ITEM 1. BUSINESS
This Business discussion contains certain forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Factors that could cause actual events or results to differ materially from those referenced in such forward-looking statement include those described in the section herein entitled "Factors Affecting Future Results" and in the Company's other filings with the Securities and Exchange Commission. The words "believe," "estimate," "expect," "intend," "anticipate," "plan" and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual events and results may differ materially from those indicated in the forward-looking statements as a result of various factors. Readers are cautioned not to place undue reliance on any forward-looking statements.
THE COMPANY
Jabil Circuit, Inc. ("Jabil" or the "Company") is an independent supplier of custom manufacturing services for circuit board assemblies, subsystems and systems to major original equipment manufacturers ("OEMs") in the communications, personal computer, peripherals, consumer and automotive industries. Jabil's business strategy is to create and support long-term manufacturing partnerships with leading electronics companies in growth industries. The Company executes this strategy by offering its customers a complete turnkey solution, including circuit and production design; component selection, sourcing and procurement; automated assembly; design and implementation of product test; and shipment to end-users. Jabil's turnkey approach enables customers to transfer virtually all internal manufacturing responsibilities to the Company. Management believes the Company is a leader in offering expanded turnkey services such as circuit and production design and in the early implementation of new manufacturing technologies.
The Company's manufacturing services combine a high volume, highly automated manufacturing approach with advanced design and manufacturing technologies. Jabil is organized in resource and product line-dedicated business units that the Company refers to as "work cells." Management believes this work cell structure promotes a high level of responsiveness to customers and facilitates highly responsive global, multi-location production that is adaptive to changing customer needs.
The Company currently conducts operations in Scotland, Malaysia, Mexico, Italy and in four regions of the United States. The Company believes that localized global production is an important factor in mitigating risks of inventory obsolescence for global customer products and reducing logistic costs such as freight and duty.
The Company was incorporated in Delaware on February 21, 1992 to succeed to the business of a Michigan Corporation named "Jabil Circuit Co., Inc." that was incorporated in 1969. Unless the context otherwise requires, the "Company" and "Jabil" refer to Jabil Circuit, Inc., a Delaware corporation, its predecessor and its subsidiaries. The Company's executive offices are located at 10800 Roosevelt Boulevard, St. Petersburg, Florida 33716, and its telephone number is (727) 577-9749. The Company's internet address is www.jabil.com.
INDUSTRY OVERVIEW
The contract manufacturing industry has seen rapid growth over the past several years as an increasing number of electronics companies have chosen or adopted an external manufacturing strategy. This growth has also been impacted by OEMs divesting of internal manufacturing capacity. Other factors driving OEMs to favor contract manufacturing outsourcing include:
Reducing product cost. Contract manufacturers have the ability to manufacture products at a reduced total cost to OEMs. These cost advantages result from higher utilization of capacity because of diversified product demand and, typically, a higher sensitivity to elements of cost.
Accelerating product time-to-market. Contract manufacturers have the ability to deliver accelerated production start-ups and high efficiencies in transferring new products into production. In addition, contract manufacturers have the ability to rapidly scale production for changing markets and to position themselves in global locations that serve the leading world markets. With increasingly shorter product life cycles, these key services allow new products to be sold in the marketplace in an accelerated time frame.
Access to advanced technologies. Customers of contract manufacturers have access to advanced technologies in manufacturing processes, as well as circuit and production design. Circuit and production design services offer customers significant improvements in the performance, cost and manufacturability of products.
Improving inventory management and purchasing power. Contract manufacturers have the ability to manage both procurement and inventory, and have demonstrated proficiency in purchasing components at improved pricing due to the scale of the operations and continuous interaction with the material marketplace.
Reducing capital investment in manufacturing. OEMs are increasingly electing to lower their investment in inventory, buildings and machinery used in manufacturing and choosing instead to allocate capital to other activities such as marketing and research and development. This shift in capital deployment has placed a greater emphasis on utilizing external manufacturing specialists.
STRATEGY
The Company's objective is to expand its position as a global provider of electronic manufacturing services. Key elements in meeting this objective include:
Long-term Relationships. The core strategy of the Company is to establish itself with leading electronics companies in expanding industries that have the critical mass and growth goals to take advantage of highly automated, continuous flow manufacturing, and global manufacturing when advantageous. Since Jabil derives most of its growth in revenue from its existing customer base, the Company strives to maintain long-term, mutually beneficial relationships with its customers. Jabil offers customers a complete turnkey solution, including circuit and production design; component selection, sourcing and procurement; automated assembly; design and implementation of product test; system assembly, order configuration and distribution to end users. Jabil's turnkey approach enables a customer to transfer virtually all internal manufacturing and distribution responsibilities to the Company.
Work Cell Structure. Jabil is organized in a decentralized, functionally-matrixed organization. In this structure each customer's line of business is produced with a high level of autonomy, utilizing dedicated production equipment, production workers, supervisors, buyers, planners and engineers. Jabil
refers to these decentralized business-units as "work cells." Each Business Unit Manager, who is the direct interface with the customer, manages their own customer work cell. Management believes the work cell structure promotes an increased responsiveness to customer needs, particularly as that relationship grows to multiple production locations.
Systems Assembly and Order Fulfillment. Management believes systems assembly and order fulfillment are services that can reduce product cost and risk of product obsolescence by reducing total work in process and finished goods inventory. The Company offers systems assembly at multiple locations as well as direct order fulfillment (direct shipment to the end customer) services.
Parallel Global Production. The Company believes its customers need to produce the same products simultaneously in different markets of the world. Jabil believes that parallel global production is a key strategy to reduce obsolescence risk, secure the lowest landed cost and simultaneously supply products of equivalent or comparable quality throughout the world. In order to accommodate this need, the Company has significantly added to its manufacturing space in Scotland, Malaysia and the United States. In addition, Jabil has increased manufacturing resources in North America and Europe by establishing a Guadalajara, Mexico plant and a Bergamo, Italy plant. The plant in Italy was a result of the August 1998 acquisition of certain manufacturing and related assets comprising the "Formatter Manufacturing Organization" business unit of Hewlett-Packard Company ("HP Acquisition").
MANUFACTURING SERVICES
THE JABIL APPROACH TO MANUFACTURING
In order to achieve high levels of manufacturing performance, the Company has adopted the following approach:
Work Cells. The Company organizes manufacturing activities on the basis of work cells operating under the leadership of Business Unit Managers. Each work cell has dedicated production lines consisting of equipment, production workers, supervisors and engineers. A work cell is typically dedicated to the needs of a single customer line-of-business and is empowered to formulate strategies tailored to its customer's needs. The work cell approach enables the Company to grow incrementally without disrupting the production of other work cells and without significantly adding to management bureaucracy. As a result, work cell members have direct responsibility for manufacturing results and time-to-volume production, promoting a sense of individual commitment and ownership.
Business Unit Managers. A Jabil Business Unit Manager coordinates all financial, manufacturing and engineering commitments for each customer relationship. Managers have the authority to develop customer relationships; make design strategy decisions and production commitments; establish pricing and implement production and circuit design changes. Business Unit Managers are also responsible for assisting customers with strategic planning for future products, including developing cost and technology goals. These managers operate autonomously, with responsibility for the development of customer relationships and direct profit and loss accountability for work cell performance.
