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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 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 NUMBER: 0-21272
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FLEXTRONICS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SINGAPORE 0-23354 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NO.)
------------------------
514 CHAI CHEE LANE #04-13
BEDOK INDUSTRIAL ESTATE
SINGAPORE 469029
(65) 449-5255
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL E. MARKS
CHIEF EXECUTIVE OFFICER
FLEXTRONICS INTERNATIONAL LTD.
514 CHAI CHEE LANE #04-13
BEDOK INDUSTRIAL ESTATE
SINGAPORE 469029
(65) 449-5255
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes {X} No { }
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate value of voting stock held by non-affiliates of the Registrant was
approximately $39.625 as of May 29, 1998, based upon the closing price of the
Registrant's Common Stock reported for such date on the Nasdaq National Market.
Shares of Common Stock held by each executive officer and director and by each
person who owns 10% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of May 29, 1998, the Registrant had 20,394,956 outstanding shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1998 annual general
meeting of shareholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form 10-K.
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FLEXTRONICS INTERNATIONAL LIMITED
1998 FORM 10-K
TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Facilities
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits and Financial Statement Schedules
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PART I
Except for historical information contained herein, the matters discussed
in this annual report Form 10-K are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words "expects,"
"anticipates," "believes," "intends," "plans" and similar expressions identify
forward-looking statements, which speak only as of the date hereof. These
forward-looking statements are subject to certain risks and uncertainties,
including, without limitation, those discussed in "Item 1-Business--Risk
Factors," that could cause future results to differ materially from historical
results or those anticipated.
Item 1. BUSINESS
Flextronics International Limited ("Flextronics" or the "Company") is a
provider of advanced electronics manufacturing services to original equipment
manufacturers ("OEMs") in the telecommunications, networking, computer, consumer
electronics, and medical device industries. Flextronics offers a full range of
services including product design, printed circuit board ("PCB") fabrication and
assembly, materials procurement, inventory management, final system assembly and
test, packaging and distribution. The components, subassemblies and finished
products manufactured by Flextronics incorporate advanced interconnect,
miniaturization and packaging technologies, such as surface mount ("SMT"),
multi-chip modules ("MCM"), chip-on-board ("COB"), ball grid array ("BGA") and
miniaturized gold-plated PCB technologies. The Company's strategy is to use its
global manufacturing capabilities and advanced technological expertise to
provide its customers with a complete manufacturing solution, highly responsive
and flexible service, accelerated time to market and reduced production costs.
The Company targets leading OEMs in growing vertical markets with which it
believes it can establish long-term relationships, and serves its customers on a
global basis from its strategically located facilities in North America, South
America, Asia, Western Europe and Central Europe. The Company's customers
include Advanced Fibre Communications, BayNetworks, Braun/ThermoScan, Cisco
Systems, Ericsson, Lifescan (a Johnson & Johnson company), Microsoft, Philips
Electronics and 3Com/US Robotics.
Industry Overview
Many OEMs in the electronic industry are increasingly utilizing electronics
manufacturing service providers in their business and manufacturing strategies,
and are seeking to outsource a broad range of manufacturing and related
engineering services. Outsourcing allows OEMs to take advantage of the
manufacturing expertise and capital investments of electronics manufacturing
service providers, thereby enabling OEMs to concentrate on their core
competencies. OEMs utilize electronics manufacturing service providers for many
reasons including the following:
Reduce Production Costs. The competitive environment for OEMs requires that they
achieve a low-cost manufacturing solution, and that they quickly reduce
production costs for new products. Due to their established manufacturing
expertise, production scale and infrastructure, electronics manufacturing
service providers can frequently provide OEMs with higher levels of
responsiveness, increased flexibility and reduced overall production costs than
in-house manufacturing operations.
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Accelerate Time to Market. Rapid technological advances and shorter product life
cycles require OEMs to reduce the time required to bring a product to market in
order to remain competitive. By providing engineering services, established
infrastructure and advanced manufacturing expertise, electronics manufacturing
service providers can help OEMs shorten their product introduction cycles.
Access Advanced Manufacturing and Design Capabilities. As electronic products
have become smaller and more technologically advanced, manufacturing processes
have become more automated and complex, making it increasingly difficult for
OEMs to maintain the design and manufacturing expertise necessary to remain
competitive. Electronics manufacturing service providers can enable OEMs to gain
access to advanced manufacturing facilities, packaging technologies and design
expertise.
Focus Resources. Because the electronics industry is experiencing increased
competition and technological change, many OEMs are focusing their resources on
activities and technologies where they add the greatest value. Electronics
manufacturing service providers offer comprehensive services that allow OEMs to
focus on their core competencies.
Reduce Investment. As electronic products have become more technologically
advanced, internal manufacturing has required significantly increased investment
for working capital, capital equipment, labor, systems and infrastructure.
Electronics manufacturing service providers can enable OEMs to gain access to
advanced, high volume manufacturing capabilities without making the capital
investments required for internal production.
Improve Inventory Management and Purchasing Power. OEMs are faced with
increasing challenges in planning, procuring and managing their inventories
efficiently due to frequent design changes, short product life cycles, large
investments in electronic components, component price fluctuations and the need
to achieve economies of scale in materials procurement. Electronics
manufacturing service providers inventory management expertise and volume
procurement capabilities can reduce OEM production and inventory costs, helping
them respond to competitive pressures and increase their return on assets.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign markets.
Electronics manufacturing service providers with worldwide capabilities are able
to offer such OEMs a variety of options on manufacturing locations to better
address their objectives regarding costs, shipment location, frequency of
interaction with manufacturing specialists and local content requirements of
end-market countries. In addition, OEMs in Europe and other international
markets are increasingly recognizing the benefits of outsourcing.
Strategy
The Company's objective is to enhance its position as a provider of
advanced electronics manufacturing and design services to OEMs worldwide. The
Company's strategy to meet this objective includes the following key elements:
Leverage Global Presence. The Company has established a manufacturing presence
in the world's major electronics markets -- Asia, the Americas and Europe -- in
order to serve the increasing outsourcing needs of regional OEMs and to provide
the global, large scale capabilities required by larger OEMs. In the past
eighteen months, the Company substantially expanded its manufacturing operations
by expanding its integrated campus in Doumen, China, constructing a new
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manufacturing campus in Guadalajara, Mexico, adding facilities in San Jose,
California, acquiring facilities in Karlskrona, Sweden from Ericsson (the
"Karlskrona Facilties") and acquiring Neutronics Electronics Holding AG
("Neutronics"), with manufacturing operations in Austria and Hungary. The
Company plans to further increase the scale and the scope of the services
offered in each site and believes that this will allow it to better address the
needs of leading OEMs.
Provide a Complete Manufacturing Solution. The Company believes that OEMs are
increasingly requiring a wider range of advanced services from electronics
manufacturing services providers. Building on its integrated engineering and
manufacturing capabilities, the Company provides its customers with services
ranging from initial product design and development and prototype production to
final product assembly and distribution to OEMs' customers. The Company believes
that this provides greater control over quality, delivery and cost, and enables
the Company to offer its customers a complete cost-effective solution.
Provide Advanced Technological Capabilities. Through its continuing investment
in advanced packaging and interconnect technologies (such as COB, BGA and
miniature gold-finished PCB capabilities), as well as its investment in advanced
design and engineering capabilities, the Company is able to offer its customers
a variety of advanced design and manufacturing solutions. In particular, the
Company believes that its ability to meet growing market demand for miniaturized
electronic products will be critical to its ongoing success, and has developed
and acquired a number of innovative technologies to address this demand.
Accelerate Customers' Time to Market. The Company's engineering services group
provides integrated product design and prototyping services to help customers
accelerate their time to market for new products. By participating in product
design and prototype development, the Company often reduces the costs of
manufacturing the product. In addition, by designing products to improve
manufacturability and by participating in the transition to volume production,
the Company believes that its engineering services group can significantly
accelerate the time to volume production. By working closely with its suppliers
and customers throughout the design and manufacturing process, the Company
believes that it can enhance responsiveness and flexibility, increase
manufacturing efficiency and reduce total cycle times.
Increase Efficiency Through Logistics. The Company is streamlining and
simplifying production logistics at its large, strategically located facilities
to decrease the costs associated with the handling and managing of materials.
The Company has incorporated suppliers of certain components in its facilities
in China, Hungary, and Mexico to further reduce material and transportation
costs. The Company has established warehousing capabilities from which it can
ship products into customers' distribution channels.
Target Leading OEMs in Growing Vertical Markets. The Company has focused its
marketing efforts on fast growing industry sectors that are increasingly
outsourcing manufacturing operations, such as the telecommunication, networking,
computer, consumer electronics and medical device industries. The Company seeks
to maintain a balance of customers among these industries, establishing
long-term relationships with leading OEMs to become an integral part of their
operations.
There can be no assurance that the Company's strategy, even if successfully
implemented, will reduce the risks associated with the Company's business. See
"Risk Factors."
6
Customers
The Company's customers consist of a select group of OEMs in the
telecommunications, networking, computer, consumer electronics and medical
device industries. Within these industries, the Company's strategy is to seek
long-term relationships with leading companies that seek to outsource
significant production volumes of complex products. The Company has increasingly
focused on sales to larger companies and to customers in the telecommunications
industries. In fiscal 1997 and fiscal 1998, the Company's five largest customers
accounted for approximately 49% and 57%, respectively, of net sales. The loss of
one or more major customers would have a material adverse effect on the Company,
its results of operations, prospects or debt service ability. See "- Risk
Factors --Customer Concentration; Dependence on Electronics Industry" and "--
Variability of Customer Requirements and Operating Results."
The following table lists in alphabetical order certain of the Company's
largest customers in the twelve months ended March 31, 1998 and the products for
which the Company provides manufacturing services.
CUSTOMER END PRODUCTS
- -------------------------------------- -----------------------------------
Advanced Fibre Communications......... Local line loop carriers
Bay Networks....... .................. Data communications products
Braun/ThermoScan...................... Temperature monitoring systems
Cisco Systems......................... Data communications products
Compaq/Microcom....................... Modems
Ericsson.............................. Business telecommunications systems
Lifescan (a Johnson & Johnson company) Portable glucose monitoring system
Microsoft............................. Computer peripheral devices
Philips Electronics................... Consumer electronics products
3Com/US Robotics...................... Pilot electronic organizers
In addition, the Company recently began manufacturing products for a number
of new customers, including Alcatel (business telecommunications systems),
Aspect (business telecommunications systems), Nokia (consumer electronics
products) and WebTV/Microsoft (consumer internet devices). None of these
customers represent more than 10% of the Company's net sales in fiscal 1998.
In connection with the acquisition of the Karlskrona Facilities, the
Company, certain of its subsidiaries and Ericsson entered into a multi-year
purchase agreement (the "Karlskrona Purchase Agreement"). Sales to Ericsson
accounted for approximately 26% of the Company's net sales in fiscal 1998, and
the Company believes that sales to Ericsson will account for a significant
portion of its net sales in fiscal 1999. See " -- Recent Acquisitions" and " -
Risk Factors -- Risks of Karlskrona Purchase Agreement."
Sales and Marketing
The Company achieves worldwide sales coverage through a direct sales force,
which focuses on generating new accounts, and through program managers, who are
responsible for managing relationships with existing customers and making
follow-on sales. In North America, the Company maintains sales offices in
California, Florida and Massachusetts. The Company's Asian sales offices are
located in Singapore and Hong Kong. In Europe, the Company maintains sales
offices in England, France, Germany, the Netherlands and Sweden. In addition to
its sales force, the Company's executive staff plays an integral role in the
Company's marketing efforts.
7
SERVICES
The Company provides a broad range of advanced engineering, manufacturing
and distribution services to OEM customers. These services are provided on a
turnkey basis and, to a lesser extent, on a consignment basis, and include
product design, PCB fabrication and assembly, materials procurement, inventory
management, final system assembly and test, packaging and distribution. The
components, subassemblies and complete products manufactured by the Company for
its OEM customers incorporate advanced interconnect, miniaturization and
packaging technologies, such as SMT, COB and BGA technologies. A substantial
portion of the Company's net sales (a majority in fiscal 1998) are derived from
the manufacture and assembly of complete products that are substantially ready
for distribution by the OEM to its customers. The Company also designs and
manufactures miniature gold-finished PCBs that OEMs then incorporate into their
products.
Engineering Services
The engineering services group coordinates and integrates the Company's
worldwide design, prototype and other engineering capabilities. Through its
"product introduction centers", the Company provides a broad range of
engineering services, and in some cases dedicated production lines for
prototype. This focused, integrated approach provides the Company's customers
with advanced service and support and leverages the Company's technological
capabilities. As a result, the engineering services group enables the Company to
strengthen its relationship with manufacturing customers as well as to attract
new customers who require advanced design services.
The engineering services group actively assists customers with initial
product design in order to reduce the time from design to prototype, improve
product manufacturability and reduce product costs. The Company provides a full
range of electrical, thermal and mechanical design services, including CAE and
CAD-based design services, manufacturing engineering services, circuit board
layout and test development. The engineering services group also coordinates
industrial design and tooling for product manufacturing. After product design,
the Company provides prototype assemblies for fast turnaround. During the
prototype process, Company engineers work with customer engineers to enhance
production efficiency and improve product design. The engineering services group
then assists with the transition to volume production. By participating in
product design and prototype development, the Company can reduce manufacturing
costs and accelerate the time to volume production.
Materials Procurement and Management
Materials procurement and management consists of the planning, purchasing,
expediting and warehousing of the components and materials used in the
manufacturing process. The Company's inventory management expertise and volume
procurement capabilities contribute to cost reductions and reduce total cycle
time. The Company generally orders components after it has a firm purchase order
or letter of authorization from a customer. However, in the case of long
lead-time items, the Company will occasionally order components in advance of
orders, based on customer forecasts, to ensure adequate and timely supply.
Although the Company works with customers and third-party suppliers to reduce
the impact of component shortages, such shortages may occur from time to time
and may have a material adverse effect on the Company. See "- Risk Factors --
Limited Availability of Components." The campuses in China, Hungary and Mexico
are designed to provide many of the custom components used by the Company
on-site,
8
in order to reduce material and transportation costs, simplify logistics and
facilitate inventory management.
Assembly and Manufacturing
The Company's assembly and manufacturing operations include PCB assembly
and, increasingly, the manufacture of subsystems and complete products. Its PCB
assembly activities primarily consist of the placement and attachment of
electronic and mechanical components on printed circuit boards using both SMT
and traditional pin-through-hole ("PTH") technology. The Company also assembles
subsystems and systems incorporating PCBs and complex electromechanical
components, and, increasingly, manufactures and packages final products for
shipment directly to the customer or its distribution channels. The Company
employs just-in-time, ship-to-stock and ship-to-line programs, continuous flow
manufacturing, demand flow processes and statistical process control. The
Company has expanded the number of production lines for finished product
assembly, burn-in and test to meet growing demand and increased customer
requirements. In addition, the Company has invested in FICO, a producer of
injection molded plastic for Asia electronics companies with facilities in
Shenzhen, China.
As OEMs seek to provide greater functionality in smaller products, they
increasingly require advanced manufacturing technologies and processes. Most of
the Company's PCB assembly involves the use of SMT, which is the leading
electronics assembly technique for more sophisticated products. SMT is a
computer-automated process which permits attachment of components directly on
both sides of a PCB. As a result, it allows higher integration of electronic
components, offering smaller size, lower cost and higher reliability than
traditional manufacturing processes. By allowing increasingly complex circuits
to be packaged with the components placed in closer proximity to each other, SMT
greatly enhances circuit processing speed, and therefore board and system
performance. The Company also provides traditional PTH electronics assembly
using PCBs and leaded components for lower cost products.
With its acquisitions of Neutronics and DTM Products, Inc. ("DTM"), the
Company gained significant plastic injection molding capabilities. In addition,
the Company has a 40% investment in FICO Investment Holding Ltd.("FICO"), which
produces injection molded plastics for Asian companies. Neutronics offers a wide
range of custom-manufactured plastic components for various sectors of the
electronics industry, including consumer, computer, telecommunications, medical
and industrial. The Company's plastic component manufacturing operations in
Hungary utilize highly automated injection molding processes.
The electronic products market is directly dependent on the plastic
components market for the packaging of an electronic product. The design of
plastic components for a new electronic product, and the associated sourcing of
plastic molds, normally involves a substantial lead time. As a result, plastic
suppliers with technical capabilities, such as Neutronics and DTM, are able to
provide additional services to electronic product manufacturers, such as the
development of plastic components and electronics assembly and development, to
improve the production process and reduce the finished product's time to market.
The Company's 1996 acquisition of Astron Group Limited ("Astron"),provided
it with significant capabilities to fabricate miniature gold-finished PCBs for
specialized applications such as cellular phones, optoelectronics, LCDs, pagers
and automotive electronics. These advanced laminate substrates can significantly
improve a product's performance, while reducing its size and cost. The Company's
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miniature, gold-finished PCBs are fabricated in the Company's facility in China.
The Company is also increasingly utilizing advanced interconnect and
packaging technologies such as chip on board and ball grid array technology. COB
technology represents a configuration in which a bare, unpackaged semiconductor
is attached directly onto a PCB, wire bonded and then encapsulated with a
polymeric material. COB technology facilitates miniaturized, low-profile
assemblies, and can result in lower component costs and reduced time to market.
The Company has significant experience in utilizing COB technology to
manufacture a wide range of products. BGA technology is an emerging technology
for packaging semiconductors that can provide higher interconnect density and
improved assembly yields and reliability by assembling surface-mount packages to
the circuit board through an array of solder balls, rather than pin leads. The
Company has recently begun utilizing BGA technology to manufacture products for
OEMs.
Test
After assembly, the Company offers computer-aided testing of PCBs,
subsystems and systems, which contributes significantly to the Company's ability
to deliver high-quality products on a consistent basis. Working with its
customers, the Company develops product-specific test strategies. The Company's
test capabilities include management defect analysis, in-circuit tests and
functional tests. In-circuit tests verify that all components have been properly
inserted and that the electrical circuits are complete. Functional tests
determine if the board or system assembly is performing to customer
specifications. The Company either designs and procures test fixtures and
develops its own test software or utilizes its customers' existing test fixtures
and test software. In addition, the Company also provides environmental stress
tests of the board or system assembly.
Distribution
The Company offers its customers flexible, just-in-time delivery programs
allowing product shipments to be closely coordinated with customers' inventory
requirements. Increasingly, the Company is warehousing products for customers
and shipping those products directly into their distribution channels. The
Company believes that this service can provide customers with a more
comprehensive solution and enable them to be more responsive to market demands.
COMPETITION
The electronics manufacturing industry is extremely competitive and
includes hundreds of companies, several of whom have achieved substantial market
share. The Company competes against numerous domestic and foreign electronics
manufacturing services providers, and current and prospective customers also
evaluate the Company's capabilities against the merits of internal production.
In addition, in recent years the electronics manufacturing industry has
attracted a significant number of new entrants, including large OEMs with excess
manufacturing capacity, and many existing participants, including the Company,
have significantly increased their manufacturing capacity by expanding their
facilities and adding new facilities. In the event of a decrease in overall
demand for electronics manufacturing services, this increased capacity could
result in substantial pricing pressures which could adversely affect the
Company's operating results. Certain of the Company's competitors, including
Solectron Corporation and SCI Systems, have substantially greater manufacturing,
10
financial, research and development and marketing resources than the Company. As
competitors increase the scale of their operations, they may increase their
ability to realize economies of scale, to reduce their prices and to more
effectively meet the needs of large OEMs. The Company believes that the
principal competitive factors in the segments of the electronics manufacturing
industry in which it operates are cost, technological capabilities,
responsiveness and flexibility, delivery cycles, location of facilities, product
quality and range of services available. Failure to satisfy any of the foregoing
requirements could materially adversely affect the Company's competitive
position, its results of operations, prospects or debt service ability.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 13,300 persons,
including 3,600 employees in Austria and Hungary who were added with the
Neutronics acquisition and approximately 1,200 employees who were added with the
Company's March 31, 1998 acquisitions of Conexao Informatica Ltda.("Conexao")
and Altatron Inc. and Marathon Business Park LLC (collectively "Altatron"). Most
of the Company's non-management employees outside of the United States are
represented by labor unions. The Company has never experienced a work stoppage
or strike. The Company believes that its employee relations are good.
The Company's success depends to a large extent upon the continued services
of key managerial and technical employees. The loss of such personnel could have
a material adverse effect on the Company, its results of operations, prospects
or debt service ability. To date, the Company has not experienced significant
difficulties in attracting or retaining such personnel. Although the Company is
not aware that any of its key personnel currently intend to terminate their
employment, their future services cannot be assured. See "- Risk Factors --
Dependence on Key Personnel and Skilled Employees."
RECENT ACQUISITIONS
On March 31, 1998 the Company acquired Conexao, a Brazil-based electronics
manufacturing services provider, in exchange for a total of 421,593 Ordinary
Shares, of which 118,305 Ordinary Shares are to be issued upon resolution of
certain general and specific contingencies.
On March 31, 1998, the Company also acquired Altatron Inc., an electronics
manufacturer service provider headquartered in Fremont, California, with
facilities in Fremont, California; Richardson, Texas; and Hamilton, Scotland in
exchange for 788,650 Ordinary Shares, of which 157,730 Ordinary Shares are to be
issued upon resolution of certain general and specific contingencies.
On December 1, 1997, the Company acquired DTM , a Colorado-based producer
of injection molded plastics for North American OEMs, in exchange for 252,469
Ordinary Shares, and Energipilot AB, a Swedish company principally engaged in
providing cables and engineering services for Northern European OEMs, in
exchange for 229,990 Ordinary Shares.
