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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-21308
JABIL CIRCUIT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1886260
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10800 ROOSEVELT BLVD., ST. PETERSBURG, FLORIDA 33716
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (727) 577-9749
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.001 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. / /
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant (based on the closing sale price of the Common
Stock as reported on the New York Stock Exchange on November 3, 1998) was
approximately $1,078 million. For purposes of this determination, shares of
Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. The number of
outstanding shares of the Registrant's Common Stock as of the close of business
on November 3, 1998, was 37,293,825. The Company does not have any non-voting
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on January 28, 1999 is incorporated by
reference in Part III of this Annual Report on Form 10-K to the extent stated
herein.
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PART I
ITEM 1. BUSINESS
This Business discussion contains certain forward-looking
statements within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Factors that could cause actual events
or results to differ materially from those referenced in such
forward-looking statement include those described in the section herein
entitled "Factors Affecting Future Results" and in the Company's other
filings with the Securities and Exchange Commission. The words "believe,"
"estimate," "expect," "intend," "anticipate," "plan" and similar
expressions and variations thereof identify certain of such
forward-looking statements, which speak only as of the dates on which they
are made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and that actual events and results
may differ materially from those indicated in the forward-looking
statements as a result of various factors. Readers are cautioned not to
place undue reliance on any forward-looking statements.
THE COMPANY
Jabil Circuit, Inc. ("Jabil" or the "Company") is an independent
supplier of custom manufacturing services for circuit board assemblies,
subsystems and systems to major original equipment manufacturers ("OEMs") in
the communications, personal computer, peripherals, consumer and automotive
industries. Jabil's business strategy is to create and support long-term
manufacturing partnerships with leading electronics companies in growth
industries. The Company executes this strategy by offering its customers a
complete turnkey solution, including circuit and production design; component
selection, sourcing and procurement; automated assembly; design and
implementation of product test; and shipment to end-users. Jabil's turnkey
approach enables customers to transfer virtually all internal manufacturing
responsibilities to the Company. Management believes the Company is a leader in
offering expanded turnkey services such as circuit and production design and in
the early implementation of new manufacturing technologies.
The Company's manufacturing services combine a high volume, highly
automated manufacturing approach with advanced design and manufacturing
technologies. Jabil is organized in resource and product line-dedicated
business units that the Company refers to as "work cells." Management believes
this work cell structure promotes a high level of responsiveness to customers
and facilitates highly responsive global, multi-location production that is
adaptive to changing customer needs.
The Company currently conducts operations in Scotland, Malaysia,
Mexico, Italy and in four regions of the United States. The Company believes
that localized global production is an important factor in mitigating risks of
inventory obsolescence for global customer products and reducing logistic costs
such as freight and duty.
The Company was incorporated in Delaware on February 21, 1992 to
succeed to the business of a Michigan Corporation named "Jabil Circuit Co.,
Inc." that was incorporated in 1969. Unless the context otherwise requires, the
"Company" and "Jabil" refer to Jabil Circuit, Inc., a Delaware corporation, its
predecessor and its subsidiaries. The Company's executive offices are located
at 10800 Roosevelt Boulevard, St. Petersburg, Florida 33716, and its telephone
number is (727) 577-9749. The Company's internet address is www.jabil.com.
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INDUSTRY OVERVIEW
The contract manufacturing industry has seen rapid growth over the
past several years as an increasing number of electronics companies have chosen
or adopted an external manufacturing strategy. This growth has also been
impacted by OEMs divesting of internal manufacturing capacity. Other factors
driving OEMs to favor contract manufacturing outsourcing include:
Reducing product cost. Contract manufacturers have the ability to
manufacture products at a reduced total cost to OEMs. These cost advantages
result from higher utilization of capacity because of diversified product
demand and, typically, a higher sensitivity to elements of cost.
Accelerating product time-to-market. Contract manufacturers have the
ability to deliver accelerated production start-ups and high efficiencies in
transferring new products into production. In addition, contract manufacturers
have the ability to rapidly scale production for changing markets and to
position themselves in global locations that serve the leading world markets.
With increasingly shorter product life cycles, these key services allow new
products to be sold in the marketplace in an accelerated time frame.
Access to advanced technologies. Customers of contract manufacturers
have access to advanced technologies in manufacturing processes, as well as
circuit and production design. Circuit and production design services offer
customers significant improvements in the performance, cost and
manufacturability of products.
Improving inventory management and purchasing power. Contract
manufacturers have the ability to manage both procurement and inventory, and
have demonstrated proficiency in purchasing components at improved pricing due
to the scale of the operations and continuous interaction with the material
marketplace.
Reducing capital investment in manufacturing. OEMs are increasingly
electing to lower their investment in inventory, buildings and machinery used
in manufacturing and choosing instead to allocate capital to other activities
such as marketing and research and development. This shift in capital
deployment has placed a greater emphasis on utilizing external manufacturing
specialists.
STRATEGY
The Company's objective is to expand its position as a global provider
of electronic manufacturing services. Key elements in meeting this objective
include:
Long-term Relationships. The core strategy of the Company is to
establish itself with leading electronics companies in expanding industries
that have the critical mass and growth goals to take advantage of highly
automated, continuous flow manufacturing, and global manufacturing when
advantageous. Since Jabil derives most of its growth in revenue from its
existing customer base, the Company strives to maintain long-term, mutually
beneficial relationships with its customers. Jabil offers customers a complete
turnkey solution, including circuit and production design; component selection,
sourcing and procurement; automated assembly; design and implementation of
product test; system assembly, order configuration and distribution to end
users. Jabil's turnkey approach enables a customer to transfer virtually all
internal manufacturing and distribution responsibilities to the Company.
Work Cell Structure. Jabil is organized in a decentralized,
functionally-matrixed organization. In this structure each customer's line of
business is produced with a high level of autonomy, utilizing dedicated
production equipment, production workers, supervisors, buyers, planners and
engineers. Jabil
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refers to these decentralized business-units as "work cells." Each Business
Unit Manager, who is the direct interface with the customer, manages their own
customer work cell. Management believes the work cell structure promotes an
increased responsiveness to customer needs, particularly as that relationship
grows to multiple production locations.
Systems Assembly and Order Fulfillment. Management believes systems
assembly and order fulfillment are services that can reduce product cost and
risk of product obsolescence by reducing total work in process and finished
goods inventory. The Company offers systems assembly at multiple locations as
well as direct order fulfillment (direct shipment to the end customer)
services.
Parallel Global Production. The Company believes its customers need to
produce the same products simultaneously in different markets of the world.
Jabil believes that parallel global production is a key strategy to reduce
obsolescence risk, secure the lowest landed cost and simultaneously supply
products of equivalent or comparable quality throughout the world. In order to
accommodate this need, the Company has significantly added to its manufacturing
space in Scotland, Malaysia and the United States. In addition, Jabil has
increased manufacturing resources in North America and Europe by establishing a
Guadalajara, Mexico plant and a Bergamo, Italy plant. The plant in Italy was a
result of the August 1998 acquisition of certain manufacturing and related
assets comprising the "Formatter Manufacturing Organization" business unit of
Hewlett-Packard Company ("HP Acquisition").
MANUFACTURING SERVICES
THE JABIL APPROACH TO MANUFACTURING
In order to achieve high levels of manufacturing performance, the
Company has adopted the following approach:
Work Cells. The Company organizes manufacturing activities on the
basis of work cells operating under the leadership of Business Unit Managers.
Each work cell has dedicated production lines consisting of equipment,
production workers, supervisors and engineers. A work cell is typically
dedicated to the needs of a single customer line-of-business and is empowered
to formulate strategies tailored to its customer's needs. The work cell
approach enables the Company to grow incrementally without disrupting the
production of other work cells and without significantly adding to management
bureaucracy. As a result, work cell members have direct responsibility for
manufacturing results and time-to-volume production, promoting a sense of
individual commitment and ownership.
Business Unit Managers. A Jabil Business Unit Manager coordinates all
financial, manufacturing and engineering commitments for each customer
relationship. Managers have the authority to develop customer relationships;
make design strategy decisions and production commitments; establish pricing
and implement production and circuit design changes. Business Unit Managers are
also responsible for assisting customers with strategic planning for future
products, including developing cost and technology goals. These managers
operate autonomously, with responsibility for the development of customer
relationships and direct profit and loss accountability for work cell
performance.
Continuous Flow. The Company uses a highly automated, "continuous
flow" approach where different pieces of equipment are joined directly or by
conveyor to create an in-line assembly process. (This process is in contrast to
a "batch" approach, where individual pieces of assembly equipment are operated
as freestanding work-centers.) Continuous flow manufacturing provides
significant cost reduction and quality improvement when applied to volume
manufacturing. The elimination of queue times
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prior to sequential operations result in increased manufacturing velocity,
which improves production efficiencies and shortens quality feedback loops.
Computer Integration. The Company supports all aspects of its
manufacturing activities with computerized control and monitoring systems.
Component inspection and vendor qualities are monitored electronically.
Materials planning, purchasing, stockroom and shop floor control systems are
supported through a computerized Manufacturing Resources Planning ("MRP")
system, providing instantaneous visibility to material availability and
real-time tracking of work in process. Manufacturing processes are supported by
a real-time, computerized statistical process control ("SPC") system.
In-circuit test, functional test and final burn-in are all monitored and
analyzed using other proprietary systems. Production design centers located in
each domestic facility are supported by advanced CAD/CAE systems. These CAD/CAE
systems support automated test design and using Jabil's proprietary
computer-integrated manufacturing software, manufacturing equipment
programming. Many of the Company's computer systems are networked, allowing a
sharing of data and programs. For example, employees in Florida can
instantaneously access data relating to Jabil's operations in other locations.
More importantly, the Company's customers can remotely access the Company's
computer systems to monitor real-time yields, inventory positions,
work-in-process status and vendor quality data for their products. See
"Technology."
The Company also utilizes an electronic commerce system/electronic
data interchange ("EDI") with customers and suppliers to implement a variety of
supply chain management programs. The Company's customers utilize the EDI
supply chain management to share demand and product forecasts and deliver
purchase orders. The Company uses the EDI system with suppliers for
just-in-time delivery, supplier-managed inventory and consigned
supplier-managed inventory.
The Company is in the process of installing a new enterprise resource
planning system ("ERP System") that will replace the current Manufacturing
Resource Planning ("MRP") system and financial information systems. This system
is believed to be "Year 2000 Compliant". The Company is also identifying and
implementing changes to its other information systems in order to make them
compliant. While the Company currently expects that the Year 2000 will not pose
significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all Year 2000 dependencies
in the Company's systems could result in material adverse consequences,
including disruption of operations, loss of information and unanticipated
increases in costs. See "Year 2000" Readiness.
DESIGN ACTIVITIES
Circuit Design. The Company provides circuit design activities for
certain of its customers. Circuit design involves the creation of electronic
circuit architecture, which ordinarily includes application specific integrated
circuit ("ASIC") design or selection and implementation, circuit function and
speed analysis, schematic development, net list generation and firmware
development. The Company's circuit design activities have resulted in designs
for video set-top boxes, personal computers, notebook computers, consumer
appliance controls, workstation I/O (input/output) cards, cellular telephone
accessories, and electronic products for use in automotive applications. The
resulting products are usually offered to customers on an exclusive basis in
exchange for a customer's commitment to use Jabil to manufacture the product.
The goals of the Company's circuit design activities are to create a more
stable stream of volume turnkey manufacturing and an elevated level of
strategic partnering with principal customers. The Company has testing and
validation capability to accelerate the time to market of products designed
internally and externally.
Production Design. The Company engages in significant production
design activities. Production design is the process of designing the circuit
board using CAD and CAE tools, concurrently with component package selection
and the development of the bill of materials, approved vendors list, assembly
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equipment configuration and processes, solder processes, in-circuit test and
functional test, test fixture design, "burn-in" and reliability monitoring
plan. The production design process improves manufacturability and generally
eliminates conflicts between disciplines while the product is still in the
design phase. Overall board costs are considered in connection with assembly
costs, materials costs and availability, process yield considerations and
targeted sources for board production. In this way, total costs can be
minimized prior to production launch. Management believes the Company's
production design process reduces product cost and accelerates time-to-volume
production. The process generally includes computer simulation and optimization
of electrical signal speed and circuit timing, simulation of thermal
characteristics and minimization of radio frequency interference ("RFI")
emissions. This computer simulation activity greatly reduces the risks of
subsequent engineering revisions and enhances attainment of time-to-volume
production goals.
Industrial/Mechanical Design. The Company offers Industrial and
Mechanical Design to its customers. Plastic and metal enclosures designed to
house printed circuit assemblies are the typical output of this activity. When
coupled with circuit and production design, this service provides complete
turnkey product support for OEMs. Industrial and Mechanical Design includes
conceptual design, industrial design, mechanical design, supplier selection,
prototype parts using stereolithography ("SLA") or metal fabrication, tooling
management, compliance certification management and volume assembly management,
all tightly integrated with the Jabil production work cell.
