FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter period ended May 31, 2001 |
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to Commission File No. 333-50981 |
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MCMS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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(State or other jurisdiction of incorporation or | 82-0480109 |
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(408) 284-3500
(Registrant's telephone number, including area code)
83 Great Oaks Boulevard, San Jose, California 95119 (Address of principal executive offices, Zip Code) (408) 284-3500 (Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares of Class A Common Stock outstanding at March 1,May 31, 2001: 3,324,259
Shares of Class B Common Stock outstanding at March 1,May 31, 2001: 863,823
Shares of Class C Common Stock outstanding at March 1,May 31, 2001: 874,999
MCMS, INC.
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Item | Financial Information | ||||
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Unaudited Consolidated Statements of Operations - - | 4 | ||||
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Unaudited Consolidated Statements of Cash Flows - - | 5 | ||||
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Item | Management's Discussion and Analysis of Financial Condition and | 14 | |||
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Item | 28 | ||||
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Part II. | |||||
Other Information | |||||
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCMS, INC. | MCMS, INC. | MCMS, INC. | ||||
March 1, | August 31, | |||||
As of | 2001 | 2000 | May 31, | August 31, | ||
ASSETS | ||||||
Current Assets: | ||||||
Trade account receivable, net of allowances for doubtful accounts of $366 and $215 | $ 78,876 | $ 62,114 | ||||
Trade accounts receivable, net of allowances for doubtful accounts of $3,041 and $215 | $ 40,696 | $ 62,114 | ||||
Inventories | 108,790 | 89,537 | 62,828 | 89,537 | ||
Other current assets | 2,435 | 1,947 | 3,527 | 1,947 | ||
Total current assets | 190,101 | 153,598 | 107,051 | 153,598 | ||
Property, plant and equipment, net | 64,040 | 57,657 | 58,083 | 57,657 | ||
Other assets | 8,779 | 6,247 | 8,272 | 6,247 | ||
Total assets | $ 262,920 | $ 217,502 | $ 173,406 | $ 217,502 | ||
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LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||
Current Liabilities: | ||||||
Outstanding checks | $ 6,399 | $ 5,220 | $ 1,800 | $ 5,220 | ||
Current portion of long-term debt | 2,543 | 1,551 | ||||
Accounts payable and accrued expenses | 110,859 | 102,323 | 57,755 | 102,323 | ||
Interest payable | 5,270 | 9,419 | ||||
Advance from customer | - | 5,000 | - | 5,000 | ||
Interest payable | 287 | 9,419 | ||||
Debt | 238,792 | 1,551 | ||||
Debt - related parties | 37,000 | - - | ||||
Total current liabilities | 120,088 | 123,513 | 340,617 | 123,513 | ||
Long-term debt, net of current portion | 238,952 | 192,299 | - | 192,299 | ||
Long-term debt - related parties | 37,000 | 23,326 | - | 23,326 | ||
Other liabilities | 3,205 | 3,183 | 2,894 | 3,183 | ||
Total liabilities | 399,245 | 342,321 | 343,511 | 342,321 | ||
Redeemable preferred stock, no par value, 750,000 shares authorized; 362,230 and 340,619 |
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Redeemable preferred stock, no par value, 750,000 shares authorized; 373,544 and 340,619 |
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SHAREHOLDERS' DEFICIT | ||||||
Series A convertible preferred stock, par value $0.001 per share, 6,000,000 shares |
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Series B convertible preferred stock, par value $0.001 per share, 6,000,000 shares |
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Series C convertible preferred stock, par value $0.001 per share, 1,000,000 shares |
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Class A common stock, par value $0.001 per share, 30,000,000 shares authorized; |
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Class B common stock, par value $0.001 per share, 12,000,000 shares authorized; 863,823 |
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Class C common stock, par value $0.001 per share, 2,000,000 shares authorized; 874,999 |
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Additional paid-in capital | 55,308 | 56,211 | 54,155 | 56,211 | ||
Accumulated other comprehensive loss | (2,452) | (2,577) | (2,444) | (2,577) | ||
Deferred compensation | (1,135) | - | (1,013) | - | ||
Deficit | (223,502) | (211,706) | (257,412) | (211,706) | ||
Less treasury stock at cost: | ||||||
Series A convertible preferred stock, 3,676 shares outstanding | (42) | (42) | (42) | (42) | ||
Class A common stock, 4,551 shares outstanding | (10) | (10) | (10) | (10) | ||
Total shareholders' deficit | (171,823) | (158,114) | (206,756) | (158,114) | ||
Total liabilities and shareholders' deficit | $ 262,920 | $ 217,502 | $ 173,406 | $ 217,502 | ||
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MCMS, INC. | |||||||
Three months ended | Six months ended | ||||||
March 1, | March 2, | March 1, | March 2, | ||||
2001 | 2000 | 2001 | 2000 | ||||
Net sales | $ 192,439 | $ 99,055 | $ 392,916 | $ 199,072 | |||
Cost of goods sold | 184,507 | 95,993 | 374,273 | 189,905 | |||
Gross profit | 7,932 | 3,062 | 18,643 | 9,167 | |||
Selling, general and administrative (includes |
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Transaction costs | 816 | - - | 816 | - - | |||
Income (loss) from operations | (142) | (3,644) | 3,601 | (3,373) | |||
Interest expense, net | 7,868 | 5,337 | 14,973 | 10,672 | |||
Loss before taxes and extraordinary item | (8,010) | (8,981) | (11,372) | (14,045) | |||
Income tax provision | - - | 30 | 50 | 30 | |||
Loss before extraordinary item | (8,010) | (9,011) | (11,422) | (14,075) | |||
Extraordinary item - loss on early |
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Net loss | (8,010) | (9,011) | (11,796) | (14,075) | |||
Redeemable preferred stock dividends | |||||||
and accretion of preferred stock discount | (1,119) | (992) | (2,205) | (1,955) | |||
Net loss to common stockholders | $ (9,129) | $ (10,003) | $ (14,001) | $ (16,030) | |||
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Net loss per common share - basic and diluted: | |||||||
Loss before extraordinary item | $ (1.80) | $ (1.99) | $ (2.69) | $ (3.19) | |||
Extraordinary item | - - | - - | (0.07) | - - | |||
Net loss per common share - basic and diluted | $ (1.80) | $ (1.99) | $ (2.76) | $ (3.19) | |||
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Weighted average common shares outstanding |
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MCMS, INC. | |||||||
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May 31, | June 1, | May 31, | June 1, | ||||
Net sales | $ 100,220 | $ 113,474 | $ 493,136 | $ 312,546 | |||
Cost of goods sold | 102,435 | 107,670 | 476,427 | 297,417 | |||
Provision for inventory | 11,439 | 425 | 11,720 | 583 | |||
Gross profit (loss) | (13,654) | 5,379 | 4,989 | 14,546 | |||
Selling, general and administrative | 5,827 | 5,591 | 19,751 | 17,946 | |||
Write-down of property, plant and equipment | 5,801 | (61) | 6,002 | (32) | |||
Other | 1,102 | 56 | 2,019 | 212 | |||
Loss from operations | (26,384) | (207) | (22,783) | (3,580) | |||
Interest expense, net | 7,481 | 5,669 | 22,454 | 16,340 | |||
Loss before taxes and extraordinary item | (33,865) | (5,876) | (45,237) | (19,920) | |||
Income tax provision | 45 | 64 | 95 | 94 | |||
Loss before extraordinary item | (33,910) | (5,940) | (45,332) | (20,014) | |||
Extraordinary item - loss on early | - - | - - | 374 | - - | |||
Net loss | (33,910) | (5,940) | (45,706) | (20,014) | |||
Redeemable preferred stock dividends | |||||||
and accretion of preferred stock discount | (1,152) | (1,022) | (3,357) | (2,976) | |||
Net loss to common stockholders | $ (35,062) | $ (6,962) | $ (49,063) | $ (22,990) | |||
Net loss per common share - basic and diluted: | |||||||
Loss before extraordinary item | $ (6.93) | $ (1.38) | $ (9.62) | $ (4.57) | |||
Extraordinary item | - - | - - | (0.07) | - - | |||
Net loss per common share - basic and diluted | $ (6.93) | $ (1.38) | $ (9.69) | $ (4.57) | |||
Weighted average common shares outstanding |
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MCMS, INC. | ||||
Six months ended | ||||
March 1, | March 2, | |||
2001 | 2000 | |||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||
Net loss | $ (11,796) | $ (14,075) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||
Depreciation and amortization | 6,896 | 8,969 | ||
Gain on sale of property, plant and equipment | (67) | (8) | ||
Stock-based compensation expense | 168 | - | ||
Loss on early extinguishment of debt | 374 | - | ||
Changes in operating assets and liabilities: | ||||
Receivables | (16,856) | 15,693 | ||
Inventories | (19,229) | (12,523) | ||
Accounts payable and accrued expenses | 2,310 | (2,810) | ||
Advance from customer | (5,000) | |||
Interest payable | (9,132) | (53) | ||
Deferred income taxes | - | 1,993 | ||
Other | (996) | (822) | ||
Net cash used for operating activities | (53,328) | (3,636) | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||
Expenditures for property, plant and equipment | (4,497) | (4,166) | ||
Proceeds from sales of property, plant and equipment | 163 | 40 | ||
Net cash used for investing activities | (4,334) | (4,126) | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||
Proceeds from borrowings on line of credit and equipment line | 41,012 | 1,012 | ||
Proceeds from term loan A | 8,000 | - | ||
Proceeds from related parties | 37,000 | 8,700 | ||
Payments on debt to related parties | (23,700) | - | ||
Payments on debt | (1,367) | (1,904) | ||
Payment of deferred debt issuance costs | (3,290) | (100) | ||
Net cash provided by financing activities | 57,655 | 7,708 | ||
Effect of exchange rate changes on cash and cash equivalents | 7 | 54 | ||
Net increase in cash and cash equivalents | - | - | ||
Cash and cash equivalents at beginning of period | - - | - - | ||
Cash and cash equivalents at end of period | $ - | $ - | ||
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MCMS, INC. | ||||
Nine months ended | ||||
May 31, | June 1, | |||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||
Net loss | $ (45,706) | $ (20,014) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||
Depreciation and amortization | 10,550 | 13,426 | ||
Provision for inventory | 11,720 | 360 | ||
Write-down of property, plant and equipment and provision for doubtful accounts | 6,002 | - | ||
Loss on early extinguishment of debt | 374 | - | ||
Stock-based compensation expense | 289 | - | ||
Gain on sale of property, plant and equipment | (67) | (27) | ||
Changes in operating assets and liabilities: | ||||
Receivables | 17,892 | 9,573 | ||
Inventories | 15,056 | (23,026) | ||
Accounts payable and accrued expenses | (47,488) | 13,198 | ||
Advance from customer | (5,000) | 5,000 | ||
Interest payable | (4,149) | 4,554 | ||
Deferred income taxes | - | 1,993 | ||
Other | (2,198) | (1,437) | ||
Net cash used for operating activities | (42,725) | 3,600 | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||
Expenditures for property, plant and equipment | (11,981) | (5,305) | ||
Proceeds from sales of property, plant and equipment | 163 | 58 | ||
Net cash used for investing activities | (11,818) | (5,247) | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||
Capital contributions | - | 59 | ||
Proceeds from borrowings on line of credit and equipment line | 38,406 | 1,053 | ||
Proceeds from term loan A | 8,000 | - | ||
Proceeds from related parties | 37,000 | 8,700 | ||
Proceeds from other borrowings | - | 351 | ||
Payments on debt to related parties | (23,700) | - | ||
Payments on debt | (1,872) | (8,485) | ||
Payment of deferred debt issuance costs | (3,290) | (100) | ||
Net cash provided by financing activities | 54,544 | 1,578 | ||
Effect of exchange rate changes on cash and cash equivalents | (1) | 69 | ||
Net increase in cash and cash equivalents | - | - | ||
Cash and cash equivalents at beginning of period | - - | - - | ||
Cash and cash equivalents at end of period | $ - - | $ - - |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS)
The information included in the accompanying consolidated interim financial statements is unaudited and should be read in conjunction with the annual audited financial statements and notes thereto contained in the Company's Report on Form 10-K for the fiscal year ended August 31, 2000. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.
