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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] 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: 0-23354
FLEXTRONICS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
SINGAPORE NOT APPLICABLE
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
514 CHAI CHEE LANE #04-13, 469029
BEDOK INDUSTRIAL ESTATE, SINGAPORE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(65) 449-5255
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
ORDINARY SHARES, S$0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes No [X]
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 or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 1997 was approximately $371 million.
As of June 30, 1997, registrant had outstanding 13,752,293 Ordinary Shares.
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THE COMPANY HAS REVISED ITS ACCOUNTING FOR ITS FEBRUARY 1996 ACQUISITION OF
ASTRON GROUP LIMITED, AND IS ENGAGED IN ONGOING DISCUSSIONS WITH THE STAFF OF
THE SECURITIES AND EXCHANGE COMMISSION CONCERNING THIS REVISED ACCOUNTING.
BECAUSE THESE DISCUSSIONS ARE CONTINUING, THE COMPANY'S ACCOUNTING FOR THIS
ACQUISITION, AND RELATED DISCLOSURES, ARE SUBJECT TO MODIFICATION.
Except for historical information contained herein, the matters discussed
in this Form 10-K are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. In this Report, the words "expects,"
"anticipates," "believes," "intends" and similar expressions identify
forward-looking statements, which speak only as of the date hereof. These
forward-looking statements are subject to certain risks and uncertainties,
including, without limitation, those discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Operating Results," that could
cause results to differ materially from historical results or those anticipated.
The Company undertakes no obligation to publicly disclose any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-K with the Securities and
Exchange Commission. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission, including its
Form 10-Qs and 8-Ks, that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
PART I
ITEM 1. BUSINESS.
GENERAL
Flextronics International Ltd. ("Flextronics" or the "Company") is a
provider of advanced contract manufacturing services to original equipment
manufacturers ("OEMs") in the communications, computer, consumer electronics and
medical device industries. Flextronics offers a full range of services including
product design, printed circuit board ("PCB") fabrication and assembly,
materials procurement, inventory management, final system assembly and testing,
packaging and distribution. The components, subassemblies and finished products
manufactured by Flextronics incorporate advanced interconnect, miniaturization
and packaging technologies, such as surface mount ("SMT"), chip-on-board
("COB"), ball grid array ("BGA") and miniaturized gold-plated PCB technology.
The Company's strategy is to use its global manufacturing capabilities and
advanced technological expertise to provide its customers with a complete
manufacturing solution, highly responsive and flexible service, accelerated time
to market and reduced production costs. The Company targets leading OEMs, in
growing vertical markets, with which it believes it can establish long-term
relationships, and serves its customers on a global basis from its strategically
located facilities in North America, East Asia and Northern Europe. The
Company's customers include Advanced Fibre Communications, Ascend
Communications, Braun/ThermoScan, Cisco Systems, Diebold, Ericsson, Harris DTS,
Lifescan (a Johnson & Johnson company), Microsoft, Philips and U.S. Robotics.
On March 27, 1997, the Company acquired from Ericsson Business Networks AB
("Ericsson") two manufacturing facilities (the "Karlskrona Facilities") located
in Karlskrona, Sweden and related inventory, equipment and other assets for
approximately $82.4 million in cash. The Karlskrona Facilities include a 220,000
square foot facility and a 110,000 square foot facility, each of which is ISO
9002 certified. The Company is currently utilizing the Karlskrona Facilities to
assemble and test PCBs, network switches, cordless base stations and other
components for business communications systems sold by Ericsson pursuant to a
multi-year purchase agreement (the "Purchase Agreement"). The Company intends to
also use the Karlskrona Facilities to offer advanced contract manufacturing
services to other European OEMs in the telecommunications and other industries,
which the Company believes are beginning to outsource the manufacture of
significant product lines. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Affecting
Future Operating Results -- Risks of Karlskrona Acquisition."
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Since 1994, the Company has substantially expanded its manufacturing
capacity, technological capabilities and service offerings, both through
acquisitions and internal growth. In fiscal 1994, the Company added U.S.
manufacturing capabilities by acquiring Relevant Industries, Inc. ("Relevant"),
a final assembly contract manufacturer located in San Jose, California. In
fiscal 1995, the Company acquired nCHIP, Inc. ("nCHIP"), a designer and
manufacturer of multichip modules ("MCMs"); added Northern European
manufacturing capabilities through the acquisition of Assembly & Automation
(Electronics) Ltd. ("A&A"), a contract manufacturer located in the United
Kingdom; and opened new facilities in China and Texas. In fiscal 1996, the
Company obtained miniature gold-finished PCB fabrication capabilities and
expanded its presence in China by acquiring Astron Group Ltd. ("Astron"). In
fiscal 1997, the Company expanded its advanced PCB design capabilities by
acquiring Fine Line Printed Circuit Design, Inc. ("Fine Line"); expanded its
presence in China by investing in FICO Investment Holding Limited ("FICO"), a
producer of injection molded plastics for Asian electronics companies; opened an
additional manufacturing facility in San Jose, California; closed its plant in
Texas; and downsized manufacturing operations in Singapore. The Company has
recently substantially expanded its manufacturing operations by expanding its
integrated campus in Doumen, China, constructing a new manufacturing campus in
Guadalajara, Mexico and adding facilities in San Jose, California.
INDUSTRY OVERVIEW
Many OEMs in the electronics industry are increasingly utilizing contract
manufacturing services in their business and manufacturing strategies, and are
seeking to outsource a broad range of manufacturing and related engineering
services. Outsourcing allows OEMs to take advantage of the manufacturing
expertise and capital investments of contract manufacturers, thereby enabling
OEMs to concentrate on their core competencies. According to an independent
industry study, these trends and overall growth in OEMs' markets have resulted
in a compound annual growth rate in the electronics contract manufacturing
industry of over 30.0% from 1992 through 1996, to approximately $60 billion.
According to this study, the industry is expected to grow to approximately $110
billion by 1999. OEMs utilize contract manufacturers to:
Reduce Production Costs. The competitive environment for OEMs requires
that they achieve a low-cost manufacturing solution, and that they quickly
reduce production costs for new products. Due to their established
manufacturing expertise and infrastructure, contract manufacturers can
frequently provide OEMs with higher levels of responsiveness, increased
flexibility and reduced overall production costs than in-house
manufacturing operations. The production scale, infrastructure, purchasing
volume and expertise of leading contract manufacturers can further enable
OEMs to reduce costs earlier in the product life cycle.
Accelerate Time to Market. Rapid technological advances and shorter
product life cycles require OEMs to reduce the time required to bring a
product to market in order to remain competitive. By providing engineering
services, established infrastructure and advanced manufacturing expertise,
contract manufacturers can help OEMs shorten their product introduction
cycles.
Access Advanced Manufacturing and Design Capabilities. As electronic
products have become smaller and more technologically advanced,
manufacturing processes have become more automated and complex, making it
increasingly difficult for OEMs to maintain the design and manufacturing
expertise necessary to remain competitive. Contract manufacturers enable
OEMs to gain access to advanced manufacturing facilities, packaging
technologies and design expertise.
Focus Resources. Because the electronics industry is experiencing
increased competition and technological change, many OEMs are focusing
their resources on activities and technologies where they add the greatest
value. Contract manufacturers that offer comprehensive services allow OEMs
to focus on their core competencies.
Reduce Investment. As electronic products have become more
technologically advanced, internal manufacturing has required significantly
increased investment for working capital, capital equipment, labor, systems
and infrastructure. Contract manufacturers enable OEMs to gain access to
advanced, high
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volume manufacturing capabilities without making the capital investments
required for internal production.
Improve Inventory Management and Purchasing Power. OEMs are faced with
increasing challenges in planning, procuring and managing their inventories
efficiently due to frequent design changes, short product life cycles,
large investments in electronic components, component price fluctuations
and the need to achieve economies of scale in materials procurement.
Contract manufacturers' inventory management expertise and volume
procurement capabilities can reduce OEM production and inventory costs,
helping them respond to competitive pressures and increase their return on
assets.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign
markets. Contract manufacturers with worldwide capabilities are able to
offer such OEMs a variety of options on manufacturing locations to better
address their objectives regarding costs, shipment location, frequency of
interaction with manufacturing specialists and local content requirements
of end-market countries. In addition, OEMs in Europe and other
international markets are increasingly recognizing the benefits of
outsourcing.
STRATEGY
The Company's objective is to enhance its position as a provider of
advanced contract manufacturing and design services to OEMs worldwide. The
Company's strategy to meet this objective includes the following key elements:
Leverage Global Presence. The Company has established a manufacturing
presence in the world's major electronics markets -- Asia, North America
and Europe -- in order to serve the increasing outsourcing needs of
regional OEMs and to provide the global, large scale capabilities required
by larger OEMs. The Company has recently substantially increased its
overall capacity by acquiring the Karlskrona Facilities in Sweden, and is
continuing to expand by developing manufacturing campuses in China and
Mexico and expanding its operations in San Jose, California. By increasing
the scale and the scope of the services offered in each site, the Company
believes that it can better address the needs of leading OEMs that are
increasingly seeking to outsource high volume production of advanced
products.
Provide a Complete Manufacturing Solution. The Company believes that
OEMs are increasingly requiring a wider range of advanced services from
contract manufacturers. Building on its integrated engineering and
manufacturing capabilities, the Company provides its customers with
services ranging from initial product design and development and prototype
production to final product assembly and distribution to OEMs' customers.
The Company believes that this provides greater control over quality,
delivery and cost, and enables the Company to offer its customers a
complete cost-effective solution.
Provide Advanced Technological Capabilities. Through its continuing
investment in advanced packaging and interconnect technologies (such as
MCM, COB and miniature gold-finished PCB capabilities), as well as its
investment in advanced design and engineering capabilities (such as those
offered by Fine Line), the Company is able to offer its customers a variety
of advanced design and manufacturing solutions. In particular, the Company
believes that its ability to meet growing market demand for miniaturized
electronic products will be critical to its ongoing success, and has
developed and acquired a number of innovative technologies to address this
demand.
Accelerate Customers' Time to Market. The Company's engineering
services group provides integrated product design and prototyping services
to help customers accelerate their time to market for new products. By
participating in product design and prototype development, the Company
often reduces the costs of manufacturing the product. In addition, by
designing products to improve manufacturability and by participating in the
transition to volume production, the Company believes that its engineering
services group can significantly accelerate the time to volume production.
By working closely with its suppliers and customers throughout the design
and manufacturing process, the Company can enhance responsiveness and
flexibility, increase manufacturing efficiency and reduce total cycle
times.
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Increase Efficiency Through Logistics. The Company is streamlining and
simplifying production logistics at its large, strategically located
facilities to decrease the costs associated with the handling and managing
of materials. The Company plans to incorporate suppliers of custom
components in its facilities in China and Mexico to further reduce material
and transportation costs. The Company also intends to establish warehousing
capabilities from which it can ship products into customers' distribution
channels.
Target Leading OEMs in Growing Vertical Markets. The Company has
focused its marketing efforts on fast growing industry sectors that are
increasingly outsourcing manufacturing operations, such as the
communications, computer, consumer electronics and medical industries. The
Company seeks to maintain a balance of customers among these industries,
establishing long-term relationships with leading OEMs to become an
integral part of their operations.
There can be no assurance that the Company's strategy, even if successfully
implemented, will reduce the risks associated with the Company's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Operating Results."
CUSTOMERS
The Company's customers consist of a select group of OEMs in the
communications, computer, consumer electronics and medical device industries.
Within these industries, the Company's strategy is to seek long-term
relationships with leading companies that seek to outsource significant
production volumes of complex products. The Company has increasingly focused on
sales to larger companies and to customers in the communications industries. In
fiscal 1997, the Company's five largest customers accounted for approximately
46% of net sales. The loss of one or more major customers would have a material
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Affecting
Future Operating Results -- Customer Concentration; Dependence on Electronics
Industry" and "Variability of Customer Requirements and Operating Results."
The following table lists in alphabetical order certain of the Company's
largest customers with which the Company expects to continue to conduct
significant business in fiscal 1998 and the products for which the Company
provides manufacturing services.
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Customer......................................... End Products
Advanced Fibre Communications.................... Local line loop carriers
Braun/ThermoScan................................. Temperature monitoring systems
Compaq........................................... Modems
Diebold.......................................... Automatic teller machines
Ericsson......................................... Business telecommunications systems
Lifescan (a Johnson & Johnson company)........... Portable glucose monitoring system
Microsoft........................................ Computer peripheral devices
U.S. Robotics.................................... Pilot electronic organizers
</TABLE>
In addition, in fiscal 1997, the Company began manufacturing products for a
number of new customers, including Ascend Communications (telecommunications
products), Auspex (drive carriers), Cisco Systems (data communications
products), Harris DTS (network switches), Philips Electronics (video cameras for
personal computers), Philips Consumer Products (telephones), Bay Networks (data
communications products) and Nokia (consumer electronics products). None of
these customers are expected to represent more than 10% of the Company's net
sales in fiscal 1998.
In connection with the acquisition of the Karlskrona Facilities, the
Company and Ericsson entered into a multi-year purchase agreement in February
1997, and the Company believes that, as a result, sales by Ericsson will account
for a significant portion of its net sales in fiscal 1998. See "-- Acquisition
of Karlskrona Facilities" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Affecting Future
Operating Results."
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SALES AND MARKETING
The Company achieves worldwide sales coverage through a 37-person direct
sales force, which focuses on generating new accounts, and through 20 program
managers, who are responsible for managing relationships with existing customers
and making follow-on sales. In North America, the Company maintains sales
offices in California and Massachusetts, as well as a recently established sales
office in Florida. The Company's Asian sales offices are located in Singapore
and Hong Kong. In Europe, the Company maintains sales offices in England,
Germany and the Netherlands. The Company is expanding its European sales force,
and intends to establish additional European sales offices in France and Sweden.
In addition to its sales force, the Company's executive staff plays an integral
role in the Company's marketing efforts. See "Item 10 -- Directors and Executive
Officers of the Registrant -- Management Team Changes."
SERVICES
The Company provides a broad range of advanced engineering, manufacturing
and distribution services to OEM customers. These services are provided on a
turnkey basis and, to a lesser extent, on a consignment basis, and include
product design, PCB fabrication and assembly, materials procurement, inventory
management, final system assembly and test, packaging and distribution. The
components, subassemblies and complete products manufactured by the Company for
its OEM customers incorporate advanced interconnect, miniaturization and
packaging technologies, such as SMT, MCM, COB and BGA technologies. An
increasing portion of the Company's net sales (a majority of its net sales in
fiscal 1997) were derived from the manufacture and assembly of complete products
that are substantially ready for distribution by the OEM to its customers. The
Company also designs and manufactures miniature gold-finished PCBs that OEMs
then incorporate into their products.
Engineering Services
The engineering services group coordinates and integrates the Company's
worldwide design, prototype and other engineering capabilities. Its focused,
integrated approach provides Flextronics' customers with advanced service and
support and leverages the Company's technological capabilities. As a result, the
engineering services group enables the Company to strengthen its relationship
with manufacturing customers as well as to attract new customers who require
advanced design services.
The engineering services group actively assists customers with initial
product design in order to reduce the time from design to prototype, improve
product manufacturability and reduce product costs. The Company provides a full
range of electrical, thermal and mechanical design services, including CAE and
CAD-based design services, manufacturing engineering services, circuit board
layout and test development. The engineering services group also coordinates
industrial design and tooling for product manufacturing. After product design,
the Company provides prototype assemblies for fast turnaround. During the
prototype process, Company engineers work with customer engineers to enhance
production efficiency and improve product design. The engineering services group
then assists with the transition to volume production. By participating in
product design and prototype development, the Company can reduce manufacturing
costs and accelerate the time to volume production.
The Company's recent acquisitions have provided it with substantial
advanced engineering capabilities. The Company's 1996 acquisition of Fine Line,
a leading San Jose-based provider of quick-turn circuit board layout and
prototype services, provides the Company with substantial expertise in a broad
range of advanced circuit board designs, and the Company's 1995 acquisition of
nCHIP provides advanced MCM design capabilities. Flextronics has integrated the
nCHIP capabilities, and is integrating the Fine Line capabilities, with the
Company's existing design and prototype capabilities in its engineering services
group. The Company plans to expand its design and prototype capabilities in
Westford, Massachusetts and San Jose, California, and also intends to establish
design and prototype capabilities in the Karlskrona Facilities.
Materials Procurement and Management
Materials procurement and management consists of the planning, purchasing,
expediting and warehousing of the components and materials used in the
manufacturing process. The Company's inventory
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management expertise and volume procurement capabilities contribute to cost
reductions and reduce total cycle time. The Company generally orders components
after it has a firm purchase order or letter of authorization from a customer.
However, in the case of long lead-time items, the Company will occasionally
order components in advance of orders, based on customer forecasts, to ensure
adequate and timely supply. Although the Company works with customers and
third-party suppliers to reduce the impact of component shortages, such
shortages may occur from time to time and may have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors Affecting Future Operating
Results -- Limited Availability of Components." The campuses under development
in China and Mexico are designed to provide many of the custom components used
by the Company on-site, in order to reduce material and transportation costs,
simplify logistics and facilitate inventory management.
Assembly and Manufacturing
The Company's assembly and manufacturing operations include PCB assembly
and, increasingly the manufacture of subsystems and complete products. Its PCB
assembly activities primarily consist of the placement and attachment of
electronic and mechanical components on printed circuit boards using both SMT
and traditional pin-through-hole ("PTH") technology. The Company also assembles
subsystems and systems incorporating PCBs and complex electromechanical
components, and, increasingly, manufactures and packages final products for
shipment directly to the customer or its distribution channels. The Company
employs just-in-time, ship-to-stock and ship-to-line programs, continuous flow
manufacturing, demand flow processes and statistical process control. The
Company has expanded the number of production lines for finished product
assembly, burn-in and test to meet growing demand and increased customer
requirements. In addition, the Company has invested in FICO, a producer of
injection molded plastic for Asia electronics companies with facilities in
Shenzhen, China.
As OEMs seek to provide greater functionality in smaller products, they
increasingly require advanced manufacturing technologies and processes. Most of
the Company's PCB assembly involves the use of SMT, which is the leading
electronics assembly technique for more sophisticated products. SMT is a
computer-automated process which permits attachment of components directly on
both sides of a PCB. As a result, it allows higher integration of electronic
components, offering smaller size, lower cost and higher reliability than
traditional manufacturing processes. By allowing increasingly complex circuits
to be packaged with the components placed in closer proximity to each other, SMT
greatly enhances circuit processing speed, and therefore board and system
performance. The Company also provides traditional PTH electronics assembly
using PCBs and leaded components for lower cost products.
In addition, the Company has invested in emerging technologies that extend
its miniaturization capabilities. The Company's 1995 acquisition of nCHIP
provided it with advanced capabilities to design and assemble MCMs (collections
of integrated circuit chips interconnected within a single package), and the
Company now offers a range of MCM technologies from low-cost laminate MCMs to
high-performance, deposited thin-film MCMs. The Company assembles completed MCMs
in its San Jose, California facilities and also utilizes an outside assembly
company for assembly of completed MCMs.
The Company's 1996 acquisition of Astron provided it with significant
capabilities to fabricate miniature gold-finished PCBs for specialized
applications such as cellular phones, optoelectronics, LCDs, pagers and
automotive electronics. These advanced laminate substrates can significantly
improve a product's performance, while reducing its size and cost. The Company's
miniature, gold-finished PCBs are fabricated in the Company's facility in China.
The Company is currently expanding this facility to provide the capacity to
fabricate other complex PCBs.
The Company is also increasingly focusing on advanced interconnect and
packaging technologies such as chip on board ("COB") and ball grid array ("BGA")
technology. COB technology represents a configuration in which a bare,
unpackaged semiconductor is attached directly onto a PCB, wire bonded and then
encapsulated with a polymeric material. COB technology facilitates miniaturized,
low-profile assemblies, and can result in lower component costs and reduced time
to market. The Company has significant experience in
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utilizing COB technology to manufacture a wide range of products. BGA technology
is an emerging technology for packaging semiconductors that can provide higher
interconnect density and improved assembly yields and reliability by assembling
surface-mount packages to the circuit board through an array of solder balls,
rather than pin leads. The Company has recently begun utilizing BGA technology
to manufacture products for OEMs.
Test
After assembly, the Company offers computer-aided testing of PCBs,
subsystems and systems, which contributes significantly to the Company's ability
to deliver high-quality products on a consistent basis. Working with its
customers, the Company develops product-specific test strategies. The Company's
test capabilities include management defect analysis, in-circuit tests and
functional tests. In-circuit tests verify that all components have been properly
inserted and that the electrical circuits are complete. Functional tests
determine if the board or system assembly is performing to customer
specifications. The Company either designs and procures test fixtures and
develops its own test software or utilizes its customers' existing test fixtures
and test software. In addition, the Company also provides environmental stress
tests of the board or system assembly.
Distribution
The Company offers its customers flexible, just-in-time delivery programs
allowing product shipments to be closely coordinated with customers' inventory
requirements. Increasingly, the Company is warehousing products for customers
and shipping those products directly into their distribution channels. The
Company believes that this service can provide customers with a more
comprehensive solution and enable them to be more responsive to market demands.
COMPETITION
The electronics contract manufacturing industry is extremely competitive
and includes hundreds of companies, several of whom have achieved substantial
market share. The Company competes against numerous domestic and foreign
contract manufacturers, and current and prospective customers also evaluate the
Company's capabilities against the merits of internal production. In addition,
in recent years the electronics contract manufacturing industry has attracted a
significant number of new entrants, including large OEMs with excess
manufacturing capacity, and many existing participants, including the Company,
have significantly increased their manufacturing capacity by expanding their
facilities and adding new facilities. In the event of a decrease in overall
demand for contract manufacturing services, this increased capacity could result
in substantial pricing pressures which could adversely affect the Company's
operating results. Certain of the Company's competitors, including Solectron
Corporation and SCI Systems, have substantially greater manufacturing,
financial, research and development and marketing resources than the Company.
Others, such as Jabil Circuits and Celestica, are rapidly increasing their sales
and capacity. As competitors increase the scale of their operations, they may
increase their ability to realize economies of scale, to reduce their prices and
to more effectively meet the needs of large OEMs. The Company believes that the
principal competitive factors in the segments of the contract manufacturing
industry in which it operates are cost, technological capabilities,
responsiveness and flexibility, delivery cycles, location of facilities, product
quality and range of services available. Failure to satisfy any of the foregoing
requirements could materially adversely affect the Company's competitive
position.
EMPLOYEES
As of May 31, 1997, the Company employed 5,518 persons, including
approximately 870 employees in Sweden who were added with the acquisition of the
Karlskrona Facilities. The Company's non-management employees located in
Singapore, Sweden and China, and the Company's hourly employees in the United
Kingdom, are represented by labor unions. The Company has never experienced a
work stoppage or strike. The Company believes that its employee relations are
good.
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The Company's success depends to a large extent upon the continued services
of key managerial and technical employees. The loss of such personnel could have
a material adverse effect on the Company's results of operations. To date, the
Company has not experienced significant difficulties in attracting or retaining
such personnel. Although the Company is not aware that any of its key personnel
currently intend to terminate their employment, their future services cannot be
assured. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors Affecting Future Operating Results --
Dependence on Key Personnel and Skilled Employees" and "Item 10 - Directors and
Executive Officers of the Registrant -- Management Team Changes."
KARLSKRONA ACQUISITION
On March 27, 1997, the Company acquired from Ericsson the Karlskrona
Facilities located in Karlskrona, Sweden and related inventory, equipment and
other assets for approximately $82.4 million in cash. The Karlskrona Facilities
include a 220,000 square foot facility and a 110,000 square foot facility, each
of which is ISO 9002 certified. These facilities assemble printed circuit
boards, network switches, cordless base stations and other components for
business communications systems sold by Ericsson. Approximately 870 Ericsson
employees currently based at the Karlskrona Facilities are expected to remain
employed by the Company at the facilities. In addition, at the closing of the
transaction, Ronny Nilsson, previously the Vice President and General Manager,
Supply and Distribution of Ericsson, was appointed President of Flextronics
International Sweden AB and Senior Vice President, Europe of the Company.
The Company, certain of its subsidiaries and Ericsson also entered into the
Purchase Agreement, under which the Company will manufacture and Ericsson will
purchase, for a three-year period, certain products used in Ericsson's business
communications systems. The Company believes that, as a result, sales to
Ericsson will account for a large portion of its net sales in fiscal 1998. The
Karlskrona Facilities' cost of sales and services (including certain overhead
allocations) for the year ended December 31, 1996 was approximately 2.1 billion
Swedish kronor (approximately $310.0 million based on exchange rates at December
31, 1996). However, there can be no assurance as to the volume of Ericsson's
purchases, or the mix of products that it will purchase, from the Karlskrona
Facilities in any future period.
By acquiring the Karlskrona Facilities, the Company substantially increased
its worldwide capacity, obtained a strong base in Northern Europe and enhanced
its position as a contract manufacturer for the telecommunications industry,
which is increasingly outsourcing manufacturing. The Company also intends to use
the manufacturing resources provided by the Karlskrona Facilities to offer
services to other European OEMs, which it believes are beginning to outsource
the manufacture of significant product lines.
Assuming Ericsson's sales of those products that the Company will
manufacture remain at current levels, the Company anticipates realizing
approximately $300 million of sales (based on current exchange rates) to
Ericsson in fiscal 1998; however, there can be no assurance that the Company's
sales to Ericsson will not be materially less than those anticipated. Although
the Company expects that its gross margin percentage on sales to Ericsson will
be less than that realized by the Company in fiscal 1996 and 1997, it also
expects that the impact of lower gross margins may be partially offset by the
effect of anticipated lower overhead and sales expenses, as a percentage of net
sales, associated with supplying products to Ericsson relative to supplying
products to other OEMs. To the extent that the Company is successful in
increasing the capacity of the Karlskrona Facilities and in using these
facilities to provide services to other OEMs, the Company anticipates increased
operating efficiencies. There can be no assurance that the Company will realize
lower overhead or sales expenses or increased operating efficiencies as
anticipated.
The foregoing, and discussions elsewhere in this Report, contain a number
of forward-looking statements relative to the benefits and effects of the
acquisition of the Karlskrona Facilities, the execution of the Purchase
Agreement (together, the "Karlskrona Acquisition"), and the Company's
relationship with Ericsson including the Company's sales to Ericsson, the
Company's net sales, gross margins and results of operations, and no assurances
can be given as to the Company's ability to achieve such benefits and results.
