-----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, UOqSRyKqNo9lRFQnMKCSy4xXIWfpgc8F6kWzNKNptq6QiqfmBx66/EShKbOpoxtt VaJ9wZsiMJbDHIHPnvpzRA== 0000891618-97-003969.txt : 19971001 0000891618-97-003969.hdr.sgml : 19971001 ACCESSION NUMBER: 0000891618-97-003969 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970930 SROS: NASD 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-K405/A SEC ACT: SEC FILE NUMBER: 000-23354 FILM NUMBER: 97688286 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-K405/A 1 AMENDMENT NO. 2 TO FORM 10-K405 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED MARCH 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM --------------- TO --------------- COMMISSION FILE NUMBER: 0-23354 FLEXTRONICS INTERNATIONAL LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) SINGAPORE NOT APPLICABLE (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 514 CHAI CHEE LANE #04-13, 469029 BEDOK INDUSTRIAL ESTATE, SINGAPORE (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(65) 449-5255 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: ORDINARY SHARES, S$0.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 1997 was approximately $371 million. As of June 30, 1997, registrant had outstanding 13,752,293 Ordinary Shares. ================================================================================ 2 THE COMPANY HAS REVISED ITS ACCOUNTING FOR ITS FEBRUARY 1996 ACQUISITION OF ASTRON GROUP LIMITED, AND IS ENGAGED IN ONGOING DISCUSSIONS WITH THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION CONCERNING THIS REVISED ACCOUNTING. BECAUSE THESE DISCUSSIONS ARE CONTINUING, THE COMPANY'S ACCOUNTING FOR THIS ACQUISITION, AND RELATED DISCLOSURES, ARE SUBJECT TO MODIFICATION. Except for historical information contained herein, the matters discussed in this Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. In this Report, the words "expects," "anticipates," "believes," "intends" and similar expressions identify forward-looking statements, which speak only as of the date hereof. These forward-looking statements are subject to certain risks and uncertainties, including, without limitation, those discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results," that could cause results to differ materially from historical results or those anticipated. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the Securities and Exchange Commission. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission, including its Form 10-Qs and 8-Ks, that attempt to advise interested parties of the risks and factors that may affect the Company's business. PART I ITEM 1. BUSINESS. GENERAL Flextronics International Ltd. ("Flextronics" or the "Company") is a provider of advanced contract manufacturing services to original equipment manufacturers ("OEMs") in the communications, computer, consumer electronics and medical device industries. Flextronics offers a full range of services including product design, printed circuit board ("PCB") fabrication and assembly, materials procurement, inventory management, final system assembly and testing, packaging and distribution. The components, subassemblies and finished products manufactured by Flextronics incorporate advanced interconnect, miniaturization and packaging technologies, such as surface mount ("SMT"), chip-on-board ("COB"), ball grid array ("BGA") and miniaturized gold-plated PCB technology. The Company's strategy is to use its global manufacturing capabilities and advanced technological expertise to provide its customers with a complete manufacturing solution, highly responsive and flexible service, accelerated time to market and reduced production costs. The Company targets leading OEMs, in growing vertical markets, with which it believes it can establish long-term relationships, and serves its customers on a global basis from its strategically located facilities in North America, East Asia and Northern Europe. The Company's customers include Advanced Fibre Communications, Ascend Communications, Braun/ThermoScan, Cisco Systems, Diebold, Ericsson, Harris DTS, Lifescan (a Johnson & Johnson company), Microsoft, Philips and U.S. Robotics. On March 27, 1997, the Company acquired from Ericsson Business Networks AB ("Ericsson") two manufacturing facilities (the "Karlskrona Facilities") located in Karlskrona, Sweden and related inventory, equipment and other assets for approximately $82.4 million in cash. The Karlskrona Facilities include a 220,000 square foot facility and a 110,000 square foot facility, each of which is ISO 9002 certified. The Company is currently utilizing the Karlskrona Facilities to assemble and test PCBs, network switches, cordless base stations and other components for business communications systems sold by Ericsson pursuant to a multi-year purchase agreement (the "Purchase Agreement"). The Company intends to also use the Karlskrona Facilities to offer advanced contract manufacturing services to other European OEMs in the telecommunications and other industries, which the Company believes are beginning to outsource the manufacture of significant product lines. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results -- Risks of Karlskrona Acquisition." 2 3 Since 1994, the Company has substantially expanded its manufacturing capacity, technological capabilities and service offerings, both through acquisitions and internal growth. In fiscal 1994, the Company added U.S. manufacturing capabilities by acquiring Relevant Industries, Inc. ("Relevant"), a final assembly contract manufacturer located in San Jose, California. In fiscal 1995, the Company acquired nCHIP, Inc. ("nCHIP"), a designer and manufacturer of multichip modules ("MCMs"); added Northern European manufacturing capabilities through the acquisition of Assembly & Automation (Electronics) Ltd. ("A&A"), a contract manufacturer located in the United Kingdom; and opened new facilities in China and Texas. In fiscal 1996, the Company obtained miniature gold-finished PCB fabrication capabilities and expanded its presence in China by acquiring Astron Group Ltd. ("Astron"). In fiscal 1997, the Company expanded its advanced PCB design capabilities by acquiring Fine Line Printed Circuit Design, Inc. ("Fine Line"); expanded its presence in China by investing in FICO Investment Holding Limited ("FICO"), a producer of injection molded plastics for Asian electronics companies; opened an additional manufacturing facility in San Jose, California; closed its plant in Texas; and downsized manufacturing operations in Singapore. The Company has recently substantially expanded its manufacturing operations by expanding its integrated campus in Doumen, China, constructing a new manufacturing campus in Guadalajara, Mexico and adding facilities in San Jose, California. INDUSTRY OVERVIEW Many OEMs in the electronics industry are increasingly utilizing contract manufacturing services in their business and manufacturing strategies, and are seeking to outsource a broad range of manufacturing and related engineering services. Outsourcing allows OEMs to take advantage of the manufacturing expertise and capital investments of contract manufacturers, thereby enabling OEMs to concentrate on their core competencies. According to an independent industry study, these trends and overall growth in OEMs' markets have resulted in a compound annual growth rate in the electronics contract manufacturing industry of over 30.0% from 1992 through 1996, to approximately $60 billion. According to this study, the industry is expected to grow to approximately $110 billion by 1999. OEMs utilize contract manufacturers to: Reduce Production Costs. The competitive environment for OEMs requires that they achieve a low-cost manufacturing solution, and that they quickly reduce production costs for new products. Due to their established manufacturing expertise and infrastructure, contract manufacturers can frequently provide OEMs with higher levels of responsiveness, increased flexibility and reduced overall production costs than in-house manufacturing operations. The production scale, infrastructure, purchasing volume and expertise of leading contract manufacturers can further enable OEMs to reduce costs earlier in the product life cycle. Accelerate Time to Market. Rapid technological advances and shorter product life cycles require OEMs to reduce the time required to bring a product to market in order to remain competitive. By providing engineering services, established infrastructure and advanced manufacturing expertise, contract manufacturers can help OEMs shorten their product introduction cycles. Access Advanced Manufacturing and Design Capabilities. As electronic products have become smaller and more technologically advanced, manufacturing processes have become more automated and complex, making it increasingly difficult for OEMs to maintain the design and manufacturing expertise necessary to remain competitive. Contract manufacturers enable OEMs to gain access to advanced manufacturing facilities, packaging technologies and design expertise. Focus Resources. Because the electronics industry is experiencing increased competition and technological change, many OEMs are focusing their resources on activities and technologies where they add the greatest value. Contract manufacturers that offer comprehensive services allow OEMs to focus on their core competencies. Reduce Investment. As electronic products have become more technologically advanced, internal manufacturing has required significantly increased investment for working capital, capital equipment, labor, systems and infrastructure. Contract manufacturers enable OEMs to gain access to advanced, high 3 4 volume manufacturing capabilities without making the capital investments required for internal production. Improve Inventory Management and Purchasing Power. OEMs are faced with increasing challenges in planning, procuring and managing their inventories efficiently due to frequent design changes, short product life cycles, large investments in electronic components, component price fluctuations and the need to achieve economies of scale in materials procurement. Contract manufacturers' inventory management expertise and volume procurement capabilities can reduce OEM production and inventory costs, helping them respond to competitive pressures and increase their return on assets. Access Worldwide Manufacturing Capabilities. OEMs are increasing their international activities in an effort to lower costs and access foreign markets. Contract manufacturers with worldwide capabilities are able to offer such OEMs a variety of options on manufacturing locations to better address their objectives regarding costs, shipment location, frequency of interaction with manufacturing specialists and local content requirements of end-market countries. In addition, OEMs in Europe and other international markets are increasingly recognizing the benefits of outsourcing. STRATEGY The Company's objective is to enhance its position as a provider of advanced contract manufacturing and design services to OEMs worldwide. The Company's strategy to meet this objective includes the following key elements: Leverage Global Presence. The Company has established a manufacturing presence in the world's major electronics markets -- Asia, North America and Europe -- in order to serve the increasing outsourcing needs of regional OEMs and to provide the global, large scale capabilities required by larger OEMs. The Company has recently substantially increased its overall capacity by acquiring the Karlskrona Facilities in Sweden, and is continuing to expand by developing manufacturing campuses in China and Mexico and expanding its operations in San Jose, California. By increasing the scale and the scope of the services offered in each site, the Company believes that it can better address the needs of leading OEMs that are increasingly seeking to outsource high volume production of advanced products. Provide a Complete Manufacturing Solution. The Company believes that OEMs are increasingly requiring a wider range of advanced services from contract manufacturers. Building on its integrated engineering and manufacturing capabilities, the Company provides its customers with services ranging from initial product design and development and prototype production to final product assembly and distribution to OEMs' customers. The Company believes that this provides greater control over quality, delivery and cost, and enables the Company to offer its customers a complete cost-effective solution. Provide Advanced Technological Capabilities. Through its continuing investment in advanced packaging and interconnect technologies (such as MCM, COB and miniature gold-finished PCB capabilities), as well as its investment in advanced design and engineering capabilities (such as those offered by Fine Line), the Company is able to offer its customers a variety of advanced design and manufacturing solutions. In particular, the Company believes that its ability to meet growing market demand for miniaturized electronic products will be critical to its ongoing success, and has developed and acquired a number of innovative technologies to address this demand. Accelerate Customers' Time to Market. The Company's engineering services group provides integrated product design and prototyping services to help customers accelerate their time to market for new products. By participating in product design and prototype development, the Company often reduces the costs of manufacturing the product. In addition, by designing products to improve manufacturability and by participating in the transition to volume production, the Company believes that its engineering services group can significantly accelerate the time to volume production. By working closely with its suppliers and customers throughout the design and manufacturing process, the Company can enhance responsiveness and flexibility, increase manufacturing efficiency and reduce total cycle times. 4 5 Increase Efficiency Through Logistics. The Company is streamlining and simplifying production logistics at its large, strategically located facilities to decrease the costs associated with the handling and managing of materials. The Company plans to incorporate suppliers of custom components in its facilities in China and Mexico to further reduce material and transportation costs. The Company also intends to establish warehousing capabilities from which it can ship products into customers' distribution channels. Target Leading OEMs in Growing Vertical Markets. The Company has focused its marketing efforts on fast growing industry sectors that are increasingly outsourcing manufacturing operations, such as the communications, computer, consumer electronics and medical industries. The Company seeks to maintain a balance of customers among these industries, establishing long-term relationships with leading OEMs to become an integral part of their operations. There can be no assurance that the Company's strategy, even if successfully implemented, will reduce the risks associated with the Company's business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results." CUSTOMERS The Company's customers consist of a select group of OEMs in the communications, computer, consumer electronics and medical device industries. Within these industries, the Company's strategy is to seek long-term relationships with leading companies that seek to outsource significant production volumes of complex products. The Company has increasingly focused on sales to larger companies and to customers in the communications industries. In fiscal 1997, the Company's five largest customers accounted for approximately 46% of net sales. The loss of one or more major customers would have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results -- Customer Concentration; Dependence on Electronics Industry" and "Variability of Customer Requirements and Operating Results." The following table lists in alphabetical order certain of the Company's largest customers with which the Company expects to continue to conduct significant business in fiscal 1998 and the products for which the Company provides manufacturing services. Customer......................................... End Products Advanced Fibre Communications.................... Local line loop carriers Braun/ThermoScan................................. Temperature monitoring systems Compaq........................................... Modems Diebold.......................................... Automatic teller machines Ericsson......................................... Business telecommunications systems Lifescan (a Johnson & Johnson company)........... Portable glucose monitoring system Microsoft........................................ Computer peripheral devices U.S. Robotics.................................... Pilot electronic organizers
In addition, in fiscal 1997, the Company began manufacturing products for a number of new customers, including Ascend Communications (telecommunications products), Auspex (drive carriers), Cisco Systems (data communications products), Harris DTS (network switches), Philips Electronics (video cameras for personal computers), Philips Consumer Products (telephones), Bay Networks (data communications products) and Nokia (consumer electronics products). None of these customers are expected to represent more than 10% of the Company's net sales in fiscal 1998. In connection with the acquisition of the Karlskrona Facilities, the Company and Ericsson entered into a multi-year purchase agreement in February 1997, and the Company believes that, as a result, sales by Ericsson will account for a significant portion of its net sales in fiscal 1998. See "-- Acquisition of Karlskrona Facilities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results." 5 6 SALES AND MARKETING The Company achieves worldwide sales coverage through a 37-person direct sales force, which focuses on generating new accounts, and through 20 program managers, who are responsible for managing relationships with existing customers and making follow-on sales. In North America, the Company maintains sales offices in California and Massachusetts, as well as a recently established sales office in Florida. The Company's Asian sales offices are located in Singapore and Hong Kong. In Europe, the Company maintains sales offices in England, Germany and the Netherlands. The Company is expanding its European sales force, and intends to establish additional European sales offices in France and Sweden. In addition to its sales force, the Company's executive staff plays an integral role in the Company's marketing efforts. See "Item 10 -- Directors and Executive Officers of the Registrant -- Management Team Changes." SERVICES The Company provides a broad range of advanced engineering, manufacturing and distribution services to OEM customers. These services are provided on a turnkey basis and, to a lesser extent, on a consignment basis, and include product design, PCB fabrication and assembly, materials procurement, inventory management, final system assembly and test, packaging and distribution. The components, subassemblies and complete products manufactured by the Company for its OEM customers incorporate advanced interconnect, miniaturization and packaging technologies, such as SMT, MCM, COB and BGA technologies. An increasing portion of the Company's net sales (a majority of its net sales in fiscal 1997) were derived from the manufacture and assembly of complete products that are substantially ready for distribution by the OEM to its customers. The Company also designs and manufactures miniature gold-finished PCBs that OEMs then incorporate into their products. Engineering Services The engineering services group coordinates and integrates the Company's worldwide design, prototype and other engineering capabilities. Its focused, integrated approach provides Flextronics' customers with advanced service and support and leverages the Company's technological capabilities. As a result, the engineering services group enables the Company to strengthen its relationship with manufacturing customers as well as to attract new customers who require advanced design services. The engineering services group actively assists customers with initial product design in order to reduce the time from design to prototype, improve product manufacturability and reduce product costs. The Company provides a full range of electrical, thermal and mechanical design services, including CAE and CAD-based design services, manufacturing engineering services, circuit board layout and test development. The engineering services group also coordinates industrial design and tooling for product manufacturing. After product design, the Company provides prototype assemblies for fast turnaround. During the prototype process, Company engineers work with customer engineers to enhance production efficiency and improve product design. The engineering services group then assists with the transition to volume production. By participating in product design and prototype development, the Company can reduce manufacturing costs and accelerate the time to volume production. The Company's recent acquisitions have provided it with substantial advanced engineering capabilities. The Company's 1996 acquisition of Fine Line, a leading San Jose-based provider of quick-turn circuit board layout and prototype services, provides the Company with substantial expertise in a broad range of advanced circuit board designs, and the Company's 1995 acquisition of nCHIP provides advanced MCM design capabilities. Flextronics has integrated the nCHIP capabilities, and is integrating the Fine Line capabilities, with the Company's existing design and prototype capabilities in its engineering services group. The Company plans to expand its design and prototype capabilities in Westford, Massachusetts and San Jose, California, and also intends to establish design and prototype capabilities in the Karlskrona Facilities. Materials Procurement and Management Materials procurement and management consists of the planning, purchasing, expediting and warehousing of the components and materials used in the manufacturing process. The Company's inventory 6 7 management expertise and volume procurement capabilities contribute to cost reductions and reduce total cycle time. The Company generally orders components after it has a firm purchase order or letter of authorization from a customer. However, in the case of long lead-time items, the Company will occasionally order components in advance of orders, based on customer forecasts, to ensure adequate and timely supply. Although the Company works with customers and third-party suppliers to reduce the impact of component shortages, such shortages may occur from time to time and may have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results -- Limited Availability of Components." The campuses under development in China and Mexico are designed to provide many of the custom components used by the Company on-site, in order to reduce material and transportation costs, simplify logistics and facilitate inventory management. Assembly and Manufacturing The Company's assembly and manufacturing operations include PCB assembly and, increasingly the manufacture of subsystems and complete products. Its PCB assembly activities primarily consist of the placement and attachment of electronic and mechanical components on printed circuit boards using both SMT and traditional pin-through-hole ("PTH") technology. The Company also assembles subsystems and systems incorporating PCBs and complex electromechanical components, and, increasingly, manufactures and packages final products for shipment directly to the customer or its distribution channels. The Company employs just-in-time, ship-to-stock and ship-to-line programs, continuous flow manufacturing, demand flow processes and statistical process control. The Company has expanded the number of production lines for finished product assembly, burn-in and test to meet growing demand and increased customer requirements. In addition, the Company has invested in FICO, a producer of injection molded plastic for Asia electronics companies with facilities in Shenzhen, China. As OEMs seek to provide greater functionality in smaller products, they increasingly require advanced manufacturing technologies and processes. Most of the Company's PCB assembly involves the use of SMT, which is the leading electronics assembly technique for more sophisticated products. SMT is a computer-automated process which permits attachment of components directly on both sides of a PCB. As a result, it allows higher integration of electronic components, offering smaller size, lower cost and higher reliability than traditional manufacturing processes. By allowing increasingly complex circuits to be packaged with the components placed in closer proximity to each other, SMT greatly enhances circuit processing speed, and therefore board and system performance. The Company also provides traditional PTH electronics assembly using PCBs and leaded components for lower cost products. In addition, the Company has invested in emerging technologies that extend its miniaturization capabilities. The Company's 1995 acquisition of nCHIP provided it with advanced capabilities to design and assemble MCMs (collections of integrated circuit chips interconnected within a single package), and the Company now offers a range of MCM technologies from low-cost laminate MCMs to high-performance, deposited thin-film MCMs. The Company assembles completed MCMs in its San Jose, California facilities and also utilizes an outside assembly company for assembly of completed MCMs. The Company's 1996 acquisition of Astron provided it with significant capabilities to fabricate miniature gold-finished PCBs for specialized applications such as cellular phones, optoelectronics, LCDs, pagers and automotive electronics. These advanced laminate substrates can significantly improve a product's performance, while reducing its size and cost. The Company's miniature, gold-finished PCBs are fabricated in the Company's facility in China. The Company is currently expanding this facility to provide the capacity to fabricate other complex PCBs. The Company is also increasingly focusing on advanced interconnect and packaging technologies such as chip on board ("COB") and ball grid array ("BGA") technology. COB technology represents a configuration in which a bare, unpackaged semiconductor is attached directly onto a PCB, wire bonded and then encapsulated with a polymeric material. COB technology facilitates miniaturized, low-profile assemblies, and can result in lower component costs and reduced time to market. The Company has significant experience in 7 8 utilizing COB technology to manufacture a wide range of products. BGA technology is an emerging technology for packaging semiconductors that can provide higher interconnect density and improved assembly yields and reliability by assembling surface-mount packages to the circuit board through an array of solder balls, rather than pin leads. The Company has recently begun utilizing BGA technology to manufacture products for OEMs. Test After assembly, the Company offers computer-aided testing of PCBs, subsystems and systems, which contributes significantly to the Company's ability to deliver high-quality products on a consistent basis. Working with its customers, the Company develops product-specific test strategies. The Company's test capabilities include management defect analysis, in-circuit tests and functional tests. In-circuit tests verify that all components have been properly inserted and that the electrical circuits are complete. Functional tests determine if the board or system assembly is performing to customer specifications. The Company either designs and procures test fixtures and develops its own test software or utilizes its customers' existing test fixtures and test software. In addition, the Company also provides environmental stress tests of the board or system assembly. Distribution The Company offers its customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with customers' inventory requirements. Increasingly, the Company is warehousing products for customers and shipping those products directly into their distribution channels. The Company believes that this service can provide customers with a more comprehensive solution and enable them to be more responsive to market demands. COMPETITION The electronics contract manufacturing industry is extremely competitive and includes hundreds of companies, several of whom have achieved substantial market share. The Company competes against numerous domestic and foreign contract manufacturers, and current and prospective customers also evaluate the Company's capabilities against the merits of internal production. In addition, in recent years the electronics contract manufacturing industry has attracted a significant number of new entrants, including large OEMs with excess manufacturing capacity, and many existing participants, including the Company, have significantly increased their manufacturing capacity by expanding their facilities and adding new facilities. In the event of a decrease in overall demand for contract manufacturing services, this increased capacity could result in substantial pricing pressures which could adversely affect the Company's operating results. Certain of the Company's competitors, including Solectron Corporation and SCI Systems, have substantially greater manufacturing, financial, research and development and marketing resources than the Company. Others, such as Jabil Circuits and Celestica, are rapidly increasing their sales and capacity. As competitors increase the scale of their operations, they may increase their ability to realize economies of scale, to reduce their prices and to more effectively meet the needs of large OEMs. The Company believes that the principal competitive factors in the segments of the contract manufacturing industry in which it operates are cost, technological capabilities, responsiveness and flexibility, delivery cycles, location of facilities, product quality and range of services available. Failure to satisfy any of the foregoing requirements could materially adversely affect the Company's competitive position. EMPLOYEES As of May 31, 1997, the Company employed 5,518 persons, including approximately 870 employees in Sweden who were added with the acquisition of the Karlskrona Facilities. The Company's non-management employees located in Singapore, Sweden and China, and the Company's hourly employees in the United Kingdom, are represented by labor unions. The Company has never experienced a work stoppage or strike. The Company believes that its employee relations are good. 8 9 The Company's success depends to a large extent upon the continued services of key managerial and technical employees. The loss of such personnel could have a material adverse effect on the Company's results of operations. To date, the Company has not experienced significant difficulties in attracting or retaining such personnel. Although the Company is not aware that any of its key personnel currently intend to terminate their employment, their future services cannot be assured. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results -- Dependence on Key Personnel and Skilled Employees" and "Item 10 - Directors and Executive Officers of the Registrant -- Management Team Changes." KARLSKRONA ACQUISITION On March 27, 1997, the Company acquired from Ericsson the Karlskrona Facilities located in Karlskrona, Sweden and related inventory, equipment and other assets for approximately $82.4 million in cash. The Karlskrona Facilities include a 220,000 square foot facility and a 110,000 square foot facility, each of which is ISO 9002 certified. These facilities assemble printed circuit boards, network switches, cordless base stations and other components for business communications systems sold by Ericsson. Approximately 870 Ericsson employees currently based at the Karlskrona Facilities are expected to remain employed by the Company at the facilities. In addition, at the closing of the transaction, Ronny Nilsson, previously the Vice President and General Manager, Supply and Distribution of Ericsson, was appointed President of Flextronics International Sweden AB and Senior Vice President, Europe of the Company. The Company, certain of its subsidiaries and Ericsson also entered into the Purchase Agreement, under which the Company will manufacture and Ericsson will purchase, for a three-year period, certain products used in Ericsson's business communications systems. The Company believes that, as a result, sales to Ericsson will account for a large portion of its net sales in fiscal 1998. The Karlskrona Facilities' cost of sales and services (including certain overhead allocations) for the year ended December 31, 1996 was approximately 2.1 billion Swedish kronor (approximately $310.0 million based on exchange rates at December 31, 1996). However, there can be no assurance as to the volume of Ericsson's purchases, or the mix of products that it will purchase, from the Karlskrona Facilities in any future period. By acquiring the Karlskrona Facilities, the Company substantially increased its worldwide capacity, obtained a strong base in Northern Europe and enhanced its position as a contract manufacturer for the telecommunications industry, which is increasingly outsourcing manufacturing. The Company also intends to use the manufacturing resources provided by the Karlskrona Facilities to offer services to other European OEMs, which it believes are beginning to outsource the manufacture of significant product lines. Assuming Ericsson's sales of those products that the Company will manufacture remain at current levels, the Company anticipates realizing approximately $300 million of sales (based on current exchange rates) to Ericsson in fiscal 1998; however, there can be no assurance that the Company's sales to Ericsson will not be materially less than those anticipated. Although the Company expects that its gross margin percentage on sales to Ericsson will be less than that realized by the Company in fiscal 1996 and 1997, it also expects that the impact of lower gross margins may be partially offset by the effect of anticipated lower overhead and sales expenses, as a percentage of net sales, associated with supplying products to Ericsson relative to supplying products to other OEMs. To the extent that the Company is successful in increasing the capacity of the Karlskrona Facilities and in using these facilities to provide services to other OEMs, the Company anticipates increased operating efficiencies. There can be no assurance that the Company will realize lower overhead or sales expenses or increased operating efficiencies as anticipated. The foregoing, and discussions elsewhere in this Report, contain a number of forward-looking statements relative to the benefits and effects of the acquisition of the Karlskrona Facilities, the execution of the Purchase Agreement (together, the "Karlskrona Acquisition"), and the Company's relationship with Ericsson including the Company's sales to Ericsson, the Company's net sales, gross margins and results of operations, and no assurances can be given as to the Company's ability to achieve such benefits and results. The Company undertakes no obligation to publicly disclose the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the date hereof. The 9 10 Karlskrona Acquisition and the Company's business are subject to a number of risks that could adversely affect the Company's ability to achieve these operating results and the anticipated benefits of the Karlskrona Acquisition, including the Company's ability to reduce costs at the Karlskrona Facilities, the Company's lack of experience operating in Sweden, the Company's ability to transition the Karlskrona Facilities from captive manufacturing for Ericsson to manufacturing for third parties and to expand capacity at these facilities and to integrate these facilities into its global operations. In addition, there can be no assurance that the Company will utilize a sufficient portion of the capacity of the Karlskrona Facilities to achieve profitable operations. Further, changes in exchange rates between Swedish kronor and U.S. dollars will affect the Company's operating results at the Karlskrona Facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results -- Risks of Karlskrona Acquisition." The Purchase Agreement contains cost reduction targets and price limitations and imposes on the Company certain manufacturing quality requirements, and there can be no assurance that the Company can achieve acceptable levels of profitability under the Purchase Agreement or reduce costs and prices to Ericsson over time as contemplated by the Purchase Agreement. In addition, the Purchase Agreement requires that the Company maintain a ratio of equity to total liabilities, debt and equity of at least 25%, and a current ratio of at least 120%. Further, the Purchase Agreement prohibits the Company from selling or relocating the equipment acquired in the transaction without Ericsson's consent. A material breach by the Company of any of the terms of the Purchase Agreement could allow Ericsson to repurchase the assets conveyed to the Company at the Company's book value or to obtain other relief, including the cancellation of outstanding purchase orders or termination of the Purchase Agreement. Ericsson also has certain rights to be consulted on the management of the Karlskrona Facilities and to approve the use of the Karlskrona Facilities for Ericsson's competitors or for other customers where such use might adversely affect Ericsson's access to production capacity at the facilities. In addition, without Ericsson's consent, the Company may not enter into any transactions that could adversely affect its ability to continue to supply products and services to Ericsson under the Purchase Agreement or its ability to reduce costs and prices to Ericsson. As a result of these rights, Ericsson may, under certain circumstances, retain a significant degree of control over the Karlskrona Facilities and their management. However, the Company understands that it is Ericksson's intention that the Company utilize the Karlskrona Facilities to provide services not just to Ericsson, but also to other OEMs, and Ericsson will receive price reductions if the Company is able to reduce costs at the Karlskrona Facilities through resulting volume efficiencies. ITEM 2. PROPERTIES. FACILITIES The Company has manufacturing facilities located in Singapore, Malaysia, China, the United Kingdom and the United States. In addition, the Company provides engineering services at its facilities in Singapore, California and Massachusetts. All of the Company's manufacturing facilities are registered to the quality requirements of the International Organization for Standardization (ISO 9002) or are in the process of final certification. 10 11 Certain information about the Company's manufacturing and engineering facilities as of March 31, 1997 is set forth below:
YEAR APPROXIMATE OWNED/ LOCATION COMMENCED SQUARE FEET LEASED(1) SERVICES - ------------------------------ --------- ----------- --------- ---------------------------- Existing Manufacturing Facilities Singapore(2)................ 1982 47,000 Leased Complex, high value-added PCB assembly. Johore, Malaysia............ 1991 80,000 Owned Full systems manufacturing; PCB assembly. Hong Kong, China............ 1985 45,000 Leased Fabrication of high density PCBs Xixiang, China.............. 1995 90,000 Leased High volume PCB assembly. Doumen, China............... 1995 175,000(3) Owned Fabrication and assembly of high density, miniaturized PCBs. San Jose, CA................ 1994 65,000 Leased Full systems manufacturing; PCB assembly. San Jose, CA................ 1996 32,500 Leased Complex, high value-added PCB assembly. San Jose, CA(2)............. 1989 30,000 Leased Advanced packaging and MCM fabrication. Tonypandy, Wales............ 1983 50,000 Owned Full systems manufacturing; medium complexity PCB assembly. Karlskrona, Sweden.......... 1997 330,000 Owned Assembly and test of complex PCBs and systems. Existing Engineering Facilities Westford, MA................ 1987 9,112 Leased Design and prototype services. Singapore................... 1982 (4) -- Design and prototype services. San Jose, CA................ 1989 (4) -- Los Gatos, CA............... 1986(5) 15,000 Leased Design and prototype services. Design and prototype services. Facilities Under Development San Jose, CA................ 1997(6) 73,000 Owned Complex, high value-added PCB assembly. San Jose, CA................ 1996(6) 71,000 Leased Engineering services and corporate functions. Doumen, China............... 1996(6) 224,000 Owned Fabrication of high volume PCBs, high volume PCB assembly, injection molded plastics for electronics. Guadalajara, Mexico......... 1997(6) 101,000 Owned High volume PCB assembly.
