<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2000
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)
<TABLE>
<S> <C>
Delaware 82-0480109
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
83 Great Oaks Boulevard, San Jose, California 95119
(Address of principal executive offices, Zip Code)
(408)284-3500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
There is no established public trading market for any class of the Company's
common equity.
The number of shares outstanding of each of the issuer's classes of common stock
on October 30, 2000 was as follows:
<TABLE>
<S> <C>
Class A Common Stock: 3,322,990
Class B Common Stock: 863,823
Class C Common Stock: 874,999
</TABLE>
<PAGE> 2
PART I
ITEM 1. BUSINESS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. Our
actual results could differ materially from our historical results of operations
and those discussed in the forward-looking statements. Factors that could cause
actual results to differ materially are included, but are not limited to, those
identified in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors."
OVERVIEW
We are a global leading provider of advanced electronics manufacturing
services to original equipment manufacturers who primarily serve the data
communications, telecommunications, and computer/memory module industries. We
target customers that are technology leaders in rapidly growing markets, such as
Internet infrastructure, wireless communications and optical networking, that
have complex manufacturing services requirements and that seek to form long-term
relationships with their electronics manufacturing services providers. We offer
a broad range of electronics manufacturing services, including:
- pre-production engineering and product design support,
- prototyping;
- supply chain management;
- manufacturing and testing of printed circuit board assemblies;
- full system assembly;
- end-order fulfillment; and
- after sales product support.
We deliver this broad range of services through six strategically
located facilities in the United States, Mexico, Asia and Europe. We have
long-standing relationships with networking and telecommunications industry
leaders and have recently established relationships with several companies in
the emerging areas of wireless communications and optical networking.
OUR SERVICES
We are a provider of manufacturing solutions for leading technology
original equipment manufacturers in the data communications, telecommunications
and computer/memory module industries, particularly in the Internet
infrastructure, wireless communications and optical networking markets, that
have complex manufacturing needs and that benefit from our full spectrum of
electronics manufacturing services. Our full range of manufacturing services
include:
Pre-Production Engineering and Product Design Support. Our advanced
engineering team works with original equipment manufacturers early in the
product development cycle for new products. This work includes:
- concurrent electrical design;
- printed circuit board design;
- component engineering;
- design for manufacturing and logistics analysis;
- design verification testing;
- reliability testing and analysis;
- product assurance; and
- packaging design.
Our pre-production engineering and product design support is used by
our customers to reduce the overall product development time thereby speeding
time to market, and to help lower the product cost.
Prototyping. Our dedicated new product introduction teams provide
comprehensive pre-production manufacturing services centered around fully
automated, quick turnaround printed circuit board assembly. Additional services
include prototype materials procurement, automated optical and X-ray inspection,
flying probe testing and rework services. These services are provided with all
of the systems and controls used for volume production, thereby assuring
performance, quality and smooth scaling to production level quantities.
2
<PAGE> 3
Supply Chain Management. We utilize our fully integrated enterprise
resource planning and supply chain management system to enable us to optimize
materials management from supplier to end-customer. Effective management of the
supply chain is critical to the success of original equipment manufacturers as
it directly impacts the time required to deliver product to market and the
capital requirements associated with carrying inventory.
Manufacturing and Testing of Printed Circuit Board Assemblies. We use
sophisticated technology in the assembly and testing of our printed circuit
board assemblies, and have continually made significant investments in
developing new assembly and test process techniques and improving product
quality. These investments have helped to reduce and improve delivery time to
customers. We work both independently of and in cooperation with customers and
suppliers to develop leading assembly and test technologies.
Full System Assembly. We provide full system assembly services, which
entail our integrating a product's various sub-assemblies into a complete end
product ready for customer use. These services require sophisticated logistics
capabilities to rapidly procure components, assemble products, perform complex
testing and distribute products to customers around the world. Our full system
assembly services involve combining a wide range of sub-assemblies and employing
advanced test techniques to various sub-assemblies and final end products.
End-Order Fulfillment. We design and test packaging of products for
bulk shipment or single end-customer use. We have a sophisticated integrated
system for managing complex international order fulfillment, allowing us to ship
worldwide and, in many cases, directly to the original equipment manufacturers'
end-customers.
After-Sales Product Support. We offer a wide range of after-sales
support services. This support can be individualized to meet each customer's
requirements and includes product upgrades, repair and engineering change
management.
OUR MANUFACTURING TECHNOLOGIES
Our technology expertise includes the following advanced areas:
- Advanced and Specialized Testing, which is used for wireless and optical
assemblies, where in-circuit tests often cannot be used. Automated x-ray
and optical inspection techniques are used to structurally examine the
completed assembly. Wireless and optical products may also require
functional and parametric testing utilizing specialized test
instrumentation. This test instrumentation requires that specialized
software be developed to allow these instruments to perform as necessary.
- Fiber Optic Cable Connectorization and Fusion Splicing, which is typically
used to manufacture passive optical components such as optical couplers,
splitters, filters and attenuators.
- Advanced Area Array, which includes ball grid arrays, column grid arrays
and chip scale packages. Advanced area array enables the surface mount
soldering of high-density integrated circuits to printed circuit boards in
less space than fine pitch component alternatives. This method enables more
interconnections in the same space than do less advanced techniques.
Advanced area array components connect the integrated circuit board through
an array of small solder balls or columns on the bottom side of the
component package, instead of the fine leads of a fine pitch device on the
periphery of the component package. Advanced area array components require
fully automated assembly and soldering processes for assembly onto printed
circuit boards. We maintain, and continue to develop, processes for current
and next generation advanced area array components.
- Complex Board and System Level Functional Testing, which searches for
defects by using external instrumentation to simulate the ultimate end-use
functionality of a completed assembly.
Our technology expertise also includes the following traditional
areas:
- Surface Mount Technology, which involves soldering component leads to a
circuit board that does not have any leads protruding through it or holes
in it, which allows for the utilization of both sides of the circuit board.
- Fine Pitch, which is used in the soldering of components to a circuit
board. The smaller spacing, or pitch, of component leads or patterns allows
for higher board densities and smaller products.
- In-Circuit Test, which is an automated technique designed to electrically
analyze printed circuit board
3
<PAGE> 4
assemblies for quality and completion to the bill of materials and
schematic. In addition to identifying manufacturing related defects,
in-circuit testing can functionally test individual components on the
printed circuit board, as well as download software to programmable devices
including flash memory and field programmable gate arrays.
- Stress Testing, which introduces adverse environmental conditions to detect
potential failures of completed printed circuit boards.
OUR SEGMENT INFORMATION
We operate in one industry segment, electronic manufacturing services.
We serve the same and similar customers on a global basis and are viewed by
management as a global provider of manufacturing services. We place primary
importance on managing worldwide services to strategic customers. For further
Segment information, see Note 16 of the Notes to Consolidated Financial
Statements.
CUSTOMER CONCENTRATION
A few of our major customers represent a significant percentage of our
net sales. During fiscal years 2000, 1999 and 1998, sales to individual
customers that exceeded 10% of our total net sales were:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
CUSTOMERS AUGUST 31, 2000 SEPTEMBER 2, 1999 SEPTEMBER 3, 1998
--------- --------------- ----------------- -----------------
<S> <C> <C> <C>
Cisco Systems 41% 43% 39%
Extreme Networks 12% -- --
Fore Systems -- 18% 24%
</TABLE>
In fiscal year 2000, our ten largest customers accounted for 88% of net
sales. Decreases in sales to, or margins with, these or any other key customers
could have a material adverse effect on the business, financial condition and
results of operations. During the fourth quarter of fiscal 1999, we and Fore
Systems, now a subsidiary of Marconi PLC, reached a decision to reduce the scope
of our relationship. During the third quarter of fiscal 2000, we substantially
completed manufacturing services for Fore Systems. For further discussion on the
risks associated with customer concentration and on the impact of the reduced
Fore Systems relationship, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SALES AND MARKETING
We use a direct sales force of senior sales professionals located in
North America, Europe and Asia to market our broad array of electronics
manufacturing services. We augment our North American direct sales force with a
network of manufacturers sales representatives from twelve organizations. We
organize our North American sales efforts on a regional basis, with each region
managed by an experienced director of sales. Each director of sales is assisted
by a director of engineering who participates in the technical sales process in
all regions. Our senior management team participates heavily both in the initial
customer sales process as well as in ongoing customer account management.
Our sales and marketing professionals target original equipment
manufacturers that require comprehensive outsourcing solutions in the data
communications, telecommunications and computer/memory module industries in
general, and in the Internet infrastructure, wireless communications and optical
networking markets in particular. Within these target markets, we focus our
sales efforts on securing programs with high growth potential from large
established original equipment manufacturers and emerging electronics companies.
We focus on developing close collaborative relationships with our customers
early in the design phase and throughout the life cycle of a product. To
facilitate these relationships, a customer team is formed to support each
customer's needs throughout the outsourcing process. Each customer team is led
by a business unit manager and consists of professionals from the procurement,
engineering, manufacturing, testing and quality areas.
INTELLECTUAL PROPERTY
Our intellectual property portfolio consists of patents, patent
applications, trademarks, trade secrets and other proprietary information. We
currently have 43 patents and 22 patent applications covering a range of
manufacturing and test processes. "MCMS" and the MCMS logo are U.S. registered
trademarks.
Our patent portfolio, trade secrets and other proprietary information
cover proprietary
4
<PAGE> 5
manufacturing processes that improve our ability to deliver high quality
services in a timely and cost-effective manner. They include methodologies
relating to, among other things, the soldering of components to printed circuit
boards, the calibration and enhancement of assembly equipment, and the testing
of printed circuit board assemblies and memory modules. When a new proprietary
manufacturing process is implemented successfully for a given application at a
manufacturing location, we endeavor to deploy its application across all
manufacturing locations. Through our multi-disciplined engineering teams, we
will continue to develop new manufacturing and testing processes to meet our
customers' changing needs and requirements, improve efficiencies and reduce
costs.
To protect our proprietary rights, we rely largely upon a combination
of patents, trade secret laws, non-disclosure agreements, our internal
confidentiality procedures and employee confidentiality agreements. Although we
take steps to protect our proprietary information and trade secrets,
misappropriation may still occur. We believe that our proprietary manufacturing
processes do not infringe on the proprietary rights of others.
EMPLOYEES
As of August 31, 2000, we had 2,484 full-time employees. Given the
variable nature of our project flow and the quick response time required by our
customers, it is critical that we be able to quickly ramp-up and ramp-down our
production capacities to maximize efficiency. We satisfy our varying labor
requirements by employing a skilled temporary labor force as needed. Except for
239 employees located in Colfontaine, Belgium and Monterrey, Mexico, our
employees are not unionized. We believe our employee relations are good, and we
have not experienced any work stoppages at any of our facilities.
COMPETITION
The electronics manufacturing services 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 original equipment manufacturers
who elect to perform their manufacturing internally rather than through an
outside electronic manufacturing services provider. We compete directly with a
number of electronics manufacturing services providers, including Celestica
Inc., Flextronics International, Ltd., Jabil Circuit, Inc., SCI Systems, Inc.,
Sanmina Corporation and Solectron Corporation. To be competitive, we 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. Some of the large electronics manufacturing
service providers with whom we compete have similar capabilities to those
described above under the caption "Our Services." Many of our competitors have
more geographically diversified manufacturing facilities, international
procurement capabilities, research and development capabilities and sales and
marketing resources. In addition, we may be at a competitive disadvantage
because some of our competitors are less financially leveraged, resulting in,
among other things, greater operational and financial flexibility.
BACKLOG
Our backlog as of August 31, 2000 and September 2, 1999 was
approximately $160.8 million and $112.4 million, respectively. Backlog consists
of purchase orders received and that are expected to be filled, typically within
three months. Because of variations in the timing of orders, quantities ordered,
delivery intervals and customer and product mix, our backlog as of any
particular date may not be representative of actual sales for any subsequent
period. In addition, subject to conditions and limitations, customer orders can
be canceled and volume levels can be changed or delayed. From time to time, some
of our customers have terminated their manufacturing arrangements with us, while
other customers have reduced or delayed the volume of design and manufacturing
services performed by us. We may not be able to replace terminated programs,
terminated relationships or canceled, delayed or reduced contracts with new
business. Termination of a manufacturing relationship or changes, reductions or
delays in orders could have a material adverse effect on our business, financial
condition and results of operations.
GOVERNMENTAL REGULATION
Our operations are subject to federal, state and local regulatory
requirements relating to environmental, waste management and health and safety
measures relating to the use, release, storage, treatment, transportation,
discharge, disposal and clean-up of hazardous substances and wastes, as well as
practices and procedures applicable to the construction and operation of our
plants. We do not regard our current costs of compliance as material, and we are
not presently aware of any factors or circumstances that would cause us to incur
significant costs or liabilities in the future related to environmental, health
and safety law compliance.
5
<PAGE> 6
ITEM 2. PROPERTIES
Our executive offices are located in San Jose, California. We have two
other U.S. facilities located in Nampa, Idaho and Durham, North Carolina as well
as facilities in Malaysia, Mexico and Belgium. Information about these
facilities is set forth below:
<TABLE>
<CAPTION>
LEASED/OWNED
SQUARE (EXPIRATION
LOCATION FEET. DATE) PRINCIPAL USES
<S> <C> <C> <C>
San Jose, California ....... 16,000 Leased (3/1/07) Executive offices, design, prototyping,
engineering
Nampa, Idaho ............... 216,000 Owned Design, prototyping, engineering, printed
circuit board assembly & test, system
assembly & test, end order fulfillment
Durham, North Carolina ..... 110,000 Leased (12/31/05) Design, prototyping, engineering, printed
circuit board assembly & test, system
assembly & test, end order fulfillment
Penang, Malaysia ........... 118,000 Leased (12/1/02) Design, prototyping, engineering, printed
circuit board assembly & test, system
assembly & test, end order fulfillment
Monterrey, Mexico .......... 112,000 Leased (7/30/07) Engineering, printed circuit board assembly &
test
Colfontaine, Belgium ....... 91,500 Owned Design, prototyping, engineering, printed
------- circuit board assembly & test, system
assembly & test
Total ................. 663,500
=======
</TABLE>
We believe our facilities are adequate for our operating needs. We
anticipate that as our business grows, we will need to acquire, lease or build
additional facilities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to various legal actions arising in
the ordinary course of business. To the best of our knowledge, we have no
material legal proceedings currently pending or threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter covered by this
report.
6
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of our
common equity.
As of August 31, 2000, there were 10 holders of record of the
registrant's Class A Common Stock, 2 holders of record of the registrants Class
B Common Stock and 5 holders of record for the registrants Class C Common Stock.
We have never declared or paid any cash dividends on any class of our common
equity. Under the Certificate of Incorporation, we may not declare or pay
dividends on our common equity unless and until we have declared and paid any
preferential dividends on any then outstanding 12 -1/2% Redeemable Preferred
Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock. Moreover, our existing credit facility, the Indenture governing our
outstanding 9 -3/4% Senior Subordinated Notes due 2008 (the "Fixed Rate Notes")
and Floating Interest Rate Subordinated Term Securities due 2008 (the "Floating
Rate Notes"), restrict us from declaring or paying cash dividends on our
outstanding common equity.
During fiscal 2000, 1999 and 1998, we granted options under our 1998
Stock Option Plan (the "Option Plan") to our employees to purchase an aggregate
of 1,052,500, 793,375 and 1,240,000 shares, respectively, of the our Class A
Common Stock at an exercise price of $2.27 per share. As of August 31, 2000, we
had 1,968,625 options outstanding under the Option Plan. We believe that the
foregoing stock option grants did not require registration under the Securities
Act, nor an exemption from the registration requirements thereof, insofar as
such grants did not involve the "offer" or "sale" of securities within the
meaning of Section 2(3) of the Securities Act. During fiscal 2000 and 1999,
options to purchase 26,500 and 35,313 shares of common stock, respectively, were
exercised. No options were exercised in fiscal 1998 under the Option Plan. We
believe that the foregoing issuance's of capital stock were exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(2) thereof, and the rules and regulations promulgated by the
Securities and Exchange Commission thereunder, insofar as the offer and sale of
such securities did not involve a public offering
7
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information of MCMS has
been derived from the historical consolidated financial statements and should be
read in conjunction with the consolidated financial statements and the notes
included herein.
Five Year Selected Financial Highlights
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
August 31, September 2, September 3, August 28, August 29,
Fiscal year ended 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 472,448 $ 432,715 $ 333,920 $ 292,379 $ 374,116
Cost of goods sold 449,957 407,354 303,251 258,982 341,110
--------- --------- --------- --------- ---------
Gross profit 22,491 25,361 30,669 33,397 33,006
Selling, general and
Administrative expenses 23,940 22,491 15,798 12,560 9,303
--------- --------- --------- --------- ---------
Income (loss) from operations (1,449) 2,870 14,871 20,837 23,703
Other expense (income):
Interest expense (income), net 22,038 19,652 9,212 (380) (482)
Transaction expenses(5) -- 45 8,398 -- --
--------- --------- --------- --------- ---------
Income (loss) before taxes
and extraordinary item (23,487) (16,827) (2,739) 21,217 24,185
Income tax provision (benefit) 163 (3,497) (930) 8,465 9,190
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (23,650) (13,330) (1,809) 12,752 14,995
Extraordinary item - loss on
early retirement of debt,
net of taxes -- (617) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (23,650) $ (13,947) $ (1,809) $ 12,752 $ 14,995
========= ========= ========= ========= =========
Net income (loss) per share -
Basic and diluted (3) (4) $ (5.49) $ (3.50) $ (1.36) $ 12,752 $ 14,995
========= ========= ========= ========= =========
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents $ -- $ -- $ 7,542 $ 13,636 $ 16,290
Working capital, excluding
Cash and cash equivalents 30,085 36,403 21,929 15,454 10,065
Total assets 217,502 166,542 145,052 124,862 113,245
Total debt 217,176 207,279 185,157 1,049 --
Redeemable preferred stock 33,295 29,267 25,675 -- --
Shareholders' equity (deficit) (158,114) (130,497) (113,051) 78,191 65,881
STATEMENT OF CASH FLOW DATA:
Cash provided by (used in)
Operating activities (822) (11,004) 1,363 20,723 33,620
Cash used in investing activities (7,900) (17,085) (19,752) (23,969) (25,643)
Cash provided by (used in)
Financing activities 8,630 20,502 12,508 592 (6,687)
OTHER FINANCIAL DATA:
EBITDA (1) 15,522 17,943 27,263 29,656 29,128
Depreciation and amortization (2) 16,971 15,073 12,392 8,819 5,425
Total capital expenditures 7,973 17,111 20,164 24,120 31,229
</TABLE>
-------------------------------
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by investors in the evaluation of companies. EBITDA should be considered as
an alternative to cash flow from operating activities, as a measure of
liquidity or as an alternative to net income as a measure of operating
results in accordance with United States GAAP.