The Company undertakes no obligation to publicly disclose the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances occurring subsequent to the date hereof. The
9
<PAGE> 10
Karlskrona Acquisition and the Company's business are subject to a number of
risks that could adversely affect the Company's ability to achieve these
operating results and the anticipated benefits of the Karlskrona Acquisition,
including the Company's ability to reduce costs at the Karlskrona Facilities,
the Company's lack of experience operating in Sweden, the Company's ability to
transition the Karlskrona Facilities from captive manufacturing for Ericsson to
manufacturing for third parties and to expand capacity at these facilities and
to integrate these facilities into its global operations. In addition, there can
be no assurance that the Company will utilize a sufficient portion of the
capacity of the Karlskrona Facilities to achieve profitable operations. Further,
changes in exchange rates between Swedish kronor and U.S. dollars will affect
the Company's operating results at the Karlskrona Facilities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Operating Results -- Risks of
Karlskrona Acquisition."
The Purchase Agreement contains cost reduction targets and price
limitations and imposes on the Company certain manufacturing quality
requirements, and there can be no assurance that the Company can achieve
acceptable levels of profitability under the Purchase Agreement or reduce costs
and prices to Ericsson over time as contemplated by the Purchase Agreement. In
addition, the Purchase Agreement requires that the Company maintain a ratio of
equity to total liabilities, debt and equity of at least 25%, and a current
ratio of at least 120%. Further, the Purchase Agreement prohibits the Company
from selling or relocating the equipment acquired in the transaction without
Ericsson's consent. A material breach by the Company of any of the terms of the
Purchase Agreement could allow Ericsson to repurchase the assets conveyed to the
Company at the Company's book value or to obtain other relief, including the
cancellation of outstanding purchase orders or termination of the Purchase
Agreement. Ericsson also has certain rights to be consulted on the management of
the Karlskrona Facilities and to approve the use of the Karlskrona Facilities
for Ericsson's competitors or for other customers where such use might adversely
affect Ericsson's access to production capacity at the facilities. In addition,
without Ericsson's consent, the Company may not enter into any transactions that
could adversely affect its ability to continue to supply products and services
to Ericsson under the Purchase Agreement or its ability to reduce costs and
prices to Ericsson. As a result of these rights, Ericsson may, under certain
circumstances, retain a significant degree of control over the Karlskrona
Facilities and their management. However, the Company understands that it is
Ericksson's intention that the Company utilize the Karlskrona Facilities to
provide services not just to Ericsson, but also to other OEMs, and Ericsson will
receive price reductions if the Company is able to reduce costs at the
Karlskrona Facilities through resulting volume efficiencies.
ITEM 2. PROPERTIES.
FACILITIES
The Company has manufacturing facilities located in Singapore, Malaysia,
China, the United Kingdom and the United States. In addition, the Company
provides engineering services at its facilities in Singapore, California and
Massachusetts. All of the Company's manufacturing facilities are registered to
the quality requirements of the International Organization for Standardization
(ISO 9002) or are in the process of final certification.
10
<PAGE> 11
Certain information about the Company's manufacturing and engineering
facilities as of March 31, 1997 is set forth below:
<TABLE>
<CAPTION>
YEAR APPROXIMATE OWNED/
LOCATION COMMENCED SQUARE FEET LEASED(1) SERVICES
- ------------------------------ --------- ----------- --------- ----------------------------
<S> <C> <C> <C> <C>
Existing Manufacturing
Facilities
Singapore(2)................ 1982 47,000 Leased Complex, high value-added
PCB assembly.
Johore, Malaysia............ 1991 80,000 Owned Full systems manufacturing;
PCB assembly.
Hong Kong, China............ 1985 45,000 Leased Fabrication of high density
PCBs
Xixiang, China.............. 1995 90,000 Leased High volume PCB assembly.
Doumen, China............... 1995 175,000(3) Owned Fabrication and assembly of
high density, miniaturized
PCBs.
San Jose, CA................ 1994 65,000 Leased Full systems manufacturing;
PCB assembly.
San Jose, CA................ 1996 32,500 Leased Complex, high value-added
PCB assembly.
San Jose, CA(2)............. 1989 30,000 Leased Advanced packaging and MCM
fabrication.
Tonypandy, Wales............ 1983 50,000 Owned Full systems manufacturing;
medium complexity PCB
assembly.
Karlskrona, Sweden.......... 1997 330,000 Owned Assembly and test of complex
PCBs and systems.
Existing Engineering
Facilities
Westford, MA................ 1987 9,112 Leased Design and prototype
services.
Singapore................... 1982 (4) -- Design and prototype
services.
San Jose, CA................ 1989 (4) --
Los Gatos, CA............... 1986(5) 15,000 Leased Design and prototype
services. Design and
prototype services.
Facilities Under Development
San Jose, CA................ 1997(6) 73,000 Owned Complex, high value-added
PCB assembly.
San Jose, CA................ 1996(6) 71,000 Leased Engineering services and
corporate functions.
Doumen, China............... 1996(6) 224,000 Owned Fabrication of high volume
PCBs, high volume PCB
assembly, injection molded
plastics for electronics.
Guadalajara, Mexico......... 1997(6) 101,000 Owned High volume PCB assembly.
</TABLE>
- ---------------
(1) The leases for the Company's leased facilities expire between December 1997
and July 2005. In addition, the Company has a 47,000 square foot
manufacturing facility in Richardson, Texas that has been closed. The
Company leases this facility under a lease that expires in April 2000, and
the Company is seeking to sublet this facility.
(2) The Company has downsized manufacturing operations at this facility in
fiscal 1997.
(3) Includes 88,000 square feet used for dormitories and other functions. The
Company has land use rights for this facility through 2020.
(4) Located within the 47,000 square foot manufacturing facility in Singapore
and the 30,000 square foot manufacturing facility in San Jose, California,
respectively.
(5) Acquired by the Company in fiscal 1997 in connection with the Fine Line
acquisition.
(6) Refers to date of commencement of construction or of lease term.
11
<PAGE> 12
The Company has recently begun to consolidate and expand its manufacturing
facilities, with the goal of concentrating its activities in a smaller number of
larger, strategically located sites. The Company has closed its Richardson,
Texas facility and downsized manufacturing operations at its Singapore facility,
while substantially increasing overall capacity by expanding operations in North
America, Asia and Europe. In North America, the Company has recently leased a
new 71,000 square foot facility, and is constructing a planned 73,000 square
foot facility, each adjacent to the Company's existing San Jose operations, and
the Company is developing a planned 101,000 square foot manufacturing facility
on a 32-acre campus site in Guadalajara, Mexico. The Company expects the
construction of the new San Jose and Guadalajara facilities will be completed in
the summer of 1998. In Asia, the Company is expanding its Doumen facilities into
a planned 393,000 square foot campus by developing an additional 224,000 square
feet, and the Company expects the construction of this expansion will be
completed in the second quarter of fiscal 1998.
The campus facilities planned for Doumen, China and Guadalajara, Mexico are
designed to be integrated facilities that can produce many of the custom
components used by the Company, to manufacture products for customers, to
warehouse the products and to distribute them directly to customer's
distribution channels. The Company believes that by offering all of those
capabilities at the same site, it can reduce material and transportation costs,
simplify logistics and communications, and improve inventory management,
providing customers with a more complete, cost-effective manufacturing solution.
FICO, in which the Company has a 40.0% investment, produces injection
molded plastics for Asian companies from its 120,000 square foot facilities in
Shenzhen, China. The Company anticipates that FICO will relocate certain of its
operations to the Doumen Campus.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF ORDINARY SHARES
The Company's Ordinary Shares have been traded on the Nasdaq National
Market under the symbol "FLEXF" since March 18, 1994. The following table shows
the high and low closing sales prices per share of the Company's Ordinary Shares
for fiscal years 1995, 1996 and 1997.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1995
First Quarter.......................................... $14.00 $ 8.75
Second Quarter......................................... $15.50 $ 9.00
Third Quarter.......................................... $16.25 $12.75
Fourth Quarter......................................... $18.00 $13.00
Fiscal 1996
First Quarter.......................................... $21.875 $13.50
Second Quarter......................................... $26.75 $21.75
Third Quarter.......................................... $30.00 $21.00
Fourth Quarter......................................... $35.75 $25.75
Fiscal 1997
First Quarter.......................................... $39.00 $25.00
Second Quarter......................................... $28.25 $17.00
Third Quarter.......................................... $37.25 $21.00
Fourth Quarter......................................... $29.75 $19.625
</TABLE>
On June 30, 1997, the closing sales price of the Ordinary Shares was $27.00
per share. On that date, there were 480 shareholders of record.
DIVIDENDS
Since inception, the Company has not declared or paid any cash dividends on
its Ordinary Shares, and the Company's loan agreements prohibit the payment of
cash dividends without the lenders' prior consent. The Company anticipates that
all earnings in the foreseeable future will be retained to finance the
continuing development of its business.
TAXATION
This summary of Singapore and U.S. tax considerations is based on current
law and is provided for general information. Insofar as the following discussion
summarizes the tax considerations applicable to the Company's shareholders under
Singapore law, it is based on the opinion of Low Yap & Associates, Singapore tax
advisors to the Company, and insofar as the following discussion summarizes the
tax considerations applicable to the Company's shareholders under United States
federal law, it is based on the opinion of Fenwick & West LLP, United States
counsel to the Company. The discussion does not purport to deal with all aspects
of taxation that may be relevant to particular shareholders in light of their
investment or tax circumstances, or to certain types of shareholders (including
insurance companies, tax-exempt organizations, regulated investment companies,
financial institutions or broker-dealers, and shareholders that are not U.S.
Shareholders (as defined below)) subject to special treatment under the U.S.
federal income tax laws. Such shareholders should consult their own tax advisors
regarding the particular tax consequences to such shareholders of any investment
in the Ordinary Shares.
13
<PAGE> 14
INCOME TAXATION UNDER SINGAPORE LAW
Under current provisions of the Income Tax Act, Chapter 134 of Singapore,
corporate profits are taxed at a rate equal to 26.0%. Under Singapore's taxation
system, the tax paid by a company is deemed paid by its shareholders. Thus, the
shareholders receive dividends net of the tax paid by the Company. Dividends
received by either a resident or a nonresident of Singapore are not subject to
withholding tax. Shareholders are taxed on the gross amount of dividends (i.e.,
the cash amount of the dividend plus the amount of corporate tax paid by the
Company). The tax paid by the Company will be available to shareholders as a tax
credit to offset the Singapore income tax liability on their overall income
(including the gross amount of dividends). No tax treaty currently exists
between the Republic of Singapore and the U.S.
Under current Singapore tax law there is no tax on capital gains, and,
thus, any profits from the disposal of shares are not taxable in Singapore
unless the vendor is regarded as carrying on a trade in shares in Singapore (in
which case, the disposal profits would be taxable as trade profits rather than
capital gains).
There is no stamp duty payable in respect of the holding and disposition of
shares. No duty is payable on the acquisition of new shares. Where existing
shares are acquired in Singapore, stamp duty is payable on the instrument of
transfer of the shares at the rate of S$2 for every S$1,000 of the market value
of the shares. The stamp duty is borne by the purchaser unless there is an
agreement to the contrary. Where the instrument of transfer is executed outside
of Singapore, stamp duty must be paid if the instrument of transfer is received
in Singapore. Under Article 22 (iii) of the Articles of Association of the
Company, its directors are authorized to refuse to register a transfer unless
the instrument of transfer has been duly stamped.
INCOME TAXATION UNDER UNITED STATES LAW
Individual shareholders that are U.S. citizens or resident aliens (as
defined in Section 7701(b) of the Internal Revenue Code of 1986 (the "Code")),
corporations or partnerships or other entities created or organized under the
laws of the United States, or any political subdivision thereof, an estate the
income of which is subject is subject to U.S. federal income taxation regardless
of its source or a trust if a U.S. court is able to exercise primary
jurisdiction over its administration and one or more U.S. fiduciaries have the
authority to control all of its substantial decisions ("U.S. Shareholders")
will, upon the sale or exchange of a share, recognize gain or loss for U.S.
income tax purposes in an amount equal to the difference between the amount
realized and the U.S. Shareholder's tax basis in such a share. If paid in
currency other than U.S. dollars, the U.S. dollar amount realized (as determined
on the trade date) is determined by translating the foreign currency into U.S.
dollars at the spot rate in effect on the settlement date of the sale in the
case of a U.S. Shareholder that is a cash basis taxpayer. An accrual basis
taxpayer may elect to use the spot rate in effect on the settlement date of the
sale by filing a statement with the U.S. Shareholder's first return in which the
election is effective clearly indicating that the election has been made. Such
an election must be applied consistently from year to year and cannot be changed
without the consent of the Internal Revenue Service. Such gain or loss will be
capital gain or loss if the share was a capital asset in the hands of the U.S.
Shareholder and will not be short-term capital gain or loss if the share has
been held for more than one year. If a U.S. Shareholder receives any currency
other than U.S. dollars on the sale of a share, such U.S. Shareholder may
recognize ordinary income or loss as a result of currency fluctuations between
the date of such sale and the date such sale proceeds are converted into U.S.
dollars.
U.S. Shareholders will be required to report as income for U.S. income tax
purposes the amount of any dividend received from the Company to the extent paid
out of the current or accumulated earnings and profits of the Company, as
determined under current U.S. income tax principles. If over 50.0% of the
Company's stock (by vote or value) were owned by U.S. Shareholders who
individually held 10.0% or more of the Company's voting stock, such U.S.
Shareholders potentially would be required to include in income a portion or all
of their pro rata share of the Company's and its non-U.S. subsidiaries' earnings
and profits. If 50.0% or more of the Company's assets during a taxable year
produced or were held for the production of passive income, as defined in
section 1297(b) of the Code (e.g., certain forms of dividends, interest and
royalties), or 75.0% or more of the Company's gross income for a taxable year
was passive income, adverse U.S. tax
14
<PAGE> 15
consequences could result to U.S. shareholders of the Company. As of June 30,
1997, the Company was aware of only one U.S. Shareholder who individually held
10% or more of its voting stock. See "Principal Shareholders."
Shareholders that are not U.S. Shareholders ("non-U.S. shareholders") will
not be required to report for U.S. federal income tax purposes the amount of any
dividend received from the Company. Non-U.S. shareholders, upon the sale or
exchange of a share, would not be required to recognize gain or loss for U.S.
federal income tax purposes.
Estate Taxation
In the case of an individual who is not domiciled in Singapore, a Singapore
estate tax is imposed on the value of all movable and immovable properties
situated in Singapore. The shares of the Company are considered to be situated
in Singapore. Thus, an individual shareholder who is not domiciled in Singapore
at the time of his or her death will be subject to Singapore estate tax on the
value of any such shares held by the individual upon the individual's death.
Such a shareholder will be required to pay Singapore estate tax to the extent
that the value of the shares (or in aggregate with any other assets subject to
Singapore estate tax) exceeds S$600,000. Any such excess will be taxed at a rate
equal to 5.0% on the first S$12,000,000 of the individual's Singapore chargeable
assets and thereafter at a rate equal to 10.0%. An individual shareholder who is
a U.S. citizen or resident (for U.S. estate tax purposes) also will have the
value of the shares included in the individual's gross estate for U.S. estate
tax purposes. An individual shareholder generally will be entitled to a tax
credit against the shareholder's U.S. estate tax to the extent the individual
shareholder actually pays Singapore estate tax on the value of the shares;
however, such tax credit is generally limited to the percentage of the U.S.
estate tax attributable to the inclusion of the value of the shares included in
the shareholder's gross estate for U.S. estate tax purposes, adjusted further by
a pro rata apportionment of available exemptions. Individuals who are domiciled
in Singapore should consult their own tax advisors regarding the Singapore
estate tax consequences of their investment.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company as of
and for each of the fiscal years ended March 31, 1993, 1994, 1995, 1996 and
1997. The selected financial data set forth below for the fiscal years ended
March 31, 1995, 1996 and 1997 have been derived from consolidated financial
statements of the Company which have been audited by Ernst & Young, independent
auditors, whose report thereon is included elsewhere herein. The selected
financial data set forth below for the fiscal years ended March 31, 1993 and
1994 has been derived from audited financial statements not included in this
Report. These historical results are not necessarily indicative of the results
to be expected in the future. The following table is qualified by reference to
and should be read in conjunction with the consolidated financial statements,
related notes thereto and other financial data included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1993 1994 1995(1) 1996(2) 1997(3)
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)(RESTATED)(4)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $100,759 $131,345 $237,386 $448,346 $490,585
Cost of sales.......................................... 91,794 117,392 214,865 407,457 440,448
-------- -------- -------- -------- --------
Gross profit......................................... 8,965 13,953 22,521 40,889 50,137
Selling, general and administrative expenses........... 7,131 8,667 11,468 18,787 26,765
Acquired in-process research and development........... 81 202 91 29,000 --
Goodwill amortization.................................. 388 398 510 739 989
Intangible assets amortization......................... -- 21 245 544 1,646
Provision for plant closings........................... -- 830 -- 1,254 5,868
-------- -------- -------- -------- --------
Operating income (loss).............................. 1,365 3,835 10,207 (9,435) 14,869
Net interest income (expense).......................... (2,628) (1,778) (774) (2,380) (3,885)
Merger expenses........................................ -- -- (816) -- --
Foreign exchange gain (loss)........................... 299 402 (303) 872 1,168
Income (loss) from associated company.................. -- (70) (729) -- 241
Other income (expense)................................. -- -- 34 (398) (2,718)
-------- -------- -------- -------- --------
Income (loss) before income taxes.................... (964) 2,389 7,619 (11,341) 9,675
Provision for income taxes............................. 264 654 1,463 3,791 2,212
Extraordinary gain..................................... -- 416 -- -- --
Net income (loss).................................... $ (1,228) $ 2,151 $ 6,156 $(15,132) $ 7,463
======== ======== ======== ======== ========
Net income (loss) per share............................ $ (0.17) $ 0.28 $ 0.51 $ (1.19) $ 0.50
======== ======== ======== ======== ========
Weighted average Ordinary Shares and equivalents....... 7,382 7,730 12,103 12,684 14,877
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
(RESTATED)(3)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................ (1,201) 30,669 33,425 30,801
Total assets............................................. 52,430 103,129 116,117 231,024
Long-term debt and capital lease obligations, less
current portion........................................ 17,243 4,755 6,890 17,674
Shareholders' equity (deficit)........................... (2,256) 46,703 57,717 73,059
</TABLE>
- ---------------
(1) In January 1995, the Company acquired nCHIP in exchange for an aggregate of
2,450,000 Ordinary Shares in a transaction accounted for as a pooling of
interests. Accordingly, the financial data presented for each fiscal period
includes the historical results of nCHIP.
(2) The Consolidated Financial Statements of the Company for the fiscal year
ended March 31, 1996 have been restated as a result of changes in the
Company's accounting for the acquisition of Astron. See Note 14 of Notes to
Consolidated Financial Statements and "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent Changes
in Accounting for Astron Acquisition."
(3) In the fourth quarter of fiscal 1996, the Company wrote off $29.0 million of
In-process research and development associated with the acquisition of
Astron and also recorded charges totaling $1.3 million for costs associated
with the closing of one of the Company's Malaysian plants and its Shekou,
China operations.
(4) In fiscal 1997, the Company incurred plant closing expenses aggregating $5.9
million in connection with closing its manufacturing facility in Texas,
downsizing manufacturing operations in Singapore, and writing off obsolete
equipment and incurring severance obligations at the nCHIP semiconductor
fabrication operations.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for historical information contained herein, the matters discussed
in this Form 10-K are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. In this Report, the words "expects,"
"anticipates," "believes," "intends" and similar expressions identify
forward-looking statements, which speak only as of the date hereof. These
forward-looking statements are subject to certain risks and uncertainties,
including, without limitation, those discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Operating Results," that could
cause results to differ materially from historical results or those anticipated.
The Company undertakes no obligation to publicly disclose any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-K with the Securities and
Exchange Commission. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission, including its
Form 10-Qs and 8-Ks, that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
OVERVIEW
The Company was organized in Singapore in 1990 to acquire the Asian
contract manufacturing operations and certain U.S. design, sales and support
operations of Flextronics, Inc. (the "Predecessor"), which had been in the
contract manufacturing business since 1982. The acquisition of the selected
operations of the Predecessor for approximately $39.0 million was completed in
June 1990 and was financed with approximately $20.0 million of secured long-term
bank debt, $4.0 million of subordinated debt and $15.0 million of equity. After
such acquisition, the equity investors held approximately 55% of the outstanding
share capital of the Company. The Company's results of operations for periods
following the 1990 acquisition and through March 1994 reflect the interest
expense associated with the indebtedness incurred in connection with this
transaction.
In July 1993 a group of new investors acquired a controlling interest in
the Company through the acquisition of substantially all of the interest in the
Company that had been retained by the Predecessor, a direct equity investment of
$3.2 million in the Company and the purchase of a portion of the shares acquired
by the investors in the 1990 acquisition. In December 1993 the Company raised an
additional $7.0 million of equity capital from investors ($3.7 million of which
represented the conversion of its outstanding subordinated debt into equity). In
March 1994 the Company raised $32.5 million in an initial public offering of
Ordinary Shares. In August 1995 the Company raised an additional $22.3 million
in a public offering of Ordinary Shares.
In recent years, the Company has substantially expanded its manufacturing
capacity, technological capabilities and service offerings, through both
acquisitions and internal growth. See "Certain Factors Affecting Future
Operating Results -- Management of Expansion and Consolidation," "Certain
Factors Affecting Future Operating Results -- Acquisitions" and Note 14 of Notes
to Consolidated Financial Statements.
In March 1994, the Company acquired Relevant, a San Jose-based contract
manufacturer, for approximately $4.0 million in cash. In January 1995, the
Company acquired nCHIP in exchange for an aggregate of approximately 2,450,000
Ordinary Shares in a transaction accounted for as a pooling of interests. In
March 1997, the Company decided to close the entire wafer fabrication
operations, and the Company is currently seeking to sell the related assets. See
"-- Provision for Plant Closings."
In April 1995, the Company acquired A&A, a contract manufacturer located in
Wales, in exchange for an aggregate of $2.9 million and 66,908 Ordinary Shares.
The Company's financial statements for fiscal 1996 include the operating results
of A&A from April 12, 1995 to March 31, 1996.
In February 1996, the Company acquired Astron Group Limited in exchange for
(i) $13.4 million in cash, (ii) $15.0 million in 8% promissory notes, ($10.0
million of which was paid in February 1997 and $5.0 million of which is payable
in February 1998), (iii) 238,684 Ordinary Shares issued at closing and (iv)
Ordinary Shares with a value of $10.0 million to be issued on June 30, 1998. The
Company also paid an
17
<PAGE> 18
earnout of an additional $6.25 million in cash in April 1997, based on the
pre-tax profit of Astron for the calendar year ended December 31, 1996. In
addition, the Company agreed to pay a $15.0 million consulting fee in June 1998
to an entity affiliated with Stephen Rees, a former shareholder and the Chairman
of Astron, pursuant to a services agreement among the Company, one of its
subsidiaries and the affiliate of Mr. Rees (the "Services Agreement"). Payment
of the fee was conditioned upon, among other things, Mr. Rees' continuing as
Chairman of Astron through June 1998. Mr. Rees currently also serves as a
director and executive officer of the Company.
In March 1997, the Company and Mr. Rees' affiliate agreed to remove the
remaining conditions to payment of the fee and to reduce the amount of the fee,
which remains payable in June 1998, to $14.0 million. This reduction was
negotiated in view of (i) a settlement in March 1997 of the amount of the
earnout payable by the Company to the former shareholders of Astron in which the
Company agreed to certain matters, previously in dispute, affecting the amount
of the earn-out payment, and (ii) the elimination of the conditions to payment
and of Mr. Rees' ongoing obligations under the Services Agreement. Substantially
all of the former shareholders of Astron were affiliates of Mr. Rees or members
of his family. See "-- Results of Operations -- Goodwill and Intangible Assets
Amortization." Accordingly, the only remaining obligation of either party is the
Company's unconditional obligation to pay the $14.0 million fee in June 1998. Of
the $14.0 million, $5.0 million must be paid in cash. The remainder may be paid
in either cash or Ordinary Shares at the option of the Company, and the Company
intends to pay such amount in Ordinary Shares. See "-- Recent Changes in
Accounting for Astron Acquisition."
Since the Company's acquisition of Astron, the net sales generated by
Astron's then-existing products and services, and by its products and services
then under development, have grown at rates significantly lower than those
anticipated by the Company at the time of the acquisition and significantly
lower than those assumed in the independent valuation used by the Company in
allocating the purchase price of Astron to the assets acquired. The Company
believes that this is attributable primarily to (i) delays in developing certain
new technologies as a result of several factors, including the unanticipated
complexity of many of the new technologies, difficulties in achieving expected
production yields, changes in the Company's development priorities and
unavailability of certain materials; (ii) interruptions in production and
diversions of resources, resulting from a fire in Astron's facilities in Doumen,
China in April 1996 (although the Company does not currently expect that such
event will have a significant long-term effect on Astron's business, customer
base or intangible assets); (iii) reduced sales of certain products to end-users
by certain of Astron's customers; and (iv) changes in product mix that adversely
affected production efficiency. The Company estimates that, at the time of the
acquisition, the average remaining economic life of Astron's developed process
technologies was seven years. While the Company has completed the development of
certain of the technologies that were under development at the time of the
acquisition, the Company has not yet completed development of other technologies
that were material to its valuation of Astron and which it initially anticipated
completing in fiscal 1996 and 1997. The Company currently anticipates that
completion of these technologies will require the expenditure of approximately
$5.0 million through fiscal 1999, consisting primarily of the cost of internal
engineering staff and related overhead, material costs and other expenses. The
completion of such development is subject to a number of uncertainties,
including potential difficulties in optimizing manufacturing processes and the
potential development of alternative technologies by competitors that could
render Astron's technologies uncompetitive or obsolete. Accordingly, no
assurances can be given as to whether, or when, the Company will be able to
complete the development of such technologies, as to the cost of such
development, or as to potential sales of products based on such technologies.
The capabilities provided by the technologies under development may not
otherwise be available to the Company. Accordingly, the failure by the Company
to successfully develop such technologies would limit the Company's ability to
compete effectively for business requiring certain advanced capabilities, and
would prevent it from achieving the anticipated benefits of the Astron
acquisition. See "-- Certain Factors Affecting Future Operating
Results -- Acquisitions" and "-- Results of Operations -- Acquired In-Process
Research and Development."
