SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 23, 1999
FLEXTRONICS INTERNATIONAL LTD.
(Exact Name of Registrant as Specified in Its Charter)
Singapore
(State or Other Jurisdiction of Incorporation)
0-23354 Not Applicable
(Commission (IRS Employer
File Number) Identification No.)
514 Chai Chee Lane, #04-13, Bedok Industrial Estate, Singapore 469029
(Address of Principal Executive Offices) (Zip Code)
(65) 449-5255
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5: Other Events.
On July 15, 1999, Flextronics International Ltd. (the "Company") acquired
Kyrel EMS Oyj ("Kyrel"), a provider of electronics manufacturing services with
two facilities in Finland and one in Luneville, France. This acquisition was
accounted for as a pooling of interests. The audited restated consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations ("Supplementary Financial Information"),
which are filed with this Form 8-K as Exhibit 99.1 and are incorporated by
reference in this Form 8-K, reflect the Company's financial position and results
of operations as if Kyrel were a wholly owned subsidiary of the Company since
inception.
Item 7: Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Moore Stephens.
27.1 Financial Data Schedule.
99.1 Supplementary Financial Information of Flextronics International
Ltd.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FLEXTRONICS INTERNATIONAL LTD.
Date: December 23, 1999 By: /s/ Robert R.B. Dykes
---------------------
Robert R.B. Dykes
Senior Vice President of
Finance and Administration
3
<PAGE>
EXHIBIT INDEX
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Moore Stephens.
27.1 Financial Data Schedule.
99.1 Supplementary Financial Information of Flextronics International
Ltd.
4
CONSENT OF ARTHUR ANDERSEN LLP
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 8-K, into the Company's
previously filed Registration Statements Nos. 333-42255 and 333-71049 on Form
S-8.
ARTHUR ANDERSEN LLP
San Jose, California
December 22, 1999
CONSENT OF MOORE STEPHENS
EXHIBIT 23.2
22 December 1999
Flextronics International Limited
2090 Fortune Drive,
San Jose
CA 95131
USA
FLEXTRONICS INTERNATIONAL LIMITED
As independent public accountants, we hereby consent to the use of our reports
(and all references to our Firm) included in or made a part of this registration
statement.
/s/ MOORE STEPHENS
- ----------------------------------------
Moore Stephens
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1999 (AUDITED) AND THE STATEMENTS OF INCOME FOR THE YEAR
ENDED MARCH 31, 1999 (AUDITED) AND IS QUALIFIED IN ITS INTEGRITY BY REFERNCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 184,860
<SECURITIES> 0
<RECEIVABLES> 278,630
<ALLOWANCES> 5,427
<INVENTORY> 221,352
<CURRENT-ASSETS> 745,524
<PP&E> 527,625
<DEPRECIATION> 130,458
<TOTAL-ASSETS> 1,217,869
<CURRENT-LIABILITIES> 493,926
<BONDS> 0
0
0
<COMMON> 620
<OTHER-SE> 484,318
<TOTAL-LIABILITY-AND-EQUITY> 1,217,869
<SALES> 2,043,374
<TOTAL-REVENUES> 2,043,374
<CGS> 1,878,360
<TOTAL-COSTS> 1,878,360
<OTHER-EXPENSES> 84,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,621
<INCOME-PRETAX> 60,048
<INCOME-TAX> 7,632
<INCOME-CONTINUING> 52,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,416
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.09
</TABLE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the fiscal years
ended March 31, 1995, 1996, 1997, 1998 and 1999. The selected financial data
includes for all periods presented the results of operations and balance sheet
of Kyrel EMS Oyj, which the Company acquired in July 1999 in a transaction
accounted for as a pooling-of-interests. 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>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 447,954 $ 834,064 $ 820,742 $ 1,191,194 $ 2,043,374
Cost of sales .......................... 406,076 754,546 747,491 1,081,189 1,878,360
----------- ----------- ----------- ----------- -----------
Gross margin ........................... 41,878 79,518 73,251 110,005 165,014
Selling, general and
administrative ....................... 21,959 37,111 39,711 57,217 75,109
Goodwill and intangible
amortization ......................... 762 1,296 2,651 3,663 3,664
Provision for excess facilities ........ -- 1,254(1) 5,868(2) 8,869(3) 3,361(4)
Acquired in-process research and
development .......................... 91 29,000(1) -- -- 2,000(4)
----------- ----------- ----------- ----------- -----------
Income from operations ................. 19,066 10,857 25,021 40,256 80,880
Merger-related expenses ................ (816) -- -- (7,415)(3) --
Interest and other expense, net ........ (1,790) (4,880) (7,648) (12,272) (20,832)
----------- ----------- ----------- ----------- -----------
Income before provision for
Income taxes .......................... 16,460 5,977 17,373 20,569 60,048
Provision for income taxes ............. 2,631 8,693 3,175 2,318 7,632
----------- ----------- ----------- ----------- -----------
Net income (loss) ...................... $ 13,829 $ (2,716) $ 14,198 $ 18,251 $ 52,416
=========== =========== =========== =========== ===========
Diluted net income (loss)
per share (5) ........................ $ 0.22 $ (0.04) $ 0.19 $ 0.23 $ 0.55
=========== =========== =========== =========== ===========
Weighted average ordinary
shares and equivalents
outstanding - diluted (5) ............ 63,172 65,388 72,956 80,032 95,970
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit) ..................... $ 52,205 $ 37,723 $ (16,314) $ 132,580 $ 251,598
Total assets .................................. $ 278,004 $ 395,306 $ 497,830 $ 780,844 $1,217,869
Long-term debt and capital
leases, excluding current
portion ..................................... $ 32,371 $ 38,407 $ 32,623 $ 192,418 $ 219,995
Shareholders' equity .......................... $ 81,207 $ 109,900 $ 125,075 $ 233,195 $ 484,938
</TABLE>
(1) In fiscal 1996, the Company wrote off $29.0 million of in-process research
and development associated with the acquisition of Astron and also recorded
charges totaling $1.3 million for costs associated with the closing of one of
the Company's Malaysian plants and its Shekou, China operations.
(2) In fiscal 1997, the Company incurred plant closing expenses aggregating to
$5.9 million in connection with closing its manufacturing facility in Texas,
downsizing manufacturing operations in Singapore, the write-off of excess
equipment and severance obligations at the nCHIP semiconductor fabrication
operations.
(3) In fiscal 1998, the Company incurred plant closing expenses aggregating to
$8.9 million in connection with closing its manufacturing facility in Wales, UK.
The Company also incurred $7.4 million of merger-related costs as a result of
the acquisitions of Neutronics Electronic Industries Holding AG, DTM Products,
Inc., Energipilot AB, Altatron, Inc. and Conexao Informatica Ltda. in fiscal
1998.
(4) In fiscal 1999, the Company incurred plant closing expenses aggregating to
$3.4 million in connection with consolidating its manufacturing facilities in
Hong Kong after the acquisition of Advanced Component Labs HK Ltd. and
restructuring some of its U.S. manufacturing facilities. The Company also wrote
off $2.0 million of in-process research and development associated with the
acquisition of Advanced Component Labs HK Ltd.
(5) The Company set a record date of December 8, 1999 for a two-for-one stock
split to be effected as a bonus issue (the Singapore equivalent of a stock
dividend). The distribution of 57,497,204 Ordinary Shares occurred on December
22, 1999. This stock dividend has been reflected in the Company's financial
statements for all periods presented unless otherwise noted. All share and per
share amounts have been retroactively restated to reflect the stock split.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In recent years, the Company has substantially expanded its manufacturing
capacity, technological capabilities and service offerings, through both
acquisitions and internal growth. See "-Certain Factors Affecting Operating
Results - If we do not manage effectively the expansion of our operations, our
business may be harmed" and "-We may encounter difficulties with acquisitions,
which could harm our business" and Note 11 of Notes to Consolidated Financial
Statements.
In October 1999, Flextronics completed a secondary offering of its Ordinary
Shares. A total of 13.8 million Ordinary Shares were sold at a price of $33.84
per share resulting in net proceeds to the Company of approximately $449.3
million.
The Company set a record date of December 8, 1999 for a two-for-one stock
split effected as a bonus issue (the Singapore equivalent of a stock dividend).
The distribution of 57,497,204 Ordinary Shares occurred on December 22, 1999.
This stock dividend has been reflected in the Company's financial statements for
all periods presented unless otherwise noted. All share and per share amounts
have been retroactively restated to reflect the stock split.
In November 1999, Flextronics acquired Circuit Board Assemblers, Inc.
("CBA"), EMC International, Inc. ("EMC") and related real property in exchange
for 559,098 Ordinary Shares of Flextronics, of which 55,910 Ordinary Shares are
to be issued upon the resolution of contingencies. CBA provides electronics
design and assembly services, and EMC provides testing services, from their
facilities in North Carolina. The acquisition of CBA and EMC have been accounted
for as a pooling-of-interests; however, prior period financial statements were
not restated because the financial results of CBA and EMC do not have a
significant impact to Flextronics' consolidated financial statements.
On July 15, 1999 Flextronics acquired 100% of the outstanding Ordinary
Shares of Kyrel EMS Oyj ("Kyrel"), a provider of electronics manufacturing
services with two facilities in Finland and one in Luneville, France, in
exchange for 3,643,610 Ordinary Shares of Flextronics, of which 364,361 Ordinary
Shares are to be issued upon the resolution of contingencies. The acquisition of
Kyrel has been accounted for as a pooling-of-interests and, accordingly, the
accompanying consolidated financial statements have been restated to reflect the
results of operations, balance sheets, shareholders' equity statement and cash
flows of Flextronics and Kyrel for all periods presented.
On June 30, 1999, Flextronics purchased the manufacturing facilities and
related assets of Ericsson's Visby, Sweden operations for approximately $39.4
million. Ericsson's Visby facility manufactures mobile systems infrastructure,
primarily radio base stations. Flextronics also offered employment to 900
persons who had been employed by Ericsson at this facility. In connection with
the acquisition of assets, the Company has also entered into a manufacturing
service agreement with Ericsson.
On May 31, 1999, Flextronics purchased the manufacturing facilities and
related assets of ABB Automation Products in Vasteras, Sweden for approximately
$24.5 million. This facility provides printed circuit board assemblies
2
<PAGE>
and other electronic equipment. Flextronics has also offered employment to 575
ABB personnel who were previously employed by ABB Automation Products. In
connection with the acquisition of certain fixed assets, the Company has also
entered into a manufacturing service agreement with ABB Automation Products.
On March 1, 1999, the Company acquired the manufacturing facilities and
related assets of Advanced Component Labs HK Ltd. ("ACL"), a Hong Kong based
advanced technology printed circuit board manufacturer for $15.0 million cash.
The transaction has been accounted for under the purchase method. As a result,
the purchase price was allocated to the assets based on their estimated fair
market values at the date of acquisition. As of the date of acquisition, $7.8
million of the purchase price was allocated to goodwill and being amortized over
10 years and $2.0 million of the purchase price was allocated to in-process
research and development related to development projects which had not reached
technological feasibility and had no probable alternative future uses;
accordingly, the Company expensed the $2.0 million on the date of acquisition as
a charge to operations. ACL's in-process research and development projects were
initiated to address the rapid technological change associated with the
miniaturized printed circuit board market. The incomplete projects include
developing technology for a low cost ball grid array package, developing thermal
vias, and developing new methods that enable the use of extremely thin 1.5 mil
technology. The Company believes the efforts to complete the acquired in-process
research and development projects will consist of internally staffed engineering
costs over the next fiscal year. These costs are estimated to be approximately
$1.1 million to complete the research and development. There can be no assurance
that the Company will succeed in making commercially viable products from the
ACL research and development projects.
On March 1, 1999, the Company increased its ownership of FICO Investment
Holding Ltd ("FICO") to 90% by acquiring an additional 50% of its equity
interests for (i) $7.2 million cash, (ii) 255,700 Ordinary Shares issued at
closing valued at $4.8 million (iii) $3.0 million in 2% promissory notes due
$1.0 million each in year 2000 through year 2002. This transaction has been
accounted for under the purchase method and, accordingly, the results of
operations for FICO have been included in the accompanying consolidated
statements of operations since March 1, 1999. The acquisition of this additional
50% interest resulted in additional goodwill and intangible assets of $8.5
million and $420,000 which were being amortized over 8 and 3 years,
respectively.
On March 31, 1998, the Company acquired Conexao Informatica Ltda., a
Brazil-based electronics manufacturing service provider, in exchange for a total
of 1,686,372 Ordinary Shares, of which 473,220 Ordinary Shares were to be issued
upon resolution of certain general and specific contingencies. The contingencies
were resolved and the 473,220 Ordinary Shares were issued in March 1999. On
March 31, 1998, the Company also acquired Altatron, Inc., an electronics
manufacturer service provider headquartered in Fremont, California, with
facilities in Fremont, California; Richardson, Texas; and Hamilton, Scotland in
exchange for 3,154,600 Ordinary Shares, of which 630,920 Ordinary Shares were to
be issued upon resolution of certain general and specific contingencies. The
contingencies were resolved and the 630,920 Ordinary Shares were to be issued
subsequent to fiscal 1999. The acquisitions of Conexao and Altatron have been
accounted for as a pooling-of-interests. The Company did not restate its prior
period financial statements with respect to these acquisitions because they did
not have a material impact on its consolidated results of operations.
Accordingly, the balance sheets of Conexao and Altatron as of March 31, 1998
were included in the Company's consolidated balance sheet as of March 31, 1998
and the results of operations
3
<PAGE>
for Conexao and Altatron are included in the Company's results of operations
beginning in the first quarter of fiscal 1999.
On December 1, 1997 the Company acquired DTM Products, Inc., a
Colorado-based producer of injection molded plastics for North American OEMs, in
exchange for 1,009,876 Ordinary Shares, and acquired Energipilot AB, a Swedish
company principally engaged in providing cables and engineering services for
Northern European OEMs, in exchange for 919,960 Ordinary Shares. The
acquisitions of DTM and Energipilot have been accounted for as a
pooling-of-interests. The Company did not restate its prior period financial
statements with respect to these acquisitions because they did not have a
material impact on its consolidated results. Accordingly, the results of
operations for DTM and Energipilot beginning in December 1, 1997 are included in
the Company's consolidated statement of operations.
On October 30, 1997, the Company acquired 92% of the outstanding shares of
Neutronics, an Austrian electronics manufacturing service provider with
operations in Austria and Hungary for 11,224,000 Ordinary Shares. The
acquisition was accounted for as a pooling-of-interests and, accordingly, the
Company has restated its prior period financial statements to give effect to
this acquisition.
On March 27, 1997, the Company acquired the facilities in Karlskrona,
Sweden from Ericsson for approximately $82.4 million. The acquisition was
financed by borrowings from banks, which the Company repaid in October 1997 with
the net proceeds from the Company's debt and equity offering in 1996. The
transaction has been accounted for under the purchase method. As a result, the
purchase price was allocated to the assets based on their estimated fair market
values at the date of acquisition.
The ability of the Company to obtain the benefits of these acquisitions is
subject to a number of risks and uncertainties, including the Company's ability
to successfully integrate the acquired operations and its ability to maintain,
and increase, sales to customers of the acquired companies. There can be no
assurance that any acquisitions will not materially affect the Company.
In fiscal 1999, the Company wrote off $2.0 million of in-process research
and development associated with the acquisition of ACL. The Company also
incurred $3.4 million associated with the consolidation of excess facilities in
Hong Kong and United States. At the completion of the Hong Kong consolidation
process, all the Hong Kong facilities will occupy 60,000 square feet of
manufacturing space with approximately 300 employees. The provision for excess
facilities of $3.4 million in fiscal 1999 is comprised of $2.2 million relating
to the costs for consolidating the Company's four manufacturing and
administrative facilities in Hong Kong and $1.2 million relating to the
consolidation of certain U.S. facilities.
The Company incurred merger-related expenses of $7.4 million in fiscal 1998
associated with the acquisitions of Neutronics, DTM, Energipilot, Altatron and
Conexao, including $4.0 million associated with the Neutronics, DTM, and
EnergiPilot acquisitions and the cancellation of Neutronics' planned initial
public offering.
