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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
/ / 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: 001-15883
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MANUFACTURERS' SERVICES LIMITED
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3258036
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 BAKER AVENUE, SUITE 106, CONCORD, 01742
MA
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (978) 287-5635
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $0.001 NEW YORK STOCK EXCHANGE
PAR VALUE PER SHARE
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 (or for such shorter periods 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 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. /X/
The aggregate market value of the voting common stock held by non-affiliates
of the Registrant (based on the closing sale price of the Common Stock as
reported on the New York Stock Exchange on March 26, 2001) was $107,320,576. For
purposes of this determination, shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of outstanding shares of the Registrant's Common
Stock as of the close of business on March 26, 2001, was 33,537,680.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2001
Annual Meeting of Stockholders............................ Part III
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PART I
ITEM 1. BUSINESS
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS. ANY STATEMENT IN THIS
REPORT THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A
FORWARD-LOOKING STATEMENT. SOME OF THE FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS,"
"MAY," "WILL," "SHOULD," "SEEKS," "APPROXIMATELY," "INTENDS," "PLANS,"
"ESTIMATES" OR "ANTICIPATES" OR THE NEGATIVE OF THOSE WORDS OR OTHER COMPARABLE
TERMINOLOGY. FORWARD-LOOKING STATEMENTS IN THIS REPORT INCLUDE:
- FORECASTS IN THE GROWTH OF THE EMS INDUSTRY, AND OUR ABILITY TO CAPITALIZE
ON SUCH GROWTH;
- STATEMENTS REGARDING OUR PLANS FOR, AND THE COSTS OF, ENHANCING OUR GLOBAL
PRESENCE AND MOVING SOME OF OUR ASIAN OPERATIONS TO CHINA; AND
- STATEMENTS REGARDING OUR FUTURE REVENUES, EXPENSE LEVELS, LIQUIDITY AND
CAPITAL RESOURCES, OPERATING LOSSES AND PROJECTIONS REGARDING OUR BUSINESS
STRATEGY OF FOCUSING ON HIGH-GROWTH, HIGH-MARGIN BUSINESS.
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. A NUMBER OF
IMPORTANT FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
THE FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION UNDER "RISK FACTORS"
CONTAINED IN THIS REPORT. ANY FORWARD-LOOKING STATEMENTS IN THIS REPORT
REPRESENT OUR VIEWS AS OF THE DATE OF THIS REPORT, AND WE DISCLAIM ANY DUTY TO
UPDATE THESE STATEMENTS, EVEN IF SUBSEQUENT EVENTS CAUSE OUR VIEWS TO CHANGE.
OVERVIEW
We are a leading global provider of advanced electronics manufacturing
services (EMS) to original equipment manufacturers (OEMs). We have established a
global network of manufacturing facilities in the world's major electronics
markets--North America, Europe and Asia. We have developed relationships with
leading OEMs in rapidly growing industries such as wired and wireless
communications, networking and storage equipment, computer systems and
peripherals, consumer electronics, industrial equipment and commercial avionics.
We offer our customers an outsourcing solution that represents a lower total
cost of ownership than that provided by their internal operations through
efficient management of our business and aggressive management of our cost and
asset base. We seek to differentiate ourselves by providing exceptional customer
service and by broadly and deeply integrating our services into our customers'
OEM operations. We provide integrated supply chain solutions that address all
stages of the product life cycle, including engineering and design, new product
introduction, materials procurement and management, printed circuit board
assembly, product assembly and system integration, testing, logistics and
distribution, and after-market support. This comprehensive range of services
promotes our growth by attracting new customers and capturing additional
outsourcing opportunities within our existing customer base.
We are organized as a Delaware corporation, incorporated in 1994. Our
principal executive office is located at 300 Baker Avenue, Suite 106, Concord,
MA 01742 and our telephone number is (978) 287-5630.
INDUSTRY BACKGROUND
Historically, OEMs have been fully integrated, performing the engineering
and design, new product introduction, assembly and manufacturing, testing,
distribution and logistics and after-market support functions for their
products. In recent years, however, as OEMs throughout the world have been under
intense pressure to reduce costs, focus on core competencies and reduce supply
chain investment, they have increasingly accepted and relied upon the
outsourcing of these functions to EMS companies that permit them to achieve
their goals. By focusing on these functions, we believe that EMS companies
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have provided OEMs with cost savings, superior technological know-how and access
to more advanced manufacturing processes. This enables OEMs to concentrate on
their core competencies, such as product development, marketing and sales. As a
result of this outsourcing strategy, OEMs have begun to divest a significant
portion of their manufacturing facilities and many newer OEMs are choosing to
outsource rather than build an internal manufacturing infrastructure.
Today, the EMS industry is comprised of companies that provide a broad range
of services, including engineering and design, new product introduction,
assembly and manufacturing, testing, distribution and logistics and after-market
support services for OEMs in the electronics industry. The penetration of EMS
companies into the total available market remains low. Technology Forecasters
estimates that the total cost of goods sold outsourced by OEMs has grown from
10% in 1998 to an estimated 13% in 2000 and will grow to 26% by 2004. As a
result, Technology Forecasters estimates the EMS industry will grow at 27%
annually from approximately $101 billion in 2000 to $260 billion in 2004.
Moreover, some industry observers believe that the trend toward outsourcing by
OEMs will accelerate in an economic downturn, as OEMs are further forced to
pursue aggressive cost savings. We also believe that larger EMS providers with
global presence will grow faster than the industry average because they can
offer multinational OEMs a comprehensive set of outsourced services through a
single global manufacturing solution. Technology Forecasters projects that large
EMS companies, defined as generating revenue over $500 million annually, will
grow at a rate of 35% over the 1998 to 2003 period.
We believe that the factors driving OEMs to favor an outsourcing strategy
include:
- REDUCED TOTAL PRODUCTION COST. OEMs need to continually reduce costs to
remain competitive. EMS companies are able to manufacture products at a
reduced total cost to OEMs because of higher utilization of manufacturing
capacity, access to leading-edge procurement and inventory management
capabilities, proficiency in purchasing materials and components and a
continual focus on improving the entire supply chain from product design
to after-market support.
- FOCUS ON CORE COMPETENCIES. By shifting design, manufacturing, testing,
logistics and distribution and after-market support functions to EMS
companies, OEMs can focus their resources on their core competencies,
including product development, marketing and sales.
- ACCESS TO LEADING TECHNOLOGIES. OEMs are continually seeking access to
engineering expertise and manufacturing technologies necessary to build
their increasingly complex products. OEMs are motivated to work with EMS
companies to gain access to their expertise in product design, assembly,
manufacturing and testing technologies, as well as their expertise in
materials procurement and management and after-market support. In
addition, EMS companies provide OEMs with access to advanced information
systems, enabling OEMs to better monitor and control the global production
and distribution of their products.
- REDUCED SUPPLY CHAIN INVESTMENT. Outsourcing to EMS companies allows
OEMs to lower their investment in inventory and manufacturing assets and
shift more of their fixed costs to variable costs, enabling them to
increase their return on assets. As a result, OEMs can react more quickly
to changing market conditions and allocate capital to other core
activities.
- ACCELERATED TIME-TO-MARKET AND TIME-TO-GLOBAL VOLUME. OEMs are
increasingly requiring EMS companies to have capabilities in all major
global markets as they seek to expand sales and simultaneously introduce
new products worldwide. Once products have been developed, OEMs need to
quickly reach commercial volume production and distribute their products
in all major markets in order to achieve the greatest impact in a
competitive market.
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OUR BUSINESS STRATEGY
Our objective is to be a leading global provider of advanced electronics
manufacturing services to leading and emerging OEMs. Our strategy includes the
following key elements:
FOCUS ON HIGH GROWTH, HIGH-MARGIN BUSINESS IN MARKETS SUCH AS WIRELESS
CONNECTIVITY AND BROADBAND INFRASTRUCTURE. We target leading and emerging
OEMs in industries such as wired and wireless communications, networking and
storage equipment, computer systems and peripherals, consumer electronics,
industrial equipment and commercial avionics. We believe that these markets are
rapidly growing and also offer the opportunity to achieve higher product margins
than those obtainable in the provision of traditional, commodity-oriented
electronic products. We will continue to focus on UNIX-based systems, microwave
and radio frequency components, satellite network terminals, switching and
transmission equipment, network cards, personal digital assistants and
industrial products. We believe that the significant demand for these products,
coupled with the high degree of expertise and technology we offer, provide the
most significant opportunities for an attractive return on investment.
ESTABLISH AND MAINTAIN LONG-TERM PARTNERSHIPS WITH LEADING OEMS THROUGH
INTEGRATED SUITE OF MANUFACTURING LIFE-CYCLE SERVICES. We seek to establish and
maintain relationships with leading OEMs and deliver complete product life-cycle
services to them, beginning with early involvement in their product engineering
and design and new product introduction cycles and continuing through
manufacturing, testing, logistics and distribution and after-market support
services. We believe that the provision of a comprehensive supply chain is
critical to our customers' success, and can provide an important competitive
advantage. We also serve emerging companies in order to establish an early
outsourcing relationship that will provide us with attractive growth
opportunities as the products of these companies gain market acceptance.
REDUCE OUR CUSTOMERS' TIME-TO-GLOBAL MARKET AND TIME-TO-GLOBAL VOLUME. We
seek to reduce our customers' time-to-global market and time-to-global volume
production for their new products through our engineering and design and new
product introduction services and our global manufacturing network capabilities.
We work closely with our customers in the early stages of their product
development efforts to reduce product costs and improve the manufacturability
and testability of their products. Our information systems and materials
management processes enable us to rapidly ramp-up operations to meet our
customers' needs, quickly respond to changes in product demand and effectively
distribute products directly to our customers' end users. By offering our
customers a comprehensive range of services in a variety of manufacturing
locations, we are better able to assist them in rapidly introducing new products
into global markets.
EXPLOIT AND ENHANCE OUR GLOBAL MANUFACTURING PRESENCE. We currently
maintain manufacturing facilities in the United States, Spain, Ireland, France,
Singapore, Malaysia and China, which allow us to serve the world's major
electronics markets. This strategically positioned network of product design and
manufacturing facilities reduces the time and cost required to bring our
customers' products to market and allows for the simultaneous introduction of
our customers' products in major global markets. We believe this is an important
benefit to our customers. We intend to continue to seek and evaluate strategic
opportunities to enhance our geographic presence and the scope of our
manufacturing capabilities, particularly near our customers and their
end-markets.
LEVERAGE OUR INFORMATION TECHNOLOGY SYSTEMS. We have made a significant
investment in developing sophisticated information technology systems, including
support of e-commerce systems that permit us to work with our customers on a
real-time basis. We believe that our investment in these information systems
delivers competitive advantages for our customers by improving supply chain
management, enhancing operational flexibility and reducing transaction
overheads. We plan to continue to make investments in e-business tools that use
the speed and technology of the Internet to facilitate
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the flow of information and increase the total efficiency of the supply chain to
achieve the business goals of our customers.
ENHANCE OUR INTEGRATED DESIGN, MANUFACTURING AND RELATED SERVICES. We
intend to continue to enhance our service offerings to meet the evolving needs
of our customers and to more effectively control and manage the supply chain.
OEMs are increasingly requiring a wider range of advanced services from EMS
companies. We offer our customers a comprehensive range of services, including
engineering and design, new product introduction services, global supply chain
management, printed circuit board assembly, product assembly and system
integration, testing, logistics and distribution, and after-market support
services. We have expanded our engineering and design capabilities through
acquisitions of two electronics design firms, Electronic System Packaging and
Ronlin Design, and our new product introduction services through the recent
acquisition of Qualitronics, a prototype and low-volume manufacturing firm. We
believe that our ability to support customers in these areas provides us insight
into our customers' future manufacturing requirements, which is critical to
further penetrating the EMS market and attracting new customers.
CONTINUALLY REDUCE OUR CUSTOMERS' OVERALL PRODUCT COSTS. We continually
seek to reduce our customers' overall product costs. We describe our
comprehensive approach to product cost reduction as "Total Cost of
Ownership-Registered Trademark-." Our Total Cost of Ownership solution is based
on the principle that the total cost of a product is the sum of all economic
costs related to designing, producing and delivering final products to customers
on a long-term basis. We believe we are able to reduce our customers' overall
product costs through our integrated product design and manufacturing expertise
and strength in global procurement and supply chain management. Our product
design capabilities enable us to develop manufacturing strategies to more
efficiently procure materials and manufacture our customers' products. We
believe the scale of our global materials purchases and our expertise in
procurement and supplier management enhances our ability to obtain advantageous
materials pricing. Our focus on the management of the global supply chain
reduces costs by optimizing the use of materials and components throughout the
entire product life cycle. In addition, we continually review our operating
performance and implement specific cost reduction and process improvement
initiatives, the savings from which further reduce our customers' overall
product costs. By providing our customers with Total Cost of Ownership
solutions, we believe we enhance our customers' competitiveness in the
marketplace.
INCREASE PENETRATION OF OUR EXISTING CUSTOMERS, EXPAND OUR CUSTOMER BASE AND
PURSUE SELECTED ACQUISITIONS. We believe that the increased penetration of our
existing customers, the continued expansion of our customer base and the pursuit
of selected acquisitions are critical to our future success. We continually
evaluate the requirements of our existing customers, and seek the opportunity to
provide them with additional services from existing facilities, thereby
strengthening our relationships with our customers and increasing the
utilization of existing manufacturing facilities. We actively pursue new
customers by conducting a focused marketing effort, designed to increase our
brand awareness and the likelihood of winning new business. In addition, we
intend to continue to pursue the acquisition of selected manufacturing and
design facilities from OEMs and small EMS and related companies that offer us
relationships with key customers, strong and experienced management teams,
strategic capabilities, attractive locations and enhanced service offerings.
Recent acquisitions are described in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Recent
Acquisitions".
OUR SERVICES
We offer technical services that provide our customers a total solution by
taking their products from initial design to high-volume production, test,
distribution and after-market support. While we currently derive substantially
all of our net sales from printed circuit board assembly, testing services,
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assembly of systems of electronics products, which include multiple components
and final products, and the fulfillment and distribution of completed products,
we believe that OEMs are increasingly demanding an integrated outsourcing
solution from EMS companies. The services that we offer OEMs include:
ENGINEERING AND DESIGN. We offer engineering, design, prototype and related
services that help our customers design their products for optimal manufacturing
and testing. Our electrical, mechanical and packaging engineers provide our
customers with circuit design, microwave and radio frequency engineering,
printed circuit board layout, mechanical design and test fixture design
services. We also provide design for manufacturability, design for testability
and design for procurement services. The purpose of design for manufacturability
is to achieve defect-free and cost-effective product designs, reduce product
development cycles, create high initial production yields and establish superior
product quality. Design for testability focuses on achieving the highest level
of fault detection and isolation before products are shipped. Design for
procurement identifies areas in which the overall cost of our customers'
products can be reduced through a decrease in material costs and effective
inventory management.
NEW PRODUCT INTRODUCTION. We offer technical services that shorten the time
it takes our customers to introduce their products into the market and that help
our customers optimize the commercial manufacturing of their products. Our
integrated approach draws on our design, supply chain management and
manufacturing, quality and test engineering experience to enable a fast,
cost-effective ramp to volume production. We are able to assist our customers
with component selection, materials strategies and supply chain development,
manufacturing process development, reliability modeling, quality plan
development and test plan implementation. In addition, we have the
infrastructure necessary to produce the low volumes associated with prototype
manufacturing, thereby enabling our customers to avoid substantial investment in
specialized manufacturing equipment.
MATERIALS PROCUREMENT AND MANAGEMENT. We offer materials procurement and
management services that involve planning, purchasing and expediting the
delivery of materials and components used in the manufacturing process. We are
becoming increasingly involved in selecting and qualifying suppliers to meet our
customers' needs. Our global information system for materials management
optimization enables us to achieve competitive component pricing and greater
sourcing flexibility. We employ various inventory management techniques, such as
just-in-time and line-side stocking, in order to allow product shipments to be
closely coordinated with our customers' requirements. Just-in-time is an
inventory control method of ordering materials only on an as-needed basis.
Line-side stocking is another inventory control method, in which components are
located within our manufacturing facilities but owned by the supplier or
customer until they are used in the manufacturing process. Both just-in-time and
line-side stocking eliminate much of the expense and managerial oversight of
maintaining inventory. We are also developing e-commerce solutions that will
further increase supply chain efficiency, resulting in lower costs and increased
responsiveness to our customers.
PRINTED CIRCUIT BOARD ASSEMBLY. We offer printed circuit board (PCB)
assembly services designed to meet our customers' needs for volume, mix, and
complexity. Our global facilities are experienced in many methods of PCB
assembly, including pin-through-hole and mixed technology, conventional and
ultra-fine pitch surface mount technology and advanced package array technology.
As OEMs seek to provide greater functionality in smaller products, they
increasingly require more sophisticated manufacturing technologies and
processes. Our investment in advanced manufacturing equipment and technology and
our experience and expertise in miniaturization, packaging and interconnect
technologies enable our customers to have access to a wide variety of advanced
manufacturing solutions without having to make substantial capital investments.
We collaborate on process development with leading suppliers of state-of-the-art
assembly and test equipment and perform beta site equipment and
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process evaluations for them. These activities enhance our ability to deliver
cost-effective PCB assembly solutions for our customers.
PRODUCT ASSEMBLY AND SYSTEM INTEGRATION. We offer assembly and
manufacturing services that include assembly of subsystems of electronics
products, which include multiple components, and the final assembly and
integration of complete products that incorporate printed circuit board
assemblies, complex electromechanical subassemblies, enclosures, power supplies
and other components. We build a wide range of final products and we believe we
are well positioned to take advantage of the anticipated acceleration in
outsourcing of final product assembly and integration. We have capabilities in
assembling smaller consumer electronics products and build millions of these
devices annually. We also assemble and integrate larger, more complex systems.
In addition, our build-to-order and configure-to-order capabilities complement
our expertise in final product assembly by allowing us to postpone the final
configuration of our customers' products until actual end-user specifications
are received, thus reducing inventory levels for us and our customers.
TESTING. We provide our customers with testing services. We work with our
customers to develop product-specific test strategies, and in some cases we
design and build specific test platforms for our customers' products. Our
functional testing capabilities are supported with software expertise in UNIX,
VisualBasic, C and C++. We also offer microwave and radio frequency engineering
experience and support the microwave and radio frequency test requirements of
many products.
LOGISTICS AND DISTRIBUTION. We offer services related to the configuration
and shipment of our customers' products. We perform final product packaging and
distribution services for completed products, as well as direct order
fulfillment. We increasingly deliver final products directly into our customers'
distribution channels and to our customers' end-users. We believe that these
services complement our comprehensive manufacturing solution, enabling our
customers to be more responsive to changing market demands and to get their
products to market more quickly.
AFTER-MARKET SUPPORT. We provide a wide range of after-market support
services, including repair, refurbishment, remanufacturing, exchange, system
upgrades and spare part manufacturing. These services are supported by specific
information systems and testing technologies and can be tailored to meet the
specific requirements of each customer.
CUSTOMERS
Our customers include leading OEMs primarily in the computer systems and
related peripherals, networking and communications equipment, consumer
electronics and industrial and medical devices industries. Our net sales were
distributed over the following significant industries for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Computer systems and related peripherals.............. 41% 72% 79%
Networking and communications equipment............... 27% 19% 18%
Consumer electronics.................................. 26% 3% --
Industrial and medical devices........................ 6% 6% 3%
---- ---- ----
100% 100% 100%
---- ---- ----
In 2000, net sales to IBM, Palm, 3Com and Hewlett-Packard represented 24%,
23%, 14% and 11%, respectively, of our total net sales and net sales to our ten
largest customers accounted for 88% of our total net sales. In 1999, sales to
IBM and Iomega represented 49% and 14%, respectively, of our total net sales and
net sales to our ten largest customers accounted for 88% of our total net sales.
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The following table lists, alphabetically within product groups, some of our
customers and the products for which we provide manufacturing services:
CUSTOMER END PRODUCTS
- -------- ------------
Computer systems and related peripherals:
Hewlett-Packard............................... Printers
IBM........................................... Point-of-sale systems, industrial PCs
Iomega........................................ Storage devices
Networking and communications:
3Com.......................................... Broadband access and transmission products, modems,
and network interface cards
Emulex........................................ Fibre channel network equipment
Gilat Satellite Networks...................... Satellite network terminals
Consumer electronics:
Palm.......................................... Palm IIIc and Palm V personal digital assistants
and Palm VII wireless personal digital assistant
SONICblue..................................... MP3 digital audio devices
Industrial and medical devices:
GE Medical.................................... MRI sub-system devices
Rockwell International........................ Industrial motion controls
We customarily enter into supply arrangements in connection with our
acquisition of facilities from OEMs. These arrangements generally govern the
conduct of business between us and our new customers, including the manufacture
of products that were previously produced at that facility by the OEM. In some
instances these arrangements contain revenue, product volume or capacity
commitments and are generally for terms of one to three years. Some of our
supply arrangements with revenue commitments contain provisions in which the
customer may satisfy those commitments through either increased revenue or the
payment of cash in periods subsequent to a period in which the revenue
commitment was not met. For these supply arrangements, we recognize minimum
commitments ratably over the term of the arrangement.