Other Design Services. The Company procures additional mechanical and
other design services from external engineering firms in response to the needs
of its customers. The Company's engineering staff coordinates the efforts of
these external engineering firms to ensure integration of the external portions
of the design with the overall production and product design to achieve optimal
product manufacturability and efficiency.
SYSTEM ASSEMBLY AND TEST
The Company offers system assembly and test services to its customers.
The Company maintains significant system assembly capacity and has seen this
portion of the business grow as an extension of the assembly of circuit boards.
This process involves the assembly of higher level sub-systems and systems
incorporating printed circuit boards. In some cases, the final product is
shipped directly to the end-user.
TECHNOLOGY
The Company believes that its experience and expertise in advanced
manufacturing technologies and its investment in state-of-the-art manufacturing
equipment are a significant competitive advantage, enabling Jabil to provide
customers with reliable and high-quality leading edge products and processes.
Among the technologies in which the Company has invested are:
Surface Mount Technology. Surface mount technology ("SMT") is a method
of assembling printed circuit boards on which components are fixed directly to
the surface of the board instead of being inserted and soldered into plated
holes in the board (the latter method being commonly known as "pin through
hole" or "PTH"). SMT offers the advantages of miniaturization and significant
cost reductions. The higher density also allows shorter signal lengths, with
resulting increases in signal speed potential and thermal performance. SMT
packages are generally more resistant to vibration and often broadcast lower
levels of electrical emissions which cause radio frequency interference.
Tape Automated Bonding. Tape automated bonding ("TAB") technology is a
complementary process to SMT and involves the use of semiconductors that are
attached to a gold or tin-plated copper lead frame using a complex bumping and
thermocompression mass bonding method. The result is a component that can be
directly mounted on the surface of the circuit board and that can be
electrically tested prior to
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assembly onto the substrate. TAB is well suited for applications involving high
manufacturing volumes, high lead counts, component pre-testing and high
electrical speeds.
Ball Grid Array. Ball grid array ("BGA") utilizes an array of solder
bumps across the underside of the package versus fine-pitch leads that are
exposed around the component perimeter. The BGA package design is more durable
than fine-leaded quad flat package ("QFP") components and has proven to be
manufacturable with higher yields.
Chip Scale Packages, Micro-Surface Mount Technology, Micro-Ball Grid
Array ("Chip Scale Packages", "Micro-SMT" and "Micro-BGA"). Chip Scale
Packages, Micro-SMT and Micro-BGA packages are a selection of the recently
emerging miniature package styles. These reduced size packages are a further
reduction of the smaller footprint created by BGA and approach the density of
Flip Chip. These packages are fully SMT compatible, can be economically tested
prior to assembly, and are well-suited for small form factor, high density, SMT
circuitry typical of portable products.
Flip Chip / Direct Chip Attach. Flip chip or direct chip attach
technology is the assembly technology that, in the opinion of the Company,
provides users with the smallest size, high performance package that is
commercially practical. Jabil is developing technology that makes flip chip
attach compatible with standard surface mount processes. The silicon die is
attached directly to the substrate by means of miniature solder bumps. The
Company's research activities in this area are subsidized in part by a
government-sponsored Low Cost Flip Chip Program composed of process-specific
industry participants.
Thin Substrate Processes. Thin substrate processes involve the use of
specialized placement, rigidization and soldering techniques to achieve the
automated assembly and soldering of multilayer substrates having a thickness of
less than .020 of an inch. These substrates are commonly used in the design of
thin products, such as PCMCIA (Person Computer Memory Card International
Association) cards and cellular telephones. The lack of stiffness typical in
these substrates makes assembly with conventional processing techniques
difficult and expensive. The Company has a patent application pending covering
processes associated with these applications. See "Proprietary Rights."
Reflow Solder of Mixed Technology Circuit Boards. Reflow soldering of
PTH devices utilizing SMT soldering processes (sometimes referred to as "Mixed
Technology Reflow" or "Reflow/reflow") involves the placement of PTH devices
through solder paste, with subsequent reflow using SMT processes to form solder
joints. Mixed Technology Reflow eliminates design miniaturization constraints
required by conventional wave solder processes used for PTH devices, allows
surface-mounted devices to be soldered using the higher yielding reflow
processes, and reduces processing costs. Mixed Technology Reflow requires
significant product-specific materials engineering, design of the substrate for
the process and specialized reflow soldering techniques.
Application Specific Robotic Assembly. Application specific robotic
assembly ("Robotics") involves the use of computer-controlled robotic arms with
custom-designed transfer mechanisms, feeders, sensors and grippers to perform
assembly functions ordinarily performed manually. Although intensive in capital
and engineering, the use of Robotics to replace manual operations promotes
higher yields, relieves assemblers from repetitive motion injuries and offers
significant cost reduction for long-lived products.
Computer Integrated Manufacturing. Computer integrated manufacturing
("CIM") involves the direct link of CAD data to computer-controlled assembly
and test equipment used to produce the product. By directly linking CAD data
files to production machines, waste generated in adjusting processes is
reduced, higher levels of mechanical precision are attained in placement and
test fixturing programs, and generally, cost is lowered with improved
time-to-volume production.
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CUSTOMERS AND MARKETING
The Company's revenue was distributed over the following significant
industry segments:
SIGNIFICANT INDUSTRY SEGMENTS
YEAR ENDED AUGUST 31
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1996 1997 1998
---- ---- ----
Communications....................................... 30% 51% 52%
Personal Computers................................... 36% 21% 16%
Computer Peripherals................................. 25% 16% 19%
Automotive and other................................. 9% 12% 13%
A small number of customers have historically comprised a major
portion of the Company's net revenue. The table below sets forth the respective
portion of net revenue for the applicable period attributable to customers who
accounted for more than 10% of net revenue in any respective period:
PERCENTAGE OF NET REVENUE
YEAR ENDED AUGUST 31
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1996 1997 1998
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Hewlett-Packard Company.............................. 20% 15% 10%
NEC Technologies, Inc................................ 15% * *
Quantum Corporation.................................. 23% 10% *
3Com................................................. 11% 21% 18%
Cisco Systems Inc. ................................. 10% 20% 20%
* less than 10% of net revenues
In fiscal 1996, 1997 and 1998, fewer than 20 customers accounted for
substantially all the Company's net revenue. The Company expects to continue to
depend upon a relatively small number of customers for a significant percentage
of its net revenue. Significant reductions or delays in sales to any of the
Company's large customers would have a material adverse effect on the Company's
results of operations. In the past, some of the Company's customers have
terminated their manufacturing arrangement with the Company, and other
customers have significantly reduced or delayed the volume of manufacturing
services ordered from the Company. There can be no assurance that present or
future customers will not terminate their manufacturing arrangements with the
Company or significantly change, reduce or delay the amount of manufacturing
services ordered from the Company or that the Company will not terminate
arrangements with customers. Any such termination of a manufacturing
relationship by the Company or its customers or change, reduction or delay in
orders could have a material adverse effect on the Company's results of
operations. See Note 7 of Notes to Consolidated Financial Statements.
The Company has pursued diversification of its customer base and
sought multiple customers in the markets it serves. The Company's principal
sources of new business are the expansion of existing relationships, referrals
and direct sales through its Business Unit Managers and executive staff. The
Company does not rely on sales or manufacturers' representatives. Business Unit
Managers, supported by the executive staff, identify and attempt to develop
relationships with potential customers who meet a certain profile. This profile
includes financial stability, need for technology-driven turnkey manufacturing,
anticipated unit volume and long-term relationship stability. Unlike
traditional sales managers, Business Unit Managers are responsible for ongoing
management of production for their customers.
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The Company is dependent upon the continued growth, viability and
financial stability of its customers, which are in turn substantially dependent
on the growth of the communications, personal computer, peripherals, consumer
and automotive industries. These industries have been characterized by rapid
technological change, short product life cycles and pricing and margin
pressures. In addition, many of the Company's customers in these industries are
affected by general economic conditions. The factors affecting the
communications, personal computer, peripherals, consumer and automotive
industries in general, and/or the Company's customers in particular, could have
a material adverse effect on the Company's results of operations. In addition,
the Company generates significant accounts receivable in connection with
providing manufacturing services to its customers. If one or more of the
Company's customers were to become insolvent or otherwise were unable to pay
for the manufacturing services provided by the Company, the Company's operating
results and financial condition would be adversely affected.
INTERNATIONAL EXPANSION
A key element in the Company's strategy is to provide localized
production of the global products produced for OEMs in the major consuming
regions of the European Community and Asia. In order to offer this localized
production, in fiscal 1993 the Company established a manufacturing facility in
Livingston, Scotland, which began volume production in May 1993. The Scotland
facility targets existing European customers, those North American customers
having significant sales in the European Community and potential European
customers who meet the profile discussed above. Additionally, the Company began
volume production in October 1995, in Penang, Malaysia. This location enables
the Company to provide manufacturing services to the Asian market from an Asian
location in order to reduce costs, freight and duties, to provide a more
competitive cost structure for these markets and to serve as a low cost
manufacturing source for new and existing customers. In order to increase
capacity both in Europe and in the Asian market, the Company completed an
expansion of both locations in the early portion of fiscal 1998. See Note 3 of
Notes to Consolidated Financial Statements.
As an addition to the North American market, the Company completed
construction of a manufacturing facility in Guadalajara, Mexico early in fiscal
1998 and began volume production in November 1997. This operation will allow
for continued expansion in North America, while providing a competitive cost
structure and close proximity to the United States market.
In August 1998, the Company acquired manufacturing operations in
Bergamo, Italy as part of the HP Acquisition.
The Company's international operations may be subject to a number of
other risks, including fluctuations in the value of currencies, export duties,
import controls and trade barriers (including quotas), restrictions on the
transfer of funds, employee turnover, work stoppages, longer payment cycles,
greater difficulty in accounts receivable collection, and burdens of complying
with a wide variety of foreign laws. In addition, net-operating losses incurred
by foreign operations cannot be utilized by the Company to reduce United States
income taxes.
COMPETITION
Competition in the contract manufacturing industry is intense. The
Company competes against numerous domestic and foreign manufacturers, including
SCI Systems, Inc., Solectron Corporation, Celestica, Inc., and Flextronics
International. In addition, the Company may in the future encounter competition
from other large electronic manufacturers that are selling, or may begin to
sell, contract manufacturing services. Several of the Company's competitors
have international operations and some have substantially greater
manufacturing, financial, research and development and marketing resources than
the Company. The Company also faces competition from the manufacturing
operations of its current
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and potential customers, who are continually evaluating the merits of
manufacturing products internally versus the merits of external manufacturing.
The Company believes that the primary basis of competition in its
targeted markets are capability, price, manufacturing quality, advanced
manufacturing technology, design expertise, time-to-volume production, reliable
delivery and regionally dispersed manufacturing. Management believes the
Company competes favorably with respect to these factors. To remain
competitive, the Company must continue to provide technologically advanced
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. There can be no assurance that the Company will be able
to compete favorably with respect to these factors in the future.
BACKLOG
The Company's order backlog at August 31, 1998 was approximately $456
million, compared to backlog of $450 million at August 31, 1997. Although the
backlog consists of firm purchase orders, the level of backlog at any
particular time is not necessarily indicative of future sales. Given the nature
of the Company's relationships with its customers, it frequently allows
customers to cancel or reschedule deliveries hence backlog is not a meaningful
indicator of future financial results. Although the Company may seek to
negotiate fees to cover the costs of such cancellations or rescheduling, it may
not be successful in doing so.
The level and timing of orders placed by a customer of the Company
varies due to the customer's attempts to balance its inventory, design changes,
changes in the customer's manufacturing strategy, acquisitions of or
consolidations among customers and variation in demand for the customer's
products due to, among other things, product life cycles, competitive
conditions or general economic conditions. The Company's inability to forecast
the level of customer orders with certainty makes it difficult to schedule
production and maximize utilization of manufacturing capacity. In the past, the
Company has been required to increase staffing and other expenses in order to
meet the anticipated demand of its customers. Anticipated orders from the
Company's customers have, in the past, failed to materialize in certain
instances or delivery schedules have been deferred as a result of changes in
the customer's business needs, thereby adversely affecting the Company's
results of operations. On other occasions, customers have required rapid
increases in production, which have placed an excessive burden on the Company's
resources. Such customer order fluctuations and deferrals have had a material
adverse effect on the Company's results of operations in the past, and there
can be no assurance that the Company will not experience such effects in the
future.
RESEARCH AND DEVELOPMENT
To meet the increasingly sophisticated needs of its customers, Jabil
continually works to develop and refine new manufacturing processes, enhance
production design and develop new circuit designs. For fiscal 1996, 1997 and
1998, the Company expended $2.1 million, $3.1 million, and $3.8 million,
respectively, on research and development activities. To date, substantially
all of the Company's research and development expenditures have related to
internal research and development activities.
In conjunction with the HP acquisition, the Company recorded a charge
of $6.5 million related to the write-off of in-process research and
development. See Note 10 of Notes to Consolidated Financial Statements.