The Company incurred costs of $8.9 million in fiscal 1998 associated with
the consolidation of excess facilities in the United Kingdom. The acquisition of
Altatron's Scotland facility resulted in duplicative facilities in Wales and
Scotland. The provision for the closure of the Wales facility includes the
4
<PAGE>
write-off of $3.8 million in goodwill, $1.6 million in severance payments and
pension scheme, $2.4 million in factory disposal related expenses, and $1.1
million in government grant reimbursements and legal fees.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
FISCAL YEAR ENDED
MARCH 31,
----------------------
1997 1998 1999
----- ----- -----
Net sales.................................... 100.0 100.0 100.0
Cost of sales................................ 91.1 90.8 91.9
----- ----- -----
Gross margin................................. 8.9 9.2 8.1
Selling, general and administrative.......... 4.8 4.8 3.7
Goodwill and intangible amortization......... 0.3 0.3 0.2
Provision for excess facilities.............. 0.7 0.7 0.1
Acquired in-process research and development. -- -- 0.1
----- ----- -----
Income from operations....................... 3.1 3.4 4.0
Merger-related expenses...................... -- (0.6) --
Interest and other expense, net.............. (1.0) (1.1) (1.0)
----- ----- -----
Income before income taxes................... 2.1 1.7 3.0
Provision for income taxes................... 0.4 0.2 0.4
----- ----- -----
Net income................................... 1.7 1.5 2.6
===== ===== =====
Net Sales
Substantially all of the Company's net sales have been derived from the
manufacture and assembly of products for OEM customers. See "-Certain Factors
Affecting Operating Results -- A majority of our sales comes from a small number
of customers; if we lose any of these customers our sales could decline
significantly" and "-We depend upon the electronics industry which continually
produces technologically advanced products with short life cycles; our ability
to continually manufacture such products on a cost-effective basis would harm
our business."
Net sales for fiscal 1999 increased 71.5% to $2.0 billion from $1.2 billion
in fiscal 1998. The increase in sales for fiscal 1999 was primarily due to
increase in sales to certain existing customers, including Philips, Ericsson and
Cisco. The Company's largest customers during fiscal 1999 were Philips,
Ericsson, and Cisco accounting for approximately 16%, 15%, and 11% of
consolidated net sales, respectively. No other customer accounted for more than
10% of consolidated net sales in fiscal 1999.
Net sales for fiscal 1998 increased 45.1% to $1.2 billion from $820.7
million in fiscal 1997. The increase in sales for fiscal 1998 was primarily due
to (i) sales to Ericsson following the March 27, 1997 acquisition from Ericsson
of facilities located in Karlskrona, Sweden (the "Karlskrona Facilities"), (ii)
an increase in sales to certain existing customers, including Advanced Fibre
Communications, Cisco, and Braun/Thermoscan and (iii) sales to certain new
customers including Bay Networks and Auspex Systems. This increase was partially
offset by reduced sales to certain customers, including Minebea, Visioneer,
3Com/US Robotics and Global Village.
Gross Profit
5
<PAGE>
Gross profit varies from period to period and is affected by, among other
things, product mix, component costs, product life cycles, unit volumes,
startup, expansion and consolidation of manufacturing facilities, pricing,
competition and new product introductions.
Gross profit margin decreased to 8.1% for fiscal 1999 from 9.2% in fiscal
1998. The decrease in gross margin was primarily due to the increases in higher
volume projects, which typically have a lower gross profit and startup expenses
associated with new projects.
Gross profit margin increased to 9.2% for fiscal 1998 from 8.9% in fiscal
1997. The gross profit margin in fiscal 1998 was adversely affected by changes
in customer and product mix and costs associated with the startup of new
facilities in Doumen, China and Guadalajara, Mexico. Prices paid to the Company
by its significant customers can vary significantly based on the customer's
order level, with per unit prices typically declining as volumes increase. These
changes in price and volume can materially affect the Company's gross profit
margin. See "-Certain Factors Affecting Operating Results - If we do not manage
effectively the expansion of our operations, our business may be harmed."
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for fiscal 1999
increased to $75.1 million from $57.2 million in fiscal 1998 but decreased as a
percentage of net sales to 3.7% in fiscal 1999 from 4.8% in fiscal 1998. The
dollar increase in SG&A was mainly due to (i) investment in infrastructure such
as personnel and other related corporate and administrative expenses and
information systems to support the expansion of the Company's business and (ii)
the addition of new sales personnel in the Asia, Europe and the United States.
SG&A for fiscal 1998 increased to $57.2 million from $39.7 million in
fiscal 1997 but as a percentage of net sales remained consistent at 4.8% for
both fiscal 1998 and fiscal 1997. The dollar increase was mainly due to (i) the
addition of new sales personnel in the United States and Europe; (ii) the
inclusion of the operations of the Karlskrona Facilities and (iii) investment in
infrastructure such as personnel and other related corporate and administrative
expenses and information systems to support the expansion of the Company's
business.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets are amortized on a straight-line basis over
the estimated life of the benefits received, which ranges from three to
twenty-five years.
Goodwill and intangible assets amortization in fiscal 1999 was unchanged at
$3.7 million from fiscal 1998. In March 1999, the Company acquired an additional
50% equity interest in FICO increasing its ownership of FICO to 90% and recorded
$8.5 million in goodwill and $420,000 in intangible assets and is amortized over
8 and 3 years, respectively. The Company also recorded another $7.8 million
goodwill from the acquisition of ACL which is amortized over 10 years. As a
result of these acquisitions, goodwill and intangible asset amortization expense
per quarter will increase by approximately $501,000 starting in the first
quarter of fiscal 2000. See Note 2 of Notes to Consolidated Financial
Statements.
6
<PAGE>
Goodwill and intangible assets amortization in fiscal 1998 increased to
$3.7 million from $2.7 million in fiscal 1997. In the second quarter of fiscal
1998, the Company reduced its estimate of the useful lives of the goodwill and
intangible assets (consisting of goodwill, customer lists and trademarks and
tradenames) arising from the Astron acquisition from approximately twenty years
to ten years. This reduction increased the Company's amortization expense per
quarter by approximately $279,000, beginning in the second quarter of fiscal
1998.
Provision for Excess Facilities
The provision for excess facilities of $3.4 million in fiscal 1999 is
comprised of $2.2 million relating to the costs for consolidating the Company's
four manufacturing and administrative facilities in Hong Kong and $1.2 million
relating to the consolidation of certain U.S. facilities. The provision for
excess facilities are comprised of $1.5 million for the reduction of certain
personnel due to consolidation of certain operations, $1.5 million for the
write-off of equipment and assets related to the operations the Company has
exited, and $400,000 related to the consolidation of facilities. In connection
with the provision for excess facilities, the Company terminated approximately
250 employees in the areas of finance, engineering, operations, production and
purchasing. The consolidation of facilities was substantially completed in
November 1999.
The provision for excess facilities of $8.9 million in fiscal 1998 relates
to the costs incurred in closing the Wales facility. This charge consists
primarily of the write-off of goodwill and intangible assets of $3.8 million,
severance payments, reimbursement of government grants, and costs associated
with the disposal of the factory. This closure is a result of the Company's
acquisition of Altatron, which resulted in duplicative facilities in the United
Kingdom. See Note 9 of Notes to Consolidated Financial Statements.
The provision for excess facilities of $5.9 million in fiscal 1997 consists
of the costs incurred in downsizing the Texas facility, downsizing the Singapore
manufacturing operations and writing off obsolete equipment and incurring
certain severance obligations at the nCHIP semiconductor fabrication facility.
The Texas facility was primarily dedicated to production for Global Village
Communications and Apple Computer, to whom the Company is no longer making
sales. The nCHIP semiconductor fabrication facility was primarily dedicated to
producing PCBs for nCHIP's MCMs, and the Company has transferred these
operations to a third party. The Singapore manufacturing facilities were
downsized in connection with the shift of manufacturing operations to lower cost
manufacturing locations.
Acquired In-Process Research and Development
Based on an independent valuation of certain of the assets of ACL and other
factors, the Company determined that the purchase price of ACL included
in-process research and development costs totaling $2.0 million which had not
reached technological feasibility and had no probable alternative future use.
Accordingly, the Company wrote-off $2.0 million of in-process research and
development in fiscal 1999.
Merger Expenses
In fiscal 1998, the Company incurred $7.4 million of merger expenses
associated with the acquisitions of Neutronics, EnergiPilot, DTM, Altatron and
7
<PAGE>
Conexao. The Neutronics merger expenses included $2.2 million in cost associated
with the cancellation of Neutronics's public offering and $900,000 in other
legal and accounting fees. The remaining $4.3 million consists of a $3.1 million
brokerage and finders fees incurred in the Altatron acquisition and $1.2 million
in legal and accounting fees for all of the fiscal 1998 acquisitions.
Interest and other expense, net
Interest and other expense, net increased to $20.8 million in fiscal 1999
from $12.3 million in fiscal 1998. The following table sets forth information
concerning the components of other income and expense.
FISCAL YEAR ENDED
MARCH 31,
--------------------------------
(IN THOUSANDS)
1997 1998 1999
------- -------- --------
Interest expense.................... $(7,123) $(17,879) $(22,820)
Interest income..................... 1,351 2,781 5,199
Foreign exchange gain (loss)........ 262 1,221 (5,068)
Equity in earnings of associated
companies......................... 133 1,194 1,036
Permanent impairment in investment.. (3,200) -- --
Bank commitment fees................ (750) -- --
Gain on sale of subsidiary's stock.. 1,027 -- --
Minority interest................... (387) (356) (1,319)
Other income (expense), net.......... 1,039 767 2,140
------- -------- --------
$(7,648) $(12,272) $(20,832)
======= ======== ========
Net interest expense increased to $17.6 million in fiscal 1999 from $15.1
million in fiscal 1998. The increase was primarily due to increased bank
borrowings to finance the capital expenditures and expansion of the Company's
facilities in Sweden, Hungary, Mexico and China. The Company anticipates that
its interest expense will increase in future periods as a result of borrowings
under its credit facility.
Net interest expense increased to $15.1 million in fiscal 1998 from $5.8
million in fiscal 1997. The increase was primarily from increased bank
borrowings to finance the acquisition of the Karlskrona Facilities, capital
expenditures and the issuance of the $150.0 million 8.75% Senior Subordinated
Notes in October 1997.
In fiscal 1999, there was $5.1 million of foreign exchange loss compared to
$1.2 million foreign exchange gain in fiscal 1998. The foreign exchange loss in
fiscal 1999 mainly relates to foreign currency monetary liabilities in Austria,
Finland, Brazil and Hungary. Foreign exchange gain increased to $1.2 million
from $262,000 gain in fiscal 1997. The foreign exchange gain for fiscal 1998 was
mainly due to the strengthening of the U.S. dollar against Asian currencies. See
Note 2 of Notes to Consolidated Financial Statements.
Equity in earnings of associated companies for fiscal 1999 decreased to
$1.0 million from $1.2 million in fiscal 1998. The equity in earnings of
associated companies results primarily from the Company's previous 40%
investment in FICO.
Equity in earnings of associated companies for fiscal 1998 increased to
$1.2 million from $133,000 in fiscal 1997. The equity in earnings of associated
companies results primarily from the Company's original 40% investment in FICO
8
<PAGE>
and, to a lesser extent, certain minority investments of Neutronics. The Company
acquired a 40% interest in FICO in December 1996. According to the equity method
of accounting, the Company did not recognize revenue from sales by FICO, but
based on its ownership interest recognized 40% of the net income or loss of the
associated company. The Company has recorded its 40% share of FICO's
post-acquisition net income.
The Company recognized a permanent impairment in an investment in fiscal
1997, represented by a write-off of publicly traded common stock received from a
customer in fiscal 1997 as payment of $3.2 million in accounts receivable. As a
result of a significant decline in the market value of this common stock
following its receipt by the Company, this common stock subsequently was deemed
to be permanently impaired in fiscal 1997, resulting in a $3.2 million expense.
In fiscal 1997, bank commitment fees represented $750,000 of commitment fees
written off in March 1997 when the bank's commitment expired unused.
Gain on sale of subsidiary of $1.0 million in fiscal 1997 was due to a gain
from the sale of a Hungarian subsidiary by Neutronics.
Minority interest expense for fiscal 1999 was comprised primarily of the 8%
minority interest in Neutronics and 10% minority interest in FICO not acquired
by the Company in March 1999.
Minority interest expense for fiscal 1997 and 1998 was comprised primarily
of the 8% minority interest in Neutronics not acquired by the Company in October
1997 and the 4.1% minority interest in Ecoplast, a subsidiary of Neutronics held
by a third party.
Other income (expense), net increased from $767,000 net other income in
fiscal 1998 to $2.1 million net other income in fiscal 1999. The other income in
fiscal 1999 comprised mainly of gain from disposal of land in Mexico. Other
income decreased to $767,000 in fiscal 1998 compared to an income of $1.0
million in fiscal 1997. Other income, net in fiscal 1997 includes $898,000 of
income received under the Company's business interruption insurance policy as a
result of an April 1996 fire at its facilities in Doumen, China.
Provision for Income Taxes
The Company is structured as a holding company, conducting its operations
through manufacturing and marketing subsidiaries in Austria, Brazil, China,
Finland, France, Hungary, Malaysia, Mauritius, Mexico, The Netherlands,
Singapore, Sweden, the United Kingdom and the United States. These subsidiaries
are subject to taxation in the country in which they have been formed. The
Company's Asian and Hungarian manufacturing subsidiaries have, at various times,
been granted certain tax relief in each of these countries, resulting in lower
than would otherwise be the case under ordinary tax rates. See Note 7 of Notes
to Consolidated Financial Statements.
The Company's consolidated effective tax rate for any given period is
calculated by dividing the aggregate taxes incurred by each of the operating
subsidiaries and the holding company by the Company's consolidated pre-tax
income. Losses incurred by any subsidiary or by the holding company are not
deductible by the entities incorporated in other countries in the calculation of
their respective local taxes. The ordinary corporate tax rates for fiscal 1999
were 34%, 28%, 41.66%, 28%, 26%, 18%, 16% and 15% in Austria, Finland, France,
Sweden, Singapore, Hungary, Hong Kong and China, respectively, and 30% on
manufacturing operations in Malaysia. In addition, the tax rate is de
9
<PAGE>
minimis in Labuan, Malaysia and Mauritius where the Company's offshore marketing
subsidiaries are located. The Company's Hungarian subsidiaries have been on a
tax holiday that expired on December 31, 1998. Effective January 1, 1999, the
Company's Hungarian subsidiaries will be subject to corporate income taxes at a
flat rate of 18%, which will effectively be reduced to 7.2% in the years 1999
through 2003 because a 60% exemption will apply. As a result of this change in
tax status, the Company expects to be subject to current income taxes in Hungary
in future years. The Company's U.S. and U.K. subsidiaries are subject to
ordinary corporate tax rates of 35% and 30% respectively. However, these tax
rates did not have any material impact on the Company's taxes in fiscal 1999 due
to the operating loss carry forwards benefited in this period.
The Company's consolidated effective tax rate was 12.7% for fiscal year
1999 compared to 11.3% for fiscal year 1998. The increase in the effective tax
rate was due to the expansion of operations and increase in profitability in
countries with higher tax rates.
At March 31, 1999, the Company had operating loss carryforwards of
approximately $24.2 million for U.S. federal income tax purposes which will
expire between 2003 and 2012 if not previously utilized. Utilization of these
net operating loss carryforwards may be subject to an annual limitation due to
the change in ownership rules provided by the Internal Revenue Code (the
"Code"). This limitation and other restrictions provided by the Code may reduce
the net operating loss carryforwards such that they would not be available to
offset future taxable income of the U.S. subsidiary.
At March 31, 1999, the Company had operating loss carryforwards of
approximately $9.9 million, $6.8 million and $6.5 million in U.K., Austria and
Hong Kong, respectively with various loss carryforward lives pursuant to local
county tax laws. 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.