SALES AND MARKETING
We are able to service all of the world's major electronics markets through
a direct sales force located in selected North American, European and Asian
cities. Our salespeople have knowledge of local markets, which we believe is
critical to identifying new customers and developing new business opportunities.
Our direct sales force is complemented by several independent firms who serve as
our representatives in areas where we believe the most significant opportunities
exist, such as Silicon Valley, and in areas where we have no direct salespeople.
We also seek to grow by developing close, long-term relationships with our
customers, working with them through a product's entire life cycle, from product
design to after-market support. The costs to an OEM of starting significant
production at an EMS company are high, whether for a new product or for a
product currently manufactured internally or by another EMS company.
Consequently, EMS companies generally face a long sales cycle and must perform
satisfactorily on a trial basis prior to obtaining significant orders from a
potential customer. Therefore, we work closely with our customers during the
initial product design and development stage. We support our existing customer
relationships and seek to expand those relationships with cross-functional
customer focus teams that are led by dedicated program managers. Each team is
responsible for focusing on new programs, products and/or part numbers and
developing an in-depth understanding of our customers' requirements and
outsourcing needs. Customer focus teams for major global accounts are
complemented by seasoned
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global account managers who coordinate a broad range of services provided from
multiple sites around the world.
We conduct an active, focused marketing effort, designed to increase our
brand awareness and the likelihood of winning new business. We communicate
important news about our company to existing and potential customers through
various news media, including national and local business publications and
industry trade journals. Our technical personnel and functional managers often
take industry leadership roles by publishing technical papers, speaking on
industry panels and maintaining active roles in industry and technical
associations. For example, at a recent industry conference, our technical
professionals recently presented five papers and our Chief Technology Officer
moderated a panel. In addition, we have established ongoing relationships with
key industry analysts and trade journalists, and we periodically host seminars
on topics of interest to potential customers at our manufacturing facilities. We
also maintain a website enabling potential customers to learn more about us.
CUSTOMER FOCUSED APPROACH
High customer satisfaction is critical for success in the EMS industry. We
seek to differentiate ourselves by providing exceptional customer service and by
broadly and deeply integrating our services into our customers' operations.
Satisfying customers begins with a service attitude that we reinforce and
reward. We have developed management reports which, we believe, summarize
several key measurements of the customer's experience with us, including, for
example, percentage of on-time deliveries and the quality of our manufacturing
processes. Our senior managers receive these reports weekly, enabling them to
monitor our performance so that we can take specific corrective actions, if
necessary, on a timely basis. Each major customer has a dedicated program
manager who manages the day-to-day relationship with the customer. A portion of
a program manager's compensation is tied to improving customer satisfaction
scores, as measured by an independent consulting firm that conducts semi-annual
customer satisfaction surveys. These surveys also are reviewed at the highest
executive levels to ensure that customers' needs are understood and addressed.
We have implemented processes, information systems and other tools that
enable our employees to provide high levels of customer service. One example is
our continuous process improvement program, in which we rigorously evaluate
operational processes relative to industry best practices and develop action
plans to improve our performance. This program ensures that best practices are
standardized across our global operations, leading to continuous improvement. In
addition, we will continue to invest in information systems that increase the
quality of our customer service. We recently implemented a suite of software
tools to help us better control the quality of our manufacturing processes and
provide timely information to our customers. Our investments increasingly
include e-business solutions that reduce transaction costs and facilitate a more
efficient flow of information between us and our suppliers and customers.
SUPPLY CHAIN MANAGEMENT
Supply chain management is critical for competing in the EMS industry, as
OEMs are increasingly outsourcing their entire product supply chain to EMS
companies. We offer our customers a supply chain solution that represents a
lower total cost of ownership than that provided by their internal operations.
Supply chain management involves the coordination of components and products
throughout the design, manufacturing and distribution functions, ensuring that
the correct component or product is delivered to its appropriate destination at
the proper time and at the lowest overall cost. We believe that, through the use
of our highly trained professionals and our significant investment in
information systems, our supply chain management expertise reduces our
customers' total costs and increases our flexibility to respond to changing
customer demands.
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We have strong relationships with a broad range of suppliers. We believe our
product design capabilities and scale of procurement enhance our ability to
obtain advantageous pricing on, and secure supply sources of, selected materials
and components. We believe we can reduce our customers' total costs by working
closely with them in their product development stages. For example, we help our
customers select components while a product is being designed to ensure
advantageous sourcing and pricing from preferred suppliers. We also utilize a
rigorous process for evaluating supplier performance based on our Total Cost of
Ownership solution. This approach realizes lower total costs for our customers
by focusing on improving our suppliers' quality, delivery, flexibility and
service.
Asset management is a critical element of efficient supply chain management.
To reduce our inventory risk, we use inventory management techniques which
closely integrate our manufacturing processes with our customers' actual orders.
One inventory management technique we utilize for certain customers is
demand-pull manufacturing, which initiates production of our customers' products
based upon their actual inventory usage. Demand-pull manufacturing is, in some
cases, complemented by our direct order fulfillment process, whereby we ship
products directly from our facilities to our customers' distribution channel and
end users. Direct order fulfillment results in lower inventory levels for both
ourselves and our customers and permits faster delivery of our customers'
products.
We utilize information systems to improve the efficiency and flexibility of
the supply chain. Our enterprise resource planning system provides comprehensive
and timely information required for managing the logistical complexities in our
business. We also are implementing a component database and global information
system to optimize our materials management, allowing us to consolidate data on
historical purchases and perform global searches for component inventory and
competitive pricing. We will continue to implement e-commerce solutions that
link us to our customers and suppliers, providing them with timely information
on specific orders, product demand, inventory and component lead times in order
to facilitate planning and increase the efficiency of the entire supply chain.
INFORMATION SYSTEMS
Information systems are a critical element for achieving our strategic
business objectives. We believe that our investment in information systems will
deliver competitive advantages for our customers by improving supply chain
management and increasing product quality and operational flexibility. We have
implemented a common technological infrastructure that allows our customers and
suppliers to communicate and transact with us globally in an easy and consistent
manner. We believe this increases the efficiency of the supply chain.
Our information systems strategy consists of selecting leading software
applications and establishing strong relationships with our software suppliers.
Our enterprise resource planning system manages the entire order cycle from
receiving customer orders and planning production schedules to billing customers
and tracking their payments. Having an enterprise resource planning platform
allows us to quickly respond to fluctuations in our customers' orders in
different parts of the world and also facilitates simultaneous product
introduction in multiple regions.
Our standard suite of engineering applications focuses on reducing our
customers' new product introduction set-up time and controlling our
manufacturing processes. These engineering applications allow us to collect
customer design data in any format and automatically convert this information
into commands that run our production lines. These tools also monitor our
manufacturing operations and alert our technicians and operators to process
deviations. Early error detection minimizes rework and reduces repair and
customer returns.
Our global information system for material management optimization is based
on two integrated applications. Our strategic sourcing application consolidates
purchasing history from suppliers and future demand from our manufacturing
sites. This allows us to realize significant materials cost savings by
concentrating our purchases with a smaller number of preferred suppliers. The
component supplier
10
application provides standardized component information that is integrated with
an industry database that enables our customers' designers to select components
from our preferred suppliers. This optimizes the selection of components used in
our customers' products and provides them with advantages in pricing and
sourcing of components.
Our information solutions portfolio increasingly includes a broad range of
e-business tools. Both customers and suppliers can communicate with us through a
comprehensive suite of electronic data interchange applications. In addition,
customers can obtain order status and product quality information, 24 hours a
day, through our secure web-based applications at many of our sites. We plan to
make significant further investments in e-business tools that will leverage the
speed and technology of the Internet to facilitate the flow of information and
increase the total efficiency of the supply chain.
INTERNATIONAL OPERATIONS
We believe that our global presence is an important strategic element that
allows us to provide product design, manufacturing and after-market support
services in locations that meet our customers' regional requirements. Consistent
with this strategy, we have established international manufacturing facilities
in Spain, Ireland, France, Singapore, Malaysia and China. We will continue to
seek strategic opportunities to acquire additional facilities throughout the
world, especially in low-cost regions, either through OEM divestitures or
acquisitions of regional EMS companies and other related companies.
Our facilities in Europe serve European customers as well as customers in
North America and Asia that have significant sales in Europe. Our Athlone,
Ireland facility provides medium to high-volume, capital intensive manufacturing
and related support services. Our Valencia, Spain facility offers a
comprehensive range of integrated services including design, low, medium and
high-volume production and highly complex assembly and manufacturing,
configuration-to-order and global order fulfillment. In addition, our Valencia
facility has a significant product repair capability. Both our Athlone and
Valencia facilities have strong technical capabilities, including radio
frequency engineering and test capabilities. During 2000, we expanded our
European operations by establishing facilities in Tarragona, Spain and Galway,
Ireland, which receive business and administrative support from our Valencia and
Athlone facilities, respectively. The Tarragona and Galway facilities were
established to increase design and manufacturing capacity and expand service
offerings available to key customers in Europe. In January 2001, we acquired a
facility in Guerande, France from Oce-Industries, which expanded our
relationship with Oce-Industries, an existing customer.
Our operations in Asia were expanded in 2000 by the addition of a facility
in Shenzhen, China. The China facility, in addition to our facilities located in
Tampoi, Malaysia, and in Singapore, enable us to provide cost competitive
manufacturing for global customers and a range of regional manufacturing and
support services. Many OEMs recognize Southeast Asia as a competitive region
that offers both low-cost manufacturing and strong technical skills. Our sites
in Southeast Asia specialize in high-volume assembly and manufacturing, and
enable us to provide globally competitive pricing for these types of
requirements. Our Asian facilities offer a wide range of lower to medium-volume
and more complex assembly and manufacturing services. Our Singapore site
provides engineering and business support for the Malaysian and Chinese sites.
In addition to our manufacturing sites, we have an international procurement
office in Singapore. We intend to move some of our Asian manufacturing
operations to our China facility to improve cost competitiveness.
We intend to further expand our international capabilities in product
design, new product introduction services, assembly and manufacturing and
after-market support services. We currently expect to establish operations in
Mexico and Central or Eastern Europe during the next several years. We also
intend to expand into other locations in Europe and Asia in order to establish
or enhance relationships with key customers, provide services to important
regional markets, expand our range of service offerings and improve our ability
to reduce our customers' time-to-global market and
11
time-to-global volume. See Note 18, "Business Segment Information," in our
consolidated financial statements for information relating to our international
operations.
RESEARCH AND DEVELOPMENT
We engage in ongoing research and development activities to meet our
customers' increasingly sophisticated EMS needs and to maintain our leading-edge
capabilities. Changes in our customers' products drive our research and
development efforts. As our customers' products are both decreasing in size and
increasing in functionality, we must continually develop advanced manufacturing
and assembly technologies such as chip scale packaging, flip-chip, ball grid
array, micro-ball grid array and ultra-fine pitch surface mount technology and
the equipment to support them. The evolution and extension of these technologies
has placed additional demands on process materials and chemistry, substrates for
interconnecting devices and the manufacturing environment.
We work with our customers, our suppliers and universities located near our
manufacturing facilities to develop and qualify advanced process capabilities
concurrent with, or prior to, our customers' needs. We are a member of an
industry consortium consisting of OEMs, equipment suppliers and other EMS
companies. This consortium supports process development and provides access to
manufacturing equipment, laboratory and research and development personnel that
complement our internal development work. The development and refinement of new
manufacturing processes are performed primarily at our advanced engineering
facility in Arden Hills, Minnesota. At Arden Hills and our other facilities, new
processes and equipment are qualified through a rigorous process to ensure
production readiness.
In addition to our process development focus on printed circuit board
assembly and testing technologies, we have an ISO 9001 certified center for
research and development in Valencia, Spain, which globally supports specific
customer requirements. In Valencia, we have over 30 engineers who use
state-of-the-art tools that can interface with customer design teams during the
product design and development phase. We also work with selected universities
and design firms to complement our services and provide a vehicle to continually
upgrade our skills in this dynamic industry environment. As a result of these
relationships, we have built strong design capabilities that can support
customers with wireless technology requirements.
For the years ended December 31, 2000, 1999 and 1998 we spent $6.3 million,
$3.2 million and $2.5 million, respectively, on research and development
activities.
12
COMPETITION
The EMS industry is highly competitive. We believe that the principal
competitive factors in our industry are:
- service offerings;
- technological capabilities;
- geographic location and coverage;
- pricing;
- product quality;
- customer service;
- reliability in meeting product delivery schedules;
- access to capital; and
- flexibility and timeliness in responding to design and schedule changes.
We compete primarily against large, global EMS providers, including
Celestica Inc., Flextronics International Ltd., SCI Systems, Inc. and Solectron
Corporation. In addition, there are numerous other EMS providers that do not
offer the range of services or the geographic breadth that we provide but with
whom we compete from time to time.
We believe that large publicly-traded OEMs prefer to enter into outsourcing
relationships with public EMS companies that present them with the opportunity
to build a long-term relationship because of their greater access to capital and
resulting financial stability. Our primary competitors are substantially larger
and have greater financial, operating, manufacturing and marketing resources
than we do. Some of our competitors have broader geographic breadth and range of
services than we do. In addition, some of our competitors may have better
relationships with our existing customers than we do. We also face competition
from the manufacturing operations of our current and potential customers, who
continually evaluate the relative benefits of internal manufacturing compared to
outsourcing. As more OEMs dispose of their manufacturing assets and increase
their use of outsourcing, we face increasing competitive pressures to grow our
business in order to maintain our competitive position.
GOVERNMENTAL REGULATION
Our operations are subject to a variety of federal, state and local
regulatory requirements relating to environmental compliance and site cleanups,
waste management and health and safety matters. In particular, we are subject to
regulations promulgated by:
- the Occupational Safety and Health Administration, pertaining to health
and safety in the workplace;
- the Environmental Protection Agency, pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
- corresponding state and foreign government agencies.
To date the costs of compliance and workplace and environmental remediation
have not been material to us. Nevertheless, additional or modified requirements
may be imposed in the future. If such additional or modified requirements are
imposed on us, or if conditions requiring remediation are found to exist, we may
be required to incur substantial additional expenditures.
13
EMPLOYEES
As of December 31, 2000, we had approximately 6,185 full-time employees,
including 4,295 in production and quality, 593 in engineering, research and
development, 714 in procurement and materials management, 119 in information
systems, 148 in program management, 17 in sales and marketing and 299 in
executive and administrative functions. Given the variability in our business
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 to maximize efficiency.
Therefore, we use skilled temporary labor as required.
None of our employees are represented by a labor union or covered by a
collective bargaining agreement other than non-management employees in Spain and
Ireland. We consider our employee relations to be good, and we have not
experienced any significant problems with non-management employees in Spain and
Ireland.
ITEM 2. PROPERTIES
Our principal executive offices are located in Concord, Massachusetts. We
also have product design and manufacturing facilities in the United States,
France, Spain, Ireland, Singapore, Malaysia and China. Information about these
facilities is set forth below:
APPROXIMATE
LOCATION PRINCIPAL FUNCTION SQUARE FEET LEASED/OWNED
- -------- -------------------- ----------- -----------------
Concord, Massachusetts.................. Headquarters 28,000 Leased
Arden Hills, Minnesota.................. Manufacturing 154,000 Leased
Charlotte, North Carolina............... Manufacturing 273,500 Leased
Newark, California...................... Administrative 2,760 Leased
Mt. Prospect, Illinois.................. Manufacturing 404,000 Leased
Salt Lake City, Utah.................... Manufacturing 250,000 Leased/Owned(a)
Westford, Massachusetts................. Design 6,000 Leased
Lowell, Massachusetts................... Manufacturing 40,000 Leased
Guerande, France........................ Manufacturing 130,000 Owned
Valencia, Spain......................... Manufacturing/Design 518,000 Leased/Owned(b)
Tarragona, Spain........................ Manufacturing 76,000 Leased
Athlone, Ireland........................ Manufacturing 55,000 Leased
Galway, Ireland......................... Manufacturing 60,000 Leased
Singapore............................... Manufacturing 52,225 Leased
Tampoi, Malaysia........................ Manufacturing 46,000 Leased
Shenzhen, China......................... Manufacturing 50,000 Leased
- ------------------------
(a) We own approximately 150,000 square feet of manufacturing and logistics
space and lease approximately 100,000 square feet of warehouse space.
(b) We own approximately 418,000 square feet of manufacturing and logistics
space and lease approximately 100,000 square feet of warehouse space.
Leases for our facilities expire between April 2001 and April 2017. We
currently expect to be able to extend the terms of expiring leases or to find
suitable replacement facilities on reasonable terms. We believe that our
facilities are well-maintained and suitable for their respective operations. We
anticipate that as our business grows we will need to obtain additional
facilities through acquisitions, leases or new construction. We may encounter
unforeseen difficulties, costs or delays in expanding our facilities.
14
ITEM 3. LEGAL PROCEEDINGS
On July 22, 1999, we received written notice from legal counsel for the
Lemelson Medical, Education & Research Foundation, Limited Partnership alleging
that we are infringing specified patents held by the Lemelson Foundation
Partnership and offering to license such patents to us. Based on our
understanding of the terms that the Lemelson Foundation Partnership has made
available to current licensees, we believe that we can obtain a license from
them under the same or similar terms which would not have an adverse effect on
our financial condition.
We are party to other lawsuits in the ordinary course of business. We do not
believe that these other proceedings individually or in the aggregate will have
a material adverse effect on our financial position, results of operations and
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to our executive
officers:
NAME AGE OFFICE
- ---- -------- ------
Kevin C. Melia......................... 54 Chairman, Chief Executive Officer and Director
Robert E. Donahue...................... 53 President, Chief Operating Officer and Director
Albert A. Notini....................... 44 Executive Vice President and Chief Financial Officer
Rodolfo Archbold....................... 47 Executive Vice President and Chief Technology Officer
James N. Poor.......................... 58 Executive Vice President, Human Resources
Richard J. Gaynor...................... 41 Vice President and Corporate Controller
KEVIN C. MELIA, a founder of MSL, has been a director and our Chairman and
Chief Executive Officer since December 1994. From December 1994 to
February 1999, he also served as President. Prior to joining us, Mr. Melia was
acting President of Sun Microsystems Computer Corporation from 1992 to 1994.
Mr. Melia also served as Chief Financial Officer of Sun Microsystems Computer
Corporation from 1991 to 1994. Mr. Melia currently serves as a director of Iona
Technologies Plc and Horizon Technologies.
ROBERT E. DONAHUE has served as our President since February 1999 and as a
director since April 2000. Mr. Donahue joined us in August 1997 as Chief
Financial Officer and served in that capacity until October 2000. Prior to
joining us, Mr. Donahue served as Chief Financial Officer of Stratus
Computer, Inc. from 1990 to August 1997. Along with his responsibilities as
Chief Financial Officer, Mr. Donahue also served as Chief Executive Officer of
S2, a subsidiary of Stratus Computer, Inc., from December 1995 to August 1997.
ALBERT A. NOTINI has served as our Chief Financial Officer since
October 2000. Mr. Notini joined us in May 2000 as Executive Vice President,
Business Development and General Counsel and served in that capacity until
October 2000. Prior to joining us, Mr. Notini was the Executive Vice President,
Corporate Development and Administration and General Counsel of Wang Global, a
worldwide provider of network services, from January 1999 to June 1999. Wang
Global was acquired by Getronics NV in June of 1999 and Mr. Notini served as
Executive Vice President of Getronics until February, 2000. Mr. Notini joined
Wang Global in February 1994 as a Senior Vice President. Prior to joining Wang
Global, Mr. Notini was a Senior Partner at the Boston law firm of Hale and Dorr
LLP. Mr. Notini currently serves as a director of ePresence, Inc., an Internet
services company.
15
RODOLFO ARCHBOLD has served as our Executive Vice President and Chief
Technology Officer since July 1997. Prior to assuming his current position,
Mr. Archbold served as our Vice President of Technology from October 1995 to
July 1997. Before joining us, Mr. Archbold served as Group Manager,
Manufacturing for Digital Equipment Corporation from February 1992 to
September 1995.