On October 30, 1997, the Company acquired 92% of the outstanding ordinary
shares of Neutronics, an Austrian electronics manufacturing service provider
with operations in Austria and Hungary, for 2,806,000 Ordinary Shares of the
Company. Neutronics' net sales in fiscal 1998 was approximately $210.2 million.
Neutronics' customers include Philips Electronics, Nokia and other OEMs in the
consumer electronics, business electronics, computer telecommunications, primary
care, medical appliances and automotive electronics industries. Approximately
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64% of Neutronic's net sales for the fiscal year 1998 were derived from sales to
Philips Electronics.
Neutronics conducts its operations through four manufacturing facilities,
one in Austria and three in Hungary. These facilities, which total 718,000
square feet and have a total of approximately 3,600 employees are engaged
primarily in PCB assembly, as well as injection molded plastics. Neutronics also
provides engineering services at its Althofen, Austria facility. The Company
believes that Neutronics' manufacturing sites in Hungary (at Tab, Sarvar and
Zalaegerszag) benefit from a relatively low cost of labor compared to Western
Europe and the United States. There can be no assurance that real wages in
Hungary will not rise to a level comparable to Western Europe or the United
States.
Neutronics commenced operations in July 1994 as a joint venture between a
subsidiary of Philips Electronics and Sandaplast B.V. ("Sandaplast"), a Dutch
company corporation based in Malaysia. Neutronics initially acquired Philips'
existing facility in Althofen, Austria, and subsequently established the three
Hungarian facilities, modernized the Austrian facility and added plastic
injection molding capabilities. Accordingly, Neutronics has a limited operating
history. At the time of the acquisition, Neutronics was owned by Philips,
Malaysian businessman Hui Shing Leong and Neutronics' management. Neutronics'
management retained ownership of eight percent of the shares of Neutronics and
Mr. Hui has joined the Company's Board of Directors.
On March 27, 1997, the Company acquired from Ericsson the Karlskrona
Facilities located in Karlskrona, Sweden and related inventory, equipment and
other assets for approximately $82.4 million in cash. The Company, certain of
its subsidiaries and Ericsson also entered into the Karlskrona Purchase
Agreement, under which the Company will manufacture and Ericsson will purchase,
for a three-year period, certain products used in Ericsson's business
communications systems. See "-Risk Factors -- Risks of Karlskrona Purchase
Agreement".
The ability of the Company to obtain the benefits of its recent
acquisitions are subject to a number of risks and uncertainties, including the
Company's ability to successfully integrate the acquired operations and its
ability to maintain, and increase, sales to customers of the acquired companies.
See "-Risk Factors -- Acquisitions" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
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RISK FACTORS
Management of Expansion and Consolidation
The Company is currently experiencing a period of rapid expansion both
through internal growth and acquisitions, with net sales increasing from $131.3
million in fiscal 1994 to $1.1 billion in fiscal 1998. There can be no assurance
that the Company's historical growth will continue or that the Company will
successfully manage the integration of acquired operations. Expansion has
caused, and is expected to continue to cause, strain on the Company's
infrastructure, including its managerial, technical, financial and other
resources. To manage further growth, the Company must continue to enhance
financial controls and hire additional engineering and sales personnel. The
Company's ability to manage any future growth effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate new
employees into its overall operations and to continue to improve its operational
systems. The Company may experience certain inefficiencies as it integrates new
operations and manages geographically dispersed operations. There can be no
assurance that the Company will be able to manage its expansion effectively, and
a failure to do so could have a material adverse effect on the Company. In
addition, the Company would be adversely affected if its new facilities do not
achieve growth sufficient to offset increased expenditures associated with
expansion.
Expansion through acquisitions and internal growth has contributed to the
Company's incurring significant accounting charges and experiencing volatility
in its operating results. There can be no assurance that the Company will not
continue to experience volatility in its operating results or incur write-offs
in connection with its expansion efforts. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company plans to further expand its manufacturing capacity by expanding
its facilities and by adding new equipment. The Company expects substantial new
capital expenditures and operating lease commitments in connection with this
expansion. The Company plans to utilize operating leases, net cash from
operations, existing cash balances and borrowings under its credit facility to
support this expansion. No assurance can be given as to the availability of such
net cash from operations or borrowings, or as to the availability or terms of
any operating leases. The Company may encounter unforeseen difficulties, costs
or delays in developing, constructing and equipping the new manufacturing
facilities, and there can be no assurance as to when it will complete
construction. The development and construction of the new facilities are subject
to significant risks and uncertainties, including cost estimation errors and
overruns, construction delays, weather problems, equipment delays or shortages,
labor shortages and disputes, production start-up problems and other factors. As
many of such factors are beyond the Company's control, the Company cannot
predict the length of any such delays, which could be substantial and could
result in substantial cost overruns. Such delays would adversely affect the
Company's sales growth and the Company's ability to timely meet delivery
schedules. Furthermore, the Company's development and construction of the new
facilities will result in new fixed and operating expenses, including
substantial increases in depreciation expense and rental expense that will
increase the Company's cost of sales. If revenue levels do not increase
sufficiently to offset these new expenses, the Company's operating results could
be materially adversely affected.
13
Acquisitions
Acquisitions have represented a significant portion of the Company's growth
strategy. Acquisitions involve a number of risks, including the diversion of
management's attention, the integration and assimilation of the operations and
personnel of the acquired companies, and the potential loss of key employees and
customers of the acquired companies. The Company may not have had any experience
with technologies, processes and markets involved with the acquired business and
accordingly may lack the management and marketing experience that will be
necessary to successfully operate and integrate the business. The successful
operation of an acquired business will require communication and cooperation in
product development and marketing among senior executives and key technical
personnel. There can be no assurance that the integration of the acquired
businesses will be successful and will not result in disruption in one or more
sectors of the Company's business. In addition, there can be no assurance that
the Company will realize any of the other anticipated benefits of the
acquisition. Furthermore, additional acquisitions would require investment of
financial resources, and may require debt or equity financing. No assurance can
be given that the Company will consummate any acquisitions in the future, that
any past or future acquisition by the Company will not materially adversely
affect the Company, or that any such acquisition will enhance the Company's
business.
The acquisitions in the last eighteen months represent a significant
expansion of the Company's operations and entail a number of risks. The acquired
operations are now being integrated into the Company's ongoing manufacturing
operations. This requires optimizing production lines, implementing new
management information systems, implementing the Company's operating systems,
and assimilating and managing existing personnel. The difficulties of this
integration may be further complicated by geographic distances. In addition,
these acquisitions have increased and will continue to increase the Company's
expenses and working capital requirements, and place burdens on the Company's
management resources. In the event the Company is unsuccessful in integrating
these operations, the Company would be materially adversely affected. In
addition, prior to the acquisitions of the Karlskrona Facilities, Neutronics and
Conexao, the Company had no experience operating in Sweden, Central Europe or
Brazil, and there can be no assurance that the Company will achieve acceptable
levels of profitability at the acquired operations, or that the acquisitions
will not adversely affect its gross margins.
Variability of Customer Requirements and Operating Results
Electronics manufacturing service providers must provide increasingly rapid
product turnaround and respond to ever-shorter lead times. The Company generally
does not obtain firm long-term purchase commitments from its customers and over
the past few years has experienced reduced lead-times in customer orders. In
addition, customer contracts can be canceled and volume levels can be changed or
delayed and such cancellations and delays could affect the ability of the
Company to forecast purchase commitments accurately. The Company must
continually make other significant decisions for which it is responsible,
including the levels of business that it will seek and accept, production
schedules, component procurement commitments, personnel needs and other resource
requirements, based on estimates of future customer requirements that are
subject to significant change. A variety of conditions, both specific to the
individual customer and generally affecting the industry, may cause customers to
cancel, reduce or delay orders. Cancellations, reductions or delays by a
significant customer or by a group of customers would adversely affect the
Company. On occasion, customers may require rapid increases in production, which
can stress the Company's resources and reduce margins. Although the Company has
14
increased its manufacturing capacity, there can be no assurance that the Company
will have sufficient capacity at any given time to meet its customers' demands
if such demands exceed anticipated levels.
In addition to the variability resulting from the short-term nature of its
customers' commitments, other factors have contributed, and may contribute in
the future, to significant periodic and quarterly fluctuations in the Company's
results of operations. These factors include, among other things: timing of
orders; volume of orders relative to the Company's capacity; customers'
announcements, introductions and market acceptance of new products or new
generations of products; evolution in the life cycles of customers' products;
timing of expenditures in anticipation of future orders; effectiveness in
managing manufacturing processes; changes in cost and availability of labor and
components; product mix; and changes or anticipated changes in economic
conditions. In addition, the Company's net sales may fluctuate throughout the
year as a result of local factors and events that may affect production volumes
and seasonality in products requirements by certain customers.
Customer Concentration; Dependence on Electronics Industry
A small number of customers are responsible for a significant portion of
the Company's net sales. Approximately 26% and 13% of the Company's net sales in
fiscal 1998 was derived from sales to Ericsson and Philips Electronics
respectively, and sales to the Company's top five customers during fiscal 1998
accounted for approximately 57% of total net sales compared to 46% during fiscal
1997. The Company anticipates that a small number of customers will continue to
account for a large portion of its net sales as it focuses on strengthening and
broadening relationships with leading OEMs. See "-- Customers" and "-- Recent
Acquisitions."
The composition of the group comprising the Company's largest customers has
varied from year to year, and there can be no assurance that the Company's
principal customers will continue to purchase products and services from the
Company at current levels, if at all. Significant reductions in sales to any of
these customers, or the loss of one or more major customers, would have a
material adverse effect on the Company. The timely replacement of expired,
canceled, delayed, or reduced contracts with new business cannot be assured. See
"-- Variability of Customer Requirements and Operating Results"
The factors affecting the electronics industry in general could have a
material adverse effect on the Company's customers and as a result on the
Company as well. The markets in which the Company's customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. These conditions frequently
result in short product life cycles. The Company's success will depend to a
significant extent on the success achieved by its customers in developing and
marketing their products, some of which are new and untested. If technologies or
standards supported by customers' products become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be materially
adversely affected. The market segments served by the Company are also subject
to economic cycles and have in the past experienced, and are likely in the
future to experience, recessionary periods. A recessionary period affecting the
industry segments served by the Company could have a material adverse effect on
the Company. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
15
The Company extends credit terms to customers after performing credit
evaluations, which continue throughout a customer's contract period. Credit
losses have occurred in the past, and no assurances can be given that credit
losses, which could be material, will not occur in the future. The Company's
concentration of customers increases the risk that any credit loss would have a
material adverse effect on the Company. See "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Competition
The electronics manufacturing services industry is extremely competitive
and includes hundreds of companies, several of whom have achieved substantial
market share. The Company competes against numerous domestic and electronics
manufacturing service providers, and current and prospective customers also
evaluate the Company's capabilities against the merits of internal production.
In addition, in recent years the electronics manufacturing services industry has
attracted a significant number of new entrants, including large OEMs with excess
manufacturing capacity, and many existing participants, including the Company,
have substantially expanded their manufacturing capacity by expanding their
facilities and adding new facilities. In the event of a decrease in overall
demand for electronics manufacturing services, this increased capacity could
result in substantial pricing pressures, which could adversely affect the
Company's operating results. Certain of the Company's competitors, including
Solectron Corporation and SCI Systems, have substantially greater manufacturing,
financial, research and development and marketing resources than the Company.
The Company believes that the principal competitive factors in the segments of
the electronics manufacturing services industry in which it operates are cost,
technological capabilities, responsiveness and flexibility, delivery cycles,
location of facilities, product quality and range of services available. Failure
to satisfy any of the foregoing requirements could materially adversely affect
the Company. See "Item 1 - Business -- Competition."
Significant Leverage
The Company's total indebtedness and capital lease obligations on March 31,
1998 were $242.5 million compared to $165.9 million at March 31, 1997. In
addition, on March 31, 1998, the Company and its subsidiaries had approximately
$100.5 million available for additional borrowings under its credit facilities.
The Company's level of indebtedness presents risks to investors, including the
possibility that the Company may be unable to generate cash sufficient to pay
the principal of and interest on the indebtedness when due. Additionally, the
Company's level of indebtedness could have a material adverse effect on the
Company's future operating performance, including, but not limited to, the
following: (i) a significant portion of the Company's cash flow from operations
will be dedicated to debt service payments, thereby reducing the funds available
to the Company for other purposes; (ii) the Company's leverage may place the
Company at a competitive disadvantage; (iii) the Company's operating flexibility
is limited by covenants that, among other things, limit its ability to incur
additional indebtedness, grant liens, make capital expenditures and enter into
sale and leaseback transactions; and (iv) the Company's degree of leverage may
make it more vulnerable to economic downturns, may limit its ability to pursue
other business opportunities and may reduce its flexibility in responding to
changing business and economic conditions. See "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
16
Risks of Karlskrona Purchase Agreement
The Karlskrona Purchase Agreement contains cost reduction targets and price
limitations and imposes on the Company certain manufacturing quality
requirements. There can be no assurance that the Company can achieve acceptable
levels of profitability under the Purchase Agreement or reduce costs and prices
to Ericsson over time as contemplated by the Purchase Agreement. In addition,
the Purchase Agreement requires that the Company maintain a ratio of equity to
the sum of total liabilities and equity of at least 25%, and a current ratio of
at least 120%. Further, the Purchase Agreement prohibits the Company from
selling or relocating the equipment acquired in the transaction without
Ericsson's consent. A material breach by the Company of any of the terms of the
Purchase Agreement could allow Ericsson to repurchase the assets conveyed to the
Company at the Company's book value or to obtain other relief, including the
cancellation of outstanding purchase orders or termination of the Purchase
Agreement. Ericsson also has certain rights to be consulted on the management of
the Karlskrona Facilities and to approve the use of the Karlskrona Facilities
for Ericsson's competitors or for other customers where such use might adversely
affect Ericsson's access to production capacity at the facilities. In addition,
without Ericsson's consent, the Company may not enter into any transactions that
could adversely affect its ability to continue to supply products and services
to Ericsson under the Purchase Agreement or its ability to reduce costs and
prices to Ericsson. As a result of these rights, Ericsson may, under certain
circumstances, retain a significant degree of control over the Karlskrona
Facilities and their management. See "Recent Acquisitions."
Replacement of Management Information Systems; Year 2000 Compliance
The Company is in the process of replacing its management information
system with a new enterprise management information system that is designed to
provide enhanced functionality and to be Year 2000 compliant. The new enterprise
management system will significantly affect many aspects of the Company's
business, including its manufacturing, sales and marketing, and accounting
functions. In addition, the successful implementation of this system will be
important to facilitate future growth. The Company currently anticipates that
the complete installation of its new enterprise management information system
will take at least eighteen months, and implementation of the new system could
cause significant disruption in operations. If the Company is not successful in
implementing its new system or if the Company experiences difficulties in such
implementation, the Company could experience problems with the delivery of its
products or an adverse impact on its ability to access timely and accurate
financial and operating information.
The Company has been advised that its new enterprise management information
system is Year 2000 compliant. However, there can be no assurance that the new
enterprise management information system will be Year 2000 compliant or that the
new system will be implemented by January 1, 2000, and any failure to be Year
2000 compliant or to effectively implement the new enterprise management system
by Year 2000 could have a material adverse effect on the Company. There can be
no assurance that the Company's customers and suppliers have, or will have,
management information systems that are Year 2000 compliant.
Risk of Increased Taxes
The Company has structured its operations in a manner designed to maximize
income in countries where tax incentives have been extended to encourage foreign
investment or where income tax rates are low. If these tax incentives are not
17
renewed upon expiration, if the tax rates applicable to the Company are
rescinded or changed, or if tax authorities successfully challenge the manner in
which profits are recognized among the Company's subsidiaries, the Company's
taxes would increase. Substantially all of the products manufactured by the
Company's Asian subsidiaries are sold to customers based in other jurisdictions
in North America and Europe. While the Company believes that profits from its
Asian operations are not sufficiently connected to such other jurisdictions to
give rise to income taxation by such other jurisdictions, there can be no
assurance that tax authorities in such other jurisdictions will not challenge
the Company's position or, if such challenge is made, that the Company would
prevail in any such dispute. If the Company's Asian profits became subject to
income taxes in such other jurisdictions, the Company's worldwide effective tax
rate would increase and its results of operations and cash flow would be
adversely affected. The expansion by the Company of its operations in the
Americas and countries in Western Europe that have higher tax rates is expected
to increase its worldwide effective tax rate. See "Item 7 Management's
Discussion and Analysis of Financial Condition and Result of Operations --
Provision for Income Taxes."
Risks of International Operations
The Company's manufacturing operations are located in a number of countries
including Austria, Brazil, China, Hungary, Malaysia, Mexico, Sweden, the United
Kingdom and the United States. Because of the location of manufacturing
facilities in a number of countries, the Company is affected by economic and
political conditions in those countries, including fluctuations in the value of
currency, duties, possible employee turnover, labor unrest, lack of developed
infrastructure, longer payment cycles, greater difficulty in collecting accounts
receivable, the burdens and costs of compliance with a variety of foreign laws
and, in certain parts of the world, political instability. Changes in policies
by the local governments resulting in, among other things, increased duties,
higher taxation, currency conversion limitations, restrictions on the transfer
of funds, limitations on imports or exports, or the expropriation of private
enterprises could also have a material adverse effect on the Company. The
Company could also be adversely affected if the current policies encouraging
foreign investment or foreign trade by its host countries were to be reversed.
In addition, the attractiveness of the Company's services to its U.S. customers
is affected by U.S. trade policies, such as "most favored nation" status and
trade preferences for certain Asian nations. For example, trade preferences
extended by the United States to Malaysia in recent years were not renewed in
1997. The Company could also be adversely affected by the inadequate development
or maintenance of infrastructure or the unavailability of adequate power and
water supplies, transportation, raw materials and parts in the countries in
which it operates.
Risks Relating to China. Under its current leadership, the Chinese government
has been pursuing economic reform policies, including the encouragement of
foreign trade and investment and greater economic decentralization. No assurance
can be given, however, that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Despite progress
in developing its legal system, China does not have a comprehensive and highly
developed system of laws, particularly with respect to foreign investment
activities and foreign trade. Enforcement of existing and future laws and
contracts is uncertain, and implementation and interpretation thereof may be
inconsistent. As the Chinese legal system develops, the promulgation of new
18
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect foreign investors.
In addition, China currently enjoys Most Favored Nation ("MFN") status
granted by the United States, pursuant to which the United States imposes the
lowest applicable tariffs on Chinese exports to the United States. The United
States annually reconsiders the renewal of MFN trading status for China. No
assurance can be given that China's MFN status will be renewed in future years.
China's loss of MFN status could adversely affect the Company by increasing the
cost to the U.S. customers of products manufactured by the Company in China.
Risks Relating to Mexico. The Mexican government exercises significant influence
over many aspects of the Mexican economy and its actions could have a
significant effect on private sector entities in general and the Company in
particular. In addition, during the 1980s, Mexico experienced periods of slow or
negative growth, high inflation, significant devaluation of the peso and limited
availability of foreign exchange.
Risks Relating to Hungary. Hungary has undergone significant political and
economic change in recent years. Political, economic, social and other
developments in Hungary may in the future have a material adverse effect on the
Company's business. In particular, changes in laws or regulations (or in the
interpretation of existing laws or regulations), whether caused by change in the
Hungarian government or otherwise, could materially adversely affect the
Company's operations and business. Annual inflation and interest rates in
Hungary have been much higher than those in Western Europe. Exchange rate
policies have not always allowed for the free conversion of currencies at the
market rate.
Corporate contract, property, insolvency, competition and securities and
other laws and regulations in Hungary have been, and continue to be,
substantially revised during its transition to a market economy. Therefore, the
interpretation and procedural safeguards of the new legal and regulatory system
are in the process of being developed and defined and existing laws and
regulations may be applied inconsistently. Also, in some circumstances, it may
not be possible to obtain the legal remedies provided for under those laws and
regulations in a reasonably timely manner, if at all.
Risks relating to Brazil. During the past several years, the Brazilian economy
has been affected by significant intervention by the Brazilian government. The
Brazilian government has changed monetary, credit, tariff and other policies to
influence the course of Brazil's economy. The Brazilian government's actions to
control inflation and effect other policies have often involved wage and price
controls, exchange controls as well as other measures, such as freezing bank
accounts and imposing capital controls. The stated policy of the present
government is to reduce gradually governmental control of the economy.
Currency Fluctuations
Historically, the Company transacted its business predominantly in U.S.
dollars and most of its revenues were collected in U.S. dollars, a portion of
the Company's costs such as payroll, rent and indirect operation costs, were
denominated in other currencies such as the Singapore dollar, the Hong Kong
dollar and the Malaysian ringgit. As a result, fluctuations in foreign currency
exchange rates have not created significant exchange losses to the Company. With
the acquisitions of Karlskrona, Neutronics and Conexao, a significant portion of
the Company's business is now also conducted in
19
the Swedish kronor, Austrian Schilling, Hungarian forint and Brazilian real. In
recent years, the Hungarian forint, Brazilian real and Mexican peso have
depreciated, principally by way of devaluation. Changes in the relation of these
and other currencies to the U.S. dollar will affect the Company's cost of goods
sold and operating margins and could result in exchange losses. The impact of
future exchange rate fluctuations on the Company's results of operations cannot
be accurately predicted.
The Company has not actively engaged in substantial exchange rate hedging
activities. The Company's European operations have limited involvement in the
normal course of business with derivative financial instruments with off-balance
sheet risks as a means of hedging fixed Japanese yen, U.S. dollar and other
currency exposures in relation to trade accounts payable and fixed purchase
obligations. Because the Company only hedges fixed obligations, the Company does
not expect that these hedging activities will have a material effect on its
results of operations or cash flows. However, there can be no assurance that the
Company will engage in any hedging activities in the future or that any of its
hedging activities will be successful.