(2) In fiscal 2000, 1999 and 1998, depreciation and amortization amount excludes
$954,000, $943,000 and $526,000, respectively, of deferred loan amortization
that was expensed as interest.
(3) The weighted average number of shares used to calculate net income (loss)
per share was 1,000 shares in fiscal 1996 and 1997, 2,534,183 shares in
fiscal 1998, 5,008,598 shares in fiscal 1999 and 5,041,001 shares in fiscal
2000. The 1996 and 1997 fiscal year weighted average common shares
outstanding do not reflect the shares issued in conjunction with the
February 1998 recapitalization and are therefore not comparable to
subsequent periods.
(4) Net income (loss) per share includes a loss of $0.80, $0.72 and $0.65 per
share in fiscal 2000, 1999 and 1998, respectively, related to dividends and
accretion of discount on Redeemable Preferred Stock.
(5) Transaction expenses include expenses incurred in conjunction with our
recapitalization, including transaction agreement fees, bank fees, the
termination of employment agreements, the buyback of employee stock options,
and other miscellaneous expenses.
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this discussion and analysis of financial
condition and results of operations should be read in conjunction with the
financial statements and the notes to those statements included elsewhere in the
Form 10-K. Statements 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 us as of such date. We assume no
obligation to update any forward-looking statements. 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 herein under "Risk Factors."
We are a global leading provider of advanced electronics manufacturing
services to original equipment manufacturers, which primarily serve the data
communications, telecommunications and computer/memory module industries.
Our principal operations were established in 1984 as the Memory
Applications Group of Micron Technology, Inc. We began providing electronics
manufacturing services to external customers in 1989, were incorporated as a
wholly owned subsidiary of Micron Technology, Inc. in 1992 and became a wholly
owned subsidiary of Micron Electronics, Inc., which is a majority owned
subsidiary of Micron Technology, in 1995. On February 26, 1998, a group of
investors led by Cornerstone Equity Investors acquired a 90% equity interest in
MCMS. Since the acquisition was structured as a recapitalization with Micron
Electronics continuing to hold a 10% equity interest, our financial statements
still reflect our historical basis of accounting. In connection with the
recapitalization, our name was changed from Micron Custom Manufacturing
Services, Inc. to MCMS, Inc.
Since the recapitalization in 1998, we have undertaken a number of
initiatives to grow and expand our business. We have expanded our global
infrastructure to include a significantly larger facility in Penang, Malaysia
and new operations in Monterrey, Mexico and San Jose, California. We have
invested in additional manufacturing and test equipment and upgraded and
enhanced our information systems in part by installing a common technology and
system platform across all of our facilities. We have continued to strengthen
both the management and technical staffs at all levels of the organization and
have aligned our organization into customer-focused teams to enhance customer
satisfaction. We have hired a number of senior management personnel, including
Richard Rowe as our Chief Executive Officer in November 1999 and Tony Nicholls
as our Chief Operating Officer in October 2000.
Our revenue growth during fiscal year 2000 was adversely affected by
our disengagement with Fore Systems, a significant customer. Our relationship
with Fore Systems ended in fiscal 2000 as a result of a number of factors,
including a change of control of Fore and Fore's desire to engage with
electronics manufacturing services providers with greater global scale. We
substantially completed our manufacturing services for Fore Systems during the
third quarter of fiscal year 2000. Sales to Fore Systems were $24.6 million
during fiscal year 2000, $78.7 million in fiscal year 1999 and $80.6 million in
fiscal year 1998. Excluding our sales to Fore Systems, our revenue grew 26.5% in
fiscal year 2000 compared to fiscal year 1999 and 39.8% in fiscal year 1999
compared to fiscal year 1998. The following table shows our revenue on a
quarterly basis during fiscal year 2000, excluding revenue derived from our
relationship with Fore Systems and our percentage sequential revenue growth.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------
DECEMBER 2, 1999 MARCH 2, 2000 JUNE 1, 2000 AUGUST 31, 2000
---------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Revenue excluding Fore Systems $87.5 million $92.3 million $110.8 million $157.2 million
Sequential revenue growth -- 5.5% 20.0% 41.8%
</TABLE>
Our gross profit and operating income during fiscal year 2000 were
adversely impacted by the costs associated with our launching new manufacturing
facilities in Monterrey, Mexico and San Jose, California, and reduced
utilization of our facility in Durham, North Carolina as a result of our
disengagement with Fore Systems. We elected to incur the expenses associated
with maintaining our capability in Durham and with expanding our capacity
through our new and enlarged facilities in anticipation of our commencement of
the programs we were recently awarded from both new and existing customers.
We provide our services on both a turnkey and consignment basis. Under
a turnkey arrangement, we assume responsibility for both the procurement of
components and their assembly. Turnkey
9
<PAGE> 10
manufacturing generates higher net sales than consignment manufacturing due to
the generation of revenue from materials as well as labor and manufacturing
overhead. Turnkey manufacturing also typically results in lower gross margins
than consignment manufacturing. Under a consignment arrangement, the original
equipment manufacturer procures the components and we assemble and test them in
exchange for a service fee. Consignment revenues accounted for 7.1% of our net
sales for the fiscal year ended August 31, 2000 compared to 6.4% in each of
fiscal 1999 and 1998.
We sell to our customers from both domestic and foreign operations. Net
sales from our foreign operations accounted for 25.4% of our net sales for the
fiscal year ended August 31, 2000 compared to 8.3% in fiscal 1999 and 7.3% in
fiscal 1998.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data expressed
as a percentage of net sales for the periods indicated. For the years ended
August 28, 1997, September 3, 1998, September 2, 1999 and August 31, 2000, the
information is derived from our audited consolidated statements of operations.
This information is expressed as a percentage of net sales and should be read in
conjunction with the consolidated financial statements and related notes
included herein.
<TABLE>
<CAPTION>
August 31, September 2, September 3,
Fiscal year ended 2000 1999 1998
------------------ ---------- ------------ ------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Costs of sales 95.2 94.1 90.8
------ ------ ------
Gross margin 4.8 5.9 9.2
Selling, general and administrative expenses 5.1 5.2 4.7
------ ------ ------
Income (loss) from operations (0.3) 0.7 4.5
Other expense (income):
Interest expense (income), net 4.7 4.6 2.8
Transaction Expenses (1) -- -- 2.5
------ ------ ------
Income (loss) before taxes and extraordinary item (5.0) (3.9) (0.8)
Income tax provision (benefit) -- (0.8) (0.3)
------ ------ ------
Income (loss) before extraordinary item (5.0) (3.1) (0.5)
Extraordinary item - loss on early extinguishment of debt -- (0.1) --
------ ------ ------
Net income (loss) (5.0)% (3.2)% (0.5)%
====== ====== ======
Depreciation and amortization (2) 3.6% 3.5% 3.7%
====== ====== ======
</TABLE>
------------------------------------------------------
(1) Transaction expenses include expenses incurred in conjunction with our
recapitalization, including transaction agreement fees, bank fees, the
termination of employment agreements, the buyback of employee stock
options, and other miscellaneous expenses.
(2) In fiscal 2000, 1999 and 1998, depreciation and amortization amount
excludes $954,000, $943,000 and $526,000, respectively, of deferred loan
amortization that was expensed as interest.
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES. Net sales for fiscal year 2000 increased by $39.7 million,
or 9.2%, to $472.4 million from $432.7 million for fiscal year 1999. The
increase in net sales is primarily the result of higher volumes of printed
circuit board assemblies and system level shipments to customers in the
networking and telecommunications industries. These increases were partially
offset by significantly lower sales to Fore Systems, who was historically our
second largest customer. Net sales to Fore Systems for fiscal year 2000
decreased by $54.1 million to $24.6 million from $78.7 million for fiscal year
1999. We substantially completed manufacturing services for Fore Systems during
the third quarter of fiscal year 2000.
Net sales attributable to foreign subsidiaries totaled $119.9 million
for fiscal year 2000, compared to $36.0 million for the corresponding period of
fiscal year 1999. The growth in foreign subsidiary net sales is primarily the
result of increased complex printed circuit board assemblies shipments at our
Malaysian operation. During fiscal year 2000, our Monterrey, Mexico operation
recognized its first sales, which totaled $3.5 million.
GROSS PROFIT. Gross profit for fiscal year 2000 decreased by $2.9
million, or 11.4%, to $22.5 million from $25.4 million for fiscal year 1999.
Gross margin for fiscal year 2000 decreased to 4.8% of net sales from 5.9% for
fiscal year 1999. Gross profit and gross margin were adversely affected, most
10
<PAGE> 11
significantly by a decrease in the capacity utilization at our Durham, North
Carolina facility, due to a significant decline in sales to Fore Systems. In
addition, during fiscal year 2000, we incurred start-up costs at our new
facilities in Monterrey, Mexico and San Jose, California.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for fiscal year 2000 increased by $1.4 million,
or 6.2%, to $23.9 million from $22.5 million for fiscal year 1999. This increase
was primarily the result of start-up costs associated with new facilities. In
addition, during fiscal year 2000, we incurred more expenses in program
management, information technology and executive management to support our
global expansion and anticipated growth. We also incurred non-cash foreign
currency adjustments related to an inter-company loan between the Company and
its Belgian subsidiary. During fiscal year 2000, SG&A expenses included a
non-cash foreign currency expense of $0.4 million, while fiscal year 1999 SG&A
expenses included a non-cash foreign currency expense of $0.5 million.
INTEREST EXPENSE. Interest expense for fiscal year 2000 increased $2.3
million, or 11.7%, to $22.0 million from $19.7 million for fiscal year 1999. The
increase was primarily due to a higher level of overall borrowing and higher
interest rates on our variable interest rate borrowings.
PROVISION FOR INCOME TAXES. Income tax expense for fiscal year 2000 was
$0.2 million compared to a benefit of $3.5 million for fiscal year 1999. The
income tax expense for fiscal year 2000 resulted primarily from a mandatory
minimum foreign income tax on its Mexico subsidiary. The effective rate of tax
expense for fiscal year 2000 was approximately 0.7%, compared to a 22.3% income
tax benefit for fiscal year 1999. The overall decrease in the effective tax rate
during fiscal year 2000, relative to fiscal year 1999, was primarily due to an
increase in the valuation allowance. During fiscal year 2000, the valuation
allowance eliminated any income tax benefit that would have otherwise resulted
from the losses. We do not provide for U.S. tax on the earnings of our foreign
subsidiaries and, therefore, the effective rate may vary significantly from
period to period.
EXTRAORDINARY LOSS. The extraordinary after tax loss of $0.6 million
for fiscal year 1999 resulted from the write-off of deferred financing costs
related to the early retirement of a revolving credit facility.
NET LOSS. For the reasons stated above, net loss for fiscal year 2000
increased by $9.7 million to a loss of $23.6 million from a loss of $13.9
million for fiscal year 1999. As a percentage of net sales, net loss for fiscal
year 2000 was 5.0% compared to 3.2% for fiscal year 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales for fiscal 1999 increased by $98.8 million, or
29.6%, to $432.7 million from $333.9 million for fiscal 1998. The increase in
net sales was primarily attributable to higher volumes of PCBA and system level
shipments to customers in the networking and telecommunications industries.
These increases were partially offset by lower PCBA prices, lower volumes and
prices of custom turnkey memory modules, and lower prices on consigned memory
modules.
Net sales of foreign subsidiaries for fiscal 1999 increased $11.5
million, or 46.9%, to $36.0 million from $24.5 million in fiscal 1998. The
growth in foreign subsidiary net sales is primarily the result of additional
sales of PCBA shipments at our Malaysian operation. This increase was partially
offset by lower volumes of custom turnkey memory modules at the Malaysian
facility. The increase was also offset as a result of a significant customer of
the Belgium operation shifting from a turnkey to consignment model early in the
second quarter of fiscal 1999.
GROSS PROFIT. Gross profit for fiscal 1999 decreased by $5.3 million,
or 17.3%, to $25.4 million from $30.7 million for fiscal 1998. Gross margin for
fiscal 1999 decreased to 5.9% of net sales from 9.2% in fiscal 1998. The
decrease in gross margin resulted primarily from demand volatility in our North
Carolina operation, higher volumes of PCBA sales with lower average selling
prices, lower prices on consigned memory modules, a decline in custom turnkey
memory module sales and increased system level shipments, which typically have
lower margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for fiscal
1999 increased by $6.7 million, or 42.4%, to $22.5 million from $15.8 million
for fiscal 1998. This increase was primarily the result of additional senior
management to support future growth and an increase in depreciation expense and
other expenses and headcount associated with operating as a stand alone entity
following the Recapitalization. We also incurred non-cash foreign currency
adjustments related to an inter-company loan between the Company and its Belgian
subsidiary. During fiscal 1999, SG&A expenses included a non-cash foreign
currency expense of $0.5 million, while fiscal 1998 SG&A expenses included a
non-cash foreign currency gain of $0.2 million.
11
<PAGE> 12
INTEREST EXPENSE. Interest expense for fiscal 1999 increased to $19.7
million from $9.2 million in fiscal 1998, due primarily to the full year impact
of $175 million in long-term debt issued in February of 1998 in conjunction with
the Recapitalization.
PROVISION (BENEFIT) FOR INCOME TAXES. We had an income tax benefit in
each of fiscal 1999 and 1998 generated primarily through utilization of net
operating losses and non-taxable foreign income. The fiscal 1999 income tax
benefit increased by $3.0 million to a benefit of $3.9 million from a benefit of
$0.9 million for fiscal 1998. Our effective income tax rate for our benefit for
fiscal 1999 decreased to 22.3% from 33.9% for fiscal 1998. The decrease in the
effective rate relates primarily to increases in the valuation allowance in
fiscal 1999 offset in part by nondeductible transaction costs associated with
our Recapitalization in fiscal 1998.
During fiscal 1999, we set up a valuation allowance of $4.7 million for
the amount of the deferred tax asset which may not be realizable through
carryback of its net operating losses or through future income.
EXTRAORDINARY LOSS. The extraordinary after tax loss of $0.6 million in
fiscal 1999 resulted from the write-off of deferred financing costs related to
the early extinguishment of a revolving credit facility.
NET LOSS. For the reasons stated above, net loss for fiscal 1999
increased by $12.1 million to a loss of $13.9 million from a loss of $1.8
million for fiscal 1998. As a percentage of net sales, net loss for fiscal 1999
increased to 3.2% from 0.5% for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 2000, net cash provided by operating activities was
$0.8 million. Net cash used by investing activities was $7.9 million and net
cash provided by financing activities was $8.6 million. Exchange rate changes
had a nominal effect on cash. Net cash used by investing activities during
fiscal year 2000 primarily consisted of capital expenditures to upgrade, expand
and establish manufacturing capacity in Nampa, Idaho, Penang, Malaysia and
Monterrey, Mexico. Net cash generated from financing activities primarily
resulted from $23.7 million in loans from some of our shareholders, offset in
part by repayments on our existing credit facility.
The $0.8 million of cash used by operations during fiscal 2000 was the
result of a combination of factors. During the fiscal year ended August 31,
2000, accounts receivable increased by $13.1 million, primarily due to a $45.1
million increase in sales for the three months ended August 31, 2000 over the
corresponding period of fiscal 1999. For the three and twelve months ended
August 31, 2000, the average accounts receivable collection period was 29.2 days
and 33.6 days, respectively, compared to 37.1 days and 37.5 days for the
corresponding periods of fiscal 1999. The fiscal year 2000 improvement in the
average accounts receivable collection period is due primarily to increased
collection efforts. During the fiscal year ended August 31, 2000, inventory
increased by $45.6 million. For the three and twelve months ended August 31,
2000, the average inventory turns were 7.8 and 7.4, respectively, compared to
9.6 for both corresponding periods of fiscal 1999. The fiscal year 2000
inventory increased primarily due to our increase in operations over fiscal year
1999. In addition, during fiscal 2000, we experienced longer lead times and
restricted availability on certain critical components, which has resulted in a
general increase in inventory levels and has negatively impacted our inventory
turns. The fiscal year 2000 inventory increase primarily resulted in a $49.1
million increase in accounts payable and a $5.0 million customer advance to fund
inventory purchases. For the three and twelve months ended August 31, 2000, the
average trade accounts payable payment period was 49.9 days and 48.5 days,
respectively, compared to 43.1 days and 44.0 days for the corresponding periods
of fiscal 1999. In addition, fiscal 2000 cash flows from operations were
positively affected by the timing of $9.4 in interest payments made subsequent
to year-end and $5.0 million in advance payments from customers received prior
to year-end.