JAMES N. POOR has served as our Executive Vice President, Human Resources
since March 1998. Prior to that he was the Director of Human Resources,
Worldwide Sales and Manufacturing for Stratus Computer, Inc. beginning in 1985.
RICHARD J. GAYNOR has served as our Vice President and Corporate Controller
since January 2001. Prior to joining us, Mr. Gaynor served as Vice President and
Chief Financial Officer for Evans & Sutherland Computer Corporation, a hardware
and software company, from January 2000 to January 2001. From 1994 to 1999, he
was Operations Controller and Vice President of Finance at Cabletron
Systems, Inc., a telecommunications and networking company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the New York Stock Exchange under the symbol
"MSV" since our initial public offering on June 22, 2000. The following table
sets forth the high and low closing sales prices per share for our common stock
as reported on the New York Stock Exchange for the fiscal periods in which our
common stock has traded thereon.
FISCAL 2000 HIGH LOW
- ----------- -------- --------
Second quarter (June 22, 2000 to July 2, 2000).............. $22.50 $19.06
Third quarter (July 3, 2000 to October 1, 2000)............. $34.38 $10.50
Fourth quarter (October 2, 2000 to December 31, 2000)....... $12.44 $ 4.06
As of March 26, 2001, we had approximately 171 stockholders of record.
We have never declared or paid any cash dividends on shares of our common
stock, and we do not anticipate paying cash dividends in the foreseeable future.
Our bank credit facilities limit our ability to pay cash dividends on our common
stock.
During the period covered by this report, we issued the following securities
which were not registered under the Securities Act of 1933, as amended:
(1) On September 30, 2000, an aggregate of 1,551,220 shares of common stock to
3Com Corporation, as part of the purchase price we paid for selected
inventory, fixed assets and intangible assets.
(2) On June 19, 2000, an aggregate of 472,479 shares of common stock to Luis
Pedroso, as part of the purchase price we paid for Qualitronics, Inc.
The issuances listed were exempt from registration under the Securities Act
by virtue of Section 4(2) thereof, as transactions not involving a public
offering.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the dates
and periods indicated has been derived from our audited consolidated financial
statements. The information set forth below is
16
not necessarily indicative of the results of future operations and should be
read in conjunction with the consolidated financial statements and notes thereto
incorporated into Item 8 of this report.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net sales...................................... $1,758,101 $920,722 $837,993 $562,666 $474,288
Cost of goods sold............................. 1,660,311 865,489 792,734 526,787 436,155
---------- -------- -------- -------- --------
Gross profit................................... 97,790 55,233 45,259 35,879 38,133
Selling, general and administrative(a)......... 70,341 38,042 29,835 28,037 31,718
Restructuring and other asset writedowns....... -- 780 6,729 12,094 2,535
Legal settlement(b)............................ 6,000 -- -- -- --
---------- -------- -------- -------- --------
Operating income (loss)........................ 21,449 16,411 8,695 (4,252) 3,880
Interest expense, net.......................... (17,729) (8,081) (10,161) (7,723) (5,702)
Foreign exchange gain (loss)................... (2,026) (2,510) 721 (931) (1,760)
Other income................................... 140 -- -- -- --
---------- -------- -------- -------- --------
Income (loss) before provisions for income
taxes and extraordinary loss................. 1,834 5,820 (745) (12,906) (3,582)
Provisions for income taxes.................... 3,057 3,810 3,294 4,372 6,144
---------- -------- -------- -------- --------
Income (loss) before extraordinary loss........ (1,223) 2,010 (4,039) (17,278) (9,726)
Extraordinary loss............................. (2,812) -- (2,202) -- --
---------- -------- -------- -------- --------
Net income (loss).............................. $ (4,035) $ 2,010 $ (6,241) $(17,278) $ (9,726)
========== ======== ======== ======== ========
Net income (loss) applicable to common stock... $ (25,959) $ 1,201 $ (6,241) $(17,278) $ (9,726)
========== ======== ======== ======== ========
Basic income (loss) per share:
Income (loss) before extraordinary loss...... $ (0.88) $ 0.06 $ (0.21) $ (1.07) $ (0.74)
Extraordinary loss).......................... $ (0.11) $ -- $ (0.12) $ -- $ --
Net income (loss)............................ $ (0.98) $ 0.06 $ (0.33) $ (1.07) $ (0.74)
Weighted average shares outstanding.......... 26,411 19,384 18,746 16,172 13,159
Diluted income (loss) per share:
Income (loss) before extraordinary loss...... $ (0.88) $ 0.06 $ (0.21) $ (1.07) $ (0.74)
Extraordinary loss........................... $ (0.11) $ -- $ (0.12) $ -- $ --
Net income (loss)............................ $ (0.98) $ 0.06 $ (0.33) $ (1.07) $ (0.74)
Weighted average shares outstanding.......... 26,411 19,608 18,746 16,172 13,159
Other Financial Data
Adjusted EBITDA(c)............................. $ 61,976 $ 32,086 $ 26,698 $ 16,218 $ 10,934
Depreciation................................... 18,583 11,686 10,686 7,575 4,693
Amortization of goodwill and other
intangibles.................................. 10,715 2,747 247 801 (174)
Capital expenditures........................... (43,530) 39,094 2,774 25,780 11,534
Net cash provided by (used in) operating
activities................................... (98,937) (25,121) 41,070 (17,396) 484
Net cash used in investing activities.......... (57,471) (81,775) (4,483) (25,978) (11,534)
Net cash provided by (used in) financing
activities................................... 144,098 109,229 (23,505) 50,220 6,647
17
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents................. $ 10,388 $ 24,182 $ 23,969 $ 9,513 $ 3,647
Working capital........................... 234,425 98,273 54,340 43,009 47,857
Total assets.............................. 933,517 411,783 277,608 266,929 191,577
Current portion of long-term debt and
capital lease obligations............... 7,737 5,414 4,939 33,800 8,378
Long-term debt and capital lease
obligations............................. 181,344 121,929 57,188 47,138 39,015
Preferred stock........................... -- 39,204 -- -- 500
Total stockholders' equity................ 215,448 48,621 39,174 42,097 39,332
- ------------------------
(a) Includes $5,229, $462 and $341 of non-cash charges related to stock-based
compensation in the year ended December 31, 2000, the year ended
December 31, 1999 and the year ended December 31, 1998, respectively.
(b) Represents the settlement of a legal claim arising from a potential
acquisition that was not consummated.
(c) Adjusted EBITDA is defined as earnings before net interest expense, income
taxes, depreciation and amortization, restructuring and other asset
write-downs and other non-recurring items as well as non-operating expenses
including foreign exchange gain (loss). Adjusted EBITDA is presented because
we believe it is a meaningful indicator of our operating performance.
Adjusted EBITDA is not intended to represent cash flows for the period, nor
is it presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP in
the United States and is not indicative of operating income or cash flow
from operations as determined under GAAP. Our method of computation may or
may not be comparable to other similarly titled measures of other companies.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
INCLUDED ELSEWHERE IN THE FORM 10-K. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS AND INVOLVES NUMEROUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT
LIMITED TO, THOSE DESCRIBED IN THE "RISK FACTORS" SECTION OF ITEM 7 OF THIS
FORM 10-K. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD-LOOKING STATEMENTS.
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS. ANY STATEMENT IN THIS
REPORT THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A
FORWARD-LOOKING STATEMENT. SOME OF THE FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS,"
"MAY," "WILL," "SHOULD," "SEEKS," "APPROXIMATELY," "INTENDS," "PLANS,"
"ESTIMATES" OR "ANTICIPATES" OR THE NEGATIVE OF THOSE WORDS OR OTHER COMPARABLE
TERMINOLOGY. FORWARD-LOOKING STATEMENTS IN THIS REPORT INCLUDE:
- FORECASTS IN THE GROWTH OF THE EMS INDUSTRY, AND OUR ABILITY TO CAPITALIZE
ON SUCH GROWTH;
- STATEMENTS REGARDING OUR PLANS FOR, AND THE COSTS OF, ENHANCING OUR GLOBAL
PRESENCE AND MOVING SOME OF OUR ASIAN OPERATIONS TO CHINA; AND
- STATEMENTS REGARDING OUR FUTURE REVENUES, EXPENSE LEVELS, LIQUIDITY AND
CAPITAL RESOURCES, OPERATING LOSSES AND PROJECTIONS REGARDING OUR BUSINESS
STRATEGY OF FOCUSING ON HIGH-GROWTH, HIGH-MARGIN BUSINESS.
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. A NUMBER OF
IMPORTANT FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
THE FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION UNDER "RISK FACTORS"
CONTAINED IN THIS REPORT. ANY FORWARD-LOOKING STATEMENTS IN THIS REPORT
REPRESENT OUR VIEWS AS OF THE DATE OF THIS REPORT, AND WE DISCLAIM ANY DUTY TO
UPDATE THESE STATEMENTS, EVEN IF SUBSEQUENT EVENTS CAUSE OUR VIEWS TO CHANGE.
OVERVIEW
We are a leading global provider of advanced electronics manufacturing
services to original equipment manufacturers (OEMs). We have established a
global network of manufacturing facilities in the world's major electronics
markets--North America, Europe and Asia. We have developed relationships with
leading OEMs in rapidly growing industries such as wired and wireless
communications, networking and storage equipment, computer systems and
peripherals, industrial equipment and commercial avionics. We offer our
customers an outsourcing solution that represents a lower total cost of
ownership than that provided by their internal operations through efficient
management of our business and aggressive management of our asset base. We seek
to differentiate ourselves by providing exceptional customer service and by
broadly and deeply integrating our services into our customers' OEM operations.
We provide integrated supply chain solutions that address all stages of the
product life cycle, including engineering and design, new product introduction,
materials procurement and management, printed circuit board assembly, product
assembly and system integration, testing, logistics and distribution, and
after-market support. We believe that this comprehensive range of services
promotes our growth by attracting new customers and capturing additional
outsourcing opportunities within our existing customer base.
Since our founding in 1994, we have experienced substantial growth driven
primarily by recent acquisitions of existing OEM manufacturing facilities and by
the increasing number of OEMs who are outsourcing their manufacturing
requirements. We intend to continue to actively pursue strategic acquisitions
and to benefit from this increasing trend by OEMs to outsource over the next
several years.
We work closely with our customers to anticipate and forecast their future
volume of orders and delivery dates. We derive most of our net sales under
purchase orders from our customers. We
19
recognize sales, net of product return and warranty costs, typically at the time
of product shipment or as services are rendered. Our cost of goods sold includes
the cost of electronic components and materials, labor costs and manufacturing
overhead. The procurement of raw materials and components requires us to commit
significant working capital to our operations and to manage the purchasing,
receiving, inspection and stocking of these items. Our typical customer contract
contains provisions which specify that we may recover from the customer
inventory costs and material acquisition costs for raw material which becomes
excess or obsolete due to customer reschedules, cancellations or product
changes.
Our operating results are affected by the level of capacity utilization in
our manufacturing facilities, indirect labor costs and selling, general and
administrative expenses. Gross margins and operating income generally improve
during periods of high-volume and high-capacity utilization in our manufacturing
facilities and decline during periods of low-volume and low-capacity
utilization.
As a result of the current economic uncertainty and slowdown in the economy
generally, several of our customers and competitors have announced layoffs and
have indicated that revenues and earnings in future periods may be less than
previously expected. Such a slowdown in economic growth could have a negative
impact on our future financial performance.
Our business strategy includes the continued expansion of our global
manufacturing network. Currently, approximately 92% of our net sales worldwide
are denominated in US dollars, while our labor and utility costs in facilities
outside of the United States are denominated in local currencies. Foreign
currency gains and losses are the result of transacting business in a currency
that is different from the functional currency of our operating entity and the
movements in those currencies between the time a transaction is recorded for
financial reporting purposes and the time payment is made or received. We
currently use forward foreign exchange contracts on a limited basis to minimize
our foreign currency risk but not for trading purposes. We expect to continue to
utilize forward foreign exchange contracts only to the extent that these
contracts minimize exposure and reduce risk from exchange rate fluctuations on
specific underlying transactions that create foreign currency exchange rate risk
for us. Any increase or decrease in our use of derivative financial instruments
will likely be as a result of these contracts.
RECENT ACQUISITIONS
A significant portion of our growth has come from recent acquisitions, which
have strengthened existing customer relationships, added new customers and
increased our range of service offerings.
In January 2001, we acquired selected fixed assets from Oce-Industries, an
existing customer and a leading Netherlands-based OEM, for approximately
$5.8 million in cash and assumed liabilities. As part of the transaction, we
acquired a 130,000 square foot manufacturing facility located in Guerande,
France. In connection with this acquisition, we entered into a two-year supply
agreement to manufacture complex printer systems for Oce-Industries. We also
retained the facility employees. The acquisition of the Guerande facility
expanded our relationship with Oce-Industries and provided us with our
operations in France.
In September 2000, we acquired selected inventory, fixed assets and
intangible assets from 3Com, an existing customer, for $79.1 million. The
purchase price consisted of $60.1 million in cash, financed with a term loan
under our bank credit facility, and 1,551,220 shares of our Common Stock. As
part of this transaction, we leased a 404,000 square foot manufacturing facility
located in Mt. Prospect, Illinois, near Chicago. In connection with this
acquisition, we entered into a two-year supply agreement with 3Com to produce
digital subscriber line (DSL) and cable modems, carrier systems products and
digital cameras. The supply agreement contains minimum purchase commitments over
the life of the contract. If 3Com does not meet quarterly minimum commitments,
3Com is required to pay for such deficits in the form of cash or volumes in
excess of the minimum in the quarter subsequent to the deficit. We also
20
retained the facility employees. In addition to expanding our relationship with
3Com, this acquisition enhanced our new product introduction, product assembly
and systems integration and testing capabilities.
In June 2000, we acquired Qualitronics, Inc., an electronics prototype
manufacturing firm, for an aggregate purchase price of $11.5 million, consisting
of $4.0 million in cash and 472,479 shares of our Common Stock. The cash portion
of the purchase price was financed with proceeds from our initial public
offering. The acquisition significantly enhanced our prototype and low-volume
manufacturing capabilities in North America. These capabilities complemented our
existing engineering and design and new product introduction services and
enhanced our ability to establish relationships with OEMs in a broad range of
industries through involvement in earlier stages of their product development
cycles.
In November 1999, we acquired selected inventory, fixed assets and
intangible assets from 3Com for $80.4 million. The acquisition was financed with
the proceeds from the issuance of $50.0 million of senior preferred stock and
warrants and borrowings under our bank credit facility. As part of this
transaction, we acquired a 150,000 square foot manufacturing facility located in
Salt Lake City, Utah. In connection with this acquisition, we entered into a
two-year supply agreement with 3Com to produce modems and network interface
cards that includes minimum purchase commitments by 3Com over the life of the
contract. We also retained the facility employees. The acquisition of the Salt
Lake City facility provided us with advanced engineering capabilities, including
radio frequency engineering capability, further diversified our customer base,
gained us access to the personal digital assistants market and provided us with
a high-volume, low-cost manufacturing facility in the United States.
In 1999, we acquired two electronics design firms, Electronic Systems
Packaging and Ronlin Design, for an aggregate purchase price of approximately
$4.4 million, consisting of cash and Common Stock. Electronic Systems Packaging
and Ronlin Design significantly enhanced our engineering and design services in
North America. These acquisitions enabled us to establish relationships with
OEMs in a broad range of industries by allowing us to become involved in the
product development cycle at an earlier stage. We believe our enhanced offering
of electronics design services has strengthened existing customer relationships
and helps us win new business.
In 1998, we acquired selected inventory and fixed assets from IBM for
$30.1 million in cash. The acquisition of these assets was financed with
borrowings under our bank credit facility. As part of this transaction, we
leased a 273,500 square foot manufacturing facility located in Charlotte, North
Carolina. In connection with this acquisition, we also entered into a three-year
supply agreement to provide product assembly and systems integration, testing
and distribution and logistics services for several divisions of IBM. The term
of this supply agreement has been extended through May 2002. We also retained
the facility employees. In addition to expanding our relationship with a premier
customer in a growing market, retail point-of-sale systems, we enhanced our
service offerings by adding complex systems assembly, integration and test
capabilities and strengthened our ability to provide order fulfillment and
distribution of products to our customers' end users.
RESTRUCTURING AND OTHER ASSET WRITEDOWNS
Generally, we enter into business acquisitions or asset acquisitions and
related supply agreements with the intention of improving the existing
manufacturing operations, reducing costs and improving operating margins. To
accomplish this, we typically assess the manufacturing processes and employee
base and restructure the operations.
During the fourth quarter of 1999, we approved a restructuring plan designed
to improve our manufacturing operations at our Charlotte facility. It comprised
$0.8 million of severance costs related to a reduction of 33 manufacturing and
managerial employees which were recorded in the fourth quarter of 1999. In the
fourth quarter of 1998, we approved a plan to restructure various operations in
the United States, Spain and Asia. The total restructuring charge for this plan
was $6.7 million,
21
comprised of the write-off of capitalized assets, lease termination costs and
severance costs related to a reduction of 72 manufacturing and managerial
employees. As of December 31, 2000, these plans were completed, and we had
realized substantially all of the $4.6 million in annual savings contemplated as
a result of implementing these plans. These savings are reflected in cost of
goods sold in our reported results of operations.
We began implementing a restructuring plan during the first quarter of 2001
related to moving some of our Asian operations to China, which we expect to
complete during the first half of 2001. We expect that the total cost associated
with this plan will be approximately $2 to $3 million. The costs for this plan
will comprise relocation costs related to moving manufacturing equipment, lease
termination costs and severance costs related to a reduction of manufacturing
and managerial employees.
RESULTS OF OPERATIONS
The following table sets forth specified operating data and percentages of
net sales for the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998
--------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
Net sales.............................. $1,758,101 100.0% $920,722 100.0% $837,993 100.0%
Cost of goods sold..................... 1,660,311 94.4 865,489 94.0 792,734 94.6
---------- ----- -------- ------ -------- ------
Gross profit........................... 97,790 5.6 55,233 6.0 45,259 5.4
Selling, general and
administrative(a).................... 70,341 4.0 38,042 4.1 29,835 3.6
Restructuring and other asset
writedowns........................... -- -- 780 0.1 6,729 0.8
Legal settlement(b).................... 6,000 0.4 -- -- -- --
---------- ----- -------- ------ -------- ------
Operating income....................... 21,449 1.2 16,411 1.8 8,695 1.0
Interest expense, net.................. (17,729) (1.0) (8,081) (0.9) (10,161) (1.2)
Foreign exchange gain (loss)........... (2,026) (0.1) (2,510) (0.3) 721 0.1
Other income........................... 140 0.0 -- -- -- --
---------- ----- -------- ------ -------- ------
Income (loss) before provision for
income taxes and extraordinary
loss................................. 1,834 0.1 5,820 0.6 (745) (0.1)
Provision for income taxes............. 3,057 0.2 3,810 0.4 3,294 0.4
---------- ----- -------- ------ -------- ------
Income (loss) before extraordinary
loss................................. (1,223) (0.1) 2,010 0.2 (4,039) (0.5)
Extraordinary loss..................... (2,812) (0.1) -- -- (2,202) (0.2)
---------- ----- -------- ------ -------- ------
Net income (loss)...................... $ (4,035) (0.2)% $ 2,010 0.2% $ (6,241) (0.7)%
========== ===== ======== ====== ======== ======
- ------------------------
(a) Includes $5,229, $462 and $341 of non-cash charges related to stock-based
compensation in the year ended December 31, 2000, the year ended
December 31, 1999 and the year ended December 31, 1998, respectively.
(b) Represents the settlement of a legal claim arising from a potential
acquisition that was not consummated.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales for the year ended December 31, 2000 increased $837.4 million, or
90.9%, to $1,758.1 million from $920.7 million for the year ended December 31,
1999. Net sales for the year ended December 31, 2000 included $545.6 million in
additional sales attributable to operating our Salt
22
Lake City facility for the full year in 2000, as compared to one month in 1999,
and $154.8 million in additional sales attributable to our Mt. Prospect
facility, which we acquired at the end of the third quarter in 2000. Volume
increases include $180.8 million from four existing customers, $36.4 million
from four new customers, and $15.1 million in additional sales from engineering
design services. These increases were partially offset by volume reductions in
three customers' programs of $97.8 million.
GROSS PROFIT
Gross profit decreased to 5.6% of net sales for the year ended December 31,
2000 from 6.0% of net sales for the year ended December 31, 1999. This decrease
resulted from the increased effect of our Salt Lake City facility (0.7% of net
sales), which had a mix of customer programs with lower average margins as
compared to our other sites, and inventory provisions and physical count
adjustments at our Asia and Salt Lake City facilities (0.3% of net sales). These
decreases were partially offset by the positive effect of increased revenues
from engineering design services (0.3% of net sales) and operation of our Mt.