Continuous Flow. The Company uses a highly automated, "continuous flow" approach where different pieces of equipment are joined directly or by conveyor to create an in-line assembly process. (This process is in contrast to a "batch" approach, where individual pieces of assembly equipment are operated as freestanding work-centers.) Continuous flow manufacturing provides significant cost reduction and quality improvement when applied to volume manufacturing. The elimination of queue times
prior to sequential operations result in increased manufacturing velocity, which improves production efficiencies and shortens quality feedback loops.
Computer Integration. The Company supports all aspects of its manufacturing activities with computerized control and monitoring systems. Component inspection and vendor qualities are monitored electronically. Materials planning, purchasing, stockroom and shop floor control systems are supported through a computerized Manufacturing Resources Planning ("MRP") system, providing instantaneous visibility to material availability and real-time tracking of work in process. Manufacturing processes are supported by a real-time, computerized statistical process control ("SPC") system. In-circuit test, functional test and final burn-in are all monitored and analyzed using other proprietary systems. Production design centers located in each domestic facility are supported by advanced CAD/CAE systems. These CAD/CAE systems support automated test design and using Jabil's proprietary computer-integrated manufacturing software, manufacturing equipment programming. Many of the Company's computer systems are networked, allowing a sharing of data and programs. For example, employees in Florida can instantaneously access data relating to Jabil's operations in other locations. More importantly, the Company's customers can remotely access the Company's computer systems to monitor real-time yields, inventory positions, work-in-process status and vendor quality data for their products. See "Technology."
The Company also utilizes an electronic commerce system/electronic data interchange ("EDI") with customers and suppliers to implement a variety of supply chain management programs. The Company's customers utilize the EDI supply chain management to share demand and product forecasts and deliver purchase orders. The Company uses the EDI system with suppliers for just-in-time delivery, supplier-managed inventory and consigned supplier-managed inventory.
The Company is in the process of installing a new enterprise resource planning system ("ERP System") that will replace the current Manufacturing Resource Planning ("MRP") system and financial information systems. This system is believed to be "Year 2000 Compliant". The Company is also identifying and implementing changes to its other information systems in order to make them compliant. While the Company currently expects that the Year 2000 will not pose significant operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems could result in material adverse consequences, including disruption of operations, loss of information and unanticipated increases in costs. See "Year 2000" Readiness.
DESIGN ACTIVITIES
Circuit Design. The Company provides circuit design activities for certain of its customers. Circuit design involves the creation of electronic circuit architecture, which ordinarily includes application specific integrated circuit ("ASIC") design or selection and implementation, circuit function and speed analysis, schematic development, net list generation and firmware development. The Company's circuit design activities have resulted in designs for video set-top boxes, personal computers, notebook computers, consumer appliance controls, workstation I/O (input/output) cards, cellular telephone accessories, and electronic products for use in automotive applications. The resulting products are usually offered to customers on an exclusive basis in exchange for a customer's commitment to use Jabil to manufacture the product. The goals of the Company's circuit design activities are to create a more stable stream of volume turnkey manufacturing and an elevated level of strategic partnering with principal customers. The Company has testing and validation capability to accelerate the time to market of products designed internally and externally.
Production Design. The Company engages in significant production design activities. Production design is the process of designing the circuit board using CAD and CAE tools, concurrently with component package selection and the development of the bill of materials, approved vendors list, assembly
equipment configuration and processes, solder processes, in-circuit test and functional test, test fixture design, "burn-in" and reliability monitoring plan. The production design process improves manufacturability and generally eliminates conflicts between disciplines while the product is still in the design phase. Overall board costs are considered in connection with assembly costs, materials costs and availability, process yield considerations and targeted sources for board production. In this way, total costs can be minimized prior to production launch. Management believes the Company's production design process reduces product cost and accelerates time-to-volume production. The process generally includes computer simulation and optimization of electrical signal speed and circuit timing, simulation of thermal characteristics and minimization of radio frequency interference ("RFI") emissions. This computer simulation activity greatly reduces the risks of subsequent engineering revisions and enhances attainment of time-to-volume production goals.
Industrial/Mechanical Design. The Company offers Industrial and Mechanical Design to its customers. Plastic and metal enclosures designed to house printed circuit assemblies are the typical output of this activity. When coupled with circuit and production design, this service provides complete turnkey product support for OEMs. Industrial and Mechanical Design includes conceptual design, industrial design, mechanical design, supplier selection, prototype parts using stereolithography ("SLA") or metal fabrication, tooling management, compliance certification management and volume assembly management, all tightly integrated with the Jabil production work cell.
Other Design Services. The Company procures additional mechanical and other design services from external engineering firms in response to the needs of its customers. The Company's engineering staff coordinates the efforts of these external engineering firms to ensure integration of the external portions of the design with the overall production and product design to achieve optimal product manufacturability and efficiency.
SYSTEM ASSEMBLY AND TEST
The Company offers system assembly and test services to its customers. The Company maintains significant system assembly capacity and has seen this portion of the business grow as an extension of the assembly of circuit boards. This process involves the assembly of higher level sub-systems and systems incorporating printed circuit boards. In some cases, the final product is shipped directly to the end-user.
TECHNOLOGY
The Company believes that its experience and expertise in advanced manufacturing technologies and its investment in state-of-the-art manufacturing equipment are a significant competitive advantage, enabling Jabil to provide customers with reliable and high-quality leading edge products and processes. Among the technologies in which the Company has invested are:
Surface Mount Technology. Surface mount technology ("SMT") is a method of assembling printed circuit boards on which components are fixed directly to the surface of the board instead of being inserted and soldered into plated holes in the board (the latter method being commonly known as "pin through hole" or "PTH"). SMT offers the advantages of miniaturization and significant cost reductions. The higher density also allows shorter signal lengths, with resulting increases in signal speed potential and thermal performance. SMT packages are generally more resistant to vibration and often broadcast lower levels of electrical emissions which cause radio frequency interference.
Tape Automated Bonding. Tape automated bonding ("TAB") technology is a complementary process to SMT and involves the use of semiconductors that are attached to a gold or tin-plated copper lead frame using a complex bumping and thermocompression mass bonding method. The result is a component that can be directly mounted on the surface of the circuit board and that can be electrically tested prior to
assembly onto the substrate. TAB is well suited for applications involving high manufacturing volumes, high lead counts, component pre-testing and high electrical speeds.
Ball Grid Array. Ball grid array ("BGA") utilizes an array of solder bumps across the underside of the package versus fine-pitch leads that are exposed around the component perimeter. The BGA package design is more durable than fine-leaded quad flat package ("QFP") components and has proven to be manufacturable with higher yields.
Chip Scale Packages, Micro-Surface Mount Technology, Micro-Ball Grid Array ("Chip Scale Packages", "Micro-SMT" and "Micro-BGA"). Chip Scale Packages, Micro-SMT and Micro-BGA packages are a selection of the recently emerging miniature package styles. These reduced size packages are a further reduction of the smaller footprint created by BGA and approach the density of Flip Chip. These packages are fully SMT compatible, can be economically tested prior to assembly, and are well-suited for small form factor, high density, SMT circuitry typical of portable products.
Flip Chip / Direct Chip Attach. Flip chip or direct chip attach technology is the assembly technology that, in the opinion of the Company, provides users with the smallest size, high performance package that is commercially practical. Jabil is developing technology that makes flip chip attach compatible with standard surface mount processes. The silicon die is attached directly to the substrate by means of miniature solder bumps. The Company's research activities in this area are subsidized in part by a government-sponsored Low Cost Flip Chip Program composed of process-specific industry participants.