Dependence on Key Personnel and Skilled Employees
The Company's success depends to a large extent upon the continued services
of key executives and skilled personnel. Generally, the Company's employees are
not bound by employment or non-competition agreements. The Company has entered
into service agreements with certain officers, including Ronny Nilsson and Tsui
Sung Lam, some of which contain non-competition provisions and provides its
officers and key employees with stock options that are structured to incent such
employees to remain with the Company. However, there can be no assurance as to
the ability of the Company to retain its officers and key employees. The loss of
such personnel could have a material adverse effect on the Company, its results
of operations, prospects or debt service ability. The Company's business also
depends upon its ability to continue to recruit, train and retain skilled and
semi-skilled employees, particularly administrative, engineering and sales
personnel. There is intense competition for skilled and semi-skilled employees,
particularly in the San Jose, California market, and the Company's failure to
recruit, train and retain such employees could adversely affect the Company, its
results of operations, prospects or debt service ability.
Limited Avaliability of Components
A substantial majority of the Company's net sales are derived from turnkey
manufacturing in which the Company is responsible for procuring materials, which
typically results in the Company bearing the risk of component price increases.
At various times there have been shortages of certain electronics components,
including DRAMs, memory modules, logic devices, ASICs, laminates, specialized
capacitors and integrated circuits in bare-die form. Component shortages could
result in manufacturing and shipping delays or higher prices which could have a
material adverse effect on the Company.
Rapid Technological Change
The markets in which the Company's customers compete are characterized by
rapidly changing technology, evolving industry standards and continuous
improvements in products and services. These conditions frequently result in
short product life cycles. The Company's success will depend to a significant
extent on the success achieved by its customers in developing and marketing
their products, some of which are new and untested. If technologies or standards
20
supported by customers' products become obsolete or fail to gain widespread
commercial acceptance, the Company may be materially adversely affected.
Environmental Compliance Risks
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. Although the Company believes that its facilities are
currently in material compliance with applicable environmental laws, there can
be no assurances that violations will not occur. In the event of a violation of
environmental laws, the Company could be held liable for damages and for the
costs of remedial actions and could also be subject to revocation of its
effluent discharge permits. Any such revocations could require the Company to
cease or limit production at one or more of its facilities, which could have a
material adverse effect on the Company's operations. Environmental laws could
also become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with any violation, which could have a
material adverse effect on the Company.
Volatility of Market Price of Ordinary Shares
The stock market in recent years has experienced significant price and
volume fluctuations that have affected the market prices of technology companies
and that have often been unrelated to or disproportionately impacted by the
operating performance of such companies. There can be no assurance that the
market for the Ordinary Shares will not be subject to similar fluctuations.
Factors such as fluctuations in the operating results of the Company,
announcements of technological innovations or events affecting other companies
in the electronics industry, currency fluctuations and general market conditions
may have a significant effect on the market prices of the Company's securities,
including the Ordinary Shares.
21
Item 2. FACILITIES
The Company has manufacturing facilities located in Austria, Brazil, China,
Hungary, Malaysia, Mexico, Singapore, Sweden, the United Kingdom and the United
States. In addition, the Company provides engineering services at its facilities
in Austria, Italy, Singapore, Sweden, California and Massachusetts. All of the
Company's manufacturing facilities are registered to the quality requirements of
the International Organization for Standardization (ISO 9002) or are in the
process of final certification.
Certain information about the Company's manufacturing and engineering
facilities as of March 31, 1998 is set forth below:
YEAR APPROXIMATE OWNED/
LOCATION COMMENCED(1) SQUARE FEET LEASED(2) SERVICES
- ------------------------------ ----------- ----------- --------- -------------------------------
Manufacturing Facilities
Althofen, Austria(3).......... 1997 153,000 Owned Full system manufacturing; PCB
assembly.
Sao Paulo, Brazil (4) 1998 23,076 Leased Complex, high value-added PCB
assembly.
Sao Paulo, Brazil (4) 1998 41,930 Leased Full system manufacturing; PCB
assembly.
Sao Paulo, Brazil (4) 1998 44,994 Leased Full system manufacturing; PCB
assembly.
Shenzhen, China............... 1995 90,000 Leased High volume PCB assembly.
Hong Kong, China(5)........... 1996 45,000 Leased Fabrication of high density
PCBs
Doumen, China(6).............. 1996 330,000(6) Owned(5) Fabrication of high density,
miniaturized PCBs, high volume
PCB assembly.
Sarvar, Hungary(3)............ 1997 298,000 Owned(7) Full system manufacturing; PCB
assembly; plastic injection
molding.
Tab, Hungary(3)............... 1997 170,000 Owned Full system manufacturing; PCB
assembly.
Zalaegerszeg, Hungary(3)...... 1997 97,000 Owned Full system manufacturing; PCB
assembly.
Johore, Malaysia.............. 1991 80,000 Owned Full system manufacturing; PCB
assembly.
Guadalajara, Mexico........... 1997 101,000 Owned High volume PCB assembly.
Singapore(8).................. 1982 47,000 Leased Complex, high value-added PCB
assembly.
Karlskrona, Sweden............ 1997 330,000 Owned(9) Assembly and test of complex
PCBs and systems.
Stockholm, Sweden(10).......... 1997 70,000 Leased Assembly of cables and cable
assemblies.
Hamilton, Scotland (11)........ 1998 50,000 Leased Complex, high value-added PCB
assembly.
Tonypandy, Wales(12).......... 1995 50,000 Owned Full system manufacturing;
medium complexity PCB assembly.
Fremont, California (11)....... 1998 48,000 Leased
Fremont, California (11)....... 1998 83,480 Owned Complex, high value-added PCB
assembly.
Fremont, California (11)....... 1998 41,968 Owned Complex, high value-added PCB
assembly.
San Jose, California.......... 1994 65,000 Leased Full system manufacturing; PCB
assembly.
San Jose, California.......... 1996 32,500 Leased Complex, high value-added PCB
assembly.
San Jose, California.......... 1997 73,000 Owned Complex, high value-added PCB
assembly.
Niwot, Colorado(13)........... 1997 40,000 Leased Plastic injection molding.
Richardson, Texas............. 1995 47,271 Leased Test, development,
procurement and warehousing.
Engineering Facilities
Althofen, Austria............. 1997 --(14) Owned Design, prototype and
engineering services.
Monza, Italy.................. Engineering services.
Singapore..................... 1982 --(15) -- Design and prototype services.
Karlskrona, Sweden............ 1997 --(16) -- Design and prototype services.
Westford, Massachusetts....... 1987 9,112 Leased Design and prototype services.
Moorpark, California (11)...... 1998 54,052 Leased Engineering services.
San Jose, California.......... 1996 71,000 Leased Engineering services and
corporate functions.
22
(1) Refers to year acquired, leased or constructed by the Company or its
predecessor.
(2) The leases for the Company's leased facilities expire between the years
1998 and 2012.
(3) Acquired by the Company in fiscal 1998 in connection with the Neutronics
acquisition.
(4) Acquired by the Company in fiscal 1998 in connection with the Conexao
acquisition
(5) Acquired by the Company in fiscal 1996 in connection with the Astron
acquisition.
(6) Excludes approximately 370,000 square feet used for dormitories,
infrastructure and other functions. The Company has land use rights for
this facility through 2020.
(7) The Company currently owns the land and certain of the buildings located in
the Sarvar Industrial Park and leases other buildings at this location.
(8) The Company downsized manufacturing operations at this facility in fiscal
1997.
(9) Ericsson has retained certain rights with respect to the Company's use and
disposition of the Karlskrona Facilities. See "Item 1 - Business - Risk
Factors -- Risks of Karlskrona Purchase Agreement."
(10) Acquired by the Company in fiscal 1998 in connection with the Energipilot
acquisition.
(11) Acquired by the Company in fiscal 1998 in connection with the Altatron
acquisition.
(12) Acquired by the Company in fiscal 1996 in connection with the A&A
acquisition. The Company is in the process of consolidating its U.K.
operations in Scotland and plans to terminate operations at this facility.
(13) Acquired by the Company in fiscal 1998 in connection with the DTM
acquisition.
(14) Located within the 153,000 square foot manufacturing facility in Althofen.
(15) Located within the 47,000 square foot manufacturing facility in Singapore.
(16) Located within the 330,000 square foot manufacturing facilities in
Karlskrona.
In North America, the Company leased a new 71,000 square foot facility in
June 1997, from which the Company offers a wide range of engineering services,
including product design and prototype development, and in July 1997 the Company
completed construction of a new 73,000 square foot facility, dedicated to high
volume PCB assembly. These new facilities are located adjacent to the Company's
other San Jose operations. Also in July 1997, the Company completed construction
of a 101,000 square foot manufacturing facility on a 32-acre campus site in
Guadalajara.
In Asia, the Company has expanded its Doumen facilities by developing an
additional 240,000 square feet of facilities for fabrication of miniaturized
gold-finished PCB fabrication and for PCB and full system assembly. The Company
completed this expansion and commenced production in June 1997. The Doumen
campus, located on a 15-acre site, now includes approximately 330,000 square
23
feet of manufacturing facilities as well as approximately 370,000 square feet of
facilities used for dormitories, infrastructure and other functions.
The campus facilities in China, Hungary, and Mexico are designed to be
integrated facilities that can produce certain components used by the Company,
manufacture complete products for customers, warehouse the products and
distribute them directly to customer's distribution channels. The Company
believes that by offering all of those capabilities at the same site, it can
reduce material and transportation costs, simplify logistics and communications,
and improve inventory management, providing customers with a more complete,
cost-effective manufacturing solution.
The Company plans to further expand these facilities and add new equipment.
There can be no assurance that the Company will not encounter unforeseen
difficulties, costs or delays in expanding its facilities. See "Item 1 Business
- - Risk Factors -- Management of Expansion and Consolidation."
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
24
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF ORDINARY SHARES
The Company's Ordinary Shares are traded on the Nasdaq National Market
under the symbol "FLEXF". The following table shows the high and low closing
sale prices of the Company's Ordinary Shares since the beginning of the
Company's 1997 fiscal year.
HIGH LOW
----- -----
Fiscal 1997
First Quarter.......................................... $39 $25
Second Quarter......................................... $28 1/4 $17
Third Quarter.......................................... $37 1/4 $21
Fourth Quarter......................................... $29 3/4 $19 5/8
Fiscal 1998
First Quarter.......................................... $27 $17 1/2
Second Quarter......................................... $47 3/8 $26 3/8
Third Quarter.......................................... $49 1/2 $29
Fourth Quarter......................................... $47 7/8 $29 3/4
On May 29, 1998, there was 407 holders or record and the closing sale price
of the Ordinary Shares was $39.625 per share.
DIVIDENDS
Since inception, the Company has not declared or paid any cash dividends on
its Ordinary Shares, and the Credit Facility prohibits the payment of cash
dividends without the lenders' prior consent. The terms of the Company's senior
subordinated notes also restrict the Company's ability to pay cash dividends.
See "Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description of
the Credit Facility." The Company anticipates that all earnings in the
foreseeable future will be retained to finance the continuing development of its
business.
TAXATION
This summary of Singapore and U.S. tax considerations is based on current
law and is provided for general information. The discussion does not purport to
deal with all aspects of taxation that may be relevant to particular
shareholders in light of their investment or tax circumstances, or to certain
types of shareholders (including insurance companies, tax-exempt organizations,
regulated investment companies, financial institutions or broker-dealers, and
shareholders that are not U.S. Shareholders (as defined below)) subject to
special treatment under the U.S. federal income tax laws. Such shareholders
should consult their own tax advisors regarding the particular tax consequences
to such shareholders of any investment in the Ordinary Shares.
INCOME TAXATION UNDER SINGAPORE LAW
Under current provisions of the Income Tax Act, Chapter 134 of Singapore,
corporate profits are taxed at a rate equal to 26%. Under Singapore's taxation
system, the tax paid by a company is deemed paid by its shareholders. Thus, the
25
shareholders receive dividends net of the tax paid by the Company. Dividends
received by either a resident or a nonresident of Singapore are not subject to
withholding tax. Shareholders are taxed on the gross amount of dividends (i.e.,
the cash amount of the dividend plus the amount of corporate tax paid by the
Company). The tax paid by the Company will be available to shareholders as a tax
credit to offset the Singapore income tax liability on their overall income
(including the gross amount of dividends). No tax treaty currently exists
between the Republic of Singapore and the U.S.
Under current Singapore tax law there is no tax on capital gains, and,
thus, any profits from the disposal of shares are not taxable in Singapore
unless the vendor is regarded as carrying on a trade in shares in Singapore (in
which case, the disposal profits would be taxable as trade profits rather than
capital gains).
There is no stamp duty payable in respect of the holding and disposition of
shares. No duty is payable on the acquisition of new shares. Where existing
shares are acquired in Singapore, stamp duty is payable on the instrument of
transfer of the shares at the rate of S$2 for every S$1,000 of the market value
of the shares. The stamp duty is borne by the purchaser unless there is an
agreement to the contrary. Where the instrument of transfer is executed outside
of Singapore, stamp duty must be paid if the instrument of transfer is received
in Singapore. Under Article 22 (iii) of the Articles of Association of the
Company, its directors are authorized to refuse to register a transfer unless
the instrument of transfer has been duly stamped.
INCOME TAXATION UNDER UNITED STATES LAW
Individual shareholders that are U.S. citizens or resident aliens (as
defined in Section 7701(b) of the Internal Revenue Code of 1986 (the "Code")),
corporations or partnerships or other entities created or organized under the
laws of the United States, or any political subdivision thereof, an estate the
income of which is subject is subject to U.S. federal income taxation regardless
of its source or a trust which is subject to the supervision of a court within
the United States and the control of section 7701(b)(30) of the Code("U.S.
Shareholders") will, upon the sale or exchange of a share, recognize gain or
loss for U.S. income tax purposes in an amount equal to the difference between
the amount realized and the U.S. Shareholder's tax basis in such a share. If
paid in currency other than U.S. dollars, certain currency translation rules
will apply to determine the U.S. dollar amount realized. Such gain or loss will
be capital gain or loss if the share was a capital asset in the hands of the
U.S. Shareholder and will be short-term capital gain or loss if the share has
been held for not more than one year, mid-term capital gain or loss if the share
has been held for more than one year but not more than eighteen months and,
long-term capital gain or loss if the share has been held for more than eighteen
months. If a U.S. Shareholder receives any currency other than U.S. dollars on
the sale of a share, such U.S. Shareholder may recognize ordinary income or loss
as a result of currency fluctuations between the date of such sale and the date
such sale proceeds are converted into U.S. dollars.
U.S. Shareholders will be required to report as income for U.S. income tax
purposes the amount of any dividend received from the Company to the extent paid
out of the current or accumulated earnings and profits of the Company, as
determined under current U.S. income tax principles. If over 50% of the
Company's stock (by vote or value) were owned by U.S. Shareholders who
individually held 10% or more of the Company's voting stock, such U.S.
Shareholders potentially would be required to include in income a portion or all
of their pro rata share of the Company's and its non-U.S. subsidiaries' earnings
and profits. Certain attribution rules apply in this regard. If 50% or more of
26
the Company's assets during a taxable year produced or were held for the
production of passive income, as defined in section 1297(b) of the Code (e.g.,
certain forms of dividends, interest and royalties), or 75% or more of the
Company's gross income for a taxable year was passive income, adverse U.S. tax
consequences could result to U.S. shareholders of the Company. As of March 31,
1998, the Company was not aware of any U.S. Shareholder who individually held
10% or more of its voting stock. See "Principal Shareholders."
Shareholders that are not U.S. Shareholders ("non-U.S. shareholders") will
not be required to report for U.S. federal income tax purposes the amount of any
dividend received from the Company. Non-U.S. shareholders, upon the sale or
exchange of a share, would not be required to recognize gain or loss for U.S.
federal income tax purposes.
ESTATE TAXATION
In the case of an individual who is not domiciled in Singapore, a Singapore
estate tax is imposed on the value of all movable and immovable properties
situated in Singapore. The shares of the Company are considered to be situated
in Singapore. Thus, an individual shareholder who is not domiciled in Singapore
at the time of his or her death will be subject to Singapore estate tax on the
value of any such shares held by the individual upon the individual's death.
Such a shareholder will be required to pay Singapore estate tax to the extent
that the value of the shares (or in aggregate with any other assets subject to
Singapore estate tax) exceeds S$600,000. Any such excess will be taxed at a rate
equal to 5% on the first S$12,000,000 of the individual's Singapore chargeable
assets and thereafter at a rate equal to 10%. An individual shareholder who is a
U.S. citizen or resident (for U.S. estate tax purposes) also will have the value
of the shares included in the individual's gross estate for U.S. estate tax
purposes. An individual shareholder generally will be entitled to a tax credit
against the shareholder's U.S. estate tax to the extent the individual
shareholder actually pays Singapore estate tax on the value of the shares;
however, such tax credit is generally limited to the percentage of the U.S.
estate tax attributable to the inclusion of the value of the shares included in
the shareholder's gross estate for U.S. estate tax purposes, adjusted further by
a pro rata apportionment of available exemptions. Individuals who are domiciled
in Singapore should consult their own tax advisors regarding the Singapore
estate tax consequences of their investment.
27
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the fiscal years
ended March 31, 1994, 1995, 1996, 1997 and 1998. In the opinion of management,
all adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation have been made. These historical results are
not necessarily indicative of the results to be expected in the future. The
following table is qualified by reference to and should be read in conjunction
with the consolidated financial statements, related notes thereto and other
financial data included elsewhere herein.
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
Net sales .................................. $ 131,345 $ 292,149 $ 572,045 $ 640,007 $ 1,113,071
Cost of sales .............................. 117,392 265,426 517,732 575,142 1,004,170
----------- ----------- ----------- ----------- -----------
Gross margin ............................... 13,953 26,723 54,313 64,865 108,901
Selling, general and administrative ........ 8,667 15,771 28,138 36,277 53,695
Goodwill and intangible amortization ....... 419 762 1,296 2,648 3,659
Provision for excess facilities ............ 830 -- 1,254(1) 5,868(2) 8,869(3)
Acquired in-process research and development 202 91 29,000(1) -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from operations .............. 3,835 10,099 (5,375) 20,072 42,678
Merger-related expenses .................... -- (816) -- -- (7,415)(3)
Other expense, net ......................... (1,446) (1,814) (4,924) (6,425) (13,092)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .......... 2,389 7,469 (10,299) 13,647 22,171
Provision for income taxes ................. 654 1,588 3,847 2,027 2,258
Extraordinary gain ......................... 416 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) .......................... $ 2,151 $ 5,881 $ (14,146) $ 11,620 $ 19,913
=========== =========== =========== =========== ===========
Diluted net income (loss) per share ........ $ 0.28 $ 0.40 $ (0.92) $ 0.67 $ 1.04
=========== =========== =========== =========== ===========
Weighted average Ordinary Shares and
equivalents outstanding -- diluted ....... 7,730 14,882 15,436 17,328 19,097
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital ............................ 30,669 36,737 25,527 (30,245) 124,536
Total assets ............................... 103,129 185,186 309,267 446,292 744,123
Long-term debt and capital lease obligations
including current portion ................ 4,755 23,055 75,566 165,916 242,474
Shareholders' equity ....................... 46,703 68,433 85,571 99,345 214,809
(1) In fiscal 1996, the Company wrote off $29.0 million of in-process research
and development associated with the acquisition of Astron and also recorded
charges totaling $1.3 million for costs associated with the closing of one
of the Company's Malaysian plants and its Shekou, China operations.
(2) In fiscal 1997, the Company incurred plant closing expenses aggregating to
$5.9 million in connection with closing its manufacturing facility in
Texas, downsizing manufacturing operations in Singapore, the write-off of
excess equipment and severance obligations at the nCHIP semiconductor
fabrication operations.
28
(3) In fiscal 1998, the Company incurred plant closing expenses aggregating to
$8.9 million in connection with closing its manufacturing facility in
Wales, UK. The Company also incurred $7.4 million of merger-related costs
as a result of the acquisitions of Neutronics, DTM, Energipilot, Altatron
and Conexao in fiscal 1998.
29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In recent years, the Company has substantially expanded its manufacturing
capacity, technological capabilities and service offerings, through both
acquisitions and internal growth. See "Item 1 - Business - Risk Factors
- --Management of Expansion and Consolidation," "Item 1 - Business - Risk Factors
- -- Acquisitions" and Note 11 of Notes to Consolidated Financial Statements.
On March 31, 1998 the Company acquired Conexao, a Brazil-based electronics
manufacturing service provider, in exchange for a total of 421,593 Ordinary
Shares, of which 118,305 Ordinary Shares are to be issued upon resolution of
certain general and specific contingencies. On March 31, 1998, the Company also
acquired Altatron, an electronics manufacturer service provider headquartered in
Fremont, California, with facilities in Fremont, California; Richardson, Texas;
and Hamilton, Scotland in exchange for 788,650 Ordinary Shares, of which 157,730
Ordinary Shares are to be issued upon resolution of certain general and specific
contingencies. Altatron has approximately 800 employees with facilities in
various parts in U.S. and in Hamilton, Scotland. Conexao is one of the oldest
and largest electronics manufacturers in Brazil with approximately 400 employees
and manufacturing facilities totaling 110,000 square feet. The acquisitions of
Conexao and Altatron have been accounted for as a pooling-of-interests. The
Company did not restate its prior period financial statements with respect to
these acquisitions because they did not have a material impact on its
consolidated results of operations. Accordingly, the balance sheets of Conexao
and Altatron as of March 31, 1998 were included in the Company's consolidated
balance sheet as of March 31, 1998 and the results of operations for Conexao and
Altatron will be included in the Company's results of operations beginning in
the first quarter of fiscal 1999.