As of August 31, 2000, we had a $60 million credit facility (the
"Credit Facility"), which was scheduled for maturity on February 26, 2004. The
Credit Facility included a $10 million equipment loan facility restricted to the
purchase of property, plant and equipment and a $50 million revolving credit
facility. Amounts available to borrow under the revolving credit facility varied
depending on domestic accounts receivable, inventory and equipment balances,
which served as collateral along with substantially all of our other assets. The
Credit Facility restricted our ability to incur additional indebtedness, to
create liens or other encumbrances, to make certain investments, loans and
guarantees and to sell or otherwise dispose of a substantial portion of its
assets or to enter into any merger or consolidation. During fiscal year 2000,
the Credit Facility was amended to allow for borrowings from certain of our
shareholders. The Credit Facility also contained a covenant requiring that we
maintain a fixed charge ratio of not less than 1.0 to 1.0, provided, however,
that this fixed charge ratio covenant was not applied to any fiscal quarter
during the term as long as the gross borrowing availability exceeded $10.0
million. As of August 31, 2000, we had a $12.4 million outstanding balance under
the revolving credit facility and $65.0 million of gross availability, of which
$37.6
12
<PAGE> 13
million was available to borrow without triggering the fixed charge ratio
covenant. Had we been required to test the fixed charge ratio, the test would
not have been satisfied.
On August 30, 2000 and February 29, 2000, we received loans totaling
$15.0 million and $8.7 million, respectively, from certain of our shareholders.
Each loan was evidenced by separate note agreements with the participating
shareholders (the "Notes from Shareholders"). Subsequent to August 31, 2000, all
Notes from Shareholders and related accrued interest were repaid by the proceeds
received from term loans provided for in our amended and restated Credit
Facility, as noted below. Interest on the Notes from Shareholders accrued at
90-day LIBOR + 3.25% (9.91% at August 31, 2000). Interest was payable monthly if
a fiscal month's fixed charge ratio, as defined, exceeded 1.1 to 1.0, so long as
no event of default had occurred under the Credit Facility or would have
occurred as a result of an interest payment under these loans. Otherwise,
interest was payable upon maturity of the notes in February 2004.
In connection with the $15 million Notes from Shareholders dated August
30, 2000, we issued to the participating shareholders warrants for the purchase
of 500,000 shares of the Company's common stock. The warrants issued on August
30, 2000 were issued for the purchase of 90,636 shares of the Company's Class A
common stock and 409,364 shares of the Company's Class B common stock each at a
price of $.001 per share. These warrants are immediately exercisable and expire
on August 30, 2005. In accordance with Accounting Principles Board Opinion No.
14 "Accounting for Convertible Debt and Debt issued with Stock Purchase
Warrants", we allocated $374,000 of the $15 million proceeds from the Notes from
Shareholders to the value of the warrants. The $374,000 is treated as a debt
discount and an increase in Additional Paid-in Capital and will be amortized to
interest over the term of the Notes from Shareholders.
On September 29, 2000 we amended and restated the Credit Facility (the
"Amended and Restated Credit Facility") to provide up to $125 million in secured
financing. The Amended and Restated Credit Facility increased the revolving
credit facility to $70 million from $50 million, maintained the $10 million
equipment loan facility, and provided for term loans of $8 million ("Term Loan
A") and $37 million ("Term Loan B"). Amounts outstanding under the Amended and
Restated Credit Facility bear interest at rates ranging from the lessor of LIBOR
plus 2.75% or a base rate, as defined, plus 0.50%, to the lessor of LIBOR plus
6.50% or a base rate, as defined, plus 4.25%. The revolving credit facility,
equipment loan facility and Term Loan A are collateralized by a first priority
security interest in substantially all of our assets, including real property,
and mature in February 2004. Term Loan B is collateralized by a second priority
lien on these same assets and matures in August 2004. Term Loan B is subject to
a mandatory prepayment, if at any time prior the maturity of Term Loan B, we
receive proceeds from the sale of our capital stock, a public offering or cash
equity contribution. If a mandatory prepayment of Term Loan B is made during the
twelve-month period commencing on September 29, 2000, prepayment is due at a
premium of 107.5% and decreases annually at a rate of 2.5% of face value to
100.0% on September 29, 2003. Other than a mandatory prepayment or payment upon
maturity, Term Loan B may not be prepaid, in whole or in part, unless all
amounts due under the revolving credit facility and equipment loan facility have
been paid in full and all commitments under the Amended and Restated Credit
Facility have been terminated. The equipment loan facility and Term Loan A and B
may not be reborrowed upon repayment. The Amended and Restated Credit Facility
restricts our ability to incur additional indebtedness, to create liens or other
encumbrances, to make certain investments, loans and guarantees and to sell or
otherwise dispose of a substantial portion of our assets or to enter into any
merger or consolidation. The Amended and Restated Credit Facility also contains
a covenant requiring that we maintain a fixed charge ratio, based upon Earnings
before Interest, Taxes, Depreciation and Amortization minus unfinanced capital
expenditures, cash dividends and cash taxes, divided by debt service.
On September 29, 2000, Term Loan A and Term Loan B were fully funded,
the proceeds of which were used to repay the $23.7 million in Notes from
Shareholders, plus $0.6 million in accrued interest, pay closing costs of
approximately $3.3 million and partially pay down the revolving credit facility.
As of October 30, 2000, we had $35.2 million outstanding under the revolving
credit facility, $5.6 million outstanding under the equipment loan facility,
$8.0 million outstanding under Term Loan A and $37.0 million outstanding under
Term Loan B. As of October 30, 2000, we had $34.8 million available to borrow
under our revolving credit facility.
Our principal sources of future liquidity are cash flows from operating
activities and borrowings under the credit facility. We have recently
experienced longer lead times and restricted availability on critical
components, which has resulted in an increase in the level of inventory and a
decrease in inventory turns. The current supply environment may continue to
drive higher-than-normal inventory levels and effect our overall liquidity. We
believe that future cash flows from operating activities and availability under
our credit facility will provide sufficient liquidity to meet our current and
future interest payments, working capital and capital expenditure obligations.
We expect that these capital expenditures will consist of acquisition and
upgrades of equipment, acquisition and upgrades of information technology
systems and expansion of our facilities. If cash flows from operating activities
and availability under the credit facility are not sufficient to meet these
obligations, we will require additional equity or debt financing. Additional
financing may not be available on satisfactory terms when required.
13
<PAGE> 14
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB No. 101B, which delayed the implementation
date of SAB No. 101 until no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. We do not believe that SAB No. 101 will
have a material effect on our financial position or results of operation.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. As amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of Effective Date of FASB Statement No. 133", and SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB Statement No. 133," SFAS No. 133 and SFAS No. 138 are effective for all
quarters and fiscal years beginning after June 15, 2000. We will adopt SFAS No.
133 and SFAS No. 138 effective at the beginning of our fiscal year 2001. We do
not believe the adoption of SFAS No. 133 and SFAS No. 138 will have a material
effect on our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 4, "Accounting for Certain Transactions involving Stock
Compensation --- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation provides guidance on the accounting for certain stock option
transactions and subsequent amendments to stock option transactions. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. To the extent that FIN 44
covers events occurring during the period from December 15, 1998 and January 12,
2000, but before July 1, 2000, the effects of applying this Interpretation are
to be recognized on a prospective basis. The adoption of FIN 44 on July 1, 2000
did not have a material effect on our financial position or results of
operation.
RISK FACTORS
OUR CURRENT AND FUTURE INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH
AND SEVERELY LIMIT OUR ABILITY TO PLAN FOR OR RESPOND TO CHANGES IN OUR
BUSINESS.
We are highly leveraged and plan to continue to incur indebtedness from
time to time to finance acquisitions, working capital or capital expenditures or
for other purposes. This debt has contributed to our shareholders' deficit which
could have adverse consequences for our business, including:
- we may be more vulnerable to adverse general economic conditions;
- we will be required to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the availability of cash
for other purposes;
- we may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
- we could be limited by financial and other restrictive covenants in our
credit arrangements in our borrowing of additional funds; and
- we may fail to comply with the covenants under which we have borrowed
our indebtedness which could result in an event of default. If an event
of default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such amounts,
the lenders could proceed against any collateral granted to them to
secure that indebtedness.
Our ability to pay principal and interest on our indebtedness, to meet
our financial and restrictive covenants and to satisfy our other debt
obligations will depend upon our future operating performance, which will be
affected by prevailing economic conditions that are beyond our control, as well
as the availability of revolving credit borrowings under our senior credit
facility or successor facilities. If cash flows from operating activities and
availability under our senior credit facility are not sufficient to meet these
obligations, we may require additional equity or debt financing. There can be no
assurance that additional financing will be available on satisfactory terms when
required.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO SUPPORT
OUR FUTURE GROWTH.
We expect to continue to have increasing working capital and capital
expenditure requirements to expand our operations and remain competitive in the
rapidly changing electronics manufacturing services industry. Our future success
may depend on our ability to obtain additional financing to support our future
growth, if any. We may not be able to obtain additional financing when we want
or need it, and it may not
14
<PAGE> 15
be available on satisfactory terms. In addition, any additional capital may have
terms and conditions that adversely affect our business, such as financial or
operating covenants.
THE TERMS OF OUR INDEBTEDNESS AGREEMENTS SIGNIFICANTLY RESTRICT OUR OPERATIONS.
The terms of our current indebtedness agreements restrict, among other
things, our ability to incur additional indebtedness, pay dividends or make
other restricted payments, consummate asset sales, enter into transactions with
affiliates, merge, consolidate or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our assets. We are also
required to maintain specified financial ratios and satisfy financial condition
tests, which further restrict our ability to operate as we choose. Substantially
all our assets and those of our subsidiaries are pledged as security under our
senior credit facility.
A SMALL NUMBER OF MAJOR CUSTOMERS ACCOUNTS FOR MOST OF OUR NET SALES, AND THE
LOSS OF ANY OF THESE CUSTOMERS WOULD HARM US.
We depend on a relatively small number of customers for a significant
portion of our net sales. Our two largest customers in fiscal year 2000 were
Cisco Systems, which represented approximately 40.8% of our net sales, and
Extreme Networks, which represented approximately 12.1% of our net sales. In
addition, our five largest customers in fiscal 2000 accounted for approximately
73.4% of our net sales. We expect to continue to depend upon a relatively small
number of customers for a significant percentage of our net sales.
Our major customers may not continue to purchase products and services
from us at current levels or at all. In the past we have lost and in the future
we could lose customers for a variety of reasons, including the acquisition of
our customers by third parties, product discontinuation and customers' shifting
of production to internal facilities or to our competitors. We may not be able
to expand our customer base to make up any sales shortfalls if we lose one or
more of our major customers. Our attempts to diversify our customer base and
reduce our reliance on particular customers may not be successful. If we lose
one or more of our major customers and are unable to adequately expand our
customer base to make up the resulting sales shortfalls, our net sales and
profitability would likely decline.
One of our major customers has notified us of its preference to limit
the percentage of our business that its orders may constitute. If we are unable
to expand and diversify our customer base, this customer or other major
customers may reduce the amount of products and services that they currently
purchase from us which could cause our net sales and profitability to decline.
WE ANTICIPATE THAT OUR NET SALES AND OPERATING RESULTS WILL FLUCTUATE.
Our net sales and operating results have fluctuated and may continue to
fluctuate significantly from quarter to quarter. We generally receive purchase
orders from customers for products to be shipped during the ensuing 60 to 90
days. Accordingly, our net sales in any given quarter depend on obtaining and
fulfilling orders for assemblies to be manufactured and shipped in the same
quarter in which those orders are received. Further, our level of net sales in a
given quarter may depend on assemblies configured, completed, packaged and
shipped in the final weeks of such quarter. Our operating results may fluctuate
in the future as a result of many factors, including:
- variations in customer orders relative to our manufacturing capacity;
- variations in the timing of shipment of products to customers;
- introduction and market acceptance of our customers' new products;
- changes in competitive and economic conditions generally or in our
customers' markets;
- effectiveness of our manufacturing processes, including controlling
costs;
- changes in cost and availability of components or skilled labor;
- the timing and price we pay for acquisitions and related acquisition
costs; and
- start-up costs associated with the launching of new customer programs
or operations.
We base our operating expenses on anticipated revenue levels and a high
percentage of our operating expenses are relatively fixed in the short term. As
a result, any unanticipated shortfall in revenue in a quarter would likely
adversely affect our operating results for that quarter. Also, changes in our
product assembly mix may cause our margins to fluctuate, which could negatively
impact our results of operations for that period. Our results in any period
should not be considered indicative of the results to be expected in any future
period.
OUR AGREEMENTS WITH OUR CUSTOMERS ARE GENERALLY SHORT-TERM PURCHASE ORDERS, AND
CANCELLATIONS, REDUCTIONS OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT
OUR NET SALES AND PROFITABILITY.
15
<PAGE> 16
We generally obtain only short-term purchase orders or commitments from
our customers, rather than long-term contracts. We work closely with our
customers to develop forecasts for future orders, but these forecasts are not
binding. Customers may cancel their orders, change production quantities from
forecast volumes or delay production for a number of reasons which are beyond
our control, including their internal operating and liquidity concerns. Any
significant delay, cancellation or reduction of orders from our customers could
cause our net sales and profitability to decline significantly. Moreover, the
cancellation of purchase orders by customers or inaccurate customer forecasts
could result in excess and obsolete inventory. We seek to hold our customers
responsible for actions on their part that result in excess and obsolete
inventory. If we are unable to get our customers to pay for excess and obsolete
inventory, or if we are otherwise unable to dispose of, make use of, or return
this inventory, there could be an adverse effect on our business, financial
condition and results of operations.
ADVERSE CHANGES IN THE INDUSTRIES WE SERVE, INCLUDING REDUCED DEMAND FOR OUR
SERVICES, WOULD LIKELY CAUSE OUR NET SALES AND PROFITABILITY TO DECLINE.
Our business depends on the data communications, telecommunications and
computer/memory module industries, which are characterized by intense
competition, relatively short product life-cycles and significant fluctuations
in product demand. In addition, these industries are generally subject to rapid
technological change and product obsolescence. If any of these factors or other
factors reduce demand for our manufacturing services, our net sales and
profitability would likely be negatively affected. Furthermore, these industries
are subject to economic cycles and have in the past experienced, and are likely
in the future to experience, recessionary periods. A recession or any other
event leading to excess capacity or a downturn in the markets we serve would
likely cause our net sales and profitability to decline.
SHORTAGES OR PRICE FLUCTUATIONS IN COMPONENT PARTS SPECIFIED BY OUR CUSTOMERS
COULD DELAY PRODUCT SHIPMENTS AND REDUCE OUR PROFITABILITY.
Many of the products we manufacture include components that are only
available from a single supplier. Supply shortages for a particular component
can delay production of all products using that component or cause cost
increases in the services we provide. In the past, we have experienced, and we
are currently experiencing, industry-wide shortages in some of the materials we
use, such as capacitors, memory components, logic devices and enclosures. As a
result, our suppliers have been forced to allocate available quantities among
their customers and we have not been able to obtain all of the materials desired
in a timely fashion. Our inability to obtain these needed materials has in some
instances slowed production or assembly, and therefore delayed shipments to our
customers, increased inventory levels, increased costs and reduced
profitability. We may also bear the risk of periodic component price increases
which could increase our costs and reduce our profitability.
WE HAVE A RECENT HISTORY OF NET LOSSES AND MAY EXPERIENCE FURTHER LOSSES IN THE
FUTURE.
We have consistently experienced net losses since the second quarter of
fiscal 1998. We reported a net loss to common stockholders for fiscal year 2000
of $27.7 million, for fiscal year 1999 of $17.5 million and for fiscal year 1998
of $3.5 million. Due to our significant leverage and other factors, we may
experience further net losses in the future. We cannot predict whether, when or
to what extent we will become consistently profitable.
In addition, if we fail to manage our inventory effectively, we may be
subject to fluctuations in materials costs, scrap and excess and obsolete
inventory, which could increase our overall costs and reduce profitability. We
are required to forecast our future inventory needs based upon the anticipated
demand of our customers. If we are unable to accurately forecast this demand, we
may experience a shortage or an excess of materials. A shortage of materials
could lengthen production schedules and increase costs, while an excess of
materials may increase the costs of maintaining inventory, adversely impact our
liquidity, and increase the risk of inventory obsolescence.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
The electronics manufacturing services industry is highly competitive
and characterized by low profit margins. We compete against numerous electronics
manufacturing service providers with global operations. In addition, current and
prospective customers could evaluate the merits of manufacturing products
internally. Consolidation in the electronics manufacturing services industry
results in a continually changing competitive landscape. The consolidation trend
in the industry also results in larger and more geographically diverse
competitors who have significant combined resources with which to compete
against us. Many of our competitors are less financially leveraged than we are
and have substantially greater managerial, manufacturing, engineering,
technical, financial, systems, sales and marketing resources than we do. These
competitors may:
16
<PAGE> 17
- have greater name recognition and geographic and market presence;
- be better able to take advantage of acquisition opportunities;
- adapt more quickly to changes in customer requirements;
- devote greater resources to the development, promotion and sale of
their services; and
- have broader service offerings.
We also may be operating at a cost disadvantage as compared to
competitors who have greater direct buying power or who have lower cost
structures. Increased competition from existing or potential competitors could
result in price reductions, reduced profitability or loss of market share.
