-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q8T5mrF4tRVo8oWqKYjkdq6yTSW7oxjGajmyM73lAsS6V/RLe/TyyakSP4++Lgwa PNiLnrLNRkvP7WkqrpYnVA== 0001060356-99-000005.txt : 19990118 0001060356-99-000005.hdr.sgml : 19990118 ACCESSION NUMBER: 0001060356-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981203 FILED AS OF DATE: 19990115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCMS INC CENTRAL INDEX KEY: 0001060356 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 820450118 STATE OF INCORPORATION: ID FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-50981 FILM NUMBER: 99506738 BUSINESS ADDRESS: STREET 1: 16399 FRANKLIN RD CITY: NAMPA STATE: ID ZIP: 83687 BUSINESS PHONE: 2088982600 10-Q 1 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 December 3, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 333-50981 MCMS, INC. (Exact name of registrant as specified in its charter) Idaho 82-0480109 (State or other jurisdiction (I.R.S. Employer identification No.) of incorporation or organization) 16399 Franklin Road, Nampa, Idaho 83687 (Address of principal executive offices, Zip Code) (208)898-2600 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes No X APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of Class A Common Stock outstanding at December 3, 1998: 3,261,177 Shares of Class B Common Stock outstanding at December 3, 1998: 863,823 Shares of Class C Common Stock outstanding at December 3, 1998: 874,999 MCMS, INC. INDEX Part I. Page ---- Item 1 Financial Information Unaudited Consolidated Balance Sheets - September 3, 1998 and December 3, 1998 3 Unaudited Consolidated Statements of Operations - Three Months Ended November 27, 1997 and December 3, 1998 4 Unaudited Consolidated Statements of Cash Flows - Three Months Ended November 27, 1997 and December 3, 1998 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Certain Factors 13 Item 3 Quantitative and Qualitative Disclosures about Market Risk 18 Part II. Other Information Item 6 Exhibits 19 Signatures 20 2 PART I FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS MCMS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 3, December 3, As of 1998 1998 - ----------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 7,542 $ - Trade account receivable, net of allowances for doubtful accounts of $97 and $278 34,231 39,323 Receivable from affiliates 2,096 1,350 Inventories 29,816 48,929 Deferred income taxes 1,255 1,452 Other current assets 356 529 ------------ ------------ Total current assets 75,296 91,583 Property, plant and equipment, net 62,106 62,668 Deferred income taxes - 314 Other assets 7,650 7,433 ------------ ------------ Total assets $ 145,052 $ 161,998 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current portion of long-term debt $ 420 $ 195 Accounts payable and accrued expenses 44,433 59,159 Payable to affiliates 775 848 Interest payable 197 4,528 ------------ ------------ Total current liabilities 45,825 64,730 Notes payable, net of current portion 184,737 186,180 Deferred income taxes 1,286 - Other liabilities 580 597 ------------ ------------ Total liabilities 232,428 251,507 Redeemable preferred stock, no par value, 750,000 shares authorized; issued and outstanding 266,313 and 274,632 shares, respectively; mandatory redemption value of $26.6 million and $27.5 million, respectively 25,675 26,528 Commitments and contingencies - - Series A convertible preferred stock, par value $0.001 per share, 6,000,000 shares authorized; issued and outstanding 3,261,177; aggregate liquidation preference of $36,949,135 3 3 Series B convertible preferred stock, par value $0.001 per share, 6,000,000 shares authorized; issued and outstanding 863,823 shares; aggregate liquidation preference of $9,787,115 1 1 Series C convertible preferred stock, par value $0.001 per share, 1,000,000 shares authorized; issued and outstanding 874,999 shares; aggregate liquidation preference of $9,913,739 1 1 Class A common stock, par value $0.001 per share, 30,000,000 shares authorized; issued and outstanding 3,261,177 3 3 Class B common stock, par value $0.001 per share, 12,000,000 shares authorized; issued and outstanding 863,823 shares 1 1 Class C common stock, par value $0.001 per share, 2,000,000 shares authorized; issued and outstanding 874,999 shares 1 1 Additional paid-in capital 63,318 62,471 Accumulated other comprehensive income (2,270) (2,337) Retained earnings (174,109) (176,131) Less treasury stock at cost: Series A convertible preferred stock, 3,676 shares outstanding - (42) Class A common stock, 3,676 shares outstanding - (8) ------------ ------------ Total shareholders' equity (deficit) (113,051) (116,037) ------------ ------------ Total liabilities and shareholders' equity (deficit) $ 145,052 $ 161,998 ============ ============
3 MCMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three months ended --------------------------------- November 27, December 3, 1997 1998 ------------ ------------ Net sales $ 71,001 $ 91,243 Cost of goods sold 60,909 86,056 ------------ ------------ Gross profit 10,092 5,187 Selling, general and administrative expenses 3,122 4,219 ------------ ------------ Income from operations 6,970 968 Other expense (income): Interest expense (income), net (135) 4,721 Other - 45 ------------ ------------ Income (loss) before taxes 7,105 (3,798) Income tax provision (benefit) 2,629 (1,775) ------------ ------------ Net income (loss) 4,476 (2,023) Redeemable preferred stock dividends and accretion of preferred stock discount - (882) ------------ ------------ Net income (loss) to common stockholders $ 4,476 $ (2,905) ============ ============ Net income (loss) per share - basic and diluted $ 4,476 $ (0.58) ============ ============ Weighted average common shares outstanding - basic and diluted 1,000 5,000,000 ============ ============
4 MCMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Three months ended --------------------------------- November 27, December 3, 1997 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 4,476 $ (2,023) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,629 3,661 Loss on sale of property, plant and equipment 2 25 Changes in operating assets and liabilities: Receivables 6,269 (4,292) Inventories (3,409) (19,103) Other assets (154) (418) Accounts payable and accrued expenses 757 13,616 Interest payable - 4,331 Deferred income taxes 178 (1,797) Other liabilities - 100 ------------ ------------ Net cash provided by (used for) operating activities 10,748 (5,900) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (7,677) (2,921) Proceeds from sales of property, plant and equipment 31 - ------------ ------------ Net cash used for investing activities (7,646) (2,921) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from (repayments of) borrowings on line of credit - 1,500 Repayments of debt (254) (70) Purchase of treasury stock - (50) ------------ ------------ Net cash provided by (used for) financing activities (254) 1,380 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents - (101) ------------ ------------ Net increase (decrease) in cash and cash equivalents 2,848 (7,542) ------------ ------------ Cash and cash equivalents at beginning of period 13,636 7,542 ------------ ------------ Cash and cash equivalents at end of period $ 16,484 $ - ============ ============
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (TABULAR DOLLAR AMOUNTS IN THOUSANDS) 1. General The information included in the accompanying consolidated interim financial statements is unaudited and should be read in conjunction with the annual audited financial statements and notes thereto contained in the Company's Report on Form 10-K for the fiscal year ended September 3, 1998. 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. 2. Effect of Recently Issued Accounting Standards During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the presentation of comprehensive income or loss in financial statements. Comprehensive income or loss includes income and loss components which are otherwise recorded directly to shareholders' equity under generally accepted accounting principles. The Company's comprehensive loss for the three months ended December 3, 1998 was $2,090,000. The Company's comprehensive income for the three months ended November 27, 1997 was $3,179,000. The accumulated balance of foreign currency translation adjustments, excluded from net income or loss, is presented in the consolidated balance sheet as "Accumulated other comprehensive income." In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, publicly held companies are required to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision-maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements must also be provided. SFAS No. 131 is effective for the Company in fiscal 1999 but the form of the presentation in the Company's financial statements has not yet been determined. In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Under SOP 98-1, companies are required to capitalize certain costs of computer software developed or obtained for internal use, provided that those costs are not research and development. The Company is currently evaluating the effect of SOP 98-1 on the Company's results of operations and financial position. The Company is required to implement SOP 98-1 in fiscal 2000. 3. Inventories
September 3, December 3, 1998 1998 ------------ ------------ Raw materials and supplies $ 18,126 $ 26,587 Work in process 11,020 21,866 Finished goods 670 476 ------------ ------------ $ 29,816 $ 48,929 ============ ============ 4. Accounts payable and accrued expenses September 3, December 3, 1998 1998 ------------ ------------ Trade accounts payable $ 39,152 $ 53,047 Short-term equipment contracts 543 1,152 Salaries, wages, and benefits 3,619 3,600 Other 1,119 1,360 ------------ ------------ $ 44,433 $ 59,159 ============ ============
6 5. Long-term Debt
September 3, December 3, 1998 1998 ------------ ------------ Revolving loan, principal payments at the Company's option to February 26, 2003, interest due quarterly, interest rates ranging from 8.38% to 10.75% and 8.0% to 9.75%, respectively (8.38% and 8.11% at September 3, 1998 and December 3, 1998, respectively) $ 9,500 $ 11,000 Note payable, matures on October 8, 1998, interest due at maturity, weighted average interest rate equal to interest earned on the Company's cash investments (5.24% at September 3, 1998) 212 - Senior subordinated notes (the "Fixed Rate Notes"), unsecured, interest at 9.75% due semiannually, mature on March 1, 2008 145,000 145,000 Floating interest rate subordinated term securities, (the "Floating Rate Notes"), unsecured, interest due semiannually, mature on March 1, 2008, variable interest rate equal to LIBOR plus 4.63% (10.22% and 10.22% at September 3, 1998 and December 3, 1998, respectively) 30,000 30,000 Note payable, quarterly installments through October 1, 2000, interest rate of 3.51% 445 375 ------------ ------------ Total debt 185,157 186,375 Less current portion (420) (195) ------------ ------------ $ 184,737 $ 186,180 ============ ============
On February 26, 1998, the Company also issued $25.0 million in 12-1/2% Redeemable Preferred Stock due on March 1, 2010 with a liquidation preference of $100 per share. Dividends are payable in cash or in-kind quarterly beginning June 1, 1998 at a rate equal to 12-1/2% per annum. To-date, the Company has paid all dividends in-kind. 6. Net Income (Loss) Per Share Basic earnings per share is computed using net income (loss) reduced (increased) by dividends on the Redeemable Preferred Stock divided by the weighted average number of common shares outstanding. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding. Common equivalent shares include shares issuable upon the 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. For the first quarter ended December 3, 1998, the inclusion of 3.3 million, 0.9 million and 0.9 million common shares issuable upon conversion of the Company's outstanding Series A, Series B and Series C Convertible Preferred Stock, respectively, are not included in the calculation of diluted earnings per share because the effect would be antidilutive. 7. Income Taxes The effective rate of the tax benefit for the first quarter of fiscal 1999 was 46.7%. The effective rate for the provision of income taxes was 37.0% for the corresponding period of fiscal 1998. The effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxation and the effect of a tax holiday granted to the Company's Malaysian operation. The increase in the effective rate of the tax benefit in the first quarter of 1999 relative to the corresponding period of fiscal 1998 was primarily due to an increase in the proportion of lower taxed income generated by the Company's Malaysian operations. Because the Company does not provide for U.S. tax on the earnings of its foreign subsidiaries, the effective rate may vary significantly from period to period. 7 8. Recapitalization On February 26, 1998 the Company completed a Recapitalization. Prior to the closing of the Recapitalization, the Company was a wholly owned subsidiary of MEI California, Inc. ("MEIC"), a wholly owned subsidiary of Micron Electronics, Inc. ("MEI"). Under the terms of the amended and restated Recapitalization Agreement between the Company, MEIC, MEI and certain other parties, pursuant to which the Company effected the Recapitalization, certain unrelated investors (the "Investors") acquired an equity interest in the Company. In order to complete the Recapitalization, the Company arranged for additional financing in the form of notes and redeemable preferred stock totaling $200.0 million. The Company used the proceeds from the Investors' equity investment and the issuance of notes and redeemable preferred stock to redeem a portion of MEIC's outstanding equity interest for approximately $249.2 million. As of the date of this report and at all times since the date of the Recapitalization, MEIC holds a 10% equity interest in the Company. 8 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 "Certain Factors" and in other Company filings with the Securities and Exchange Commission. All quarterly references are to the Company's fiscal periods ended December 3, 1998, September 3, 1998 or November 27, 1997, unless otherwise indicated. MCMS, Inc. ("MCMS" or the "Company") is a leading electronics manufacturing service ("EMS") provider serving original equipment manufacturers ("OEMs") in the networking, telecommunications, computer systems and other sectors of the electronics industry. The Company offers a broad range of capabilities and manufacturing management services, including product design and prototype manufacturing; materials procurement and inventory management; manufacturing and testing of printed circuit board assemblies ("PCBAs") and memory modules and systems; quality assurance; and end-order fulfillment. MCMS provides services on both a turnkey and consignment basis. Under a consignment arrangement, the OEM procures the components and the Company assembles and tests them in exchange for a process fee. Under a turnkey arrangement, the Company assumes responsibility for both the procurement of components and their assembly and test. Turnkey manufacturing generates higher net sales than consignment manufacturing due to the generation of revenue from materials as well as labor and manufacturing overhead, but also typically results in lower gross margins than consignment manufacturing because the Company generally realizes lower gross margins on material-based revenue than on manufacturing-based revenue. The Company also provides services on a partial consignment basis, whereby the OEM procures certain materials and the Company procures the remaining materials. Consignment revenues, excluding partial consignment revenues, accounted for 4.6% of the Company's net sales for the three months ended December 3, 1998. Results of Operations
Three months ended ---------------------------- November 27, December 3, 1997 1998 ------------ ------------ Net sales 100.0% 100.0% Costs of sales 85.8 94.3 ------------ ------------ Gross margin 14.2 5.7 Selling, general and administrative expenses 4.4 4.6 ------------ ------------ Income from operations 9.8 1.1 Interest expense (income), net (0.2) 5.2 Other - 0.1 ------------ ------------ Income (loss) before taxes 10.0 (4.2) Income tax provision (benefit) 3.7 (2.0) Net income (loss) 6.3% (2.2%) ============ ============ Depreciation and amortization (1) 3.7% 3.8% - --------------------------------- ============ ============ (1) For the three months ended December 3, 1998 depreciation and amortization amount excludes $233,000 of deferred loan amortization that was expensed as interest.