The Company has structured its operations in Asia in a manner designed to
maximize income in countries where tax incentives have been extended to
encourage foreign investment or where income tax rates are low. The Company's
investments in its plants in Xixiang and Doumen, China fall under the "Foreign
Investment Scheme" which entitles the Company to apply for a five-year tax
incentive. The Company obtained the tax incentive for the Doumen plant in
December 1995 and the Xixiang plant in October 1996. With these approvals, the
Company's tax rates on income from these facilities during the incentive period
will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the
first profitable year and 15% thereafter. The Company has transferred its
offshore marketing and distribution functions to marketing subsidiaries located
in Labuan, Malaysia, where the tax rate is de minimis and Mauritius, where the
tax rate is 0%. 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%.
If tax incentives are not renewed upon expiration, if the tax rates
applicable to the Company are rescinded or changed, or if tax authorities were
to challenge successfully the manner in which profits are recognized among the
Company's subsidiaries, the Company's worldwide effective tax rate would
increase and its results of operations and cash flow would be adversely
affected. A significant portion of the products manufactured by the Company's
Asian subsidiaries are sold to customers based in other jurisdictions in North
10
<PAGE>
America and Europe. While the Company believes that profits from its Asian
operations are not sufficiently connected to such other jurisdictions to give
rise to income taxation in such other jurisdictions, there can be no assurance
that tax authorities will not challenge the Company's position or, if such
challenge is made, that the Company will prevail in any such disagreement. If
the Company's Asian profits became subject to income taxes in such other
jurisdictions, the Company's taxes would increase and its results of operations
and cash flows would be adversely affected. The expansion by the Company of its
operations in the Americas and countries in Western Europe that have higher tax
rates is expected to increase its worldwide effective tax rate. See "-Certain
Factors Affecting Operating Results - We are subject to the risk of increased
taxes."
Quarterly Results
The following table contains selected unaudited quarterly financial data
for 1998 and 1999 fiscal years. In the opinion of management, this information
has been presented on the same basis as the annual audited consolidated
financial statements appearing elsewhere, and all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of the Company.
The Company's results of operations have varied and may continue to fluctuate
significantly from quarter to quarter. Results of operations in any period
should not be considered indicative of the results to be expected from any
future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $255,077 $270,998 $314,530 $350,589 $397,273 $470,889 $580,395 $594,817
Cost of sales.......... 231,771 246,041 285,447 317,930 363,294 431,893 534,053 549,120
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin........... 23,306 24,957 29,083 32,659 33,979 38,996 46,342 45,697
Selling, general and
administrative....... 13,448 12,685 14,653 16,431 14,983 17,976 19,783 22,367
Goodwill and intangible
amortization......... 745 1,010 952 956 884 890 893 997
Provision for excess
facilities........... -- -- -- 8,869 -- -- -- 3,361
Acquired in-process
research and
development.......... -- -- -- -- -- -- -- 2,000
-------- -------- -------- -------- -------- -------- -------- -------
Income from operations. 9,113 11,262 13,478 6,403 18,112 20,130 25,666 16,972
Merger-related expenses -- -- (4,000) (3,415) -- -- -- --
Interest and other
expense, net......... (2,219) (4,129) (2,742) (3,182) (4,801) (5,361) (7,791) (2,879)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
Income taxes......... 6,894 7,133 6,736 (194) 13,311 14,769 17,875 14,093
Income tax expense
(benefit)............ 762 927 1,212 (583) 1,576 1,726 2,079 2,251
-------- -------- -------- -------- -------- -------- -------- --------
Net income............. $ 6,132 $ 6,206 $ 5,524 $ 389 $ 11,735 $ 13,043 $ 15,796 $ 11,842
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings
per share............ $ 0.08 $ 0.08 $ 0.07 $ 0.00 $ 0.13 $ 0.15 $ 0.16 $ 0.11
======== ======== ======== ======== ======== ======== ======== ========
Weighted average
ordinary shares and
equivalents
outstanding - diluted 73,612 75,528 84,856 86,840 90,636 89,944 95,766 107,004
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
11
<PAGE>
The Company has experienced, and expects to continue to experience,
significant periodic and quarterly fluctuations in results of operations due to
a variety of factors. These factors include, among other things, timing of
orders, the short-term nature of most customers' purchase commitments, volume of
orders relative to the Company's capacity, customers' announcement, introduction
and market acceptance of new products or new generations of products, evolution
in the life cycles of customers' products, timing of expenditures in
anticipation of future orders, effectiveness in managing manufacturing
processes, changes in cost and availability of labor and components, mix of
orders filled, timing of acquisitions and related expenses and changes or
anticipated changes in economic conditions. In addition, the Company's net sales
may fluctuate throughout the year as a result of local factors and other events
that may affect production volumes. The market segments served by the Company
are also subject to economic cycles and have in the past experienced, and are
likely in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period, and fluctuations in operating results may also result in
fluctuations in the price of the Company's Ordinary Shares. In future periods,
the Company's revenues or results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Ordinary Shares would likely be materially adversely affected. See "Certain
Factors Affecting Operating Results -- Our customer requirements and operating
results vary significantly."
BACKLOG
Although the Company obtains firm purchase orders from its customers, OEM
customers typically do not make firm orders for delivery of products more than
30 to 90 days in advance. The Company does not believe that the backlog of
expected product sales covered by firm purchase orders is a meaningful measure
of future sales since orders may be rescheduled or canceled.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations from the proceeds of public offerings
of equity securities and debt offerings, cash and cash equivalents generated
from operations, bank debt and lease financing of capital equipment. In December
1998, the Company issued 10.8 million Ordinary Shares for net proceeds of $194.0
million. In October 1997, the Company issued $150.0 million principal amount of
Senior Subordinated Notes due in 2007 for net proceeds of $145.7 million and
issued 8,740,000 Ordinary Shares for net proceeds of $96.2 million. At March 31,
1999 the Company had cash and cash equivalents balances totaling $184.9 million,
total bank and other debts amounting to $315.4 million and $99.1 million
available for borrowing under its credit facilities subject to compliance with
certain financial ratios.
In October 1999, the Company completed an offering of its Ordinary Shares.
A total of 13.8 million Ordinary Shares were sold at a price of $33.84 per share
resulting in net proceeds of approximately $449.3 million. The net proceeds from
this equity offering will be used to fund further expansion of our business,
including additional working capital and capital expenditures and strategic
acquisitions or investments.
Cash provided by operating activities was $46.2 million, $46.8 million and
$69.2 million in fiscal 1999, 1998 and 1997, respectively. Cash provided by
12
<PAGE>
operating activities increased in fiscal 1999 from fiscal 1998 due to an
increase in net income, depreciation and amortization and accounts payable,
partially offset by increases in accounts receivables and inventories. Cash
provided by operating activities decreased in fiscal 1998 from fiscal 1997
because of the increase in accounts receivable and inventories, partially offset
by increases in accounts payables, increases in depreciation and amortization
and the increase in profitability in fiscal 1998.
Accounts receivable, net of allowance for doubtful accounts increased to
$273.2 million at March 31, 1999 from $167.6 million at March 31, 1998. The
increase in accounts receivable was primarily due to a 71.4% increase in sales
in fiscal 1999.
Inventories increased to $221.4 million at March 31, 1999 from $164.3
million at March 31, 1998. The increase in inventories was primarily the results
of increased purchases of material to support the growing sales.
Cash used in investing activities was $226.3 million, $108.7 million and
$120.3 million in fiscal 1999, 1998 and 1997, respectively. Cash used in
investing activities in fiscal 1999 were primarily related to (i) $169.9 million
of capital expenditures to purchase equipment and expand manufacturing
facilities in Brazil, China, Hungary, Mexico, the United States and Sweden. (ii)
$15.0 million for the acquisition of ACL, (iii) $7.2 million for the acquisition
of FICO, (iv) $24.0 million to the former shareholders of Astron for the
remaining purchase price relating to the acquisition of Astron, (v) $17.8
million for minority investment in stocks of various technology companies in
software and related industries. Cash used in investing activities in fiscal
1998 were primarily related to capital expenditures of $101.3 million. Capital
expenditures in fiscal 1998 related to the purchase of equipment and
construction of new facilities in Doumen, China, Guadalajara, Mexico, San Jose,
California and Karlskrona, Sweden. Cash used in investing activities in fiscal
1997 consisted primarily of $82.4 million paid for the acquisition of the
Karlskrona Facilities and $39.2 million in capital expenditures.
Cash provided by financing activities was $275.3 million, $130.8 million
and $62.8 million in fiscal 1999, 1998, and 1997, respectively. Cash provided by
financing activities in fiscal 1999 resulted primarily from the Company's equity
offering of 5.4 million Ordinary Shares in December 1998 with net proceeds of
$194.0 million. Cash provided by financing activities in fiscal 1998 resulted
primarily from net proceeds of the issuance of Senior Subordinated Notes of
$145.7 million and net proceeds from the equity offering of $96.2 million,
partially offset by $111.0 million of net repayments of bank borrowings, capital
leases, long-term debts and payment of $5.0 million notes due to Astron's former
shareholders. Cash provided by financing activities in fiscal 1997 consisted
primarily of net bank borrowings and proceeds from long term debt of $80.8
million.
The Company maintains a credit facility with a syndicate of banks. This
facility provides for revolving credit borrowings by Flextronics and a number of
its subsidiaries of up to $120.0 million, subject to compliance with certain
financial covenants and the satisfaction of customary borrowing conditions. The
credit facility consists of two separate credit agreements, one providing for up
to $62.9 million principal amount of revolving credit loans to the Company and
designated subsidiaries and one providing for up to $57.1 million principal
amount of revolving credit loans to the Company's United States subsidiary.
Loans under the credit facility will terminate in January 2001. See Note 4 of
Notes to Consolidated Financial Statements. The Company anticipates that it
13
<PAGE>
will from time to time borrow revolving credit loans to fund its operations and
growth.
The Company anticipates that its working capital requirements will increase
in order to support anticipated increases in business capacity. In addition, the
Company anticipates incurring significant capital expenditures and operating
lease commitments in order to support its anticipated expansions of these
facilities in China, Hungary, Mexico and Brazil. Future liquidity needs will
depend on fluctuations in levels of inventory, the timing of expenditures by the
Company on new equipment, the extent to which the Company utilizes operating
leases for the new facilities and equipment, levels of shipments by the Company
and changes in volumes of customer orders. The Company believes that the
existing cash balances, together with anticipated cash flow from operations and
amounts available under the credit facility, will be sufficient to fund its
operations through fiscal 1999. However, to the extent that the Company's
operations significantly expand, the Company may be required to obtain
additional debt or equity financing. See "Certain Factors Affecting Operating
Results -- If we do not manage effectively the expansion of our operations, our
business may be harmed" and "--We may encounter difficulties with acquisitions,
which could harm our business."
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
A portion of the Company's exposure to market risk for changes in interest
rates relates to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company ensures
the safety and preservation of its invested principal funds by limiting default
risk, market risk and reinvestment risk. The Company mitigates default risk by
investing in safe and high-credit quality securities and by constantly
positioning its portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer, guarantor or depository. The portfolio
includes only marketable securities with active secondary or resale markets to
ensure portfolio liquidity. Maturities of short-term investments are timed,
whenever possible, to correspond with debt payments and capital investments. As
of March 31, 1999, the outstanding amount in the investment portfolio was $130.5
million, with an average maturity of 71 days and an average return of 5.05%.
The Company also has exposure to interest rate risk with certain variable
rate lines of credit. These credit lines are located throughout the world and
are based on a spread over that country's inter-bank offering rate. The Company
primarily enters into debt obligations to support general corporate purposes
including capital expenditures and working capital needs. As of March 31, 1999,
the outstanding short-term debt, including capitalized leases was $95.5 million.
The following table presents principal cash flows and related interest rates by
fiscal year of maturity for debt obligations. The variable interest rate for
future years assumes the same rate as March 31, 1999.
Expected Fiscal Year of Maturity
(in thousands)
<TABLE>
<CAPTION>
There-
Debt 2000 2001 2002 2003 2004 after Total
- ------------------------- ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Subordinated Notes -- -- -- -- -- 150,000 150,000
Average interest rate 8.75% 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
Fixed Rate 14,367 12,004 8,560 5,335 3,537 11,341 55,144
Average interest rate 7.2% 7.2% 6.6% 7.4% 6.6 7.7% 7.6%
Variable Rate 82,071 6,341 4,949 4,949 4,102 7,890 110,302
Average interest rate 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1%
</TABLE>
14
<PAGE>
Foreign Currency Exchange Risk
The Company transacts business in various foreign countries. The Company
manages its foreign currency exposure by borrowing in various foreign currencies
and by entering into foreign exchange forward contracts only with respect to
transaction exposure. The Company's policy is to maintain a fully hedged
position for all certain, known transactions exposures. These exposures are
primarily, but not limited to, vendor payments and inter-company balances in
currencies other than the functional unit of the operating entity. The Company
will first evaluate and, to the extent possible, use non-financial techniques,
such as currency of invoice, leading and lagging payments, receivable management
or local borrowing to reduce transaction exposure before taking steps to
minimize remaining exposure with financial instruments. As of March 31, 1999,
the total cumulative outstanding amounts of forward contracts in French Franc,
Japanese Yen, Swedish Kronor and United States dollar was approximately $16.5
million.
15
<PAGE>
CERTAIN FACTORS AFFECTING OPERATING RESULTS
If we do not manage effectively the expansion of our operations, our business
may be harmed.
We have grown rapidly in recent periods, and this growth may not continue.
Internal growth will require us to develop new customer relationships and expand
existing ones, improve our operational and information systems and further
expand our manufacturing capacity.
We plan to increase our manufacturing capacity by expanding our facilities
and by adding new equipment. Such expansion involves significant risks. For
example:
o we may not be able to attract and retain the management personnel and
skilled employees necessary to support expanded operations;
o we may not efficiently and effectively integrate new operations,
expand existing ones and manage geographically dispersed operations;
o we may incur cost overruns;
o we may encounter construction delays, equipment delays or shortages,
labor shortages and disputes and production start-up problems that
could adversely affect our growth and our ability to meet customers'
delivery schedules; and
o we may not be able to obtain funds for this expansion, and we may not
be able to obtain loans or operating leases with attractive terms.
In addition, we expect to incur new fixed operating expenses associated
with our expansion efforts, including substantial increases in depreciation
expense and rental expense, that will increase our cost of sales. If our
revenues do not increase sufficiently to offset these expenses, our operating
results would be adversely affected. Our expansion, both through acquisitions
and internal growth, has contributed to our incurring significant accounting
charges and experiencing volatility in our operating results and may continue to
do so in the future.
We may encounter difficulties with acquisitions, which could harm our business.
We have completed a number of acquisitions of businesses and facilities and
expect to continue to pursue growth through acquisitions in the future.
Acquisitions involve a number of risks and challenges, including:
o diversion of management's attention;
o the need to integrate acquired operations;
o potential loss of key employees and customers of the acquired
companies;
o lack of experience operating in the geographic market of the acquired
business; and
16
<PAGE>
o an increase in our expenses and working capital requirements.
To integrate acquired operations, we must implement our management
information systems and operating systems and assimilate and manage the
personnel of the acquired operations. The difficulties of this integration may
be further complicated by geographic distances. The integration of acquired
businesses may not be successful and could result in disruption to other parts
of our business.
Any of these and other factors could adversely affect our ability to
achieve anticipated levels of profitability at acquired operations or realize
other anticipated benefits of an acquisition. Furthermore, any future
acquisitions may require additional debt or equity financing, which could
increase our leverage or be dilutive to our existing shareholders. We cannot
assure that we will consummate any acquisitions in the future.
We have new customer relationships from which we are not yet receiving
significant revenues, and orders from these customers may not reach anticipated
levels.
We have recently announced major new customer relationships from which we
anticipate significant future sales. However, similar to our other customer
relationships, there are no volume purchase commitments under these new
programs, and the revenues we actually achieve may not meet our expectations. In
anticipation of future activities under these programs, we are incurring
substantial expenses as we add personnel and manufacturing capacity and procure
materials. Our operating results will be adversely affected if sales do not
develop to the extent and within the time frame we anticipate.
Our customer requirements and operating results vary significantly.
