-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SShmtA8Tye8JlP7+9p/86co9i4yKBcKJB6ayo8nygPMkz7kaTw5YQl+Y8X+a2sTW 7MdORpPK8NyFQKwDuDHD4g== 0000891554-99-001993.txt : 19991025 0000891554-99-001993.hdr.sgml : 19991025 ACCESSION NUMBER: 0000891554-99-001993 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990924 FILED AS OF DATE: 19991022 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEXTRONICS INTERNATIONAL LTD CENTRAL INDEX KEY: 0000866374 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23354 FILM NUMBER: 99732616 BUSINESS ADDRESS: STREET 1: BLK 514 CHAI CHEE LANE #04-13 STREET 2: BODEK INDUSTRIAL ESTATE REPUBLIC OF SING CITY: SINGAPORE 1646 STATE: U0 BUSINESS PHONE: 0654495255 FORMER COMPANY: FORMER CONFORMED NAME: FLEX HOLDINGS PTE LTD DATE OF NAME CHANGE: 19940201 10-Q 1 QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 24, 1999 OR {_} TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to _________ COMMISSION FILE NUMBER: 0-23354 FLEXTRONICS INTERNATIONAL LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) SINGAPORE NOT APPLICABLE (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ------------------------ 514 Chai Chee Lane #04-13 Bedok Industrial Estate SINGAPORE 469029 (65) 449-5255 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MICHAEL E. MARKS CHIEF EXECUTIVE OFFICER FLEXTRONICS INTERNATIONAL LTD. 514 CHAI CHEE LANE #04-13 BEDOK INDUSTRIAL ESTATE SINGAPORE 469029 (65) 449-5255 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes {X} No {_} At October 15, 1999, there were 50,316,600 Ordinary Shares, S$0.01 par value per share, outstanding. 1 FLEXTRONICS INTERNATIONAL LIMITED INDEX PART I. FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 24, 1999 and March 31, 1999 ................................................. 3 Condensed Consolidated Statements of Income - Three Months Ended September 24, 1999 and September 25, 1998 ....................... 4 Condensed Consolidated Statements of Income - Six Months Ended September 24,1999 and September 25, 1998 ...................... 5 Condensed Consolidated Statements of Cash Flow - Six Months Ended September 24, 1999 and September 25, 1998 ..................... 6 Notes to Condensed Consolidated Financial Statements ..................... 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................ 11-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............... 22 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders ..................... 23 Item 6. Exhibits and Reports on Form 8-K ......................................... 24 Signatures ............................................................. 25
2 ITEM 1. FINANCIAL STATEMENTS FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
Sept. 24, March 31, 1999 1999 ----------- ----------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents .............................. $ 96,582 $ 184,860 Accounts receivable, net ............................... 417,101 273,203 Inventories ............................................ 415,632 221,352 Deferred income taxes and other current assets ......... 89,682 66,109 ----------- ----------- Total current assets ........................... 1,018,997 745,524 Property and equipment, net .............................. 486,608 397,167 Other non-current assets ................................. 91,125 75,178 ----------- ----------- Total assets ................................... $ 1,596,730 $ 1,217,869 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank borrowings and current portion of long-term debt .. $ 168,405 $ 83,976 Capital lease obligations .............................. 14,800 11,475 Accounts payable and accrued liabilities ............... 508,874 292,757 Other current liabilities .............................. 123,819 105,718 ----------- ----------- Total current liabilities ...................... 815,898 493,926 ----------- ----------- Long-term debt, net of current portion ................... 183,475 188,808 Capital lease obligations, net of current portion ........ 47,095 31,187 Deferred income taxes .................................... 4,496 4,831 Other long-term liabilities .............................. 7,046 10,157 Minority interest ........................................ 4,359 4,022 ----------- ----------- Total long-term liabilities ................... 246,471 239,005 ----------- ----------- Shareholders' Equity: Ordinary shares ........................................ 312 310 Additional paid-in capital ............................. 432,491 426,230 Retained earnings ...................................... 119,643 82,245 Accumulated other comprehensive loss ................... (18,085) (23,847) ----------- ----------- Total shareholders' equity ..................... 534,361 484,938 ----------- ----------- Total liabilities and shareholders' equity ..... $ 1,596,730 $ 1,217,869 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