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MANUFACTURING PROCESSES
The Company conducts research and development in connection with the
development and refinement of new manufacturing processes that the Company
believes have near-term commercial potential. This research and development
activity, which is accounted for as a research and development expense, is
performed primarily at Jabil's advanced engineering facility in San Jose,
California. Other manufacturing process developments and refinements are made
in connection with providing manufacturing services for particular customers
and related expenses are charged to cost of revenue.
PRODUCTION DESIGN
The Company performs research and development for its customers in
connection with providing production design. This ongoing research and
development is associated with providing manufacturing services to these
customers and is charged to cost of revenue.
CIRCUIT DESIGN
From time to time, the Company performs research and development
related to new products on a project-by-project basis. The research and
development consists of design of the circuit board assembly and the related
production design necessary to manufacture the circuit board assembly in the
most cost-effective and reliable manner. The Company expenses these costs to
research and development expense.
The market for the Company's manufacturing services is characterized
by rapidly changing technology and continuing process development. The Company
is continually evaluating the advantages and feasibility of new manufacturing
processes, such as TAB, chip on board and thin substrate processes. The Company
believes that its future success will depend upon its ability to develop and
market manufacturing services that meet changing customer needs, maintain
technological leadership and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. There can be no assurance that the Company's process development efforts
will be successful.
COMPONENTS
The Company procures components from a broad group of suppliers,
determined on an assembly-by-assembly basis. Almost all the products
manufactured by Jabil require one or more components that are ordered from only
one source, and most assemblies require components that are available from only
a single source. Some of these components are allocated in response to supply
shortages. The Company attempts to ensure continuity of supply of these
components. In cases where unanticipated customer demand or supply shortages
occur, the Company attempts to arrange for alternative sources of supply, where
available, or defers planned production to meet the anticipated availability of
the critical component. In some cases, supply shortages will substantially
curtail production of all assemblies using a particular component. In addition,
at various times there have been industry-wide shortages of certain electronic
components, particularly memory and logic devices. There can be no assurance
that such shortfalls will not have a material adverse effect on the Company's
results of operations in the future.
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PROPRIETARY RIGHTS
The Company regards its manufacturing processes and circuit designs as
proprietary trade secrets and confidential information. Jabil relies largely
upon a combination of trade secret laws; non-disclosure agreements with its
customers, employees, and suppliers; its internal security systems;
confidentiality procedures and employee confidentiality agreements to maintain
the trade secrecy of its circuit designs and manufacturing processes. Although
the Company takes steps to protect its trade secrets, there can be no assurance
that misappropriation will not occur.
The Company currently has six patents and one patent application
pending. However, Jabil believes that the rapid pace of technological change
makes patent protection less significant than such factors as the knowledge and
experience of management and personnel and the Company's ability to develop,
enhance and market manufacturing services.
The Company licenses some technology from third parties that it uses
in providing manufacturing services to its customers. The Company believes that
such licenses are generally available on commercial terms from a number of
licensors. Generally, the agreements governing such technology grant to Jabil
non-exclusive, worldwide licenses with respect to the subject technology and
terminate upon a material breach by the Company.
Although the Company does not believe that its circuit designs or
manufacturing processes infringe on the proprietary rights of third parties,
there can be no assurance that if third parties assert valid infringement
claims against the Company with respect to past, current or future designs or
processes, the Company will not be required to enter into an expensive royalty
arrangement, develop non-infringing designs or processes, or engage in costly
litigation.
EMPLOYEES
As of August 31, 1998, the Company had 5,311 full-time employees. This
compares to 3,661 full-time employees at August 31, 1997. Approximately six
hundred employees joined the company as a result of the HP acquisition in
August 1998.
Recruitment of personnel in the contract manufacturing industry is
highly competitive. The Company believes that its future success will depend,
in part, on its ability to continue to attract and retain highly skilled
technical and management personnel. The Company does not have employment
agreements or noncompetition agreements with its key employees. Although to
date the Company has been successful in retaining key managerial and technical
employees, the loss of services of certain of these key employees could have a
material adverse effect on the Company.
GEOGRAPHIC INFORMATION
The information regarding revenue, operating profit, identifiable
assets and export sales set forth in Note 7 of Notes to Consolidated Financial
Statements, set forth elsewhere herein, is hereby incorporated by reference
into this Part I, Item 1.
ENVIRONMENTAL
The Company is subject to a variety of federal, state, local and
foreign environmental regulations relating to the use, storage, discharge and
disposal of hazardous chemicals used during its manufacturing process. Although
the Company believes that it is currently in substantial compliance with all
material environmental regulations, any failure by the Company to comply with
present and future regulations could subject it to future liabilities or the
suspension of production. In addition, such regulations could
11
13
restrict the Company's ability to expand its facilities or could require the
Company to acquire costly equipment or to incur other significant expense to
comply with environmental regulations.
ITEM 2. PROPERTIES
The Company has manufacturing facilities located in the United States,
Scotland, Malaysia, Mexico and Italy.
A summary of building locations is as follows:
CURRENT FACILITIES
Year Approximate
Location Commenced Owned/Leased Square Footage Description
-------- --------- ------------ -------------- -----------
St. Petersburg, Florida 1988 Owned 110,000 High volume mfg.,
Corporate office
St. Petersburg, Florida 1997 Owned 125,000 High volume mfg.
St. Petersburg, Florida 1997 Leased 91,000 Systems assembly
St. Petersburg, Florida 1997 Leased 27,000 Operations
St. Petersburg, Florida 1998 Leased 27,000 Office
Auburn Hills, Michigan 1997 Leased 54,000 High volume mfg.
Auburn Hills, Michigan 1993 Owned 125,000 High volume mfg.
Auburn Hills, Michigan 1993 Leased 30,000 Warehouse
San Jose, California 1998 Leased 181,000 Design/prototype mfg./
volume mfg.
Boise, Idaho 1998 Leased 129,000 High volume mfg.
Penang, Malaysia 1997 Owned 150,000 High volume mfg.
Guadalajara, Mexico 1997 Owned 150,000 High volume mfg.
Livingston, Scotland 1997 Owned 130,000 High volume mfg.
Bergamo, Italy 1998 Leased 102,000 High volume mfg.
LEASED FACILITY TO BE REPLACED BY CURRENT FACILITY
San Jose, California 1987 Leased 21,000 Design/prototype mfg.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain lawsuits in the ordinary course of
business. Management does not believe that these proceedings individually or in
the aggregate, will have a material adverse effect on the Company's financial
position, results of operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 5, 1998 the Common Stock of the Company trades publicly on
The New York Stock Exchange under the symbol JBL. Prior to May 5, 1998, the
Company's Common Stock was traded on the Nasdaq National Market under the
symbol JBIL. The following table sets forth, for the periods indicated, the
high and low closing sales prices per share for the Company's Common Stock as
reported by the New York Stock Market and the Nasdaq National Market, as
applicable.
HIGH LOW
---- ---
YEAR ENDED AUGUST 31, 1997
First Quarter (September 1, 1996 November 30, $13.63 $ 5.75
1996)
Second Quarter (December 1, 1996 February 28, $24.69 $12.63
1997)
Third Quarter (March 1, 1997--May 31, 1997) $32.63 $16.50
Fourth Quarter (June 1, 1997--August 31, 1997) $60.00 $27.50
YEAR ENDED AUGUST 31, 1998
First Quarter (September 1, 1997 November 30, $71.50 $38.44
1997)
Second Quarter (December 1, 1997 February 28, $53.81 $32.50
1998)
Third Quarter (March 1, 1998--May 31, 1998) $50.56 $30.31
Fourth Quarter (June 1, 1998--August 31, 1998) $37.63 $23.50
As of August 31, 1998, there were approximately 1,327 holders of
record.
The Company has never paid cash dividends on its capital stock and
does not anticipate paying cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto incorporated into Item 8 of
this report.
YEARS ENDED AUGUST 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ------- -------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue.......................................... $375,815 $559,474 $863,285 $978,102 $1,277,374
Cost of revenue..................................... 351,608 523,338 790,311 857,245 1,115,647
-------- -------- -------- -------- ----------
Gross profit......................................... 24,207 36,136 72,974 120,857 161,727
Selling, general and administrative................ 14,038 17,898 25,456 35,886 52,014
Research and development........................... 1,768 1,819 2,112 3,117 3,784
Acquisition related charge......................... -- -- -- -- 20,825
-------- -------- -------- -------- ----------
Operating income..................................... 8,401 16,419 45,406 81,854 85,104
Interest expense, net.............................. 3,470 6,347 1,612 3,124
-------- -------- -------- -------- ----------
7,333
Income before income taxes........................... 4,931 10,072 38,073 80,242 81,980
Income taxes....................................... 2,363 2,792 13,724 27,745 25,047
-------- -------- -------- -------- ----------
Net income........................................... $ 2,568 $ 7,280 $ 24,349 $ 52,497 $ 56,933
======== ======== ======== ======== ==========
Basic earnings per share............................. $ 0.09 $ 0.25 $ 0.71 $ 1.45 $ 1.53
Diluted earnings per share........................... $ 0.08 $ 0.23 $ 0.67 $ 1.37 $ 1.48
Common shares used in the calculations of basic
earnings per share................................... 28,312 29,178 34,458 36,299 37,125
Common and common equivalent shares used in
the calculations of diluted earnings per share....... 30,894 31,100 36,334 38,340 38,575
YEARS ENDED AUGUST 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- --------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital ..................................... $ 27,639 $ 33,333 $ 115,758 $ 97,349 $ 103,660
Total assets ........................................ 174,318 280,961 299,940 405,903 526,703
Current installments of long-term obligations ....... 48,562 81,130 2,451 2,475 8,333
Notes payable and long-term obligations, excluding
current installments.................................
Net stockholders' equity............................. 18,215 27,932 58,371 50,000 81,667
$ 51,231 $ 59,595 $ 124,234 $181,485 248,366
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements within
the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Factors that could cause actual events or results to differ
materially from those referenced in such forward-looking statements
include those described in the section herein entitled "Factors Affecting
Future Results" and in the Company's other filings with the Securities and
Exchange Commission. The words "believe," "expect," "intend,"
"anticipate," "plan" and similar expressions and variations thereof
identify certain of such forward-looking statements, which speak only as
of the dates on which they are made. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Readers are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
events and results may differ materially from those indicated in the
forward-looking statements as a result of various factors. Readers are
cautioned not to place undue reliance on any forward-looking statements.
The Company provides high volume turnkey manufacturing services using
surface mount technology for leading electronics OEMs in the communications,
personal computer, peripherals, consumer and automotive industries. In turnkey
manufacturing, unlike manufacturing on consignment, the Company is responsible
for procuring the components utilized in the manufacturing process. The
component procurement responsibility requires the Company to provide
significant working capital, materials management, purchasing, receiving
inspection and stockroom management. This approach transfers the economic risks
of materials cost fluctuations, excess scrap and inventory obsolescence to the
Company. The Company believes that turnkey manufacturing generates higher net
revenue than consignment manufacturing due to the generation of revenue from
materials as well as labor and manufacturing overhead, but also results in
lower gross margins than consignment manufacturing because the Company
generally realizes lower gross margins on materials-based revenue than on
manufacturing-based revenue.
The Company's annual and quarterly operating results are affected by a
number of factors. The primary factors affecting operating results are the
level and timing of customer orders, fluctuations in materials costs and the
mix of materials costs versus labor and manufacturing overhead costs. The level
and timing of orders placed by a customer vary due to the customer's attempts
to balance its inventory, design changes, changes in a customer's manufacturing
strategy, acquisitions of or consolidations among customers, and variation in
demand for a customer's products due to, among other things, product life
cycles, competitive conditions and general economic conditions. In the past,
changes in orders from customers have had a significant effect on results of
operations due to corresponding changes in the level of overhead absorption.
Other factors affecting the Company's annual and quarterly operating results
include price competition, the Company's level of experience in manufacturing a
particular product, the degree of automation used in the assembly process, the
efficiencies achieved by the Company in managing inventories and fixed assets,
the timing of expenditures in anticipation of increased sales, customer product
delivery requirements and shortages of components or labor.
The level of capacity utilization of manufacturing facilities,
indirect labor and selling, general and administrative expenses also affect
operating results. Accordingly, gross margins and operating income
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margins have generally improved during periods of high volume and high capacity
utilization. During periods of lower-volume production, Jabil generally has
idle capacity and reduced operating margins.
The Company has continued to depend upon a relatively small number of
customers for a significant percentage of its net revenue. Significant
reductions in sales to any of the Company's large customers would have a
material adverse effect on the Company's results of operations. In the past,
some of the Company's customers have terminated their manufacturing arrangement
with the Company, and other customers have significantly reduced or delayed the
volume of manufacturing services ordered from the Company. There can be no
assurance that present or future customers will not terminate their
manufacturing arrangements with the Company or significantly change, reduce or
delay the amount of manufacturing services ordered from the Company. Any such
termination of a manufacturing relationship or change, reduction or delay in
orders could have an adverse effect on the Company's results of operations or
financial condition. See Note 7 of Notes to Consolidated Financial Statements.
