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[FLEXTRONICS INTERNATIONAL LOGO]
FLEXTRONICS INTERNATIONAL
[GRAPHIC 1]
Annual Report 1996
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CORPORATE PROFILE
Flextronics International offers advanced contract manufacturing services of
sophisticated electronics for OEMs in the medical, consumer, computer, and
communications industries. The Company offers a full range of services including
printed circuit board (PCB) and multichip module (MCM) design, materials
procurement and management, advanced packaging fabrication, PCB assembly, final
system build, distribution, and warranty repair. The Company has facilities
located in North America, Europe, and Asia.
TO OUR SHAREHOLDERS:
It is particularly gratifying to report to you after another year of rapid
growth and record profitability. In just three short years, Flextronics
International has grown from three manufacturing operations in Asia and revenues
of $131 million, to a company with a global presence, revenues of $448 million,
and among the highest profitability rates in the contract electronics
manufacturing industry. I would like to review for a moment the strategies that
have generated these results, and then look forward to the new opportunities
available to our Company.
SETTING THE STRATEGY
During the summer of 1993, the management of Flextronics met to consider the
Company's position in the industry and what strategies should be pursued to
enhance that position. At the time, the Company's annual revenue was $100
million, which ranked the Company approximately twentieth by revenue in the
industry worldwide. It was clear to the management that in a rapidly growing
industry, it was important to be in the top five in both revenues and profits.
To achieve that result, the following strategies were established:
- - Leverage the Asian cost base to increase profitability;
- - Add manufacturing operations in Europe and North America;
- - Acquire or develop leading edge manufacturing technology;
- - Expand services to include design through distribution;
- - Broaden the customer base, and the industries served.
ACHIEVING THE OBJECTIVES
During the three years since these strategies were set, the Company grew
rapidly, both internally and through acquisition. In March, 1994, Relevant
Industries was acquired, which provided Flextronics with its first manufacturing
operation in North America, located in San Jose, California. Relevant was a
small, system level assembly supplier which also added this new service to the
Company. Since then, our San Jose business has grown more than ten fold,
encompasses a second building devoted to PCB assembly, and soon a third building
will be built on land acquired recently. An additional PCBA manufacturing
operation was opened in 1995 in Dallas, Texas, thereby providing additional
capacity in North America.
In early 1995, we acquired nCHIP, a company engaged in the design and
production of multichip modules on silicon substrates. nCHIP's capabilities in a
variety of packaging designs has since been expanded to include development of
integrated passive components, leading edge bare die placement techniques, and
research and development (with Dow Chemical) on a new low cost substrate. The
revenue at nCHIP has more than doubled since its acquisition, and it now serves
as the design front end for all of Flextronics' worldwide operations.
In April, 1995, we acquired A&A, a small PCBA facility in Wales, United
Kingdom, giving Flextronics its first operation in Europe. Our intention in
Wales is to provide a facility for "localization" of products produced in high
volume in Asia and North America yet bound for countries on the European
[Photo of Michael E. Marks, Chairman and CEO]
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continent.The facility has been completely renovated, and the first localization
activities are underway.
During this time, many new customers were added, representing a variety
of industries. In the medical arena, Thermoscan, Inc. and Enact Health
Management Systems came on board. In telecommunications, we added Global Village
Communication, Inc., Advanced Fibre Communications, Inc., and Whitetree Network
Technologies, Inc. In the consumer area, we added Palm Computing, now a division
of U.S. Robotics. And in computer peripherals, we added Microsoft Corporation
and Visioneer, Inc., a supplier of low cost scanners.
The results of our efforts are shown in the charts displayed here. For
all years we have presented actual results and results before non-recurring
items which are related primarily to aquisitions, in-process R&D, and two plant
closings in the fourth quarter of fiscal 1996. Revenue has increased to $448
million from $131 million two years ago. Profits have risen even faster, from
$2.9 million to $16.6 million (before non-recurring items). And Earnings Per
Share has grown to $1.25 (before non-recurring items) from just $0.38 two years
ago.
BECOMING A BILLION DOLLAR COMPANY
Having quickly reached our objective of being in the top five contract
manufacturers in both revenue and profits (before non-recurring items), we are
now turning our attention toward new strategies designed to enable Flextronics
to grow to a $1 billion company. Outlined in some detail on the following pages
is a new strategic focus in two areas--logistics and miniaturization.
Our focus on logistics is an attempt to reduce costs associated with
handling and management of materials. We will accomplish this by locating our
factories on large campuses, where many materials will be manufactured and
supplied to the assembly operation. The focus on miniaturization encompasses all
of the activities at nCHIP, including bare die assembly, integrated passives,
and multichip assemblies on a variety of substrates.
The first significant step in these new directions was taken when we
acquired Astron during the fourth quarter of this past fiscal year. Astron is a
manufacturer of sophisticated, miniature laminate circuit boards. Astron's
capabilities fit very well with those at nCHIP, and provide an even broader set
of tools to be used in designing smaller, less expensive packaging for our
customers. In addition, Astron has a facility situated on 15 acres of land in
Doumen, China, which Flextronics now owns. This will be the site of our first
campus, on which we intend to build a 300,000 square foot facility during the
current fiscal year.
A TEAM EFFORT
The past year has been an eventful one. In addition to the very satisfactory
financial results, our Company has become much more global in terms of
operations, customers and employees. Our senior management team is comprised of
Asians, Europeans and Americans. We have found this diversity serves us well as
we develop strategies for the future. And our approximately 4,000 employees
continue to improve their skills and flexibility which enables us to lower costs
in an increasingly competitive industry. We salute them all. We also thank you,
our shareholders, for your continued support.
Best regards,
/s/ Michael E. Marks
Michael E. Marks
Chairman and CEO
CHART 1 REVENUES
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(In Millions)
1994 1995 1996
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$131.3 $237.4 $448.3
CHART 2 INCOME
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(In Millions)
1994 1995 1996
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Before non-recurring items ............ $2.9 $6.8 $ 16.6
Actual results ........................ $2.2 $6.2 $(17.4)
CHART 3 EARNINGS PER SHARE
----------------------
1994 1995 1996
------ ------ ------
Before non-recurring items ............ $.38 $.56 $ 1.25
Actual results ........................ $.28 $.51 $(1.39)
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A ROADMAP FOR SUCCESS
A ROADMAP FOR SUCCESS
In 1996, Flextronics International continued to fulfill its commitment to its
original business strategy--and to see the rewards of that effort. The
underlying principles of that strategy demand that the Company:
- - keep costs low and quality high;
- - provide a spectrum of advanced technologies and services;
- - maintain a global presence in strategic markets;
- - create a flexible environment to meet rapidly changing market needs.
To achieve these goals, Flextronics developed and implemented a number
of innovative programs and solutions in 1996.
DEMAND FLOW TECHNOLOGY
Perhaps most critical to the Company's success in 1996 has been its
implementation of Demand Flow Technology (DFT) in most of its factories
worldwide.
An alternative to traditional manufacturing strategies, DFT is a
comprehensive manufacturing and quality strategy that streamlines the entire
manufacturing process, from order-taking to delivery. With DFT, products are
manufactured as customers order them, parts are delivered directly to assembly
lines, assembly is done using a system known as "Kanban"--an assembly technique
whereby products are pulled down a manufacturing line instead of being pushed
through--and goods are shipped as soon as they are built.
In 1996, Flextronics reconfigured production lines in many of its
factories to apply DFT principles. Today, these factories operate with highly
efficient work "cells" that eliminate many of the non-value-added labor costs
associated with building a product. As a result, the Company has begun to see
the many benefits of DFT, including shrinking inventories, shorter cycle times,
and significantly lower costs. DFT has also made Flextronics' manufacturing
process more flexible, allowing customers to make changes in product orders even
during manufacturing cycles--and allowing the Company to meet rapidly changing
market needs.
DEDICATED FACTORIES
Also in 1996, Flextronics extended its dedicated factory concept to many of its
manufacturing facilities and customers.
Similar to DFT, the dedicated factory concept significantly reduces
cycle times and labor costs while increasing inventory turns by optimizing the
manufacturing process. Instead of operating exclusively with traditional
manufacturing lines, Flextronics dedicated space within many of its factories to
building specific customers' products. These "factories within factories" were
then specially redesigned to manufacture the products as quickly and efficiently
as possible. Some, for example, were configured to maximize repeatability, while
others were redesigned to do mixed-model manufacturing.
As with DFT, the dedicated factory concept affords Flextronics a degree
of flexibility almost un-matched in the contract manufacturing industry. Rather
than having to ask customers to conform to its manufacturing set-up, the Company
is now able to conform to its customers' product and market needs with these
dedicated factories.