Electronics manufacturing service providers must provide increasingly rapid
product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers and we continue to experience
reduced lead-times in customer orders. Customers may cancel their orders, change
production quantities or delay production for a number of reasons.
Cancellations, reductions or delays by a significant customer or by a group of
customers would adversely affect our results of operations.
In addition to the variable nature of our operating results due to the
short-term nature of our customers' commitments, other factors may contribute to
significant fluctuations in our results of operations. These factors include:
o the timing of customer orders;
o the volume of these orders relative to our capacity;
o market acceptance of customers' new products;
o changes in demand for customers' products and product obsolescence;
o the timing of our expenditures in anticipation of future orders;
o our effectiveness in managing manufacturing processes;
17
<PAGE>
o changes in the cost and availability of labor and components;
o changes in our product mix;
o changes in economic conditions;
o local factors and events that may affect our production volume, such
as local holidays; and
o seasonality in customers' product requirements.
One of our significant end-markets is the consumer electronics market. This
market exhibits particular strength towards the end of the year in connection
with the holiday season. As a result, we have experienced relative strength in
revenues in our third fiscal quarter.
We make significant decisions, including the levels of business that we
will seek and accept, production schedules, component procurement commitments,
personnel needs and other resource requirements, based on our estimates of
customer requirements. The short-term nature of our customers' commitments and
the possibility of rapid changes in demand for their products reduces our
ability to estimate accurately future customer requirements. On occasion,
customers may require rapid increases in production, which can stress our
resources and reduce margins. Although we have increased our manufacturing
capacity and plan further increases, we may not have sufficient capacity at any
given time to meet our customers' demands. In addition, because many of our
costs and operating expenses are relatively fixed, a reduction in customer
demand can adversely affect our gross margins and operating income.
A majority of our sales comes from a small number of customers; if we lose any
of these customers, our sales could decline significantly.
Sales to our five largest customers have represented a majority of our net
sales in recent periods. Our five largest customers accounted for approximately
54% and 59% of consolidated net sales in the six months ended September 24, 1999
and September 25, 1998, respectively. Our largest customers during fiscal 1999
were Philips, Ericsson and Cisco accounting for approximately 16%, 15% and 11%
of consolidated net sales, respectively. The identity of our principal customers
has varied from year to year, and our principal customers may not continue to
purchase services from us at current levels, if at all. Significant reductions
in sales to any of these customers, or the loss of major customers, would have a
material and adverse effect on us. We may not be able to timely replace expired,
canceled, or reduced contracts with new business. See "--Our customer
requirements and operating results vary significantly."
We depend upon the electronics industry which continually produces
technologically advanced products with short life cycles; our inability to
continually manufacture such products on a cost-effective basis would harm our
business.
Factors affecting the electronics industry in general could have a material
adverse effect on our customers and, as a result on us. These factors include:
o the inability of our customers to adapt to rapidly changing technology
and evolving industry standards, which results in short product life
cycles;
18
<PAGE>
o the inability of our customers to develop and market their products,
some of which are new and untested. If customers' products become
obsolete or fail to gain widespread commercial acceptance, our
business may be materially and adversely affected; and
o recessionary periods in our customers' markets.
There may be shortages of required electronic components.
A substantial majority of our net sales are derived from turnkey
manufacturing in which we are responsible for procuring materials, which
typically results in our bearing the risk of component price changes.
Accordingly, certain component price changes could adversely affect our
operating results. At various times, there have been shortages of some of the
electronic components that we use, and suppliers of some components have lacked
sufficient capacity to meet the demand for such components. In recent months,
component shortages have become more prevalent in our industry. In some cases,
supply shortages could curtail production of assemblies using a particular
component and could result in manufacturing and shipping delays.
Our industry is extremely competitive.
The electronics manufacturing services industry is extremely competitive
and includes hundreds of companies, several of which have achieved substantial
market share. Current and prospective customers also evaluate our capabilities
against the merits of internal production. Some of our competitors, including
Solectron and SCI Systems, have substantially greater market shares than us, and
substantially greater manufacturing, financial, research and development and
marketing resources. In recent years, many participants in the industry,
including us, have substantially expanded their manufacturing capacity. If
overall demand for electronics manufacturing services should decrease, this
increased capacity could result in substantial pricing pressures, which could
adversely affect our operating results.
We are subject to the risk of increased taxes.
We have structured our 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. Our taxes could increase if these
tax incentives are not renewed upon expiration, or tax rates applicable to us
are increased. Substantially all of the products manufactured by our Asian
subsidiaries are sold to customers based in North America and Europe. We believe
that profits from our Asian operations are not sufficiently connected to
jurisdictions in North America or Europe to give rise to income taxation there.
However, tax authorities in jurisdictions in North America and Europe could
challenge the manner in which profits are allocated among our subsidiaries, and
we may not prevail in any such challenge. If the profits recognized by our
subsidiaries in jurisdictions where income taxes are lower became subject to
income taxes in such other jurisdictions, our worldwide effective tax rate could
increase.
We conduct operations in a number of countries and are subject to risks of
international operations.
The geographical distances between Asia, the Americas and Europe create a
19
<PAGE>
number of logistical and communications challenges. Our manufacturing operations
are located in a number of countries, including Austria, Brazil, China, Finland,
France, Hungary, Malaysia, Mexico, Sweden, the United Kingdom and the United
States. As a result, we are affected by economic and political conditions in
those countries, including:
o fluctuations in the value of currencies;
o changes in labor conditions;
o longer payment cycles;
o greater difficulty in collecting accounts receivable;
o burdens and costs of compliance with a variety of foreign laws;
o political and economic instability;
o increases in duties and taxation;
o imposition of restrictions on currency conversion or the transfer of
funds;
o limitations on imports or exports;
o expropriation of private enterprises; and
o reversal of the current policies including favorable tax and lending
policies encouraging foreign investment or foreign trade by our host
countries.
The attractiveness of our services to our U.S. customers can be affected by
changes in U.S. trade policies, such as "most favored nation" status and trade
preferences for certain Asian nations. In addition, some countries in which we
operate, such as Brazil, Mexico and Malaysia, have experienced periods of slow
or negative growth, high inflation, significant currency devaluations and
limited availability of foreign exchange. Furthermore, in countries such as
Mexico and China, governmental authorities exercise significant influence over
many aspects of the economy, and their actions could have a significant effect
on us. Finally, we could be adversely affected by inadequate infrastructure,
including lack of adequate power and water supplies, transportation, raw
materials and parts in countries in which we operate.
Risks Relating to China. Under its current leadership, the Chinese
government has been pursuing economic reform policies. However, the Chinese
government may not continue to pursue such policies and these policies may not
be successful even if pursued. In addition, China does not have a comprehensive
and highly developed system of laws, and enforcement of laws and contracts is
uncertain. The United States annually reconsiders the renewal of most favored
nation trading status of China. China's loss of most favored nation status could
adversely affect us by increasing the cost to U.S. customers of products
manufactured by us in China.
Risks relating to Mexico. The Mexican government exercises significant
influence over many aspects of the Mexican economy and its action could have a
20
<PAGE>
significant effect on private sector entities in general and the Company in
particular.
Risks Relating to Hungary. Hungary has undergone significant political and
economic change in recent years. Political, economic, social and other
developments, and changes in laws could have a material and adverse effect on
our business. Annual inflation and interest rates in Hungary have historically
been much higher than those in Western Europe. Exchange rate policies have not
always allowed for the free conversion of currencies at the market rate. Laws
and regulations in Hungary have been, and continue to be, substantially revised
during its transition to a market economy. As a result, laws and regulations may
be applied inconsistently. Also in some circumstances, it may not be possible to
obtain the legal remedies provided for under those laws and regulations in a
reasonably timely manner, if at all.
Risks Relating to Brazil. During the past several years, the Brazilian
economy has been affected by significant intervention by the Brazilian
government. The Brazilian government has changed monetary, credit, tariff and
other policies to influence the course of Brazil's economy. The Brazilian
government's actions to control inflation and effect other policies have often
involved wage, price and exchange controls as well as other measures such as
freezing bank accounts and imposing capital controls.
We are subject to risks of currency fluctuations.
A significant portion of our business is conducted in the Swedish kronor,
European euro and Brazilian real. In addition, some of our costs, such as
payroll and rent, are denominated in currencies such as the Singapore dollar,
the Hong Kong dollar, the Malaysian ringgit, the Hungarian forint, the Mexican
peso, and the British pound, as well as the kronor, the euro and the real. In
recent years, the Hungarian forint, Brazilian real and Mexican peso have
experienced significant devaluations, and in January 1999 the Brazilian real
experienced further significant devaluations. Changes in exchange rates between
these and other currencies and the U.S. dollar will affect our cost of sales and
operating margins. We cannot predict the impact of future exchange rate
fluctuations. We use financial instruments, primarily forward purchase
contracts, to hedge Japanese yen, European euro, U.S. dollar, and other foreign
currency commitments arising from trade accounts payable and fixed purchase
obligations. Because we hedge only fixed obligations, we do not expect that
these hedging activities will have a material effect on our results of
operations or cash flows. However, our hedging activities may be unsuccessful,
and we may change or reduce our hedging activities in the future.
We depend on our key personnel.
Our success depends to a larger extent upon the continued services of our
key executives and skilled personnel. Generally our employees are not bound by
employment or non-competition agreements, and there can be no assurance that we
will retain our officers and key employees. We could be materially and adversely
affected by the loss of key personnel.
We are subject to risks from the Year 2000 issue.
The Year 2000 computer issue refers to a condition in computer software
where a two digit field rather than a four digit field is used to distinguish a
calendar year. Unless corrected, some computer programs could be unable to
function on January 1, 2000, and thereafter until corrected, as they will be
21
<PAGE>
unable to distinguish the correct date. Such an uncorrected condition could
significantly interfere with the conduct of our business, could result in
disruption of our operations, and could subject it to potentially significantly
legal liabilities.
We are primarily addressing the Year 2000 issue concerning enterprise wide
applications by replacing our management information system with a new
enterprise management information system that is designed to provide enhanced
functionality. We have been advised that our new enterprise management
information system is Year 2000 compliant. However, we cannot provide assurances
that the new system will be Year 2000 compliant. We currently have implemented
this new information in a majority of our facilities in Asia, Central Europe,
Western Europe and the Americas. We are currently evaluating the implementation
of this new management information system at the facilities that we have
recently acquired in Finland, France and Sweden. The new system will
significantly affect many aspects of our business, including our manufacturing,
sales and marketing and accounting functions. The successful implementation of
this system is important to our future growth.
Our business operations utilize electronic commerce systems and electronic
data interchanges with suppliers and customers to implement a variety of supply
chain management programs. While we are actively seeking assurances of Year 2000
compliance from our suppliers and customers, the failure by any one of these
third parties to address Year 2000 issues could result in our temporary
inability to process these supply chain management programs with such third
parties, and this inability could have a material and adverse impact on our
business and results of operations. In addition, we would be harmed if Year 2000
compliance issues resulted in serious disruptions in the operations of our
customers and suppliers.
We have facilities located in numerous countries throughout the world, and
these facilities depend on the local infrastructure for power,
telecommunications, transportation and other services. If Year 2000 issues cause
disruptions in these fundamental services, our ability to conduct our operations
could be seriously impaired. The Year 2000 issue also could affect our
infrastructure and production lines.
We are subject to environmental compliance risks.
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals. Although we believe
that our facilities are currently in material compliance with applicable
environmental laws, violations could occur. The costs and penalties that could
result from a violation of environmental laws could materially and adversely
affect us.
The market price of the ordinary shares is volatile.
The stock market in recent years has experienced significant price and
volume fluctuations that have affected the market prices of technology
companies. These fluctuations have often been unrelated to or disproportionately
impacted by the operating performance of such companies. The market for our
Ordinary Shares may be subject to similar fluctuations. Factors such as
fluctuations in our operating results, 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 price of our Ordinary Shares.
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Flextronics International Ltd :
We have audited the accompanying consolidated balance sheets of Flextronics
International Ltd. and subsidiaries (a Singapore company) as of March 31, 1998
and 1999 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Neutronics Electronics Industries Holding A.G., a company acquired on October
30, 1997 in a transaction accounted for as a pooling-of-interests, as discussed
in Note 2. Such statements are included in the consolidated financial statements
of Flextronics International Ltd. and reflect total revenues of 18 percent of
the consolidated totals for the year ended March 31, 1997. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Neutronics Electronics Industries
Holding A.G., is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Flextronics International Ltd. and
subsidiaries as of March 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
December 22, 1999
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Management and Supervisory Boards and Shareholders at Neutronics Electronic
Industries Holding A.G.
We have audited the accompanying consolidated balance sheets (not presented
herein) of Neutronics Electronic Industries Holdings A.G. and its subsidiaries
(the `Group') as at December 31, 1996 ,1995 and 1994 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the periods then ended (not presented herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with United States Generally Accepted
Auditing Standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements (not presented
herein) present fairly, in all material respects the financial position of the
Group as at December 31, 1996, 1995 and 1994 and the results of its operations
and its cash flows for the periods then ended in conformity with United States
Generally Accepted Accounting Principles.
/s/ MOORE STEPHENS
Moore Stephens
Registered Auditors
St. Paul's House
Warwick Lane
London EC4P 4BN.