Certain amounts from the previous periods have been reclassified to conform with the current period presentation.
2. LiquidityThe Company faces severe near-term liquidity problems. As a result of a collapse in demand in the networking, telecommunication, computer and general electronics industries, many of the Company's customers cancelled orders and delayed production. The significant deterioration in demand from nearly all of the Company's customers has resulted in excess and obsolete inventory, overadvances on the Company's revolving credit facility and cash flows insufficient to meet a covenant requirement at May 31, 2001 under the Company's Amended and Restated Credit Facility (See Note 8 "Debt" and Note 9 "Debt - Related Parties"). As of May 31, 2001, the outstanding balance of the Company's revolving credit facility exceeded the amount available to borrow by $8.9 million, as determined by collateral advance rates under the Amended and Restated Credit Facility. The Company's overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under its Amended and Restated Credit Facility.
A significant factor affecting the Company's liquidity, including its need to borrow in excess of amounts available to borrow under the facility, is excess and obsolete inventory created when customers cancelled orders and delayed production. While the Company's customers are contractually responsible for excess and obsolete inventory, including any loss on the Company's sale of excess and obsolete inventory, some of the Company's customers have not complied with this responsibility on a timely basis or at all. The Company, for example, has commenced a lawsuit (See Note 16 "Commitments and Contingencies") against Nokia Internet Communications, Inc. ("Nokia") to enforce its rights concerning, among other things, certain accounts receivable and a significant level of excess and obsolete inventory (See Note 5 "Inventory" and Note 11 " Write-Down of Property, Plant & Equipment and Provision for Doubtful Accounts"). In addition, the Company generally pays for inventory well in advance of receiving payment for the inventory from its customers. During the three months ended May 31, 2001, the Company sold $24.9 million in excess and obsolete inventory to its customers and, subsequent to May 31, 2001, received purchase commitments from its customers, subject to certain terms and conditions, for an additional $15.0 million of excess and obsolete inventory.
The Company's overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under its Amended and Restated Credit Facility. Pursuant to a letter agreement dated June 29, 2001, the revolving credit facility was reduced to $52 million from $70 million. In addition, the lenders under the Amended and Restated Credit Facility (hereinafter referred to as the "Credit Facility Lenders") have indicated a willingness to enter into an agreement to forbear through July 31, 2001, from exercising the remedies available to them due to such events of default and to advance certain amounts in excess of amounts available to borrow under the Amended and Restated Credit Facility. The Company is currently in discussions with the Credit Facility Lenders concerning such a forbearance agreement. As currently contemplated, the forbearance agreement would contain certain terms and conditions, including the implementation of certain maximum overadvance amounts and the Company's pledge of assets and common stock of certain foreign subsidiaries. If the Company does not meet the terms and conditions of any forbearance agreement, the forbearance could be revoked by the Credit Facility Lenders before July 31, 2001. There can be no assurance that any forbearance agreement will be entered into or the terms of any such forbearance agreement. The Company has also had conversations with the Credit Facility Lenders regarding the possible need to extend any forbearance period beyond July 31, 2001. There can be no assurance that the Credit Facility Lenders will be willing to extend any forbearance period beyond July 31, 2001.
The Company has engaged Credit Suisse First Boston Corporation as a financial advisor to assist the Company in evaluating various alternatives to improve the Company's liquidity, including a possible merger or sale of the Company or its assets, raising additional equity capital or restructuring the Company's debt. The Company is currently in conversation with several potential acquirers. However, there is no assurance that such conversations will continue, that any such conversations will result in a definitive agreement or, if a definitive agreement is reached, what the terms of any such agreement would be. Further, given the limited duration of any forbearance agreement, there is no assurance that the Company will be able to implement a merger or sale of the Company or its assets, obtain additional funds or restructure its debt without seeking protection under the United States Bankruptcy Code. If a sale of the Company or its assets were to occur, the Company anticipates that the proceeds from such a sale may not be sufficient to repay all of the Company's debt, including the Company's senior debt and fixed and floating rate subordinated notes (See Note 8 - Debt),or yield any distribution on its Redeemable Preferred Stock, Preferred Stock and Common Stock.The Company does not intend to make any further comments regarding a merger or sale of the Company or its assets until the Company has entered into a definitive agreement or all such conversations have been terminated.
The Credit Facility Lenders could demand that all amounts outstanding under the Amended and Restated Credit Facility, including accrued interest, become immediately due and payable. As of May 31, 2001, the Company's outstanding balance under the Amended and Restated Credit Facility was $99.9 million, all of which is classified as a current obligation. A demand for immediate payment of amounts outstanding under the Amended and Restated Credit Facility would also constitute an event of default under the Company's fixed rate and floating rate subordinated notes, if such demand is not rescinded, annulled or otherwise cured within 20 days of the Company's receipt of such demand. The Company anticipates that it will not be able or permitted by its Credit Facility Lenders to make a September 1, 2001 interest payment on its fixed rate and floating rate subordinated notes, which will result in an event of default thereunder if not cured within 30 days. The outstanding balance of the Company's fixed rate and floating rate subordinated notes, which totaled $175.0 million at May 31, 2001, is also classified as a current obligation due to the aforementioned circumstances.
3.Customer Concentration
The Company depends on a relatively small number of customers for a significant portion of its net sales. The Company's three largest customers for the three months ended May 31, 2001 were Cisco Systems, Extreme Networks and Nokia, which represented approximately 26.0%, 13.0% and 12.1%, respectively, of its net sales. During the third quarter of fiscal 2001, the Company substantially completed disengagement with Nokia. Subsequent to May 31, 2001, the Company also received notification from Cisco of their intent to reduce the number of contract manufacturers on which they rely and to disengage with the Company. The Company is currently in the process of negotiating a disengagement agreement and anticipates completing manufacturing services for Cisco sometime before the end of calendar 2001. The Company anticipates that the loss of Cisco will require the Company to restructure its operations and, in the near-term, have a material adverse effect on the Company's financial condition and results of operations. Although the loss of Cisco and Nokia will have a significant adverse effect on the Company's near-term sales and profitability, the Company has attracted several new customers throughout fiscal 2000 and 2001 in an attempt to diversify its customer base and reduce its reliance on any particular customer. These new customers are primarily in the RF (wireless), optical and/or digital networking industries.
4. Effect of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Subsequently, the SEC released SAB No. 101B, which delayed theThe Company's implementation date of SAB No. 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company doeson June 1, 2001 did not believe that SAB No. 101 will have a material effect on its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement7
5.Inventories
May 31, | August 31, | ||
Raw materials and supplies | $ 62,869 | $ 63,487 | |
Reserve for excess and obsolete inventory | (15,116) | (3,902) | |
Work in process | 13,929 | 28,596 | |
Finished goods | 1,146 | 1,356 | |
$ 62,828 | $ 89,537 | ||
As a result of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133," SFAS No. 133 and No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 and SFAS No. 138a collapse in demand in the firstnetworking, telecommunication, computer and general electronics industries, many of the Company's customers cancelled orders, changed production quantities from forecasted volumes and delayed production. These actions created excess and obsolete inventory. Excess inventory represents raw material components with no customer demand within six months, of fiscal 2001 did not have awhile obsolete inventory represents raw material effectcomponents with no customer demand at all. While the Company's customers are contractually responsible for excess and obsolete inventory, including any loss on the Company's financial positionsale of excess and obsolete inventory, some of the Company's customers have not complied with this responsibility on a timely basis or resultsat all. The Company, for example, has commenced a lawsuit (Note 16 "Commitments and Contingencies") against Nokia to enforce its rights concerning, among other things, certain accounts receivable (See Note 11 "Write-Down of operations.Property, Plant and Equipment and Provision for Doubtful Accounts") and a significant level of excess and obsolete inventory. To date, no amounts have been recovered from Nokia. In addition, the Company generally pays for inventory well in advance of receiving payment for the inventory from its customers. During the three months ended May 31, 2001, the Company sold $24.9 million in excess and obsolete inventory to its customers and, subsequent to May 31, 2001, received purchase commitments from its customers, subject to certain terms and conditions, for an additional $15.0 million of excess and obsolete inventory. The Company attempts to sell excess and obsolete inventory in the market place. Due to the custom nature of certain excess and obsolete inventory and the excess supply of raw materials in the market place today, the Company anticipates that any sale of excess and obsolete inventory will occur at a substantial discount. Since the timing of recovery from the Company's customers of the loss on the sale of excess and obsolete inventory is uncertain, the Company recorded an $11.4 million charge to cost of goods sold. The $11.4 million charge to cost of goods sold and the $15.1 million balance sheet reserve for excess and obsolete inventory include $10.0 million and $11.9 million, respectively, related to inventory purchased for Nokia.
3.Inventories
March 1, | August 31, | ||
2001 | 2000 | ||
Raw materials and supplies | $ 74,621 | $ 59,585 | |
Work in process | 28,624 | 28,596 | |
Finished goods | 5,545 | 1,356 | |
$ 108,790 | $ 89,537 | ||
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4.6. Property, plant and equipment
ForIn the three and six months ended March 1,first quarter of fiscal 2001, the Company revised the estimated service life of manufacturing equipment from five to seven years, based upon an analysis of historical equipment life cycles, future usage and external market demand for used equipment. This change in accounting estimate is treated prospectively in the statement of operations and resulted in a $1.1$1.0 million ($1.11.0 million net of taxes and $0.22$0.20 per share) and $2.3$3.2 million ($2.33.2 million net of taxes and $0.46$0.64 per share) decrease to depreciation expense for the three and sixnine months ended March 1,May 31, 2001, respectively.
5.7. Accounts payable and accrued expenses
March 1, | August 31, | May 31, | August 31, | |||
2001 | 2000 | |||||
Trade accounts payable | $ 97,385 | $ 94,404 | $ 51,164 | $ 94,404 | ||
Salaries, wages, and benefits | 5,198 | 4,321 | 3,364 | 4,321 | ||
Equipment contracts payable | 5,246 | 1,067 | 575 | 1,067 | ||
Other | 3,030 | 2,531 | 2,652 | 2,531 | ||
$ 110,859 | $ 102,323 | $ 57,755 | $ 102,323 | |||
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6. Long-term
8. Debt
March 1, | August 31, | ||
2001 | 2000 | ||
Revolving credit facility, principal payments at the Company's option to |
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Equipment loan facility, principal payments, as defined, through |
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Term loan A, principal due in equal monthly installments of $95,238 |
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Senior subordinated notes (the "Fixed Rate Notes"), unsecured, interest |
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Floating interest rate subordinated term securities, (the "Floating Rate |
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Other notes payable, due in varying installments through November 1, |
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Total debt | 241,495 | 193,850 | |
Less current portion | (2,543) | (1,551) | |
Long-term debt, net of current portion | $ 238,952 | $ 192,299 | |
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May 31, | August 31, | ||
Revolving credit facility, principal payments at the Company's option to | $ 46,630 | $ 12,445 | |
Equipment loan facility, principal payments, as defined, through | 8,929 | 5,230 | |
Term loan A, principal due in equal monthly installments of $95,238 | 7,333 | - | |
Senior subordinated notes (the "Fixed Rate Notes"), unsecured, interest | 145,000 | 145,000 | |
Floating interest rate subordinated term securities, (the "Floating Rate | 30,000 | 30,000 | |
Other notes payable, due in varying installments through November 1, | 900 | 1,175 | |
Total debt | 238,792 | 193,850 | |
Less current portion | (238,792) | (1,551) | |
Long-term debt, net of current portion | $ - - | $ 192,299 |
On September 29, 2000, the Company amended and restated its credit facility (the "Amended and Restated Credit Facility") to provide up to $125 million in secured financing. The Amended and Restated Credit Facility increased the revolving credit facility to $70 million from $50 million, maintained a $10 million equipment loan facility, and provided for an $8 million term loan A and a $37 million term loan B (See Note 7 - Long-term Debt9 "Debt - Related Parties)Parties"). Amounts available to borrow under the revolving credit facility vary depending on domestic accounts receivable, inventory and equipment balances. The revolving credit facility, equipment loan facility and term loan A are collateralized by a first priority security interest in substantially all of the Company's assets, including real property, and mature in February 2004. Term loan B is collateralized by a second priority lien on these same assets and matures in August 2004. The equipment loan facility and term loan A and B may not be re-borrowed upon repayment. The Amended and Restated Credit Facility restricts the Company's ability to incur additional indebtedness, to create liens or other encumbrances, to make certain investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of its assets or to enter into any merger or consolidation. The Amended and Restated Credit Facility also contains a covenant requiring that the Company maintain a fixed charge ratio, as calculated at the end of each fiscal quarter. The Company is in compliance with the covenant requirement as of March 1, 2001, however, due to a significant deterioration in demand from nearly all of the Company's customers, the Company believes it will not be in compliance with the covenant requirement at the end of its third fiscal quarter, which ends on May 31, 2001. If the Company is not in covenant compliance and is unable to obtain a waiver from its lenders, it will be in default and will be unable to borrow additional funds under this facility. Although management of the Company has discussed this impending non-compliance with the Company's lenders, there can be no assurance that a waiver will be obtained. To the extent the Company is unable to borrow additional funds, due to covenant non-compliance or borrowing availability, the Company may not have sufficient liquidity to meet its current and future interest payments, working capital needs and capital expenditure obligations. See Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations --- "Liquidity and Capital Resources."