COST-SAVING VENDOR PROGRAMS
To further reduce costs and improve manufacturing efficiencies, the Company
developed and implemented a number of innovative vendor programs in 1996.
With the help of key suppliers, for instance, Flextronics was able to
more efficiently implement a critical ship-to-line delivery program in its
factories this year. Under a new system, vendors are required to pass a rigorous
quality certification review administered by Flextronics. This process ensures
that suppliers deliver only the highest quality components for the Company's
use, and it eliminates the need for quality inspections upon delivery. Now,
certified vendors deliver directly to manufacturing lines, which reduces the
costs associated with shipping, receiving, and maintaining parts inventories.
This program also has increased the Company's yield and inventory turns.
Similarly, Flextronics developed a material replenishment system in
1996 that allows the Company to use components on an as-needed basis. Again,
rather than carry the cost of maintaining parts inventories on-site, Flextronics
has arranged for key suppliers to provide next-day delivery of materials based
on Company forecasts. Not only has this new system simplified the Company's
accounting efforts, but it has also reduced manufacturing lead times and
personnel requirements in receiving.
AUGMENTING THE ORIGINAL BUSINESS STRATEGY
While the original business strategy has served Flextronics well since 1993, it
must be modified periodically to help the Company maintain a competitive edge.
In 1996, Flextronics augmented its original business strategy with two
new components, one dealing with product miniaturization and the other with a
focus on logistics. These two enhancements--working in concert with the
Company's original goals and objectives--are expected to propel Flextronics to
the forefront of the contract manufacturing industry.
GRAPHIC 2
Flextronics offers a number of manufacturing
programs designed to reduce cost and
increase our customers' competitiveness
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[GRAPHIC 3]
THERMOSCAN, INC.
When Thermoscan went looking for a contract manufacturer who could provide low
cost, offshore manufacturing and cutting edge technologies, the company quickly
found Flextronics. With its bare die assembly techniques, Flextronics was one of
the few contract manufacturers that had both the manufacturing capability and
the microelectronics technology Thermoscan needed to produce its infrared ear
thermometers more efficiently and cost effectively. Flextronics' manufacturing
facilities in Europe, Asia, and North America could provide Thermoscan with
high-volume manufacturing in key markets worldwide. Just as importantly, though,
the Company was also experienced with chip-on-board design and manufacturing, a
sophisticated bare die assembly technique that enables the Company to produce
smaller--but higher performing and more reliable--products at a reduced cost.
Along with its advanced manufacturing, Flextronics now provides product
development services for some of Thermoscan's next-generation products.
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MINIATURIZATION
As a result of its original business strategy, Flextronics has achieved some of
the lowest labor costs and cycle times in the industry. The challenge that lies
ahead is to find additional methods for reducing the cost of production--while
continuing to provide the cutting-edge technologies and services needed to make
customers more competitive in their marketplaces.
Years ago, the Company identified miniaturization as an emerging
technology capable of lowering manufacturing costs while increasing product
competitiveness. Today, the demand for smaller, lighter electronic products with
more features and lower prices is skyrocketing--and the cost savings achieved by
packing more power into smaller spaces are growing.
As evidenced by its modified business strategy, Flextronics recognizes
the critical role that miniaturization will play in the Company's short- and
long-term success and is now focusing on that area of opportunity.
ADVANCED MINIATURIZATION TECHNOLOGIES
Having foreseen the importance of miniaturization, the Company developed and
acquired a number of innovative new manufacturing, packaging, and component
technologies for producing miniaturized electronics products.
With the 1995 purchase of nCHIP, for example, Flextronics acquired the
technical knowledge it needed to design and build products using bare die
assembly techniques. These techniques--the most advanced in the industry--are
used to create multichip module (MCM), chip-on-board (COB), ball grid array
(BGA), and flip-chip assemblies, and they enable the Company to build products
with greater performance and reliability but for a lower cost than traditional
manufacturing methods would allow.
In 1996, Flextronics was able to extend miniaturization to the
component level when it used a proprietary technology developed by nCHIP to
integrate scores of resistors and capacitors into a single piece of silicon.
Called an integrated passive, this miniaturized component not only takes up far
less space than its traditional counterparts, but it also is considerably less
expensive to make.
MICROELECTRONICS DESIGN AND MANUFACTURING
Today, Flextronics is using these advanced technologies to create--in volume--a
variety of microelectronics products. And it is these technologies that provide
the foundation for the Company's future in miniaturization.
Yet it was the acquisition of Astron in 1996 that gave the Company a
microelectronics manufacturing capability that is truly unique within the
contract manufacturing industry.
Astron, a Hong Kong-based company, is a leading manufacturer of
miniature, gold-finished printed circuit boards. These advanced laminate
substrates are used in portable computer and communications products--the very
products that require nCHIP's bare die capabilities. With the Astron
acquisition, Flextronics can now offer its customers a complete spectrum of
advanced design and manufacturing technologies and services. From traditional
pin-through-hole and surface mount (SMT) technologies to Astron's miniaturized
fineline substrates and nCHIP's advanced multichip modules, Flextronics has the
technical knowledge and capabilities needed to efficiently design and
manufacture its customers' next-generation microelectronics products.
STRATEGIC RELATIONSHIPS AND SERVICES
To further develop its competitive edge--and the one it offers to its
customers--Flextronics entered into a joint development effort with The Dow
Chemical Co. in 1996. This strategic partnership will combine Dow Chemical's
expertise in materials and packaging assembly with Flextronics' expertise in
interconnect and electronics assembly to develop advanced packaging and
interconnect technologies for the future.
This joint effort, coupled with the Company's 1996 acquisitions and
developments, positions Flextronics at the vanguard of the miniaturization
movement in the contract manufacturing industry.
Yet miniaturization is only one of the two new directions detailed in
Flextronics' modified business strategy. In the coming years, the Company
intends to secure its position as an industry leader with a new focus on
logistics.
GRAPHIC 4
Flextronics offers a complete spectrum of
manufacturing technologies to aid in the
development of next generation products.
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[GRAPHIC 5]
PALM COMPUTING, A DIVISION OF U.S. ROBOTICS
Providing customers with advanced technologies and services is an important part
of Flextronics' business strategy. And for the Palm Computing Division of U.S.
Robotics, it was an important reason for selecting Flextronics to help design
and manufacture its Pilot connected organizer. A software firm with an idea for
a powerful new organizational tool, Palm Computing recognized it needed help
both in developing a hardware platform for its new device and in organizing
offshore and regional manufacturing once the design was complete.
Flextronics--with its engineering services and manufacturing
capabilities--seemed the perfect choice. Working together, engineers at
Flextronics and Palm created an initial design that not only optimized the
performance and manufacturability of the new product, but that also hit the
stringent cost targets and development schedules set by the customer. Then,
operating as the project's prime contractor, Flextronics organized a battery of
experts, including those in board layout, testing, plastics and packaging before
completing final assembly. Mass production began as scheduled at Flextronics'
offshore and regional manufacturing facilities, where it continues today.
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INTRODUCING LOGISTICS
When Flextronics' management devised a new operational strategy in 1996, it
created a plan that would not only significantly reduce the costs of
manufacturing products for its customers, but that would also completely
redefine the entire material acquisition and distribution cycle.
A unique new strategy was designed to eliminate many of the
non-value-added costs associated with material procurement, production, and
distribution. And it is expected do so by eliminating the customer's involvement
in these processes.
A NEW LEVEL OF SERVICE
With the traditional production/distribution strategy, raw materials from all
over the world are brought into manufacturing facilities, where products are
assembled. Finished goods are then transported to customer warehouses and, as
demand requires, trucked to distribution centers and, finally, retail outlets
for dispersion to end users. At best, this is an expensive process--in terms of
both time and money.
Flextronics envisions a more efficient and cost-effective method of
managing the production and distribution process.
The first step in this new strategy requires the Company to establish a
series of "manufacturing campuses" in strategic locations throughout the world.
Because of its proximity to Asia and Europe, Astron's 15-acre high-technology
center in Doumen, China, has been earmarked as the Company's first manufacturing
campus. The recently expanded 100,000-square-foot manufacturing operation in San
Jose, California will eventually serve as the center of the Company's Silicon
Valley manufacturing campus. A third campus is planned for Guadularaja, Mexico
where we have 32-acres currently under contract.