On December 1, 1997 the Company acquired DTM Products, Inc., a
Colorado-based producer of injection molded plastics for North American OEMs, in
exchange for 252,469 Ordinary Shares, and acquired Energipilot AB, a Swedish
company principally engaged in providing cables and engineering services for
Northern European OEMs, in exchange for 229,990 Ordinary Shares. The
acquisitions of DTM and Energipilot have been accounted for as a
pooling-of-interests. The Company did not restate its prior period financial
statements with respect to these acquisitions because they did not have a
material impact on its consolidated results. Accordingly, the results of
operations for DTM and Energipilot beginning in December 1, 1997 are included in
the Company's consolidated statement of operations.
On October 30, 1997, the Company acquired 92% of the outstanding shares of
Neutronics, an Austrian electronics manufacturing service provider with
operations in Austria and Hungary for 2,806,000 Ordinary Shares of the Company.
The acquisition was accounted for as a pooling-of-interests and accordingly, the
Company has restated its prior period financial statements to give effect to
this acquisition.
On March 27, 1997, the Company acquired the Karlskrona Facilities for
approximately $82.4 million. The acquisition was financed by borrowings from
banks, which the Company repaid in October 1997 with the net proceeds from the
Company's debt and equity offerings. The transaction has been accounted for
under the purchase method. As a result, the purchase price was allocated to the
assets based on their estimated fair market values at the date of acquisition.
30
On December 20, 1996, the Company acquired 40% of FICO for $5.2 million. Of
this, the Company paid $3.0 million in December 1996 and paid the $2.2 million
balance in the third quarter of fiscal 1998.
On November 25, 1996, the Company acquired Fine Line for an aggregate of
223,321 Ordinary Shares in a transaction accounted for as pooling of interests.
The Company's prior financial statements were not restated because the financial
results of Fine Line did not have a material impact on the consolidated results.
In February 1996, the Company acquired Astron Group Limited ("Astron") in
exchange for (i) $13.4 million in cash, (ii) $15.0 million in 8% promissory
notes ($10.0 million of which was paid in February 1997 and $5.0 million of
which was paid in February 1998), (iii) 238,684 Ordinary Shares issued at
closing and (iv) Ordinary Shares with a value of $10.0 million to be issued on
June 30, 1998. The Company also paid an earn-out of an additional $6.25 million
in cash in April 1997, based on the pre-tax profit of Astron for the calendar
year ended December 31, 1996. In addition, the Company agreed to pay a $14.0
million consulting fee in June 1998 to an entity affiliated with Stephen Rees, a
former shareholder and the Chairman of Astron, pursuant to a services agreement
among the Company, one of its subsidiaries and the affiliate of Mr. Rees (the
"Services Agreement"). Of the $14.0 million, $5.0 million must be paid in cash.
The remainder may be paid in either cash or Ordinary Shares at the option of the
Company, and the Company intends to pay such amount in Ordinary Shares. Mr. Rees
currently also serves as a director and executive officer of the Company.
The Company incurred merger-related expenses of $7.4 million in fiscal 1998
associated with the acquisitions of Neutronics, DTM, Energipilot, Altatron and
Conexao, including $4.0 million associated with the Neutronics, DTM, and
EnergiPilot acquisitions and the cancellation of Neutronics' planned initial
public offering. The ability of the Company to obtain the benefits of these
acquisitions is subject to a number of risks and uncertainties, including the
Company's ability to successfully integrate the acquired operations and its
ability to maintain, and increase, sales to customers of the acquired companies.
There can be no assurance that any acquisitions will not materially affect the
Company. See "Item 1 - Business - Risk Factors -- Acquisitions."
The Company incurred costs of $8.9 million in fiscal 1998 associated with
the consolidation of excess facilities in the United Kingdom. The recent
acquisition of Altatron's Scotland facility resulted in duplicative facilities
in Wales and Scotland. The provision for the closure of the Wales facility
includes the write-off of $3.8 million in goodwill, $1.6 million in severance
payments and pension scheme, $2.4 million in factory disposal related expenses,
and $1.1 million in government grant reimbursements and legal fees.
In addition to acquisitions, the Company has also substantially increased
overall capacity by expanding operations in North America, Asia and Europe. In
June 1997, the Company leased a new 71,000 square foot facility in North America
from which the Company offers a wide range of engineering services, and in July
1997 the Company completed construction of a new 73,000 square foot facility
dedicated to high volume PCB assembly. These new facilities are located adjacent
to the Company's other San Jose operations. Also in July 1997, the Company
completed construction of a 101,000 square foot manufacturing facility on a
32-acre campus site in Guadalajara, Mexico. In Asia, the Company has expanded
its Doumen facilities by developing an additional 224,000 square feet for
miniaturized gold-finished PCB fabrication and for PCB and full system assembly.
The Company has commenced production at the new and expanded facilities.
31
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
FISCAL YEAR ENDED
MARCH 31,
--------------------------
1996 1997 1998
------ ------ ------
Net sales ........................................ 100.0 100.0 100.0
Cost of sales .................................... 90.5 89.9 90.2
------ ------ ------
Gross margin ..................................... 9.5 10.1 9.8
Selling, general and administrative .............. 4.9 5.7 4.8
Goodwill and intangible amortization ............. 0.2 0.4 0.3
Provision for excess facilities .................. 0.2 0.9 0.8
Acquired in-process research and development ..... 5.1 -- --
------ ------ ------
Income(loss) from operations ..................... (0.9) 3.1 3.9
Merger-related expenses .......................... -- -- (0.7)
Other expense, net ............................... (0.9) (1.0) (1.2)
------ ------ ------
Income (loss) before income taxes ................ (1.8) 2.1 2.0
Provision for income taxes ....................... 0.7 0.3 0.2
------ ------ ------
Net income (loss) ................................ (2.5) 1.8 1.8
====== ====== ======
Net Sales
Substantially all of the Company's net sales have been derived from the
manufacture and assembly of products for OEM customers. Net sales for fiscal
1998 increased 73.9% to $1.1 billion from $640.0 million in fiscal 1997. The
increase in sales for fiscal 1998 was primarily due to (i) sales to Ericsson
following the March 27, 1997 acquisition of the Karlskrona Facilities, (ii) an
increase in sales to certain existing customers, including Advanced Fibre
Communications, Cisco Systems, Microsoft and Braun/Thermoscan and (iii) sales to
certain new customers including Bay Networks and Auspex. This increase was
partially offset by reduced sales to certain customers, including Minebea,
Visioneer, 3Com/US Robotics and Global Village. See "Item 1 - Business - Risk
Factors -- Customer Concentration; Dependence on Electronics Industry" and "Item
1 - Business - Risk Factors -- Risks of Karlskrona Purchase Agreement."
The Company's largest customers during fiscal 1998 were Ericsson and
Philips Electronics, accounting for approximately 26% and 13% of consolidated
net sales, respectively. No other customer accounted for more than 10% of
consolidated net sales in fiscal 1998. See "Item 1 - Business - Risk Factors --
Customer Concentration; Dependence on Electronics Industry" and "Item 1
- -Business - Risk Factors -- Risks of Karlskrona Purchase Agreement".
Net sales in fiscal 1997 increased 11.9% to $640.0 million from $572.0
million in fiscal 1996. This increase was primarily due to higher sales to
existing customers, including US Robotics, Microsoft, Phillips Electronics,
Advanced Fibre Communications and Braun/Thermoscan, sales to new customers such
as Cisco and Auspex, and the inclusion of Astron's sales following its
acquisition in February 1996. This increase was partially offset by reduced
sales to certain existing customers, including Visioneer, Apple Computer,
Houston Tracker Systems, Logitech, Voice Powered Technology and Fast Multimedia.
The Company believes that the reduction in sales to these customers was due in
part to reductions in these customers' sales to end-users. See "Item 1 -
Business - Risk Factors -- Rapid Technological Change."
32
Gross Profit
Gross profit varies from period to period and is affected by, among other
things, product mix, component costs, product life cycles, unit volumes,
startup, expansion and consolidation of manufacturing facilities, pricing,
competition and new product introductions. Gross profit margin decreased to 9.8%
for fiscal 1998 from 10.1% in fiscal 1997. The gross profit margin in fiscal
1998 was adversely affected by changes in customer and product mix and costs
associated with the startup of new facilities in Doumen, China and Guadalajara,
Mexico. Prices paid to the Company by its significant customers can vary
significantly based on the customer's order level, with per unit prices
typically declining as volumes increase. These changes in price and volume can
materially affect the Company's gross profit margin. See "Item 1 - Business-Risk
Factors -- Management of Consolidation and Expansion."
Gross margin increased to 10.1% in fiscal 1997 compared to 9.5% in fiscal
1996. The increase was mainly attributable to (i) the inclusion of Astron's
printed circuit board business, which has historically had a relatively higher
gross profit margin than the Company, (ii) the concentration of more sales in
the Company's facility in China which has a lower manufacturing cost than the
Company's facilities in other locations and (iii) increased sales, resulting in
increased labor and overhead absorption. This benefit was partially offset by
the underutilization of manufacturing operations at the Company's Richardson,
Texas facility and the closure of the Company's nCHIP fabrication facility, and
the related inventory write-offs. See "Item 1 - Business - Risk Factors --
Management of Expansion and Consolidation."
Cost of sales included research and development costs of approximately
$1,153,000, $913,000 and $153,000 in fiscal 1998, 1997 and 1996, respectively.
These costs are associated with research and development expenditures in the
Company's Astron facility in Doumen, China.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for fiscal 1998
increased to $53.7 million from $36.3 million in fiscal 1997 but decreased as a
percentage of net sales to 4.8% in fiscal 1998 from 5.7% in fiscal 1997. The
dollar increase in SG&A was mainly due to (i) the addition of new sales
personnel in the United States and Europe; (ii) the inclusion of the operations
of the Karlskrona Facilities and (iii) investment in infrastructure such as
personnel and other related corporate and administrative expenses and
information systems to support the expansion of the Company's business. The
Company anticipates its SG&A expenses will continue to increase in dollars in
the future. However, to the extent that net sales continue to grow faster than
SG&A expenses, SG&A expenses would continue to decline as a percentage of net
sales.
SG&A expenses in fiscal 1997 increased to $36.3 million from $28.1 million
in fiscal 1996 and increased as percentage of net sales to 5.7% in fiscal 1997
from 4.9% in fiscal 1996. The increase was mainly due to: (i) the inclusion of
Astron's selling and general administrative expenses for all of fiscal 1997;
(ii) increased consulting fees; and (iii) increased sales and marketing
expenses. The increased consulting fees resulted from financial consulting
services provided by two banks for a total of $719,000 in fiscal 1997. The
Company also recorded $362,000 in March 1997 for compensation for management
services paid to a new executive officer who was formerly a key employee of
33
Ericsson in Sweden and who joined the Company upon the acquisition of the
Karlskrona Facilities.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets are amortized on a straight line basis over
the estimated life of the benefits received, which ranges from three to
twenty-five years. Goodwill and intangible assets amortization in fiscal 1998
increased to $3.7 million from $2.6 million in fiscal 1997. In the second
quarter of fiscal 1998, the Company reduced its estimate of the useful lives of
the goodwill and intangible assets (consisting of goodwill, customer lists and
trademarks and tradenames) arising from the Astron acquisition from
approximately twenty years to ten years. This reduction increased the Company's
amortization expense per quarter by approximately $279,000, beginning in the
second quarter of fiscal 1998. See Note 2 of Notes to Consolidated Financial
Statements.
Goodwill and intangible assets amortization increased to $2.6 million in
fiscal 1997 from $1.3 million in fiscal 1996. The increase from fiscal 1996 to
fiscal 1997 was primarily due to the amortization of additional goodwill and
intangible assets which arose from the Astron acquisition in 1996.
Provision for Excess Facilities
The provision for excess facilities of $8.9 million in fiscal 1998 relates
to the costs incurred in closing the Wales facility. This charge consists
primarily of the write-off of goodwill and intangible assets of $3.8 million,
severance payments, reimbursement of government grants, and costs associated
with the disposal of the factory. This closure is a result of the Company's
acquisition of Altatron, which resulted in duplicative facilities in the United
Kingdom. See Note 9 of Notes to Consolidated Financial Statements.
The provision for excess facilities of $5.9 million in fiscal 1997 consists
of the costs incurred in downsizing the Texas facility, downsizing the Singapore
manufacturing operations and writing off obsolete equipment and incurring
certain severance obligations at the nCHIP semiconductor fabrication facility.
The Texas facility was primarily dedicated to production for Global Village
Communications and Apple Computer, to whom the Company is no longer making
sales. The nCHIP semiconductor fabrication facility was primarily dedicated to
producing PCBs for nCHIP's MCMs, and the Company has transferred these
operations to a third party. The Singapore manufacturing facilities was
downsized in connection with the shift of manufacturing operations to lower cost
manufacturing locations.
The provision for excess facilities of $1.3 million in fiscal 1996 was
associated with the write-off of certain obsolete equipment at one of the
Company's facilities in Malaysia and in Shekou, China. The provision for excess
facilities were related to the Company ceasing its satellite receiver product
line in Malaysia and the closing of its manufacturing operations in Shekou,
China. Production from the Shekou facility has been moved to the Company's plant
in Xixiang, China.
Acquired In-Process Research and Development
Based on an independent valuation of certain of the assets of Astron and
other factors, the Company determined that the purchase price of Astron included
in-process research and development costs totaling $29.0 million which had not
34
reached technological feasability and had no probable alternative future use.
Accordingly, the Company wrote-off $29.0 million of in-process research and
development in fiscal 1996.
Merger Expenses
In fiscal 1998, the Company incurred $7.4 million of merger expenses
associated with the acquisitions of Neutronics, EnergiPilot, DTM, Altatron and
Conexao. The Neutronics merger expenses included $3.1 million in cost associated
with the cancellation of Neutronics's public offering and $900,000 in other
legal and accounting fees. The remaining $4.3 million consists of a $3.1 million
brokerage and finders fees incurred in the Altatron acquisition and $1.2 million
in legal and accounting fees for all of the fiscal 1998 acquisitions.
Other expense, net
Other expense, net increased to $13.1 million in fiscal 1998 from $6.4
million in fiscal 1997. The following table sets forth information concerning
the components of other income and expense.
FISCAL YEAR ENDED
MARCH 31,
----------------------------------
1996 1997 1998
-------- -------- --------
Interest expense ........................ $ (4,286) $ (6,426) $(17,700)
Interest income ......................... 756 706 2,742
Foreign exchange gain(loss) ............. (638) 1,665 1,581
Equity in earnings of associated
companies ............................. -- 133 1,194
Permanent impairment in investment ...... -- (3,200) --
Bank commitment fees .................... -- (750) --
Gain on sale of subsidiary's stock ...... -- 1,027 --
Minority interest ....................... (103) (394) (363)
Other income(expense), net .............. (653) 814 (546)
-------- -------- --------
$ (4,924) $ (6,425) $(13,092)
======== ======== ========
Net interest expense increased to $15.0 million in fiscal 1998 from $5.7
million in fiscal 1997. The increase was primarily due to increased bank
borrowings to finance the acquisition of the Karlskrona Facilities, capital
expenditures and the issuance of the $150.0 million 8.75% Senior Subordinated
Notes in October 1997. The Company anticipates that its interest expense will
increase in future periods as a result of borrowings under its credit facility.
Net interest expense increased to $5.7 million in fiscal 1997 from $3.5
million in fiscal 1996 mainly due to increases in interest expense in connection
with additional indebtedness used to finance working capital requirements, to
finance acquisitions and to purchase machinery and equipment for capacity
expansion. The Company also recorded approximately $363,000 of interest expense
in fiscal 1997 related to the cash portion of the Company's obligations to an
affiliate of Stephen Rees, a former shareholder and the Chairman of Astron,
pursuant to the Services Agreement. See "-- Overview."
Foreign exchange gain decreased to $1.6 million in fiscal 1998 from $1.7
million gain in fiscal 1997. The foreign exchange gain for fiscal 1998 was
mainly due to the strengthening of the U.S. dollar against Asian currencies.
Foreign exchange gain increased to $1.7 million in fiscal 1997 from a $638,000
loss in fiscal 1996. The foreign exchange loss in fiscal 1996 was primarily due
35
to the devaluation of the Hungarian Forint. Before the establishment in late
1995 of customs-free zones at the Company's sites in Hungary, the Company was
obliged to prepay (and later reclaim) customs duties to the Hungarian
authorities on all imported materials. As a result of the devaluation of the
Hungarian Forint in 1995, the Company incurred a loss of approximately $1.3
million on these receivables in calendar 1995. Since the Company no longer has
to prepay such duties, depreciation of the Hungarian Forint generally benefits
the Company's results of operations as it reduces the Company's cost of labor.
See "Note 2 --Notes to Consolidated Financial Statements."
Equity in earnings of associated companies for fiscal 1998 increased to
$1.2 million from $133,000 in fiscal 1997. The equity in earnings of associated
companies results primarily from the Company's investment in FICO and, to a
lesser extent, certain minority investments of Neutronics. The Company acquired
a 40% interest in FICO in December 1996. According to the equity method of
accounting, the Company did not recognize revenue from sales by FICO, but based
on its ownership interest recognized 40% of the net income or loss of the
associated company. The Company has recorded its 40% share of FICO's
post-acquisition net income.
The Company recognized a permanent impairment in an investment in fiscal
1997, represented by a write-off of publicly traded common stock received from a
customer in fiscal 1997 as payment of $3.2 million in accounts receivable. As a
result of a significant decline in the market value of this common stock
following its receipt by the Company, this common stock subsequently was deemed
to be permanently impaired in fiscal 1997, resulting in a $3.2 million expense.
In fiscal 1997, bank commitment fees represented $750,000 of commitment fees
written off in March 1997 when the bank's commitment expired unused.
Gain on sale of subsidiary of $1.0 million in fiscal 1997 was due to a gain
from the sale of a Hungarian subsidiary by Neutronics.
Minority interest expense for fiscal 1996, 1997, and 1998 was comprised
primarily of the 8% minority interest in Neutronics not acquired by the Company
in October 1997 and the 4.1% minority interest in Ecoplast, a subsidiary of
Neutronics held by a third party.
Other income (expense), net was an expense of $546,000 in fiscal 1998
compared to an income of $814,000 in fiscal 1997. Other expense, net in fiscal
1998 and fiscal 1996 primarily consisted of the write-off of fixed assets. Other
expense, net in fiscal 1997 includes $898,000 of income received under the
Company's business interruption insurance policy as a result of an April 1996
fire at its facilities in Doumen, China.
Provision for Income Taxes
The Company is structured as a holding company, conducting its operations
through manufacturing and marketing subsidiaries in Austria, Brazil, China,
Hungary, Malaysia, Mauritius, Mexico, The Netherlands, Singapore, Sweden, the
United Kingdom, and the United States. These subsidiaries are subject to
taxation in the country in which they have been formed. The Company's Asian and
Hungarian manufacturing subsidiaries have, at various times, been granted
certain tax relief in each of these countries, resulting in lower than would
36
otherwise be the case under ordinary tax rates. See Note 7 of Notes to
Consolidated Financial Statements.
The Company's consolidated effective tax rate for any given period is
calculated by dividing the aggregate taxes incurred by each of the operating
subsidiaries and the holding company by the Company's consolidated pre-tax
income. Losses incurred by any subsidiary or by the holding company are not
deductible by the entities incorporated in other countries in the calculation of
their respective local taxes. For example, the charge for the closing of
manufacturing operations at the Company's facility in Richardson, Texas in
fiscal 1997 was incurred by a United States subsidiary that did not have income
against which this charge could be offset. The ordinary corporate tax rates for
calendar 1997 were 34%, 28%, 26%, 18%, 16.5% and 15% in Austria, Sweden,
Singapore, Hungary, Hong Kong and China, respectively, and 30% on manufacturing
operations in Malaysia. In addition, the tax rate is de minimis in Labuan,
Malaysia and Mauritius where the Company's offshore marketing subsidiaries are
located. The Company's Hungarian subsidiaries have been on a tax holiday that
expired on December 31, 1997. Effective January 1, 1998, the Company's Hungarian
subsidiaries will be subject to corporate income taxes at a flat rate of 18%,
which will effectively be reduced to 7.2% in the years 1998 through 2002 because
a 60% exemption will apply. As a result of this change in tax status, the
Company expects to be subject to current income taxes in Hungary in future
years. The Company's U.S. and U.K. subsidiaries are subject to ordinary
corporate tax rates of 35% and 33% respectively. However, these tax rates did
not have any material impact on the Company's taxes in fiscal 1998 due to the
operating loss carry forwards benefited in this period.
The Company's consolidated effective tax rate was 10.2% for fiscal year
1998 compared to 14.9% for fiscal year 1997. The Company's effective tax rate
decreased primarily due to the Company benefiting from net loss carry forwards
related to the U.S. operations, due to the United States operations reaching
profitability in fiscal 1998. In addition, the Company's effective tax rate was
reduced by the shifting of some of its manufacturing operations from Singapore,
which has an ordinary corporate tax rate of 26%, to low cost manufacturing
operations located in countries with lower corporate tax rates.