Thin Substrate Processes. Thin substrate processes involve the use of specialized placement, rigidization and soldering techniques to achieve the automated assembly and soldering of multilayer substrates having a thickness of less than .020 of an inch. These substrates are commonly used in the design of thin products, such as PCMCIA (Person Computer Memory Card International Association) cards and cellular telephones. The lack of stiffness typical in these substrates makes assembly with conventional processing techniques difficult and expensive. The Company has a patent application pending covering processes associated with these applications. See "Proprietary Rights."
Reflow Solder of Mixed Technology Circuit Boards. Reflow soldering of PTH devices utilizing SMT soldering processes (sometimes referred to as "Mixed Technology Reflow" or "Reflow/reflow") involves the placement of PTH devices through solder paste, with subsequent reflow using SMT processes to form solder joints. Mixed Technology Reflow eliminates design miniaturization constraints required by conventional wave solder processes used for PTH devices, allows surface-mounted devices to be soldered using the higher yielding reflow processes, and reduces processing costs. Mixed Technology Reflow requires significant product-specific materials engineering, design of the substrate for the process and specialized reflow soldering techniques.
Application Specific Robotic Assembly. Application specific robotic assembly ("Robotics") involves the use of computer-controlled robotic arms with custom-designed transfer mechanisms, feeders, sensors and grippers to perform assembly functions ordinarily performed manually. Although intensive in capital and engineering, the use of Robotics to replace manual operations promotes higher yields, relieves assemblers from repetitive motion injuries and offers significant cost reduction for long-lived products.
Computer Integrated Manufacturing. Computer integrated manufacturing ("CIM") involves the direct link of CAD data to computer-controlled assembly and test equipment used to produce the product. By directly linking CAD data files to production machines, waste generated in adjusting processes is reduced, higher levels of mechanical precision are attained in placement and test fixturing programs, and generally, cost is lowered with improved time-to-volume production.
CUSTOMERS AND MARKETING
The Company's revenue was distributed over the following significant industry segments:
SIGNIFICANT INDUSTRY SEGMENTS
A small number of customers have historically comprised a major portion of the Company's net revenue. The table below sets forth the respective portion of net revenue for the applicable period attributable to customers who accounted for more than 10% of net revenue in any respective period:
PERCENTAGE OF NET REVENUE
In fiscal 1996, 1997 and 1998, fewer than 20 customers accounted for substantially all the Company's net revenue. The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its net revenue. Significant reductions or delays in sales to any of the Company's large customers would have a material adverse effect on the Company's results of operations. In the past, some of the Company's customers have terminated their manufacturing arrangement with the Company, and other customers have significantly reduced or delayed the volume of manufacturing services ordered from the Company. There can be no assurance that present or future customers will not terminate their manufacturing arrangements with the Company or significantly change, reduce or delay the amount of manufacturing services ordered from the Company or that the Company will not terminate arrangements with customers. Any such termination of a manufacturing relationship by the Company or its customers or change, reduction or delay in orders could have a material adverse effect on the Company's results of operations. See Note 7 of Notes to Consolidated Financial Statements.
The Company has pursued diversification of its customer base and sought multiple customers in the markets it serves. The Company's principal sources of new business are the expansion of existing relationships, referrals and direct sales through its Business Unit Managers and executive staff. The Company does not rely on sales or manufacturers' representatives. Business Unit Managers, supported by the executive staff, identify and attempt to develop relationships with potential customers who meet a certain profile. This profile includes financial stability, need for technology-driven turnkey manufacturing, anticipated unit volume and long-term relationship stability. Unlike traditional sales managers, Business Unit Managers are responsible for ongoing management of production for their customers.
The Company is dependent upon the continued growth, viability and financial stability of its customers, which are in turn substantially dependent on the growth of the communications, personal computer, peripherals, consumer and automotive industries. These industries have been characterized by rapid technological change, short product life cycles and pricing and margin pressures. In addition, many of the Company's customers in these industries are affected by general economic conditions. The factors affecting the communications, personal computer, peripherals, consumer and automotive industries in general, and/or the Company's customers in particular, could have a material adverse effect on the Company's results of operations. In addition, the Company generates significant accounts receivable in connection with providing manufacturing services to its customers. If one or more of the Company's customers were to become insolvent or otherwise were unable to pay for the manufacturing services provided by the Company, the Company's operating results and financial condition would be adversely affected.
INTERNATIONAL EXPANSION
A key element in the Company's strategy is to provide localized production of the global products produced for OEMs in the major consuming regions of the European Community and Asia. In order to offer this localized production, in fiscal 1993 the Company established a manufacturing facility in Livingston, Scotland, which began volume production in May 1993. The Scotland facility targets existing European customers, those North American customers having significant sales in the European Community and potential European customers who meet the profile discussed above. Additionally, the Company began volume production in October 1995, in Penang, Malaysia. This location enables the Company to provide manufacturing services to the Asian market from an Asian location in order to reduce costs, freight and duties, to provide a more competitive cost structure for these markets and to serve as a low cost manufacturing source for new and existing customers. In order to increase capacity both in Europe and in the Asian market, the Company completed an expansion of both locations in the early portion of fiscal 1998. See Note 3 of Notes to Consolidated Financial Statements.
As an addition to the North American market, the Company completed construction of a manufacturing facility in Guadalajara, Mexico early in fiscal 1998 and began volume production in November 1997. This operation will allow for continued expansion in North America, while providing a competitive cost structure and close proximity to the United States market.
In August 1998, the Company acquired manufacturing operations in Bergamo, Italy as part of the HP Acquisition.
The Company's international operations may be subject to a number of other risks, including fluctuations in the value of currencies, export duties, import controls and trade barriers (including quotas), restrictions on the transfer of funds, employee turnover, work stoppages, longer payment cycles, greater difficulty in accounts receivable collection, and burdens of complying with a wide variety of foreign laws. In addition, net-operating losses incurred by foreign operations cannot be utilized by the Company to reduce United States income taxes.
COMPETITION
Competition in the contract manufacturing industry is intense. The Company competes against numerous domestic and foreign manufacturers, including SCI Systems, Inc., Solectron Corporation, Celestica, Inc., and Flextronics International. In addition, the Company may in the future encounter competition from other large electronic manufacturers that are selling, or may begin to sell, contract manufacturing services. Several of the Company's competitors have international operations and some have substantially greater manufacturing, financial, research and development and marketing resources than the Company. The Company also faces competition from the manufacturing operations of its current
and potential customers, who are continually evaluating the merits of manufacturing products internally versus the merits of external manufacturing.
The Company believes that the primary basis of competition in its targeted markets are capability, price, manufacturing quality, advanced manufacturing technology, design expertise, time-to-volume production, reliable delivery and regionally dispersed manufacturing. Management believes the Company competes favorably with respect to these factors. To remain competitive, the Company must continue to provide technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis and compete favorably on the basis of price. There can be no assurance that the Company will be able to compete favorably with respect to these factors in the future.
BACKLOG
The Company's order backlog at August 31, 1998 was approximately $456 million, compared to backlog of $450 million at August 31, 1997. Although the backlog consists of firm purchase orders, the level of backlog at any particular time is not necessarily indicative of future sales. Given the nature of the Company's relationships with its customers, it frequently allows customers to cancel or reschedule deliveries hence backlog is not a meaningful indicator of future financial results. Although the Company may seek to negotiate fees to cover the costs of such cancellations or rescheduling, it may not be successful in doing so.
