,000
23
<PAGE>
2. Section 8.10 of the Credit Agreement is hereby
amended by deleting the first six lines of the table therein and
inserting in lieu thereof the following:
Fiscal Quarter
Ending on or about Ratio
May 31, 1998 1.6:1.0
August 31, 1998 1.2:1.0
Fiscal Quarter
Ending on or about Ratio
November 30, 1998 1.0:1.0
February 28, 1999 1.0:1.0
May 31, 1999 1.2:1.0
August 31, 1999 1.5:1.0
3. Section 8.11 of the Credit Agreement is hereby
amended by deleting the first three paragraphs of the table
therein and inserting in lieu thereof the following:
Period Ratio
The Effective Date to but
not including the last day
of the Borrower's fiscal
quarter ending on or about
May 31, 1998 6.2:1.0
Thereafter to but not
including the last day of
the Borrower's fiscal
quarter ending on or about
August 31, 1998 8.0:1:0
Thereafter to but not
including the last day of
the Borrower's fiscal
quarter ending on or about
November 30, 1998 8.9:1.0
Thereafter to but not
including the last day of
the Borrower's fiscal
quarter ending on or about
February 28, 1999 9.2:1.0
Thereafter to but not
including the last day of
the Borrower's fiscal
quarter ending on or about
May 31, 1999 7.8:1.0
24
<PAGE>
Period Ratio
Thereafter to but
not including the
last day of the
Borrower's fiscal
quarter ending on or
about August 31,
1999 6.5:1.0
4. In order to induce the Banks to enter into this
Amendment, the Borrower hereby represents and warrants that (i)
no Default or Event of Default exists as of the Amendment
Effective Date (as defined below) after giving effect to this
Amendment and (ii) on the Amendment Effective Date, both before
and after giving effect to this Amendment, all representations
and warranties contained in the Credit Agreement or in the other
Credit Documents are true and correct in all material respects.
5. This Amendment shall become effective on the date
(the "Amendment Effective Date") when each of the Borrower and
the Required Banks shall have signed a counterpart hereof
(whether the same or different counterparts) and shall have
delivered (including by way of facsimile transmission) the same
to the Agent at its Notice Office.
6. This Amendment is limited as specified and shall
not constitute a modification, acceptance or waiver of any other
provision of the Credit Agreement or any other Credit Document.
7. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate
counterparts, each of which counterparts when executed and
delivered shall be an original, but all of which shall together
constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
8. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
* * *
25
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has
caused a counterpart of this Amendment to be duly executed and
delivered as of the date hereof.
MCMS, INC.
By: /s/ Robert F. Subia
Title:President
BANKERS TRUST COMPANY,
Individually and as Agent
By: /s/ Anthony LoGrippo
Title:Vice President
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Peter L. Skavia
Title: Vice President
FLEET NATIONAL BANK
By: /s/ Frank H. Benesh
Title: Vice President
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Mark H. Trachy
Title: Vice President
26
<PAGE>
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES, INC.
By: /s/ Gary Stewart
Title: Vice President
SILICON VALLEY BANK
By: /s/ Ron Sherman
Title: Vice President
27
Exhibit 11
<TABLE>
MCMS, INC.
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<CAPTION>
Three months ended Nine months ended
May 29, May 28, May 29, May 28,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income basic $ 2,364 $ (2,037) $ 8,421 $ (1,424)
Dividends on redeemable preferred
stock accumulated but not paid - (825) - (825)
------------ --------- ----------- --------------
Net income available to common
stockholders $ 2,364 $ (2,862) $ 8,421 $ (2,249)
============ ============ ============ ==============
Shares used to compute net income
per share:
Weighted average common shares
outstanding - basic and diluted 1,000 5,000,000 1,000 1,667,333
============ =========== ============ =============
Net income (loss) per share - basic
and diluted $ 2,364 $ (0.57) $ 8,421 $ (1.35)
=========== ============ =========== ==============
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-28-1998
<PERIOD-END> MAY-28-1998
<CASH> 10,050
<SECURITIES> 0
<RECEIVABLES> 39,053
<ALLOWANCES> 1,734
<INVENTORY> 35,337
<CURRENT-ASSETS> 85,048
<PP&E> 91,968
<DEPRECIATION> 28,281
<TOTAL-ASSETS> 156,355
<CURRENT-LIABILITIES> 63,703
<BONDS> 0
24,021
5
<COMMON> 5
<OTHER-SE> (111,157)
<TOTAL-LIABILITY-AND-EQUITY> 156,355
<SALES> 234,246
<TOTAL-REVENUES> 234,246
<CGS> 210,781
<TOTAL-COSTS> 210,781
<OTHER-EXPENSES> 19,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,088
<INCOME-PRETAX> (409)
<INCOME-TAX> 1,015
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,424)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> 0
</TABLE>