- --------------- (1) The leases for the Company's leased facilities expire between December 1997 and July 2005. In addition, the Company has a 47,000 square foot manufacturing facility in Richardson, Texas that has been closed. The Company leases this facility under a lease that expires in April 2000, and the Company is seeking to sublet this facility. (2) The Company has downsized manufacturing operations at this facility in fiscal 1997. (3) Includes 88,000 square feet used for dormitories and other functions. The Company has land use rights for this facility through 2020. (4) Located within the 47,000 square foot manufacturing facility in Singapore and the 30,000 square foot manufacturing facility in San Jose, California, respectively. (5) Acquired by the Company in fiscal 1997 in connection with the Fine Line acquisition. (6) Refers to date of commencement of construction or of lease term. 11 12 The Company has recently begun to consolidate and expand its manufacturing facilities, with the goal of concentrating its activities in a smaller number of larger, strategically located sites. The Company has closed its Richardson, Texas facility and downsized manufacturing operations at its Singapore facility, while substantially increasing overall capacity by expanding operations in North America, Asia and Europe. In North America, the Company has recently leased a new 71,000 square foot facility, and is constructing a planned 73,000 square foot facility, each adjacent to the Company's existing San Jose operations, and the Company is developing a planned 101,000 square foot manufacturing facility on a 32-acre campus site in Guadalajara, Mexico. The Company expects the construction of the new San Jose and Guadalajara facilities will be completed in the summer of 1998. In Asia, the Company is expanding its Doumen facilities into a planned 393,000 square foot campus by developing an additional 224,000 square feet, and the Company expects the construction of this expansion will be completed in the second quarter of fiscal 1998. The campus facilities planned for Doumen, China and Guadalajara, Mexico are designed to be integrated facilities that can produce many of the custom components used by the Company, to manufacture products for customers, to warehouse the products and to distribute them directly to customer's distribution channels. The Company believes that by offering all of those capabilities at the same site, it can reduce material and transportation costs, simplify logistics and communications, and improve inventory management, providing customers with a more complete, cost-effective manufacturing solution. FICO, in which the Company has a 40.0% investment, produces injection molded plastics for Asian companies from its 120,000 square foot facilities in Shenzhen, China. The Company anticipates that FICO will relocate certain of its operations to the Doumen Campus. ITEM 3. LEGAL PROCEEDINGS. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 12 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF ORDINARY SHARES The Company's Ordinary Shares have been traded on the Nasdaq National Market under the symbol "FLEXF" since March 18, 1994. The following table shows the high and low closing sales prices per share of the Company's Ordinary Shares for fiscal years 1995, 1996 and 1997.
HIGH LOW ------- ------- Fiscal 1995 First Quarter.......................................... $14.00 $ 8.75 Second Quarter......................................... $15.50 $ 9.00 Third Quarter.......................................... $16.25 $12.75 Fourth Quarter......................................... $18.00 $13.00 Fiscal 1996 First Quarter.......................................... $21.875 $13.50 Second Quarter......................................... $26.75 $21.75 Third Quarter.......................................... $30.00 $21.00 Fourth Quarter......................................... $35.75 $25.75 Fiscal 1997 First Quarter.......................................... $39.00 $25.00 Second Quarter......................................... $28.25 $17.00 Third Quarter.......................................... $37.25 $21.00 Fourth Quarter......................................... $29.75 $19.625
On June 30, 1997, the closing sales price of the Ordinary Shares was $27.00 per share. On that date, there were 480 shareholders of record. DIVIDENDS Since inception, the Company has not declared or paid any cash dividends on its Ordinary Shares, and the Company's loan agreements prohibit the payment of cash dividends without the lenders' prior consent. The Company anticipates that all earnings in the foreseeable future will be retained to finance the continuing development of its business. TAXATION This summary of Singapore and U.S. tax considerations is based on current law and is provided for general information. Insofar as the following discussion summarizes the tax considerations applicable to the Company's shareholders under Singapore law, it is based on the opinion of Low Yap & Associates, Singapore tax advisors to the Company, and insofar as the following discussion summarizes the tax considerations applicable to the Company's shareholders under United States federal law, it is based on the opinion of Fenwick & West LLP, United States counsel to the Company. The discussion does not purport to deal with all aspects of taxation that may be relevant to particular shareholders in light of their investment or tax circumstances, or to certain types of shareholders (including insurance companies, tax-exempt organizations, regulated investment companies, financial institutions or broker-dealers, and shareholders that are not U.S. Shareholders (as defined below)) subject to special treatment under the U.S. federal income tax laws. Such shareholders should consult their own tax advisors regarding the particular tax consequences to such shareholders of any investment in the Ordinary Shares. 13 14 INCOME TAXATION UNDER SINGAPORE LAW Under current provisions of the Income Tax Act, Chapter 134 of Singapore, corporate profits are taxed at a rate equal to 26.0%. Under Singapore's taxation system, the tax paid by a company is deemed paid by its shareholders. Thus, the shareholders receive dividends net of the tax paid by the Company. Dividends received by either a resident or a nonresident of Singapore are not subject to withholding tax. Shareholders are taxed on the gross amount of dividends (i.e., the cash amount of the dividend plus the amount of corporate tax paid by the Company). The tax paid by the Company will be available to shareholders as a tax credit to offset the Singapore income tax liability on their overall income (including the gross amount of dividends). No tax treaty currently exists between the Republic of Singapore and the U.S. Under current Singapore tax law there is no tax on capital gains, and, thus, any profits from the disposal of shares are not taxable in Singapore unless the vendor is regarded as carrying on a trade in shares in Singapore (in which case, the disposal profits would be taxable as trade profits rather than capital gains). There is no stamp duty payable in respect of the holding and disposition of shares. No duty is payable on the acquisition of new shares. Where existing shares are acquired in Singapore, stamp duty is payable on the instrument of transfer of the shares at the rate of S$2 for every S$1,000 of the market value of the shares. The stamp duty is borne by the purchaser unless there is an agreement to the contrary. Where the instrument of transfer is executed outside of Singapore, stamp duty must be paid if the instrument of transfer is received in Singapore. Under Article 22 (iii) of the Articles of Association of the Company, its directors are authorized to refuse to register a transfer unless the instrument of transfer has been duly stamped. INCOME TAXATION UNDER UNITED STATES LAW Individual shareholders that are U.S. citizens or resident aliens (as defined in Section 7701(b) of the Internal Revenue Code of 1986 (the "Code")), corporations or partnerships or other entities created or organized under the laws of the United States, or any political subdivision thereof, an estate the income of which is subject is subject to U.S. federal income taxation regardless of its source or a trust if a U.S. court is able to exercise primary jurisdiction over its administration and one or more U.S. fiduciaries have the authority to control all of its substantial decisions ("U.S. Shareholders") will, upon the sale or exchange of a share, recognize gain or loss for U.S. income tax purposes in an amount equal to the difference between the amount realized and the U.S. Shareholder's tax basis in such a share. If paid in currency other than U.S. dollars, the U.S. dollar amount realized (as determined on the trade date) is determined by translating the foreign currency into U.S. dollars at the spot rate in effect on the settlement date of the sale in the case of a U.S. Shareholder that is a cash basis taxpayer. An accrual basis taxpayer may elect to use the spot rate in effect on the settlement date of the sale by filing a statement with the U.S. Shareholder's first return in which the election is effective clearly indicating that the election has been made. Such an election must be applied consistently from year to year and cannot be changed without the consent of the Internal Revenue Service. Such gain or loss will be capital gain or loss if the share was a capital asset in the hands of the U.S. Shareholder and will not be short-term capital gain or loss if the share has been held for more than one year. If a U.S. Shareholder receives any currency other than U.S. dollars on the sale of a share, such U.S. Shareholder may recognize ordinary income or loss as a result of currency fluctuations between the date of such sale and the date such sale proceeds are converted into U.S. dollars. U.S. Shareholders will be required to report as income for U.S. income tax purposes the amount of any dividend received from the Company to the extent paid out of the current or accumulated earnings and profits of the Company, as determined under current U.S. income tax principles. If over 50.0% of the Company's stock (by vote or value) were owned by U.S. Shareholders who individually held 10.0% or more of the Company's voting stock, such U.S. Shareholders potentially would be required to include in income a portion or all of their pro rata share of the Company's and its non-U.S. subsidiaries' earnings and profits. If 50.0% or more of the Company's assets during a taxable year produced or were held for the production of passive income, as defined in section 1297(b) of the Code (e.g., certain forms of dividends, interest and royalties), or 75.0% or more of the Company's gross income for a taxable year was passive income, adverse U.S. tax 14 15 consequences could result to U.S. shareholders of the Company. As of June 30, 1997, the Company was aware of only one U.S. Shareholder who individually held 10% or more of its voting stock. See "Principal Shareholders." Shareholders that are not U.S. Shareholders ("non-U.S. shareholders") will not be required to report for U.S. federal income tax purposes the amount of any dividend received from the Company. Non-U.S. shareholders, upon the sale or exchange of a share, would not be required to recognize gain or loss for U.S. federal income tax purposes. Estate Taxation In the case of an individual who is not domiciled in Singapore, a Singapore estate tax is imposed on the value of all movable and immovable properties situated in Singapore. The shares of the Company are considered to be situated in Singapore. Thus, an individual shareholder who is not domiciled in Singapore at the time of his or her death will be subject to Singapore estate tax on the value of any such shares held by the individual upon the individual's death. Such a shareholder will be required to pay Singapore estate tax to the extent that the value of the shares (or in aggregate with any other assets subject to Singapore estate tax) exceeds S$600,000. Any such excess will be taxed at a rate equal to 5.0% on the first S$12,000,000 of the individual's Singapore chargeable assets and thereafter at a rate equal to 10.0%. An individual shareholder who is a U.S. citizen or resident (for U.S. estate tax purposes) also will have the value of the shares included in the individual's gross estate for U.S. estate tax purposes. An individual shareholder generally will be entitled to a tax credit against the shareholder's U.S. estate tax to the extent the individual shareholder actually pays Singapore estate tax on the value of the shares; however, such tax credit is generally limited to the percentage of the U.S. estate tax attributable to the inclusion of the value of the shares included in the shareholder's gross estate for U.S. estate tax purposes, adjusted further by a pro rata apportionment of available exemptions. Individuals who are domiciled in Singapore should consult their own tax advisors regarding the Singapore estate tax consequences of their investment. 15 16 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data of the Company as of and for each of the fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997. The selected financial data set forth below for the fiscal years ended March 31, 1995, 1996 and 1997 have been derived from consolidated financial statements of the Company which have been audited by Ernst & Young, independent auditors, whose report thereon is included elsewhere herein. The selected financial data set forth below for the fiscal years ended March 31, 1993 and 1994 has been derived from audited financial statements not included in this Report. These historical results are not necessarily indicative of the results to be expected in the future. The following table is qualified by reference to and should be read in conjunction with the consolidated financial statements, related notes thereto and other financial data included elsewhere herein.
YEAR ENDED MARCH 31, ------------------------------------------------------------ 1993 1994 1995(1) 1996(2) 1997(3) -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA)(RESTATED)(4) STATEMENT OF OPERATIONS DATA: Net sales.............................................. $100,759 $131,345 $237,386 $448,346 $490,585 Cost of sales.......................................... 91,794 117,392 214,865 407,457 440,448 -------- -------- -------- -------- -------- Gross profit......................................... 8,965 13,953 22,521 40,889 50,137 Selling, general and administrative expenses........... 7,131 8,667 11,468 18,787 26,765 Acquired in-process research and development........... 81 202 91 29,000 -- Goodwill amortization.................................. 388 398 510 739 989 Intangible assets amortization......................... -- 21 245 544 1,646 Provision for plant closings........................... -- 830 -- 1,254 5,868 -------- -------- -------- -------- -------- Operating income (loss).............................. 1,365 3,835 10,207 (9,435) 14,869 Net interest income (expense).......................... (2,628) (1,778) (774) (2,380) (3,885) Merger expenses........................................ -- -- (816) -- -- Foreign exchange gain (loss)........................... 299 402 (303) 872 1,168 Income (loss) from associated company.................. -- (70) (729) -- 241 Other income (expense)................................. -- -- 34 (398) (2,718) -------- -------- -------- -------- -------- Income (loss) before income taxes.................... (964) 2,389 7,619 (11,341) 9,675 Provision for income taxes............................. 264 654 1,463 3,791 2,212 Extraordinary gain..................................... -- 416 -- -- -- Net income (loss).................................... $ (1,228) $ 2,151 $ 6,156 $(15,132) $ 7,463 ======== ======== ======== ======== ======== Net income (loss) per share............................ $ (0.17) $ 0.28 $ 0.51 $ (1.19) $ 0.50 ======== ======== ======== ======== ======== Weighted average Ordinary Shares and equivalents....... 7,382 7,730 12,103 12,684 14,877
MARCH 31, ----------------------------------------------- 1993 1994 1995 1996 -------- -------- -------- -------- (RESTATED)(3) (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit)................................ (1,201) 30,669 33,425 30,801 Total assets............................................. 52,430 103,129 116,117 231,024 Long-term debt and capital lease obligations, less current portion........................................ 17,243 4,755 6,890 17,674 Shareholders' equity (deficit)........................... (2,256) 46,703 57,717 73,059
- --------------- (1) In January 1995, the Company acquired nCHIP in exchange for an aggregate of 2,450,000 Ordinary Shares in a transaction accounted for as a pooling of interests. Accordingly, the financial data presented for each fiscal period includes the historical results of nCHIP. (2) The Consolidated Financial Statements of the Company for the fiscal year ended March 31, 1996 have been restated as a result of changes in the Company's accounting for the acquisition of Astron. See Note 14 of Notes to Consolidated Financial Statements and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Changes in Accounting for Astron Acquisition." (3) In the fourth quarter of fiscal 1996, the Company wrote off $29.0 million of In-process research and development associated with the acquisition of Astron and also recorded charges totaling $1.3 million for costs associated with the closing of one of the Company's Malaysian plants and its Shekou, China operations. (4) In fiscal 1997, the Company incurred plant closing expenses aggregating $5.9 million in connection with closing its manufacturing facility in Texas, downsizing manufacturing operations in Singapore, and writing off obsolete equipment and incurring severance obligations at the nCHIP semiconductor fabrication operations. 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for historical information contained herein, the matters discussed in this Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. In this Report, the words "expects," "anticipates," "believes," "intends" and similar expressions identify forward-looking statements, which speak only as of the date hereof. These forward-looking statements are subject to certain risks and uncertainties, including, without limitation, those discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Future Operating Results," that could cause results to differ materially from historical results or those anticipated. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the Securities and Exchange Commission. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission, including its Form 10-Qs and 8-Ks, that attempt to advise interested parties of the risks and factors that may affect the Company's business. OVERVIEW The Company was organized in Singapore in 1990 to acquire the Asian contract manufacturing operations and certain U.S. design, sales and support operations of Flextronics, Inc. (the "Predecessor"), which had been in the contract manufacturing business since 1982. The acquisition of the selected operations of the Predecessor for approximately $39.0 million was completed in June 1990 and was financed with approximately $20.0 million of secured long-term bank debt, $4.0 million of subordinated debt and $15.0 million of equity. After such acquisition, the equity investors held approximately 55% of the outstanding share capital of the Company. The Company's results of operations for periods following the 1990 acquisition and through March 1994 reflect the interest expense associated with the indebtedness incurred in connection with this transaction. In July 1993 a group of new investors acquired a controlling interest in the Company through the acquisition of substantially all of the interest in the Company that had been retained by the Predecessor, a direct equity investment of $3.2 million in the Company and the purchase of a portion of the shares acquired by the investors in the 1990 acquisition. In December 1993 the Company raised an additional $7.0 million of equity capital from investors ($3.7 million of which represented the conversion of its outstanding subordinated debt into equity). In March 1994 the Company raised $32.5 million in an initial public offering of Ordinary Shares. In August 1995 the Company raised an additional $22.3 million in a public offering of Ordinary Shares. In recent years, the Company has substantially expanded its manufacturing capacity, technological capabilities and service offerings, through both acquisitions and internal growth. See "Certain Factors Affecting Future Operating Results -- Management of Expansion and Consolidation," "Certain Factors Affecting Future Operating Results -- Acquisitions" and Note 14 of Notes to Consolidated Financial Statements. In March 1994, the Company acquired Relevant, a San Jose-based contract manufacturer, for approximately $4.0 million in cash. In January 1995, the Company acquired nCHIP in exchange for an aggregate of approximately 2,450,000 Ordinary Shares in a transaction accounted for as a pooling of interests. In March 1997, the Company decided to close the entire wafer fabrication operations, and the Company is currently seeking to sell the related assets. See "-- Provision for Plant Closings." In April 1995, the Company acquired A&A, a contract manufacturer located in Wales, in exchange for an aggregate of $2.9 million and 66,908 Ordinary Shares. The Company's financial statements for fiscal 1996 include the operating results of A&A from April 12, 1995 to March 31, 1996. In February 1996, the Company acquired Astron Group Limited in exchange for (i) $13.4 million in cash, (ii) $15.0 million in 8% promissory notes, ($10.0 million of which was paid in February 1997 and $5.0 million of which is payable in February 1998), (iii) 238,684 Ordinary Shares issued at closing and (iv) Ordinary Shares with a value of $10.0 million to be issued on June 30, 1998. The Company also paid an 17 18 earnout of an additional $6.25 million in cash in April 1997, based on the pre-tax profit of Astron for the calendar year ended December 31, 1996. In addition, the Company agreed to pay a $15.0 million consulting fee in June 1998 to an entity affiliated with Stephen Rees, a former shareholder and the Chairman of Astron, pursuant to a services agreement among the Company, one of its subsidiaries and the affiliate of Mr. Rees (the "Services Agreement"). Payment of the fee was conditioned upon, among other things, Mr. Rees' continuing as Chairman of Astron through June 1998. Mr. Rees currently also serves as a director and executive officer of the Company. In March 1997, the Company and Mr. Rees' affiliate agreed to remove the remaining conditions to payment of the fee and to reduce the amount of the fee, which remains payable in June 1998, to $14.0 million. This reduction was negotiated in view of (i) a settlement in March 1997 of the amount of the earnout payable by the Company to the former shareholders of Astron in which the Company agreed to certain matters, previously in dispute, affecting the amount of the earn-out payment, and (ii) the elimination of the conditions to payment and of Mr. Rees' ongoing obligations under the Services Agreement. Substantially all of the former shareholders of Astron were affiliates of Mr. Rees or members of his family. See "-- Results of Operations -- Goodwill and Intangible Assets Amortization." Accordingly, the only remaining obligation of either party is the Company's unconditional obligation to pay the $14.0 million fee in June 1998. Of the $14.0 million, $5.0 million must be paid in cash. The remainder may be paid in either cash or Ordinary Shares at the option of the Company, and the Company intends to pay such amount in Ordinary Shares. See "-- Recent Changes in Accounting for Astron Acquisition." Since the Company's acquisition of Astron, the net sales generated by Astron's then-existing products and services, and by its products and services then under development, have grown at rates significantly lower than those anticipated by the Company at the time of the acquisition and significantly lower than those assumed in the independent valuation used by the Company in allocating the purchase price of Astron to the assets acquired. The Company believes that this is attributable primarily to (i) delays in developing certain new technologies as a result of several factors, including the unanticipated complexity of many of the new technologies, difficulties in achieving expected production yields, changes in the Company's development priorities and unavailability of certain materials; (ii) interruptions in production and diversions of resources, resulting from a fire in Astron's facilities in Doumen, China in April 1996 (although the Company does not currently expect that such event will have a significant long-term effect on Astron's business, customer base or intangible assets); (iii) reduced sales of certain products to end-users by certain of Astron's customers; and (iv) changes in product mix that adversely affected production efficiency. The Company estimates that, at the time of the acquisition, the average remaining economic life of Astron's developed process technologies was seven years. While the Company has completed the development of certain of the technologies that were under development at the time of the acquisition, the Company has not yet completed development of other technologies that were material to its valuation of Astron and which it initially anticipated completing in fiscal 1996 and 1997. The Company currently anticipates that completion of these technologies will require the expenditure of approximately $5.0 million through fiscal 1999, consisting primarily of the cost of internal engineering staff and related overhead, material costs and other expenses. The completion of such development is subject to a number of uncertainties, including potential difficulties in optimizing manufacturing processes and the potential development of alternative technologies by competitors that could render Astron's technologies uncompetitive or obsolete. Accordingly, no assurances can be given as to whether, or when, the Company will be able to complete the development of such technologies, as to the cost of such development, or as to potential sales of products based on such technologies. The capabilities provided by the technologies under development may not otherwise be available to the Company. Accordingly, the failure by the Company to successfully develop such technologies would limit the Company's ability to compete effectively for business requiring certain advanced capabilities, and would prevent it from achieving the anticipated benefits of the Astron acquisition. See "-- Certain Factors Affecting Future Operating Results -- Acquisitions" and "-- Results of Operations -- Acquired In-Process Research and Development." In the fourth quarter of fiscal 1996 the Company also recorded one time charges totaling $1.3 million for costs associated with the closing of one of the Company's Malaysia plants and its Shekou, China operations in addition to the write off of $29.0 million of In-Process R&D associated with the acquisition of Astron. 18 19 Without taking into account these write-offs and charges, the Company's net income and earnings per share in fiscal 1996 would have been $15.1 million and $1.13, respectively. On November 25, 1996, the Company acquired Fine Line for an aggregate of 223,321 Ordinary Shares in a transaction accounted for as pooling of interest. The Company's prior financial statements were not restated because the financial results of Fine Line did not have a material impact on the consolidated results. On December 20, 1996, the Company acquired 40% of FICO for $5.2 million. Of this, the Company paid $3 million in December 1996 and accrued the $2.2 million balance in the fourth quarter of fiscal 1997. The Company also has an option to purchase the remaining 60% interest of FICO in 1998 for a price that is dependent on the financial performance of FICO for the period ending December 31, 1997. On March 27, 1997, the Company acquired the manufacturing facilities in Karlskrona, Sweden and related inventory, equipment and assets from Ericsson for approximately $82.4 million. The acquisition was financed by a bank loan and the transaction has been accounted for under the purchase method. As a result, the purchase price was allocated to the assets acquired based on their estimated fair market values at the date of acquisition. See "Certain Factors Affecting Future Operating Results -- Risks of Ericsson Transaction." In the second quarter of fiscal 1997, the Company purchased approximately 32 acres of land in Guadalajara, Mexico. The land is intended to be used for the Company's planned development of a new manufacturing campus in Mexico. In addition, the Company has begun construction of a new 240,000 square foot facility on its campus located in Doumen, China. During the third and fourth quarters of fiscal 1997, the Company incurred plant closing expenses totalling $5.9 million relating to the closing of its Texas facility and of the nCHIP semiconductor fabrication facility, and the downsizing of manufacturing at its Singapore facilities. The Company has restated its financial results for the fiscal year ended March 31, 1996 and for the first three reported quarters of the fiscal year ended March 31, 1997 to reflect corrections to its accounting for the acquisition of Astron. The acquisition of Astron has been accounted for under the purchase method, and accordingly the purchase price had been allocated to the assets and liabilities assumed based upon their estimated fair values at the date of acquisition. The revisions include an increase in the initially recorded purchase price to include the payment to be made in June 1998 to an affiliate of Stephen Rees pursuant to the Services Agreement. In addition, a second valuation was obtained and used to allocate the purchase price to the assets acquired, including current assets, net property, plant and equipment, developed technologies, in-process research and development, assembled workforce, tradenames and trademarks, customer list and other intangible assets. As a consequence, in-process research and development written off in the fiscal year ended March 31, 1997 (the "In-Process R&D") was reduced from $31.6 million to $29.0 million and the fair value of other assets recorded at the date of the close of the transaction was increased by $16.7 million, representing $4.8 million of goodwill and $11.9 million of identified intangible assets. See Note 14 of Notes to Consolidated Financial Statements. The effect of the restatement on the Company's previously reported statement of operations data is as follows (in thousands except per share data):
NINE MONTHS ENDED DECEMBER 31, 1996 FISCAL YEAR ENDED MARCH 31, 1996 -------------------------------- ----------------------------------- PREVIOUSLY REPORTED RESTATED PREVIOUSLY REPORTED RESTATED ------------------- -------- ------------------- ----------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA Gross profit...................... $ 41,889 $ 40,889 $36,437 $36,057 Operating income (loss)........... (11,775) (9,435) 14,152 12,656 Net income (loss)................. (17,412) (15,132) 10,536 9,026 Net income (loss) per share....... (1.39) (1.19) 0.73 0.61 Weighted average Ordinary Shares and equivalents................. 12,536 12,684 14,377 14,889
19 20 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales.