Three months ended Sept. 24, Sept. 25, 1999 1998 --------- --------- Net sales ........................................ $ 870,820 $ 470,889 Cost of sales .................................... 809,146 431,893 --------- --------- Gross margin ............................ 61,674 38,996 --------- --------- Operating expenses: Selling, general and administrative ............ 27,504 17,976 Goodwill and intangibles amortization .......... 1,460 890 --------- --------- Total operating expenses ................ 28,964 18,866 --------- --------- Income from operations .................. 32,710 20,130 Other income and expenses: Interest expense ............................... 8,146 5,581 Interest income ................................ (1,349) (596) Merger expenses ................................ 2,455 -- Other expense, net ............................. 519 376 --------- --------- Income before income taxes .............. 22,939 14,769 Provision for income taxes ....................... 3,170 1,726 --------- --------- Net income .............................. $ 19,769 $ 13,043 ========= ========= Earnings per share: Basic .......................................... $ 0.39 $ 0.30 Diluted ........................................ $ 0.36 $ 0.29 Shares used in computing per share amounts: Basic .......................................... 50,312 43,476 Diluted ........................................ 54,483 44,972
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Six months ended Sept. 24, Sept. 25, 1999 1998 ----------- ----------- Net sales ...................................... $ 1,482,090 $ 868,163 Cost of sales .................................. 1,370,892 795,188 ----------- ----------- Gross margin .......................... 111,198 72,975 ----------- ----------- Operating expenses: Selling, general and administrative .......... 50,953 32,959 Goodwill and intangibles amortization ........ 2,874 1,774 ----------- ----------- Total operating expenses .............. 53,827 34,733 ----------- ----------- Income from operations ................ 57,371 38,242 Other income and expenses: Interest expense ............................. 14,017 10,533 Interest income .............................. (3,286) (1,481) Merger expenses .............................. 2,455 -- Other expense, net ........................... 175 1,110 ----------- ----------- Income before income taxes ............ 44,010 28,080 Provision for income taxes ..................... 5,793 3,302 ----------- ----------- Net income ............................ $ 38,217 $ 24,778 =========== =========== Earnings per share: Basic ........................................ $ 0.76 $ 0.57 Diluted ...................................... $ 0.70 $ 0.55 Shares used in computing per share amounts: Basic ........................................ 50,215 43,352 Diluted ...................................... 54,353 45,160 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six months ended Sept. 24, Sept. 25, 1999 1998 --------- --------- Net cash used in operating activities ....................... $ (4,948) $ (2,376) --------- --------- Cash flows from investing activities: Purchases of property and equipment ....................... (107,617) (71,736) Proceeds from sale of property and equipment .............. 779 1,389 Net cash paid for acquisition of net assets ............... (72,343) -- Other investments ......................................... (7,515) (2,123) Payment of earnout and remaining purchase price related to the acquisition of Astron ................................ -- (24,000) --------- --------- Net cash used in investing activities ....................... (186,696) (96,470) --------- --------- Cash flows from financing activities: Bank borrowings and proceeds from long-term debt .......... 107,454 57,223 Repayment of bank borrowings and long-term debt ........... (20,091) (17,919) Repayment of capital lease obligations .................... (10,684) (5,236) Proceeds from mortgage of equipment ....................... 18,663 -- Proceeds from exercise of stock options and Employee Stock Purchase Plan ........................................... 6,263 3,856 --------- --------- Net cash provided by financing activities ................... 101,605 37,924 --------- --------- Effect of exchange rate changes on cash ..................... 1,761 (1,782) --------- --------- Net decrease in cash and cash equivalents ................... (88,278) (62,704) Cash and cash equivalents at beginning of period ............ 184,860 91,827 --------- --------- Cash and cash equivalents at end of period .................. $ 96,582 $ 29,123 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FLEXTRONICS INTERNATIONAL LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 24, 1999 (unaudited) Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the annual audited consolidated statements as of and for the year ended March 31, 1999 contained in the Company's 1999 annual report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month period ended September 24, 1999 are not necessarily indicative of the results that may be expected for the year ending March 31, 2000. On July 15, 1999, Flextronics acquired 100% of Kyrel EMS Oyj ("Kyrel"), a provider of electronics manufacturing services with two facilities in Finland and one in Luneville, France in exchange for 1,821,825 Ordinary Shares, of which 182,183 Ordinary Shares are to be issued upon resolution of certain contingencies. The acquisition was accounted for as a pooling-of-interests and, accordingly, the Company's condensed consolidated financial statements have been restated to reflect the merger as if it occurred at the beginning of the first period