The level and timing of orders placed by a customer of the Company varies due to the customer's attempts to balance its inventory, design changes, changes in the customer's manufacturing strategy, acquisitions of or consolidations among customers and variation in demand for the customer's products due to, among other things, product life cycles, competitive conditions or general economic conditions. The Company's inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. In the past, the Company has been required to increase staffing and other expenses in order to meet the anticipated demand of its customers. Anticipated orders from the Company's customers have, in the past, failed to materialize in certain instances or delivery schedules have been deferred as a result of changes in the customer's business needs, thereby adversely affecting the Company's results of operations. On other occasions, customers have required rapid increases in production, which have placed an excessive burden on the Company's resources. Such customer order fluctuations and deferrals have had a material adverse effect on the Company's results of operations in the past, and there can be no assurance that the Company will not experience such effects in the future.
RESEARCH AND DEVELOPMENT
To meet the increasingly sophisticated needs of its customers, Jabil continually works to develop and refine new manufacturing processes, enhance production design and develop new circuit designs. For fiscal 1996, 1997 and 1998, the Company expended $2.1 million, $3.1 million, and $3.8 million, respectively, on research and development activities. To date, substantially all of the Company's research and development expenditures have related to internal research and development activities.
In conjunction with the HP acquisition, the Company recorded a charge of $6.5 million related to the write-off of in-process research and development. See Note 10 of Notes to Consolidated Financial Statements.
MANUFACTURING PROCESSES
The Company conducts research and development in connection with the development and refinement of new manufacturing processes that the Company believes have near-term commercial potential. This research and development activity, which is accounted for as a research and development expense, is performed primarily at Jabil's advanced engineering facility in San Jose, California. Other manufacturing process developments and refinements are made in connection with providing manufacturing services for particular customers and related expenses are charged to cost of revenue.
PRODUCTION DESIGN
The Company performs research and development for its customers in connection with providing production design. This ongoing research and development is associated with providing manufacturing services to these customers and is charged to cost of revenue.
CIRCUIT DESIGN
From time to time, the Company performs research and development related to new products on a project-by-project basis. The research and development consists of design of the circuit board assembly and the related production design necessary to manufacture the circuit board assembly in the most cost-effective and reliable manner. The Company expenses these costs to research and development expense.
The market for the Company's manufacturing services is characterized by rapidly changing technology and continuing process development. The Company is continually evaluating the advantages and feasibility of new manufacturing processes, such as TAB, chip on board and thin substrate processes. The Company believes that its future success will depend upon its ability to develop and market manufacturing services that meet changing customer needs, maintain technological leadership and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. There can be no assurance that the Company's process development efforts will be successful.
COMPONENTS
The Company procures components from a broad group of suppliers, determined on an assembly-by-assembly basis. Almost all the products manufactured by Jabil require one or more components that are ordered from only one source, and most assemblies require components that are available from only a single source. Some of these components are allocated in response to supply shortages. The Company attempts to ensure continuity of supply of these components. In cases where unanticipated customer demand or supply shortages occur, the Company attempts to arrange for alternative sources of supply, where available, or defers planned production to meet the anticipated availability of the critical component. In some cases, supply shortages will substantially curtail production of all assemblies using a particular component. In addition, at various times there have been industry-wide shortages of certain electronic components, particularly memory and logic devices. There can be no assurance that such shortfalls will not have a material adverse effect on the Company's results of operations in the future.
PROPRIETARY RIGHTS
The Company regards its manufacturing processes and circuit designs as proprietary trade secrets and confidential information. Jabil relies largely upon a combination of trade secret laws; non-disclosure agreements with its customers, employees, and suppliers; its internal security systems; confidentiality procedures and employee confidentiality agreements to maintain the trade secrecy of its circuit designs and manufacturing processes. Although the Company takes steps to protect its trade secrets, there can be no assurance that misappropriation will not occur.
The Company currently has six patents and one patent application pending. However, Jabil believes that the rapid pace of technological change makes patent protection less significant than such factors as the knowledge and experience of management and personnel and the Company's ability to develop, enhance and market manufacturing services.
The Company licenses some technology from third parties that it uses in providing manufacturing services to its customers. The Company believes that such licenses are generally available on commercial terms from a number of licensors. Generally, the agreements governing such technology grant to Jabil non-exclusive, worldwide licenses with respect to the subject technology and terminate upon a material breach by the Company.
Although the Company does not believe that its circuit designs or manufacturing processes infringe on the proprietary rights of third parties, there can be no assurance that if third parties assert valid infringement claims against the Company with respect to past, current or future designs or processes, the Company will not be required to enter into an expensive royalty arrangement, develop non-infringing designs or processes, or engage in costly litigation.
EMPLOYEES
As of August 31, 1998, the Company had 5,311 full-time employees. This compares to 3,661 full-time employees at August 31, 1997. Approximately six hundred employees joined the company as a result of the HP acquisition in August 1998.
Recruitment of personnel in the contract manufacturing industry is highly competitive. The Company believes that its future success will depend, in part, on its ability to continue to attract and retain highly skilled technical and management personnel. The Company does not have employment agreements or noncompetition agreements with its key employees. Although to date the Company has been successful in retaining key managerial and technical employees, the loss of services of certain of these key employees could have a material adverse effect on the Company.
GEOGRAPHIC INFORMATION
The information regarding revenue, operating profit, identifiable assets and export sales set forth in Note 7 of Notes to Consolidated Financial Statements, set forth elsewhere herein, is hereby incorporated by reference into this Part I, Item 1.
ENVIRONMENTAL
The Company is subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Although the Company believes that it is currently in substantial compliance with all material environmental regulations, any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could
restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expense to comply with environmental regulations.
ITEM 2.
ITEM 2. PROPERTIES
The Company has manufacturing facilities located in the United States, Scotland, Malaysia, Mexico and Italy.
A summary of building locations is as follows:
CURRENT FACILITIES
LEASED FACILITY TO BE REPLACED BY CURRENT FACILITY
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain lawsuits in the ordinary course of business. Management does not believe that these proceedings individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations and cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the fourth quarter covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 5, 1998 the Common Stock of the Company trades publicly on The New York Stock Exchange under the symbol JBL. Prior to May 5, 1998, the Company's Common Stock was traded on the Nasdaq National Market under the symbol JBIL. The following table sets forth, for the periods indicated, the high and low closing sales prices per share for the Company's Common Stock as reported by the New York Stock Market and the Nasdaq National Market, as applicable.
As of August 31, 1998, there were approximately 1,327 holders of record.
The Company has never paid cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto incorporated into Item 8 of this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Factors that could cause actual events or results to differ materially from those referenced in such forward-looking statements include those described in the section herein entitled "Factors Affecting Future Results" and in the Company's other filings with the Securities and Exchange Commission. The words "believe," "expect," "intend," "anticipate," "plan" and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual events and results may differ materially from those indicated in the forward-looking statements as a result of various factors. Readers are cautioned not to place undue reliance on any forward-looking statements.