IF WE ARE UNABLE TO RESPOND TO RAPIDLY CHANGING TECHNOLOGIES AND PROCESS
DEVELOPMENTS, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets for our products and services are characterized by rapidly
changing technologies and continuing process developments. Our success will
depend in large part upon our ability to maintain and enhance our technological
capabilities, to develop and market products and services that meet changing
customer needs and to successfully anticipate or respond to technological
changes on a cost-effective and timely basis. Our core technologies may
encounter competition from new or revised technologies that render existing
technology less competitive or obsolete or that reduce the demand for our
services. We may be unable to respond effectively to the technological
requirements of the changing market. If we determine that new technologies and
equipment are required to remain competitive, the development, acquisition and
implementation of these technologies may require us to make significant capital
investments. We may not be able to obtain capital for these purposes in the
future, and our investments in new technologies may not result in commercially
viable technological processes. If we are unable to successfully respond to
these changing technologies and process developments, our net sales and
profitability could be adversely affected.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, OUR BUSINESS MAY SUFFER.
Our future success largely depends on the skills and efforts of our
executive management and our engineering, program management, procurement,
manufacturing and sales employees. Our continued growth will also require us to
attract, motivate, train and retain additional skilled and experienced
personnel. We face intense competition for such personnel. We may not be able to
attract, motivate and retain personnel with the skills and experience needed to
successfully manage our business and operations.
OUR FOREIGN OPERATIONS EXPOSE US TO POLITICAL, ECONOMIC AND LOGISTICAL
UNCERTAINTIES.
We currently have foreign operations in Malaysia, Mexico and Belgium.
We may in the future expand into other international regions. We also purchase a
significant number of components manufactured in foreign countries. Because of
the scope of our international operations, we are subject to the following
uncertainties:
- economic or political instability;
- transportation delays and interruptions;
- foreign currency exchange rate fluctuations;
- increased employee turnover and labor unrest;
- longer payment cycles;
- greater difficulty in collecting accounts receivable;
- difficulties in staffing and managing foreign personnel and diverse
cultures; and
- less developed infrastructures.
In addition, changes in policies by the United States or foreign
governments could negatively affect our operating results due to increased
duties, increased regulatory requirements, higher taxation, currency conversion
limitations, restrictions on the transfer of funds, the imposition of or
increase in tariffs and limitations on imports or exports. Also, we could be
negatively affected if our host countries revise their policies away from
encouraging foreign investment or foreign trade, including tax holidays.
IF WE ARE UNABLE TO MANAGE OUR EXPANSION, OUR BUSINESS COULD BE DISRUPTED AND
OUR NET SALES AND PROFITABILITY COULD DECREASE.
Since 1996, we have completed one acquisition and commenced operations
at three new facilities. Our growth has placed and will continue to place a
significant strain on our management, financial resources and information,
operations and financial systems.
17
<PAGE> 18
As part of our business strategy, we expect to continue to expand our
operations through the opening of new facilities, expanding existing facilities
and by selectively making acquisitions. Competition for attractive manufacturing
operations in our industry is substantial. Expanding our operations involves
numerous risks, including:
- difficulty in integrating operations, technologies, systems, and
products and services of acquired companies;
- diversion of management's attention;
- disruption of operations; and
- failure to effectively enter markets in which we have limited or no
prior experience and where competitors in such markets have stronger
market positions; and
Acquisitions may have an adverse financial impact on our business as a
result of various factors, including:
- the potential liabilities of the acquired businesses;
- increases in expenses and working capital requirements;
- the dilutive effect of the issuance of additional equity securities;
- the financial impact of transaction expenses; and
- the amortization of goodwill and other intangible assets involved in
any transactions that are accounted for using the purchase method of
accounting, and possible adverse tax and accounting effects.
We may not be able to identify suitable acquisition candidates or
finance and complete transactions that we select.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE.
We believe that the protection of our intellectual property rights is,
and will continue to be, important to the success of our business. We rely on a
combination of patent, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. Despite these
protections, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. We cannot be certain that patents we have or
that may be issued as a result of our pending patent applications will protect
or benefit us or give us adequate protection from competing technologies. We
also cannot be certain that others will not develop our unpatented proprietary
technology or effective competing technologies on their own. We believe that our
proprietary technology does not infringe on the proprietary rights of others.
However, if others assert valid infringement claims against us with respect to
our past, current or future designs or processes, we could be required to enter
into cross-licensing agreements or expensive royalty arrangements, indemnify
third parties, develop non-infringing technologies or engage in costly
litigation.
WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL AND WORKPLACE HEALTH AND SAFETY
LAWS, WHICH EXPOSE US TO POTENTIAL FINANCIAL LIABILITY.
Our operations are regulated under a number of federal, state,
provincial, local and foreign environmental and workplace health and safety laws
and regulations, which govern, among other things, the discharge of hazardous
materials into the air, ground and water as well as the handling, storage and
disposal of these materials. Compliance with these laws is an important
consideration for us because we do use hazardous materials in our manufacturing
processes. We may be liable under environmental laws for the cost of cleaning up
properties we own or operate if they are or become contaminated by the release
of hazardous materials, regardless of whether we caused the release. Even if we
fully comply with applicable environmental laws, we, along with any other person
who arranges for the disposal of our wastes, may be liable for costs associated
with an investigation and remediation of sites at which we have arranged for the
disposal of hazardous wastes if the sites become contaminated. In addition, we
may be liable in the event employees and/or visitors are exposed to hazardous
materials in excess of legally permissible exposure limits. In the event of a
contamination or a violation of environmental and workplace health and safety
laws, we could be held liable for damages, including fines, penalties and the
costs of remedial actions, and could also be subject to revocation of our
discharge permits. Any revocations could require us to cease or limit production
at one or more of our facilities, thereby negatively affecting our operations.
Environmental and workplace health and safety laws could also become more
stringent over time, imposing greater compliance costs and increasing risks and
penalties associated with any violation.
18
<PAGE> 19
CONCENTRATION OF OWNERSHIP
As a result of our fiscal year 1998 Recapitalization, Cornerstone and
certain other investors beneficially owned in the aggregate approximately 90.0%
of the outstanding capital stock (other than the Redeemable Preferred Stock) of
us. As a result, although no single investor has more than 49.0% of the voting
power of our 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 us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of August 31, 2000, we had $217.2 million of total debt outstanding,
of which $71.0 million is floating interest rate borrowings and is subject to
periodic adjustments. As interest rates fluctuate we may experience interest
expense increases that may materially impact financial results. For example, if
interest rates were to increase or decrease by 1% the result would be an annual
increase or decrease of $710,000 to interest expense.
We use the U.S. dollar as our functional currency, except for our
operations in Belgium, Malaysia and Mexico. Direct labor, manufacturing
overhead, and selling, general and administrative costs of the international
operations are denominated in the local currencies. We have evaluated the
potential costs and benefits of hedging potential adverse changes in the
exchange rates between U.S. dollar, Belgian Franc, Malaysian Ringgit and Mexican
Peso. Currently, we do not enter into derivative financial instruments because a
substantial portion of our sales in these foreign operations are in U.S dollar.
The assets and liabilities of the Belgium, Malaysian and Mexican operations are
translated into U.S. dollars at an exchange rates in effect at the period end
date. Income and expense items are translated at the year-to-date average rate.
Aggregate transaction losses included in net loss for the fiscal year ended
August 31, 2000 were $0.4 million.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report 21
Consolidated Balance Sheets as of August 31, 2000 and September 2, 1999 22
Consolidated Statements of Operations for the Fiscal Years Ended
August 31, 2000, September 2, 1999 and September 3, 1998 23
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive
Loss for the Fiscal Years Ended August 31, 2000, September 2, 1999 and
September 3, 1998 24
Consolidated Statements of Cash Flows for the Fiscal Years Ended
August 31, 2000, September 2, 1999 and September 3, 1998 27
Notes to Consolidated Financial Statements 28
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Fiscal Years August
31, 2000, September 2, 1999 and September 3, 1998 40
</TABLE>
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
MCMS, Inc.
We have audited the accompanying consolidated balance sheets of MCMS, Inc.
and subsidiaries as of August 31, 2000 and September 2, 1999, and the related
consolidated statements of operations, shareholders' equity (deficit) and
comprehensive loss and cash flows for each of the years in the three-year period
ended August 31, 2000. In connection with our audits of the consolidated
financial statements, we also audited the financial statement schedule as listed
in the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial position of MCMS, Inc.
and subsidiaries as of August 31, 2000 and September 2, 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended Augsut 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
October 20, 2000
21
<PAGE> 22
MCMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF
------------------------
AUGUST 31, SEPTEMBER 2,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Trade accounts receivable, net of allowances for doubtful
accounts of $215 and $258, respectively $ 62,114 $ 49,469
Inventories 89,537 43,975
Other current assets 1,947 970
--------- ---------
Total current assets 153,598 94,414
Property, plant and equipment, net 57,657 64,618
Other assets 6,247 7,510
--------- ---------
Total assets $ 217,502 $ 166,542
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 107,543 $ 57,355
Interest payable 9,419 334
Advance payment from customer 5,000 --
Current portion of long-term debt 1,551 322
--------- ---------
Total current liabilities 123,513 58,011
Long-term debt, net of current portion 192,299 206,957
Long-term debt -- shareholders 23,326 --
Other liabilities 3,183 2,804
--------- ---------
Total liabilities 342,321 267,772
Redeemable preferred stock, no par value, 750,000 shares
authorized; 340,619 and 301,179 shares issued and
outstanding, respectively; mandatory redemption value of
$34.1 and $30.1 million, respectively 33,295 29,267
--------- ---------
SHAREHOLDERS' DEFICIT
Series A convertible preferred stock, par value $0.001 per share, 6,000,000
shares authorized; 3,261,177 shares
issued; aggregate liquidation preference of $36,949,135 3 3
Series B convertible preferred stock, par value $0.001 per
share, 6,000,000 shares authorized; 863,823 shares issued;
aggregate liquidation preference of $9,787,115 1 1
Series C convertible preferred stock, par value $0.001 per
share, 1,000,000 shares authorized; 874,999 shares issued
and outstanding; aggregate liquidation preference of
$9,913,739 1 1
Class A common stock, par value $0.001 per share, 30,000,000
shares authorized; 3,322,990 and 3,296,490 shares issued,
respectively 3 3
Class B common stock, par value $0.001 per share, 12,000,000
shares authorized; 863,823 shares issued and
outstanding 1 1
Class C common stock, par value $0.001 per share, 2,000,000
shares authorized; 874,999 shares issued and
outstanding 1 1
Additional paid-in capital 56,211 59,806
Accumulated other comprehensive loss (2,577) (2,207)
Deficit (211,706) (188,056)
Less treasury stock at cost:
Series A convertible preferred stock, 3,676 shares (42) (42)
Class A common stock, 4,551 and 3,676 shares,
Respectively (10) (8)
--------- ---------
Total shareholders' deficit (158,114) (130,497)
--------- ---------
Commitments and contingencies (Note 14)
Subsequent Event (Note 18)
Total liabilities and shareholders' deficit $ 217,502 $ 166,542
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
MCMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 472,448 $ 432,715 $ 333,920
Cost of goods sold 449,957 407,354 303,251
----------- ----------- -----------
Gross profit 22,491 25,361 30,669
Selling, general and administrative expenses 23,940 22,491 15,798
----------- ----------- -----------
Income (loss) from operations (1,449) 2,870 14,871
Other expense:
Interest, net 22,038 19,652 9,212
Transaction expenses -- 45 8,398
----------- ----------- -----------
Loss before taxes and extraordinary item (23,487) (16,827) (2,739)
Income tax provision (benefit) 163 (3,497) (930)
----------- ----------- -----------
Loss before extraordinary item (23,650) (13,330) (1,809)
----------- ----------- -----------
Extraordinary item -- loss on early extinguishment of
debt, net of income tax benefit of $403 -- (617) --
----------- ----------- -----------
Net loss (23,650) (13,947) (1,809)
Redeemable preferred stock dividends and accretion of
preferred stock discount (4,029) (3,592) (1,650)
----------- ----------- -----------
Net loss to common stockholders $ (27,679) $ (17,539) $ (3,459)
=========== =========== ===========
Net loss per common share -- basic and diluted:
Loss before extraordinary item $ (5.49) $ (3.38) $ (1.36)
Extraordinary item -- (.12) --
----------- ----------- -----------
Net loss per common share $ (5.49) $ (3.50) $ (1.36)
=========== =========== ===========
Weighted average common shares outstanding -- basic
and diluted: 5,041,001 5,008,598 2,534,183
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS - CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
($0.001 PAR) ($0.001 PAR) ($0.001 PAR)
----------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of August 28, 1997 -- $ -- -- $ -- -- $ --
Comprehensive Income:
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
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 -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance as of September 3, 1998 3,261,177 3 863,823 1 874,999 1
Comprehensive Income:
Net loss -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Issuance of Class A common stock -- -- -- -- -- --
Treasury stock purchases -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Accretion of preferred stock discount -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance as of September 2, 1999 3,261,177 3 863,823 1 874,999 1
Comprehensive Income:
Net loss -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Issuance of Class A common stock -- -- -- -- -- --
Treasury stock purchases -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Accretion of preferred stock discount -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance as of August 31, 2000 3,261,177 $ 3 863,823 $ 1 874,999 $ 1
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS - CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
($0.001 PAR) ($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 August 28, 1997 1,000 $ -- -- $ -- -- $ -- -- $ --
Comprehensive Income:
Net loss -- -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
Capital contribution -- -- -- -- -- -- -- --
Redemption of common stock and
Recapitalization (1,000) -- 500,000 1 -- -- -- --
Issuance of Series A and B and C
Preferred stock -- -- -- -- -- -- -- --
Issuance of Class A and B and C
Common stock -- -- 2,761,177 2 863,823 1 874,999 1
Preferred stock dividends -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of September 3, 1998 -- -- 3,261,177 3 863,823 1 874,999 1
Comprehensive Income:
Net loss -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
Issuance of Class A common
Stock -- -- 35,313 -- -- -- -- --
Treasury stock purchases -- -- -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- -- -- --
Accretion of preferred stock
Discount -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of September 2, 1999 -- -- 3,296,490 3 863,823 1 874,999 1
Comprehensive Income:
Net loss -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
Issuance of Class A common
Stock -- -- 26,500 -- -- -- -- --
Treasury stock purchases -- -- -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- -- -- --
Accretion of preferred stock
Discount -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of August 31, 2000 -- $ -- 3,322,990 $ 3 863,823 $ 1 874,999 $ 1
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
MCMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS - CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
(BALANCE ADDITIONAL OTHER RETAINED SHAREHOLDERS'
FORWARD) PAID-IN COMPREHENSIVE EARNINGS TREASURY EQUITY
AMOUNT CAPITAL LOSS (DEFICIT) SHARES (DEFICIT)
--------- ---------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of August 28, 1997 $ -- $ 35,813 $ (630) $ 43,008 $ -- $ 78,191
Comprehensive Income:
Net loss -- -- -- (1,809) -- (1,809)
Foreign currency translation
adjustment -- -- (1,640) -- -- (1,640)
---------
Comprehensive loss -- (3,449)
Capital contribution 1,786 -- -- -- 1,786
Redemption of common stock and
recapitalization 2 (33,841) -- (215,308) -- (249,147)
Issuance of Series A and B and C
preferred stock 4 50,996 -- -- -- 51,000
Issuance of Class A and B and C
common stock 4 10,196 -- -- -- 10,200
Preferred stock dividends -- (1,632) -- -- -- (1,632)
--------- --------- --------- --------- --------- ---------
Balance as of September 3, 1998 10 63,318 (2,270) (174,109) -- (113,051)
Comprehensive Income:
Net loss -- -- -- (13,947) -- (13,947)
Foreign currency translation
adjustment -- -- 63 -- -- 63
---------
Comprehensive loss -- (13,884)
Issuance of Class A common
stock -- 80 -- -- -- 80
Treasury stock purchases -- -- -- -- (50) (50)
Preferred stock dividends -- (3,509) -- -- -- (3,509)
Accretion of preferred stock
discount -- (83) -- -- -- (83)
--------- --------- --------- --------- --------- ---------
Balance as of September 2, 1999 10 59,806 (2,207) (188,056) (50) (130,497)
Comprehensive Income:
Net loss -- -- -- (23,650) -- (23,650)
Foreign currency translation
adjustment -- -- (370) -- -- (370)
---------
Comprehensive loss -- (24,020)
Issuance of Class A common
stock -- 60 -- -- -- 60
Issuance of stock purchase
warrants -- 374 -- -- -- 374
Treasury stock purchases -- -- -- -- (2) (2)
Preferred stock dividends -- (3,946) -- -- -- (3,946)
Accretion of preferred stock
discount -- (83) -- -- -- (83)
--------- --------- --------- --------- --------- ---------
Balance as of August 31, 2000 $ 10 $ 56,211 $ (2,577) $(211,706) $ (52) $(158,114)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
MCMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................... $ (23,650) $ (13,947) $ (1,809)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization .......................... 17,925 16,016 12,918
Loss (gain) on sale of property, plant and equipment ... (35) 11 (90)
Write-off of deferred loan costs ....................... -- 617 206
Changes in operating assets and liabilities:
Receivables, net ..................................... (13,146) (13,481) 419
Inventories .......................................... (45,647) (14,168) (12,301)
Accounts payable and accrued expenses ................ 49,087 12,841 5,372
Advance payment from customer ........................ 5,000 -- --
Interest payable ..................................... 9,086 137 --
Deferred income taxes ................................ 1,993 (315) (2,577)
Other ................................................ (1,435) 1,285 (775)
--------- --------- ---------
Net cash provided by (used for) operating activities ... (822) (11,004) 1,363
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment ......... (7,973) (17,111) (20,111)
Proceeds from sales of property, plant and equipment ... 73 26 359
--------- --------- ---------
Net cash used by investing activities .................. (7,900) (17,085) (19,752)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions .................................. 60 80 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 ............................... -- 31,915 186,500
Proceeds from shareholder loans ........................ 23,700 -- --
Repayments of debt ..................................... (15,027) (10,169) (3,964)
Payment of deferred debt issuance costs ................ (100) (1,272) (7,867)
Purchase of treasury shares ............................ (2) (50) --
Other .................................................. (1) (2) --
--------- --------- ---------
Net cash provided by financing activities .............. 8,630 20,502 12,508
--------- --------- ---------
Effect of exchange rate changes on cash and cash
Equivalents .......................................... 92 45 (213)
--------- --------- ---------
Net decrease in cash and cash equivalents .............. -- (7,542) (6,094)
Cash and cash equivalents at beginning of period ....... -- 7,542 13,636
--------- --------- ---------
Cash and cash equivalents at end of period ............. $ -- $ -- $ 7,542
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ...................................... $ 41 $ -- $ 792
Interest paid, net of amounts capitalized .............. 12,042 18,717 9,023
Noncash investing and financing activities:
Preferred stock dividend paid in-kind .................. 3,945 3,508 1,633
Discount on debt and increase in paid in capital for the
estimated fair market value of common stock purchase
warrants issued with shareholder loans ............... 374 -- --
Foreign currency translation adjustment ................ 370 (63) 1,640
Contracts payable and/or notes payable incurred for
insurance contracts and capitalized software ......... 1,597 376 1,659
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
MCMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: MCMS, Inc., (the "Company"), is a global provider of
advanced electronics manufacturing services to original equipment manufacturers
primarily in the data communications, telecommunications, and computer/memory
module industry. The Company targets customers that are technology leaders in
rapidly growing markets, such as Internet infrastructure, wireless
communications and optical networking, that have complex manufacturing services
requirements and that desire to form long-term partnerships with their
electronics manufacturing services provider. The Company offers a broad range of
manufacturing management services, including:
- pre-production engineering and product design support,
- prototyping;
- supply chain management;
- manufacturing and testing of printed circuit board assemblies;
- full system assembly;
- end-order fulfillment; and
- after sales product support.