presented. Kyrel's fiscal year ends December 31. The condensed consolidated income statements combined Kyrel's results for the three and six months ended September 24, 1999 with Flextronics results for the three and six months ended September 24, 1999. The condensed consolidated income statements also combined Kyrel's results for the three and six months ended June 30, 1998 with Flextronics results for the three and six months ended September 25, 1998. The condensed consolidated balance sheets as of March 31, 1999 include Kyrel's balance sheets as of December 31, 1998. Kyrel's net loss of $818,000 for the three months ended March 31, 1999 has been recorded as an adjustment to retained earnings. A reconciliation of the previously reported results for the three and six months ended September 25, 1998 to the results in this form 10-Q is as follows (in thousands):
Three months ended Six months ended Sept. 25, 1998 Sept. 25, 1998 -------- -------- Net sales : As previously reported .............. $422,948 $799,027 Kyrel ............................... 47,941 69,136 -------- -------- As restated ......................... $470,889 $868,163 ======== ======== Net income : As previously reported .............. $ 12,863 $ 24,520 Kyrel ............................... 180 258 -------- -------- As restated ......................... $ 13,043 $ 24,778 ======== ========
Note B - Inventories Inventories consist of the following (in thousands): Sept. 24, March 31, 1999 1999 -------- -------- Raw materials .................. $328,163 $173,739 Work-in-process ................ 53,040 25,740 Finished goods ................. 34,429 21,873 -------- -------- $415,632 $221,352 ======== ======== 7 Note C - EARNINGS PER SHARE Reconciliation between basic and diluted earnings per share is as follows for the three and six month periods ended September 24, 1999 and September 25, 1998 (in thousands, except per share data):
Three months ended Six months ended Sept. 24, Sept. 25, Sept. 24, Sept. 25 ------- ------- ------- ------- 1999 1998 1999 1998 ------- ------- ------- ------- Shares issued and outstanding(1) ....................... 50,312 43,476 50,215 43,352 ------- ------- ------- ------- Weighted average ordinary shares - basic ......................................... 50,312 43,476 50,215 43,352 Ordinary share equivalents: Stock options(2) ..................................... 4,171 1,496 4,138 1,808 ------- ------- ------- ------- Weighted average ordinary shares and equivalents - diluted ............................ 54,483 44,972 54,353 45,160 ======= ======= ======= ======= Net income ............................................. $19,769 $13,043 $38,217 $24,778 ======= ======= ======= ======= Basic earnings per share ............................... $ 0.39 $ 0.30 $ 0.76 $ 0.57 ======= ======= ======= ======= Diluted earnings per share ............................. $ 0.36 $ 0.29 $ 0.70 $ 0.55 ======= ======= ======= =======
(1) Ordinary Shares issued and outstanding based on the weighted average method. (2) Stock options of the Company calculated based on the treasury stock method using average market price for the period, if dilutive. Options to purchase 23,748 shares and 884,193 shares outstanding during the three months ended September 24, 1999 and September 25, 1998, respectively, and options to purchase 22,902 shares and 171,822 shares outstanding during the six months ended September 24, 1999 and September 25, 1998, respectively, were excluded from the computation of diluted earnings per share because the options' exercise price were greater than the average market price of the Company's Ordinary Shares during those periods. Note D - COMPREHENSIVE INCOME (in thousands)
Three months ended Six months ended Sept. 24, Sept. 25, Sept. 24, Sept. 25 -------- -------- -------- -------- 1999 1998 1999 1998 -------- -------- -------- -------- Net income .................................................... $ 19,769 $ 13,043 $ 38,217 $ 24,778 Other comprehensive gain(loss), net of tax: Foreign currency translation adjustments .................... 1,449 2,415 (3,339) 3,118 Unrealized gain on available-for-sale securities ............................................... 8,281 -- 8,344 -- -------- -------- -------- -------- Comprehensive income .......................................... $ 29,499 $ 15,458 $ 43,222 $ 27,896 ======== ======== ======== ========
Note E - NEW ACCOUNTING STANDARDS 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 the first quarter of fiscal 2001 and anticipates that SFAS No. 133 will not have a material impact on its consolidated financial statements. 8 Note F - SEGMENT REPORTING The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131") 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, the Americas, Western Europe and Central Europe. Each operating segment has a regional president who reports to Mr. Michael Marks. Information about segments were as follows (in thousands):
