<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 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 Number: 0-25560
ACT Manufacturing, Inc.
------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2777507
------------- ----------
(State or other jurisdiction of (IRS Employer ID. No.)
incorporation or organization)
2 Cabot Road 01749
Hudson, Massachusetts -----
--------------------- (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (978) 567-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 16,703,269 Shares
- ----------------- -----------------------------
(Class) (Outstanding on May 11, 2000)
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ACT MANUFACTURING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2000 and 1999......................... 3
Consolidated Statements of Comprehensive Income for
the three months ended March 31, 2000 and 1999......................... 3
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999................................... 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2000 and 1999......................... 5
Notes to Condensed Consolidated Financial Statements................... 6
ITEM 2--Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 10
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 24
PART II. OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K............................... 25
Signatures............................................................. 26
Exhibit Index.......................................................... 27
2
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PART I. FINANCIAL INFORMATION
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales .......................................... $229,088 $145,947
-------- --------
Cost of goods sold ................................. 209,089 135,511
-------- --------
Gross profit ....................................... 19,999 10,436
Selling, general and administrative expenses........ 9,323 6,314
-------- --------
Operating income.................................... 10,676 4,122
Interest and other expense, net..................... 593 1,030
-------- --------
Income before provision for income taxes............ 10,083 3,092
Provision for income taxes.......................... 3,933 1,242
-------- --------
Net income.......................................... $ 6,150 $ 1,850
======== ========
Basic net income per common share................... $ 0.37 $ 0.14
======== ========
Diluted net income per common share................. $ 0.35 $ 0.14
======== ========
Weighted average shares outstanding--basic.......... 16,546 12,881
Weighted average shares outstanding--diluted........ 17,645 13,384
</TABLE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited--in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C>
2000 1999
---- ----
Net income......................................... $6,150 $1,850
Other comprehensive (loss) income:
Foreign currency translation adjustment ........ (176) 127
------ ------
Comprehensive income .............................. $5,974 $1,977
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .......................... $ 6,290 $ 4,558
Accounts receivable, net ........................... 189,398 160,830
Inventory .......................................... 200,154 171,762
Deferred tax asset ................................. 1,252 1,252
Prepaid expenses and other assets .................. 5,599 2,925
--------- ---------
Total current assets ............................ 402,693 341,327
PROPERTY AND EQUIPMENT--Net .......................... 37,139 38,047
INVESTMENT IN AND ADVANCE TO AFFILIATE ............... 762 6,434
GOODWILL--Net ........................................ 10,098 10,334
OTHER ASSETS--Net ................................... 8,307 6,184
--------- ---------
TOTAL ........................................... $ 458,999 $ 402,326
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
other liabilities ................................ $ 5,013 $ 4,097
Accounts payable ................................... 157,593 153,764
Accrued compensation and related taxes ............. 5,256 3,769
Deferred tax liability ............................. 253 253
Accrued expenses and other ......................... 7,366 9,024
--------- ---------
Total current liabilities ....................... 175,481 170,907
LONG-TERM DEBT--Less current portion ................. 92,292 46,933
DEFERRED TAX LIABILITY ............................... 2,735 2,735
OTHER LONG-TERM LIABILITIES .......................... 2,816 3,622
CONTINGENCIES (Note 8) ...............................
STOCKHOLDERS' EQUITY:
Common stock ....................................... 167 165
Additional paid-in capital ......................... 159,457 157,887
Accumulated other comprehensive loss ............... (813) (637)
Retained earnings .................................. 26,864 20,714
--------- ---------
Total stockholders' equity ...................... 185,675 178,129
--------- ---------
TOTAL ................................................ $ 458,999 $ 402,326
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
<S> <C> <C>
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 6,150 $ 1,850
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ........................................... 2,193 1,877
Gain on the sale of investment in affiliate.............................. (894) --
Increase (decrease) increase in cash from:
Accounts receivable .................................................. (28,662) (3,343)
Inventory ............................................................ (28,479) 6,401
Prepaid expenses and other assets .................................... (2,674) 871
Accounts payable ..................................................... 3,829 (9,731)
Accrued expenses and other ........................................... (171) (1,038)
-------- -------
Net cash used for operating activities ............................. (48,708) (3,113)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ...................................... (1,184) (1,942)
Proceeds from the sale of investment in affiliate .......................... 6,417 --
Increase in other assets ................................................... (2,124) (3)
-------- -------
Net cash provided by (used for) investing activities ............... 3,109 (1,945)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements ............................. 45,734 1,174
Repayments on term loan .................................................... (250) --
Decrease in other liabilities .............................................. (15) (517)
Net proceeds from sale of stock ............................................ 1,572 739
-------- -------
Net cash provided by financing activities .......................... 47,041 1,396
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS ...................... 290 43
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 1,732 (3,619)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................. 4,558 6,406
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 6,290 $ 2,787
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim condensed consolidated financial statements furnished
herein reflect all adjustments, which in the opinion of management are of a
normal recurring nature, necessary to fairly state ACT Manufacturing, Inc. and
subsidiaries' (the "Company") financial position, cash flows and the results
of operations for the periods presented and have been prepared on a basis
substantially consistent with the audited consolidated financial statements.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the period
ending December 31, 1999 filed with the Securities and Exchange Commission.
2. PENDING ACQUISITION
On March 15, 2000, the Company signed a pre-tender agreement (the
"Agreement") to acquire GSS Array Technology Public Company Limited ("GSS
Thailand"). As part of the Agreement, certain of GSS Thailand's principal
shareholders have agreed to tender all their issued shares and outstanding
options to the Company. GSS Thailand is a Thai-based contract electronics
manufacturing company and is listed on the Stock Exchange of Thailand. The
acquisition is subject to various closing conditions and is expected to close
in the third quarter of fiscal 2000.
Under the terms of the Agreement, GSS Thailand would be delisted from the
Stock Exchange of Thailand and ACT would then make a cash tender offer for all
issued shares and outstanding options of GSS Thailand for approximately $93.3
million in cash. Upon the closing of the acquisition, ACT would assume on-
going relationships with GSS Thailand customers and will retain certain GSS
Thailand management to support this additional operation.
On April 28, 2000, approximately 84% of GSS Thailand shareholders voted to
delist their company from the Stock Exchange of Thailand in a general
shareholder meeting.
3. BANK FINANCING
On July 29, 1999, the Company executed an Amended and Restated Credit
Agreement for a new $107.0 million Senior Secured Credit Facility ("Credit
Facility") with a group of banks led by The Chase Manhattan Bank as agent
("Agent") to replace the Company's previous credit facilities with the banks.