In the fourth quarter of fiscal 1996 the Company also recorded one time
charges totaling $1.3 million for costs associated with the closing of one of
the Company's Malaysia plants and its Shekou, China operations in addition to
the write off of $29.0 million of In-Process R&D associated with the acquisition
of Astron.
18
<PAGE> 19
Without taking into account these write-offs and charges, the Company's net
income and earnings per share in fiscal 1996 would have been $15.1 million and
$1.13, respectively.
On November 25, 1996, the Company acquired Fine Line for an aggregate of
223,321 Ordinary Shares in a transaction accounted for as pooling of interest.
The Company's prior financial statements were not restated because the financial
results of Fine Line did not have a material impact on the consolidated results.
On December 20, 1996, the Company acquired 40% of FICO for $5.2 million. Of
this, the Company paid $3 million in December 1996 and accrued the $2.2 million
balance in the fourth quarter of fiscal 1997. The Company also has an option to
purchase the remaining 60% interest of FICO in 1998 for a price that is
dependent on the financial performance of FICO for the period ending December
31, 1997.
On March 27, 1997, the Company acquired the manufacturing facilities in
Karlskrona, Sweden and related inventory, equipment and assets from Ericsson for
approximately $82.4 million. The acquisition was financed by a bank loan and the
transaction has been accounted for under the purchase method. As a result, the
purchase price was allocated to the assets acquired based on their estimated
fair market values at the date of acquisition. See "Certain Factors Affecting
Future Operating Results -- Risks of Ericsson Transaction."
In the second quarter of fiscal 1997, the Company purchased approximately
32 acres of land in Guadalajara, Mexico. The land is intended to be used for the
Company's planned development of a new manufacturing campus in Mexico. In
addition, the Company has begun construction of a new 240,000 square foot
facility on its campus located in Doumen, China. During the third and fourth
quarters of fiscal 1997, the Company incurred plant closing expenses totalling
$5.9 million relating to the closing of its Texas facility and of the nCHIP
semiconductor fabrication facility, and the downsizing of manufacturing at its
Singapore facilities.
The Company has restated its financial results for the fiscal year ended
March 31, 1996 and for the first three reported quarters of the fiscal year
ended March 31, 1997 to reflect corrections to its accounting for the
acquisition of Astron. The acquisition of Astron has been accounted for under
the purchase method, and accordingly the purchase price had been allocated to
the assets and liabilities assumed based upon their estimated fair values at the
date of acquisition. The revisions include an increase in the initially recorded
purchase price to include the payment to be made in June 1998 to an affiliate of
Stephen Rees pursuant to the Services Agreement. In addition, a second valuation
was obtained and used to allocate the purchase price to the assets acquired,
including current assets, net property, plant and equipment, developed
technologies, in-process research and development, assembled workforce,
tradenames and trademarks, customer list and other intangible assets. As a
consequence, in-process research and development written off in the fiscal year
ended March 31, 1997 (the "In-Process R&D") was reduced from $31.6 million to
$29.0 million and the fair value of other assets recorded at the date of the
close of the transaction was increased by $16.7 million, representing $4.8
million of goodwill and $11.9 million of identified intangible assets. See Note
14 of Notes to Consolidated Financial Statements. The effect of the restatement
on the Company's previously reported statement of operations data is as follows
(in thousands except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1996
FISCAL YEAR ENDED MARCH 31, 1996
-------------------------------- -----------------------------------
PREVIOUSLY REPORTED RESTATED PREVIOUSLY REPORTED RESTATED
------------------- -------- ------------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Gross profit...................... $ 41,889 $ 40,889 $36,437 $36,057
Operating income (loss)........... (11,775) (9,435) 14,152 12,656
Net income (loss)................. (17,412) (15,132) 10,536 9,026
Net income (loss) per share....... (1.39) (1.19) 0.73 0.61
Weighted average Ordinary Shares
and equivalents................. 12,536 12,684 14,377 14,889
</TABLE>
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of sales....................................................... 90.5 90.9 89.8
----- ----- -----
Gross profit........................................................ 9.5 9.1 10.2
Selling, general and administrative expenses........................ 4.8 4.2 5.5
Goodwill and intangible assets amortization......................... 0.4 0.2 0.5
Provision for plant closings........................................ -- 0.3 1.2
Acquired in-process research and development........................ -- 6.5 --
----- ----- -----
Operating income (loss)................................... 4.3 (2.1) 3.0
Net interest expense................................................ (0.4) (0.5) (0.8)
Merger expenses..................................................... (0.3) -- --
Foreign exchange gain (loss)........................................ (0.1) 0.2 0.3
Income (loss) from associated company............................... (0.3) -- --
Other income (expense).............................................. -- (0.1) (0.6)
----- ----- -----
Income (loss) before income taxes......................... 3.2 (2.5) 1.9
Provision for income taxes.......................................... 0.6 0.9 0.4
----- ----- -----
Net income (loss)......................................... 2.6% (3.4%) 1.5%
===== ===== =====
</TABLE>
NET SALES
Substantially all of the Company's net sales have been derived from the
manufacture and assembly of products for OEM customers. Net sales in fiscal 1997
increased 9.4% to $490.6 million from $448.3 million in fiscal 1996. This
increase was primarily due to higher sales to existing customers, including US
Robotics, Microsoft, Advanced Fibre Communications and Braun/Thermoscan, sales
to new customers such as Cisco and Auspex, and the inclusion of Astron's sales
following its acquisition in February 1996. This increase was partially offset
by reduced sales to certain existing customers, including Visioneer, Apple
Computer, Houston Tracker Systems, Logitech, Voice Powered Technology and Fast
Multimedia. The Company believes that the reduction in sales to these customers
was due in part to reductions in these customers' sales to end-users. See
"Certain Factors Affecting Future Operating Results -- Rapid Technological
Change."
Net sales in fiscal 1996 increased 88.9% to $448.3 million from $237.4
million in fiscal 1995. This increase was primarily the result of higher sales
to existing customers, including Lifescan (a Johnson & Johnson Company),
Visioneer, Microcom and Global Village Communications, sales to new customers in
the computer and medical industries such as Apple Computer and Thermoscan and
the inclusion of A&A's and Astron's sales after their acquisitions in April 1995
and February 1996, respectively. This was partially offset by a significant
decline in sales to IBM due to IBM's efforts to consolidate more of its
manufacturing business internally.
GROSS PROFIT
Gross profit varies from period to period and is affected by, among other
things, product mix, component costs, product life cycles, unit volumes, start
up, expansion and consolidation of manufacturing facilities and new product
introductions. The Company's new and expanded facilities provide capacity for
production volumes significantly greater than current levels. As a result of
this expansion, the Company anticipates increased depreciation and other fixed
expenses, and expects that its gross profit margin will be adversely affected in
the remainder of fiscal 1998 as it commences volume production in the new
facilities.
20
<PAGE> 21
Gross margin increased to 10.2% in fiscal 1997 compared to 9.1% in fiscal
1996. The increase was mainly attributable to (i) the inclusion of Astron's
printed circuit board business, which has historically had a relatively higher
gross profit margin than the Company, (ii) the concentration of more sales in
the Company's facility in China which has a lower manufacturing cost compared to
the Company's facilities in other locations, and (iii) increased sales,
resulting in increased labor and overhead absorption. This benefit was partially
offset by underutilization of the nCHIP semiconductor fabrication facility and
the Company's Texas facility, which have been closed, and the related inventory
write-offs. Gross margin for fiscal 1998 may be adversely affected in the short
term as the Company commences production in new facilities.
Gross profit margin declined slightly to 9.1% in fiscal 1996 as compared to
9.5% in fiscal 1995 mainly due to the additional costs associated with new
manufacturing facilities in Texas and China that were opened in the fourth
quarter of fiscal 1995 and the expansion of nCHIP's semiconductor fabrication
facility. The decrease in gross profit margin was also attributable to a
reduction in certain selling prices in order to remain competitive.
Cost of sales included research and development costs of approximately
$913,000 and $153,000 in fiscal 1997 and 1996, respectively. The increase from
fiscal 1996 to fiscal 1997 was primarily due to the inclusion of Astron's
results following its acquisition in February 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1997 increased to
$26.8 million from $18.8 million in fiscal 1996 and increased as percentage of
net sales to 5.5% in fiscal 1997 from 4.2% in fiscal 1996. The increase was
mainly due to: (i) the inclusion of Astron's selling and general administrative
expenses for all of fiscal 1997; (ii) increased consulting fees; and (iii)
increased sales and marketing expenses. The increased consulting fees resulted
from financial consulting services provided by two banks for a total of $719,000
in fiscal 1997. The Company also recorded $362,000 in March 1997 for
compensation for management services paid to a new executive officer who was
formerly a key employee of Ericsson in Sweden and who joined the Company upon
the acquisition of the Karlskrona Facilities.
Selling, general and administrative expenses in fiscal 1996 increased to
$18.8 million from $11.5 million in fiscal 1995, but decreased as percentage of
net sales to 4.2% in fiscal 1996 from 4.9% in fiscal 1995. The increase in
absolute dollars was principally due to costs associated with the expanded
facilities in China and Texas, increased sales personnel and market research
activities in U.S. and the inclusion of A&A's and Astron's selling and general
administrative expenses after their acquisitions in April 1995 and February
1996, respectively.
GOODWILL AND INTANGIBLE ASSETS AMORTIZATION
Goodwill, which represents the excess of the purchase price of an acquired
company over the fair market value of its net assets, and intangible assets are
amortized on a straight line basis over the estimated life of the benefits
received which range from three to twenty-five years. Goodwill amortization
increased from $739,000 in fiscal 1996 to $989,000 in fiscal 1997 and intangible
asset amortization increased from $544,000 in fiscal 1996 to $1.6 million in
fiscal 1997. These increases were due to the amortization of additional goodwill
and intangible assets which arose from the Astron acquisition in 1996. In fiscal
1997, the Company recognized approximately $8.5 million of additional goodwill,
as a result of the Astron earnout payment of $6.25 million and the acquisition
of the 40% interest in FICO, partially offset by the effect of the $1.0 million
reduction in the payment due in June 1998 to an affiliate of Stephen Rees.
Goodwill amortization increased from $510,000 in fiscal 1995 to $739,000 in
fiscal 1996 primarily due to the goodwill from the Company's acquisition of A&A
and Astron. Intangible asset amortization increased from $245,000 in fiscal 1995
to $544,000 in fiscal 1996 primarily due to the acquisition of A&A and Astron.
21
<PAGE> 22
PROVISION FOR PLANT CLOSINGS
The provision for plant closings of $5.9 million in fiscal 1997 consists of
$3.4 million relating to the closing of the Texas and nCHIP facilities and $2.5
million for the shift of manufacturing operations from Singapore to lower cost
manufacturing locations. These provisions include $3.3 million associated with
the write-off of obsolete equipment and $2.6 million for severance payments. The
Texas facility had been primarily dedicated to production for Global Village
Communications and Apple Computer, to whom the Company does not anticipate
making substantial sales in future periods.
The provision for plant closings of $1.3 million in fiscal 1996 was
associated with the write-off of certain obsolete equipment at one of the
Company's facilities in Malaysia and in Shekou, China. The provision for plant
closings were related to the Company ceasing its satellite receiver product line
in Malaysia and the closing of its manufacturing operations in Shekou, China.
Production from the Shekou facility has been moved to the Company's plant in
Xixiang, China.
RESEARCH AND DEVELOPMENT
Most of the research and development conducted by the Company is paid for
by customers and is therefore included in cost of sales. Other research and
development is conducted by the Company, but is not specifically identified, as
the Company believes such expenses are less than 1% of its total net sales.
In June 1997, the Company obtained an independent valuation of the value of
certain of the assets of Astron and the In-Process R&D as of the date of
Astron's acquisition. This valuation determined that the fair market value of
the In-Process R&D was $29.0 million. Accordingly, the Company wrote off $29.0
million of In-Process R&D in fiscal 1996. See " -- Recent Changes in Accounting
for Astron Acquisition."
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In June 1997, the Company obtained an independent valuation of certain of
the assets of Astron and the In-Process R&D as of the date of Astron's
acquisition. This valuation determined that the fair value of the In-Process R&D
was $29.0 million. Accordingly, the Company adjusted the amount of In-Process
R&D written off in fiscal 1996 to $29.0 million. See "-- Overview" and
"-- Recent Changes in Accounting for Astron Acquisition."
NET INTEREST EXPENSE
Net interest expense increased to $2.9 million for the three months ended
June 30, 1997 from $595,000 for the three months ended June 30, 1996, due to
interest and amortization of commitment fees related to borrowings under the
Credit Facility, primarily incurred to finance the Karlskrona Acquisition. See
"-- Liquidity and Capital Resources" and "Certain Factors Affecting Future
Operating Results -- Increased Leverage."
22
<PAGE> 23
Net interest expense increased to $3.9 million in fiscal 1997 from $2.4
million in fiscal 1996 mainly due to increases in interest expense in connection
with additional indebtedness used to finance working capital requirements, to
finance acquisitions and to purchase machinery and equipment for capacity
expansion. The Company also recorded approximately $363,000 of interest expense
in fiscal 1997 related to the cash portion of the Company's obligations to an
affiliate of Stephen Rees, a former shareholder and the Chairman of Astron,
pursuant to the Services Agreement. See "-- Overview."
Net interest expense increased to $2.4 million in fiscal 1996 from $774,000
in fiscal 1995. The increase reflects interest incurred in connection with
additional indebtedness used to finance the cash portion of the A&A and Astron
acquisitions, to purchase machinery and equipment for capacity expansion and to
finance the Company's working capital requirements.
MERGER EXPENSES
The Company recorded a one-time non-operating charge of approximately
$816,000 as a result of the nCHIP acquisition in January 1995.
FOREIGN EXCHANGE GAIN (LOSS)
Foreign exchange gain increased to $1.2 million in fiscal 1997 from
$872,000 in fiscal 1996. Foreign exchange gain (loss) increased to a gain of
$872,000 in fiscal 1996 from a loss of $303,000 in fiscal 1995. In each case,
the changes resulted from changes in the rates of exchange between the U.S.
dollar and local currencies of the Company's international operations such as
the Malaysia ringgit and Singapore dollar. See Note 2 of Notes to Consolidated
Financial Statements.
The Company has historically not actively engaged in substantial exchange
rate hedging activities. The Company from time to time may enter into forward
exchange contracts or other hedging activities with respect to other specific,
fixed foreign currency obligations. Because the Company only hedges fixed
obligations, the Company does not expect that these hedging activities will have
a material effect on its results of operations or cash flow. However, there can
be no assurance that the Company will engage in any hedging activities in the
future or that any of its hedging activities will be successful.
INCOME (LOSS) FROM ASSOCIATED COMPANY
The Company acquired 40% interest in FICO in December 1996. According to
the equity method of accounting, the Company previously did not recognize
revenue from sales by FICO, but based on its ownership interest recognized 40%
of the net income or loss of the associated company. In fiscal 1997, the Company
recorded its 40% share of the FICO's post-acquisition net income, amounting to
$241,000.
Flextracker, the joint venture with HTS in which the Company previously
owned a 49% interest, commenced operations in June 1993. According to the equity
method of accounting, the Company previously did not recognize revenue from
sales by Flextracker, but based on its ownership interest recognized 49% of the
net income or loss of the joint venture. Due to start-up costs and manufacturing
inefficiencies, the Company recognized a loss of $729,000 and $70,000 associated
with its interest in Flextracker in fiscal 1995 and fiscal 1994 respectively.
The Company initially contributed $2.5 million for a 49% interest in Flextracker
and HTS contributed $2.6 million for the remaining 51% interest. In April 1994
the Company and HTS each loaned $1 million to Flextracker. In December 1994, the
Company acquired all of the net assets of Flextracker (except the $1.0 million
loan made by HTS to Flextracker) for approximately $3.3 million.
OTHER INCOME (EXPENSE)
Other expense increased to $2.7 million in fiscal 1997 from $398,000 in
fiscal 1996, mainly due to a $3.2 million write-off of publicly traded common
stock received from a customer in 1997 in payment of $3.2 million in accounts
receivable. As a result of a significant decline in the market value of this
common stock following its receipt by the Company, this common stock was
subsequently deemed to be permanently impaired in 1997 resulting in a $3.2
million increase in other expense. Other expense in fiscal 1997 also included
bank commitment fees of $750,000 written off in March 1997 when the bank's
commitment expired
23
<PAGE> 24
unused. See "-- Liquidity and Capital Resources." These increased expenses in
1997 were offset by $898,000 received in fiscal 1997 under the Company's
business interruption insurance policy as a result of an April 1996 fire at its
facilities in Doumen, China and $276,000 of grants to the Company from the local
government in Wales.
Other income (expense) decreased from income of $34,000 in fiscal 1995 to
an expense of $398,000 in fiscal 1996.
PROVISION FOR INCOME TAXES
The Company is structured as a holding company, conducting its operations
through manufacturing and marketing subsidiaries in Singapore, Malaysia, Hong
Kong, Mauritius, China, the United Kingdom, Sweden and the United States. Each
of these subsidiaries is subject to taxation in the country in which it has been
formed. The Company's Asian manufacturing subsidiaries have at various times
been granted certain tax relief in each of these countries, resulting in lower
taxes than would otherwise be the case under ordinary tax rates. See Note 7 of
Notes to Consolidated Financial Statements.
The Company's consolidated effective tax rate for any given period is
calculated by dividing the aggregate taxes incurred by each of the operating
subsidiaries and the holding company by the Company's pre-tax income. Losses
incurred by any subsidiary or by the holding company are not deductible by the
entities incorporated in other countries in the calculation of their respective
local taxes. For example, the charge for the closing of the Texas facility in
fiscal 1997 was incurred by a U.S. subsidiary that did not have income against
which this charge could be offset. The ordinary corporate tax rates for calendar
1997 were 26%, 16.5% and 15% in Singapore, Hong Kong and China, respectively,
and 30% on manufacturing operations in Malaysia. In addition, the tax rate is de
minimis in Labuan, Malaysia and Mauritius where the Company's offshore marketing
and distribution subsidiaries are located. The Company's U.S. and U.K.
subsidiaries are subject to ordinary corporate tax rates of 35% and 33%
respectively. However, these tax rates did not have any material impact on the
Company's taxes in fiscal 1997 due to the losses of these two subsidiaries in
this period. The Company's Swedish subsidiary, which began operation on March
27, 1997 with the acquisition of the Karlskrona Facilities, will be subject to
an ordinary corporate tax rate of 28%.
The Company's consolidated effective tax rate was 22.9% in fiscal 1997. The
provision for plant closings of $1.3 million and the $29.0 million write-off of
In-Process R&D in fiscal 1996 resulted in aggregate net losses for that year,
but the Company incurred taxes on the profitable operations of certain of its
subsidiaries. If the provision for plant closings and In-Process R&D written off
are excluded from such calculation, the Company's fiscal 1996 effective tax rate
would have been 20%.
The Company has structured its operations in Asia in a manner designed to
maximize income in countries where tax incentives have been extended to
encourage foreign investment or where income tax rates are low. The Company's
Singapore subsidiary was granted an investment allowance incentive in respect of
approved fixed capital expenditures subject to certain conditions. These
allowances have been utilized to reduce its taxable income since fiscal 1991,
and were fully utilized at the end of fiscal 1996. If the Singapore subsidiary
sells, leases or disposes of assets in respect of which investment allowances
have been granted before July 31, 1997, the amount of income previously exempted
from Singapore tax will then become taxable at the standard rate of 26%. The
Company's investments in its plants in Xixiang and Doumen, China fall under the
"Foreign Investment Scheme" which entitles the Company to apply for a five year
tax incentive. The Company obtained the tax incentive for the Doumen plant in
December 1995 and the Xixiang plant in October 1996. With the approval, the
Company's tax rates on income from these facilities during the incentive period
will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the
first profitable year. In fiscal 1993, the Company transferred its offshore
marketing and distribution functions to a newly formed marketing subsidiary
located in Labuan, Malaysia, where the tax rate is de minimis. In February 1996,
the Company transferred Astron's sales and marketing business to a newly formed
subsidiary in Mauritius, where the tax rate is 0%. The Company's Malaysian
manufacturing subsidiary has obtained a five year pioneer certificate from the
relevant authority that provides a tax exemption on manufacturing income from
certain products in Johore, Malaysia. To date, this incentive has had a limited
impact on the Company due to the
24
<PAGE> 25
relatively short history of its Malaysian operations and its tax allowances and
losses carry forward. The Company's facility in Shekou, China, which was closed
in fiscal 1996, was located in a "Special Economic Zone" and was an approved
"Product Export Enterprise" that qualified for a special corporate income tax
rate of 10.0%.
If tax incentives are not renewed upon expiration, if the tax rates
applicable to the Company are rescinded or changed, or if tax authorities were
to challenge successfully the manner in which profits are recognized among the
Company's subsidiaries, the Company's worldwide effective tax rate would
increase and its results of operations and cash flow would be adversely
affected. Substantially all of the products manufactured by the Company's Asian
subsidiaries are sold to U.S. based customers. While the Company believes that
profits from its Asian operations are not sufficiently connected to the U.S. to
give rise to U.S. federal or state income taxation, there can be no assurance
that U.S. tax authorities will not challenge the Company's position or, if such
challenge is made, that the Company will prevail in any such disagreement. If
the Company's Asian profits became subject to U.S. income taxes, the Company's
taxes would increase and its results of operations and cash flow would be
adversely affected. In addition, the expansion by the Company of its operations
in North America and Northern Europe may increase its worldwide effective tax
rate.
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $30.7 million for U.S. federal income tax purposes which will
expire between 2003 and 2011 if not previously utilized. Utilization of the U.S.
net operating loss carryforwards may be subject to an annual limitation due to
the change in ownership rules provided by the Internal Revenue Code of 1986.
This limitation and other restrictions provided by the Internal Revenue Code of
1986 may reduce the net operating loss carryforward such that it would not be
available to offset future taxable income of the U.S. subsidiary. At March 31,
1997, the Company had net operating loss carryforwards of approximately $10.0
million and $632,000 in the U.K. and Malaysia, respectively. The utilization of
these net operating loss carryforwards is limited to the future operations of
the Company in the tax jurisdictions in which such carryforwards arose. These
losses carryforward indefinitely. See Note 8 of Notes to Consolidated Financial
Statements.
VARIABILITY OF RESULTS
The Company has experienced, and expects to continue to experience,
significant periodic and quarterly fluctuations in the Company's results of
operations due to a variety of factors. These factors include, among other
things, timing of orders, the short-term nature of most customers' purchase
commitments, volume of orders relative to the Company's capacity, customers'
announcement and introduction and market acceptance of new products or new
generations of products, evolutions in the life cycles of customers' products,
timing of expenditures in anticipation of future orders, effectiveness in
managing manufacturing processes, changes in cost and availability of labor and
components, product mix, and changes or anticipated changes in economic
conditions. In addition, the Company's net sales are adversely affected by the
observance of local holidays during the fourth fiscal quarter in Malaysia and
China, reduced production levels in Sweden in July, and the reduction in orders
by certain customers in the fourth quarter reflecting a seasonal slowdown
following the Christmas holiday. The market segments served by the Company are
also subject to economic cycles and have in the past experienced, and are likely
in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period, and fluctuations in operating results may also result in
fluctuations in the price of the Company's Ordinary Shares. In future, periods,
the Company's revenue or results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Ordinary Shares would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations from the proceeds of public offerings
of equity securities, cash generated from operations, bank debt and lease
financing of capital equipment. In March 1997, the Company terminated the $48.0
million line of credit from several banks and obtained a new $175.0 million
credit facility from BankBoston, N.A. At March 31, 1997 the Company had cash
balances totaling $23.6 million,
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<PAGE> 26
outstanding bank borrowings of $111 million, and an aggregate of $64.0 million
available for borrowing under the New Credit Facility (as defined below).
Cash provided by operating activities in fiscal 1997 was $46.7 million,
consisting primarily of net income, depreciation, provision for plant closing
and decreases in accounts receivable.
Cash used for operating activities in fiscal 1996 was $710,000, consisting
primarily of net profit of $15.1 million (excluding In-Process R&D written off
and provision for plant closings), depreciation, amortization and allowance for
doubtful debt and obsolescence. Cash used for operating activities was primarily
comprised of increases in accounts receivable and inventories reflecting higher
sales in fiscal 1996.
Accounts receivable, net of allowance for doubtful accounts, decreased to
$69.3 million at March 31, 1997 from $78.1 million at March 31, 1996. The
decrease in accounts receivable was primarily due to improved collection of
accounts receivable during fiscal 1997. Inventories increased to $106.6 million
at March 31, 1997 from $52.6 million at March 31, 1996. The increase in
inventories was mainly a result of the acquisition of the $55 million of
inventories at the Karlskrona Facilities. The Company's allowances for doubtful
accounts increased from $3.6 million at March 31, 1996 to $5.7 million at March
31, 1997. The Company allowance for inventory obsolescence increased to $6.2
million at March 31, 1997 from $4.6 million at March 31, 1996. The increases in
the allowances were due to the increases in sales and inventories during fiscal
1997 and the $3.2 million provision for doubtful debts, and write-off shares
taken in payment of receivables, related to one specific customer and inventory
exposure relating to the closing of the Texas facility.
Accounts receivable, net of allowance for doubtful accounts, increased to
$78.1 million at March 31, 1996 from $44.3 million at March 31, 1995 and
inventories increased to $52.6 million at March 31, 1996 from $30.2 million at
March 31, 1995. The increase in accounts receivable and inventories was mainly
due to the 88.9% increase in sales during fiscal 1996. The Company's allowances
for doubtful accounts increased from $1.8 million at March 31, 1995 to $3.6
million at March 31, 1996. The Company's allowance for inventory obsolescence
increased from $1.9 million at March 31, 1995 to $4.6 million at March 31, 1996.
The increases in the allowances were due to the increases in sales and
inventories during fiscal 1996 and the $1.0 million provision for inventory
exposure relating to the closing of the satellite receiver product line in one
of the Company's Malaysia plants.
Cash used for investing activities in fiscal 1997 was $112.0 million,
consisting primarily of $82.4 million for the acquisition of the Karlskrona
Facilities, and $27.0 million of expenditures for machinery and equipment in the
Company's, China, Mexico and California manufacturing facilities and $3.0
million cash paid in November for the 40% interest in FICO.
Cash used for investing activities in fiscal 1996 consisted primarily of
$15.8 million of expenditures for machinery and equipment in the Company's
Texas, China and California manufacturing facilities as well as payment of $15.2
million for the cash portion of the A&A and Astron acquisitions.