Three months ended Six months ended Sept. 24, Sept. 25, Sept. 24, Sept. 25, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net Sales Asia ........................................... $ 143,001 $ 99,387 $ 255,411 $ 178,555 Americas ....................................... 322,634 153,272 530,709 321,558 Western Europe ................................. 247,938 138,877 418,731 225,277 Central Europe ................................. 170,774 92,842 299,481 166,350 Intercompany eliminations ...................... (13,527) (13,489) (22,242) (23,577) ----------- ----------- ----------- ----------- $ 870,820 $ 470,889 $ 1,482,090 $ 868,163 =========== =========== =========== =========== Income (Loss) Before Income Tax Asia ........................................... $ 7,810 $ 4,577 $ 14,585 $ 10,276 Americas ....................................... 4,600 5,547 10,258 12,455 Western Europe ................................. 6,446 4,627 8,852 4,942 Central Europe ................................. 4,403 3,098 7,563 5,322 Intercompany eliminations ...................... (320) (3,080) 2,752 (4,915) ----------- ----------- ----------- ----------- $ 22,939 $ 14,769 $ 44,010 $ 28,080 =========== =========== =========== ===========
9 As of As of Sept. 24, March 31, 1999 1999 -------- -------- Long-Lived Assets Asia ..................................... $119,287 $109,513 Americas ................................. 143,183 117,526 Western Europe ........................... 91,361 75,435 Central Europe ........................... 132,777 94,693 -------- -------- $486,608 $397,167 ======== ======== For purposes of the preceding tables, "Asia" includes China, Malaysia, and Singapore; "Americas" includes the U.S., Mexico, and Brazil; "Western Europe" includes Sweden, Finland, France, and the United Kingdom; and "Central Europe" includes Austria, Hungary and Scotland. 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. Note G - SUBSEQUENT EVENTS On October 13, 1999, the Company announced that it is commencing a public offering of 5,000,000 Ordinary Shares pursuant to a currently effective shelf registration statement. The Company intends to use the net proceeds from the offering to fund the further expansion of its business, including additional working capital and capital expenditures, and for other general corporate purposes. The Company may use a portion of the net proceeds for strategic acquisitions or investments. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expects," "anticipates," "believes," "intends," "plans" and similar expressions identify forward-looking statements, which speak only as of the date hereof. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to certain risks and uncertainties, including, without limitation, those discussed in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors Affecting Operating Results." Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. OVERVIEW Flextronics is a leading provider of advanced electronics manufacturing services to original equipment manufacturers ("OEMs") primarily in the telecommunications and networking, consumer electronics and computer industries. The Company provides a wide range of integrated services, from initial product design to volume production and fulfillment. In addition, the Company provides advanced engineering services, including product design, PCB layout, quick-turn prototyping and test development. Throughout the production process, the Company offers logistics services, such as materials procurement, inventory management, and packaging and distribution. In recent years, the Company has substantially expanded its manufacturing capacity, technological capabilities and service offerings, through both acquisitions and internal growth. On July 15, 1999, Flextronics acquired 100% of Kyrel EMS Oyj ("Kyrel"), a provider of electronics manufacturing services with two facilities in Finland and one in Luneville, France in exchange for 1,821,825 Ordinary Shares, of which 182,182 Ordinary Shares are to be issued upon the resolution of contingencies. The acquisition has been accounted for as a pooling-of-interests and, accordingly, the Company's condensed consolidated financial statements have been restated to reflect the combined results as if it occurred at the beginning of the first period 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 approximately 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 and other electronic equipment. Flextronics has also offered employment to 575 ABB personnel who had been previously employed by ABB Automation Products. In connection with the acquisition of the manufacturing facilities, the Company has also entered into a manufacturing service agreement with ABB Automation Products. In addition to acquisitions, the Company has substantially increased overall capacity by expanding operations in its industrial parks in China, Hungary, and Mexico. As a result of these acquisitions and expansions, the Company's overall capacity has increased from approximately 3.2 million square feet since the beginning of fiscal 1998 to over 4.7 million square feet of capacity, providing an extensive network of manufacturing facilities in the world's major electronics markets - Asia, the Americas and Europe. The Company is continuing to expand operations and capacity at each of the industrial parks and is developing an industrial park in Brazil. See "-Certain Factors Affecting Operating Results -- If we do not manage effectively the expansion of our operations, our business may be harmed." 11 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. This table reflects the combined results of Flextronics and Kyrel.