Three Months Ended December 3, 1998 Compared to Three Months Ended November 27, 1997 Net Sales. Net sales for the three months ended December 3, 1998 increased by $20.2 million, or 28.5%, to $91.2 million from $71.0 million for the three months ended November 27, 1997. The increase in net sales is primarily the result of a higher volume of PCBA shipments to customers in the networking and 9 telecommunications industries. These increases were partially offset by lower PCBA prices and by decreases in both the volume and price of custom turnkey and consigned memory modules. Net sales attributable to foreign subsidiaries totaled $7.1 million for the three months ended December 3, 1998, compared to $5.4 million for the corresponding period of fiscal 1998. The growth in foreign subsidiary net sales is primarily the result of additional sales at the Company's Belgian operation, which began operations in November of 1997. Gross Profit. Gross profit for the three months ended December 3, 1998 decreased by $4.9 million, or 48.6%, to $5.2 million from $10.1 million for the three months ended November 27, 1997. Gross margin for the three months ended December 3, 1998 decreased to 5.7% of net sales from 14.2% for the comparable period ended November 27, 1997. The decrease in gross profit resulted from a lower volume of units shipped and lower pricing on consigned modules, lower volumes of turnkey custom memory modules and reduced capacity utilization at the Durham, North Carolina operation. To a lesser degree, the Belgian operation had a negative impact on gross margin during this period and it is anticipated that it will continue to have a negative impact on margins for the remainder of fiscal 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three months ended December 3, 1998 increased by $1.1 million, or 35.1%, to $4.2 million from $3.1 million for the three months ended November 27, 1997. This increase for the three months ended December 3, 1998 was the result of additional headcount in senior management, finance and administration, sales and marketing, and information technology which collectively amounted to $0.6 million, as well as additional SG&A associated with the Company's foreign subsidiaries in the amount of $0.4 million. Interest Expense. Interest expense for the three months ended December 3, 1998 increased to $4.7 million due to the addition of $175 million in long-term debt issued or incurred in conjunction with the Recapitalizaton. Provision for Income Taxes. Income taxes for the three months ended December 3, 1998 decreased by $4.4 million, to a benefit of $1.8 million from an expense of $2.6 million for the three months ended November 27, 1997. The effective rate of the tax benefit for the first quarter of fiscal 1999 was 46.7%, as compared to a provision for income taxes of 37.0% for the corresponding period of fiscal 1998. The increase in the effective rate of the tax benefit in the first quarter of fiscal 1999 was primarily due to an increase in the proportion of lower taxed income generated by the Company's Malaysian operation. Net Income. For the reasons stated above, net income for the three months ended December 3, 1998 decreased by $6.5 million to a loss of $2.0 million from income of $4.5 million for the three months ended November 27, 1997. As a percentage of net sales, net loss for the three months ended December 3, 1998 was 2.2% compared to net income of 6.3% for the three months ended November 27, 1997. Liquidity and Capital Resources During the first quarter of fiscal 1999, the Company's cash and cash equivalents decreased by $7.5 million. Net cash consumed by operating activities was $5.9 million. Net cash used by investing activities was $2.9 million and net cash provided by financing activities was $1.4 million. Exchange rate changes reduced net cash by $0.1 million. Net cash used by investing activities during the first quarter of fiscal 1999 primarily consisted of to capital expenditures for additional manufacturing capacity in the U.S and implementation of the Baan Enterprise Resource Planning ("ERP") system. Net cash generated from financing activities principally resulted from net borrowings under the Company's existing credit facilities. The cash consumed by operations of $5.9 million was primarily due to an increase in inventory of $19.1 million during the first quarter of 1999. The growth in inventory included increases in raw materials of $6.9 million and work in process of $3.8 million resulting from the growth and volatility of new programs at the Nampa, Idaho operation and increases in work in process of $6.4 million due to stronger customer demand late in the first quarter at the Durham, North Carolina operation. The average collection period for accounts receivable and the average inventory turns were 38.5 days and 8.7 turns during the first quarter of fiscal 1999 compared to 44.3 days and 12.6 turns during the corresponding period in fiscal 1998. The average collection period and average inventory turn level vary as a function of sales volume, sales volatility, product mix, payment terms with customers and suppliers and the mix of consigned and turnkey business. 10 Capital expenditures during the first quarter of fiscal 1999 were $2.9 million, including $1.6 million for additional manufacturing capacity in the U.S. and $1.3 million toward the implementation of the Baan ERP system. The Company anticipates spending an additional $2.9 million in fiscal 1999 to complete the ERP system implementation. See "Year 2000 Compliance" and "Certain Factors -- Baan Implementation." In conjunction with the Recapitalization, the Company entered into a revolving credit facility ("Revolving Credit Facility") with Bankers Trust Company, as agent, which provides for borrowings of up to $40.0 million for working capital, capital expenditures and other general corporate purposes. Subsequent to the end of the fiscal quarter and as of January 11, 1999, the Company had drawn $22.5 million on the Revolving Credit Facility and had a cash balance of $10.9 million. As of December 3, 1998, the Company was in compliance with the covenants under the Revolving Credit Facility, as amended May 20, 1998, for periods through August 31, 1999. The Company's principal sources of future liquidity are cash flows from operating activities and borrowings under the Revolving Credit Facility. The Company is highly leveraged and believes that these sources should provide sufficient liquidity and capital resources to meet its current and future interest payments, working capital and capital expenditures obligations. No assurance can be given, however, that this will be the case. Depending upon rate of growth and profitability and the ability of the Company to manage its working capital effectively, including its inventory turns and accounts receivable collection period, the Company may require additional equity or debt financing to meet its interest payments and working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to the Company. The Company's future operating performance and ability to service or refinance the notes and to repay, extend or refinance the Revolving Credit Facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. See "Certain Factors--High Level of Indebtedness; Ability to Service Indebtedness and Satisfy Preferred Stock Dividend Requirements." Year 2000 Compliance State of Readiness The Year 2000 presents many issues for the Company because many computer hardware and software systems use only the last two digits to refer to a calendar year. Consequently, these systems may fail to process dates correctly after December 31, 1999, which may cause system failures. In October 1997, the Company established a cross functional team chartered with the specific task of evaluating all of the Company's software, equipment and processes for Year 2000 compliance. This team determined that a substantial portion of the Company's systems, including its company-wide enterprise resource planning ("ERP") system, were not Year 2000 compliant and therefore developed a plan to resolve this issue which includes, among other things, implementing the Baan ERP system. The Baan ERP system is being implemented across all of the Company's sites with targeted completion scheduled in 1999. In addition, the Company retained the services of outside consulting firms to review and assess the Company's evaluation and implementation plan. The Company believes that the Baan ERP system will make all "mission critical" company information systems Year 2000 compliant. As part of the Company's Year 2000 compliance evaluation, the Company recently began to contact key suppliers and significant customers to determine the extent to which the Company is exposed to third party failure to remedy their Year 2000 compliance issues. The Company will continue to contact key suppliers and significant customers as part of its Year 2000 compliance evaluation. In addition, the Company intends to conduct audits and/or testing of certain suppliers for Year 2000 compliance. There can be no assurance the Company will be able to successfully complete such evaluations on a timely basis which could have a material adverse effect on the Company's business, financial condition and results of operations. Costs The total costs, whether capitalized or expensed, associated with implementation and system modification relating to the Year 2000 problem is anticipated to be approximately $10 million, excluding internal programming time on existing systems. The total amount spent in the first quarter of fiscal 1999 relating to the Year 2000 problem was $1.3 million with anticipated expenditures of approximately $2.9 million during the remainder of fiscal 1999. This amount includes the costs associated with new systems that will be Year 2000 compliant even though such compliance was not the primary reason for installation. 11 Contingency Plan Although the Company has no formal contingency plan related to the Baan implementation at the present time, the implementation is on schedule with completion slated for late fiscal 1999. If the Baan implementation is delayed, the Company will endeavor to develop a contingency plan. The Company will be attempting to develop a contingency plan designed to address problems which might arise from the failure of the Company's suppliers and customers to timely and adequately address Year 2000 issues. Risks Associated with the Company's Year 2000 Issues The Company presently believes that by modifying existing software and converting to new software, such as the Baan ERP system, the Year 2000 problem will not pose significant operational problems for the Company's information systems. However, if such modifications and conversions are not timely or properly implemented, the Year 2000 problem could affect the ability of the Company, among other things, to manufacture product, procure and manage materials, and administer functions and processes, which could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, failure of third party suppliers to become Year 2000 compliant on a timely basis could create a need for the Company to change suppliers and otherwise impair the sourcing of components, raw materials or services to the Company, or the functionality of such components or raw materials, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's Year 2000 compliance efforts have caused significant strain on the Company's information technology resources and, as a result, could cause the deferral or cancellation of other important Company projects. There can be no assurance that the delay or cancellation of such projects will not have a material adverse affect on the Company's business, financial condition and results of operations. 12 CERTAIN FACTORS In addition to factors discussed elsewhere in this Form 10-Q and in other Company filings with the Securities and Exchange Commission, the following are important factors which could cause actual results or events to differ materially from the historical results of the Company's operations or those results or events contemplated in any forward-looking statements made by or on behalf of the Company. High Level of Indebtedness; Ability to Service Indebtedness and Satisfy Preferred Stock Dividend Requirements The Company is highly leveraged. At December 3, 1998, the Company had approximately $186.2 million of total indebtedness outstanding (exclusive of unused commitments of $29 million under the Revolving Credit Facility), and Series B 12-1/2% Senior Preferred Stock (the "Redeemable Preferred Stock") outstanding with an aggregate liquidation preference of $27.5 million. In addition, as of January 11, 1999, the Company had drawn $22.5 million on the Revolving Credit Facility. The Company may incur additional indebtedness from time to time to provide for working capital or capital expenditures or for other purposes, subject to certain restrictions in the (i) the Revolving Credit Facility (ii) the Indenture (the "Indenture") governing the Company's Series B 9-3/4% Senior Subordinated Notes due 2008 and the Series B Floating Interest Rate Subordinated Term Securities due 2008 (collectively, the "Notes"), (iii) the Certificate of Designation relating to the Redeemable Preferred Stock (the "Certificate of Designation") and (iv) the Indenture (the "Exchange Indenture") governing the 12-1/2% Subordinated Exchange Debentures (the "Exchange Debentures") due 2010 issuable in exchange for the Redeemable Preferred Stock. The level of the Company's indebtedness could have important consequences to the Company and the holders of the Company's securities, including, but not limited to, the following: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional financing in the future, as needed, may be limited; (iii) the Company's leveraged position and covenants contained in the Indenture, the Certificate of Designation, the Exchange Indenture and the Revolving Credit Facility may limit its ability to grow and make capital improvements and acquisitions; (iv) the Company's level of indebtedness may make it more vulnerable to economic downturns; and (v) the Company may be at a competitive disadvantage because some of the Company's competitors are less financially leveraged, resulting in greater operational and financial flexibility for such competitors. The ability of the Company to pay cash dividends on, and to satisfy the redemption obligations in respect of, the Redeemable Preferred Stock and to satisfy its debt obligations, including the Notes, will be primarily dependent upon the future financial and operating performance of the Company. Such performance is dependent upon financial, business and other general economic factors, many of which are beyond the control of the Company. If the Company is unable to generate sufficient cash flow to meet its debt service obligations or provide adequate long-term liquidity, it will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing debt, selling assets or raising equity capital. There can be no assurance that such alternatives could be accomplished on satisfactory terms, if at all, or in a timely manner. Restrictions Imposed by Terms of Indebtedness and Redeemable Preferred Stock The Indenture, the Certificate of Designation, the Exchange Indenture and the Revolving Credit Facility contain certain covenants that restrict, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, consummate certain assets sales and purchases, issue preferred stock, incur liens, pay dividends or make certain other restricted payments, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries, none of which impaired the Company's ability to conduct business in the first quarter of fiscal 1999. A breach of any of these covenants could result in a default under the Revolving Credit Facility, the Indenture and the Exchange Indenture and would violate certain provisions of the Certificate of Designation. The Revolving Credit Facility also requires the Company to maintain specified financial ratios and to satisfy certain financial condition tests. The ability of the Company to meet those financial ratios and financial condition tests can be affected by events beyond its control, and there can be no assurance that the Company will meet those ratios and tests. 