As these campuses are established, the Company will then implement its
new logistics strategy. The idea is simple: Rather than have raw materials and
components brought into these sites from all over the world, the campuses will
manufacture many of the raw materials and components needed to build customer
products. These campuses will also house the manufacturing facilities that will
build the products--and once completed, the products will be moved to nearby
warehouses where they will be distributed to end users.
This streamlined approach to production and distribution can eliminate
the need for customers to take possession of their products for warehousing or
distribution. And while this logistics strategy has many advantages, the most
important is cost reduction.
With these new campuses, the Company believes it will be able to
significantly reduce manufacturing overhead and, consequently, overall product
costs. Producing some raw materials on-site will cut material costs considerably
and shorten the supply chain. The expense of freight and handling will also drop
dramatically since the components will be created at the same place from which
they are distributed. Not having to move components or materials from factory to
factory also will result in lower material packaging costs. These cost
reductions will ultimately result in a more competitive product for our
customers.
Finally, because these manufacturing campuses will be located near
major marketplaces, they will enable the Company to react more quickly to its
customers' market changes--and to get products to end users even faster.
LOOKING FORWARD
Although its original business strategy was well-conceived--and
successful--Flextronics believes the enhancements it made to that strategy in
1996 are necessary to the Company's continued success. Course changes are not
unusual in rapidly changing industries; in fact, they are often requirements.
The Company sees its new logistics strategy and focus on miniaturization as just
that essential.
In the coming year, Flextronics will continue to evaluate new
technologies and services so that it may meet--and exceed--the high expectations
of its customers. The Company is dedicated to being one of the world's leading
contract manufacturers and, for the reasons outlined above, looks forward to
1997 with enthusiasm.
GRAPHIC 6 - Logistics: The production and distribution strategy of tomorrow.
Raw materials - Manufacturing Campus located close to major market place
Distribution - End User
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[GRAPHIC 7]
MICROSOFT CORPORATION
By establishing itself in the three most strategic markets worldwide--North
America, Europe, and Asia--Flextronics responded to its customers' needs for
globalized manufacturing. It also opened the door to potential customers, like
Microsoft, that were looking for a contract manufacturer with just that kind of
exposure. When Microsoft began its exhaustive search for a strategic
manufacturing partner, it started by reviewing over 100 companies, evaluating
each one for quality, manufacturing locations and costs, among other things.
After nine months, only one name remained--and Flextronics was chosen to produce
Microsoft's computer peripheral devices. The Company's regional manufacturing
capabilities, particularly in Europe and Asia, and its cost competitiveness
strongly influenced Microsoft's decision--as did the fact that Flextronics does
only contract manufacturing and has no products of its own, thereby respecting
its customers' proprietary technology. Today, Flextronics manufactures the
Microsoft mouse for European and Asian markets and is an integral part of
Microsoft's U. S. product development team--reviewing next generation product
designs for manufacturability and testability, and designing complete board
layouts based on Microsoft's functionality requirements.
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FLEXTRONICS INTERNATIONAL'S
DESIGN AND MANUFACTURING FACILITIES
GRAPHIC 7 - World Map with Flextronics' locations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed below and elsewhere herein contain forward-looking statements
regarding the future performance of the Company and future events that involve
risks and uncertainties that could cause actual results to differ materially
from the statements contained herein. This document, and the documents that the
Company files from time to time with the Securites and Exchange Commission, such
as its reports on Form 10-K, Form 10-Q, Form 8-K and its proxy materials,
contain additional important factors that could cause actual results to differ
from the Company's current expectations and the forward-looking statements
contained herein.
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 April 1995, the Company acquired Assembly & Automation (Electronics)
Limited ("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.
Flextronics International Ltd.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In February 1996, the Company acquired Astron Group Limited ("Astron")
for (i) $13,440,605 in cash, (ii) $15 million in promissory notes payable over a
two year period and bearing interest at a rate of 8% per annum, and (iii)
Ordinary Shares of S$0.01 each in the capital of the Company with a value of
$6,507,000. In addition, the Company will issue Ordinary Shares with a value of
$10 million to the former Astron shareholders on June 30, 1998 and will pay an
earnout of up to an additional $12.5 million in cash and Ordinary Shares
calculated in accordance with a formula based upon Astron's pre-tax profit for
calendar year 1996, on or about March 31, 1997. The Company has included $3.125
million or 25% of the earnout goals in fiscal 1996 as the management believes
that Astron will most probably be able to meet the profit target for the first
quarter. The Company has also entered into consulting agreements with the former
Chairman of Astron, which include confidentiality provisions and a convenant not
to compete. The agreements provide for the payment of an annual fee, plus a $15
million payment to be made on June 30, 1998. The Company's financial statements
for fiscal 1996 include two months of Astron's operating results.
In the fourth quarter of fiscal 1996 the Company wrote off $31.6
million of in-process research and development associated with the acquisition
of Astron and also recorded one time charges totalling $2.5 million for costs
associated with the closing of one of the Company's Malaysia plants and its
Shekou, China operations. Without taking into account these write-offs and
charges, the Company's net income and earnings per share in fiscal 1996 were
$16.6 million and $1.25, respectively.
The Company's subsidiaries, with the exception of Astron, 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.
The selected financial data set forth below as of March 31, 1994, 1995
and 1996, and for the fiscal years ended March 31, 1993, 1994, 1995 and 1996 has
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 Company accounted for the January 1995
acquisition of nCHIP as a pooling of interest. Therefore, the financial data
presented below for fiscal years 1992, 1993, 1994 and 1995 include the
historical results of nCHIP. These historical results are not necessarily
indicative of the results to be expected in the future.
Fiscal Year Ended March 31, 1992 1993 1994 1995 1996
-----------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
STATEMENT OF OPERATIONS DATA:
Net sales $ 80,729 $ 100,759 $ 131,345 $ 237,386 $ 448,346
Cost of sales 73,361 91,794 117,392 214,865 406,457
------------------------------------------------------------
Gross profit 7,368 8,965 13,953 22,521 41,889
Selling, general and administrative expenses 7,252 7,131 8,667 11,468 18,587
Research and development 2,737 81 202 91 31,562
Goodwill/intangible assets amortization 399 388 419 755 1,061
Provision for plant closings 202 -- 830 -- 2,454
------------------------------------------------------------
Operating income (loss) (3,222) 1,365 3,835 10,207 (11,775)
Interest expense and other, net 2,898 2,329 1,376 1,043 1,846
Merger expenses -- -- -- 816 --
Income (loss) from joint venture -- -- (70) (729) --
------------------------------------------------------------
Income (loss) before income taxes (6,120) (964) 2,389 7,619 (13,621)
Provision for income taxes 398 264 654 1,463 3,791
Extraordinary gain -- -- 416 -- --
------------------------------------------------------------
Net income (loss) $ (6,518) $ (1,228) $ 2,151 $ 6,156 $ (17,412)
============================================================
Net income (loss) per share $ (0.89) $ (0.17) $ 0.28 $ 0.51 $ (1.39)
============================================================
Weighted average Ordinary Shares
and equivalents 7,284 7,382 7,730 12,103 12,536
============================================================
March 31, 1992 1993 1994 1995 1996
-----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 856 $ (1,201) $ 30,669 $ 33,425 $ 27,676
Total assets 41,734 52,430 103,129 116,117 214,588
Long-term debt and capital lease
obligations, excluding current portion 7,514 17,243 4,755 6,890 28,360
Shareholders' equity (1,040) (2,256) 46,703 57,717 70,779
Flextronics International Ltd.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 1994 1995 1996
- ------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 89.4 90.5 90.7
---------------------------
Gross profit 10.6 9.5 9.3
Selling, general and administrative expenses 6.6 4.9 4.2
Goodwill/intangible assets amortization 0.3 0.3 0.2
Provision for plant closings 0.6 -- 0.5
Research and development 0.2 -- 7.0
---------------------------
Operating income (loss) 2.9 4.3 (2.6)
Interest expense and other, net 1.0 0.5 0.4
Merger expenses -- 0.3 --
Income (loss) from joint venture (0.1) (0.3) --
---------------------------
Income (loss) before income taxes 1.8 3.2 (3.0)
Provision for income taxes 0.5 0.6 0.9
Extraordinary gain 0.3 -- --
---------------------------
Net income (loss) 1.6% 2.6% (3.9%)
===========================
NET SALES
Net sales in fiscal 1996 increased 89% to $448 million from $237
million in fiscal 1995. This increase was primarily due to 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. As expected, sales to IBM declined significantly
due to IBM's efforts to consolidate more of its manufacturing business
internally. The Company expects sales in the first quarter of fiscal 1997 to be
approximately the same as the sales in the fourth quarter of fiscal 1996 due to
softening of the PC peripheral business during this period.