Prospect facility (0.3% of net sales).
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the year ended December 31,
2000 increased to $70.3 million, or 4.0% of net sales, from $38.0 million, or
4.1% of net sales, for the year ended December 31, 1999. This increase was due,
in part, to operating our Salt Lake City facility for a full year
($9.0 million), and additional administrative expenses related to operating
Qualitronics and our Mt. Prospect facility, both of which were acquired during
2000 ($2.0 million). Amortization of goodwill and intangible assets also
increased $6.3 million due to a full year of amortization of intangibles at Salt
Lake City and amortization related to acquisitions in 2000. Additional increases
include an expense of $5.2 million related to stock awards and option grants
made to some of our senior managers and other key employees, and staffing
increases at all of our sites to support growth in customer programs.
LEGAL SETTLEMENT
In April 2000, we agreed to settle a claim for damages brought against us
arising from a potential acquisition that was not consummated. As a result, we
recorded a $6.0 million charge in the year ended December 31, 2000.
INTEREST EXPENSE, NET
Net interest expense for the year ended December 31, 2000 increased to
$17.7 million from $8.1 million for the year ended December 31, 1999. This
increase reflects higher average borrowings and the effect of higher interest
rates.
FOREIGN EXCHANGE GAINS/LOSSES
Foreign exchange losses for the year ended December 31, 2000 were
$2.0 million compared with foreign exchange losses of $2.5 million for the year
ended December 31, 1999. Approximately $1.1 million of the foreign exchange loss
for the year ended December 31, 2000 related to the strengthening of the US
dollar in relation to the Spanish peseta in connection with US dollar
denominated loans for our Valencia facility which were repaid during 2000. The
remainder of the foreign exchange loss for the year ended December 31, 2000
related to the strengthening of the US dollar in relation to the Spanish peseta
on materials purchased in Valencia which must be settled in US dollars,
partially offset by foreign exchange gains realized in Asia related to the
strengthening of certain Asian currencies in relation to the US dollar. The
foreign exchange loss for the year ended December 31, 1999 related primarily to
the strengthening of the US dollar in relation to the Spanish peseta in
connection with a US dollar-denominated loan in Valencia, which was repaid in
2000.
23
PROVISION FOR INCOME TAXES
Provision for income taxes was $3.1 million for the year ended December 31,
2000 and $3.8 million for the year ended December 31, 1999. Our tax provisions
in both years resulted from the mix of profits and losses experienced by us
across the jurisdictions within which we operate. Losses in the United States
and Ireland provided us with no income tax benefit while profits in Spain and
Asia required us to record tax provisions.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales for the year ended December 31, 1999 increased $82.7 million, or
9.9%, to $920.7 million from $838.0 million for the year ended December 31,
1998. This increase in net sales was the result of a $138.1 million increase
attributable to operating our Charlotte facility for the full year in 1999, as
compared to seven months in 1998, and the acquisition of our Salt Lake City
facility in November 1999. In addition, $81.3 million of this increase was
attributable to growth from three existing customers. These increases were
partially offset by $90.0 million resulting from the cancellation of a
customer's manufacturing program caused by the sale of the business by that
customer to a third party and $39.5 million resulting from a reduction in unit
volumes of a different customer due to competitive pressures in that customer's
industry.
GROSS PROFIT
Gross profit increased to 6.0% of net sales for the year ended December 31,
1999 from 5.4% of net sales for the year ended December 31, 1998. A portion of
this increase (0.1% of net sales) resulted from having a mix of customer
programs in 1999 in which the gross margins were higher than the mix of customer
programs in 1998. A portion of the increase (0.2% of net sales) was due to the
improvement in the utilization of our manufacturing capacity. In addition, the
operations of our Fremont facility in 1998, prior to its closing, negatively
impacted margins in that year (0.3% of net sales).
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the year ended December 31,
1999 increased to $38.0 million, or 4.1% of net sales, from $29.8 million, or
3.6% of net sales, for the year ended December 31, 1998. This increase was
comprised of expenses of $2.4 million related to the impact of operating our
Charlotte facility for a full year, $1.3 million related to the modification of
an equipment leasing arrangement, $1.6 million related to the expansion of our
information systems to support our additional facilities and $1.1 million
related to our acquisition of two electronics design firms and our Salt Lake
City facility. This increase was partially offset by the reduction of expenses
totaling $0.7 million resulting from the closing of our Fremont facility in
1998.
INTEREST EXPENSE, NET
Net interest expense for the year ended December 31, 1999, decreased to
$8.1 million from $10.2 million for the year ended December 31, 1998. This
decrease reflects lower average borrowings during 1999, partially offset by the
effect of higher interest rates.
FOREIGN EXCHANGE GAINS/LOSSES
Foreign exchange loss for the year ended December 31, 1999 was $2.5 million
compared with a foreign exchange gain of $0.7 million for the year ended
December 31, 1998. Most of our foreign
24
exchange loss in 1999 related to the strengthening of the US dollar in relation
to the Spanish peseta in connection with a US dollar denominated loan for our
Valencia facility, which was repaid in 2000.
PROVISION FOR INCOME TAXES
Provision for income taxes increased to $3.8 million for the year ended
December 31, 1999 compared with $3.3 million for the year ended December 31,
1998. Our tax provision in both years resulted from the mix of profits and
losses we experienced across the jurisdictions within which we operate. Losses
in the United States and Ireland provided us with no income tax benefit while
profits in Spain and Singapore required us to record tax provisions.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited financial information for the
past eight quarterly periods. The information presented has been derived from
our unaudited consolidated financial statements that, in our opinion, reflect
all normal, recurring adjustments necessary for a fair presentation. The
operating results for any quarter are not necessarily indicative of results for
any future period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
APRIL 2, JULY 2, OCT. 1, DEC. 31, APRIL 4, JULY 4, OCT. 4, DEC. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net sales................................. $332,820 $362,422 $424,444 $638,415 $206,964 $221,043 $221,068 $271,647
Cost of goods sold........................ 316,505 341,266 399,450 603,090 195,879 207,487 206,408 255,715
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit.............................. 16,315 21,156 24,994 35,325 11,085 13,556 14,660 15,932
Selling, general and administrative(a).... 16,702 14,191 16,267 23,181 7,928 10,253 9,639 10,222
Restructuring and other asset
writedowns.............................. -- -- -- -- -- -- -- 780
Legal settlement(b)....................... 6,000 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)................... (6,387) 6,965 8,727 12,144 3,157 3,303 5,021 4,930
Interest expense, net..................... (3,476) (4,085) (3,546) (6,622) (1,702) (1,773) (1,900) (2,706)
Foreign exchange gain (loss).............. (673) (293) (1,756) 696 (1,160) (1,215) 858 (993)
Other income.............................. -- -- -- 140 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before provision for income
taxes and extraordinary loss............ (10,536) 2,587 3,425 6,358 295 315 3,979 1,231
Provision for income taxes................ 287 739 854 1,177 192 205 2,613 800
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary loss... (10,823) 1,848 2,571 5,181 103 110 1,366 431
Extraordinary loss........................ -- (627) (2,036) (149) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)......................... $(10,823) $ 1,221 $ 535 $ 5,032 $ 103 $ 110 $ 1,366 $ 431
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) applicable to common
stock................................... $(12,954) $(18,572) $ 535 $ 5,032 $ 103 $ 110 $ 1,366 $ (378)
======== ======== ======== ======== ======== ======== ======== ========
Basic income (loss) per share:
Income (loss) before extraordinary
loss.................................. $ (0.66) $ (0.85) $ 0.08 $ 0.15 $ 0.01 $ 0.01 $ 0.07 $ (0.02)
Extraordinary loss...................... $ -- $ (0.03) $ (0.06) $ -- $ -- $ -- $ -- $ --
Net income (loss)....................... $ (0.66) $ (0.88) $ 0.02 $ 0.15 $ 0.01 $ 0.01 $ 0.07 $ (0.02)
Weighted average shares outstanding..... 19,673 21,123 31,620 33,301 19,053 19,543 19,518 19,546
Diluted income (loss) per share:
Income (loss) before extraordinary
loss.................................. $ (0.66) $ (0.85) $ 0.08 $ 0.15 $ 0.01 $ 0.01 $ 0.07 $ (0.02)
Extraordinary loss...................... $ -- $ (0.03) $ (0.06) $ -- $ -- $ -- $ -- $ --
Net income (loss)....................... $ (0.66) $ (0.88) $ 0.02 $ 0.15 $ 0.01 $ 0.01 $ 0.07 $ (0.02)
Weighted average shares outstanding..... 19,673 21,123 32,977 33,922 19,208 19,576 19,636 19,546
- ------------------------------
(a) Includes $3,987, $210, $232, $800, $10, $10, $10 and $432 of non-cash
charges related to stock-based compensation in the three months ended
April 2, 2000, July 2, 2000, October 1, 2000, December 31, 2000, April 4,
1999, July 4, 1999, October 4, 1999 and December 31, 1999, respectively.
(b) Represents the settlement of a legal claim arising from a potential
acquisition that was not consummated.
25
The following table sets forth our financial information stated as a
percentage of net sales for the past eight quarterly periods:
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
APRIL 2, JULY 2, OCT. 1, DEC. 31, APRIL 4, JULY 4, OCT. 4, DEC. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................. 95.1 94.2 94.1 94.5 94.6 93.9 93.4 94.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit....................... 4.9 5.8 5.9 5.5 5.4 6.1 6.6 5.9
Selling, general and
administrative................... 5.0 3.9 3.8 3.6 3.8 4.6 4.4 3.8
Restructuring and other asset
writedowns....................... -- -- -- -- -- -- -- 0.3
Legal settlement................... 1.8 -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)............ (1.9) 1.9 2.1 1.9 1.5 1.5 2.3 1.8
Interest expense, net.............. (1.0) (1.1) (0.8) (1.0) (0.8) (0.8) (0.9) (1.0)
Foreign exchange gain (loss)....... (0.2) -- (0.4) 0.1 (0.6) (0.5) 0.4 (0.4)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income taxes and extraordinary
loss............................. (3.2) 0.7 0.8 1.0 0.1 0.1 1.8 0.5
Provision for income taxes......... 0.1 0.2 0.2 0.2 0.1 0.1 1.2 0.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before extraordinary
loss............................. (3.3) 0.5 0.6 0.8 -- -- 0.6 0.2
Extraordinary loss................. -- (0.2) (0.5) -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).................. (3.3)% 0.3% 0.1% 0.8% -- -- 0.6% 0.2%
===== ===== ===== ===== ===== ===== ===== =====
Our quarterly operating results are subject to fluctuations and seasonality.
Our first quarters are typically subject to lower volumes of customer orders as
compared to our fourth quarters due to the seasonal nature of the sales of
certain significant customers, resulting in lower utilization of manufacturing
capacity which may adversely affect our operating results. This trend was not
necessarily reflected in our net sales during the first quarter of 2000 due to
the acquisition of our Salt Lake City facility consummated late in the fourth
quarter of 1999. However, operating results for the first quarter of 2000 were
adversely affected by the lower utilization experienced relative to the
manufacturing capacity in place for the full quarter.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash and cash equivalents of $10.4 million,
total bank and other debt of $189.1 million and $84.2 million of unused
borrowing capacity under our revolving bank credit facility. During 2000, our
operations were principally funded with borrowings under our bank credit
facility and net proceeds of $161.3 million from our initial public offering of
11.0 million shares of Common Stock in June 2000.
Net cash used in operating activities of $98.9 million for the year ended
December 31, 2000 resulted from a net loss of $4.0 million and an increase in
operating assets of $441.7 million offset by an increase in operating
liabilities of $304.4 million, depreciation and amortization of $29.3 million
and other non-cash items aggregating $13.1 million. The net increase in
operating assets and liabilities was attributable to growth in accounts
receivable, inventories and accounts payable related to increased levels of
business at our existing facilities and the acquisition of our Mt. Prospect
facility and Qualitronics. Also included in the increase in operating
liabilities is $9.3 million in deferred revenue related to a customer supply
agreement. That agreement includes a provision whereby we will either retain or
repay a portion of this amount each quarter, through the fourth quarter of 2001,
dependent upon certain sales levels achieved in that quarter. The deferred
revenue will either be recognized in income or repaid to the customer based on
actual sales volumes each quarter. Other non-cash items include non-cash charges
for equity awards of $5.2 million and other non-cash charges of $1.0 million
associated with the obligations of Donaldson, Lufkin & Jenrette Securities
Corporation under a litigation settlement agreement with Lockheed Martin
Corporation.
26
Net cash used in operating activities of $25.1 million for the year ended
December 31, 1999 resulted from an increase in operating assets of
$72.6 million, offset by an increase in operating liabilities of $25.0 million,
net income of $2.0 million, depreciation and amortization of $14.4 million and
other non-cash items aggregating $6.1 million. Other non-cash items include
amortization of capitalized finance fees of $0.8 million, foreign exchange loss
of $2.2 million, write-downs and loss on disposal of fixed assets of
$1.9 million and non-cash charges for share issuances of $0.5 million. The
increase in depreciation and amortization for the year ended December 31, 2000
compared to the year ended December 31, 1999 reflects the effect of the
acquisitions of our Salt Lake City and Mt. Prospect facilities and an overall
increase in the depreciable asset base due to investments in manufacturing
equipment in response to increased customer demand throughout the company.
Net cash provided by operating activities of $41.1 million for the year
ended December 31, 1998 resulted from an increase in operating liabilities of
$29.1 million, depreciation and amortization of $10.9 million and other non-cash
items aggregating $6.7 million, and a decrease in operating assets of
$0.6 million, offset by a net loss of $6.2 million.
Net cash used in investing activities for the year ended December 31, 2000
was $57.5 million, consisting of $47.7 million of net capital expenditures,
$6.0 million for the acquisition of intangible assets related to our Mt.
Prospect facility and $3.8 million for the acquisition of Qualitronics. Capital
expenditures consisted of production equipment purchased for our Valencia, Asia
and Salt Lake City manufacturing sites, building and improvement costs related
to establishing new manufacturing sites in Ireland and China and computer
hardware and software in Salt Lake City. Net cash used in investing activities
for the year ended December 31, 1999 was $81.8 million consisting primarily of
capital expenditures of $45.1 million and acquisitions of intangible assets of
$35.3 million in connection with our Salt Lake City facility. Net cash used in
investing activities for the year ended December 31, 1998 was $4.5 million,
which consisted of $2.5 million of internal use software and $2.0 million of
production equipment and computer hardware. Approximately half of the
$2.0 million was related to our Charlotte acquisition. We expect capital
expenditures in 2001, excluding effects of any acquisitions, to be approximately
$34.3 million, primarily for the purchase of additional manufacturing assets.
Net cash provided by financing activities for the year ended December 31,
2000 was $144.1 million, including net proceeds of $161.3 million from the
issuance of Common Stock in the initial public offering which closed on
June 28, 2000. These proceeds were used to pay off a portion of borrowings under
our bank credit facility ($99.4 million) and retire all of our outstanding
senior preferred stock ($58.9 million, including remaining dividends owed).
Other financing activities included net borrowings under our bank credit
facility of $149.2 million, excluding amounts paid off with proceeds from the
initial public offering, $7.9 million in debt issuance costs and $2.2 million of
dividends paid on our senior preferred stock prior to the retirement. Net cash
provided by financing activities for the year ended December 31, 1999 was
$109.2 million, principally consisting of net borrowings of $64.6 million under
our bank credit facility and net proceeds of $49.1 million from the issuance of
senior preferred stock and warrants in connection with our acquisition of the
Salt Lake City facility. Net cash used in financing activities for the year
ended December 31, 1998 was $23.5 million, principally consisting of net
repayments under our bank credit facility.
At December 31, 2000, we had $84.8 million outstanding under our term loan
facility and $90.8 million outstanding under our revolving credit facility with
$84.2 million available for additional borrowings. During August 2000, we
replaced our existing credit facility with a new $175 million revolving credit
facility. The facility has a final maturity of August 2003. The new credit
facility is secured by substantially all domestic assets and a pledge of 66% of
the shares of foreign subsidiaries. It includes covenants restricting leverage
ratios as well as covenants requiring minimum working capital, net worth and
fixed charge coverage ratios. In connection with replacing the previous credit
facility with the new credit facility, we recorded an extraordinary non-cash
charge of $2.2 million, net of $0.3 million tax benefit, associated with the
write off of deferred financing costs.
27
In September 2000, we closed an $85.0 million term loan with a final
maturity of September 2005 to finance the cash portion of our purchase of the
assets of 3Com's Mt. Prospect, IL facility. The existing credit agreement was
amended to allow for this new term loan as well as to establish a monthly
borrowing base that utilizes receivables and inventory as the base calculation.
Borrowings under our new bank credit facility are limited by a borrowing
base calculation based on defined levels of accounts receivable and inventory.
At December 31, 2000, the total borrowing base was in excess of committed
borrowings under the credit facility.
The interest rate on our revolving credit facility is, at our option,
either:
- a base rate margin of 0.75% to 1.75% per annum plus the base rate,
- the rate as publicly announced from time to time by Bank of America as
its "reference rate", or
- the federal funds effective rate plus 0.50% per annum; or
- the reserve-adjusted London interbank offered rate, or LIBOR, margin of
1.75% to 2.75% per annum plus LIBOR.
The interest rate on our term loan facility is, at our option, either:
- the base rate plus 2.5% to 2.75% per annum; or
- the sum of LIBOR plus 3.5% to 3.75% per annum.
The rates for the revolving credit facility and the term loan facility are
subject to adjustment based on our consolidated leverage ratio and our corporate
credit rating. At December 31, 2000, the interest rates on borrowings under our
revolving credit facility were between 9.0625% and 11.25% and the interest rate
on our term loan was 10.64%.
We believe our current level of working capital, cash generated from
operations, leasing capabilities and amounts available under our existing
revolving credit facility will be adequate to meet our anticipated future
operating expenses, capital expenditures and debt obligations for at least the
next twelve months. Our liquidity needs beyond the next twelve months will not
be materially different from current needs except for the financing requirements
of future acquisitions, if any, and for future internal growth.
As of December 31, 2000, we had $84.2 million of unused borrowing capacity
under our bank credit facility to make future acquisitions and for general
corporate purposes. We intend to continue our acquisition strategy, which could
result in significant future acquisitions. If available resources are not
sufficient to finance these acquisitions, we would be required to seek
additional equity or debt financing. There can be no assurance that funds from
these sources, if required, will be available on terms suitable to us, if at
all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value, as well as identifying the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of Effective Date of SFAS
No. 133," deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, which is fiscal year 2001 for us. We do not believe
adoption of SFAS No. 133 will have a material impact on our financial condition
and results of operations.
28
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. ANY OF THESE RISKS COULD
HAVE A MATERIAL AND NEGATIVE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS.
BECAUSE A SIGNIFICANT PORTION OF OUR SALES CURRENTLY COMES FROM A SMALL NUMBER
OF CUSTOMERS, ANY DECREASE IN SALES FROM THESE CUSTOMERS COULD HARM OUR
OPERATING RESULTS.
We depend on a small number of customers for a large portion of our
business, and changes in our customers' orders have, in the past, had a
significant impact on our operating results. If a major customer significantly
reduces the amount of business it does with us, there would be an adverse impact
on our operating results. The following table sets forth the percentages of our
total net sales to those customers who accounted for 10% or more of our total
net sales in any of the last three fiscal years and the percentage of our total
net sales to our ten largest customers in those years:
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
IBM...................................................... 24% 49% 51%
Palm..................................................... 23% 3% --
3Com..................................................... 14% 1% --
Hewlett-Packard.......................................... 11% 8% 4%
Iomega................................................... 4% 14% 20%
Ten largest customers as a group......................... 88% 88% 89%
We expect to continue to depend on sales to our major customers. Because it
is not always possible to replace lost business on a timely basis, it is likely
that our operating results would be adversely affected if one or more of our
major customers were to cancel, delay or reduce a large amount of business with
us in the future. Our customer agreements typically permit the customer to
terminate the agreement on three to six month's notice. Were a customer to
terminate its agreement with us, it is likely that our operating results would
be adversely affected.
In addition, we generate significant accounts receivable in connection with
providing services to our major customers. If one or more of our customers were
to become insolvent or otherwise be unable to pay for our services, our
operating results and financial condition could be adversely affected.