13 In the event the Company does not meet such tests, the availability of capital from bank borrowings, including but not limited to the ability to access the Revolving Credit Facility, could be adversely affected. The inability to borrow under the Revolving Credit Facility could have a material adverse effect on the Company's business, financial condition and results of operations. Upon an event of default under the Revolving Credit Facility, the Indenture or the Exchange Indenture, the lenders thereunder could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. In the case of the Revolving Credit Facility, if the Company were unable to repay those amounts, the lenders thereunder could proceed against the collateral granted to them to secure that indebtedness. Such collateral is comprised of substantially all of the tangible and intangible assets of the Company, including the capital stock of its subsidiaries (limited to no more than 65% of the capital stock of its foreign subsidiaries). On May 20, 1998, the Company and its lenders under the Revolving Credit Facility amended certain financial covenants under the Revolving Credit Facility through August 31, 1999. As of December 3, 1998, the Company was in compliance with such financial covenants, as amended. Customer Concentration; Dependence on Certain Industries At any given time, certain customers may account for significant portions of the Company's net sales. For the first quarter of fiscal 1999, approximately 80% of net sales were derived from networking and telecommunications customers. In addition, for the first quarter of fiscal 1999, the Company's ten largest customers accounted for approximately 89.1% of net sales. The Company's top two customers accounted for approximately 46.5% and 18.1% of net sales in the first quarter of 1999. In addition, the Company has another major customer that operates under a consignment manufacturing model and, while sales are less than 10% of total revenue, the customer makes an important contribution to the Company's overall financial performance. Moreover, the Company has significant customer concentration at a site level. Volatility in demand from these customers may lead to reduced site capacity utilization and have a negative effect on the Company gross margin. Decreases in sales to or margins with these or any other key customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its net sales. There can be no assurance that the Company's principal customers will continue to purchase services at current levels, if at all. The percentage of the Company's sales to such major customers may fluctuate from period-to-period. Significant reductions in sales to any of the Company's major customers as well as period-to-period fluctuations in sales and changes in product mix ordered by such customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company is dependent upon the continued growth, viability and financial stability of its OEM customers, which are in turn substantially dependent on the growth of the networking, telecommunications, computer systems and other industries. These industries are subject to rapid technological change, product obsolescence and price competition. In addition, many of the Company's customers in these industries are affected by general economic conditions. Recent currency devaluations and economic slowdowns in various Asian economies may have an adverse effect on the results of operations of certain of the Company's OEM customers, and in turn, their orders from the Company. These and other competitive factors affecting the networking, telecommunications and computer system industries in general, and the Company's OEM customers in particular, could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, any further volatility in the market for DRAM components caused by, among other things, the turmoil in the Asian economies, could have a material adverse effect on MTI, which has historically been one of the Company's major customers, and consequently the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." Variability of Results of Operations The Company's operations may be affected by a number of factors including economic conditions, price competition, the level of volume and the timing of customer orders, product mix, management of manufacturing processes, materials procurement and inventory management, fixed asset utilization, foreign currency 14 fluctuations, the level of experience in manufacturing a particular product, customer product delivery requirements, availability and pricing of components, availability of experienced labor and failure to introduce, or lack of market acceptance, new processes, services, technologies and products. In addition, the level of net sales and gross margin can vary significantly based on whether certain projects are contracted on a turnkey basis, where the Company purchases materials, versus on a consignment basis, where materials are provided by the customer (turnkey manufacturing tends to result in higher net sales and lower gross margins than consignment manufacturing). An adverse change in one or more of these factors could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, customer orders can be canceled and volume levels can be changed or delayed. From time to time, some of the Company's customers have terminated their manufacturing arrangements with the Company, and other customers have reduced or delayed the volume of design and manufacturing services performed by the Company. Resolving customer obligations due to program or relationship termination and the replacement of canceled, delayed or reduced contracts with new business cannot be assured. Termination of a manufacturing relationship or changes, reductions or delays in orders could have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth Expansion has caused, and is expected to cause, strain on the Company's infrastructure, including its managerial, technical, financial, information systems and other resources. To manage further growth, the Company must continue to enhance financial and operational controls, develop or hire additional executive officers and other qualified personnel. Continued growth will also require increased investments to add manufacturing capacity and to enhance management information systems. See "Certain Factors--Baan Implementation." There can be no assurance that the Company will be able to scale its internal infrastructure and other resources to effectively manage growth and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The markets served by the Company are characterized by short product life cycles and rapid technology changes. The Company's ability to successfully support new product introductions is critical to the Company's customers. New product introductions have caused, and are expected to continue to cause, certain inefficiencies and strain on the Company's resources. Any such inefficiencies could have a material adverse effect on the Company's business, financial condition and results of operations. New operations, whether foreign or domestic, can require significant start-up costs and capital expenditures. In the event that the Company continues to expand its domestic or international operations, there can be no assurance that the Company will be successful in generating revenue to recover start-up and operating costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations." Baan Implementation In fiscal 1997, the Company finalized selection of a company- wide ERP software solution to, among other things, accommodate the future growth and requirements of the Company and, in October 1997, the Company began implementation of ERP software provided by Baan U.S.A., Inc. The Company based its selection criteria on a number of items it deemed critical, and included among other things, multi-site and foreign currency capabilities, 7x24 hour system availability, enhanced customer communications, end-order fulfillment and other mix mode manufacturing support and year 2000 compliance. The Company began to implement this software in late 1998 with completion scheduled in 1999. There can be no assurance that the Company will be successful and timely in its implementation efforts and any delay of such implementation could have a material adverse affect on the Company's business, financial condition and results of operations. Competition The electronics manufacturing services industry is intensely competitive and subject to rapid change, and includes numerous regional, national and international companies, a number of which have achieved substantial market share. The Company believes that the primary competitive factors in its targeted markets are manufacturing technology, product quality, responsiveness and flexibility, consistency of performance, range of services provided, the location of facilities and price. To be competitive, the Company must provide technologically advanced manufacturing services, high quality products, flexible production schedules and reliable delivery of finished products 15 on a timely and price competitive basis. Failure to satisfy any of the foregoing requirements could materially and adversely affect the Company's competitive position. The Company competes directly with a number of EMS firms, including Celestica International Holdings Inc., Flextronics International, Ltd., Jabil Circuits, Inc., SCI Systems, Inc., Sanmina Corporation and Solectron Corporation. The Company also faces indirect competition from the captive manufacturing operations of its current and prospective customers, which continually evaluate the merits of manufacturing products internally rather than using the services of EMS providers. Many of the Company's competitors have more geographically diversified manufacturing facilities, international procurement capabilities, research and development and capital and marketing resources than the Company. In addition, the Company may be at a competitive disadvantage because some of the Company's competitors are less financially leveraged, resulting in, among other things, greater operational and financial flexibility for such competitors. See "Certain Factors--High Level of Indebtedness; Ability to Service Indebtedness and Satisfy Preferred Stock Dividend Requirements." In recent years, the EMS industry has attracted new entrants, including large OEMs with excess manufacturing capacity, and many existing participants have substantially expanded their manufacturing capacity by expanding their facilities through both internal expansion and acquisitions. In the event of a decrease in overall demand for EMS services, this increased capacity could result in substantial pricing pressures, which could have a material adverse effect on the Company's business, financial condition and results of operations. Capital Requirements The Company believes that, in order to achieve its long-term expansion objectives and maintain and enhance its competitive position, it will need significant financial resources over the next several years for capital expenditures, including investments in manufacturing capabilities and management information systems, working capital and debt service. The Company has added significant manufacturing capacity and increased capital expenditures since 1995. In April 1995, it opened its Durham, North Carolina facility. In October 1996, it opened its first international facility in Penang, Malaysia and moved from its former Boise, Idaho facility to a new facility in Nampa, Idaho. In November 1997, it purchased its first European facility in Colfontaine, Belgium from Alcatel. The Company anticipates that its capital expenditures will continue to increase as the Company expands its facilities in Asia and Europe, invests in necessary equipment to continue new product production, and continues to invest in new technologies and equipment to increase the performance and the cost efficiency of its manufacturing operations. The precise amount and timing of the Company's future funding needs cannot be determined at this time and will depend upon a number of factors, including the demand for the Company's services and the Company's management of its working capital. The Company may not be able to obtain additional financing on acceptable terms or at all. If the Company is unable to obtain sufficient capital, it could be required to reduce or delay its capital expenditures and facilities expansion, which could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." International Operations The Company currently offers EMS capabilities in North America, Asia and Europe. In the first quarter of fiscal 1999, net sales attributable to foreign operations totaled $7.1 million or 7.8% of total net sales. The Company may be affected by economic and political conditions in each of the countries in which it operates and certain other risks of doing business abroad, including fluctuations in the value of currencies, import duties, changes to import and export regulations (including quotas), possible restrictions on the transfer of funds, employee turnover, labor or civil unrest, long payment cycles, greater difficulty in collecting accounts receivable, the burdens, cost and risk of compliance with a variety of foreign laws, and, in certain parts of the world, political and economic instability. In addition, the attractiveness of the Company's services to its United States customers is affected by United States trade policies, such as "most favored nation" status and trade preferences, which are reviewed periodically by the United States government. Changes in policies by the United States or foreign governments could result in, for example, increased duties, higher taxation, currency conversion limitations, hostility toward United States-owned operations, limitations on imports or exports, or the expropriation of private enterprises, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. The Company's Belgian operations are subject to labor union agreements covering managerial, supervisory and production employees, which set standards for, among other things, the maximum number of working hours and minimum compensation levels. In addition, economic considerations may make it difficult for the Company to compete effectively compared to other lower cost European locations. The Company's Malaysian operations and assets are subject to significant political, economic, legal and other uncertainties customary for businesses located in Southeast Asia. 16 The Company's international operations are based in Belgium and Malaysia. The functional currencies of the Company's international operations are the Belgian Franc and the Malaysian Ringgit. The Company's financial performance may be adversely impacted by changes in exchange rates between these currencies and the U.S. dollar. Fixed assets for the Belgian and Malaysian operations are denominated in each entity's functional currency and translation gains or losses will occur as the exchange rate between the local functional currency and the U.S. dollar fluctuates on each balance sheet reporting date. The Company's investments in fixed assets as of December 3, 1998 were $6.8 million (10.8% of total fixed assets) and $2.4 million (3.8% of total fixed assets) in Belgium and Malaysia, respectively. The Company's cumulative translation losses as of December 3, 1998, were $0.1 million and $2.2 million for the Belgian and Malaysian operations, respectively. The Company's equity investment in Belgium and Malaysia are long-term in nature and, therefore, the translations adjustments are shown as a separate component of shareholders' equity and do not effect the Company's net income. An additional risk is that certain working capital accounts such as accounts receivable and accounts payable are denominated in currencies other than the functional currency and may give rise to exchange gains or losses upon settlement or at the end of any financial reporting period. Sales in currencies other than the functional currency were approximately 2.6% and 4.3% of consolidated sales for the quarter ended December 3, 1998 for Belgium and Malaysia, respectively. The Company's transaction gains for the fiscal quarter ended December 3, 1998 were $0.5 million and $0.0 million for the Belgian and Malaysian operations, respectively. The exchange rate between the Malaysian Ringgit and U.S. dollar has been extremely volatile over the last year. In September 1998, the Malaysian government imposed currency control measures which, among other things, fixed the exchange rate between the United States dollar and the Malaysian Ringgit and make 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. Direct labor, manufacturing overhead, and selling, general and administrative costs of the international operations are also denominated in the local currencies. Transaction losses are reflected in the Company's net income. As exchange rates fluctuate, the Company will continue to experience translation and transaction adjustments related to its investments in Belgium and Malaysia which could have a material and adverse effect on the Company's business, financial condition and results of operations. Dependence on Key Personnel The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The Company's business will also depend upon its ability to continue to attract and retain qualified employees. Although the Company has been successful in attracting and retaining key managerial and technical employees to date, the loss of services of certain key employees, in particular any of its executive officers, or the Company's failure to continue to attract and retain other key managerial and technical employees could have a material adverse effect on the Company's business, financial condition and results of operations. Environmental Regulations The Company is subject to a variety of environmental laws and regulations governing, among other things, air emissions, waste water discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials. While the Company believes that it is currently in material compliance with all such environmental requirements, any failure to comply with present and future requirements could have a material adverse effect on the Company's business, financial conditions and results of operations. Such requirements could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The imposition of additional or more stringent environmental requirements, the results of future testing at the Company's facilities, or a determination that the Company is potentially responsible for remediation at other sites where problems are not presently known, could result in expenditures in excess of amounts currently estimated to be required for such matters. Concentration of Ownership Cornerstone Equity Investors and certain other investors beneficially own, in the aggregate, approximately 90.0% of the outstanding capital stock (other than the Redeemable Preferred Stock) of the Company. As a result, although no single investor has more than 49.0% of the voting power of the Company's outstanding securities or the ability to appoint a majority of the directors, the aggregate votes of these investors could 17 determine the composition of a majority of the board of directors and, therefore, influence the management and policies of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company uses the U.S. dollar as its functional currency, except for its operations in Belgium and Malaysia. The Company has evaluated the potential costs and benefits of hedging potential adverse changes in the exchange rates between U.S. dollar, Belgian Franc and Malaysian Ringgit. Currently, the Company does not enter into derivative financial instruments because a substantial portion of the Company's sales in these foreign operations are in U.S dollars. The assets and liabilities of the these two 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 gains included in net income for the first quarter ended December 3, 1998 were $462,000 and $20,000 for the Belgian and Malaysian operations, respectively. 