Net sales in fiscal 1995 increased 81% to $237 million from $131
million in fiscal 1994. This increase was primarily the result of higher sales
to existing customers, including Lifescan (a Johnson & Johnson Company), IBM and
Interbold and sales to new customers in the consumer electronics industries such
as Phonex, International Components Corporation and Global Village
Communications.
GROSS PROFIT
Gross profit is affected by, among other things, product mix, component
costs, product life cycles, unit volumes, start up of new manufacturing
facilities and new product introductions. Gross profit margin declined slightly
to 9.3% 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 MCM fab facility. The decrease in gross profit margin was also
attributable to a reduction in certain selling prices in order to remain
competitive.
Gross margin decreased to 9.5% in fiscal 1995 as compared to 10.6% in
fiscal 1994, principally as a result of the consolidation of nCHIP's results of
operations with the Company and sales to new customers, which typically entail
higher expenses and lower margin initially.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1996 increased
to $18.6 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. The Company anticipates that selling, general and
administrative expenses will continue to increase in absolute dollars.
Selling, general and administrative expenses in fiscal 1995 increased
to $11.5 million from $8.7 million in fiscal 1994, but decreased as a percentage
of net sales to 4.9% in fiscal 1995 from 6.6% in fiscal 1994. The increase in
absolute dollars was principally due to costs associated with increases in
corporate administrative expenses and provision for doubtful accounts, the
Flextronics International Ltd.
10
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
inclusion of Relevant's selling and general administrative expenses, and
provision for severance payment to certain nCHIP personnel.
GOODWILL AND INTANGIBLE ASSETS
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. Goodwill amortization increased
from $510,000 in fiscal 1995 to $725,000 in fiscal 1996 primarily due to the
goodwill from the Company's acquisition of A&A. Intangible asset amortization
increased from $245,000 in fiscal 1995 to $336,000 in fiscal 1996 primarily due
to the acquisition of A&A and Astron.
Due to the acquisition of Relevant, goodwill amortization increased
from $398,000 in fiscal 1994 to $510,000 in fiscal 1995 and intangible assets
amortization increased from $21,000 in fiscal 1994 to $245,000 in fiscal 1995.
PROVISION FOR PLANT CLOSINGS
The provision for plant closings of $2.5 million in fiscal 1996
includes a $1.0 million provision for inventory exposure and $1.3 million
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.
These plant closings reflect the Company's strategy to move away from a large
number of small facilities and toward larger, campus type operations. Production
from the Shekou facility has been moved to the Company's plant in Xixiang,
China.
RESEARCH AND DEVELOPMENT
In connection with the Astron acquisition the Company engaged Duff &
Phelps Capital Markets Co. ("DPCM") to determine the fair market value of
Astron's research and development assembly in process. ("In-Process R&D"). The
valuation of the In-Process R&D was performed using the discounted cashflow
technique whereby the future cashflow expected to be generated is determined by
the current level of technology investment by Astron. DPCM determined the
valuation to be between $31 million and $37 million, and the Company has written
off $31.6 million of In-Process R&D in fiscal 1996.
INTEREST EXPENSE AND OTHER, NET
Interest expense and other, net increased to $1.8 million in fiscal
1996 from $1.0 million 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.
The Company has recorded an unrealized foreign exchange gain of $872,000 in
fiscal 1996 compared to a foreign exchange loss of $303,000 in fiscal 1995 due
to weaker Malaysian Ringgit and Singapore dollars.
Interest expense and other, net decreased to $1.0 million in fiscal
1995 from $1.4 million in fiscal 1994. The decrease reflects lower interest
expense during this period as a result of the repayment of long term bank debt
in March 1994 and repayment of short-term advances in April 1994, and higher
income earned on cash balances for the first six months of fiscal 1995.
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.
INCOME (LOSS) FROM JOINT VENTURE
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.
PROVISION FOR INCOME TAXES
The Company is structured as a holding company with several operating
subsidiaries. The Company conducts its operations in Asia primarily through its
manufacturing and marketing subsidiaries incorporated in Singapore, Malaysia,
Hong Kong
Flextronics International Ltd.
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and China, and each of these subsidiaries is subject to taxation in the country
in which it has been formed. The Company's manufacturing subsidiaries have been
granted certain tax relief in each of these countries, resulting in lower taxes
than would otherwise be the case under ordinary tax rates. The ordinary
corporate tax rates for calendar 1995 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 consolidated effective tax rate for any given period is
calculated by dividing the aggregate taxes incurred by each of the operating
subsidiaries and the holding company by the Company's consolidated pretax
income. Losses incurred by any subsidiary or by the holding company are not
deductible by the other entities in the calculation of their respective local
taxes. For example, the charge for the closing of one plant in Malaysia in
fiscal 1996 was incurred by a Malaysian subsidiary that did not have income
against which this charge could be offset. Similarly, interest on senior debt,
which was an obligation of the holding company, produced losses for that
company. Losses of the Hong Kong subsidiary and holding company were not
deducted from the income of the other subsidiaries. In addition, nCHIP's
historical losses and the accounting of its acquisition as a pooling of
interests have negatively impacted the Company's pre-tax performance, resulting
in a higher effective tax rate for the prior periods.
The Company's consolidated effective tax rate was 27.8% and 19.2% in
fiscal 1996 and 1995 respectively. Variations in the Company's consolidated
effective tax rates are primarily attributable to the differences in the
relative amount of holding company interest expense compared to the amount of
pretax income in the respective periods, as well as the impact of nCHIP's
historical losses and the accounting of its acquisition as a pooling of
interests. In addition, the provision for plant closings of $2.5 million and the
$31.6 million write-off of In-Process R&D in fiscal 1996 have contributed to the
higher consolidated effective tax rate in that period. 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 18.6%.
The Company's Singapore operations were previously granted "Pioneer
Status", which expired on July 31, 1990. Under such status the Singapore
subsidiary's manufacturing income had been exempt from tax. The Company has
reached an agreement with the Economic Development Board of Singapore for a
specified amount of investment allowances on approved fixed capital
expenditures. This investment allowance, which has certain conditions and
expired in July 1995, has been utilized by the Company to reduce taxable income
of the Singapore subsidiary since fiscal 1991. The Company's Malaysian
manufacturing subsidiary has been granted a five-year pioneer incentive which
provides a tax exemption on manufacturing income in Johore, Malaysia. To date,
this incentive has had a limited impact on the Company due to the relatively
short history of its Malaysian operations and its losses carry forward. The
Company's facility in China 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,
and the Company's status as a Product Export Enterprise is reviewed annually by
the Chinese government authorities. The Company's investments in its plant in
Xixiang, China and Astron fall under the "Foreign Investment Scheme" which
entitles the Company to apply for a five year tax incentive. The Company has
applied for the tax incentive and believes that it will be approved by the
relevant tax authorities, although there can be no assurance in this regard. If
approval is received, the Company's tax rates on income from this facility
during the incentive period will be 0% in years 1 and 2 and 7 1/2 % in years 3
through 5. 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 at 0% .
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. 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 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
will prevail in any such disagreement. If the Company's Asian profits became
subject to U.S. income taxes, the Company's taxes could increase and its results
of operations and cash flow could be adversely affected. The expansion by the
Company of its operations in the U.S may increase its effective tax rate.
There are no Singapore exchange controls or other restrictions on the
export or import of capital. The remittance of dividends or other payments by
the Company to non-resident shareholders is therefore not subject to any
restriction. Singapore
Flextronics International Ltd.
12
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
does not currently have a double tax treaty with the United States of America.
However, under the current Singapore tax rules, there is no Singapore
withholding tax on payments of dividends or other distributions by the Company
to its non-resident shareholders.
EXTRAORDINARY GAIN
The extraordinary gain of $416,000 in fiscal 1994 represents the
forgiveness of accrued interest on the Company's outstanding subordinated debt,
the principal amount of which was converted into equity in December 1993.
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. These factors include, among other things, timing of orders, volume
of orders relative to the Company's capacity, customers' announcement and
introduction 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, mix of orders filled, and changes
or anticipated changes in economic conditions. In addition, the Company's
operating results are affected adversely by seasonality (principally in Malaysia
and China during each fourth fiscal quarter due to local holiday seasons). 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.
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. At March 31, 1994 the outstanding balance
on the Company's total borrowing was $10.5 million, substantially all of which
was repaid in April 1994 with a portion of the net proceeds of the Company's
initial public offering. The Company has obtained a $48 million line of credit
from several banks and is negotiating for a $50 million, two year revolving
credit facility to replace the existing facilities.