22 December 1999
24
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 91,827 $ 184,860
Accounts receivable, less allowances
for doubtful accounts of $9,695 and $5,427 .................... 167,560 273,203
Inventories ..................................................... 164,257 221,352
Other current assets ............................................ 39,060 66,109
----------- -----------
Total current assets .................................... 462,704 745,524
----------- -----------
Property and equipment, net ....................................... 268,564 397,167
Goodwill and other intangibles, net ............................... 26,569 38,839
Other assets ...................................................... 23,007 36,339
----------- -----------
Total assets ............................................ $ 780,844 $ 1,217,869
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings and current portion of long-term debt ........... $ 44,374 $ 83,976
Capital lease obligations ....................................... 9,587 11,475
Accounts payable ................................................ 186,694 292,757
Accrued liabilities ............................................. 89,469 99,742
Deferred revenue ................................................ -- 5,976
----------- -----------
Total current liabilities ............................... 330,124 493,926
----------- -----------
Long-term debt, net of current portion ............................ 169,237 188,808
Capital lease obligations, net of current portion ................. 23,181 31,187
Deferred income taxes ............................................. 4,567 4,457
Other long-term liabilities ....................................... 19,543 10,531
Minority interest ................................................. 997 4,022
----------- -----------
Total long-term liabilities ............................. 217,525 239,005
----------- -----------
Commitments (Note 6) SHAREHOLDERS' EQUITY:
Ordinary Shares, S$.01 par value; authorized--250,000,000 shares;
issued and outstanding--86,113,326 and 100,054,596 as of March
31, 1998 and 1999, respectively ............................... 542 620
Additional paid-in capital ...................................... 214,124 425,397
Retained earnings ............................................... 30,352 82,768
Cumulative translation adjustment ............................... (11,823) (23,847)
----------- -----------
Total shareholders' equity .............................. 233,195 484,938
----------- -----------
Total liabilities and shareholders' equity .............. $ 780,844 $ 1,217,869
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net Sales .................................... $ 820,742 $ 1,191,194 $ 2,043,374
Cost of Sales ................................ 747,491 1,081,189 1,878,360
----------- ----------- -----------
Gross margin ....................... 73,251 110,005 165,014
----------- ----------- -----------
Operating Expenses:
Selling, general and administrative ........ 39,711 57,217 75,109
Goodwill and intangibles amortization ...... 2,651 3,663 3,664
Provision for excess facilities ............ 5,868 8,869 3,361
Acquired in-process research and development -- -- 2,000
----------- ----------- -----------
Total operating expenses ........... 48,230 69,749 84,134
----------- ----------- -----------
Income from operations ............. 25,021 40,256 80,880
Other Expense:
Merger-related expenses .................... -- (7,415) --
Interest and other expense, net ............ (7,648) (12,272) (20,832)
----------- ----------- -----------
Income before income taxes .......... 17,373 20,569 60,048
Provision for Income Taxes ................... 3,175 2,318 7,632
----------- ----------- -----------
Net income .......................... $ 14,198 $ 18,251 $ 52,416
=========== =========== ===========
Earnings Per Share
Basic ................................... $ 0.20 $ 0.24 $ 0.58
=========== =========== ===========
Diluted ................................. $ 0.19 $ 0.23 $ 0.55
=========== =========== ===========
Shares used for earnings per share
Basic ................................... 70,460 76,696 90,782
=========== =========== ===========
Diluted ................................. 72,956 80,032 95,970
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................... $ 14,198 $ 18,251 $ 52,416
Other comprehensive loss, net of tax:
Foreign currency translation adjustment................ (835) (10,034) (10,496)
-------- -------- --------
Comprehensive income..................................... $ 13,363 $ 8,217 $ 41,920
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORDINARY SHARES ADDITIONAL RETAINED CUMULATIVE TOTAL
--------------------- PAID-IN EARNINGS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996 ................... 67,719 $ 436 $ 104,354 $ 4,604 $ 506 $ 109,900
Issuance of Ordinary Shares for
acquisition of Fine Line ............... 893 4 193 1,019 -- 1,216
Exercise of stock options ................. 959 6 1,736 -- -- 1,742
Net income ................................ -- -- -- 14,198 -- 14,198
Dividend paid to former Kyrel
shareholder ............................ -- -- -- (959) -- (959)
Foreign currency translation .............. -- -- -- -- (1,022) (1,022)
------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1997 ................... 69,571 446 106,283 18,862 (516) 125,075
Adjustment to conform fiscal year
of pooled entity ...................... -- -- -- (3,136) -- (3,136)
Issuance of Ordinary Shares for
acquisition of DTM ..................... 1,009 6 1,028 (1,481) -- (447)
Issuance of Ordinary Shares for
acquisition of Energipilot ............. 920 4 254 549 -- 807
Issuance of Ordinary Shares for
acquisition of Altatron ................ 3,154 18 32 4,132 -- 4,182
Issuance of Ordinary Shares for
acquisition of Conexao ................. 1,685 10 8,487 (6,023) -- 2,474
Exercise of stock options ................. 1,034 8 1,940 -- -- 1,948
Sale of shares in public offering,
net of $6,545 in offering costs ........ 8,740 50 96,100 -- -- 96,151
Net income ................................ -- -- -- 18,251 -- 18,251
Dividend paid to former Kyrel
shareholder ............................ -- -- -- (802) -- (802)
Foreign currency translation .............. -- -- -- -- (11,307) (11,307)
------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1998 ................... 86,113 542 214,124 30,352 (11,823) 233,195
Sale of shares in public offering,
net of $1,750 in offering costs ......... 10,800 58 193,942 -- -- 194,000
Issuance of Ordinary Shares for
acquisition of FICO ..................... 256 2 4,798 -- -- 4,800
Exercise of stock options ................. 2,741 16 11,369 -- -- 11,385
Ordinary Shares issued under
Employee Stock Purchase Plan ........... 145 2 1,164 -- -- 1,166
Net income ................................ -- -- -- 52,416 -- 52,416
Foreign currency translation .............. -- -- -- -- (12,024) (12,024)
------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1999 ................... 100,055 $ 620 $ 425,397 $ 82,768 $ (23,847) $ 484,938
======= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 14,198 $ 18,251 $ 52,416
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 22,305 34,149 54,789
Gain on sale of subsidiary ............................. (1,027) -- --
Provision for doubtful accounts ........................ 3,258 1,218 (2,374)
Provision for inventories .............................. 4,228 3,249 4,163
Equity in earnings of associated companies ............. (133) (1,194) (1,036)
In-process research and development .................... -- -- 2,000
Provision for excess facilities ........................ 5,308 8,869 3,361
Minority interest expense and other non-cash expenses .. 1,295 908 575
Changes in operating assets and liabilities (net of
effect of acquisitions):
Accounts receivable ................................ 9,624 (41,090) (102,803)
Inventories ........................................ 13,744 (28,619) (65,811)
Other current assets ............................... (10,362) (19,937) (25,679)
Accounts payable and accrued liabilities ........... 6,919 70,682 126,979
Deferred revenue ................................... 1,788 317 314
Deferred income taxes .............................. (1,926) -- (729)
--------- --------- ---------
Net cash provided by operating activities .................. 69,219 46,803 46,165
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...................... (39,152) (101,844) (159,578)
Proceeds from sale of property and equipment ............. 4,827 1,622 6,544
Proceeds from sale of subsidiaries ....................... 1,012 -- --
Investment in associated company ......................... (3,116) (2,200) --
Proceeds from disposal of investment in associated company -- -- 572
Other investments ........................................ (41) (3,611) (17,754)
Dividend paid to former Kyrel shareholder................. (959) (802) --
Payment for Astron earnout and remaining purchase price
related to the acquisition of Astron ................... -- (6,250) (24,000)
Effect of acquisitions on cash ........................... -- 4,363 379
Net cash paid for acquired businesses .................... (82,354) -- (22,200)
Repayments from (loans to) related party ................. (469) 35 --
--------- --------- ---------
Net cash used in investing activities ...................... (120,252) (108,687) (216,037)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and proceeds from long-term debt ......... 160,940 160,615 190,266
Repayment of bank borrowings and long-term debt .......... (80,136) (261,420) (119,817)
Borrowings from (payments to) related company ............ (4,403) 2,946 --
Equipment refinanced under capital leases ................ 3,509 -- --
Repayment of capital lease obligations ................... (7,991) (10,152) (11,957)
Proceeds from exercise of stock options and Employee
Stock Purchase Plan .................................... 1,362 1,948 12,551
Payments on notes payable ................................ (10,463) (5,000) --
Gross proceeds from issuance of Senior Subordinated Notes -- 150,000 --
Expenses related to the issuance of Senior Subordinated
Notes .................................................. -- (4,313) --
Gross proceeds from sales of Ordinary Shares ............. -- 102,695 195,750
Expenses related to sales of Ordinary Shares ............. -- (6,545) (1,750)
--------- --------- ---------
Net cash provided by financing activities .................. 62,818 130,774 265,043
--------- --------- ---------
Effect of exchange rate changes ............................ (245) (4,305) (2,138)
Effect of Neutronics fiscal year conversion ................ -- 389 --
--------- --------- ---------
Increase in cash and cash equivalents ...................... 11,540 64,974 93,033
Cash and cash equivalents, beginning of period ............. 15,313 26,853 91,827
--------- --------- ---------
Cash and cash equivalents, end of period ................... $ 26,853 $ 91,827 $ 184,860
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
1. ORGANIZATION OF THE COMPANY
Flextronics International Ltd. ("Flextronics" or the "Company") is
incorporated in the Republic of Singapore. Flextronics provides advanced
electronics manufacturing services to sophisticated original equipment
manufacturers ("OEMs") in the telecommunications, networking, computer, consumer
and medical electronics industries. Flextronics offers a full range of services
including product design, printed circuit board ("PCB") assembly and
fabrication, material procurement, inventory management, plastic injection
molding, final system assembly and test, packaging and distribution. The
components, subassemblies and finished products manufactured by the Company
incorporate advanced interconnect, miniaturization and packaging technologies
such as surface mount ("SMT"), multichip modules ("MCM") and chip-on-board
("COB") technologies.
2. SUMMARY OF ACCOUNTING POLICIES
Principles of consolidation and basis of presentation
The accompanying consolidated financial statements include the accounts of
Flextronics and its wholly and majority-owned subsidiaries, after elimination of
all significant intercompany accounts and transactions.
As is more fully described in Note 11, Flextronics acquired 100% of the
outstanding shares of Kyrel EMS Oyj ("Kyrel") on July 15, 1999 and 92% of the
outstanding shares of Neutronics Electronics Industries Holding A.G.
("Neutronics") on October 30, 1997. Both acquisitions were accounted for as a
pooling-of-interests and the consolidated financial statements have been
restated to reflect the combined operations of Kyrel, Neutronics and Flextronics
for all periods presented.
Neutronics operated under a calendar year end prior to merging with
Flextronics and, accordingly, Neutronics' statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996 have
been combined with the corresponding Flextronics consolidated statements for the
fiscal years ended March 31, 1997. During fiscal 1998, Neutronics' fiscal year
end was changed from December 31 to March 31 to conform to the Company's fiscal
year-end. Accordingly, Neutronics' operations for the three months ended March
31, 1997, which included net sales of $34.9 million and net loss of $3.1 million
have been excluded from the consolidated results and have been reported as an
adjustment to retained earnings in the first quarter of fiscal 1998.
As is more fully described in Note 11, Flextronics acquired 100% of the
outstanding shares of Kyrel on July 15, 1999. The acquisition was accounted for
as a pooling-of-interest business combination and the consolidated financial
statements have been restated to reflect the combined operations of Kyrel for
all periods presented.
Kyrel operated under a calendar year end prior to merging with Flextronics
and, accordingly, Kyrel's statements of operations, shareholders' equity and
cash flows for the years ended December 31, 1998 have been combined with the
corresponding Flextronics consolidated statements for the fiscal years ended
March 31, 1999. During fiscal 2000, Kyrel's year end was changed from December
31 to March 31 to conform to the Company's fiscal year end. Accordingly, Kyrel's
operations for the three months ended March 31, 1999, which included net sales
of $101.8 million and net loss of $0.8 million have been
30
<PAGE>
excluded from the consolidated results of fiscal 2000 and will be reported as an
adjustment to retained earnings in the first quarter of fiscal 2000.
All dollar amounts included in the financial statements are expressed in
U.S. dollars unless otherwise designated as Singapore dollars (S$).
Reclassifications
Certain prior years' balances have been reclassified to conform with the
current year's presentation.
Translation of Foreign Currencies
The functional currency of the majority of Flextronics' Asian subsidiaries
and certain other subsidiaries is the U.S. dollar. Accordingly, all of the
monetary assets and liabilities of these subsidiaries are translated into U.S.
dollars at the current exchange rate as of the applicable balance sheet date,
and all non-monetary assets and liabilities are remeasured at historical rates.
Revenues and expenses are translated at the average exchange rate prevailing
during the period. Gains and losses resulting from the translation of these
subsidiaries' financial statements are included in the accompanying consolidated
statements of operations.
The financial position and results of operations of the Company's Swedish,
UK, Austrian, Finnish, French, Brazilian and Hungarian subsidiaries are measured
using local currency as the functional currency. Accordingly, for these
subsidiaries all assets and liabilities are translated into U.S. dollars at
current exchange rates as of the respective balance sheet date. Revenue and
expense items are translated at the average exchange rates prevailing during the
period. Cumulative translation gains and losses from the translation of these
subsidiaries' financial statements are reported as a separate component of
shareholders' equity. On January 1, 1999, the Company's Austrian, Finnish,
French and Hungarian subsidiaries adopted the euro as its functional currency.
Cash and cash equivalents
Cash and cash equivalents consisted of the following as of March 31 (in
thousands):
1998 1999
-------- --------
Cash......................................... $ 64,258 $ 52,928
Certificates of deposit...................... 27,569 41,469
Money market funds........................... -- 40,960
Corporate debt securities.................... -- 49,503
-------- --------
Cash and cash equivalents................ $ 91,827 $184,860
======== ========
For the purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist of investments in certificates of
deposit, money market funds, and corporate debt securities with original
maturity of three months or less. The Company classifies its investments in
corporate debt securities as available-for-sale and are reported at fair market
value in accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." As of March 31, 1999, the fair value of the
investments in corporate debt securities approximated amortized cost and, as
such, unrealized holding gains and losses were insignificant. The fair value of
31
<PAGE>
the Company's investments was determined based on quoted market prices at the
reporting date for those instruments.
Property and equipment
Property and equipment is stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the related
assets (two to ten years), with the exception of building leasehold
improvements, which are amortized over the life of the lease, if shorter.
Repairs and maintenance costs are expensed as incurred. Property and equipment
was comprised of the following as of March 31 (in thousands):
1998 1999
--------- ---------
Machinery and equipment ................. $ 204,245 $ 282,271
Land .................................... 16,191 21,229
Buildings ............................... 88,869 116,458
Leasehold improvements .................. 15,641 26,688
Computer equipment and software ......... 20,407 36,527
Furniture, fixtures and vehicles ........ 19,673 44,452
--------- ---------
365,026 527,625
Accumulated depreciation and amortization (96,462) (130,458)
--------- ---------
Property and equipment, net ............. $ 268,564 $ 397,167
========= =========
Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, are primarily accounts receivable and cash
equivalents. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains an allowance for doubtful accounts based on
the outcome of its credit evaluations. The Company maintains cash and cash
equivalents with various financial institutions that management believes to be
high credit quality. These financial institutions are located in many different
locations throughout the world.
Sales to customers who accounted for more than 10% of net sales were as
follows for the years ended March 31:
1997 1998 1999
---- ---- ----
Ericsson....................................... 0.2% 24.0% 14.6%
Philips........................................ 14.7 11.6 15.9
Cisco.......................................... 0.9 3.0 11.3
Nokia.......................................... 21.3 5.6 7.1
Prior to the company's acquisition of Neutronics, Philips Electronics Group
("Philips") held a significant ownership interest in Neutronics (see Note 11).
Sales to Philips, which are included in net sales in the accompanying
consolidated statements of operations, totaled $120 million, $139 million, and
$325 million in fiscal 1997, 1998 and 1999, respectively. Neutronics also
purchased raw materials from Philips totaling $30 million, $53 million and $153
million in fiscal 1997, 1998 and 1999, respectively.
In addition, Neutronics received an interest free loan from Philips in
fiscal 1994 of $10.8 million which was fully repaid in fiscal 1997.
32
<PAGE>
Goodwill and other intangibles
Any excess of cost over net assets acquired (goodwill) is amortized by the
straight-line method over estimated lives ranging from eight to twenty-five
years.
Intangible assets are comprised of technical agreements, patents,
trademarks, developed technologies and other acquired intangible assets
including assembled work forces, favorable leases and customer lists. Technical
agreements are being amortized on a straight-line basis over periods of up to
five years. Patents and trademarks are being amortized on a straight-line basis
over periods of up to ten years. Purchased developed technologies are being
amortized on a straight-line basis over periods of up to seven years. Intangible
assets related to assembled work forces, favorable leases and customer lists are
amortized on a straight-line basis over three to ten years.
Goodwill and other intangibles were as follows as of March 31 (in
thousands):
1998 1999
-------- --------
Goodwill....................................... $ 21,861 $ 37,533
Other intangibles.............................. 16,986 13,840
-------- --------
38,847 51,373
Accumulated amortization....................... (12,278) (12,534)
-------- --------
Goodwill and other intangibles, net............ $ 26,569 $ 38,839
======== ========
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of property and equipment is measured by
comparison of its carrying amount, including the unamortized portion of goodwill
allocated to the property and equipment, to future net cash flows the property
and equipment are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the property and equipment, including the allocated goodwill,
if any, exceeds its fair market value. The Company assesses the recoverability
of enterprise level goodwill and intangible assets as well as long-lived assets
by determining whether the unamortized balances can be recovered through
undiscounted future results of the operation or asset. The amount of enterprise
level long lived asset impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting the Company's average
cost of funds. To date, the Company has made no adjustments to the carrying
value of its long-lived assets.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
33
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value. Cost is comprised of direct materials, labor and overhead. As of
March 31, the components of inventories are as follows (in thousands):
1998 1999
-------- --------
Raw materials.................................... $136,710 $173,739
Work-in-process.................................. 22,251 25,740
Finished goods................................... 5,296 21,873
-------- --------
$164,257 $221,352
======== ========
Accrued liabilities
Accrued liabilities was comprised of the following as of March 31 (in
thousands):
1998 1999
------- -------
Income taxes payable.................................. $ 4,891 $10,163
Accrued payroll....................................... 22,559 36,482
Accrued loan interest................................. 6,016 6,200
Provision for excess facilities (see note 9).......... 5,445 2,523
Purchase price payable to former Astron's shareholders 10,000 --
Amount due under the Service Agreement................ 13,909 --
Customer deposits..................................... 4,121 18,299
Sales tax payable..................................... 4,347 6,022
Other accrued liabilities............................. 18,181 20,053
------- -------
$89,469 $99,742
======= =======
Revenue recognition
The Company's net sales are comprised of product sales and service revenue
earned from engineering and design services. Revenue from product sales is
recognized upon shipment of the goods. Service revenue is recognized as the
services are performed, or under the percentage-of-completion method of
accounting, depending on the nature of the arrangement. If total costs to
complete a project exceed the anticipated revenue from that project, the loss is
recognized immediately.