Net cash provided by financing activities in fiscal 1997 was $82.4 million,
consisting primarily of bank borrowings of $152.8 million and capital lease
financing. Cash used for financing activities in fiscal 1997 consisted primarily
of $56 million repayment to banks, $10.5 million repayment of notes to Astron's
ex-shareholders (part of purchase consideration) and $8 million repayment of
capital lease obligations.
Net cash provided by financing activities in fiscal 1996 was $31.6 million,
consisting primarily of $22.3 million from the sale of 1,000,000 newly issued
Ordinary Shares and net bank borrowings of $12.3 million.
During the quarter ended March 31, 1997, the Company obtained a commitment
for a new $100.0 million credit facility for which it paid commitment fees of
$750,000. Ultimately, however, the Company required a larger credit facility in
order to fund the acquisition of the Karlskrona Facilities. As a result, the
$100.0 million facility was never consummated and expired during the quarter
unused. Instead of consummating this $100.0 million credit facility and
borrowing under this commitment, the Company entered into the $175.0 million
Credit Facility in March 1997 to provide funding for the acquisition of the
Karlskrona Facilities, for capital expenditures and for general working capital.
The Company paid a separate $2.2 million
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fee for the Credit Facility, which, together with other direct costs of the
facility, was capitalized and is being amortized over the term of the Credit
Facility.
The Credit Facility consists of two loan agreements provided by the
BankBoston, N.A. as agent. Under the Credit Facility, subject to compliance with
certain financial ratios and the satisfaction of customary borrowing conditions,
the Company borrowed $70.0 million of term loans as of March 27, 1997 and the
Company and its United States subsidiary may borrow up to an aggregate of $105.0
million of revolving credit loans. The revolving credit loans are subject to a
borrowing base equal to 70% of consolidated accounts receivable and 20% of
consolidated inventory. As of June 30, 1997, $69.0 million of revolving credit
loans and $70.0 million of term loans were outstanding, and bore interest at a
variable rate equal, as of June 30, 1997, to approximately 8.4% per annum. The
term loans amortize over a five-year period and are subject to certain mandatory
prepayment provisions. Loans under the revolving credit facility will mature in
March 2000. The Company intends to use the net proceeds from this offering to
repay a portion of the outstanding term loans, and intends to use the net
proceeds from the anticipated issuance of the Senior Subordinated Notes to repay
all of the remaining outstanding borrowings under the Credit Facility. See "Use
of Proceeds." Following such repayment, the Company anticipates increasing the
aggregate principal amount of revolving credit loans that may be made under the
Credit Facility and the Company anticipates that it will from time to time
borrow such revolving credit loans to fund its operations and growth. No
assurances can be given, however, as to the availability or amount of any such
increase.
The Credit Facility is secured by a lien on substantially all accounts
receivable and inventory of the Company and its subsidiaries, as well as a
pledge of the Company's shares in certain of its subsidiaries. Loans to the
Company are guaranteed by certain of its subsidiaries and loans to the Company's
United States subsidiary are guaranteed by the Company and by certain of the
Company's subsidiaries. The Credit Facility contains covenants and provisions
that, among other things, prohibit the Company and its subsidiaries from (i)
incurring additional indebtedness, except for subordinated debt evidenced by the
Subordinated Notes (as defined therein) in an aggregate principal amount of not
more than $150.0 million, certain purchase money debt and leases not to exceed
$25.0 million and certain subsidiary and other debt not to exceed $15.0 million;
(ii) incurring liens on their property (subject to certain exceptions); (iii)
making capital investments exceeding $65.0 million in fiscal 1998 and $25.0
million annually thereafter; (iv) engaging in certain sales of assets; (v)
making acquisitions that do not meet certain criteria; and (vi) making certain
other investments. In addition, the Credit Facility prohibits the payment of
dividends or other distributions by the Company to its shareholders.
The Credit Facility also requires that the Company satisfy certain
financial covenants and tests on a consolidated basis which, among other things,
provide that the Company's: (i) Leverage ratio (the ratio of Total Debt to
EBITDA (each as defined therein)) must not exceed 4.25 : 1.00 (reducing to 2.75
: 1.00 by April 1, 1999), (ii) Interest Coverage Ratio (the ratio of EBITDA to
Consolidated Interest Expense (as defined therein)) must not be less than 3.00 :
1.00 (increasing to 4.00 : 1.00 by January 1, 1999), (iii) Fixed Charge Coverage
Ratio (the ratio of EBITDA to Fixed Charges (as defined therein)) must not
exceed 1.15 : 1.00 (increasing to 1.25 : 1.00 by April 1, 1999) and (iv)
Consolidated Tangible Net Worth (as defined therein) must not be less than (a)
95% of Consolidated Tangible Worth at March 31, 1997 plus (b) 75% of positive
Consolidated Net Income (as defined therein) plus (c) 100% of the proceeds of
any Equity Issuance (as defined therein).
The Company's capital expenditures in fourth quarter of fiscal 1997 were
approximately $9.1 million (excluding the purchase price for the Karlskrona
Facilities) and the Company anticipates that its capital expenditures in fiscal
1998 will be approximately $65.0 million, primarily relating to the development
of new and expanded facilities in San Jose, California, Guadalajara, Mexico and
Doumen, China. In addition, the Company expended cash in the fourth quarter of
fiscal 1997 and will be required to expend cash in fiscal 1998 pursuant to the
terms of the Astron acquisition. The Company will be required to make a
principal payment of $5.0 million in February 1998, pursuant to the terms of a
note issued by it in connection with the Astron acquisition and paid an earnout
of $6.25 million in cash in April 1997. The Company is also required to make a
$14.0 million payment to an entity affiliated with Stephen Rees in June 1998,
$5.0 million of this amount is payable in cash and $9.0 million is payable in
cash or, at the option of the Company, in Ordinary Shares, and
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the Company intends to pay the $9.0 million portion in Ordinary Shares. The
Company believes that the existing cash balances, together with anticipated cash
flow from operations and amounts available under the New Credit Facility, will
be sufficient to fund its operations through fiscal 1998.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's future operating results will depend upon conditions in its
market that may affect demand for its services. The following factors, among
others, have in some cases affected, and in the future could affect, the
Company's actual results and could cause such results to differ materially from
those expressed in forward-looking statements made by the Company.
Risks Of Karlskrona Acquisition
The acquisition of the Karlskrona Facilities and the execution of the
Purchase Agreement (together the "Karlskrona Acquisition") represent a
significant expansion of the Company's operations, and entail a number of risks.
In particular, the Karlskrona Facilities had operated as captive manufacturing
facilities for Ericsson prior to March 27, 1997 and are now being integrated
into the Company's ongoing manufacturing operations. This requires optimizing
production lines, implementing new management information systems, implementing
the Company's operating systems, and assimilating and managing existing
personnel. See "-- Overview." The difficulties of this integration may be
further complicated by the geographical distance of the Karlskrona Facilities
from the Company's other operations in East Asia and North America. In addition,
the Karlskrona Acquisition has increased and will continue to increase the
Company's expenses and working capital requirements, and has burdened the
Company's management resources. In the event the Company is unsuccessful in
integrating these operations, the Company would be materially adversely
affected.
As a result of the Karlskrona Acquisition, sales to Ericsson represent, and
the Company expects will continue to represent, a large portion of its net
sales. The Company currently anticipates that sales to Ericsson will represent
from 25% to 40% of its net sales in fiscal 1998. See "Certain Factors Affecting
Future Operating Results -- Customer Concentration; Dependence on Electronics
Industry" and "Business -- Karlskrona Acquisition." Prior to the Karlskrona
Acquisition, Ericsson was not a substantial customer of the Company. The Company
has no experience operating in Sweden, and there can be no assurance that the
Company can achieve acceptable levels of profitability, or reduce costs and
prices to Ericsson over time as contemplated by the Purchase Agreement. In
addition, there can be no assurance that the Company will not encounter
difficulties in meeting Ericsson's expectations as to product quality and
timeliness. If Ericsson's requirements exceed the volume anticipated by the
Company, the Company may be unable to meet these requirements on a timely basis.
The Company's inability to meet Ericsson's volume, quality, timeliness and cost
requirements, and to quickly resolve any other issues with Ericsson, could have
a material adverse effect on the Company and its results of operations. There
can also be no assurance that Ericsson will purchase a sufficient quantity of
products from the Company to meet the Company's expectations or that the Company
will utilize a sufficient portion of the capacity of the Karlskrona Facilities
to achieve profitable operations.
The Company intends to use the Karlskrona Facilities to manufacture
products for OEMs other than Ericsson. The Company has no commitments by any
third party to purchase manufacturing services to be provided at the Karlskrona
Facilities, and no assurance can be given that the Company will be successful in
marketing and providing manufacturing services to third parties from the
Karlskrona Facilities. Ericsson also has certain rights to be consulted on the
management of the Karlskrona Facilities and to approve the use of the Karlskrona
Facilities for Ericsson's competitors, or for other customers where such use
might adversely affect Ericsson's access to production capacity at the
facilities. Further, no assurances can be given as to the Company's ability to
expand manufacturing capacity at the Karlskrona Facilities.
The Purchase Agreement contains cost reduction targets and price
limitations and imposes on the Company certain manufacturing quality
requirements, and there can be no assurance that the Company can achieve
acceptable levels of profitability under the Purchase Agreement or reduce costs
and prices to Ericsson over time as contemplated by the Purchase Agreement. In
addition, the Purchase Agreement requires that the Company maintain a ratio of
equity to total liabilities, debt and equity of at least 25%, and a current
ratio of at
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least 120%. Further, the Purchase Agreement prohibits the Company from selling
or relocating the equipment acquired in the transaction without Ericsson's
consent. A material breach by the Company of any of the terms of the Purchase
Agreement could allow Ericsson to repurchase the assets conveyed to the Company
at the Company's book value or to obtain other relief, including the
cancellation of outstanding purchase orders or termination of the Purchase
Agreement. Ericsson also has certain rights to be consulted on the management of
the Karlskrona Facilities and to approve the use of the Karlskrona Facilities
for Ericsson's competitors or for other customers where such use might adversely
affect Ericsson's access to production capacity at the facilities. In addition,
without Ericsson's consent, the Company may not enter into any transactions that
could adversely affect its ability to continue to supply products and services
to Ericsson under the Purchase Agreement or its ability to reduce costs and
prices to Ericsson. As a result of these rights, Ericsson may, under certain
circumstances, retain a significant degree of control over the Karlskrona
Facilities and their management. See "Business -- Karlskrona Acquisition."
Increased Leverage
At March 31, 1997, the Company had consolidated indebtedness of
approximately $150.6 million (including bank borrowings, long-term debts and
capitalized lease obligations, and excluding $9.0 million of liabilities
relating to the Astron acquisition that may be repaid in cash or, at the option
of the Company, in the Company's Ordinary Shares). The Company's indebtedness as
of March 31, 1997 included borrowings under the New Credit Facility on March 27,
1997 of $111.0 million which substantially increased the Company's leverage. As
a result, the Company's ratio of indebtedness to shareholders equity increased
from approximately 88% at March 31, 1996 to 181% at March 31, 1997. See
"-- Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to the Company and its shareholders, including the following: (i)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures, product development, acquisitions or other
purposes may be limited or impaired; (ii) the Company's operating flexibility
with respect to certain matters will be limited by covenants that will limit the
ability of the Company and certain of its subsidiaries to incur additional
indebtedness, grant liens, make capital expenditures, pay dividends, redeem
capital stock or prepay certain subordinated indebtedness and enter into sale
and leaseback transactions; and (iii) the Company's degree of leverage may make
it more vulnerable to economic downturns, may limit its ability to pursue other
business opportunities and may reduce its flexibility in responding to changing
business and economic conditions. The Company's ability to generate cash for the
repayment of debt will be dependent upon the future performance of the Company's
businesses, which will in turn be subject to financial, business, economic and
other factors affecting the business and operations of the Company, including
factors beyond its control, such as prevailing economic conditions.
The Company may seek growth through selective acquisitions, including
significant acquisitions. The Company could incur substantial additional
indebtedness in connection with a significant acquisition, in which event the
Company's leverage would be increased.
Management of Expansion and Consolidation
The Company is currently experiencing a period of rapid expansion through
both internal growth and acquisitions, with net sales increasing from $80.7
million in fiscal 1992 to $490.6 million in fiscal 1997. In addition to its
recent acquisitions, the Company may from time to time pursue the acquisition of
other companies, assets or product lines that complement or expand its existing
business. There can be no assurance that the Company's historical growth will
continue or that the Company will successfully manage the integration of the
acquired operations. Expansion has caused, and is expected to continue to cause,
strain on the Company's infrastructure, including its managerial, technical,
financial and other resources. To manage further growth, the Company must
continue to enhance financial controls and hire additional engineering and sales
personnel. Continued growth will also require increased investments to enhance
management information systems capabilities and to add manufacturing capacity.
The Company may experience certain inefficiencies as it integrates new
operations and manages geographically dispersed operations. There can be no
assurance that the Company will be able to manage its expansion effectively, and
a failure to do so could have
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a material adverse effect on the Company's results of operations. In addition,
the Company's results of operations would be adversely affected if its new
facilities do not achieve growth sufficient to offset increased expenditures
associated with expansion.
Expansion through acquisitions and internal growth has contributed to the
Company's incurring significant accounting charges and experiencing volatility
in its operating results. In the fourth quarter of fiscal 1996, the Company
reported a substantial loss as a result of the write-off of in-process research
and development charges related to the Astron acquisition and closure of a
facility in Malaysia and a facility in China. In fiscal 1997, the Company
reported charges associated with closing its manufacturing facility in Texas,
downsizing manufacturing operations in Singapore, and writing off obsolete
equipment and incurring severance obligations at the nCHIP semiconductor
fabrication facility. There can be no assurance that the Company will not
continue to experience volatility in its operating results or incur write-offs
in connection with expansion, acquisitions and consolidation. Furthermore, the
Company has recently completed the construction of significant new facilities in
Guadalajara, Mexico, Doumen, China, and San Jose, California, resulting in new
fixed and operating expenses, including substantial increases in depreciation
expense that will increase the Company's cost of sales. There can be no
assurances that the Company will utilize a sufficient portion of the capacity of
these facilities to offset the impact of these expenses on its gross margins and
operating income. If revenue levels do not increase sufficiently to offset these
new expenses, the Company's operating results could be materially adversely
affected.
The Company is beginning the process of replacing its management
information systems. The new systems will significantly affect many aspects of
the Company's business including its manufacturing, sales and marketing, and
accounting functions, and the Company's ability to integrate the Karlskrona
Facilities, which must be converted to the new system, and the successful
implementation of these systems will be important to facilitate future growth.
The Company intends to implement the new system incrementally on a regional
basis and currently anticipates that the implementation of the new management
information systems will take at least 18 months. The Company anticipates
expending from $7.0 million to $15.0 million in fiscal 1998 and 1999 to
implement the new management information system, and anticipates funding these
expenditures with cash from operations and borrowings under its credit facility.
Delays or difficulties could be encountered in the implementation process, which
could cause significant disruption in operations, including problems with the
delivery of its products or an adverse impact on its ability to access timely
and accurate financial and operating information and could materially increase
the cost of implementing the new management information system. If the Company
is not successful in implementing its new systems or if the Company experiences
difficulties in such implementation, the Company's operating results could be
materially adversely affected.
Acquisitions
Acquisitions have represented a significant portion of the Company's growth
strategy, and the Company intends to continue to pursue attractive acquisition
opportunities. Acquisitions involve a number of risks in addition to those
described under "-- Management of Expansion and Consolidation" that could
adversely affect the Company, including the diversion of management's attention,
the integration and assimilation of the operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees of the acquired companies. The Company may not have had any
experience with technologies, processes and markets involved with the acquired
business and accordingly may lack the management and marketing experience that
will be necessary to successfully operate and integrate the business. The
successful operation of an acquired business will require communication and
cooperation in product development and marketing among senior executives and key
technical personnel. Given the inherent difficulties involved in completing a
major business combination, there can be no assurance that such cooperation will
occur or that integration of the respective businesses will be successful and
will not result in disruption in one or more sectors of the Company's business.
In addition, there can be no assurance that the Company will retain key
technical, management, sales and other personnel, that the market will favorably
view the Company's entry into a new industry or market or that the Company will
realize any of the other anticipated benefits of the acquisition. Furthermore,
additional acquisitions would require investment of financial resources, and may
require debt or equity financing. No assurance can be given that the Company
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will consummate any acquisitions in the future, that any past or future
acquisition by the Company will not materially adversely affect the Company or
that any such acquisition will enhance the Company's business.
Since the Company's acquisition of Astron, the net sales generated by
Astron's then-existing products and services, and by its products and services
then under development, have grown at rates significantly lower than those
anticipated by the Company at the time of the acquisition and significantly
lower than those assumed in the independent valuation used by the Company in
allocating the purchase price of Astron to the assets acquired. The Company has
not yet completed development of other technologies that were material to its
valuation of Astron and which it initially anticipated completing in fiscal 1996
and 1997. The completion of such development is subject to a number of
uncertainties, including potential difficulties in optimizing manufacturing
processes and the potential development of alternative technologies by
competitors that could render Astron's technologies uncompetitive or obsolete.
Accordingly, no assurances can be given as to whether, or when, the Company will
be able to complete the development of such technologies, as to the cost of such
development, or as to potential sales of products based on such technologies.
The capabilities provided by the technologies under development may not
otherwise be available to the Company. Accordingly, the failure by the Company
to successfully develop such technologies would limit the Company's ability to
compete effectively for business requiring certain advanced capabilities, and
would prevent it from achieving the anticipated benefits of the Astron
acquisition. See "-- Overview."
Customer Concentration; Dependence on Electronics Industry
A small number of customers are currently responsible for a significant
portion of the Company's net sales. In fiscal 1997, the Company's five largest
customers accounted for approximately 46.0% of net sales. Approximately 13.3%
and 11% of the Company's net sales for fiscal 1997 were derived from sales to
Lifescan and U.S. Robotics, respectively. The Company anticipates that a small
number of customers will continue to account for a large portion of its net
sales as it focuses on strengthening and broadening relationships with leading
OEMs. The Company expects that sales to Ericsson will represent a significant
portion of its net sales. See "Business -- Customers" and "-- Karlskrona
Acquisition."
The composition of the group comprising the Company's largest customers has
varied from year to year, and there can be no assurance that the Company's
principal customers will continue to purchase products and services from the
Company at current levels, if at all. For example, the Company expects that its
sales to Global Village Communications in fiscal 1998 will be materially lower
than in recent periods. Significant reductions in sales to any of these
customers, or the loss of one or more major customers, would have a material
adverse effect on the Company. The Company generally does not obtain firm
long-term volume purchase commitments from its customers, and over the past few
years has experienced reduced lead-times in customer orders. In addition,
customer contracts can be canceled and volume levels can be changed or delayed.
The timely replacement of canceled, delayed, or reduced contracts with new
business cannot be assured. These risks are exacerbated because a majority of
the Company's sales are to customers in the electronics industry, which is
subject to rapid technological change and product obsolescence. The factors
affecting the electronics industry in general, or any of the Company's major
customers in particular, could have a material adverse effect on the Company.
Credit terms are extended to customers after performing credit evaluations,
which continue throughout a customer's contract period. Credit losses have
occurred in the past, and no assurances can be given that credit losses, which
could be material, will not occur in the future. The Company's concentration of
customers increases the risk that any credit loss would have a material adverse
effect on the Company.
Variability of Customer Requirements and Operating Results
Contract manufacturers must provide increasingly rapid product turnaround
and respond to ever-shorter lead times. The Company generally does not obtain
long-term purchase orders but instead works with its customers to anticipate the
volume of future orders. In certain cases, the Company will procure components
without a customer commitment to pay for them, and the Company must continually
make other significant decisions for which it is responsible, including the
levels of business that it will seek and accept, production
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schedules, personnel needs and other resource requirements. A variety of
conditions, both specific to the individual customer and generally affecting the
industry, may cause customers to cancel, reduce or delay orders. Cancellations,
reductions or delays by a significant customer or by a group of customers would
adversely affect the Company. On occasion, customers may require rapid increases
in production, which can stress the Company's resources and reduce margins.
Although the Company has increased its manufacturing capacity, there can be no
assurance that the Company will have sufficient capacity at any given time to
meet its customers' demands if such demands exceed anticipated levels.
In addition to the variability resulting from the short-term nature of its
customers' commitments, other factors have contributed, and may contribute in
the future to significant periodic and quarterly fluctuations in the Company's
results of operations. These factors include, among other things: timing of
orders; volume of orders relative to the Company's capacity; customers'
announcements, introductions and market acceptance of new products or new
generations of products; evolution in the life cycles of customers' products;
timing of expenditures in anticipation of future orders; effectiveness in
managing manufacturing processes; changes in cost and availability of labor and
components; product mix; and changes or anticipated changes in economic
conditions. In addition, the Company's revenues are adversely affected by the
observance of local holidays during the fourth fiscal quarter in Malaysia and
China, reduced production levels in Sweden in July, and the reduction in orders
by certain customers in the fourth fiscal quarter reflecting a seasonal slowdown
following the Christmas holiday.
Expansion through acquisition and internal growth has contributed to the
Company's incurring significant accounting charges and to volatility in its
operating results. In the fourth quarter of fiscal 1996, the Company reported a
substantial loss as a result of the write off of in-process research and
development charges related to the Astron acquisition and closure of facilities
in Malaysia and China. In the third and fourth quarters of fiscal 1997, the
Company reported charges associated with the closure of its manufacturing
facilities in Texas, the termination of manufacturing operations in Singapore
and the write-off of obsolete equipment at the nCHIP semiconductor fabrication
facility. There can be no assurance that the Company will not continue to
experience volatility in its operating results or incur write-offs in connection
with expansion, acquisitions and consolidation.
The market segments served by the Company are also subject to economic
cycles and have in the past experienced, and are likely in the future to
experience, recessionary periods. A recessionary period affecting the industry
segments served by the Company could have a material adverse effect on the
Company's results of operations. Results of operations in any period should not
be considered indicative of the results to be expected for any future period,
and fluctuations in operating results may also result in fluctuations in the
price of the Company's Ordinary Shares. In future periods, the Company's revenue
or results of operations may be below the expectations of public market analysts
and investors. In such event, the price of the Company's Ordinary Shares would
likely be materially adversely affected. See "-- Results of Operations."
Rapid Technological Change
The markets in which the Company's customers compete are characterized by
rapidly changing technology, evolving industry standards and continuous
improvements in products and services. These conditions frequently result in
short product life cycles. The Company's success will depend to a significant
extent on the success achieved by its customers in developing and marketing
their products, some of which are new and untested. If technologies or standards
supported by customers' products become obsolete or fail to gain widespread
commercial acceptance, the Company's business may be materially adversely
affected. See "-- Results of Operations."
The Company has made substantial investments in developing advanced
interconnect technological capabilities. See "Business -- Services." These
capabilities, primarily MCMs, miniature gold-finished PCBs and epoxy molding
conductive compounds, currently account for a relatively small portion of the
overall market for electronic interconnect products. The ability of the Company
to achieve desired operating results will depend upon the extent to which
customers design, manufacture and adopt systems based on these advanced
technologies. There can be no assurance that the Company will be able to develop
and exploit these
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technologies successfully. In addition, there can be no assurance that the
Company will be able to exploit new technologies as they are developed or to
adapt its manufacturing processes, technologies and facilities to address
emerging customer requirements.
Competition
The electronics contract manufacturing industry is extremely competitive
and includes hundreds of companies, several of whom have achieved substantial
market share. The Company competes against numerous domestic and foreign
contract manufacturers, and current and prospective customers also evaluate the
Company's capabilities against the merits of internal production. In addition,
in recent years the electronics contract manufacturing industry has attracted a
significant number of new entrants, including large OEMs with excess
manufacturing capacity, and many existing participants, including the Company,
have substantially expanded their manufacturing capacity by expanding their
facilities and adding new facilities. In the event of a decrease in overall
demand for contract manufacturing services, this increased capacity could result
in substantial pricing pressures, which could adversely affect the Company's
operating results. Certain of the Company's competitors, including Solectron
Corporation and SCI Systems, have substantially greater manufacturing,
financial, research and development and marketing resources than the Company.
The Company believes that the principal competitive factors in the segments of
the contract manufacturing industry in which it operates are cost, technological
capabilities, responsiveness and flexibility, delivery cycles, location of
facilities, product quality and range of services available. Failure to satisfy
any of the foregoing requirements could materially adversely affect the
Company's competitive position.
Risk of Increased Taxes
The Company has structured its operations in a manner designed to maximize
income in countries where tax incentives have been extended to encourage foreign
investment or where income tax rates are low. If these tax incentives are not
renewed upon expiration, if the tax rates applicable to the Company are
rescinded or changed, or if tax authorities successfully challenge the manner in
which profits are recognized among the Company's subsidiaries, the Company's
taxes would increase and its results of operations and cash flow would be
adversely affected. Substantially all of the products manufactured by the
Company's Asian subsidiaries are sold to U.S.-based customers. While the Company
believes that profits from its Asian operations are not sufficiently connected
to the U.S. to give rise to U.S. federal or state income taxation, there can be
no assurance that U.S. tax authorities will not challenge the Company's position
or, if such challenge is made, that the Company would prevail in any such
dispute. If the Company's Asian profits became subject to U.S. income taxes, the
Company's worldwide effective tax rate would increase and its results of
operations and cash flow would be adversely affected. The expansion by the
Company of its operations in North America and Northern Europe may increase its
worldwide effective tax rate. See "-- Provision for Income Taxes."
Risks of International Operations
The Company has substantial manufacturing operations located in China,
Malaysia, Sweden and the United States. In addition, the Company has recently
constructed a manufacturing campus in Mexico, where the Company has never
manufactured products. The Company's net sales derived from operations outside
of the United States was $327.0 million in fiscal 1997, $161.8 million of which
was derived from operations in Hong Kong and China, and was $148.4 million in
the three months ended June 30, 1997, $50.0 million of which was derived from
operations in Hong Kong and China. The geographical distances between Asia,
North America and Europe create a number of logistical and communications
challenges. Because of the location of manufacturing facilities in a number of
countries, the Company is affected by economic and political conditions in those
countries, including fluctuations in the value of currency, duties, possible
employee turnover, labor unrest, lack of developed infrastructure, longer
payment cycles, greater difficulty in collecting accounts receivable, the
burdens and costs of compliance with a variety of foreign laws and, in certain
parts of the world, political instability. Changes in policies by the U.S. or
foreign governments resulting in, among other things, increased duties, higher
taxation, currency conversion limitations, restrictions on the transfer of
funds, limitations on imports or exports, or the expropriation of private
enterprises could also have a material adverse effect on the Company. The
Company could also be adversely affected if the current policies
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encouraging foreign investment or foreign trade by its host countries were to be
reversed. In addition, the attractiveness of the Company's services to its U.S.
customers is affected by U.S. trade policies, such as "most favored nation"
status and trade preferences for certain Asian nations. For example, trade
preferences extended by the United States to Malaysia in recent years were not
renewed in 1997.