The Company provides high volume turnkey manufacturing services using surface mount technology for leading electronics OEMs in the communications, personal computer, peripherals, consumer and automotive industries. In turnkey manufacturing, unlike manufacturing on consignment, the Company is responsible for procuring the components utilized in the manufacturing process. The component procurement responsibility requires the Company to provide significant working capital, materials management, purchasing, receiving inspection and stockroom management. This approach transfers the economic risks of materials cost fluctuations, excess scrap and inventory obsolescence to the Company. The Company believes that turnkey manufacturing generates higher net revenue than consignment manufacturing due to the generation of revenue from materials as well as labor and manufacturing overhead, but also results in lower gross margins than consignment manufacturing because the Company generally realizes lower gross margins on materials-based revenue than on manufacturing-based revenue.
The Company's annual and quarterly operating results are affected by a number of factors. The primary factors affecting operating results are the level and timing of customer orders, fluctuations in materials costs and the mix of materials costs versus labor and manufacturing overhead costs. The level and timing of orders placed by a customer vary due to the customer's attempts to balance its inventory, design changes, changes in a customer's manufacturing strategy, acquisitions of or consolidations among customers, and variation in demand for a customer's products due to, among other things, product life cycles, competitive conditions and general economic conditions. In the past, changes in orders from customers have had a significant effect on results of operations due to corresponding changes in the level of overhead absorption. Other factors affecting the Company's annual and quarterly operating results include price competition, the Company's level of experience in manufacturing a particular product, the degree of automation used in the assembly process, the efficiencies achieved by the Company in managing inventories and fixed assets, the timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor.
The level of capacity utilization of manufacturing facilities, indirect labor and selling, general and administrative expenses also affect operating results. Accordingly, gross margins and operating income
margins have generally improved during periods of high volume and high capacity utilization. During periods of lower-volume production, Jabil generally has idle capacity and reduced operating margins.
The Company has continued to depend upon a relatively small number of customers for a significant percentage of its net revenue. Significant reductions in sales to any of the Company's large customers would have a material adverse effect on the Company's results of operations. In the past, some of the Company's customers have terminated their manufacturing arrangement with the Company, and other customers have significantly reduced or delayed the volume of manufacturing services ordered from the Company. There can be no assurance that present or future customers will not terminate their manufacturing arrangements with the Company or significantly change, reduce or delay the amount of manufacturing services ordered from the Company. Any such termination of a manufacturing relationship or change, reduction or delay in orders could have an adverse effect on the Company's results of operations or financial condition. See Note 7 of Notes to Consolidated Financial Statements.
ACQUISITION
On August 3, 1998, the Company acquired certain manufacturing and related assets comprising the "Formatter Manufacturing Organization" business unit of Hewlett-Packard located in Boise, Idaho and Bergamo, Italy. The acquisition was made pursuant to an agreement dated as of August 3, 1998 between the registrant and Hewlett-Packard and an agreement dated as of August 3, 1998 between Jabil Circuit S.r.l. (a subsidiary of the registrant) and Hewlett-Packard Italiana S.p.A. The Company will lease from Hewlett-Packard the physical facilities that the acquired assets are currently operating from pending the Company's construction of new facilities. Approximately $76 million of consideration was given by the registrant for the acquired assets, consisting of approximately $65 million of cash and the assumption of approximately $11 million of trade payables and personnel related liabilities relating to the acquired assets. The final purchase price was subject to a post-closing adjustment as provided for in the acquisition agreements. This post-closing adjustment resulted in an approximately $4 million in additional net assets acquired. The acquired assets were used by the Seller to manufacture printed circuit-board assemblies for the LaserJet printer divisions of Hewlett-Packard and shall continue to be used by the Company to manufacture printed circuit-board assemblies for the LaserJet printer division of Hewlett-Packard.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating data as a percentage of net revenue:
NET REVENUE
Net revenue increased 13.3% over fiscal 1996 to $978.1 million in fiscal 1997. The increase was due primarily to manufacturing services provided to both new and existing customers, offset by the end of production of certain hard drive products. Net revenue increased 30.6% over fiscal 1997 to $1.3 billion in fiscal 1998. The increase was primarily a result of manufacturing services growth provided to existing and new customers.
Foreign source revenue represented 31% of net revenue for fiscal 1996 and 30% of net revenue for fiscal 1997. Foreign source revenue in 1998 represented 31% of net revenue.
GROSS MARGIN
Cost of revenue includes the cost of materials and the cost of labor and manufacturing overhead, as well as provisions for excess and obsolete inventory adjustments. The Company's various customers typically require different manufacturing services. Different manufacturing services have different gross margins depending upon (i) the mix of materials costs versus manufacturing costs, and (ii) the Company's experience in manufacturing a particular product. The Company typically realizes better gross margins on manufacturing-based revenue than it does on materials-based revenue, and better gross margins on manufacturing services for products with which it has more experience due to the increased efficiencies achieved over time. Gross margins also fluctuate due to changes in materials costs.
Gross margin increased from 8.5% in fiscal 1996 to 12.4% in fiscal 1997 to 12.7% in fiscal 1998 due to a shift toward manufacturing-based revenues and increased capacity utilization. In fiscal 1997 and 1998 the portion of manufacturing based revenue was significantly higher than in fiscal 1996. Manufacturing based revenue was the largest impact on the gross margin percentage.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased from $25.5 million (2.9% of net revenue) in fiscal 1996 to $35.9 million (3.7% of net revenue) in fiscal 1997. This increase was primarily due to increased staffing and related departmental expenses at all the Company's locations along with investments in information systems staff to support the expansion of the Company's business. Selling, general and administrative expenses increased from $35.9 million (3.7% of net revenue) in fiscal 1997 to $52.0 million (4.1% of net revenue) in fiscal 1998. This increase was primarily due to continued increases in staffing and related departmental expenses, both at the Company's existing operations and new Mexican operations, along with investments in information systems staff to support the expansion of the Company's business in existing and new locations.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal 1997 increased by approximately $1.0 million over fiscal 1996. Research and development expenses in fiscal 1998 increased by $0.7 million to $3.8 million, reflecting an increase in design-based activity.
ACQUISITION RELATED CHARGE
During the fourth quarter of fiscal 1998, Jabil completed the HP acquisition and recorded a one-time acquisition-related charge of $20.8 million. The charge relates primarily to write-offs of in-process research and development and work force related expenses. See Note 10 of Notes to Consolidated Financial Statements.
INTEREST EXPENSE
Net interest expense decreased to $1.6 million in fiscal 1997 from $7.3 million in fiscal 1996 primarily reflecting significantly reduced short-term borrowings and increased income on cash balances. Interest expense increased to $3.1 million in fiscal 1998 primarily reflecting interest expense on the Company's private placement debt offset, in part, by income on cash balances. See Notes 4 and 5 of Notes to Consolidated Financial Statements.