On September 29, 2000, term loan A and B were fully funded, the proceeds of which were used to repay $23.7 million in notes from shareholders (see Note 7 - Long-term Debt9 "Debt - Related Parties)Parties"), plus $0.6 million in accrued interest, $3.3 million in closing costs and partially pay down the revolver balance. As of April 5, 2001, the Company had $61.7 million outstanding under the revolving credit facility, $8.6 million outstanding under the equipment loan facility, $7.4 million outstanding under term loan A and $37.0 million outstanding under term loan B (See Note 7 - Long-term Debt - Related Parties). As of April 5, 2001, the Company had $8.3 million available to borrow under its revolving credit facility and $0.6 million available to borrow under its equipment loan facility.
Also on September 29, 2000, LB1 Group, Inc., purchased all shares of MCMS formerly owned by Micron Electronics of California, Inc., a less than 10% owner. LB1 Group, Inc., an affiliate of Lehman Brothers, is the lender under term loan B of the Amended and Restated Credit Facility.
A significant deterioration in demand from nearly all of the Company's customers has resulted in excess and obsolete inventory, overadvances on its revolving credit facility and cash flows insufficient to meet a covenant requirement at May 31, 2001 under the Company's Amended and Restated Credit Facility. As of May 31, 2001, the outstanding balance of the revolving credit facility exceeded amounts available to borrow under that facility by $8.9 million, as determined by collateral advance rates under the Amended and Restated Credit Facility. The Company's overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under its Amended and Restated Credit Facility. Pursuant to a letter agreement dated June 29, 2001, the revolving credit facility was reduced to $52 million from $70 million. In addition, the Credit Facility (see Note 7 - Long-term Debt - Related Parties).Lenders have indicated a willingness to enter into an agreement to forbear through July 31, 2001, from exercising the remedies available to them due to such events of default and to advance certain amounts in excess of amounts available to borrow under the Amended and Restated Credit Facility. The Company is currently in discussions with the Credit Facility Lenders concerning such a forbearance agreement. As currently contemplated, the forbearance agreement would contain certain terms and provisions, including the implementation of certain maximum overadvance amounts and the Company's pledge of assets and common stock of certain foreign subsidiaries. If the Company does not meet the terms and conditions of any forbearance agreement, the forbearance could be revoked by the Credit Facility Lenders before July 31, 2001. There can be no assurance that any forbearance agreement will be entered into or as to the terms of any such forbearance agreement. The Company has also had conversations with the Credit Facility Lenders regarding the possible need to extend any forbearance period beyond July 31, 2001. There can be no assurance that the Credit Facility Lenders will be willing to extend any forbearance period beyond July 31, 2001.
7. Long-term The Company has engaged Credit Suisse First Boston Corporation as a financial advisor to assist the Company in evaluating various alternatives to improve the Company's liquidity, including a possible merger or sale of the Company or its assets, raising additional equity capital or restructuring the Company's debt. The Company is currently in conversation with several potential acquirers. However, there is no assurance that such conversations will continue, that any such conversations will result in a definitive agreement or, if a definitive agreement is reached, what the terms of any such agreement would be. Further, given the limited duration of the forbearance agreement, there is no assurance that the Company will be able to implement a merger or sale of the Company or its assets, obtain additional funds or restructure its debt without seeking protection under the United States Bankruptcy Code. If a sale of the Company or its assets were to occur, the Company anticipates that the proceeds from such a sale may not be sufficient to repay all of the Company's debt, including the Company's senior debt and fixed and floating rate subordinated notes, or yield any distribution on its Redeemable Preferred Stock, Preferred Stock and Common Stock.The Company does not intend to make any further comments regarding the merger or sale of the Company or its assets until the Company has entered into a definitive agreement or all such conversations have been terminated.
The Credit Facility Lenders could demand that all amounts outstanding under the Amended and Restated Credit Facility, including accrued interest, become immediately due and payable. As of May 31, 2001, the Company's outstanding balance under the Amended and Restated Credit Facility was $99.9 million, all of which is classified as a current obligation. A demand for immediate payment of amounts outstanding under the Amended and Restated Credit Facility would also constitute an event of default under the Company's fixed rate and floating rate subordinated notes if such demand is not rescinded, annulled or otherwise cured within 20 days of the Company's receipt of such demand. The Company anticipates that it will not be able or permitted by its Credit Facility Lenders to make a September 1, 2001 interest payment on its fixed rate and floating rate subordinated notes, which will result in an event of default thereunder if not cured within 30 days. The outstanding balance of the Company's fixed rate and floating rate subordinated notes, which totaled $175.0 million at May 31, 2001, is also classified as a current obligation due to the aforementioned circumstances.
9. Debt - Related Parties
March 1, | August 31, | ||
2001 | 2000 | ||
Term loan B, mandatory prepayments due as defined, otherwise |
|
| |
Notes from shareholders, principal and unpaid interest due on February |
|
| |
Less debt discount | - - | (374) | |
Long-term Debt - Related Parties | $ 37,000 | $ 23,326 | |
===== | ===== |
May 31, | August 31, | ||
Term loan B, mandatory prepayments due as defined, otherwise principal due upon maturity in August 2004, interest due monthly and accrues at the lesser of Prime + 4.25% or LIBOR + 6.50% (11.25% interest rate at March 1, 2001) | $ 37,000 | $ - - | |
Notes from shareholders, principal and unpaid interest due on February 27, 2004, interest accrues at LIBOR + 3.25% (9.91% at August 31, 2000) | - | 23,700 | |
Less debt discount | - | (374) | |
Total debt - related parties | 37,000 | ||
Less current portion | (37,000) | ||
Long-term debt - related parties | $ - - | $ 23,326 |
On September 29, 2000, the Company repaid all notes from shareholders from the proceeds received from term loans provided for in the Amended and Restated Credit Facility (See Note 6 - Long-term debt)8 "Debt"). In connection with $15 million of the notes from shareholders dated August 30, 2000, the Company issued to the participating shareholders warrants for the purchase of 500,000 shares of the Company's common stock. A debt discount was recorded on August 30, 2000 for the estimated fair market value of the warrants issued. The early repayment of the notes from shareholders resulted in a $374,000 extraordinary loss, net of taxes, for the unamortized portion of the debt discount.
8. The Amended and Restated Credit Facility contains a covenant requiring that the Company maintain a fixed charge ratio, as calculated at the end of each fiscal quarter. A significant deterioration in demand from nearly all of the Company's customers has resulted in excess and obsolete inventory, overadvances on the Company's revolving credit facility and cash flows insufficient to meet a covenant requirement as of May 31, 2001 under the Company's Amended and Restated Credit Facility. The Company's overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under the Amended and Restated Credit Facility. The Credit Facility Lenders have indicated a willingness to enter into an agreement to forbear through July 31, 2001, from exercising the remedies available to them due to such events of default and to advance certain amounts in excess of amounts available to borrow under the Amended and Restated Credit Facility. The Company is currently in discussions with the Credit Facility Lenders concerning such a forbearance agreement. Since any forbearance agreement is anticipated to be temporary, all amounts due under the Amended and Restated Credit Facility are classified as current obligations as of May 31, 2001 (See Note 2 "Liquidity").
10. Redeemable Preferred Stock
The Redeemable Preferred Stock is subject to mandatory redemption on March 1, 2010 and has a liquidation preference of $100 per share. The holders of Redeemable Preferred Stock are entitled to a cumulative 12-1/2% annual dividend based upon the liquidation preference per share of Redeemable Preferred Stock, payable quarterly. To date, the Company has paid all dividends in-kind.
9. Transaction11. Write-Down of Property, Plant and Equipment and Provision for Doubtful Accounts
During the three months ended May 31, 2001, the Company recorded a $3.3 million charge to operating expenses related to the write-down of property, plant and equipment of the Company's Belgian operations. During the three months ended May 31, 2001, the primary customer of the Belgian operations significantly reduced its future demand. The Company does not currently anticipate that future sales from the Belgian operations will improve significantly. As a result, the Company made an assessment of impairment, whereby the Company determined that the carrying amount of fixed assets from its Belgian operations would not be recovered through its estimated and undiscounted future cash flows, before interest. The impairment is measured as the amount by which the fixed asset carrying amounts exceed their estimated fair value. Fair value was determined through an appraisal on land and building and external market demand for equipment. The new basis of the impaired assets, including a building, computer software and equipment and production machinery and equipment, will be depreciated over their remaining useful lives.
During the three months ended May 31, 2001, the Company also determined that an assessment of impairment was necessary on its other operations, due to the significant deterioration in demand that the Company experienced from nearly all of its customers. Although the deterioration in demand had a significant adverse effect on the Company's sales and profitability for the three months ended May 31, 2001, the Company determined that the carrying amount of fixed assets from its other operations would be recovered through their respective estimated and undiscounted future cash flows, before interest. Subsequent to May 31, 2001, the Company received notification from Cisco, a major customer, of their intent to reduce the number of contract manufacturers on which they rely and to disengage with the Company. The Company is currently in the process of negotiating a disengagement agreement and anticipates completing manufacturing services for Cisco sometime before the end of calendar 2001. The Company anticipates that the loss of Cisco will require the Company to restructure its operations and, in the near-term, have a material adverse effect on the Company's financial condition and results of operations. The loss of Cisco may require an additional assessment of impairment in the three months ending August 30, 2001 (See Note 3 "Customer Concentration").
As a result of the lawsuit commenced by the Company against Nokia (See Note 16 "Commitments and Contingencies"), Nokia has elected to default on the payment of certain accounts receivable. During the three months ended May 31, 2001, the Company recorded a provision for doubtful accounts of $2.5 million, of which $2.4 million related to Nokia due to the uncertainty as to the timing of the recovery of such amount.
12. Other costs
Transaction Other costs for both the three and sixnine months ended March 1,May 31, 2001 totaled $816,000. The$1.1 million and $2.0 million, respectively. During the three months ended May 31, 2001, other costs include $0.6 million in foreign currency expense, $0.4 million in financial advisory fees and $0.1 million in stock compensation expense. During the nine months ended May 31, 2001, other costs include $0.8 million of costs incurred by the Company incurred these costs in anticipation of a public offering of its common stock. As a result of a significant change in market conditions and in anticipation of a significant decline in sales and profitability in the third and fourth quartersquarter of fiscal 2001, the Company has suspended its efforts to effect a public offering of its common stock. Other costs for the nine months ended May 31, 2001 also includes $0.5 million in foreign currency expense, $0.4 million in financial advisory fees and $0.3 million in stock compensation expense.