This new Credit Facility provides for a $7.0 million, five-year Term Loan
("Term Loan") and a $100.0 million five-year Line of Credit ("Revolving Credit
Facility"), both of which are secured by substantially all of the assets of
the Company. At March 31, 2000, $87.0 million of the Credit Facility was
utilized and an additional $13.0 million was available for use based upon the
applicable borrowing base and the full term loan was utilized. At March 31,
2000, the interest rate on the $7.0 million term loan was 7.89% and the rate
on the line of credit was 8.75%. The Term Loan shall amortize at a rate of
$1.0 million per year for the first year and $1.5 million per year for years
two through five. The Revolving Credit Facility provides for borrowings up to
an aggregate amount of $100.0 million, limited to a certain percentage of
qualified accounts receivable and qualified inventory. Interest is payable
monthly. For the Term Loan, the Company may choose an interest rate of either
(i) 2.5% above the prevailing London Interbank Offering rate ("LIBOR"), or
(ii) 0.5% above the prime rate as announced by the Agent. For the Revolving
Credit Facility the Company may choose an interest rate of either (i) 2.25%
above the prevailing LIBOR rate, or (ii) 0.25% above the prime rate as
announced by the Agent. In addition to certain other prohibited actions, the
Credit Facility limits capital expenditures by the Company and prohibits the
payment of cash dividends on the Company's common stock. The Credit Facility
requires the Company to maintain certain minimum fixed charge coverage ratios
and maximum leverage ratios. Outstanding borrowings under the Credit Facility
are secured primarily by the Company's accounts receivable, inventories,
machinery and equipment.
6
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4. INVENTORY
Inventory consisted of the following at the dates indicated (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Raw material ............................. $165,096 $125,869
Work in process .......................... 33,386 42,039
Finished goods ........................... 1,672 3,854
-------- --------
Total ................................. $200,154 $171,762
======== ========
</TABLE>
5. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per common share reflects the
potential dilution as if common equivalent shares outstanding (common stock
options) were exercised and converted into common stock unless the effect of
such equivalent shares was antidilutive.
A reconciliation of net income per common share and the weighted average
shares used in the earnings per share ("EPS") calculations for the periods
indicated is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Net income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three Months Ended March 31, 2000
Basic ........................ $6,150 16,546 $ 0.37
======
Effect of stock options 1,099 (0.02)
------ ------
Diluted ...................... $6,150 17,645 $ 0.35
====== ====== ======
Three Months Ended March 31, 1999
Basic ........................ $1,850 12,881 $ 0.14
======
Effect of stock options ...... 503 --
------ ------
Diluted ...................... $1,850 13,384 $ 0.14
====== ====== ======
</TABLE>
All outstanding options to purchase common stock were included in the
computation of diluted EPS at March 31, 2000.
6. OPERATING DATA
The Company operates within a single segment of the electronics
manufacturing services industry. The Company organizes itself as one segment
reporting to the Company's chief decision maker.
A summary of the principal service offerings' net sales for the three
months ended March 31, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
<S> <C> <C>
2000 1999
-------- --------
Printed circuit boards ............ $220,431 $137,981
Cable and harness.................. 8,657 7,966
-------- --------
Total..................... $229,088 $145,947
======== ========
</TABLE>
7
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7. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 1999 and effective for
the fiscal years beginning after June 15, 2000. The new standard requires that
all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the consolidated financial
statements of the Company. The Company will adopt this accounting standard on
January 1, 2001, as required.
8. CONTINGENCIES
On February 27, 1998, our company and several of our officers and directors
were named as defendants in a purported securities class action lawsuit filed
in the United States District Court for the District of Massachusetts. The
plaintiffs amended the complaint on October 16, 1998. The plaintiffs purport
to represent a class of all persons who purchased or otherwise acquired our
common stock in the period from April 17, 1997 through March 31, 1998. The
amended complaint alleges, among other things, that the defendants knowingly
made misstatements to the investing public about the value of our inventory
and the nature of our accounting practices. On December 15, 1998, we filed a
motion to dismiss the case in its entirety based on the pleadings. Our motion
to dismiss was granted without prejudice on May 27, 1999 and the case was
closed by the court on June 1, 1999. On June 29, 1999, the plaintiffs filed a
motion with the court seeking permission to file a second amended complaint.
We opposed that motion. On July 13, 1999, the court denied the plaintiffs'
motion to amend, noting "final judgment having entered the case." On July 26,
1999, the plaintiffs filed a motion with the court asking the court to extend
the 30-day period for filing an appeal of its ruling dismissing the case. We
opposed that motion as well, and the court denied the motion on August 10,
1999. The plaintiffs filed an appeal with the United States Court of Appeals
for the First Circuit requesting that the Court of Appeals reverse each of the
orders described above. In an opinion dated May 5, 2000, the Court of Appeals
affirmed in all respects the orders of the District Court that the plaintiffs
had appealed.
In December 1993, CMC Industries retained the services of a consultant to
assist in quantifying the potential exposure to CMC in connection with clean-
up and related costs of a former manufacturing site. This site is commonly
known as the ITT Telecommunications site in Milan, Tennessee. The consultant
initially estimated that the cost to remove and dispose of the contaminated
soil would be approximately $200,000. CMC subsequently entered into a
voluntary agreement to investigate the site with the Tennessee Department of
Environment and Conservation. In addition, CMC agreed to reimburse a tenant of
the site $115,000 for expenditures previously incurred to investigate
environmental conditions at the site. CMC recorded a total provision of
$320,000 based on these estimates. In fiscal 1995, an environmental consultant
estimated that the cost of a full study combined with short and long term
remediation of the site may cost between $3.0 and $4.0 million. Subsequent
environmental studies done in 1999 have estimated such costs as between
$750,000 and $3.5 million. During CMC's fiscal 1996, the State of Tennessee's
Department of Environment and Conservation named certain potentially
responsible parties in relation to the former facility. CMC was not named as a
potentially responsible party. However, Alcatel, Inc., a potentially
responsible party named by the State of Tennessee's Department of Environment
and Conversation and a former owner of CMC, sought indemnification from CMC
under the purchase agreement by which CMC acquired the stock of one of the
operators of the facility. To date, Alcatel has not filed any legal
proceedings to enforce its indemnification claim. However, Alcatel could
initiate such proceedings and other third parties could assert claims against
us relating to remediation of the site. We have entered into an agreement with
Alcatel pursuant to which the statute of limitations on their indemnification
claim is tolled for a period of time. In the event any proceedings are
initiated or any claim is made, we would defend ourselves vigorously but
defense or resolution of this matter could negatively impact our financial
position and results of operations.
On June 15, 1999, we received written notice from legal counsel for the
Lemelson Medical, Education & Research Foundation, Limited Partnership
alleging that we are infringing certain patents held by the Lemelson
Foundation Partnership and offering to license such patents to us. We entered
into a patent license agreement with the Lemelson Foundation Partnership in
February 2000.
8
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From time to time, we are also subject to claims or litigation incidental
to our business. We do not believe that any incidental claims or litigation
will have a material adverse effect on our results of operations.