INCOME TAXES
The Company's effective tax rate decreased slightly from 36% in fiscal 1996 to 35% in fiscal 1997 primarily as a result of the granting of a tax holiday for the Company's Malaysian operations. In fiscal 1998, the effective tax rate decreased to 30.6%. The effective tax rate is predominantly a function of the mix of domestic versus international income from operations. The Company's international operations are being taxed at a lower rate than in the United States, primarily due to the tax holiday granted to the Company's Malaysian subsidiary. The Malaysian tax holiday is effective through October 30, 2000. See Note 5 of Notes to Consolidated Financial Statements.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial information for the 1997 and 1998 fiscal years. In the opinion of management, this information has been presented on the same basis as the audited consolidated financial statements appearing elsewhere, and all necessary adjustments (consisting of normal recurring adjustments and an acquisition related charge which is discussed in Note 10 in the Notes to Consolidated Financial Statements) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of the Company and related notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal years ended August 31, 1996 and 1997, the Company primarily funded operations through borrowings under credit facilities with several banks, a public offering of Common Stock in fiscal 1996, and a private placement of debt in fiscal 1996. During the fiscal year ended August 31, 1998, the Company experienced growth in net revenue and in cash flows from operations. Cash and cash equivalents decreased from $45.5 million at the 1997 fiscal year end to $23.1 million at August 31,1998 as a result of cash generated from operations offsetting cash used in the acquisition of property, plant and equipment, along with the HP acquisition.
At August 31, 1998, the Company's principal sources of liquidity consisted of cash and available borrowings under the Company's credit facilities.
Net cash provided by operating activities for the year ended August 31, 1998 was $98.4 million. This consisted primarily of $56.9 million of net income, $35.7 million of depreciation and amortization, $10.6 million of decreases in inventory, $3.7 million decreases in other assets and $5.0 million increases in accounts payable and accrued expenses, offset by $5.4 million of increases in deferred taxes and $9.3 million in increases in accounts receivable.
Net cash used in investing activities of $162.1 million for the year ended August 31, 1998 was primarily a result of the Company's capital expenditures for equipment and facilities in North America, Scotland, and Malaysia to support increased manufacturing activities. Additionally, the Company invested $65.0 million in net assets acquired from Hewlett-Packard Company in the HP acquisition in August 1998.
Net cash provided by financing activities of $41.3 million for the year ended August 31, 1998 resulted primarily from $40.0 million in proceeds from the Company's revolving credit facility in August, 1998 to finance the HP acquisition. See Notes 4 and 6 of Notes to Consolidated Financial Statements.
The Company believes that current cash balances, available borrowings, and funds provided by operations will be sufficient to satisfy working capital requirements for at least the next 12 months.
"YEAR 2000" READINESS
The Company is aware of and is addressing the Year 2000 issue. The Year 2000 issue creates risks for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals. Failure of the Company's and or/third parties computer systems, manufacturing equipment and control systems could have a material adverse effect on the Company's results from operations.
The Company is actively taking steps to ensure that its global information technology infrastructure and business system applications, manufacturing equipment and systems will be Year 2000 compliant while seeking adequate assurances from third parties with whom the Company conducts business with, that any such systems shall be Year 2000 compliant. A global team, overseen by a corporate officer, has been formed and has implemented a proactive multi-phase approach, which includes assessing the scope of work, prioritizing, certifying compliance, and testing compliance.
As of the end of fiscal 1998 the Company was substantially complete in its compliance certification process of its global information technology infrastructure. Most of the Company's global business systems are currently being replaced by a Year 2000 compliant application; this process is expected to be complete by January 1, 2000. As a contingency, however, legacy systems have been upgraded to be Year 2000 compliant and are in the process of being tested.
As of the end of fiscal 1998 manufacturing and test equipment and local plant business systems had been identified and prioritized in terms of Year 2000 compliance with focus now on compliance certification. It is anticipated that 85% of all equipment and systems will be certified as compliant by the end of calendar 1998, with the remaining 15% by the end of the first calendar quarter of 1999, at which time compliance testing and verification will commence.
The Company is also in the process of assessing its suppliers. The initial phase of the assessment is expected to be complete by the end of calendar 1998. Early in calendar 1999, the Company anticipates validating its suppliers' representations where deemed appropriate, and will develop sourcing contingency plans in areas where the Company assesses that supplier readiness is insufficient.
The Company estimates the cost to complete its remediation to be approximately $3 million. The Company is unable to fully determine the effect of failure of its own systems or those of third parties with which it does business, but any significant failures could have an material adverse effect on the Company's financial position, results of operations and cash flows.
FACTORS AFFECTING FUTURE RESULTS
VARIABILITY OF OPERATING RESULTS
The Company's annual and quarterly operating results are affected by a number of factors. The primary factors affecting operating results are the level and timing of customer orders, fluctuations in materials costs and the mix of materials costs versus labor and manufacturing overhead costs. The level and timing of orders placed by customer vary due to the customer's attempts to balance its inventory, changes in a customer's manufacturing strategy and variation in demand for a customer's products due to, among other things, product life cycles, competitive conditions and general economic conditions. In the past, changes in orders from customers have had a significant effect on results of operations due to corresponding changes in the level of overhead absorption. Other factors affecting the Company's annual and quarterly operating results include price competition, the Company's level of experience in manufacturing a particular product, the degree of automation used in the assembly process, the efficiencies achieved by the Company in managing inventories and fixed assets, the timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor. Any one of these factors or a combination thereof could adversely affect the Company's annual and quarterly results of operations in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
For the fiscal year ended August 31, 1998, the Company's three largest customers accounted for approximately 48% of net revenue and fewer than 20 customers accounted for substantially all net revenue. Cisco Systems, Inc. ("Cisco"), 3Com Corporation ("3Com"), and Hewlett-Packard Company ("Hewlett- Packard"), accounted for approximately 20%, 18%, 10% of net revenue, respectively. The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its net revenue. Significant reductions in sales to any of the Company's large customers would have a material adverse effect on the Company's results of operations. In the past, some of the Company's customers have terminated their manufacturing arrangement with the Company, and other customers have significantly reduced or delayed the volume of manufacturing services ordered from the Company. There can be no assurance that present or future customers will not terminate their manufacturing arrangements with the Company or significantly change, reduce or delay the amount of manufacturing services ordered from the Company. Any such termination of a manufacturing relationship or change, reduction or delay in orders could have an adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Customers and Marketing."
LIMITED AVAILABILITY OF COMPONENTS
Substantially all the Company's net revenue is derived from turnkey manufacturing in which the Company provides both materials procurement and assembly. In turnkey manufacturing, the Company typically bears the risk of component price increases, which could adversely affect the Company's gross profit margins. Almost all the products manufactured by Jabil require one or more components that are available from only a single source. Some of these components are allocated in response to supply shortages. In some cases, supply shortages will substantially curtail production of all assemblies using a particular component. In addition, at various times there have been industry wide shortages of electronic components, particularly memory and logic devices. Such circumstances have produced significant levels of short-term interruption of the Company's operations in the past. There can be no assurance that such shortfalls will not have a material adverse effect on the Company's results of operations in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Components."
DEPENDENCE ON CERTAIN INDUSTRIES
The Company is dependent upon the continued growth, viability and financial stability of its customers, which are in turn substantially dependent on the growth of the communications, personal computer, peripherals, consumer and automotive industries. These industries have been characterized by rapid technological change, short product life cycles and have pricing and margin pressures. In addition, many of the Company's customers in these industries are affected by general economic conditions. The factors affecting the communications, personal computer, peripherals, consumer and automotive industries in general, and/or the Company's customers in particular, could have a material adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Customers and Marketing."