The Company has structured its operations in Asia in a manner designed to
maximize income in countries where tax incentives have been extended to
encourage foreign investment or where income tax rates are low. The Company's
investments in its plants in Xixiang and Doumen, China fall under the "Foreign
Investment Scheme" which entitles the Company to apply for a five-year tax
incentive. The Company obtained the tax incentive for the Doumen plant in
December 1995 and the Xixiang plant in October 1996. With the approval, the
Company's tax rates on income from these facilities during the incentive period
will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the
first profitable year and 15.0% thereafter. In fiscal 1993, the Company
transferred its offshore marketing and distribution functions to a newly formed
marketing subsidiary located in Labuan, Malaysia, where the tax rate is de
minimis. In February 1996, the Company transferred Astron's sales and marketing
business to a newly formed subsidiary in Mauritius, where the tax rate is 0%.
The Company's Malaysian manufacturing subsidiary has obtained a five year
pioneer certificate from the relevant authority that provides a tax exemption on
manufacturing income from certain products in Johore, Malaysia. The Company's
facility in Shekou, China, which was closed in fiscal 1996, was located in a
"Special Economic Zone" and was an approved "Product Export Enterprise" that
qualified for a special corporate income tax rate of 10%.
37
If tax incentives are not renewed upon expiration, if the tax rates
applicable to the Company are rescinded or changed, or if tax authorities were
to challenge successfully the manner in which profits are recognized among the
Company's subsidiaries, the Company's worldwide effective tax rate would
increase and its results of operations and cash flow would be adversely
affected. A significant portion of the products manufactured by the Company's
Asian subsidiaries are sold to customers based in other jurisdictions in North
America and Europe. While the Company believes that profits from its Asian
operations are not sufficiently connected to such other jurisdictions to give
rise to income taxation in such other jurisdictions, there can be no assurance
that tax authorities in such other jurisdictions will not challenge the
Company's position or, if such challenge is made, that the Company will prevail
in any such disagreement. If the Company's Asian profits became subject to
income taxes in such other jurisdictions, the Company's taxes would increase and
its results of operations and cash flows would be adversely affected. The
expansion by the Company of its operations in the Americas and countries in
Western Europe is likely to increase its worldwide effective tax rate. See "Item
1 - Business - Risk Factors -- Risk of Increased Taxes."
Quarterly Results
The following table contains selected unaudited quarterly financial data
for 1997 and 1998 fiscal years. In the opinion of management, this information
has been presented on the same basis as the annual audited consolidated
financial statements appearing elsewhere, and all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of the Company.
The Company's results of operations have varied and may continue to fluctuate
significantly from quarter to quarter. Results of operations in any period
should not be considered indicative of the results to be expected from any
future period.
(UNAUDITED)
FISCAL YEAR ENDED MARCH 31, 1997 FISCAL YEAR ENDED MARCH 31, 1998
---------------------------------------------- ---------------------------------------------
First Second Third Fourth First Second Third Fourth
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales ............... $ 149,782 $ 156,757 $ 161,248 $ 172,220 $ 235,545 $ 251,468 $ 295,000 $ 331,058
Cost of sales ........... 134,656 138,661 148,614 153,211 212,517 226,786 266,192 298,675
--------- --------- --------- --------- --------- --------- --------- ---------
Gross margin ............ 15,126 18,096 12,634 19,009 23,028 24,682 28,808 32,383
Selling, general and
administrative ....... 8,218 8,550 9,333 10,176 12,564 11,806 13,773 15,552
Goodwill and intangible
amortization ......... 662 741 749 496 744 1,009 951 955
Provision for excess
facilities ........... -- -- 2,321 3,547 -- -- -- 8,869
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations .. 6,246 8,805 231 4,790 9,720 11,867 14,084 7,007
Merger-related expenses . -- -- -- -- -- -- 4,000 3,415
Other expense, net ...... 336 1,925 173 3,991 2,428 4,333 2,946 3,385
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income
taxes ............... 5,910 6,880 58 799 7,292 7,534 7,138 207
Income tax expense
(benefit) ............ 763 985 281 (2) 746 912 1,197 (597)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income .............. $ 5,147 $ 5,895 $ (223) $ 801 $ 6,546 $ 6,622 $ 5,941 $ 804
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income
(loss) per share ..... $ 0.30 $ 0.34 $ (0.01) $ 0.05 $ 0.37 $ 0.37 $ 0.29 $ 0.04
========= ========= ========= ========= ========= ========= ========= =========
Weighted average Ordinary
Shares and equivalents
outstanding - diluted 17,318 17,121 17,393 17,481 17,492 18,047 20,379 20,799
========= ========= ========= ========= ========= ========= ========= =========
38
The Company has experienced, and expects to continue to experience,
significant periodic and quarterly fluctuations in results of operations due to
a variety of factors. These factors include, among other things, timing of
orders, the short-term nature of most customers' purchase commitments, volume of
orders relative to the Company's capacity, customers' announcement, introduction
and market acceptance of new products or new generations of products, evolution
in the life cycles of customers' products, timing of expenditures in
anticipation of future orders, effectiveness in managing manufacturing
processes, changes in cost and availability of labor and components, mix of
orders filled, timing of acquisitions and related expenses and changes or
anticipated changes in economic conditions. In addition, the Company's net sales
may fluctuate throughout the year as a result of local factors and other event
that may affect production volumes. The market segments served by the Company
are also subject to economic cycles and have in the past experienced, and are
likely in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period, and fluctuations in operating results may also result in
fluctuations in the price of the Company's Ordinary Shares. In future periods,
the Company's revenues or results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Ordinary Shares would likely be materially adversely affected. See "Item 1
Business - Risk Factors -- Variability of Customer Requirements and Operating
Results."
BACKLOG
Although the Company obtains firm purchase orders from its customers, OEM
customers typically do not make firm orders for delivery of products more than
30 to 90 days in advance. The Company does not believe that the backlog of
expected product sales covered by firm purchase orders is a meaningful measure
of future sales since orders may be rescheduled or canceled.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations from the proceeds of public offerings
of equity securities, cash and cash equivalents generated from operations, bank
debt and lease financing of capital equipment. In October 1997, the Company
issued $150.0 million principal amount of Senior Subordinated Notes due in 2007
for net proceeds of $145.7 million and issued 2,185,000 Ordinary Shares for net
proceeds of $96.2 million. At March 31, 1998 the Company had cash and cash
equivalents balances totaling $89.4 million, total bank and other debts
amounting to $242.5 million and $100.5 million available for borrowing under its
credit facilities subject to compliance with certain financial ratios.
Cash provided by operating activities was $38.3 million, $54.4 million and
$2.4 million in fiscal 1998, 1997 and 1996, respectively. Cash provided by
operating activities decreased in fiscal 1998 from fiscal 1997 because of the
increase in accounts receivable and inventories, partially offset by increases
in accounts payables, increases in depreciation and amortization expenses of
$30.9 million in fiscal 1998 from $18.1 million in fiscal 1997 and the increase
in profitability in fiscal 1998. Cash provided by operating activities increased
in fiscal 1997 over fiscal 1996 mainly due to the increase in profitability,
decrease in accounts receivable, increase in accounts payable, and increases in
depreciation and amortization expenses of $18.1 million in fiscal 1997 from
39
$13.8 million in fiscal 1996 partially off-set by increases in other current
assets.
Accounts receivable, net of allowance for doubtful accounts has increased
to $155.1 million at March 31, 1998 from $87.5 million at March 31, 1997. The
increase in accounts receivable was primarily due to a 73.9% increase in sales
in fiscal 1998 and to $19.4 million of accounts receivable acquired as a result
of the acquisitions of Altatron and Conexao effective March 31, 1998. The
Company's allowance for doubtful accounts increased from $6.1 million at March
31, 1997 to $9.5 million at March 31, 1998 to reflect the increased receivable
levels.
Inventories increased to $157.1 million at March 31, 1998 from $124.4
million at March 31, 1997. The increase in inventories was primarily the results
of increased purchases of material to support the growing sales and also $8.5
million of inventories as a result of the acquisitions of Altatron and Conexao
effective March 31, 1998. Inventories increased to $124.4 million at March 31,
1997 from $65.9 million at March 31, 1996. The increase in inventories was
primarily the result of the acquisition of $55.3 million of inventories at the
Karlskrona Facilities. The Company's allowance for inventory obsolescence
increased from $6.2 million at March 31, 1997 to $9.6 million at March 31, 1998.
Cash used in investing activities was $104.7 million, $117.6 million and
$39.8 million in fiscal 1998, 1997 and 1996, respectively. Cash used in
investing activities in fiscal 1998 were primarily related to capital
expenditures of $98.6 million. Capital expenditures in fiscal 1998 related to
the purchase of equipment and construction of new facilities in Doumen, China,
Guadalajara, Mexico, San Jose, California and Karlskrona, Sweden. Cash used in
investing activities in fiscal 1997 consisted primarily of $82.4 million paid
for the acquisition of the Karlskrona Facilities and $37.5 million in capital
expenditures. Cash used in investing activities in fiscal 1996 was primarily
comprised of capital expenditures of $23.5 million and $15.2 million cash
portion of the purchase price paid for the Assembly & Automation (Electronics)
Limited and Astron acquisitions.
Cash provided by financing activities was $133.1 million, $79.0 million and
$34.0 million in fiscal 1998, 1997, and 1996, respectively. Cash provided by
financing activities in fiscal 1998 resulted primarily from net proceeds of the
issuance of senior subordinated notes of $145.7 million and net proceeds from
the equity offering of $96.2 million, partially offset by $108.6 million of net
repayments of bank borrowings, capital leases, long-term debts and payment of
$5.0 million notes due to Astron's former shareholders. See "--- Overview." Cash
provided by financing activities in fiscal 1997 consisted primarily of net bank
borrowings and proceeds from long term debt of $97.0. Cash provided by financing
activities in fiscal 1996 consisted primarily of $22.3 million from the sale of
Ordinary Shares and net bank borrowings of $22.9 million. This was partially
offset by repayments of capital lease and loan from related company.
On March 27, 1997, the Company established the credit facility (the "Credit
Facility") with a syndicate of banks. The Facility, provides for revolving
credit borrowings by the Company and Flextronics International USA, Inc., a
California corporation and a wholly-owned subsidiary of the Company of an
aggregate of $105.0 million, is subject to compliance with certain financial
covenants and the satisfaction of customary borrowing conditions. BankBoston,
N.A. (the "Bank") is the lead agent and a lender under the Credit Facility. In
January 1998, the Credit Facility was amended to, among other things, (i)
eliminate a term loan facility; (ii) reduce the commitment fees and interest
40
rate payable under the facility; (iii) provide for loans directly to certain of
the Company's subsidiaries; and (iv) provide for loans in foreign currencies.
The Credit Facility consists of two separate credit agreements, one providing
for up to $55.0 million principal amount of revolving credit loans to the
Company and designated subsidiaries and one providing for up to $50.0 million
principal amount of revolving credit loans to the Company's United States
subsidiary. Loans under the Credit Facility will mature in March 2000. The
Company anticipates that it will from time to time borrow revolving credit loans
to fund its operations and growth.
The Company anticipates that its working capital requirements will increase
in order to support anticipated increases in business capacity. In addition, the
Company anticipates incurring significant capital expenditures and operating
lease commitments in order to support its anticipated expansions of these
facilities in China, Hungary and Mexico. Future liquidity needs will depend on
fluctuations in levels of inventory, the timing of expenditures by the Company
on new equipment, the extent to which the Company utilizes operating leases for
the new facilities and equipment, levels of shipments by the Company and changes
in volumes of customer orders. The Company believes that the existing cash
balances, together with anticipated cash flow from operations and amounts
available under the Credit Facility, will be sufficient to fund its operations
through fiscal 1999. However, to the extent that the Company's operations
significantly expand, the Company may be required to obtain additional debt or
equity financing. See "Item 1 - Business - Risk Factors -- Management of
Expansion and Consolidation."
The Company anticipates expending $15.0 million in fiscal 1999 to
implement the new management information system, and anticipates funding these
expenditures with cash from operations and borrowings under the Credit Facility.
The Company also will be required to expend cash in fiscal 1999 pursuant to the
terms of the Astron acquisition. The Company is required to make a $14.0 million
payment to an entity affiliated with Stephen Rees in June 1998. Of this amount
$5.0 million is payable in cash and $9.0 million is payable in cash or, at the
option of the Company, in Ordinary Shares, and the Company intends to pay the
$9.0 million portion in Ordinary Shares.
41
Item 8. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders' of
Flextronics International Ltd:
We have audited the accompanying consolidated balance sheets of
Flextronics International Ltd. and subsidiaries (a Singapore company) as of
March 31, 1997 and 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Neutronics Electronics Industries Holding A.G., a company acquired
on October 30, 1997 in a transaction accounted for as a pooling-of-interests, as
discussed in Note 2. Such statements are included in the consolidated financial
statements of Flextronics International Ltd. and reflect total assets of 20
percent of the consolidated total as of March 31, 1997 and total revenues of 22
percent and 23 percent, respectively, of the consolidated totals for the years
ended March 31, 1996 and 1997. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts included for Neutronics Electronics Industries Holding A.G., is based
solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Flextronics International Ltd. and
subsidiaries as of March 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 23, 1998
42
REPORT OF INDEPENDENT AUDITORS
The Management and Supervisory Boards and Shareholders at
Neutronics Electronic Industries Holding A.G.
We have audited the accompanying consolidated balance sheets (not presented
herein) of Neutronics Electronic Industries Holdings A.G. and its subsidiaries
(the `Group') as at December 31, 1996, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the periods then ended (not presented herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with United States Generally Accepted
Auditing Standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements (not presented
herein) present fairly, in all material respects the financial position of the
Group as at December 31, 1996, 1995 and 1994 and the results of its operations
and its cash flows for the periods then ended in conformity with United States
Generally Accepted Accounting Principles.
/s/ MOORE STEPHENS
Moore Stephens
Registered Auditors
St. Paul's House
Warwick Lane
London EC4P 4BN.
Friday 12 June 1998
43
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31
----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 24,159 $ 89,390
Accounts receivable, less allowances of $6,072 and $9,528 ......... 87,507 155,125
Inventories ....................................................... 124,362 157,077
Deferred tax asset ................................................ 3,049 28
Other current assets .............................................. 15,319 37,914
--------- ---------
Total current assets ...................................... 254,396 439,534
Property and equipment, net ......................................... 149,015 255,573
Goodwill and other intangibles, net ................................. 33,506 26,561
Related party receivables ........................................... 2,554 2,520
Other assets ........................................................ 6,821 19,935
--------- ---------
Total assets .............................................. $ 446,292 $ 744,123
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings and current portion of long-term debt ............. $ 128,515 $ 43,209
Capital lease obligations ......................................... 8,273 9,587
Accounts payable .................................................. 97,917 177,084
Accrued liabilities and other ..................................... 47,344 84,736
Payables to associated company .................................... 546 382
Deferred revenue .................................................. 2,046 0
--------- ---------
Total current liabilities ................................. 284,641 314,998
--------- ---------
Long-term debt, net of current portion .............................. 9,029 166,497
Capital lease obligations, net of current portion ................... 20,099 23,181
Deferred income taxes ............................................... 3,710 4,812
Other long-term liabilities ......................................... 28,326 18,832
Minority interest ................................................... 1,142 994
--------- ---------
Total long-term liabilities ............................... 62,306 214,316
--------- ---------
Commitments (Note 6)
SHAREHOLDERS' EQUITY:
Ordinary Shares, S$.01 par value; Authorized -- 100,000,000 shares;
issued and outstanding -- 16,482,243 and 20,617,429 as of March
31, 1997 and 1998, respectively ................................ 107 134
Additional paid-in capital ................................... 106,556 214,466
Retained earnings(deficit) ........................................ (7,020) 6,934
Cumulative translation adjustment ................................. (298) (6,725)
--------- ---------
Total shareholders' equity ................................ 99,345 214,809
--------- ---------
Total liabilities and shareholders' equity ................ $ 446,292 $ 744,123
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
44
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net Sales ........................................... $ 572,045 $ 640,007 $ 1,113,071
Cost of Sales ....................................... 517,732 575,142 1,004,170
----------- ----------- -----------
Gross margin .............................. 54,313 64,865 108,901
----------- ----------- -----------
Operating Expenses:
Selling, general and administrative ............... 28,138 36,277 53,695
Goodwill and intangibles amortization ............. 1,296 2,648 3,659
Provision for excess facilities ................... 1,254 5,868 8,869
Acquired in-process research and development ...... 29,000 -- --
----------- ----------- -----------
Total operating expenses .................. 59,688 44,793 66,223
----------- ----------- -----------
Income(loss) from operations ........................ (5,375) 20,072 42,678
Other Expense:
Merger-related expenses ........................... -- -- (7,415)
Other expense, net ................................ (4,924) (6,425) (13,092)
----------- ----------- -----------
Income(loss) before income taxes ............... (10,299) 13,647 22,171
Provision for Income Taxes .......................... 3,847 2,027 2,258
----------- ----------- -----------
Net income(loss) .................................... $ (14,146) $ 11,620 $ 19,913
=========== =========== ===========
Basic net income (loss) per share .............. $ (0.92) $ 0.70 $ 1.09
=========== =========== ===========
Diluted net income (loss) per share ............ $ (0.92) $ 0.67 $ 1.04
=========== =========== ===========
Weighted average Ordinary Shares
outstanding -- basic ......................... 15,436 16,704 18,263
=========== =========== ===========
Weighted average Ordinary Shares and equivalents
outstanding -- diluted ....................... 15,436 17,328 19,097
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
45
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
ORDINARY SHARES ADDITIONAL RETAINED CUMULATIVE TOTAL
--------------------- PAID-IN EARNINGS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
--------- --------- --------- --------- ---------- ---------
BALANCE AT MARCH 31, 1995 .......... 14,410 $ 92 $ 73,868 $ (5,513) $ (12) $ 68,435
Issuance of Ordinary Shares for
acquisition of A&A ............ 67 -- 938 -- -- 938
Issuance of Ordinary Shares for
acquisition of Astron ......... 238 2 6,505 -- -- 6,507
Exercise of stock options ........ 304 2 1,007 -- -- 1,009
Sale of shares in public
offering, net of $1,190 in
offering costs ................ 1,000 8 22,302 -- -- 22,310
Net loss ......................... -- -- -- (14,146) -- (14,146)
Foreign exchange gain ............ -- -- -- -- 518 518
--------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1996 .......... 16,019 104 104,620 (19,659) 506 85,571
Issuance of Ordinary Shares for
acquisition of Fine Line ...... 223 1 196 1,019 -- 1,216
Exercise of stock options ........ 240 2 1,740 -- -- 1,742
Net income ....................... -- -- -- 11,620 -- 11,620
Foreign exchange loss ............ -- -- -- -- (804) (804)
--------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1997 .......... 16,482 107 106,556 (7,020) (298) 99,345
Adjustment to conform fiscal
year of pooled entity ......... -- -- -- (3,136) -- (3,136)
Issuance of Ordinary Shares for
acquisition of DTM ............ 252 2 1,032 (1,481) -- (447)
Issuance of Ordinary Shares for
acquisition of Energipilot .... 230 1 257 549 -- 807
Issuance of Ordinary Shares for
acquisition of Altatron ....... 788 5 45 4,132 -- 4,182
Issuance of Ordinary Shares for
acquisition of Conexao ........ 421 3 8,494 (6,023) -- 2,474
Exercise of stock options ........ 259 2 1,946 -- -- 1,948
Sale of shares in public offering,
net of $6,545 in offering costs 2,185 14 96,136 -- -- 96,150
Net income ....................... -- -- -- 19,913 -- 19,913
Foreign exchange loss ............ -- -- -- -- (6,427) (6,427)
--------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1998 .......... 20,617 $ 134 $ 214,466 $ 6,934 $ (6,725) $ 214,809
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
46
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $ (14,146) $ 11,620 $ 19,913
Adjustments to reconcile net income (loss) to net cash
provided by from operating activities:
Depreciation and amortization ............................... 13,864 18,140 30,948
Gain on sale of subsidiary .................................. -- (1,027) --
Provision for receivables and inventories ................... 3,496 7,319 4,467
Equity in earnings of associated companies .................. -- (133) (1,194)
In-process research and development ......................... 29,000 -- --
Provision for excess facilities ............................. 1,254 5,308 8,869
Minority interest expense and other non-cash expenses ....... 346 1,302 413
Changes in operating assets and liabilities (net of effect of
acquisitions):
Accounts receivable .................................... (28,957) 4,290 (46,685)
Inventories ............................................ (19,553) (8,400) (32,258)
Other current assets ................................... 2,126 (10,581) (22,476)
Accounts payable, accrued liabilities and
other ................................................ 14,677 25,719 74,973
Deferred revenue ....................................... 171 1,788 317
Deferred income taxes .................................. 140 (976) 999
--------- --------- ---------
Net cash provided by operating activities ........................ 2,418 54,369 38,286
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................ (23,520) (37,503) (98,617)
Proceeds from sale of property and equipment ................... 630 4,827 1,622
Proceeds from sale of subsidiaries ............................. -- 1,012 --
Investment in associated company ............................... (1,408) (3,116) (2,200)
Other investments .............................................. (1,192) (25) (3,621)
Payment for Astron earnout ..................................... -- -- (6,250)
Effect of acquisitions on cash ................................. -- -- 4,363
Net cash paid for acquired businesses .......................... (15,152) (82,354) --
Repayments from (loans to) related party ....................... 815 (469) 35
--------- --------- ---------
Net cash used in investing activities ............................ (39,827) (117,628) (104,668)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and proceeds from long-term debt ............... 56,944 160,940 160,438
Repayment of bank borrowings and long-term debt ................ (34,069) (63,957) (258,910)
Borrowings from (payments to) related company .................. (6,440) (4,403) 2,946
Equipment refinanced under capital leases ...................... -- 3,509 --
Repayment of capital lease obligations ......................... (5,767) (7,991) (10,152)
Proceeds from exercise of stock options ........................ 1,009 1,362 1,948
Payments on notes payable ...................................... (17) (10,463) (5,000)
Gross proceeds from issuance of Senior Subordinated Notes ...... -- -- 150,000
Expenses related to the issuance of Senior Subordinated Notes .. -- -- (4,313)
Gross proceeds from sales of Ordinary Shares ................... 23,500 -- 102,695
Expenses related to sales of Ordinary Shares ................... (1,190) -- (6,545)
--------- --------- ---------
Net cash provided by financing activities ........................ 33,970 78,997 133,107
--------- --------- ---------
Effect of exchange rate changes .................................. (70) (226) (1,883)
Effect of Neutronics fiscal year conversion ...................... -- -- 389
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................. (3,509) 15,512 65,231
Cash and cash equivalents, beginning of period ................... 12,156 8,647 24,159
--------- --------- ---------
Cash and cash equivalents, end of period ......................... $ 8,647 $ 24,159 $ 89,390
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
47
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION OF THE COMPANY
Flextronics International Ltd. ("Flextronics" or the "Company") is
incorporated in the Republic of Singapore. Flextronics provides advanced
electronics manufacturing services to sophisticated original equipment
manufacturers ("OEMs") in the telecommunications, networking, computer, consumer
and medical electronics industries. Flextronics offers a full range of services
including product design, printed circuit board ("PCB") assembly and
fabrication, material procurement, inventory management, plastic injection
molding, final system assembly and test, packaging and distribution. The
components, subassemblies and finished products manufactured by the Company
incorporate advanced interconnect, miniaturization and packaging technologies
such as surface mount ("SMT"), multichip modules ("MCM") and chip-on-board
("COB") technologies.