ACQUISITION
On August 3, 1998, the Company acquired certain manufacturing and
related assets comprising the "Formatter Manufacturing Organization" business
unit of Hewlett-Packard located in Boise, Idaho and Bergamo, Italy. The
acquisition was made pursuant to an agreement dated as of August 3, 1998
between the registrant and Hewlett-Packard and an agreement dated as of August
3, 1998 between Jabil Circuit S.r.l. (a subsidiary of the registrant) and
Hewlett-Packard Italiana S.p.A. The Company will lease from Hewlett-Packard the
physical facilities that the acquired assets are currently operating from
pending the Company's construction of new facilities. Approximately $76 million
of consideration was given by the registrant for the acquired assets,
consisting of approximately $65 million of cash and the assumption of
approximately $11 million of trade payables and personnel related liabilities
relating to the acquired assets. The final purchase price was subject to a
post-closing adjustment as provided for in the acquisition agreements. This
post-closing adjustment resulted in an approximately $4 million in additional
net assets acquired. The acquired assets were used by the Seller to manufacture
printed circuit-board assemblies for the LaserJet printer divisions of
Hewlett-Packard and shall continue to be used by the Company to manufacture
printed circuit-board assemblies for the LaserJet printer division of
Hewlett-Packard.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating data as a percentage of net revenue:
YEARS ENDED AUGUST 31,
----------------------
1996 1997 1998
---- ---- ----
Net revenue.......................................... 100.0% 100.0% 100.0%
Cost of revenue...................................... 91.5 87.6 87.3
----- ----- -----
Gross margin......................................... 8.5 12.4 12.7
Selling, general and administrative.................. 2.9 3.7 4.1
Research and development............................. 0.3 0.3 0.3
Acquisition related charge........................... -- -- 1.6
---- ----- -----
Operating income..................................... 5.3 8.4 6.7
Interest expense, net................................ 0.9 0.2 0.2
---- ----- -----
Income before income taxes........................... 4.4 8.2 6.5
Income taxes......................................... 1.6 2.8 2.0
---- ----- -----
Net income........................................... 2.8% 5.4% 4.5%
==== ===== =====
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NET REVENUE
Net revenue increased 13.3% over fiscal 1996 to $978.1 million in
fiscal 1997. The increase was due primarily to manufacturing services provided
to both new and existing customers, offset by the end of production of certain
hard drive products. Net revenue increased 30.6% over fiscal 1997 to $1.3
billion in fiscal 1998. The increase was primarily a result of manufacturing
services growth provided to existing and new customers.
Foreign source revenue represented 31% of net revenue for fiscal 1996
and 30% of net revenue for fiscal 1997. Foreign source revenue in 1998
represented 31% of net revenue.
GROSS MARGIN
Cost of revenue includes the cost of materials and the cost of labor
and manufacturing overhead, as well as provisions for excess and obsolete
inventory adjustments. The Company's various customers typically require
different manufacturing services. Different manufacturing services have
different gross margins depending upon (i) the mix of materials costs versus
manufacturing costs, and (ii) the Company's experience in manufacturing a
particular product. The Company typically realizes better gross margins on
manufacturing-based revenue than it does on materials-based revenue, and better
gross margins on manufacturing services for products with which it has more
experience due to the increased efficiencies achieved over time. Gross margins
also fluctuate due to changes in materials costs.
Gross margin increased from 8.5% in fiscal 1996 to 12.4% in fiscal
1997 to 12.7% in fiscal 1998 due to a shift toward manufacturing-based revenues
and increased capacity utilization. In fiscal 1997 and 1998 the portion of
manufacturing based revenue was significantly higher than in fiscal 1996.
Manufacturing based revenue was the largest impact on the gross margin
percentage.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased from $25.5
million (2.9% of net revenue) in fiscal 1996 to $35.9 million (3.7% of net
revenue) in fiscal 1997. This increase was primarily due to increased staffing
and related departmental expenses at all the Company's locations along with
investments in information systems staff to support the expansion of the
Company's business. Selling, general and administrative expenses increased from
$35.9 million (3.7% of net revenue) in fiscal 1997 to $52.0 million (4.1% of
net revenue) in fiscal 1998. This increase was primarily due to continued
increases in staffing and related departmental expenses, both at the Company's
existing operations and new Mexican operations, along with investments in
information systems staff to support the expansion of the Company's business in
existing and new locations.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal 1997 increased by
approximately $1.0 million over fiscal 1996. Research and development expenses
in fiscal 1998 increased by $0.7 million to $3.8 million, reflecting an
increase in design-based activity.
ACQUISITION RELATED CHARGE
During the fourth quarter of fiscal 1998, Jabil completed the HP
acquisition and recorded a one-time acquisition-related charge of $20.8 million.
The charge relates primarily to write-offs of in-process research and
development and work force related expenses. See Note 10 of Notes to
Consolidated Financial Statements.
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INTEREST EXPENSE
Net interest expense decreased to $1.6 million in fiscal 1997 from
$7.3 million in fiscal 1996 primarily reflecting significantly reduced
short-term borrowings and increased income on cash balances. Interest expense
increased to $3.1 million in fiscal 1998 primarily reflecting interest expense
on the Company's private placement debt offset, in part, by income on cash
balances. See Notes 4 and 5 of Notes to Consolidated Financial Statements.
INCOME TAXES
The Company's effective tax rate decreased slightly from 36% in fiscal
1996 to 35% in fiscal 1997 primarily as a result of the granting of a tax
holiday for the Company's Malaysian operations. In fiscal 1998, the effective
tax rate decreased to 30.6%. The effective tax rate is predominantly a function
of the mix of domestic versus international income from operations. The
Company's international operations are being taxed at a lower rate than in the
United States, primarily due to the tax holiday granted to the Company's
Malaysian subsidiary. The Malaysian tax holiday is effective through October
30, 2000. See Note 5 of Notes to Consolidated Financial Statements.
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QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial
information for the 1997 and 1998 fiscal years. In the opinion of management,
this information has been presented on the same basis as the audited
consolidated financial statements appearing elsewhere, and all necessary
adjustments (consisting of normal recurring adjustments and an acquisition
related charge which is discussed in Note 10 in the Notes to Consolidated
Financial Statements) 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 and related notes
thereto. The operating results for any quarter are not necessarily indicative
of results for any future period.
FISCAL 1997 FISCAL 1998
----------------------------------------- ------------------------------------------
NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- ------- -------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenue ........................... $203,070 $222,187 $247,637 $305,208 $319,512 $330,688 $309,599 $317,575
Cost of revenue ..................... 179,978 195,711 215,603 265,953 278,167 286,628 269,826 281,026
-------- -------- -------- -------- -------- -------- --------- --------
Gross profit .......................... 23,092 26,476 32,034 39,255 41,345 44,060 39,773 36,549
Selling, general and
Administrative .................... 7,727 7,918 9,252 10,989 11,077 12,858 12,941 15,138
Research and development ............ 705 804 723 885 912 879 1,065 928
Acquisition related charge ............ -- -- -- -- -- -- -- 20,825
-------- -------- -------- -------- -------- -------- --------- --------
Operating income (loss) .............. 14,660 17,754 22,059 27,381 29,356 30,323 25,767 (342)
Interest expense, net ............... 658 389 406 159 713 1,134 722 555
-------- -------- -------- -------- -------- -------- --------- --------
Income (loss) before income
Taxes ............................... 14,002 17,365 21,653 27,222 28,643 29,189 25,045 (897)
Income tax expense (benefit) ........ 5,174 6,306 7,081 9,184 9,572 9,050 7,764 (1,339)
-------- -------- -------- -------- -------- -------- --------- --------
Net income ............................ $ 8,828 $ 11,059 $ 14,572 $ 18,038 $ 19,071 $ 20,139 $ 17,281 $ 442
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share .............. $ 0.25 $ 0.31 $ 0.40 $ 0.49 $ 0.52 $ 0.54 $ 0.46 $ 0.01
======== ======== ======== ======== ======== ======== ========= ========
Diluted earnings per share ............ $ 0.23 $ 0.29 $ 0.38 $ 0.47 $ 0.49 $ 0.52 $ 0.45 $ 0.01
======== ======== ======== ======== ======== ======== ========= ========
Common shares used in the
calculations of basic
earnings per share .................... 35,669 36,181 36,503 36,844 37,019 37,080 37,167 37,233
======== ======== ======== ======== ======== ======== ========= ========
Common and common
equivalent shares used in the
calculations of diluted earnings
per share............................. 37,884 38,326 38,392 38,760 38,675 38,564 38,615 38,447
======== ======== ======== ======== ======== ======== ========= ========
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal years ended August 31, 1996 and 1997, the Company
primarily funded operations through borrowings under credit facilities with
several banks, a public offering of Common Stock in fiscal 1996, and a private
placement of debt in fiscal 1996. During the fiscal year ended August 31, 1998,
the Company experienced growth in net revenue and in cash flows from
operations. Cash and cash equivalents decreased from $45.5 million at the 1997
fiscal year end to $23.1 million at August 31,1998 as a result of cash
generated from operations offsetting cash used in the acquisition of property,
plant and equipment, along with the HP acquisition.
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At August 31, 1998, the Company's principal sources of liquidity
consisted of cash and available borrowings under the Company's credit
facilities.
Net cash provided by operating activities for the year ended August
31, 1998 was $98.4 million. This consisted primarily of $56.9 million of net
income, $35.7 million of depreciation and amortization, $10.6 million of
decreases in inventory, $3.7 million decreases in other assets and $5.0 million
increases in accounts payable and accrued expenses, offset by $5.4 million of
increases in deferred taxes and $9.3 million in increases in accounts
receivable.
Net cash used in investing activities of $162.1 million for the year
ended August 31, 1998 was primarily a result of the Company's capital
expenditures for equipment and facilities in North America, Scotland, and
Malaysia to support increased manufacturing activities. Additionally, the
Company invested $65.0 million in net assets acquired from Hewlett-Packard
Company in the HP acquisition in August 1998.
Net cash provided by financing activities of $41.3 million for the
year ended August 31, 1998 resulted primarily from $40.0 million in proceeds
from the Company's revolving credit facility in August, 1998 to finance the HP
acquisition. See Notes 4 and 6 of Notes to Consolidated Financial Statements.
The Company believes that current cash balances, available borrowings,
and funds provided by operations will be sufficient to satisfy working capital
requirements for at least the next 12 months.
"YEAR 2000" READINESS
The Company is aware of and is addressing the Year 2000 issue. The
Year 2000 issue creates risks for the Company from unforeseen problems in its
own computer systems and from third parties with whom the Company deals.
Failure of the Company's and or/third parties computer systems, manufacturing
equipment and control systems could have a material adverse effect on the
Company's results from operations.
The Company is actively taking steps to ensure that its global
information technology infrastructure and business system applications,
manufacturing equipment and systems will be Year 2000 compliant while seeking
adequate assurances from third parties with whom the Company conducts business
with, that any such systems shall be Year 2000 compliant. A global team,
overseen by a corporate officer, has been formed and has implemented a
proactive multi-phase approach, which includes assessing the scope of work,
prioritizing, certifying compliance, and testing compliance.
As of the end of fiscal 1998 the Company was substantially complete in
its compliance certification process of its global information technology
infrastructure. Most of the Company's global business systems are currently
being replaced by a Year 2000 compliant application; this process is expected
to be complete by January 1, 2000. As a contingency, however, legacy systems
have been upgraded to be Year 2000 compliant and are in the process of being
tested.
As of the end of fiscal 1998 manufacturing and test equipment and
local plant business systems had been identified and prioritized in terms of
Year 2000 compliance with focus now on compliance certification. It is
anticipated that 85% of all equipment and systems will be certified as
compliant by the end of calendar 1998, with the remaining 15% by the end of the
first calendar quarter of 1999, at which time compliance testing and
verification will commence.
The Company is also in the process of assessing its suppliers. The
initial phase of the assessment is expected to be complete by the end of
calendar 1998. Early in calendar 1999, the Company anticipates validating its
suppliers' representations where deemed appropriate, and will develop sourcing
contingency plans in areas where the Company assesses that supplier readiness
is insufficient.
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22
The Company estimates the cost to complete its remediation to be
approximately $3 million. The Company is unable to fully determine the effect
of failure of its own systems or those of third parties with which it does
business, but any significant failures could have an material adverse effect on
the Company's financial position, results of operations and cash flows.
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FACTORS AFFECTING FUTURE RESULTS
VARIABILITY OF OPERATING RESULTS
The Company's annual and quarterly operating results are affected by a
number of factors. The primary factors affecting operating results are the
level and timing of customer orders, fluctuations in materials costs and the
mix of materials costs versus labor and manufacturing overhead costs. The level
and timing of orders placed by customer vary due to the customer's attempts to
balance its inventory, changes in a customer's manufacturing strategy and
variation in demand for a customer's products due to, among other things,
product life cycles, competitive conditions and general economic conditions. In
the past, changes in orders from customers have had a significant effect on
results of operations due to corresponding changes in the level of overhead
absorption. Other factors affecting the Company's annual and quarterly
operating results include price competition, the Company's level of experience
in manufacturing a particular product, the degree of automation used in the
assembly process, the efficiencies achieved by the Company in managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased sales, customer product delivery requirements and shortages of
components or labor. Any one of these factors or a combination thereof could
adversely affect the Company's annual and quarterly results of operations in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
For the fiscal year ended August 31, 1998, the Company's three largest
customers accounted for approximately 48% of net revenue and fewer than 20
customers accounted for substantially all net revenue. Cisco Systems, Inc.