Three months ended Six months ended Sept. 24, Sept. 25, Sept. 24, Sept. 25 --------- -------- --------- --------- 1999 1998 1999 1998 ------ ------ ------ ------ Net sales .................................................... 100.0 100.0 100.0 100.0 Cost of sales ................................................ 92.9 91.7 92.5 91.6 ------ ------ ------ ------ Gross margin ............................................... 7.1 8.3 7.5 8.4 Selling, general and administrative .......................... 3.2 3.8 3.4 3.8 Goodwill and intangibles amortization ........................ 0.2 0.2 0.2 0.2 ------ ------ ------ ------ Income from operations ....................................... 3.7 4.3 3.9 4.4 Other expenses, net .......................................... 1.1 1.1 0.9 1.2 ------ ------ ------ ------ Income before income taxes ................................. 2.6 3.2 3.0 3.2 Provision for income taxes ................................... 0.3 0.4 0.4 0.4 ------ ------ ------ ------ Net income ................................................. 2.3 2.8 2.6 2.8 ====== ====== ====== ======
Net Sales Substantially all of the Company's net sales have been derived from the manufacture and assembly of products for OEM customers. Net sales for the second quarter of fiscal 2000 increased 85% to $870.8 million from $470.9 million for the second quarter of fiscal 1999. Net sales for the six months ended September 24, 1999 increased 71% to $1.5 billion from $868.2 million for the same period of fiscal 1999. The increase in net sales was primarily due to increased sales to certain existing customers and, to a lesser extent, sales to new customers. The Company's five largest customers in the first six months of fiscal 2000 accounted for approximately 54% of consolidated net sales with no single customer exceeding 20% of consolidated net sales. During the second quarter of fiscal 2000, the Company's five largest customers accounted for approximately 57% of consolidated net sales, with no single customer exceeding 20% of consolidated net sales. 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 are dependent 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." Gross Profit Gross profit varies from period to period and is affected by, among other things, product mix, component costs, customer's product life cycles, unit volumes, expansion and consolidation of manufacturing facilities, pricing, competition and new product introductions. Gross profit margin for the second quarter of fiscal 2000 decreased to 7.1% from 8.3% for the second quarter of fiscal 1999. Gross profit margin decreased to 7.5% for the first six months of fiscal 2000 from 8.4% for the first six months of fiscal 1999. Gross profit was adversely affected by several factors, including costs associated with expanding facilities, manufacturing overhead costs associated with the startup of new customers and projects, changes in product mix, as well as other factors. We believe our gross margin will continue to be affected by start-up costs associated with new programs, expansion of our facilities and other factors. See "-Certain Factors Affecting Operating Results - If we do not manage effectively the expansion of our operations, our business may be harmed." 12 Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for the second quarter of fiscal 2000 increased to $27.5 million from $18.0 million in the second quarter of fiscal 1999 but decreased as a percentage of net sales to 3.2% for the second quarter of fiscal 2000 from 3.8% for the second quarter of fiscal 1999. SG&A increased to $51.0 million in the first six months of fiscal 2000 from $33.0 million in the first six months of fiscal 1999. The dollar increase in SG&A was mainly due to SG&A expenses from increased expansion of operations in Brazil and Hungary, increased staffing and related administrative expenses, and increased sales and marketing expenses. The Company anticipates its SG&A expenses will continue to increase in absolute terms in the future. However, to the extent that net sales continue to grow faster than SG&A expenses, SG&A expenses will decline as a percentage of net sales. Goodwill and Intangibles 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 asset amortization for the second quarter of fiscal 2000 increased to $1.5 million from $890,000 for the same period of fiscal 1999. Goodwill and intangible assets amortization was $2.9 million and $1.8 million for the first six months of fiscal 2000 and fiscal 1999, respectively. The increase in goodwill and intangible assets amortization in the second quarter and first six months of fiscal 2000 was primarily due to the goodwill and intangible assets amortization associated with acquisitions of Advanced Component Labs HK Ltd. ("ACL") in Asia and the increase in the Company's ownership interest in FICO Investment Holding Ltd ("FICO"). Interest Expense, Net Interest expense, net was $6.8 million for the second quarter of fiscal 2000 compared to $5.0 million for the second quarter of fiscal 1999. Interest expense, net increased to $10.7 million for the first six months of fiscal 2000 from $9.1 million for the first six months of fiscal 1999. The increase in interest expense, net for the three and first six months of fiscal 2000 was primarily attributable to a $1.0 million interest expense charge relating to the write off of the remaining bank arrangement fees associated with the termination of the Bank of Boston credit facilities during the quarter, increase in our factoring costs of accounts receivable in Sweden after assuming Ericsson's and ABB's facilities, offset by the increase in interest income from the Company's investment in money market funds and corporate debt securities. As discussed above, included in net interest expense of $6.8 million was the accelerated amortization of approximately $1.0 million in bank arrangement