10.13. Loss Per Share
Basic loss per share is computed using net loss increased by dividends on the Redeemable Preferred Stock divided by the weighted-average number of common shares outstanding. Diluted loss per share is computed using
the weighted-average number of common and common stock equivalent shares outstanding. Common stock equivalent shares result from the assumed exercise of outstanding stock options and shares issuable upon the conversion of outstanding convertible securities and affect earnings per share only when they have a dilutive effect. The Company's basic loss per share and its fully diluted loss per share were the same for the three and sixnine months ended March 1,May 31, 2001 and March 2,June 1, 2000 because of the antidilutive effect of outstanding convertible securities and stock options.
11.14. Income Taxes
The Company had income tax expense of $0$45,000 and $50,000$95,000 for the three and sixnine months ended March 1,May 31, 2001, respectively, compared to $30,000$64,000 and $94,000 for both the three and sixnine months ended March 2,June 1, 2000. The effective rate of income tax expense for the three and sixnine months ended March 1,May 31, 2001 was 0%0.1% and 0.4%0.2%, respectively, compared to 0.3%1.1% and 0.2%0.5% for the three and sixnine months ended March 2,June 1, 2000, respectively. During the three and sixnine months ended March 1,May 31, 2001, the Company's valuation allowance increased by $5.4$13.6 million and $8.8$22.4 million, respectively, to $28.9$42.5 million, which eliminates the income tax benefit that would have otherwise resulted from the losses.
12.
15. Comprehensive Loss
The Company's comprehensive loss is comprised of net loss and foreign currency translation adjustments. Comprehensive loss was $7,965,000$33.9 million and $11,671,000$45.6 million for the three and sixnine months ended March 1,May 31, 2001, respectively. Comprehensive loss was $9,095,000$6.0 million and $14,338,000$20.3 million for the three and sixnine months ended March 2,June 1, 2000, respectively. The accumulated balance of foreign currency translation adjustments, excluded from net loss, is presented in the consolidated balance sheet as "Accumulated other comprehensive loss."
13.16. Commitments and Contingencies
The Company's facilities in Durham, North Carolina; San Jose, California; Penang, Malaysia; and Monterrey, Mexico; and certain other property and equipment, are leased under operating lease agreements with non-cancelable terms expiring through 2007, with renewals thereafter at the option of the Company. Future minimum lease payments total approximately $29,484,000$29.6 million and are as follows: $3,971,000$2.1 million remaining in fiscal 2001, $7,685,000$8.4 million in fiscal 2002, $6,147,000$7.0 million in fiscal 2003, $4,807,000$5.2 million in fiscal 2004 and $6,874,000$6.9 million in fiscal 2005 and thereafter.
In February 2001, the Company filed a lawsuit, as amended in May 2001, in the Third Judicial District Court of the State of Idaho against Nokia Internet Communications, Inc. ("Nokia").Nokia. The lawsuit claims, among other things, that Nokia breached a contract with MCMS.MCMS and misappropriated MCMS trade secrets. In May 2001, Nokia filed an answer to the lawsuit and counterclaims alleging a breach of contract by the Company. The Company has not yet quantifiedbelieves Nokia's claims have no merit and intends to defend the damages.action vigorously.
From time to time, the Company is party to various legal actions arising in the ordinary course of business. To the best of the Company's knowledge, there are no other material legal proceedings currently pending or threatened.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Form 10-Q that are not purely historical are forward-looking statements and are being provided in reliance upon the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are made as of the date hereof and are based on current management expectations and information available to the Company as of such date. The Company assumes no obligation to update any forward-looking statement. It is important to note that actual results could differ materially from historical results or those contemplated in the forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and include trend information. Factors that could cause actual results to differ materially include, but are not limited to, those identified herein under "Risk Factors" and in other Company filings with the Securities and Exchange Commission. All quarterly references are to the Company's fiscal periods ended March 1,May 31, 2001, August 31, 2000 or March 2,June 1, 2000, unless otherwise indicated.
MCMS is a global leading provider of advanced electronics manufacturing services to original equipment manufacturers, that primarily serves the data communications, telecommunications, and computer/memory module industries. We target customers that are technology leaders in growing markets, such as Internet infrastructure, wireless communications and optical networking, that have complex manufacturing services requirements and that seek to form long-term relationships with their electronics manufacturing services providers. We offer a broad range of electronics manufacturing services, including pre-production engineering and product design support, prototyping; supply chain management; manufacturing and testing of printed circuit board assemblies; full system assembly; end-order fulfillment; and after sales product support. We deliver this broad range of services through six strategically located facilities in the United States, Mexico, Asia and Europe.
We provide services on both a turnkey and consignment basis. Under a turnkey arrangement, we assume responsibility for both the procurement of components and their assembly. Turnkey manufacturing generates higher net sales than consignment manufacturing due to the generation of revenue from materials as well as labor and manufacturing overhead. Turnkey manufacturing also typically results in lower gross margins than consignment manufacturing. Under a consignment arrangement, the original equipment manufacturer procures the components and we assemble and test them in exchange for a service fee. Consignment revenues accounted for 3.4%6.4% and 3.3%3.9% of our net sales for the three and sixnine months ended March 1,May 31, 2001, compared to 8.4%10.8% and 9.4%9.9% of the Company's net sales for the corresponding periods of fiscal 2000.
Results of Operations
Three months ended | Six months ended | ||||||||||||||
March 1, | March 2, | March 1, | March 2, | Three months ended | Nine months ended | ||||||||||
2001 | 2000 | 2001 | 2000 | May 31, | June 1, | May 31, | June 1, | ||||||||
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Net sales | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |||||||
Costs of sales | 95.9 | 96.9 | 95.3 | 95.4 | |||||||||||
Gross margin | 4.1 | 3.1 | 4.7 | 4.6 | |||||||||||
Cost of goods sold | 102.2 | 94.9 | 96.6 | 95.2 | |||||||||||
Provision for inventory(1) | 11.4 | 0.4 | 2.4 | 0.2 | |||||||||||
Gross margin(1) | (13.6) | 4.7 | 1.0 | 4.6 | |||||||||||
Selling, general and |
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| 5.8 | 4.9 | 4.0 | 5.7 | |||||||
Transaction costs | 0.4 | - | 0.2 | - | |||||||||||
Income (loss) from operations | (0.1) | (3.7) | 0.9 | (1.7) | |||||||||||
Write-down of property, plant | 5.8 | - | 1.2 | - | |||||||||||
Other | 1.1 | - | 0.4 | 0.1 | |||||||||||
Loss from operations | (26.3) | (0.2) | (4.6) | (1.2) | |||||||||||
Interest expense, net | 4.1 | 5.4 | 3.8 | 5.4 | 7.5 | 5.0 | 4.6 | 5.2 | |||||||
Loss before taxes | (4.2) | (9.1) | (2.9) | (7.1) | (33.8) | (5.2) | (9.2) | (6.4) | |||||||
Income tax provision | - | - | - | - | - | - | - | - | |||||||
Extraordinary loss | - - | - | (0.1) | - | - - | - - | (0.1) | - - | |||||||
Net loss | (4.2)% | (9.1)% | (3.0)% | (7.1)% | (33.8)% | (5.2)% | (9.3)% | (6.4)% | |||||||
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Depreciation and amortization(1) | 1.6 % | 4.2 % | 1.5% | 4.3 % | |||||||||||
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(1) For the three and six months ended March 1, 2001, the depreciation and amortization amount excludes $451,000 and $849,000 respectively, in deferred loan amortization that was expensed as interest. For the three and six months ended March 2, 2000, the depreciation and amortization amount excludes $235,000 and $470,000, respectively, of deferred loan amortization that was expensed as interest. | |||||||||||||||
Depreciation and amortization(2) | 3.3 % | 3.7 % | 1.9 % | 4.1 % | |||||||||||
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10
Three Months Ended March 1,months ended May 31, 2001 compared to the three months ended March 2,June 1, 2000
Net Sales.Sales. Net sales for the three months ended March 1,May 31, 2001 increaseddecreased by $93.3$13.3 million or 94.1%11.7% to $192.4$100.2 million from $99.1$113.5 million for the three months ended March 2,June 1, 2000. The increasedecrease in net sales is primarily the result of higherlower volumes of PCBAprinted circuit board assemblies ("PCBA") and system assembly shipments to customers in the networking and telecommunications industries. The decline in net sales was even more significant from the previous quarter. Net sales for the three months ended May 31, 2001 decreased by $92.2 million or 47.8% from $192.2 million for the three months ended March 1, 2001. The significant decline in net sales from the three months ended March 1, 2001 is primarily the result of a significant decrease in demand from nearly all of our customers.
Net sales attributable to foreign subsidiaries totaled $40.5$20.5 million for the three months ended March 1,May 31, 2001, compared to $18.8$33.7 million for the corresponding period of fiscal 2000. The growthdecline in foreign subsidiary net sales is primarily the result of increasedlower volumes of PCBA shipments from our Malaysian operation. Net sales for the three months ended March 1,May 31, 2001 included $7.1$5.7 million from our Mexican operation compared to no sales in$0.8 million for the corresponding period of fiscal 2000.
Gross Profit. Gross profit for the three months ended March 1,May 31, 2001 increaseddecreased by $4.8$19.1 million, or 154.8%353.7%, to $7.9($13.7) million from $3.1$5.4 million for the three months ended March 2,June 1, 2000. Gross margin for the three months ended March 1,May 31, 2001 increaseddecreased to 4.1%(13.6)% of net sales from 3.1%4.7% for the comparable period ended March 2,of fiscal 2000. The increasesignificant decline in gross profit and gross margin isare primarily the result of highera significant decrease in demand from nearly all of our customers, which resulted in an $11.4 million charge to cost of goods sold for the write-down of excess and obsolete inventory to net realizable value. The $11.4 million charge to cost of goods sold includes $10.0 million related to inventory purchased for Nokia.
As a result of a collapse in demand in the networking, telecommunication, computer and general electronics industries, many of our customers cancelled orders, changed production quantities from forecasted volumes and delayed production. These factors resulted in excess and obsolete inventory. Excess inventory represents raw material components with no customer demand within six months, while obsolete inventory represents raw material components with no customer demand at all. While our customers are contractually responsible for excess and obsolete inventory, including any loss on our sale of PCBAexcess and system assembly shipments. The improvementobsolete inventory, some our customers have not complied with this responsibility on a timely basis or at all. We, for example, have commenced a lawsuit against Nokia to enforce our rights concerning, among other things, certain accounts receivable and a significant level of excess and obsolete inventory. In addition, we generally pay for inventory well in gross profitadvance of receiving payment for the inventory from our customers. We attempt to sell excess and obsolete inventory in the market place. Due to the custom nature of certain excess and obsolete inventory and the excess supply of raw materials in the market place today, we anticipate that any sale of the excess and obsolete inventory will occur at a substantial discount. Since the timing of recovery from our customers of the loss on the sale of excess and obsolete inventory is uncertain, we recorded an $11.4 million charge to cost of goods sold.
Excluding the charge for excess and obsolete inventory, gross margin were off-set, in part, byfor the under utilizationthree months ended May 31, 2001 was (2.2%). As a result of the rapidly declining demand from nearly all of our customers, nearly all of our facilities in Monterrey, Mexico and San Jose, California, while we invested in additional staffing and training to support future business. Reduced capacity utilization continued to impact our operations in Durham, North Carolina in the second quarter of fiscal 2001 as it did in the second quarter of fiscal 2000.were under utilized. In addition, we experienced lower shipments of consigned memory modules, dueresponse to the softeningdecline in customer demand, we reduced our manufacturing related staffing levels by over 40% since the beginning of product demandcalendar 2001. Nevertheless, our high level of fixed costs in the computer industry.buildings, equipment and support overhead negatively affected gross margin.
Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three months ended March 1,May 31, 2001 increased by $0.5$0.2 million, or 7.5%3.6%, to $7.2$5.8 million from $6.7$5.6 million for the three months ended March 2,June 1, 2000. This increase
Write-Down of Property, Plant & Equipment and Provision for Doubtful Accounts. During the three months ended May 31, 2001, we recorded a $3.3 million charge to operating expenses related to the impairment of property, plant and equipment of our Belgian operations. During the three months ended May 31, 2001, the primary customer of the Belgian operations significantly reduced its future demand. We do not currently anticipate that future sales from the Belgian operations will improve significantly. Based on these factors, we determined that the carrying amount of fixed assets from our Belgian operations would not be recovered through its estimated and undiscounted future cash flows. The impairment is measured as the amount by which the fixed asset carrying amounts exceed their estimated fair values. The impaired assets include a building, computer software and equipment and production machinery and equipment.