Cash used for operating activities was $710,000 and $3.4 million for
fiscal 1996 and 1995, respectively. Cash provided by operating activities for
fiscal 1996 was comprised primarily of net profit of $16.6 million (excluding
In-Process R&D written off and provision for plant closings), depreciation,
amortization and allowance for doubtful accounts and obsolescence. Cash used for
operating activities was primarily comprised of increases in accounts receivable
and inventories reflecting higher sales in fiscal 1996. Cash provided by
operating activities for fiscal 1995 was comprised primarily of net income,
depreciation amortization allowance for doubtful debts, loss from the
Flextracker joint venture and cash used for operating activities for fiscal 1995
was comprised mainly of an increase in accounts receivable and inventories.
Cash used for investing activities during 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. Cash used for investing activities for fiscal 1995 was $10.2
million which consisted mainly of purchases of property and equipment in three
Asia plants and payment for the acquisition of the net assets of FlexTracker.
Cash provided by financing activities was $31.6 million in fiscal 1996
which consisted primarily of $22.3 million from the sale of 1,000,000 newly
issued Ordinary Shares and net bank borrowings of $12.3 million. Cash used for
financing activities was $10.8 million for fiscal 1995 which consisted primarily
of repayment of bank borrowings and notes payable, offset in part by proceeds
from issuance of share capital and increased capital lease financing.
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
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
million provision for inventory exposure relating to the closing of the
satellite receiver product line in one of the Company's Malaysia plants.
The Company presently anticipates that its capital expenditures in
fiscal 1997 will be approximately $20 million to $25 million. The Company
believes that existing cash, together with anticipated cash flow from operations
and amounts available under its credit facilities, will be sufficient to fund
its operations through fiscal 1997.
Flextronics International Ltd.
13
16
CONSOLIDATED BALANCE SHEETS
March 31, 1995 1996
- -------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
ASSETS
Current assets:
Cash $ 4,751 $ 6,546
Accounts receivable, net of allowance for doubtful accounts of $1,760
and $3,576 at March 31, 1995 and 1996 respectively 44,250 78,114
Inventories 30,193 52,637
Other current assets 4,527 3,827
Deferred income taxes 220 260
----------------------
Total current assets 83,941 141,384
----------------------
PROPERTY AND EQUIPMENT:
Machinery and equipment 43,358 77,771
Building 283 5,736
Leasehold improvements 3,891 15,491
----------------------
47,532 98,998
Accumulated depreciation and amortization (21,774) (37,896)
----------------------
Net property and equipment 25,758 61,102
----------------------
OTHER NON-CURRENT ASSETS:
Goodwill, net of accumulated amortization of $1,976 and $2,701,
at March 31, 1995 and 1996 respectively 4,964 8,662
Intangible assets, net of accumulated amortization of $306 and $642,
at March 31, 1995 and 1996 respectively 624 775
Deposits and other 226 580
Receivables from related party -- 2,085
Other investments 520 --
Deferred income taxes 84 --
----------------------
Total other non-current assets 6,418 12,102
----------------------
Total assets $ 116,117 $ 214,588
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings $ 2,000 $ 14,379
Notes payable -- 10,000
Current portion of long-term debt 9 4,198
Current portion of capital lease 3,911 6,736
Accounts payable 38,489 64,625
Accrued payroll 2,549 5,606
Other accrued liabilities 2,029 5,389
Income taxes payable 1,529 2,775
----------------------
Total current liabilities 50,516 113,708
----------------------
NON CURRENT LIABILITIES:
Notes payable to shareholders 684 686
Long-term debt, less current portion -- 2,554
Other payable -- 15,000
Capital lease, less current portion 6,206 10,120
Deferred income taxes 994 1,256
Commitments (Notes 4 and 5) -- --
----------------------
Total non-current liabilities 7,884 29,616
Minority interests -- 485
----------------------
SHAREHOLDERS' EQUITY:
Ordinary Shares, S$.01 par value:
Authorized -- 100,000,000 shares at
March 31, 1995 and 1996
Issued and outstanding -- 11,603,496
shares at March 31, 1995 and
13,213,289 shares at March 31, 1996 73 85
Additional paid-in capital 62,882 93,634
Accumulated deficit (5,238) (22,940)
----------------------
Total shareholders' equity 57,717 70,779
----------------------
Total liabilities and shareholders' equity $ 116,117 $ 214,588
======================
See accompanying notes.
Flextronics International Ltd.
14
17
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31, 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net sales $ 131,345 $ 237,386 $ 448,346
Cost of sales 117,392 214,865 406,457
-----------------------------------
Gross profit 13,953 22,521 41,889
Selling, general and administrative expenses 8,667 11,468 18,587
Goodwill amortization 398 510 725
Intangible assets amortization 21 245 336
Provision for plant closings 830 -- 2,454
Research and development 202 91 31,562
-----------------------------------
Operating income/(loss) 3,835 10,207 (11,775)
Interest expense (1,778) (740) (2,718)
Merger expenses -- (816) --
Foreign exchange gain (loss) 402 (303) 872
Income (loss) from joint venture (70) (729) --
-----------------------------------
Income (loss) before income taxes and cumulative effect of change in
accounting for income taxes 2,389 7,619 (13,621)
Provision for income taxes 97 1,463 3,791
-----------------------------------
Income (loss) after income taxes, before cumulative effect of change in
accounting for income taxes and extraordinary gain 2,292 6,156 (17,412)
Cumulative effect as of March 31, 1994 of change in accounting
for income taxes 557 -- --
-----------------------------------
Income (loss) before extraordinary gain 1,735 6,156 (17,412)
Extraordinary gain 416 -- --
-----------------------------------
Net income (loss) $ 2,151 $ 6,156 $ (17,412)
===================================
Earnings per share:
Net income (loss) before cumulative effect of change in accounting
for income taxes and extraordinary gain $ 0.30 $ 0.51 $ (1.39)
Cumulative effect of accounting change (0.07) -- --
-----------------------------------
Net income (loss) before extraordinary gain $ 0.23 $ 0.51 $ (1.39)
Extraordinary gain 0.05 -- --
-----------------------------------
Net income (loss) per share $ 0.28 $ 0.51 $ (1.39)
===================================
Weighted average outstanding Ordinary Shares and equivalents 7,730 12,103 12,536
===================================
See accompanying notes.
Flextronics International Ltd.
15
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Class "A" Class "B" Total
Convertible Convertible Redeemable Additional Share-
Preference Shares Preference Shares Ordinary Shares Paid-in Retained holders'
Shares Amount Shares Amount Shares Amount Capital Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
BALANCE AT MARCH 31, 1993 2,700 $ 15 51 $ -- 2,404 $16 $ 10,662 $(12,949) $ (2,256)
Issuance of "A" Convertible
Preference Shares for cash 27 2 -- -- -- -- 65 -- 67
Issuance of Ordinary Shares for
cash and from capitalization of
Subordinated Note Payable -- -- -- -- 2,968 19 10,449 -- 10,468
Compensation expense related to
stock options -- -- -- -- -- -- 159 -- 159
Issuance of Ordinary Shares for
acquisition of subsidiary -- -- -- -- 600 4 3,998 -- 4,002
Issuance of Ordinary Shares in the
initial public offering (net) -- -- -- -- 2,500 15 32,088 -- 32,103
Exercise of stock options -- -- -- -- 54 -- -- -- --
Conversion of Preference Shares
to Ordinary Shares (2,727) (17) (51) -- 2,778 17 -- -- --
Net income for the year -- -- -- -- -- -- 2,151 2,151
Transaction by pooled companies:
Issuance of common stock -- -- -- -- -- -- 9 -- 9
----------------------------------------------------------------------------------------
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
Secondary listing -- -- -- -- 1,000 8 23,492 -- 23,500
Expenses related to secondary listing -- -- -- -- -- -- (1,190) -- (1,190)
Currency translation adjustments -- -- -- -- -- -- -- (290) (290)
Net loss for the year -- -- -- -- -- -- -- (17,412) (17,412)
----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 -- $ -- -- $ -- 13,213 $85 $ 93,634 $(22,940) $ 70,779
========================================================================================
See accompanying notes.
Flextronics International Ltd.