fees associated with the termination of the Bank of Boston credit facilities. The Bank of Boston credit facilities were secured facilities that contained a number of convenants that restrict the operations of the Company. During the second quarter of fiscal 2000, the Company decided to replace the Bank of Boston credit facilities with an unsecured credit facility from another bank that is expected to contain fewer restrictions on the Company's operations. Merger expenses In the three months ended September 24,1999, the Company incurred $2.5 million of merger expenses associated with the pooling-of-interest merger with Kyrel. The merger expenses included a transfer tax of $1.7 million and legal and accounting fees of approximately $0.8 million. Other expenses, net Other expenses, net was a net expense of $519,000 for the second quarter of fiscal 2000 compared to a net expense of $376,000 for the second quarter fiscal 1999. The net expense of $519,000 primarily consists of loss on disposal of fixed assets and minority interests from FICO and the Company's Austrian subsidiary, partially offset by compensation received in settlement of a claim. Other expenses, net was a net expense of $175,000 for the first six months of fiscal 2000 compared to a net expense of $1.1 million for the first six months of fiscal 1999. The net expense of $1.1 million for the first six months of fiscal 1999 was primarily due to a foreign exchange loss, partially offset by income from the previous associated company, FICO. In March 1999, the Company acquired an additional 50% interest in FICO and, accordingly, the Company has consolidated the balance sheets and the results of operations of FICO from March 1999 onward. Provision for Income Taxes The Company's consolidated effective tax rates were 13.8% and 13.2% for second quarter and first six months of fiscal 2000, respectively. 13 The Company is structured as a holding company, conducting its operations through manufacturing and marketing subsidiaries in Austria, Brazil, China, Finland, France, Hungary, Italy, Malaysia, Mauritius, Mexico, 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 income taxes than would otherwise be the case under ordinary tax rates. See "- Certain Factors Affecting Operating Results - We are subject to Risk of Increased Taxes." Liquidity and Capital Resources The Company has funded its operations from the proceeds of public offerings of equity and debt securities, cash and cash equivalents generated from operations, bank debt and lease financing of capital equipment. As of September 24, 1999, the Company had cash and cash equivalents balances totaling $96.6 million, total bank and other debts totaling $413.8 million and $65.0 million available for future borrowing under its credit facilities subject to compliance with certain financial covenants. Cash used by operating activities was $4.9 million for the first six months of fiscal 2000. Cash used in operating activities was $2.4 million for the first six months of fiscal 1999. Cash provided by operating activities increased primarily due to the increase in accounts receivable and inventories due to increased revenues. Cash used in investing activities was $186.6 million and $96.5 million for the first six months of fiscal 2000 and fiscal 1999, respectively. Cash used in investing activities for the first six months of fiscal 2000 was primarily related to (i)capital expenditures of $107.6 million to purchase equipment and expanded facilities and (ii)$72.3 million related to the acquisition of manufacturing facilities and related assets from Ericsson and ABB in Sweden. Cash used in investing activities for the first six months of fiscal 1999 consisted primarily of capital expenditures of $71.7 million to purchase equipment. Net cash provided by financing activities was $101.6 million and $37.9 million for the first six months of fiscal 2000 and fiscal 1999, respectively. Cash provided by financing activities for the first six months of fiscal 2000 and fiscal 1999 both primarily resulted from net proceeds from bank borrowings, partially offset by repayments of capital leases and repayment of bank borrowings. In addition, the first six months of fiscal 2000, proceeds from the mortgage of equipment in Austria amounted to $18.7 million. The Company has currently incurred in excess of $18.0 million in total hardware, software, and system related costs in connection with remediation of Year 2000 issues. These costs are primarily costs associated with the implementation of the Company's new information system and have primarily been capitalized as fixed assets. The Company anticipates expending an additional $1.0 million before January 1, 2000 to complete the implementation of the new information system and address any Year 2000 compliance issues. See "- Year 2000 Compliance." The Company anticipates that its working capital requirements will increase in order to support anticipated increases in its business. In addition, the Company anticipates incurring significant capital expenditures in order to support the anticipated expansions of its facilities. Future liquidity needs will depend on fluctuations in inventory levels, the timing of expenditures by the Company on new equipment, the extent to which the Company utilizes leases to finance new facilities and equipment, levels of shipments by the Company and changes in volumes of customer orders. The Company believes that its existing cash balances, together with anticipated cash flows from operations and amounts available under its credit facilities, will be sufficient to fund its operations at its current level of business. In addition, the Company is currently engaged in a public offering of 5,000,000 Ordinary Shares. To the extent the Company finances its working capital and capital expenditures through increased borrowings, its interest expense may increase. From time to time, the Company may consider alternative financing opportunities, including certain off-balance sheet transactions such as sale leasebacks transactions or receivable financings. See "- Certain Factors Affecting Operating Results -- If we do not manage effectively the expansion of our operations, our business may be harmed." 