WE HAVE MADE SEVERAL RECENT STRATEGIC ACQUISITIONS OF MANUFACTURING FACILITIES
AND BUSINESSES AND MAY MAKE MORE ACQUISITIONS IN THE FUTURE, AND THE FAILURE TO
SUCCESSFULLY INTEGRATE ACQUIRED FACILITIES AND BUSINESSES MAY ADVERSELY AFFECT
OUR FINANCIAL PERFORMANCE.
We have made several significant acquisitions since the beginning of fiscal
1999, and selectively pursuing strategic acquisitions remains an important part
of our overall business strategy. However, any acquisitions we make could result
in:
- difficulty integrating our operations, technologies, financial controls
and information systems, products and services with those of the acquired
facility;
- difficulty in managing and operating geographically dispersed businesses,
including some located in foreign countries;
- diversion of our capital and our management's attention away from other
business issues;
- an increase in our expenses and our working capital requirements;
- potential loss of key employees and customers of facilities or businesses
we acquire; and
29
- financial risks, such as:
- potential liabilities of the facilities and businesses we acquire;
- our need to incur additional indebtedness; and
- dilution if we issue additional equity securities.
We may not successfully integrate any operations, technologies, systems,
products or services that we acquire, and we cannot assure you that any of our
recent or future acquisitions will be successful. If any of our recent or future
acquisitions are not successful, it is likely that our financial performance
will be adversely affected.
OUR GROWTH MAY BE LIMITED AND OUR COMPETITIVE POSITION MAY BE HARMED IF WE ARE
UNABLE TO IDENTIFY, FINANCE AND COMPLETE FUTURE ACQUISITIONS.
We expect to selectively pursue strategic acquisitions as part of our
overall business strategy. Competition for acquiring attractive facilities and
businesses in our industry is substantial. In executing this part of our
business strategy, we may experience difficulty in identifying suitable
acquisition candidates or in completing selected transactions. In addition, our
existing bank credit facilities limit our ability to acquire the assets or
businesses of other companies. If we are able to identify acquisition
candidates, such acquisitions may be financed with substantial debt or with
potentially dilutive issuances of equity securities. Our ability to successfully
complete acquisitions in the future will depend upon several factors, including
the continued availability of financing. We cannot assure you that financing for
acquisitions will be available on terms acceptable to us, if at all.
THE INCURRENCE OF INDEBTEDNESS COULD HARM OUR OPERATING RESULTS AND FINANCIAL
CONDITION.
Our growth and acquisition strategy could require us to incur substantial
amounts of indebtedness. As of December 31, 2000, our total debt was
$189.1 million and our interest expense for the quarter then ended was
$6.6 million. In addition, we may incur additional indebtedness in the future.
Our future level of indebtedness could have adverse consequences for our
business, including:
- vulnerability to the effects of poor economic and industry conditions
affecting our business;
- dedication of a substantial portion of our cash flow from operations to
repayment of debt, limiting the availability of cash for working capital,
capital expenditures or acquisitions which may be attractive to us;
- reduced flexibility in planning for, or reacting to, changes in our
business and industry, due to the debt repayment obligations and
restrictive covenants contained in our debt instruments; and
- failure to comply with the financial covenants under the agreements
governing our indebtedness relating to matters such as interest coverage,
leverage, consolidated EBITDA and net worth resulting in an event of
default, which if not cured or waived, could cause substantially all of
our indebtedness to become immediately due and payable.
We have financial instruments that are subject to interest rate risk,
principally debt obligations under our bank credit facility. An increase in the
base rates upon which our interest rates are determined could have an adverse
effect on our operating results and financial condition.
COMPETITION FROM EXISTING OR NEW COMPANIES IN THE EMS INDUSTRY COULD CAUSE US TO
EXPERIENCE DOWNWARD PRESSURE ON PRICES, FEWER CUSTOMER ORDERS, REDUCED MARGINS,
THE INABILITY TO TAKE ADVANTAGE OF NEW BUSINESS OPPORTUNITIES AND THE LOSS OF
MARKET SHARE.
We operate in a highly competitive industry. We compete against many
domestic and foreign companies, some of which have substantially greater
manufacturing, financial, research and development and marketing resources than
we do. Some of our competitors have broader geographic breadth and range of
services than we do. In addition, some of our competitors may have more
30
developed relationships with our existing customers than we do. We also face
competition from the manufacturing operations of our current and potential
customers, who continually evaluate the benefits of internal manufacturing
versus outsourcing. As more OEMs dispose of their manufacturing assets and
increase the outsourcing of their products, we will face increasing competitive
pressures to grow our business in order to maintain our competitive position.
LONG-TERM CONTRACTS ARE NOT TYPICAL IN OUR INDUSTRY, AND REDUCTIONS,
CANCELLATIONS OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
As is typical in the EMS industry, we do not usually obtain long-term
purchase orders or commitments from our customers. Instead, we work closely with
our customers to develop non-binding forecasts of the future volume of orders.
Customers may cancel their orders, change production quantities from forecasted
volumes or delay production for a number of reasons beyond our control.
Significant or numerous cancellations, reductions or delays in orders by our
customers would reduce our net sales. In addition, because many of our costs are
fixed, a reduction in net sales could have a disproportionate adverse effect on
our operating results. From time to time we make capital investments in
anticipation of future business opportunities. There can be no assurance that we
will receive the anticipated business. If we are unable to obtain the
anticipated business, our operating results and financial condition may be
harmed.
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE THE SOLE SOURCE FOR OUR
COMPONENTS, AND OUR PRODUCTION WOULD BE SUBSTANTIALLY CURTAILED IF THESE
SUPPLIERS ARE NOT ABLE TO MEET OUR DEMANDS AND ALTERNATIVE SOURCES ARE NOT
AVAILABLE.
We order raw materials and components to complete our customers' orders, and
some of these raw materials and components are ordered from sole-source
suppliers. Although we work with our customers and suppliers to minimize the
impact of shortages in raw materials and components, we sometimes experience
short-term adverse effects due to price fluctuations and delayed shipments. In
the past, there have been industry-wide shortages of electronic components,
particularly memory and logic devices. If a significant shortage of raw
materials or components were to occur, we may have to delay shipments, and our
operating results would be adversely affected. In some cases, supply shortages
of particular components will substantially curtail production of products using
these components. While most of our significant customer contracts permit
quarterly or other periodic reviews of pricing based on decreases and increases
in the prices of raw materials and components, we are not always able to pass on
price increases to our customers. Accordingly, some raw material and component
price increases could adversely affect our operating results. We also depend on
a small number of suppliers for many of the other raw materials and components
that we use in our business. If we were unable to continue to purchase these raw
materials and components from our suppliers, our operating results would be
adversely affected. Because many of our costs are fixed, our margins depend on
our volume of output at our facilities and a reduction in volume will adversely
affect our margins.
31
IF WE ARE LEFT WITH EXCESS INVENTORY, OUR OPERATING RESULTS WILL BE ADVERSELY
AFFECTED.
We typically purchase components and manufacture products in anticipation of
customer orders based on customer forecasts. For a variety of reasons, such as
decreased end-user demand for the products we are manufacturing, our customers
may not purchase all of the products we have manufactured or for which we have
purchased components. In such event, we would attempt to recoup our materials
and manufacturing costs by means such as returning components to our vendors,
disposing of excess inventory through other channels or requiring our OEM
customers to purchase or otherwise compensate us for such excess inventory. Some
of our significant customer agreements do not give use the ability to require
our OEM customers to do so. To the extent we are unsuccessful in recouping our
material and manufacturing costs, not only would our net sales be adversely
affected, but our operating results would be disproportionately adversely
affected. Moreover, carrying excess inventory would reduce the working capital
we have available to continue to operate and grow our business.
UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE ELECTRONICS INDUSTRY OR ANY OF
OUR MAJOR CUSTOMERS MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our business depends on the electronics industry, which is subject to rapid
technological change, short product life cycles and pricing and margin pressure.
In addition, the electronics industry has historically been cyclical and subject
to significant downturns characterized by diminished product demand, rapid
declines in average selling prices and production over-capacity. When these
factors adversely affect our customers, we may suffer similar effects. Our
customers' markets are also subject to economic cycles and are likely to
experience recessionary periods in the future. The economic conditions affecting
the electronics industry, in general, or any of our major customers, in
particular, may adversely affect our operating results.
BECAUSE WE HAVE SIGNIFICANT OPERATIONS OVERSEAS, OUR OPERATING RESULTS COULD BE
HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER FACTORS EXISTING IN FOREIGN
COUNTRIES IN WHICH WE OPERATE.
We have substantial manufacturing operations in Europe and Asia. Our
international operations are subject to inherent risks, which may adversely
affect us, including:
- political and economic instability in countries where we have
manufacturing facilities, particularly in Asia where we conduct a
significant portion of our business;
- fluctuations in the value of foreign currencies;
- high levels of inflation, historically the case in a number of countries
in Asia where we do business;
- changes in labor conditions and difficulties in staffing and managing our
foreign operations;
- greater difficulty in collecting our accounts receivable and longer
payment cycles;
- burdens and costs of our compliance with a variety of foreign laws;
- increases in the duties and taxes we pay;
- imposition of restrictions on currency conversion or the transfer of
funds; and
- expropriation of private enterprises.
32
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY AND
IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS THE
PRICE OF OUR SECURITIES MAY DECREASE.
Our annual and quarterly results may vary significantly depending on various
factors, many of which are beyond our control, and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our common
stock would likely decline. These factors include:
- variations in the timing and volume of customer orders relative to our
manufacturing capacity;
- introduction and market acceptance of our customers' new products;
- changes in demand for our customers' existing products;
- the timing of our expenditures in anticipation of future orders;
- effectiveness in managing our manufacturing processes;
- changes in competitive and economic conditions generally or in our
customers' markets;
- the timing of, and the price we pay for, acquisitions and related
integration costs;
- changes in the cost or availability of components or skilled labor; and
- foreign currency exposure.
As is the case with many technology companies, we typically ship a
significant portion of our products in the last few weeks of a quarter. As a
result, any delay in anticipated sales is likely to result in the deferral of
the associated revenue beyond the end of a particular quarter, which would have
a significant effect on our operating results for that quarter. In addition,
most of our operating expenses do not vary directly with net sales and are
difficult to adjust in the short term. As a result, if net sales for a
particular quarter were below our expectations, we could not proportionately
reduce operating expenses for that quarter, and, therefore, that revenue
shortfall would have a disproportionate adverse effect on our operating results
for that quarter.
LOSS OF ANY OF OUR KEY PERSONNEL COULD HURT OUR BUSINESS BECAUSE OF THEIR
EXPERIENCE IN THE EMS INDUSTRY AND THEIR TECHNOLOGICAL EXPERTISE.
We operate in the highly competitive EMS industry and depend on the services
of our key senior executives and our technological experts. The loss of the
services of one or several of our key employees or an inability to attract,
train and retain qualified and skilled employees, specifically engineering,
operations and sales personnel, could result in the loss of customers or
otherwise inhibit our ability to operate and grow our business successfully. In
addition, our ability to successfully integrate acquired facilities or
businesses depends, in part, on our ability to retain and motivate key
management and employees hired by us in connection with the acquisition.
IF WE ARE UNABLE TO MAINTAIN OUR TECHNOLOGICAL EXPERTISE IN DESIGN AND
MANUFACTURING PROCESSES WE WILL NOT BE ABLE TO SUCCESSFULLY COMPETE.
We believe that our future success will depend upon our ability to develop
and provide design and manufacturing services that meet the changing needs of
our customers. This requires that we successfully anticipate and respond to
technological changes in design and manufacturing processes in a cost-effective
and timely manner. As a result, we continually evaluate the advantages and
feasibility of new product design and manufacturing processes. We cannot,
however, assure you that our process development efforts will be successful.
33
WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS THAT EXPOSE US TO POTENTIAL
FINANCIAL LIABILITY.
Our operations are regulated under a number of federal, state and foreign
environmental and safety laws and regulations that govern, among other things,
the discharge of hazardous materials into the air and water as well as the
handling, storage and disposal of these materials. These laws and regulations
include the Clean Air Act, the Clean Water Act, the Resource, Conservation and
Recovery Act, and the Comprehensive Environmental Response, Compensation and
Liability Act, as well as analogous state and foreign laws. Compliance with
these environmental laws is a major consideration for us because we use
hazardous materials in our manufacturing process. In addition, because we are a
generator of hazardous wastes, we, along with any other person who arranges for
the disposal of our wastes, may be subject to financial exposure for costs
associated with an investigation and any remediation of sites at which we have
arranged for the disposal of hazardous wastes if these sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a violation of environmental laws, we could be held liable for damages
and for the costs of remedial actions and could also be subject to revocation of
our effluent discharge permits. Any revocation could require us to cease or
limit production at one or more of our facilities, thereby negatively impacting
our revenues and results of operations. Environmental laws could also become
more stringent over time, imposing greater compliance costs and increasing risks
and penalties associated with any violation, which also could negatively impact
our operating results.
OUR CONTROLLING STOCKHOLDERS AND SOME OF OUR DIRECTORS MAY HAVE INTERESTS THAT
DIFFER FROM YOURS.
Credit Suisse First Boston, through certain of its affiliates, owns
approximately 48.7% of our outstanding common stock and, as a result, has
significant control over our business, policies and affairs, including,
effectively, the power to appoint new management, prevent or cause a change of
control and approve any action requiring the approval of the holders of our
common stock, such as adopting amendments to our certificate of incorporation
and approving mergers or sales of all or substantially all of our assets. In
addition, under the terms of a stockholders agreement between us, certain other
parties and those affiliates of Credit Suisse First Boston, those affiliates
have the right to elect a majority of our directors if they own 50% or more of
our outstanding common stock. See Item 13, "Certain Relationships and Related
Transactions." Circumstances may occur in which the interests of these
stockholders could be in conflict with your interests.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY, DETER OR PREVENT
SOMEONE FROM ACQUIRING US, WHICH COULD DECREASE THE VALUE OF OUR COMMON STOCK.
Provisions in our charter and bylaws may have the effect of delaying,
deterring or preventing a change of control or changes in our management that
investors might consider favorable unless approved by our stockholders and
directors affiliated with Credit Suisse First Boston. Those provisions serve to
limit the circumstances in which a premium may be paid for our common stock in
proposed transactions or where a proxy contest for control of our board may be
initiated. If a change of control or change in management is delayed, deterred
or prevented, the market price of our common stock could suffer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE RELATING TO MARKET RISKS
INTEREST RATE RISK
Our exposure to interest rate risk arises from variable rate debt
arrangements entered into for other than trading purposes. The interest rate
risk on our fixed-rate debt is not material as the amounts outstanding under
these arrangements are not significant.
The cost of borrowings under our term loan facility is the applicable spread
plus the underlying cost of funds option (either the base rate or LIBOR). The
applicable spread on the base rate loans is
34
2.5% to 2.75%, and the spread on the LIBOR loans is 3.5% to 3.75%. The cost of
borrowings under our revolving credit facility is the applicable spread plus the
underlying cost of funds option (either the base rate or LIBOR). The applicable
spread on the base rate loans varies between 0.75% and 1.75% based on our
consolidated leverage ratio and our corporate credit ratings. The applicable
spread on the LIBOR loans varies between 1.75% and 2.75% based on our
consolidated leverage ratio and our corporate credit ratings.
The following table summarizes our market risks associated with our variable
rate debt in place at December 31, 2000 based on current maturities and interest
rates:
DECEMBER 31,
----------------------------------------------------
2001 2002 2003 2004 2005
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Term loan balance........................... $ 83,938 $ 83,088 $ 76,075 $42,712 $ --
Effective interest rate..................... 10.64% 10.64% 10.64% 10.64% 10.64%
Principal payments.......................... $ 850 $ 850 $ 7,013 $33,363 $42,712
Interest expense............................ $ 8,976 $ 8,886 $ 8,664 $ 7,617 $ 3,853
Revolving facility balance.................. $ 90,800 $ 90,800 $ -- -- --
Available credit............................ $175,000 $175,000 $175,000 -- --
Effective interest rate..................... 9.703% 9.703% 9.703% -- --
Fee on unused portion....................... 0.75% 0.75% 0.75% -- --
Interest expense............................ $ 9,442 $ 9,442 $ 6,393 -- --
The carrying cost of the above credit facility approximates fair value due
to the variable nature of the interest rates.
FOREIGN CURRENCY EXCHANGE RATE RISK
We also have exposure to various foreign currency exchange-rate fluctuations
for cash flow received from our foreign subsidiaries. This risk is mitigated
because the functional currency of our subsidiaries in Ireland, Singapore and
Malaysia is the US dollar and most of their financial transactions are
denominated in US dollars. The foreign currency exchange-rate risk for our
subsidiary in Spain is mitigated because its functional currency is the Spanish
peseta and most of its financial transactions are denominated in Spanish
pesetas. Our exposure to foreign currency exchange-rate fluctuations is
primarily related to an intercompany loan payable to the corporate entity, an
intercompany receivable from the corporate entity and specific trade receivables
and payables, all at our subsidiary in Spain, which are denominated in US
dollars. Our foreign currency exchange-rate exposure on the intercompany
balances and the trade receivables and payables is mitigated by the use of
foreign exchange contracts which are effective as a means of minimizing exposure
and reducing risk from exchange rate fluctuations related to these specific
transactions. We actively monitor our foreign currency exchange-rate exposure
and manage our foreign exchange contract positions to maintain the effectiveness
of this risk mitigation process. As of December 31, 2000, we had the following
foreign exchange forward contracts outstanding:
NOTIONAL AMOUNT FAIR VALUE
--------------- ----------
(IN THOUSANDS)
Foreign exchange sell contracts:
US Dollars........................................ $(5,746) $ 166
Foreign exchange buy contracts:
US Dollars........................................ $54,996 $(3,716)
At December 31, 2000, we had $20.6 million in U.S. denominated trade
receivables and $58.7 million in U.S. denominated trade payables at our
subsidiary in Spain. The net unrealized gain
35
(loss) on these balances was immaterial as of December 31, 2000 due to the use
of foreign exchange contracts. A hypothetical 10% fluctuation in the foreign
currency exchange rate between the Spanish peseta and the US dollar would result
in a change in unrealized gain (loss) of $3.8 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain information required by this item is included in Item 7 of Part II
of this Report under the heading "Quarterly Results of Operations" and is
incorporated into this item by reference. All other information required by this
item is included in Item 14 of Part IV of this Report and is incorporated into
this item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
sections captioned "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within
120 days after the end of our fiscal year ended December 31, 2000.
ITEM 11: EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" in the Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year ended
December 31, 2000.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated herein by reference to the
section captioned "Beneficial Ownership of Voting Stock" in the Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year ended
December 31, 2000.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated herein by reference to the
section captioned "Transactions with Related Parties" in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our fiscal year ended December 31,
2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements (see index on page F-1 of this
report).
2. Financial Statement Schedule (see index on page F-1 of this report).
This financial statement schedule should be read in conjunction with our
consolidated financial statements, and related notes thereto.
36
Schedules not listed in the Index to Consolidated Financial Statements and
Schedule have been omitted because they are not applicable, not required, or
the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
3. Exhibits. See Item 14(c) below.
(b) Reports on Form 8-K. We filed the following Current Reports on Form 8-K
during the last quarter of the fiscal year ended December 31, 2000.
1. On December 5, 2000 we filed a Current Report on Form 8-K regarding the
First Amendment to First Amended and Restated Credit Agreement.
2. On December 8, 2000 we filed a Current Report on Form 8-K regarding
certain communications made with analysts regarding a major customer's
press release.
(c) Exhibits. The exhibits listed on the Exhibits Index are filed as part of, or
incorporated by reference into, this Report.
(d) Financial Statement Schedules. See Item 14(a) above.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 2nd day of
April 2001.
MANUFACTURERS' SERVICES LIMITED
By: /s/ KEVIN C. MELIA
-----------------------------------------
Name: Kevin C. Melia
Title: CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
* * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board,
/s/ KEVIN C. MELIA Chief Executive Officer
------------------------------------------- (Principal executive April 2, 2001
Kevin C. Melia officer) and Director
/s/ ROBERT E. DONAHUE
------------------------------------------- President and Director April 2, 2001
Robert E. Donahue
Executive Vice President
/s/ ALBERT A. NOTINI and Chief Financial Officer
------------------------------------------- (Principal financial April 2, 2001
Albert A. Notini officer)
Vice President and
/s/ RICHARD J. GAYNOR Corporate Controller
------------------------------------------- (Principal accounting April 2, 2001
Richard J. Gaynor officer)
/s/ THOMPSON DEAN
------------------------------------------- Director April 2, 2001
Thompson Dean
/s/ KARL WYSS
------------------------------------------- Director April 2, 2001
Karl Wyss
/s/ GEORGE W. CHAMILLARD
------------------------------------------- Director April 2, 2001
George W. Chamillard
/s/ WILLIAM WEYAND
------------------------------------------- Director April 2, 2001
/s/ William Weyand
/s/ JOHN F. FORT
------------------------------------------- Director April 2, 2001
John F. Fort
/s/ CURTIS S. WOZNIAK
------------------------------------------- Director April 2, 2001
Curtis S. Wozniak
38
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
2.1(1) Securities Purchase Agreement dated as of January 20, 1995
by and among MSL and the parties listed therein.