9. SUBSEQUENT EVENTS
In April and May 2000, the Company received net proceeds of approximately
$95.6 million from the sale of 7% Convertible Subordinated Notes due April 15,
2007 (the "Notes") in a private placement. The Notes are general unsecured
obligations of the Company and are subordinated in right of payment to all the
Company's existing and future senior indebtedness. Interest payments are due
on the Notes on April 15 and October 15 of each year. The proceeds of this
convertible debt offering are intended to fund the acquisition of GSS
Thailand. Until allocated for specific use, the net proceeds from this
offering have been invested in short-term, interest-bearing, investment grade
securities.
Effective May 12, 2000, the Credit Facility was amended to increase the
amount available under the Revolving Credit Facility to $125.0 million. All of
the terms of the agreement as described in Note 3 remain unchanged.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q, including the following discussions,
contains trend analysis and other forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Any
statements in this Quarterly Report that are not statements of historical facts
are forward-looking statements, which involve risks and uncertainties. Our
actual results may differ materially from those indicated in the forward-looking
statements as a result of the factors set forth elsewhere in this Quarterly
Report on Form 10-Q, including under "Cautionary Statements." You should read
the following discussion and analysis together with our condensed consolidated
financial statements for the periods specified and the related notes included
herein. Further reference should be made to our Annual Report on Form 10-K for
the period ended December 31, 1999.
OVERVIEW
We are a leading provider of value-added electronics manufacturing services to
original equipment manufacturers ("OEMs") in the networking and
telecommunications, computer and industrial and medical equipment markets. We
provide OEMs with complex printed circuit board assembly, primarily utilizing
advanced surface mount technology, electro-mechanical sub-assembly, total system
assembly and integration, and mechanical and molded cable and harness assembly.
We target and have developed a particular expertise in serving emerging and
established OEMs who require moderate volume production runs of complex,
leading-edge commercial market applications. These applications are generally
characterized by multiple configurations and high printed circuit board
densities. As a result, they generally require technologically-advanced and
flexible manufacturing as well as a high degree of other value-added services.
As an integral part of our offerings to customers, we provide the following
value-added services: new product introduction services, advanced manufacturing
and test engineering, flexible materials management, comprehensive test
services, product diagnostics and repair, packaging, order fulfillment and
distribution services.
We currently manufacture at ten facilities having an aggregate of
approximately 1.0 million square feet. Of our leased manufacturing facilities,
five of the facilities are located in Massachusetts and one facility is located
in each of Santa Clara, California; Lawrenceville, Georgia; Corinth,
Mississippi; and Dublin, Ireland. We also own a 4.4-acre tract of land and a
110,000 square foot manufacturing facility on that property in Hermosillo,
Mexico. All of our manufacturing facilities have been certified to the ISO 9002
international quality standard, except our Corinth, Mississippi facility which
has been certified to the ISO 9001 international quality standard. We commenced
operations in a 126,000 square foot, newly leased facility in Massachusetts in
the first quarter of 2000. This new facility has not been certified to the ISO
9001 or 9002 international quality standards, although we expect that it will be
certified in the near future. We have signed a lease for a new 202,000 square
foot facility in San Jose, California that is under construction. We plan to
move our existing Santa Clara operations and equipment to this new facility. We
expect to begin operating in this new facility in the fourth quarter of 2000.
Our facilities contained 54 surface mount technology lines at March 31, 2000.
We recognize revenue upon shipment to customers or otherwise, under certain
contracts, when title to and reward of ownership pass to the customer. We
generally do not obtain long-term purchase orders or commitments from our
customers. Instead, we work closely with our customers to anticipate delivery
dates and future volume of orders based on customer forecasts. The level and
timing of orders placed by our customers vary due to:
. customer attempts to manage inventory;
. changes in the customer's manufacturing strategy; and
. variation in demand for customer products due to, among other things,
introduction of new products, product life cycles, competitive conditions or
industry or general economic conditions.
10
<PAGE>
We may purchase components for product assemblies based on customer forecasts.
Our policy is that customers are generally responsible for materials and
associated acquisition costs in the event of a significant reduction, delay or
cancellation of orders from the forecasted amounts.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Our net sales increased $83.1 million or 57.0% to $229.1 million for the
three-month period ended March 31, 2000 compared with $146.0 million for the
comparable period in 1999. The increase was attributable principally to a net
expansion of business in our printed circuit board assembly service offering of
$82.5 million from existing customers as well as new customers in the networking
and telecommunications market.
Net sales in the printed circuit board assembly service offering (including
value-added services such as system integration, test, repair and order
fulfillment) as a percentage of net sales was approximately 96% for the three
month period ended March 31, 2000 compared to approximately 95% for the
comparable period in 1999. Net sales in the cable and harness assembly service
offering accounted for approximately 4% of net sales for the three-month period
ended March 31, 2000 compared to approximately 5% of net sales for the
comparable period in 1999.
Gross profit increased $9.6 million or 91.6% to $20.0 million for the three
months ended March 31, 2000 compared with $10.4 million for the comparable
period in 1999. Gross profit as a percentage of net sales ("gross margin")
increased to 8.7% for the three months ended March 31, 2000 from 7.1% for the
three months ended March 31, 1999. This increase was primarily attributable to
growth in our sales volume, an increase in sales with higher margins and an
increase in absorption of overhead in our Mexican and Massachusetts facilities.
Selling, general and administrative ("SG&A") expenses increased $3.0 million
or 47.7% to $9.3 million, or 4.1% of net sales, for the three months ended March
31, 2000 compared with $6.3 million, or 4.3% of net sales, for the three months
ended March 31, 1999. SG&A expenses increased primarily to support the larger
revenue base and anticipated growth in fiscal year 2000.
Operating income increased $6.6 million to $10.7 million, or 4.7% of net
sales, for the three months ended March 31, 2000 compared with operating income
of $4.1 million, or 2.8% of net sales, for the comparable period in 1999 as a
result of the above factors.
Interest and other expense, net decreased 42.4% to $0.6 million for the three
months ended March 31, 2000 compared to $1.0 million for the three months ended
March 31, 1999. Included in our interest and other expense, net balance for the
three months ended March 31, 2000 was a $0.9 million gain in the partial sale of
our investment in eOn Communications (formerly Cortelco), a related party.
Excluding the eOn gain, interest and other expense, net increased $0.5 million
or 44.2% to $1.5 million. This increase was due primarily to higher average
working capital requirements resulting in a higher average loan balance for the
three-month period ended March 31, 2000.