As a result of the lawsuit commenced by us against Nokia, Nokia has elected to default on the payment of certain accounts receivable. During the three months ended May 31, 2001, we recorded a provision for doubtful accounts of $2.5 million, of which $2.4 million related to Nokia due to the uncertainty as to the timing of the recovery of such amount.
Other.Other costs for the three months ended March 1,May 31, 2001 is primarily due to additional staffing costs incurred to support our growth.
Transaction Costs.totaled $1.1 million. During the three month periodmonths ended March 1,May 31, 2001, we incurredother costs of approximately $0.8include $0.6 million in anticipationforeign currency expense, $0.4 million in financial advisory fees and $0.1 million in stock compensation expense. Other costs for the three months ended June 1, 2000 consists of a public offering$0.1 million of our common stock. As a result of a significant change in market conditions and in anticipation of a significant decline in sales and profitability in the third and fourth quarters of fiscal 2001, we have suspended efforts to effect a public offering of our common stock.foreign currency expense.
Provision for Income Taxes. We had no incomeIncome tax expense for the three months ended March 1,May 31, 2001 was $45,000 compared to $30,000$64,000 for the three months ended March 2,June 1, 2000. The income tax expense for the three months ended March 2,May 31, 2001 resulted primarily from minimum state taxes, while the income tax expense for the corresponding period of fiscal 2000 resulted primarily from a mandatory minimum foreign income tax on itsour Mexican subsidiary. We had noThe effective rate of tax expense for the three months ended March 1,May 31, 2001 was 0.1% compared to 0.3%1.1% for the corresponding period of fiscal 2000. During the three months ended March 1,May 31, 2001 and March 2,June 1, 2000, a valuation allowance eliminated any income tax benefit that would have otherwise resulted from the losses. We do not provide for U.S. tax on the earnings of some of our foreign subsidiaries.
Net Loss. For the reasons stated above, net loss for the three months ended March 1,May 31, 2001 decreasedincreased by $1.0$28.0 million to a loss of $8.0$33.9 million from a loss of $9.0$5.9 million for the three months ended March 2,June 1, 2000. As a percentage of net sales, net loss for the three months ended March 1,May 31, 2001 was 4.2%33.8% compared to 9.1%5.2% for the three months ended March 2,June 1, 2000.
Six Months Ended March 1,Nine months ended May 31, 2001 compared to the threenine months ended March 2,June 1, 2000
Net Sales.Sales. Net sales for the sixnine months ended March 1,May 31, 2001 increased by $193.8$180.6 million or 97.3%57.8% to $392.9$493.1 million from $199.1$312.5 million for the sixnine months ended March 2,June 1, 2000. The increase in net sales is primarily the result of higher volumes of PCBA and system assembly shipments in the first two quarters of fiscal 2001 to customers in the networking and telecommunications industries.
Net sales attributable to foreign subsidiaries totaled $106.6$127.1 million for the sixnine months ended March 1,May 31, 2001, compared to $37.3$71.0 million for the corresponding period of fiscal 2000. The growth in foreign subsidiary net sales is primarily the result of increased PCBA shipments from our Malaysian operation. Net sales for the sixnine months ended March 1,May 31, 2001 includes $12.6$18.3 million from our Mexican operation compared to no sales in$0.8 million for the corresponding period of fiscal 2000.
Gross Profit. Gross profit for the sixnine months ended March 1,May 31, 2001 increaseddecreased by $9.4$9.5 million, or 102.2%65.5%, to $18.6$5.0 million from $9.2$14.5 million for the sixnine months ended March 2,June 1, 2000. Gross margin for the sixnine months ended March 1,May 31, 2001 increaseddecreased to 4.7%1.0% of net sales from 4.6% for the comparablecorresponding period ended March 2,of fiscal 2000. The increase inDuring the first two quarters of fiscal 2001, gross profit and gross margin is primarilyincreased significantly over the corresponding period of fiscal 2000, as a result of higher volumes of PCBA and system assembly shipments. TheHowever, due to a significant decline in demand from nearly all of our customers in the third quarter of fiscal 2001, we recorded an $11.7 million charge to cost of sales for excess and obsolete inventory, which more than offset the improvement in gross profitprofit. The $11.7 million charge to cost of goods sold includes $10.0 million related to inventory purchased for Nokia.
As a result of a collapse in demand in the networking, telecommunication, computer and general electronics industries, many of our customers cancelled orders, changed production quantities from forecasted volumes and delayed production. These factors resulted in excess and obsolete inventory. Excess inventory represents raw material components with no customer demand within six months, while obsolete inventory represents raw material components with no customer demand at all. While our customers are contractually responsible for excess and obsolete inventory, including any loss on our sale of excess and obsolete inventory, some our customers have not complied with this responsibility on a timely basis or at all. We, for example, have commenced a lawsuit against Nokia to enforce our rights concerning, among other things, certain accounts receivable and a significant level of excess and obsolete inventory. In addition, we generally pay for inventory well in advance of receiving payment for the inventory from our customers. We attempt to sell excess and obsolete inventory in the market place. Due to the custom nature of certain excess and obsolete inventory and the excess supply of raw materials in the market place today, we anticipate that any sale of the excess and obsolete inventory will occur at a substantial discount. Since the timing of recovery from our customers of the loss on the sale of excess and obsolete inventory is uncertain, we recorded an $11.7 million charge to cost of goods sold.
Excluding the charge for excess and obsolete inventory, gross margin were off-set, in part, byfor the under utilizationnine months ended May 31, 2001 was 3.4%. As a result of the rapidly declining demand from nearly all of our customers, nearly all of our facilities in Monterrey, Mexico and San Jose, California, while we invested in additional staffing and training to support future business. Reduced capacity utilization continued to impact our operations in Durham, North Carolina in the first six months of fiscal 2001 as it did in the first six months of fiscal 2000.were under utilized. In addition, we experienced lower shipments of consigned memory modules, dueresponse to the softeningdecline in customer demand, we reduced our temporary and full-time manufacturing related staffing levels by over 40%. Nevertheless, our high level of product demandfixed costs in the computer industry.buildings, equipment and support overhead negatively affected gross margin.
Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A")&A for the sixnine months ended March 1,May 31, 2001 increased by $1.6$1.9 million, or 12.7%10.6%, to $14.2$19.8 million from $12.6$17.9 million for the sixnine months ended March 2,June 1, 2000. ThisThe increase for the sixnine months ended March 1,May 31, 2001 is primarily due to additional staffing costs incurred during the first six months of fiscal 2001 to support our growth.revenue growth over that same period.
Transaction CostsWrite-Down of Property, Plant & Equipment and Provision for Doubtful Accounts. During the six month periodnine months ended March 1,May 31, 2001, we incurredrecorded a $3.3 million charge to operating expenses related to the impairment of property, plant and equipment of our Belgian operations. During the nine months ended May 31, 2001, the primary customer of the Belgian operations significantly reduced its future demand. We do not currently anticipate that future sales from the Belgian operations will improve significantly. Based on these factors, we determined that the carrying value of fixed assets from our Belgian operations would not be recovered through its estimated and undiscounted future cash flows. The impairment charge is measured as the amount by which the fixed asset carrying amounts exceed their estimated fair values. The impaired assets include a building, computer software and equipment and production machinery and equipment.
As a result of the lawsuit commenced by us against Nokia, Nokia has elected to default on the payment of certain accounts receivable. During the nine months ended May 31, 2001, we recorded a provision for doubtful accounts of $2.7 million, of which $2.4 million related to Nokia due to the uncertainty as to the timing of the recovery of such amount.
Other.Other costs of approximatelyfor the nine months ended May 31, 2001 totaled $2.0 million. During the nine months ended May 31, 2001, other costs include $0.8 million of costs incurred in anticipation of a public offering of our common stock. As a result of a significant change in market conditions and in anticipation of a significant decline in sales and profitability in the third and fourth quartersquarter of fiscal 2001, we have suspended efforts to effect a public offering of our common stock. Other costs for the nine months ended May 31, 2001 also include $0.5 million in foreign currency expense, $0.4 million in financial advisory fees and $0.3 million in stock compensation expense. Other costs for the nine months ended June 1, 2000 consists of $0.2 million in foreign currency expense.
Provision for Income Taxes. Income tax expense for the sixnine months ended March 1,May 31, 2001 was $50,000$95,000 compared to $30,000$94,000 for the sixnine months ended March 2,June 1, 2000. The income tax expense for each period resulted primarily from a mandatory minimum foreign income tax on our Mexican subsidiary.subsidiary and minimum state taxes. The effective rate of tax expense for the sixnine months ended March 1,May 31, 2001 was 0.4%0.2% compared to 0.2%0.5% for the corresponding period of fiscal 2000. During the sixnine months ended March 1,May 31, 2001 and March 2,June 1, 2000, a valuation allowance eliminated any income tax benefit that would have otherwise resulted from the losses. We do not provide for U.S. tax on the earnings of some of our foreign subsidiaries.
Extraordinary Loss.During the sixnine months ended March 1,May 31, 2001, the early repayment of certain loans from shareholders resulted in a $0.4 million extraordinary loss for the unamortized portion of a debt discount.
Net Loss. For the reasons stated above, net loss for the sixnine months ended March 1,May 31, 2001 decreasedincreased by $2.3$25.7 million to a loss of $11.8$45.7 million from a loss of $14.1$20.0 million for the sixnine months ended March 2,June 1, 2000. As a percentage of net sales, net loss for the sixnine months ended March 1,May 31, 2001 was 3.0%9.3% compared to 7.1%6.4% for the threenine months ended March 2,June 1, 2000.
Current Market and Business Conditions
Our business depends on the market acceptance and demand for the products we build for our customers, who primarily serve the data communications, telecommunications and computer/memory module industries. Recently,During the second quarter of fiscal 2001 and continuing into the third quarter of fiscal 2001, many sectors of the telecommunications, networking and computer/memory module industries have experienced both a substantial reduction in demand and a reduced predictability of demand for their products. As a result, we have experienced a significant deterioration in demand from nearly all of our customers.customers, which had a significant adverse effect on our sales and profitability for the three months ended May 31, 2001. We currently anticipate that this will continue to have a significant adverse effect on our sales and profitability in the third and fourth quartersquarter of fiscal 2001.2001 and the first quarter of fiscal 2002. In response to these conditions, we have reduced our temporary and full-time manufacturing related staffing levels by more than 30% during the quarternearly 40% in calendar 2001 and through the date of this filing, and are continuingwe continue to monitor and evaluate our cost structure.
We also depend on a relatively small number of customers for a significant portion of our net sales. Our three largest customers for the three months ended May 31, 2001 were Cisco Systems, Extreme Networks and Nokia, which represented approximately 26.0%, 13.0% and 12.1%, respectively, of our net sales. During the third quarter of fiscal 2001, we substantially completed disengagement with Nokia. Subsequent to May 31, 2001, we have also received notification from Cisco of their intent to reduce the number of contract manufacturers on which they rely and to disengage with us. We are currently in the process of negotiating a disengagement agreement and anticipate completing manufacturing services for Cisco sometime before the end of calendar 2001. We anticipate that the loss of Cisco will require us to restructure our operations and, in the near-term, have a material adverse effect on our financial condition and results of operations. Although the loss of Cisco and Nokia will have a significant adverse effect on our near-term sales and profitability, we have attracted several new customers throughout fiscal 2000 and 2001 in an attempt to diversify our customer base and reduce our reliance on any particular customer. These new customers are primarily in the RF (wireless), optical and/or digital networking industries.