18 PART II OTHER INFORMATION - -------------------------- ITEM 6. EXHIBITS (a) The following are filed as part of this report: Exhibit Description 10.9 (a) Employment Agreement, dated as of October 12, 1998, by and between MCMS, Inc. and David Garcia. 10.9 (b) Employment Agreement, dated as of December 2, 1998, by and between MCMS, Inc. and Richard Downing. 10.20 (a) Form of Stock Option Agreement for officers of the Company. 10.25 Executive Bonus Plan. 10.26 Employee Profit Sharing Plan. 11 MCMS, Inc. Basic and Diluted Earnings Per Share. 27 Financial Data Schedules. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the registrant by the following duly authorized person. MCMS, Inc. (Registrant) Date: January 14, 1999 By: /s/ Chris J. Anton Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Accounting Officer) 20 EX-10.9(A) 2 Exhibit 10.9 (a) MCMS, INC. 16399 FRANKLIN ROAD NAMPA, IDAHO 83687 October 12, 1998 David Garcia 15200 Blackberry Hill Road Los Gatos, California 95032 Dear David: This letter agreement sets forth the terms of your ("Executive") employment with MCMS, Inc., an Idaho corporation (the "Company"), as follows: 1. Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company to serve as the Vice President, Sales and Marketing of the Company, upon the terms and conditions as set forth in this letter agreement for the period beginning as of Effective Time (as defined in paragraph 8 hereof) and ending as provided in paragraph 4 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the Vice President, Sales and Marketing of the Company and shall have the normal duties, responsibilities and authority of the Vice President, Sales and Marketing, subject to the power of the Board of Directors of the Company (the "Board") to expand or limit such duties, responsibilities and authority within the confines of the ordinary duties, responsibilities and authority of a Vice President, Sales and Marketing and to override actions of the Vice President, Sales and Marketing. (b) Executive shall report to the Chief Executive Officer of the Company, and Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its subsidiaries. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. The foregoing shall not preclude Executive from devoting reasonable time to the supervision of his personal investments, civic and charitable affairs and, at any time after the date six months after the Effective Time, serving on a maximum of two boards other than the Company's or any of its subsidiaries' board of directors, provided that such activities do not interfere with the performance of his duties hereunder. (c) Location. Subject to customary business travel and frequent travel to the principal executive offices of the Company now located in Nampa, Idaho, Executive shall perform the services and duties provided for in this paragraph 2 in the San Francisco, California Standard Metropolitan Statistical Area or such other location as the parties may mutually agree upon (the "Geographical Employment Area"). 3. Base Salary and Benefits. (a) During the Employment Period, Executive's base salary shall be in an amount set by the Board or a Committee of the Board (the "Compensation Committee"), and shall initially be $225,000 per annum (the "Base Salary"), which salary shall be payable in regular installments in accordance with the Company's general payroll practices and shall be subject to customary withholding. In addition, during the Employment Period, Executive shall be entitled to participate in all of the Company's employee benefit programs for which senior executive employees of the Company and its subsidiaries are generally eligible including the Company's Executive Bonus Plan and the 1998 Stock Option Plan, with any awards under such Plans to be set by the Board or the Compensation Committee. 21 (b) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this letter agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. 4. Term. (a) Unless renewed by the mutual agreement of the Company and Executive, the Employment Period shall end on the third anniversary of the Effective Time; provided that (i) the Employment Period shall terminate prior to such date upon Executive's resignation (other than if the Company Constructively Terminates Executive), death or permanent disability or incapacity (as determined by the Board in its good faith judgment or as provided in paragraph 4(f) hereof), (ii) the Employment Period may be terminated by the Company at any time prior to such date for Cause (as defined below) or without Cause and (iii) the Employment Period shall terminate prior to such date upon Executive's resignation if the Company Constructively Terminates Executive. (b) If the Employment Period is terminated by the Company without Cause or the Company Constructively Terminates Executive, Executive shall be entitled to receive his Base Salary plus all fringe benefits which Executive is receiving on the termination date (but no bonuses) for ten (10) months after the date of such termination, if and only if, Executive has not breached the provisions of paragraph 5, 6, and 7 hereof. (c) If the Employment Period is terminated by the Company for Cause or is terminated pursuant to clause (a)(i) above, Executive shall be entitled to receive his Base Salary through the date of termination. (d) Except as provided in paragraph 4(b) above, all of the Executive's rights to fringe benefits and bonuses hereunder (if any) which accrue after the termination of the Employment Period shall cease upon such termination. The Company may offset any amount Executive owes it or its subsidiaries against any amounts it owes Executive hereunder. (e) For purposes of this letter, "Cause" shall mean (i) the commission of a felony or a crime involving moral turpitude or the commission of any other act or omission involving dishonesty, disloyalty or fraud with respect to the Company or any of its subsidiaries, or any of their customers or suppliers, (ii) conduct tending to bring the Company or any of its subsidiaries into substantial public disgrace or disrepute, (iii) substantial and repeated failure to perform duties as reasonably directed by the Board, provided that such failure has continued for more than 15 days after the Company has given written notice to Executive of such failure and of the Company's intention to terminate Executive's employment because of such failure, (iv) gross negligence or willful misconduct with respect to the Company or any of its subsidiaries or (v) any other material breach of this letter agreement which is not cured within 15 days after written notice thereof to Executive. (f) Death or Disability. In the event of Executive's death or disability during the Employment Period, the Company shall continue to pay to Executive (or his spouse or other designated beneficiary) the Base Salary Executive was receiving immediately prior to his death or disability for twelve (12) months following his death or disability. Executive's employment shall be deemed terminated because of his disability if Executive becomes entitled to benefits under the Company's long-term disability insurance plan, and the periodic benefits payable under that plan shall reduce, on a dollar-for-dollar basis, the payments to Executive required under this paragraph 4(f). (g) For purposes of this letter agreement, "Constructive Termination" shall mean, without Executive's express written consent, the Company materially reduces the nature, scope, level or extent of Executive's responsibilities from the nature, scope, level or extent of such responsibilities as of the effectiveness of this Agreement, or fails to provide Executive with adequate office facilities and support services to perform such responsibilities. 5. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company and its subsidiaries concerning the business or affairs of the Company or any of its subsidiaries ("Confidential Information") are the property of the Company or such subsidiary. Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned 22 matters become generally known to and available for use by the public other than as a result of the Executive's acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) or the business of the Company or any subsidiary which he may then possess or have under his control. 6. Inventions and Patents. Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) which related to the Company's or any of its subsidiaries' actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive while employed by the Company and its subsidiaries ("Work Product") belong to the Company or such subsidiary. 7. Non-Compete, Non-Solicitation. (a) In further consideration of the compensation to be paid to Executive hereunder, Executive acknowledges that in the course of his employment with the Company he shall become familiar with the Company's trade secrets and with other Confidential Information concerning the Company and its subsidiaries and that his services shall be of special, unique and extraordinary value to the Company and its subsidiaries. Therefore, Executive agrees that, during the Employment Period and for six (6) months thereafter (the "Noncompete Period"), he shall not directly or indirectly own any interest in, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with the business of the Company or any of its subsidiaries, as such businesses exist or are in process at any time during the period beginning on the date hereof and ending on the date of the termination of Executive's employment, within any geographical area in which the Company or its subsidiaries engage in such businesses, which shall include the geographical area in which the Company's customers are located.. The foregoing shall not prohibit Executive from owning directly or indirectly capital stock or similar securities that are listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System which do not represent more than two percent (2%) of the outstanding capital stock of any business competing with the business of the Company. (b) During the Noncompete Period, Executive shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries to leave the employ of the Company or any such subsidiary, or in any way interfere with the relationship between the Company or any of its subsidiaries and any employee thereof, (ii) hire any person who was an employee of the Company or any of its subsidiaries during the Employment Period, (iii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any such subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any such subsidiary. (c) If, at the time of enforcement of this paragraph 7, a court shall hold that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Executive agrees that the restrictions contained in paragraph 7 are reasonable. (d) In the event of the breach or threatened breach by Executive of any of the provisions of this paragraph 7, the Company, in addition and supplementary to other rights and remedies existing in its favor, may apply to the court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. (e) Executive represents and warrants that he is not bound by any non-compete agreement with any third party that would restrict or could potentially restrict his ability to work for the Company as contemplated hereby. Any breach of this paragraph by Executive shall render this Agreement null and void and Company shall have no obligations under this Agreement whatsoever. 23 8. Effectiveness. Notwithstanding anything to the contrary contained herein, this letter agreement shall be effective as of Executive's first day of hire with the Company (the "Effective Time"). 9. Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this letter agreement shall be governed by, and construed in accordance with, the laws of the State of Idaho, without giving effect to any choice of law or conflict of law rules or provisions that could cause the applications of the laws of any jurisdiction other than the State of Idaho. 10. Mitigation and Set-Off. Executive shall not be required to mitigate Executive's damages by seeking other employment or otherwise. The Company's obligations under this letter agreement shall not be reduced in any way by reason of any compensation or benefits received (or foregone) by Executive from sources other than the Company after the termination of the Employment Period or any amounts that might have been received by Executive in other employment had Executive sought such other employment. Executive's entitlement to benefits and coverage under this letter agreement shall continue after, and shall not be affected by, Executive's obtaining other employment after the termination of the Employment Period, provided that any such benefit or coverage shall not be furnished if Executive expressly waives the specific benefit or coverage by giving written notice of waiver to the Company. 11. Litigation Expenses. The Company shall pay to Executive all out-of-pocket expenses, including attorney's fees, incurred by Executive in the event Executive successfully enforces any provision of this letter agreement in any action, arbitration or lawsuit. 12. Indemnification. The Company will indemnify and hold harmless Executive from and against any and all costs, liability and expenses from any claim by any person with respect to, or in any way related to, Executive's employment with the Company as contemplated by this letter agreement (including reasonable attorney's fees) (collectively, "Claims") resulting from any act or omission of Executive that relate to Executive's employment with the Company, to the maximum extent permitted by law other than for Claims which shall be proven to be the result of gross negligence, bad faith or willful misconduct by Executive. Notwithstanding this Agreement or any termination of his employment by the Company pursuant to this Agreement or otherwise, the Executive shall be entitled to coverage under the directors' and officers' liability coverage maintained by the Company, as in effect from time to time, to the same extent as other officers and directors of the Company. 13. Amendment or Termination. This Agreement may be amended at any time by written agreement between the Company and Executive. 14. Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute but one Agreement. 15. No Waiver. No failure or delay on the part of the Company or Executive in enforcing or exercising any right or remedy hereunder shall operate as a waiver thereof. 16. No Representations. Executive represents that he has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 17. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Executive concerning Executive's employment with the Company, and supersedes and replaces any and all prior agreements and understandings, written or oral. * * * * * 24 IN WITNESS WHEREOF, the parties hereto have executed this letter agreement as of the date first written above. MCMS, INC. By: /s/ Robert F. Subia Name: Robert F. Subia Title: President and Chief Executive Officer EXECUTIVE: /s/ David Garcia 25 EX-10.9(B) 3 Exhibit 10.9 (b) December 2, 1998 Mr. Richard Downing 4 Natalies Way Governors Island Gilford, New Hampshire 03246 Dear Rich: This letter agreement sets forth the terms of your ("Executive") employment with MCMS, Inc., an Idaho corporation (the "Company"), as follows: 1. Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company to serve as the President and Chief Operating Officer of the Company, upon the terms and conditions as set forth in this letter agreement for the period beginning as of Effective Time (as defined in paragraph 8 hereof) and ending as provided in paragraph 4 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the President and Chief Operating Officer of the Company and shall have all responsibility and authority over the Manufacturing, Operations, Engineering, Information Technology, Purchasing, and Personnel Departments, subject to the power of the Chief Executive Officer of the Company to expand or limit such duties, responsibilities and authority within the confines of the ordinary duties, responsibilities and authority of a President and Chief Operating Officer and to override actions of the President and Chief Operating Officer. (b) Executive shall report to the Chief Executive Officer of the Company, and Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its subsidiaries. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. The foregoing shall not preclude Executive from devoting reasonable time to the supervision of his personal investments, civic and charitable affairs and, at any time after the date six months after the Effective Time, serving on a maximum of two boards other than the Company's or any of its subsidiaries' board of directors, provided that such activities do not interfere with the performance of his duties hereunder. (c) Location. Subject to customary business travel, Executive shall be required to perform the services and duties provided for in this paragraph 2 only at the location of the principal executive offices of the Company, which shall be located in the Boise, Idaho Standard Metropolitan Statistical Area or such other location as the parties may mutually agree upon (the "Geographical Employment Area"). 3. Base Salary and Benefits. (a) During the Employment Period, Executive's base salary shall be in an amount set by the Board of Directors of the Company (the "Board") or a Committee of the Board (the "Compensation Committee"), and shall initially be $240,000 per annum (the "Base Salary"), which salary shall be payable in regular installments in accordance with the Company's general payroll practices and shall be subject to customary withholding. In addition, during the Employment Period, Executive shall be entitled to participate in all of the Company's employee benefit programs for which senior executive employees of the Company and its subsidiaries are generally eligible including the Company's Executive Bonus Plan and the 1998 Stock Option Plan, with any awards under such Plans to be set by the Board or the Compensation Committee. (b) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this letter agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. 26 4. Term. (a) Unless renewed by the mutual agreement of the Company and Executive, the Employment Period shall end on the second anniversary of the Effective Time; provided that (i) the Employment Period shall terminate prior to such date upon Executive's resignation (other than if the Company Constructively Terminates Executive), death or permanent disability or incapacity (as determined by the Board in its good faith judgment or as provided in paragraph 4(e) hereof), (ii) the Employment Period may be terminated by the Company at any time prior to such date for cause or without cause and (iii) the Employment Period shall terminate prior to such date upon Executive's resignation if the Company Constructively Terminates Executive. (b) If, prior to the second anniversary date of the Effective Time, MCMS Constructively Terminates Executive, MCMS will pay Executive severance equal to Executive's Base Salary for (i) twelve (12) months after the date of the Constructive Termination in the event the Constructive Termination occurs prior to the first anniversary date of the Effective Time or (ii) the period of time between the date of Constructive Termination and the second anniversary of the Effective Time in the event Executive is Constructively Terminated after the first anniversary date of the Effective Time, in each case if, and only if, Executive has not breached the provisions of paragraphs 5, 6 or 7 hereof. (c) If the Employment Period is terminated for any reason (including pursuant to clause (a)(i) above) other than as set forth in paragraph 4(b) hereof, Executive shall be entitled to receive his Base Salary through the date of termination. (d) Except as provided in paragraph 4(b) above, all of the Executive's rights to fringe benefits and bonuses hereunder (if any) which accrue after the termination of the Employment Period shall cease upon such termination. The Company may offset any amount Executive owes it or its subsidiaries against any amounts it owes Executive hereunder. (e) Death or Disability. In the event of Executive's death or disability during the Employment Period, the Company shall continue to pay to Executive (or his spouse or other designated beneficiary) the Base Salary Executive was receiving immediately prior to his death or disability for twelve (12) months following his death or disability. Executive's employment shall be deemed terminated because of his disability if Executive becomes entitled to benefits under the Company's long-term disability insurance plan, and the periodic benefits payable under that plan shall reduce, on a dollar-for-dollar basis, the payments to Executive required under this paragraph 4(e). (f) For purposes of this letter agreement, "Constructive Termination" shall mean, without Executive's express written consent, the Company materially reduces the scope of Executive's responsibilities from the scope of such responsibilities as of the Effective Time as a result of a merger, acquisition, or other business combination. 5. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company and its subsidiaries concerning the business or affairs of the Company or any of its subsidiaries ("Confidential Information") are the property of the Company or such subsidiary. Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of the Executive's acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) or the business of the Company or any subsidiary which he may then possess or have under his control. 6. Inventions and Patents. Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) which related to the Company's or any of its subsidiaries' actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive while employed by the Company and its subsidiaries ("Work Product") belong to the Company or such subsidiary. 27 7. Non-Solicitation. (a) For a period of twelve (12) months after Executive's Employment Period, Executive shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries to leave the employ of the Company or any such subsidiary, or in any way interfere with the relationship between the Company or any of its subsidiaries and any employee thereof, and (ii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any such subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any such subsidiary. (b) In the event of the breach or threatened breach by Executive of any of the provisions of this paragraph 7, the Company, in addition and supplementary to other rights and remedies existing in its favor, may apply to the court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. (c) Executive represents and warrants that he is not bound by any non-compete agreement with any third party that would restrict or could potentially restrict his ability to work for the Company as contemplated hereby. Any breach of this paragraph by Executive shall render this Agreement null and void and Company shall have no obligations under this Agreement whatsoever. 8. Effectiveness. Notwithstanding anything to the contrary contained herein, this letter agreement shall be effective as of December 7, 1998 (the "Effective Time"). 9. Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this letter agreement shall be governed by, and construed in accordance with, the laws of the State of Idaho, without giving effect to any choice of law or conflict of law rules or provisions that could cause the applications of the laws of any jurisdiction other than the State of Idaho. 10. Mitigation and Set-Off. Executive shall not be required to mitigate Executive's damages by seeking other employment or otherwise. The Company's obligations under this letter agreement shall not be reduced in any way by reason of any compensation or benefits received (or foregone) by Executive from sources other than the Company after the termination of the Employment Period or any amounts that might have been received by Executive in other employment had Executive sought such other employment. Executive's entitlement to benefits and coverage under this letter agreement shall continue after, and shall not be affected by, Executive's obtaining other employment after the termination of the Employment Period, provided that any such benefit or coverage shall not be furnished if Executive expressly waives the specific benefit or coverage by giving written notice of waiver to the Company. 11. Litigation Expenses. The Company shall pay to Executive all out-of-pocket expenses, including attorney's fees, incurred by Executive in the event Executive successfully enforces any provision of this letter agreement in any action, arbitration or lawsuit. 12. Indemnification. The Company will indemnify and hold harmless Executive from and against any and all costs, liability and expenses from any claim by any person with respect to, or in any way related to, Executive's employment with the Company as contemplated by this letter agreement (including reasonable attorney's fees) (collectively, "Claims") resulting from any act or omission of Executive that relate to Executive's employment with the Company, to the maximum extent permitted by law other than for Claims which shall be proven to be the result of gross negligence, bad faith or willful misconduct by Executive. Notwithstanding this Agreement or any termination of his employment by the Company pursuant to this Agreement or otherwise, the Executive shall be entitled to coverage under the directors' and officers' liability coverage maintained by the Company, as in effect from time to time, to the same extent as other officers and directors of the Company. 13. Amendment or Termination. This Agreement may be amended at any time by written agreement between the Company and Executive. 14. Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute but one Agreement. 28 15. No Waiver. No failure or delay on the part of the Company or Executive in enforcing or exercising any right or remedy hereunder shall operate as a waiver thereof. 16. No Representations. Executive represents that he has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 17. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Executive concerning Executive's employment with the Company, and supersedes and replaces any and all prior agreements and understandings, written or oral. * * * * * 29 IN WITNESS WHEREOF, the parties hereto have executed this letter agreement as of the date first written above. MCMS, INC. By: /s/ Robert F. Subia Name: Robert F. Subia Title: Chief Executive Officer EXECUTIVE: /s/ Richard Downing 30 EX-10.20(A) 4 Exhibit 10.20 (a) MCMS, INC. AGREEMENT EVIDENCING A GRANT OF A NONQUALIFIED STOCK OPTION UNDER 1998 STOCK OPTION PLAN Agreement made as of **** between MCMS, Inc., an Idaho corporation (the "Company"), and **** ("Grantee"). Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Plan (as defined below). 1. Grant of Option. Pursuant to the MCMS, Inc. 1998 Stock Option Plan (the "Plan"), the Company hereby grants to Grantee, as of the grant date specified above, a nonqualified stock option (the "Option") to purchase **** shares (which number of shares may be adjusted as provided in the Plan) of the Company's Common Stock, $0.001 par value per share (the "Common Stock"), at the exercise price per share of $2.27 subject to the terms and conditions set forth herein and in the Plan. Attached hereto as Annex A is a summary of the terms of the Option evidenced by this Agreement. 2. Grantee Bound by Plan. Attached hereto as Annex B is a copy of the Plan which is incorporated herein by reference and made a part hereof. Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. The Plan should be carefully examined before any decision is made to exercise the Option. 3. Exercise of Option. Subject to the earlier termination of the Option as provided herein and in the Plan and subject to Section 7, the Option may be exercised, in whole or in part, to the extent it has become vested, by written notice to the Company at any time and from time to time after the date of grant. An Option shall not be exercisable in any event after the tenth anniversary of grant. An Option may not be exercised for a fraction of a share of Common Stock. Options are subject to cancellation as provided in the Plan. 4. Vesting of Option. This Option shall vest and become exercisable with respect to the Option Shares subject to this Option as follows: (a) Class I Option Shares. This Option shall vest and become exercisable with respect to 50% of the Option Shares subject to this Option (the "Class I Option Shares") provided the Grantee remains continuously employed with the Company after the date hereof and through and including the vesting dates described below as follows: Number of Class I Vesting Date Option Shares Vested - -------------------------------- ----------------------------- The first anniversary of the 1/4 of Class I Option Shares Vesting Commencement Date (see Annex A hereto) The last day of each of the first 1/48 of Class I Option Shares 36 months after the first anniversary of the Vesting Commencement Date - ----------------------------------------------------------------- 31 (b) Class II Option Shares. (i) Time Vesting. This Option shall vest and become exercisable with respect to the remaining 50% of the Option Shares subject to this Option (the "Class II Option Shares") on the seventh anniversary of the Vesting Commencement Date provided that the Grantee has been continuously employed with the Company from the Vesting Commencement Date through the seventh anniversary thereafter. (ii) Performance Vesting. This Option shall vest and become exercisable with respect to the Class II Option Shares prior to the seventh anniversary upon the attainment of certain goals described in this Section 4(b)(ii). This Option shall vest and become exercisable with respect to the following percentages of Class II Option Shares on the vesting dates set forth opposite such percentages below if (x) the Company's EBITDA (as defined below) for the fiscal year ending on such vesting date equals at least the dollar amount set forth opposite such vesting date (each an "EBITDA Target") and (y) the Grantee has been continuously employed with the Company from the date hereof through the applicable vesting date: - ----------------------------------------------------------------- Vesting Date EBITDA Target Percentage of Class II Option Shares Vested - -------------------- ------------------- ---------------------- August 30, 1999 $30,548,463 50% August 30, 2000 To be determined by 50% further action of the Compensation Committee of the Board of Directors - ----------------------------------------------------------------- "EBITDA" shall have the same meaning ascribed to "Consolidated EBITDA" in the Credit Agreement, dated as of February 26, 1998, among MCMS, Inc., various lending institutions named therein, and Bankers Trust Company, as amended. In the event the Company consummates an acquisition of another Person the EBITDA Targets for the periods occurring after such acquisition will be adjusted in good faith by Grantee and approved by the Board, and such adjusted and approved EBITDA Targets shall, once approved, be deemed the EBITDA Targets for all purposes hereunder. 32 5. Conditions to Exercise. The Option may not be exercised by Grantee unless the following conditions are met: (a) The Option has become vested with respect to the Option Shares to be acquired pursuant to such exercise; (b) legal counsel for the Company must be satisfied at the time of exercise that the issuance of shares of Common Stock upon exercise will be in compliance with the Securities Act and applicable United States federal, state, local and foreign laws; and (c) Grantee must pay at the time of exercise the full purchase price for the shares of Common Stock being acquired hereunder in accordance with the terms of the Plan. 6. Right to Purchase Option Shares Upon Termination of Employment. (a) Repurchase Right. In the event a Participant's employment with the Company is terminated for any reason, the Option Shares (whether held by such Participant or one or more transferees and including any Option Shares acquired subsequent to such termination of employment) will be subject to repurchase by the Company pursuant to the terms and conditions set forth in this Section 6 (the "Repurchase Option") at a price per share equal to the Fair Market Value thereof determined as of the Termination Date. (b) Repurchase Notice. The Board may elect to purchase all or any portion of the Option Shares by delivery of written notice (the "Repurchase Notice") to the holder or holders of the Option Shares within 180 days after the Termination Date (or if termination is caused by the Participant's death or disability, 180 days after the expiration of the Options held by such Participant). The Repurchase Notice will set forth the number of Option Shares to be acquired from such holder, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. 