Interest and other expense, net
Interest and other expense, net was comprised of the following for the
years ended March 31 (in thousands):
1997 1998 1999
------- -------- --------
Interest expense........................... $(7,123) $(17,879) $(22,820)
Interest income............................ 1,351 2,781 5,199
Foreign exchange gain (loss)............... 262 1,221 (5,068)
Equity in earnings of associated companies. 133 1,194 1,036
Permanent impairment in investment......... (3,200) -- --
Bank commitment fees....................... (750) -- --
Gain on sale of subsidiary................. 1,027 -- --
Minority interest.......................... (387) (356) (1,319)
Other income(expense), net................. 1,039 767 2,140
------- -------- --------
Total other expense, net......... $(7,648) $(12,272) $(20,832)
======= ======== ========
34
<PAGE>
Net income per share
Basic net income per share is computed using the weighted average number of
Ordinary Shares outstanding during the applicable periods.
Diluted net income per share is computed using the weighted average number
of Ordinary Shares and dilutive Ordinary Share equivalents outstanding during
the applicable periods. Ordinary Share equivalents include Ordinary Shares
issuable upon the exercise of stock options and are computed using the treasury
stock method.
The Company has performed a two-for-one stock split, effected as a bonus
issue (the Singapore equivalent of a stock dividend) twice. The record date of
the first stock split was set on December 22, 1998. The distribution of
47,068,458 Ordinary Shares occurred on January 11, 1999. The record date of the
second stock split was set on December 8, 1999. The distribution of 57,497,204
Ordinary Shares occurred on December 22, 1999. All share and per share amounts
have been retroactively restated to reflect these stock splits.
Reconciliation between basic and diluted earnings per share is as follows
for the fiscal years ended March 31 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Ordinary Shares issued and outstanding(1)................ 68,520 74,856 90,782
Ordinary Shares due to Astron(2)......................... 1,940 1,840 --
-------- -------- --------
Weighted average Ordinary Shares -- basic................ 70,460 76,696 90,782
Ordinary Share equivalents -- stock options(3)........... 2,496 3,336 5,188
-------- -------- --------
Weighted average Ordinary Shares and
equivalents -- diluted................................. 72,956 80,032 95,970
======== ======== ========
Net income .............................................. $ 14,198 $ 18,251 $ 52,416
======== ======== ========
Basic earnings per share................................. $ 0.20 $ 0.24 $ 0.58
======== ======== ========
Diluted earnings per share............................... $ 0.19 $ 0.23 $ 0.55
======== ======== ========
</TABLE>
(1) Ordinary Shares issued and outstanding based on the weighted average method.
(2) Ordinary Shares to be issued as purchase price due to Astron's former
shareholders in June 1998.
(3) Stock options of the Company calculated based on the treasury stock method
using average market price for the period, if dilutive. Options to purchase
991,220, 347,584 and 112,658 weighted shares outstanding during fiscal 1997,
1998, and 1999, respectively, were excluded from the computation of diluted
earnings per share because the options exercise price was greater than the
average market price of the Company's Ordinary Shares during those years.
Comprehensive Income
The Company adopted SFAS No. 130, "Comprehensive Income" in the first
quarter of fiscal 1999. SFAS No. 130 requires companies to report an additional
measure of income on the income statement referred to as "comprehensive income"
or to create a separate financial statement that reflects comprehensive income.
The Company's comprehensive income includes net income and foreign currency
translation adjustments.
35
<PAGE>
The following table sets forth the components of other comprehensive loss
net of income tax for the years ended March 31:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- ----------------------------- ------------------------------
Tax Tax Tax
Pre-Tax (Expense) Net-of-Tax Pre-Tax (Expense) Net-of-Tax Pre-Tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount Amount or Benefit Amount
------- --------- -------- ------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other comprehensive
loss:
Foreign currency
translation
adjustment $(1,022) $ 187 $ (835) $(11,308) $ 1,274 $ (10,034) $ (12,024) $ 1,528 $ (10,496)
</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts and for hedging activities. It requires
that companies recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company expects to adopt SFAS No. 133 in the first quarter of fiscal 2001 and
anticipates that SFAS No. 133 will not have a material impact on its
consolidated financial statements.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
For purposes of the statement of cash flows, the Company considers highly
liquid investments with an original maturity of three months or less to be cash
equivalents. The following information relates to fiscal years ended March 31
(in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash paid for:
Interest.................................................. $ 5,624 $ 11,255 $ 16,226
Income taxes.............................................. 2,866 1,331 3,015
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations........ 14,783 9,094 22,104
Earnout of $6.25 million payable to Astron's
shareholders less reduction in amount due under
the Services Agreement.................................. 5,250 -- --
Issuance of 255,700 Ordinary Shares valued at $18.77 for
acquisition of FICO..................................... -- -- 4,800
</TABLE>
4. BANK BORROWINGS AND LONG-TERM DEBT
The Company has $150 million in unsecured Senior Subordinated Notes due in
2007 outstanding with an annual interest rate of 8.75% due semi-annually. The
fair value of the unsecured Senior Subordinated Notes based on broker trading
prices was 103% of the face value on March 31, 1999. In addition, during fiscal
1999, the Company increased its credit facility to $120.0 million and amended
certain covenants and financial ratios. As of March 31, 1999, the Company has
borrowed $20.9 million under the credit facility line of credit. The credit
facility is secured by substantially all of the Company's assets and expires in
January 2001. Borrowings under the credit facility bear interest, at the
Company's option, of the United States prime rate or the London interbank
offering rate (LIBOR) plus 0.5% (5.0% as of March 31, 1999). As of March 31,
1999, the Company has $99.1 million available under its credit facility line of
credit.
36
<PAGE>
Certain subsidiaries of the Company have various lines of credit available
with annual interest rates ranging from 4% to 6.4%. These lines of credit expire
on various dates through 2001. The Company has term loans with annual interest
rates generally ranging from 4% to 7% with terms of up to 20 years. These lines
of credit and term loans are primarily secured by assignment of account
receivables and assets.
The Company has financed the purchase of certain facilities with mortgages.
The mortgages generally have terms of 5 to 20 years and annual interest rates
ranging from 6% to 10% and are secured by the underlying properties with a net
book value of approximately $23.0 million.
In addition, the Company had notes payable for purchase price due to the
former shareholders of FICO for the additional 50% interest acquired in March
1999. The notes were unsecured for a total of $3.0 million and bear interest at
2%.
Bank borrowings and long-term debt was comprised of the following at March
31 (in thousands):
1998 1999
--------- ---------
Senior Subordinated Notes........................ $ 150,000 $ 150,000
Outstanding under lines of credit................ 24,620 13,193
Credit facility.................................. -- 40,073
Mortgages........................................ 12,848 15,630
Term loans and other debt .. .................... 26,143 53,888
--------- ---------
213,611 272,784
Current portion................................ (44,374) (83,976)
--------- ---------
Non-current portion............................ $ 169,237 $ 188,808
========= =========
Maturities for the bank borrowings and other long-term debt are as follows
for the years ended March 31 (in thousands):
2000.............................................. $ 83,975
2001.............................................. 7,853
2002.............................................. 6,433
2003.............................................. 5,340
2004.............................................. 4,363
Thereafter........................................ 164,820
--------
$272,784
========
5. FINANCIAL INSTRUMENTS
The value of the Company's cash and cash equivalents, accounts receivable
and accounts payable carrying amount approximates fair value. The fair value of
the Company's long-term debt (see Note 4) is determined based on current broker
trading prices. The Company's cash equivalents are comprised of investment grade
certificates of deposits, money market accounts, and corporate debt securities
(see Note 2). The Company's investment policy limits the amount of credit
exposure to 10% of the total investment portfolio in any single issuer. All of
the Company's investments have an original maturity of 90 days or less.
37
<PAGE>
The Company enters into forward exchange contracts to hedge underlying
transactional currency exposures and does not engage in foreign currency
speculation. The credit risk of these forward contracts is minimal since the
contracts are with large financial institutions. The Company hedges committed
exposures and these forward contracts generally do not subject the Company to
risk of accounting losses. The gains and losses on forward contracts generally
offset the gains and losses on the asset, liabilities and transactions hedged.
The Company's off-balance sheet financial instruments consist of $80.7 million
and $16.5 million of aggregate foreign currency forward contracts outstanding at
the end of fiscal year 1998 and 1999, respectively. These foreign exchange
contracts expire in less than three months and will settle in French Franc,
Japanese Yen, Swedish Kronor and United States dollar.
6. COMMITMENTS
As of March 31, 1998 and 1999, the Company has financed a total of $49.6
million and $61.5 million, respectively in machinery and equipment purchases
with capital leases. Accumulated amortization for property and equipment under
capital leases totaled $13.8 million and $14.8 million at March 31, 1998 and
1999, respectively. These capital leases have interest rates ranging from 1.7%
to 16.6%. The Company also leases certain of its facilities under non-cancelable
operating leases. The capital and operating leases expire in various years
through 2008 and require the following minimum lease payments for the years
ended March 31 (in thousands):
CAPITAL OPERATING
------- ---------
2000.............................................. $14,854 $18,278
2001.............................................. 11,529 17,563
2002.............................................. 8,165 13,049
2003.............................................. 5,872 4,942
2004.............................................. 3,997 1,929
Thereafter........................................ 5,146 6,770
------- -------
Minimum lease payments............................ 49,563 $62,531
=======
Amount representing interest...................... (6,901)
-------
Present value of minimum lease payments........... 42,662
Current portion................................... (11,475)
-------
Capital lease obligations, net of current
portion......................................... $31,187
=======
Total rent expense was $3.2 million, $8.3 million and $17.3 million for the
years ended March 31, 1997, 1998 and 1999, respectively.
38
<PAGE>
7. INCOME TAXES
The domestic and foreign components of income before income taxes were
comprised of the following for the years ended March 31 (in thousands):
1997 1998 1999
-------- -------- --------
Singapore........................... $ (392) $ (9,346) $ (8,159)
Foreign............................. 17,765 29,915 68,207
-------- -------- --------
$ 17,373 $ 20,569 $ 60,048
======== ======== ========
The provision for income taxes consisted of the following for the years
ended March 31 (in thousands):
1997 1998 1999
-------- ------- --------
Current :
Singapore........................ $ 1,608 $ 226 $ --
Foreign.......................... 3,286 5,423 8,135
-------- ------- --------
$ 4,894 $ 5,649 $ 8,135
======== ======= ========
Deferred :
Singapore........................ $ (559) $ (451) $ --
Foreign.......................... (1,160) (2,880) (503)
-------- ------- --------
(1,719) (3,331) (503)
-------- ------- --------
$ 3,175 $ 2,318 $ 7,632
======== ======= ========
The Singapore statutory income tax rate was 26% for the years ended March
31, 1997, 1998 and 1999. The reconciliation of the income tax expense expected
based on Singapore statutory income tax rates to the provision for income taxes
included in the consolidated statements of operations for the years ended March
31 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income taxes based on Singapore statutory
rates ...................................... $ 4,517 $ 5,347 $ 15,612
Losses from non-incentive Singapore operations 498 2,707 3,098
Tax exempt income ............................ -- -- (549)
Effect of foreign operations taxed at various
rates ...................................... (3,189) (2,966) (6,335)
Amortization of goodwill and intangibles ..... 436 946 942
Merger costs ................................. -- 398 --
Benefit from realized deferred tax assets .... -- (2,829) (5,229)
Joint venture losses ......................... -- (310) (269)
Bank commitment fees ......................... 382 -- --
Other ........................................ 531 (975) 362
-------- -------- --------
Provision for income taxes ......... $ 3,175 $ 2,318 $ 7,632
======== ======== ========
Effective tax rate .......................... 18.3% 11.3% 12.7%
</TABLE>
39
<PAGE>
The components of deferred income taxes are as follows as of March 31 (in
thousands):
1998 1999
-------- --------
Deferred tax liabilities:
Depreciation ............................. $ (855) $ (4,314)
Intangible assets ........................ (2,405) (2,059)
Fixed assets ............................. -- (515)
Exchange losses .......................... -- (934)
Others ................................... (2,436) (2,010)
-------- --------
Total deferred tax liability ...... $ (5,696) $ (9,832)
-------- --------
Deferred tax assets:
Depreciation ............................. $ 471 $ 598
Provision for inventory obsolescence ..... 3,351 3,260
Provision for doubtful accounts .......... 1,147 1,717
Net operating loss carryforwards ......... 17,525 15,107
General accruals and reserves ............ 1,588 3,777
Unabsorbed capital allowance carryforwards 239 --
Leasing - interest and exchange .......... -- 771
Others ................................... 465 1,870
-------- --------
24,786 27,100
Valuation allowance ...................... (21,626) (18,637)
-------- --------
Net deferred tax asset ............... $ 3,160 $ 8,463
-------- --------
Net deferred tax liability ............... $ (2,536) $ (1,369)
======== ========
The net deferred tax liability is classified as follows (in thousands):
Long-term liability $ (4,567) $ (4,457)
Current and non-current assets 2,031 3,088
-------- --------
$ (2,536) $ (1,369)
======== ========
The deferred tax asset arises substantially from available tax loss
carryforwards. These tax losses can only be offset against future income of
operations in respect of which the tax losses arose. As a result, management is
uncertain as to when or whether these operations will generate sufficient profit
to realize the deferred tax asset benefit. The valuation allowance provides a
reserve against deferred tax assets that may expire or go unutilized by the
Company. In accordance with the guidelines included in SFAS No. 109 "Accounting
for Income Taxes," management has determined that more likely than not the
Company will not realize these benefits and, accordingly, has provided a
valuation allowance for them. The amount of deferred tax assets considered
realizable, however, could be reduced or increased in the near-term if facts
change, including the amount of taxable income or the mix of taxable income
between subsidiaries, differ from management's estimates.
At March 31, 1999, the Company had operating loss carryforwards of
approximately $24.2 million for U.S. federal income tax purposes which will
expire between 2003 and 2012 if not previously utilized. Utilization of these
net operating loss carryforwards may be subject to an annual limitation due to
the change in ownership rules provided by the Internal Revenue Code (the
"Code"). This limitation and other restrictions provided by the Code may reduce
the net operating loss carryforwards such that they would not be available to
offset future taxable income of the U.S. subsidiary.
40
<PAGE>
At March 31, 1999, the Company had operating loss carryforwards of
approximately $9.9 million, $6.8 million and $6.5 million in the U.K., Austria
and Hong Kong, respectively with various loss carryforward lives pursuant to
local county tax laws. The utilization of these net operating loss carryforwards
is limited to the future operations of the Company in the tax jurisdictions in
which such carryforwards arose.
Distributions of earnings by the Austrian subsidiary are exempt from
Austrian income taxes under the international participation privilege. No
deferred tax liability has been provided for withholding taxes on distributions
of dividends by the Austrian subsidiary, or any other foreign subsidiaries,
because earnings of foreign subsidiaries are to be reinvested indefinitely.
Due to a change in the tax assessment system of Malaysia, the income for
the year ended March 31, 1999 was not subject to Malaysian tax.
The Company has been granted the following tax incentives:
(i) Pioneer status for various products were granted to one of its
Malaysian subsidiaries under the Promotion of Investment Act. The pioneer
status for the various products expire on various dates ranging from
January 4, 1998 to January 12, 2000. This incentive provides for
full/partial tax exemption on manufacturing income from the various Pioneer
products for this subsidiary.
(ii) Product Export Enterprise incentive for the Shekou and Shenzhen, China
facilities. The Company's operation in Shekou and Shenzhen, China are
located in "Special Economic Zone" and are approved "Product Export
Enterprise' which qualifies for a special corporate income tax rate of 10%.
This special tax rate is subject to the Company exporting more than 70% of
its total value of products manufactured in China. The Company's status as
a Product Export Enterprise is reviewed annually by the Chinese government.