We recorded a provision for income taxes of $3.9 million and $1.2 million for
the three months ended March 31, 2000 and 1999, respectively. The Company
provided for income taxes using a 39% and 40% effective tax rate for the three-
month period ended March 31, 2000 and 1999, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $227.2 million at March 31, 2000 compared with
$170.4 million at December 31, 1999. Operating activities used $48.7 million of
cash for the first three months of 2000 compared with cash used for operations
of $3.1 million for the comparable period in 1999. The primary use of cash for
operating activities for the three-month period ended March 31, 2000 was an
increase in both inventory and accounts receivable. Inventory increased $28.5
million to $200.1 million and accounts receivable increased $28.7 million to
$189.4 million at March 31, 2000. The increase in inventory and accounts
receivable are the results of continued sequential quarterly revenue growth. In
addition, the increase in inventory is also attributable to purchasing
strategies to prevent shortages of key components and reflect inventory
requirements to support second quarter 2000 customer demand.
11
<PAGE>
We have a $107.0 million Senior Secured Credit Facility with a group of banks
led by The Chase Manhattan Bank as agent to replace our previous credit
facilities with the banks. This new credit facility provides for a $7.0 million,
five-year term loan and a $100.0 million five-year line of credit, both of which
are secured by substantially all of our assets. At March 31, 2000, $87.0 million
of the credit facility was utilized and an additional $13.0 million was
available for use based upon the applicable borrowing base and the full term
loan was utilized. At March 31, 2000, the interest rate on the $7.0 million term
loan was 7.89% and the rate on the line of credit was 8.75%. The term loan
amortizes at a rate of $1.0 million per year for the first year and $1.5 million
per year for years two through five. We made $0.3 million in principal payments
on the term loan in 2000. The credit facility also provides for borrowings up to
an aggregate amount of $100.0 million, limited to a certain percentage of
qualified accounts receivable and qualified inventory. Interest is payable
monthly. For the term loan, we may choose an interest rate of either (i) 2.5%
above the prevailing London Interbank Offering rate ("LIBOR"), or (ii) 0.5%
above the prime rate as announced by the Agent. For the revolving credit
facility, we may choose an interest rate of either (i) 2.25% above the
prevailing LIBOR rate, or (ii) 0.25% above the prime rate as announced by the
Agent. In addition to certain other prohibited actions, the credit facility also
limits capital expenditures and prohibits the payment of cash dividends on our
common stock. The credit facility requires us to maintain certain minimum fixed
charge coverage ratios and maximum leverage ratios. Effective May 12, 2000, the
credit facility was amended to increase the amount available under the revolving
credit facility to $125.0 million.
We were party to a $17.0 million interest swap in order to fix the interest
rate on a portion of our outstanding borrowings. The swap agreement provided
for payments by us at a fixed rate of interest of 6.76% and would have matured
on October 19, 2001. We terminated the swap agreement on March 24, 2000,
without penalty.
We sold 575,000 shares of common stock of eOn Communications (formerly
Cortelco), a related party, for net proceeds of approximately $6.4 million in
the first quarter of 2000. We recognized a gain on this sale of approximately
$0.9 million.
Capital expenditures of approximately $1.2 million for the three months ended
March 31, 2000 were primarily for the acquisition of equipment related to our
operations.
We lease a manufacturing facility and certain equipment and computer software
used in our manufacturing operations under capital lease agreements that expire
through 2003.
As of March 31, 2000, we had equipment lease lines of approximately $6.9
million available for purchases of manufacturing equipment, computer hardware
and software and furniture.
In April and May 2000, we received net proceeds of approximately $95.6
million from the sale of 7% Convertible Subordinated Notes due April 15, 2007 in
a private placement. Interest payments are due on these Notes on April 15 and
October 15 of each year. Until allocated for specific use, the net proceeds of
this offering have been invested in short-term, interest-bearing, investment
grade securities.
Our need for, cost of and access to funds are dependent in the long-term on
our future operating results as well as conditions external to us. We may
require additional capital to finance further acquisitions or other enhancements
to or expansion of our manufacturing capacity. Although no assurance can be
given that any additional financing will be available on terms satisfactory to
us, we may seek additional funds from time to time through public or private
debt or equity offerings or through further bank borrowings or equipment lease
financing. We believe that our current sources of liquidity are adequate to
support our anticipated liquidity needs for the next twelve months.
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YEAR 2000 READINESS DISCLOSURE STATEMENT
We have not experienced any material disruption in our operations as a result
of the Year 2000 issue, although it is possible that we could still experience
such a disruption. We incurred approximately $0.5 million in costs in assessing
and correcting our internal hardware, software, equipment and embedded
technology in fiscal 1999. We used our working capital and available lease
liens to fund our Year 2000 project costs.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 1999, effective for the
fiscal years beginning after June 15, 2000. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
the impact of SFAS No. 133 on the consolidated financial statements of the
Company. The Company will adopt this accounting standard on January 1, 2001, as
required.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act") contains
certain safe harbors regarding forward-looking statements. From time to time,
information provided by the Company or statements made by its employees may
contain "forward-looking" information which involve risks and uncertainties. Any
statements in this Quarterly Report on Form 10-Q that are not statements of
historical fact are forward-looking statements. The following cautionary
statements should be considered carefully in evaluating the Company and its
business. The factors discussed in these cautionary statements, among other
factors, could cause actual results to differ materially from those contained in
the forward-looking statements made in this Quarterly Report on Form 10-Q and
presented elsewhere by management from time to time. If any of the following
risks or uncertainties actually occurs, our business, financial condition and
operating results would likely suffer. In that event, the market price of our
common stock could decline. These cautionary statements are being made pursuant
to the provisions of the Act and with the intention of obtaining the benefits of
the safe harbor provisions of the Act.
WE MAY NOT CLOSE THE ACQUISITION OF GSS THAILAND.
Our obligation to launch the tender offer for all issued shares and
outstanding options of GSS Thailand is conditioned on, among other things:
. the occurrence of all necessary government approvals, filings and
registrations;
. the shareholders of GSS Thailand voting in favor of the delisting of the
ordinary shares from the Stock Exchange of Thailand and the transferability
of the outstanding options to ACT, based on ACT's obligation to make the
tender offer;
. GSS Thailand obtaining a waiver from the Board of Investment relating to its
factory premises at Ayudhaya;
. no material breach of the Pre-Tender Agreement;
. no material adverse change in the business, condition (financial or
otherwise) or results of operations of GSS Thailand and/or reduction in the
value and/or assets of GSS Thailand (excluding changes occasioned by (i)
events affecting the contract electronic manufacturing industry as a whole
and (ii) fluctuations in the baht/U.S. dollar exchange rate); and
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. no proposal or offer for a tender offer for the shares of GSS Thailand which
is publicly announced and, in the judgment of the board of directors of GSS
Thailand, would result in a transaction more favorable to the shareholders
than the ACT offer, which causes GSS Thailand's board to withdraw or
adversely modify its recommendations to the shareholders and optionholders
for the delisting of the shares and the acceptance of the tender offer.