33 (c) Closing of Repurchase. The closing of the repurchase transaction will take place on the date designated by the Company in the Repurchase Notice, which date will not be more than 45 days nor less than 10 days after the delivery of such notice. The Company will pay for the Option Shares to be purchased pursuant to the Repurchase Option by delivering, at the option of the Company to such Participant and/or the other holder(s), (1) a check in the amount of the aggregate sale price of the Option Shares to be repurchased or (2) if the aggregate consideration to be paid to such holder(s) of Option Shares exceeds $50,000, a check in the amount of 20% of the aggregate sale price of the Option Shares to be repurchased (except to the extent not permitted under that certain revolving credit facility with various lending institutions and Bankers Trust Company of up to $40.0 million, a note in compliance therewith) and a subordinated promissory note in a principal amount equal to the remainder of the aggregate sale price, bearing interest at a floating rate of interest equal to the prime rate as stated from time to time by Chase Manhattan Bank or any successor thereto, and payable, as to principal and interest, in four equal annual installments on the first four anniversaries of the closing of such repurchase; provided that if the Company determines that withholding tax is required with respect to the exercise of a Repurchase Option, the Company shall withhold an amount equal to such withholding tax from the purchase price. At the closing, the Participant and each other seller will deliver the certificates representing the Option Shares to be sold duly endorsed in form for transfer to the Company or its designee, and the Company will be entitled to receive customary representations and warranties from the Participant and the other sellers regarding title to the Option Shares. 7. Restrictions on Transfer. (a) Restrictions. A Participant may not sell, pledge or otherwise transfer any interest in any Option Shares except pursuant to the provisions of this Section 7. At least 60 days prior to making any transfer, the Participant proposing such transfer shall deliver a written notice (the "Sale Notice") to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the proposed transfer. Such Participant (and such Participant's transferees) shall not consummate any such transfer until 60 days after the Sale Notice has been delivered to the Company, unless the Company has notified such Participant in writing that it will not exercise its rights under this Section 7. (The date of the first to occur of such events is referred to herein as the "Authorization Date"). (b) Repurchase Option. The Company may elect to purchase all or any portion of the Option Shares to be transferred upon the same terms and conditions as those set forth in the Sale Notice (the "Right of First Refusal") by delivering a written notice of such election to such Participant within 30 days after the receipt of the Sale Notice by the Company (the "Election Notice"). If the Company has not elected to purchase all of the Option Shares specified in the Sale Notice, such Participant may transfer the Option Shares not purchased by the Company to the prospective transferee(s) as specified in the Sale Notice at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the Authorization Date. Any Option Shares not so transferred within such 60-day period must be re-offered to the Company in accordance with the provisions of this Section 7 in connection with any subsequent proposed transfer. (c) Exceptions. The restrictions contained in this Section 7 will not apply with respect to transfers of Option Shares (1) pursuant to applicable laws of descent and distribution, (2) pursuant to the Shareholders Agreement or (3) among the Participant's family group; provided that the restrictions contained in this paragraph will continue to be applicable to the Option Shares after any such transfer and the transferees of such Option Shares have agreed in writing to be bound by the terms and provisions of this Plan and the Option grant, as amended from time to time. The Participant's "family group" means the Participant's spouse and descendants (whether natural or adopted) and any trust solely for the benefit of the Participant and/or the Participant's spouse and/or descendants. 34 8. Administration. Any action taken or decision made by the Company, the Board, or the Committee or its delegates arising out of or in connection with the construction, administration, interpretation or effect of the Plan or this Agreement shall lie within its sole and absolute discretion, as the case may be, and shall be final, conclusive and binding on Grantee and all persons claiming under or through Grantee. By accepting this grant or other benefit under the Plan, Grantee and each person claiming under or through Grantee shall be conclusively deemed to have indicated acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee or its delegates. 9. No Rights as Shareholder. Unless and until a certificate or certificates representing such shares of Common Stock shall have been issued to Grantee (or any person acting under Section 7 above), Grantee shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares of Common Stock acquirable upon exercise of the Option. 10. Investment Representation. Grantee hereby acknowledges that the shares of Common Stock which Grantee may acquire by exercising the Option shall be acquired for investment without a view to distribution, within the meaning of the Securities Act, and shall not be sold, transferred, assigned, pledged or hypothecated in the absence of an effective registration statement for the shares of Common Stock under the Securities Act and applicable state securities laws or an applicable exemption from the registration requirements of the Act and any applicable state securities laws. Grantee also agrees that the shares of Common Stock which Grantee may acquire by exercising the Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws. 11. Sale of the Company. (a) Consent to Sale of Company. If the Board and the holders of a majority of the shareholders of the Company's then outstanding shares of capital stock approve a Sale of the Company (the "Approved Sale"), you will (i) consent to and raise no objections against the Approved Sale or the process pursuant to which the Approved Sale is arranged, (ii) waive any dissenter's rights and any similar rights with respect thereto and (iii) if the Approved Sale is structured as a sale of stock, you will agree to sell all of your Option Shares and rights to acquire Option Shares on the terms and conditions approved by the Board and the shareholders of a majority of the shares of capital stock then outstanding. You will take all necessary and desirable actions in connection with the consummation of the Approved Sale as requested by the Board. (b) Purchaser Representative. If the Company or the holders of the Company's securities enter into any negotiation or transaction for which Rule 506 (or any similar rule then in effect) promulgated by the Securities Exchange Commission pursuant to the Securities Act may be available with respect to such negotiation or transaction (including a merger, consolidation or other reorganization), you will, at the request of the Company, appoint a purchaser representative (as such term is defined in Rule 501) reasonably acceptable to the Company. If you appoint the purchaser representative designated by the Company, the Company will pay the fees of such purchaser representative, but if you decline to appoint the purchaser representative designated by the Company you will appoint another purchaser representative (reasonably acceptable to the Company), and you will be responsible for the fees of the purchaser representative so appointed. (c) Termination of Restrictions. The provisions of this Section 11 will terminate when the Company has sold shares of its Common Stock pursuant to a Qualified Initial Public Offering. 35 12. Notification of Inquiries and Agreements. Grantee and each permitted transferee shall notify the Company in writing within 10 days after the date the Grantee or such permitted transferee (i) first obtains knowledge of any Internal Revenue Service inquiry, audit, assertion, determination, investigation, or question relating in any way to the value of Options granted pursuant to this Agreement; (ii) includes or agrees (including, without limitation, in any settlement, closing, or other similar agreement) to include in gross income with respect to Options granted pursuant to this Agreement (A) any amount in excess of the amount reported on Form 1099 or Form W-2 to Grantee by the Company, or (B) if no such Form is received, any amount; or (iii) exercises, sells, disposes of, or otherwise transfers (other than to a permitted transferee) an Option acquired pursuant to this Agreement. Upon request, Grantee shall provide to the Company any information or document relating to any event described in the preceding sentence which the Company (in its sole discretion) requires in order to calculate and substantiate any change in the Company's tax liability as a result of such event. 13. Listing and Registration of Common Stock. The Company, in its discretion, may postpone the issuance and/or delivery of shares of Common Stock upon any exercise of the Option until completion of such stock exchange listing, or registration, or other qualification of such shares under any state and/or federal law, rule or regulation as the Company may consider appropriate. 14. Rights of Participants. Neither this Agreement nor the Plan creates any employment rights in Grantee and the Company shall have no liability hereunder for terminating Grantee's employment or materially reducing Grantee's responsibilities. 15. Notices. Any notice hereunder to the Company shall be addressed to the Company, Attention: Board of Directors, and any notice hereunder to Grantee shall be addressed to Grantee at Grantee's last address on the records of the Company, subject to the right of either party to designate at any time hereafter in writing some other address. Any notice shall be deemed to have been duly given when delivered personally, one day following dispatch if sent by reputable overnight courier, fees prepaid, or three days following mailing if sent by registered mail, return receipt requested, postage prepaid and addressed as set forth above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Grantee. 17. Governing Law. The validity, construction, interpretation, administration and effect of the Plan, and of its rules and regulations, and rights relating to the Plan and to this Agreement, shall be governed by the substantive laws, but not the choice of law rules, of whichever state in the United States in which the Company is incorporated from time to time. * * * * * 36 IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of the date first above written. MCMS, INC. Name: Title: GRANTEE Employee's Signature Name of Employee (Print) 37 ANNEX A SUMMARY OF OPTION TERMS Name of Grantee: Class I Options Date of Option Grant: -------------------------------- Total Option Shares Granted: -------------------------------- Option Exercise Price Per Share: -------------------------------- Total Option Exercise Price: -------------------------------- Option Term/Expiration Date: -------------------------------- Vesting Commencement Date: -------------------------------- Vesting Schedule: -------------------------------- - ----------------------------------------------------------------- Number of Class I Vesting Date Option Shares Vested - ------------------------------ --------------------------------- The first anniversary of the 1/4 of Class I Option Shares Vesting Commencement Date The last day of each of the 1/48 of Class I Option Shares first 36 months after the first anniversary of the Vesting Commencement Date - ----------------------------------------------------------------- 38 Class II Options Date of Option Grant: -------------------------------- Total Option Shares Granted: -------------------------------- Option Exercise Price Per Share: -------------------------------- Total Option Exercise Price: -------------------------------- Option Term/Expiration Date: -------------------------------- Vesting Commencement Date: -------------------------------- Vesting Schedule: -------------------------------- Class II Options shall vest and become exercisable on the seventh anniversary of the Vesting Commencement Date provided that the Grantee has been continuously employed with the Company from the Vesting Commencement Date through the seventh anniversary thereafter. Class II Options shall vest and become exercisable prior to the seventh anniversary of the Vesting Commencement Date upon the attainment of certain goals as follows: - ----------------------------------------------------------------- Vesting Date EBITDA Target Percentage of Class II Option Shares Vested - -------------------- ------------------- ---------------------- August 30, 1999 $30,548,463 50% August 30, 2000 To be determined by 50% further action of the Compensation Committee of the Board of Directors - ----------------------------------------------------------------- 39 ANNEX B MCMS, INC. 1998 STOCK OPTION PLAN ARTICLE I Purpose of Plan of Plan The 1998 Stock Option Plan (the "Plan") of MCMS, Inc. (the "Company"), adopted by the Board of Directors and shareholders of the Company effective May 14, 1998, is intended to advance the best interests of the Company by providing executives, key employees and certain advisors of the Company or any Subsidiary (as defined below) who have substantial responsibility for the management and growth of the Company or any Subsidiary with additional incentives by allowing such employees to acquire an ownership interest in the Company. The Plan is a compensatory benefit plan within the meaning of Rule 701 under the Securities Act of 1933, as amended (the "Securities Act") and, unless and until the Common Stock (as defined below) is publicly traded, the issuance pursuant to the Plan of stock purchase options to purchase shares of Common Stock ("Options"), and the issuance of Common Stock upon the exercise of Options issued pursuant to the Plan, are each intended to qualify for the exemption from registration under the Securities Act provided by Rule 701. ARTICLE II Definitions For purposes of the Plan the following terms have the indicated meanings: "Authorization Date" has the meaning ascribed thereto in Section 5.9(a) hereof. "Affiliate" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such specified Person. For purposes of this definition, "control" (including the terms "controlled by" and "under common control with"), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. 