FISCAL YEAR ENDED MARCH 31, ------------------------- 1995 1996 1997 ----- ----- ----- Net sales........................................................... 100.0% 100.0% 100.0% Cost of sales....................................................... 90.5 90.9 89.8 ----- ----- ----- Gross profit........................................................ 9.5 9.1 10.2 Selling, general and administrative expenses........................ 4.8 4.2 5.5 Goodwill and intangible assets amortization......................... 0.4 0.2 0.5 Provision for plant closings........................................ -- 0.3 1.2 Acquired in-process research and development........................ -- 6.5 -- ----- ----- ----- Operating income (loss)................................... 4.3 (2.1) 3.0 Net interest expense................................................ (0.4) (0.5) (0.8) Merger expenses..................................................... (0.3) -- -- Foreign exchange gain (loss)........................................ (0.1) 0.2 0.3 Income (loss) from associated company............................... (0.3) -- -- Other income (expense).............................................. -- (0.1) (0.6) ----- ----- ----- Income (loss) before income taxes......................... 3.2 (2.5) 1.9 Provision for income taxes.......................................... 0.6 0.9 0.4 ----- ----- ----- Net income (loss)......................................... 2.6% (3.4%) 1.5% ===== ===== =====
NET SALES Substantially all of the Company's net sales have been derived from the manufacture and assembly of products for OEM customers. Net sales in fiscal 1997 increased 9.4% to $490.6 million from $448.3 million in fiscal 1996. This increase was primarily due to higher sales to existing customers, including US Robotics, Microsoft, Advanced Fibre Communications and Braun/Thermoscan, sales to new customers such as Cisco and Auspex, and the inclusion of Astron's sales following its acquisition in February 1996. This increase was partially offset by reduced sales to certain existing customers, including Visioneer, Apple Computer, Houston Tracker Systems, Logitech, Voice Powered Technology and Fast Multimedia. The Company believes that the reduction in sales to these customers was due in part to reductions in these customers' sales to end-users. See "Certain Factors Affecting Future Operating Results -- Rapid Technological Change." Net sales in fiscal 1996 increased 88.9% to $448.3 million from $237.4 million in fiscal 1995. This increase was primarily the result of higher sales to existing customers, including Lifescan (a Johnson & Johnson Company), Visioneer, Microcom and Global Village Communications, sales to new customers in the computer and medical industries such as Apple Computer and Thermoscan and the inclusion of A&A's and Astron's sales after their acquisitions in April 1995 and February 1996, respectively. This was partially offset by a significant decline in sales to IBM due to IBM's efforts to consolidate more of its manufacturing business internally. GROSS PROFIT Gross profit varies from period to period and is affected by, among other things, product mix, component costs, product life cycles, unit volumes, start up, expansion and consolidation of manufacturing facilities and new product introductions. The Company's new and expanded facilities provide capacity for production volumes significantly greater than current levels. As a result of this expansion, the Company anticipates increased depreciation and other fixed expenses, and expects that its gross profit margin will be adversely affected in the remainder of fiscal 1998 as it commences volume production in the new facilities. 20 21 Gross margin increased to 10.2% in fiscal 1997 compared to 9.1% in fiscal 1996. The increase was mainly attributable to (i) the inclusion of Astron's printed circuit board business, which has historically had a relatively higher gross profit margin than the Company, (ii) the concentration of more sales in the Company's facility in China which has a lower manufacturing cost compared to the Company's facilities in other locations, and (iii) increased sales, resulting in increased labor and overhead absorption. This benefit was partially offset by underutilization of the nCHIP semiconductor fabrication facility and the Company's Texas facility, which have been closed, and the related inventory write-offs. Gross margin for fiscal 1998 may be adversely affected in the short term as the Company commences production in new facilities. Gross profit margin declined slightly to 9.1% in fiscal 1996 as compared to 9.5% in fiscal 1995 mainly due to the additional costs associated with new manufacturing facilities in Texas and China that were opened in the fourth quarter of fiscal 1995 and the expansion of nCHIP's semiconductor fabrication facility. The decrease in gross profit margin was also attributable to a reduction in certain selling prices in order to remain competitive. Cost of sales included research and development costs of approximately $913,000 and $153,000 in fiscal 1997 and 1996, respectively. The increase from fiscal 1996 to fiscal 1997 was primarily due to the inclusion of Astron's results following its acquisition in February 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in fiscal 1997 increased to $26.8 million from $18.8 million in fiscal 1996 and increased as percentage of net sales to 5.5% in fiscal 1997 from 4.2% in fiscal 1996. The increase was mainly due to: (i) the inclusion of Astron's selling and general administrative expenses for all of fiscal 1997; (ii) increased consulting fees; and (iii) increased sales and marketing expenses. The increased consulting fees resulted from financial consulting services provided by two banks for a total of $719,000 in fiscal 1997. The Company also recorded $362,000 in March 1997 for compensation for management services paid to a new executive officer who was formerly a key employee of Ericsson in Sweden and who joined the Company upon the acquisition of the Karlskrona Facilities. Selling, general and administrative expenses in fiscal 1996 increased to $18.8 million from $11.5 million in fiscal 1995, but decreased as percentage of net sales to 4.2% in fiscal 1996 from 4.9% in fiscal 1995. The increase in absolute dollars was principally due to costs associated with the expanded facilities in China and Texas, increased sales personnel and market research activities in U.S. and the inclusion of A&A's and Astron's selling and general administrative expenses after their acquisitions in April 1995 and February 1996, respectively. GOODWILL AND INTANGIBLE ASSETS AMORTIZATION Goodwill, which represents the excess of the purchase price of an acquired company over the fair market value of its net assets, and intangible assets are amortized on a straight line basis over the estimated life of the benefits received which range from three to twenty-five years. Goodwill amortization increased from $739,000 in fiscal 1996 to $989,000 in fiscal 1997 and intangible asset amortization increased from $544,000 in fiscal 1996 to $1.6 million in fiscal 1997. These increases were due to the amortization of additional goodwill and intangible assets which arose from the Astron acquisition in 1996. In fiscal 1997, the Company recognized approximately $8.5 million of additional goodwill, as a result of the Astron earnout payment of $6.25 million and the acquisition of the 40% interest in FICO, partially offset by the effect of the $1.0 million reduction in the payment due in June 1998 to an affiliate of Stephen Rees. Goodwill amortization increased from $510,000 in fiscal 1995 to $739,000 in fiscal 1996 primarily due to the goodwill from the Company's acquisition of A&A and Astron. Intangible asset amortization increased from $245,000 in fiscal 1995 to $544,000 in fiscal 1996 primarily due to the acquisition of A&A and Astron. 21 22 PROVISION FOR PLANT CLOSINGS The provision for plant closings of $5.9 million in fiscal 1997 consists of $3.4 million relating to the closing of the Texas and nCHIP facilities and $2.5 million for the shift of manufacturing operations from Singapore to lower cost manufacturing locations. These provisions include $3.3 million associated with the write-off of obsolete equipment and $2.6 million for severance payments. The Texas facility had been primarily dedicated to production for Global Village Communications and Apple Computer, to whom the Company does not anticipate making substantial sales in future periods. The provision for plant closings of $1.3 million in fiscal 1996 was associated with the write-off of certain obsolete equipment at one of the Company's facilities in Malaysia and in Shekou, China. The provision for plant closings were related to the Company ceasing its satellite receiver product line in Malaysia and the closing of its manufacturing operations in Shekou, China. Production from the Shekou facility has been moved to the Company's plant in Xixiang, China. RESEARCH AND DEVELOPMENT Most of the research and development conducted by the Company is paid for by customers and is therefore included in cost of sales. Other research and development is conducted by the Company, but is not specifically identified, as the Company believes such expenses are less than 1% of its total net sales. In June 1997, the Company obtained an independent valuation of the value of certain of the assets of Astron and the In-Process R&D as of the date of Astron's acquisition. This valuation determined that the fair market value of the In-Process R&D was $29.0 million. Accordingly, the Company wrote off $29.0 million of In-Process R&D in fiscal 1996. See " -- Recent Changes in Accounting for Astron Acquisition." ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In June 1997, the Company obtained an independent valuation of certain of the assets of Astron and the In-Process R&D as of the date of Astron's acquisition. This valuation determined that the fair value of the In-Process R&D was $29.0 million. Accordingly, the Company adjusted the amount of In-Process R&D written off in fiscal 1996 to $29.0 million. See "-- Overview" and "-- Recent Changes in Accounting for Astron Acquisition." NET INTEREST EXPENSE Net interest expense increased to $2.9 million for the three months ended June 30, 1997 from $595,000 for the three months ended June 30, 1996, due to interest and amortization of commitment fees related to borrowings under the Credit Facility, primarily incurred to finance the Karlskrona Acquisition. See "-- Liquidity and Capital Resources" and "Certain Factors Affecting Future Operating Results -- Increased Leverage." 22 23 Net interest expense increased to $3.9 million in fiscal 1997 from $2.4 million in fiscal 1996 mainly due to increases in interest expense in connection with additional indebtedness used to finance working capital requirements, to finance acquisitions and to purchase machinery and equipment for capacity expansion. The Company also recorded approximately $363,000 of interest expense in fiscal 1997 related to the cash portion of the Company's obligations to an affiliate of Stephen Rees, a former shareholder and the Chairman of Astron, pursuant to the Services Agreement. See "-- Overview." Net interest expense increased to $2.4 million in fiscal 1996 from $774,000 in fiscal 1995. The increase reflects interest incurred in connection with additional indebtedness used to finance the cash portion of the A&A and Astron acquisitions, to purchase machinery and equipment for capacity expansion and to finance the Company's working capital requirements. MERGER EXPENSES The Company recorded a one-time non-operating charge of approximately $816,000 as a result of the nCHIP acquisition in January 1995. FOREIGN EXCHANGE GAIN (LOSS) Foreign exchange gain increased to $1.2 million in fiscal 1997 from $872,000 in fiscal 1996. Foreign exchange gain (loss) increased to a gain of $872,000 in fiscal 1996 from a loss of $303,000 in fiscal 1995. In each case, the changes resulted from changes in the rates of exchange between the U.S. dollar and local currencies of the Company's international operations such as the Malaysia ringgit and Singapore dollar. See Note 2 of Notes to Consolidated Financial Statements. The Company has historically not actively engaged in substantial exchange rate hedging activities. The Company from time to time may enter into forward exchange contracts or other hedging activities with respect to other specific, fixed foreign currency obligations. Because the Company only hedges fixed obligations, the Company does not expect that these hedging activities will have a material effect on its results of operations or cash flow. However, there can be no assurance that the Company will engage in any hedging activities in the future or that any of its hedging activities will be successful. INCOME (LOSS) FROM ASSOCIATED COMPANY The Company acquired 40% interest in FICO in December 1996. According to the equity method of accounting, the Company previously did not recognize revenue from sales by FICO, but based on its ownership interest recognized 40% of the net income or loss of the associated company. In fiscal 1997, the Company recorded its 40% share of the FICO's post-acquisition net income, amounting to $241,000. Flextracker, the joint venture with HTS in which the Company previously owned a 49% interest, commenced operations in June 1993. According to the equity method of accounting, the Company previously did not recognize revenue from sales by Flextracker, but based on its ownership interest recognized 49% of the net income or loss of the joint venture. Due to start-up costs and manufacturing inefficiencies, the Company recognized a loss of $729,000 and $70,000 associated with its interest in Flextracker in fiscal 1995 and fiscal 1994 respectively. The Company initially contributed $2.5 million for a 49% interest in Flextracker and HTS contributed $2.6 million for the remaining 51% interest. In April 1994 the Company and HTS each loaned $1 million to Flextracker. In December 1994, the Company acquired all of the net assets of Flextracker (except the $1.0 million loan made by HTS to Flextracker) for approximately $3.3 million. OTHER INCOME (EXPENSE) Other expense increased to $2.7 million in fiscal 1997 from $398,000 in fiscal 1996, mainly due to a $3.2 million write-off of publicly traded common stock received from a customer in 1997 in payment of $3.2 million in accounts receivable. As a result of a significant decline in the market value of this common stock following its receipt by the Company, this common stock was subsequently deemed to be permanently impaired in 1997 resulting in a $3.2 million increase in other expense. Other expense in fiscal 1997 also included bank commitment fees of $750,000 written off in March 1997 when the bank's commitment expired 23 24 unused. See "-- Liquidity and Capital Resources." These increased expenses in 1997 were offset by $898,000 received in fiscal 1997 under the Company's business interruption insurance policy as a result of an April 1996 fire at its facilities in Doumen, China and $276,000 of grants to the Company from the local government in Wales. Other income (expense) decreased from income of $34,000 in fiscal 1995 to an expense of $398,000 in fiscal 1996. PROVISION FOR INCOME TAXES The Company is structured as a holding company, conducting its operations through manufacturing and marketing subsidiaries in Singapore, Malaysia, Hong Kong, Mauritius, China, the United Kingdom, Sweden and the United States. Each of these subsidiaries is subject to taxation in the country in which it has been formed. The Company's Asian manufacturing subsidiaries have at various times been granted certain tax relief in each of these countries, resulting in lower taxes than would otherwise be the case under ordinary tax rates. See Note 7 of Notes to Consolidated Financial Statements. The Company's consolidated effective tax rate for any given period is calculated by dividing the aggregate taxes incurred by each of the operating subsidiaries and the holding company by the Company's pre-tax income. Losses incurred by any subsidiary or by the holding company are not deductible by the entities incorporated in other countries in the calculation of their respective local taxes. For example, the charge for the closing of the Texas facility in fiscal 1997 was incurred by a U.S. subsidiary that did not have income against which this charge could be offset. The ordinary corporate tax rates for calendar 1997 were 26%, 16.5% and 15% in Singapore, Hong Kong and China, respectively, and 30% on manufacturing operations in Malaysia. In addition, the tax rate is de minimis in Labuan, Malaysia and Mauritius where the Company's offshore marketing and distribution subsidiaries are located. The Company's U.S. and U.K. subsidiaries are subject to ordinary corporate tax rates of 35% and 33% respectively. However, these tax rates did not have any material impact on the Company's taxes in fiscal 1997 due to the losses of these two subsidiaries in this period. The Company's Swedish subsidiary, which began operation on March 27, 1997 with the acquisition of the Karlskrona Facilities, will be subject to an ordinary corporate tax rate of 28%. The Company's consolidated effective tax rate was 22.9% in fiscal 1997. The provision for plant closings of $1.3 million and the $29.0 million write-off of In-Process R&D in fiscal 1996 resulted in aggregate net losses for that year, but the Company incurred taxes on the profitable operations of certain of its subsidiaries. If the provision for plant closings and In-Process R&D written off are excluded from such calculation, the Company's fiscal 1996 effective tax rate would have been 20%. The Company has structured its operations in Asia in a manner designed to maximize income in countries where tax incentives have been extended to encourage foreign investment or where income tax rates are low. The Company's Singapore subsidiary was granted an investment allowance incentive in respect of approved fixed capital expenditures subject to certain conditions. These allowances have been utilized to reduce its taxable income since fiscal 1991, and were fully utilized at the end of fiscal 1996. If the Singapore subsidiary sells, leases or disposes of assets in respect of which investment allowances have been granted before July 31, 1997, the amount of income previously exempted from Singapore tax will then become taxable at the standard rate of 26%. The Company's investments in its plants in Xixiang and Doumen, China fall under the "Foreign Investment Scheme" which entitles the Company to apply for a five year tax incentive. The Company obtained the tax incentive for the Doumen plant in December 1995 and the Xixiang plant in October 1996. With the approval, the Company's tax rates on income from these facilities during the incentive period will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the first profitable year. In fiscal 1993, the Company transferred its offshore marketing and distribution functions to a newly formed marketing subsidiary located in Labuan, Malaysia, where the tax rate is de minimis. In February 1996, the Company transferred Astron's sales and marketing business to a newly formed subsidiary in Mauritius, where the tax rate is 0%. The Company's Malaysian manufacturing subsidiary has obtained a five year pioneer certificate from the relevant authority that provides a tax exemption on manufacturing income from certain products in Johore, Malaysia. To date, this incentive has had a limited impact on the Company due to the 24 25 relatively short history of its Malaysian operations and its tax allowances and losses carry forward. The Company's facility in Shekou, China, which was closed in fiscal 1996, was located in a "Special Economic Zone" and was an approved "Product Export Enterprise" that qualified for a special corporate income tax rate of 10.0%. If tax incentives are not renewed upon expiration, if the tax rates applicable to the Company are rescinded or changed, or if tax authorities were to challenge successfully the manner in which profits are recognized among the Company's subsidiaries, the Company's worldwide effective tax rate would increase and its results of operations and cash flow would be adversely affected. Substantially all of the products manufactured by the Company's Asian subsidiaries are sold to U.S. based customers. While the Company believes that profits from its Asian operations are not sufficiently connected to the U.S. to give rise to U.S. federal or state income taxation, there can be no assurance that U.S. tax authorities will not challenge the Company's position or, if such challenge is made, that the Company will prevail in any such disagreement. If the Company's Asian profits became subject to U.S. income taxes, the Company's taxes would increase and its results of operations and cash flow would be adversely affected. In addition, the expansion by the Company of its operations in North America and Northern Europe may increase its worldwide effective tax rate. At March 31, 1997, the Company had net operating loss carryforwards of approximately $30.7 million for U.S. federal income tax purposes which will expire between 2003 and 2011 if not previously utilized. Utilization of the U.S. net operating loss carryforwards may be subject to an annual limitation due to the change in ownership rules provided by the Internal Revenue Code of 1986. This limitation and other restrictions provided by the Internal Revenue Code of 1986 may reduce the net operating loss carryforward such that it would not be available to offset future taxable income of the U.S. subsidiary. At March 31, 1997, the Company had net operating loss carryforwards of approximately $10.0 million and $632,000 in the U.K. and Malaysia, respectively. The utilization of these net operating loss carryforwards is limited to the future operations of the Company in the tax jurisdictions in which such carryforwards arose. These losses carryforward indefinitely. See Note 8 of Notes to Consolidated Financial Statements. VARIABILITY OF RESULTS The Company has experienced, and expects to continue to experience, significant periodic and quarterly fluctuations in the Company's results of operations due to a variety of factors. These factors include, among other things, timing of orders, the short-term nature of most customers' purchase commitments, volume of orders relative to the Company's capacity, customers' announcement and introduction and market acceptance of new products or new generations of products, evolutions in the life cycles of customers' products, timing of expenditures in anticipation of future orders, effectiveness in managing manufacturing processes, changes in cost and availability of labor and components, product mix, and changes or anticipated changes in economic conditions. In addition, the Company's net sales are adversely affected by the observance of local holidays during the fourth fiscal quarter in Malaysia and China, reduced production levels in Sweden in July, and the reduction in orders by certain customers in the fourth quarter reflecting a seasonal slowdown following the Christmas holiday. The market segments served by the Company are also subject to economic cycles and have in the past experienced, and are likely in the future to experience, recessionary periods. A recessionary period affecting the industry segments served by the Company could have a material adverse effect on the Company's results of operations. Results of operations in any period should not be considered indicative of the results to be expected for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's Ordinary Shares. In future, periods, the Company's revenue or results of operations may be below the expectations of public market analysts and investors. In such event, the price of the Company's Ordinary Shares would likely be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations from the proceeds of public offerings of equity securities, cash generated from operations, bank debt and lease financing of capital equipment. In March 1997, the Company terminated the $48.0 million line of credit from several banks and obtained a new $175.0 million credit facility from BankBoston, N.A. At March 31, 1997 the Company had cash balances totaling $23.6 million, 25 26 outstanding bank borrowings of $111 million, and an aggregate of $64.0 million available for borrowing under the New Credit Facility (as defined below). Cash provided by operating activities in fiscal 1997 was $46.7 million, consisting primarily of net income, depreciation, provision for plant closing and decreases in accounts receivable. Cash used for operating activities in fiscal 1996 was $710,000, consisting primarily of net profit of $15.1 million (excluding In-Process R&D written off and provision for plant closings), depreciation, amortization and allowance for doubtful debt and obsolescence. Cash used for operating activities was primarily comprised of increases in accounts receivable and inventories reflecting higher sales in fiscal 1996. Accounts receivable, net of allowance for doubtful accounts, decreased to $69.3 million at March 31, 1997 from $78.1 million at March 31, 1996. The decrease in accounts receivable was primarily due to improved collection of accounts receivable during fiscal 1997. Inventories increased to $106.6 million at March 31, 1997 from $52.6 million at March 31, 1996. The increase in inventories was mainly a result of the acquisition of the $55 million of inventories at the Karlskrona Facilities. The Company's allowances for doubtful accounts increased from $3.6 million at March 31, 1996 to $5.7 million at March 31, 1997. The Company allowance for inventory obsolescence increased to $6.2 million at March 31, 1997 from $4.6 million at March 31, 1996. The increases in the allowances were due to the increases in sales and inventories during fiscal 1997 and the $3.2 million provision for doubtful debts, and write-off shares taken in payment of receivables, related to one specific customer and inventory exposure relating to the closing of the Texas facility. Accounts receivable, net of allowance for doubtful accounts, increased to $78.1 million at March 31, 1996 from $44.3 million at March 31, 1995 and inventories increased to $52.6 million at March 31, 1996 from $30.2 million at March 31, 1995. The increase in accounts receivable and inventories was mainly due to the 88.9% increase in sales during fiscal 1996. The Company's allowances for doubtful accounts increased from $1.8 million at March 31, 1995 to $3.6 million at March 31, 1996. The Company's allowance for inventory obsolescence increased from $1.9 million at March 31, 1995 to $4.6 million at March 31, 1996. The increases in the allowances were due to the increases in sales and inventories during fiscal 1996 and the $1.0 million provision for inventory exposure relating to the closing of the satellite receiver product line in one of the Company's Malaysia plants. Cash used for investing activities in fiscal 1997 was $112.0 million, consisting primarily of $82.4 million for the acquisition of the Karlskrona Facilities, and $27.0 million of expenditures for machinery and equipment in the Company's, China, Mexico and California manufacturing facilities and $3.0 million cash paid in November for the 40% interest in FICO. Cash used for investing activities in fiscal 1996 consisted primarily of $15.8 million of expenditures for machinery and equipment in the Company's Texas, China and California manufacturing facilities as well as payment of $15.2 million for the cash portion of the A&A and Astron acquisitions. Net cash provided by financing activities in fiscal 1997 was $82.4 million, consisting primarily of bank borrowings of $152.8 million and capital lease financing. Cash used for financing activities in fiscal 1997 consisted primarily of $56 million repayment to banks, $10.5 million repayment of notes to Astron's ex-shareholders (part of purchase consideration) and $8 million repayment of capital lease obligations. Net cash provided by financing activities in fiscal 1996 was $31.6 million, consisting primarily of $22.3 million from the sale of 1,000,000 newly issued Ordinary Shares and net bank borrowings of $12.3 million. During the quarter ended March 31, 1997, the Company obtained a commitment for a new $100.0 million credit facility for which it paid commitment fees of $750,000. Ultimately, however, the Company required a larger credit facility in order to fund the acquisition of the Karlskrona Facilities. As a result, the $100.0 million facility was never consummated and expired during the quarter unused. Instead of consummating this $100.0 million credit facility and borrowing under this commitment, the Company entered into the $175.0 million Credit Facility in March 1997 to provide funding for the acquisition of the Karlskrona Facilities, for capital expenditures and for general working capital. The Company paid a separate $2.2 million 26 27 fee for the Credit Facility, which, together with other direct costs of the facility, was capitalized and is being amortized over the term of the Credit Facility. The Credit Facility consists of two loan agreements provided by the BankBoston, N.A. as agent. Under the Credit Facility, subject to compliance with certain financial ratios and the satisfaction of customary borrowing conditions, the Company borrowed $70.0 million of term loans as of March 27, 1997 and the Company and its United States subsidiary may borrow up to an aggregate of $105.0 million of revolving credit loans. The revolving credit loans are subject to a borrowing base equal to 70% of consolidated accounts receivable and 20% of consolidated inventory. As of June 30, 1997, $69.0 million of revolving credit loans and $70.0 million of term loans were outstanding, and bore interest at a variable rate equal, as of June 30, 1997, to approximately 8.4% per annum. The term loans amortize over a five-year period and are subject to certain mandatory prepayment provisions. Loans under the revolving credit facility will mature in March 2000. The Company intends to use the net proceeds from this offering to repay a portion of the outstanding term loans, and intends to use the net proceeds from the anticipated issuance of the Senior Subordinated Notes to repay all of the remaining outstanding borrowings under the Credit Facility. See "Use of Proceeds." Following such repayment, the Company anticipates increasing the aggregate principal amount of revolving credit loans that may be made under the Credit Facility and the Company anticipates that it will from time to time borrow such revolving credit loans to fund its operations and growth. No assurances can be given, however, as to the availability or amount of any such increase. The Credit Facility is secured by a lien on substantially all accounts receivable and inventory of the Company and its subsidiaries, as well as a pledge of the Company's shares in certain of its subsidiaries. Loans to the Company are guaranteed by certain of its subsidiaries and loans to the Company's United States subsidiary are guaranteed by the Company and by certain of the Company's subsidiaries. The Credit Facility contains covenants and provisions that, among other things, prohibit the Company and its subsidiaries from (i) incurring additional indebtedness, except for subordinated debt evidenced by the Subordinated Notes (as defined therein) in an aggregate principal amount of not more than $150.0 million, certain purchase money debt and leases not to exceed $25.0 million and certain subsidiary and other debt not to exceed $15.0 million; (ii) incurring liens on their property (subject to certain exceptions); (iii) making capital investments exceeding $65.0 million in fiscal 1998 and $25.0 million annually thereafter; (iv) engaging in certain sales of assets; (v) making acquisitions that do not meet certain criteria; and (vi) making certain other investments. In addition, the Credit Facility prohibits the payment of dividends or other distributions by the Company to its shareholders. The Credit Facility also requires that the Company satisfy certain financial covenants and tests on a consolidated basis which, among other things, provide that the Company's: (i) Leverage ratio (the ratio of Total Debt to EBITDA (each as defined therein)) must not exceed 4.25 : 1.00 (reducing to 2.75 : 1.00 by April 1, 1999), (ii) Interest Coverage Ratio (the ratio of EBITDA to Consolidated Interest Expense (as defined therein)) must not be less than 3.00 : 1.00 (increasing to 4.00 : 1.00 by January 1, 1999), (iii) Fixed Charge Coverage Ratio (the ratio of EBITDA to Fixed Charges (as defined therein)) must not exceed 1.15 : 1.00 (increasing to 1.25 : 1.00 by April 1, 1999) and (iv) Consolidated Tangible Net Worth (as defined therein) must not be less than (a) 95% of Consolidated Tangible Worth at March 31, 1997 plus (b) 75% of positive Consolidated Net Income (as defined therein) plus (c) 100% of the proceeds of any Equity Issuance (as defined therein). The Company's capital expenditures in fourth quarter of fiscal 1997 were approximately $9.1 million (excluding the purchase price for the Karlskrona Facilities) and the Company anticipates that its capital expenditures in fiscal 1998 will be approximately $65.0 million, primarily relating to the development of new and expanded facilities in San Jose, California, Guadalajara, Mexico and Doumen, China. In addition, the Company expended cash in the fourth quarter of fiscal 1997 and will be required to expend cash in fiscal 1998 pursuant to the terms of the Astron acquisition. The Company will be required to make a principal payment of $5.0 million in February 1998, pursuant to the terms of a note issued by it in connection with the Astron acquisition and paid an earnout of $6.25 million in cash in April 1997. The Company is also required to make a $14.0 million payment to an entity affiliated with Stephen Rees in June 1998, $5.0 million of this amount is payable in cash and $9.0 million is payable in cash or, at the option of the Company, in Ordinary Shares, and 27 28 the Company intends to pay the $9.0 million portion in Ordinary Shares. The Company believes that the existing cash balances, together with anticipated cash flow from operations and amounts available under the New Credit Facility, will be sufficient to fund its operations through fiscal 1998. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS The Company's future operating results will depend upon conditions in its market that may affect demand for its services. The following factors, among others, have in some cases affected, and in the future could affect, the Company's actual results and could cause such results to differ materially from those expressed in forward-looking statements made by the Company. Risks Of Karlskrona Acquisition The acquisition of the Karlskrona Facilities and the execution of the Purchase Agreement (together the "Karlskrona Acquisition") represent a significant expansion of the Company's operations, and entail a number of risks. In particular, the Karlskrona Facilities had operated as captive manufacturing facilities for Ericsson prior to March 27, 1997 and are now being integrated into the Company's ongoing manufacturing operations. This requires optimizing production lines, implementing new management information systems, implementing the Company's operating systems, and assimilating and managing existing personnel. See "-- Overview." The difficulties of this integration may be further complicated by the geographical distance of the Karlskrona Facilities from the Company's other operations in East Asia and North America. In addition, the Karlskrona Acquisition has increased and will continue to increase the Company's expenses and working capital requirements, and has burdened the Company's management resources. In the event the Company is unsuccessful in integrating these operations, the Company would be materially adversely affected. As a result of the Karlskrona Acquisition, sales to Ericsson represent, and the Company expects will continue to represent, a large portion of its net sales. The Company currently anticipates that sales to Ericsson will represent from 25% to 40% of its net sales in fiscal 1998. See "Certain Factors Affecting Future Operating Results -- Customer Concentration; Dependence on Electronics Industry" and "Business -- Karlskrona Acquisition." Prior to the Karlskrona Acquisition, Ericsson was not a substantial customer of the Company. The Company has no experience operating in Sweden, and there can be no assurance that the Company can achieve acceptable levels of profitability, or reduce costs and prices to Ericsson over time as contemplated by the Purchase Agreement. In addition, there can be no assurance that the Company will not encounter difficulties in meeting Ericsson's expectations as to product quality and timeliness. If Ericsson's requirements exceed the volume anticipated by the Company, the Company may be unable to meet these requirements on a timely basis. The Company's inability to meet Ericsson's volume, quality, timeliness and cost requirements, and to quickly resolve any other issues with Ericsson, could have a material adverse effect on the Company and its results of operations. There can also be no assurance that Ericsson will purchase a sufficient quantity of products from the Company to meet the Company's expectations or that the Company will utilize a sufficient portion of the capacity of the Karlskrona Facilities to achieve profitable operations. The Company intends to use the Karlskrona Facilities to manufacture products for OEMs other than Ericsson. The Company has no commitments by any third party to purchase manufacturing services to be provided at the Karlskrona Facilities, and no assurance can be given that the Company will be successful in marketing and providing manufacturing services to third parties from the Karlskrona Facilities. Ericsson also has certain rights to be consulted on the management of the Karlskrona Facilities and to approve the use of the Karlskrona Facilities for Ericsson's competitors, or for other customers where such use might adversely affect Ericsson's access to production capacity at the facilities. Further, no assurances can be given as to the Company's ability to expand manufacturing capacity at the Karlskrona Facilities. The Purchase Agreement contains cost reduction targets and price limitations and imposes on the Company certain manufacturing quality requirements, and there can be no assurance that the Company can achieve acceptable levels of profitability under the Purchase Agreement or reduce costs and prices to Ericsson over time as contemplated by the Purchase Agreement. In addition, the Purchase Agreement requires that the Company maintain a ratio of equity to total liabilities, debt and equity of at least 25%, and a current ratio of at 28 29 least 120%. Further, the Purchase Agreement prohibits the Company from selling or relocating the equipment acquired in the transaction without Ericsson's consent. A material breach by the Company of any of the terms of the Purchase Agreement could allow Ericsson to repurchase the assets conveyed to the Company at the Company's book value or to obtain other relief, including the cancellation of outstanding purchase orders or termination of the Purchase Agreement. Ericsson also has certain rights to be consulted on the management of the Karlskrona Facilities and to approve the use of the Karlskrona Facilities for Ericsson's competitors or for other customers where such use might adversely affect Ericsson's access to production capacity at the facilities. In addition, without Ericsson's consent, the Company may not enter into any transactions that could adversely affect its ability to continue to supply products and services to Ericsson under the Purchase Agreement or its ability to reduce costs and prices to Ericsson. As a result of these rights, Ericsson may, under certain circumstances, retain a significant degree of control over the Karlskrona Facilities and their management. See "Business -- Karlskrona Acquisition." Increased Leverage At March 31, 1997, the Company had consolidated indebtedness of approximately $150.6 million (including bank borrowings, long-term debts and capitalized lease obligations, and excluding $9.0 million of liabilities relating to the Astron acquisition that may be repaid in cash or, at the option of the Company, in the Company's Ordinary Shares). The Company's indebtedness as of March 31, 1997 included borrowings under the New Credit Facility on March 27, 1997 of $111.0 million which substantially increased the Company's leverage. As a result, the Company's ratio of indebtedness to shareholders equity increased from approximately 88% at March 31, 1996 to 181% at March 31, 1997. See "-- Liquidity and Capital Resources." The degree to which the Company is leveraged could have important consequences to the Company and its shareholders, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, product development, acquisitions or other purposes may be limited or impaired; (ii) the Company's operating flexibility with respect to certain matters will be limited by covenants that will limit the ability of the Company and certain of its subsidiaries to incur additional indebtedness, grant liens, make capital expenditures, pay dividends, redeem capital stock or prepay certain subordinated indebtedness and enter into sale and leaseback transactions; and (iii) the Company's degree of leverage may make it more vulnerable to economic downturns, may limit its ability to pursue other business opportunities and may reduce its flexibility in responding to changing business and economic conditions. The Company's ability to generate cash for the repayment of debt will be dependent upon the future performance of the Company's businesses, which will in turn be subject to financial, business, economic and other factors affecting the business and operations of the Company, including factors beyond its control, such as prevailing economic conditions. The Company may seek growth through selective acquisitions, including significant acquisitions. The Company could incur substantial additional indebtedness in connection with a significant acquisition, in which event the Company's leverage would be increased. Management of Expansion and Consolidation The Company is currently experiencing a period of rapid expansion through both internal growth and acquisitions, with net sales increasing from $80.7 million in fiscal 1992 to $490.6 million in fiscal 1997. In addition to its recent acquisitions, the Company may from time to time pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. There can be no assurance that the Company's historical growth will continue or that the Company will successfully manage the integration of the acquired operations. Expansion has caused, and is expected to continue to cause, strain on the Company's infrastructure, including its managerial, technical, financial and other resources. To manage further growth, the Company must continue to enhance financial controls and hire additional engineering and sales personnel. Continued growth will also require increased investments to enhance management information systems capabilities and to add manufacturing capacity. The Company may experience certain inefficiencies as it integrates new operations and manages geographically dispersed operations. There can be no assurance that the Company will be able to manage its expansion effectively, and a failure to do so could have 29 30 a material adverse effect on the Company's results of operations. In addition, the Company's results of operations would be adversely affected if its new facilities do not achieve growth sufficient to offset increased expenditures associated with expansion. Expansion through acquisitions and internal growth has contributed to the Company's incurring significant accounting charges and experiencing volatility in its operating results. In the fourth quarter of fiscal 1996, the Company reported a substantial loss as a result of the write-off of in-process research and development charges related to the Astron acquisition and closure of a facility in Malaysia and a facility in China. In fiscal 1997, the Company reported charges associated with closing its manufacturing facility in Texas, downsizing manufacturing operations in Singapore, and writing off obsolete equipment and incurring severance obligations at the nCHIP semiconductor fabrication facility. There can be no assurance that the Company will not continue to experience volatility in its operating results or incur write-offs in connection with expansion, acquisitions and consolidation. Furthermore, the Company has recently completed the construction of significant new facilities in Guadalajara, Mexico, Doumen, China, and San Jose, California, resulting in new fixed and operating expenses, including substantial increases in depreciation expense that will increase the Company's cost of sales. There can be no assurances that the Company will utilize a sufficient portion of the capacity of these facilities to offset the impact of these expenses on its gross margins and operating income. If revenue levels do not increase sufficiently to offset these new expenses, the Company's operating results could be materially adversely affected. The Company is beginning the process of replacing its management information systems. The new systems will significantly affect many aspects of the Company's business including its manufacturing, sales and marketing, and accounting functions, and the Company's ability to integrate the Karlskrona Facilities, which must be converted to the new system, and the successful implementation of these systems will be important to facilitate future growth. The Company intends to implement the new system incrementally on a regional basis and currently anticipates that the implementation of the new management information systems will take at least 18 months. The Company anticipates expending from $7.0 million to $15.0 million in fiscal 1998 and 1999 to implement the new management information system, and anticipates funding these expenditures with cash from operations and borrowings under its credit facility. Delays or difficulties could be encountered in the implementation process, which could cause significant disruption in operations, including problems with the delivery of its products or an adverse impact on its ability to access timely and accurate financial and operating information and could materially increase the cost of implementing the new management information system. If the Company is not successful in implementing its new systems or if the Company experiences difficulties in such implementation, the Company's operating results could be materially adversely affected. Acquisitions Acquisitions have represented a significant portion of the Company's growth strategy, and the Company intends to continue to pursue attractive acquisition opportunities. Acquisitions involve a number of risks in addition to those described under "-- Management of Expansion and Consolidation" that could adversely affect the Company, including the diversion of management's attention, the integration and assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. The Company may not have had any experience with technologies, processes and markets involved with the acquired business and accordingly may lack the management and marketing experience that will be necessary to successfully operate and integrate the business. The successful operation of an acquired business will require communication and cooperation in product development and marketing among senior executives and key technical personnel. Given the inherent difficulties involved in completing a major business combination, there can be no assurance that such cooperation will occur or that integration of the respective businesses will be successful and will not result in disruption in one or more sectors of the Company's business. In addition, there can be no assurance that the Company will retain key technical, management, sales and other personnel, that the market will favorably view the Company's entry into a new industry or market or that the Company will realize any of the other anticipated benefits of the acquisition. Furthermore, additional acquisitions would require investment of financial resources, and may require debt or equity financing. No assurance can be given that the Company 30 31 will consummate any acquisitions in the future, that any past or future acquisition by the Company will not materially adversely affect the Company or that any such acquisition will enhance the Company's business. Since the Company's acquisition of Astron, the net sales generated by Astron's then-existing products and services, and by its products and services then under development, have grown at rates significantly lower than those anticipated by the Company at the time of the acquisition and significantly lower than those assumed in the independent valuation used by the Company in allocating the purchase price of Astron to the assets acquired. The Company has not yet completed development of other technologies that were material to its valuation of Astron and which it initially anticipated completing in fiscal 1996 and 1997. The completion of such development is subject to a number of uncertainties, including potential difficulties in optimizing manufacturing processes and the potential development of alternative technologies by competitors that could render Astron's technologies uncompetitive or obsolete. Accordingly, no assurances can be given as to whether, or when, the Company will be able to complete the development of such technologies, as to the cost of such development, or as to potential sales of products based on such technologies. The capabilities provided by the technologies under development may not otherwise be available to the Company. Accordingly, the failure by the Company to successfully develop such technologies would limit the Company's ability to compete effectively for business requiring certain advanced capabilities, and would prevent it from achieving the anticipated benefits of the Astron acquisition. See "-- Overview." Customer Concentration; Dependence on Electronics Industry A small number of customers are currently responsible for a significant portion of the Company's net sales. In fiscal 1997, the Company's five largest customers accounted for approximately 46.0% of net sales. Approximately 13.3% and 11% of the Company's net sales for fiscal 1997 were derived from sales to Lifescan and U.S. Robotics, respectively. The Company anticipates that a small number of customers will continue to account for a large portion of its net sales as it focuses on strengthening and broadening relationships with leading OEMs. The Company expects that sales to Ericsson will represent a significant portion of its net sales. See "Business -- Customers" and "-- Karlskrona Acquisition." The composition of the group comprising the Company's largest customers has varied from year to year, and there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, if at all. For example, the Company expects that its sales to Global Village Communications in fiscal 1998 will be materially lower than in recent periods. Significant reductions in sales to any of these customers, or the loss of one or more major customers, would have a material adverse effect on the Company. The Company generally does not obtain firm long-term volume purchase commitments from its customers, and over the past few years has experienced reduced lead-times in customer orders. In addition, customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of canceled, delayed, or reduced contracts with new business cannot be assured. These risks are exacerbated because a majority of the Company's sales are to customers in the electronics industry, which is subject to rapid technological change and product obsolescence. The factors affecting the electronics industry in general, or any of the Company's major customers in particular, could have a material adverse effect on the Company. Credit terms are extended to customers after performing credit evaluations, which continue throughout a customer's contract period. Credit losses have occurred in the past, and no assurances can be given that credit losses, which could be material, will not occur in the future. The Company's concentration of customers increases the risk that any credit loss would have a material adverse effect on the Company. Variability of Customer Requirements and Operating Results Contract manufacturers must provide increasingly rapid product turnaround and respond to ever-shorter lead times. The Company generally does not obtain long-term purchase orders but instead works with its customers to anticipate the volume of future orders. In certain cases, the Company will procure components without a customer commitment to pay for them, and the Company must continually make other significant decisions for which it is responsible, including the levels of business that it will seek and accept, production 31 32 schedules, personnel needs and other resource requirements. A variety of conditions, both specific to the individual customer and generally affecting the industry, may cause customers to cancel, reduce or delay orders. Cancellations, reductions or delays by a significant customer or by a group of customers would adversely affect the Company. On occasion, customers may require rapid increases in production, which can stress the Company's resources and reduce margins. Although the Company has increased its manufacturing capacity, there can be no assurance that the Company will have sufficient capacity at any given time to meet its customers' demands if such demands exceed anticipated levels. In addition to the variability resulting from the short-term nature of its customers' commitments, other factors have contributed, and may contribute in the future to significant periodic and quarterly fluctuations in the Company's results of operations. These factors include, among other things: timing of orders; volume of orders relative to the Company's capacity; customers' announcements, introductions and market acceptance of new products or new generations of products; evolution in the life cycles of customers' products; timing of expenditures in anticipation of future orders; effectiveness in managing manufacturing processes; changes in cost and availability of labor and components; product mix; and changes or anticipated changes in economic conditions. In addition, the Company's revenues are adversely affected by the observance of local holidays during the fourth fiscal quarter in Malaysia and China, reduced production levels in Sweden in July, and the reduction in orders by certain customers in the fourth fiscal quarter reflecting a seasonal slowdown following the Christmas holiday. Expansion through acquisition and internal growth has contributed to the Company's incurring significant accounting charges and to volatility in its operating results. In the fourth quarter of fiscal 1996, the Company reported a substantial loss as a result of the write off of in-process research and development charges related to the Astron acquisition and closure of facilities in Malaysia and China. In the third and fourth quarters of fiscal 1997, the Company reported charges associated with the closure of its manufacturing facilities in Texas, the termination of manufacturing operations in Singapore and the write-off of obsolete equipment at the nCHIP semiconductor fabrication facility. There can be no assurance that the Company will not continue to experience volatility in its operating results or incur write-offs in connection with expansion, acquisitions and consolidation. The market segments served by the Company are also subject to economic cycles and have in the past experienced, and are likely in the future to experience, recessionary periods. A recessionary period affecting the industry segments served by the Company could have a material adverse effect on the Company's results of operations. Results of operations in any period should not be considered indicative of the results to be expected for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's Ordinary Shares. In future periods, the Company's revenue or results of operations may be below the expectations of public market analysts and investors. In such event, the price of the Company's Ordinary Shares would likely be materially adversely affected. See "-- Results of Operations." Rapid Technological Change The markets in which the Company's customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. These conditions frequently result in short product life cycles. The Company's success will depend to a significant extent on the success achieved by its customers in developing and marketing their products, some of which are new and untested. If technologies or standards supported by customers' products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. See "-- Results of Operations." The Company has made substantial investments in developing advanced interconnect technological capabilities. See "Business -- Services." These capabilities, primarily MCMs, miniature gold-finished PCBs and epoxy molding conductive compounds, currently account for a relatively small portion of the overall market for electronic interconnect products. The ability of the Company to achieve desired operating results will depend upon the extent to which customers design, manufacture and adopt systems based on these advanced technologies. There can be no assurance that the Company will be able to develop and exploit these 32 33 technologies successfully. In addition, there can be no assurance that the Company will be able to exploit new technologies as they are developed or to adapt its manufacturing processes, technologies and facilities to address emerging customer requirements. Competition The electronics contract manufacturing industry is extremely competitive and includes hundreds of companies, several of whom have achieved substantial market share. The Company competes against numerous domestic and foreign contract manufacturers, and current and prospective customers also evaluate the Company's capabilities against the merits of internal production. In addition, in recent years the electronics contract manufacturing industry has attracted a significant number of new entrants, including large OEMs with excess manufacturing capacity, and many existing participants, including the Company, have substantially expanded their manufacturing capacity by expanding their facilities and adding new facilities. In the event of a decrease in overall demand for contract manufacturing services, this increased capacity could result in substantial pricing pressures, which could adversely affect the Company's operating results. Certain of the Company's competitors, including Solectron Corporation and SCI Systems, have substantially greater manufacturing, financial, research and development and marketing resources than the Company. The Company believes that the principal competitive factors in the segments of the contract manufacturing industry in which it operates are cost, technological capabilities, responsiveness and flexibility, delivery cycles, location of facilities, product quality and range of services available. Failure to satisfy any of the foregoing requirements could materially adversely affect the Company's competitive position. Risk of Increased Taxes The Company has structured its operations in a manner designed to maximize income in countries where tax incentives have been extended to encourage foreign investment or where income tax rates are low. If these tax incentives are not renewed upon expiration, if the tax rates applicable to the Company are rescinded or changed, or if tax authorities successfully challenge the manner in which profits are recognized among the Company's subsidiaries, the Company's taxes would increase and its results of operations and cash flow would be adversely affected. Substantially all of the products manufactured by the Company's Asian subsidiaries are sold to U.S.-based customers. While the Company believes that profits from its Asian operations are not sufficiently connected to the U.S. to give rise to U.S. federal or state income taxation, there can be no assurance that U.S. tax authorities will not challenge the Company's position or, if such challenge is made, that the Company would prevail in any such dispute. If the Company's Asian profits became subject to U.S. income taxes, the Company's worldwide effective tax rate would increase and its results of operations and cash flow would be adversely affected. The expansion by the Company of its operations in North America and Northern Europe may increase its worldwide effective tax rate. See "-- Provision for Income Taxes." Risks of International Operations The Company has substantial manufacturing operations located in China, Malaysia, Sweden and the United States. In addition, the Company has recently constructed a manufacturing campus in Mexico, where the Company has never manufactured products. The Company's net sales derived from operations outside of the United States was $327.0 million in fiscal 1997, $161.8 million of which was derived from operations in Hong Kong and China, and was $148.4 million in the three months ended June 30, 1997, $50.0 million of which was derived from operations in Hong Kong and China. The geographical distances between Asia, North America and Europe create a number of logistical and communications challenges. Because of the location of manufacturing facilities in a number of countries, the Company is affected by economic and political conditions in those countries, including fluctuations in the value of currency, duties, possible employee turnover, labor unrest, lack of developed infrastructure, longer payment cycles, greater difficulty in collecting accounts receivable, the burdens and costs of compliance with a variety of foreign laws and, in certain parts of the world, political instability. Changes in policies by the U.S. or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer of funds, limitations on imports or exports, or the expropriation of private enterprises could also have a material adverse effect on the Company. The Company could also be adversely affected if the current policies 33 34 encouraging foreign investment or foreign trade by its host countries were to be reversed. In addition, the attractiveness of the Company's services to its U.S. customers is affected by U.S. trade policies, such as "most favored nation" status and trade preferences for certain Asian nations. For example, trade preferences extended by the United States to Malaysia in recent years were not renewed in 1997. In particular, the Company's operations and assets are subject to significant political, economic, legal and other uncertainties in China and Mexico, where the Company is substantially expanding its operations. Risks Relating to China. The Company's operations and assets are subject to significant political, economic, legal and other uncertainties in China, where the Company is substantially expanding its operations. Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. No assurance can be given, however, that the Chinese government will continue to pursue such policies, that such policies will be successful if pursued, or that such policies will not be significantly altered from time to time. Despite progress in developing its legal system, China does not have a comprehensive and highly developed system of laws, particularly with respect to foreign investment activities and foreign trade. Enforcement of existing and future laws and contracts is uncertain, and implementation and interpretation thereof may be inconsistent. As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors. The Company could also be adversely affected by the imposition of austerity measures intended to reduce inflation, the inadequate development or maintenance of infrastructure or the unavailability of adequate power and water supplies, transportation, raw materials and parts, or a deterioration of the general political, economic or social environment in China. In addition, China currently enjoys Most Favored Nation ("MFN") status granted by the United States, pursuant to which the United States imposes the lowest applicable tariffs on Chinese exports to the United States. The United States annually reconsiders the renewal of MFN trading status for China. No assurance can be given that China's MFN status will be renewed in the future years. China's loss of MFN status could adversely affect the Company by increasing the cost to the U.S. customers of products manufactured by the Company in China. The Company maintains certain administrative, procurement and manufacturing operations in Hong Kong, which may be influenced by the changing political situation in Hong Kong and by the general state of the Hong Kong economy. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to China, and Hong Kong became a Special Administrative Region ("SAR"). Based on current political conditions and the Company's understanding of the Basic Law of the Hong Kong SAR of China, the Company does not believe that the transfer of sovereignty over Hong Kong will have a material adverse effect on the Company. There can be no assurance, however, that changes in political, legal or other conditions will not result in such an adverse effect. Risks Relating to Mexico. The Mexican government exercises significant influence over many aspects of the Mexican economy. Accordingly, the actions of the Mexican government concerning the economy could have a significant effect on private sector entities in general and the Company in particular. In addition, during the 1980s, Mexico experienced periods of slow or negative growth, high inflation, significant devaluations of the peso and limited availability of foreign exchange. As a result of the Company's recent expansion in Mexico, economic conditions in Mexico will affect the Company. Currency Fluctuations While Flextronics transacts business predominantly in U.S. dollars and most of its revenues are collected in U.S. dollars, a portion of Flextronics' costs such as payroll, rent and indirect operation costs, are denominated in other currencies such as Singapore dollars, Swedish kronor, Hong Kong dollars, Malaysian ringgit, British pounds sterling and Chinese renminbi. Historically, fluctuations in foreign currency exchange rates have not resulted in significant exchange losses to the Company. As a result of the Karlskrona 34 35 Acquisition, a significant portion of the Company's business has been, and is expected to continue to be, conducted in Swedish kronor. Changes in the relation of these and other currencies to the U.S. dollar will affect the Company's cost of goods sold and operating margins and could result in exchange losses. The impact of future exchange rate fluctuations on the Company's results of operations cannot be accurately predicted. The Company has historically not actively engaged in substantial exchange rate hedging activities. The Company from time to time may enter into forward exchange contracts or other hedging activities with respect to other specific, fixed foreign currency obligations. Because the Company only hedges fixed obligations, the Company does not expect that these hedging activities will have a material effect on its results of operations or cash flow. However, there can be no assurance that the Company will engage in any hedging activities in the future or that any of its hedging activities will be successful. See "-- Results of Operations -- Foreign Exchange Gain (Loss)." Over the last five years, the Chinese renminbi has experienced significant devaluation against most major currencies. The establishment of the current exchange rate system as of January 1, 1994 produced a significant devaluation of the renminbi from $1.00 to Rmb 5.7 to approximately $1.00 to Rmb 8.7. The rates at which exchanges of renminbi into U.S. dollars may take place in the future may vary, and any material increase in the value of the renminbi relative to the U.S. dollar would increase the Company's costs and expenses and therefore would have a material adverse effect on the Company. Limited Availability of Components A substantial majority of the Company's net sales are derived from turnkey manufacturing in which the Company is responsible for procuring materials, which typically results in the Company bearing the risk of component price increases. At various times there have been shortages of certain electronics components, including DRAMs, memory modules, logic devices, ASICs, laminates, specialized capacitors and integrated circuits in bare-die form. Component shortages could result in manufacturing and shipping delays or higher prices which could have a material adverse effect on the Company. Dependence on Key Personnel and Skilled Employees The Company's success depends to a large extent upon the continued services of key executives and skilled personnel. Generally, the Company's employees are not bound by employment or noncompetition agreements. The Company has entered into service agreements with certain officers, including Ronny Nilsson, Teo Buck Song, Michael McNamara and Tsui Sung Lam, some of which contain non-competition provisions and provides its officers and key employees with stock options that are structured to incentivize such employees to remain with the Company. However, there can be no assurance as to the ability of the Company to retain its officers and key employees. The loss of such personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to recruit, train and retain skilled and semi-skilled employees, particularly administrative, engineering and sales personnel. There is intense competition for skilled and semi-skilled employees, particularly in the San Jose, California market, and the Company's failure to recruit, train and retain such employees could adversely affect the Company's results of operations. Environmental Compliance Risks The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Substrates for its MCMs are manufactured on a semiconductor-type fabrication line in California owned by the Company. The Company is also expanding its PCB fabrication operations in China. Proper handling, storage and disposal of the metals and chemicals used in these manufacturing processes are important considerations in avoiding environmental contamination. Although the Company believes that its facilities are currently in material compliance with applicable environmental laws, and it monitors its operations to avoid violations arising from human error or equipment failures, there can be no assurances that violations will not occur. In the event of a violation of environmental laws, the Company could be held liable for damages and for the costs of remedial actions and could also be subject to revocation of its effluent discharge permits. Any such revocations could require the 35 36 Company to cease or limit production at one or more of its facilities, thereby having a material adverse effect on the Company's operations. Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, which could have a material adverse effect on the Company. Protection of Intellectual Property The Company relies on a combination of patent, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect its intellectual property. The Company seeks to protect certain of its technology under trade secret laws, which afford only limited protection. There can be no assurance that any of the Company's pending patent applications will be issued or that intellectual property laws will protect the Company's intellectual property rights. In addition, there can be no assurance that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to obtain and use information that the Company regards as proprietary. Furthermore, there can be no assurance that others will not independently develop similar technology or design around any patents issued to the Company. Moreover, effective protection of intellectual property rights may be unavailable or limited in certain foreign countries in which the Company operates. In particular, the Company may be afforded only limited protection of its intellectual property rights in China. The Company may in the future be notified that it is infringing certain patent or other intellectual property rights of others, although there are no such pending lawsuits against the Company or unresolved notices that it is infringing intellectual property rights of others. No assurance can be given that in the event of such infringement, licenses could be obtained on commercially reasonable terms, if at all, or that litigation will not occur. The failure to obtain necessary licenses or other rights or the occurrence of litigation arising out of such claims could materially adversely affect the Company. Volatility of Market Price of Ordinary Shares The stock market in recent years has experienced significant price and volume fluctuations that have affected the market prices of technology companies and that have often been unrelated to or disproportionately impacted by the operating performance of such companies. There can be no assurance that the market for the Ordinary Shares will not be subject to similar fluctuations. Factors such as fluctuations in the operating results of the Company, announcements of technological innovations or events affecting other companies in the electronics industry, currency fluctuations and general market conditions may have a significant effect on the market prices of the Company's securities, including the Ordinary Shares. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by ITEM 8 is incorporated by reference herein from Part IV, Item 14(a)(1) and (2). ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable 36 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS The names, ages and positions of the Company's Directors and officers as of June 30, 1997 are as follows:
NAME AGE POSITION - ----------------- --- ------------------------------------------------ Michael E. Marks 46 Chief Executive Officer and Director Tsui Sung Lam 47 President, Asia Pacific Operations and Director Robert R. B. 48 Senior Vice President of Finance and Dykes Administration and Director Ronny Nilsson 49 Senior Vice President, Europe Goh Chan Peng 42 Senior Vice President of Finance and Operations, Asia-Pacific Teo Buck Song 40 Vice President, Purchasing, Asia Pacific Michael McNamara 40 Vice President, President North American Operations Stephen J. L. 36 Senior Vice President, Worldwide Sales and Rees Marketing and Director Michael J. Moritz 42 Director Richard L. Sharp 50 Director Bernard J. 53 Director Lacroute
Michael E. Marks -- Mr. Marks has been the Company's Chief Executive Officer since January 1994 and its Chairman of the Board since July 1993. He has been a Director of the Company since December 1991. From November 1990 to December 1993, Mr. Marks was President and Chief Executive Officer of Metcal, Inc., a precision heating instrument company ("Metcal"). Mr. Marks received a B.A. and M.A. from Oberlin College and an M.B.A. from the Harvard Business School. Tsui Sung Lam -- Mr. Tsui has been the Company's President, Asia-Pacific since April 1997, and a Director since 1991. From January 1994 to April 1997, he served as the Company's President and Chief Operating Officer. From June 1990 to December 1993, he was the Company's Managing Director and Chief Executive Officer. From 1982 to June 1990, Mr. Tsui served in various positions for Flextronics, Inc., the Company's predecessor, including Vice President of Asian Operations. Mr. Tsui received Diplomas in Production Engineering and Management Studies from Hong Kong Polytechnic, and a Certificate in Industrial Engineering from Hong Kong University. Robert R. B. Dykes -- Mr. Dykes has served as a Director of the Company since January 1994 and since February 1997, has served as its Senior Vice President of Finance and Administration. Mr. Dykes was Executive Vice President, Worldwide Operations and Chief Financial Officer of Symantec Corporation, an application and system software products company, from 1988 to February 1997. Mr. Dykes received a Bachelor of Commerce and Administration degree from Victoria University in Wellington, New Zealand. Mr. Dykes is on the board of directors of Symantec Corporation. Ronny Nilsson -- Mr. Nilsson has served as the Company's Senior Vice President, Europe since April 1997. From May 1995 to April 1997, he was Vice President and General Manager, Supply & Distribution and Vice President, Procurement, of Ericsson Business Networks where he was responsible for facilities in Sweden, Austria, China, the Netherlands, Mexico and Australia. From January 1991 to May 1995, he was Director of Production at the EVOX+RIFA Group, a manufacturer of components, and Vice President of RIFA AB where he was responsible for factories in Sweden, Finland, Singapore and Indonesia. Mr. Nilsson received a certificate in Mechanical Engineering from the Lars Kagg School in Kalmar, Sweden and certificates from the Swedish Management Institute and the Ericsson Management Program. Goh Chan Peng -- Mr. Goh has served as the Company's Chief Financial Officer since July 1992 and as its Senior Vice President of Finance and Operations, Asia-Pacific since April 1997. From June 1990 to 37 38 July 1992, he was the Company's Director of Finance. From 1982 to June 1990, he served in various financial capacities at Flex Holdings Pte Limited, the predecessor to the Company, including Director of Finance and Finance Manager-Asia Pacific Region. Mr. Goh received a Bachelor of Commerce from Singapore Nanyang University and a Diploma in Personnel Management from Singapore Institute of Management. Teo Buck Song -- Mr. Teo has served as Vice President, Purchasing since April 1994. He was Director of Purchasing at Flex Holdings Pte Limited, the predecessor to the Company from 1988 to April 1994. From 1982 to 1988, he served in various operational capacities at Flex Holdings Pte Limited, the predecessor to the Company, including Purchasing Manager and Production Material Control Manager. Mr. Teo received a Production Engineering Diploma from Singapore Polytechnic. Michael McNamara -- Mr. McNamara has served as Vice President, President North American Operations since April 1994. From May 1993 to March 1994, he was President and Chief Executive Officer of Relevant Industries, Inc., which was acquired by the Company in March 1994. From May 1992 to May 1993, he was Vice President, Manufacturing Operations at Anthem Electronics, an electronics distributor. From April 1987 to May 1992, he was a Principal of Pittiglo, Rabin, Todd & McGrath, an operations consulting firm. Mr. McNamara received a B.S. from the University of Cincinnati and an M.B.A. from Santa Clara University. Stephen J. L. Rees -- Mr. Rees has served as a Director of the Company since April 1996, as Senior Vice President, Worldwide Sales and Marketing since May 1997, and as Chairman and Chief Executive Officer of Astron since the acquisition of Astron by the Company in February 1996. Mr. Rees has been Chairman and Chief Executive Officer of Astron since November 1991. Mr. Rees holds a B.A. in Finance from the City of London Business School and graduated in Production Technology and Mechanical Engineering from the HTL St. Polten Technical Institute in Austria. Michael J. Moritz -- Mr. Moritz has served as a Director of the Company since July 1993. Mr. Moritz has been a General Partner of Sequoia Capital, a venture capital firm, since 1988. Mr. Moritz also serves as director of Yahoo, Inc., Neomagic and several privately-held companies. Richard L. Sharp -- Mr. Sharp has served as a Director of the Company since July 1993. He has been the Chairman, President, Chief Executive Officer and a director of Circuit City Stores, Inc., a consumer electronics and appliances retailer, since June 1986. Mr. Sharp also serves as a director of S&K Famous Brands, Inc. and the Fort James Corporation. Bernard J. Lacroute -- Mr. Lacroute has served as a Director of the Company since July 1993. Mr. Lacroute has been a partner of Kleiner Perkins Caufield & Byers, a Northern California venture capital firm, since 1989. Mr. Lacroute also serves as a director of several privately-held companies. MANAGEMENT TEAM CHANGES As of May 1, 1997 Stephen Rees, Chairman of Astron, has taken over responsibility for world-wide sales and marketing and Dennis Stradford, formerly responsible for world-wide sales and marketing, is now responsible for sales in Europe. Tsui Sung Lam, formerly President and Chief Operating Officer, has assumed responsibility for Asian operations, and Ronny Nilsson, formerly with Ericsson, has assumed responsibility for European operations. Michael McNamara remains responsible for North American operations. Robert Dykes, a director, has become an executive officer of the Company, with responsibility for finance, information technology, legal and human resources and will assume the role of Chief Financial Officer, previously held by Goh Chan Peng, who assumed responsibility for finance, information technology and legal activities in Asia. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Ordinary Shares and other equity securities of the Company. Additionally, Directors, officers and 38 39 greater than ten-percent shareholders are required by Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that there was compliance for the year ended March 31, 1997 with all Section 16(a) filing requirements applicable to the Company's Directors, officers and greater than ten-percent (10%) beneficial owners. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth all compensation awarded, earned or paid for services rendered in all capacities to the Company and its subsidiaries during each of fiscal 1995, 1996 and 1997 to the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers who were serving as executive officers at the end of fiscal 1997 (the "Named Executive Officers"). See "Item 10 -- Directors and Executive Officers of the Registrant -- Management Team Changes." This information includes the dollar values of base salaries, bonus awards, the number of shares subject to stock options granted and certain other compensation, if any, whether paid or deferred. The Company does not grant stock appreciation rights (except as noted in footnote (1) in the Option Grants in Fiscal 1997 table) and has no long-term compensation benefits other than the stock options. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------ -------------------------------------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS - ------------------------------------------------- --------- --------- ------------- ------------ Michael E. Marks........................... 1997 $ 300,000 $ 80,400 $ 242,403(1) 250,000 Chairman of the Board and Chief 1996 $ 275,000 $ 132,500 $ 19,188(2) 150,000 Executive Officer 1995 $ 250,000 $ 45,750 $ 16,374(3) 25,000 Tsui Sung Lam.............................. 1997 $ 256,791 $ 87,180 $ 28,757(4) 20,000 President Asia-Pacific Operations 1996 $ 249,176 $ 143,313 $ 39,988(5) 40,000 1995 $ 216,028 $ 67,533 $ 18,288(6) -- Michael McNamara........................... 1997 $ 199,999 $ 30,642 $ 16,495(7) 21,000 Vice President, President of U.S. 1996 $ 173,250 $ 53,626 $ 11,778(8) 15,000 Operations 1995 $ 165,000 $ 15,468 $ 6,600(9) -- Dennis Stradford........................... 1997 $ 191,100 $ 33,634 $ 15,490(11) -- Senior Vice President, Sales and 1996 $ 191,100 $ 65,066 $ 21,835(12) 13,000 Marketing (10) 1995 $ 182,000 $ 45,018 $ 16,000(13) -- Goh Chan Peng.............................. 1997 $ 174,283 $ 44,870 $ 24,449(14) 16,000 Senior Vice President of Finance 1996 $ 163,718 $ 65,976 $ 24,217(15) 15,000 and Operations, Asia-Pacific 1995 $ 134,193 $ 49,544 $ 14,122(16) --
- --------------- (1) Includes an auto allowance of $7,712, Company contributions to the Company's 401(k) plan of $4,750, life and disability insurance premium payments of $3,601, forgiveness of a promissory note due to the Company of $200,000 and forgiveness of interest payment of $26,340 on the promissory note. (2) Includes an auto allowance of $8,978, Company contributions to the Company's 401(k) plan of $4,370 and life and disability insurance premium payments of $5,839. (3) Includes an auto allowance of $7,204, Company contributions to the Company's 401(k) plan of $4,520 and life insurance premium payments of $4,650. (4) Includes life insurance payments of $736 and Company contributions to the Central Provident Fund of $28,021. The Central Provident Fund is a Singapore statutory savings plan to which contributions may be made to provide for employees' retirement. (5) Includes life insurance payments of $736 and Company contributions to the Central Provident Fund of $39,252. 39 40 (6) Includes life insurance premium payments of $671 and Company contributions to the Central Provident Fund of $17,617. (7) Includes an auto allowance of $7,200, Company contributions to the Company's 401(k) plan of $3,958 and forgiveness of $5,337 interest payment due on a promissory note payable to the Company. (8) Represents an auto allowance of $11,778. (9) Represents an auto allowance of $6,600. (10) Mr. Stradford was the Company's Vice President, Sales and Marketing through April 1997. (11) Includes an auto allowance of $7,200, Company contributions to the Company's 401(k) plan of $4,750 and life insurance premium payments of $3,540. (12) Includes an auto allowance of $7,200, Company contributions to the Company's 401(k) plan of $3,832, life insurance premium payments of $5,587 and a travel allowance of $5,216. (13) Includes an auto allowance of $7,200, Company contributions to the Company's 401(k) plan of $5,460 and life insurance premium payments of $3,340. (14) Includes life insurance payments of $736 and Company contributions to the Central Provident Fund of $23,713. (15) Includes life insurance premium payments of $736 and Company contributions to the Central Provident Fund of $23,481. (16) Includes life insurance premium payments of $671 and Company contributions to the Central Provident Fund of $13,451. The following table sets forth further information regarding option grants during fiscal 1997 to each of the Named Executive Officers. All options were granted pursuant to the Company's 1993 Share Option Plan. In accordance with the rules of the Securities and Exchange Commission, the table sets forth the hypothetical gains or "option spreads" that would exist for the options at the end of their respective five-year terms. These gains are based on assumed rates of annual compound stock price appreciation of 5.0% and 10.0% from the date the option was granted to the end of the option term. OPTION GRANTS IN FISCAL 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES NUMBER OF PERCENTAGE OF OF STOCK PRICE SECURITIES TOTAL OPTIONS APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------- NAME GRANTED(1) 1997 PER SHARE(2) DATE 5% 10% - ------------------------- --------- ------------- ------------ ---------- ---------- ---------- Michael E. Marks......... 250,000 34.7% $ 23.125 11/08/01 $1,597,244 $3,529,511 Tsui Sung Lam............ 20,000 2.8% $ 23.125 11/08/01 127,780 282,361 Michael McNamara......... 1,000 0.1% $ 19.75 08/27/01 5,457 12,058 20,000 2.1% $ 23.125 11/08/01 127,780 282,361 Dennis P. Stradford...... -- -- -- -- -- -- Goh Chan Peng............ 1,000 0.1% $ 19.75 08/27/01 5,457 12,058 15,000 2.1% $ 23.125 11/08/01 95,835 211,771
- --------------- (1) The options shown in the table were granted at fair market value, are incentive stock options and will expire five years from the date of grant, subject to earlier termination upon termination of the optionee's employment. The options become exercisable over a four-year period, with 25.0% of the shares vesting on the first anniversary of the date of grant and thereafter 1/36th of the shares vesting for each full calendar month that an optionee renders services to the Company. All of the options shown in the table will become immediately exercisable for all of the option shares in the event the Company is acquired by merger or sale of substantially all of the Company's assets or outstanding Ordinary shares, unless the options are assumed or otherwise replaced by the acquiring entity. The Compensation Committee has authority to provide for the acceleration of each option in connection with certain hostile tender offers or proxy contests for Board membership. Each option includes a limited stock appreciation right pursuant to 40 41 which the option will automatically be canceled upon the occurrence of certain hostile tender offers, in return for a cash distribution from the Company based on the tender offer price per share. The options have a maximum term of five years, subject to earlier termination following a specified period after the optionee's termination of employment with the Company. In the case of Messrs. Tsui and Goh, all of the options shown in the table will become immediately exercisable in the event of termination of employment for any reason. (2) The exercise price of the option may be paid in cash or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Compensation Committee has the authority to reprice outstanding options through the cancellation of those options and the grant of replacement options with an exercise price equal to the lower fair market value of the option shares on the regrant date. (3) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5.0% and 10.0% rates of share price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future Ordinary Share prices. The following table sets forth certain information concerning the exercise of options by each of the Named Executive Officers during fiscal 1997, including the aggregate amount of gains on the date of exercise. In addition, the table includes the number of shares covered by both exercisable and unexercisable stock options as of March 31, 1997. Also reported are values of "in-the-money" options that represent the positive spread between the respective exercise prices of outstanding stock options and $19.875 per share, which was the closing price of the Company's Ordinary Shares as reported on the Nasdaq National Market on March 31, 1997, the last day of trading for fiscal 1997. AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND YEAR-END VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES FISCAL YEAR-END(2) FISCAL YEAR-END(2) ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE(1) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------ ----------- ----------- ----------- ------------- ----------- ------------- Michael E. Marks........ 10,000 286,700 132,002 349,998 1,196,977 692,213 Tsui Sung Lam........... 10,000 310,800 63,355 43,645 830,253 150,482 Michael McNamara........ -- -- 30,418 35,582 403,468 114,257 Dennis P. Stradford..... 16,000 416,648 6,105 6,895 44,970 52,915 Goh Chan Peng........... -- -- 35,230 27,770 502,256 70,529
- --------------- (1) "Value Realized" represents the fair market value of the Ordinary Shares underlying the option on the date of exercise less the aggregate exercise price of the option. (2) These values, unlike the amounts set forth in the column entitled "Value Realized," have not been, and may never be, realized and are based on the positive spread between the respective exercise prices of outstanding options and the closing price of the Company's Ordinary Shares on March 31, 1997, the last day of trading for fiscal 1997. DIRECTOR REMUNERATION Each non-employee Director who does not reside in Singapore receives stock options pursuant to the automatic option grant provisions of the Company's 1993 Share Option Plan. Pursuant to the 1993 Share Option Plan, Richard L. Sharp, Bernard J. Lacroute, Robert Dykes and Michael J. Moritz each received option grants for 3,000 Ordinary Shares in fiscal 1997. In addition, all Directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with meetings of the Board of Directors. No Director who is an employee of the Company receives compensation for services rendered as a Director. 41 42 EMPLOYMENT AND CONSULTING AGREEMENTS In July 1993, the Company entered into employment agreements with Messrs. Tsui and Goh. Under these agreements, Messrs. Tsui and Goh were entitled to receive an annual salary of S$344,539, and S$207,103, respectively. In April 1997, the Compensation Committee increased the base salaries of Messrs. Tsui and Goh to S$429,000 and S$304,499, respectively. The Company entered into a revised employment agreement with Messrs. Tsui and Goh as President, Asia Pacific and Senior Vice President of Finance and Operations, Asia Pacific, respectively, effective April 1, 1997. Pursuant to the new employment agreements, the employment of Messrs. Tsui and Goh will continue until either the Company or the employee gives the other 12 months notice of termination (or pays the other 12 months' base salary in lieu of notice). The Company is required to pay one month salary for each year of employment by Messrs. Tsui and Goh upon termination of their respective employment by the Company. The Company also agreed that upon termination of employment of Mr. Tsui or Mr. Goh for any reason, any options to purchase Ordinary Shares then held by them would immediately vest and become executed for all of the shares subject to such option. The Company entered into an Employment and Noncompetition Agreement with Mr. Ronny Nilsson dated as of April 30, 1997 in which Mr. Nilsson become an executive officer of the Company. See "Certain Relationships and Related Transactions. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information known to the Company regarding beneficial ownership of the Company's Ordinary Shares as of June 30, 1997 by (i) each of the Company's Directors, the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers in fiscal year 1997, (ii) all executive officers and Directors as a group, and (iii) each person who is known by the Company to own beneficially more than 5.0% of the Company's Ordinary Shares. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all the shares beneficially owned, subject to community property laws where applicable.