In particular, the Company's operations and assets are subject to
significant political, economic, legal and other uncertainties in China and
Mexico, where the Company is substantially expanding its operations.
Risks Relating to China. The Company's operations and assets are subject to
significant political, economic, legal and other uncertainties in China,
where the Company is substantially expanding its operations. Under its
current leadership, the Chinese government has been pursuing economic
reform policies, including the encouragement of foreign trade and
investment and greater economic decentralization. No assurance can be
given, however, that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Despite
progress in developing its legal system, China does not have a
comprehensive and highly developed system of laws, particularly with
respect to foreign investment activities and foreign trade. Enforcement of
existing and future laws and contracts is uncertain, and implementation and
interpretation thereof may be inconsistent. As the Chinese legal system
develops, the promulgation of new laws, changes to existing laws and the
preemption of local regulations by national laws may adversely affect
foreign investors.
The Company could also be adversely affected by the imposition of austerity
measures intended to reduce inflation, the inadequate development or
maintenance of infrastructure or the unavailability of adequate power and
water supplies, transportation, raw materials and parts, or a deterioration
of the general political, economic or social environment in China.
In addition, China currently enjoys Most Favored Nation ("MFN") status
granted by the United States, pursuant to which the United States imposes
the lowest applicable tariffs on Chinese exports to the United States. The
United States annually reconsiders the renewal of MFN trading status for
China. No assurance can be given that China's MFN status will be renewed in
the future years. China's loss of MFN status could adversely affect the
Company by increasing the cost to the U.S. customers of products
manufactured by the Company in China.
The Company maintains certain administrative, procurement and manufacturing
operations in Hong Kong, which may be influenced by the changing political
situation in Hong Kong and by the general state of the Hong Kong economy.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to China, and Hong Kong became a Special Administrative Region
("SAR"). Based on current political conditions and the Company's
understanding of the Basic Law of the Hong Kong SAR of China, the Company
does not believe that the transfer of sovereignty over Hong Kong will have
a material adverse effect on the Company. There can be no assurance,
however, that changes in political, legal or other conditions will not
result in such an adverse effect.
Risks Relating to Mexico. The Mexican government exercises significant
influence over many aspects of the Mexican economy. Accordingly, the
actions of the Mexican government concerning the economy could have a
significant effect on private sector entities in general and the Company in
particular. In addition, during the 1980s, Mexico experienced periods of
slow or negative growth, high inflation, significant devaluations of the
peso and limited availability of foreign exchange. As a result of the
Company's recent expansion in Mexico, economic conditions in Mexico will
affect the Company.
Currency Fluctuations
While Flextronics transacts business predominantly in U.S. dollars and most
of its revenues are collected in U.S. dollars, a portion of Flextronics' costs
such as payroll, rent and indirect operation costs, are denominated in other
currencies such as Singapore dollars, Swedish kronor, Hong Kong dollars,
Malaysian ringgit, British pounds sterling and Chinese renminbi. Historically,
fluctuations in foreign currency exchange rates have not resulted in significant
exchange losses to the Company. As a result of the Karlskrona
34
<PAGE> 35
Acquisition, a significant portion of the Company's business has been, and is
expected to continue to be, conducted in Swedish kronor. Changes in the relation
of these and other currencies to the U.S. dollar will affect the Company's cost
of goods sold and operating margins and could result in exchange losses. The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted. The Company has historically not
actively engaged in substantial exchange rate hedging activities. The Company
from time to time may enter into forward exchange contracts or other hedging
activities with respect to other specific, fixed foreign currency obligations.
Because the Company only hedges fixed obligations, the Company does not expect
that these hedging activities will have a material effect on its results of
operations or cash flow. However, there can be no assurance that the Company
will engage in any hedging activities in the future or that any of its hedging
activities will be successful. See "-- Results of Operations -- Foreign Exchange
Gain (Loss)."
Over the last five years, the Chinese renminbi has experienced significant
devaluation against most major currencies. The establishment of the current
exchange rate system as of January 1, 1994 produced a significant devaluation of
the renminbi from $1.00 to Rmb 5.7 to approximately $1.00 to Rmb 8.7. The rates
at which exchanges of renminbi into U.S. dollars may take place in the future
may vary, and any material increase in the value of the renminbi relative to the
U.S. dollar would increase the Company's costs and expenses and therefore would
have a material adverse effect on the Company.
Limited Availability of Components
A substantial majority of the Company's net sales are derived from turnkey
manufacturing in which the Company is responsible for procuring materials, which
typically results in the Company bearing the risk of component price increases.
At various times there have been shortages of certain electronics components,
including DRAMs, memory modules, logic devices, ASICs, laminates, specialized
capacitors and integrated circuits in bare-die form. Component shortages could
result in manufacturing and shipping delays or higher prices which could have a
material adverse effect on the Company.
Dependence on Key Personnel and Skilled Employees
The Company's success depends to a large extent upon the continued services
of key executives and skilled personnel. Generally, the Company's employees are
not bound by employment or noncompetition agreements. The Company has entered
into service agreements with certain officers, including Ronny Nilsson, Teo Buck
Song, Michael McNamara and Tsui Sung Lam, some of which contain non-competition
provisions and provides its officers and key employees with stock options that
are structured to incentivize such employees to remain with the Company.
However, there can be no assurance as to the ability of the Company to retain
its officers and key employees. The loss of such personnel could have a material
adverse effect on the Company. The Company's business also depends upon its
ability to continue to recruit, train and retain skilled and semi-skilled
employees, particularly administrative, engineering and sales personnel. There
is intense competition for skilled and semi-skilled employees, particularly in
the San Jose, California market, and the Company's failure to recruit, train and
retain such employees could adversely affect the Company's results of
operations.
Environmental Compliance Risks
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. Substrates for its MCMs are manufactured on a
semiconductor-type fabrication line in California owned by the Company. The
Company is also expanding its PCB fabrication operations in China. Proper
handling, storage and disposal of the metals and chemicals used in these
manufacturing processes are important considerations in avoiding environmental
contamination. Although the Company believes that its facilities are currently
in material compliance with applicable environmental laws, and it monitors its
operations to avoid violations arising from human error or equipment failures,
there can be no assurances that violations will not occur. In the event of a
violation of environmental laws, the Company could be held liable for damages
and for the costs of remedial actions and could also be subject to revocation of
its effluent discharge permits. Any such revocations could require the
35
<PAGE> 36
Company to cease or limit production at one or more of its facilities, thereby
having a material adverse effect on the Company's operations. Environmental laws
could also become more stringent over time, imposing greater compliance costs
and increasing risks and penalties associated with any violation, which could
have a material adverse effect on the Company.
Protection of Intellectual Property
The Company relies on a combination of patent, trade secret and trademark
laws, confidentiality procedures and contractual provisions to protect its
intellectual property. The Company seeks to protect certain of its technology
under trade secret laws, which afford only limited protection. There can be no
assurance that any of the Company's pending patent applications will be issued
or that intellectual property laws will protect the Company's intellectual
property rights. In addition, there can be no assurance that any patent issued
to the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to obtain and use information that the Company regards as
proprietary. Furthermore, there can be no assurance that others will not
independently develop similar technology or design around any patents issued to
the Company. Moreover, effective protection of intellectual property rights may
be unavailable or limited in certain foreign countries in which the Company
operates. In particular, the Company may be afforded only limited protection of
its intellectual property rights in China.
The Company may in the future be notified that it is infringing certain
patent or other intellectual property rights of others, although there are no
such pending lawsuits against the Company or unresolved notices that it is
infringing intellectual property rights of others. No assurance can be given
that in the event of such infringement, licenses could be obtained on
commercially reasonable terms, if at all, or that litigation will not occur. The
failure to obtain necessary licenses or other rights or the occurrence of
litigation arising out of such claims could materially adversely affect the
Company.
Volatility of Market Price of Ordinary Shares
The stock market in recent years has experienced significant price and
volume fluctuations that have affected the market prices of technology companies
and that have often been unrelated to or disproportionately impacted by the
operating performance of such companies. There can be no assurance that the
market for the Ordinary Shares will not be subject to similar fluctuations.
Factors such as fluctuations in the operating results of the Company,
announcements of technological innovations or events affecting other companies
in the electronics industry, currency fluctuations and general market conditions
may have a significant effect on the market prices of the Company's securities,
including the Ordinary Shares.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by ITEM 8 is incorporated by reference herein from
Part IV, Item 14(a)(1) and (2).
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable
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<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS
The names, ages and positions of the Company's Directors and officers as of
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------- --- ------------------------------------------------
<S> <C> <C>
Michael E. Marks 46 Chief Executive Officer and Director
Tsui Sung Lam 47 President, Asia Pacific Operations and Director
Robert R. B. 48 Senior Vice President of Finance and
Dykes Administration and Director
Ronny Nilsson 49 Senior Vice President, Europe
Goh Chan Peng 42 Senior Vice President of Finance and Operations,
Asia-Pacific
Teo Buck Song 40 Vice President, Purchasing, Asia Pacific
Michael McNamara 40 Vice President, President North American
Operations
Stephen J. L. 36 Senior Vice President, Worldwide Sales and
Rees Marketing and Director
Michael J. Moritz 42 Director
Richard L. Sharp 50 Director
Bernard J. 53 Director
Lacroute
</TABLE>
Michael E. Marks -- Mr. Marks has been the Company's Chief Executive
Officer since January 1994 and its Chairman of the Board since July 1993. He has
been a Director of the Company since December 1991. From November 1990 to
December 1993, Mr. Marks was President and Chief Executive Officer of Metcal,
Inc., a precision heating instrument company ("Metcal"). Mr. Marks received a
B.A. and M.A. from Oberlin College and an M.B.A. from the Harvard Business
School.
Tsui Sung Lam -- Mr. Tsui has been the Company's President, Asia-Pacific
since April 1997, and a Director since 1991. From January 1994 to April 1997, he
served as the Company's President and Chief Operating Officer. From June 1990 to
December 1993, he was the Company's Managing Director and Chief Executive
Officer. From 1982 to June 1990, Mr. Tsui served in various positions for
Flextronics, Inc., the Company's predecessor, including Vice President of Asian
Operations. Mr. Tsui received Diplomas in Production Engineering and Management
Studies from Hong Kong Polytechnic, and a Certificate in Industrial Engineering
from Hong Kong University.
Robert R. B. Dykes -- Mr. Dykes has served as a Director of the Company
since January 1994 and since February 1997, has served as its Senior Vice
President of Finance and Administration. Mr. Dykes was Executive Vice President,
Worldwide Operations and Chief Financial Officer of Symantec Corporation, an
application and system software products company, from 1988 to February 1997.
Mr. Dykes received a Bachelor of Commerce and Administration degree from
Victoria University in Wellington, New Zealand. Mr. Dykes is on the board of
directors of Symantec Corporation.
Ronny Nilsson -- Mr. Nilsson has served as the Company's Senior Vice
President, Europe since April 1997. From May 1995 to April 1997, he was Vice
President and General Manager, Supply & Distribution and Vice President,
Procurement, of Ericsson Business Networks where he was responsible for
facilities in Sweden, Austria, China, the Netherlands, Mexico and Australia.
From January 1991 to May 1995, he was Director of Production at the EVOX+RIFA
Group, a manufacturer of components, and Vice President of RIFA AB where he was
responsible for factories in Sweden, Finland, Singapore and Indonesia. Mr.
Nilsson received a certificate in Mechanical Engineering from the Lars Kagg
School in Kalmar, Sweden and certificates from the Swedish Management Institute
and the Ericsson Management Program.
Goh Chan Peng -- Mr. Goh has served as the Company's Chief Financial
Officer since July 1992 and as its Senior Vice President of Finance and
Operations, Asia-Pacific since April 1997. From June 1990 to
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<PAGE> 38
July 1992, he was the Company's Director of Finance. From 1982 to June 1990, he
served in various financial capacities at Flex Holdings Pte Limited, the
predecessor to the Company, including Director of Finance and Finance
Manager-Asia Pacific Region. Mr. Goh received a Bachelor of Commerce from
Singapore Nanyang University and a Diploma in Personnel Management from
Singapore Institute of Management.
Teo Buck Song -- Mr. Teo has served as Vice President, Purchasing since
April 1994. He was Director of Purchasing at Flex Holdings Pte Limited, the
predecessor to the Company from 1988 to April 1994. From 1982 to 1988, he served
in various operational capacities at Flex Holdings Pte Limited, the predecessor
to the Company, including Purchasing Manager and Production Material Control
Manager. Mr. Teo received a Production Engineering Diploma from Singapore
Polytechnic.
Michael McNamara -- Mr. McNamara has served as Vice President, President
North American Operations since April 1994. From May 1993 to March 1994, he was
President and Chief Executive Officer of Relevant Industries, Inc., which was
acquired by the Company in March 1994. From May 1992 to May 1993, he was Vice
President, Manufacturing Operations at Anthem Electronics, an electronics
distributor. From April 1987 to May 1992, he was a Principal of Pittiglo, Rabin,
Todd & McGrath, an operations consulting firm. Mr. McNamara received a B.S. from
the University of Cincinnati and an M.B.A. from Santa Clara University.
Stephen J. L. Rees -- Mr. Rees has served as a Director of the Company
since April 1996, as Senior Vice President, Worldwide Sales and Marketing since
May 1997, and as Chairman and Chief Executive Officer of Astron since the
acquisition of Astron by the Company in February 1996. Mr. Rees has been
Chairman and Chief Executive Officer of Astron since November 1991. Mr. Rees
holds a B.A. in Finance from the City of London Business School and graduated in
Production Technology and Mechanical Engineering from the HTL St. Polten
Technical Institute in Austria.
Michael J. Moritz -- Mr. Moritz has served as a Director of the Company
since July 1993. Mr. Moritz has been a General Partner of Sequoia Capital, a
venture capital firm, since 1988. Mr. Moritz also serves as director of Yahoo,
Inc., Neomagic and several privately-held companies.
Richard L. Sharp -- Mr. Sharp has served as a Director of the Company since
July 1993. He has been the Chairman, President, Chief Executive Officer and a
director of Circuit City Stores, Inc., a consumer electronics and appliances
retailer, since June 1986. Mr. Sharp also serves as a director of S&K Famous
Brands, Inc. and the Fort James Corporation.
Bernard J. Lacroute -- Mr. Lacroute has served as a Director of the Company
since July 1993. Mr. Lacroute has been a partner of Kleiner Perkins Caufield &
Byers, a Northern California venture capital firm, since 1989. Mr. Lacroute also
serves as a director of several privately-held companies.
MANAGEMENT TEAM CHANGES
As of May 1, 1997 Stephen Rees, Chairman of Astron, has taken over
responsibility for world-wide sales and marketing and Dennis Stradford, formerly
responsible for world-wide sales and marketing, is now responsible for sales in
Europe. Tsui Sung Lam, formerly President and Chief Operating Officer, has
assumed responsibility for Asian operations, and Ronny Nilsson, formerly with
Ericsson, has assumed responsibility for European operations. Michael McNamara
remains responsible for North American operations. Robert Dykes, a director, has
become an executive officer of the Company, with responsibility for finance,
information technology, legal and human resources and will assume the role of
Chief Financial Officer, previously held by Goh Chan Peng, who assumed
responsibility for finance, information technology and legal activities in Asia.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Ordinary Shares and other equity securities of the Company.
Additionally, Directors, officers and
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<PAGE> 39
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that there was compliance for the year ended March 31, 1997
with all Section 16(a) filing requirements applicable to the Company's
Directors, officers and greater than ten-percent (10%) beneficial owners.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation awarded, earned or paid for
services rendered in all capacities to the Company and its subsidiaries during
each of fiscal 1995, 1996 and 1997 to the Company's Chief Executive Officer and
the Company's four other most highly compensated executive officers who were
serving as executive officers at the end of fiscal 1997 (the "Named Executive
Officers"). See "Item 10 -- Directors and Executive Officers of the
Registrant -- Management Team Changes." This information includes the dollar
values of base salaries, bonus awards, the number of shares subject to stock
options granted and certain other compensation, if any, whether paid or
deferred. The Company does not grant stock appreciation rights (except as noted
in footnote (1) in the Option Grants in Fiscal 1997 table) and has no long-term
compensation benefits other than the stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ------------------------------------------------- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Michael E. Marks........................... 1997 $ 300,000 $ 80,400 $ 242,403(1) 250,000
Chairman of the Board and Chief 1996 $ 275,000 $ 132,500 $ 19,188(2) 150,000
Executive Officer 1995 $ 250,000 $ 45,750 $ 16,374(3) 25,000
Tsui Sung Lam.............................. 1997 $ 256,791 $ 87,180 $ 28,757(4) 20,000
President Asia-Pacific Operations 1996 $ 249,176 $ 143,313 $ 39,988(5) 40,000
1995 $ 216,028 $ 67,533 $ 18,288(6) --
Michael McNamara........................... 1997 $ 199,999 $ 30,642 $ 16,495(7) 21,000
Vice President, President of U.S. 1996 $ 173,250 $ 53,626 $ 11,778(8) 15,000
Operations 1995 $ 165,000 $ 15,468 $ 6,600(9) --
Dennis Stradford........................... 1997 $ 191,100 $ 33,634 $ 15,490(11) --
Senior Vice President, Sales and 1996 $ 191,100 $ 65,066 $ 21,835(12) 13,000
Marketing (10) 1995 $ 182,000 $ 45,018 $ 16,000(13) --
Goh Chan Peng.............................. 1997 $ 174,283 $ 44,870 $ 24,449(14) 16,000
Senior Vice President of Finance 1996 $ 163,718 $ 65,976 $ 24,217(15) 15,000
and Operations, Asia-Pacific 1995 $ 134,193 $ 49,544 $ 14,122(16) --
</TABLE>
- ---------------
(1) Includes an auto allowance of $7,712, Company contributions to the
Company's 401(k) plan of $4,750, life and disability insurance premium
payments of $3,601, forgiveness of a promissory note due to the Company of
$200,000 and forgiveness of interest payment of $26,340 on the promissory
note.
(2) Includes an auto allowance of $8,978, Company contributions to the
Company's 401(k) plan of $4,370 and life and disability insurance premium
payments of $5,839.
(3) Includes an auto allowance of $7,204, Company contributions to the
Company's 401(k) plan of $4,520 and life insurance premium payments of
$4,650.
(4) Includes life insurance payments of $736 and Company contributions to the
Central Provident Fund of $28,021. The Central Provident Fund is a
Singapore statutory savings plan to which contributions may be made to
provide for employees' retirement.
(5) Includes life insurance payments of $736 and Company contributions to the
Central Provident Fund of $39,252.
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<PAGE> 40
(6) Includes life insurance premium payments of $671 and Company contributions
to the Central Provident Fund of $17,617.
(7) Includes an auto allowance of $7,200, Company contributions to the
Company's 401(k) plan of $3,958 and forgiveness of $5,337 interest payment
due on a promissory note payable to the Company.
(8) Represents an auto allowance of $11,778.
(9) Represents an auto allowance of $6,600.
(10) Mr. Stradford was the Company's Vice President, Sales and Marketing through
April 1997.
(11) Includes an auto allowance of $7,200, Company contributions to the
Company's 401(k) plan of $4,750 and life insurance premium payments of
$3,540.
(12) Includes an auto allowance of $7,200, Company contributions to the
Company's 401(k) plan of $3,832, life insurance premium payments of $5,587
and a travel allowance of $5,216.
(13) Includes an auto allowance of $7,200, Company contributions to the
Company's 401(k) plan of $5,460 and life insurance premium payments of
$3,340.
(14) Includes life insurance payments of $736 and Company contributions to the
Central Provident Fund of $23,713.
(15) Includes life insurance premium payments of $736 and Company contributions
to the Central Provident Fund of $23,481.
(16) Includes life insurance premium payments of $671 and Company contributions
to the Central Provident Fund of $13,451.
The following table sets forth further information regarding option grants
during fiscal 1997 to each of the Named Executive Officers. All options were
granted pursuant to the Company's 1993 Share Option Plan. In accordance with the
rules of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective five-year terms. These gains are based on assumed rates
of annual compound stock price appreciation of 5.0% and 10.0% from the date the
option was granted to the end of the option term.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED(1) 1997 PER SHARE(2) DATE 5% 10%
- ------------------------- --------- ------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Marks......... 250,000 34.7% $ 23.125 11/08/01 $1,597,244 $3,529,511
Tsui Sung Lam............ 20,000 2.8% $ 23.125 11/08/01 127,780 282,361
Michael McNamara......... 1,000 0.1% $ 19.75 08/27/01 5,457 12,058
20,000 2.1% $ 23.125 11/08/01 127,780 282,361
Dennis P. Stradford...... -- -- -- -- -- --
Goh Chan Peng............ 1,000 0.1% $ 19.75 08/27/01 5,457 12,058
15,000 2.1% $ 23.125 11/08/01 95,835 211,771
</TABLE>
- ---------------
(1) The options shown in the table were granted at fair market value, are
incentive stock options and will expire five years from the date of grant,
subject to earlier termination upon termination of the optionee's
employment. The options become exercisable over a four-year period, with
25.0% of the shares vesting on the first anniversary of the date of grant
and thereafter 1/36th of the shares vesting for each full calendar month
that an optionee renders services to the Company. All of the options shown
in the table will become immediately exercisable for all of the option
shares in the event the Company is acquired by merger or sale of
substantially all of the Company's assets or outstanding Ordinary shares,
unless the options are assumed or otherwise replaced by the acquiring
entity. The Compensation Committee has authority to provide for the
acceleration of each option in connection with certain hostile tender offers
or proxy contests for Board membership. Each option includes a limited stock
appreciation right pursuant to
40
<PAGE> 41
which the option will automatically be canceled upon the occurrence of
certain hostile tender offers, in return for a cash distribution from the
Company based on the tender offer price per share. The options have a
maximum term of five years, subject to earlier termination following a
specified period after the optionee's termination of employment with the
Company. In the case of Messrs. Tsui and Goh, all of the options shown in
the table will become immediately exercisable in the event of termination of
employment for any reason.
(2) The exercise price of the option may be paid in cash or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Compensation Committee has the authority to reprice outstanding options
through the cancellation of those options and the grant of replacement
options with an exercise price equal to the lower fair market value of the
option shares on the regrant date.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5.0% and 10.0% rates of share price appreciation are mandated by rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Ordinary Share prices.
The following table sets forth certain information concerning the exercise
of options by each of the Named Executive Officers during fiscal 1997, including
the aggregate amount of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of March 31, 1997. Also reported are values of "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding stock options and $19.875 per share, which was the closing
price of the Company's Ordinary Shares as reported on the Nasdaq National Market
on March 31, 1997, the last day of trading for fiscal 1997.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END(2) FISCAL YEAR-END(2)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(1) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Marks........ 10,000 286,700 132,002 349,998 1,196,977 692,213
Tsui Sung Lam........... 10,000 310,800 63,355 43,645 830,253 150,482
Michael McNamara........ -- -- 30,418 35,582 403,468 114,257
Dennis P. Stradford..... 16,000 416,648 6,105 6,895 44,970 52,915
Goh Chan Peng........... -- -- 35,230 27,770 502,256 70,529
</TABLE>
- ---------------
(1) "Value Realized" represents the fair market value of the Ordinary Shares
underlying the option on the date of exercise less the aggregate exercise
price of the option.
(2) These values, unlike the amounts set forth in the column entitled "Value
Realized," have not been, and may never be, realized and are based on the
positive spread between the respective exercise prices of outstanding
options and the closing price of the Company's Ordinary Shares on March 31,
1997, the last day of trading for fiscal 1997.
DIRECTOR REMUNERATION
Each non-employee Director who does not reside in Singapore receives stock
options pursuant to the automatic option grant provisions of the Company's 1993
Share Option Plan. Pursuant to the 1993 Share Option Plan, Richard L. Sharp,
Bernard J. Lacroute, Robert Dykes and Michael J. Moritz each received option
grants for 3,000 Ordinary Shares in fiscal 1997. In addition, all Directors
receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with meetings of the Board of Directors. No Director who is an
employee of the Company receives compensation for services rendered as a
Director.
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<PAGE> 42
EMPLOYMENT AND CONSULTING AGREEMENTS
In July 1993, the Company entered into employment agreements with Messrs.
Tsui and Goh. Under these agreements, Messrs. Tsui and Goh were entitled to
receive an annual salary of S$344,539, and S$207,103, respectively. In April
1997, the Compensation Committee increased the base salaries of Messrs. Tsui and
Goh to S$429,000 and S$304,499, respectively. The Company entered into a revised
employment agreement with Messrs. Tsui and Goh as President, Asia Pacific and
Senior Vice President of Finance and Operations, Asia Pacific, respectively,
effective April 1, 1997. Pursuant to the new employment agreements, the
employment of Messrs. Tsui and Goh will continue until either the Company or the
employee gives the other 12 months notice of termination (or pays the other 12
months' base salary in lieu of notice). The Company is required to pay one month
salary for each year of employment by Messrs. Tsui and Goh upon termination of
their respective employment by the Company. The Company also agreed that upon
termination of employment of Mr. Tsui or Mr. Goh for any reason, any options to
purchase Ordinary Shares then held by them would immediately vest and become
executed for all of the shares subject to such option.
The Company entered into an Employment and Noncompetition Agreement with
Mr. Ronny Nilsson dated as of April 30, 1997 in which Mr. Nilsson become an
executive officer of the Company. See "Certain Relationships and Related
Transactions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Ordinary Shares as of June 30,
1997 by (i) each of the Company's Directors, the Company's Chief Executive
Officer and each of the Company's four other most highly compensated executive
officers in fiscal year 1997, (ii) all executive officers and Directors as a
group, and (iii) each person who is known by the Company to own beneficially
more than 5.0% of the Company's Ordinary Shares. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and sole
investment power with respect to all the shares beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT(2)
- ----------------------------------------------------------------- --------------------- ----------
<S> <C> <C>
Ronald Baron(3).................................................. 1,931,600 14.05%
c/o Baron Capital Management, Inc.