("Cisco"), 3Com Corporation ("3Com"), and Hewlett-Packard Company ("Hewlett-
Packard"), accounted for approximately 20%, 18%, 10% of net revenue,
respectively. The Company expects to continue to depend upon a relatively small
number of customers for a significant percentage of its net revenue.
Significant reductions in sales to any of the Company's large customers would
have a material adverse effect on the Company's results of operations. In the
past, some of the Company's customers have terminated their manufacturing
arrangement with the Company, and other customers have significantly reduced or
delayed the volume of manufacturing services ordered from the Company. There
can be no assurance that present or future customers will not terminate their
manufacturing arrangements with the Company or significantly change, reduce or
delay the amount of manufacturing services ordered from the Company. Any such
termination of a manufacturing relationship or change, reduction or delay in
orders could have an adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Customers and Marketing."
LIMITED AVAILABILITY OF COMPONENTS
Substantially all the Company's net revenue is derived from turnkey
manufacturing in which the Company provides both materials procurement and
assembly. In turnkey manufacturing, the Company typically bears the risk of
component price increases, which could adversely affect the Company's gross
profit margins. Almost all the products manufactured by Jabil require one or
more components that are available from only a single source. Some of these
components are allocated in response to supply shortages. In some cases, supply
shortages will substantially curtail production of all assemblies using a
particular component. In addition, at various times there have been industry
wide shortages of electronic components, particularly memory and logic devices.
Such circumstances have produced significant levels of short-term interruption
of the Company's operations in the past. There can be no assurance that such
shortfalls will not have a material adverse effect on the Company's results of
operations in the future. See
22
24
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Components."
DEPENDENCE ON CERTAIN INDUSTRIES
The Company is dependent upon the continued growth, viability and
financial stability of its customers, which are in turn substantially dependent
on the growth of the communications, personal computer, peripherals, consumer
and automotive industries. These industries have been characterized by rapid
technological change, short product life cycles and have pricing and margin
pressures. In addition, many of the Company's customers in these industries are
affected by general economic conditions. The factors affecting the
communications, personal computer, peripherals, consumer and automotive
industries in general, and/or the Company's customers in particular, could have
a material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Customers and Marketing."
VARIABILITY OF CUSTOMER REQUIREMENTS AND CUSTOMER FINANCING
The level and timing of sales to a customer of the Company varies due
to the customer's attempts to balance its inventory, design changes, changes in
the customer's manufacturing strategy, acquisitions of or consolidations among
customers and variation in demand for its products due to, among other things,
product life cycles, competitive conditions or general economic conditions. Due
in part to these factors, most of the Company's customers do not commit to firm
production schedules for more than one quarter in advance. The Company's
inability to forecast the level of customer orders with certainty makes it
difficult to schedule production and maximize utilization of manufacturing
capacity. In the past, the Company has been required to increase staffing and
other expenses in order to meet the anticipated demand of its customers.
Anticipated orders from many of the Company's customers have, in the past,
failed to materialize or delivery schedules have been deferred as a result of
changes in the customer's business needs, thereby adversely affecting the
Company's results of operations. On other occasions, customers have required
rapid increases in production, which have placed an excessive burden on the
Company's resources. Such customer order fluctuations and deferrals have had a
material adverse effect on the Company's results of operations in the past, and
there can be no assurance that the Company will not experience such effects in
the future. In addition, the Company generates significant accounts receivables
in connection with providing manufacturing services to its customers. If one or
more of the Company's customers were to become insolvent or otherwise were
unable to pay for the manufacturing services provided by the Company, the
Company's operating results and financial condition would be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Backlog."
MANAGEMENT OF GROWTH
The Company has experienced a period of rapid growth which has placed,
and could continue to place, a significant strain on the Company's management,
operational and financial resources. The Company's ability to manage growth
effectively will require it to continue to implement and improve its
operational, financial and management information systems; to develop the
management skills of its managers and supervisors; and to train, motivate and
manage its employees. The Company's failure to effectively manage growth could
have a material adverse effect on the Company's results of operations.
23
25
COMPETITION
Competition in the contract manufacturing industry is intense. The
Company competes against numerous domestic and foreign manufacturers, including
SCI Systems, Inc., Solectron Corporation, Celestica, Inc., and Flextronics
International. In addition, the Company may in the future encounter competition
from other large electronic manufacturers that are selling, or may begin to
sell, contract manufacturing services. Most of the Company's competitors have
international operations and some have substantially greater manufacturing,
financial, research and development and marketing resources than the Company.
The Company also faces competition from the manufacturing operations of its
current and potential customers, which are continually evaluating the merits of
manufacturing products internally versus the advantages of using external
manufacturers. See "Business--Competition."
TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT
The market for the Company's manufacturing services is characterized
by rapidly changing technology and continuing process development. The Company
is continually evaluating the advantages and feasibility of new manufacturing
processes, such as Tape Automated Bonding, chip on board and thin substrate
processes. The Company believes that its future success will depend upon its
ability to develop and market manufacturing services which meet changing
customer needs, maintain technological leadership and successfully anticipate
or respond to technological changes in manufacturing processes on a
cost-effective and timely basis. There can be no assurance that the Company's
process development efforts will be successful. See "Business--Technology" and
"Research and Development."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends to a large extent upon the
efforts and abilities of key managerial and technical employees. Although to
date the Company has been successful in retaining key managerial and technical
employees, the loss of services of certain of these key employees could have a
material adverse effect on the Company. The Company's business will also depend
upon its ability to continue to attract and retain qualified employees. The
Company does not have employment agreements or noncompetition agreements with
its key employees.
ENVIRONMENTAL COMPLIANCE
The Company is subject to a variety of federal, state, local and
foreign environmental regulations relating to the use, storage, discharge and
disposal of hazardous chemicals used during its manufacturing process. Although
the Company is currently in substantial compliance with all material
environmental regulations, any failure by the Company to comply with present
and future regulations could subject it to future liabilities or the suspension
of production. In addition, such regulations could restrict the Company's
ability to expand its facilities or could require the Company to acquire costly
equipment or to incur other significant expense to comply with environmental
regulations. See "Business--Environmental."
CONTROL BY EXISTING STOCKHOLDERS
Officers, directors, principal stockholders and their affiliates own
approximately 43% of the Company's common stock outstanding. Consequently, the
officers, directors, principal stockholders and their affiliates have
significant influence over the election of Jabil's directors, determine the
outcome of most corporate actions requiring stockholder approval, and otherwise
control the business of the Company.
24
26
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, general conditions in the contract manufacturing, communications,
personal computer, peripherals, consumer or automotive industries and other
factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market price for many high technology companies in
particular, and that often are unrelated to operating performance. See "Market
for Registrant's Common Equity and Related Stockholder Matters."
INTEREST RATE SENSITIVITY
The Company's private placement $50,000,000 Senior Notes carry a fixed
interest rate of 6.89%, thus the Company is not subject to market risk from
this debt instrument. The Company pays interest on its outstanding borrowings
under its revolving credit facility at the London Interbank Offering Rate
(LIBOR) in effect at the loan inception date plus a factor of 0.625% to 1.00%
depending on the Company's funded debt to capitalization ratios. See Note 4 of
Notes to Consolidated Financial Statements. An adverse change in the LIBOR
rates could have a material adverse effect on the Company's financial position,
results of operations and cash flows.
INTERNATIONAL EXPANSION
A key element in the Company's strategy is to provide localized
production of the global products produced for OEMs in the major consuming
regions of the European Community and Asia. In order to offer this localized
production, in fiscal 1993 the Company established a manufacturing facility in
Livingston, Scotland, which began volume production in May 1993. The Scotland
facility targets existing European customers, those North American customers
having significant sales in the European Community and potential European
customers who meet the profile discussed above. Additionally, the Company began
volume production in October 1995, in Penang, Malaysia. This location enables
the Company to provide manufacturing services to the Asian market from an Asian
location in order to reduce costs, freight and duties, to provide a more
competitive cost structure for these markets and to serve as a low cost
manufacturing source for new and existing customers. In order to increase
capacity both in the European and in the Asian markets, the Company completed
an expansion of both locations in the early portion of fiscal 1998. See Note 3
of Notes to Consolidated Financial Statements.
As an addition to the North American market, the Company completed
construction of a manufacturing facility in Guadalajara, Mexico and began
volume production early in fiscal 1998. This operation will allow for continued
expansion in North America, while providing a competitive cost structure and
close proximity to the United States market.
In August 1998, the Company acquired manufacturing operations in
Bergamo, Italy as part of its acquisition of certain manufacturing and related
assets comprising the HP acquisition.
The Company's international operations may be subject to a number of
other risks, including fluctuations in the value of currencies, export duties,
import controls and trade barriers (including quotas), restrictions on the
transfer of funds, employee turnover, work stoppages, longer payment cycles,
greater difficulty in accounts receivable collection, and burdens of complying
with a wide variety of foreign laws. In addition, net-operating losses incurred
by foreign operations cannot be utilized by the Company to reduce U.S. income
taxes.
25
27
COMPUTER INTEGRATION
The Company is in the process of installing a new enterprise resource
planning system ("ERP System") that will replace the current Manufacturing
Resource Planning ("MRP") system and financial information systems. This system
is believed to be Year 2000 Compliant. The Company is also identifying and
implementing changes to its other information systems in order to make them
Year 2000 Compliant. While the Company currently expects that the Year 2000
will not pose significant operational problems, delays in the implementation of
new information systems, or a failure to fully identify all Year 2000
dependencies in the Company's systems could result in material adverse
consequences, including disruption of operations, loss of information, and
unanticipated increases in costs. See "Year 2000" Readiness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and
Results of Operations: Factors Affecting Future Results - Limited Availability
of Components, Interest Rate Sensitivity, and International Expansion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain information required by this item is included in Item 6 of
Part II of this Report under the heading "Quarterly Results" and is
incorporated into this item by reference. All other information required by
this item is included in Item 14 of Part IV of this Report and is incorporated
into this item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated by
reference to the information set forth under the caption "Proposal No. 1:
Election of Directors" in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days after the end of the Company's fiscal year ended
August 31, 1998.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled [Information Concerning Solicitation and Voting]
Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference to the information set forth under the captions "Proposal No. 1:
Election of Directors - "Compensation of Directors" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended August 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the information set forth under
the caption "Other Information -- Share Ownership by Principal Stockholders and
Management" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended August 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
is incorporated by reference to the information set forth under the caption
"Certain Transactions" in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended August 31, 1998.
27
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The consolidated financial statements, and
related notes thereto, of the Company with independent auditors'
report thereon are included in Part IV of this report on the pages
indicated by the Index to Consolidated Financial Statements and
Schedule as presented on page 29 of this report.
2. Financial Statement Schedule. The financial statement schedule of
the Company is included in Part IV of this report on the page
indicated by the Index to Consolidated Financial Statements and
Schedule as presented on page 29 of this report. This financial
statement schedule should be read in conjunction with the
consolidated financial statements, and related notes thereto, of
the Company.
Schedules not listed in the Index to Consolidated Financial
Statements and Schedule have been omitted because they are not
applicable, not required, or the information required to be set
forth therein is included in the consolidated financial statements
or notes thereto.
3. Exhibits. See Item 14(c) below.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on
August 18, 1998 reporting the consummation of the acquisition of
certain manufacturing and related assets comprising the "Formatter
Manufacturing Organization" business unit of Hewlett-Packard
Company.
(c) Exhibits. The exhibits listed on the Exhibits Index are filed as part
of, or incorporated by reference into, this Report.
(d) Financial Statement Schedules. See Item 14(a) above.
28
30
JABIL CIRCUIT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Independent Auditors' Report................................................................ 30
Consolidated Financial Statements:
Consolidated Balance Sheets--August 31, 1997 and 1998................................... 31
Consolidated Statements of Operations--Years ended August 31, 1996,
1997, and 1998...................................................................... 32
Consolidated Statements of Stockholders' Equity--Years ended
August 31, 1996, 1997, and 1998..................................................... 33
Consolidated Statements of Cash Flows--Years ended August 31, 1996,
1997, and 1998...................................................................... 34
Notes to Consolidated Financial Statements............................................. 35
Financial Statement Schedule:
Schedule VIII - Valuation and Qualifying Accounts...................................... S-5
29
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
JABIL CIRCUIT, INC:
We have audited the consolidated financial statements of Jabil
Circuit, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with 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 referred to
above present fairly, in all material respects, the financial position of Jabil
Circuit, Inc. and subsidiaries as of August 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the years in the
three-year period ended August 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
-------------------------
St. Petersburg, Florida
October 6, 1998, except as to Note 10 which is as of December 7, 1998.