14 YEAR 2000 COMPLIANCE The Company is aware of the issues associated with programming code in existing computer systems as the Year 2000 approaches. 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 unable to distinguish the correct date. Such an uncorrected condition could significantly interfere with the conduct of the Company's business, could result in disruption of its operations, and could subject it to potentially significant legal liabilities. The Company has been addressing the Year 2000 issue with a project plan divided into major initiatives: enterprise wide applications, manufacturing and related equipment and facilities and infrastructure. The Company has established geographic regional teams to follow established policies and guidelines on the remediation of the Year 2000 issue. The Company created an internal intranet database to record the status and remediation activity on all internal equipment. The Company is primarily addressing the Year 2000 issue concerning enterprise wide applications by replacing its 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. The Company currently has implemented this new information system in a majority of its facilities in Asia, Central Europe, Western Europe, and the Americas. The Company is currently evaluating the implementation of this new management information system for its recent acquisitions in Finland, France and Sweden. However, there can be no assurance that the new system will be Year 2000 compliant. The new system will significantly affect many aspects of our business, including our manufacturing, sales and marketing and accounting functions. In addition, the successful implementation of this system will be important to our future growth. The Year 2000 issue also could affect the Company's infrastructure and production lines. The possibility also exists that the Company could inadvertently fail to correct a Year 2000 problem with a mechanical equipment micro-controller. The Company believes the impact of such an occurrence would be minor, as substantial Year 2000 compliant equipment additions and upgrades have occurred in recent years. The Company has been in contact with the manufacturers of mechanical equipment to fully validate the readiness of its microprocessors. Additional testing is planned during the remainder of fiscal 2000 to reasonably ensure their Year 2000 readiness. The Company has sent a Year 2000 Readiness Questionnaire to most of its critical and significant suppliers. These critical suppliers have been classified into risk categories and the Company is in the process of identifying and devoting resources to verify Year 2000 compliance of these suppliers. The Company may need to find alternative suppliers based on the results of the questionnaires. There can be no assurance that the Company will be able to find suitable alternative suppliers and contract with them on reasonable prices and terms, and such inability could have a material and adverse impact on the Company's business and results of operations. The Company is currently working with many of its major customers to ensure year 2000 compliance and has been audited by many of its customers. The Company currently works with many of its major customers to formulate contingency plans. These contingency plans include the movement of manufacturing production, identification of alternative suppliers and logistics companies. The Company intends to review its contracts with customers and suppliers with respect to responsibility for Year 2000 issues and to seek to address such issues in future agreements with customers and suppliers. 15 The Company has currently incurred in excess of approximately $18.0 million in total hardware, software, and system related costs in connection with remediation of Year 2000 issues. These costs are primarily costs associated with the implementation of the Company's new information system and have primarily been capitalized as fixed assets. The Company anticipates expending an additional $1.0 before January 1, 2000 to complete the implementation of the new information system and address any Year 2000 compliance issues. There can be no assurances that the cost estimates associated with the Company's Year 2000 issues will prove to be accurate or that the actual costs will not have a material adverse effect on the Company's results of operations and financial condition. The Company's operations utilize electronic commerce systems and electronic data interchanges with suppliers and customers to implement a variety of supply chain management programs. While the Company is actively seeking assurances of Year 2000 compliance from 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, the Company would be harmed if Year 2000 compliance issues resulted in serious disruptions in the operations of our customers and suppliers. The Company has 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, the Company's ability to conduct operations could be seriously impaired. The Year 2000 issue also could affect the Company's infrastructure and production lines. 16 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: we may not be able to attract and retain the management personnel and skilled employees necessary to support expanded operations; we may not efficiently and effectively integrate new operations, expand existing ones and manage geographically dispersed operations; we may incur cost overruns; 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 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: diversion of management's attention; the need to integrate acquired operations; potential loss of key employees and customers of the acquired companies; lack of experience operating in the geographic market of the acquired business; and 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. 