767 Fifth Avenue, 24th Floor
New York, New York 10153
Sequoia Capital(4)............................................... 953,443 6.92%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, California 94025
The Capital Group Companies(5)................................... 781,500 5.68%
333 South Hope Street
Los Angeles, California 90071
Richard L. Sharp(6).............................................. 948,019 6.89%
c/o Circuit City Stores, Inc.
9950 Mayland Drive
Richmond, Virginia 23233
Michael E. Marks(7).............................................. 384,551 2.80%
Tsui Sung Lam(8)................................................. 56,878 *
Michael McNamara(9).............................................. 35,356 *
Goh Chan Peng(10)................................................ 21,604 *
Robert R.B. Dykes(11)............................................ 37,899 *
Ronny Nilsson.................................................... -- *
Bernard J. Lacroute(12).......................................... 62,730 *
Michael Moritz(13)............................................... 953,443 6.92%
Stephen J.L. Rees(14)............................................ 61,255 *
All directors and executive officers as a group (10
persons)(15)................................................... 2,561,735 18.08%
</TABLE>
42
<PAGE> 43
- ---------------
* Less than 1.0%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has voting or investment power with respect to such
shares. Ordinary Shares subject to options that are currently exercisable
or exercisable within 60 days after June 30, 1997 are deemed to be
outstanding and to be beneficially owned by the person holding such options
for the purpose of computing the percentage ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Percentage ownership is based upon 13,752,293 outstanding Ordinary Shares
as of June 30, 1997.
(3) Based on information supplied by Mr. Baron in a Schedule 13D filed with the
Securities and Exchange Commission on January 26, 1997. Includes 205,000
shares held by Baron Capital Partners, L.P. and Baron Investment Partners,
L.P., of which Mr. Baron is a general partner. Mr. Baron may be deemed to
have sole power to vote and direct the disposition of such shares. Also
includes 1,465,000 shares held by Baron Asset Fund and Baron Growth &
Income Fund, which are advised by BAMCO, Inc., and 261,600 shares held by
investment advisory clients of Baron Capital Management, Inc. BAMCO, Inc.
and Baron Capital Management, Inc. are controlled by Mr. Baron, and Mr.
Baron may be deemed to share power to vote and dispose of such shares.
(4) Includes 788,985 shares held by Sequoia Capital Growth Fund, a limited
partnership, 50,291 shares held by Sequoia Technology Partners III, a
limited partnership, 80,167 shares held by Sequoia Capital VII, a limited
partnership, 3,900 shares held by Sequoia Technology Partners VII, a
limited partnership and 2,600 shares held by Sequoia 1995, a limited
corporation. Sequoia Partners (CF) is the general partner of Sequoia
Capital Growth Fund and has sole voting and investment power over such
shares. The general partners of Sequoia Partners (CF) are Donald T.
Valentine, Pierre R. Lamond, Thomas F. Stephenson, Michael J. Moritz and
Gordon Russell. The general partners of Sequoia Technology Partners III are
Donald T. Valentine, Pierre R. Lamond, Thomas F. Stephenson and Gordon
Russell. The general partner of Sequoia Capital VII and Sequoia Technology
Partners VII is Sequoia Capital VII-A Management, LLC. The general partners
of Sequoia Capital VII-A Management, LLC are Mr. Moritz, Douglas Leone,
Mark Stevens, Thomas Stephenson and J. Thomas McMurray. Also includes
27,500 shares subject to options exercisable within 60 days after June 30,
1997 held by Mr. Moritz.
(5) Includes 781,500 shares beneficially owned by Capital Research and
Management Company.
(6) Includes 225,000 shares beneficially owned by Bethany Limited Partnership.
Mr. Sharp, the general partner of Bethany Limited Partnership, may be
deemed to share voting and investment power with respect to such shares.
Mr. Sharp disclaims beneficial ownership of all such shares except to the
extent of his proportionate interest therein. Also includes 37,500 shares
subject to options exercisable within 60 days after June 30, 1997 held by
Mr. Sharp.
(7) Includes 158,044 shares subject to options exercisable within 60 days after
June 30, 1997 held by Mr. Marks.
(8) Includes 37,803 shares subject to options exercisable within 60 days after
June 30, 1997 held by Mr. Tsui.
(9) Includes 35,356 shares subject to options exercisable within 60 days after
June 30, 1997 held by Mr. McNamara.
(10) Includes 21,604 shares subject to options exercisable within 60 days after
June 30, 1997 held by Mr. Goh.
(11) Includes 37,500 shares subject to options exercisable within 60 days after
June 30, 1997 held by Mr. Dykes.
43
<PAGE> 44
(12) Includes 14,503 shares held by KPCB Zaibatsu Fund I. KPCB IV Associates,
L.P., of which Mr. Lacroute is a limited partner, is the general partner of
KPCB Zaibatsu Fund I. Mr. Lacroute disclaims beneficial ownership of such
shares. Also includes 10,727 shares held by the Bernard and Ronni Lacroute
Trust and 37,500 shares subject to options exercisable within 60 days after
June 30, 1997 held by Mr. Lacroute.
(13) Includes 788,985 shares held by Sequoia Capital Growth Fund, a limited
partnership, 50,291 shares held by Sequoia Technology Partners III, a
limited partnership, 80,167 shares held by Sequoia Capital VII, a limited
partnership, 3,900 shares held by Sequoia Technology Partners VII, a
limited partnership and 2,600 shares held by Sequoia 1995, a limited
corporation. Sequoia Partners (CF) is the general partner of Sequoia
Capital Growth Fund and has sole voting and investment power over such
shares. The general partners of Sequoia Partners (CF) are Donald T.
Valentine, Pierre R. Lamond, Thomas F. Stephenson, Michael J. Moritz and
Gordon Russell. The general partners of Sequoia Technology Partners III are
Donald T. Valentine, Pierre R. Lamond, Thomas F. Stephenson and Gordon
Russell. The general partner of Sequoia Capital VII and Sequoia Technology
Partners VII is Sequoia Capital VII-A Management, LLC. The general partners
of Sequoia Capital VII-A Management, LLC are Mr. Moritz, Douglas Leone,
Mark Stevens, Thomas Stephenson and J. Thomas McMurray. Also includes
27,500 shares subject to options exercisable within 60 days after June 30,
1997 held by Mr. Moritz.
(14) Also includes 3,754 shares held by Mrs. Janine Margaret Rees. Includes
20,208 shares subject to options exercisable within 60 days after June 30,
1997 held by Mr. Rees.
(15) Includes 413,015 shares subject to options exercisable within 60 days after
June 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In fiscal 1997, the Company had net sales of approximately $1.55 million to
Metcal, a precision heating instrument company. Prior to becoming the Company's
Chief Executive Officer in January 1994, Michael E. Marks was the President and
Chief Executive Officer of Metcal. The Company believes that sales made to
Metcal were made on terms no less favorable to the Company than those that could
have been obtained from third parties.
In fiscal 1997, the Company had net sales of approximately $38.1 million to
Global Village Communication. Mr. Moritz, a Director of the Company, is
affiliated with Sequoia Capital, which through its affiliates owns more than
10.0% of the outstanding shares of Global Village Communications. Mr. Moritz is
also a director of Global Village Communications. The Company believes that
sales made to Global Village were made on terms no less favorable to the Company
than those that could have been obtained from third parties.
In July 1993, the Company entered into employment agreements with Messrs.
Tsui and Goh. Under these agreements, Messrs. Tsui and Goh were entitled to
receive an annual salary of S$344,539, and S$207,103, respectively. In April
1997, the Compensation Committee increased the base salaries of Messrs. Tsui and
Goh to S$429,000 and S$304,499, respectively. The Company entered into a revised
employment agreement with Messrs. Tsui and Goh as President, Asia Pacific and
Senior Vice President of Finance and Operations, Asia Pacific, respectively,
effective April 1, 1997. Pursuant to the new employment agreements, the
employment of Messrs. Tsui and Goh will continue until either the Company or the
employee gives the other 12 months notice of termination (or pays the other 12
months' base salary in lieu of notice). The Company is required to pay one month
salary for each year of employment by Messrs. Tsui and Goh upon termination of
their respective employment by the Company. The Company also agreed that upon
termination of employment of Mr. Tsui or Mr. Goh for any reason, any options to
purchase Ordinary Shares then held by them would immediately vest and become
executed for all of the shares subject to such option.
In connection with the Company's acquisition of Astron, the Company entered
into a Services Agreement (the "Services Agreement") with Astron Technologies
Limited, a subsidiary of the Company ("ATL") and Croton Technology Ltd., a
company under the management and control of Mr. Rees ("Croton"), and ATL entered
into a Supplemental Services Agreement (the "Supplemental Services
44
<PAGE> 45
Agreement") with Mr. Rees. Under the terms of the Services Agreement, Mr. Rees
acted as President of Astron, and Croton was responsible for developing the
business of Astron through June 1998. The Services Agreement provided that
Croton will receive (i) a payment of $15 million on June 30, 1998, $5 million of
which was to be payable in cash and $10 million of which was to be payable in
cash or the Ordinary Shares of the Company at the option of the Company and (ii)
an annual fee in the amount of $90,000. Payment of the $15.0 million lump sum
payment was conditioned upon, among other things, Mr. Rees' continuing as
Chairman of Astron through June 1998. The Service Agreement was to terminate on
June 30, 1998 but may be terminated for cause under the terms described therein.
Pursuant to the terms of the Supplemental Services Agreement, Mr. Rees acted as
Chairman of Astron and was responsible for maintaining and developing the
business of Astron, and, in exchange, received an annual salary of $140,000. The
Supplemental Services Agreement was to terminate on June 30, 1998.
Effective March 27, 1997, the Company revised the Services Agreement and
the Supplemental Services Agreement, and appointed Mr. Rees as the Company's
Senior Vice President-Worldwide Sales. In connection with this revision, the
amount of the payment due on June 30, 1998 was reduced from $15.0 million to
$14.0 million and the remaining conditions to the Company's payment of the fee
were removed. Of the $14.0 million, $5.0 million remains payable in cash, and
$9.0 million remains payable in cash or, at the option of the Company, in
Ordinary Shares. This reduction was negotiated in view of (i) a negotiated
settlement in March 1997 of the amount of the earn-out payable by the Company to
the former shareholders of Astron in which the Company agreed to certain matters
affecting the amount of the earn-out payment, and (ii) the elimination of the
conditions to payment and of Mr. Rees' ongoing obligations under the Services
Agreement and the Supplemental Services Agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
In connection with the acquisition of the Karlskrona Facilities, the
Company and Mr. Nilsson entered into an Employment and Noncompetition Agreement
("Employment Agreement") and a Services Agreement, both dated as of April 30,
1997. Pursuant to the Employment Agreement, Mr. Nilsson (a) was appointed as the
Company's Senior Vice President, Europe for a four-year period, (b) receives an
annual salary of $250,000, and (c) is entitled to a bonus of up to 45.0% of his
annual salary upon the successful completion of certain performance criteria.
Pursuant to the Services Agreement, Mr. Nilsson is to perform management
consultation and guidance services to the Company in consideration of (a) an
aggregate of $775,000 to be paid between March 31, 1997 and April 15, 1998, and
(b) the issuance by the Company to Mr. Nilsson of an interest-free loan in the
amount of $415,000 to be repaid by Mr. Nilsson in two installments of $210,000
and $205,000 on September 15, 1997 and April 15, 1998, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are submitted herewith:
-- Report of Independent Auditors
-- Consolidated Balance Sheets as of March 31, 1997, 1996 and 1995
-- Consolidated Statements of Operations for each of the three years in
the period ended March 31, 1997
-- Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended March 31, 1997
-- Consolidated Statements of Cash Flows for each of the three years in
the period ended March 31, 1997
-- Notes to Consolidated Financial Statements
45
<PAGE> 46
2. Financial Statement Schedules
The following consolidated financial statement schedules for each of the
three years in the period ended March 31, 1997 are submitted herewith:
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
b) REPORTS ON FORM 8-K
1. The Company's Current Report on Form 8-K filed with the Commission on
December 13, 1996.
2. The Company's Current Report on Form 8-K filed with the Commission on
March 12, 1997.
3. The Company's Current Report on Form 8-K/A filed with the Commission
on March 27, 1997.
c) EXHIBITS
See Exhibit Index.
46
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Flextronics International Ltd.
We have audited the accompanying consolidated balance sheets of Flextronics
International Ltd as of March 31, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with United States Generally Accepted
Auditing Standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Flextronics International Ltd at March 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1997, in conformity with United States Generally Accepted
Accounting Principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 14 of the notes to consolidated financial statements,
the 1996 financial statements have been restated to correct the Company's
accounting for the acquisition of the Astron Group Limited to conform to United
States Generally Accepted Accounting Principles.
/s/ ERNST & YOUNG
ERNST & YOUNG
Singapore
July 31, 1997
47
<PAGE> 48
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996* 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................. $ 6,546 $ 23,645
Accounts receivable, net of allowance for doubtful accounts of $3,576
and $5,658 at March 31, 1996 and 1997 respectively................ 78,114 69,331
Inventories.......................................................... 52,637 106,583
Other current assets................................................. 3,827 10,361
Deferred income taxes................................................ 260 408
-------- --------
Total current assets................................................... 141,384 210,328
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment.............................................. 77,771 100,795
Building............................................................. 5,975 37,758
Leasehold improvements............................................... 15,491 14,584
-------- --------
99,237 153,137
Accumulated depreciation and amortization............................ (37,896) (42,172)
-------- --------
Net property and equipment............................................. 61,341 110,965
-------- --------
OTHER NON-CURRENT ASSETS:
Goodwill, net of accumulated amortization of $2,715 and $3,704, at
March 31, 1996 and 1997 respectively.............................. 13,407 20,865
Intangible assets, net of accumulated amortization of $850 and
$2,496, at March 31, 1996 and 1997 respectively................... 12,227 10,469
Deposits and other................................................... 580 1,812
Receivables from related party....................................... 2,085 2,554
Investment in associated company..................................... -- 2,241
-------- --------
Total other non-current assets....................................... 28,299 37,941
-------- --------
TOTAL ASSETS................................................. $231,024 $359,234
======== ========
</TABLE>
- ---------------
* Restated -- See Note 14
See accompanying notes.
48
<PAGE> 49
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996* 1997
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Bank borrowings...................................................... $ 14,379 $111,075
Current portion of long-term debt.................................... 11,073 5,758
Current portion of capital lease.................................. 6,736 6,475
Accounts payable.................................................. 64,625 73,631
Accrued payroll................................................... 5,606 10,680
Other accrued liabilities......................................... 5,389 23,039
Income taxes payable.............................................. 2,775 4,171
Payables to associated company....................................... -- 546
-------- --------
Total current liabilities.............................................. 110,583 235,375
-------- --------
NON CURRENT LIABILITIES:
Notes payable to shareholders........................................ 686 223
Long-term debt, less current portion................................. 7,554 2,165
Other payable........................................................ 24,184 23,547
Capital lease, less current portion.................................. 10,120 10,137
Deferred income taxes................................................ 4,353 3,710
-------- --------
Total non-current liabilities.......................................... 46,897 39,782
-------- --------
Minority interests..................................................... 485 485
-------- --------
SHAREHOLDERS' EQUITY:
Ordinary Shares, S$.01 par value:
Authorized -- 100,000,000 shares at March 31, 1996 and 1997
Issued and outstanding -- 13,213,289 shares at March 31, 1996 and
13,676,243 shares at March 31, 1997.............................. 85 88
Additional paid-in capital........................................ 93,634 95,570
Accumulated deficit............................................... (20,660) (12,066)
-------- --------
Total shareholders' equity............................................. 73,059 83,592
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $231,024 $359,234
======== ========
</TABLE>
- ---------------
* Restated -- See Note 14
See accompanying notes.
49
<PAGE> 50
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------------------------
1995 1996* 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $237,386 $448,346 $490,585
Cost of sales.............................................. 214,865 407,457 440,448
-------- -------- --------
Gross profit............................................... 22,521 40,889 50,137
Selling, general and administrative expenses............... 11,468 18,787 26,765
Goodwill amortization...................................... 510 739 989
Intangible assets amortization............................. 245 544 1,646
Provision for plant closings............................... -- 1,254 5,868
Acquired in-process research and development............... 91 29,000 --
-------- -------- --------
Operating income/(loss).................................... 10,207 (9,435) 14,869
Net interest expense....................................... (774) (2,380) (3,885)
Merger expenses............................................ (816) -- --
Foreign exchange gain/(loss)............................... (303) 872 1,168
Income/(loss) from associated company...................... (729) -- 241
Other income/(expense)..................................... 34 (398) (2,718)
-------- -------- --------
Income/(loss) before income taxes.......................... 7,619 (11,341) 9,675
Provision for income taxes................................. 1,463 3,791 2,212
-------- -------- --------
Net income/(loss).......................................... $ 6,156 $(15,132) $ 7,463
======== ======== ========
Earnings per share:
Net income/(loss) per share................................ $0.51 $(1.19) $0.50
======== ======== ========
Weighted average outstanding Ordinary Shares and
equivalents.............................................. 12,103 12,684 14,877
======== ======== ========
</TABLE>
- ---------------
* Restated -- See Note 14
See accompanying notes.
50
<PAGE> 51
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORDINARY SHARES ADDITIONAL TOTAL
--------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994...................... 11,304 $ 71 $ 57,430 $(10,798) $46,703
nCHIP fiscal year conversion................... -- -- -- (596) (596)
Issuance of Ordinary Shares.................... 300 2 925 -- 927
Expenses related to issuance of Ordinary
Shares....................................... -- -- (968) -- (968)
Net income for the year........................ -- -- -- 6,156 6,156
Transactions by pooled companies:
Issuance of common stock....................... -- -- 37 -- 37
Issuance of preference stock................... -- -- 5,458 -- 5,458
------ --- ------- -------- -------
BALANCE AT MARCH 31, 1995...................... 11,604 $ 73 $ 62,882 $ (5,238) $57,717
Issuance of Ordinary Shares for acquisition of
subsidiaries................................. 305 2 7,443 -- 7,445
Issuance of Ordinary Shares.................... 304 2 1,007 -- 1,009
Sale of shares for cash in public offering..... 1,000 8 23,492 -- 23,500
Expenses related to sale of shares for cash in
public offering.............................. -- -- (1,190) -- (1,190)
Currency translation adjustments............... -- -- -- (290) (290)
Net loss for the year.......................... -- -- -- (15,132) (15,132)
------ --- ------- -------- -------
BALANCE AT MARCH 31, 1996*..................... 13,213 $ 85 $ 93,634 $(20,660) $73,059
Issuance of Ordinary Shares and Options........ 240 2 1,740 -- 1,742
Currency translation adjustments............... -- -- -- 112 112
Net income for the year........................ -- -- -- 7,463 7,463
Issuance of common stock for Fine Line Printed
Circuit Design Inc........................... 223 1 196 1,019 1,216
------ --- ------- -------- -------
BALANCE AT MARCH 31, 1997...................... 13,676 $ 88 $ 95,570 $(12,066) $83,592
====== === ======= ======== =======
</TABLE>
- ---------------
* Restated -- See Note 14
See accompanying notes.
51
<PAGE> 52
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------------------------
1995 1996* 1997
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)........................................... $ 6,156 $(15,132) $ 7,463
Adjustments to reconcile net income to cash provided by
operating activities:
nCHIP fiscal year conversion............................. (596) -- --
Depreciation and amortization of equipment and leasehold
improvements........................................... 5,370 9,344 10,940
Amortization of goodwill................................. 510 739 989
Amortization of intangible assets........................ 245 544 1,646
Loss/(gain) on disposal of property and equipment........ 56 (121) (85)
Loss on disposal of investment........................... -- 266 --
Allowance for doubtful debts............................. 1,211 1,675 2,866
Allowance for stock obsolescence......................... 43 1,631 4,228
Loss/(income) from associated company.................... 729 -- (241)
In process research and development written off.......... -- 29,000 --
Provision for plant closure.............................. -- 1,254 5,308
Deferred income taxes.................................... 237 84 (791)
Amortization of discount................................. -- 60 363
Issuance of non-employee stock options................... -- -- 380
-------- -------- ---------
13,961 29,344 33,066
Changes in operating assets and liabilities:
Trade accounts receivable................................ (15,057) (28,965) 7,007
Notes receivable......................................... -- (500) (586)
Inventories.............................................. (3,156) (19,209) (2,533)
Other accounts receivable................................ (2,430) 2,889 (5,678)
Deposits and other....................................... 311 (140) (1,208)
Accounts payable......................................... 2,995 14,143 7,991
Other accrued liabilities................................ (984) 607 6,666
Income taxes payable..................................... 933 1,121 1,396
Amount due from associated company....................... -- -- 546
-------- -------- ---------
Cash provided by (used for) operating activities....... $ (3,427) $ (710) $ 46,667
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... $ (7,536) $(15,812) $ (26,984)
Proceeds from sale of property and equipment................ 38 228 816
Intangibles arising from acquisition of subsidiaries........ (62) -- --
Investment in associated company............................ -- 886 (3,000)
Loan to joint venture....................................... (1,000) -- --
Redemption of preference shares in joint venture............ 1,730 -- --
Payment for business acquired, net of cash acquired......... (3,343) (15,152) --
Repayment of loan from related party........................ -- 815 --
Loan to related party....................................... -- -- (469)
Purchase of assets from Ericsson............................ -- -- (82,354)
-------- -------- ---------
Cash used for investing activities............................ (10,173) (29,035) (111,991)
-------- -------- ---------
</TABLE>
52
<PAGE> 53
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1995 1996* 1997
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks....................................... 7,000 43,980 152,761
Repayments to banks......................................... (16,417) (31,700) (56,041)
Proceeds from long-term debt................................ -- 2,873 776
Repayment of long-term debt................................. (8) (1,070) (1,536)
Refinancing of lease assets................................. -- -- 3,509
Repayment of capital lease obligations...................... (4,310) (5,767) (7,991)
Proceeds from issuance of share capital..................... 5,454 1,009 1,362
Payments on notes payable................................... (2,535) (17) (10,463)
Proceeds from secondary listing............................. -- 22,310 --
-------- -------- ---------
Cash provided by/(used for) financing activities......... (10,816) 31,618 82,377
-------- -------- ---------
Increase (decrease) in cash and cash equivalents............ (24,416) 1,873 17,053
Effect of exchange rate changes on cash and cash
equivalents.............................................. -- (78) 46
Cash and cash equivalents at beginning of period............ 29,167 4,751 6,546
-------- -------- ---------
Cash and cash equivalents at end of period............... $ 4,751 $ 6,546 $ 23,645
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest................................................. $ 779 $ 2,482 $ 3,025
Income taxes............................................. 297 2,656 1,717
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired under capital lease obligations.......... 8,338 11,556 6,387
Purchase of subsidiaries financed by issuance of 66,908
ordinary shares valued at $14.019........................ -- 938 --
238,684 ordinary shares valued at $27.262................... -- 6,507 --
223,321 ordinary shares valued at $25.524................... -- -- 5,700
Promissory notes valued at $10 million payable in February
1997..................................................... -- 10,000 --
Promissory notes valued at $5 million payable in February
1998..................................................... -- 5,000 --
Ordinary Shares with a value of $10 million to be issued on
June 30, 1998............................................ -- 10,000 --
Cash and Ordinary Shares valued at $14.124 million to
Stephen Rees at the option of the Company due on June 30,
1998..................................................... -- 14,124 (1,000)
Contingent earnout of $6.25 million payable to Astron
shareholders in April 1997............................... -- -- 6,250
</TABLE>
- ---------------
* Restated -- See Note 14
See accompanying notes.
53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
1. ORGANIZATION OF THE COMPANY
Flextronics International Ltd. was incorporated in the Republic of
Singapore on May 31, 1990 as Flex Holdings Pte Limited. The subsidiary companies
are located in Singapore, Malaysia, Hong Kong, the People's Republic of China,
United Kingdom, Mauritius, Sweden and the United States. The Company was
incorporated to acquire the Asian and certain U.S. operations of Flextronics
Inc. (the "Predecessor"). The Predecessor had been involved in contract
manufacturing operations in Singapore since 1982, Hong Kong since 1983 and the
People's Republic of China since 1987.
The Company provides advanced contract manufacturing services to
sophisticated original equipment manufacturers (OEMs) in the communications,
computer, consumer and medical electronics industries. Flextronics offers a full
range of services including product design, printed circuit board (PCB) assembly
and fabrication, material procurement, inventory management, final system
assembly and test, packaging and distribution.
The components, subassemblies and finished products manufactured by the
Company incorporate advanced interconnect, miniaturization and packaging
technologies such as SMT, MCM and COB technologies.
The Company's fiscal year-end is March 31. The Company follows accounting
policies which are in accordance with principles generally accepted in the
United States.
2. SUMMARY OF ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include the accounts of
Flextronics International Ltd. and its subsidiaries (together "the Company"),
after elimination of all significant intercompany balances and transactions.
Investments in affiliates owned 20% or more and corporate joint ventures in
which the Company does not have control, but has the ability to exercise
significant management influence over operating and financial policies, are
accounted for by the equity method. Other securities and investments are
generally carried at cost.
All dollar amounts included in the financial statements and in the notes
herein are U.S. dollars unless designated as Singapore dollars (S$).
Foreign exchange
The Company, with the exception of certain subsidiaries, considers the U.S.
dollar as its functional currency. This is because the majority of the Company's
sales are billed and collected in U.S. dollars, and the majority of the
Company's purchases, such as raw materials, are invoiced and paid in U.S.
dollars.
Accordingly, transactions in currencies other than the functional currency
are measured and recorded in U.S. dollars using the exchange rate in effect at
the date of the transaction. At each balance sheet date, recorded monetary
balances that are denominated in currencies other than the functional currency
are adjusted to reflect the rate at the balance sheet date. All gains and losses
resulting from the remeasurement of accounts denominated in other than the
functional currency are reflected in the determination of net income in the year
in which they occur.
For inclusion in the consolidated financial statements, all assets and
liabilities of foreign subsidiaries having a functional currency other than the
U.S. dollar are translated into U.S. dollars at the exchange rate ruling at the
balance sheet date and the results of these foreign subsidiaries are translated
into U.S. dollars at the weighted average exchange rates for the period.
Exchange differences due to such currency translations are recorded in
shareholders' equity.
54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Cash and cash equivalents
For purposes of statement of cash flows, the Company considers highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
Property and equipment
Property and equipment is stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the related
assets (two to fifty years).
Concentration of credit risk
The Company is a manufacturer of sophisticated electronics for original
equipment manufacturers engaged in the computer, medical, consumer and
communications industries. Financial instruments which potentially subject the
Company to concentration of credit risk are primarily accounts receivable and
cash equivalents. The Company performs ongoing credit evaluations of its
customers' financial conditions and, generally, requires no collateral from its
customers. The Company maintains cash and cash equivalents with various
financial institutions. These financial institutions are located in many
different geographic locations throughout the world.