30
32
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
AUGUST 31,
----------
1997 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 45,457 $ 23,139
Accounts receivable, less allowance for doubtful accounts of $2,690
in 1997 and $3,079 in 1998 (note 7)................................... 116,987 126,276
Inventories (note 2)..................................................... 96,187 123,097
Prepaid expenses and other current assets................................ 776 1,772
Deferred income taxes (note 5)........................................... 6,591 16,095
-------- --------
Total current assets.................................................. 265,998 290,379
Property, plant and equipment, net (note 3)................................ 139,520 224,680
Other assets............................................................... 385 11,644
-------- --------
$405,903 $526,703
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 4).......................... $ 2,475 $ 8,333
Accounts payable......................................................... 125,741 132,601
Accrued expenses......................................................... 34,248 40,460
Income taxes payable..................................................... 6,186 5,325
-------- --------
Total current liabilities............................................. 168,650 186,719
Note Payable and long-term debt, less current installments (note 4)........ 50,000 81,667
Deferred income taxes (note 5)............................................. 3,663 7,724
Deferred grant revenue..................................................... 2,105 2,227
-------- --------
Total liabilities..................................................... 224,418 278,337
-------- --------
Stockholders' equity (notes 1 and 6):
Preferred stock, $.001 par value, authorized 1,000,000 shares; no shares
issued and outstanding................................................ -- --
Common stock, $.001 par value, authorized 60,000,000 shares;
issued and outstanding, 37,000,092 shares in 1997, and
37,268,425 in 1998 ................................................... 37 37
Additional paid-in capital............................................... 61,632 71,580
Retained earnings........................................................ 119,816 176,749
-------- --------
Net stockholders' equity.............................................. 181,485 248,366
-------- --------
Commitments and contingencies (note 9) ....................................
-------- --------
$405,903 $526,703
======== ========
See accompanying notes to consolidated financial statements.
31
33
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEARS ENDED AUGUST 31,
----------------------
1996 1997 1998
-------- -------- ----------
Net revenue (note 7)................................................. $863,285 $978,102 $1,277,374
Cost of revenue...................................................... 790,311 857,245 1,115,647
-------- -------- ----------
Gross profit......................................................... 72,974 120,857 161,727
Operating expenses:
Selling, general and administrative.................................. 25,456 35,886 52,014
Research and development............................................. 2,112 3,117 3,784
Acquisition-related charge (note 10)................................. -- -- 20,825
-------- -------- ----------
Operating income..................................................... 45,406 81,854 85,104
Interest expense, net................................................ 7,333 1,612 3,124
-------- -------- ----------
Income before income taxes........................................... 38,073 80,242 81,980
Income taxes (note 5)................................................ 13,724 27,745 25,047
-------- -------- ----------
Net income........................................................... $ 24,349 $ 52,497 $ 56,933
======== ======== ==========
Basic earnings per share............................................. $ 0.71 $ 1.45 $ 1.53
======== ======== ==========
Diluted earnings per share........................................... $ 0.67 $ 1.37 $ 1.48
======== ======== ==========
Common shares used in the calculations of basic earnings per share... 34,458 36,299 37,125
======== ======== ==========
Common and common equivalent shares used in the calculations of
diluted earnings per share........................................ 36,334 38,340 38,575
======== ======== ==========
See accompanying notes to consolidated financial statements.
32
34
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
COMMON STOCK
------------ UNEARNED
ADDITIONAL COMPENSATION NET
SHARES PAID-IN RETAINED FROM GRANT OF STOCKHOLDERS'
OUTSTANDING PAR VALUE CAPITAL EARNINGS STOCK OPTION EQUITY
----------- --------- ------- -------- ------------ ------
Balance at August 31, 1995 ................... 29,549,814 $ 30 $ 16,703 $ 42,970 $ (108) $ 59,595
Exercise of stock options .................... 129,800 -- 268 -- -- 268
Public offering .............................. 5,750,000 6 39,146 -- -- 39,152
Amortization of unearned
compensation ............................... -- -- -- -- 81 81
Shares issued under Employee
Stock Purchase Plan ........................ 166,832 -- 678 -- -- 678
Tax benefit of options exercised ............. -- -- 111 -- -- 111
Net income .................................. -- -- -- 24,349 -- 24,349
---------- ---- -------- -------- ------ --------
Balance at August 31, 1996 ................... 35,596,446 $ 36 $ 56,906 $ 67,319 $ (27) $124,234
Exercise of stock options .................... 1,265,010 1 2,386 -- -- 2,387
Amortization of unearned
compensation ............................... -- -- -- -- 27 27
Shares issued under Employee
Stock Purchase Plan ........................ 138,636 -- 1,237 -- -- 1,237
Tax benefit of options exercised ............. -- -- 1,103 -- -- 1,103
Net income ................................... -- -- -- 52,497 -- 52,497
---------- ---- -------- -------- ------ --------
Balance at August 31, 1997 ................... 37,000,092 $ 37 $ 61,632 $119,816 $ -- $181,485
Exercise of stock options .................... 192,390 -- 514 -- -- 514
Shares issued under Employee
Stock Purchase Plan ........................ 75,943 -- 2,320 -- -- 2,320
Tax benefit of options exercised ............. -- -- 7,114 -- -- 7,114
Net income ................................... -- -- -- 56,933 -- 56,933
---------- ---- -------- -------- ------ --------
Balance at August 31, 1998 ................... 37,268,425 $ 37 $ 71,580 $176,749 $ -- $248,366
========== ==== ======== ======== ====== ========
See accompanying notes to consolidated financial statements.
33
35
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED AUGUST 31,
----------------------
1996 1997 1998
--------- -------- ---------
Cash flows from operating activities:
Net income .................................................................. $ 24,349 $ 52,497 $ 56,933
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................... 18,210 24,924 35,702
Recognition of grant revenue ................................................ (2,073) (1,705) (827)
Deferred income taxes ....................................................... (2,876) (1,840) (5,443)
Loss (gain) on sale of property ............................................. 168 (275) 160
Acquisition related in-process research and development charge .............. -- -- 6,500
Change in operating assets and liabilities, exclusive of net assets acquired:
Accounts receivable ...................................................... 28,828 (32,148) (9,289)
Inventories .............................................................. 26,789 (31,318) 10,566
Prepaid expenses and other current assets ................................ 361 (436) 2,776
Other assets ............................................................. (1,241) 1,513 (2,828)
Accounts payable and accrued expenses .................................... (584) 56,838 5,059
Income taxes payable ..................................................... 8,133 1,310 (861)
--------- -------- ---------
Net cash provided by operating activities ................................ 100,064 69,360 98,448
--------- -------- ---------
Cash flows from investing activities:
Net cash paid for net assets acquired ....................................... -- -- (64,990)
Acquisition of property, plant and equipment ................................ (27,252) (93,805) (99,782)
Proceeds from sale of property and equipment ................................ 358 368 2,698
--------- -------- ---------
Net cash used in investing activities .................................... (26,894) (93,437) (162,074)
--------- -------- ---------
Cash flows from financing activities:
Increase (decrease) in note payable to bank ................................. (73,000) -- 40,000
Proceeds from long-term debt ................................................ 57,994 -- --
Payments of long-term debt and capital lease obligations .................... (33,234) (8,347) (2,475)
Net proceeds from issuance of common stock .................................. 40,098 3,624 2,834
Proceeds from grants ........................................................ 2,805 938 949
--------- -------- ---------
Net cash provided by (used in) financing activities ...................... (5,337) (3,785) 41,308
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents .......................... 67,833 (27,862) (22,318)
Cash and cash equivalents at beginning of period .............................. 5,486 73,319 45,457
--------- -------- ---------
Cash and cash equivalents at end of period .................................... $ 73,319 $ 45,457 $ 23,139
========= ======== =========
Supplemental disclosure information:
Interest paid ............................................................... $ 7,639 $ 4,707 $ 5,135
========= ======== =========
Income taxes paid, net of refunds received .................................. $ 8,578 $ 29,378 $ 31,351
========= ======== =========
Tax benefit of options exercised ............................................ $ 111 $ 1,103 $ 7,114
========= ======== =========
See accompanying notes to consolidated financial statements.
34
36
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jabil Circuit, Inc. (together with its subsidiaries, herein referred
to as the "Company") is an independent supplier of custom manufacturing services
for circuit board assemblies, subsystems and systems to major original equipment
manufacturers ("OEMs") in the communications, personal computer, peripherals,
consumer and automotive industries. The Company's manufacturing services combine
a high volume, highly automated manufacturing approach with advanced design and
manufacturing technologies. The Company is headquartered in St. Petersburg,
Florida and has manufacturing operations in the United States, Europe, Asia and
Mexico.
Significant accounting policies followed by the Company are as
follows:
A. CONSOLIDATION
The consolidated financial statements include the accounts and
operations of Jabil Circuit, Inc. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions have been
eliminated in preparing the consolidated financial statements.
B. REVENUE RECOGNITION
The Company recognizes revenue typically at the time of product
shipment. Such revenue is recorded net of estimated product return and warranty
costs. At August 31, 1997 and 1998, such estimated amounts for returns and
warranties are not considered material.
C. ACCOUNTING ESTIMATES
Management is required to make estimates and assumptions during the
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles. These estimates and assumptions affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the dates of the consolidated financial statements.
They also affect the reported amount of net income. Actual results could differ
materially from these estimates and assumptions.
D. INVENTORIES
Inventories are stated at the lower of cost (first in, first out (FIFO)
method) or market.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated and
amortized on the straight-line method over the estimated useful lives of the
respective assets, primarily thirty-five years for buildings and three to five
years for other assets. Maintenance and repairs are charged to expense as
incurred.
The Company performs a periodic analysis of the carrying value of its
property and equipment balances to determine that no impairment exists. Such
analysis includes, but is not limited to, a comparison of the undiscounted cash
flows of production related assets in relation to their carrying value. As of
August 31, 1998 the Company is of the opinion that no such impairment exists.
35
37
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of 90 days or less to be cash equivalents for financial statement
purposes. At August 31, 1997 and 1998, cash equivalents totaled approximately
$281,000 and $0, respectively.
G. GRANT REVENUE
The Company has been awarded grants related to the development of its
Scottish operations. Grant funds are earned as certain milestones are met, and
are being amortized over two to five-year periods.
H. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rate is recognized in income in
the period that includes the enactment date of the rate change.
I. PROFIT SHARING AND 401(K) PLAN
The Company has a contributory profit-sharing plan with a 401(k)
feature. Company contributions are at the discretion of the Company's Board of
Directors. To participate, an employee must have completed a 12-month period of
service in which the employee worked at least 1,000 hours. Vesting is immediate.
The Company contributed approximately $1,650,000, $4,483,000, and $6,317,000 for
the years ended August 31, 1996, 1997, and 1998, respectively.
J. FOREIGN CURRENCY TRANSACTIONS
Gains or losses on foreign currency transactions are included in the
determination of net income as the Company considers the United States dollar to
be the functional currency of its foreign operations.
The Company enters into foreign currency contracts in order to mitigate
the impact of certain foreign currency fluctuations. Gains and losses related to
the hedges of firmly committed and anticipated transactions are deferred and
included in the basis of the transaction when it occurs. Foreign currency
exchange contracts outstanding at August 31, 1998 are described further in Note
8.
36
38
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
(Statement 128), Earnings per Share, in the fiscal year ended August 31, 1998.
Under Statement 128, the Company presents two earnings per share (EPS) amounts.
Basic EPS is calculated based on net earnings available to common shareholders
and the weighted-average number of shares outstanding during the reported
period. Diluted EPS includes additional dilution from potential common stock,
such as stock issuable pursuant to the exercise of stock options outstanding.
Previously reported earnings per share amounts have been restated to conform to
the Statement 128 requirements.
Fiscal Year Ended
--------------------------------------------------
August 31, August 31, August 31,
1996 1997 1998
------------- -------------- --------------
(In thousands except per share data)
Numerator:
Net income $24,349 $52,497 $56,933
======= ======= =======
Denominator:
Weighted average shares outstanding - Basic 34,458 36,299 37,125
Employee stock options and other 1,876 2,041 1,450
------- ------- -------
Weighted average shares outstanding - Diluted 36,334 38,340 38,575
======= ======= =======
Earnings per common share:
Basic $ 0.71 $ 1.45 $ 1.53
======= ======= =======
Diluted $ 0.67 $ 1.37 $ 1.48
======= ======= =======
For the years ended August 31, 1996, 1997 and 1998, options to purchase
11,600, 106,000, and 40,000 shares of common stock were outstanding during the
period but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares, and therefore, the effect would be anti-dilutive.
L. STOCK BASED COMPENSATION
Prior to September 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
granting of stock options only if the current market price of the underlying
stock exceeded the exercise price. Effective September 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation (Statement 123), which permits entities to recognize as
expense over the vesting period the fair value of all stock based awards on the
date of the grant. Alternatively, Statement 123 allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma net income per share disclosures for employee stock options made in
fiscal 1996 and future years as if the fair value based method defined in
Statement 123
37
39
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure required by Statement
123.