If the conditions set forth above are satisfied and the Stock Exchange of
Thailand accepts the delisting application of GSS Thailand, we will be required
to commence our tender offer for all issued shares and outstanding options of
GSS Thailand at the price per share set forth in the Pre-Tender Agreement, and
may not terminate our offer or lower the purchase price for any reason,
including due to adverse developments in the business, condition or results of
operations of GSS Thailand or otherwise. As part of the Pre-Tender Agreement,
holders of approximately 23% of GSS Thailand's issued shares agreed to tender
their shares and options in ACT's tender offer.
Alternatively, we have the option to make the cash tender offer prior to or
independently of the delisting of GSS Thailand from the Stock Exchange of
Thailand, which would be conditioned only on the tender of a majority of the
shares outstanding. Under this alternative, once a majority of shares are
tendered, we may not terminate our offer for any reason. While we plan to make a
tender offer for all issued shares and outstanding options, we cannot force any
non-tendering shareholder to exchange GSS Thailand shares or options for the
tender offer price, and accordingly a minority interest could likely exist
following the closing. This minority interest would result in our not receiving
the full benefit of ownership of the GSS Thailand operations.
We cannot assure you that the conditions set forth above will be satisfied or
that we will consummate the acquisition of GSS Thailand on a timely basis or at
all. Even if we consummate the GSS Thailand acquisition, we may not realize any
of the anticipated benefits of the acquisition. In addition, the tender offer
price per share and option is fixed in Thai baht, and we have not and may not
hedge any currency exposure to fluctuations in the baht/dollar exchange rate.
ADDITIONAL BENEFITS FROM THE MERGER WITH CMC INDUSTRIES MAY NOT OCCUR.
We completed the merger with CMC Industries in July 1999 with the expectation
that the merger would result in certain benefits, including:
. the opportunity to generate revenue from new customers that require an
electronics manufacturing services provider to have a minimum size and
geographic coverage;
. opportunities to increase revenues from our current customers by providing a
lower cost alternative and a broader geographic presence;
. operating efficiencies such as combined managerial, sales, marketing and
technological expertise and personnel; and
. other synergies due to the strategic fit and compatibility of the two
companies, including their common equipment platforms and information
systems.
We may not realize all of the additional expected benefits of the merger.
Integrating CMC's operations and personnel with our business has been and
continues to be a complex and difficult process. Achieving the benefits of the
merger will depend upon the successful integration of CMC's business in an
efficient and timely manner. The integration of CMC with our operations could
require additional costs and expenses as well as demands on management
personnel. The diversion of the attention of our management and any difficulties
encountered in the process of combining our companies could cause the disruption
of, or a loss of momentum in, our activities.
WE MAY FAIL TO MAKE ADDITIONAL ACQUISITIONS AND MAY NOT SUCCESSFULLY INTEGRATE
ACQUISITIONS WE DO MAKE, WHICH COULD IMPAIR OUR ABILITY TO COMPETE AND OUR
OPERATING RESULTS.
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In light of the consolidation trend in our industry, we intend to pursue
selective acquisitions of additional electronics manufacturing services
providers, facilities, assets or businesses. We may compete for acquisition
opportunities with entities having significantly greater resources than us. As a
result, we may not succeed in acquiring some or all companies, facilities,
assets or businesses that we seek to acquire. Failure to consummate additional
acquisitions may prevent us from accumulating sufficient critical mass required
by customers in this consolidating industry. This failure could significantly
impact our ability to effectively compete in our targeted markets and could
negatively affect our results of operations.
Moreover, acquisitions that we do complete may result in:
. the potentially dilutive issuance of common stock or other equity instruments;
. the incurrence of debt and amortization expenses related to goodwill and other
intangible assets; or
. the incurrence of significant costs and expenses.
Acquisition transactions, including our pending acquisition of GSS Thailand,
also involve numerous business risks, including:
. difficulties in assimilating the acquired operations, technologies, personnel
and products;
. difficulties in managing geographically dispersed and international
operations;
. the diversion of management's attention from other business concerns;
. the potential disruption of our business; and
. the potential loss of key employees.
OUR BUSINESS MAY SUFFER IF THE NETWORKING AND TELECOMMUNICATIONS SEGMENTS OF THE
ELECTRONICS INDUSTRY FAIL TO GROW AND EVOLVE.
Our customer base has historically been concentrated in a limited number of
segments within the electronics industry. Net sales to customers within the
networking and telecommunications segments accounted for approximately 77% of
our net sales for the three months ended March 31, 2000, 66% in fiscal 1999 and
58% in fiscal 1998. Developments adverse to these industry segments could
materially and negatively impact us. These industry segments, and the
electronics industry as a whole, experience:
. intense competition;
. rapid technological changes resulting in short product life-cycles and
consequent product obsolescence;
. significant fluctuations in product demand;
. economic cycles, including recessionary periods; and
. consolidation.
A recessionary period or other event leading to excess capacity affecting one
or more segments of the electronics industry we serve would likely result in
intensified price competition, reduced margins and a decrease in our net sales.
THE LOSS OF MAJOR CUSTOMERS COULD ADVERSELY AFFECT US.
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We depend on a small number of customers for a significant portion of our
business. Our four largest customers accounted for approximately 50% of our net
sales for the three months ended March 31, 2000. For the period, Nortel
Networks (formerly Bay Networks and Aptis Communications) and Efficient
Networks, Inc. each accounted for 10% or more of our net sales (20% and 16%,
respectively).
Customers representing 10% or more of our net sales in fiscal 1999 were Nortel
Networks and S-3 Incorporated (formerly Diamond Multimedia) with 15% and 13%,
respectively, as compared to Nortel Networks and Micron Electronics, each with
approximately 12% of our fiscal 1998 net sales. The timing and level of orders
from our customers varies substantially from period to period. The historic
level of net sales we have received from a specific customer in one particular
period is not necessarily indicative of net sales we may receive from that
customer in any future period.
Our results may depend on our ability to diversify our customer base and
reduce our reliance on particular customers. Our major customers may not
continue to purchase products and services from us at current levels or at all.
In particular, we terminated our business with Ascend, which was acquired by
Lucent Technologies, in the fourth quarter of fiscal 1999 and we experienced a
significant decrease in sales to Micron in the third quarter of fiscal 1998. For
various reasons, including consolidation in our customers' industries, we have
in the past and will continue in the future to terminate or lose relationships
with customers. We may not be able to expand our customer base to make up any
sales shortfalls from our major customers so as to increase overall net sales.
Because certain customers represent such a large part of our business, any of
the following could negatively impact our business:
. the loss of one or more major customers;
. a significant reduction or delay in purchases from any major customer;
. discontinuance by any major customer of the sale of products we manufacture;
. a reduction in demand for the products of major customers that we
manufacture; or
. the inability or unwillingness of a major customer to pay for products and
services on a timely basis or at all.
OUR CUSTOMERS DO NOT ENTER INTO LONG-TERM PURCHASE ORDERS OR COMMITMENTS, AND
CANCELLATIONS, REDUCTIONS OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT
OUR PROFITABILITY.