16
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,151 $ 6,156 $(17,412)
Adjustments to reconcile net income to cash provided
by operating activities:
nCHIP fiscal year conversion -- (596) --
Depreciation and amortization of equipment
and leasehold improvements 4,202 5,370 9,344
Amortization of goodwill 398 510 725
Amortization of intangible assets 21 245 336
Loss / (gain) on disposal of property and equipment 368 56 (121)
Loss on disposal of investment -- -- 266
Write-off of property and equipment 20 -- --
Extraordinary gain (416) -- --
Allowance for doubtful debts (32) 1,211 1,475
Allowance for stock obsolescence (120) 43 631
Compensation expense relating to stock option plan 159 -- --
Loss from joint venture 70 729 --
In process research and development written off -- -- 31,562
Provision for plant closure -- -- 2,454
Deferred income taxes 339 237 84
--------------------------------
$ 7,160 $ 13,961 $ 29,344
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade accounts receivable $ (8,306) $(15,057) $(28,965)
Notes receivable -- -- (500)
Inventories (5,863) (3,156) (19,209)
Other accounts receivable (572) (2,430) 2,889
Due from joint venture (1,588) -- --
Deposits and other (121) 311 (140)
Accounts payable 14,812 2,995 14,143
Other accounts payable 1,283 (841) 727
Deferred rent (1,302) (143) (120)
Income taxes payable 111 933 1,121
--------------------------------
Cash provided by (used for) operating activities $ 5,614 $ (3,427) $ (710)
--------------------------------
Flextronics International Ltd.
17
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment $ (5,246) $ (7,536) $(15,812)
Proceeds from sale of property and equipment 2,301 38 228
Intangibles arising from acquisition of subsidiaries -- (62) --
Other investments (120) -- 886
Investment in joint venture (2,529) -- --
Restricted cash 379 -- --
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
--------------------------------
Cash used for investing activities $ (5,215) $(10,173) $(29,035)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from (repayments to) banks $ 1,177 $ (9,417) $ 12,280
Proceeds from (repayment of) long-term debt (13,008) (8) 1,803
Repayment of capital lease obligations (1,998) (4,310) (5,767)
Proceeds from issuance of share capital 38,598 5,454 1,009
Proceeds from notes payable 1,449 -- --
Payments on notes payable (224) (2,535) (17)
Proceeds from secondary listing -- -- 22,310
--------------------------------
Cash provided by (used for) financing activities 25,994 (10,816) 31,618
--------------------------------
Increase (decrease) in cash and cash equivalents $ 26,393 $(24,416) $ 1,873
Effect of exchange rate changes on cash and cash equivalents -- -- (78)
Cash and cash equivalents at beginning of period 2,774 29,167 4,751
--------------------------------
Cash and cash equivalents at end of period $ 29,167 $ 4,751 $ 6,546
================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (refunded) for:
Interest $ 1,579 $ 779 $ 2,482
Income taxes (200) 297 2,656
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations 494 8,338 11,556
Additional ordinary shares issued upon conversion
of subordinated note debt 3,658 -- --
Purchase of subsidiaries financed by issuance of
600,000 ordinary shares valued at $6.67 4,002 -- --
66,908 ordinary shares valued at $14.019 -- -- 938
238,684 ordinary shares valued at $27.262 -- -- 6,507
See accompanying notes.
Flextronics International Ltd.
18
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 offers advanced contract manufacturing services of
sophisticated original equipment manufacturers (OEMs) in the communications,
computer, consumer and medical electronics industries. Flextronics offers a full
range of services including microelectronics packages and printed circuit board
(PCB) assembly design and fabrication, material procurement, inventory
management, PCB assembly, final system box build and distribution.
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 translation of accounts designated 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. Exchange differences
due to such currency translations are recorded in shareholders' equity.
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 twenty-two years).
CONCENTRATION OF CREDIT RISK
The Company is a turnkey 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 undiscounted
future operating income before goodwill amortization of the businesses to which
the goodwill relates.
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.
INTANGIBLE ASSETS
Intangible assets comprise technical agreements, patents, trademarks 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 seventeen 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 years.
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, 1995 1996
- -------------------------------------------------------------------------------
Raw materials $ 21,691 $ 42,202
Work-in-process 10,249 14,049
Finished goods 128 962
-------------------------
32,068 57,213
Less: allowance for obsolescence (1,875) (4,576)
-------------------------
$ 30,193 $ 52,637
=========================
REVENUE RECOGNITION
Revenue from product sales and services are recognized on delivery and
acceptance of the goods.
Flextronics International Ltd.
19
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Effective April 1, 1993, the Company changed its method of accounting for income
taxes from the deferred method to the liability method required by SFAS
Statement No. 109, "Accounting for Income Taxes".
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). Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin (SAB) No. 83, Ordinary Shares and
Ordinary Share equivalents issued by the Company during the twelve-month period
prior to the initial public offering have been included in the calculation of
Ordinary Shares and Ordinary Share equivalents using the treasury stock method
and the initial public offering price of US $14 per share as if they were
outstanding for all periods presented.
(in thousands, except per share data) 1994 1995 1996
- ----------------------------------------------------------------------------
Supplemental net income (loss) per share $ 0.32 $ 0.51 $ (1.39)
Weighted average ordinary shares 6,740 12,103 12,536
Supplemental net income/(loss) per share is calculated in accordance
with Accounting Principles Board Opinion No.15 (APB 15). The supplemental net
income/(loss) per share amounts are presented for comparison purposes because
under APB 15 the effect of options is excluded from the net income/(loss) per
share calculation if anti-dillutive, whereas, under SAB No. 83, such options are
considered outstanding even if the effect of including them is anti-dillutive.
RETROACTIVE RESTATEMENTS
The consolidated financial statements give retroactive effect to the acquisition
of nCHIP, Inc. ("nCHIP") in January 1995 which was accounted for as a pooling of
interest.
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
Three of the Company's subsidiaries have obtained from several banks working
capital lines of credit, totalling approximately US$48 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 7.125% per annum.
The lines of credits are collateralized by:
(a) negative pledge on assets of all the group entities;
(b) corporate guarantees from the Company and its subsidiaries;
These lines of credits require that the Company maintains certain
financial ratios and other covenants. As at March 31, 1996, the Company was in
compliance with its covenants.
As of March 31, 1996, the Company had utilized the following credit
facilities under the above lines of credit (in thousands):
Short term cash advances $ 14,379
Letters of credits and guarantees $ 1,003
========
The remaining unused portion of lines of credit total $32.5 million
The weighted average interest rates on borrowings are as follows:
March 31, 1995 1996
- -----------------------------------------------------
Interest on borrowings 6.438% 6.41%
==============
4. LONG TERM DEBT
Long-term debt consisted of the following at March 31 1996.
1995 1996
- ---------------------------------------------------------------------------
Term loan at 4.5% $-- $ 333
Mortgage loans at 10.5% -- 2,244
Other loans at 8% 9 1,050
Purchase obligation earnout -- 3,125
-----------------
9 6,752
Less: current portion (9) (4,198)
-----------------
$-- $ 2,554
=================
Maturities of long-term debt for the five years succeeding March 31,
1996 are $4,198,000 by March 31, 1997, $740,000 by March 31, 1998, $645,000 by
March 31, 1999, $358,000 by March 31, 2000 and $358,000 by March 31, 2001.
The purchase obligation earnout is contingent upon Astron Group Limited
meeting certain pre-tax profit for the calender year 1996.
5. 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,
1997 $ 7,960
1998 5,987
1999 3,411
2000 1,472
2001 503
Thereafter --
--------
Total installment payments 19,333
Amount representing interest (2,477)
--------
Present value of net installment payments 16,856
Less: current portion 6,736
--------
Long-term portion of capital lease $ 10,120
========
Items costing $28,387,304 (1995: $15,993,603) with accumulated
amortization $8,780,878 (1995: $4,168,453) purchased under capital leases have
been included in machinery and equipment as of March 31, 1996. Lease
amortization is included in depreciation expense.
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,
1997 $2,177
1998 1,782
1999 1,530
2000 1,147
2001 793
Thereafter 1,890
------
$9,319
======
Flextronics International Ltd.
20
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The facilities lease of one of the subsidiaries provides for escalating
rental payments over the lease period. Rent expense is being recognized on a
straight-line basis over the term of the lease period.
Total operating lease expense for the Company was $1,263,019,
$1,956,733 and $2,211,077 for the years ended March 31, 1994, 1995 and 1996
respectively.
6. CAPITAL COMMITMENTS
One of the subsidiaries, Flextronics (Malaysia) Sdn. Bhd. has contracted to
purchase $457,714 of fixed assets as of March 31, 1996. These fixed assets have
not been delivered and are therefore not provided for in the accounts as of
March 31, 1996.