VARIABILITY OF CUSTOMER REQUIREMENTS AND CUSTOMER FINANCING
The level and timing of sales to a customer of the Company varies due to the customer's attempts to balance its inventory, design changes, changes in the customer's manufacturing strategy, acquisitions of or consolidations among customers and variation in demand for its products due to, among other things, product life cycles, competitive conditions or general economic conditions. Due in part to these factors, most of the Company's customers do not commit to firm production schedules for more than one quarter in advance. The Company's inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. In the past, the Company has been required to increase staffing and other expenses in order to meet the anticipated demand of its customers. Anticipated orders from many of the Company's customers have, in the past, failed to materialize or delivery schedules have been deferred as a result of changes in the customer's business needs, thereby adversely affecting the Company's results of operations. On other occasions, customers have required rapid increases in production, which have placed an excessive burden on the Company's resources. Such customer order fluctuations and deferrals have had a material adverse effect on the Company's results of operations in the past, and there can be no assurance that the Company will not experience such effects in the future. In addition, the Company generates significant accounts receivables in connection with providing manufacturing services to its customers. If one or more of the Company's customers were to become insolvent or otherwise were unable to pay for the manufacturing services provided by the Company, the Company's operating results and financial condition would be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Backlog."
MANAGEMENT OF GROWTH
The Company has experienced a period of rapid growth which has placed, and could continue to place, a significant strain on the Company's management, operational and financial resources. The Company's ability to manage growth effectively will require it to continue to implement and improve its operational, financial and management information systems; to develop the management skills of its managers and supervisors; and to train, motivate and manage its employees. The Company's failure to effectively manage growth could have a material adverse effect on the Company's results of operations.
COMPETITION
Competition in the contract manufacturing industry is intense. The Company competes against numerous domestic and foreign manufacturers, including SCI Systems, Inc., Solectron Corporation, Celestica, Inc., and Flextronics International. In addition, the Company may in the future encounter competition from other large electronic manufacturers that are selling, or may begin to sell, contract manufacturing services. Most of the Company's competitors have international operations and some have substantially greater manufacturing, financial, research and development and marketing resources than the Company. The Company also faces competition from the manufacturing operations of its current and potential customers, which are continually evaluating the merits of manufacturing products internally versus the advantages of using external manufacturers. See "Business--Competition."
TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT
The market for the Company's manufacturing services is characterized by rapidly changing technology and continuing process development. The Company is continually evaluating the advantages and feasibility of new manufacturing processes, such as Tape Automated Bonding, chip on board and thin substrate processes. The Company believes that its future success will depend upon its ability to develop and market manufacturing services which meet changing customer needs, maintain technological leadership and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. There can be no assurance that the Company's process development efforts will be successful. See "Business--Technology" and "Research and Development."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. Although to date the Company has been successful in retaining key managerial and technical employees, the loss of services of certain of these key employees could have a material adverse effect on the Company. The Company's business will also depend upon its ability to continue to attract and retain qualified employees. The Company does not have employment agreements or noncompetition agreements with its key employees.
ENVIRONMENTAL COMPLIANCE
The Company is subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Although the Company is currently in substantial compliance with all material environmental regulations, any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expense to comply with environmental regulations. See "Business--Environmental."
CONTROL BY EXISTING STOCKHOLDERS
Officers, directors, principal stockholders and their affiliates own approximately 43% of the Company's common stock outstanding. Consequently, the officers, directors, principal stockholders and their affiliates have significant influence over the election of Jabil's directors, determine the outcome of most corporate actions requiring stockholder approval, and otherwise control the business of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the contract manufacturing, communications, personal computer, peripherals, consumer or automotive industries and other factors. In addition, the stock market is subject to price and volume fluctuations that affect the market price for many high technology companies in particular, and that often are unrelated to operating performance. See "Market for Registrant's Common Equity and Related Stockholder Matters."
INTEREST RATE SENSITIVITY
The Company's private placement $50,000,000 Senior Notes carry a fixed interest rate of 6.89%, thus the Company is not subject to market risk from this debt instrument. The Company pays interest on its outstanding borrowings under its revolving credit facility at the London Interbank Offering Rate (LIBOR) in effect at the loan inception date plus a factor of 0.625% to 1.00% depending on the Company's funded debt to capitalization ratios. See Note 4 of Notes to Consolidated Financial Statements. An adverse change in the LIBOR rates could have a material adverse effect on the Company's financial position, results of operations and cash flows.
INTERNATIONAL EXPANSION
A key element in the Company's strategy is to provide localized production of the global products produced for OEMs in the major consuming regions of the European Community and Asia. In order to offer this localized production, in fiscal 1993 the Company established a manufacturing facility in Livingston, Scotland, which began volume production in May 1993. The Scotland facility targets existing European customers, those North American customers having significant sales in the European Community and potential European customers who meet the profile discussed above. Additionally, the Company began volume production in October 1995, in Penang, Malaysia. This location enables the Company to provide manufacturing services to the Asian market from an Asian location in order to reduce costs, freight and duties, to provide a more competitive cost structure for these markets and to serve as a low cost manufacturing source for new and existing customers. In order to increase capacity both in the European and in the Asian markets, the Company completed an expansion of both locations in the early portion of fiscal 1998. See Note 3 of Notes to Consolidated Financial Statements.
As an addition to the North American market, the Company completed construction of a manufacturing facility in Guadalajara, Mexico and began volume production early in fiscal 1998. This operation will allow for continued expansion in North America, while providing a competitive cost structure and close proximity to the United States market.
In August 1998, the Company acquired manufacturing operations in Bergamo, Italy as part of its acquisition of certain manufacturing and related assets comprising the HP acquisition.
The Company's international operations may be subject to a number of other risks, including fluctuations in the value of currencies, export duties, import controls and trade barriers (including quotas), restrictions on the transfer of funds, employee turnover, work stoppages, longer payment cycles, greater difficulty in accounts receivable collection, and burdens of complying with a wide variety of foreign laws. In addition, net-operating losses incurred by foreign operations cannot be utilized by the Company to reduce U.S. income taxes.
COMPUTER INTEGRATION
The Company is in the process of installing a new enterprise resource planning system ("ERP System") that will replace the current Manufacturing Resource Planning ("MRP") system and financial information systems. This system is believed to be Year 2000 Compliant. The Company is also identifying and implementing changes to its other information systems in order to make them Year 2000 Compliant. While the Company currently expects that the Year 2000 will not pose significant operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems could result in material adverse consequences, including disruption of operations, loss of information, and unanticipated increases in costs. See "Year 2000" Readiness.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of Operations: Factors Affecting Future Results - Limited Availability of Components, Interest Rate Sensitivity, and International Expansion.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain information required by this item is included in Item 6 of Part II of this Report under the heading "Quarterly Results" and is incorporated into this item by reference. All other information required by this item is included in Item 14 of Part IV of this Report and is incorporated into this item by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated by reference to the information set forth under the caption "Proposal No. 1: Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the "Commission") within 120 days after the end of the Company's fiscal year ended August 31, 1998.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is hereby incorporated herein by reference from the section entitled [Information Concerning Solicitation and Voting] Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the information set forth under the captions "Proposal No. 1: Election of Directors - "Compensation of Directors" and "Executive Officer Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company's fiscal year ended August 31, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption "Other Information -- Share Ownership by Principal Stockholders and Management" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company's fiscal year ended August 31, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated by reference to the information set forth under the caption "Certain Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company's fiscal year ended August 31, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The consolidated financial statements, and related notes thereto, of the Company with independent auditors' report thereon are included in Part IV of this report on the pages indicated by the Index to Consolidated Financial Statements and Schedule as presented on page 29 of this report.