NUMBER OF SHARES NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT(2) - ----------------------------------------------------------------- --------------------- ---------- Ronald Baron(3).................................................. 1,931,600 14.05% c/o Baron Capital Management, Inc. 767 Fifth Avenue, 24th Floor New York, New York 10153 Sequoia Capital(4)............................................... 953,443 6.92% 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, California 94025 The Capital Group Companies(5)................................... 781,500 5.68% 333 South Hope Street Los Angeles, California 90071 Richard L. Sharp(6).............................................. 948,019 6.89% c/o Circuit City Stores, Inc. 9950 Mayland Drive Richmond, Virginia 23233 Michael E. Marks(7).............................................. 384,551 2.80% Tsui Sung Lam(8)................................................. 56,878 * Michael McNamara(9).............................................. 35,356 * Goh Chan Peng(10)................................................ 21,604 * Robert R.B. Dykes(11)............................................ 37,899 * Ronny Nilsson.................................................... -- * Bernard J. Lacroute(12).......................................... 62,730 * Michael Moritz(13)............................................... 953,443 6.92% Stephen J.L. Rees(14)............................................ 61,255 * All directors and executive officers as a group (10 persons)(15)................................................... 2,561,735 18.08%
42 43 - --------------- * Less than 1.0%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that deem shares to be beneficially owned by any person who has voting or investment power with respect to such shares. Ordinary Shares subject to options that are currently exercisable or exercisable within 60 days after June 30, 1997 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Percentage ownership is based upon 13,752,293 outstanding Ordinary Shares as of June 30, 1997. (3) Based on information supplied by Mr. Baron in a Schedule 13D filed with the Securities and Exchange Commission on January 26, 1997. Includes 205,000 shares held by Baron Capital Partners, L.P. and Baron Investment Partners, L.P., of which Mr. Baron is a general partner. Mr. Baron may be deemed to have sole power to vote and direct the disposition of such shares. Also includes 1,465,000 shares held by Baron Asset Fund and Baron Growth & Income Fund, which are advised by BAMCO, Inc., and 261,600 shares held by investment advisory clients of Baron Capital Management, Inc. BAMCO, Inc. and Baron Capital Management, Inc. are controlled by Mr. Baron, and Mr. Baron may be deemed to share power to vote and dispose of such shares. (4) Includes 788,985 shares held by Sequoia Capital Growth Fund, a limited partnership, 50,291 shares held by Sequoia Technology Partners III, a limited partnership, 80,167 shares held by Sequoia Capital VII, a limited partnership, 3,900 shares held by Sequoia Technology Partners VII, a limited partnership and 2,600 shares held by Sequoia 1995, a limited corporation. Sequoia Partners (CF) is the general partner of Sequoia Capital Growth Fund and has sole voting and investment power over such shares. The general partners of Sequoia Partners (CF) are Donald T. Valentine, Pierre R. Lamond, Thomas F. Stephenson, Michael J. Moritz and Gordon Russell. The general partners of Sequoia Technology Partners III are Donald T. Valentine, Pierre R. Lamond, Thomas F. Stephenson and Gordon Russell. The general partner of Sequoia Capital VII and Sequoia Technology Partners VII is Sequoia Capital VII-A Management, LLC. The general partners of Sequoia Capital VII-A Management, LLC are Mr. Moritz, Douglas Leone, Mark Stevens, Thomas Stephenson and J. Thomas McMurray. Also includes 27,500 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Moritz. (5) Includes 781,500 shares beneficially owned by Capital Research and Management Company. (6) Includes 225,000 shares beneficially owned by Bethany Limited Partnership. Mr. Sharp, the general partner of Bethany Limited Partnership, may be deemed to share voting and investment power with respect to such shares. Mr. Sharp disclaims beneficial ownership of all such shares except to the extent of his proportionate interest therein. Also includes 37,500 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Sharp. (7) Includes 158,044 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Marks. (8) Includes 37,803 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Tsui. (9) Includes 35,356 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. McNamara. (10) Includes 21,604 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Goh. (11) Includes 37,500 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Dykes. 43 44 (12) Includes 14,503 shares held by KPCB Zaibatsu Fund I. KPCB IV Associates, L.P., of which Mr. Lacroute is a limited partner, is the general partner of KPCB Zaibatsu Fund I. Mr. Lacroute disclaims beneficial ownership of such shares. Also includes 10,727 shares held by the Bernard and Ronni Lacroute Trust and 37,500 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Lacroute. (13) Includes 788,985 shares held by Sequoia Capital Growth Fund, a limited partnership, 50,291 shares held by Sequoia Technology Partners III, a limited partnership, 80,167 shares held by Sequoia Capital VII, a limited partnership, 3,900 shares held by Sequoia Technology Partners VII, a limited partnership and 2,600 shares held by Sequoia 1995, a limited corporation. Sequoia Partners (CF) is the general partner of Sequoia Capital Growth Fund and has sole voting and investment power over such shares. The general partners of Sequoia Partners (CF) are Donald T. Valentine, Pierre R. Lamond, Thomas F. Stephenson, Michael J. Moritz and Gordon Russell. The general partners of Sequoia Technology Partners III are Donald T. Valentine, Pierre R. Lamond, Thomas F. Stephenson and Gordon Russell. The general partner of Sequoia Capital VII and Sequoia Technology Partners VII is Sequoia Capital VII-A Management, LLC. The general partners of Sequoia Capital VII-A Management, LLC are Mr. Moritz, Douglas Leone, Mark Stevens, Thomas Stephenson and J. Thomas McMurray. Also includes 27,500 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Moritz. (14) Also includes 3,754 shares held by Mrs. Janine Margaret Rees. Includes 20,208 shares subject to options exercisable within 60 days after June 30, 1997 held by Mr. Rees. (15) Includes 413,015 shares subject to options exercisable within 60 days after June 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In fiscal 1997, the Company had net sales of approximately $1.55 million to Metcal, a precision heating instrument company. Prior to becoming the Company's Chief Executive Officer in January 1994, Michael E. Marks was the President and Chief Executive Officer of Metcal. The Company believes that sales made to Metcal were made on terms no less favorable to the Company than those that could have been obtained from third parties. In fiscal 1997, the Company had net sales of approximately $38.1 million to Global Village Communication. Mr. Moritz, a Director of the Company, is affiliated with Sequoia Capital, which through its affiliates owns more than 10.0% of the outstanding shares of Global Village Communications. Mr. Moritz is also a director of Global Village Communications. The Company believes that sales made to Global Village were made on terms no less favorable to the Company than those that could have been obtained from third parties. In July 1993, the Company entered into employment agreements with Messrs. Tsui and Goh. Under these agreements, Messrs. Tsui and Goh were entitled to receive an annual salary of S$344,539, and S$207,103, respectively. In April 1997, the Compensation Committee increased the base salaries of Messrs. Tsui and Goh to S$429,000 and S$304,499, respectively. The Company entered into a revised employment agreement with Messrs. Tsui and Goh as President, Asia Pacific and Senior Vice President of Finance and Operations, Asia Pacific, respectively, effective April 1, 1997. Pursuant to the new employment agreements, the employment of Messrs. Tsui and Goh will continue until either the Company or the employee gives the other 12 months notice of termination (or pays the other 12 months' base salary in lieu of notice). The Company is required to pay one month salary for each year of employment by Messrs. Tsui and Goh upon termination of their respective employment by the Company. The Company also agreed that upon termination of employment of Mr. Tsui or Mr. Goh for any reason, any options to purchase Ordinary Shares then held by them would immediately vest and become executed for all of the shares subject to such option. In connection with the Company's acquisition of Astron, the Company entered into a Services Agreement (the "Services Agreement") with Astron Technologies Limited, a subsidiary of the Company ("ATL") and Croton Technology Ltd., a company under the management and control of Mr. Rees ("Croton"), and ATL entered into a Supplemental Services Agreement (the "Supplemental Services 44 45 Agreement") with Mr. Rees. Under the terms of the Services Agreement, Mr. Rees acted as President of Astron, and Croton was responsible for developing the business of Astron through June 1998. The Services Agreement provided that Croton will receive (i) a payment of $15 million on June 30, 1998, $5 million of which was to be payable in cash and $10 million of which was to be payable in cash or the Ordinary Shares of the Company at the option of the Company and (ii) an annual fee in the amount of $90,000. Payment of the $15.0 million lump sum payment was conditioned upon, among other things, Mr. Rees' continuing as Chairman of Astron through June 1998. The Service Agreement was to terminate on June 30, 1998 but may be terminated for cause under the terms described therein. Pursuant to the terms of the Supplemental Services Agreement, Mr. Rees acted as Chairman of Astron and was responsible for maintaining and developing the business of Astron, and, in exchange, received an annual salary of $140,000. The Supplemental Services Agreement was to terminate on June 30, 1998. Effective March 27, 1997, the Company revised the Services Agreement and the Supplemental Services Agreement, and appointed Mr. Rees as the Company's Senior Vice President-Worldwide Sales. In connection with this revision, the amount of the payment due on June 30, 1998 was reduced from $15.0 million to $14.0 million and the remaining conditions to the Company's payment of the fee were removed. Of the $14.0 million, $5.0 million remains payable in cash, and $9.0 million remains payable in cash or, at the option of the Company, in Ordinary Shares. This reduction was negotiated in view of (i) a negotiated settlement in March 1997 of the amount of the earn-out payable by the Company to the former shareholders of Astron in which the Company agreed to certain matters affecting the amount of the earn-out payment, and (ii) the elimination of the conditions to payment and of Mr. Rees' ongoing obligations under the Services Agreement and the Supplemental Services Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." In connection with the acquisition of the Karlskrona Facilities, the Company and Mr. Nilsson entered into an Employment and Noncompetition Agreement ("Employment Agreement") and a Services Agreement, both dated as of April 30, 1997. Pursuant to the Employment Agreement, Mr. Nilsson (a) was appointed as the Company's Senior Vice President, Europe for a four-year period, (b) receives an annual salary of $250,000, and (c) is entitled to a bonus of up to 45.0% of his annual salary upon the successful completion of certain performance criteria. Pursuant to the Services Agreement, Mr. Nilsson is to perform management consultation and guidance services to the Company in consideration of (a) an aggregate of $775,000 to be paid between March 31, 1997 and April 15, 1998, and (b) the issuance by the Company to Mr. Nilsson of an interest-free loan in the amount of $415,000 to be repaid by Mr. Nilsson in two installments of $210,000 and $205,000 on September 15, 1997 and April 15, 1998, respectively. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a) 1. FINANCIAL STATEMENTS The following consolidated financial statements are submitted herewith: -- Report of Independent Auditors -- Consolidated Balance Sheets as of March 31, 1997, 1996 and 1995 -- Consolidated Statements of Operations for each of the three years in the period ended March 31, 1997 -- Consolidated Statements of Shareholders' Equity for each of the three years in the period ended March 31, 1997 -- Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 1997 -- Notes to Consolidated Financial Statements 45 46 2. Financial Statement Schedules The following consolidated financial statement schedules for each of the three years in the period ended March 31, 1997 are submitted herewith: Schedule II: Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. b) REPORTS ON FORM 8-K 1. The Company's Current Report on Form 8-K filed with the Commission on December 13, 1996. 2. The Company's Current Report on Form 8-K filed with the Commission on March 12, 1997. 3. The Company's Current Report on Form 8-K/A filed with the Commission on March 27, 1997. c) EXHIBITS See Exhibit Index. 46 47 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Flextronics International Ltd. We have audited the accompanying consolidated balance sheets of Flextronics International Ltd as of March 31, 1996 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with United States Generally Accepted Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flextronics International Ltd at March 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with United States Generally Accepted Accounting Principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 14 of the notes to consolidated financial statements, the 1996 financial statements have been restated to correct the Company's accounting for the acquisition of the Astron Group Limited to conform to United States Generally Accepted Accounting Principles. /s/ ERNST & YOUNG ERNST & YOUNG Singapore July 31, 1997 47 48 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
MARCH 31, --------------------- 1996* 1997 -------- -------- CURRENT ASSETS: Cash................................................................. $ 6,546 $ 23,645 Accounts receivable, net of allowance for doubtful accounts of $3,576 and $5,658 at March 31, 1996 and 1997 respectively................ 78,114 69,331 Inventories.......................................................... 52,637 106,583 Other current assets................................................. 3,827 10,361 Deferred income taxes................................................ 260 408 -------- -------- Total current assets................................................... 141,384 210,328 -------- -------- PROPERTY AND EQUIPMENT: Machinery and equipment.............................................. 77,771 100,795 Building............................................................. 5,975 37,758 Leasehold improvements............................................... 15,491 14,584 -------- -------- 99,237 153,137 Accumulated depreciation and amortization............................ (37,896) (42,172) -------- -------- Net property and equipment............................................. 61,341 110,965 -------- -------- OTHER NON-CURRENT ASSETS: Goodwill, net of accumulated amortization of $2,715 and $3,704, at March 31, 1996 and 1997 respectively.............................. 13,407 20,865 Intangible assets, net of accumulated amortization of $850 and $2,496, at March 31, 1996 and 1997 respectively................... 12,227 10,469 Deposits and other................................................... 580 1,812 Receivables from related party....................................... 2,085 2,554 Investment in associated company..................................... -- 2,241 -------- -------- Total other non-current assets....................................... 28,299 37,941 -------- -------- TOTAL ASSETS................................................. $231,024 $359,234 ======== ========
- --------------- * Restated -- See Note 14 See accompanying notes. 48 49 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, --------------------- 1996* 1997 -------- -------- CURRENT LIABILITIES: Bank borrowings...................................................... $ 14,379 $111,075 Current portion of long-term debt.................................... 11,073 5,758 Current portion of capital lease.................................. 6,736 6,475 Accounts payable.................................................. 64,625 73,631 Accrued payroll................................................... 5,606 10,680 Other accrued liabilities......................................... 5,389 23,039 Income taxes payable.............................................. 2,775 4,171 Payables to associated company....................................... -- 546 -------- -------- Total current liabilities.............................................. 110,583 235,375 -------- -------- NON CURRENT LIABILITIES: Notes payable to shareholders........................................ 686 223 Long-term debt, less current portion................................. 7,554 2,165 Other payable........................................................ 24,184 23,547 Capital lease, less current portion.................................. 10,120 10,137 Deferred income taxes................................................ 4,353 3,710 -------- -------- Total non-current liabilities.......................................... 46,897 39,782 -------- -------- Minority interests..................................................... 485 485 -------- -------- SHAREHOLDERS' EQUITY: Ordinary Shares, S$.01 par value: Authorized -- 100,000,000 shares at March 31, 1996 and 1997 Issued and outstanding -- 13,213,289 shares at March 31, 1996 and 13,676,243 shares at March 31, 1997.............................. 85 88 Additional paid-in capital........................................ 93,634 95,570 Accumulated deficit............................................... (20,660) (12,066) -------- -------- Total shareholders' equity............................................. 73,059 83,592 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $231,024 $359,234 ======== ========
- --------------- * Restated -- See Note 14 See accompanying notes. 49 50 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED MARCH 31, ---------------------------------- 1995 1996* 1997 -------- -------- -------- Net sales.................................................. $237,386 $448,346 $490,585 Cost of sales.............................................. 214,865 407,457 440,448 -------- -------- -------- Gross profit............................................... 22,521 40,889 50,137 Selling, general and administrative expenses............... 11,468 18,787 26,765 Goodwill amortization...................................... 510 739 989 Intangible assets amortization............................. 245 544 1,646 Provision for plant closings............................... -- 1,254 5,868 Acquired in-process research and development............... 91 29,000 -- -------- -------- -------- Operating income/(loss).................................... 10,207 (9,435) 14,869 Net interest expense....................................... (774) (2,380) (3,885) Merger expenses............................................ (816) -- -- Foreign exchange gain/(loss)............................... (303) 872 1,168 Income/(loss) from associated company...................... (729) -- 241 Other income/(expense)..................................... 34 (398) (2,718) -------- -------- -------- Income/(loss) before income taxes.......................... 7,619 (11,341) 9,675 Provision for income taxes................................. 1,463 3,791 2,212 -------- -------- -------- Net income/(loss).......................................... $ 6,156 $(15,132) $ 7,463 ======== ======== ======== Earnings per share: Net income/(loss) per share................................ $0.51 $(1.19) $0.50 ======== ======== ======== Weighted average outstanding Ordinary Shares and equivalents.............................................. 12,103 12,684 14,877 ======== ======== ========
- --------------- * Restated -- See Note 14 See accompanying notes. 50 51 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
ORDINARY SHARES ADDITIONAL TOTAL --------------- PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ---------- -------- ------------- BALANCE AT MARCH 31, 1994...................... 11,304 $ 71 $ 57,430 $(10,798) $46,703 nCHIP fiscal year conversion................... -- -- -- (596) (596) Issuance of Ordinary Shares.................... 300 2 925 -- 927 Expenses related to issuance of Ordinary Shares....................................... -- -- (968) -- (968) Net income for the year........................ -- -- -- 6,156 6,156 Transactions by pooled companies: Issuance of common stock....................... -- -- 37 -- 37 Issuance of preference stock................... -- -- 5,458 -- 5,458 ------ --- ------- -------- ------- BALANCE AT MARCH 31, 1995...................... 11,604 $ 73 $ 62,882 $ (5,238) $57,717 Issuance of Ordinary Shares for acquisition of subsidiaries................................. 305 2 7,443 -- 7,445 Issuance of Ordinary Shares.................... 304 2 1,007 -- 1,009 Sale of shares for cash in public offering..... 1,000 8 23,492 -- 23,500 Expenses related to sale of shares for cash in public offering.............................. -- -- (1,190) -- (1,190) Currency translation adjustments............... -- -- -- (290) (290) Net loss for the year.......................... -- -- -- (15,132) (15,132) ------ --- ------- -------- ------- BALANCE AT MARCH 31, 1996*..................... 13,213 $ 85 $ 93,634 $(20,660) $73,059 Issuance of Ordinary Shares and Options........ 240 2 1,740 -- 1,742 Currency translation adjustments............... -- -- -- 112 112 Net income for the year........................ -- -- -- 7,463 7,463 Issuance of common stock for Fine Line Printed Circuit Design Inc........................... 223 1 196 1,019 1,216 ------ --- ------- -------- ------- BALANCE AT MARCH 31, 1997...................... 13,676 $ 88 $ 95,570 $(12,066) $83,592 ====== === ======= ======== =======
- --------------- * Restated -- See Note 14 See accompanying notes. 51 52 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31, ------------------------------- 1995 1996* 1997 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss)........................................... $ 6,156 $(15,132) $ 7,463 Adjustments to reconcile net income to cash provided by operating activities: nCHIP fiscal year conversion............................. (596) -- -- Depreciation and amortization of equipment and leasehold improvements........................................... 5,370 9,344 10,940 Amortization of goodwill................................. 510 739 989 Amortization of intangible assets........................ 245 544 1,646 Loss/(gain) on disposal of property and equipment........ 56 (121) (85) Loss on disposal of investment........................... -- 266 -- Allowance for doubtful debts............................. 1,211 1,675 2,866 Allowance for stock obsolescence......................... 43 1,631 4,228 Loss/(income) from associated company.................... 729 -- (241) In process research and development written off.......... -- 29,000 -- Provision for plant closure.............................. -- 1,254 5,308 Deferred income taxes.................................... 237 84 (791) Amortization of discount................................. -- 60 363 Issuance of non-employee stock options................... -- -- 380 -------- -------- --------- 13,961 29,344 33,066 Changes in operating assets and liabilities: Trade accounts receivable................................ (15,057) (28,965) 7,007 Notes receivable......................................... -- (500) (586) Inventories.............................................. (3,156) (19,209) (2,533) Other accounts receivable................................ (2,430) 2,889 (5,678) Deposits and other....................................... 311 (140) (1,208) Accounts payable......................................... 2,995 14,143 7,991 Other accrued liabilities................................ (984) 607 6,666 Income taxes payable..................................... 933 1,121 1,396 Amount due from associated company....................... -- -- 546 -------- -------- --------- Cash provided by (used for) operating activities....... $ (3,427) $ (710) $ 46,667 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......................... $ (7,536) $(15,812) $ (26,984) Proceeds from sale of property and equipment................ 38 228 816 Intangibles arising from acquisition of subsidiaries........ (62) -- -- Investment in associated company............................ -- 886 (3,000) Loan to joint venture....................................... (1,000) -- -- Redemption of preference shares in joint venture............ 1,730 -- -- Payment for business acquired, net of cash acquired......... (3,343) (15,152) -- Repayment of loan from related party........................ -- 815 -- Loan to related party....................................... -- -- (469) Purchase of assets from Ericsson............................ -- -- (82,354) -------- -------- --------- Cash used for investing activities............................ (10,173) (29,035) (111,991) -------- -------- ---------
52 53 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEAR ENDED MARCH 31, 1995 1996* 1997 -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from banks....................................... 7,000 43,980 152,761 Repayments to banks......................................... (16,417) (31,700) (56,041) Proceeds from long-term debt................................ -- 2,873 776 Repayment of long-term debt................................. (8) (1,070) (1,536) Refinancing of lease assets................................. -- -- 3,509 Repayment of capital lease obligations...................... (4,310) (5,767) (7,991) Proceeds from issuance of share capital..................... 5,454 1,009 1,362 Payments on notes payable................................... (2,535) (17) (10,463) Proceeds from secondary listing............................. -- 22,310 -- -------- -------- --------- Cash provided by/(used for) financing activities......... (10,816) 31,618 82,377 -------- -------- --------- Increase (decrease) in cash and cash equivalents............ (24,416) 1,873 17,053 Effect of exchange rate changes on cash and cash equivalents.............................................. -- (78) 46 Cash and cash equivalents at beginning of period............ 29,167 4,751 6,546 -------- -------- --------- Cash and cash equivalents at end of period............... $ 4,751 $ 6,546 $ 23,645 ======== ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest................................................. $ 779 $ 2,482 $ 3,025 Income taxes............................................. 297 2,656 1,717 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital lease obligations.......... 8,338 11,556 6,387 Purchase of subsidiaries financed by issuance of 66,908 ordinary shares valued at $14.019........................ -- 938 -- 238,684 ordinary shares valued at $27.262................... -- 6,507 -- 223,321 ordinary shares valued at $25.524................... -- -- 5,700 Promissory notes valued at $10 million payable in February 1997..................................................... -- 10,000 -- Promissory notes valued at $5 million payable in February 1998..................................................... -- 5,000 -- Ordinary Shares with a value of $10 million to be issued on June 30, 1998............................................ -- 10,000 -- Cash and Ordinary Shares valued at $14.124 million to Stephen Rees at the option of the Company due on June 30, 1998..................................................... -- 14,124 (1,000) Contingent earnout of $6.25 million payable to Astron shareholders in April 1997............................... -- -- 6,250
- --------------- * Restated -- See Note 14 See accompanying notes. 53 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) 1. ORGANIZATION OF THE COMPANY Flextronics International Ltd. was incorporated in the Republic of Singapore on May 31, 1990 as Flex Holdings Pte Limited. The subsidiary companies are located in Singapore, Malaysia, Hong Kong, the People's Republic of China, United Kingdom, Mauritius, Sweden and the United States. The Company was incorporated to acquire the Asian and certain U.S. operations of Flextronics Inc. (the "Predecessor"). The Predecessor had been involved in contract manufacturing operations in Singapore since 1982, Hong Kong since 1983 and the People's Republic of China since 1987. The Company provides advanced contract manufacturing services to sophisticated original equipment manufacturers (OEMs) in the communications, computer, consumer and medical electronics industries. Flextronics offers a full range of services including product design, printed circuit board (PCB) assembly and fabrication, material procurement, inventory management, final system assembly and test, packaging and distribution. The components, subassemblies and finished products manufactured by the Company incorporate advanced interconnect, miniaturization and packaging technologies such as SMT, MCM and COB technologies. The Company's fiscal year-end is March 31. The Company follows accounting policies which are in accordance with principles generally accepted in the United States. 2. SUMMARY OF ACCOUNTING POLICIES Basis of presentation The accompanying consolidated financial statements include the accounts of Flextronics International Ltd. and its subsidiaries (together "the Company"), after elimination of all significant intercompany balances and transactions. Investments in affiliates owned 20% or more and corporate joint ventures in which the Company does not have control, but has the ability to exercise significant management influence over operating and financial policies, are accounted for by the equity method. Other securities and investments are generally carried at cost. All dollar amounts included in the financial statements and in the notes herein are U.S. dollars unless designated as Singapore dollars (S$). Foreign exchange The Company, with the exception of certain subsidiaries, considers the U.S. dollar as its functional currency. This is because the majority of the Company's sales are billed and collected in U.S. dollars, and the majority of the Company's purchases, such as raw materials, are invoiced and paid in U.S. dollars. Accordingly, transactions in currencies other than the functional currency are measured and recorded in U.S. dollars using the exchange rate in effect at the date of the transaction. At each balance sheet date, recorded monetary balances that are denominated in currencies other than the functional currency are adjusted to reflect the rate at the balance sheet date. All gains and losses resulting from the remeasurement of accounts denominated in other than the functional currency are reflected in the determination of net income in the year in which they occur. For inclusion in the consolidated financial statements, all assets and liabilities of foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate ruling at the balance sheet date and the results of these foreign subsidiaries are translated into U.S. dollars at the weighted average exchange rates for the period. Exchange differences due to such currency translations are recorded in shareholders' equity. 54 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Cash and cash equivalents For purposes of statement of cash flows, the Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Property and equipment Property and equipment is stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets (two to fifty years). Concentration of credit risk The Company is a manufacturer of sophisticated electronics for original equipment manufacturers engaged in the computer, medical, consumer and communications industries. Financial instruments which potentially subject the Company to concentration of credit risk are primarily accounts receivable and cash equivalents. The Company performs ongoing credit evaluations of its customers' financial conditions and, generally, requires no collateral from its customers. The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located in many different geographic locations throughout the world. The allowance for doubtful accounts the Company maintains is based upon the expected collectibility of all accounts receivable. Goodwill Goodwill represents the excess of the purchase price of acquired companies over the fair value of the net assets acquired. Goodwill is amortized on a straight line basis over the estimated life of the benefits received which ranges from ten to twenty-five years. On an annual basis, the Company evaluates recorded goodwill for potential impairment against the current and estimated future operating income before goodwill amortization of the businesses to which the goodwill relates.