7. INCOME TAXES
The domestic and foreign components of income (loss) before taxes are as
follows:
March 31,
(in thousands) 1994 1995 1996
- -------------------------------------------------------
Singapore $ (412) $(1,529) $(21,917)
Foreign 2,801 9,148 8,296
--------------------------
$2,389 $ 7,619 $(13,621)
==========================
Income tax expense consists of the following :
March 31,
(in thousands) 1994 1995 1996
- ------------------------------------------------------
Current:
Singapore $ 226 $ 366 $ 1,441
Foreign 89 860 2,266
-------------------------
315 1,226 3,707
-------------------------
Deferred:
Singapore 339 237 74
Foreign -- -- 10
-------------------------
339 237 84
-------------------------
$ 654 $ 1,463 $ 3,791
=========================
Total income tax expense differs from the amount computed by applying
the Singapore statutory income tax rate of 26% (1995 and 1994: 27%) to income
before taxes as follows :
March 31,
(in thousands) 1994 1995 1996
- -------------------------------------------------------------------------------
Computed expected income taxes $ 645 $ 2,057 $(3,541)
Effect of Singapore income tax
incentives (278) -- (82)
Effect of losses from non-incentive
Singapore operations 255 367 8,472
Effect of foreign operations (667) (1,609) (1,785)
Non-deductible items:
Amortization of goodwill
and intangibles 113 205 270
Loss on sale of investments -- -- 69
Joint venture losses -- 216 --
Others 29 227 388
-------------------------------
97 1,463 3,791
Cumulative effect of March 31, 1993
of change from deferral method to
liability method 557 -- --
-------------------------------
$ 654 $ 1,463 $ 3,791
===============================
The components of deferred income taxes are as
follows (in thousands):
March 31, 1995 1996
- ----------------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets $ 1,466 $ 1,365
Others 486 193
----------------------
1,952 1,558
----------------------
Deferred tax assets
Provision for stock obsolescence (249) (677)
Provision for doubtful debts (180) (343)
Net operating losses carry forwards (11,032) (11,020)
Unabsorbed capital allowances
carried forwards (731) (438)
Investment allowance (84) --
Others (118) (699)
----------------------
(12,394) (13,177)
Valuation allowance 11,132 12,615
----------------------
Net deferred tax liability $ 690 $ 996
======================
The net deferred tax liability is classified as follows:
Non-current liability $ 994 $ 1,256
Current asset (220) (260)
Non-current asset (84) --
----------------------
$ 690 $ 996
======================
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 $2,700,000 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 the year.
(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
China operations. The Company's operations in China 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.
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$8,000 tax each year in accordance with the Labuan tax
legislation. Also 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.
8. SHAREHOLDERS' EQUITY
EXERCISE OF OPTIONS
During the year, certain employees exercised their options to purchase 304,201
Ordinary Shares at an exercise price of US$0.77 to US$14.50 per share.
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 $2,878,860 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
Flextronics International Ltd.
21
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding stock of Astron in exchange for $13,440,605 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 shall bear interest at the rate of 8% per annum.
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.
9. 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. In February
1994, 53,748 Ordinary Shares were issued due to the exercise of the options
under ISS. During fiscal 1994, the Company amortized the full compensation
expense of $159,303. In March 1994, 53,748 Ordinary Shares were issued due to
the exercise of the options granted under ISS.
On December 1, 1993, the Company adopted the 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. At March 31, 1995, the
Company had reserved 900,000 Ordinary Shares for issuance under the Plan. In
August 1995 the Company's 1993 Share Option Plan was amended to reserve an
additional 600,000 Ordinary Shares for issuance.
In January 1995, the Company acquired nCHIP and thereby assumed the
existing nCHIP stock option plan and the 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.
As at March 31,1996, options to purchase 1,327,000 Ordinary Shares at a
weighted average exercise price of $12.63 per share were outstanding under the
share option plans. The following table presents the activity for options:
Options outstanding
----------------------------------------------
Options
available for
grant Shares Price per share
- -------------------------------------------------------------------------------
Balance at March 31, 1994 649,872 729,180 S$0.01 - US$6.67
nCHIP options converted
to Flex options 345,389 -- US$0.77 - US$4.74
Options granted (508,501) 508,501 US$0.77 - US$16.75
Options exercised -- (143,699) US$2.92 - US$4.33
Options cancelled 33,418 (33,418) US$2.92 - US$10.50
-----------------------------------------
Balance at March 31, 1995 520,178 1,060,564 US$2.92 - US$16.75
Increase in options available
for grant 600,000 -- S$0.01 - US$35.75
Options granted (641,783) 641,783 US$14.75 - US$35.75
Options exercised -- (304,201) US$0.77 - US$14.50
Options cancelled 71,146 (71,146) US$0.77 - US$24.00
-----------------------------------------
Balance at March 31, 1996 549,541 1,327,000
===================
10. PROVISION FOR PLANT CLOSURE
The provision for plant closure of $2,454,000 relates to the downsizing of the
Malaysia and Shekou, China manufacturing operations. The provision includes $1
million provision for inventory exposure and $200,000 provision for doubtful
debts related to one specific project in Malaysia. An amount of $1,254,000
associated with certain obsolete equipment at the Company's facilities in
Malaysia and Shekou, China has been written off.
11. EXTRAORDINARY ITEM
In July 1993, the Company recognized $416,000 of extraordinary gain in
connection with the forgiveness of accrued interest on a subordinated note.
12. RELATED PARTY TRANSACTIONS
For the year ended March 31, 1996, the Company had net sales of $2,132,972 to
Metcal, Inc., a precision heating instrument company. 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, 1996.
For the year ended March 31, 1995, the Company had net sales of
$989,220 to Metcal, Inc..
Following the acquisition of Astron, its Managing Director, Stephen JL
Rees, was made a director of the Company on April 15, 1996. At the date of the
Astron acquisition a loan of $2,908,000 to Mayfield International Limited
(`Mayfield'), a company in which Stephen JL Rees has a beneficial interest, was
outstanding. At March 31, 1996 the loan balance amounted to $2,085,082. The loan
is secured by a corporate guarantee from Mayfield's holding company and it bears
interest at 7.15% per annum, earning $26,911 in the period. Astron has also
rented an office from Mayfield, and rentals charged to Astron during the period
amounted to $34,669.
In May 1993, Flextronics (Malaysia) Sdn. Bhd. sold plant and machinery
to FlexTracker Sdn. Bhd. valued at $2,033,315. In December 1993, Flextronics
(Malaysia) Sdn. Bhd. repurchased a portion of such plant and machinery from
FlexTracker Sdn. Bhd. worth $251,654. The sale and purchase of plant and
machinery represent the net book value recorded in the parties' books at the
date of transfer. During the year ended March 1994, Flextronics (Singapore) Pte.
Ltd. purchased $8,692,917 worth of materials on behalf of FlexTracker Sdn. Bhd.
The transfer of these materials to FlexTracker Sdn. Bhd. was at original cost of
the materials.
13. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS
CURRENT YEAR
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 $237,000 was allocated to intangibles which
are being amortized on a straight line basis over their estimated useful life of
three years.
Flextronics International Ltd.
22
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $45.6 million by way of cash;
issuance of 238,864 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 will pay an earnout of up to $12.5 million contingent upon
Astron meeting certain pre-tax profit for calendar year 1996, and, in addition,
to the $45.6 million the Company has included $3.125 million of the earnout as
part of the purchase consideration. 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 valuation of Astron's In-process research &
development was determined by an independent corporate valuation firm to be
between $31 million to 37 million, and the Company has written off $31.6 million
in the consolidated financial statements this year. An amount of $250,000 was
allocated to intangibles which are being amortized on a straight line basis over
their estimated useful life of three years.
The Company has entered into consulting agreements with the former
Chairman of Astron, which provide for an annual fee, plus a $15 million payment
to be made and expensed on June 30, 1998 subject to certain terms and conditions
to be met, which include continuation of employment and non-competition clauses.
The consolidated financial statements contain the results of the
acquired companies from the date of acquisition.
The following unaudited proforma information of the Company reflects
the results of operations for the year 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 after giving effect to certain
adjustments including amortizing of intangibles and goodwill. The unaudited
proforma information is based on 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 non co-terminus. These proforma results
have been prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had the acquisitions
actually took place at April 1, 1994 or of operating results which may occur in
the future.