The level and timing of orders placed by our customers vary due to:
. customer attempts to manage inventory;
. changes in the customers' manufacturing strategy, such as a decision by a
customer to either diversify or consolidate the number of electronics
manufacturing services providers used or to manufacture their products
internally; and
. variation in demand for customer products.
We generally do not obtain long-term purchase orders or commitments from our
customers. Instead, we work closely with our customers to anticipate delivery
dates and future volume of orders based on customer forecasts. We rely on our
estimates of anticipated future volumes when making commitments regarding:
. the levels of business that we will seek and accept;
. the timing of production schedules;
. the purchase of materials;
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. the purchase or leasing of facilities and equipment; and
. the levels and utilization of personnel and other resources.
Customers may cancel, reduce or delay orders that were either previously made
or anticipated for a variety of reasons. Significant or numerous terminations,
reductions or delays in our customers' orders could negatively impact our
operating results. We often purchase components for product assemblies based on
customer forecasts, at times without a written customer commitment to pay for
them. Our policy is that customers are generally responsible for materials and
associated acquisition costs in the event of a significant reduction, delay or
cancellation of orders from the forecasted amounts. A customer's unwillingness
or inability to reimburse us for materials costs in the case of a significant
variance from forecast could adversely affect our operating results.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
The electronics manufacturing services industry is highly competitive. We
compete against numerous U.S. and foreign electronics manufacturing services
providers with global operations, as well as those who operate on a local or
regional basis. In addition, current and prospective customers continually
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. Some of our competitors have
substantially greater managerial, manufacturing, engineering, technical,
financial, systems, sales and marketing resources than we do. These competitors
may:
. respond more quickly to new or emerging technologies;
. have greater name recognition, critical mass and geographic and market
presence;
. be better able to take advantage of acquisition opportunities;
. adapt more quickly to changes in customer requirements; and
. devote greater resources to the development, promotion and sale of their
services.
We may be operating at a cost disadvantage compared to manufacturers who have
greater direct buying power from component suppliers, distributors and raw
material suppliers or who have lower cost structures. Our manufacturing
processes are generally not subject to significant proprietary protection, and
companies with greater resources or a greater geographic and market presence may
enter our market or increase their competition with us. Increased competition
from existing or potential competitors could result in price reductions, reduced
margins or loss of market share.
WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A
TIMELY BASIS OR AT ALL.
We rely on a single or limited number of third-party suppliers for many
proprietary and other components used in the assembly process. We do not have
any long-term supply agreements. Shortages of materials and components have
occurred from time to time and will likely occur in the future. In particular,
we are currently experiencing a shortage in components such as tantalum and
ceramic capacitors, flash memory, and dynamic and static ram. Raw materials or
component shortages could result in shipping delays or increased prices which
could adversely affect our ability to manufacture products for our customers on
a timely basis or at acceptable cost. Moreover, the consolidation trend in our
suppliers' industry results in changes in supply relationships and in the price,
availability and quality of components and raw materials. Due to our utilization
of just-in-time inventory techniques, the timely availability of many components
is dependent on our ability to both develop accurate forecasts of customer
requirements and manage the materials supply chain. If we fail to do either, our
operating results may suffer.
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OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
We acquired in fiscal 1997, and then subsequently expanded in fiscal 1998,
operations in Dublin, Ireland. As a result of our merger with CMC, we acquired
operations in Hermosillo, Mexico and a procurement office in Taiwan. We expect
to expand into other international regions. We have limited experience in
managing geographically dispersed operations and in operating in Europe, Mexico
or Asia. 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 risks which could materially impact our results of
operations:
. economic or political instability;
. transportation delays and interruptions;
. foreign exchange rate fluctuations;
. increased employee turnover and labor unrest;
. longer payment cycles;
. greater difficulty in collecting accounts receivable;
. utilization of different systems and equipment;
. difficulties in staffing and managing foreign personnel and diverse cultures;
and
. less developed infrastructures.
In addition, changes in policies by the U.S. 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; or
. limitations on imports or exports.
Also, we could be adversely affected if our host countries revise their
current policies encouraging foreign investment or foreign trade.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF, OR FAIL TO ATTRACT, KEY
PERSONNEL.
Our future success largely depends upon the skills and efforts of John A.
Pino, Chairman of the Board, President and Chief Executive Officer, our other
key executives and our managerial, manufacturing, sales and technical employees.
With the exception of Jack O'Rear, Vice President of Operations and Chief
Operating Officer, and a small number of sales people, we have not entered into
employment contracts or noncompetition agreements with any of our senior
management or other key employees. We do not maintain or plan to acquire any
key-man life
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insurance on any of our key personnel. The loss of services of any of our
executives or other key personnel could negatively affect our business. Our
continued growth will also require us to attract, motivate, train and retain
additional skilled and experienced managerial, manufacturing, sales and
technical 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.
WE MAY NOT BE ABLE TO MAINTAIN OUR TECHNOLOGICAL AND MANUFACTURING PROCESS
EXPERTISE.
The markets for our manufacturing services are characterized by rapidly
changing technology and evolving process development. The continued success of
our business will depend upon our ability to:
. maintain and enhance our technological capabilities;
. develop and market manufacturing services which meet changing customer needs;
and
. successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and testing
technologies, equipment and processes currently required by our customers, we
cannot be certain that we will develop capabilities required by our customers in
the future. Also, the emergence of new technologies, industry standards or
customer requirements may render our equipment, inventory or processes obsolete
or noncompetitive. In addition, we may have to acquire new assembly and testing
technologies and equipment to remain competitive. The acquisition and
implementation of new technologies and equipment may require significant expense
or capital investment. Our failure to anticipate and adapt to our customers'
changing technological needs and requirements would have an adverse effect on
our business.
WE MAY INCUR SIGNIFICANT LIABILITIES IF WE FAIL TO COMPLY WITH ENVIRONMENTAL
REGULATIONS.
We are subject to environmental regulations relating to the use, storage,
discharge, site cleanup, and disposal of hazardous chemicals used in our
manufacturing processes. If we fail to comply with present and future
regulations, or are required to perform site remediation, we could be subject to
future liabilities or the suspension of production. Present and future
regulations may also:
. restrict our ability to expand our facilities;
. require us to acquire costly equipment; or
. require us to incur other significant costs and expenses.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH COULD
RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
We manufacture products to our customers' specifications which are highly
complex and may at times contain design or manufacturing errors or failures.
Defects have been discovered in products we manufacture in the past and, despite
our quality control and quality assurance efforts, defects may occur in the
future. Defects in the products we manufacture, whether caused by a design,
manufacturing or component failure or error, may result in delayed shipments to
customers or reduced or cancelled customer orders. If these defects occur in
large quantities or too frequently, our business reputation may also be
impaired. In addition, these defects may result in liability claims against us.