The Company delivers this broad range of electronics manufacturing
services through six strategically located facilities in the United States,
Mexico, Asia and Europe.
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 held 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 inter-company 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.
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
under the Company's 90-day manufacturer's warranty is recorded in the period in
which the sales are recognized.
LOSS PER SHARE: Basic loss per share is computed using the
weighted-average number of common shares outstanding. Diluted loss per share is
computed using the weighted average number of common and common stock equivalent
shares outstanding. Common stock equivalent shares result from the assumed
exercise of outstanding stock options and affect loss per share when they have a
dilutive effect. The effect of potentially dilutive common stock equivalent was
antidilutive in fiscal 2000, 1999 and 1998.
STOCK OPTIONS: 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."
CASH EQUIVALENTS: The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
28
<PAGE> 29
FINANCIAL INSTRUMENTS: The Company invests it excess cash in
overnight repurchase agreements consisting of treasuries and government agency
securities.
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. Because a significant portion of our business is
conducted with a small number of customers, a concentration of credit risk
exists with respect to trade receivables. 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,
accounts payable, accrued expenses and debt are considered by the Company to be
reasonable approximations of their fair values, based on their short term nature
and floating interest rates, where applicable.
INVENTORIES: Inventories are stated at the lower of cost or market.
Cost is computed using standard cost, which approximates actual cost on a
first-in, first-out basis.
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.
ACCOUNTING FOR LONG-LIVED ASSETS: The Company reviews property and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
property and equipment is measured by comparison of its carrying amount to
future net cash flows the property and equipment are expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the property and
equipment exceeds its fair market value. To date, the Company has made no
adjustments to the carrying value of its long-lived assets.
DEBT ISSUANCE COSTS: Costs incurred in connection with the issuance
of new debt instruments are deferred and included in other assets. Such costs
are amortized over the term of the related debt obligation.
COMPREHENSIVE LOSS: Comprehensive loss is included in the
consolidated statements of shareholders' equity (deficit). Comprehensive loss,
in general, includes all changes in stockholders' deficit, with the exception of
stock transaction activity. Comprehensive loss for the Company includes net loss
and other comprehensive income (loss). Other comprehensive income (loss) for the
Company consists only of foreign currency translation adjustments.
INCOME TAXES: The Company uses the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. When necessary, a
valuation allowance is recorded to reduce tax assets to an amount whose
realization is more likely than not.
FOREIGN CURRENCY TRANSLATION: The functional currency of the
Company's international subsidiaries are the Belgian Franc, Malaysian Ringgit
and Mexican Peso. 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 other comprehensive income
(loss) and, accordingly, have no effect on net loss. 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
consolidated net income. For the fiscal years ended August 31, 2000, September
2, 1999 and September 3, 1998, the Company incurred net transaction gains
(losses) of ($365,000), ($529,000) and $151,000, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS: In December 1999, the
Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB No. 101B,
which delayed the implementation date of SAB No. 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company does not believe that SAB No. 101 will have a material effect on its
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial
29
<PAGE> 30
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. As amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133" and SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133." SFAS No. 133 and No. 138 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 and SFAS No. 138 effective at the beginning of our fiscal
year end 2001. The Company does not believe the adoption of SFAS No. 133 and
SFAS No. 138 will have a material effect on its financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation provides guidance on the accounting for certain stock option
transactions and subsequent amendments to stock option transactions. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. To the extent that FIN 44
covers events occurring during the period from December 15, 1998 and January 12,
2000, but before July 1, 2000, the effects of applying this Interpretation are
to be recognized on a prospective basis. The adoption of FIN 44 on July 1, 2000
did not have a material effect on the Company's financial position or results of
operations.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials......................................... $ 59,585 $ 27,720
Work in progress...................................... 28,596 14,901
Finished goods........................................ 1,356 1,354
----------- -----------
$ 89,537 $ 43,975
=========== ===========
</TABLE>
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
------------ ------------
<S> <C> <C>
Land.................................................. $ 1,206 $ 1,295
Buildings............................................. 30,962 29,989
Equipment and software................................ 80,689 74,817
Construction in progress.............................. 3,140 2,010
------------ -----------
115,997 108,111
Less accumulated depreciation......................... (58,340) (43,493)
------------ -----------
$ 57,657 $ 64,618
============ ===========
</TABLE>
NOTE 4. OTHER ASSETS
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
----------- -----------
<S> <C> <C>
Deferred financing costs.............................. $ 6,069 $ 6,922
Deferred income taxes................................. -- 343
Deferred patent costs................................. 178 139
Other................................................. -- 106
----------- -----------
$ 6,247 $ 7,510
=========== ===========
</TABLE>
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
----------- -----------
<S> <C> <C>
Trade accounts payable................................ $ 99,624 $ 51,562
Salaries, wages, and benefits......................... 4,321 4,579
Accrued and other..................................... 3,598 1,214
------------ -----------
$ 107,543 $ 57,355
============ ===========
</TABLE>
30
<PAGE> 31
NOTE 6. DEBT
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
--------- ---------
<S> <C> <C>
Revolving credit facility, principal payments at the Company's option to
February 26, 2004, interest due monthly, 8.87% and 7.80% weighted
average rate at August 31, 2000 and September 2, 1999, respectively ..... $ 12,445 $ 28,893
Equipment loan facility, principal payments, as defined,
through February 26, 2004, interest due monthly, 9.75% and 8.50%
weighted average interest at August 31, 2000 and
September 2, 1999, respectively ........................................ 5,230 3,022
Senior subordinated notes (the "Fixed Rate Notes"),
unsecured, interest at 9.75% due semiannually, matures on
March 1, 2008 .......................................................... 145,000 145,000
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% (10.95%
and 10.52% at August 31, 2000 and September 2, 1999, respectively) .... 30,000 30,000
Other notes payable, due in varying installments through
November 1, 2001, interest rates ranging from 3.51% to 11.11% ......... 1,175 364
--------- ---------
Total debt ............................................................... 193,850 207,279
Less current portion ..................................................... (1,551) (322)
--------- ---------
Long-term debt, net of current portion ................................... $ 192,299 $ 206,957
========= =========
Maturities of debt as of August 31, 2000 are as follows:
FISCAL YEAR
2001 ..................................................................... $ 1,551
2002 ..................................................................... 1,477
2003 ..................................................................... 1,126
2004 ..................................................................... 14,696
2005 and thereafter ...................................................... 175,000
---------
$ 193,850
=========
</TABLE>
As of August 31, 2000, the Company had a $60 million Credit Facility
(the "Credit Facility"), which was scheduled for maturity on February 26, 2004.
As of August 31, 2000, the Company's Credit Facility included a $10 million
equipment loan facility restricted to the purchase of qualifying equipment and a
$50 million revolving credit facility. Amounts outstanding under the equipment
loan facility bear interest at rates as defined in the agreement. Amounts
available to borrow under the equipment loan facility were limited to the first
three loan years commencing in February 1998. Amounts available to borrow under
the revolving credit facility vary depending on domestic accounts receivable,
inventory and equipment balances, which serve as collateral along with
substantially all of the other assets of the Company. The Credit Facility
restricts the Company's ability to incur additional indebtedness, create liens
or other encumbrances, to make certain investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets or to enter
into any merger or consolidation. During fiscal year 2000, the Credit Facility
was amended to allow for loans from certain of the Company's shareholders (see
Note 7). The Credit Facility also contains a covenant requiring that the Company
maintain a fixed charge ratio of not less than 1.0 to 1.0, provided, however,
that this fixed charge ratio covenant will not be applied to any fiscal quarter
during the term as long as the gross borrowing availability exceeded $10
million. As of August 31, 2000, the Company had a $12.4 million outstanding
balance under the revolving credit facility and approximately $65.0 million of
gross availability, of which $37.6 million was available to borrow without
triggering the fixed charge ratio covenant. As of August 31, 2000, had the
Company consumed its adjusted availability and been required to test the fixed
charge ratio covenant, the test would not have been satisfied. Any default under
the Credit Facility could have also resulted in default of the Fixed Rate Notes,
Floating Rate Notes and Redeemable Preferred Stock. Subsequent to August 31,
2000, the Company amended and restated the Credit Facility (See Note 18 --
Subsequent Event).
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. 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 principal amount thereof if certain
restrictions regarding principal amount and additional fixed rate notes are met.
The redemption rate, if redeemed during the twelve-month period commencing on
March 1, 2003, decreases from 104.875% in 2003 to 100.000% in 2006 and
thereafter (expressed as percentages of the principal amount thereof).
31
<PAGE> 32
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, 1998, 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.
In fiscal 1998, the Company incurred an extraordinary loss of
$617,000, net of tax, resulting from the write-off of deferred financing costs
related to the early retirement of outstanding debt.
Interest expense is net of interest income of $67,000, $185,000 and
$549,000 in the fiscal years ended August 31, 2000, September 2, 1999 and
September 3, 1998, respectively. Construction period interest of $0, $88,000 and
$34,000 was capitalized in fiscal years ended August 31, 2000, September 2, 1999
and September 3, 1998, respectively.
NOTE 7. LONG-TERM DEBT -- SHAREHOLDERS
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
-------- ---------
<S> <C> <C>
Notes from Shareholders, principal and unpaid
interest due on February 27, 2004, interest at
LIBOR plus 3.25% (9.91% at August 31, 2000)...... $ 23,700 $ --
Less debt discount, net of amortization ........... (374) --
-------- ---------
Long-term debt -- shareholders .................... $ 23,326 $ --
======== =========
</TABLE>
On August 30, 2000 and February 29, 2000, the Company received loans
from certain of its shareholders totaling $15.0 million and $8.7 million,
respectively. Each loan is evidenced by separate note agreements with the
participating shareholders (the "Notes from Shareholders"). Subsequent to August
31, 2000, the Company repaid all Notes from Shareholders, plus $0.6 million in
accrued interest, from the proceeds received from term loans provided for in an
amended and restated credit facility (See Note 18 -- Subsequent Event). Interest
on the Notes from Shareholders accrued at 90 day LIBOR + 3.25% (9.91% at August
31, 2000). Interest was payable monthly if a fiscal month's fixed charge ratio,
as defined, exceeded 1.1 to 1.0, so long as no event of default had occurred
under the Credit Facility or would occur as a result of an interest payment
under these loans. Otherwise, interest was payable upon maturity of the notes in
February 2004.
In connection with the $15 million Notes from Shareholders dated
August 30, 2000, the Company issued to the participating shareholders warrants
for the purchase of 500,000 shares of the Company's common stock. The warrants
issued on August 30, 2000 were issued for the purchase of 90,636 shares of the
Company's Class A common stock and 409,364 shares of the Company's Class B
common stock each at a price of $.001 per share. These warrants are immediately
exercisable and expire on August 30, 2005. In accordance with Accounting
Principle Board Opinion No. 14 "Accounting for Convertible Debt and Debt issued
with Stock Purchase Warrants", the Company allocated $374,000 of the $15 million
proceeds from the Notes from Shareholders to the value of the warrants. The
$374,000 is treated as a debt discount and an increase in Additional Paid-in
Capital and will be amortized to interest over the term of the Notes from
Shareholders. (See Note 18 -- Subsequent Event).
NOTE 8. REDEEMABLE PREFERRED STOCK
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 Redeemable Preferred Stock at a 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 Redeemable Preferred Stock is also 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, 2003 decreases
from 106.25% in 2003 to 100.00% in 2006 and thereafter (expressed in percentages
of the liquidation preference).
The Redeemable 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 is recorded at its liquidation
preference discounted for issuance costs of $1,000,000. The preferred stock
discount is being accreted by charging additional paid-in capital over the
twelve-year term of the Redeemable Preferred Stock.
32
<PAGE> 33
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. To date, the Company has paid all dividends in kind.
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 may
be paid either in cash or by the issuance of additional shares of Redeemable
Preferred Stock with a liquidation preference equal to the amount of such
dividends through March 1, 2003, thereafter, dividends will be payable in cash.
All dividends are cumulative, whether or not earned or declared, on a daily
basis from February 26, 1998 and compound on a quarterly basis. Dividends on the
Redeemable Preferred Stock are accrued monthly to the liquidation preference
amount by charges to additional paid-in capital for dividends expected to 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.
NOTE 9. 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 on
the liquidation value per share plus all declared and unpaid dividends. Such
dividends shall not be cumulative. 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.
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. As of
August 31, 2000, the aggregate liquidation preference of the Convertible
Preferred Stock is approximately $34.1 million.
NOTE 10. TRANSACTION EXPENSES
Transaction expenses incurred in fiscal year 1998 associated with
the Recapitalization Agreement consisted of the following:
<TABLE>
<S> <C>
Transaction agreement fee (note 13)................................... $ 2,710
Bank fees............................................................. 2,150
Termination agreements................................................ 1,400
MEI/MTI stock option buyback.......................................... 698
Other................................................................. 1,440
---------
$ 8,398
=========
</TABLE>
NOTE 11. STOCK PURCHASE AND INCENTIVE PLANS
In order to provide financial incentives for certain of the
Company's employees, the Company's board of directors adopted the 1998 Stock
Option Plan (the "Option Plan") pursuant to which it may grant options to
purchase Class A Common stock to senior executives and other employees of the
Company. As of August 31, 2000, the Plan provides for option grants representing
2,500,000 shares of Class A common stock. Subsequent to August 31, 2000, the
Company's Board of Directors approved a resolution to increase the option grants
provided for under the Plan to 3,000,000 shares of Class A common stock. Under
the Plan for certain executive officers, 50% of the options vest over four years
from the date of grant and the other 50% vest if certain financial performance
targets are met or at the end of seven years if such targets are not
33
<PAGE> 34
met and if the grantee has remained continuously employed with the Company.
Under each option grant for other key employees, all options will vest over four
years from the date of grant. 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 stock, the Company
shall have the right to repurchase at fair market value the Class A Common stock
of the Company held by the employee.
The following table summarizes information about the MCMS stock
option activity under the Option Plan as of August 31, 2000:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AUGUST 31, AVERAGE SEPTEMBER 2, AVERAGE SEPTEMBER 3, AVERAGE
2000 PRICE 1999 PRICE 1998 PRICE
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period: .. 1,385,375 $ 2.27 1,060,000 $ 2.27 -- --
Granted .............................. 1,052,500 2.27 793,375 2.27 1,240,000 $ 2.27
Exercised ............................ (26,500) 2.27 (35,313) 2.27 -- --
Terminated or canceled ............... (442,750) 2.27 (432,687) 2.27 (180,000) 2.27
---------- ------------- ---------- ------------- ---------- -------------
Outstanding at end of year ........... 1,968,625 $ 2.27 1,385,375 $ 2.27 1,060,000 $ 2.27
========== ============= ========== ============= ========== =============
Exercisable at the end of year ....... 425,333 $ 2.27 164,063 $ 2.27 --
========== ============= ========== ============= ==========
Options available for future grants
to employees of the Company ........ 469,562 1,079,312 1,440,000
========== ========== ==========
</TABLE>
The minimum value of options outstanding at date of grant was estimated
using the Black-Scholes options pricing model. The weighted-average remaining
contractual life of the outstanding options was 3.5 years and all outstanding
options have an exercise price of $2.27 per share. The assumptions and resulting
fair values at date of grant for options granted during the fiscal years ended
August 31, 2000 follow:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Assumptions:
Expected life .......................... 4.5 years 4.5 years 4.5 years
Risk-free interest rate ................ 6.0% 5.90% 6.20%
Expected volatility .................... 0.0% 0.0% 0.0%
Dividend yield ......................... 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price greater than market price $-- N/A N/A
Exercise price equal to market price ... N/A $0.49 $0.50
</TABLE>
Stock based compensation costs would have increased $63,000,
$118,000 and $85,000 in fiscal 2000, 1999 and 1998, respectively ($62,000,
$92,000 and $52,000, respectively, net of taxes), and pro forma net loss per
share would have been ($5.50), ($3.52) and ($1.39) in fiscal 2000, 1999 and
1998, respectively, 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.