M. STOCK SPLIT
On June 17, 1997, the Company's Board of Directors approved a
two-for-one stock split of the Company's common stock, effected in the form of a
100% stock dividend to holders of record on July 8, 1997. Financial information
in the accompanying consolidated financial statements and notes has been
adjusted to reflect the impact of the common stock split for all periods
presented.
N. INTANGIBLE ASSETS
Intangible assets are comprised of goodwill and other intellectual
property. Intangible assets, aggregating approximately $11.2 million as of
August 31, 1998, are classified as a component of other assets in the
accompanying consolidated balance sheets. Such amounts are amortized over a
ten-year period.
The Company performs a periodic analysis of the carrying value of its
intangible assets in order to determine that no instances of impairment exist.
Such an analysis includes a comparison of the undiscounted future cash flows of
related assets acquired in relation to the carrying value of recorded
intangible assets. As of August 31, 1998, the Company is of the opinion that no
such impairment exists.
2. INVENTORIES
Inventories consist of the following (in thousands):
AUGUST 31,
----------
1997 1998
---- ----
Raw materials...................................................... $75,433 $101,319
Work in process.................................................... 15,160 15,955
Finished goods..................................................... 5,594 5,823
------- --------
$96,187 $123,097
======= ========
38
40
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
AUGUST 31,
----------
1997 1998
---- ----
Land and improvements....................................................... $ 9,232 $ 13,679
Buildings................................................................... 23,336 58,382
Leasehold improvements...................................................... 3,682 4,988
Machinery and equipment..................................................... 123,294 186,747
Furniture, fixtures and office equipment.................................... 7,225 9,990
Computer equipment.......................................................... 15,062 23,039
Transportation equipment.................................................... 3,937 3,884
Construction in progress.................................................... 30,743 23,627
-------- --------
216,511 324,336
Less accumulated depreciation and amortization.............................. 76,991 99,656
-------- --------
$139,520 $224,680
======== ========
During the year ended August 31, 1998, the Company completed new
manufacturing facilities for its Scotland and Malaysia operations to replace
its existing leased facilities in those locations, as well as a new greenfield
facility in Guadalajara, Mexico. During the years ended August 31, 1997 and
1998, the Company capitalized approximately $120,000 and $83,000, respectively,
in interest related to the constructed facilities.
Maintenance and repairs expense was approximately $4,320,000,
$5,229,000, and $9,341,000 for the years ended August 31, 1996, 1997, and 1998,
respectively.
39
41
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable and Long-term debt consists of the following (in
thousands):
AUGUST 31,
----------
1997 1998
---- ----
Term loans(a)...................................................................... $ 50,000 $ 50,000
Borrowings under revolving credit facility(b)...................................... -- 40,000
Mortgage, repaid in 1998........................................................... 2,475 --
-------- --------
Total notes payable and long-term debt............................................. 52,475 90,000
Less current installments of long-term debt........................................ 2,475 8,333
-------- --------
Notes Payable and long-term debt, less current installments........................ $ 50,000 $ 81,667
======== ========
(a) In May 1996, the Company completed a private placement of $50,000,000
Senior Notes due 2004. The Notes have a fixed interest rate of 6.89%,
with interest payable on a semi-annual basis. Principal is payable in
six equal annual installments beginning May 30, 1999.
(b) In August 1998, the Company renegotiated its unsecured line of credit
facility and established a $225 million unsecured revolving credit
facility with a syndicate of banks ("Revolver"). Under the terms of the
Revolver, borrowings can be made under either floating rate loans or
Eurodollar rate loans. The Company pays interest on outstanding
floating rate loans at the banks' prime rate. The Company pays interest
on outstanding Eurodollar loans at the London Interbank Offer Rate
(LIBOR) in effect at the loan inception date plus a factor of .625% to
1.00% depending on the Company's funded debt to total capitalization
ratios. The Company pays a commitment fee on the unused portion of the
Revolver at .20% to .25% depending on the Company's funded debt to
total capitalization ratios. The renegotiated Revolver expires on
August 3, 2001 and outstanding borrowings are then due and payable. As
of August 31, 1998, there were $40 million in borrowings outstanding
under the Revolver and $185 million of the facility was available. As
of August 31, 1997, there were no borrowings under the previous $100
million revolving credit facility.
The agreements related to the obligations described above contain a number of
restrictive financial and/or other covenants. In all cases, the Company was in
compliance with the respective covenants as of August 31, 1998.
Aggregate annual maturities for notes payable and long-term debt are
as follows (in thousands):
AMOUNT
------
1999............................................................................... $ 8,333
2000............................................................................... 8,333
2001............................................................................... 48,333
2002............................................................................... 8,333
2003............................................................................... 8,333
2004............................................................................... 8,335
-------
$90,000
=======
40
42
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Income tax expense amounted to $13,724,000, $27,745,000, and
$25,047,000 for the years ended August 31, 1996, 1997 and 1998, respectively (an
effective rate of 36%, 35%, and 31%, respectively). The actual expense differs
from the "expected" tax expense (computed by applying the U.S. federal corporate
tax rate of 35% to earnings before income taxes) as follows (in thousands):
YEARS ENDED AUGUST 31,
----------------------
1996 1997 1998
---- ---- ----
Computed "expected" tax expense.......................................... $13,326 $28,085 $28,693
State taxes, net of Federal benefit...................................... 698 1,352 895
Utilization of net operating loss from Scottish subsidiary............... (389) -- --
Income of Malaysian subsidiary........................................... -- (2,706) (5,957)
Other, net............................................................... 89 1,014 1,416
------- ------- -------
$13,724 $27,745 $25,047
======= ======= =======
The Company's Malaysian subsidiary has been granted "pioneer" tax
status for the five-year period commencing November 1, 1995. This status allows
tax-free treatment by the Malaysian government for the subsidiary's income
through October 30, 2000. Malaysia's statutory income tax rate is 30%. The
Malaysian subsidiary generated income during the years ended August 31, 1997 and
1998, resulting in a tax holiday of approximately $2,320,000 ($0.06 per share)
and $5,106,000 ($0.13 per share), respectively. The Company intends to
indefinitely re-invest income from all of its foreign subsidiaries. The
aggregate undistributed earnings of the Company's foreign subsidiaries for which
no deferred income taxes have been recorded was approximately $7,426,000 as of
August 31, 1998.
The components of income tax expense are (in thousands):
CURRENT DEFERRED TOTAL
------- -------- -----
1996:
Federal................................................................ $14,496 $(2,360) $12,136
State.................................................................. 1,280 (204) 1,076
Foreign................................................................ 824 (312) 512
------- ------- -------
$16,600 $(2,876) $13,724
======= ======= =======
1997:
Federal................................................................ $24,155 $(1,800) $22,355
State.................................................................. 2,236 (156) 2,080
Foreign................................................................ 3,194 116 3,310
------- ------- -------
$29,585 $(1,840) $27,745
======= ======== =======
1998:
Federal................................................................ $26,682 $(4,001) $22,681
State.................................................................. 1,770 (449) 1,321
Foreign................................................................ 2,038 (993) 1,045
------- ------- -------
$30,490 $(5,443) $25,047
======= ======== =======
41
43
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
AUGUST 31,
----------
1997 1998
---- ----
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts........... $1,015 $ 1,171
Grant receivable.................................................................. 707 1,397
Inventories, principally due to reserves and additional costs
inventoried for tax purposes pursuant to the Tax Reform Act of 1986............ 2,211 5,365
Compensated absences, principally due to accrual for financial reporting purposes... 878 839
Accrued expenses, principally due to deferrals for financial reporting purposes..... 1,457 3,023
Intangible assets................................................................... -- 3,376
Other............................................................................. 490 1,168
------ -------
Total gross deferred tax assets................................................ 6,758 16,339
Less valuation allowance....................................................... 167 244
------ -------
Net deferred tax assets........................................................ $6,591 $16,095
====== =======
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in
depreciation and amortization.................................................. $3,663 $ 7,724
====== =======
Based on the Company's historical operating income, management believes
that it is more likely than not that the Company will realize the benefit of its
net deferred tax assets.
42
44
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
A. PUBLIC OFFERING
The Company completed a public offering of 8,050,000 common shares on
November 3, 1995 in which the Company sold 5,750,000 shares (including an
over-allotment of 750,000 shares) and certain selling stockholders sold
2,300,000 shares. Net proceeds to the Company (net of underwriters' discounts
and commissions and other offering costs of approximately $350,000) were
approximately $39,152,000.
B. STOCK OPTION PLANS
As of August 31, 1998, options to purchase a total of 1,394,400 shares
were outstanding under the 1983 and 1989 stock option plans. The Board of
Directors terminated these plans in November 1992, and no additional options
may be issued thereunder. The exercise price of the outstanding options under
these plans is equal to fair market value, as determined by the Company, on the
date of grant.
The Company's 1992 Stock Option Plan (the "1992 Plan") provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and for the granting of non-statutory
stock options to employees and consultants of the Company. The 1992 Plan was
adopted by the Board of Directors in November 1992 and approved by the
stockholders in December 1992. A total of 2,610,000 shares of common stock have
been reserved for issuance under the 1992 Plan, of which 800,000 were authorized
during the year ended August 31, 1998. As of August 31, 1998, options to
purchase 926,060 shares are outstanding under the 1992 Plan.
The exercise price of all incentive stock options granted under the
1992 Plan is to be at least equal to the fair market value of shares of common
stock on the date of grant. With respect to any participant who owns stock
representing more than 10% of the voting power of all classes of stock of the
Company, the exercise price of any stock option granted is to equal at least
110% of the fair market value on the grant date and the maximum term of the
option may not exceed five years. The term of all other options under the 1992
Plan may not exceed ten years.
43
45
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
B. STOCK OPTION PLANS (CONTINUED)
The following table summarizes option activity from September 1, 1995
through August 31, 1998:
OPTIONS OUTSTANDING
-------------------
SHARES WEIGHTED
AVAILABLE AVERAGE AGGREGATE
FOR GRANT SHARES OPTION PRICE VALUE
--------- ------ ------------ -----
Balance at August 31, 1995 645,960 3,258,880 $ 1.52 $ 4,951,000
Options granted (364,000) 364,000 4.21 1,533,000
Options cancelled 37,080 (37,080) 2.81 (104,000)
Options exercised -- (129,800) 2.07 (268,000)
-------- ---------- ------ -----------
Balance at August 31, 1996 319,040 3,456,000 $ 1.77 $ 6,112,000
Options granted (148,000) 148,000 25.23 3,734,000
Options cancelled 4,640 (4,640) 2.59 (12,000)
Options exercised -- (1,265,010) 1.87 (2,369,000)
-------- ---------- ------ -----------
Balance at August 31, 1997 175,680 2,334,350 $ 3.20 $ 7,465,000
Options authorized 800,000 -- -- --
Options granted (178,500) 178,500 37.21 6,642,000
Options exercised -- (192,390) 2.67 (514,000)
-------- ---------- ----- -----------
Balance at August 31, 1998 797,180 2,320,460 $ 5.85 $13,593,000
======== ========== ====== ===========
At August 31, 1998, options for 1,826,860 shares were exercisable.
44
46
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
B. STOCK OPTION PLANS (CONTINUED)
The range of exercise prices, shares, weighted average contractual life and
exercise price for the options outstanding as of August 31, 1998 are presented
below:
Weighted- Weighted-
Range of Average Average
Exercise Prices Shares Contractual Life Exercise Price
--------------- ------ ---------------- --------------
$ 0.87 1,394,400 3 $ 0.87
2.50 - 7.44 639,600 6 3.52
22.00 - 61.69 286,460 10 35.91
============== --------- == ------
$ 0.87 - 61.69 2,320,460 5 $ 5.85
============== ========= == ======
The range of exercise prices, shares and weighted average exercise
price of the options exercisable at August 31, 1998 are presented below:
Weighted-
Range of Exercise Shares Average
Prices Exercisable Exercise Price
------------------ ----------- --------------
$ 0.87 1,394,400 $ 0.87
2.50 - 7.44 390,180 3.32
22.00 - 61.69 42,280 34.10
============== --------- ======
$ 0.87 - 61.69 1,826,860 $ 2.16
============== ========= ======
The per-share weighted-average fair value of stock options granted
during 1997 and 1998 was $29.63 and $22.45, respectively, on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 0%, risk-free
interest rate of 6.2%, expected volatility of 76%, and an expected life of 5
years; 1998 - Expected dividend yield of 0%, risk-free interest rate of 5.6%,
expected volatility of 78% and an expected life of 5 years.
45
47
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
C. PRO FORMA RESULTS
The Company applies APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Additionally, no compensation
costs are reflected for the discount related to shares granted to employees
under the 1992 Employee Stock Purchase Plan. Had the Company determined
compensation cost based on Statement 123, the Company's net income would have
been as follows:
1997 1998
----------------- -----------------
Net Diluted Net Diluted
Income EPS Income EPS
------ --- ------ ---
As Reported $52,497 $ 1.37 $56,933 $ 1.48
Statement 123 Compensation
(Net of tax) (262) (0.01) (1,580) (0.04)
Pro-forma disclosure $52,235 $ 1.36 $55,353 $ 1.44
As discussed in note 1 (l) the disclosure presented above represents
the estimated fair value of stock options granted in fiscal 1996 and subsequent
years for which attribution is attributable to fiscal 1997 and 1998. Such
disclosure is not necessarily indicative of the fair value of stock options that
could be granted by the Company in future fiscal years or of all options
currently outstanding.