The allowance for doubtful accounts the Company maintains is based upon the
expected collectibility of all accounts receivable.
Goodwill
Goodwill represents the excess of the purchase price of acquired companies
over the fair value of the net assets acquired. Goodwill is amortized on a
straight line basis over the estimated life of the benefits received which
ranges from ten to twenty-five years. On an annual basis, the Company evaluates
recorded goodwill for potential impairment against the current and estimated
future operating income before goodwill amortization of the businesses to which
the goodwill relates.
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Cost
Balance at beginning of the year....................... $ 6,939 $16,122
Additions.............................................. 9,183 8,447
------ -------
Balance at end of the year............................. 16,122 24,569
------ -------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Amortization
Balance at beginning of the year....................... $ 1,976 $ 2,715
Charge for the year.................................... 739 989
------- -------
Balance at end of the year............................. 2,715 3,704
------- -------
Net book value at end of the year........................ $13,407 $20,865
======= =======
</TABLE>
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Intangible assets
Intangible assets comprise technical agreements, patents, trademarks,
developed technologies and identifiable intangible assets in a subsidiary's
assembled work force, its favourable lease and its customer list.
Technical agreements are being amortized on a straight line basis over
periods not exceeding five years. Patents and trademarks are being amortized on
a straight line basis over periods not exceeding twenty-five years. Purchased
developed technologies are being amortised on a straight line basis over periods
not exceeding seven years. The identifiable intangible assets in the
subsidiary's assembled work force, its favourable lease and its customer list
are amortized on a straight line basis over the estimated life of the benefits
received of three to twenty years.
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Cost
Balance at beginning of the year..................... $ 933 $13,077
Additions............................................ 12,144 --
Written off during the year.......................... -- (112)
------- -------
Balance at end of the year........................... 13,077 12,965
------- -------
Amortization
Balance at beginning of the year..................... $ 306 $ 850
Charge for the year.................................. 544 1,646
------- -------
Balance at end of the year........................... 850 2,496
------- -------
Net book value at end of the year...................... $12,227 $10,469
======= =======
</TABLE>
Inventories
Inventories are stated at the lower of cost or market value. Cost is
comprised of direct materials on a first-in-first-out basis and in the case of
finished products and work-in-progress includes direct labor and attributable
production overheads based on normal levels of activity. The components of
inventories are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997
------- --------
<S> <C> <C>
Raw materials......................................... $42,202 $ 70,384
Work-in-process....................................... 14,049 16,561
Finished goods........................................ 962 25,809
------- --------
57,213 112,754
Less: allowance for obsolescence...................... (4,576) (6,171)
------- --------
$52,637 $106,583
======= ========
</TABLE>
Revenue recognition
Revenue from product sales and services are recognized on delivery and
acceptance of the goods.
Associated companies
An associated company is a company, not being a subsidiary, in which the
Group has a long-term interest of not less than 20% of the equity and in whose
financial and operating policy decisions the Group exercises significant
influence.
56
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The Group's share of the results of associated companies is included in the
consolidated statement of operations. Where the audited accounts are not
co-terminous with those of the Group, the share of profits is arrived at from
the last audited accounts.
Shares in associated companies are stated in the Company's balance sheet at
cost and equity in post-acquisition earnings/(losses). Provision is made for
other than temporary declines in values.
Income taxes
Income taxes have been provided using the liability method in accordance
with SFAS Statement No. 109, "Accounting for Income Taxes".
Stock based compensation
The Company has elected to follow APB opinion 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its employee
options because, as discussed below (see note 10), the alternative fair value
accounting provided for under SFAS 123, "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognised.
Research and development
Research and development costs are recorded as such costs are incurred.
Cost of sales included research and development costs of approximately $913,000
and $153,000 in fiscal 1997 and 1996, respectively.
Net income per share
Net income per share is computed using the weighted average number of
Ordinary Shares and Ordinary Share equivalents outstanding during the respective
periods. Ordinary Share equivalents include Ordinary Shares issuable upon the
exercise of stock options (using the treasury stock method).
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the years ended March 31, 1995 and
1997 to $0.54 and $0.56 per share, respectively. Statement 128 should have no
effect on primary loss per share for the year ended March 31, 1996. The impact
of Statement 128 on the calculation of fully diluted earnings per share for
these years is not expected to be material.
Financial statement prepared in accordance with accounting principles accepted
in Singapore
A separate financial statement for the same period has been prepared in
accordance with accounting principles accepted in Singapore.
3. BANK BORROWINGS
Line of Credit
In March 1997 the Company terminated its $48 million US Dollar line of
credit with the group of banks and obtained a new credit facility totalling $175
million representing $105 million revolving credit and $70 million through term
loans amortized over a 5 year period and subject to mandatory prepayment
provisions. As at March 31, 1997, the Company has utilized $111 million of the
new credit facility.
57
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The lines of credits are collateralized by:
(a) A floating charge over all the assets and the entire undertaking of the
holding company;
(b) Corporate guarantees from the Company and several of its subsidiaries;
(c) First fixed charge over the securities and a pledge of the Company's
shares in certain of its subsidiaries;
(d) A lien on all accounts receivable and inventory of the Company and
certain of its subsidiaries.
The new credit facilities require that the Company maintains certain
financial ratios and other covenants. In addition, the Company and its
subsidiaries are not allowed to declare dividends for distribution out of
retained earnings. As at March 31, 1997, the Company was in compliance with its
covenants.
In addition, five of the Company's subsidiaries have obtained from several
banks working capital lines of credit, totalling approximately US$10.3 million,
representing overdraft facilities, bridging loan, short term cash advances,
letters of credit and letters of guarantee and trust receipts. Interest on
borrowings is charged within the range 5.75% to 7% per annum.
As of March 31, 1997, the Group had utilized the following credit
facilities under the above lines of credit (in thousands):
<TABLE>
<S> <C>
Short term cash advances.......................................... $111,075
Letters of credits and guarantees................................. $ 985
========
</TABLE>
The remaining unused portion of lines of credit total $64 million.
<TABLE>
<CAPTION>
MARCH 31,
---------------
1996 1997
----- -----
<S> <C> <C>
The weighted average interest rate per annum on all short
term borrowings outstanding as at year end are as
follows:.................................................. 6.41% 8.50%
===== =====
</TABLE>
4. LONG TERM DEBT
Long-term debt consisted of the following at March 31, 1996 and 1997.
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997
-------- -------
<S> <C> <C>
Term loan at 4.5%....................................... 333 83
Mortgage loans at 11.4%................................. 2,244 1,886
Other loans at 8% -- 9%................................. 1,050 954
Notes payable to Astron's former shareholders at 8%..... 15,000 5,000
-------- -------
18,627 7,923
Less: current portion................................... (11,073) (5,758)
-------- -------
$ 7,554 $ 2,165
======== =======
</TABLE>
Maturities of long-term debt for the five years succeeding March 31, 1997
are $5,758 by March 31, 1998, $469 by March 31, 1999, $469 by March 31, 2000,
$469 by March 31, 2001, $469 by March 31, 2002 and the balance thereafter.
The notes payable is payable to the former shareholders of Astron as part
of the purchase consideration.
58
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
5. OTHER PAYABLES
In accordance to the agreement signed to acquire Astron in February 1996,
the Company will issue Ordinary Shares with a value of $10 million to the former
Astron shareholders on June 30, 1998.
In addition the Company agreed to pay $15 million in June 1998 to an entity
affiliated with Stephen Rees as a consulting fee subject to certain conditions.
In March 1997, the agreement with Mr. Rees' affiliate was revised, the
conditions eliminated and the fee was reduced to $14 million. The cash portion
of $5 million has been discounted at 8% over the period of the agreement and the
remaining $9 million has not been discounted on the basis of the Company's
intention to pay that portion in stock. The payment to former Astron
shareholders and Mr. Rees' affiliate is interest-free and secured.
The components of Other Payables are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Balance at beginning of the year......................... -- $24,184
Additions during the year.............................. $24,124 --
Amortization of discount............................... 60 363
Amendment of agreement................................. -- (1,000)
------- -------
Balance at end of the year............................... $24,184 $23,547
======= =======
</TABLE>
6. LEASE COMMITMENTS
Capital Lease
Following is a schedule by fiscal year, of future minimum lease payments
under capital lease obligations for certain machinery and equipment, together
with the present value of the net minimum lease payments (in thousands):
Fiscal Years Ending March 31,
<TABLE>
<S> <C>
1998............................................................... $ 7,749
1999............................................................... 5,514
2000............................................................... 3,282
2001............................................................... 2,164
2002............................................................... 562
Thereafter......................................................... --
-------
Total installment payments......................................... 19,271
Amount representing interest....................................... (2,659)
-------
Present value of net installment payments.......................... 16,612
Less: current portion.............................................. 6,475
-------
Long-term portion of capital lease................................. $10,137
=======
</TABLE>
Items costing $29,912 (1996: $28,387) with accumulated amortization $11,389
(1996: $8,781) purchased under capital leases have been included in machinery
and equipment as of March 31, 1997. Lease amortization is included in
depreciation expense.
59
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Operating Leases
The Company leases some of its facilities under operating leases. Future
minimum lease payments under operating leases with a term of more than one year
are as follows (in thousands):
Fiscal Years Ending March 31,
<TABLE>
<S> <C>
1998............................................... 3,302
1999............................................... 3,078
2000............................................... 2,404
2001............................................... 1,697
2002............................................... 1,406
Thereafter......................................... 5,518
-------
$17,405
=======
</TABLE>
The facilities lease of one of the subsidiaries provides for escalating
rental payments over the lease period. Rent expense for the lease is being
recognized on a straight-line basis over the term of the lease period. Total
operating lease expenses were $1,957, $2,211 and $2,593 for the years ended
March 31, 1995, 1996 and 1997 respectively.
7. CAPITAL COMMITMENTS
Two of the subsidiaries, Flextronics (Malaysia) Sdn. Bhd. and Astron Group
Limited have contracted to purchase $111 and $10,007 respectively, of fixed
assets as of March 31, 1997. These fixed assets have not been delivered and are
therefore not provided for in the accounts as of March 31, 1997.
Astron Group Limited has authorised but not contracted to purchase $28,927
of fixed assets as at March 31, 1997. A commitment of $9,710 has also been made
to contribute to a subsidiary of Astron Group Limited in PRC China for
construction in progress in relation to the factory in Doumen.
8. INCOME TAXES
The domestic and foreign components of income/(loss) before taxes are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Singapore.................................... $(1,529) $(21,977) $ (392)
Foreign...................................... 9,148 10,636 10,067
------- -------- -------
$ 7,619 $(11,341) $ 9,675
======= ======== =======
</TABLE>
60
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Income tax expense consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Singapore...................................... $ 366 $1,441 $1,608
Foreign........................................ 860 2,266 1,395
------ ------ ------
1,226 3,707 3,003
------ ------ ------
Deferred:
Singapore...................................... 237 74 (559)
Foreign........................................ -- 10 (232)
------ ------ ------
237 84 (791)
------ ------ ------
$1,463 $3,791 $2,212
====== ====== ======
</TABLE>
Total income tax expense differs from the amount computed by applying the
Singapore statutory income tax rate of 26% (1996 and 1995: 26% and 27%) to
income before taxes as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Computed expected income taxes................ $ 2,057 $(2,950) $ 2,516
Effect of Singapore income tax incentives..... -- (82) --
Effect of losses from non-incentive Singapore
operations.................................. 367 7,822 498
Effect of foreign operations.................. (1,609) (1,785) (2,336)
Non-deductible items:
Amortization of goodwill and intangibles.... 205 329 436
Loss on sale of investments................. -- 69 --
Joint venture losses........................ 216 -- --
Bank commitment fee......................... -- -- 382
Others........................................ 227 388 716
------- ------- -------
$ 1,463 $ 3,791 $ 2,212
======= ======= =======
</TABLE>
61
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets......................................... $ 1,343 $ 801
Intangible assets.................................... 3,097 2,751
Others............................................... 169 237
-------- --------
4,609 3,789
-------- --------
Deferred tax assets
Fixed assets......................................... (207) (311)
Provision for stock obsolescence..................... (683) (1,364)
Provision for doubtful debts......................... (361) (1,636)
Net operating loss carry forwards.................... (13,805) (16,665)
Unabsorbed capital allowances carry forwards......... (539) (606)
Others............................................... (611) (645)
-------- --------
(16,206) (21,227)
-------- --------
Valuation allowance.................................... 15,690 20,740
-------- --------
Net deferred tax liability............................. $ 4,093 $ 3,302
======== ========
The net deferred tax liability is classified as
follows:
Non-current liability................................ $ 4,353 $ 3,710
Current asset........................................ (260) (408)
-------- --------
$ 4,093 $ 3,302
======== ========
</TABLE>
The Company's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Net operating loss carried forward
UK................................................. 2,596 3,291
USA................................................ 11,020 13,185
Malaysia........................................... 189 189
Others............................................... 2,145 4,483
-------- --------
Total deferred tax assets............................ 15,950 21,148
Valuation allowance.................................. (15,690) (20,740)
-------- --------
Net deferred tax assets.............................. $ 260 $ 408
======== ========
</TABLE>
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $30,663 for U.S. federal income tax purposes which will expire
between 2003 and 2011 if not previously utilized. Utilization of the U.S. net
operating loss carryforwards may be subject to an annual limitation due to the
change in ownership rules provided by the Internal Revenue Code of 1986. This
limitation and other restrictions provided by the Internal Revenue Code of 1986
may reduce the net operating loss carryforward such that it would not be
available to offset future taxable income of the U.S. subsidiary.
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $9,973 and $632 in U.K. and Malaysia respectively. The utilization
of these net operating loss carryforwards is limited to the future operations of
the Company in the tax jurisdictions in which such carryforwards arose. These
losses carryforward indefinitely.
62
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The Company has been granted the following tax incentives:
(i) Investment allowance on approved fixed capital expenditure
incurred within 5 years after August 1, 1990 subject to a maximum of $2,700
for its Singapore operations was granted by the Economic Development Board
of Singapore. This investment allowance has been utilized by the Company to
reduce taxable income of its Singapore subsidiary since 1991. This
allowance is however fully utilized at the end of fiscal 1996.
(ii) Pioneer status granted to one of its Malaysian subsidiary for a
period of 5 years under the Promotion of Investment Act, 1986. This pioneer
incentive provides a tax exemption on manufacturing income of this
subsidiary.
(iii) Product Export Enterprise incentive for a lower rate for its
facility at Shekou. The Company's operations in Shekou is located in a
"Special Economic Zone" and is an approved "Product Export Enterprise"
which qualifies for a special corporate income tax rate of 10%. This
special tax rate is subject to the Company exporting more than 70% of its
total value of products manufactured in China. The Company's status as a
Product Export Enterprise is reviewed annually by the Chinese government
authorities.
The Company's investments in its plants in Xixiang and Doumen, China fall
under the "Foreign Investment Scheme" that entitles the Company to apply for a
five-year tax incentive. The Company obtained the incentive for the Doumen plant
in December 1995 and the Xixiang plant in October 1996. With the approval, the
Company's tax rates on income from these facilities during the incentive period
will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the
first profitable year.
A portion of the Company's sales are carried out by its subsidiary in
Labuan, Malaysia where the Company has opted to pay the Labuan tax authorities a
fixed amount of US$8 tax each year in accordance with the Labuan tax
legislation.
A portion of the Company's sales are carried out by its subsidiary, an
offshore ordinary company, in Mauritius where the tax rate is at 0% for such
companies.
The potential deferred tax asset arises substantially from tax losses
available for carry-forward. These tax losses can only be set off against future
income of the operations in respect of which the tax losses arose.
As a result, management is uncertain as to when or whether these operations
will generate sufficient profit to realise the deferred tax asset benefit.
9. SHAREHOLDERS' EQUITY
Exercise of Options
During the financial year ended March 31, 1997, certain employees exercised
their options to purchase 239,633 Ordinary Shares at an exercise price of
US$0.77 -- US$24.00 per share.
Declaration of Dividends
The Company in a general meeting may by ordinary resolution declare
dividends but no dividend will be payable in excess of the amount recommended by
the directors. As the Company is incorporated in Singapore, all dividends
declared will be denominated in Singapore currency. The Company has not declared
any dividends to date.
63
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Acquisition of Flextronics International (UK) Limited ("FILUK) (formerly known
as Assembly & Automation (Electronics) Limited)
On April 12, 1995, the Company acquired all the outstanding stock of FILUK
in exchange for $2,879 in cash and 66,908 Ordinary Shares of the Company, valued
at $14.019 per share.
Acquisition of Astron Group Limited ("Astron")
On February 2, 1996, the Company acquired all the outstanding stock of
Astron in exchange for $13,440 in cash; 238,684 Ordinary Shares of the Company,
valued at $27.262 per share; issuance of a $10 million promissory note due one
year after acquisition date; issuance of a $5 million promissory note due two
years after acquisition date and the issuance of $10 million of Ordinary Shares
of the capital of the Company on June 30, 1998. The promissory notes bear
interest at the rate of 8% per annum.
In addition, the Company will issue $9 million of Ordinary Shares of the
Company on June 30, 1998, in accordance to the revised agreement with Mr.
Stephen Rees' affiliate in March 1997.
Acquisition of Fine Line Printed Circuit Design Inc. ("Fine Line")
On November 25, 1996, the Company acquired all the outstanding stock of
Fine Line in exchange for 223,321 Ordinary Shares of the Company, valued at
$25.52 per share.
Foreign Currency Payments in the Company's subsidiaries operating in the
People's Republic of China
The Company's subsidiaries operating in the People's Republic of China are
required to obtain approval from the relevant authorities when making foreign
currency payments.
Issuance of non-employee stock options
On June 3, 1996, the Company issued 20,000 stock options with an exercise
price of $31.25 to a customer under a sales agreement with the customer that
provided for the issuance of such options upon that customer's reaching a
specified sales target.
These options were valued as of the grant date using the Black-Scholes
model. The resulting value of $380,000 was recorded as a discount in the
accompanying fiscal 1997 income statement.
10. SHARE OPTION PLANS
In July 1993, the Company adopted an Executives' Share Option Scheme
("SOS") and an Executives' Incentive Share Scheme ("ISS") for selected
management employees of the Company. The Company granted stock options for
344,520 Ordinary Shares exercisable at $2.92 per share (fair market value at
date of the grant) under the SOS and stock options for 54,618 Ordinary Shares at
S$0.01 per share (fair market value at date of grant was $2.92 per share) under
the ISS.
The Company's 1993 Share Option Plan (the "Plan") that provides for the
grant of incentive stock options, automatic option grants and non-statutory
stock options to employees and other qualified individuals to purchase Ordinary
Shares of the Company. In August 1996 the Company's 1993 Share Option Plan was
amended to reserve an additional 500,000 Ordinary Shares for issuance. At March
31, 1997, the Company had reserved 2,000,000 Ordinary Shares for issuance under
the Plan.
In January 1995, the Company acquired nCHIP and thereby assumed the
existing nCHIP stock option plan and employee stock options outstanding
thereunder. The outstanding nCHIP employee stock options were converted into
options to purchase approximately 345,389 of the Company's Ordinary Shares.
64
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Proforma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to March 31, 1995 under the fair value method of this Statement. The fair value
of these options was estimated at the date of grant using the Black-Scholes
multiple option pricing model with the following weighted average assumptions:
risk-free interest rates ranging from 5.31% to 5.66% and from 5.40% to 5.77% for
1996 and 1997, respectively; a dividend yield of 0.0%, a volatility factor of
the expected market price of the Company's common stock of 0.67, and a
weighted-average expected life of the option of 0.13 years beyond each
respective vesting period.
<TABLE>
<CAPTION>
MARCH 31,
-------------
1996 1997
---- ----
<S> <C> <C>
Options granted 4 year vesting................................. 628 705
Options granted 2 year vesting................................. 15 15
---- ----
Total granted.................................................. 643 720
==== ====
Weighted average vesting period (years)........................ 3.96 3.96
</TABLE>
The weighted average vesting period is rounded to 4 years.
The amount of compensation expense recognized under all Flextronics Share
Option Plans is $1,453 in 1996 and $3,290 in 1997.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those traded options, and because the changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had the compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the SFAS 123, the Company's net income and earnings
per share would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
-------- ------
<S> <C> <C>
Net income/(loss):
As reported............................................ $(15,132) $7,463
Proforma............................................... (16,052) 5,380
Net income/(loss) per share
Primary
As reported......................................... $ (1.19) $ 0.50
Proforma............................................ (1.27) 0.36
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to
December 30, 1994, the proforma effect will not be fully reflected until 1998.
65
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The following table presents the activity for options.
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year.... 1,004,902 $ 3.47 1,026,052 $ 4.76 1,315,970 $12.52
Granted............................. 231,249 8.97 641,783 20.63 721,203 25.10
Exercised........................... (143,699) 2.96 (304,201) 3.30 (239,633) 5.86
Forfeited........................... (66,400) 3.88 (47,664) 11.03 (124,629) 17.81
Outstanding -- end of year.......... 1,026,052 4.76 1,315,970 12.60 1,672,911 18.57
Exercisable at end of year.......... 394,535 414,855 576,896
Weighted average fair value of
options granted during the year... 9.67 9.22 11.25
</TABLE>
11. PROVISION FOR PLANT CLOSURE
The provision for plant closure of $5,868 in fiscal 1997 relates to the
costs incurred in the closure of the Texas facility, the write-off of obsolete
equipment at the nChip semiconductor fabrication facility and downsizing the
Singapore manufacturing operations. The provision includes $2 million provision
for severance payment and $500 provision for the write-off of fixed assets in
the Singapore manufacturing facilities. An amount of $2,808 associated with
certain obsolete equipment at the Company's nChip and Texas facilities have been
written off. The provision also includes severance payments amounting to $560
for the employees of the Texas and nChip facility. The Company has not recorded
the remaining costs related to existing leases at the Texas facility as the
Company is continuing to use the facility for certain administrative and
warehousing functions, and believes it is probable that it will sublease this
facility and that the sublease income will not be materially less than the
remaining obligations under the lease.
The provision for plant closure of $1,254 in fiscal 1996 was associated
with the write off of certain obsolete equipment at the Company's facilities in
Malaysia and Shekou, China.
The components of plant closure costs are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
------ ------
<S> <C> <C>
Assets write-off........................................... $1,254 $3,308
Severance payment to employees............................. -- 2,560
------ ------
1,254 5,868
------ ------
Severance payment made during the year..................... -- $ 560
====== ======
</TABLE>
12. BANK COMMITMENT FEES
In March 1997, the Company incurred bank commitment fees of $750 which were
related to a proposed $100.0 million credit facility. This proposed credit
facility was not consummated, and the bank's commitment expired unused at the
end of March, 1997. Accordingly, such fees were included in other expense in the
fiscal 1997 income statement.
13. RELATED PARTY TRANSACTIONS
For the year ended March 31, 1997, the Company had net sales of $1,548 to
Metcal, Inc., a precision heating instrument company. The Company's Chairman and
Chief Executive Officer, Michael E. Marks has a beneficial interest in Metcal,
Inc.
For the year ended March 31, 1996, the Company had net sales of $2,133 to
Metcal, Inc.
66
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Prior to becoming the Company's Chief Officer in January 1994, Michael E.
Marks was the President and Chief Executive Officer of Metcal, Inc. Michael E.
Marks remained as a director of Metcal, Inc. during the year ended March 31,
1997.
In March 1997, the Company revised the agreement to pay in June 1998 a $15
million consulting fee to an entity affiliated with Stephen JL Rees Senior Vice
President, Worldwide Sales and Marketing. The Company and Mr. Rees agreed to
remove the remaining conditions to payment of the fee and to reduce this amount
of the fee which remains payable in June 1998 to $14 million.
For the year ended March 31, 1997, the Company transacted with Croton Ltd
and Mayfield International Limited ('Mayfield'), both companies of which Stephen
JL Rees has beneficial interests. During the current fiscal year, $118 was paid
for services rendered by Croton Ltd under a management service contract. Astron
has also rented an office from Mayfield, and rentals charged to Astron during
the period amounted to $208. At March 31, 1997 a loan balance in the amount of
$2,554 was due from Mayfield. The loan is unsecured, interest bearing at 7.15%
per annum and is wholly repayable by February 4, 1999.
14. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS
Restatement
The Company has reconsidered its accounting treatment for the acquisition
of the Astron Group Limited ("Astron") and a new independent valuation was
performed as of the date of the acquisition to address certain matters not
addressed in the original valuation. The cost of acquiring Astron has also been
changed from amounts previously reported to correct certain errors. The
allocation of the revised purchase price to the assets acquired is based on the
new valuation report.
The originally reported consideration paid to acquire Astron at February 2,
1996 and the revised cost are as follows:
<TABLE>
<CAPTION>
AS ORIGINALLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Cash................................................ $13,440 $13,440
Ordinary shares..................................... 6,507 6,507
Ordinary shares to be issued June 30, 1998.......... 10,000 10,000
Promissory notes.................................... 15,000 15,000
Contingent ("earnout") consideration................ 3,125 --(i)
Service agreement................................... -- 14,124(ii)
Direct costs........................................ 700 700
------- -------
Total purchase consideration........................ $48,772 $59,771
======= =======
</TABLE>
- ---------------
(i) Part of the conditions for the contingent earnout have been deemed by
management to have been met based on the management accounts of Astron at
March 31, 1996, but this amount was not accounted for as required by
generally accepted accounting principles where any contingent additional
consideration should be disclosed but not recorded as a liability.
(ii) The consultant and service agreement with an affiliate of the former
Chairman of Astron ("Service Agreement") required a $15 million payment on
June 30, 1998, of which $5 million is payable in cash and the balance in
Ordinary Shares. The Service Agreement was originally deemed a contingent
compensation agreement. However, no compensation expense was recorded in
1996 and no effect was given in the computation of earnings per share to
the portion payable in Ordinary Shares as required by generally accepted
accounting principles. On reconsideration, it was determined that the
agreement should be accounted for as the payment of purchase consideration.
The cash portion is included at its present value as of February 2, 1996,
and the stock portion has been included in the computation of earnings per
share. This Service Agreement was subsequently revised on March 27, 1997 to
remove the remaining conditions to payment of the fee and reduce the amount
payable to $14 million.