Prior to the Recapitalization, the Company participated in MEI's
1995 Stock Option Plan, which provided for the granting of incentive and
nonstatutory stock options to eligible employees of both MEI and the Company.
Exercise prices of the incentive and nonstatutory stock options had generally
been 100% and 85%, respectively, of the fair market value of MEI's stock on the
date of grant. Options were granted subject to terms and conditions determined
by MEI's Board of Directors, and generally were exercisable in increments of 20%
for each year of employment beginning one year from date of grant and generally
expired six years from date of grant. As a result of the Recapitalization
Agreement, employees of the Company could no longer participate in the MEI stock
option plan. In accordance with the MEI option plan, employees had 30 days from
the date of Recapitalization to exercise any vested options. The Company elected
to pay employees who maintained 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. In September 1998, the Company paid $471,000 related to the
cancellation of these options.
NOTE 12. EMPLOYEE SAVINGS PLAN
On July 1, 1998 the Company established a new 401(k) profit-sharing
plan (the "401k Plan") and the account balances for all eligible employees were
transferred from MEI's 401(k) profit-sharing plan (the
34
<PAGE> 35
"RAM Plan") to this plan. Under the 401k Plan, employees may contribute from 2%
to 16% of eligible pay, up to IRS limitations, to various savings alternatives.
The 401k 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
at its option based upon the Company's financial performance. The Company's
expense pursuant to these plans was approximately $1,184,000, $1,638,000 and
$1,333,000 in the fiscal years ended August 31, 2000, September 2, 1999 and
September 3, 1998, respectively.
Prior to the Recapitalization, eligible employees of the Company
could participate in the RAM Plan. Under the RAM Plan, employees could
contribute from 2% to 16% of eligible pay to various savings alternatives. The
RAM Plan provided 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. In connection with the Recapitalization
Agreement, the RAM plan was modified to become a multi-employer plan and
employees of the Company continued to participate in the RAM plan until July 1,
1998.
NOTE 13. TRANSACTIONS WITH RELATED PARTIES
As part of the Recapitalization, the Company entered into a
Management Services Agreement ("MSA") with Cornerstone Equity Investors ("CEI"),
the primary stockholder, pursuant to which CEI agrees to provide general
management services. The MSA has an initial term of five years, subject to
automatic one- year extensions unless the Company or CEI provide written notice
of termination. Pursuant to the terms of the MSA, CEI earned a management fee of
$250,000, $250,000 and $125,000 in fiscal 2000, 1999 and 1998. Pursuant to the
terms of the MSA, CEI also earned a $600,000 transaction fee in fiscal 1999 in
association with the Company entering into the $60 million Credit Facility --
See Note 6 Debt, and a $2,710,000 transaction arrangement fee in fiscal 1998 in
association with the Recapitalization -- See Note 10 Transaction expenses.
Subsequent to August 31, 2000, CEI earned a transaction fee in connection with
the Company amending and restating its Credit Facility (See Note 18 --
Subsequent Event).
NOTE 14. COMMITMENTS AND CONTINGENCIES
As of August 31, 2000, the Company had commitments of $2,513,000 for
equipment purchases and $2,543,000 for inventory purchases.
The Company's facilities in North Carolina, Malaysia and Mexico, and
certain other property and equipment, are leased under operating lease
agreements with non-cancelable terms expiring through 2007, with renewals
thereafter at the option of the Company. Future minimum lease payments total
approximately $17,342,000 and are as follows: $5,081,000 in 2001, $3,971,000 in
2002, $3,119,000 in 2003, $1,645,000 in 2004 and $3,526,000 in 2005 and
thereafter.
Rental expense was approximately $2,773,000, $1,635,000 and $863,000
in the fiscal years ended August 31, 2000, September 2, 1999 and September 3,
1998, respectively.
The Company has contingent liabilities related to legal proceedings arising
out of the normal course of business. Although it is reasonably possible that
the Company may incur losses upon conclusion of such matters, an estimate of any
loss or range of loss can not be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies, will not be material in relation to the accompanying consolidated
financial statements.
35
<PAGE> 36
NOTE 15. INCOME TAXES
Prior to the Recapitalization, the Company was included in the
consolidated U.S. federal income tax return of MEI's parent, MTI. The provision
(benefit) for income taxes is computed as if the Company was a separate
taxpayer. Subsequent to the Recapitalization, the Company became a separate
taxable corporation. Components of income tax expense are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
U.S. federal .......................... $ -- $(3,197) $ 2,108
State ................................. 163 15 (460)
-------- ------- --------
163 (3,182) 1,648
-------- ------- --------
Deferred:
U.S. federal ......................... -- (634) (2,469)
State ................................ -- (84) (109)
-------- ------- --------
-- (718) (2,578)
-------- ------- --------
Income tax provision (benefit) ......... $ 163 $(3,900) $ (930)
======== ======= ========
</TABLE>
The current portion of the fiscal 1998 income tax provision reflects
the agreed upon determination of income taxes owed to the Company's parent for
the period ended February 26, 1998, during which the Company was a member of the
parent's consolidated group, calculated as described above.
A reconciliation between the income tax provision (benefit) and
income tax computed using the federal statutory rate follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate $ (8,220) $ (6,246) $ (959)
State taxes, net of federal benefit ..... (1,529) (1,123) (53)
Nondeductible transaction costs ......... -- -- 1,791
Rate adjustment -- foreign operations ... (2,950) (1,251) (435)
Change in valuation allowance ........... 12,784 4,742 --
Other ................................... 78 (22) (1,274)
-------- -------- --------
$ 163 $ (3,900) $ (930)
======== ======== ========
</TABLE>
As a part of the Recapitalization, the Company revised its estimated
accrual for prior period's tax matters and recorded a decrease in such estimated
accrued taxes of $1,208,000. This adjustment is reflected in the reconciliation
shown above under Other for the fiscal year ended September 3, 1998.
Deferred income taxes reflect the estimated future tax effect of
temporary differences between the amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by presently enacted
tax rates and laws. Deferred tax assets (liabilities), net of the valuation
allowance, are as follows:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover .......................... $ 20,097 $ 10,029
Inventory reserves and allowances ..................... 2,660 765
Accrued compensation .................................. 716 834
Technology amortization ............................... 537 273
Investment tax credits ................................ 307 246
Other ................................................. 385 289
-------- --------
Total deferred tax assets ............................... 24,702 12,436
-------- --------
Deferred tax liabilities:
Property, plant and equipment ......................... 4,509 5,610
Other ................................................. 1,371 1,397
-------- --------
Total deferred tax liabilities .......................... 5,880 7,007
-------- --------
Deferred tax asset valuation allowance .................. (20,128) (4,742)
-------- --------
Net deferred tax assets (liabilities) ................... $ (1,306) $ 687
======== ========
Current -- included in other current assets (liabilities) $ (226) $ 344
Noncurrent -- included in other assets (liabilities) .... (1,080) 343
-------- --------
Net deferred tax assets (liabilities) ................... $ (1,306) $ 687
======== ========
</TABLE>
The Company intends to reinvest the unremitted earnings of its
non-U.S. subsidiaries and
36
<PAGE> 37
postpone their remittance indefinitely. Accordingly, no provision for U.S.
income taxes was required on such earnings during the three years ended August
31, 2000. The cumulative amount of undistributed earnings of foreign
subsidiaries as of August 31, 2000 is approximately $13,486,000.
As of August 31, 2000, the Company has U.S. net operating loss,
Idaho investment tax credit and foreign tax credit carryovers of approximately
$49,072,000, $472,000 and $29,000, respectively. The U.S. net operating loss,
Idaho investment tax credit and foreign tax credit carryovers are available to
offset regular taxable income through the years 2020, 2007 and 2004,
respectively. During fiscal 2000, the Company increased the valuation allowance
by $15,386,000 to a total of $20,128,000 for the amount of deferred tax assets
which may not be realizable through either carryback of its net operating losses
or through future income generated by reversal of deferred tax liabilities
during the loss carry-forward periods.
NOTE 16. SEGMENT INFORMATION
The Company operates principally in the electronics manufacturing
services industry. The Company serves the same or similar customers on a global
basis and is viewed by management as a global provider of manufacturing
services. The Company places primary importance on managing its worldwide
services to strategic customers. The categorization of net sales, as domestic or
foreign, is based on the location from which the product is manufactured.
The Company's external sales and long-lived asset information
associated with its domestic and foreign operations are as follows:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Domestic ....... $352,589 $396,739 $309,449
Foreign ........ 119,859 35,976 24,471
-------- -------- --------
$472,448 $432,715 $333,920
======== ======== ========
Long-lived assets:
Domestic ....... $ 45,821 $ 53,414 $ 53,024
Foreign ........ 11,836 11,204 9,082
-------- -------- --------
$ 57,657 $ 64,618 $ 62,106
======== ======== ========
</TABLE>
NOTE 17. CUSTOMER CONCENTRATION
During fiscal 2000, 1999 and 1998, the Company had two customers,
which comprised more than 10% of the Company's net sales. In fiscal 2000, 1999
and 1998, the Company's largest customer, Cisco Systems, represented 40.8% 43.5%
and 39.2%, respectively, of the Company's net sales. In fiscal 2000, the
Company's second largest customer, Extreme Networks, represented 12.1% of the
Company's net sales. In fiscal 1999 and 1998, the Company's second largest
customer, Fore Systems, represented 18.2% and 24.1%, respectively, of the
Company's net sales. No other customer accounted for more than 10% of
consolidated sales for fiscal year 2000, 1999 or 1998. During fiscal 2000, the
Company's third largest customer, Nokia, represented 9.9% of the Company's net
sales compared to 2.5% and 0.2% of the Company's consolidated sales in fiscal
1999 and 1998, respectively.
NOTE 18. SUBSEQUENT EVENT
On September 29, 2000, the Company amended and restated the Credit
Facility (the "Amended and Restated Credit Facility") to provide up to $125
million in secured financing. The Amended and Restated Credit Facility increased
the revolving credit facility to $70 million from $50 million, maintained the
$10 million equipment loan facility, and provided for term loans of $8 million
("Term Loan A") and $37 million ("Term Loan B"). Amounts outstanding under the
Amended and Restated Credit Facility bear interest at rates ranging from the
lessor of LIBOR plus 2.75% or a base rate, as defined, plus 0.50%, to the lessor
of LIBOR plus 6.50% or a base rate, as defined, plus 4.25%. The revolving credit
facility, equipment loan facility and Term Loan A are collateralized by a first
priority security interest in substantially all of the Company's assets,
including real property, and mature in February 2004. Term Loan B is
collateralized by a second priority lien on these same assets and matures in
August 2004. Term Loan B is subject to a mandatory prepayment, if at any time
prior the maturity of Term Loan B, the Company receives proceeds from the sale
of its capital stock, a public offering or cash equity contribution. If a
mandatory prepayment on Term Loan B is made during the twelve-month period
commencing on September 29, 2000, prepayment is due at a premium of 107.5% of
face value and decreases annually at a rate of 2.5% of face value to 100.0% on
September 29, 2003. Other than a mandatory prepayment or payment upon maturity,
Term Loan B may not be prepaid, in whole or in part, unless all amounts due
under
37
<PAGE> 38
the revolving credit facility and equipment loan facility have been paid in full
and all commitments under the Amended and Restated Credit Facility have been
terminated. The equipment loan facility and Term Loan A and B may not be
reborrowed upon repayment. The Amended and Restated Credit Facility restricts
the Company's ability to incur additional indebtedness, to create liens or other
encumbrances, to make certain investments, loans and guarantees and to sell or
otherwise dispose of a substantial portion of its assets or to enter into any
merger or consolidation. The Amended and Restated Credit Facility also contains
a covenant requiring that the Company maintain a fixed charge ratio, based upon
Earnings before Interest, Taxes, Depreciation and Amortization minus unfinanced
capital expenditures, cash dividends and cash taxes, divided by debt service.
On September 29, 2000, Term Loan A and Term Loan B were fully
funded, the proceeds of which were used to repay the $23.7 million in Notes from
Shareholders, plus $0.6 million in accrued interest, pay closing costs of
approximately $3.3 million and partially pay down the revolver balance. As of
October 30, 2000, the Company had $35.2 million outstanding under the revolving
credit facility, $5.6 million outstanding under the equipment loan facility,
$8.0 million outstanding under Term Loan A and $37.0 million outstanding under
Term Loan B. As of October 30, 2000, the Company had $34.8 million available to
borrow under its revolving credit facility.
Pursuant to the terms of the Company's management services agreement
with Cornerstone Equity Investors (Note 13 -- Transactions with Related
Parties), its primary stockholder, Cornerstone Equity Investors earned a
$370,000 transaction fee in association with the funding of Term Loan B in the
Amended and Restated Credit Facility.
The early repayment of the Notes from Shareholders on September 29,
2000 resulted in a $347,000 extraordinary loss subsequent to August 31, 2000 for
the unamortized portion of a debt discount. The debt discount was recorded on
August 30, 2000 for the estimated fair market value of the warrants issued with
the Notes from Shareholders dated August 30, 2000 (See Note 7 -- Long-Term Debt
-- Shareholders).
38
<PAGE> 39
NOTE 19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL 2000
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ........................................... $ 100,016 $ 99,055 $ 113,474 $ 159,903
Cost of goods sold .................................. 93,912 95,993 108,095 151,957
--------- --------- --------- ---------
Gross profit ........................................ 6,104 3,062 5,379 7,946
Selling, general and administrative expenses ........ 5,833 6,706 5,586 5,815
--------- --------- --------- ---------
Income (loss) from operations ....................... 271 (3,644) (207) 2,131
Interest expense, net ............................... 5,335 5,336 5,669 5,698
--------- --------- --------- ---------
Loss before taxes ................................... (5,064) (8,980) (5,876) (3,567)
Income tax expense .................................. -- 30 64 69
--------- --------- --------- ---------
Net loss ............................................ (5,064) (9,010) (5,940) (3,636)
Redeemable preferred stock dividends and accretion of
preferred stock discount ............................ (962) (992) (1,022) (1,053)
--------- --------- --------- ---------
Net loss to common stockholders ..................... $ (6,026) $ (10,002) $ (6,962) $ (4,689)
========= ========= ========= =========
Net loss per common share -- basic and diluted ...... $ (1.20) $ (1.99) $ (1.38) $ (0.92)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ..................................................... $ 91,243 $ 116,348 $ 110,305 $ 114,819
Cost of goods sold ............................................ 86,056 110,337 103,917 107,044
--------- --------- --------- ---------
Gross profit .................................................. 5,187 6,011 6,388 7,775
Selling, general and administrative expenses .................. 4,219 6,790 5,846 5,636
--------- --------- --------- ---------
Income (loss) from operations ................................. 968 (779) 542 2,139
Other expense (income):
Interest expense, net ......................................... 4,721 4,925 5,023 4,983
Other ......................................................... 45 -- -- --
--------- --------- --------- ---------
Loss before taxes and extraordinary item ...................... (3,798) (5,704) (4,481) (2,844)
Income tax benefit ............................................ (1,775) (1,722) -- --
--------- --------- --------- ---------
Loss before extraordinary item ................................ (2,023) (3,982) (4,481) (2,844)
Extraordinary item -- loss on early extinguishment of
debt, net of income tax benefit of $403 in the second quarter -- (617) -- --
--------- --------- --------- ---------
Net loss ...................................................... (2,023) (4,599) (4,481) (2,844)
Redeemable preferred stock dividends and accretion of
preferred stock discount .................................... (882) (918) (945) (847)
--------- --------- --------- ---------
Net loss to common stockholders ............................... $ (2,905) $ (5,517) $ (5,426) $ (3,691)
========= ========= ========= =========
Net loss per common share-basic and diluted:
Loss before extraordinary item ........................... $ (0.58) $ (0.98) $ (1.08) $ (0.74)
Extraordinary item ....................................... -- (0.12) -- --
--------- --------- --------- ---------
Net loss per common share -- basic and diluted ................ $ (0.58) $ (1.10) $ (1.08) $ (0.74)
========= ========= ========= =========
</TABLE>
39
<PAGE> 40
SCHEDULE II
MCMS. INC
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
DESCRIPTION PERIOD ADDITIONS(a) DEDUCTIONS(b) PERIOD
----------- ------ ------------ ------------- ------
<S> <C> <C> <C> <C>
Allowance for trade receivables:
Year ended September 3, 1998.............................. $ 881 $ (766) $ (18) $ 97
Year ended September 2, 1999.............................. 97 217 (56) 258
Year ended August 31, 2000................................ 258 (26) (17) 215
Notes:
(a) amounts charged (credited) to expense
(b) bad debt write-offs
</TABLE>
40
<PAGE> 41
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth the names, ages and a brief account
of each person who is a director or executive officer of the Company as of
October 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard L. Rowe ... 51 Chief Executive Officer, Director
Tony Nicholls ..... 36 Executive Vice President, Chief Operating Officer
Robert Subia ...... 38 President, Chief Sales and Marketing Officer, Director
Chris J. Anton .... 38 Executive Vice President, Finance and Chief Financial Officer
Angelo Ninivaggi .. 33 Executive Vice President, General Counsel and Corporate Secretary
R. Stephen Cheheyl 55 Director
John A. Downer .... 42 Chairman, Director
C. Nicholas Keating 58 Director
Michael E. Najjar . 34 Director
Mark Rossi ........ 44 Director
</TABLE>
RICHARD L. ROWE was appointed our Chief Executive Officer in November 1999.