MARCH 31, ------------------- 1996 1997 ------- ------- Cost Balance at beginning of the year....................... $ 6,939 $16,122 Additions.............................................. 9,183 8,447 ------ ------- Balance at end of the year............................. 16,122 24,569 ------ -------
MARCH 31, ------------------- 1996 1997 ------- ------- Amortization Balance at beginning of the year....................... $ 1,976 $ 2,715 Charge for the year.................................... 739 989 ------- ------- Balance at end of the year............................. 2,715 3,704 ------- ------- Net book value at end of the year........................ $13,407 $20,865 ======= =======
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 55 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Intangible assets Intangible assets comprise technical agreements, patents, trademarks, developed technologies and identifiable intangible assets in a subsidiary's assembled work force, its favourable lease and its customer list. Technical agreements are being amortized on a straight line basis over periods not exceeding five years. Patents and trademarks are being amortized on a straight line basis over periods not exceeding twenty-five years. Purchased developed technologies are being amortised on a straight line basis over periods not exceeding seven years. The identifiable intangible assets in the subsidiary's assembled work force, its favourable lease and its customer list are amortized on a straight line basis over the estimated life of the benefits received of three to twenty years.
MARCH 31, ------------------- 1996 1997 ------- ------- Cost Balance at beginning of the year..................... $ 933 $13,077 Additions............................................ 12,144 -- Written off during the year.......................... -- (112) ------- ------- Balance at end of the year........................... 13,077 12,965 ------- ------- Amortization Balance at beginning of the year..................... $ 306 $ 850 Charge for the year.................................. 544 1,646 ------- ------- Balance at end of the year........................... 850 2,496 ------- ------- Net book value at end of the year...................... $12,227 $10,469 ======= =======
Inventories Inventories are stated at the lower of cost or market value. Cost is comprised of direct materials on a first-in-first-out basis and in the case of finished products and work-in-progress includes direct labor and attributable production overheads based on normal levels of activity. The components of inventories are as follows (in thousands):
MARCH 31, -------------------- 1996 1997 ------- -------- Raw materials......................................... $42,202 $ 70,384 Work-in-process....................................... 14,049 16,561 Finished goods........................................ 962 25,809 ------- -------- 57,213 112,754 Less: allowance for obsolescence...................... (4,576) (6,171) ------- -------- $52,637 $106,583 ======= ========
Revenue recognition Revenue from product sales and services are recognized on delivery and acceptance of the goods. Associated companies An associated company is a company, not being a subsidiary, in which the Group has a long-term interest of not less than 20% of the equity and in whose financial and operating policy decisions the Group exercises significant influence. 56 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The Group's share of the results of associated companies is included in the consolidated statement of operations. Where the audited accounts are not co-terminous with those of the Group, the share of profits is arrived at from the last audited accounts. Shares in associated companies are stated in the Company's balance sheet at cost and equity in post-acquisition earnings/(losses). Provision is made for other than temporary declines in values. Income taxes Income taxes have been provided using the liability method in accordance with SFAS Statement No. 109, "Accounting for Income Taxes". Stock based compensation The Company has elected to follow APB opinion 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee options because, as discussed below (see note 10), the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognised. Research and development Research and development costs are recorded as such costs are incurred. Cost of sales included research and development costs of approximately $913,000 and $153,000 in fiscal 1997 and 1996, respectively. Net income per share Net income per share is computed using the weighted average number of Ordinary Shares and Ordinary Share equivalents outstanding during the respective periods. Ordinary Share equivalents include Ordinary Shares issuable upon the exercise of stock options (using the treasury stock method). In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the years ended March 31, 1995 and 1997 to $0.54 and $0.56 per share, respectively. Statement 128 should have no effect on primary loss per share for the year ended March 31, 1996. The impact of Statement 128 on the calculation of fully diluted earnings per share for these years is not expected to be material. Financial statement prepared in accordance with accounting principles accepted in Singapore A separate financial statement for the same period has been prepared in accordance with accounting principles accepted in Singapore. 3. BANK BORROWINGS Line of Credit In March 1997 the Company terminated its $48 million US Dollar line of credit with the group of banks and obtained a new credit facility totalling $175 million representing $105 million revolving credit and $70 million through term loans amortized over a 5 year period and subject to mandatory prepayment provisions. As at March 31, 1997, the Company has utilized $111 million of the new credit facility. 57 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The lines of credits are collateralized by: (a) A floating charge over all the assets and the entire undertaking of the holding company; (b) Corporate guarantees from the Company and several of its subsidiaries; (c) First fixed charge over the securities and a pledge of the Company's shares in certain of its subsidiaries; (d) A lien on all accounts receivable and inventory of the Company and certain of its subsidiaries. The new credit facilities require that the Company maintains certain financial ratios and other covenants. In addition, the Company and its subsidiaries are not allowed to declare dividends for distribution out of retained earnings. As at March 31, 1997, the Company was in compliance with its covenants. In addition, five of the Company's subsidiaries have obtained from several banks working capital lines of credit, totalling approximately US$10.3 million, representing overdraft facilities, bridging loan, short term cash advances, letters of credit and letters of guarantee and trust receipts. Interest on borrowings is charged within the range 5.75% to 7% per annum. As of March 31, 1997, the Group had utilized the following credit facilities under the above lines of credit (in thousands): Short term cash advances.......................................... $111,075 Letters of credits and guarantees................................. $ 985 ========
The remaining unused portion of lines of credit total $64 million.
MARCH 31, --------------- 1996 1997 ----- ----- The weighted average interest rate per annum on all short term borrowings outstanding as at year end are as follows:.................................................. 6.41% 8.50% ===== =====
4. LONG TERM DEBT Long-term debt consisted of the following at March 31, 1996 and 1997.
MARCH 31, -------------------- 1996 1997 -------- ------- Term loan at 4.5%....................................... 333 83 Mortgage loans at 11.4%................................. 2,244 1,886 Other loans at 8% -- 9%................................. 1,050 954 Notes payable to Astron's former shareholders at 8%..... 15,000 5,000 -------- ------- 18,627 7,923 Less: current portion................................... (11,073) (5,758) -------- ------- $ 7,554 $ 2,165 ======== =======
Maturities of long-term debt for the five years succeeding March 31, 1997 are $5,758 by March 31, 1998, $469 by March 31, 1999, $469 by March 31, 2000, $469 by March 31, 2001, $469 by March 31, 2002 and the balance thereafter. The notes payable is payable to the former shareholders of Astron as part of the purchase consideration. 58 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) 5. OTHER PAYABLES In accordance to the agreement signed to acquire Astron in February 1996, the Company will issue Ordinary Shares with a value of $10 million to the former Astron shareholders on June 30, 1998. In addition the Company agreed to pay $15 million in June 1998 to an entity affiliated with Stephen Rees as a consulting fee subject to certain conditions. In March 1997, the agreement with Mr. Rees' affiliate was revised, the conditions eliminated and the fee was reduced to $14 million. The cash portion of $5 million has been discounted at 8% over the period of the agreement and the remaining $9 million has not been discounted on the basis of the Company's intention to pay that portion in stock. The payment to former Astron shareholders and Mr. Rees' affiliate is interest-free and secured. The components of Other Payables are as follows:
MARCH 31, ------------------- 1996 1997 ------- ------- Balance at beginning of the year......................... -- $24,184 Additions during the year.............................. $24,124 -- Amortization of discount............................... 60 363 Amendment of agreement................................. -- (1,000) ------- ------- Balance at end of the year............................... $24,184 $23,547 ======= =======
6. LEASE COMMITMENTS Capital Lease Following is a schedule by fiscal year, of future minimum lease payments under capital lease obligations for certain machinery and equipment, together with the present value of the net minimum lease payments (in thousands): Fiscal Years Ending March 31, 1998............................................................... $ 7,749 1999............................................................... 5,514 2000............................................................... 3,282 2001............................................................... 2,164 2002............................................................... 562 Thereafter......................................................... -- ------- Total installment payments......................................... 19,271 Amount representing interest....................................... (2,659) ------- Present value of net installment payments.......................... 16,612 Less: current portion.............................................. 6,475 ------- Long-term portion of capital lease................................. $10,137 =======
Items costing $29,912 (1996: $28,387) with accumulated amortization $11,389 (1996: $8,781) purchased under capital leases have been included in machinery and equipment as of March 31, 1997. Lease amortization is included in depreciation expense. 59 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Operating Leases The Company leases some of its facilities under operating leases. Future minimum lease payments under operating leases with a term of more than one year are as follows (in thousands): Fiscal Years Ending March 31, 1998............................................... 3,302 1999............................................... 3,078 2000............................................... 2,404 2001............................................... 1,697 2002............................................... 1,406 Thereafter......................................... 5,518 ------- $17,405 =======
The facilities lease of one of the subsidiaries provides for escalating rental payments over the lease period. Rent expense for the lease is being recognized on a straight-line basis over the term of the lease period. Total operating lease expenses were $1,957, $2,211 and $2,593 for the years ended March 31, 1995, 1996 and 1997 respectively. 7. CAPITAL COMMITMENTS Two of the subsidiaries, Flextronics (Malaysia) Sdn. Bhd. and Astron Group Limited have contracted to purchase $111 and $10,007 respectively, of fixed assets as of March 31, 1997. These fixed assets have not been delivered and are therefore not provided for in the accounts as of March 31, 1997. Astron Group Limited has authorised but not contracted to purchase $28,927 of fixed assets as at March 31, 1997. A commitment of $9,710 has also been made to contribute to a subsidiary of Astron Group Limited in PRC China for construction in progress in relation to the factory in Doumen. 8. INCOME TAXES The domestic and foreign components of income/(loss) before taxes are as follows:
MARCH 31, -------------------------------- 1995 1996 1997 ------- -------- ------- Singapore.................................... $(1,529) $(21,977) $ (392) Foreign...................................... 9,148 10,636 10,067 ------- -------- ------- $ 7,619 $(11,341) $ 9,675 ======= ======== =======
60 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Income tax expense consists of the following:
MARCH 31, ---------------------------- 1995 1996 1997 ------ ------ ------ Current: Singapore...................................... $ 366 $1,441 $1,608 Foreign........................................ 860 2,266 1,395 ------ ------ ------ 1,226 3,707 3,003 ------ ------ ------ Deferred: Singapore...................................... 237 74 (559) Foreign........................................ -- 10 (232) ------ ------ ------ 237 84 (791) ------ ------ ------ $1,463 $3,791 $2,212 ====== ====== ======
Total income tax expense differs from the amount computed by applying the Singapore statutory income tax rate of 26% (1996 and 1995: 26% and 27%) to income before taxes as follows:
MARCH 31, ------------------------------- 1995 1996 1997 ------- ------- ------- Computed expected income taxes................ $ 2,057 $(2,950) $ 2,516 Effect of Singapore income tax incentives..... -- (82) -- Effect of losses from non-incentive Singapore operations.................................. 367 7,822 498 Effect of foreign operations.................. (1,609) (1,785) (2,336) Non-deductible items: Amortization of goodwill and intangibles.... 205 329 436 Loss on sale of investments................. -- 69 -- Joint venture losses........................ 216 -- -- Bank commitment fee......................... -- -- 382 Others........................................ 227 388 716 ------- ------- ------- $ 1,463 $ 3,791 $ 2,212 ======= ======= =======
61 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The components of deferred income taxes are as follows:
MARCH 31, --------------------- 1996 1997 -------- -------- Deferred tax liabilities: Fixed assets......................................... $ 1,343 $ 801 Intangible assets.................................... 3,097 2,751 Others............................................... 169 237 -------- -------- 4,609 3,789 -------- -------- Deferred tax assets Fixed assets......................................... (207) (311) Provision for stock obsolescence..................... (683) (1,364) Provision for doubtful debts......................... (361) (1,636) Net operating loss carry forwards.................... (13,805) (16,665) Unabsorbed capital allowances carry forwards......... (539) (606) Others............................................... (611) (645) -------- -------- (16,206) (21,227) -------- -------- Valuation allowance.................................... 15,690 20,740 -------- -------- Net deferred tax liability............................. $ 4,093 $ 3,302 ======== ======== The net deferred tax liability is classified as follows: Non-current liability................................ $ 4,353 $ 3,710 Current asset........................................ (260) (408) -------- -------- $ 4,093 $ 3,302 ======== ========
The Company's net deferred tax assets consist of the following:
MARCH 31, --------------------- 1996 1997 -------- -------- Net operating loss carried forward UK................................................. 2,596 3,291 USA................................................ 11,020 13,185 Malaysia........................................... 189 189 Others............................................... 2,145 4,483 -------- -------- Total deferred tax assets............................ 15,950 21,148 Valuation allowance.................................. (15,690) (20,740) -------- -------- Net deferred tax assets.............................. $ 260 $ 408 ======== ========
At March 31, 1997, the Company had net operating loss carryforwards of approximately $30,663 for U.S. federal income tax purposes which will expire between 2003 and 2011 if not previously utilized. Utilization of the U.S. net operating loss carryforwards may be subject to an annual limitation due to the change in ownership rules provided by the Internal Revenue Code of 1986. This limitation and other restrictions provided by the Internal Revenue Code of 1986 may reduce the net operating loss carryforward such that it would not be available to offset future taxable income of the U.S. subsidiary. At March 31, 1997, the Company had net operating loss carryforwards of approximately $9,973 and $632 in U.K. and Malaysia respectively. The utilization of these net operating loss carryforwards is limited to the future operations of the Company in the tax jurisdictions in which such carryforwards arose. These losses carryforward indefinitely. 62 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The Company has been granted the following tax incentives: (i) Investment allowance on approved fixed capital expenditure incurred within 5 years after August 1, 1990 subject to a maximum of $2,700 for its Singapore operations was granted by the Economic Development Board of Singapore. This investment allowance has been utilized by the Company to reduce taxable income of its Singapore subsidiary since 1991. This allowance is however fully utilized at the end of fiscal 1996. (ii) Pioneer status granted to one of its Malaysian subsidiary for a period of 5 years under the Promotion of Investment Act, 1986. This pioneer incentive provides a tax exemption on manufacturing income of this subsidiary. (iii) Product Export Enterprise incentive for a lower rate for its facility at Shekou. The Company's operations in Shekou is located in a "Special Economic Zone" and is an approved "Product Export Enterprise" which qualifies for a special corporate income tax rate of 10%. This special tax rate is subject to the Company exporting more than 70% of its total value of products manufactured in China. The Company's status as a Product Export Enterprise is reviewed annually by the Chinese government authorities. The Company's investments in its plants in Xixiang and Doumen, China fall under the "Foreign Investment Scheme" that entitles the Company to apply for a five-year tax incentive. The Company obtained the incentive for the Doumen plant in December 1995 and the Xixiang plant in October 1996. With the approval, the Company's tax rates on income from these facilities during the incentive period will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the first profitable year. A portion of the Company's sales are carried out by its subsidiary in Labuan, Malaysia where the Company has opted to pay the Labuan tax authorities a fixed amount of US$8 tax each year in accordance with the Labuan tax legislation. A portion of the Company's sales are carried out by its subsidiary, an offshore ordinary company, in Mauritius where the tax rate is at 0% for such companies. The potential deferred tax asset arises substantially from tax losses available for carry-forward. These tax losses can only be set off against future income of the operations in respect of which the tax losses arose. As a result, management is uncertain as to when or whether these operations will generate sufficient profit to realise the deferred tax asset benefit. 9. SHAREHOLDERS' EQUITY Exercise of Options During the financial year ended March 31, 1997, certain employees exercised their options to purchase 239,633 Ordinary Shares at an exercise price of US$0.77 -- US$24.00 per share. Declaration of Dividends The Company in a general meeting may by ordinary resolution declare dividends but no dividend will be payable in excess of the amount recommended by the directors. As the Company is incorporated in Singapore, all dividends declared will be denominated in Singapore currency. The Company has not declared any dividends to date. 63 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Acquisition of Flextronics International (UK) Limited ("FILUK) (formerly known as Assembly & Automation (Electronics) Limited) On April 12, 1995, the Company acquired all the outstanding stock of FILUK in exchange for $2,879 in cash and 66,908 Ordinary Shares of the Company, valued at $14.019 per share. Acquisition of Astron Group Limited ("Astron") On February 2, 1996, the Company acquired all the outstanding stock of Astron in exchange for $13,440 in cash; 238,684 Ordinary Shares of the Company, valued at $27.262 per share; issuance of a $10 million promissory note due one year after acquisition date; issuance of a $5 million promissory note due two years after acquisition date and the issuance of $10 million of Ordinary Shares of the capital of the Company on June 30, 1998. The promissory notes bear interest at the rate of 8% per annum. In addition, the Company will issue $9 million of Ordinary Shares of the Company on June 30, 1998, in accordance to the revised agreement with Mr. Stephen Rees' affiliate in March 1997. Acquisition of Fine Line Printed Circuit Design Inc. ("Fine Line") On November 25, 1996, the Company acquired all the outstanding stock of Fine Line in exchange for 223,321 Ordinary Shares of the Company, valued at $25.52 per share. Foreign Currency Payments in the Company's subsidiaries operating in the People's Republic of China The Company's subsidiaries operating in the People's Republic of China are required to obtain approval from the relevant authorities when making foreign currency payments. Issuance of non-employee stock options On June 3, 1996, the Company issued 20,000 stock options with an exercise price of $31.25 to a customer under a sales agreement with the customer that provided for the issuance of such options upon that customer's reaching a specified sales target. These options were valued as of the grant date using the Black-Scholes model. The resulting value of $380,000 was recorded as a discount in the accompanying fiscal 1997 income statement. 10. SHARE OPTION PLANS In July 1993, the Company adopted an Executives' Share Option Scheme ("SOS") and an Executives' Incentive Share Scheme ("ISS") for selected management employees of the Company. The Company granted stock options for 344,520 Ordinary Shares exercisable at $2.92 per share (fair market value at date of the grant) under the SOS and stock options for 54,618 Ordinary Shares at S$0.01 per share (fair market value at date of grant was $2.92 per share) under the ISS. The Company's 1993 Share Option Plan (the "Plan") that provides for the grant of incentive stock options, automatic option grants and non-statutory stock options to employees and other qualified individuals to purchase Ordinary Shares of the Company. In August 1996 the Company's 1993 Share Option Plan was amended to reserve an additional 500,000 Ordinary Shares for issuance. At March 31, 1997, the Company had reserved 2,000,000 Ordinary Shares for issuance under the Plan. In January 1995, the Company acquired nCHIP and thereby assumed the existing nCHIP stock option plan and employee stock options outstanding thereunder. The outstanding nCHIP employee stock options were converted into options to purchase approximately 345,389 of the Company's Ordinary Shares. 64 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Proforma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to March 31, 1995 under the fair value method of this Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes multiple option pricing model with the following weighted average assumptions: risk-free interest rates ranging from 5.31% to 5.66% and from 5.40% to 5.77% for 1996 and 1997, respectively; a dividend yield of 0.0%, a volatility factor of the expected market price of the Company's common stock of 0.67, and a weighted-average expected life of the option of 0.13 years beyond each respective vesting period.
MARCH 31, ------------- 1996 1997 ---- ---- Options granted 4 year vesting................................. 628 705 Options granted 2 year vesting................................. 15 15 ---- ---- Total granted.................................................. 643 720 ==== ==== Weighted average vesting period (years)........................ 3.96 3.96
The weighted average vesting period is rounded to 4 years. The amount of compensation expense recognized under all Flextronics Share Option Plans is $1,453 in 1996 and $3,290 in 1997. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those traded options, and because the changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had the compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the SFAS 123, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below:
MARCH 31, ------------------- 1996 1997 -------- ------ Net income/(loss): As reported............................................ $(15,132) $7,463 Proforma............................................... (16,052) 5,380 Net income/(loss) per share Primary As reported......................................... $ (1.19) $ 0.50 Proforma............................................ (1.27) 0.36
Because SFAS 123 is applicable only to awards granted subsequent to December 30, 1994, the proforma effect will not be fully reflected until 1998. 65 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The following table presents the activity for options.