40 "Committee" means the Compensation Committee or such other committee of the Board as the Board may designate to administer the Plan or, if for any reason the Board has not designated such a committee, the Board. The Committee, if other than the Board, shall be composed of two or more directors as appointed from time to time by the Board. "Common Stock" means the Class A Common Stock, $0.001 par value per share, of MCMS, Inc., an Idaho corporation. "Election Notice" has the meaning ascribed thereto in Section 5.9(b) hereof. "Fair Market Value" per share on any given date means the average of the closing prices of the sales of the Common Stock on all securities exchanges on which such stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such stock is not so listed, the average of the representative bid and asked prices quoted on the Nasdaq Stock Market as of 4:00 P.M., New York time, or, if on any day such stock is not quoted on the Nasdaq Stock Market, the average of the highest bid and lowest asked prices on such day in the domestic over-the- counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization. If at any time the Common Stock is not listed or quoted, the Fair Market Value per share shall be determined by the Committee or the Board based on such factors as the members thereof in the exercise of their business judgment, consider relevant. "Measurement Date" means the date on which any taxable income resulting from the exercise of an Option is determined under applicable federal income tax law. "Option Agreement" has the meaning set forth in Section 6.1 hereof. "Option Shares" shall mean (i) all shares of Common Stock issued or issuable upon the exercise of an Option and (ii) all shares of Common Stock issued with respect to the Common Stock referred to in clause (i) above by way of stock dividend or stock split or in connection with any conversion, merger, consolidation or recapitalization or other reorganization affecting the Common Stock. Unless provided otherwise herein or in the Participant's Option Agreement, Option Shares will continue to be Option Shares in the hands of any holder other than the Participant (except for the Company), and each such transferee thereof will succeed to the rights and obligations of a holder of Option Shares hereunder. "Options" has the meaning set forth in the preamble hereof. "Participant" means (i) any employee of the Company or any Subsidiary or (ii) any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity who has been selected to participate in the Plan by the Committee or the Board. "Permitted Transferee" means those persons to whom the Participant is authorized (1) pursuant to Section 5.9, to transfer Option Shares, or (2) pursuant to Section 6.3, to transfer Options. "Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity. 41 "Plan" has the meaning set forth in the preamble hereof. "Qualified Initial Public Offering" means an offering by the Corporation of its capital stock or equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the public offering price per share of which is not less than $14.00 (adjusted to reflect stock dividends, stock splits or recapitalizations) after the date hereof and results in aggregate gross cash proceeds to the Corporation of at least $30,000,000 (before deduction of underwriting discounts and expenses). "Repurchase Notice" has the meaning ascribed thereto in Section 5.8(b) hereof. "Repurchase Option" has the meaning ascribed thereto in Section 5.8(a) hereof. "Right of First Refusal" has the meaning ascribed thereto in Section 5.9(b) hereof. "Sale Notice" has the meaning ascribed thereto in Section 5.9(a) hereof. "Sale of the Company" means the sale of the Company to any Third Party or Parties pursuant to which such party or parties acquire (i) capital stock of the Company possessing the voting power under normal circumstances necessary to elect a majority of the Board (whether by merger, consolidation or sale or transfer of the Company's capital stock) or (ii) all or substantially all of the Company's assets determined on a consolidated basis. "Securities Act" has the meaning ascribed thereto in Article 1 hereof. "Shareholders Agreement" means the Shareholders Agreement dated as of February 26, 1998 by and among the Company, Cornerstone Equity Investors IV, L.P., MEI California, Inc., Randolph Street Partners II, BT Investment Partners, Inc. and the other investors listed in Appendix A thereto. "Subsidiary" means any subsidiary corporation (as such term is defined in Section 424(f) of the Code) of the Company. "Termination Date" shall mean the date upon which such Participant's employment or engagement, as the case may be, with the Company terminated. "Third Party" means any Person which is not an Affiliate of the Company. 42 ARTICLE III Administration The Plan shall be administered by the Committee. Subject to the limitations of the Plan, the Committee shall have the sole and complete authority to: (i) select Participants, (ii) grant Options to Participants in such forms and amounts as it shall determine, (iii) impose such limitations, restrictions and conditions upon such Options as it shall deem appropriate, (iv) interpret the Plan and adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan, (v) correct any defect or omission or reconcile any inconsistency in the Plan or in any Options granted under the Plan and (vi) make all other determinations and take all other actions necessary or advisable for the implementation and administration of the Plan. The Committee's determinations on matters within its authority shall be conclusive and binding upon the Participants, the Company and all other persons. All expenses associated with the administration of the Plan shall be borne by the Company. The Committee may, as approved by the Board and to the extent permissible by law, delegate any of its authority hereunder to such persons or entities as it deems appropriate. ARTICLE IV Limitation on Aggregate Shares The number of shares of Common Stock with respect to which Options may be granted under the Plan shall not exceed, in the aggregate, 2,500,000 shares, subject to adjustment in accordance with Section 6.4. To the extent any Options expire unexercised or are canceled, terminated or forfeited in any manner without the issuance of Common Stock thereunder, such shares shall again be available under the Plan. The shares of Common Stock available under the Plan may consist of authorized and unissued shares, treasury shares or a combination thereof, as the Committee shall determine. ARTICLE V Awards 5.1 Grant of Options. The Committee may grant Options to Participants from time to time in accordance with this Article V. Options granted under the Plan may be nonqualified stock options or "incentive stock options" within the meaning of Section 422 of the Code or any successor provision as specified by the Committee; provided, however, that no incentive stock option may be granted to any Participant who, at the time of grant, owns stock of the Company (or any Subsidiary) representing more than 10% of the total combined voting power of all classes of stock of the Company (or any Subsidiary), unless such incentive stock option shall at the time of grant (a) have a termination date not later than the fifth anniversary of the issuance date and (b) have an exercise price per share equal to at least 110% of the Fair Market Value of a share of Common Stock on the date of grant. The exercise price per share of Common Stock under each Option shall be determined by the Committee or the Board at the time of grant; provided, however, that the exercise price per share of Common Stock under each incentive stock option shall be fixed by the Committee at the time of grant of the Option and shall equal at least 100% of the Fair Market Value of a share of Common Stock on the date of grant, but not less than the par value per share (as adjusted pursuant to Section 6.4). Subject to Section 5.6, Options shall be exercisable at such time or times as the Committee shall determine; provided, however, that any option intended to be an incentive stock option shall be treated as an incentive stock option only to the extent that the aggregate Fair Market Value of the Common Stock (determined as of the date of Option grant) with respect to which incentive stock options (but not nonqualified options) are exercisable for the first time by any Participant during any calendar year (under all stock option plans of the Company and its Subsidiaries) does not exceed $100,000. The Committee shall determine the term of each Option, which term shall not exceed ten years from the date of grant of the Option. 5.2 Exercise Procedure. Options shall be exercisable, to the extent they are vested, by written notice to the Company (to the attention of the Company's Secretary) accompanied by payment in full of the applicable exercise price. Payment of such exercise price may be made (i) in cash (including check, bank draft, money order or wire transfer of immediately available funds), (ii) if approved by the Committee prior to exercise (or in the case of an incentive stock option, if approved by the Committee and set forth in the Option Agreement) by delivery of a 43 full recourse promissory note of the Participant bearing interest at a rate not less than the applicable federal rate determined pursuant to Section 1274 of the Code, (iii) in shares of Common Stock valued at their Fair Market Value as of the date of exercise as provided in Section 5.3 below, (iv) in the consideration received by the Company pursuant to a cashless exercise program implemented by the Company in connection with the Plan, or (v) in a combination of the foregoing. 5.3 Exchange of Previously Acquired Stock. The Committee, in its discretion and subject to such conditions as the Committee may determine, may permit the exercise price for the shares being acquired upon the exercise of an Option to be paid, in full or in part, by the delivery to the Company of Common Stock. Any Common Stock so delivered shall be treated as the payment of cash equal to the aggregate Fair Market Value on the date of delivery of such Common Stock. In the case of incentive stock options, the Committee shall specify in the Option Agreement whether the option holder may satisfy the exercise price with respect to shares of Common Stock purchased upon exercise of such Option by delivering to the Company shares of previously acquired Common Stock. In the case of shares of Common Stock acquired upon exercise of an Option, such shares shall have been owned by the optionee for more than six months on the date of surrender, and have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares of Common Stock as to which said Option shall be exercised. 5.4 Withholding Tax Requirements. (a) Amount of Withholding. It shall be a condition of the exercise of any Option that the Participant exercising the Option make appropriate payment or other provision acceptable to the Company with respect to any withholding tax requirement arising from such exercise. The amount of withholding tax required, if any, with respect to any Option exercise (the "Withholding Amount") shall be determined by the Treasurer or other appropriate officer of the Company, and the Participant shall furnish such information and make such representations as such officer requires to make such determination. (b) Withholding Procedure. If the Company determines that withholding tax is required with respect to any Option exercise, the Company shall notify the Participant of the Withholding Amount, and the Participant shall pay to the Company an amount not less than the Withholding Amount. In lieu of making such payment and at the discretion of the Company, the Participant may elect to pay the Withholding Amount by either (i) delivering to the Company a number of shares of Common Stock having an aggregate Fair Market Value as of the Measurement Date not less than the Withholding Amount or (ii) directing the Company to withhold (and not to deliver or issue to the Participant) a number of shares of Common Stock, otherwise issuable upon the exercise of an Option, having an aggregate Fair Market Value as of the Measurement Date not less than the Withholding Amount. In addition, if the Committee approves, a Participant may elect pursuant to the prior sentence to deliver or direct the withholding of shares of Common Stock having an aggregate Fair Market Value in excess of the minimum Withholding Amount but not in excess of the Participant's applicable highest marginal combined federal income and state income tax rate, as estimated in good faith by such Participant. Any fractional share interests resulting from the delivery or withholding of shares of Common Stock to meet withholding tax requirements shall be settled in cash. All amounts paid to or withheld by the Company and the value of all shares of Common Stock delivered to or withheld by the Company pursuant to this Section 5.4 shall be deposited in accordance with applicable law by the Company as withholding tax for the Participant's account. If the Treasurer or other appropriate officer of the Company determines that no withholding tax is required with respect to the exercise of any Option (because such option is an incentive stock option or otherwise), but subsequently it is determined that the exercise resulted in taxable income as to which withholding is required (as a result of a disposition of shares or otherwise), the Participant shall promptly, upon being notified of the withholding requirement, pay to the Company, by means acceptable to the Company, the amount required to be withheld; and at its election the Company may condition the transfer of any shares issued upon exercise of an incentive stock option upon receipt of such payment. 5.5 Notification of Inquiries and Agreements. Each Participant and each Permitted Transferee shall notify the Company in writing within 10 days after the date such Participant or Permitted Transferee (i) first obtains knowledge of any Internal Revenue Service inquiry, audit, assertion, determination, investigation, or question relating in any manner to the value of Options granted hereunder; (ii) includes or agrees (including, without limitation, in any settlement, closing or other similar agreement) to include in gross income with respect to any Option granted under this Plan (A) any amount in excess of the amount reported on Form 1099 or Form W-2 to such Participant by the Company, or (B) if no such Form was received, any amount; and/or (iii) exercises, sells, disposes of, or otherwise transfers an Option acquired pursuant to this Plan. Upon request, a Participant or Permitted Transferee shall provide 44 to the Company any information or document relating to any event described in the preceding sentence which the Company (in its sole discretion) requires in order to calculate and substantiate any change in the Company's tax liability as a result of such event. 5.6 Conditions and Limitations on Exercise. At the discretion of the Committee, exercised at the time of grant, Options may vest, in one or more installments, upon (i) the fulfillment of certain conditions, (ii) the passage of a specified period of time, and/or (iii) the achievement by the Company or any Subsidiary of certain performance goals. 5.7 Expiration of Options. (a) Normal Expiration. In no event shall any part of any Option be exercisable after the stated date of expiration thereof. (b) Early Expiration Upon Termination of Employment. Any part of any Option that was not vested on a Participant's Termination Date shall expire and be forfeited on such date, and any part of any Option that was vested on the Termination Date shall also expire and be forfeited to the extent not theretofore exercised on the thirtieth (30th) day (one year, if termination is caused by the Participant's death or disability) following the Termination Date, but in no event after the stated date of expiration thereof. 5.8 Right to Purchase Option Shares Upon Termination of Employment. (a) Repurchase Right. In the event a Participant's employment with the Company is terminated for any reason, the Option Shares (whether held by such Participant or one or more transferees and including any Option Shares acquired subsequent to such termination of employment) will be subject to repurchase by the Company pursuant to the terms and conditions set forth in this Section 5.8 (the "Repurchase Option") at a price per share equal to the Fair Market Value thereof determined as of the Termination Date. (b) Repurchase Notice. The Board may elect to purchase all or any portion of the Option Shares by delivery of written notice (the "Repurchase Notice") to the holder or holders of the Option Shares within 180 days after the Termination Date (or if termination is caused by the Participant's death or disability, 180 days after the expiration of the Options held by such Participant). The Repurchase Notice will set forth the number of Option Shares to be acquired from such holder, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. (c) Closing of Repurchase. The closing of the repurchase transaction will take place on the date designated by the Company in the Repurchase Notice, which date will not be more than 45 days nor less than 10 days after the delivery of such notice. The Company will pay for the Option Shares to be purchased pursuant to the Repurchase Option by delivering, at the option of the Company to such Participant and/or the other holder(s), (1) a check in the amount of the aggregate sale price of the Option Shares to be repurchased or (2) if the aggregate consideration to be paid to such holder(s) of Option Shares exceeds $50,000, a check in the amount of 20% of the aggregate sale price of the Option Shares to be repurchased (except to the extent not permitted under that certain revolving credit facility with various lending institutions and Bankers Trust Company of up to $40 million, a note in compliance therewith) and a subordinated promissory note in a principal amount equal to the remainder of the aggregate sale price, bearing interest at a floating rate of interest equal to the prime rate as stated from time to time by Chase Manhattan Bank or any successor thereto, and payable, as to principal and interest, in four equal annual installments on the first four anniversaries of the closing of such repurchase; provided that if the Company determines that withholding tax is required with respect to the exercise of a Repurchase Option, the Company shall withhold an amount equal to such withholding tax from the purchase price. At the closing, the Participant and each other seller will deliver the certificates representing the Option Shares to be sold duly endorsed in form for transfer to the Company or its designee, and the Company will be entitled to receive customary representations and warranties from the Participant and the other sellers regarding title to the Option Shares. 