Liquidity and Capital Resources
We face severe near-term liquidity problems. As a result of a collapse in demand in the networking, telecommunication, computer and general electronics industries, many of our customers cancelled orders and delayed production. The significant deterioration in demand from nearly all of our customers has resulted in excess and obsolete inventory, overadvances on our revolving credit facility and cash flows insufficient to meet a covenant requirement at May 31, 2001 under the Amended and Restated Credit Facility (See Note 8 "Debt"). As of May 31, 2001, the outstanding balance of our revolving credit facility exceeded the amount available to borrow by $8.9 million, as determined by collateral advance rates under the Amended and Restated Credit Facility. Our overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under the Amended and Restated Credit Facility.
A significant factor affecting our liquidity, including our need to borrow in excess of amounts available to borrow under the revolving credit facility, is excess and obsolete inventory created when customers cancelled orders and delayed production. While our customers are contractually responsible for excess and obsolete inventory, including any loss on our sale of excess and obsolete inventory, some our customers have not complied with this responsibility on a timely basis or at all. We, for example, have commenced a lawsuit against Nokia to enforce our rights concerning, among other things, certain accounts receivable and a significant level of excess and obsolete inventory. In addition, we generally pay for inventory well in advance of receiving payment for the inventory from our customers. During the three months ended May 31, 2001, we sold $24.9 million in excess and obsolete inventory to our customers and, subsequent to May 31, 2001, received purchase commitments from our customers, subject to certain terms and conditions, for an additional $15.0 million of excess and obsolete inventory.
Our overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under the Amended and Restated Credit Facility. Pursuant to a letter agreement dated June 29, 2001, the revolving credit facility was reduced to $52 million from $70 million. In addition, the Credit Facility Lenders have indicated a willingness to forbear from exercising through July 31, 2001, the remedies available to them due to the events of default and to advance certain amounts in excess of amounts available to borrow under the Amended and Restated Credit Facility. We are currently in discussions with the Credit Facility Lenders concerning such a forbearance agreement. As currently contemplated, the forbearance agreement would contain certain terms and provisions, including the implementation of certain maximum overadvance amounts and our pledge of assets and common stock of certain foreign subsidiaries. If we do not meet the terms and conditions of any forbearance agreement, the forbearance could be revoked by the Credit Facility Lenders before July 31, 2001. There can be no assurance that any forbearance agreement will be entered into or as to the terms of any such forbearance agreement. The Company has also had conversations with the Credit Facility Lenders regarding the possible need to extend any forbearance period beyond July 31, 2001. There can be no assurance that the Credit Facility Lenders will be willing to extend any forbearance period beyond July 31, 2001.
We have engaged Credit Suisse First Boston Corporation as a financial advisor to assist us in evaluating various alternatives to improve our liquidity, including a possible merger or sale of the Company or its assets, raising additional equity capital or restructuring our debt. Currently, we are in conversation with several potential acquirers. However, there is no assurance that such conversations will continue, that any such conversations will result in a definitive agreement or, if a definitive agreement is reached, what the terms of any such agreement would be. Further, given the limited duration of the forbearance agreement, there is no assurance that we will be able to implement a merger or sale of the Company or its assets, obtain additional funds or restructure our debt without seeking protection under the United States Bankruptcy Code. If a sale of the Company or its assets were to occur, we anticipate that the proceeds from such a sale may not be sufficient to repay all of the Company's debt, including the Company's senior debt and fixed and floating rate subordinated notes, or yield any distribution on Redeemable Preferred Stock, Preferred Stock and Common Stock.We do not intend to make any further comments regarding a merger or sale of the Company or its assets until we have entered into a definitive agreement or all such conversations have been terminated.
The Credit Facility Lenders could demand that all amounts outstanding under the Amended and Restated Credit Facility, including accrued interest, become immediately due and payable. As of May 31, 2001, our outstanding balance under the Amended and Restated Credit Facility was $99.9 million, all of which is classified as a current obligation. A demand for immediate payment of amounts outstanding under the Amended and Restated Credit Facility would also constitute an event of default under our fixed rate and floating rate subordinated notes if such demand is not rescinded, annulled or otherwise cured within 20 days of our receipt of such demand. We anticipate that we will not be able or permitted by our Credit Facility Lenders to make a September 1, 2001 interest payment on our fixed rate and floating rate subordinated notes, which will result in an event of default thereunder if not cured within 30 days. The outstanding balance of our fixed rate and floating rate subordinated notes, which totaled $175.0 million at May 31, 2001, is also classified as a current obligation due to the aforementioned circumstances.
During the first sixnine months of fiscal 2001, net cash consumed by operating activities was $53.3$42.7 million. Net cash used by investing activities was $4.3$11.8 million and net cash provided by financing activities was $57.6$54.5 million. Exchange rate changes had a nominal effect on cash. Net cash used by investing activities during the second quarterfirst nine months of fiscal 2001 primarily consisted of capital expenditures for facility upgrades and expansion of manufacturing capacity in Nampa, Idaho, Monterrey, Mexico and San Jose, California. Net cash generated from financing activities resulted from net borrowings under our Amended and Restated Credit Facility, dated September 29, 2000.
The cash consumed by operations of $53.3$42.7 million was primarily due to an increasea decrease in accounts payable, offset in part by decreases in accounts receivable and inventory, offset in part by an increase in accounts payable.inventory. As of March 1,May 31, 2001, accounts receivable increased $16.8decreased $17.9 million from August 31, 2000, primarily due to increasesa significant decrease in sales in the current yearthree months ended May 31, 2001 compared to the period ended August 31, 2000. For the three and six months ended March 1, 2001, the average accounts receivable collection period was 40.6 and 37.9 days, respectively, compared to 34.2 and 37.7 days for the corresponding periods of fiscal 2000. As of March 1, 2001, inventory increased by $19.2 million over the six months ended August 31, 2000. For the three and six months ended March 1,As of May 31, 2001, the average inventory turns were 6.4 and 6.8 turns, respectively, compared to 7.1 and 7.5 turns for the corresponding periodsdecreased by $15.1 million from August 31, 2000. As of fiscal 2000. The increase in inventory isMay 31, 2001, accounts payable decreased by $47.5 million due to a combination of factors. Most significantly, we increaseddecline in inventory purchases, of material to support our growingwhich resulted from the decline in sales. During the quarter ending March 1, 2001, we experienced a reduction in forecasted orders from our customers. Some increase in inventory levels resulted from our receipt of raw materials ordered prior to the reduction in forecasts. The inventory increase in the first six months of fiscal 2001 resulted in a $2.3 million increase in accounts payable (including bank overdrafts) during this same period. For the three and sixnine months ended March 1, 2001, the average trade accounts payable payment period was 56.0 days and 54.8 days, respectively, compared to 46.3 and 47.5 days for the corresponding period of fiscal 2000. During the six months ended March 1,May 31, 2001, we also repaid a $5.0 million advance from a customer.
Our Amended and Restated Credit Facility, dated September 29, 2000, provides up to $125 million in secured financing. The Amended and Restated Credit Facility increased the revolving credit facility to $70 million from $50 million, maintained the $10 million equipment loan facility, and provided for an $8 million term loan A and a $37 million term loan B. The revolving credit facility, equipment loan facility and term loan A are collateralized by a first priority security interest in substantially all of our assets, including real property, and mature in February 2004. Term loan B is collateralized by a second priority lien on these same assets and matures in August 2004. Term loan B is subject to a mandatory prepayment, if at any time prior the maturity of term loan B, we receive proceeds from the sale of our capital stock, a public offering or cash equity contribution. If a mandatory prepayment of term loan B is made during the twelve-month period commencing on September 29, 2000, prepayment is due at a premium of 107.5% and decreases annually at a rate of 2.5% of face value to 100.0% on September 29, 2003. Other than a mandatory prepayment or payment upon maturity, term loan B may not be prepaid, in whole or in part, unless all amounts due under the revolving credit facility and equipment loan facility have been paid in full and all commitments under the Amended and Restated Credit Facility have been terminated. The equipment loan facility and term loans A and B may not be reborrowed upon repayment. The Amended and Restated Credit Facility restricts our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of our assets or to enter into any merger or consolidation. The Amended and Restated Credit Facility also contains a covenant requiring that we maintain a fixed charge ratio, as calculated at the end of each fiscal quarter.
On September 29, 2000, term loans A and B were fully funded, the proceeds of which were used to repay $23.7 million in notes from shareholders, plus $0.6 million in accrued interest, pay closing costs of approximately $3.3 million and partially pay down the revolving credit facility. As of April 5, 2001, we had $61.7 million outstanding under the revolving credit facility, $8.6 million outstanding under the equipment loan facility, $7.4 million outstanding under term loan A and $37.0 million outstanding under term loan B. As of April 5, 2001, we had $8.3 million available to borrow under our revolving credit facility and $0.6 million available to borrow under our equipment loan facility.
Our principal sources of future liquidity are cash flows from operating activities and borrowings under the Amended and Restated Credit Facility. Recently, we have experienced a significant deterioration in customer demand. Based upon our current sales forecast, at the end of our third fiscal quarter ending May 31, 2001, we believe that we will not be in compliance with a fixed charge ratio covenant, as contained in our Amended and Restated Credit Agreement. If we are not in covenant compliance and are unable to obtain a waiver from our lenders, we will be in default under our Amended and Restated Credit Facility and will be unable to borrow additional funds under this facility. Although we have discussed this impending non-compliance with our lenders, there can be no assurance that a waiver will be obtained. To the extent we are unable to borrow additional funds, due to covenant non-compliance or borrowing availability, we may not have sufficient liquidity to meet our current and future interest payments, working capital needs and capital expenditure obligations. Capital expenditures, to the extent necessary, will consist of acquisition and upgrades of equipment, expansion of our facilities and acquisition and upgrades of information technology systems. Our ability to meet our cash obligations will be dependent upon our future performance, which in turn, will be subject to general economic conditions and financial, business and other factors, including factors beyond our control.If we are not able to obtain a waiver under our Amended and Restated Credit Facility or if cash flows from operating activities and borrowing availability under the credit facility are not sufficient to meet these obligations, we will have to pursue one or
more alternatives, such as reducing or delaying capital expenditures, reducing our work force, closing a site, raising additional equity capital, obtaining additional financing or restructuring our debt. Additional financing may not be available when required or on satisfactory terms.
In addition to factors discussed elsewhere in this Form 10-Q and in other Company filings with the Securities and Exchange Commission, the following are important factors which could cause actual results or events to differ materially from the historical results of the Company's operations or those results or events contemplated in any forward-looking statements made by or on behalf of the Company.
Our current and future indebtedness could adversely affect our financial health and severely limit our ability to plan for or respond to changes in our business.
We are highly leveraged and plan to continue to incur indebtedness from time to time to finance acquisitions, working capital or capital expenditures or for other purposes. This debt has contributed to our shareholders' deficit which could have adverse consequences for our business, including:
Our ability to pay principal and interest on our indebtedness, to meet our financial and restrictive covenants and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions that are beyond our control, as well as the availability of revolving credit borrowings under our senior credit facility or successor facilities. Recently, we have experienced a significant deterioration in customer demand. Based upon our current sales forecast, at the end of our third fiscal quarter ending May 31, 2001, we believe that we will not be in compliance with a fixed charge ratio covenant, as contained in our Amended and Restated Credit Agreement. If we are not in covenant compliance and are unable to obtain a waiver from our lenders, we will becurrently in default under our Amended and Restated Credit Facility and will beFacility. If we are unable to find a solution to our liquidity problems, all amounts outstanding under our Amended and Restated Credit Facility could become due and payable on demand. A demand for payment by the Credit Facility Lenders would also accelerate full payment of our subordinated debt.
We face severe near-term liquidity problems. As a result of a collapse in demand in the networking, telecommunication, computer and general electronics industries, many of our customers cancelled orders and delayed production. The significant deterioration in demand from nearly all of our customers has resulted in excess and obsolete inventory, overadvances on the revolving credit facility and cash flows insufficient to meet a covenant requirement at May 31, 2001 under the Amended and Restated Credit Facility. As of May 31, 2001, the outstanding balance of our revolving credit facility exceeded the amount available to borrow additional fundsby $8.9 million, as determined by collateral advance rates under this facility. Although we have discussed this impendingthe Amended and Restated Credit Facility. Our overadvances on the revolving credit facility and non-compliance with a covenant requirement created events of default under the Amended and Restated Credit Facility.