2.2(1) Warrant Agreement dated as of August 31, 1995 by and among
MSL, Bank of America National Trust and Savings Association
and the parties listed therein.
2.3(1) Preferred Stock and Warrant Subscription Agreement dated as
of November 26, 1999 by and among MSL and the parties listed
therein.
2.4(1) Escrow Agreement dated as of November 26, 1999 by and among
MSL and the parties listed therein.
2.5(1) Asset Purchase Agreement dated as of November 19, 1999 among
3Com Corporation, Manufacturers' Services Limited and
Manufacturers' Services Salt Lake City Operations, Inc.
2.6(2) Asset Purchase Agreement dated as of September 26, 2000
among 3Com Corporation, Manufacturers' Services Limited and
Manufacturers' Services Salt Lake City Operations, Inc.
3.1(1) Restated Certificate of Incorporation of MSL.
3.2(1) Amended and Restated By-Laws of MSL.
3.4 Amended and Restated Articles of Incorporation of MSL
3.3(1) Form of certificate representing shares of common stock,
$.001 par value per share.
4.1(1) Stockholders Agreement dated as of January 20, 1995 by and
among MSL and the stockholders named therein.
4.2(1) Stockholders Agreement Amendment dated November 26, 1999 by
and among MSL and the stockholders named therein.
4.3(1) Credit Agreement dated August 21, 1998 among MSL, MSL
Overseas Finance B.V and the lenders named therein.
4.4(1) First Amendment to Credit Agreement and Limited Waiver dated
as of February 26, 1999 by and among MSL, MSL Overseas
Finance B.V. and the lenders named in the Credit Agreement.
4.5(1) Second Amendment to Credit Agreement and Consent dated as of
November 23, 1999 by and among MSL, MSL Overseas Finance
B.V. and the lenders named in the Credit Agreement.
4.6(4) First Amended and Restated Credit Agreement dated as of
September 29, 2000 by and between Manufacturers' Services
Limited and the lenders named in the Credit Agreement.
4.7(4) First Amendment Agreement and Consent dated as of
September 29, 2000 by and between Manufacturers' Services
Limited and the lenders named therein.
4.8(3) First Amendment to First Amended and Restated Credit
Agreement dated as of October 25, 2000 by and between
Manufacturers' Services Limited and the lenders named
therein
4.9 Second Amendment to First Amended and Restated Credit
Agreement dated as of March 2, 2001 by and between
Manufacturers' Services Limited and the lenders named
therein
10.1(1) Employment Agreement dated as of January 20, 1995 by and
between MSL and Kevin C. Melia.
10.2(1) Employment Letter dated as of June 20, 1997 by and between
MSL and Robert E. Donahue.
10.3(1) Employment Letter dated as of September 27, 1995 by and
between MSL and Rodolfo Archbold.
39
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.4(1) Employment Letter dated as of January 4, 1996 by and between
MSL and Dale R. Johnson.
10.5(1) Severance Letter dated June 25, 1996 by and between MSL and
Dale R. Johnson.
10.6(1) Employment Letter dated as of January 23, 1998 by and
between MSL and James N. Poor.
10.7(1) Second Amended and Restated Non-Qualified Option Plan.
10.8(1) Form of 2000 Equity Incentive Plan.
10.9(1) Form of 2000 Employee Stock Purchase Plan.
10.10(1) Form of Indemnification Agreement.
10.11(1) Office/Warehouse Lease dated as of April 14, 1997 by and
between Amberjack, Ltd. and Manufacturers' Services
Limited--Roseville, Inc.
10.12(1) Lease dated as of May 5, 1998 by and between International
Business Machines Corporation and Manufacturers' Services
Western U.S. Operations, Inc.
10.13(1)+ Supply Agreement dated as of November 27, 1999 buy and
between MSL and 3Com Corporation.
10.14(1)+ Outsourcing Agreement dated as of June 1, 1998 by and
between International Business Machines Corporation and
Manufacturers' Services Western US Operations, Inc.
10.15+(1) Manufacturing, Integration and Fulfillment Contract dated as
of June 26, 1998 by and between International Business
Machines S.A. and Global Manufacturers' Services--Valencia
10.16+(1) Global Requirements Agreement No. MSL 183G dated as of
July 30, 1997 by and between MSL and Iomega Corporation.
10.17+(1) Supply Agreement dated as of November 27, 1999 by and
between MSL and Palm Computing, Inc.
10.18+(1) Manufacturing Services Agreement dated as of June 1, 1999 by
and between Hewlett-Packard Singapore Pte Ltd. and
Manufacturers' Services Singapore Pte Ltd.
10.19(1) 2000 Cash Incentive Compensation Plan.
10.20(4)+ Supply Agreement dated as of September 30, 2000 between
Manufacturers' Services Salt Lake City Operations, Inc. and
3Com Corporation.
10.21(4)+ Lease dated as of September 30, 2000 by and between 3Com
Corporation and Manufacturers' Services Salt Lake City
Operations, Inc.
10.22(4) 2000 Non-employee Director Stock Option Plan, as amended
10.23(4) 2000 Non-qualified Stock Option Plan
10.24(4) Second Amended and Restated Non-qualified Stock Option Plan,
as amended
10.25(4) 2000 Equity Incentive Plan, as amended
10.26 Form of Change in Control Agreement for Kevin Melia, Robert
Donahue, Albert Notini, Rodolfo Archbold, James Poor and
Richard Gaynor
10.27+ First Amendment to Supply Agreement between Manufacturers'
Services Salt Lake City Operations, Inc. and Palm, Inc.,
effective as of December 1, 2000.
10.28 Amendment to Employment Letter dated as of September 27,
1995 between MSL and Rodolfo Archbold
10.29+ First Amendment to Supply Agreement between Manufacturers
Services Salt Lake City Operations, Inc. and 3Com
Corporation, effective as of January 15, 2001
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
- ------------------------
+ Confidential treatment requested as to certain portions which portions have
been filed separately with the Securities and Exchange Commission.
40
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1,
as amended (File No. 333-96227), filed on February 4, 2000
(2) Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed on
October 11, 2000
(3) Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed on
December 5, 2000
(4) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q filed
on November 14, 2000
41
MANUFACTURERS' SERVICES LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
--------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to the Consolidated Financial Statements.............. F-7
Financial Statement Schedules
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Schedule II--Valuation and Qualifying Accounts.............. S-2
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Manufacturers' Services Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of
Manufacturers' Services Limited and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 5, 2001
F-2
MANUFACTURERS' SERVICES LIMITED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,388 $ 24,182
Accounts receivable, less allowance for doubtful accounts
of $2,239 and $728 at December 31, 2000 and 1999,
respectively............................................ 359,978 131,301
Inventories............................................... 363,485 125,164
Prepaid expenses and other current assets................. 36,060 18,618
-------- --------
Total current assets.................................... 769,911 299,265
Property and equipment, net............................... 93,649 62,814
Goodwill and other intangibles............................ 44,535 37,949
Other assets.............................................. 25,422 11,755
-------- --------
Total assets............................................ $933,517 $411,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................. $ 7,737 $ 5,414
Accounts payable.......................................... 474,579 164,261
Accrued expenses and other current liabilities............ 50,102 26,845
Income taxes payable...................................... 3,068 4,472
-------- --------
Total current liabilities............................... 535,486 200,992
Long-term debt and capital lease obligations................ 181,344 121,929
Other liabilities........................................... 1,239 1,037
-------- --------
Total liabilities....................................... 718,069 323,958
Commitments and contingencies (Note 10)
Senior redeemable preferred stock, 2,000,000 shares
authorized; 0 and 2,000,000 shares issued and outstanding
at December 31, 2000 and 1999, respectively; redemption
value of $25 per share.................................... -- 39,204
Stockholders' equity:
Preferred stock, $0.001 par value, 3,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock, $0.001 par value; 150,000,000 shares
authorized; 33,346,735 and 19,588,897 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 33 20
Additional paid in capital................................ 262,024 88,471
Accumulated deficit....................................... (34,396) (30,361)
Accumulated other comprehensive loss...................... (12,213) (9,509)
-------- --------
Total stockholders' equity.............................. 215,448 48,621
-------- --------
Total liabilities and stockholders' equity.............. $933,517 $411,783
======== ========
See accompanying notes to the consolidated financial statements.
F-3
MANUFACTURERS' SERVICES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Net sales............................................. $ 1,758,101 $ 920,722 $ 837,993
Cost of goods sold.................................... 1,660,311 865,489 792,734
----------- ----------- -----------
Gross profit.......................................... 97,790 55,233 45,259
Operating expenses:
Selling, general and administrative................. 70,341 38,042 29,835
Legal settlement.................................... 6,000 -- --
Restructuring and other asset writedowns............ -- 780 6,729
----------- ----------- -----------
76,341 38,822 36,564
----------- ----------- -----------
Operating income...................................... 21,449 16,411 8,695
Interest expense, net................................. (17,729) (8,081) (10,161)
Foreign exchange gain (loss).......................... (2,026) (2,510) 721
Other income.......................................... 140 -- --
----------- ----------- -----------
Income (loss) before provision for income taxes and
extraordinary loss.................................. 1,834 5,820 (745)
Provision for income taxes............................ 3,057 3,810 3,294
----------- ----------- -----------
Income (loss) before extraordinary loss............... (1,223) 2,010 (4,039)
Extraordinary loss.................................... (2,812) -- (2,202)
----------- ----------- -----------
Net income (loss)..................................... $ (4,035) $ 2,010 $ (6,241)
=========== =========== ===========
Net income (loss) applicable to common stock (Note
16)................................................. $ (25,959) $ 1,201 $ (6,241)
=========== =========== ===========
Basic income (loss) per share:
Income (loss) before extraordinary loss............. $ (0.88) $ 0.06 $ (0.21)
Extraordinary loss.................................. $ (0.11) $ -- $ (0.12)
Net income (loss)................................... $ (0.98) $ 0.06 $ (0.33)
Weighted average shares outstanding................. 26,410,876 19,384,277 18,745,786
Diluted income (loss) per share:
Income (loss) before extraordinary loss............. $ (0.88) $ 0.06 $ (0.21)
Extraordinary loss.................................. $ (0.11) $ -- $ (0.12)
Net income (loss)................................... $ (0.98) $ 0.06 $ (0.33)
Weighted average shares outstanding................. 26,410,876 19,608,168 18,745,786
See accompanying notes to the consolidated financial statements.
F-4
MANUFACTURERS' SERVICES LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
-------------------- ADDITIONAL OTHER TOTAL
NUMBER PAID IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) INCOME (LOSS) EQUITY
--------- -------- ---------- ----------- ------------- ------------- -------------
Balance at December 31, 1997.... 18,624 $19 $ 74,416 $(26,130) $ (6,208) $ 42,097
Net loss........................ (6,241) (6,241) (6,241)
Translation adjustment.......... 2,279 2,279 2,279
-------
Comprehensive income (loss)..... $(3,962)
-------
Issuance of stock............... 71 341 341
Exercise of stock options....... 54 217 217
Purchase of shares.............. 100 481 481
------- --- -------- -------- -------- --------
Balance at December 31, 1998.... 18,849 $19 $ 75,455 $(32,371) $ (3,929) $ 39,174
Net income...................... 2,010 2,010 2,010
Translation adjustment.......... (5,580) (5,580) (5,580)
-------
Comprehensive income (loss)..... $(3,570)
-------
Issuance of stock............... 90 430 430
Exercise of stock options....... 559 1 2,236 2,237
Purchase of shares.............. 91 436 436
Dividends declared on preferred
shares........................ (671) (671)
Issuance of warrants............ 10,723 10,723
Accretion of preferred stock.... (138) (138)
------- --- -------- -------- -------- --------
Balance at December 31, 1999.... 19,589 $20 $ 88,471 $(30,361) $ (9,509) $ 48,621
Net loss........................ (4,035) (4,035) (4,035)
Translation adjustment.......... (2,704) (2,704) (2,704)
-------
Comprehensive income (loss)..... $(6,739)
-------
Issuance of stock for cash...... 11,000 11 161,321 161,332
Issuance of stock for
acquisitions.................. 2,024 2 26,592 26,594
Exercise of stock options and
warrants...................... 487 2,318 2,318
Issuance of stock to
employees..................... 213 3,825 3,825
Issuance of stock to founders... 34 421 421
Dividends declared on preferred
shares........................ (3,464) (3,464)
Accretion of preferred stock.... (18,460) (18,460)
Stockholder contribution for
legal settlement.............. 1,000 1,000
------- --- -------- -------- -------- --------
Balance at December 31, 2000.... 33,347 $33 $262,024 $(34,396) $(12,213) $215,448
======= === ======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
F-5
MANUFACTURERS' SERVICES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
CASH FLOWS RELATING TO OPERATING ACTIVITIES:
Net income (loss)......................................... $ (4,035) $ 2,010 $(6,241)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 29,298 14,433 10,933
Amortization of capitalized finance fees................ 1,089 777 1,800
Write off of capitalized bank fees...................... 2,812 -- 2,202
Additions to allowance for doubtful accounts............ 1,718 339 319
Issuance of shares to founders.......................... -- 422 341
Non cash charge for stock and option issuances.......... 5,229 40 --
Foreign exchange (gain) loss............................ 455 2,249 (485)
Deferred taxes.......................................... 755 370 1,196
Writedowns and loss on disposal of fixed assets......... -- 1,854 1,302
Litigation settled by shareholder....................... 1,000 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (227,242) (16,094) (3,282)
Inventories............................................. (197,383) (42,591) 5,284
Prepaid expenses and other assets....................... (17,031) (13,910) (1,447)
Accounts payable........................................ 288,150 20,122 26,700
Accrued expenses and other liabilities.................. 16,248 4,858 2,448
--------- -------- -------
Net cash provided by (used in) operating activities......... (98,937) (25,121) 41,070
--------- -------- -------
CASH FLOWS RELATING TO INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired........... (3,763) (1,844) --
Intangible assets acquired................................ (5,972) (35,287) --
Proceeds from sale of fixed assets........................ 7,352 406 785
Purchases of property and equipment....................... (43,530) (39,094) (2,774)
Cost of internal use software............................. (11,558) (5,956) (2,494)
--------- -------- -------
Net cash used in investing activities....................... (57,471) (81,775) (4,483)
--------- -------- -------
CASH FLOWS RELATING TO FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 110,000 -- 50,000
Net proceeds from new revolving line of credit............ 22,700 64,600 3,500
Repayment of old revolving line of credit................. -- -- (22,000)
Repayments of long-term debt and capital lease
obligations............................................. (82,958) (6,268) (52,599)
Debt issuance costs....................................... (7,892) (894) (3,104)
Proceeds from exercise of stock options................... 2,051 2,237 217
Proceeds from issuance of common stock, net of issuance
costs................................................... 161,332 436 481
Proceeds from issuance of preferred stock and warrants,
net of issuance costs................................... -- 49,118 --
Retirement of preferred stock............................. (57,000) -- --
Preferred dividends paid.................................. (4,135) -- --
--------- -------- -------
Net cash provided by (used in) financing activities......... 144,098 109,229 (23,505)
--------- -------- -------
Effect of foreign exchange rate changes on cash............. (1,484) (2,120) 1,374
--------- -------- -------
Net increase (decrease) in cash............................. (13,794) 213 14,456
Cash and cash equivalents at beginning of year.............. 24,182 23,969 9,513
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 10,388 $ 24,182 $23,969
========= ======== =======
SUPPLEMENTAL CASH FLOW DATA:
Interest paid............................................. $ 16,574 $ 8,140 $ 8,417
Taxes paid................................................ $ 3,269 $ 1,342 $ 1,826
Assets acquired under capital leases...................... $ 11,706 $ 2,861 $ 2,578
Assets acquired through issuance of common stock.......... $ 26,594 $ 430 $ --
See accompanying notes to the consolidated financial statements.
F-6
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF OPERATIONS
Manufacturers' Services Limited (the "Company" or "MSL") is a leading global
provider of advanced electronics manufacturing services ("EMS") to original
equipment manufacturers ("OEMs"). The Company has developed relationships with
leading OEMs in rapidly growing industries such as computer systems and
peripherals, wired and wireless communications, networking equipment, consumer
electronics, industrial equipment and commercial avionics. The Company provides
OEMs with a range of services including engineering and design, new product
introduction, material procurement and management, printed circuit board
assembly, product assembly and system integration, testing, logistics and
distribution, and after-market support. The Company has established a network of
manufacturing facilities in the world's major electronics markets, including
North America, Europe and Asia. The Company operates in one business segment,
electronics design and manufacturing services, and is managed geographically.
The Company consummated an initial public offering (the "Offering") of
11,000,000 shares of its Common Stock at a price of $16 per share during the
second quarter of 2000. The Offering closed on June 28, 2000. Proceeds of the
Offering, net of underwriting discounts and costs of the Offering, were
$161,332. The Company used the net proceeds of the Offering to redeem its senior
redeemable preferred stock, to repay a portion of its term loans, to repay a
portion of its outstanding revolver, and to fund an acquisition (Note 9).
At December 31, 1999, the Company had preferred stock outstanding of
$39,204. All outstanding shares of preferred stock were retired on June 28, 2000
with proceeds from the Offering in the amount of $58,951. This amount included
the remaining accretion on the preferred stock of $10,744, a call premium of
$7,000 and accrued dividends of $1,951. These amounts have been deducted from
net income available to common stockholders for purposes of the earnings per
share calculation for the year ended December 31, 2000.
Upon completion of the Offering, the Company repaid a $50,000 term loan,
which had an outstanding balance of $49,125. In addition, the Company also paid
down the balance in its revolving credit facility by $50,286. In connection with
the repayment of the term loan, an extraordinary loss of $627 was recognized in
June 2000 related to the write-off of deferred financing costs on the term loan.
There was no tax effect on this extraordinary item as the Company's United
States operations are in a tax loss position with a full valuation allowance
against net operating losses and other deferred tax assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
a remaining maturity of three months or less to be cash equivalents.
F-7
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
INVENTORIES
Inventories are stated at the lower of cost or market with cost being
determined on the FIFO basis.
INCOME TAXES
Income taxes for financial reporting purposes are recorded in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of the Company's assets and liabilities. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance.
U.S. income taxes have not been provided on a portion of undistributed
earnings of foreign subsidiaries as such earnings are expected to be permanently
reinvested. Such earnings would become taxable upon the sale or liquidation of
these foreign subsidiaries or upon the remittance of dividends. It is not
practicable to estimate the amount of the deferred tax liability on foreign
undistributed earnings that are intended to be permanently reinvested.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed based
on the estimated useful lives of the respective assets, using the straight-line
method. Estimated useful lives are as follows:
Machinery and equipment..................................... 1 to 10 years
Land improvements........................................... 5 to 15 years
Building improvements....................................... 5 to 15 years
Buildings................................................... 45 years
Repair and maintenance costs are expensed as incurred.
OTHER ASSETS
Debt issuance costs associated with the Company's credit agreements are
capitalized and amortized on a straight-line basis over the life of the
agreement. Amortization of these assets is included in interest expense.
Straight line amortization is not considered to be materially different from
amortization under the interest method.
The Company capitalizes the cost of software obtained or developed for
internal use in accordance with Statement of Position No. 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use." In
compliance with SOP 98-1, the Company expenses costs incurred in the preliminary
project stage and capitalizes costs incurred to develop or obtain internal use
software. Certain costs, such as maintenance and training, are expensed as
incurred. Capitalized costs are amortized over a period of three to five years
and include direct materials, external consultant costs and payroll and payroll
related costs for employees incurred in developing the internal use software.
F-8
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
OTHER INTANGIBLE ASSETS
The Company has acquired certain intangible assets in connection with asset
acquisitions (see Note 9). Other intangible assets are comprised of the
following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Customer relationships.................................... $39,804 $32,784
Workforce in place........................................ 1,717 1,155
Purchased software........................................ 1,366 1,348
Other..................................................... 568 --
------- -------
43,455 35,287
Less accumulated amortization............................. (6,940) (497)
------- -------
$36,515 $34,790
======= =======
These assets are being amortized on a straight-line basis over their
estimated useful lives, ranging from four to six years. Amortization of other
intangibles during the years ended December 31, 2000 and 1999 was $6,443 and
$497 respectively.