2. SUMMARY OF ACCOUNTING POLICIES
Principles of consolidation and basis of presentation
The accompanying consolidated financial statements include the accounts of
Flextronics and its wholly and majority-owned subsidiaries, after elimination of
all significant intercompany accounts and transactions.
As is more fully described in Note 11, Flextronics acquired 92% of the
outstanding shares of Neutronics Electronics Industries Holding A.G.
("Neutronics") on October 30, 1997. The acquisition was accounted for as a
pooling-of-interests and the consolidated financial statements have been
restated to reflect the combined operations of Neutronics and Flextronics for
all periods presented.
Neutronics operated under a calendar year end prior to merging with
Flextronics, and accordingly, Neutronics' statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1995 and
1996 have been combined with the corresponding Flextronics consolidated
statements for the fiscal years ended March 31, 1996 and 1997. Neutronics'
balance sheet as of December 31, 1996 has been combined with Flextronics'
consolidated balance sheet as of March 31, 1997. During fiscal 1998, Neutronics'
fiscal year end was changed from December 31, 1997 to March 31, 1998 to conform
to the Company's fiscal year-end. Accordingly, Neutronics' operations for the
three months ended March 31, 1997, which included net sales of $34.9 million and
net loss of $3.1 million have been excluded from the consolidated results and
have been reported as an adjustment to retained earnings in the first quarter of
fiscal 1998.
All dollar amounts included in the financial statements are expressed in
U.S. dollars unless otherwise designated as Singapore dollars (S$).
Translation of Foreign Currencies
The functional currency of the majority of Flextronics' Asian subsidiaries
and certain other subsidiaries is the U.S. dollar. Accordingly, all of the
monetary assets and liabilities of these subsidiaries are translated into U.S.
dollars at the current exchange rate as of the applicable balance sheet
48
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
date, and all non-monetary assets and liabilities are remeasured at historical
rates. Revenues and expenses are translated at the average exchange rate
prevailing during the period. Gains and losses resulting from the translation of
these subsidiaries' financial statements are included in the accompanying
consolidated statements of operations.
The financial position and results of operations of the Company's Swedish,
UK, Austrian, Brazilian and Hungarian subsidiaries are measured using local
currency as the functional currency. Accordingly, for these subsidiaries all
assets and liabilities are translated into U.S. dollars at current exchange
rates as of the respective balance sheet date. Revenue and expense items are
translated at the average exchange rates prevailing during the period.
Cumulative translation gains and losses from the translation of these
subsidiaries' financial statements are reported as a separate component of
shareholders' equity.
The Company entered into forward contracts to hedge foreign currency
exposures in fiscal 1997 related to a kronor denominated intercompany loan.
These transactions were settled in September 1997 and did not subject the
Company to risk of accounting losses because gains and losses on these contracts
offset losses and gains on the liability. The Company had $6.8 million and $80.7
million of aggregate foreign currency forward exchange contracts outstanding at
the end of fiscal year 1997 and fiscal 1998, respectively.
Property and equipment
Property and equipment is stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the related
assets (two to ten years), with the exception of building leasehold
improvements, which are amortized over the life of the lease, if shorter.
Property and equipment was comprised of the following as of March 31:
1997 1998
--------- ---------
Machinery and equipment .................... $ 103,243 $ 186,279
Land ....................................... 6,603 15,976
Buildings .................................. 53,136 80,352
Leasehold improvements ..................... 7,369 15,506
Furniture, fixtures and vehicles ........... 27,463 37,802
--------- ---------
197,814 335,915
Accumulated depreciation and amortization . (48,799) (80,342)
--------- ---------
Property and equipment, net ............... $ 149,015 $ 255,573
========= =========
Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, are primarily accounts receivable and cash
equivalents. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains an allowance for doubtful accounts based on
the outcome of its credit evaluations. The Company maintains cash and cash
equivalents with various financial institutions. These financial institutions
are located in many different locations throughout the world.
Sales to customers who accounted for more than 10% of net sales were as
follows for the years ended March 31:
49
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1996 1997 1998
------ ------ ------
Ericsson ................................. --% --% 25.6%
Philips Electronics Group (see Note 10) .. 17.8 18.8 12.5
Lifescan ................................. 11.1 10.2 5.0
Visioneer ................................ 10.3 5.4 0.4
Prior to the company's acquisition of Neutronics, Philips Electronics Group
("Philips") held a significant ownership interest in Neutronics (see Note 11).
Sales to Philips, which are included in net sales in the accompanying
consolidated statements of operations, totaled $102 million, $120 million, and
$139 million in fiscal 1996, 1997 and 1998, respectively. Neutronics also
purchased raw materials from Philips totaling $9 million, $30 million and $53
million in fiscal 1996, 1997 and 1998, respectively.
In addition, Neutronics received an interest free loan from Philips in
fiscal 1994 of $10.8 million which was fully repaid by fiscal 1997.
Goodwill and other intangibles
Any excess of cost over net assets acquired (goodwill) is amortized by the
straight-line method over estimated lives ranging from ten to twenty-five years.
Intangible assets are comprised of technical agreements, patents,
trademarks, developed technologies and other acquired intangible assets
including assembled work forces, favorable leases and customer lists. Technical
agreements are being amortized on a straight-line basis over periods of up to
five years. Patents and trademarks are being amortized on a straight-line basis
over periods of up to ten years. Purchased developed technologies are being
amortized on a straight-line basis over periods of up to seven years. Intangible
assets related to assembled work forces, favorable leases and customer lists are
amortized on a straight-line basis over three to twenty years.
Goodwill and other intangibles were as follows as of March 31:
1997 1998
-------- --------
Goodwill ................................. $ 26,483 $ 21,850
Other intangibles ........................ 13,964 16,986
-------- --------
40,447 38,836
Accumulated amortization ................. (6,941) (12,275)
-------- --------
Goodwill and other intangibles, net ...... $ 33,506 $ 26,561
======== ========
Long-Lived Assets
Effective December 1995 the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
statement requires that long-lived assets and certain identifiable intangibles
to be held and used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
50
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of property and equipment is measured by
comparison of its carrying amount, including the unamortized portion of goodwill
allocated to the property and equipment, to future net cash flows the property
and equipment are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the property and equipment, including the allocated goodwill,
if any, exceeds its fair market value. The Company assesses the recoverability
of enterprise level goodwill and intangible assets as well as long-lived assets
by determining whether the unamortized balances can be recovered through
undiscounted future results of the operation or asset. The amount of enterprise
level long lived asset impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting the Company's average
cost of funds. To date, the Company has made no adjustments to the carrying
value of its long-lived assets.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value. Cost is comprised of direct materials, labor and overhead. As of
March 31, the components of inventories are as follows:
1997 1998
-------- --------
Raw materials .................... $ 80,010 $130,868
Work-in-process .................. 16,665 21,536
Finished goods ................... 27,687 4,673
-------- --------
$124,362 $157,077
======== ========
Accrued liabilities and other
Accrued liabilities was comprised of the following as of March 31:
1997 1998
------- -------
Income taxes .......................................... $ 4,171 $ 4,183
Accrued payroll ....................................... 15,443 19,928
Accrued loan interest ................................ -- 6,016
Provision for excess facilities ...................... 5,308 5,445
Amount payable to FICO for remaining purchase price .. 2,200 --
Earnout payable to Astron (See Note 11) ............... 6,250 --
Purchase price payable to former Astron's Shareholders
(See Note 11) .................................... -- 10,000
Amount due under the Service Agreement (See Note 11) .. -- 13,909
Other accrued liabilities ............................. 13,972 25,255
------- -------
$47,344 $84,736
======= =======
51
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Revenue recognition
The Company's net sales are comprised of product sales and service revenue
earned from engineering and design services. Revenue from product sales is
recognized upon shipment of the goods. Service revenue is recognized as the
services are performed, or under the percentage-of-completion method of
accounting, depending on the nature of the arrangement. If total costs to
complete a project exceed the anticipated revenue from that project, the loss is
recognized immediately.
Research and development
Research and development costs arise from the Company's efforts to develop
new manufacturing processes and technologies and are expensed as incurred. Cost
of sales included research and development costs of approximately $153, $913 and
$1,153 in fiscal 1996, 1997 and 1998, respectively.
Other expense, net
Other expense, net was comprised of the following for the years ended March
31:
1996 1997 1998
-------- -------- --------
Interest expense ......................... $ (4,286) $ (6,426) $(17,700)
Interest income .......................... 756 706 2,742
Foreign exchange gain (loss) ............. (638) 1,665 1,581
Equity in earnings of associated companies -- 133 1,194
Permanent impairment in investment ....... -- (3,200) --
Bank commitment fees ..................... -- (750) --
Gain on sale of subsidiary ............... -- 1,027 --
Minority interest ........................ (103) (394) (363)
Other income(expense), net ............... (653) 814 (546)
-------- -------- --------
Total other expense, net ....... $ (4,924) $ (6,425) ($13,092)
======== ======== ========
52
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Net income per share
Basic net income per share is computed using the weighted average number of
Ordinary Shares outstanding during the applicable periods.
Diluted net income per share is computed using the weighted average number
of Ordinary Shares and dilutive Ordinary Share equivalents outstanding during
the applicable periods. Ordinary Share equivalents include Ordinary Shares
issuable upon the exercise of stock options and are computed using the treasury
stock method.
Reconciliation between basic and diluted earnings per share is as follows
for the fiscal years ended March 31 (in thousands, except per share data):
1996 1997 1998
-------- -------- --------
Ordinary Shares issued and outstanding(1) .... 15,342 16,219 17,803
Ordinary Shares due to Astron(2) ............. 94 485 460
-------- -------- --------
Weighted average Ordinary Shares -- basic .... 15,436 16,704 18,263
Ordinary Share equivalents -- stock options(3) -- 624 834
-------- -------- --------
Weighted average Ordinary Shares and
equivalents -- diluted ..................... 15,436 17,328 19,097
======== ======== ========
Net income (loss) ............................ $(14,146) $ 11,620 $ 19,913
======== ======== ========
Basic net income (loss) per share ............ $ (0.92) $ 0.70 $ 1.09
======== ======== ========
Diluted net income (loss) per share .......... $ (0.92) $ 0.67 $ 1.04
======== ======== ========
(1) Ordinary Shares issued and outstanding based on the weighted average
method.
(2) Ordinary Shares to be issued as purchase price due to Astron's former
shareholders in June 1998.
(3) Stock options of the Company calculated based on the treasury stock method
using average market price for the period, if dilutive.
New accounting standards
In 1998, the Company adopted SFAS No. 129, "Disclosure of information about
capital structure." SFAS No. 129 requires companies to disclose certain
information about their capital structure. SFAS No. 129 did not have a material
impact on the Company's consolidated financial statement disclosures.
In 1998, the FASB issued SFAS No. 130, "Comprehensive Income," which will
be adopted by the Company in the first quarter of 1999. SFAS No. 130 requires
companies to report a new, additional measure of income on the income statement
or to create a new financial statement that has the new measure of income on it.
"Comprehensive Income" is to include foreign currency translation gains and
losses and other unrealized gains and losses that have been previously excluded
from net income and reflected instead in equity. The Company anticipates that
SFAS No. 130 will not have a material impact on its consolidated financial
statements.
53
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In 1998, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which will be adopted by the Company in its
1999 annual consolidated financial statements. SFAS No. 131 requires companies
to report financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and expense
items, and segment assets, as well as information about the revenues derived
from the Company's products and services, the countries in which the Company
earns revenues and holds assets, and major customers.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
For purposes of the statement of cash flows, the Company considers highly
liquid investments with an original maturity of three months or less to be cash
equivalents. The following information relates to fiscal years ended March 31:
1996 1997 1998
------- ------- -------
Cash paid for:
Interest ........................................ $ 4,035 $ 4,927 $11,076
Income taxes .................................... 2,656 1,717 1,271
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations . 14,381 14,783 9,094
Acquisition related items:
Notes payable to Astron's shareholders ......... 15,000 -- --
Ordinary Shares due to Astron's shareholders .... 10,000 -- --
Ordinary Shares due under the Services Agreement 14,124 -- --
Earnout of $6.25 million payable to Astron's
shareholders less reduction in amount due under
the Services Agreement ...................... -- 5,250 --
Cash and cash equivalents was comprised primarily of cash in bank and short
term certificate of deposits as of March 31, 1998 and cash in bank as of March
31, 1997.
4. BANK BORROWINGS AND LONG-TERM DEBT
The Company has $150 million in unsecured Senior Subordinated Notes due in
2007 outstanding with an annual interest rate of 8.75% due semi-annually. In
addition, during fiscal 1998, the Company repaid the $70.0 million in Credit
Facility term loans and amended the Credit Facility to provide up to $105.0
million in line of credit borrowings, subject to certain financial ratios and
covenants. As of March 31, 1998, the Company has borrowed $20 million under the
Credit Facility line of credit. The Credit Facility is secured by substantially
all of the Company's assets and expires in December 2000. The annual interest
rate of the Credit Facility is 8.5%. Certain subsidiaries of the Company have
various lines of credit available with annual interest rates ranging from 8.0%
to 9.0%. These lines of credit expire on various dates through 2014. In total,
as of March 31, 1998, the Company has $100.5 million available under its various
lines of credit.
The Company has financed the purchase of certain facilities with mortgages.
The mortgages generally have terms of 6 to 7 years and annual interest rates
ranging from 4.0% to 18.25%.
Term loans and other debt include loans with annual interest rates
generally ranging from 6.72% to 10% with terms of up to 8 years. In addition,
the Company had notes payable for purchase price due to the former shareholders
of Astron Group Limited, a company acquired in February 1996. The notes were
unsecured for
54
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
a total of $15 million and bore interest at 8%. Of the $15 million balance, $10
million was paid in February 1997 and the remaining $5 million was paid in
February 1998.
Bank borrowings and long-term debt was comprised of the following at March
31:
1997 1998
--------- ---------
Senior Subordinated Notes .............. $ -- $ 150,000
Outstanding under lines of credit ...... $ 50,160 23,010
Credit Facility term loan .............. 70,000 --
Mortgages .............................. 7,770 12,848
Term loans and other debt .............. 9,614 23,848
--------- ---------
137,544 209,707
Current portion ...................... (128,515) (43,209)
--------- ---------
Non-current portion .................. $ 9,029 $ 166,497
========= =========
Maturities for the bank borrowings and other long-term debt are as follows
for the years ended March 31:
1999 ........................ $ 43,209
2000 ........................ 5,500
2001 ........................ 1,684
2002 ........................ 1,032
2003 ........................ 433
Thereafter .................. 157,849
--------
$209,707
========
5. OTHER LONG-TERM LIABILITIES
Other long-term liabilities were comprised of the following as of March 31:
1997 1998
------- -------
Purchase price payable to former Astron shareholders
(See Note 11) .................................... $10,000 $ --
Amount due under the Services Agreement (See Note 11) 13,547 --
Provision for severance and employee related payments -- 6,025
Other long-term liabilities .......................... 4,779 12,807
------- -------
$28,326 $18,832
======= =======
6. COMMITMENTS
As of March 31, 1997 and 1998, the Company has financed a total of $40,467
and $49,606 in machinery and equipment purchases with capital leases,
respectively. Accumulated amortization for property and equipment under capital
leases totals $11,974 and $13,764 at March 31, 1997 and 1998, respectively.
These capital leases have interest rates ranging from 3.7% to 16.5%. The Company
also leases certain of its facilities under non-cancelable operating leases. The
capital and operating leases expire in various years
55
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
through 2012 and require the following minimum lease payments for the years
ended March 31:
CAPITAL OPERATING
-------- ---------
1999 .......................................... $ 11,467 $ 11,004
2000 .......................................... 8,535 9,943
2001 .......................................... 6,017 6,664
2002 .......................................... 3,795 5,674
2003 .......................................... 2,433 4,961
Thereafter .................................... 7,217 10,526
-------- --------
Minimum lease payments ........................ 39,464 $ 48,772
========
Amount representing interest .................. (6,696)
--------
Present value of minimum lease payments ....... 32,768
Current portion ............................... (9,587)
--------
Capital lease obligations, net of current
portion ................................ $ 23,181
========
Total rent expense was $3,405, $3,144 and $8,188 for the years ended March
31, 1996, 1997 and 1998, respectively.
7. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes
were comprised of the following for the years ended March 31:
1996 1997 1998
-------- -------- --------
Singapore ............ $(21,977) $ (392) $ (9,346)
Foreign .............. 11,678 14,039 31,517
-------- -------- --------
$(10,299) $ 13,647 $ 22,171
======== ======== ========
The Singapore statutory income tax rate was 26% for the years ended March
31, 1996, 1997 and 1998. The reconciliation of the income tax expense expected
based on Singapore statutory income tax rates to the provision for income taxes
included in the consolidated statements of operations for the years ended March
31 is as follows:
1996 1997 1998
------- -------- -------
Income taxes based on Singapore statutory
rates ...................................... $(2,678) $ 3,548 $ 5,764
Losses from non-incentive Singapore operations 282 498 2,707
In-process research and development .......... 7,540 -- --
Foreign subsidiaries' earnings taxed at rates
below the Singapore statutory rate ......... (2,057) (3,368) (3,443)
Amortization of goodwill and intangibles ..... 329 436 946
Merger Costs ................................ -- -- 398
Benefit from realized deferred tax assets ... -- -- (2,829)
Joint venture losses ........................ -- -- (310)
Bank commitment fees .......................... -- 382 --
Other ......................................... 431 531 (975)
------- ------- -------
Provision for income taxes ......... $ 3,847 $ 2,027 $ 2,258
======= ======= =======
Effective tax rate .......................... (37.4%) 14.9% 10.2%
The components of deferred income taxes are as follows as of March 31:
56
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1997 1998
-------- --------
Deferred tax liabilities:
Depreciation .............................................. $ (939) $ (855)
Intangible assets ......................................... (2,751) (2,405)
Others .................................................... (247) (1,552)
-------- --------
Total deferred tax liability ...................... (3,937) (4,812)
-------- --------
Deferred tax assets:
Depreciation .............................................. 591 471
Provision for inventory obsolescence ...................... 1,364 3,117
Provision for doubtful accounts ........................... 1,636 1,100
Provision for severance payments and other employee related
costs .................................................. 1,760 --
Net operating loss carryforwards .......................... 18,793 17,525
Accruals and reserves ..................................... -- 1,540
Unabsorbed capital allowance carryforwards ................ 606 239
Others .................................................... 665 220
-------- --------
25,415 24,212
Valuation allowance ....................................... (22,139) (21,626)
-------- --------
Net deferred tax asset ............................... 3,276 2,586
-------- --------
Net deferred tax liability ........................... $ (661) $ (2,226)
======== ========
The deferred tax asset arises substantially from tax losses available for
carryforward. These tax losses can only be offset against future income of
operations in respect of which the tax losses arose. As a result, management is
uncertain as to when or whether these operations will generate sufficient profit
to realize the deferred tax asset benefit. The valuation allowance provides a
reserve against deferred tax assets that may expire or go unutilized by the
Company. In accordance with the guidelines included in SFAS No. 109 "Accounting
for Income Taxes," management has determined that more likely than not the
Company will not realize these benefits and, accordingly, has provided a
valuation allowance for them. The amount of deferred tax assets considered
realizable, however, could be reduced or increased in the near-term if facts
change, including the amount of taxable income or the mix of taxable income
between subsidiaries.
At March 31, 1998, the Company had operating loss carryforwards of
approximately $22,159 for U.S. federal income tax purposes which will expire
between 2003 and 2012 if not previously utilized. Utilization of these net
operating loss carryforwards may be subject to an annual limitation due to the
change in ownership rules provided by the Internal Revenue Code (the "Code").
This limitation and other restrictions provided by the Code may reduce the net
operating loss carryforwards such that they would not be available to offset
future taxable income of the U.S. subsidiary.
At March 31, 1998, the Company had operating loss carryforwards of
approximately $14,853, $632 and $9,332 in U.K., Malaysia and
57
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Austria, respectively and such losses carry forward indefinitely. The
utilization of these net operating loss carryforwards is limited to the future
operations of the Company in the tax jurisdictions in which such carryforwards
arose.