67
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
In the Company's original accounting for the allocation of the purchase
price, certain intangible assets had been identified and valued. However, due to
an oversight, no value was recorded. The allocation of the purchase price as
originally reported and as reallocated on the basis of the new valuation are as
follows:
<TABLE>
<CAPTION>
AS ORIGINALLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Astron's net assets at fair value................... $16,960 $17,200
In-process research and development................. 31,562 29,000
Intangible assets................................... 250 11,910
Goodwill............................................ -- 4,758
Less: deferred tax liability........................ -- (3,097)
------- -------
Total............................................... $48,772 $59,771
======= =======
</TABLE>
The Company has restated its March 31, 1996 financial statements to give
effect to the above changes in the consideration, and the new allocation of the
purchase price. The $17.4 million net loss previously reported for the year
ended March 31, 1996 has been reduced by $2.3 million ($0.20 per share) to give
effect to the change in the amount of in-process research and development
written off on acquisition offset in part by the amortization of the recorded
goodwill and the increase in the acquired intangible assets. The per share
amount also includes the effect of restating the weighted average number of
outstanding Ordinary Shares and equivalents.
The effects of the adjustments described above are as follows:
<TABLE>
<S> <C>
Restatement of 1996 Net Loss
Net loss as originally reported................................. $(17,412)
Decrease in amount of in-process research and development
written off................................................... 2,562
Increase in:
Intangible asset amortization................................. (208)
Goodwill amortization......................................... (14)
Interest expense due from discounting of $5 million cash...... (60)
--------
Net loss as restated............................................ $(15,132)
========
</TABLE>
The discussion of the Astron acquisition below gives effect to the
restatement of the 1996 amounts.
Current Year
In November 25, 1996, the Company acquired Fine Line Printed Circuit
Design, Inc. ("Fine Line"), a circuit board layout and prototype operation
located in San Jose, California. The acquisition was accounted for as a pooling
of interests and the Company has issued 223,321 Ordinary Shares in exchange for
all of the outstanding capital stock of Fine Line. Prior period financial
statements were not restated because the financial results of Fine Line do not
have a material impact on the consolidated result.
On December 20, 1996, the Company acquired 40% of FICO Investment Holding
Limited ("FICO") for $5.2 million of which $3 million was paid in December 1996
and the balance payment of $2.2 million which was paid in June 1997 was accrued
for in March 1997. The excess of the purchase price over the fair market value
of the net tangible assets acquired amounted to $3.2 million which are being
amortized over ten years. The Company has an option to purchase the remaining of
60% of FICO in 1998; the consideration for the remaining 60% is dependent on the
financial performance of FICO for the period ending December 31, 1997.
On March 27, 1997, the Company acquired the manufacturing facilities in
Karlskrona, Sweden and related inventory, equipment and assets from Ericsson
Business Networks AB ("Ericsson") for $82,354 which was financed by a bank loan.
The transaction has been accounted for under the purchase method and
68
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
accordingly, the purchase price has been allocated to the assets based on their
estimated fair market values at the date of acquisition.
The consolidated financial statements contain the results of the acquired
companies from the date of acquisition.
Previous Years
On April 12, 1995, the Company acquired all of the issued share capital of
Assembly & Automation (Electronics) Limited, a private limited company
incorporated in the UK that provides contract manufacture of electronics and
telecommunications equipment, for a total consideration of $4.1 million by way
of cash and the issuance of 66,908 Ordinary Shares. The transaction has been
accounted for under the purchase method, and accordingly, the purchase price has
been allocated to the assets and liabilities assumed based upon their estimated
fair market values at the date of acquisition. The excess of the purchase price
over the fair market value of the net tangible assets acquired aggregated
approximately $4.6 million of which $237 was allocated to intangibles which are
being amortized on a straight line basis over their estimated useful life of
three years. Goodwill is amortized over twenty years.
On February 2, 1996, the Company acquired all of the issued share capital
of Astron Group Limited, a private limited company incorporated in the Hong Kong
who is a manufacturer of circuit boards used in electronics and
telecommunications, for a consideration of $59.8 million by way of cash;
issuance of 238,684 Ordinary Shares and $10 million of Ordinary Shares of the
Company on June 30, 1998; and the issuance of promissory notes bearing interest
at 8%. The Company had originally agreed to pay an earnout of up to $12.5
million contingent upon Astron meeting certain pre-tax profit for calendar year
1996.
The transaction was accounted for under the purchase method, and
accordingly, the purchase price has been allocated to the assets and liabilities
assumed based upon their estimated fair market values at the date of
acquisition. The valuation of Astron's in-process research & development was
determined by an independent valuation firm to be $29 million, and the Company
has written off this $29 million in the consolidated Statement of Operations for
the year ended March 31, 1996. The valuation has also resulted in the allocation
of $16.7 million to goodwill and identifiable intangible assets. Goodwill of
$4.8 million and $11.9 million of identifiable intangible assets principally
related to developed technology, customer list, assembly workforce and
trademarks were recorded.
The consulting and service agreements with an affiliate of the former
Chairman of Astron, provided for an annual fee, plus a $15 million payment to be
made on June 30, 1998 subject to certain terms and conditions. A new agreement
was signed between the two parties in March 1997 which reduced the amount to $14
million and removed the original terms and conditions. This revision to the
agreement has been accounted for as a reduction in the purchase price and
goodwill as of this date of the new agreement.
In March 1997, management negotiated with Stephen Rees, Chairman of Astron
who was representing the former shareholders of Astron, a settlement of the
earnout condition of the Astron purchase agreement discussed above, the amount
of which was in dispute. Substantially all of the former shareholders of Astron
were affiliates of Mr. Rees or members of his family. Concurrently with
negotiation of the earnout payment, management and Mr. Rees renegotiated the
terms and conditions of the Services Agreement among the Company and an
affiliate of Mr. Rees. As a result of these negotiations, management agreed to
pay to the former shareholders of Astron an earnout in the amount of $6.25
million, and Mr. Rees agreed to reduce to $14 million, the amount due to the
affiliate under the Services Agreement. Because of the contemporaneous nature of
these negotiations and the relationship of Mr. Rees to the parties to the
agreements, management determined that the resulting adjustments should each be
accounted for as an adjustment to the cost of acquiring Astron. Accordingly,
$5.25 million has been added in March 1997 to the goodwill acquired. This amount
represents the agreed upon $6.25 million payment due under the earnout agreement
less the $1.0 million reduction in the amount due under the Services Agreement.
69
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The consolidated financial statements contain the results of the acquired
companies from the date of acquisition.
In January 1995, the Company acquired nCHIP by the issuance of 2,104,602
ordinary shares of S$0.01 par value each, in exchange for all of the outstanding
capital stock of nCHIP. In addition, outstanding nCHIP employee stock options
were converted into options to purchase approximately 345,389 of the Company's
ordinary shares. The transaction was accounted for as a pooling of interests and
therefore, all prior period financial statements presented have been restated as
if the acquisition took place at the beginning of such periods.
nCHIP has a calendar year end and, accordingly, the nCHIP statement of
income for the year ended December 31, 1993 have been combined with the
Company's statement of income for the fiscal years ended March 1994. Effective
April 1, 1994 nCHIP's fiscal year end has been changed from December 31 to March
31 to conform to the Company's fiscal year-end. Accordingly, nCHIP's operations
for the three months ended March 31, 1994 including net sales of $2,302 and net
loss of $596 have been excluded from consolidated results and have been reported
as an adjustment to the April 1, 1994 consolidated retained earnings.
Separate results of operations for the period prior to the acquisition are
as follows:
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS
ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net sales
Company....................................................... $163,249
nCHIP......................................................... 7,623
--------
Combined...................................................... $170,872
========
Net income
Company....................................................... $ 7,626
nCHIP......................................................... (3,400)
--------
Combined...................................................... $ 4,226
========
Other changes in shareholders' equity
Company....................................................... $ (144)
nCHIP......................................................... 5,287
--------
Combined...................................................... $ 5,143
========
</TABLE>
As of December 20, 1994, the Company had a 49% interest in FlexTracker and
accounted for this investment using the equity method. On December 30, 1994, the
Company acquired the net assets (except the $1.0 million loan made by the joint
venture partner, HTS, to FlexTracker) for approximately $3.3 million.
On March 1, 1994, the Company acquired all of the outstanding stock of FTI,
a company that provides high value-added, high quality, just-in-time
manufacturing services to original equipment manufacturers in the computer and
electronics industry, for approximately $4.0 million. The transaction has been
accounted for under the purchase method, and accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition. Such allocation has
been based on the valuation by an independent corporate valuation firm. The
excess of the purchase price over the fair market value of the net tangible
assets acquired resulting in goodwill aggregated approximately $2.4 million and
has been allocated to goodwill which is being amortized on a straight-line basis
over its estimated useful life of twenty-five years.
70
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
The operating results of FTI are included in the Company's consolidated
results of operations from the date of acquisition.
The following unaudited pro forma information of the Company reflects the
results of operations for the years ended March 31, 1995 and 1996 as if the
acquisitions of Assembly & Automation (Electronics) Limited and Astron Group
Limited had occurred as of April 1, 1994 and as if the acquisitions of the net
assets and business of Flextracker and FTI also had, occurred as of April 1,
1994 and after giving effect to certain adjustments including amortization of
intangibles and goodwill. The unaudited proforma information does not include
the effects of acquiring the Karlskrona Facilities in March 1997 because
information relating to its operation prior to the company's acquisition is not
available. The unaudited pro forma information is based on the acquired
entities' results of operations for the years ended December 31, 1994 and 1995
as the fiscal year end of these entities and the rest of the group are not
co-terminus. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results would have
been had the acquisition actually took place at April 1, 1994 or 1995 or of
operating results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995 1996
-------------------------------------------------------- -------- -------
<S> <C> <C>
Net sales............................................... $292,219 466,039
Net income.............................................. (872)* 11,977*
Net income per share.................................... (0.07) 0.89
</TABLE>
- ---------------
* Excludes the effects of the write-off of $29,000 of in-process research and
development at the date of the acquisition of Astron.
15. SEGMENT REPORTING
The Company operates in one primary business segment -- providing
sophisticated electronics assembly and turnkey manufacturing services to a
select group of original equipment manufacturers engaged in the computer,
medical, consumer electronics and communications industries. Sales to major
customers who accounted for more than 10% of net sales were as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
CUSTOMER 1995 1996 1997
----------------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
Visioneer............................................ 1.70% 13.14% 7.00%
Lifescan............................................. 20.1% 14.10% 13.34%
Global Village....................................... 4.50% 10.50% 8.26%
U.S. Robotics........................................ 0.00% 0.00% 10.63%
</TABLE>
71
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
Sales for similar classes of products within the Company's business segment
is presented below (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
PRODUCT TYPE 1995 1996 1997
------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Medical.................................... $ 49,152 $ 78,322 $ 89,682
Computer................................... 77,419 220,930 250,498
Telecommunication.......................... 43,399 60,466 75,947
PCB........................................ -- 4,485 28,470
Industrial................................. -- 9,664 6,832
Consumer products.......................... 47,515 23,858 12,495
MCMs....................................... 11,847.. 19,817 19,214
Others..................................... 8,054 30,804 7,447
-------- -------- --------
$237,386 $448,346 $490,585
======== ======== ========
</TABLE>
A summary of the Company's operations by geographical area for the three
years ended March 31, 1995, 1996 and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
PRODUCT TYPE 1995 1996 1997
------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
NET SALES:
Singapore:
Unaffiliated customers
Domestic............................ $ 3,596 $ 653 $ 1,401
Export.............................. 7,358 9,277 851
Intercompany.......................... 67,572 77,899 88,054
-------- -------- --------
78,526 87,829 90,306
Hong Kong/China/Mauritius:
Unaffiliated customers
Domestic............................ 17,757 11,838 11,398
Export.............................. -- 2,980 21,203
Intercompany.......................... 29,353 60,780 129,162
-------- -------- --------
47,110 75,598 161,763
USA/Europe/Mexico:
Unaffiliated customers
Domestic............................ $ 50,506 $207,961 $208,225
Export.............................. -- 13,767 2,431
Intercompany.......................... -- 27 9
-------- -------- --------
50,506 221,755 210,665
Malaysia:
Unaffiliated customers
Domestic............................ -- -- --
Export.............................. 158,168 $201,870 $245,075
Intercompany.......................... 4 -- --
-------- -------- --------
158,172 201,870 245,075
Eliminations............................... (96,928) (138,706) (217,224)
-------- -------- --------
$237,386 $448,346 $490,585
======== ======== ========
</TABLE>
72
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION
UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
MARCH 31,
PRODUCT TYPE 1995 1996 1997
------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
INCOME/(LOSS) FROM OPERATIONS:
Singapore................................ $ 90 $(25,334) $ (184)
Hong Kong/China/Mauritius................ 638 (6,110) 4,787
USA/Mexico............................... (1,290) 4,570 (5,531)
Europe................................... 15 (1,514) (1,829)
Malaysia................................. 10,754 18,953 17,626
-------- -------- --------
$ 10,207 $ (9,435) $ 14,869
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
PRODUCT TYPE 1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Singapore................................ $ 23,426 $ 48,434 $ 50,118
Hong Kong/China/Mauritius................ 17,020 50,284 68,695
USA/Mexico............................... 26,354 73,552 74,884
Europe................................... 22 11,060 116,919
Malaysia................................. 49,295 47,694 48,618
-------- -------- --------
$116,117 $231,024 $359,234
======== ======== ========
</TABLE>
Geographic revenue transfers are based on selling prices to unaffiliated
companies, less discounts. Income (loss) from operations is net sales less
operating expenses, goodwill amortization and provision for plant closings, but
prior to interest or other expenses and income taxes.
The Company's subsidiaries, with the exception of Astron Group Limited, are
interdependent and are not managed for stand alone results. Certain operational
functions for the entire Company, such as marketing and administration, may be
carried out by a subsidiary in one country. In addition, the Company may from
time to time shift responsibilities from a subsidiary in one country to a
subsidiary in another country, thereby changing the operating results of the
impacted subsidiaries but not the Company as a whole. For these reasons, the
Company believes that changes in results of operations in the individual
countries in which it operates are not necessarily reflective of material
changes in the Company's overall results.
73
<PAGE> 74
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 1997
FLEXTRONICS INTERNATIONAL LTD.
By: /s/ MICHAEL E. MARKS
------------------------------------
Michael E. Marks
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL E. MARKS Chairman of the Board and September 25, 1997
- --------------------------------------------- Chief Executive Officer
Michael E. Marks (principal executive
officer)
/s/ TSUI SUNG LAM* President, Asia Pacific September 25, 1997
- --------------------------------------------- Operations and Director
Tsui Sung Lam
/s/ GOH CHAN PENG* Senior Vice President, September 25, 1997
- --------------------------------------------- Finance and Operations, Asia
Goh Chan Peng Pacific (principal financial
and accounting officer)
/s/ ROBERT R.B. DYKES* Senior Vice President of September 25, 1997
- --------------------------------------------- Finance and Administration
Robert R.B. Dykes and Director
/s/ BERNARD J. LACROUTE* Director September 25, 1997
- ---------------------------------------------
Bernard J. Lacroute
/s/ MICHAEL J. MORITZ* Director September 25, 1997
- ---------------------------------------------
Michael J. Moritz
/s/ STEPHEN J.L. REES* Senior Vice President, September 25, 1997
- --------------------------------------------- Worldwide Sales and
Stephen J.L. Rees Marketing and Director
/s/ RICHARD L. SHARP* Director September 25, 1997
- ---------------------------------------------
Richard L. Sharp
*By: /s/ MICHAEL E. MARKS
- ---------------------------------------------
Michael E. Marks
Attorney-in-fact
</TABLE>
74
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ -----------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of September 12, 1994 among the
Company, nCHIP Acquisition Corporation and nCHIP (the "Reorganization
Agreement"). Certain Disclosure Schedules of nCHIP and the Company setting
forth various exceptions to the representations and warranties pursuant to
the Reorganization Agreement have been omitted. The Company agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon request.
(Incorporated by reference to Exhibits 2.1 through 2.6 of the Company's
registration statement on Form S-4, No. 33-85842.)
2.2 Amendment No. 1 to the Reorganization Agreement dated as of December 8, 1994
among the Company, nCHIP Acquisition Corporation and nCHIP. (Incorporated by
reference to Exhibit 2.7 of the Company's registration statement on Form S-4,
No. 33-85842.)
2.3 Share Purchase Agreement dated as of April 12, 1995 among the Company, A&A
and all of the shareholders of A&A. (Incorporated by reference to Exhibit 2.1
of the Company's Current Report on Form 8-K for the event reported on April
12, 1995.)
2.4 Share Purchase Agreement among the Company, A&A and all of the shareholders
of A&A. 2.5 (Incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K for the event reported on April 12, 1995.)
2.5 Agreement among the Company, Alberton Holdings Limited and Omac Sales Limited
dated as of January 6, 1996. (Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K for the event reported on February 2,
1996.)
2.6 Asset Transfer Agreement dated as of February 12, 1997 between Ericsson
Business Networks AB and Flextronics International Sweden AB. (Incorporated
by reference to Exhibit 2.1 of the Company's registration statement on Form
S-3, No. 333-21715.)
3.1 Memorandum of Association of the Company. (Incorporated by reference to
Exhibit 3.1 of the Company's registration statement on Form S-1, No.
33-74622.)
3.2 Articles of Association of the Company. (Incorporated by reference to Exhibit
3.2 of the Company's registration statement on Form S-4, No. 33-85842.)
4.1 Registration Rights Agreement dated July 8, 1993, as amended. (Incorporated
by reference to Exhibit 10.34 of the Company's registration statement on Form
S-1, No. 33-74622.)
4.2 Registration Rights Agreement dated as of April 12, 1995 among the Company
and certain shareholders of A&A. (Incorporated by reference to Exhibit 2.2 of
the Company's Current Report on Form 8-K for the event reported on April 12,
1995.)
10.1 Form of Indemnification Agreement between the Registrant and its Directors
and certain officers. (Incorporated by reference to Exhibit 10.1 of the
Company's registration statement on Form S-1, No. 33-74622.)
10.2+ 1993 Share Option Plan. (Incorporated by reference to Exhibit 10.2 of the
Company's registration statement on Form S-1, No. 33-74622.
10.3+ Executives' Share Option Scheme, as amended. (Incorporated by reference to
Exhibit 10.3 of the Company's registration statement on Form S-1, No.
33-74622.)
10.4+ Executives' Incentive Share Scheme, as amended. (Incorporated by reference to
Exhibit 10.4 of the Company's registration statement on Form S-1, No.
33-74622.)
10.5+ nCHIP, Inc. Amended and Restated 1988 Stock Option Plan. (Incorporated by
reference to Exhibit 10.5 of the Company's registration statement on Form
S-4, No. 33-85842.)
10.6* Agreement to Grant Options dated as of June 9, 1995 between the Company and
Lifescan. (Incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995.)
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ -----------------------------------------------------------------------------
<S> <C>
10.7 Lease Agreement dated as of October 1, 1994 among Shenzhen Xinan Industrial
Shareholdings Limited, Flextronics Industrial (Shenzhen) Limited and
Flextronics Singapore Pte Ltd. (Incorporated by reference to Exhibit 10.25 of
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1995).
10.11 Lease Agreement dated as of January 2, 1995 between Shenzhen Xinan Industrial
Shareholdings Limited and Flextronics Industrial (Shenzhen) Limited.
(Incorporated by reference to Exhibit 10.25 of the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)
10.8+ Services Agreement between the Registrant and Stephen Rees dated as of
January 6, 1996. (Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K for the event reported on February 2, 1996.)
10.9+ Supplemental Services Agreement between Astron and Stephen Rees dated as of
January 6, 1996. (Incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K for the event reported on February 2, 1996.)
10.10+ Promissory Note dated April 17, 1995 executed by Michael E. Marks in favor of
Flextronics Technologies, Inc. (Incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1995.)
10.11+ Employment and Noncompetition Agreement between the Company and David
Tuckerman. (Incorporated by reference to Exhibit 10.35 of the Company's
registration statement on Form S-4, No. 33- 85842.)
10.12+ Service Agreement dated July 8, 1993 between the Registrant and Dennis P.
Stradford. (Incorporated by reference to Exhibit 10.36 of the Company's
registration statement on Form S-1, No. 33-74622.)
10.13+ Service Agreement dated July 8, 1993 between the Registrant and Tsui Sung
Lam. (Incorporated by reference to Exhibit 10.37 of the Company's
registration statement on Form S-1, No. 33-74622.)
10.14+ Service Agreement dated July 8, 1993 between the Registrant and Goh Chan
Peng. (Incorporated by reference to Exhibit 10.38 of the Company's
registration statement on Form S-1, No. 33-74622.)
10.15+ Service Agreement dated July 8, 1993 between the Registrant and Teo Buck
Song. (Incorporated by reference to Exhibit 10.39 of the Company's
registration statement on Form S-1, No. 33-74622.)
10.22* Printed Circuit Board Assembly Services Agreement between Lifescan Inc., a
Johnson & Johnson Company, and the Registration dated November 1, 1992.
(Incorporated by reference to Exhibit 10.41 of the Company's registration
statement on Form S-1, No. 33-74622.)
10.23 Tenancy of Flatted Factory Unit dated February 28, 1996 between Jurong Town
Corporation and the Registrant. (Incorporated by reference to Exhibit 10.44
of the Company's Annual Report on Form 10-K for fiscal year ended March 31,
1990.)
10.24 Tenancy of Flatted Factory Unit dated May 14, 1993 between Jurong Town
Corporation and the Registrant. (Incorporated by reference to Exhibit 10.45
of the Company's registration statement on Form S-1, No. 33-74622.)
10.25+ Flextronics Asia U.S.A. 401(k) plan. (Incorporated by reference to Exhibit
10.52 of the Company's registration statement on Form S-1, No. 33-74622.)
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ -----------------------------------------------------------------------------
<S> <C>
10.26 Acquisition and Subscription Agreement dated June 30, 1993 between FI
Liquidating Company, Inc., Asian Oceanic Nominees and Custodians Limited,
N.T. Butterfield Trustee (Bermuda) Limited, Overseas Asset Holdings, Inc., JF
Asia Select Limited, the Executive Representative, Flex Holdings Pte Limited,
CLG Partners, L.P. and the Liquidators of Asian Oceanic Nominees and
Custodians Limited. (Incorporated by reference to Exhibit 10.53 of the
Company's registration statement on Form S-1, No. 33-74622.)
10.27 Revolving Credit and Term Loan Agreement dated as of March 27, 1997 among the
Company, The First National Bank of Boston, as Agent, and the other lending
institutions listed on Schedule 1 attached thereto. The Company agrees to
furnish a copy of the omitted schedule to the Commission upon request.
(Incorporated by reference to Exhibit 5(a) of the Company's Current Report on
Form 8-K for the event reported on March 27, 1997.)
10.28 Revolving Credit Agreement dated as of March 27, 1997 among Flextronics
International USA, Inc., The First National Bank of Boston, as Agent, and the
other lending institutions listed of Schedule 1 attached thereto.
(Incorporated by reference to Exhibit 5(b) of the Company's Current Report on
Form 8-K for the event reported on March 27, 1997.)
10.29+ Employment and Noncompetition Agreement dated as of April 30, 1997 between
Flextronics International Sweden AB and Ronny Nilsson.
10.30+ Services Agreement dated as of April 30, 1997 between Flextronics
International USA, Inc. and Ronny Nilsson.
10.31+ Promissory Note dated April 15, 1997 executed by Ronny Nilsson in favor of
Flextronics International USA, Inc.
10.32+ Letter Agreement dated March 27, 1997 among the Company, Astron Technologies
Limited, Croton Technology Ltd. and Stephen Rees regarding the termination of
the Services Agreement.
10.33+ Letter Agreement dated March 27, 1997 between Astron Group Limited and
Stephen Rees regarding the termination of the Supplemental Services
Agreement.
10.34++ Services Agreement between Flextronics Singapore Pte Limited and Goh Chan
Peng effective as of April 1, 1997.
10.35++ Services Agreement between Astron Technologies Limited and Goh Chan Peng
effective as of April 1, 1997.
10.36++ Services Agreement between Astron Technologies Limited and Tsui Sung Lam
effective as of April 1, 1997.
10.37++ Services Agreement between Flextronics Singapore Pte Limited and Tsui Sung
Lam effective as of April 1, 1997.
10.38+ First Amendment to Revolving Credit and Term Loan Agreement dated as of May
19, 1997 among the Company, BankBoston, N.A. (formerly known as The First
National Bank of Boston), as Agent, and the other lending institutions listed
on Schedule 1 attached thereto.
10.39+ First Amendment to Revolving Credit Agreement dated as of May 19, 1997 among
Flextronics International USA, Inc., BankBoston, N.A., as Agent, and the
other lending institutions listed on Schedule 1 attached thereto.
10.40+ Second Amendment to Revolving Credit and Term Loan Agreement dated as of June
30, 1997 among the Company, BankBoston, N.A., as Agent, and the other lending
institutions listed on Schedule 1 attached thereto.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ -----------------------------------------------------------------------------
<S> <C>
10.41+ Second Amendment to Revolving Credit Agreement dated as of June 30, 1997
among Flextronics International USA, Inc., BankBoston N.A. as Agent, and the
other lending institutions listed on Schedule 1 attached thereto.
11.1+ Statement regarding computation of per share earnings.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1+ Financial Data Schedule
</TABLE>
- ---------------
* Confidential treatment requested for portions of agreement.
+ Management contract or compensatory plan or arrangement.
+ Previously filed.
(d) See Item 14(a).
<PAGE> 1
Exhibit 23.1
[ERNST & YOUNG LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated July 31, 1997,
with respect to the audited financial statements and schedule of Flextronics
International Ltd. as of March 31, 1996 and 1997 and for each of the three
years in the period ended March 31, 1997, included in this Annual Report (Form
10-KA) for the fiscal year ended March 31, 1997, into (i) the Registration
Statement on Form S-8 (File No. 33-78529) pertaining to the 1993 Share Option
Plan, Executives' Share Option Scheme and Executives' Incentive Share Scheme of
Flextronics International Ltd.; (ii) the Registration Statement on Form S-8
(File No. 33-89454) pertaining to Ordinary Shares authorized for issuance under
the nCHIP, Inc. Amended and Restated 1988 Stock Option Plan which was assumed
by Flextronics International Ltd. in connection with the acquisition of nCHIP,
Inc.; and (iii) the Registration Statement on Form S-3 (File No. 333-20623)
pertaining to the resale of certain outstanding Ordinary Shares.
/s/ ERNST & YOUNG
- --------------------------------
ERNST & YOUNG
Certified Public Accountants
Singapore
September 29, 1997