Prior to joining us, he held a number of senior management positions in
Honeywell, Inc. from 1977 to 1999, most recently serving, from December 1998 to
August 1999, as Vice President and General Manager of Honeywell-Measurex,
headquartered in Cupertino, California, with operations in Ireland, Germany,
Finland, Japan, Asia-Pacific and Latin America, along with six North America
operations. He has served on numerous boards, including the board of directors
of the Silicon Valley Manufacturing Group. Mr. Rowe holds a B.S. in Engineering
from the U.S. Military Academy at West Point, and an M.S. in Engineering
Management from George Washington University in Washington, D.C.
TONY NICHOLLS joined us in October 2000 as our Executive Vice President, Chief
Operating Officer. From January 1999 until joining us, he served as Vice
President of Operations of Plexus Corp. From 1993 to January 1999, Mr. Nicholls
held a number of manufacturing and quality management positions at SCI Systems.
Mr. Nicholls holds a degree in Mechanical Engineering from South Dakota School
of Mines and Technology.
ROBERT F. SUBIA joined us from Micron Technology, Inc. in February 1993 as
Director of Sales. In November 1999, he was appointed and continues to serve as
President and Chief Sales and Marketing Officer. From April 1995 to November
1999, he served as our President and Chief Executive Officer. Mr. Subia holds a
B.S. in Business Administration with an emphasis in Marketing from Boise State
University.
CHRIS J. ANTON joined us in July 1996 and now serves as our Executive Vice
President, Finance and Chief Financial Officer. From July 1996 to October 1997,
he served as our Corporate Controller. He was appointed Vice President, Finance
and Chief Financial Officer in October 1997 and Executive Vice President,
Finance in September 2000. Prior to joining us, Mr. Anton served as the Chief
Financial Officer of Futura Corporation from February 1996 to July 1996. From
September 1994 to February 1996, he held the positions of President and General
Manager of Image National, Inc., and prior to joining Image National he served
as 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
Micron Technology, Inc. Mr. Anton received a B.S. in Chemistry from the
University of Idaho and an M.B.A. from the Columbia University School of
Business.
ANGELO M. NINIVAGGI joined us in January 1998 and now serves as our Executive
Vice President, General Counsel and Corporate Secretary. From January 1998 to
September 1998, he served as our Chief Corporate Counsel. He was appointed
Corporate Secretary in May 1998, Vice President and General Counsel in September
1998, and Executive Vice President in September 2000. From March 1996 until
joining us, Mr.
41
<PAGE> 42
Ninivaggi served as Corporate Counsel with Micron Electronics, Inc. Prior to Mr.
Ninivaggi's employment with Micron Electronics, Inc., he worked as an associate
with the law firm of Weil, Gotshal & Manges in New York. Mr. Ninivaggi holds a
B.A. in Economics from Columbia University, an M.B.A. in Finance from Fordham
University, and a J.D. from Fordham University.
R. STEPHEN CHEHEYL joined our board of directors in connection with the
recapitalization. Since his retirement in December 1995, Mr. Cheheyl has been a
private investor and independent consultant. From October 1994 to December 1995,
he served as Executive Vice President, Business Operations of Bay Networks,
Inc., which was formed through the merger of Wellfleet Communications, Inc. 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 Sapient Corporation. Mr. Cheheyl received an A.B.
from Dartmouth College and an M.B.A. from Northwestern University.
JOHN A. DOWNER joined our board of directors in connection with the
recapitalization and has been Chairman since September 2000. 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. Mr. Downer is also a director of several
privately held companies. Mr. Downer received an A.B., M.B.A. and J.D. from
Harvard University.
C. NICHOLAS KEATING joined our board of directors in connection with the
recapitalization. Mr. Keating is currently the President, CEO and Director of IP
Infusion Inc., an Internet Protocol software developer. 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 February
1999 to January 2000, Mr. Keating was President and CEO of US Search.com Inc.
Mr. Keating was Vice President of Network Equipment Technologies, a wide area
networking company, from 1987 to 1993. Mr. Keating currently serves as a
Director of Energy Solutions International, a European systems company serving
the global energy market, and Foundry Networks, Inc., a supplier of high
performance networking products. Mr. Keating holds a B.A. and an M.A. from
American University and was a former Fulbright Scholar.
MICHAEL E. NAJJAR joined our board of directors in connection with the
recapitalization. Mr. Najjar has served as a Managing Director of Cornerstone
since February 1997. From January 1996 to February 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 is also a director of several privately held
companies. 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 joined our board of directors in connection with the
recapitalization. Since December 1996, Mr. Rossi has served as a Managing
Director of Cornerstone Equity Investors, LLC. Prior to joining Cornerstone,
from 1994 to 1996, Mr. Rossi served as President of Prudential Equity Investors,
Inc. Mr. Rossi currently serves as Director of Maxwell Technologies, Inc.,
Centurion Wireless Technologies, Inc., Novatel Wireless, Inc., True Temper
Sports, Inc. and several other private companies. Mr. Rossi holds a B.A. from
Saint Vincent College and an M.B.A. from Northwestern University.
DIRECTOR COMPENSATION
Our board members receive no remuneration for their services as
directors. We reimburse our directors for travel and lodging expenses, if any,
incurred in connection with attendance at Board meetings. On September 14, 2000,
we granted options for the purchase of 40,000 shares of our common stock to each
of our five outside directors.
42
<PAGE> 43
ITEM 11: EXECUTIVE COMPENSATION
The following table summarizes the annual and long-term
compensation for services in all capacities rendered to us for each of fiscal
years 2000, 1999 and 1998, by those who served as (i) chief executive officer
during fiscal years 2000, 1999 and 1998 and (ii) the four most highly
compensated executive officers for the fiscal years ended 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------ ---------------
(2) (3)
OTHER SECURITIES (4)
(1) ANNUAL UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION OPTIONS/SARS (#) COMPENSATION
---- ------- --------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Richard L. Rowe 2000 $ 222,115 $ -- $ 21,087 250,000 $ 503
Chief Executive Officer, 1999 -- -- -- -- --
Director 1998 -- -- -- -- --
Robert F. Subia 2000 250,000 135 29,326 37,500 1,717
President and Chief Sales and 1999 260,096 510 29,326 -- 1,741
Marketing Officer 1998 245,051 1,226,686 36,107 250,000 4,700
Chris J. Anton 2000 156,153 135 18,191 15,000 1,615
Executive Vice President, 1999 154,903 879 16,621 -- 1,622
Finance and Chief Financial 1998 130,616 37,506 5,250 145,000 3,408
Officer
Angelo Ninivaggi (5) 2000 135,077 135 15,902 -- 1,583
Executive Vice President, 1999 118,250 1,641 12,547 50,000 1,563
General Counsel and 1998 85,199 14,416 8,089 40,000 1,500
Corporate Secretary
Richard Downing (6) 2000 138,462 135 10,038 -- 1,068
President and Chief 1999 175,385 20,094 14,826 200,000 1,924
Operating Officer 1998 -- -- -- -- --
William Anderson(7)
Vice President 2000 165,000 20,000 14,855 75,000 2,013
Materials and Supply 1999 -- -- -- -- --
Chain Management 1998 -- -- -- -- --
</TABLE>
(1) In connection with the Recapitalization, Robert F. Subia entered into an
agreement with MEI, effective as of the closing date of the
Recapitalization, terminating his employment relationship with MEI.
Pursuant to a termination agreement, Mr. Subia received a lump-sum payment
of $1,026,223 in fiscal 1998.
(2) Represents amounts paid to Named Executive Officers for accrued vacation
time.
(3) Fiscal year 1998 and 1999 options were issued pursuant to the MCMS 1998
Stock Option Plan.
(4) Fiscal year 1998 and 1999 represent amounts paid on behalf of each of the
officers under MCMS's defined contribution plan.
(5) Mr. Ninivaggi was appointed Vice President, General Counsel and Corporate
Secretary effective September 1998.
(6) Mr. Downing was President and Chief Operating Officer of our company. Mr.
Downing's employment with us ceased on January 24, 2000.
(7) Mr. Anderson ceased to be an executive officer effective September 2000.
43
<PAGE> 44
The following table sets forth certain information regarding the options
granted to executive officers during fiscal 2000 pursuant to MCMS's 1998 Stock
Option Plan (the "Option Plan").
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SAR's Price Appreciation
Underlying Granted to Exercise or For Option Term (2)
Options/SARs Employees in Base Price Expiration ------------------------
Name Granted (#)(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- -------------- ----------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard Rowe(1) ... 250,000 23.8% $ 2.27 11/08/09 -- --
Rob Subia(1) ...... 37,500 3.6% 2.27 11/08/09 -- --
Chris Anton(1) .... 15,000 1.4% 2.27 06/05/10 -- --
Angelo M. Ninivaggi -- -- -- -- -- --
Richard Downing ... -- -- -- -- -- --
William Anderson(1) 75,000 7.1% 2.27 08/23/09 -- --
</TABLE>
-------------------
(1) With respect to the options in this table, options under the plan are
subject to vesting based on time, performance or a combination of these
factors, as determined by the board of directors at the time of the grant.
(2) All options were granted at an exercise price above the estimated fair
value of the common stock.
COMPENSATION COMMITTEE OF THE BOARD
During fiscal 2000, our compensation committee was comprised of Mr.
Keating and Mr. Rossi. The compensation committee met four times in fiscal 2000
and intends to meet annually or more frequently as necessary. The compensation
committee reviews and makes recommendations to the board regarding our
compensation policies and all forms of compensation to be provided to our
executive officers and directors. In addition, the compensation committee
reviews bonus and stock compensation arrangements for all of our employees and
directors.
EXECUTIVE OFFICER COMPENSATION
Our executive officer compensation programs are described below for
the purpose of providing a general understanding of the various components of
executive officer compensation. These executive officer compensation programs
are designed to attract, retain and reward highly qualified executive officers
who are important to the success of our company and to provide incentives
relating directly to the financial performance and long term growth of our
company. The following is a summary of the executive officer compensation
programs:
CASH COMPENSATION
Base Salary. The base salary of each executive officer is
established primarily upon (i) a review of executive compensation offered by
companies generally comparable to our company, and (ii) a subjective evaluation
of the executive officer's expected contribution to our company, including
individual performance, level of responsibility, and technical expertise.
Performance Bonuses. Cash bonuses to executive officers are intended
to reward executive officers for our financial performance during the fiscal
year and are earned and paid pursuant to the our Executive Bonus Plan, which was
approved by our Board of Directors in February 2000. Bonuses awarded under the
Executive Bonus Plan are based on the achievement of certain working capital
targets and a certain level of earnings, before interest, taxes, depreciation,
and amortization, as determined by the Board of Directors. Performance bonuses
are generally payable within ninety (90) days after the completion of the audit
of our fiscal year, but may be payable, in part, on a quarterly basis after the
end of each fiscal quarter, unless otherwise determined by the Committee. No
performance bonuses have been or are anticipated to be paid to our executive
officers for fiscal 2000.
44
<PAGE> 45
EQUITY COMPENSATION
To provide long-term incentive to our executive officers and key
employees, we grant stock options to such persons pursuant to our 1998 Stock
Option Plan. Such options provide a link to long-term growth in the value of our
Common Stock. Which employees receive stock options and the number of stock
options granted is determined at the discretion of the Board of Directors. Stock
options granted to executive officers typically have a term of ten (10) years. A
portion of the options granted to executive officers will vest over four years
from the vesting commencement date and a portion will vest if certain financial
performance targets are met (or at the end of seven years if such targets are
not met and if the executive officer has remained continuously employed with
us).
OTHER COMPENSATION
In addition to cash and equity compensation programs, executive
officers participate in various other employee benefit plans, including, but not
limited to, a time-off plan. Under the time-off plan, our full-time employees
(including executive officers) are allowed to accumulate a predetermined number
of hours based on length of service for vacation, holidays, sick time,
emergencies and personal needs. No employee may accumulate hours in excess of
400. We may also fund executive officer participation in various professional
organizations and professional associations.
CEO COMPENSATION
Richard Rowe is our Chief Executive Officer. Mr. Rowe's base
compensation is based on an analysis of compensation paid to chief executive
officers of comparable companies and on a subjective analysis of Mr. Rowe's
experience, level of responsibility, and contribution to our company. In fiscal
2000, Mr. Rowe's annualized base salary was $275,000. No bonus was earned or
paid to Mr. Rowe pursuant to the Executive Bonus Plan in fiscal 2000. Mr. Rowe
was granted options to purchase 250,000 shares of our common stock in fiscal
2000.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m)
to the Internal Revenue Code. Section 162(m) limits deductions for certain
executive compensation in excess of $1 million. Certain types of compensation
are deductible only if performance criteria are specified in detail, and
payments are contingent upon stockholder approval of the compensation
arrangement. We believe that it is generally in the best interests of our
stockholders to structure our compensation plans to achieve maximum
deductibility under Section 162(m) with minimal sacrifices in flexibility and
corporate objectives. With respect to non-equity compensation arrangements, the
compensation committee has reviewed the terms of those arrangements likely to be
subject to Section 162(m) and believes that at this time we are in compliance
with Section 162(m). We also believe the 1998 Stock Option Plan is in compliance
with Section 162(m). The compensation committee will continue to monitor
compliance with Section 162(m) and will take appropriate action if warranted.
Since corporate objectives may not always be consistent with the requirement for
full deductibility, it is conceivable that we may enter into compensation
arrangements under which payments are not deductible under Section 162(m).
Deductibility is not the sole factor used by the compensation committee in
ascertaining appropriate levels or modes of compensation.
EMPLOYMENT AGREEMENTS
During fiscal 2000, we entered into an employment agreement with
Richard L. Rowe governing the terms and conditions of Mr. Rowe's employment with
us as our Chief Executive Officer. During fiscal year 1999, we entered into
employment agreements with Richard Downing, David Garcia and Angelo M.
Ninivaggi, which provided for employment periods of two, three, and three years,
respectively. During fiscal year 1998 and in connection with the
recapitalization, we entered into employment agreements with each of Robert F.
Subia and Chris J. Anton, which provided for employment periods ending on the
third anniversary date of the closing of the recapitalization. As described
below, Messrs. Downing and Garcia are no longer employed by us. Under the
employment agreements, the individuals:
- receive an annual base salary (as set by our board of directors or
compensation committee but subject to minimum amount);
- are eligible to participate in all of our employee benefit programs for
which our senior executive employees are generally eligible, including the
1998 Stock Option Plan;
- receive other employee benefits; and
- have employment periods which will automatically terminate upon
resignation, death or permanent disability or incapacity, or upon
termination by us, with or without cause.
If we terminate the employment period without cause, or if we
constructively terminate the
45
<PAGE> 46
individual, the affected individual, in the case of Messrs. Subia, Anton and
Ninivaggi, is entitled to receive his base salary plus all fringe benefits (but
no bonuses) for 18 months following termination in the case of Mr. Subia, and up
to 12 months following termination for the other individuals. If we terminate
Mr. Rowe without cause, or if we constructively terminate Mr. Rowe, Mr. Rowe is
entitled to receive his base salary and health and welfare benefits for 12
months following termination plus a pro rata bonus based upon Mr. Rowe's
duration of employment during the fiscal year in which his employment terminated
and our performance through the date of termination. If the employment period
terminates upon the individual's death or permanent disability, the individual,
in the case of Messrs. Subia, Anton, and Ninivaggi, is entitled to receive his
base salary for 12 months following such termination. If the employment period
terminates upon the individual's resignation (other than if we constructively
terminate) or incapacity, or is terminated by us for cause, the individual will
be entitled to receive his base salary through the date of termination. Under
the employment agreements, the individuals agree not to:
- compete with us during the period in which he is employed by us and for 12
months thereafter in the case of Mr. Rowe, 18 months thereafter in the
case of Mr. Subia, and either 6 or 12 months thereafter for the other
individuals;
- disclose any confidential information;
- solicit or hire any of our employees or our subsidiary's employees during
the noncompete period; and
- induce or attempt to induce any of our customers, suppliers, licensees,
licensors, franchisees or other business relations to cease doing business
with us during the noncompete period.
In connection with Mr. Garcia's termination of employment in
September 1999, we entered into a severance agreement and release, requiring
among other things, for a period of approximately 10 months following his
employment termination, that we continue to pay wages to Mr. Garcia and that he
not compete with us, solicit or hire our employees, or induce or attempt to
induce any of our customers, suppliers, licensees, licensors, franchisees or
other business relations to cease doing business with us. The scope of these
conditions are consistent with his employment agreement.
In connection with Mr. Downing's termination of employment in
January 2000, we entered into a severance agreement and release under which we
paid wages to Mr. Downing for two months following his employment termination.
1998 STOCK OPTION PLAN
In order to provide financial incentives for our senior executives
and other employees, the board of directors has adopted the 1998 Stock Option
Plan pursuant to which it grants options to purchase Class A common stock to our
senior executives and other employees of MCMS and its subsidiaries. Under the
plan, we also grant options to purchase Class A common stock to our consultants.
The plan provides for option grants representing 3,000,000 common stock. Options
under the plan are subject to vesting based on time, performance or a
combination of these factors, as determined by the board of directors at the
time of grant. Options granted to other key employees vest over four years from
the date of grant. As of October 31, 2000, we had 2,486,625 options outstanding
under the plan. Upon an employee's termination with us, all of the employee's
unvested options will expire and 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.