GOODWILL
The excess of cost over fair value of the net assets of businesses acquired
is amortized on a straight-line basis over periods ranging from five to ten
years. Goodwill amortization during the years ended December 31, 2000, 1999 and
1998 was $921, $575 and $397, respectively. Accumulated amortization as of
December 31, 2000, 1999 and 1998 was $4,426, $3,505 and $2,930, respectively.
IMPAIRMENT OF ASSETS
The Company evaluates long-lived assets and intangibles whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposal are less than its carrying amount. In such instances, the
carrying value of long-lived assets is reduced to the estimated fair value as
determined using an appraisal or discounted cash flow, as appropriate.
FOREIGN CURRENCY CONTRACTS
The Company has from time to time entered into forward foreign exchange and
option contracts to manage risk associated with firm commitments and existing
transactions. The Company does not engage in currency speculation. These
financial instruments are designed to minimize exposure and reduce risk from
exchange rate fluctuations in the regular course of business. These contracts
have maturities which do not exceed six months. Realized and unrealized gains
and losses arising from forward currency contracts are recognized in income as
offsets to the gains and losses resulting from the underlying transactions. The
table below summarizes the notional amounts and fair values of the
F-9
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Company's foreign exchange contracts as of December 31, 2000 which have been
entered into by the Company's Spanish subsidiary:
CURRENCY NOTIONAL AMOUNT BUY (SELL) FAIR VALUE
- -------- -------------------------- ----------
US Dollar................................... $(5,746) $ 166
US Dollar................................... $54,996 $(3,716)
The fair values of the Company's forward foreign exchange contracts are the
estimated amounts the Company would receive or pay to terminate the agreements
based on quoted market prices obtained from brokers.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value, as well as identifying the conditions for which a derivative may be
specifically designated as a hedge. SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of Effective Date of SFAS
No. 133," deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, which is fiscal year 2001 for MSL. The Company does not
believe adoption of SFAS No. 133 will have a material impact on its financial
condition and results of operations.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product, which is the
point at which both title and risk of ownership pass to the customer. The
Company's manufacturing contracts contain customer acceptance clauses. However,
the Company does not consider these clauses to be substantive because it can and
does replicate the customer acceptance test environment and perform the agreed
upon product testing prior to shipment. Service revenues are recognized as such
services are rendered.
In addition, certain of the Company's contracts contain guaranteed minimum
purchase commitments over the life of the contracts. Such contracts require the
customer to either purchase contractual minimum quantities or pay the Company
for amounts in deficit of the minimum purchase commitment. These contracts also
contain quarterly sales price decreases. Therefore, in such instances the
Company recognizes revenue ratably over the term of the contract.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"). SAB 101 sets forth guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The adoption
of SAB 101 in the fourth quarter of 2000 did not have a significant impact on
the Company's financial condition and results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs related to the Company's manufacturing
processes are expensed currently. Costs related to manufacturing design services
provided to customers are charged to cost of goods sold as services are
rendered. Total expenditures on research and development for the years ended
December 31, 2000, 1999 and 1998 were $6,267, $3,200 and $2,500, respectively.
F-10
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
FOREIGN CURRENCY
Monetary assets and liabilities of foreign subsidiaries with the US dollar
as the functional currency are remeasured at year-end exchange rates and
non-monetary assets and liabilities are remeasured at historical rates. Foreign
subsidiaries with functional currencies other than the US dollar translate
assets and liabilities at year-end exchange rates; income, expenses and cash
flows at average exchange rates; and stockholders' equity at historical rates.
The effects of these translation adjustments are reported as accumulated other
comprehensive income or loss in stockholders' equity. Foreign exchange gains and
losses arising from transactions denominated in a currency other than the
functional currency of the entity involved are included in income.
COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
defines comprehensive income as changes in equity of an enterprise except those
resulting from shareholder transactions. The amounts shown on the consolidated
statements of stockholders' equity related to translation adjustments for
certain foreign operations. During fiscal 2000, the Company held marketable
securities classified as available-for-sale securities, and unrealized gains and
losses on the marketable securities were recorded in other comprehensive income
during the year. The Company sold the marketable securities during 2000, and
reclassified the unrealized gain on marketable securities from other
comprehensive income to a realized gain of $140, reported in other income in the
consolidated statement of operations.
EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings per Share," ("SFAS 128"), the Company presents basic and diluted
earnings (loss) per share ("EPS") amounts. Basic EPS is calculated based on net
earnings (loss) available to common stockholders and the weighted average number
of shares outstanding during the reported period. Diluted EPS gives effect to
all dilutive potential common shares that were outstanding during the period.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk include foreign exchange contracts and accounts receivable.
The exposure to credit risk from foreign exchange contracts is minimized
since they are held with major financial institutions and because the impact of
movements in currency exchange rates on such contracts offsets the related
impact of such movements on recorded transactions and balances.
Potential concentrations of credit risk in the Company's trade accounts
receivable are substantially mitigated by the Company's credit evaluation
process, reasonably short collection terms and geographical dispersion of sales
transactions. Collateral is generally not required by the Company. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations.
F-11
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of trade receivables, other current assets, accounts
payable, and accrued expenses and other current liabilities approximate their
fair value due to their current nature.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
which requires financial and descriptive information about an enterprise's
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company operates in one business
segment, electronics design and manufacturing services. The Company is managed
geographically and each geographic region has its own president and support
staff.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified to
conform to the current year presentation.
FOURTH QUARTER CHARGES
During the fourth quarter of 2000, the Company recorded charges of $4,050 in
connection with physical inventories taken at the Company's operating
facilities.
3. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Raw materials and purchased inventory................... $310,175 $ 91,944
Work-in-process......................................... 48,162 29,623
Finished goods.......................................... 5,148 3,597
-------- --------
$363,485 $125,164
======== ========
F-12
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets are comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Non-trade receivables................................... $ 15,409 $ 8,954
Value added and other miscellaneous tax receivables..... 9,244 3,701
Other................................................... 11,407 5,963
-------- --------
$ 36,060 $ 18,618
======== ========
5. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Land, buildings and leasehold improvements.............. $ 24,504 $ 19,608
Machinery, equipment, computer equipment, furniture and
fixtures.............................................. 116,649 73,742
-------- --------
141,153 93,350
Less accumulated depreciation........................... (47,504) (30,536)
-------- --------
$ 93,649 $ 62,814
======== ========
Depreciation expense totaled $18,583, $11,686 and $10,686 for the years
ended December 31, 2000, 1999 and 1998, respectively. Gross value of equipment
under capital leases, primarily machinery and equipment, was $20,073 and $8,673
and the related accumulated depreciation on those assets totaled $7,708 and
$5,252 at December 31, 2000 and 1999, respectively.
6. OTHER ASSETS
Other assets are comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Debt issuance costs..................................... $ 6,525 $ 2,800
Internal use software costs, net........................ 16,539 8,332
Other................................................... 2,358 623
-------- --------
$ 25,422 $ 11,755
======== ========
Amortization of debt issuance costs for the periods ended December 31, 2000,
1999 and 1998 was $1,089, $777 and $1,800, respectively. In 2000 and 1998, the
Company wrote off debt issuance costs of $2,812 and $2,202, respectively,
related to certain changes in the Company's credit facilities (see Note 8).
F-13
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The gross cost of internal use software at December 31, 2000 and 1999 was
$22,781 and $11,223, respectively. Amortization of internal use software costs
for the periods ended December 31, 2000, 1999 and 1998 was $3,351, $1,675 and
$694, respectively.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
DECEMBER 31
-------------------
2000 1999
-------- --------
Payroll and other employee costs........................ $ 23,327 $ 12,363
Value added tax and withholding tax payable............. 3,976 3,054
Deferred revenue........................................ 12,749 2,220
Other................................................... 10,050 9,208
-------- --------
$ 50,102 $ 26,845
======== ========
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations are comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Revolving Facility...................................... $ 90,800 $ 68,100
Term Loans.............................................. 84,788 49,375
Other................................................... 1,405 2,406
Obligations under capital leases........................ 12,088 7,462
-------- --------
189,081 127,343
Less: Current portion................................... 7,737 5,414
-------- --------
$181,344 $121,929
======== ========
CREDIT AGREEMENT
On August 21, 1998, the Company and one of its Dutch finance subsidiaries
(MSL Overseas Finance B.V., herein "Overseas") entered into a six-year credit
agreement (the "Credit Agreement") with a consortium of banks, including an
affiliate of a significant stockholder. The Credit Agreement contained two
facilities: a $50,000 bank term loan facility and a $75,000 revolving credit
facility. In 1998, the Company wrote off $2,202 of unamortized debt issuance
costs in conjunction with the cancellation of a prior facility that was replaced
with the Credit Agreement.
In November 1999, the Company entered into an amendment to the Credit
Agreement. The amendment served to modify the Company's borrowing base on the
revolving credit facility and to modify the spread used in calculating interest
on the outstanding borrowings. In 1999, the Company incurred $894 of debt
issuance costs in association with the closing of the amendment.
During the quarter ended April 2, 2000, the Company amended the Credit
Agreement to increase its borrowings with an additional term loan of $25,000.
These additional borrowings are subject to the same terms and conditions
including debt covenants and interest rate arrangements as the prior borrowings
under the facility. The Company capitalized $540 of debt issuance costs incurred
in connection with the closing of this amendment.
F-14
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
In August 2000, the Company replaced the Credit Agreement with a $175,000
revolving credit facility (the "2000 Credit Agreement"). The 2000 Credit
Agreement has a final maturity of August 17, 2003 and is secured by
substantially all domestic assets and a pledge of 66% of the shares of foreign
subsidiaries. Restrictive covenants for the 2000 Credit Agreement include
restrictions on leverage ratios as well as covenants requiring minimum working
capital, net worth and fixed charge coverage ratios. In September 2000, the
Company entered into an amendment of the 2000 Credit Agreement increasing
borrowings through an $85,000 term loan. The amendment also establishes a
monthly borrowing base that utilizes receivables and inventory as the borrowing
base calculation. There are regular quarterly payments on the term loan of $213
through the quarter ended September 30, 2003, with the remaining balance to be
paid through quarterly payments of $6,375 through the quarter ended
September 30, 2004 and quarterly payments of $14,238 thereafter through the
quarter ended September 30, 2005.
In connection with the replacement of the previous credit facility, an
extraordinary loss of $2,185, net of a $266 tax benefit, was recorded. This
extraordinary loss related to the write-off of deferred financing costs. The tax
benefit on this extraordinary item related to a portion of the loss attributable
to the Company's Spanish operations. There was no tax benefit on the remainder
of the loss as the loss was attributed to the Company's United States operations
which are in a tax loss position with a full valuation allowance against net
operating losses and other deferred tax assets. The Company capitalized $7,352
of debt issuance costs incurred in connection with the closing of the 2000
Credit Agreement and the amendment for the term loan.
The cost of borrowings under the term loan under the 2000 Credit Agreement
is the applicable spread plus the underlying cost of funds option (base rate or
LIBOR). The spread on the base rate loans is between 2.5% to 2.75% and the
spread on the LIBOR loans is between 3.5% to 3.75%. All interest is payable in
arrears quarterly. At December 31, 2000, the interest rate on the term loan was
10.64%.
Borrowings under the revolving facility are limited to, (a) the sum of
(1) 85% of all eligible accounts receivable of the Company and its domestic
subsidiaries, (2) 45% of all eligible inventory of the Company and its domestic
subsidiaries and (3) the lesser of (A) (i) the sum of 40% of all eligible
accounts receivable of the Company's foreign subsidiaries and (ii) 15% of all
eligible inventory of the Company's foreign subsidiaries and (B) $50,000 minus
(b) the outstanding principal amount of the term loan. The revolving facility
provides for a commitment fee of between 0.50% and 0.75% on the unused portion
of the revolving facility, payable in arrears quarterly. On December 31, 2000,
the Company had unused borrowing capacity of $84,200 under the revolving
facility.
The cost of borrowings under the revolving facility is the applicable spread
plus the underlying cost of funds option (either the base rate or LIBOR). The
spread on the base rate loans varies between 0.75% and 1.75%, based on the
Company's consolidated leverage ratio and corporate credit rating. The spread on
the LIBOR loans is between 1.75% and 2.75%, based on the Company's consolidated
leverage ratio and corporate credit rating. All interest is payable in arrears
quarterly. At December 31, 2000, the interest rates on borrowings under the
revolving facility were between 9.0625% and 11.25%.
Up to $10,000 of the revolving facility is available to MSL in the form of
either financial or performance standby letters of credit. Outstanding letters
of credit are subject to a one-time issuance fee and to an amount, payable
quarterly, calculated on the available amount to be drawn. The Company had no
letters of credit outstanding at December 31, 2000.
F-15
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Principal due on long-term debt for each of the years following
December 31, 2000 is as follows:
2001........................................................ $ 2,533
2002........................................................ 1,422
2003........................................................ 96,963
2004........................................................ 33,363
2005........................................................ 42,712
--------
$176,993
========
CAPITAL LEASES
The Company leases certain equipment under capital lease arrangements.
Future minimum lease payments under capitalized leases for each of the years
following December 31, 2000 are as follows:
2001........................................................ $ 5,485
2002........................................................ 4,823
2003........................................................ 2,031
2004........................................................ 466
2005........................................................ 160
-------
Future minimum payments..................................... 12,965
Less amounts representing interest.......................... 877
-------
Present value of future minimum lease payments (including
current portion of $5,204)................................ $12,088
=======
9. ACQUISITIONS
BUSINESS ACQUISITIONS
In June 2000, the Company acquired the assets of Qualitronics, Inc., a
privately held company located in Massachusetts, which provides electronics
prototype and manufacturing services, for a purchase price of $11,530. The
purchase price consisted of cash of $3,970 and 472,479 shares of the Company's
Common Stock. With respect to the cash component of the acquisition, $2,970 was
paid in June 2000, and the remaining balance of $1,000 was paid during the third
quarter of 2000.
In June 1999, MSL acquired the assets of Ronlin Design Co., Inc., a
privately held company located in Massachusetts, which provides electronics
design services, for a total purchase price of $1,596. The purchase price
consisted of cash of $1,416 and 37,500 shares of the Company's Common Stock.
In April 1999, MSL acquired the assets of Electronics Systems
Packaging, Inc., a privately held company located in Massachusetts, which
provides electronics design services, for a purchase price of $2,850. The
purchase price consisted of cash of $2,600 and 52,000 shares of the Company's
Common Stock.
With respect to the cash component of the acquisitions in 1999, $2,100 was
paid on the dates of the transactions, with the remaining balances of $1,916 to
be paid in future installments.
F-16
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
These acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values at the date
of acquisition.
ASSET ACQUISITIONS
In September 2000, the Company acquired certain assets from 3Com used in the
production of carrier equipment and modems for total consideration of $79,127.
The purchase price consisted of cash of $60,092 and 1,551,220 shares of the
Company's Common Stock. These assets consisted of inventory, fixed assets and
certain intangible assets, consisting primarily of customer relationships and
workforce in place. The transaction was accounted for as a purchase of assets,
and the purchase price was allocated to the assets acquired based on the
relative fair values of the tangible and intangible assets at the date of
acquisition. The allocation is based on values of the long-lived tangible and
intangible assets at the date of the acquisition, as follows:
Fixed assets................................................ $ 3,447
Inventory................................................... 68,000
Intangible assets........................................... 7,680
-------
$79,127
=======
Additionally, the Company purchased $20,401 of additional inventory from
3Com subsequent to the asset acquisition.
Under the terms of the related supply agreement, the Company will provide
manufacturing, distribution and repair services related to the production of
3Com's carrier and modem products for an initial term of two years. The Company
will lease a manufacturing facility from 3Com in connection with providing these
services.
In November 1999, the Company acquired certain assets from 3Com Corporation
used in the production of Palm handheld computing devices and modems and network
interface cards for total consideration of $80,405, including approximately $776
of assumed liabilities. The purchase price includes an adjustment of $925 to
long-lived assets acquired upon the Company's finalization of the purchase price
allocation in the first quarter of 2000. These assets consisted primarily of a
manufacturing facility, other fixed assets, inventory and certain intangible
assets, consisting primarily of customer relationships, workforce in place and
purchased software. The transaction was accounted for as a purchase of assets,
and the purchase price was allocated to the assets acquired based on the
relative fair values of the tangible and intangible assets at the date of
acquisition, as follows:
Land and buildings.......................................... $16,739
Other fixed assets.......................................... 15,233
Inventory................................................... 12,658
Intangible assets........................................... 35,775
-------
$80,405
=======
Under the terms of related supply agreements with 3Com and Palm, Inc,
formerly a subsidiary of 3Com, the Company will provide a full range of
manufacturing services related to the production of Palm handheld computing
devices and modems and network interface cards.
F-17
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
In June 1998, the Company entered into a three-year outsourcing agreement to
perform and manage certain manufacturing, fulfillment, integration and other
services for IBM. As part of this agreement, MSL purchased certain machinery and
equipment at its estimated fair value of $125 and leased a manufacturing
facility from IBM. In addition, MSL purchased certain inventory at its estimated
fair value of $30,000.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain facilities and equipment under operating leases
extending until the year 2017. Future minimum commitments under these leases for
each of the years following December 31, 2000 are summarized as follows:
2001........................................................ $19,107
2002........................................................ 16,201
2003........................................................ 12,032
2004........................................................ 5,700
2005........................................................ 5,160
Thereafter.................................................. 23,519
-------
Future minimum payments..................................... $81,719
=======
Total rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $13,276, $8,109 and $7,743 respectively.
LITIGATION
In 1998, Lockheed Martin Corporation ("LM") filed a complaint against the
Company and certain principal stockholders. The complaint alleged that the
Company failed to complete the acquisition of one of LM's subsidiaries under a
purchase agreement signed in 1997. The complaint alleged unspecified damages.
In April 2000, the Company and LM agreed to terms on a settlement, whereby
the Company paid LM $5,000. In addition, the Company's major shareholder agreed
to provide services to LM with a fair market value of $1,000. The Company
recorded a $6,000 charge with a corresponding $5,000 liability and a $1,000
capital contribution in the first quarter of 2000. The $5,000 due LM was paid by
the Company during the nine months ended October 1, 2000.
In addition, the Company is from time to time subject to legal proceedings
and claims which arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on the Company's financial position or its
results of operations.
ACCOUNTS RECEIVABLE
The Company had outstanding receivables with a customer totalling $6,900
which were disputed by that customer in 2000. The dispute involved inventory
that was purchased by the Company at a premium in order to meet the customers'
increase in forecast demand. The Company resolved this issue with the customer
under an agreement in which the customer paid the Company one-half of the
outstanding receivables in October 2000, and agreed to pay the remaining
outstanding receivables
F-18
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
under an established payment plan. No reserve has been provided for the
remaining receivables due as of December 31, 2000 as management believes the
receivable is valid and the total amount will ultimately be collected.
As of December 31, 2000, the Company had $785 of outstanding receivables
with a customer experiencing severe financial difficulty. Additionally, the
Company held $2,067 in inventory purchased specifically for this customer, some
of which can not be readily used in products manufactured for other customers or
sold in the open market. The Company has evaluated the risk of not fully
recovering the assets related to this customer. As of December 31, 2000, the
Company has a reserve of approximately $2,300 based on management's best
estimate of the realizability of these assets in light of all information
currently available.
DEFERRED REVENUE
In June 2000, the Company received a payment of $14,592 in connection with a
supply agreement with a customer. The agreement includes a provision whereby the
Company will either retain or repay a portion of this amount each quarter,
through the fourth quarter of 2001, dependent upon sales levels achieved in each
quarter. At December 31, 2000, the remaining deferred revenue balance of $9,345
was included in accrued expenses. The deferred revenue will either be recognized
in income or repaid to the customer based on actual sales volumes each quarter.
During fiscal 2000, $5,247 was repaid to the customer based on sales levels
achieved. The Company currently expects the amounts to continue to be repaid
based on the customer's expected sales levels.