OUR OPERATING RESULTS WILL DEPEND ON OUR ABILITY TO MANAGE OUR GROWTH.
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We have grown rapidly in recent years and we expect to continue to expand our
operations. This growth has placed, and will continue to place, significant
strain on our management, operations, technical, financial, systems, sales,
marketing and other resources. For example, we identified a significant
inventory shortfall occurring in the fourth quarter of fiscal 1997 that
substantially adversely affected our operating results for that period. As a
result of this shortfall, we reviewed and continue to review our security
procedures and operating and financial controls. Based upon such review, we
implemented enhanced security systems and inventory work-in-process tracking
systems. These systems may not be adequate or have the intended results. We
have implemented various cost management programs to enhance our profitability.
These programs may not result in the anticipated cost savings, however. We will
have to continue to invest in both our manufacturing infrastructure to expand
capacity and our operational, financial, and management information systems. If
we fail to manage our expected growth effectively, the quality of our services
and products and our operating results could suffer significantly.
EXPANSION OF OUR OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
We may expand our operations by establishing or acquiring new manufacturing
facilities or by expanding capacity in our current facilities. We may expand
both in geographical areas in which we currently operate and in new geographical
areas within the United States and internationally. We have recently begun
operations in a new facility in Massachusetts and have signed a lease for a new
facility in California which is currently under construction and which will
enable us to consolidate and expand our operations. We expect to begin
operations in this new California facility in the fourth quarter of fiscal 2000.
We may not be able to find additional suitable facilities on a timely basis or
on terms satisfactory to us. Expansion of operations involves numerous business
risks, including:
. the inability to successfully integrate additional facilities or capacity and
to realize anticipated synergies, economies of scale or other value;
. difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans;
. the diversion of management's attention from other business areas during the
planning and implementation of expansions;
. the strain placed on our operational, financial, management, technical and
information systems and resources;
. disruption in manufacturing operations;
. the incurrence of significant costs and expenses; and
. the inability to locate enough customers or employees to support the
expansion.
Our results of operations could be adversely affected if the revenues
associated with new or expanded facilities are not sufficient to offset the
increased expenditures associated with the expansions.
WE MAY FAIL TO SECURE NECESSARY ADDITIONAL FINANCING.
We have made and will continue to make substantial capital expenditures 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 and capital to support our continued growth and
operations. We may seek to raise capital by:
. issuing additional common stock or other equity instruments;
. issuing debt securities;
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. obtaining additional lease financings;
. increasing our lines of credit; or
. obtaining off-balance sheet financing.
We may not be able to obtain additional capital when we want or need it, and
capital may not be available on satisfactory terms. If we issue additional
equity securities or convertible debt to raise capital, it may be dilutive to
your ownership interest. Furthermore, any additional capital may have terms and
conditions that adversely affect our business, such as financial or operating
covenants.
WE ANTICIPATE THAT OUR NET SALES AND OPERATING RESULTS WILL FLUCTUATE WHICH
COULD AFFECT THE TRADING PRICE OF OUR SECURITIES.
Our net sales and operating results have fluctuated and may continue to
fluctuate significantly from quarter to quarter. A substantial portion of our
net sales in a given quarter may depend on obtaining and fulfilling orders for
assemblies to be manufactured and shipped in the same quarter in which those
orders are received. Further, a significant portion of our net sales in a given
quarter may depend on assemblies configured, completed, packaged and shipped in
the final weeks of such quarter. In addition to the variability resulting from
the short-term nature of our customers' commitments, the following factors may
contribute to such fluctuations:
. fluctuations in demand for our services or the products we manufacture;
. shipment delays;
. interruptions in manufacturing caused by earthquakes or other natural
disasters;
. effectiveness in controlling manufacturing costs;
. changes in cost and availability of labor and components;
. inefficiencies in managing inventory and accounts receivable, including
inventory obsolescence and write-offs; and
. the levels at which we utilize our manufacturing capacity.
Our operating expenses are based 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. Results of operations in any
period should not be considered indicative of the results to be expected for any
future period. It is likely that in one or more future periods our results of
operations will fail to meet the expectations of securities analysts or
investors, and the price of our securities could decline significantly.
WE MAY INCUR COSTS AND LIABILITIES RELATED TO POTENTIAL OR PENDING LITIGATION.
On February 27, 1998, our company and several of our officers and directors
were named as defendants in a purported securities class action lawsuit filed in
the United States District Court for the District of Massachusetts. The
plaintiffs amended the complaint on October 16, 1998. The plaintiffs purport to
represent a class of all persons who purchased or otherwise acquired our common
stock in the period from April 17, 1997 through March 31, 1998. The amended
complaint alleges, among other things, that the defendants knowingly made
misstatements to the investing public about the value of our inventory and the
nature of our accounting practices. On December 15, 1998, we filed a motion to
dismiss the case in its entirety based on the pleadings. Our motion to dismiss
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was granted without prejudice on May 27, 1999, and the case was closed by the
court on June 1, 1999. On June 29, 1999, the plaintiffs filed a motion with the
court seeking permission to file a second amended complaint. We opposed that
motion. On July 13, 1999, the court denied the plaintiffs' motion to amend,
noting "final judgment having entered in the case." On July 26, 1999, the
plaintiffs filed a motion with the court asking the court to extend the 30-day
period for filing an appeal of its ruling dismissing the case. We opposed that
motion as well, and the court denied the motion on August 10, 1999. The
plaintiffs filed an appeal with the United States Court of Appeals for the First
Circuit requesting that the Court of Appeals reverse each of the orders
described above. In an opinion dated May 5, 2000, the Court of Appeals affirmed
in all respects the orders of the District Court that the plaintiffs had
appealed.
In December 1993, CMC Industries retained the services of a consultant to
assist in quantifying the potential exposure to CMC in connection with clean-up
and related costs of a former manufacturing site. This site is commonly known as
the ITT Telecommunications site in Milan, Tennessee. The consultant initially
estimated that the cost to remove and dispose of the contaminated soil would be
approximately $200,000. CMC subsequently entered into a voluntary agreement to
investigate the site with the Tennessee Department of Environment and
Conservation. In addition, CMC agreed to reimburse a tenant of the site $115,000
for expenditures previously incurred to investigate environmental conditions at
the site. CMC recorded a total provision of $320,000 based on these estimates.