46
<PAGE> 47
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of October 5,
2000 regarding the beneficial ownership of (i) capital stock (other than
Redeemable Preferred Stock) held by each person (other than directors and
executive officers of the Company) known to us to own more than 5% of our
outstanding capital stock (other than the Redeemable Preferred Stock), (ii)
capital stock held by each our directors and executive officers and (iii)
capital stock held by all directors and executive officers as a group. Shares
listed below for such beneficial owners include shares which can be acquired
through options and/or warrants that are vested or vest within the next 60 days.
To the best of our knowledge, 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.(1) 2,450,000 67.1% 419,557 33.0% -- --
c/o Cornerstone Equity Investors L.L.C
717 Fifth Avenue (Suite 1100)
New York, New York 10022
August Capital (6) 33,333 * -- -- 424 ,632 48.5%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
BT Investment Partners (2,3) 245,000 6.7 853,630 67.0 -- --
130 Liberty Street
New York, New York 10006
LB1 Group, Inc. 500,000 13.7 -- -- -- --
3 World Financial Center
New York, New York 10285
Oak Investment Funds (4,5) 48,845 1.3 -- -- 424,632 48.5
c/o Oak Investment Partners
525 University Avenue, Suite 1300
Palo Alto, California 94301
EXECUTIVE OFFICERS AND DIRECTORS
Richard Rowe (7) 33,854 * -- -- -- --
Robert F. Subia (8) 119,940 3.3 -- -- -- --
Tony Nicholls -- -- -- -- -- --
Chris J. Anton (9) 59,553 1.6 -- -- -- --
Angelo Ninivaggi (10) 41,875 1.1 -- -- -- --
R. Stephen Cheheyl (11) 846 * -- -- 7,353 *
C. Nicholas Keating (13) 423 * -- -- 3,676 *
Michael E. Najjar (12) -- 67.1 -- 33.0 -- --
John A. Downer (12) -- 67.1 -- 33.0 -- --
Mark Rossi (12) -- 67.1 -- 33.0 -- --
Richard Downing (14) -- -- -- -- -- --
William Anderson (15) 12,500 * -- -- -- --
Directors and executive officers 2,718,992 74.5 419,557 33.0 11,029 1.3
as a group - 12 persons (16)
</TABLE>
<TABLE>
<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.(1) 2,450,000 74.3% 123,529 14.3% -- --
c/o Cornerstone Equity Investors L.L.C
717 Fifth Avenue (Suite 1100)
New York, New York 10022
August Capital (6) -- -- -- -- 424,632 48.5%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
BT Investment Partners (2,3) 245,000 7.4 740,294 85.7 -- --
130 Liberty Street
New York, New York 10006
LB1 Group, Inc. 500,000 15.2 -- -- -- --
3 World Financial Center
New York, New York 10285
Oak Investment Funds (4,5) -- -- -- -- 424,632 48.5
c/o Oak Investment Partners
525 University Avenue, Suite 1300
Palo Alto, California 94301
EXECUTIVE OFFICERS AND DIRECTORS
Richard Rowe (7) -- -- -- -- -- --
Robert F. Subia (8) 14,706 * -- -- -- --
Tony Nicholls -- -- -- -- -- --
Chris J. Anton (9) 7,353 * -- -- -- --
Angelo Ninivaggi (10) -- -- -- -- -- --
R. Stephen Cheheyl (11) -- -- -- -- 7,353 *
C. Nicholas Keating (13) -- -- -- -- 3,676 *
Michael E. Najjar (12) -- 74.3 -- 14.3 -- --
John A. Downer (12) -- 74.3 -- 14.3 -- --
Mark Rossi (12) -- 74.3 -- 14.3 -- --
Richard Downing (14) -- -- -- -- -- --
William Anderson (15) -- -- -- -- -- --
Directors and executive officers 2,472,059 75.8 123,529 14.3 11,029 1.3
as a group - 12 persons (16)
</TABLE>
------------------------------------
* Less than 1% of the outstanding shares of common stock. Notes continued on
next page
47
<PAGE> 48
(1) Class B common stock includes 296,028 shares issuable upon exercise of
warrants.
(2) Includes shares beneficially owned by Bankers Trust Company, an affiliate
of BT Investment Partners.
(3) Class B common stock includes 113,336 shares issuable upon exercise of
warrants.
(4) Includes shares owned by Oak VII Affiliate Fund and Oak Investment
Partners, which are affiliates of Oak Investment Funds. Mr. Frederic W.
Harman is a principal of Oak Investment Partners, and accordingly, may be
deemed to beneficially own shares owned by these entities. Mr. Harman
disclaims beneficial ownership of any of those shares in which he does not
have a pecuniary interest.
(5) Class A common stock includes 48,845 shares issuable upon exercise of
warrants.
(6) Class A common stock includes 33,333 shares issuable upon exercise of
warrants. Messrs. David Marquardt, John Johnston and Andy Rappaport are
principals of August Capital L.P. Accordingly, Messrs. Marquardt Johnston
and Rappaport may be deemed to beneficially own shares owned by this fund.
Each person disclaims ownership of any of those shares in which he does
not have a pecuniary interest.
(7) Class A common stock reflects 33,854 shares issuable upon exercise of
options.
(8) Class A common stock includes 105,234 shares issuable upon exercise of
options and warrants.
(9) Class A common stock includes 52,200 shares issuable upon exercise of
options and warrants.
(10) Class A common stock reflects 41,875 shares issuable upon exercise of
options.
(11) Class A common stock includes 846 shares issuable upon exercise of
warrants.
(12) Messrs. Downer, Rossi and Najjar are each managing directors of
Cornerstone Equity Investors, L.L.C., the sole general partner of
Cornerstone Equity Investors IV, L.P. Accordingly, Messrs. Downer, Najjar
and Rossi may be deemed to beneficially own shares owned by this fund.
Each such person disclaims beneficial ownership of any of those shares in
which he does not have a pecuniary interest.
(13) Class A common stock includes 423 shares issuable upon exercise of
warrants.
(14) Mr. Downing's employment with us ceased on January 24, 2000.
(15) Class A common stock reflects 12,500 shares issuable upon exercise of
options. Mr. Anderson ceased to be an executive officer effective
September 2000.
(16) See Notes (1) through (11), (13) and (15). Includes an aggregate of
738,474 shares issuable upon the exercise of currently exercisable options
and warrants held by Cornerstone and our executive officers and directors.
48
<PAGE> 49
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMENDED AND RESTATED CREDIT FACILITY
On September 29, 2000 an affiliate of Lehman Brothers Inc. purchased
the 500,000 shares of Class A Common Stock and the 500,000 shares of Convertible
Preferred Stock previously held by Micron Electronics, Inc. On the same date, an
affiliate of Lehman Brothers, Inc. participated in the Amended and Restated
Credit Facility by providing the funding for the $37.0 million Term Loan B. The
loan bears interest at the lesser of PNC Bank's base rate plus 4.25% or the one,
two or three month LIBOR plus 6.50%. At the closing of the Amended and Restated
Credit Facility, we paid Lehman Brothers a commitment fee of $1.3 million.
MANAGEMENT SERVICES AGREEMENT
In connection with the recapitalization, we entered into a five-year
management services agreement with Cornerstone Equity Investors pursuant to
which Cornerstone agreed to provide:
- general management services;
- assistance with the identification, negotiation and analysis of
acquisitions and dispositions;
- assistance with the negotiation and analysis of financial alternatives; and
- other services agreed upon by us and Cornerstone.
In exchange for such services, Cornerstone receives an annual
management fee of $250,000, plus reasonable out-of-pocket expenses (payable
quarterly) and 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 us or any of it
subsidiaries. In fiscal years 2000, 1998 and 1999, Cornerstone earned fees
aggregating $250,000, $850,000 and $2,835,000, respectively. Subsequent to the
end of fiscal year 2000, Cornerstone earned a transaction fee of $370,000 in
association with the funding of Term Loan B in the Amended and Restated Credit
Facility. We believe that our agreement with Cornerstone is on terms that are no
less favorable than could be obtained with unaffiliated third parties.
SHAREHOLDER NOTES
Under a loan agreement with some of our shareholders dated February 29,
2000, we issued notes in the aggregate principal amount of $8.7 million. Under a
separate agreement with the same shareholders and some additional shareholders
dated August 29, 2000, we issued additional notes in the aggregate principal
amount of $15.0 million.
In connection with the $15.0 million aggregate principal of notes, we
issued warrants to purchase 500,000 shares of common stock for a price of $0.001
per share. On September 29, 2000 we repaid the shareholder notes in full
together with accrued interest. The following chart sets forth the amounts paid
to our significant shareholders, executive officers and directors and the number
of warrants held by each.
<TABLE>
<CAPTION>
WARRANTS
STOCKHOLDER AMOUNT PAID HELD
----------- ----------- --------
<S> <C> <C>
Cornerstone Equity Investors IV, L.P. $14,334,387 296,028
BT Investment Partners 5,488,023 113,336
Oak Investment Funds 1,896,120 48,845
August Capital, L.P. 2,364,174 33,333
Robert Subia 51,195 1,692
Chris Anton 25,605 846
Stephen Cheheyl 25,598 846
Nicholas Keating 12,799 423
</TABLE>
49
<PAGE> 50
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) The following are filed as a part of this report:
Financial statements and financial statement schedules - See "Item 8.
Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<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. incorporated by reference to Exhibit 2.1 in Registration
Statement on Form S-4 (Registration No. 333-50981).
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. incorporated
by reference to Exhibit 2.2 in Registration Statement on Form S-4
(Registration No. 333-50981).
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. incorporated by reference to Exhibit 2.3 in
Registration Statement on Form S-4 (Registration No. 333-50981).
3.1 Articles of Incorporation of MCMS, Inc.
3.2 By-laws 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
incorporated by reference to Exhibit 4.1 in Registration Statement on
Form S-4 (Registration No. 333-50981).
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 incorporated by reference to Exhibit 4.2 in
Registration Statement on Form S-4 (Registration No. 333-50981).
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 incorporated by reference to
Exhibit 4.3 in Registration Statement on Form S-4 (Registration No.
333-50981).
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
incorporated by reference to Exhibit 4.4 in Amendment No. 1 to
Registration Statement on Form S-4 (Registration No. 333-50981).
10.1 Management Services Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and Cornerstone Equity Investors, LLC incorporated
by reference to Exhibit 10.1 in Registration Statement on Form S-4
(Registration No. 333-50981).
10.2 Purchase Agreement, dated February 19, 1998, by and between MCMS, Inc.
and BT Alex. Brown Incorporated incorporated by reference to Exhibit
10.2 in Registration Statement on Form S-4 (Registration No.
333-50981).
10.3 Registration Rights Agreement, dated as of February 26, 1998, by and
between MCMS, Inc. and BT Alex. Brown Incorporated incorporated by
reference to Exhibit 10.3 in Registration Statement on Form S-4
(Registration No. 333-50981).
10.4 Amended and Restated Revolving Credit, Equipment Loan, Term Loan and
Security Agreement, dated as of September 29, 2000, by and among PNC
Bank, as agent and co-lead arranger, and Lehman Brothers Inc., as
co-lead arranger.
10.5 Loan Agreement, dated as of February 29, 2000, between MCMS, Inc. and
Cornerstone Equity Investors IV, L.P., Bankers Trust Company, Oak
Investment Funds and August Capital incorporated by reference to
Exhibit 10.4(d) to the Quarterly Report on Form 10-Q for the quarter
ended March 2, 2000.
10.6 Loan Agreement, dated as of August 29, 2000, between MCMS, Inc. and
Cornerstone Equity Investors IV, L.P., Bankers Trust Company, Oak
Investment Funds, August Capital, and other lenders named therein.
Incorporated by reference to Exhibit 10.6 to Registration Statement on
Form S-1 (Registration No. 333-46668).
10.7 Warrant Purchase Agreement, dated August 29, 2000, between MCMS, Inc.
and Cornerstone Equity Investors IV, L.P., Bankers Trust Company, Oak
Investment Funds, August Capital, and other persons named therein.
Incorporated by reference to Exhibit 10.7 to Registration Statement on
Form S-1 (Registration No. 333-46668).
</TABLE>
50
<PAGE> 51
10.8 Employment Agreement, dated as of February 26, 1998, by and between
MCMS, Inc. and Robert F. Subia incorporated by reference to Exhibit
10.7 in Registration Statement on Form S-4 (Registration No.
333-46668).
10.9 Employment Agreement, dated as of February 26, 1998, by and between
MCMS, Inc. and Chris Anton incorporated by reference to Exhibit 10.8 in
Registration Statement on Form S-4 (Registration No. 333-50981).
10.10 Employment Agreement, dated as of October 12, 1998, by and between
MCMS, Inc. and David Garcia incorporated by reference to Exhibit
10.9(a) in the Quarterly Report on Form 10-Q for the quarter ended
December 3, 1998.
10.11 Employment Agreement, dated as of December 2, 1998, by and between
MCMS, Inc. and Richard Downing incorporated by reference to Exhibit
10.9(b) in the Quarterly Report on Form 10-Q for the quarter ended
December 3, 1998.
10.12 Employment Agreement, dated as of December 21, 1998, by and between
MCMS, Inc. and Angelo Ninivaggi incorporated by reference to Exhibit
10.9(c) in the Annual Report on Form 10-K for the fiscal year ended
September 2, 1999.
10.13 Employment Agreement, dated December 3, 1999, by and between MCMS, Inc.
and Richard Rowe incorporated by reference to Exhibit 10.9(d) in the
Quarterly Report on Form 10-Q for the quarter ended December 2, 1999.
10.14 Termination Agreement, dated October 13, 1999, by and between MCMS,
Inc. and David Garcia incorporated by reference to Exhibit 10.14 to
Registration Statement on Form S-1 (Registration No. 333-46668).
10.15 Termination Agreement, dated January 24, 2000, by and between MCMS,
Inc. and Richard Downing. Incorporated by reference to Exhibit 10.15 to
Registration Statement on Form S-1 (Registration No. 333-46668).
10.16 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 incorporated by reference to Exhibit
10.11 in Registration Statement on Form S-4 (Registration No.
333-50981).
10.17 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 incorporated by reference to
Exhibit 10.12 in Registration Statement on Form S-4 (Registration No.
333-50981).
10.18 1998 Stock Option Plan, as amended.
10.19 Form of Stock Option Agreement for officers of MCMS, Inc. under the
1998 Stock Option Plan incorporated by reference to Exhibit 10.20(a) to
the Quarterly Report on Form 10-Q for the quarter ended December 3,
1998.
10.23 Patent and Invention Disclosure Assignment and License Agreement, dated
as of February 26, 1998, by and between Micron Electronics, Inc. and
MCMS, Inc. incorporated by reference to Exhibit 10.22 in Amendment No.
2 to Registration Statement on Form S-4 (Registration No. 333-50981).
10.24 Know-How License Agreement, dated as of February 26, 1998, by and
between Micron Electronics, Inc. and MCMS, Inc. incorporated by
reference to Exhibit 10.23 in Amendment No. 1 to Registration Statement
on Form S-4 (Registration No. 333-50981).
10.25 Forbearance Agreement, dated as of February 26, 1998, by and between
Micron Electronics, Inc. and MCMS, Inc. incorporated by reference to
Exhibit 10.24 in Amendment No. 1 to Registration Statement on Form S-4
(Registration No. 333-50981).
10.26 Lease, dated as of June 18, 1999, by and between MCMS, Sdn. Bhd. and
Klih Project Management, Sdn. Bhd. incorporated by reference to Exhibit
10.17(a) in the Quarterly Report on Form 10-Q for the fiscal quarter
ended June 3, 1999.
10.27 Sublease Agreement, dated as of October 6, 1999, by and between MCMS de
Mexico S. de R.L. de C.V. and SMTC de Mexico incorporated by reference
to Exhibit 10.17(b) in the Annual Report on Form 10-K for the fiscal
year ended September 2, 1999.
10.28 Lease, dated as of December 1994, by and between MCMS, Inc. and
Tri-Center South Limited Partnership, as amended, incorporated by
reference to Exhibit 10.18 in Registration Statement on Form S-4
(Registration No. 333-50981).
10.29 Lease Agreement, dated February 9, 2000, between MCMS, Inc. and South
San Jose, LLC
16.1 Letter re Change in Certifying Accountant incorporated by reference to
Exhibit 16.1 in Amendment No. 2 to Registration Statement on Form S-4
(Registration No. 333-50981).
21.1 Subsidiaries of MCMS, Inc. Incorporated by reference to Exhibit 21.1 to
Registration Statement on Form S-1 (Registration No. 333-46668).
27.1 Financial Data Schedule.
---------------
(b): Reports on Form 8-K:
During the fourth quarter of Fiscal 2000, no reports on Form 8-K were
filed
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 November 15, 2000.
MCMS, Inc.
By: /s/ Chris J. Anton
(Chris J. Anton, Executive Vice President,
Finance and Chief Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Richard L. Rowe Chief Executive November 15, 2000
Officer and Director (Principal
Executive Officer)
/s/ Robert F. Subia President, Chief Sales November 15, 2000
and Marketing Officer
and Director
/s/ Chris J. Anton Executive Vice President, Finance November 15, 2000
and Chief Financial Officer
(Principal Financial Officer
and Accounting Officer)
/s/ R. Stephen Cheheyl Director November 15, 2000
/s/ John A. Downer Director November 15, 2000
/s/ C. Nicholas Keating Director November 15, 2000
/s/ Michael E. Najjar Director November 15, 2000
/s/ Mark Rossi Director November 15, 2000
</TABLE>
52