Distributions of earnings by the Austrian subsidiary are exempt from
Austrian income taxes under the international participation privilege. No
deferred tax liability has been provided for withholding taxes on distributions
of dividends by the Austrian subsidiary, or any other foreign subsidiaries,
because earnings of foreign subsidiaries are intended to be reinvested
indefinitely.
The Company has been granted the following tax incentives:
(i) Pioneer status granted to one of its Malaysian subsidiaries for a
period of five years under the Promotion of Investment Act. This incentive
provides a tax exemption on manufacturing income for this subsidiary.
(ii) Product Export Enterprise incentive for the Shekou, China
facility. The Company's operation in Shekou, China is located in a "Special
Economic Zone" and is an approved "Product Export Enterprise' which
qualifies for a special corporate income tax rate of 10%. This special tax
rate is subject to the Company exporting more than 70% of its total value
of products manufactured in China. The Company's status as a Product Export
Enterprise is reviewed annually by the Chinese government.
(iii) Five year negotiated tax holiday with the Hungarian government
for its Hungarian subsidiaries. This incentive provides for the reduction
of the regular tax rate by 60% to 7.2%. The incentive expires December 31,
2002.
The Company's investments in its plants in Xixiang, China and Doumen,
China, fall under the "Foreign Investment Scheme" that entitles the Company to
apply for a five-year tax incentive. The Company obtained the incentive for the
Doumen plant in December 1995 and the Xixiang plant in October 1996. With the
approval of the Chinese tax authorities, the Company's tax rates on income from
these facilities during the incentive period will be 0% in years 1 and 2 and
7.5% in years 3 through 5, commencing in the first profitable year. The Company
has another plant in Doumen which commenced operations during the fiscal year.
The plant, which falls under the "Foreign Investment Scheme", has applied for
and is awaiting approval for the five year tax incentive.
A portion of the Company's sales are carried out by its subsidiary in
Labuan, Malaysia where the Company has opted to pay the Labuan tax authorities a
fixed amount of $8 tax each year in accordance with Labuan tax legislation.
A portion of the Company's sales were also carried out by its Mauritius
subsidiary which is not taxed.
8. SHAREHOLDERS' EQUITY
Issuance of non-employee stock options
58
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In June 1996, the Company issued 20,000 stock options with an exercise
price of $31.25 to a customer as a result of that customer reaching a specified
sales target in accordance with an option agreement. These options were valued
as of the grant date using the Black-Scholes model. The resulting value of
$380,000 was recorded as a sales discount in the accompanying consolidated
statement of operations for fiscal 1997.
Secondary offerings
In August 1995, the Company completed a secondary offering of its Ordinary
Shares. A total of 1,000,000 Ordinary Shares were sold at a price of $23.50 per
share resulting in net proceeds to the Company of $22.3 million.
In October 1997, the Company completed another offering of its Ordinary
Shares. A total of 2,185,000 shares were sold at a price of $47.00 per share
resulting in net proceeds to the Company of $96.2 million.
Stock-based compensation
The Company's 1993 Share Option Plan (the "Plan") provides for the grant of
up to 2,600,000 incentive stock options and non-statutory stock options to
employees and other qualified individuals to purchase Ordinary Shares of the
Company. As of March 31, 1998, the Company had 202,306 Ordinary Shares available
for future option grants under the Plan at an exercise price of not less than
85% of the fair value of the underlying stock on the date of grant. Options
issued under the Plan generally vest over 4 years and expire 5 years from the
date of grant.
The Company's 1997 Interim Option Plan provides for the grant of up to
250,000 non-statutory options to employees and other qualified individuals to
purchase Ordinary Shares of the Company. The Company had 39,605 Ordinary Shares
available for future option grants under the 1997 Interim Option Plan at an
exercise price of not less than 85% of fair market value of the underlying stock
on the date of grant. Options can not be granted to executive officers and
directors under the 1997 Interim Option Plan. Options issued under this plan
generally vest over 4 years and expire 5 years from the date of grant.
The Company's 1998 Interim Option Plan provides for the grant of up to
200,000 non-statutory options to employees and other qualified individuals to
purchase Ordinary Shares of the Company. The Company had 650,000 Ordinary Shares
available for future option grants under the 1998 Interim Option Plan at an
exercise price of not less than 85% of fair market value of the underlying stock
on the date of grant. Options can not be granted to executive officers and
directors under the 1998 Interim Option Plan. Options issued under this plan
generally vest over 4 years and expire 5 years from the date of grant.
The Company has assumed certain option plans and the underlying options of
companies which the Company has merged with or acquired (the "Assumed Plans").
Options under the Assumed Plans have been converted into the Company's options
and adjusted to effect the appropriate conversion ratio as specified by the
applicable acquisition or merger agreement, but are otherwise administered in
accordance with the terms of the Assumed Plans. Options under the Assumed Plans
generally vest over 4 years and expire 5 years from the date of grant.
59
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table presents the activity for options outstanding under all
of the stock option plans as of March 31 ("Price" reflects the weighted average
exercise price):
1996 1997 1998
----------------- ------------------ ------------------
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----- --------- ------ --------- ------
Outstanding, beginning of year....... 1,026,052 $4.76 1,315,970 $12.60 1,675,022 $18.62
Granted.............................. 641,783 20.63 723,314 25.10 1,407,504 29.06
Exercised............................ (304,201) 3.30 (239,633) 5.86 (259,708) 7.50
Forfeited............................ (47,664) 11.03 (124,629) 17.81 (375,779) 30.12
--------- --------- ---------
Outstanding, end of year............. 1,315,970 $12.60 1,675,022 $18.62 2,447,039 $24.04
========= ========= =========
The per-share weighted average fair value of options granted during fiscal 1996,
1997 and 1998 was $20.62, $25.10 and $29.24, respectively.
The following table presents the composition of options outstanding and
exercisable as of March 31, 1998 ("Price" and "Life" reflect the weighted
average exercise price and weighted average contractual life unless otherwise
noted):
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
RANGE OF EXERCISE ----------------------------- ------------------
PRICES AMOUNT PRICE LIFE AMOUNT PRICE
- ------------------------- --------- ------ ---- -------- -----
$ 1.19 -- $14.75 498,835 $11.06 1.55 411,499 $10.35
15.25 -- 23.13 549,264 22.19 3.77 204,211 21.21
23.25 -- 23.25 570,785 23.25 5.14 110,000 23.25
23.75 -- 33.50 660,517 32.03 4.88 73,908 30.45
34.50 - 47.38 167,638 39.86 4.60 15,958 40.31
--------- -------
Total, March 31, 1998 2,447,039 24.04 3.99 815,576 17.22
========= =======
Options for 414,855 and 576,896 Ordinary shares with per-share weighted
average share price of $5.48 and $10.74 was exercisable as of March 31, 1996 and
1997, respectively.
Options reserved for future issuance under all stock options plans was
241,911 as of March 31, 1998.
The Company's employee stock purchase plan (the "Purchase Plan") provides
for issuance of up to 75,000 Ordinary Shares. The Purchase Plan was approved by
the stockholders in October 1997. Under the Purchase Plan, employees may
purchase, on a periodic basis, a limited number of shares of common stock
through payroll deductions over a six month period up to 10% of each
participant's base salary. The per share purchase price is 85% of the fair
market value of the stock at the beginning or end of the offering period,
whichever is lower. No shares have been issued under the Purchase Plan as of
March 31, 1998 as the Purchase Plan's first purchase period occurs on May 31,
1998. The Company estimated the per-share weighted average fair value of the
purchase rights granted under the Purchase Plan to be $33.58.
The Company has elected to follow APB Opinion No. 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its employee
stock option plans and employee stock purchase plans and has adopted the
disclosure provisions of SFAS No. 123 "Accounting for Stock Based Compensation".
60
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Because the exercise price of the Company's stock options has equaled the fair
value of the underlying stock on the date of grant, no compensation expense has
been recognized under APB Opinion No. 25. Had the compensation cost for the
Company's stock-based compensation plans been determined based on the fair
values of these options, the Company's fiscal 1997 and 1998 net income per share
would have been adjusted to the pro-forma amounts indicated below:
1996 1997 1998
---------- ---------- ----------
Net income:
As reported ............... $ (14,146) $ 11,620 $ 19,913
Pro-forma ................. (15,066) 9,449 14,242
Basic earnings per share:
As reported ............. $ (0.92) $ 0.70 $ 1.09
Pro-forma ............... (0.98) 0.57 0.78
Diluted earnings per share:
As reported .............. $ (0.92) $ 0.67 $ 1.04
Pro-forma ................ (0.98) 0.55 0.75
In accordance with the disclosure provisions of SFAS No. 123, the fair
value of employee stock options granted during fiscal 1997 and 1998 was
estimated at the date of grant using the Black-Scholes model and the following
weighted average assumptions:
Years Ended March 31,
1996 1997 1998
------- ------- ------
Volatility ................................... 67% 67% 66%
Risk-free interest rate range ................ 5.5% 5.9% 5.9%
Dividend yield ............................... 0% 0% 0%
Expected lives ............................... 4.1 yrs 4.1 yrs 4.0 yrs
Because SFAS No. 123 is applicable only to awards granted subsequent to
December 30, 1994, and due to the subjective nature of the assumptions used in
the Black-Scholes model, the pro-forma net income(loss) and net income(loss) per
share disclosures may not reflect the associated fair value of the outstanding
options.
Report on Option Repricing
In light of the substantial decline in the market price of the Company's
Ordinary Shares in the first quarter of fiscal 1998, in June 1997 the Company
offered to all employees the opportunity to cancel existing options outstanding
with exercise price in excess of $23.25 per share, the fair market value of the
Company's Ordinary Shares at that time, and to have such options replaced with
options that have the lower exercise price of $23.25 per share. Employees
electing to have options repriced were required to accept an extension of their
vesting schedule. The other terms of the options remained unchanged. On June 5,
1997, the Company amended options to purchase 288,960 shares pursuant to this
offer.
9. PROVISION FOR EXCESS FACILITIES
The provision for excess facilities of $8.9 million in fiscal 1998 relates
to the costs incurred in closing the Wales facility. The provision includes $3.8
million for the write-off of goodwill associated with the acquisition of the
Wales facility, $1.6 million for severance payments and payments required under
the pension scheme, $2.4 million for fixed asset write-offs and factory closure
61
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
expenses and $1.0 million for required repayment of previously received
government grants.
The provision for excess facilities of $5.8 million in fiscal 1997 relates
to the costs incurred in downsizing the Texas facility, the write-off of
equipment at the nChip semiconductor fabrication facility and downsizing the
Singapore manufacturing operations. The provision includes $2.0 million for
severance payments and $500 for the write-off of fixed assets in the Singapore
manufacturing facilities. An additional amount of $2.8 million associated with
certain obsolete equipment at the Company's nChip and Texas facilities has been
written-off. The provision also includes severance payments amounting to $500
for the employees of the Texas and nChip facility which were paid during fiscal
1997. The Company has not recorded the remaining costs related to existing
leases at the Texas facility as the Company is continuing to use the facility
for certain administrative and warehousing functions.
The provision for excess facilities of $1,254 in fiscal 1996 was associated
with the write-off of certain obsolete equipment at the Company's facilities in
Malaysia and Shekou, China.
The following table summarizes the Company's components of the provision
for excess facilities during the years ended in fiscal 1996, 1997 and 1998:
Severance Fixed Factory Goodwill Other Total
and benefits Assets Closure
--------------------------------------------------------------
Balance at March 31, 1995 $ -- $ -- $ -- $ -- $ -- $ --
1996 provision ........ -- 1,254 -- -- -- 1,254
--------------------------------------------------------------
Balance at March 31, 1996 -- 1,254 -- -- -- 1,254
1997 provision ........ 2,560 3,308 -- -- -- 5,868
Cash charges .......... (560) -- -- -- -- (560)
Non-cash charges ...... -- (1,254) -- -- -- (1,254)
---------------------------------------------------------------
Balance at March 31, 1997 2,000 3,308 -- -- -- 5,308
1998 provision ........ 1,636 807 1,565 3,769 1,092 8,869
Cash charges .......... (1,655) -- -- -- -- (1,655)
Non-cash charges ...... -- (3,308) -- (3,769) -- (7,077)
--------------------------------------------------------------
Balance at March 31, 1998 $ 1,981 $ 807 $ 1,565 $ -- $ 1,092 $ 5,445
==============================================================
10. RELATED PARTY TRANSACTIONS AND NOTES PAYABLES TO SHAREHOLDERS
Prior to becoming the Company's Chief Executive Officer in January 1994,
Michael E. Marks was the President and Chief Executive Officer of Metcal, Inc.
("Metcal"). Michael E. Marks remains a director of, and continues to hold a
beneficial interest in, Metcal. The Company had net sales of $2,133, $1,548 and
$1,586 to Metcal during fiscal 1996, 1997 and 1998, respectively.
Stephen Rees, a Director and Senior Vice President of the Company, holds a
beneficial interest in both Mayfield International Ltd. ("Mayfield") and Croton
Ltd. ("Croton"). During fiscal 1998, the Company paid $140 to Croton for
management services and $208 to Mayfield for the rental of certain office space.
Additionally, as of March 31, 1998, $2,520 was due from Mayfield under a note
receivable. The note is unsecured, bears interest at 7.15% per annum and matures
on February 4, 1999. The note is included in related party receivables on the
accompanying balance sheet.
62
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
As of March 31, 1997, the Company had notes receivable due from certain
executives and officers amounting to approximately $2.5 million. These notes
bear interest at rates ranging from 7.0% to 7.21% and have maturities of 6
months to 5 years and are reflected in other current assets on the accompanying
balance sheet. Subsequent to March 31, 1998, $425 of the $2.5 million was paid
through forfeiture of management bonuses.
On April 16, 1995, the Company's U.S. subsidiary, Flextronics International
USA, Inc. ("Flextronics USA"), loaned $500 to Michael E. Marks. Mr. Marks
executed a promissory note in favor of Flextronics USA which matures on April
16, 2000. In fiscal 1997, Flextronics USA forgave a total of $200 of outstanding
principal amount and $26 in accrued interest. In fiscal 1998, Flextronics USA
forgave a total of $100 of outstanding principal amount and $73 in accrued
interest. The remaining outstanding balance of the loan as of April 30, 1998 was
$202 (representing $200 in principal and $2 in accrued interest) and bears
interest at a rate of 7.21%.
On November 6, 1997, Flextronics USA loaned $1.5 million to Mr. Marks. Mr.
Marks executed a promissory note in favor of Flextronics USA which bears
interest at a rate of 7.259% and matures on November 6, 1998. This loan is
secured by certain assets owned by Mr. Marks.
The Company also purchases materials from FICO Investment Holdings
("FICO"), an associated company in which the Company holds a 40% interest (see
Note 11). At March 31, 1998, the amount due to FICO for these purchases was
$382.
11. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS
On March 31, 1998 the Company acquired Conexao, a Brazil-based electronics
manufacturing service provider, in exchange for a total of 421,593 Ordinary
Shares, of which 118,305 Ordinary Shares are to be issued upon resolution of
certain general and specific contingencies. On March 31, 1998, the Company also
acquired Altatron, an electronics manufacturer service provider headquartered in
Fremont, California, with facilities in Fremont, California; Richardson, Texas;
and Hamilton, Scotland in exchange for 788,650 Ordinary Shares, of which 157,730
Ordinary Shares are to be issued upon resolution of certain general and specific
contingencies. These acquisitions were accounted for as a pooling-of-interests.
The Company did not restate its prior period financial statements with respect
to these acquisitions because they did not have a material impact on the
Company's consolidated results. Accordingly, the results of the acquired
companies are included in the Company's consolidated statements of operations
from the date of acquisition onward.
On December 1, 1997, the Company merged with DTM Products, Inc.("DTM") and
EnergiPilot AB ("Energipilot"). DTM is based in Colorado and produces injection
molded plastics. Energipilot is based in Sweden and produces cable and cable
assemblies. All of the outstanding shares of DTM and Energipilot were acquired
in exchange for 252,469 and 229,990 Ordinary Shares, respectively. These
acquisitions were accounted for as a pooling-of-interests. The Company did not
restate its prior period financial statements with respect to these acquisitions
because they did not have a material impact on the Company's consolidated
results. Accordingly, the results of the acquired companies are included in the
Company's consolidated statements of operations from the date of acquisition
onward.
63
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Neutronics Holdings A.G.
On October 30, 1997, the Company acquired Neutronics Holdings A.G.
("Neutronics"), an electronics manufacturing services provider with operations
located in Austria and Hungary. The acquisition was accounted for as a
pooling-of-interests and the Company has issued 2,806,000 Ordinary Shares in
exchange for 92% of the outstanding shares of Neutronics. All financial
statements presented have been retroactively restated to include the results of
Neutronics.
Separate results of operations for the periods presented are as follows for
the years ended March 31 and December 31:
1996 1997
-------- --------
Net sales:
Previously reported ............. $ 448,346 $ 490,585
Neutronics ...................... 123,699 149,422
--------- ---------
As restated ..................... $ 572,045 $ 640,007
========= =========
Net income(loss):
Previously reported ............. $ (15,132) $ 7,463
Neutronics ...................... 986 4,157
--------- ---------
As restated ..................... $ (14,146) $ 11,620
========= =========
Shareholders' equity:
Previously reported ............. $ 73,059 $ 83,592
Neutronics ...................... 12,512 15,753
--------- ---------
As restated ..................... $ 85,571 $ 99,345
========= =========
Ericsson Business Networks AB
On March 27, 1997, the Company acquired certain manufacturing facilities in
Karlskrona, Sweden and related inventory, equipment and assets ("The Karlskrona
Facilities") from Ericsson Business Networks AB ("Ericsson") for $82,354 which
was financed by the Credit Facility described in Note 4. The transaction has
been accounted for as a purchase and accordingly, the purchase price has been
allocated to the net assets acquired based on their estimated fair market values
at the date of acquisition. There was no material purchase price in excess of
the fair value of the net assets acquired. The results of operations of the
Karlskrona Facilities have been included in the consolidated results of the
Company since the date of acquisition and such results of these facilities were
immaterial for March 27, 1997 to March 31, 1997.
FICO Investment Holding Ltd.
On December 20, 1996, the Company acquired 40% of FICO, a plastic injection
molding company located in Shenzhen, China for $5.2 million of which $3 million
was paid in December 1996. The remaining $2.2 million purchase price was paid in
June 1997. Goodwill and other intangibles resulting from this purchase totaled
$3.2 million and are being amortized over ten years. The Company had the option
to purchase the remaining 60% of FICO in fiscal 1998; however, the option
expired unexercised on April 17, 1998. The Company accounts for its investment
in FICO under the equity method and accordingly has included its 40% share of
FICO's operating results in its
64
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
accompanying consolidated statement of operations since the date of acquisition.
Fine Line Printed Circuit Design Inc.
On November 25, 1996, the Company acquired Fine Line Printed Circuit
Design, Inc. ("Fine Line"), a circuit board layout and prototype operation
company located in San Jose, California. The Company issued 223,321 Ordinary
Shares in exchange for all of the outstanding capital stock of Fine Line. The
merger was accounted under the pooling-of-interests method of accounting;
however, prior period financial statements were not restated because the
financial results of Fine Line are not material to the consolidated financial
statements.
Astron Group Ltd.
On February 2, 1996, the Company acquired all the outstanding stock of
Astron Group Ltd. ("Astron") for $13.4 million in cash; 238,684 Ordinary Shares
valued at $6.5 million; issuance of $15 million in notes payable, $10 million of
Ordinary Shares to be issued on June 30, 1998 and $15 million due in June 1998
under a Services Agreement (the "Service Agreement"). These components
aggregated to a purchase price of approximately $59.9 million. This acquisition
was accounted for as a purchase and accordingly, the results of Astron have been
included in the Company's consolidated statements of operations since the date
of acquisition.
The Services Agreement originally provided for an annual fee, plus a $15
million payment to be made on June 30, 1998 subject to certain terms and
conditions. As substantially all of the former shareholders of Astron were
affiliates of Mr. Rees, or members of his family, the Company has accounted for
the amounts due under the Services Agreement as part of the Astron purchase
price.
In addition, the purchase agreement required certain payments contingent
upon resolution of an earn-out provision based on the 1996 operating results of
Astron. In March 1997, the Company contemporaneously negotiated a $6.25 million
settlement of the earn-out provision and the termination of the Services
Agreement, removing the original terms and conditions and reducing the amount
due from $15 million to $14 million, $5 million of which is payable in cash and
$9 million of which may be settled in cash or Ordinary Shares at the Company's
option. Due to the interrelationship of these two settlements, the Company
determined that the resulting amounts should each be accounted for as an
adjustment to the purchase price of Astron. Accordingly, in March of 1997, the
purchase price of Astron was increased by a net amount of $5.25 million which
represents the agreed upon $6.25 million payment due under the earn-out
provision less the $1 million reduction due to the termination of the Services
Agreement. The $6.25 million due under the earn-out provision is included in
accrued liabilities in the accompanying consolidated balance sheets and was paid
in April 1997. As a result, the aggregate adjusted purchase price of Astron
including the earn-out consideration totaled $65 million.
The aggregate adjusted purchase price of $65 million was allocated based on
the relative fair value of the net assets acquired as follows:
Astron's net assets at fair value .................... $14,103
In-process research and development .................. 29,000
Goodwill and other intangible assets ................. 21,918
-------
Total purchase price ....................... $65,021
=======
65
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Goodwill and other intangible assets consist of goodwill, developed
technologies, customer lists, assembled workforce and trademarks which were
initially being amortized over 5 to 25 years.