In fiscal 1995, an environmental consultant estimated that the cost of a full
study combined with short- and long-term remediation of the site may cost
between $3.0 and $4.0 million. Subsequent environmental studies done in fiscal
1999 have estimated such costs as between $750,000 and $3.5 million. During
CMC's fiscal 1996, the State of Tennessee's Department of Environment and
Conservation named certain potentially responsible parties in relation to the
former facility. CMC was not named as a potentially responsible party. However,
Alcatel, Inc., a potentially responsible party named by the State of Tennessee's
Department of Environment and Conservation and a former owner of CMC, sought
indemnification from CMC under the purchase agreement by which CMC acquired the
stock of one of the operators of the facility. To date, Alcatel has not filed
any legal proceedings to enforce its indemnification claim. However, Alcatel
could initiate such proceedings and other third parties could assert claims
against us relating to remediation of the site. We have entered into an
agreement with Alcatel pursuant to which the statute of limitations on its
indemnification claim is tolled for a period of time. In the event any
proceedings are initiated or any claim is made, we would defend ourselves
vigorously but defense or resolution of this matter could negatively impact our
financial position and results of operations.
JOHN A. PINO HAS SIGNIFICANT INFLUENCE OVER OUR COMPANY.
John A. Pino, Chairman of the Board, President and Chief Executive Officer,
and a number of trusts for his and his family's benefit, collectively
beneficially own approximately 30% of our common stock. As a result, Mr. Pino
is able to exert significant influence over us through his ability to influence
the election of directors and all other matters that require action by our
stockholders. The voting power of Mr. Pino and these trusts could have the
effect of preventing or delaying a change in control of our company which Mr.
Pino opposes even if our other stockholders believe it is in their best
interests.
THE PRICE OF OUR SECURITIES HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and may continue to be
volatile. From October 1, 1998 through March 31, 2000, our stock price
fluctuated between a low of $5.06 per share and a high of $57.38 per share. On
May 12, 2000, the reported last sale price for our common stock was $32.00. The
price of our common stock may fluctuate significantly in response to a number of
events and factors relating to our company, our competitors and the market for
our services, many of which are beyond our control, such as:
. quarterly variations in our operating results;
. announcements of new technological innovations, equipment or service offerings
by us or our competitors;
. announcements of new products or enhancement by our customers;
22
<PAGE>
. changes in financial estimates and recommendations by securities analysts; and
. news relating to trends in our markets.
In addition, the stock market in general, and the market prices for technology
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating performance.
Recently, when the market price of a stock has been volatile, holders of that
stock have often instituted securities class action litigation against the
company that issued the stock. We have been the subject of such a lawsuit. If
any of our stockholders brought another securities class action lawsuit against
us, we could incur substantial additional costs defending that lawsuit. The
lawsuit could also divert the time and attention of our management and an
adverse judgment could cause our financial condition or operating results to
suffer.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS THE TRADING PRICE OF OUR SECURITIES.
Massachusetts corporate law and our articles of organization and by-laws
contain provisions that could have the effect of delaying, deferring or
preventing a change in control of our company or our management. These
provisions could discourage proxy contests and make it more difficult for you
and other stockholders to elect directors and take other corporate actions.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock. These provisions:
. authorize the issuance of "blank check" preferred stock, which is preferred
stock that can be created and issued by our board of directors without
prior stockholder approval, with rights senior to those of common stock;
. provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
. require unanimity for stockholder action by written consent; and
. establish advance notice requirements for submitting nominations for election
to the board of directors and for proposing matters that can be acted upon
by stockholders at a meeting.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates and foreign currency exchange
primarily in its cash, debt and foreign currency transactions. We do not hold
derivative financial instruments for trading or speculative purposes.
We have a $107.0 million Senior Secured Credit Facility which bears interest
at variable interest rates. We had a $17.0 million interest rate swap agreement
that would have matured in October 2001 in order to reduce the impact of
fluctuating interest rates on our credit facility. This swap agreement was
classified as held for purposes other than trading. Under this swap agreement,
we had agreed with the counterpart to pay fixed rate payments on a monthly
basis, based upon an annual interest rate of 6.76%, in exchange for receiving
variable rate payments, on a monthly basis, calculated on an agreed-upon
notional amount. Net interest payments or receipts from interest rate swaps were
recorded as adjustments to interest expense in our condensed consolidated
statements of operations. We terminated the swap agreement on March 24, 2000,
without penalty. Our exposure related to adverse movements in interest rates is
primarily derived from the variable rate on our credit facility. As of March 31,
2000, all of the outstanding balance of $87.0 million under the credit facility
was at an interest rate of 8.75%. An adverse change of one percent in the
interest rate would cause a change in interest expense of approximately $0.9
million on an annual basis.
The foreign currencies to which we have exchange rate exposure are the Irish
punt and the Mexican peso. International operations do not constitute a
significant portion of our net sales and therefore this exposure is not
considered material to us.
Based on a hypothetical ten percent adverse movement in foreign currency
exchange rates, the potential losses in future earnings, fair value of the risk-
sensitive financial instruments and cash flows are immaterial. However, the
actual effects of interest rates and foreign currency exchange rates may differ
materially from the hypothetical analysis.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11. Computation of Net Income Per Common Share
27. Financial Data Schedule
(b) Reports on Form 8-K:
The Registrant filed a report on Form 8-K on April 6, 2000, which reported
that the Company intended to raise money through an offering of convertible
subordinated notes to qualified institutional buyers.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2000 ACT MANUFACTURING, INC.
/s/ JEFFREY B. LAVIN
----------------------------
Jeffrey B. Lavin
Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- --------------------------------------------------
11. Computation of Net Income Per Common Share
27. Financial Data Schedule
<PAGE>
EXHIBIT 11
ACT MANUFACTURING, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
2000 1999
----- ----
<S> <C> <C>
BASIC NET INCOME PER COMMON SHARE:
Net income as reported ................................ $ 6,150 $ 1,850
Weighted average number of common shares outstanding:
Common stock ........................................ 16,546 12,881
------- -------
Basic net income per common share ................... $ 0.37 $ 0.14
======= =======
DILUTED NET INCOME PER COMMON SHARE:
Net income as reported ................................ $ 6,150 $ 1,850
Weighted average number of shares outstanding:
Common stock ........................................ 16,546 12,881
Effect of stock options ............................. 1,099 503
------- -------
Total ............................................. 17,645 13,384
------- -------
Diluted net income per common share ................. $ 0.35 $ 0.14
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,290
<SECURITIES> 0
<RECEIVABLES> 188,739
<ALLOWANCES> 3,032
<INVENTORY> 200,154
<CURRENT-ASSETS> 402,693
<PP&E> 65,363
<DEPRECIATION> 28,224
<TOTAL-ASSETS> 458,999
<CURRENT-LIABILITIES> 175,481
<BONDS> 95,027
0
0
<COMMON> 167
<OTHER-SE> 185,508
<TOTAL-LIABILITY-AND-EQUITY> 458,999
<SALES> 229,088
<TOTAL-REVENUES> 229,088
<CGS> 209,089
<TOTAL-COSTS> 218,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 593
<INCOME-PRETAX> 10,083
<INCOME-TAX> 3,933
<INCOME-CONTINUING> 6,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,150
<EPS-BASIC> .37
<EPS-DILUTED> .35
</TABLE>