(iii) The Company's investment in its plants in Xixiang, China and Doumen,
China fall under the "Foreign Investment Scheme" that entitles the Company
to apply for a five-year tax incentive. The Company obtained the incentive
for the Doumen plant in December 1995 and the Xixiang plant in October.
With the approval of the Chinese tax authorities, the Company's tax rates
on income from these facilities during the incentive period will be 0% in
years 1 and 2 and 7.5% in years 3 through 5, commencing in the first
profitable year. The Company has another plant in Doumen which commenced
operations in the fiscal year 1998. The plant which falls under the
"Foreign Investment Scheme" is confident that the five year incentive will
be granted upon formal application in its first profitable year. However,
there can be no assurance that the five year incentive will be granted.
(iv) Five year negotiated tax holiday with the Hungarian government for its
Hungarian subsidiaries. This incentive provides for the reduction of the
regular tax rate by 60% to 7.2%. The incentive expires December 31, 2003.
41
<PAGE>
A portion of the Company's sales were carried out by its two subsidiaries
in Labuan, Malaysia where the Company has opted to pay the Labuan tax
authorities a fixed amount of $6 tax each year in accordance with Labuan tax
legislation.
A portion of the Company's sales was carried out by its Mauritius
subsidiary which is taxed at 0%.
8. SHAREHOLDERS' EQUITY
Issuance of non-employee stock options
In June 1996, the Company issued 80,000 stock options with an exercise
price of $7.81 to a customer as a result of that customer reaching a specified
sales target in accordance with an option agreement. These options were valued
as of the grant date using the Black-Scholes model. The resulting value of
$380,000 was recorded as a sales discount in the accompanying consolidated
statement of operations for fiscal 1997.
Secondary offerings
In October 1997, the Company completed an offering of its Ordinary Shares.
A total of 8,740,000 shares were sold at a price of $11.75 per share resulting
in net proceeds to the Company of $96.2 million.
In December 1998, the Company completed another offering of its Ordinary
Shares. A total of 10,800,000 shares were sold at a price of $18.125 per share
resulting in net proceeds to the Company of $194.0 million.
Stock split
The Company had two stock splits. The first stock split was in 1998 and the
record date was set on December 22, 1998 for a 2:1 stock split. The distribution
of 47,068,458 Ordinary Shares occurred on January 11, 1999. The second stock
split was in 1999 and the record date was set on December 8, 1999 for a 2:1
stock split. The distribution of 57,497,204 Ordinary Shares occurred on December
22, 1999. Both stock splits were to be effected as bonus issues (the Singapore
equivalent of a stock dividend). The Company has accounted for these
transactions as a stock split and all share and per share amounts have been
retroactively restated to reflect both stock splits.
Stock-based compensation
The Company's 1993 Share Option Plan (the "Plan") provides for the grant of
up to 14,400,000 incentive stock options and non-statutory stock options to
employees and other qualified individuals to purchase Ordinary Shares of the
Company. As of March 31, 1999, the Company had 227,934 Ordinary Shares available
for future option grants under the Plan at an exercise price of not less than
85% of the fair value of the underlying stock on the date of grant. Options
issued under the Plan generally vest over 4 years and expire 5 years from the
date of grant.
The Company's 1997, 1998 and 1999 Interim Option Plans provide for grants
of up to 1,000,000, 1,600,000, and 2,600,000 respectively. These plans provide
grants of non-statutory options to employees and other qualified individuals to
purchase Ordinary Shares of the Company. Options under these plans can not be
42
<PAGE>
granted to executive officers and directors. The Company's 1997, 1998 and 1999
Interim Option Plans had 171,986, 55,266, and 1,972,394 Ordinary Shares
available for future option grants respectively. All Interim Option Plans have
an exercise price of not less than 85% of fair market value of the underlying
stock on the date of grant. Options issued under these plans generally vest over
4 years and expire 5 years from the date of grant.
The Company has assumed certain option plans and the underlying options of
companies which the Company has merged with or acquired (the "Assumed Plans").
Options under the Assumed Plans have been converted into the Company's options
and adjusted to effect the appropriate conversion ratio as specified by the
applicable acquisition or merger agreement, but are otherwise administered in
accordance with the terms of the Assumed Plans. Options under the Assumed Plans
generally vest over 4 years and expire 5 years from the date of grant.
The following table presents the activity for options outstanding under all
of the stock option plans as of March 31 ("Price" reflects the weighted average
exercise price):
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ------------------- --------------------
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----- ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year....... 5,263,880 $3.15 6,700,088 $4.66 9,788,156 $ 6.01
Granted.............................. 2,893,256 6.28 5,630,016 7.27 6,857,078 11.48
Exercised............................ (958,532) 1.47 (1,038,832) 1.88 (2,738,740) 4.19
Forfeited............................ (498,516) 4.46 (1,503,116) 7.53 (914,762) 6.99
--------- ---------- ----------
Outstanding, end of year............. 6,700,088 $4.66 9,788,156 $6.01 12,991,732 $ 9.19
========= ========== ==========
Exercisable, end of year............. 2,399,062 3,262,304 3,251,040
========= ========== ==========
Weighted average fair value per
option granted................... $3.05 $3.48 $6.61
===== ===== =====
</TABLE>
The following table presents the composition of options outstanding and
exercisable as of March 31, 1999 ("Price" and "Life" reflect the weighted
average exercise price and weighted average contractual life unless otherwise
noted):
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
RANGE OF EXERCISE ------------------------------ -------------------
PRICES AMOUNT PRICE LIFE AMOUNT PRICE
- ----------------- ---------- ------ ---- --------- ------
$ 0.30 -- $ 5.82 3,615,730 $ 5.52 3.26 2,166,826 $ 5.37
5.94 -- 8.38 3,010,852 8.04 3.93 701,734 7.91
8.41 -- 11.85 2,278,344 9.64 4.10 262,480 10.32
12.00 -- 12.00 3,326,000 12.00 4.58 120,000 12.00
12.46 -- 24.97 760,806 17.52 4.85 -- --
---------- ---------
Total, March 31, 1999 12,991,732 $ 9.19 3.99 3,251,040 $ 6.57
========== =========
Options reserved for future issuance under all stock options plans was
2,427,580 as of March 31, 1999.
The Company's employee stock purchase plan (the "Purchase Plan") provides
for issuance of up to 300,000 Ordinary Shares. The Purchase Plan was approved by
the stockholders in October 1997. Under the Purchase Plan, employees may
purchase, on a periodic basis, a limited number of ordinary shares.
43
<PAGE>
through payroll deductions over a six month period up to 10% of each
participant's compensation. The per share purchase price is 85% of the fair
market value of the stock at the beginning or end of the offering period,
whichever is lower. A total of 144,860 Ordinary Shares have been issued under
the Purchase Plan as of March 31, 1999. The Company estimated the per-share
weighted average fair value of stock issued to employees in the Purchase Plan
was $4.26 using the Black-Scholes option pricing model with the same assumptions
as those listed for stock options granted during fiscal 1999.
The Company has elected to follow APB Opinion No. 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its employee
stock option plans and employee stock purchase plans and has adopted the
disclosure provisions of SFAS No. 123 "Accounting for Stock Based Compensation."
Because the exercise price of the Company's stock options has equaled the fair
value of the underlying stock on the date of grant, no compensation expense has
been recognized under APB Opinion No. 25. Had the compensation cost for the
Company's stock-based compensation plans been determined based on the fair
values of these options, the Company's fiscal 1997, 1998 and 1999 net income and
earnings per share would have been adjusted to the pro-forma amounts indicated
below (in thousands, except per share amounts):
1997 1998 1999
-------- -------- --------
Net income:
As reported...................... $ 14,198 $ 18,251 $ 52,416
Pro-forma........................ 12,027 12,580 39,827
Basic earnings per share:
As reported...................... $ 0.20 $ 0.24 $ 0.58
Pro-forma........................ 0.17 0.16 0.44
Diluted earnings per share:
As reported...................... $ 0.19 $ 0.23 $ 0.55
Pro-forma........................ 0.16 0.16 0.42
In accordance with the disclosure provisions of SFAS No. 123, the fair
value of employee stock options granted during fiscal 1997, 1998 and 1999 was
estimated at the date of grant using the Black-Scholes model and the following
weighted average assumptions:
Years Ended March 31,
1997 1998 1999
------- ------- -------
Volatility................................ 67% 66% 64%
Risk-free interest rate range............. 5.9% 5.9% 5.0%
Dividend yield............................ 0% 0% 0%
Expected lives............................ 4.1 yrs 4.0 yrs 4.0 yrs
Because SFAS No. 123 is applicable only to awards granted subsequent to
December 30, 1994, and due to the subjective nature of the assumptions used in
the Black-Scholes model, the pro-forma net income and net income per share
disclosures may not reflect the associated fair value of the outstanding
options.
Option Repricing
In light of the substantial decline in the market price of the Company's
Ordinary Shares in the first quarter of fiscal 1998, in June 1997 the Company
offered to all employees the opportunity to cancel existing options outstanding
with exercise price in excess of $5.82 per share, the fair market value of the
44
<PAGE>
Company's Ordinary Shares at that time, and to have such options replaced with
options that have the lower exercise price of $5.82 per share. Employees
electing to have options repriced were required to accept an extension of their
vesting schedule. The other terms of the options remained unchanged. On June 5,
1997, the Company repriced options to purchase 1,155,840 shares pursuant to this
offer.
9. PROVISION FOR EXCESS FACILITIES
The provision for excess facilities of $3.4 million in fiscal 1999 is
comprised of $2.2 million relating to the costs for consolidating the Company's
four manufacturing and administrative facilities in Hong Kong and $1.2 million
relating to the consolidation of certain U.S. facilities. The provision for
excess facilities consists of $1.5 million for the reduction of certain
personnel due to consolidation of certain operations, $1.5 million for the
write-off of equipment and assets related to the operations the Company has
exited, and $0.4 million related to the consolidation of facilities. In
connection with the provision for excess facilities, the Company terminated
approximately 250 employees in the areas of finance, engineering, operations,
production and purchasing. The consolidation of these facilities was
substantially completed by November 1999.
The provision for excess facilities of $8.9 million in fiscal 1998 relates
to the costs incurred in closing the Wales facility. The provision includes $3.8
million for the write-off of goodwill associated with the acquisition of the
Wales facility, $1.6 million for severance payments and payments required under
the pension scheme, $2.4 million for fixed asset write-offs and factory closure
expenses and $1.1 million for required repayment of previously received
government grants.
The provision for excess facilities of $5.9 million in fiscal 1997 relates
to the costs incurred in downsizing the Texas facility, the write-off of
equipment at the nChip semiconductor fabrication facility and downsizing the
Singapore manufacturing operations. The provision includes $2.0 million for
severance payments and $0.5 million for the write-off of fixed assets in the
Singapore manufacturing facilities. An additional amount of $2.9 million
associated with certain obsolete equipment at the Company's nChip and Texas
facilities has been written-off. The provision also includes severance payments
amounting to $0.5 million for the employees of the Texas and nChip facility
which were paid during fiscal 1997. The Company has not recorded the remaining
costs related to existing leases at the Texas facility as the Company is
continuing to use the facility for certain administrative and warehousing
functions.
45
<PAGE>
The following table summarizes the Company's components of the provision
for excess facilities during the years ended in fiscal 1997, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
Severance Fixed Factory Goodwill Other Total
and benefits Assets Closure
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 $ -- $ 1,254 $ -- $ -- $ -- $ 1,254
1997 provision ........ 2,560 3,308 -- -- -- 5,868
Cash charges .......... (560) -- -- -- -- (560)
Non-cash charges ...... -- (1,254) -- -- -- (1,254)
--------------------------------------------------------------------------
Balance at March 31, 1997 2,000 3,308 -- -- -- 5,308
1998 provision ........ 1,636 807 1,565 3,769 1,092 8,869
Cash charges .......... (1,655) -- -- -- -- (1,655)
Non-cash charges ...... -- (3,308) -- (3,769) -- (7,077)
--------------------------------------------------------------------------
Balance at March 31, 1998 1,981 807 1,565 -- 1,092 5,445
1999 provision ........ 1,471 1,455 385 -- 50 3,361
Cash charges .......... (923) -- -- -- (937) (1,860)
Non-cash charges ...... (673) (2,149) (1,446) -- (155) (4,423)
--------------------------------------------------------------------------
Balance at March 31, 1999 $ 1,856 $ 113 $ 504 $ -- $ 50 $ 2,523
==========================================================================
</TABLE>
10. RELATED PARTY TRANSACTIONS AND NOTES PAYABLES TO SHAREHOLDERS
Stephen Rees, a former Director and Senior Vice President of the Company,
holds a beneficial interest in both Mayfield International Ltd. ("Mayfield") and
Croton Ltd. ("Croton"). During fiscal 1998, the Company paid $140,000 to Croton
for management services and $208,000 to Mayfield for the rental of certain
office space. Additionally, as of March 31, 1999, $2.5 million was due from
Mayfield under a note receivable. The note is included in other current assets
on the accompanying balance sheet.
On April 16, 1995, the Company's U.S. subsidiary, Flextronics International
USA, Inc. ("Flextronics USA"), loaned $500,000 to Michael E. Marks. Mr. Marks
executed a promissory note in favor of Flextronics USA which matures on April
16, 2000. In fiscal 1997, Flextronics USA forgave a total of $200,000 of
outstanding principal amount and $26,000 in accrued interest. In fiscal 1998,
Flextronics USA forgave a total of $100,000 of outstanding principal amount and
$73,000 in accrued interest. The remaining outstanding balance of the loan as of
March 31, 1999 was $217,000 (representing $200,000 in principal and $17,000 in
accrued interest) and bears interest at a rate of 7.21%.
On November 6, 1997, Flextronics USA loaned $1.5 million to Mr. Marks. Mr.
Marks executed a promissory note in favor of Flextronics USA which bears
interest at a rate of 7.259% and matures on November 6, 2002. This loan is
secured by certain assets owned by Mr. Marks. The remaining outstanding balance
of the loan as of March 31, 1999 was $1.5 million and all interest accrued has
been paid up to March 31, 1999.
On October 22, 1996, Flextronics USA loaned $136,000 to Mr. Michael
McNamara. Mr. McNamara executed a promissory note in favor of Flextronics USA
which bears interest at a rate of 7.0% and matures on October 22, 2001. The
remaining outstanding balance of the loan as of March 31, 1999 was $150,000
(representing $136,000 in principal and $14,000 in accrued interest).
On November 25, 1998, Flextronics USA loaned $130,000 to Mr. McNamara. Mr.
McNamara executed a promissory note in favor of Flextronics USA
46
<PAGE>
which bears interest at a rate of 7.25% and matures on November 25, 2003. The
remaining outstanding balance of the loan as of March 31, 1999 was $133,000
(representing $130,000 in principal and $3,000 in accrued interest).
On January 15, 1999, Flextronics USA loaned $200,000 to Mr. Robert Dykes.
Mr. Dykes executed a promissory note in favor of Flextronics USA which bears
interest at a rate of 7.25% and matures on January 15, 2004. The remaining
outstanding balance of the loan as of March 31, 1999 was $203,000 (representing
$200,000 in principal and $3,000 in accrued interest).
On February 4, 1999, the Company loaned $410,000 to Mr. Ronny Nilsson. Mr.
Nilsson executed a non-interest bearing promissory note in favor of the Company
and the note matures on March 31, 2000.
The Company also purchases materials from FICO Investment Holdings
("FICO"), an associated company in which the Company held a 40% interest through
March 1999.(see Note 11). At March 31, 1998, the amount due to FICO for these
purchases was $382,000. On March 1, 1999, the Company acquired an additional 50%
of FICO and the results of FICO have been consolidated in the accompanying
financial statements since this date (see Note 11 below).
11. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS
Advanced Component Labs HK Ltd.
On March 1, 1999, the Company acquired the manufacturing facilities and
related assets of Advanced Component Labs HK Ltd. ("ACL"), a Hong Kong based
advanced technology printed circuit board manufacturer for $15 million cash. The
transaction has been accounted for under the purchase method and accordingly,
the results of ACL was included in the Company's consolidated statements of
operations from March 1, 1999. Comparative pro-forma information has not been
presented as the results of operations for ACL are not material to the Company's
financial statements. The goodwill associated with this acquisition is amortized
over ten years.