D. STOCK PURCHASE PLAN
The Company's 1992 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors in November 1992 and approved by the
stockholders in December 1992. A total of 1,205,000 shares of common stock have
been reserved for issuance under the Purchase Plan. The Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code.
Employees are eligible to participate after one year of employment
with the Company. The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation, as defined, at a price equal to 85% of the fair market
value of the Common Stock at the beginning or end of the offering period,
whichever is lower. Unless terminated sooner, the Purchase Plan will terminate
ten years from its effective date. As of August 31, 1998, a total of 851,533
shares had been issued under the Purchase Plan.
The per-share weighted-average fair value of stock issued to employees
in 1998 under the Company's 1992 Employee Stock Purchase Plan was $13.76 using
the Black-Scholes option-pricing model with the identical assumptions as those
listed for stock options granted during 1998.
46
48
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONCENTRATION OF RISK AND GEOGRAPHIC DATA
A. CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses.
Sales of the Company's products are concentrated among specific
customers. Sales to the following customers, expressed as a percentage of
consolidated net revenue, and the percentage of accounts receivable for each
customer, were as follows:
PERCENTAGE OF PERCENTAGE OF
NET REVENUE ACCOUNTS RECEIVABLE
YEAR ENDED AUGUST 31, AUGUST 31, AUGUST 31,
--------------------- ---------- ----------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
Hewlett-Packard Company.................... 20% 15% 10% 13% 28%
NEC Technologies, Inc...................... 15% * * * *
Quantum Corporation........................ 23% 10% * 13% *
3Com....................................... 11% 21% 18% 14% *
Cisco Systems, Inc......................... 10% 20% 20% * *
* Amount was less than 10% of total
47
49
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONCENTRATION OF RISK AND GEOGRAPHIC DATA (CONTINUED)
B. GEOGRAPHIC DATA
The Company has defined the three geographic regions for the segment
in which it operates: North America (including Mexico), Europe and Asia. Sales
to unaffiliated customers are based on the location of the Company's operating
entity. Corporate assets include cash and cash equivalents, intangibles, and
deferred income taxes. Transfers between regions are not considered material.
The following data does not consider fully the extent of interrelated activities
between the regions including product development, manufacturing, engineering,
marketing and corporate management. Accordingly, the following amounts are not
necessarily indicative of the operating contribution of the geographic regions.
The following table sets forth information concerning these geographic segments
(in thousands):
YEAR ENDED
AUGUST 31,
----------
Sales to Unaffiliated Customers: 1996 1997 1998
---- ---- ----
North America.............................................. $595,941 $682,333 $911,419
Europe..................................................... 161,195 207,850 222,524
Asia....................................................... 106,149 87,919 143,431
Export Sales................................................. 88,150 2,494 1,169
Operating Income:
North America.............................................. 40,811 62,770 62,393
Europe..................................................... 3,244 11,381 5,831
Asia....................................................... 1,351 7,703 16,880
Identifiable Assets:
North America, including corporate......................... 239,582 285,440 376,549
Europe..................................................... 48,022 74,698 99,304
Asia....................................................... 12,336 45,765 50,850
Foreign source revenue for the years ended August 31, 1996, 1997, and
1998 was approximately 31%, 30%, and 31%, respectively.
48
50
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FOREIGN CURRENCY EXCHANGE CONTRACTS
The purpose of the Company's foreign currency hedging activity is to
protect the Company from the risk that the eventual dollar net cash flows
resulting from the sale and purchase of products in foreign currencies will be
adversely affected by changes in the exchange rates. It is the Company's policy
to utilize derivative financial instruments to reduce foreign exchange risks
where internal netting strategies cannot be effectively employed. The Company
does not hold or issue financial instruments for trading purposes. Fluctuations
in the value of hedging instruments are offset by fluctuations in the underlying
exposures being hedged, and deferred gains and losses on these contracts are
recognized when the future purchases and sales being hedged are realized.
The Company had approximately $5 million of net foreign currency exchange
contracts outstanding at August 31, 1998 related to the United Kingdom, with
$26 million outstanding at August 31, 1997 related to the United Kingdom and
Malaysia. Unrealized gains and losses on these contracts were not material.
9. COMMITMENTS AND CONTINGENCIES
A. LEASE AGREEMENTS
The Company leases certain facilities and computer services under
non-cancelable operating leases. The future minimum lease payments under
noncancelable operating leases outstanding August 31, 1998 are as follows (in
thousands):
FISCAL YEAR ENDING AUGUST 31,
-----------------------------
1999............................................... $ 12,593
2000............................................... 11,871
2001............................................... 4,393
2002............................................... 294
2003............................................... 74
Thereafter......................................... --
--------
Total minimum lease payments....................... $ 29,225
========
Total rent expense for operating leases was approximately $3,354,000,
$3,868,000, and $5,311,424 for the years ended August 31, 1996, 1997, and 1998,
respectively.
B. LITIGATION
The Company is party to certain lawsuits in the ordinary course of
business. Management does not believe that these proceedings individually or in
the aggregate, will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
49
51
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACQUISITION
On August 3, 1998 the Company acquired certain assets (primarily raw
material inventory and property, plant and equipment) relating to the LaserJet
Formatter Manufacturing Organization business unit of Hewlett-Packard Company
located in Boise, Idaho, and Bergamo, Italy. The acquisition price was
approximately $80 million and was accounted for under the purchase method of
accounting. The acquisition resulted in goodwill and other intangible assets of
approximately $11.2 million, which is being amortized on a straight-line basis
over ten years.
Simultaneously, the Company entered into a manufacturing arrangement
to continue to produce the Laserjet circuit board assemblies being produced by
the Hewlett-Packard operations in Boise and Bergamo.
In conjunction with the acquisition, the Company recorded an
acquisition-related charge of $20.8 million consisting of an in-process
technology write-off of $6.5 million, work force related expenses of $10.0
million, and $4.3 million of other expenses.
11. NEW ACCOUNTING PRONOUNCEMENTS
During 1997 and 1998, the Financial Accounting Standards Board
("FASB") issued several Statements of Financial Accounting Standards
(Statements) which are pending implementation by the Company. They are as
follows:
Statement 130 - Reporting Comprehensive Income. Statement 130 establishes
standards for reporting comprehensive income. The Statement defines
comprehensive income as the change in equity of an enterprise except those
resulting from shareholder transactions. All components of comprehensive income
are required to be reported in a new financial statement that is displayed with
equal prominence as existing financial statements. The Company will be required
to adopt this Statement September 1, 1998. As the Statement addresses reporting
and presentation issues only, there will be no impact on earnings from its
adoption.
Statement 131 - Disclosures about Segments of an Enterprise and Related
Information. Statement 131 establishes standards for related disclosures about
the products and services, geographic areas, and major customers of an
enterprise The Company will be required to adopt this Statement for financial
statements for the fiscal year beginning September 1, 1998. As this Statement
addresses reporting and disclosure issues only, there will be no impact on
earnings from its adoption. The Company is currently evaluating this Statement
and has yet to form an opinion on whether segment disclosure presented herein
will change significantly upon the adoption of Statement 131.
Statement 133 - Accounting for Derivative Instruments and Hedging Activities.
Statement 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. The Company is currently evaluating this Statement and has
yet to form an opinion on whether its adoption will have any significant impact
on the Company's consolidated financial statements. The Company will be required
to implement Statement 133 for its fiscal year ending August 31, 2000.
Statement of Position 98-5 Reporting on the Costs of Start Up Activities. SOP
98-5 establishes standards on the financial reporting of start-up costs and
organization costs. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. As the
Company has historically made a practice of expensing costs related to both the
establishment of greenfield manufacturing facilities and the set-up of
production lines as such costs are incurred, it does not anticipate that the
adoption of SOP 98-5 will have any material impact on its consolidated financial
statements.
50
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 7th day of
December, 1998.
JABIL CIRCUIT, INC.
By: /s/ THOMAS A. SANSONE
------------------------------------
Date: December 7, 1998
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Thomas A. Sansone and Ronald J.
Rapp and each of them, jointly and severally, his attorneys-in-fact, each with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, 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 said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ WILLIAM D. MOREAN Chief Executive Officer December 7, 1998
----------------------- (Principal Executive Officer)
William D. Morean and Chairman of the Board
By: /s/ THOMAS A. SANSONE President and Director December 7, 1998
-----------------------
Thomas A. Sansone
By: /s/ CHRIS A. LEWIS Chief Financial Officer December 7, 1998
----------------------- (Principal Financial and Accounting
Chris A. Lewis Officer)
By: /s/ RONALD J. RAPP Executive Vice President - Operations December 7, 1998
----------------------- and Director
Ronald J. Rapp
By: /s/ LAWRENCE J. MURPHY Director December 7, 1998
-----------------------
Lawrence J. Murphy
By: /s/ MEL S. LAVITT Director December 7, 1998
-----------------------
Mel S. Lavitt
By: /s/ STEVEN A. RAYMUND Director December 7, 1998
-----------------------
Steven A. Raymund
By: /s/ FRANK NEWMAN Director December 7, 1998
-----------------------
Frank Newman
51
53
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(1) -- Registrant's Certificate of Incorporation, as amended.
3.2(1) -- Registrant's Bylaws.
4.1(2) -- Form of Certificate for Shares of Registrant's Common Stock.
4.2(1) -- Form of Agreement and Plan of Merger dated February 27, 1992 between Jabil
Circuit Co., Inc., a Michigan corporation, and Jabil Circuit, Inc., a Delaware
corporation.
10.1(1)(5) -- 1983 Stock Option Plan and forms of agreement used thereunder.
10.2(1)(5) -- 1989 Non-Qualified Stock Option Plan and forms of agreement used
Thereunder.
10.3(1)(5) -- 1992 Stock Option Plan and forms of agreement used thereunder.
10.4(1)(5) -- 1992 Employee Stock Purchase Plan and forms of agreement used thereunder.
10.5(1)(5) -- Restated cash or deferred profit sharing plan under section 401(k).
10.6(1)(5) -- Form of Indemnification Agreement between Registrant and its officers
and Directors.
10.7(1) -- Lease for 2220 Lundy Avenue, San Jose, California, between Registrant and
Lundy Associates dated April 1, 1992.
10.8(1) -- Letter Agreement dated November 27, 1992 between Registrant and Scottish Office
Industry Department relating to grant to establish Scottish facility.
10.9(6)(5) -- Amendment to 1989 Non-Qualified Stock Option Plan.
10.10(3) -- Renewal dated March 21, 1994 of Lease for 2220 Lundy Avenue, San Jose,
California, between Registrant and Lundy Associates.
10.11(4) -- Lease Agreement dated October 1, 1997 between registrant and Charrington Estates.
10.12(4) -- Lease Agreement dated October 30, 1997 between registrant and Teachers Insurance
and Annuity Association.
10.13 -- Lease Agreement dated May 12, 1998 between registrant and Lincoln-RECP Great
Oaks OPCO. LLC.
10.14 -- Amended and Restated Loan Agreement dated as of August 3, 1998 between
registrant and certain banks and the First National Bank Of Chicago as agent for
banks.
21.1 -- List of Subsidiaries.
23.1 -- Independent Auditors' Consent.
24.1 -- Power of Attorney (See Page 51).
27.1 -- Financial Data Schedule.
- ----------
(1) Incorporated by reference to the Registration Statement on Form S-1 filed by
the Registrant on March 3, 1993 (File No. 33-58974).
(2) Incorporated by reference to exhibit Amendment No. 1 to the Registration
Statement on Form S-1 filed by the Registrant on March 17, 1993 (File No.
33-58974).
(3) Incorporated by reference to exhibit the Registrant's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1994.
(4) Incorporated by reference to exhibit the Registrant's Annual Report on Form
10-K for the fiscal year ended August 31, 1997.
(5) Indicates management compensatory plan, contract or arrangement.
54
SCHEDULE VIII
JABIL CIRCUIT, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
OF PERIOD EXPENSE WRITE-OFFS PERIOD
--------- ------- ---------- ------
YEAR ENDED AUGUST 31, 1996:
Allowance for uncollectible accounts receivable... $ 669 $ 501 -- $1,170
Reserve for excess and obsolete inventory......... $ 973 $5,178 $3,850 $2,301
====== ====== ====== ======
YEAR ENDED AUGUST 31, 1997:
Allowance for uncollectible accounts receivable... $1,170 $1,520 -- $2,690
Reserve for excess and obsolete inventory......... $2,301 $3,690 $1,248 $4,743
====== ====== ====== ======
YEAR ENDED AUGUST 31, 1998:
Allowance for uncollectible accounts receivable... $2,690 $1,789 $1,400 $3,079
Reserve for excess and obsolete inventory......... $4,743 $7,026 $3,432 $8,337
====== ====== ====== ======
S-5