17 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. No assurance can be given 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: the timing of customer orders; the volume of these orders relative to our capacity; market acceptance of customers' new products; changes in demand for customers' products and product obsolescence; the timing of our expenditures in anticipation of future orders; our effectiveness in managing manufacturing processes; changes in the cost and availability of labor and components; changes in our product mix; changes in economic conditions; local factors and events that may affect our production volume, such as local holidays; and 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. 18 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 are dependent 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: the inability of our customers to adapt to rapidly changing technology and evolving industry standards, which results in short product life cycles; 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 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. 19 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 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: fluctuations in the value of currencies; changes in labor conditions; longer payment cycles; greater difficulty in collecting accounts receivable; burdens and costs of compliance with a variety of foreign laws; political and economic instability; increases in duties and taxation; imposition of restrictions on currency conversion or the transfer of funds; limitations on imports or exports; expropriation of private enterprises; and 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. 20 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 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 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. 21 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. 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 have 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes during the three and six months ended September 24, 1999 to the Company's exposure to market risk for changes in interest rates and foreign currency exchange rates. 22 PART II - OTHER INFORMATION Item 1 through 3. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual General Meeting of shareholders on August 27, 1999, at which the following matters were acted upon : 1a) Re-election of Mr. Michael E. Marks to the board of directors. For : 45,827,975 Against : 191,690 1b) Re-election of Mr. Tsui Sung Lam to the board of directors. For : 45,827,742 Against : 191,923 1c) Re-election of Mr. Chuen Fah Alain Ahkong to the board of directors. For : 45,261,233 Against : 758,432 2) Adoption of the Directors' report, auditors' report and For : 46,005,005 audited accounts for the fiscal year ended March 31, 1999. Against : 705 Abstain : 13,955 3) Appointment of Arthur Andersen as the Company's independent For : 45,989,508 auditors for the fiscal year ending March 31, 2000 and at a Against : 16,548 remuneration to be determined by the Board of Directors. Abstain : 13,609 4) Approval of the increase in the Company's authorized share capital For : 40,749,072 from 100,000,000 ordinary shares to 250,000,000 ordinary shares. Against : 1,178,713 Abstain : 36,549 5) Approval of an amendment to the Company's 1993 Share Option Plan For : 22,298,445 relating to the increase in the maximum number of shares Against : 19,123,199 authorized for issuance to 8,200,000 ordinary shares and Abstain : 674,015 approval of certain amendments to the 1993 Share Option Plan. 6) Approval of an amendment to the Company's 1997 Employee's Share For : 41,820,361 Purchase Plan relating to the increase in the maximum Against : 236,401 number of shares authorized for issuance to 400,000 ordinary Abstain : 38,897 shares. 7) Approval of grant to the Board of Directors of authority to allot For : 33,252,492 and issue or grant options in respect of ordinary shares. Against : 12,596,912 Abstain : 38,936 8) Approval of grant to the Board of Directors of authority to allot For : 45,578,416 and issue bonus shares. Against : 272,528 Abstain : 37,396 9) Approval of amendments to the Company's Articles of Association. For : 45,819,449 Against : 21,146 Abstain : 47,745 10) Approval of the share purchase mandate. For : 45,826,970 Against : 16,261 Abstain : 45,109
23 Item 5. Not applicable. Item 6. Exhibits and reports on Form 8-K (a) Exhibits 3.01 Articles of Association* 27.01 Financial Data Schedule * To be filed by amendment (a) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 24, 1999. 24 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 thereunto duly authorized. FLEXTRONICS INTERNATIONAL LTD. (Registrant) Date : October 22, 1999 /s/ MICHAEL E.MARKS ---------------------------- Michael E. Marks Chief Executive Officer Date : October 22, 1999 /s/ ROBERT R.B. DYKES ---------------------------- Robert R.B. Dykes President, Systems Group and Chief Financial Officer (principal financial and accounting officer) 25 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF SEPTEMBER 24, 1999 (UNAUDITED) AND THE STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED SEPTEMBER 24, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS. 6-MOS MAR-31-2000 APR-01-1999 SEP-24-1999 96,582 0 422,096 4,995 415,632 1,018,997 649,145 162,537 1,596,730 815,898 0 0 0 312 534,049 1,596,730 1,482,090 1,482,090 1,370,892 1,370,892 2,630 0 10,731 44,010 5,793 38,217 0 0 0 38,217 0.76 0.70
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