The purchase price of $15 million was allocated to the net assets acquired
based on their estimated fair values at the date of acquisition as follows (in
thousands):
ACL's net assets at fair value.................. $ 5,250
In-process research and development............. 2,000
Goodwill........................................ 7,750
-------
$15,000
=======
As of the date of acquisition, the $2 million of purchase price allocated
to in-process research and development related to development projects which had
not reached technological feasibility and had no probable alternative future
uses; accordingly, the Company expensed the entire amount on the date of
acquisition as a one-time charge to operations. ACL's in-process research and
development projects were initiated to address the rapid technological change
associated with the miniaturized printed circuit board market. The incomplete
projects include developing technology for a low cost Ball Grid Array ("BGA")
package, developing thermal vias, and developing new methods that enable the use
of extremely thin 1.5 mil technology.
47
<PAGE>
The Company believes the efforts to complete the in-process research and
development projects will consist of internally staffed engineers and will be
completed during fiscal year 2000. The estimated cost to complete the research
and development is approximately $1,1 million. There is substantial risk
associated with the completion of each project and there is no assurance that
any of the projects will meet with technological or commercial success.
FICO Investment Holding Ltd.
On December 20, 1996, the Company acquired an initial 40% of FICO, a
plastic injection molding company located in Shenzhen, China for $5.2 million of
which $3.0 million was paid in December 1996. The remaining $2.2 million
purchase price was paid in June 1997. Goodwill and other intangibles resulting
from this initial purchase totaled $3.2 million and are being amortized over ten
years. The Company accounted for its investment in FICO under the equity method
and accordingly has included its 40% share of FICO's operating results in its
accompanying consolidated statement of operations since December 20, 1996
through February 28, 1999. On March 1, 1999, the Company acquired an additional
50% of FICO for (i) $7.2 million cash, (ii) 255,700 Ordinary Shares issued at
closing valued at $4.8 million (iii) $3.0 million in 2% promissory notes due
$1.0 million each in year 2000 through year 2002. This transaction has been
accounted for under the purchase method and accordingly, the results of
operations for FICO have been included in the accompanying consolidated
statements of operations since March 1, 1999. The acquisition of the additional
50% interest resulted in additional goodwill and intangible assets of $8.5
million and $420,000 which were being amortized over 8 and 3 years,
respectively.
Conexao Informatical Ltd. and Altatron, Inc.
On March 31, 1998 the Company acquired Conexao, a Brazil-based electronics
manufacturing service provider, in exchange for a total of 1,686,372 Ordinary
Shares, of which 473,220 Ordinary Shares to be issued upon resolution of certain
general and specific contingencies. The contingencies were resolved and the
473,220 Ordinary Shares were issued in March 1999. On March 31, 1998, the
Company also acquired Altatron, an electronics manufacturer service provider
headquartered in Fremont, California, with facilities in Fremont, California;
Richardson, Texas; and Hamilton, Scotland in exchange for 3,154,600 Ordinary
Shares, of which 630,920 Ordinary Shares to be issued upon resolution of certain
general and specific contingencies. The contingencies were resolved and the
630,920 Ordinary Shares were issued in March 1999. These acquisitions were
accounted for as a pooling-of-interests. The Company did not restate its prior
period financial statements with respect to these acquisitions because they did
not have a material impact on the Company's consolidated results. Accordingly,
the results of the acquired companies are included in the Company's consolidated
statements of operations from the date of acquisition.
DTM Products, Inc. and Energipilot AB
On December 1, 1997, the Company merged with DTM Products, Inc. and
EnergiPilot AB. DTM is based in Colorado and produces injection molded plastics.
Energipilot is based in Sweden and produces cable and cable assemblies. All of
the outstanding shares of DTM and Energipilot were acquired in exchange for
1,009,876 and 919,960 Ordinary Shares, respectively. These acquisitions were
accounted for as a pooling-of-interests. The Company did not restate its prior
period financial statements with respect to these acquisitions because they did
not have a material impact on the Company's consolidated
48
<PAGE>
results. Accordingly, the results of the acquired companies are included in the
Company's consolidated statements of operations from the date of acquisition
onward.
Neutronics Holdings A.G. and Kyrel EMS Oyj
On October 30, 1997, the Company acquired Neutronics Holdings A.G., an
electronics manufacturing services provider with operations located in Austria
and Hungary. The acquisition was accounted for as a pooling-of-interests and the
Company has issued 11,224,000 Ordinary Shares in exchange for 92% of the
outstanding shares of Neutronics. All financial statements presented have been
retroactively restated to include the results of Neutronics. Neutronics operated
under a calendar year end prior to merging with Flextronics, and accordingly,
Neutronics' statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1996 has been combined with the corresponding
Flextronics consolidated statements for the fiscal years ended March 31, 1997.
During fiscal 1998, Neutronics' fiscal year end was changed from December 31 to
March 31 to conform to the Company's fiscal year-end. Accordingly, Neutronics'
operations for the three months ended March 31, 1997, which included net sales
of $34.9 million and net loss of $3.1 million have been excluded from the
consolidated results and have been reported as an adjustment to retained
earnings in the first quarter of fiscal 1998.
On July 15, 1999, the Company acquired Kyrel EMS Oyj, an electronics
manufacturing services provider with operations in Finland and France. The
acquisition was accounted for as a pooling-of-interests and the Company has
issued 3,643,610 Ordinary Shares in exchange for all the outstanding shares of
Kyrel. All financial statements presented have been retroactively restated to
include the financial results of Kyrel. Kyrel operated under a calendar year end
prior to merging with Flextronics, and accordingly, Kyrel's statements of
operations, shareholders' equity and cash flow for the years ended December 31,
1998 have been combined with the corresponding Flextronics consolidated
statements for the fiscal year ended March 31, 1999. In fiscal 2000, Kyrel's
fiscal year end will be changed to conform to Flextronics' fiscal year end.
Accordingly, Kyrel's operations for the three months ended March 31, 1999, which
include net sales of $101.8 million and net loss of $0.8 million have been
excluded from the consolidated results and will be reported as an adjustment to
retained earnings in the first quarter of fiscal 2000.
Separate results of operations for the periods presented are as follows for
the years ended March 31 (in thousands):
1997
----------
Net sales:
Previously reported........................ $ 490,585
Neutronics................................. 149,422
Kyrel...................................... 180,735
----------
As restated................................ $ 820,742
==========
Net income(loss):
Previously reported........................ $ 7,463
Neutronics................................. 4,157
Kyrel...................................... 2,578
----------
As restated................................ $ 14,198
==========
49
<PAGE>
1998 1999
---------- ----------
Net sales:
Previously reported (including Neutronics).. $1,113,071 $1,807,628
Kyrel....................................... 78,123 235,746
---------- ----------
As restated................................. $1,191,194 $2,043,374
========== ==========
Net income(loss):
Previously reported (including Neutronics).. $ 19,913 $ 51,530
Kyrel....................................... (1,662) 886
---------- ---------
As restated................................. $ 18,251 $ 52,416
========== ==========
Ericsson Business Networks AB
On March 27, 1997, the Company acquired certain manufacturing facilities in
Karlskrona, Sweden and related inventory, equipment and assets (the "Karlskrona
Facilities") from Ericsson Business Networks AB ("Ericsson") for $82.4 million
which was financed by the Credit Facility described in Note 4. The transaction
has been accounted for as a purchase and accordingly, the purchase price has
been allocated to the net assets acquired based on their estimated fair market
values at the date of acquisition. There was no material purchase price in
excess of the fair value of the net assets acquired. The results of operations
of the Karlskrona Facilities have been included in the consolidated results of
the Company since the date of acquisition and such results of these facilities
were immaterial for March 27, 1997 to March 31, 1997.
Fine Line Printed Circuit Design Inc.
On November 25, 1996, the Company acquired Fine Line Printed Circuit
Design, Inc., a circuit board layout and prototype operation company located in
San Jose, California. The Company issued 893,284 Ordinary Shares in exchange for
all of the outstanding capital stock of Fine Line. The merger was accounted
under the pooling-of-interests method of accounting; however, prior period
financial statements were not restated because the financial results of Fine
Line are not material to the consolidated financial statements.
12. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" during the fourth quarter of fiscal 1999.
SFAS No. 131 establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. Mr. Michael Marks, the Chairman and chief executive officer, is the
Company's chief decision maker. The Company operates and is managed internally
by four geographic business segments. The operating segments include Asia,
Americas, Western Europe and Central Europe. Each operating segment has a
regional president that reports to Mr. Michael Marks.
50
<PAGE>
Information about segments for the years ended March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
Asia ................................. $ 307,545 $ 303,993 $ 401,126
Americas ............................. 160,860 277,783 683,564
Western Europe ....................... 203,295 410,960 603,792
Central Europe ....................... 149,042 210,233 406,107
Intercompany eliminations ............ -- (11,775) (51,215)
----------- ----------- -----------
$ 820,742 $ 1,191,194 $ 2,043,374
=========== =========== ===========
Income(Loss) before Income Taxes:
Asia ................................. $ 25,974 $ 15,970 $ 25,416
Americas ............................. (3,973) (4,413) 19,296
Western Europe ....................... 1,239 7,269 12,885
Central Europe ....................... 4,598 7,723 12,833
Intercompany eliminations, corporate
allocations and non-recurring charges (10,465) (5,980) (10,382)
----------- ----------- -----------
$ 17,373 $ 20,569 $ 60,048
=========== =========== ===========
Long Lived Assets:
Asia ................................. $ 52,702 $ 76,011 $ 109,513
Americas ............................. 20,601 86,390 117,526
Western Europe ....................... 53,590 58,689 75,435
Central Europe ....................... 38,050 47,474 94,693
----------- ----------- -----------
$ 164,943 $ 268,564 $ 397,167
=========== =========== ===========
Depreciation and Amortization:
Asia ................................. $ 8,004 $ 12,690 $ 15,321
Americas ............................. 2,873 5,703 14,815
Western Europe ....................... 5,094 10,499 14,492
Central Europe ....................... 6,334 5,257 10,161
----------- ----------- -----------
$ 22,305 $ 34,149 $ 54,789
=========== =========== ===========
Capital Expenditure:
Asia ................................. $ 15,729 $ 34,549 $ 37,418
Americas ............................. 11,562 38,799 46,427
Western Europe ....................... 2,235 14,827 32,816
Central Europe ....................... 9,626 13,167 53,170
----------- ----------- -----------
$ 39,152 $ 101,342 $ 169,831
=========== =========== ===========
</TABLE>
For purposes of the preceding tables, "Asia" includes China, Malaysia, and
Singapore, "Americas" includes U.S, Mexico, and Brazil, "Western Europe"
includes Sweden, Finland, France, Scotland and United Kingdom and "Central
Europe" includes Austria and Hungary.
Geographic revenue transfers are based on selling prices to unaffiliated
companies, less discounts. Income before tax is net sales less operating
expenses, interest or other expenses, but prior to income taxes.
51
<PAGE>
The following table represents net sales and long lived assets attributable
to foreign countries exceeding 10% for fiscal years ended March 31:
1997 1998 1999
---- ---- ----
Net Sales:
China............................. 18% 17% 15%
United States..................... 20% 22% 24%
Sweden............................ -- 25% 16%
Finland........................... 22% 7% 8%
Hungary........................... 10% 12% 15%
All others........................ 30% 17% 22%
Long Lived Assets:
China............................. 23% 24% 25%
United States..................... 10% 22% 17%
Sweden............................ 19% 15% 10%
Hungary........................... 18% 13% 17%
All others........................ 30% 26% 31%
13. SUBSEQUENT EVENTS (UNAUDITED)
On May 31, 1999, Flextronics purchased the manufacturing facilities and
related assets of ABB Automation Products in Vasteras, Sweden for approximately
$24.5 million. This facility provides printed circuit board assemblies and other
electronic equipment. Flextronics has also offered employment to 575 ABB
personnel who were previously employed by ABB Automation Products. In connection
with the acquisition of certain fixed assets, the Company has also entered into
a manufacturing service agreement with ABB Automation Products.
On June 30, 1999, Flextronics purchased the manufacturing facilities and
related assets of Ericsson's Visby, Sweden operations for approximately $39.4
million. Ericsson's Visby facility manufactures mobile systems infrastructure,
primarily radio base stations. Flextronics also offered employment to 900
persons who had been employed by Ericsson at this facility. In connection with
the acquisition of assets, the Company has also entered into a manufacturing
service agreement with Ericsson.
On July 15, 1999 Flextronics acquired 100% of the outstanding ordinary
shares of Kyrel, a provider of electronics manufacturing services with two
facilities in Finland and one in Luneville, France, in exchange for 3,643,610
ordinary shares of Flextronics, of which 364,361 ordinary shares are to be
issued upon the resolution of contingencies. The acquisition of Kyrel has been
accounted for as a pooling-of-interests and, accordingly, the accompanying
financial statements have been restated to reflect the results of operations,
balance sheets, statement of shareholders' equity and cash flows of Kyrel for
all periods presented.
In October 1999, Flextronics completed a secondary offering of its Ordinary
Shares. A total of 13,800,000 shares were sold at a price of $33.84 per share
resulting in net proceeds to the Company of approximately $449.3 million.
In November 1999, Flextronics acquired Circuit Board Assemblers, Inc., EMC
International, Inc. and related real property in exchange for 559,098 shares of
Flextronics, of which 55,910 ordinary shares are to be issued upon the
resolution of contingencies. CBA provides electronics design and assembly
services, and EMC provides testing services, from their facilities in North
Carolina. The acquisition of CBA and EMC have been accounted for as a
pooling-of-
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<PAGE>
interests; however, prior period financial statements were not restated because
the financial results of CBA and EMC do not have a significant impact to the
Company's consolidated financial statements.
In November 1999, Flextronics announced the signing of a definitive merger
agreement for a tax-free, stock-for-stock merger with The DII Group, Inc. DII is
a leading provider of electronics manufacturing and design services, operating
through a global operations network in the Americas, Asia/Pacific and Europe.
The combination enables Flextronics to expand its printed circuit board
operations and design services, while providing additional geographic locations
and customer relationships. Based on Flextronics' closing price of $40.63 on
November 19, 1999, the transaction is valued at approximately $32.71 per share
of DII common stock, or more than $2.4 billion in the aggregate. Under the
agreement, DII stockholders will receive 1.61 Flextronics ordinary shares for
each share of DII Common Stock, resulting in current DII stockholders owning
approximately 34% of the combined company. The merger is intended to be
accounted for as a pooling of interests, and is subject to approval by
shareholders of both companies, regulatory approvals and other customary
conditions. Executives and directors of both companies have agreed to vote their
shares in favor of the proposed transaction. The companies anticipate that the
transaction will be completed in early April 2000.
The Company set a record date of December 8, 1999 for a two-for-one stock
split to be effected as a bonus issue (the Singapore equivalent of a stock
dividend). The distribution of 57,497,204 Ordinary Shares occurred on December
22, 1999. This stock dividend has been reflected in the Company's financial
statements for all periods presented unless otherwise noted. All share and per
share amounts have been retroactively restated to reflect the stock split.
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VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------------------------
BALANCE AT EFFECT CHARGED TO CHARGED BALANCE AT
BEGINNING OF OF COSTS AND TO OTHER DEDUCTIONS/ END OF
PERIOD ACQUISITIONS EXPENSES ACCOUNTS WRITE-OFFS PERIOD
------------ ------------ ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:
Period
Year ended March 31, 1997 ... 3,766 -- 3,258 -- (785) 6,239
Year ended March 31, 1998 ... 6,239 4,188 1,218 -- (1,950) 9,695
Year ended March 31, 1999 ... 9,695 223 (2,374) -- (2,117) 5,427
Provision for excess facilities:
Period
Year ended March 31, 1997 ... 1,254 -- 5,868 -- (1,814) 5,308
Year ended March 31, 1998 ... 5,308 -- 8,869 -- (8,732) 5,445
Year ended March 31, 1999 ... 5,445 -- 3,361 -- (6,283) 2,523
</TABLE>
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