As of the date of acquisition, the $29 million of purchase price allocated
to in-process research and development related to development projects which had
not reached technological feasibility and had no probable alternative future
uses; accordingly, the Company expensed the entire amount on the date of
acquisition as a one-time charge to operations.
Subsequent to March 31, 1997, the Company revised prospectively its
estimate of the useful lives associated with the Astron goodwill and other
intangible assets from 5 to 25 years to 5 to 10 years. This revision has
increased amortization expense by $279 per quarter beginning in the second
quarter of fiscal 1998.
Assembly & Automation (Electronics) Ltd.
On April 12, 1995, the Company acquired all of the issued share capital of
Assembly & Automation (Electronics) Ltd. ("A&A"), a private limited company
incorporated in the United Kingdom that provided electronics manufacturing
services for the electronics and telecommunications industries, for total
consideration of $4.1 million, which included cash of $3.2 million and the
issuance of 66,908 Ordinary Shares valued at $938. The transaction has been
accounted for as a purchase, and accordingly, the results of operations for A&A
have been included in the accompanying consolidated statements of operations
since the date of acquisition. The acquisition resulted in goodwill and other
intangible assets of $4.6 million which were being amortized over 3 to 20 years
prior to closure of the facility in 1998, at which time the remaining balances
were expensed. (See Note 9)
12. SEGMENT REPORTING
The Company operates in one primary business segment: providing
sophisticated electronics assembly and turnkey electronics manufacturing
services to a select group of original equipment manufacturers engaged in the
computer, medical, consumer electronics and communications industries.
Sales for similar classes of products within the Company's business segment
is presented below for the years ended March 31:
1996 1997 1998
---------- ---------- ----------
Medical ........................ $ 78,395 $ 94,238 $ 106,682
Computer ....................... 238,120 260,687 191,770
Telecommunication and Networking 67,254 110,093 514,765
PCB ............................ 4,485 28,470 39,632
Industrial ..................... 10,691 8,612 7,032
Consumer products .............. 105,204 110,397 204,071
MCMs ........................... 19,817 19,214 24,410
Others ......................... 48,079 8,296 24,709
---------- ---------- ----------
$ 572,045 $ 640,007 $1,113,071
========== ========== ==========
66
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following tables summarize the Company's operations by geographical
area for the years ended March 31:
1996 1997 1998
----------- ----------- -----------
NET SALES:
Asia:
Domestic ............. $ 12,491 $ 12,799 $ 24,734
Export ............... 214,127 267,129 229,876
Intercompany ......... 30,615 29,376 49,277
----------- ----------- -----------
257,233 309,304 303,887
----------- ----------- -----------
Americas:
Domestic ............. 191,209 188,097 309,314
Export ............... 11,178 -- 16,643
Intercompany ......... 27 9 5
----------- ----------- -----------
202,414 188,106 325,962
----------- ----------- -----------
Western Europe:
Domestic ............. 16,753 20,128 297,192
Export ............... 2,589 2,431 25,079
Intercompany ......... -- -- 306
----------- ----------- -----------
19,342 22,559 322,577
----------- ----------- -----------
Central Europe:
Domestic ............. 21,471 58,377 39,253
Export ............... 102,227 $ 91,046 170,980
Intercompany ......... -- -- --
----------- ----------- -----------
123,698 149,423 210,233
----------- ----------- -----------
Intercompany eliminations ... (30,642) (29,385) (49,588)
----------- ----------- -----------
$ 572,045 $ 640,007 $ 1,113,071
=========== =========== ===========
1996 1997 1998
----------- ----------- -----------
INCOME(LOSS) FROM OPERATIONS:
Asia ...................... $ (12,491) $ 22,229 $ 19,461
Americas .................. 4,570 (5,531) 4,049
Western Europe ............ (1,514) (1,829) 11,046
Central Europe ............ 4,060 5,203 8,122
----------- ----------- -----------
$ (5,375) $ 20,072 $ 42,678
=========== =========== ===========
IDENTIFIABLE ASSETS:
Asia ...................... $ 146,412 $ 167,431 $ 244,994
Americas .................. 73,552 74,884 243,366
Western Europe ............ 11,060 116,919 144,338
Central Europe ............ 78,243 87,058 111,425
----------- ----------- -----------
$ 309,267 $ 446,292 $ 744,123
=========== =========== ===========
For purposes of the preceding tables, "Americas" includes U.S. and Mexico,
"Western Europe" includes Sweden and United Kingdom and "Central Europe"
includes Austria, Hungary and Italy.
67
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Geographic revenue transfers are based on selling prices to unaffiliated
companies, less discounts. Income (loss) from operations is net sales less
operating expenses, goodwill amortization and provision for excess facilities,
but prior to interest or other expenses and income taxes.
The Company's subsidiaries are interdependent and are not managed for
stand-alone results. Certain operational functions for the entire Company, such
as marketing and administration, may be carried out by a subsidiary in one
country. In addition, the Company may from time to time shift responsibilities
from a subsidiary in one country to a subsidiary in another country, thereby
changing the operating results of the impacted subsidiaries but not the Company
as a whole. For these reasons, the Company believes that changes in results of
operations in the individual countries in which it operates are not necessarily
reflective of material changes in the Company's overall results.
68
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
Item 10. DIRECTORS AND OFFICERS
The names, ages and positions of the Company's Directors and officers as of
March 31, 1998 are as follows:
NAME AGE POSITION
- ----------------- --- ------------------------------------------------
Michael E. Marks 47 Chairman and Chief Executive Officer
Tsui Sung Lam 48 President, Asia Pacific Operations and Director
Robert R. B. Dykes 48 Senior Vice President of Finance and
Administration, Chief Financial Officer
Ronny Nilsson 49 Senior Vice President, Western European
Operations
Michael McNamara 41 President, Americas Operations
Stephen J. L. Rees 36 Senior Vice President, Worldwide Sales and
Marketing and Director
Michael J. Moritz 47 Director
Richard L. Sharp 50 Director
Patrick Foley 66 Director
Chuen Fah Alain Ahkong 50 Director
Hui Shing Leong 39 Director
Michael E. Marks -- Mr. Marks has been the Company's Chief Executive
Officer since January 1994 and is Chairman of the Board since July 1993. He has
been a Director of the Company since December 1991. From November 1990 to
December 1993, Mr. Marks was President and Chief Executive Officer of Metcal,
Inc., a precision heating instrument company ("Metcal"). Mr. Marks received a
B.A. and M.A. from Oberlin College and an M.B.A. from the Harvard Business
School.
Tsui Sung Lam -- Mr. Tsui has been the Company's President, Asia-Pacific
since April 1997, and a Director since 1991. From January 1994 to April 1997, he
served as the Company's President and Chief Operating Officer. From June 1990 to
December 1993, he was the Company's Managing Director and Chief Executive
Officer. From 1982 to June 1990, Mr. Tsui served in various positions for
Flextronics, Inc., the Company's predecessor, including Vice President of Asian
Operations. Mr. Tsui received Diplomas in Production Engineering and Management
Studies from Hong Kong Polytechnic, and a Certificate in Industrial Engineering
from Hong Kong University.
Robert R. B. Dykes -- Mr. Dykes served as a Director of the Company from
January 1994 until August 1997 and since February 1997 he has served as its
Senior Vice President of Finance and Administration. Mr. Dykes was Executive
Vice President, Worldwide Operations and Chief Financial Officer of Symantec
Corporation, an application and system software products company, from 1988 to
February 1997. Mr. Dykes received a Bachelor of Commerce and Administration
degree from Victoria University in Wellington, New Zealand. Mr. Dykes is on the
board of directors of Symantec Corporation.
69
Ronny Nilsson -- Mr. Nilsson has served as the Company's Senior Vice
President, Europe since April 1997. From May 1995 to April 1997, he was Vice
President and General Manager, Supply & Distribution and Vice President,
Procurement, of Ericsson Business Networks where he was responsible for
facilities in Sweden, Austria, China, the Netherlands, Mexico and Australia.
From January 1991 to May 1995, he was Director of Production at the EVOX+RIFA
Group, a manufacturer of components, and Vice President of RIFA AB where he was
responsible for factories in Sweden, Finland, Singapore and Indonesia. Mr.
Nilsson received a certificate in Mechanical Engineering from the Lars Kagg
School in Kalmar, Sweden and certificates from the Swedish Management Institute
and the Ericsson Management Program.
Michael McNamara -- Mr. McNamara has served as President of Americas
Operations since April 1994. From May 1993 to March 1994, he was President and
Chief Executive Officer of Relevant Industries, Inc., which was acquired by the
Company in March 1994. From May 1992 to May 1993, he was Vice President,
Manufacturing Operations at Anthem Electronics, an electronics distributor. From
April 1987 to May 1992, he was a Principal of Pittiglo, Rabin, Todd & McGrath,
an operations consulting firm. Mr. McNamara received a B.S. from the University
of Cincinnati and an M.B.A. from Santa Clara University.
Stephen J. L. Rees -- Mr. Rees has served as a Director of the Company
since April 1996, as Senior Vice President, Worldwide Sales and Marketing since
May 1997, and as Chairman and Chief Executive Officer of Astron since the
acquisition of Astron by the Company in February 1996. Mr. Rees has been
Chairman and Chief Executive Officer of Astron since November 1991. Mr. Rees
holds a B.A. in Finance from the City of London Business School and graduated in
Production Technology and Mechanical Engineering from the HTL St. Polten
Technical Institute in Austria.
Michael J. Moritz -- Mr. Moritz has served as a Director of the Company
since July 1993. Mr. Moritz has been a General Partner of Sequoia Capital, a
venture capital firm, since 1988. Mr. Moritz also serves as director of Yahoo,
Inc., Neomagic and several privately-held companies.
Richard L. Sharp -- Mr. Sharp has served as a Director of the Company since
July 1993. He is Chairman of the Board and Chief Executive Officer of Circuit
City Stores, Inc., a consumer electronics and appliance retailer. He joined
Circuit City as an Executive Vice President in 1982. He was President from June
1984 to March 1997 and became Chief Executive Officer in 1986 and Chairman of
the Board in 1994. Mr. Sharp also serves as a director of Fort James
Corporation.
Patrick Foley -- Mr. Foley has been a Director of the Company since October
1997. Mr. Foley is Chairman, President and Chief Executive Officer of DHL
Corporation, Inc. and its major subsidiary, DHL Airways, Inc., a global
document, package and airfreight delivery company. He joined DHL in September
1988 with more than 30 years experience in hotel and airline industries. Mr.
Foley also serves as a director of Continental Airlines, Inc., Del Monte
Corporation, DHL International, Foundation Health Systems, Inc. and Glenborough
Realty Trust, Inc.
Chuen Fah Alain Ahkong -- Mr. Ahkong has served as a Director of the
Company since October 1997. Mr. Ahkong is a founder of Pioneer Management
Services Pte. Ltd. ("Pioneer"), a Singapore-based consultancy firm, and has been
the Managing Director of Pioneer since 1990. Pioneer provides advice to the
70
Company, and other multinational corporations, on matters related to
international taxation.
Hui Shing Leong -- Mr. Hui has served as a Director of the Company since
October 1997. Since 1996 he has been Managing Director of CS Hui Holdings in
Malaysia. Between 1984 and 1994 he was Managing Director of Samda Plastics
Industries Ltd., a plastic injection molding company in Malaysia. Since 1994 Mr.
Hui has also been a committee member of the Penang, Malaysia Industrial Council,
Vice-Chairman of the SMI Center in Malaysia, and Chairman of the Sub-Committee
Plastics Technology Training Center in Malaysia. Since 1990 he has been
President of the North Malaysian Small and Medium Enterprises Association.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" of the Registrants
definitive Proxy Statement and notice of the Company's Annual Meeting of
shareholders to be held on June 17, 1998 which the Company will file with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" of the Registrants definitive Proxy Statement and notice of the
Company's Annual Meeting of shareholders to be held on June 17, 1998 which the
Company will file with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with required by this item is incorporated by reference to
the information under the caption "Certain Relationships and Related
Transactions" of the Registrants definitive Proxy Statement and notice of the
Company's Annual Meeting of shareholders to be held on June 17, 1998 which the
Company will file with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.
71
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereto duly authorized.
Date : June 12, 1998
FLEXTRONICS INTERNATIONAL LTD.
By: /s/ MICHAEL E. MARKS
------------------------------------
Michael E. Marks
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Michael E. Marks
and Robert R.B. Dykes and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report (including any and all amendments), and to file the
same, with exhibits thereto and other documents In connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL E. MARKS Chairman of the Board, and Chief June 12, 1998
- -------------------------------------- Executive Officer (principal
Michael E. Marks executive officer)
/s/ TSUI SUNG LAM President, Asia Pacific Operations June 12, 1998
- -------------------------------------- and Director
Tsui Sung Lam
/s/ ROBERT R.B. DYKES Senior Vice President of Finance and June 12, 1998
- -------------------------------------- Administration and Chief Financial
Robert R.B. Dykes Officer (principal financial and
accounting officer)
/s/ MICHAEL J. MORITZ Director June 12, 1998
- --------------------------------------
Michael J. Moritz
/s/ STEPHEN J.L. REES Senior Vice President, June 12, 1998
- -------------------------------------- Worldwide Sales and Marketing
Stephen J.L. Rees and Director
/s/ RICHARD L. SHARP Director June 12, 1998
- --------------------------------------
Richard L. Sharp
/s/ PATRICK FOLEY Director June 12, 1998
- --------------------------------------
Patrick Foley
/s/ ALAIN AHKONG Director June 12, 1998
- --------------------------------------
Alain Ahkong
/s/ HUI SHING LEONG Director June 12, 1998
- --------------------------------------
Hui Shing Leong
72
Part IV
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------------------------------------------------------
2.1 Agreement among the Registrant, Alberton Holdings Limited and Omac
Sales Limited dated as of January 6, 1996. (Incorporated by
reference to Exhibit 2.1 of the Registrant's Current Report on
Form 8-K for the event reported on February 2, 1996.)
2.2 Asset Transfer Agreement between Ericsson Business Networks AB and
Flextronics International Sweden AB dated as February 12, 1997.
Certain schedules have been omitted. The Company agrees to furnish
supplementally a copy of any omitted schedule to the Commission
upon request. (Incorporated by reference to Exhibit 2.6 of the
Registrant's registration statement on Form S-3, No. 333-21715.)
2.3 Exchange Agreement dated October 19, 1997 by and among Registrant,
Neutronics Electronic Industries Holding A.G. and the named
Shareholders of Neutronics Electronic Industries Holding A.G.
(Incorporated by reference to Exhibit 2 of the Registrant's
Current Report on Form 8-K for event reported on October 30,
1997.)
3.1 Memorandum of Association of the Registrant. (Incorporated by
reference to Exhibit 3.1 of the Registrant's registration
statement on Form S-1, No. 33-74622.)
3.2 Articles of Association of the Registrant. (Incorporated by
reference to Exhibit 3.2 of the Registrant's registration
statement on Form S-4, No. 33-85842.)
4.1 Indenture dated as of October 15, 1997 between Registrant and
State Street Bank and Trust Company of California, N.A., as
trustee. (Incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K for event reported on
October 15, 1997.)
10.1 Form of Indemnification Agreement between the Registrant and its
Directors and certain officers. (Incorporated by reference to
Exhibit 10.1 of the Company's registration statement on Form S-1,
No. 33-74622.)
10.2 1993 Share Option Plan. (Incorporated by reference to Exhibit 10.2
of the Company's registration statement on Form S-1, No.
33-74622.)
10.3 nCHIP, Inc. Amended and Restated 1988 Stock Option Plan.
(Incorporated by reference to Exhibit 10.5 of the Company's
registration statement on Form S-4, No. 33-85842.)
10.4* Agreement to Grant Options dated as of June 9, 1995 between the
Company and Lifescan. (Incorporated by reference to Exhibit 10.7
of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.)
10.5 Lease Agreement dated as of October 1, 1994 among Shenzhen Xinan
Industrial Shareholdings Limited, Flextronics Industrial
(Shenzhen) Limited and Flextronics Singapore Pte Ltd.
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1995.)
10.6 Lease Agreement dated as of January 2, 1995 between Shenzhen Xinan
Industrial Shareholdings Limited and Flextronics Industrial
(Shenzhen) Limited. (Incorporated by reference to Exhibit 10.25 of
the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995.)
10.7 Services Agreement between the Registrant and Stephen Rees dated
as of January 6, 1996. (Incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K for the event reported
on February 2, 1996.)
10.8 Supplemental Services Agreement between Astron and Stephen Rees
dated as of January 6, 1996. (Incorporated by reference to Exhibit
10.2 of the Company's Current Report on Form 8-K for the event
reported on February 2, 1996.)
10.9 Promissory Note dated April 17, 1995 executed by Michael E. Marks
in favor of Flextronics Technologies, Inc. (Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995.)
73
10.10* Printed Circuit Board Assembly Services Agreement between Lifescan
Inc., a Johnson & Johnson Company, and the Registration dated
November 1, 1992. (Incorporated by reference to Exhibit 10.41 of
the Company's registration statement on Form S-1, No. 33-74622.)
10.11 Tenancy of Flatted Factory Unit dated February 28, 1996 between
Jurong Town Corporation and the Registrant. (Incorporated by
reference to Exhibit 10.44 of the Company's Annual Report on Form
10-K for fiscal year ended March 31, 1990.)
10.12 Tenancy of Flatted Factory Unit dated May 14, 1993 between Jurong
Town Corporation and the Registrant. (Incorporated by reference to
Exhibit 10.45 of the Company's registration statement on Form S-1,
No. 33-74622.)
10.13 Flextronics Asia U.S.A. 401(k) plan. (Incorporated by reference to
Exhibit 10.52 of the Company's registration statement on Form S-1,
No. 33-74622.)
10.14 Amended and Restated Revolving Credit Agreement dated as of
January 14, 1998 among Flextronics International USA, Inc.,
BankBoston, N.A. and the lending institutions listed on Schedule 1
attached thereto and BankBoston, N.A. as agent with BancBoston
Securities Inc. as arranger. The Company agrees to furnish a copy
of the omitted schedules to the Commission upon request.
(Incorporated by reference to Exhibit 10.1 of the Company's Report
on Form 10-Q for the quarterly period ended December 31, 1997.)
10.15 Amended and Restated Revolving Credit Agreement dated as of
January 14, 1998 among Flextronics International Ltd., BankBoston,
N.A. and the lending institutions listed on Schedule 1 attached
thereto and BankBoston, N.A. as agent with BancBoston Securities
Inc. as arranger. The Company agrees to furnish a copy of the
omitted schedules to the Commission upon request. (Incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q for
the quarterly period ended December 31, 1997.)
10.16 Employment and Noncompetition Agreement dated as of April 30, 1997
between Flextronics International Sweden AB and Ronny Nilsson.
(Incorporated by reference to Exhibit 10.29 of the Company's
Annual Report on Form 10-K for fiscal year ended March 31, 1997.)
10.17 Services Agreement dated as of April 30, 1997 between Flextronics
International USA, Inc. and Ronny Nilsson. (Incorporated by
reference to Exhibit 10.30 of the Company's Annual Report on Form
10-K for fiscal year ended March 31, 1997.)
10.18 Promissory Note dated April 15, 1997 executed by Ronny Nilsson in
favor of Flextronics International USA, Inc. (Incorporated by
reference to Exhibit 10.31 of the Company's Annual Report on Form
10-K for fiscal year ended March 31, 1997.)
10.19 Letter Agreement dated March 27, 1997 among the Company, Astron
Technologies Limited, Croton Technology Ltd. and Stephen Rees
regarding the termination of the Services Agreement. (Incorporated
by reference to Exhibit 10.32 of the Company's Annual Report on
Form 10-K for fiscal year ended March 31, 1997.)
10.20 Letter Agreement dated March 27, 1997 between Astron Group Limited
and Stephen Rees regarding the termination of the Supplemental
Services Agreement. (Incorporated by reference to Exhibit 10.33 of
the Company's Annual Report on Form 10-K for fiscal year ended
March 31, 1997.)
10.21 Services Agreement between Astron Technologies Limited and Tsui
Sung Lam effective as of April 1, 1997. (Incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-K for
fiscal year ended March 31, 1997.)
10.22 Services Agreement between Flextronics Singapore Pte Limited and
Tsui Sung Lam effective as of April 1, 1997. (Incorporated by
reference to Exhibit 10.37 of the Company's Annual Report on Form
10-K for fiscal year ended March 31, 1997.)
74
10.23 Loan Agreement between Flextronics International USA, Inc. as
lender, and Michael E. Marks, as borrower dated November 6, 1997.
(Incorporated by reference to Exhibit 10.35 of the Company's
Registration Statement on Form S-4, No. 333-41293.)
10.24 Secured Full Recourse Promissory Note, dated November 6, 1997,
executed by Michael E. Marks in favor of Flextronics International
USA, Inc. (Incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-4, No. 333-41293.)
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Moore Stephens.
- ---------------
* Confidential treatment requested for portions of agreement.
75
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
YEAR ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
ADDITIONS
---------------------------
BALANCE AT EFFECT CHARGED TO CHARGED BALANCE AT
BEGINNING OF OF COSTS AND TO OTHER DEDUCTIONS/ END OF
PERIOD ACQUISITIONS EXPENSES ACCOUNTS WRITE-OFFS PERIOD
------ ------------ -------- -------- ---------- ------
Allowance for doubtful accounts
receivable:
Period
Year ended March 31, 1996. 1,903 0 2,170 0 (307) 3,766
Year ended March 31, 1997. 3,766 0 3,091 0 (785) 6,072
Year ended March 31, 1998. 6,072 4,188 1,216 0 (1,950) 9,528
76