A significant factor affecting our lenders, thereliquidity problems, including our need to borrow in excess of amounts available to borrow under the facility, is excess and obsolete inventory that has resulted from the deterioration in customer demand. While our customers are contractually responsible for excess and obsolete inventory, including any loss on our sale of excess and obsolete inventory, some our customers have not complied with this responsibility on a timely basis or at all. We, for example, have commenced a lawsuit against Nokia to enforce our rights concerning, among other things, certain accounts receivable and a significant level of excess and obsolete inventory. In addition, we generally pay for inventory well in advance of receiving payment for the inventory from our customers. During the three months ended May 31, 2001, we sold $24.9 million in excess and obsolete inventory to our customers and, subsequent to May 31, 2001, received purchase commitments from our customers, subject to certain terms and conditions, for an additional $15.0 million of excess and obsolete inventory.
Our overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under the Amended and Restated Credit Facility. Pursuant to a letter agreement dated June 29, 2001, the revolving credit facility was reduced to $52 million from $70 million. In addition, the Credit Facility Lenders have indicated a willingness to forbear through July 31, 2001 from exercising the remedies available to them due to such events of default and to advance certain amounts in excess of amounts available to borrow under the Amended and Restated Credit Facility. We are currently in discussions with the Credit Facility Lenders concerning such a forbearance agreement. As currently contemplated, the forbearance agreement would contain certain terms and provisions, including the implementation of certain maximum overadvance amounts and our pledge of assets and common stock of our foreign subsidiaries. If we do not meet the terms and conditions of any forbearance agreement, the forbearance could be revoked by the Credit Facility Lenders before July 31, 2001. There can be no assurance that a waiverany forbearance agreement will be obtained.entered into or as to the terms of any such forbearance agreement. The Company has also had conversations with the Credit Facility Lenders regarding the possible need to extend any forbearance period beyond July 31, 2001. There can be no assurance that the Credit Facility Lenders will be willing to extend any forbearance period beyond July 31, 2001.
ToWe have engaged Credit Suisse First Boston Corp as a financial advisor to us in assist in evaluating various alternatives to improve our liquidity, including a possible merger or sale of the extent we are unable to borrow additional funds due to covenant non-complianceCompany or borrowing availability, we may not have sufficient liquidity to meet our current and future interest payments, working capital needs and capital expenditure obligations. Under such circumstances, we will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, reducing our work force, closing a site,its assets, raising additional equity capital obtaining additional financing or restructuring our debt. Additional financingCurrently, we are in conversation with several potential acquirers. However, there is no assurance that such conversations will continue, that any such conversations will result in a definitive agreement or, if a definitive agreement is reached, what the terms of any such agreement would be. Further, given the limited duration of the forbearance agreement, there is no assurance that we will be able to implement a merger or sale of the Company or its assets, obtain additional funds or restructure our debt without seeking protection under the United States Bankruptcy Code. If a sale of the Company or its assets were to occur, we anticipate that the proceeds from such a sale may not be available when requiredsufficient to repay all of the Company's debt, including the Company's senior debt and fixed and floating rate subordinated notes, or yield any distribution on satisfactory terms..Redeemable Preferred Stock, Preferred Stock and Common Stock.We do not intend to make any further comments regarding a merger or sale of the Company or its assets until we have entered into a definitive agreement or all such conversations have been terminated.
The Credit Facility Lenders could demand that all amounts outstanding under the Amended and Restated Credit Facility, including accrued interest, become immediately due and payable. As of May 31, 2001, our outstanding balance under the Amended and Restated Credit Facility was $99.9 million, all of which is classified as a current obligation. A demand for immediate payment of amounts outstanding under the Amended and Restated Credit Facility would also constitute an event of default under our fixed rate and floating rate subordinated notes if such demand is not rescinded, annulled or otherwise cured within 20 days of our receipt of such demand. We anticipate that we will not be able or permitted by our Credit Facility Lenders to make a September 1, 2001 interest payment on our fixed rate and floating rate subordinated notes, which will result in an event of default thereunder if not cured within 30 days. The outstanding balance of our fixed rate and floating rate subordinated notes, which totaled $175.0 million at May 31, 2001, is also classified as a current obligation due to the aforementioned circumstances.
The terms of our indebtedness agreements significantly restrict our operations.
The terms of our current indebtedness agreements restrict, among other things, our ability to incur additional indebtedness, pay dividends or make other restricted payments, consummate asset sales, enter into transactions with affiliates, merge, consolidate or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. We are also required to maintain specified financial ratios and satisfy financial condition tests, which further restrict our ability to operate as we choose. Substantially all our assets and those of our subsidiaries are pledged as security under our senior credit facility. A significant deterioration in demand from nearly all of our customers has resulted in excess and obsolete inventory, overadvances on our revolving credit facility and cash flows insufficient to a covenant requirement at May 31, 2001 under the Amended and Restated Credit Facility. As of May 31, 2001, the outstanding balance of the revolving credit facility exceeded amounts available to borrow under that facility by $8.9 million, as determined by collateral advance rates under the Amended and Restated Credit Facility. Our overadvances on the revolving credit facility and non-compliance with a covenant requirement have created events of default under the Amended and Restated Credit Facility. See Management Discussion and Analysis of Financial Condition and Results of Operations -- "Liquidity and Capital Resources."
Although we have hired a financial advisor to assist us in evaluating alternatives to improve our liquidity, a sale of the Company is not assured.
Although we have engaged the services of Credit Suisse First Boston Corp to assist us in evaluating alternatives to improve our liquidity, one of which includes a possible sale of the Company or its assets, there is no assurance that we will be able to find a buyer for the Company or its assets without seeking protection under the United States Bankruptcy Code. If a sale of the Company or its assets were to occur, we are unable to obtain additional financing, weanticipate that the proceeds from such a sale may not be ablesufficient to support our future growth.
We expect to have on-going working capitalrepay all of the Company's debt, including the Company's senior debt and capital expenditure requirements. Our future success may dependfixed and floating rate subordinated notes, or yield any distribution on our ability to obtain additional financing. We may not be able to obtain additional financing when we want or need it,Redeemable Preferred Stock, Preferred Stock and it may not be available on satisfactory terms.Common Stock.
A small number of major customers accounts for most of our net sales, and the loss of any of these customers wouldhas and will likely continue to harm us.
We depend on a relatively small number of customers for a significant portion of our net sales. Our twothree largest customers for the three months ended March 1,May 31, 2001 were Cisco Systems, and Extreme Networks and Nokia, which represented approximately 37.9%26.0%, 13.0% and 23.2%12.1%, respectively, of our net sales. Our two largest customers for the sixnine months ended March 1,May 31, 2001 were Cisco Systems and Extreme Networks, which represented approximately 41.4%38.3% and 20.8%19.2%, respectively, of our net sales. In addition, our ten largest customers for the three and sixnine months ended March 1,May 31, 2001 accounted for approximately 89.0%84.6% and 90.3%88.8%, respectively, of our net sales. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales.
Our
During the third quarter of fiscal 2001, we substantially completed disengagement with Nokia. Subsequent to May 31, 2001, we also received notification from Cisco of their intent to reduce the number of contract manufacturers on which they rely and to disengage with us. We are currently in the process of negotiating a disengagement agreement and anticipate completing manufacturing services for Cisco sometime before the end of calendar 2001. We anticipate that the loss of Cisco will require us to restructure our operations and, in the near-term, have a material adverse effect on our financial condition and results of operations. Although the loss of Cisco and Nokia will have a significant adverse effect on our near-term sales and profitability, we have attracted several new customers throughout fiscal 2000 and 2001 in an attempt to diversify our customer base and reduce our reliance on any particular customer. These new customers are primarily in the RF (wireless), optical or digital networking industries.
As we have experienced with Cisco and Nokia, our major customers may not continue to purchase products and services from us at current levels or at all. Recently, dueDue to recent market conditions, we have experienced a significant deterioration in demand from nearly all of our customers. In the past we have lost and in the future we could lose customers for a variety of reasons, including the acquisition of our customers by third parties, product discontinuation and customers' shifting of production to internal facilities or to our competitors. We may not be able to expand our customer base to make up any sales shortfalls if we lose one or more of our major customers.shortfalls. Our attempts to diversify our customer base and reduce our reliance on particular customers may not be successful. If we lose one or more of our major customers and are unable to adequately expand our customer base to make up the resulting sales shortfalls, our net sales and profitability would likely decline.
One of our major customers has notified us of its preference to limit the percentage of our business that its orders may constitute. If we are unable to expand and diversify our customer base, this customer or other major customers may reduce the amount of products and services that they currently purchase from us, which could cause our net sales and profitability to decline.
We anticipate that ourOur net sales and operating results have and will likely continue to fluctuate.
Our net sales and operating results have fluctuated and maywill likely continue to fluctuate significantly from quarter to quarter. We generally receive purchase orders from customers for products to be shipped during the ensuing 60 to 90 days. Accordingly, our net sales in any given quarter depend on obtaining and fulfilling orders for assemblies to be manufactured and shipped in the same quarter in which those orders are received. Further, our level of net sales in a given quarter may depend on assemblies configured, completed, packaged and shipped in the final weeks of such quarter. Our operating results maywill likely fluctuate in the future as a result of many factors, including:
We base our operating expenses on anticipated revenue levels and a high percentage of our operating expenses are relatively fixed. We often increase staffing, purchase materials and incur other expenses to meet the anticipated demand of our customers. Anticipated orders may not materialize, and delivery schedules may be deferred as a result of changes in demand for our customers' products. As a result, any unanticipated shortfall in revenue in a quarter wouldhas and is likely to adversely affect our operating results for that quarter. Also, changes in our product assembly mix may cause our margins to fluctuate, which could negatively impact our results of operations for that period. Our results in any period should not be considered indicative of the results to be expected in any future period.
Nearly all of our customers have experienced significant reductions in demand for their products and difficulty in accurately forecasting demand for their products. This has had a significant adverse affect in our customer demand and on our ability to anticipate the levels and timing of future customer demand. The reduction in demand, particularly when unanticipated, has resulted in, and will continue to result in excess and obsolete inventory and reduced profitability.
Our agreements with our customers arebusiness is generally based upon short-term purchase orders and cancellations,with our customers. Cancellations, reductions or delays in customer orders would adverselyhave and will likely continue to have an adverse affect on our net sales and profitability.
We generally obtain short-term purchase orders or commitments from our customers, rather than long-term contracts. We work closely withAs a result of a collapse in demand in the networking, telecommunication, computer and general electronics industries, many of our customers to develop forecasts for future orders. Customers may cancel theircancelled orders, changechanged production quantities from forecastforecasted volumes or delay production for a number of reasons which are beyond our control, including their internal operating and liquidity concerns. Any significant delay, cancellation or reduction of orders from our customers could cause our net sales and profitability to decline significantly. Moreover, the cancellation of purchase orders by customers, inaccurate customer forecasts or a failure on our part to anticipate customer material requirements accurately, hasdelayed production. These factors resulted in and could continue to result in excess and obsolete inventory. In a period of declining component prices, excessExcess inventory could lead torepresents raw material components with no customer demand within six months, while obsolete inventory revaluation charges.represents raw material components with no customer demand at all. While we seek to hold our customers are contractually responsible for actions on their part that result in excess and obsolete inventory, including any loss on our failuresale of excess and obsolete inventory, some our customers have not complied with this responsibility on a timely basis or at all. We, for example, have commenced a lawsuit against Nokia to do so orenforce our inabilityrights concerning, among other things, certain accounts receivable and a significant level of excess and obsolete inventory. In addition, we generally pay for inventory well in advance of receiving payment for the inventory from our customers. We attempt to otherwise dispose of, make use of, or return thissell excess and obsolete inventory has in the past resulted in,market place. Due to the custom nature of certain excess and mayobsolete inventory and the excess supply of raw materials in the future resultmarket place today, we anticipate that any sale of the excess and obsolete inventory will occur at a substantial discount. Since the timing of recovery from our customers of the loss on the sale of excess and obsolete inventory is uncertain, we recorded an $11.4 million charge to cost of goods sold in the three months ended May 31, 2001. The $11.4 million charge to cost of goods sold includes $10.0 million related to inventory revaluation charges or inventory write-offs, which could have an adverse effect on our business, financial condition and results of operations.purchased for Nokia.