11. INCOME TAXES
Worldwide income (loss) before income taxes consisted of the following:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Domestic.......................................... $(8,831) $(5,368) $(2,478)
Foreign........................................... 10,665 11,188 1,733
------- ------- -------
$ 1,834 $ 5,820 $ (745)
======= ======= =======
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Current:
Federal.......................................... $ -- $ -- $ --
State............................................ 322 150 --
Foreign.......................................... 2,046 3,487 1,960
------ ------- ------
2,368 3,637 1,960
Deferred:
Federal.......................................... -- -- --
State............................................ -- -- --
Foreign.......................................... 689 173 1,334
------ ------- ------
689 173 1,334
------ ------- ------
$3,057 $ 3,810 $3,294
====== ======= ======
F-19
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The overall effective income tax rate differs from the expected federal U.S.
income tax rate as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Income tax (benefit) expense at expected rate of
34%.............................................. $ 624 $ 1,979 $ (253)
Change in valuation allowance...................... (42) 1,482 978
Foreign tax credits................................ -- (1,668) (192)
Deemed remittance of foreign earnings.............. -- 1,526 --
Rate change in Singapore........................... 1,296 -- --
Forgiveness of accrued interest on intercompany
debt............................................. 2,261 -- --
Income of foreign subsidiaries taxed at different
rates............................................ (623) (97) 1,997
Other.............................................. (459) 588 764
------ ------- ------
Income tax expense................................. $3,057 $ 3,810 $3,294
====== ======= ======
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Deferred tax assets:
Accruals, allowances and reserves....................... $ 7,190 $ 7,904
NOL carryforwards....................................... 11,358 10,894
Plant and equipment..................................... 1,717 942
Foreign tax credits..................................... 3,431 3,431
Other................................................... -- 73
------- -------
Total deferred tax assets................................. 23,696 23,244
------- -------
Deferred tax liabilities:
Plant and equipment..................................... (1,087) (1,977)
Amortization of goodwill and other intangibles.......... (1,139) --
Other................................................... (124) (93)
------- -------
Total deferred tax liabilities............................ (2,350) (2,070)
------- -------
Deferred tax valuation allowance.......................... (21,030) (19,985)
------- -------
Net deferred tax assets................................... $ 316 $ 1,189
======= =======
At December 31, 2000, net deferred tax assets of $612 and $81 were included
in prepaid and other current assets, and other assets, respectively, and $377 of
net deferred tax liabilities were included in accrued expenses and other current
liabilities. At December 31, 1999, $1,068 and $121 of net deferred tax assets
were included in prepaid expenses and other current assets and other assets,
respectively. Management believes that it is more likely than not that it will
generate taxable income in certain jurisdictions sufficient to realize a portion
of the tax benefit associated with the future deductible temporary differences
identified above. This belief is based upon a review of all available evidence,
including historical operating results and projections of future taxable income.
The valuation allowance relates primarily to net deferred tax assets generated
in the United States and Ireland as more fully disclosed below.
F-20
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The Company's provision for income taxes results from the mix of profits and
losses experienced across the jurisdictions in which it operates. Losses in the
United States and Ireland provide no income tax benefit while profits in Spain
and Singapore require tax provisions. At December 31, 2000, the Company had
gross operating loss carryforwards of $23,483 for federal and state income tax
purposes and $18,545 for foreign tax purposes. The federal and state
carryforwards expire between 2011 and 2018. The foreign carryforwards do not
expire. A change in ownership of the Company may reduce the amount of operating
loss carryforwards the Company is able to utilize. The Company also has foreign
tax credit carryovers of $3,431 which expire between 2002 and 2004.
The Company has not provided for U.S. federal and foreign withholding taxes
on approximately $36,321 of its foreign subsidiaries' undistributed earnings as
of December 31, 2000 because such earnings are intended to be permanently
reinvested.
12. SENIOR REDEEMABLE PREFERRED STOCK
In conjunction with the 1999 asset acquisition from 3Com (see Note 9), the
Company issued 2,000,000 shares of preferred stock with a par value of $0.001
per share and warrants to purchase Common Stock (see Note 14). The total
consideration received of $49,118, net of issuance costs incurred of $882, was
allocated to the preferred stock and the warrants based on their fair values, as
determined by the Company based on its consideration of various factors
including appraisals, market comparables and the use of generally accepted
valuation models, of $38,395 and $10,723, respectively. The discount on the
preferred stock of $11,605 was being accreted, using the interest method,
through the mandatory redemption date and recorded as a charge against
additional paid in capital. In June 2000, the Company retired all outstanding
shares of preferred stock with proceeds from its initial public offering. The
remaining discount, as well as the call premium, on the preferred stock was
accreted in connection with this retirement. Total accretion recorded against
additional paid in capital in the years ended December 31, 2000 and 1999, was
$18,460 and $138, respectively. These amounts, as well as dividends on preferred
stock for the years ended December 31, 2000 and 1999 of $3,434 and $671,
respectively, have been deducted from net income available to common
stockholders for purposes of the earnings per share calculations.
13. COMMON STOCK
On April 27, 2000, the Company's Board of Directors declared a four-for-one
reverse stock split of the Company's Common Stock. This reverse stock split was
effective May 2, 2000. All earnings per common share amounts, references to
common stock and stockholders' equity amounts have been restated as if the
reverse stock split had occurred as of the earliest period presented.
In the quarter ended April 2, 2000, the Board of Directors approved a grant
of 200,000 shares of Common Stock to the Company's Chief Executive Officer, and
a grant of 12,500 shares of Common Stock to senior management of the Company. In
connection with these grants, the Company recorded a one time non-cash charge of
$3,825, based upon the number of shares awarded and the fair value of $18 per
share, as determined by the Company at the time of the grant.
In 1998, the Company issued an aggregate of 71,000 shares of Common Stock to
three founders of the Company in connection with their shareholder agreements.
In 1999 the Company was obligated to issue an additional 34,341 shares of Common
Stock to the three founders of the Company. These shares were issued in fiscal
2000. A non-cash charge of $422 and $341 was recorded in selling, general and
administrative expenses related to the above shares, representing the fair value
of $12.28 and $4.80 per share at the time of the obligation to issue shares, in
1999 and 1998, respectively. At December 31, 1999, $422 has been included in
accrued expenses related to the shares issued in 2000.
F-21
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
14. WARRANTS
The Company issued warrants to purchase 1,160,542 shares of Common Stock in
conjunction with the issuance of the senior redeemable preferred stock (see
Note 12). The warrants, which had an exercise price of $4.80 per share, were
issued in two tranches. The first tranche was comprised of warrants, which were
immediately exercisable, to purchase 222,730 shares of Common Stock. The second
tranche was comprised of warrants, which were held in escrow, to purchase
937,812 shares of Common Stock. The second tranche of warrants would be released
from escrow on November 26, 2000 if the preferred stock remained outstanding at
that date. The second tranche of warrants was cancelled upon the retirement of
all outstanding shares of senior redeemable preferred stock in June 2000.
In conjunction with a prior credit agreement entered into in August 1995,
the Company issued a stock purchase warrant to a lending bank entitling the
holder to purchase shares of the Company's Common Stock. The warrant was
exercisable at any time, had no expiration date and, using a generally accepted
valuation model, was determined to have an insignificant value at its time of
issuance. The number of shares that could be acquired at an exercise price of
$4.00 per share was 128,008. The warrant was exercised during 2000 to purchase
107,241 shares of the Company's Common Stock under a cashless exercise provision
of the warrant agreement.
15. OPTION PLAN
Effective December 4, 1996, the Board of Directors adopted a non-qualified
stock option plan (the "Plan"). Under the terms of the Plan, the Board of
Directors, or its designee, has the ability to grant two types of options
("Share Value" and "Ordinary") to employees of the Company to purchase the
Company's Common Stock at an exercise price determined by the Board of Directors
or its designee at the date of grant. The Company has reserved 312,500 common
shares for issuance of Share Value options and 2,687,500 common shares for
issuance of Ordinary options. The Plan terminates in November 2006.
For Ordinary options granted, one-half of the award will vest ratably over
four years following the date of grant. The remainder of the grant vests eight
years from the date of grant, with provisions for acceleration based on
pre-established financial performance goals. Ordinary options expire ten years
from the date of grant.
Share Value options have been issued by the Company at exercise prices of
$4.00 and $20.00. Under the original terms of the plan, these options vest based
on certain pre-established financial performance goals, which were measured
through January 2000. Prior to January 1, 1999, none of the pre-established
financial goals were met and, as such, none of the options vested and no
compensation was recognized. In January 1999, the Plan was amended to convert
the Share Value options with a $20.00 exercise price to Ordinary options, with
fifty percent vested as of January 1999 and the remaining vesting in
January 2000. In addition, the vesting of the Share Value options with a $4.00
exercise price was adjusted to provide for vesting four years from the
modification date, subject to acceleration based on pre-established Company
share price goals. Non-cash compensation charges of $65 and $40 were recognized
in selling, general and administrative expenses due to this modification in the
periods ended December 31, 2000 and 1999, respectively.
In January 2000, the stockholders approved the 2000 Equity Incentive Plan
(the "2000 Plan"). The 2000 Plan is administered by the Board of Directors and
selected employees, directors and non-employees, who provide services to the
Company, are eligible to participate. The 2000 Plan
F-22
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
provides for the award of a broad variety of stock-based compensation
alternatives, such as non-qualified stock options, incentive stock options,
restricted stock, performance awards and stock appreciation rights. The 2000
Plan specifies that 2,668,750 shares of Common Stock plus an annual increase to
be added on the date of each annual meeting of the stockholders equal to 1% of
the outstanding shares of Common Stock on such date may be offered from either
authorized and unissued shares or issued shares which have been reacquired by
the Company.
For options granted under the 2000 Plan, one-half of each award will vest
ratably over four years following the date of grant, unless otherwise specified
by the Board of Directors or a committee thereof. The remainder of each grant
vests eight years from the date of grant, with provisions for acceleration based
on the achievement of pre-established financial performance goals.
In connection with the completion of the Company's initial public offering
(Note 1), the Company's stockholders approved the 2000 Employee Stock Purchase
Plan (the "Stock Purchase Plan") and the 2000 Non-Employee Director Stock Option
Plan (the "Director Option Plan"). The Stock Purchase Plan provides employees
meeting certain minimum eligibility requirements the opportunity to purchase
shares of the Company's stock with up to 10% of the eligible employees' cash
compensation. Shares are to be purchased at the lower of 85% of the market value
at the beginning or end of each six-month plan period. The Company has reserved
750,000 shares of common stock for issuance in connection with the Stock
Purchase Plan.
The Director Option Plan provides for an initial one-time grant of options
to purchase 20,000 shares of the Company's Common Stock to each non-employee
director who has not previously received an initial grant of options.
Additionally, the compensation committee or the full Board of Directors is
authorized to make discretionary grants of options and determine the terms and
conditions of such options. The Director Option Plan also provides for annual
option grants of 5,000 shares upon each annual shareholders' meeting. The
Director Option Plan requires that the exercise price of each option granted
under the plan must be at least 100% of the fair market value of the Company's
Common Stock on the date the option is granted. The initial one-time grants
issued prior to August 2000 will vest in three equal installments commencing on
the first anniversary of the grant date specified in the plan or by the
Committee. All grants issued after September 2000 will vest one-third at the
initial grant date and one-third at both the first and second anniversary of the
initial grant thereafter. The Company has reserved 225,000 shares of common
stock for issuance in connection with the Director Option Plan.
In connection with the acquisition of assets from 3Com in September 2000
(Note 9), the Company's Board of Directors approved the 2000 Non-Qualified Stock
Option Plan (the "2000 NQ Plan"). The 2000 NQ Plan provides for the award of
non-qualified stock options and specifies 400,000 shares of common stock may be
issued thereunder. Unless otherwise specified by the Board of Directors or a
committee thereof, the options will vest generally in the same manner as the
options issued under the 2000 Plan.
Compensation expense of $1,023 was recognized during the year ended
December 31, 2000 to account for the vesting of options granted below the fair
market price of the Company's Common Stock. An additional $316 of compensation
expense was recognized in the fourth quarter of 2000 due to the modification of
an option award.
F-23
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
A summary of stock option activity for the Company's option Plans is as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES OPTION PRICE EXERCISE PRICE
--------- ------------ ----------------
Outstanding at December 31, 1997....................... 1,985,774 $4.00-20.00 $ 7.96
Granted.............................................. 265,500 4.00-20.00 5.04
Exercised............................................ (54,459) 4.00 4.00
Forfeited............................................ (106,468) 4.00-20.00 10.16
---------
Outstanding at December 31, 1998....................... 2,090,347 4.00-20.00 7.60
Granted.............................................. 1,315,514 4.00-12.28 10.88
Exercised............................................ (559,292) 4.00-4.80 4.00
Forfeited............................................ (809,325) 4.00-20.00 12.74
---------
Outstanding at December 31, 1999....................... 2,037,244 4.00-20.00 8.48
Granted.............................................. 2,404,790 4.81-29.25 11.85
Exercised............................................ (380,039) 4.00-20.00 5.15
Forfeited............................................ (315,350) 4.00-21.75 8.61
---------
Outstanding at December 31, 2000..................... 3,746,646 $4.00-29.25 $10.92
=========
Exercisable at December 31, 2000....................... 840,974 $4.00-20.00 $12.02
=========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ---------------------------------------
NUMBER OUTSTANDING WEIGHTED NUMBER EXERCISABLE WEIGHTED
AT DECEMBER 31, WEIGHTED AVERAGE AVERAGE EXERCISE AT DECEMBER 31, AVERAGE EXERCISE
EXERCISE PRICE 2000 REMAINING YEARS PRICE 2000 PRICE
- -------------- ------------------ ---------------- ----------------- ------------------- -----------------
$4.00 to $8.06 992,200 8 $ 4.50 404,837 $ 4.11
$8.19 to $12.06 992,005 10 $ 9.37 11,667 $11.75
$12.28 to $16.00 1,174,391 9 $13.04 15,883 $12.28
$18.00 to $29.25 588,050 8 $20.15 408,587 $19.85
--------- -------
3,746,646 840,974
========= =======
As permitted, the Company applied Accounting Principles Board Opinion 25 and
related Interpretations in accounting for its stock-based compensation plan. If
compensation cost for the Company's stock-based compensation plan had been
determined based on the fair value of the options at the grant dates of the
awards consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's pro forma net income (loss) would have been as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net income (loss) available to common stockholders:
As reported............................................... $(23,147) $1,201 $(6,241)
Pro forma................................................. $(24,881) $ 370 $(6,630)
Diluted net income (loss) per share:
As reported............................................... $ (0.88) $ 0.06 $ (0.33)
Pro forma................................................. $ (0.94) $ 0.02 $ (0.35)
F-24
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for options granted in 2000: risk free interest rate of 5.99%;
expected life of 7 years; volatility of 49% and no dividend declarations. The
weighted average assumptions for options granted in 1999 are as follows: risk
free interest rate of 5.78%; expected life of 7 years; volatility of 51% and no
dividend declarations. The weighted average assumptions for options granted in
1998 are as follows: risk-free interest rate of 5.74%; expected life of
7 years; volatility of 42% and no dividend declarations.
16. EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerator and
denominator of basic and diluted income (loss) per share before extraordinary
loss computations as required by SFAS 128:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Numerator--basic and diluted earnings per share:
Income (loss) before extraordinary loss............... $ (1,223) $ 2,010 $ (4,039)
Dividends on senior redeemable preferred stock........ (3,464) (671) --
Accretion of senior redeemable preferred stock........ (18,460) (138) --
----------- ----------- -----------
Income (loss) available to common stockholders before
extraordinary loss.................................. $ (23,147) $ 1,201 $ (4,039)
=========== =========== ===========
Denominator:
Basic income (loss) per share--weighted average shares
outstanding......................................... 26,410,876 19,384,277 18,745,786
Effect of dilutive securities--stock options and
warrants............................................ -- 223,891 --
----------- ----------- -----------
Diluted income (loss) per share--weighted average
shares outstanding.................................. 26,410,876 19,608,168 18,745,786
=========== =========== ===========
Basic income (loss) per share......................... $ (0.88) $ 0.06 $ (0.21)
Diluted income (loss) per share....................... $ (0.88) $ 0.06 $ (0.21)
For the years ended December 31, 2000, December 31, 1999 and December 31,
1998 anti-dilutive options and warrants of 3,746,646, 1,752,830 and 2,218,347,
respectively, have been excluded from the calculation of EPS as either the
Company had a net loss for the year or the options' exercise price was greater
than the estimated fair market price of the common shares.
17. RETIREMENT AND BENEFIT PROGRAMS
The Company sponsors a defined contribution plan covering its eligible U.S.
employees. The plan permits the Company to make non-discretionary contributions
on behalf of its employees. In 2000, 1999 and 1998, the Company made
contributions to the plan of $1,364, $636 and $282, respectively.
Employees of certain foreign operations participate in various local defined
benefit and defined contribution plans which, in the aggregate, are not
significant to the consolidated financial statements. In 1999, the Company
curtailed its defined benefit plan in Valencia, Spain. There was no significant
gain or loss recorded in relation to this curtailment.
F-25
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
18. BUSINESS SEGMENT INFORMATION
The Company's operations comprise a single line of business, providing
electronics design and manufacturing services. Information about the Company's
operations in different geographic regions is presented in the table below:
OPERATING IDENTIFIABLE
NET SALES INCOME ASSETS
---------- ---------- ------------
YEAR ENDED DECEMBER 31, 2000
United States--Corporate................................ $ -- $(35,169) $ 13,395
--Operations................................. 1,262,420 38,955 662,559
Europe.................................................. 336,679 7,967 84,137
Asia.................................................... 159,002 9,696 173,426
---------- -------- --------
$1,758,101 $ 21,449 $933,517
========== ======== ========
YEAR ENDED DECEMBER 31, 1999
United States--Corporate................................ $ -- $(23,044) $ 14,167
--Operations................................. 457,390 15,432 236,705
Europe.................................................. 289,611 13,993 99,610
Asia.................................................... 173,721 10,030 61,301
---------- -------- --------
$ 920,722 $ 16,411 $411,783
========== ======== ========
YEAR ENDED DECEMBER 31, 1998
United States--Corporate................................ $ -- $(14,639) $ 10,041
--Operations................................. 301,011 6,863 87,720
Europe.................................................. 349,229 9,292 122,615
Asia.................................................... 187,753 7,179 57,232
---------- -------- --------
$ 837,993 $ 8,695 $277,608
========== ======== ========
Identifiable assets are those assets used in the Company's operations in
each location.
19. MAJOR CUSTOMERS
The Company had sales to four customers totaling 24%, 23%, 14% and 11%,
respectively, of total sales for the year ended December 31, 2000. Accounts
receivable from these customers represented 20%, 10%, 22% and 8%, respectively
of total accounts receivable at December 31, 2000.
The Company had sales to two customers totaling 49% and 14%, respectively,
of total sales for the year ended December 31, 1999. Accounts receivable from
these customers represented 19% and 13%, respectively, of total accounts
receivable at December 31, 1999.
The Company had sales to two customers totaling 51% and 20%, respectively,
of total sales for the year ended December 31, 1998. Accounts receivable from
these customers represented 46% and 23%, respectively, of total accounts
receivable at December 31, 1998.
20. RESTRUCTURING AND OTHER ASSET WRITEDOWNS
The Company enters into business acquisitions or asset acquisitions and
related supply agreements with the intention of improving the existing
manufacturing operations to reduce costs and improve
F-26
MANUFACTURERS' SERVICES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
operating margins. In order to do this, the Company typically assesses the
manufacturing processes and employee base and restructures the operations to
achieve the expected operating margins.
During the fourth quarter of 1999, management approved a restructuring plan
designed to improve its manufacturing operations at its Charlotte facility. This
restructuring plan was comprised primarily of severance costs of $780 related to
personnel reductions of approximately 33 manufacturing and managerial employees.
The plan was completed during 2000.
In the fourth quarter of 1998, management approved a plan to restructure
certain operations in the United States, Spain and Asia. The total charge
recorded for this plan was $6,729, which was comprised primarily of the
write-off of certain capitalized assets in Asia of $1,135, lease termination
costs in Asia, Europe and the United States of $1,921, and the severance related
to personnel reductions of approximately 72 managerial and manufacturing
employees in both the United States and Spain of $3,672. The impairment of
capitalized assets in Asia related to manufacturing machinery and equipment and
resulted from a significant reduction in the demand from one customer. The
assets, which were taken out of service in 1998, were written down to their fair
market value and were treated as held for disposal. Depreciation on these assets
ceased. The plan was completed during 1999.
F-27
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Manufacturers' Services Limited
Our audits of the consolidated financial statements referred to in our report
dated February 5, 2001 appearing in this Form 10-K of Manufacturers' Services
Limited also included an audit of the financial statement schedule listed in
Item 14 of this Annual Report on Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 5, 2001
S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ------------ ---------- ---------- ---------- -------------
Allowance for doubtful accounts:
2000...................................... $ 728 1,718 -- (207) $ 2,239
1999...................................... $ 698 339 700 (1,009) $ 728
1998...................................... $ 1,942 319 -- (1,563) $ 698
Deferred tax asset valuation allowance:
2000...................................... $19,985 (42) 1,087 -- $21,030
1999...................................... $17,698 1,482 805 -- $19,985
1998...................................... $13,960 978 2,760 -- $17,698
S-2