(in thousands, except per share data unaudited)
Year ended March 31, 1995 1996
- -----------------------------------------------------
Net Sales $273,872 $466,039
Net income/(loss) (28,017) 13,413
Net income/(loss) per share (2.26) 1.00
PREVIOUS YEARS
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 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 $ 2,302,218 and
net loss of $ 595,868 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
Fiscal year nine months
ended ended
March 31 December 31
(in thousands) 1994 1994
- -----------------------------------------------------
Net sales
Company $ 122,948 $ 163,249
-------------------------
nCHIP 8,397 7,623
=========================
Combined $ 131,345 $ 170,872
Net income
Company $ 2,896 $ 7,626
-------------------------
nCHIP (745) (3,400)
=========================
Combined $ 2,151 $ 4,226
Other changes in
shareholders' equity
Company $ 50,098 $ (144)
nCHIP 9 5,287
-------------------------
Combined $ 50,107 $ 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
Relevant, 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 aggregated approximately $2.4 million and are being amortized on
a straight-line basis over their estimated useful life of twenty-five years.
The operating results of Relevant 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, 1994 and 1995 as if the
acquisitions of nCHIP, the net assets and business of Flextracker and Relevant
had occured as of April 1, 1993 and after giving effect to certain adjustments
including amortization of intangibles and goodwill. The unaudited pro forma
information is based on certain acquired entities' results of operations for the
years ended December 31, 1993 and 1994 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, 1993 or of operating results which may occur in the future.
(in thousands, except per share data unaudited)
Year ended March 31, 1994 1995
- -----------------------------------------------------------
Net Sales $ 155,349 $ 255,733
Net income before Extraordinary Gain 92 4,301
Net income after Extraordinary Gain 508 4,301
Net income per share 0.07 0.36
Flextronics International Ltd.
23
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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, 1994 1995 1996
- -----------------------------------------------------
CUSTOMER
Visioneer 0.44% 1.70% 13.14%
Lifescan 22.8% 20.1% 14.10%
IBM 14.4% 7.7% 2.80%
Global Village -- 4.50% 10.50%
Sales for similar classes of products within the Company's business
segment is presented below (in thousands):
March 31,
(in thousands) 1994 1995 1996
- --------------------------------------------------------------------------------
PRODUCT TYPE
Medical $ 30,076 $ 49,152 $ 78,322
Computer, computer peripherals
& telecommunication 64,865 120,818 285,881
Industrial -- -- 9,664
Consumer products 15,792 47,515 23,858
MCMs 8,397 11,847 19,817
Disk drive/tape drive 4,331 -- --
Others 7,884 8,054 30,804
------------------------------------
$131,345 $237,386 $448,346
====================================
A summary of the Company's operations by geographical area for the
three years ended March 31, 1994, 1995 and 1996 was as follows (in thousands):
March 31,
(in thousands) 1994 1995 1996
- -------------------------------------------------------------------------------
Net Sales:
Singapore:
Unaffiliated customers
Domestic $ 29,151 $ 3,596 $ 653
Export -- 7,358 9,277
Intercompany 32,849 67,572 77,899
---------------------------------------
62,000 78,526 87,829
Hong Kong/China and Malaysia:
Unaffiliated customers
Domestic 6,452 17,757 11,838
Export 83,668 158,169 204,850
Intercompany 21,415 29,356 60,780
---------------------------------------
111,535 205,282 277,468
USA/UK:
Unaffiliated customers
Domestic 12,074 50,506 207,961
Export -- -- 13,767
Intercompany -- -- 27
---------------------------------------
12,074 50,506 221,755
Eliminations (54,264) (96,928) (138,706)
---------------------------------------
$ 131,345 $ 237,386 $ 448,346
=======================================
Income (loss) from operations:
Singapore $ 553 $ 90 $ (27,674)
Hong Kong/China and
Malaysia 2,913 11,392 12,843
USA/UK 369 (1,275) 3,056
---------------------------------------
$ 3,835 $ 10,207 $ (11,775)
=======================================
Identifiable assets:
Singapore $ 46,115 $ 23,426 $ 31,998
Hong Kong/China and
Malaysia 49,956 66,315 97,977
USA/UK 7,058 26,376 84,613
---------------------------------------
$ 103,129 $ 116,117 $ 214,588
=======================================
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.
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, 1995 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. 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, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1996, in conformity with U.S. Generally Accepted
Accounting Principles.
ERNST & YOUNG
Singapore
May 13, 1996
Flextronics International Ltd.
24
27
CORPORATE DIRECTORY
OFFICERS
Michael E. Marks
Chairman of the Board and
Chief Executive Officer
Tsui Sung Lam
President, Chief Operating Officer
and Director
Dennis P. Stradford
Senior Vice President
Goh Chan Peng
Chief Financial Officer
Hans D. Nilsson
Managing Director, Europe
Teo Buck Song
Vice President, Purchasing
Michael McNamara
Vice President, Flextronics International
and President, U.S. Operations
Bruce McWilliams
Vice President, Flextronics International
and President of nCHIP
Stephen Rees
Chairman, Astron Group Ltd.
[PHOTO]
(Clockwise, back to front:) Dennis Stradford,
Ash Bhardwaj, Stephen Rees, S.L. Tsul, B.S.
Teo, C.P. Goh, Michael Marks, Michael McNamara,
Hans Nilsson, Bruce McWilliams.
DIRECTORS
Robert R.B. Dykes
Bernard J. Lacroutte
Tsui Sung Lam
Michael E. Marks
Michael Moritz
Stephen J.L. Rees
Andrew W. Russell
Richard L. Sharp
WESTERN HEMISPHERE HEADQUARTERS
Flextronics International Ltd.
2241 Lundy Avenue
San Jose, CA 95131
U.S.A.
Tel: +1.408.428.1300
Fax: +1.408.428.0420
EASTERN HEMISHPERE HEADQUATERS
Flextronics International Ltd.
514 Chai Chee Lane
#04-13
Bedok Industrial Estate
Singapore 469029
Tel: +65.449.5255
Fax: +65.448.6040
WORLDWIDE FACILITIES
Singapore
Doumen, People's Republic of China
Xixiang, People's Republic of China
Senai, Johore, Malyasia
Kwai Chung, Hong Kong
San Jose, California, U.S.A.
Westford, Massachusetts, U.S.A.
Richardson, Texas, U.S.A.
Wales, United kingdom
INVESTOR RELATIONS
For shareholder or investor related inquiries contact:
Investor Relations
Flextronics International
2241 Lundy Avenue
San Jose, CA 95131
U.S.A.
Tel: +1.408.383.7722
Fax: +1.408.526.9215
TRANSFER AGENT AND REGISTRAR
For questions regarding misplaced share certificates, changes of address or the
consolidation of accounts, please contact the Company's transfer agent:
The First National Bank of Boston
435 Tasso Street
Suite 250
Palo Alto, CA 94301
U.S.A.
Tel: +1.415.853.1483
LEGAL COUNSEL
Brobeck, Phleger & Harrison LLP
San Francisco, California, U.S.A.
INDEPENDENT AUDITORS
Ernst & Young, Singapore
STOCK LISTING
The Company's Ordinary Shares are traded over-the-counter on the Nasdaq National
Market System under the symbol FLEXF.
================================================================================
ANNUAL MEETING
The annual meeting of the shareholders will be held at 9:00 A.M. on August 15,
1996 at the Sheraton San Jose Hotel, 1810 Barber Lane, Milpitas, California
95035 U.S.A. Tel: +1.408.943.0600
[LOGO] Printed on recycled paper.
(C)1996 Flextronics International Ltd.
Flextronics International Ltd. All Rights Reserved.
28
[FLEXTRONICS INTERNATIONAL LOGO]
FLEXTRONICS
INTERNATIONAL
2241 Lundy Avenue
San Jose, CA 95131 U.S.A.
www.flextronics.com
29
APPENDIX
ANNUAL REPORT
FLEXTRONICS EDGAR DESCRIPTIONS
1. Cover Page
[photograph of selected items the Company manufactures for its clients]
2. Page -- Shareholder letter
[photograph of Chief Executive Officer Michael E. Marks]
3. Page 1
[graphical charts depicting the Company's revenue, income and earnings
per share for fiscal years 1994, 1995 and 1996]
4. Page 2
[graphical chart depicting sample manufacturing programs the Company
offers]
5. Page 3
[photograph of selected Thermoscan, Inc. products and components]
6. Page 4
[graphical chart depicting a spectrum of manufacturing technologies the
Company offers]
7. Page 5
[photograph of certain Palm Computing products and components]
8. Page 6
[graphical chart depicting production and distribution strategies]
9. Page 7
[photograph of certain Microsoft Corporation products and components]
10. Page 8
[map illustrating Plextronics' design and manufacturing facilities]
11. Page 25
[photographs of Messers. Stradford, Bhardwaj, Rees, Goh, Marks, Tsui,
Nilsson, Teo, McNamara, McWilliams.]