1995 1996 1997 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- Outstanding -- beginning of year.... 1,004,902 $ 3.47 1,026,052 $ 4.76 1,315,970 $12.52 Granted............................. 231,249 8.97 641,783 20.63 721,203 25.10 Exercised........................... (143,699) 2.96 (304,201) 3.30 (239,633) 5.86 Forfeited........................... (66,400) 3.88 (47,664) 11.03 (124,629) 17.81 Outstanding -- end of year.......... 1,026,052 4.76 1,315,970 12.60 1,672,911 18.57 Exercisable at end of year.......... 394,535 414,855 576,896 Weighted average fair value of options granted during the year... 9.67 9.22 11.25
11. PROVISION FOR PLANT CLOSURE The provision for plant closure of $5,868 in fiscal 1997 relates to the costs incurred in the closure of the Texas facility, the write-off of obsolete equipment at the nChip semiconductor fabrication facility and downsizing the Singapore manufacturing operations. The provision includes $2 million provision for severance payment and $500 provision for the write-off of fixed assets in the Singapore manufacturing facilities. An amount of $2,808 associated with certain obsolete equipment at the Company's nChip and Texas facilities have been written off. The provision also includes severance payments amounting to $560 for the employees of the Texas and nChip facility. The Company has not recorded the remaining costs related to existing leases at the Texas facility as the Company is continuing to use the facility for certain administrative and warehousing functions, and believes it is probable that it will sublease this facility and that the sublease income will not be materially less than the remaining obligations under the lease. The provision for plant closure of $1,254 in fiscal 1996 was associated with the write off of certain obsolete equipment at the Company's facilities in Malaysia and Shekou, China. The components of plant closure costs are as follows:
MARCH 31, ----------------- 1996 1997 ------ ------ Assets write-off........................................... $1,254 $3,308 Severance payment to employees............................. -- 2,560 ------ ------ 1,254 5,868 ------ ------ Severance payment made during the year..................... -- $ 560 ====== ======
12. BANK COMMITMENT FEES In March 1997, the Company incurred bank commitment fees of $750 which were related to a proposed $100.0 million credit facility. This proposed credit facility was not consummated, and the bank's commitment expired unused at the end of March, 1997. Accordingly, such fees were included in other expense in the fiscal 1997 income statement. 13. RELATED PARTY TRANSACTIONS For the year ended March 31, 1997, the Company had net sales of $1,548 to Metcal, Inc., a precision heating instrument company. The Company's Chairman and Chief Executive Officer, Michael E. Marks has a beneficial interest in Metcal, Inc. For the year ended March 31, 1996, the Company had net sales of $2,133 to Metcal, Inc. 66 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Prior to becoming the Company's Chief Officer in January 1994, Michael E. Marks was the President and Chief Executive Officer of Metcal, Inc. Michael E. Marks remained as a director of Metcal, Inc. during the year ended March 31, 1997. In March 1997, the Company revised the agreement to pay in June 1998 a $15 million consulting fee to an entity affiliated with Stephen JL Rees Senior Vice President, Worldwide Sales and Marketing. The Company and Mr. Rees agreed to remove the remaining conditions to payment of the fee and to reduce this amount of the fee which remains payable in June 1998 to $14 million. For the year ended March 31, 1997, the Company transacted with Croton Ltd and Mayfield International Limited ('Mayfield'), both companies of which Stephen JL Rees has beneficial interests. During the current fiscal year, $118 was paid for services rendered by Croton Ltd under a management service contract. Astron has also rented an office from Mayfield, and rentals charged to Astron during the period amounted to $208. At March 31, 1997 a loan balance in the amount of $2,554 was due from Mayfield. The loan is unsecured, interest bearing at 7.15% per annum and is wholly repayable by February 4, 1999. 14. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS Restatement The Company has reconsidered its accounting treatment for the acquisition of the Astron Group Limited ("Astron") and a new independent valuation was performed as of the date of the acquisition to address certain matters not addressed in the original valuation. The cost of acquiring Astron has also been changed from amounts previously reported to correct certain errors. The allocation of the revised purchase price to the assets acquired is based on the new valuation report. The originally reported consideration paid to acquire Astron at February 2, 1996 and the revised cost are as follows:
AS ORIGINALLY REPORTED AS RESTATED ------------- ----------- Cash................................................ $13,440 $13,440 Ordinary shares..................................... 6,507 6,507 Ordinary shares to be issued June 30, 1998.......... 10,000 10,000 Promissory notes.................................... 15,000 15,000 Contingent ("earnout") consideration................ 3,125 --(i) Service agreement................................... -- 14,124(ii) Direct costs........................................ 700 700 ------- ------- Total purchase consideration........................ $48,772 $59,771 ======= =======
- --------------- (i) Part of the conditions for the contingent earnout have been deemed by management to have been met based on the management accounts of Astron at March 31, 1996, but this amount was not accounted for as required by generally accepted accounting principles where any contingent additional consideration should be disclosed but not recorded as a liability. (ii) The consultant and service agreement with an affiliate of the former Chairman of Astron ("Service Agreement") required a $15 million payment on June 30, 1998, of which $5 million is payable in cash and the balance in Ordinary Shares. The Service Agreement was originally deemed a contingent compensation agreement. However, no compensation expense was recorded in 1996 and no effect was given in the computation of earnings per share to the portion payable in Ordinary Shares as required by generally accepted accounting principles. On reconsideration, it was determined that the agreement should be accounted for as the payment of purchase consideration. The cash portion is included at its present value as of February 2, 1996, and the stock portion has been included in the computation of earnings per share. This Service Agreement was subsequently revised on March 27, 1997 to remove the remaining conditions to payment of the fee and reduce the amount payable to $14 million. 67 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) In the Company's original accounting for the allocation of the purchase price, certain intangible assets had been identified and valued. However, due to an oversight, no value was recorded. The allocation of the purchase price as originally reported and as reallocated on the basis of the new valuation are as follows:
AS ORIGINALLY REPORTED AS RESTATED ------------- ----------- Astron's net assets at fair value................... $16,960 $17,200 In-process research and development................. 31,562 29,000 Intangible assets................................... 250 11,910 Goodwill............................................ -- 4,758 Less: deferred tax liability........................ -- (3,097) ------- ------- Total............................................... $48,772 $59,771 ======= =======
The Company has restated its March 31, 1996 financial statements to give effect to the above changes in the consideration, and the new allocation of the purchase price. The $17.4 million net loss previously reported for the year ended March 31, 1996 has been reduced by $2.3 million ($0.20 per share) to give effect to the change in the amount of in-process research and development written off on acquisition offset in part by the amortization of the recorded goodwill and the increase in the acquired intangible assets. The per share amount also includes the effect of restating the weighted average number of outstanding Ordinary Shares and equivalents. The effects of the adjustments described above are as follows: Restatement of 1996 Net Loss Net loss as originally reported................................. $(17,412) Decrease in amount of in-process research and development written off................................................... 2,562 Increase in: Intangible asset amortization................................. (208) Goodwill amortization......................................... (14) Interest expense due from discounting of $5 million cash...... (60) -------- Net loss as restated............................................ $(15,132) ========
The discussion of the Astron acquisition below gives effect to the restatement of the 1996 amounts. Current Year In November 25, 1996, the Company acquired Fine Line Printed Circuit Design, Inc. ("Fine Line"), a circuit board layout and prototype operation located in San Jose, California. The acquisition was accounted for as a pooling of interests and the Company has issued 223,321 Ordinary Shares in exchange for all of the outstanding capital stock of Fine Line. Prior period financial statements were not restated because the financial results of Fine Line do not have a material impact on the consolidated result. On December 20, 1996, the Company acquired 40% of FICO Investment Holding Limited ("FICO") for $5.2 million of which $3 million was paid in December 1996 and the balance payment of $2.2 million which was paid in June 1997 was accrued for in March 1997. The excess of the purchase price over the fair market value of the net tangible assets acquired amounted to $3.2 million which are being amortized over ten years. The Company has an option to purchase the remaining of 60% of FICO in 1998; the consideration for the remaining 60% is dependent on the financial performance of FICO for the period ending December 31, 1997. On March 27, 1997, the Company acquired the manufacturing facilities in Karlskrona, Sweden and related inventory, equipment and assets from Ericsson Business Networks AB ("Ericsson") for $82,354 which was financed by a bank loan. The transaction has been accounted for under the purchase method and 68 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) accordingly, the purchase price has been allocated to the assets based on their estimated fair market values at the date of acquisition. The consolidated financial statements contain the results of the acquired companies from the date of acquisition. Previous Years On April 12, 1995, the Company acquired all of the issued share capital of Assembly & Automation (Electronics) Limited, a private limited company incorporated in the UK that provides contract manufacture of electronics and telecommunications equipment, for a total consideration of $4.1 million by way of cash and the issuance of 66,908 Ordinary Shares. The transaction has been accounted for under the purchase method, and accordingly, the purchase price has been allocated to the assets and liabilities assumed based upon their estimated fair market values at the date of acquisition. The excess of the purchase price over the fair market value of the net tangible assets acquired aggregated approximately $4.6 million of which $237 was allocated to intangibles which are being amortized on a straight line basis over their estimated useful life of three years. Goodwill is amortized over twenty years. On February 2, 1996, the Company acquired all of the issued share capital of Astron Group Limited, a private limited company incorporated in the Hong Kong who is a manufacturer of circuit boards used in electronics and telecommunications, for a consideration of $59.8 million by way of cash; issuance of 238,684 Ordinary Shares and $10 million of Ordinary Shares of the Company on June 30, 1998; and the issuance of promissory notes bearing interest at 8%. The Company had originally agreed to pay an earnout of up to $12.5 million contingent upon Astron meeting certain pre-tax profit for calendar year 1996. The transaction was accounted for under the purchase method, and accordingly, the purchase price has been allocated to the assets and liabilities assumed based upon their estimated fair market values at the date of acquisition. The valuation of Astron's in-process research & development was determined by an independent valuation firm to be $29 million, and the Company has written off this $29 million in the consolidated Statement of Operations for the year ended March 31, 1996. The valuation has also resulted in the allocation of $16.7 million to goodwill and identifiable intangible assets. Goodwill of $4.8 million and $11.9 million of identifiable intangible assets principally related to developed technology, customer list, assembly workforce and trademarks were recorded. The consulting and service agreements with an affiliate of the former Chairman of Astron, provided for an annual fee, plus a $15 million payment to be made on June 30, 1998 subject to certain terms and conditions. A new agreement was signed between the two parties in March 1997 which reduced the amount to $14 million and removed the original terms and conditions. This revision to the agreement has been accounted for as a reduction in the purchase price and goodwill as of this date of the new agreement. In March 1997, management negotiated with Stephen Rees, Chairman of Astron who was representing the former shareholders of Astron, a settlement of the earnout condition of the Astron purchase agreement discussed above, the amount of which was in dispute. Substantially all of the former shareholders of Astron were affiliates of Mr. Rees or members of his family. Concurrently with negotiation of the earnout payment, management and Mr. Rees renegotiated the terms and conditions of the Services Agreement among the Company and an affiliate of Mr. Rees. As a result of these negotiations, management agreed to pay to the former shareholders of Astron an earnout in the amount of $6.25 million, and Mr. Rees agreed to reduce to $14 million, the amount due to the affiliate under the Services Agreement. Because of the contemporaneous nature of these negotiations and the relationship of Mr. Rees to the parties to the agreements, management determined that the resulting adjustments should each be accounted for as an adjustment to the cost of acquiring Astron. Accordingly, $5.25 million has been added in March 1997 to the goodwill acquired. This amount represents the agreed upon $6.25 million payment due under the earnout agreement less the $1.0 million reduction in the amount due under the Services Agreement. 69 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The consolidated financial statements contain the results of the acquired companies from the date of acquisition. In January 1995, the Company acquired nCHIP by the issuance of 2,104,602 ordinary shares of S$0.01 par value each, in exchange for all of the outstanding capital stock of nCHIP. In addition, outstanding nCHIP employee stock options were converted into options to purchase approximately 345,389 of the Company's ordinary shares. The transaction was accounted for as a pooling of interests and therefore, all prior period financial statements presented have been restated as if the acquisition took place at the beginning of such periods. nCHIP has a calendar year end and, accordingly, the nCHIP statement of income for the year ended December 31, 1993 have been combined with the Company's statement of income for the fiscal years ended March 1994. Effective April 1, 1994 nCHIP's fiscal year end has been changed from December 31 to March 31 to conform to the Company's fiscal year-end. Accordingly, nCHIP's operations for the three months ended March 31, 1994 including net sales of $2,302 and net loss of $596 have been excluded from consolidated results and have been reported as an adjustment to the April 1, 1994 consolidated retained earnings. Separate results of operations for the period prior to the acquisition are as follows:
UNAUDITED NINE MONTHS ENDED DECEMBER 31, 1994 ------------ Net sales Company....................................................... $163,249 nCHIP......................................................... 7,623 -------- Combined...................................................... $170,872 ======== Net income Company....................................................... $ 7,626 nCHIP......................................................... (3,400) -------- Combined...................................................... $ 4,226 ======== Other changes in shareholders' equity Company....................................................... $ (144) nCHIP......................................................... 5,287 -------- Combined...................................................... $ 5,143 ========
As of December 20, 1994, the Company had a 49% interest in FlexTracker and accounted for this investment using the equity method. On December 30, 1994, the Company acquired the net assets (except the $1.0 million loan made by the joint venture partner, HTS, to FlexTracker) for approximately $3.3 million. On March 1, 1994, the Company acquired all of the outstanding stock of FTI, a company that provides high value-added, high quality, just-in-time manufacturing services to original equipment manufacturers in the computer and electronics industry, for approximately $4.0 million. The transaction has been accounted for under the purchase method, and accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair market values at the date of acquisition. Such allocation has been based on the valuation by an independent corporate valuation firm. The excess of the purchase price over the fair market value of the net tangible assets acquired resulting in goodwill aggregated approximately $2.4 million and has been allocated to goodwill which is being amortized on a straight-line basis over its estimated useful life of twenty-five years. 70 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) The operating results of FTI are included in the Company's consolidated results of operations from the date of acquisition. The following unaudited pro forma information of the Company reflects the results of operations for the years ended March 31, 1995 and 1996 as if the acquisitions of Assembly & Automation (Electronics) Limited and Astron Group Limited had occurred as of April 1, 1994 and as if the acquisitions of the net assets and business of Flextracker and FTI also had, occurred as of April 1, 1994 and after giving effect to certain adjustments including amortization of intangibles and goodwill. The unaudited proforma information does not include the effects of acquiring the Karlskrona Facilities in March 1997 because information relating to its operation prior to the company's acquisition is not available. The unaudited pro forma information is based on the acquired entities' results of operations for the years ended December 31, 1994 and 1995 as the fiscal year end of these entities and the rest of the group are not co-terminus. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually took place at April 1, 1994 or 1995 or of operating results which may occur in the future.
YEAR ENDED MARCH 31, 1995 1996 -------------------------------------------------------- -------- ------- Net sales............................................... $292,219 466,039 Net income.............................................. (872)* 11,977* Net income per share.................................... (0.07) 0.89
- --------------- * Excludes the effects of the write-off of $29,000 of in-process research and development at the date of the acquisition of Astron. 15. SEGMENT REPORTING The Company operates in one primary business segment -- providing sophisticated electronics assembly and turnkey manufacturing services to a select group of original equipment manufacturers engaged in the computer, medical, consumer electronics and communications industries. Sales to major customers who accounted for more than 10% of net sales were as follows:
MARCH 31, ------------------------ CUSTOMER 1995 1996 1997 ----------------------------------------------------- ---- ----- ----- Visioneer............................................ 1.70% 13.14% 7.00% Lifescan............................................. 20.1% 14.10% 13.34% Global Village....................................... 4.50% 10.50% 8.26% U.S. Robotics........................................ 0.00% 0.00% 10.63%
71 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED) Sales for similar classes of products within the Company's business segment is presented below (in thousands):
MARCH 31, ---------------------------------- PRODUCT TYPE 1995 1996 1997 ------------------------------------------- -------- -------- -------- Medical.................................... $ 49,152 $ 78,322 $ 89,682 Computer................................... 77,419 220,930 250,498 Telecommunication.......................... 43,399 60,466 75,947 PCB........................................ -- 4,485 28,470 Industrial................................. -- 9,664 6,832 Consumer products.......................... 47,515 23,858 12,495 MCMs....................................... 11,847.. 19,817 19,214 Others..................................... 8,054 30,804 7,447 -------- -------- -------- $237,386 $448,346 $490,585 ======== ======== ========
A summary of the Company's operations by geographical area for the three years ended March 31, 1995, 1996 and 1997 was as follows (in thousands):
MARCH 31, ---------------------------------- PRODUCT TYPE 1995 1996 1997 ------------------------------------------- -------- -------- -------- NET SALES: Singapore: Unaffiliated customers Domestic............................ $ 3,596 $ 653 $ 1,401 Export.............................. 7,358 9,277 851 Intercompany.......................... 67,572 77,899 88,054 -------- -------- -------- 78,526 87,829 90,306 Hong Kong/China/Mauritius: Unaffiliated customers Domestic............................ 17,757 11,838 11,398 Export.............................. -- 2,980 21,203 Intercompany.......................... 29,353 60,780 129,162 -------- -------- -------- 47,110 75,598 161,763 USA/Europe/Mexico: Unaffiliated customers Domestic............................ $ 50,506 $207,961 $208,225 Export.............................. -- 13,767 2,431 Intercompany.......................... -- 27 9 -------- -------- -------- 50,506 221,755 210,665 Malaysia: Unaffiliated customers Domestic............................ -- -- -- Export.............................. 158,168 $201,870 $245,075 Intercompany.......................... 4 -- -- -------- -------- -------- 158,172 201,870 245,075 Eliminations............................... (96,928) (138,706) (217,224) -------- -------- -------- $237,386 $448,346 $490,585 ======== ======== ========
72 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION UNLESS OTHERWISE INDICATED)
MARCH 31, PRODUCT TYPE 1995 1996 1997 ------------------------------------------- -------- -------- -------- INCOME/(LOSS) FROM OPERATIONS: Singapore................................ $ 90 $(25,334) $ (184) Hong Kong/China/Mauritius................ 638 (6,110) 4,787 USA/Mexico............................... (1,290) 4,570 (5,531) Europe................................... 15 (1,514) (1,829) Malaysia................................. 10,754 18,953 17,626 -------- -------- -------- $ 10,207 $ (9,435) $ 14,869 ======== ======== ========
MARCH 31, ---------------------------------- PRODUCT TYPE 1995 1996 1997 -------- -------- -------- IDENTIFIABLE ASSETS: Singapore................................ $ 23,426 $ 48,434 $ 50,118 Hong Kong/China/Mauritius................ 17,020 50,284 68,695 USA/Mexico............................... 26,354 73,552 74,884 Europe................................... 22 11,060 116,919 Malaysia................................. 49,295 47,694 48,618 -------- -------- -------- $116,117 $231,024 $359,234 ======== ======== ========
Geographic revenue transfers are based on selling prices to unaffiliated companies, less discounts. Income (loss) from operations is net sales less operating expenses, goodwill amortization and provision for plant closings, but prior to interest or other expenses and income taxes. The Company's subsidiaries, with the exception of Astron Group Limited, are interdependent and are not managed for stand alone results. Certain operational functions for the entire Company, such as marketing and administration, may be carried out by a subsidiary in one country. In addition, the Company may from time to time shift responsibilities from a subsidiary in one country to a subsidiary in another country, thereby changing the operating results of the impacted subsidiaries but not the Company as a whole. For these reasons, the Company believes that changes in results of operations in the individual countries in which it operates are not necessarily reflective of material changes in the Company's overall results. 73 74 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 25, 1997 FLEXTRONICS INTERNATIONAL LTD. By: /s/ MICHAEL E. MARKS ------------------------------------ Michael E. Marks Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ---------------------------- ------------------- /s/ MICHAEL E. MARKS Chairman of the Board and September 25, 1997 - --------------------------------------------- Chief Executive Officer Michael E. Marks (principal executive officer) /s/ TSUI SUNG LAM* President, Asia Pacific September 25, 1997 - --------------------------------------------- Operations and Director Tsui Sung Lam /s/ GOH CHAN PENG* Senior Vice President, September 25, 1997 - --------------------------------------------- Finance and Operations, Asia Goh Chan Peng Pacific (principal financial and accounting officer) /s/ ROBERT R.B. DYKES* Senior Vice President of September 25, 1997 - --------------------------------------------- Finance and Administration Robert R.B. Dykes and Director /s/ BERNARD J. LACROUTE* Director September 25, 1997 - --------------------------------------------- Bernard J. Lacroute /s/ MICHAEL J. MORITZ* Director September 25, 1997 - --------------------------------------------- Michael J. Moritz /s/ STEPHEN J.L. REES* Senior Vice President, September 25, 1997 - --------------------------------------------- Worldwide Sales and Stephen J.L. Rees Marketing and Director /s/ RICHARD L. SHARP* Director September 25, 1997 - --------------------------------------------- Richard L. Sharp *By: /s/ MICHAEL E. MARKS - --------------------------------------------- Michael E. Marks Attorney-in-fact
74 75 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ ----------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization dated as of September 12, 1994 among the Company, nCHIP Acquisition Corporation and nCHIP (the "Reorganization Agreement"). Certain Disclosure Schedules of nCHIP and the Company setting forth various exceptions to the representations and warranties pursuant to the Reorganization Agreement have been omitted. The Company agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request. (Incorporated by reference to Exhibits 2.1 through 2.6 of the Company's registration statement on Form S-4, No. 33-85842.) 2.2 Amendment No. 1 to the Reorganization Agreement dated as of December 8, 1994 among the Company, nCHIP Acquisition Corporation and nCHIP. (Incorporated by reference to Exhibit 2.7 of the Company's registration statement on Form S-4, No. 33-85842.) 2.3 Share Purchase Agreement dated as of April 12, 1995 among the Company, A&A and all of the shareholders of A&A. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K for the event reported on April 12, 1995.) 2.4 Share Purchase Agreement among the Company, A&A and all of the shareholders of A&A. 2.5 (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K for the event reported on April 12, 1995.) 2.5 Agreement among the Company, Alberton Holdings Limited and Omac Sales Limited dated as of January 6, 1996. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K for the event reported on February 2, 1996.) 2.6 Asset Transfer Agreement dated as of February 12, 1997 between Ericsson Business Networks AB and Flextronics International Sweden AB. (Incorporated by reference to Exhibit 2.1 of the Company's registration statement on Form S-3, No. 333-21715.) 3.1 Memorandum of Association of the Company. (Incorporated by reference to Exhibit 3.1 of the Company's registration statement on Form S-1, No. 33-74622.) 3.2 Articles of Association of the Company. (Incorporated by reference to Exhibit 3.2 of the Company's registration statement on Form S-4, No. 33-85842.) 4.1 Registration Rights Agreement dated July 8, 1993, as amended. (Incorporated by reference to Exhibit 10.34 of the Company's registration statement on Form S-1, No. 33-74622.) 4.2 Registration Rights Agreement dated as of April 12, 1995 among the Company and certain shareholders of A&A. (Incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K for the event reported on April 12, 1995.) 10.1 Form of Indemnification Agreement between the Registrant and its Directors and certain officers. (Incorporated by reference to Exhibit 10.1 of the Company's registration statement on Form S-1, No. 33-74622.) 10.2+ 1993 Share Option Plan. (Incorporated by reference to Exhibit 10.2 of the Company's registration statement on Form S-1, No. 33-74622. 10.3+ Executives' Share Option Scheme, as amended. (Incorporated by reference to Exhibit 10.3 of the Company's registration statement on Form S-1, No. 33-74622.) 10.4+ Executives' Incentive Share Scheme, as amended. (Incorporated by reference to Exhibit 10.4 of the Company's registration statement on Form S-1, No. 33-74622.) 10.5+ nCHIP, Inc. Amended and Restated 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form S-4, No. 33-85842.) 10.6* Agreement to Grant Options dated as of June 9, 1995 between the Company and Lifescan. (Incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995.)
76
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ ----------------------------------------------------------------------------- 10.7 Lease Agreement dated as of October 1, 1994 among Shenzhen Xinan Industrial Shareholdings Limited, Flextronics Industrial (Shenzhen) Limited and Flextronics Singapore Pte Ltd. (Incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995). 10.11 Lease Agreement dated as of January 2, 1995 between Shenzhen Xinan Industrial Shareholdings Limited and Flextronics Industrial (Shenzhen) Limited. (Incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995.) 10.8+ Services Agreement between the Registrant and Stephen Rees dated as of January 6, 1996. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K for the event reported on February 2, 1996.) 10.9+ Supplemental Services Agreement between Astron and Stephen Rees dated as of January 6, 1996. (Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K for the event reported on February 2, 1996.) 10.10+ Promissory Note dated April 17, 1995 executed by Michael E. Marks in favor of Flextronics Technologies, Inc. (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995.) 10.11+ Employment and Noncompetition Agreement between the Company and David Tuckerman. (Incorporated by reference to Exhibit 10.35 of the Company's registration statement on Form S-4, No. 33- 85842.) 10.12+ Service Agreement dated July 8, 1993 between the Registrant and Dennis P. Stradford. (Incorporated by reference to Exhibit 10.36 of the Company's registration statement on Form S-1, No. 33-74622.) 10.13+ Service Agreement dated July 8, 1993 between the Registrant and Tsui Sung Lam. (Incorporated by reference to Exhibit 10.37 of the Company's registration statement on Form S-1, No. 33-74622.) 10.14+ Service Agreement dated July 8, 1993 between the Registrant and Goh Chan Peng. (Incorporated by reference to Exhibit 10.38 of the Company's registration statement on Form S-1, No. 33-74622.) 10.15+ Service Agreement dated July 8, 1993 between the Registrant and Teo Buck Song. (Incorporated by reference to Exhibit 10.39 of the Company's registration statement on Form S-1, No. 33-74622.) 10.22* Printed Circuit Board Assembly Services Agreement between Lifescan Inc., a Johnson & Johnson Company, and the Registration dated November 1, 1992. (Incorporated by reference to Exhibit 10.41 of the Company's registration statement on Form S-1, No. 33-74622.) 10.23 Tenancy of Flatted Factory Unit dated February 28, 1996 between Jurong Town Corporation and the Registrant. (Incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for fiscal year ended March 31, 1990.) 10.24 Tenancy of Flatted Factory Unit dated May 14, 1993 between Jurong Town Corporation and the Registrant. (Incorporated by reference to Exhibit 10.45 of the Company's registration statement on Form S-1, No. 33-74622.) 10.25+ Flextronics Asia U.S.A. 401(k) plan. (Incorporated by reference to Exhibit 10.52 of the Company's registration statement on Form S-1, No. 33-74622.)
77
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ ----------------------------------------------------------------------------- 10.26 Acquisition and Subscription Agreement dated June 30, 1993 between FI Liquidating Company, Inc., Asian Oceanic Nominees and Custodians Limited, N.T. Butterfield Trustee (Bermuda) Limited, Overseas Asset Holdings, Inc., JF Asia Select Limited, the Executive Representative, Flex Holdings Pte Limited, CLG Partners, L.P. and the Liquidators of Asian Oceanic Nominees and Custodians Limited. (Incorporated by reference to Exhibit 10.53 of the Company's registration statement on Form S-1, No. 33-74622.) 10.27 Revolving Credit and Term Loan Agreement dated as of March 27, 1997 among the Company, The First National Bank of Boston, as Agent, and the other lending institutions listed on Schedule 1 attached thereto. The Company agrees to furnish a copy of the omitted schedule to the Commission upon request. (Incorporated by reference to Exhibit 5(a) of the Company's Current Report on Form 8-K for the event reported on March 27, 1997.) 10.28 Revolving Credit Agreement dated as of March 27, 1997 among Flextronics International USA, Inc., The First National Bank of Boston, as Agent, and the other lending institutions listed of Schedule 1 attached thereto. (Incorporated by reference to Exhibit 5(b) of the Company's Current Report on Form 8-K for the event reported on March 27, 1997.) 10.29+ Employment and Noncompetition Agreement dated as of April 30, 1997 between Flextronics International Sweden AB and Ronny Nilsson. 10.30+ Services Agreement dated as of April 30, 1997 between Flextronics International USA, Inc. and Ronny Nilsson. 10.31+ Promissory Note dated April 15, 1997 executed by Ronny Nilsson in favor of Flextronics International USA, Inc. 10.32+ Letter Agreement dated March 27, 1997 among the Company, Astron Technologies Limited, Croton Technology Ltd. and Stephen Rees regarding the termination of the Services Agreement. 10.33+ Letter Agreement dated March 27, 1997 between Astron Group Limited and Stephen Rees regarding the termination of the Supplemental Services Agreement. 10.34++ Services Agreement between Flextronics Singapore Pte Limited and Goh Chan Peng effective as of April 1, 1997. 10.35++ Services Agreement between Astron Technologies Limited and Goh Chan Peng effective as of April 1, 1997. 10.36++ Services Agreement between Astron Technologies Limited and Tsui Sung Lam effective as of April 1, 1997. 10.37++ Services Agreement between Flextronics Singapore Pte Limited and Tsui Sung Lam effective as of April 1, 1997. 10.38+ First Amendment to Revolving Credit and Term Loan Agreement dated as of May 19, 1997 among the Company, BankBoston, N.A. (formerly known as The First National Bank of Boston), as Agent, and the other lending institutions listed on Schedule 1 attached thereto. 10.39+ First Amendment to Revolving Credit Agreement dated as of May 19, 1997 among Flextronics International USA, Inc., BankBoston, N.A., as Agent, and the other lending institutions listed on Schedule 1 attached thereto. 10.40+ Second Amendment to Revolving Credit and Term Loan Agreement dated as of June 30, 1997 among the Company, BankBoston, N.A., as Agent, and the other lending institutions listed on Schedule 1 attached thereto.
78
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ ----------------------------------------------------------------------------- 10.41+ Second Amendment to Revolving Credit Agreement dated as of June 30, 1997 among Flextronics International USA, Inc., BankBoston N.A. as Agent, and the other lending institutions listed on Schedule 1 attached thereto. 11.1+ Statement regarding computation of per share earnings. 21.1+ Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 27.1+ Financial Data Schedule
- --------------- * Confidential treatment requested for portions of agreement. + Management contract or compensatory plan or arrangement. + Previously filed. (d) See Item 14(a). EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.1 [ERNST & YOUNG LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated July 31, 1997, with respect to the audited financial statements and schedule of Flextronics International Ltd. as of March 31, 1996 and 1997 and for each of the three years in the period ended March 31, 1997, included in this Annual Report (Form 10-KA) for the fiscal year ended March 31, 1997, into (i) the Registration Statement on Form S-8 (File No. 33-78529) pertaining to the 1993 Share Option Plan, Executives' Share Option Scheme and Executives' Incentive Share Scheme of Flextronics International Ltd.; (ii) the Registration Statement on Form S-8 (File No. 33-89454) pertaining to Ordinary Shares authorized for issuance under the nCHIP, Inc. Amended and Restated 1988 Stock Option Plan which was assumed by Flextronics International Ltd. in connection with the acquisition of nCHIP, Inc.; and (iii) the Registration Statement on Form S-3 (File No. 333-20623) pertaining to the resale of certain outstanding Ordinary Shares. /s/ ERNST & YOUNG - -------------------------------- ERNST & YOUNG Certified Public Accountants Singapore September 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----