Adverse changes in the companies or industries we serve, including reduced demand for our services, wouldhas and will likely continue to cause our net sales and profitability to decline.
Our business depends on the market acceptance and demand for the products we build for our customers, who primarily serve the data communications, telecommunications and computer/memory module industries, which are characterized by intense competition, relatively short product life cycles, significant fluctuations in product demand and recessionary periods. These industries and our customers' products are generally subject to rapid technological change and product obsolescence. If any of these factors or other factors reduce demand for our customers' products, our net sales and profitability would likely be negatively affected. Recently, many sectors of the telecommunications, networking and computer/memory module industries have experienced both a substantial reduction in demand and reduced predictability of demand for their products. As a result, we have experienced a significant deterioration in customer demand, which will havehad a significant adverse affect on our sales and profitabilityprofitability. The significant deterioration in customer demand is expected to continue into the third and fourth quartersquarter of fiscal 2001.2001 and the first quarter of fiscal 2002.
Shortages or price fluctuations in component parts specified by our customers could delay product shipments and reduce our profitability.
Many of the products we manufacture include components that are only available from a single supplier. Supply shortages for a particular component can delay production of all products using that component or cause cost increases in the services we provide. In the past, we have experienced industry-wide shortages in some of the materials we use, such as capacitors, memory components, logic devices and enclosures. As a result, our suppliers have been forced to allocate available quantities among their customers and we have not been able to obtain all of the materials desired in a timely fashion. Our inability to obtain these needed materials has in some instances slowed production or assembly, and therefore delayed shipments to our customers, increased inventory levels, increased costs and reduced profitability. We may also bear the risk of periodic component price increases, which could increase our costs and reduce our profitability.
We have a recent history of net losses and maywill experience further losses in the future.
We have consistently experienced net losses since the second quarter of fiscal 1998. We reported a net loss to common stockholders for fiscal year 2000 of $27.7 million, for fiscal year 1999 of $17.5 million and for fiscal year 1998 of $3.5 million. We anticipate continued losses due to a significant decline in our customer demand and our significant leverage. We cannot predict whether, when or to what extent we will become profitable.
In addition, if we fail to manage our inventory effectively, we may be subject to fluctuations in materials costs, scrap and excess and obsolete inventory, which could increase our overall costs and reduce profitability. We
are required to forecast our future inventory needs based upon the anticipated demand of our customers. If we are unable to accurately forecast this demand, we may experience a shortage or an excess of materials. A shortage of materials could lengthen production schedules and increase costs, while an excess of materials may increase the costs of maintaining inventory, adversely impact our liquidity, and increase the risk of inventory obsolescence.
Increased competition may result in decreased demand or prices for our services.
The electronics manufacturing services industry is highly competitive and characterized by low profit margins. We compete against numerous electronics manufacturing service providers with global operations. In addition, current and prospective customers could evaluate the merits of manufacturing products internally. Consolidation in the electronics manufacturing services industry results in a continually changing competitive landscape. The consolidation trend in the industry also results in larger and more geographically diverse competitors who have significant combined resources with which to compete against us. Many of our competitors are less financially leveraged than we are and have substantially greater managerial, manufacturing, engineering, technical, financial, systems, sales and marketing resources than we do. These competitors may:
We also may be operating at a cost disadvantage as compared to competitors who have greater direct buying power or who have lower cost structures. Increased competition from existing or potential competitors could result in price reductions, reduced profitability or loss of market share.
In recent years, many electronics manufacturing services providers, including us, have substantially expanded their manufacturing capacity. The recent and substantial decline in demand for electronics manufacturing services, which was driven by economic conditions in the markets we serve, has resulted in excess capacity, which could result in increased competition, substantial pricing pressures and adversely affect our net sales and profitability.
If we are unable to respond to rapidly changing technologies and process developments, we may not be able to compete effectively.
The markets for our products and services are characterized by rapidly changing technologies and continuing process developments. Our success will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market products and services that meet changing customer needs and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. Our core technologies may encounter competition from new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services. We may be unable to respond effectively to the technological requirements of the changing market. If we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of these technologies may require us to make significant capital investments. We may not be able to obtain capital for these purposes in the future, and our investments in new technologies may not result in commercially viable technological processes. If we are unable to successfully respond to these changing technologies and process developments, our net sales and profitability could be adversely affected.
If we are unable to attract and retain key personnel, our business may suffer.
Our future success largely depends on the skills and efforts of our executive management and our engineering, program management, procurement, manufacturing and sales employees. Our future success will also require us to attract, motivate, train and retain additional skilled and experienced personnel. We face intense competition for such personnel. Deteriorating market conditions hasand our financial condition have resulted in and may continue to result in a loss of key personnel. We may not be able to attract, motivate and retain personnel with the skills and experience needed to successfully manage our business and operations.
Our foreign operations expose us to political, economic and logistical uncertainties.
We currently have foreign operations in Malaysia, Mexico and Belgium. In addition, at the request of
one of our existing customers, we plan to commence operations in China before the end of the calendar year. The new operation in China, which will provide additional low-cost manufacturing capacity, will utilize a government-subsidized leased facility and existing production equipment. We also purchase a significant number of components manufactured in foreign countries. Because of the scope of our international operations, we are subject to the following uncertainties:
In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to increased duties, increased regulatory requirements, higher taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of or increase in tariffs and limitations on imports or exports. Also, we could be negatively affected if our host countries revise their policies away from encouraging foreign investment or foreign trade, including tax holidays.
The functional currency of the Company's Belgian, Malaysian and Mexican operations are the Belgium franc, Malaysian ringgit and U.S. dollar, respectively. Fixed assets for the Belgian and Malaysian operations are denominated in each entity's functional currency and translation gains or losses will occur as the exchange rate between the local functional currency and the U.S. dollar fluctuates on each balance sheet reporting date. The Company's financial performance may be adversely impacted by changes in exchange rates between these currencies and the U.S. dollar. The Company's equity investment in Malaysia and a portion of its investment in Belgium are long-term in nature and, therefore, any translation adjustments are shown as a separate component of shareholders' equity and do not affect the Company's net loss. The Company's cumulative translation losses as of May 31, 2001, were $2.2 million and $0.2 million for the Malaysian and Belgian operations, respectively.An additional risk is that certain working capital accounts, such as accounts receivable and accounts payable, including inter-company accounts, are denominated in currencies other than the functional currency and may give rise to exchange gains or losses upon settlement or at the end of any financial reporting period. Certain direct labor, manufacturing overhead, and selling, general and administrative costs of the international operations are denominated in the local currencies. Transaction gains and losses are reflected in the Company's net loss. The Company's transaction losses for the quarter ended May 31, 2001 were $0.5 million and $0.1 million for the Belgian and Mexican operations, respectively. The Company's transaction losses for the nine months ended May 31, 2001 were $0.4 million and $0.1 million for the Belgian and Mexican operations, respectively. There were no significant transaction gains or losses for the Malaysian operations during these same periods. In September 1998, the Malaysian government imposed currency control measures which, among other things, fixed the exchange rate between the U.S. dollar and the Malaysian ringgit and made it more difficult to repatriate the Company's investments. The Company attempts to minimize the impact of exchange rate volatility by entering into U.S. dollar denominated transactions whenever possible for purchases of raw materials and capital equipment and by keeping minimal cash balances of foreign currencies. As exchange rates fluctuate, the Company will continue to experience translation and transaction adjustments related to its investments in Belgium, Malaysia and Mexico, which could have a material and adverse effect on the Company's business, financial condition and results of operations.
If we are unable to manage our global operations, our business could be disrupted and our net sales and profitability could decrease.
Since 1996, we have completed one acquisition and commenced operations at three new facilities. Our growth has placed and will continue to place a significant strain on our management, financial resources and information, operations and financial systems.
As part of our business strategy, we have expanded our operations through the opening of new facilities, expanding existing facilities and by selectively making acquisitions. Management of our global operations involves numerous risks, including:
We may be unable to protect our intellectual property, which would negatively affect our ability to compete.
We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely on a combination of patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite these protections, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. We cannot be certain that patents we have or that may be issued as a result of our pending patent applications will protect or benefit us or give us adequate protection from competing technologies. We also cannot be certain that others will not develop our unpatented proprietary technology or effective competing technologies on their own. We believe that our proprietary technology does not infringe on the proprietary rights of others. However, if others assert valid infringement claims against us with respect to our past, current or future designs or processes, we could be required to enter into cross-licensing agreements or expensive royalty arrangements, indemnify third parties, develop non-infringing technologies or engage in costly litigation.
We are subject to a variety of environmental and workplace health and safety laws, which expose us to potential financial liability.
Our operations are regulated under a number of federal, state, provincial, local and foreign environmental and workplace health and safety laws and regulations, which govern, among other things, the discharge of
hazardous materials into the air, ground and water as well as the handling, storage and disposal of these materials. Compliance with these laws is an important consideration for us because we do use hazardous materials in our manufacturing processes. We may be liable under environmental laws for the cost of cleaning up properties we own or operate if they are or become contaminated by the release of hazardous materials, regardless of whether we caused the release. Even if we fully comply with applicable environmental laws, we, along with any other person who arranges for the disposal of our wastes, may be liable for costs associated with an investigation and remediation of sites at which we have arranged for the disposal of hazardous wastes if the sites become contaminated. In addition, we may be liable in the event employees and/or visitors are exposed to hazardous materials in excess of legally permissible exposure limits. In the event of a contamination or a violation of environmental and workplace health and safety laws, we could be held liable for damages, including fines, penalties and the costs of remedial actions, and could also be subject to revocation of our discharge permits. Any revocations could require us to cease or limit production at one or more of our facilities, thereby negatively affecting our operations. Environmental and workplace health and safety laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation.
Concentration of ownership
MCMS is owned by an investment group led by Cornerstone Equity Investors IV, L.P. No single investor has more than 49.0% of the voting power of our outstanding securities or the ability to appoint a majority of the directors. However, the aggregate votes of these investors could determine the composition of a majority of the board of directors and, therefore, influence our management and policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 1,May 31, 2001, we had $278.5$275.8 million of total debt outstanding, of which $132.8$129.9 million is floating interest rate borrowings and is subject to periodic adjustments. As interest rates fluctuate, we may experience interest expense increases that may materially impact financial results. For example, if interest rates were to increase or decrease by 1% the result would be an annual increase or decrease of approximately $1.3 million to interest expense.
We use the U.S. dollar as our functional currency, except for our operations in Belgium, Malaysia and Mexico. Direct labor, manufacturing overhead, and selling, general and administrative costs of the international operations are denominated in the local currencies. We have evaluated the potential costs and benefits of hedging potential adverse changes in the exchange rates between U.S. dollar, Belgian Franc, Malaysian Ringgit and Mexican Peso. Currently, we do not enter into derivative financial instruments because a substantial portion of our sales in these foreign operations are in U.S dollar. The assets and liabilities of the Belgium,Belgian, Malaysian and Mexican operations are translated into U.S. dollars at an exchange rates in effect at the period end date. Income and expense items are translated at the year-to-date average rate. Aggregate transaction gainslosses included in net loss for the three and sixnine months ended March 1,May 31, 2001 were $0.3$0.6 million and $0.1$0.5 million, respectively.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS
(a) The following are filed as part of this report:
Exhibit | Description | |
| Employment | |
|
| |
10.31 | MCMS, Inc. CIC Severance Plan for Eligible Key Employees | |
10.32 | June 29, 20001 Amendment to the Amended and Restated Revolving Credit, Equipment | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the following duly authorized person has signed this report on behalf of the registrant.
MCMS, Inc. | ||
(Registrant) | ||
Date: | By: /s/ | Chris J. Anton |
Executive Vice President, Finance and Chief | ||
Financial Officer (Principal Financial | ||
Officer and Accounting Officer) | ||
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