45 5.9 Restrictions on Transfer. (a) Restrictions. A Participant may not sell, pledge or otherwise transfer any interest in any Option Shares except pursuant to the provisions of this Section 5.9. At least 60 days prior to making any transfer, the Participant proposing such transfer shall deliver a written notice (the "Sale Notice") to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the proposed transfer. Such Participant (and such Participant's transferees) shall not consummate any such transfer until 60 days after the Sale Notice has been delivered to the Company, unless the Company has notified such Participant in writing that it will not exercise its rights under this Section 5.9. (The date of the first to occur of such events is referred to herein as the "Authorization Date"). (b) Repurchase Option. The Company may elect to purchase all or any portion of the Option Shares to be transferred upon the same terms and conditions as those set forth in the Sale Notice (the "Right of First Refusal") by delivering a written notice of such election to such Participant within 30 days after the receipt of the Sale Notice by the Company (the "Election Notice"). If the Company has not elected to purchase all of the Option Shares specified in the Sale Notice, such Participant may transfer the Option Shares not purchased by the Company to the prospective transferee(s) as specified in the Sale Notice at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the Authorization Date. Any Option Shares not so transferred within such 60-day period must be reoffered to the Company in accordance with the provisions of this Section 5.9 in connection with any subsequent proposed transfer. (c) Exceptions. The restrictions contained in this Section 5.9 will not apply with respect to transfers of Option Shares (1) pursuant to applicable laws of descent and distribution, (2) pursuant to the Shareholders Agreement or (3) among the Participant's family group; provided that the restrictions contained in this paragraph will continue to be applicable to the Option Shares after any such transfer and the transferees of such Option Shares have agreed in writing to be bound by the terms and provisions of this Plan and the Option grant, as amended from time to time. The Participant's "family group" means the Participant's spouse and descendants (whether natural or adopted) and any trust solely for the benefit of the Participant and/or the Participant's spouse and/or descendants. 46 5.10 Termination of Restrictions. The rights and obligations set forth in Sections 5.8 and 5.9 hereof will terminate upon the earlier of (A) the consummation by the Company of a Qualified Initial Public Offering or (B) the sale of Option Shares in accordance with the terms and conditions of Section 5.9 (except for a transfer pursuant to Section 5.9 (c)); provided that with respect to clause (B) above, such rights and obligations shall terminate only with respect to those Option Shares sold. ARTICLE VI General Provisions 6.1 Written Agreement. Each Option granted hereunder shall be embodied in a written agreement (the "Option Agreement") which shall be signed by the Participant to whom the Option is granted and shall be subject to the terms and conditions set forth herein. 6.2 Listing, Registration and Legal Compliance. If at any time the Committee determines, in its discretion, that the listing, registration or qualification of the shares subject to Options upon any securities exchange or under any state or federal securities or other law or regulation, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to or in connection with the granting of Options or the purchase or issuance of shares thereunder, no Options may be granted or exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The holders of such Options will supply the Company with such certificates, representations and information as the Company shall request and shall otherwise cooperate with the Company in obtaining such listing, registration, qualification, consent or approval. In the case of officers and other persons subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, the Committee may at any time impose any limitations upon the exercise of Options that, in the Committee's discretion, are necessary or desirable in order to comply with such Section 16(b) and the rules and regulations thereunder. If the Company, as part of an offering of securities or otherwise, finds it desirable because of federal or state regulatory requirements to reduce the period during which any Options may be exercised, the Committee may, in its discretion and without the Participant's consent, so reduce such period on not less than 15 days' written notice to the holders thereof. 6.3 Options Not Transferrable. Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the Participant to whom they were granted, may be exercised only by such Participant (or, if such Participant is incapacitated, by such Participant's legal guardian or legal representative). In the event of the death of a Participant, Options which are not vested on the date of death shall terminate; exercise of Options granted hereunder to such Participant, which are vested as of the date of death, may be made only by the executor or administrator of such Participant's estate or the person or persons to whom such Participant's rights under the Options will pass by will or the laws of descent and distribution. 6.4 Adjustments. In the event of a reorganization, recapitalization, stock dividend or stock split, or combination or other change in the shares of Common Stock, the Board or the Committee may, in order to prevent the dilution or enlargement of rights under the Plan or outstanding Options, adjust (1) the number and type of shares as to which options may be granted under the Plan, (2) the number and type of shares covered by outstanding Options, (3) the exercise prices specified therein and (4) other provisions of this Plan which specify a number of shares, all as such Board or Committee determines to be appropriate and equitable. 6.5 Rights of Participants. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time (with or without cause), or confer upon any Participant any right to continue in the employ of the Company or any Subsidiary for any period of time or to continue to receive such Participant's current (or other) rate of compensation. No employee shall have a right to be selected as a Participant or, having been so selected, to be selected again as a Participant. 6.6 Fair Market Value Determination. Until the Common Stock is listed on a security exchange or quoted on the Nasdaq Stock Market, the Board or the Committee will determine the Fair Market Value per share of Common Stock based on such factors as the members thereof in the exercise of their business judgment consider relevant as necessary and any Participant may receive upon termination of his or her employment with the Company the most recent Fair Market Value determination for the Common Stock upon written request to the Board. 47 6.7 Amendment, Suspension and Termination of Plan. The Board or the Committee may suspend or terminate the Plan or any portion thereof at any time and may amend it from time to time in such respects as the Board or the Committee may deem advisable; provided, however, that no such amendment shall be made without shareholder approval to the extent such approval is required by law, agreement or the rules of any exchange or national market system upon which the Common Stock is listed, and no such amendment, suspension or termination shall impair the rights of Participants under outstanding Options without the written consent of the Participants affected thereby, except as provided below. No Options shall be granted hereunder after the tenth anniversary of the adoption of the Plan. 6.8 Amendment of Outstanding Options. The Committee may amend or modify any Option in any manner to the extent that the Committee would have had the authority under the Plan initially to grant such Option; provided that, except as expressly contemplated elsewhere herein or in any agreement evidencing such Option, no such amendment or modification shall impair the rights of any Participant under any outstanding Option without the written consent of such Participant. 6.9 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Committee shall be indemnified by the Company against (i) all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted under the Plan, and (ii) all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding; provided, however, that any such Committee member shall be entitled to the indemnification rights set forth in this Section 6.9 only if such member (1) acted in good faith and in a manner that such member reasonably believed to be in, and not opposed to, the best interests of the Company, and (2) with respect to any criminal action or proceeding, (A) had no reasonable cause to believe that such conduct was unlawful, and (B) upon the institution of any such action, suit or proceeding a Committee member shall give the Company written notice thereof and an opportunity to handle and defend the same before such Committee member undertakes to handle and defend it on his own behalf. 6.10 Restricted Securities. Unless registered as described in Section 6.2 hereof, all Common Stock issued pursuant to the terms of this Plan shall constitute "restricted securities," as that term is defined in Rule 144 promulgated by the Securities and Exchange Commission pursuant to the Securities Act, and may not be transferred except in compliance with the registration requirements of the Securities Act or an exemption therefrom. * * * * * 48 EX-10.25 5 Exhibit 10.25 MCMS, INC. EXECUTIVE BONUS PLAN 1. PURPOSE The MCMS, Inc. Executive Bonus Plan (the "Bonus Plan") is designed to attract, retain, and reward highly qualified executives and key employees who are important to the Company's success and to provide incentives relating directly to the performance and growth of the Company. 2. DEFINITIONS (a) Bonus - The cash incentive awarded to an Executive Officer or Key Employee pursuant to the terms and conditions of the Bonus Plan. (b) Board - The Board of Directors of MCMS, Inc. (c) Code - The Internal Revenue Code of 1986, as amended. (d) Committee - The Compensation Committee of the Board, or such other committee of the Board that is designated by the Board to administer the Bonus Plan, in compliance with requirements of Section 162(m) of the Code. (e) Company - MCMS, Inc. and any other corporation in which MCMS, Inc. controls, directly or indirectly, more than fifty percent (50%) of the combined voting power of all classes of voting securities. (f) Executive - An Executive Officer or Key Employee of the Company. (g) Executive Officer - Any officer of the Company. (h) Key Employee - Any employee of the Company as may be designated by the Committee to participate in this Bonus Plan. 3. ELIGIBILITY Only Executives are eligible to participate in the Bonus Plan. 4. ADMINISTRATION (a) Awards of bonuses under the Bonus Plan shall be based on one or more of the following performance goals, as determined by resolution of the Committee in their discretion: (i) net income, (ii) earnings, before interest, taxes, depreciation, and amortization, (iii) earnings per share, (iv) return on equity, (v) gross margin,(vi) return on assets, (vii) net sales, (viii) new products, (ix) expansion of facilities, (x) customer satisfaction (xi) asset management, (xii) debt management, or (xiii) other criteria identified by the Committee. (b) The Committee shall administer the Bonus Plan and shall have full power and authority to construe, interpret, and administer the Bonus Plan necessary to comply with the requirements of Section 162(m) of the Code. The Committee's decisions shall be final, conclusive, and binding upon all persons. The Committee in its sole discretion has the authority, by resolution, to modify performance goals and/or reduce or increase the amount of a bonus otherwise allocated to Executives upon attainment of performance goals. In addition, bonuses will be conditioned upon the Company's compliance, both before and after such bonuses are paid, with any existing Company obligations or covenants. (c) Prior to the commencement of a fiscal year, or at such other time as the Committee deems appropriate, the Committee shall: (i) determine the performance goals; (ii) determine the Executives who will participate in the Bonus Plan for the relevant period; and (iii) determine the method for computing the amount of bonus payable to each Executive if the performance goals are achieved. Bonus amounts shall be paid within ninety (90) days after the completion of the audit of the Company's fiscal year unless otherwise determined by the Committee. 49 (d) If the Executive ceases to be employed by the Company, any unpaid bonuses shall be paid in accordance with the Executive's employment agreement, if applicable. (e) The Committee may amend, modify, suspend, or terminate the Bonus Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. The Committee will seek shareholder approval of any amendment determined to require shareholder approval or advisable under the regulations of the Internal Revenue Service or other applicable law or regulation. 5. NONASSIGNABILITY No Bonus or any other benefit under the Bonus Plan shall be assignable or transferable by the participant during the participant's lifetime except as otherwise approved by the Committee. 6. NO RIGHT TO CONTINUED EMPLOYMENT Subject to employment agreements entered into between the Company and the Executives, nothing in the Bonus Plan shall confer upon any employee any right to continue in the employ of the Company or shall interfere with or restrict in any way the right of the Company to discharge an Executive at any time for any reason whatsoever, with or without good cause. 7. EFFECTIVE DATE The Bonus Plan shall be deemed effective as of February 27, 1998. 50 EX-10.26 6 Exhibit 10.26 MCMS, INC. PROFIT SHARING PLAN 1. PURPOSE The MCMS, Inc. (the "Company") Profit Sharing Plan (the "Plan") is designed to recognize individual performance and contribution to the profitability of the Company. 2. PROFIT SHARING AND ADMINISTRATION (a) The Company will distribute a bonus of up to approximately 7% of its earnings, before, interest, taxes, depreciation and amortization ("EBITDA") (the "Bonus Pool"), to eligible team members. The Bonus Pool, after approval of the Compensation Committee (the "Committee") in their discretion, may be distributed in the form of a broad based equal distribution to all eligible team members ("Broad Based Distribution") and/or a distribution to eligible team members based on individual performance or other criteria ("Pay for Performance"). All distributions are subject to the profitability of the Company and are at the discretion of the Committee, which shall have the authority to determine performance goals and other criteria for Pay for Performance distributions, the team members to be awarded bonuses, and the amount and timing of bonuses under the Plan. The Committee also shall have the right to make adjustments to the Bonus Pool as it deems appropriate. In addition, bonuses will be conditioned upon the Company's compliance, both before and after such bonuses are paid, with any existing Company obligations or covenants. (b) Bonuses will be distributed after the announcement of the Company's fiscal quarterly results of operations or at such other times as determined by the Committee. (c) Any questions concerning interpretations of, or eligibility under, the Plan shall be decided by the Committee. The Plan may be modified or discontinued at any time by the Committee, with or without cause or notice. 3. ELIGIBILITY To be eligible to participate under the Plan, the following requirements must be met: (a) Employees must be continuously employed with the Company for ninety (90) days prior to the close of the most recent fiscal quarter (time worked as a temporary employee will be credited to fulfilling this ninety (90) day requirement). In addition, any Broad Based Distribution to part-time team members shall be prorated based on the hours worked by such team member. (b) Team members must be a full or part-time MCMS employee on the payroll transmit date without respect to a retroactive or other termination date established after the payroll has been transmitted. Temporary employees are not eligible. (c) Officers, interns, and commission-based sales team members are not eligible for Pay for Performance bonuses. 4. EFFECTIVE DATE The Plan shall be deemed effective as of February 27, 1998. 51 EX-11 7 Exhibit 11 MCMS, INC. EARNINGS PER SHARE (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
Three months ended --------------------------------- November 27, December 3, 1997 1998 ------------ ------------ Net income basic $ 4,476 $ (2,023) Dividends on redeemable preferred stock accumulated but not paid - (28) Redeemable preferred stock dividends and discount accretion - (854) ------------ ------------ Net income available to common stockholders $ 4,476 $ (2,905) ============ ============ Shares used to compute net income per share: Weighted average common shares outstanding - basic and diluted 1,000 5,000,000 ============ ============ Net income (loss) per share - basic and diluted $ 4,476 $ (0.58) ============ ============
52 EX-27 8
5 1,000 3-MOS SEP-02-1999 DEC-03-1998 0 0 40,951 278 48,929 91,583 96,611 33,943 161,998 64,730 0 26,528 5 5 (116,047) 161,998 91,243 91,243 86,056 86,056 4,264 0 4,721 (3,798) (1,775) 0 0 0 0 (2,023) (0.58) 0
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