2. Financial Statement Schedule. The financial statement schedule of the Company is included in Part IV of this report on the page indicated by the Index to Consolidated Financial Statements and Schedule as presented on page 29 of this report. This financial statement schedule should be read in conjunction with the consolidated financial statements, and related notes thereto, of the Company.
Schedules not listed in the Index to Consolidated Financial Statements and Schedule have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
3. Exhibits. See Item 14(c) below.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on August 18, 1998 reporting the consummation of the acquisition of certain manufacturing and related assets comprising the "Formatter Manufacturing Organization" business unit of Hewlett-Packard Company.
(c) Exhibits. The exhibits listed on the Exhibits Index are filed as part of, or incorporated by reference into, this Report.
(d) Financial Statement Schedules. See Item 14(a) above.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Directors JABIL CIRCUIT, INC:
We have audited the consolidated financial statements of Jabil Circuit, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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 financial position of Jabil Circuit, Inc. and subsidiaries as of August 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP -------------------------
St. Petersburg, Florida October 6, 1998, except as to Note 10 which is as of December 7, 1998.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
See accompanying notes to consolidated financial statements.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
See accompanying notes to consolidated financial statements.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE DATA)
See accompanying notes to consolidated financial statements.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jabil Circuit, Inc. (together with its subsidiaries, herein referred to as the "Company") is an independent supplier of custom manufacturing services for circuit board assemblies, subsystems and systems to major original equipment manufacturers ("OEMs") in the communications, personal computer, peripherals, consumer and automotive industries. The Company's manufacturing services combine a high volume, highly automated manufacturing approach with advanced design and manufacturing technologies. The Company is headquartered in St. Petersburg, Florida and has manufacturing operations in the United States, Europe, Asia and Mexico.
Significant accounting policies followed by the Company are as follows:
A. CONSOLIDATION
The consolidated financial statements include the accounts and operations of Jabil Circuit, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in preparing the consolidated financial statements.
B. REVENUE RECOGNITION
The Company recognizes revenue typically at the time of product shipment. Such revenue is recorded net of estimated product return and warranty costs. At August 31, 1997 and 1998, such estimated amounts for returns and warranties are not considered material.
C. ACCOUNTING ESTIMATES
Management is required to make estimates and assumptions during the preparation of the consolidated financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements. They also affect the reported amount of net income. Actual results could differ materially from these estimates and assumptions.
D. INVENTORIES
Inventories are stated at the lower of cost (first in, first out (FIFO) method) or market.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated and amortized on the straight-line method over the estimated useful lives of the respective assets, primarily thirty-five years for buildings and three to five years for other assets. Maintenance and repairs are charged to expense as incurred.
The Company performs a periodic analysis of the carrying value of its property and equipment balances to determine that no impairment exists. Such analysis includes, but is not limited to, a comparison of the undiscounted cash flows of production related assets in relation to their carrying value. As of August 31, 1998 the Company is of the opinion that no such impairment exists.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. CASH EQUIVALENTS
The Company considers all highly liquid instruments with original maturities of 90 days or less to be cash equivalents for financial statement purposes. At August 31, 1997 and 1998, cash equivalents totaled approximately $281,000 and $0, respectively.
G. GRANT REVENUE
The Company has been awarded grants related to the development of its Scottish operations. Grant funds are earned as certain milestones are met, and are being amortized over two to five-year periods.
H. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income in the period that includes the enactment date of the rate change.
I. PROFIT SHARING AND 401(K) PLAN
The Company has a contributory profit-sharing plan with a 401(k) feature. Company contributions are at the discretion of the Company's Board of Directors. To participate, an employee must have completed a 12-month period of service in which the employee worked at least 1,000 hours. Vesting is immediate. The Company contributed approximately $1,650,000, $4,483,000, and $6,317,000 for the years ended August 31, 1996, 1997, and 1998, respectively.
J. FOREIGN CURRENCY TRANSACTIONS
Gains or losses on foreign currency transactions are included in the determination of net income as the Company considers the United States dollar to be the functional currency of its foreign operations.
The Company enters into foreign currency contracts in order to mitigate the impact of certain foreign currency fluctuations. Gains and losses related to the hedges of firmly committed and anticipated transactions are deferred and included in the basis of the transaction when it occurs. Foreign currency exchange contracts outstanding at August 31, 1998 are described further in Note 8.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128 (Statement 128), Earnings per Share, in the fiscal year ended August 31, 1998. Under Statement 128, the Company presents two earnings per share (EPS) amounts. Basic EPS is calculated based on net earnings available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding. Previously reported earnings per share amounts have been restated to conform to the Statement 128 requirements.
For the years ended August 31, 1996, 1997 and 1998, options to purchase 11,600, 106,000, and 40,000 shares of common stock were outstanding during the period but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares, and therefore, the effect would be anti-dilutive.
L. STOCK BASED COMPENSATION
Prior to September 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of granting of stock options only if the current market price of the underlying stock exceeded the exercise price. Effective September 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (Statement 123), which permits entities to recognize as expense over the vesting period the fair value of all stock based awards on the date of the grant. Alternatively, Statement 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma net income per share disclosures for employee stock options made in fiscal 1996 and future years as if the fair value based method defined in Statement 123
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure required by Statement 123.
M. STOCK SPLIT
On June 17, 1997, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock, effected in the form of a 100% stock dividend to holders of record on July 8, 1997. Financial information in the accompanying consolidated financial statements and notes has been adjusted to reflect the impact of the common stock split for all periods presented.
N. INTANGIBLE ASSETS
Intangible assets are comprised of goodwill and other intellectual property. Intangible assets, aggregating approximately $11.2 million as of August 31, 1998, are classified as a component of other assets in the accompanying consolidated balance sheets. Such amounts are amortized over a ten-year period.
The Company performs a periodic analysis of the carrying value of its intangible assets in order to determine that no instances of impairment exist. Such an analysis includes a comparison of the undiscounted future cash flows of related assets acquired in relation to the carrying value of recorded intangible assets. As of August 31, 1998, the Company is of the opinion that no such impairment exists.
2. INVENTORIES
Inventories consist of the following (in thousands):
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
During the year ended August 31, 1998, the Company completed new manufacturing facilities for its Scotland and Malaysia operations to replace its existing leased facilities in those locations, as well as a new greenfield facility in Guadalajara, Mexico. During the years ended August 31, 1997 and 1998, the Company capitalized approximately $120,000 and $83,000, respectively, in interest related to the constructed facilities.
Maintenance and repairs expense was approximately $4,320,000, $5,229,000, and $9,341,000 for the years ended August 31, 1996, 1997, and 1998, respectively.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable and Long-term debt consists of the following (in thousands):
(a) In May 1996, the Company completed a private placement of $50,000,000 Senior Notes due 2004. The Notes have a fixed interest rate of 6.89%, with interest payable on a semi-annual basis. Principal is payable in six equal annual installments beginning May 30, 1999.
(b) In August 1998, the Company renegotiated its unsecured line of credit facility and established a $225 million unsecured revolving credit facility with a syndicate of banks ("Revolver"). Under the terms of the Revolver, borrowings can be made under either floating rate loans or Eurodollar rate loans. The Company pays interest on outstanding floating rate loans at the banks' prime rate. The Company pays interest on outstanding Eurodollar loans at the London Interbank Offer Rate (LIBOR) in effect at the loan inception date plus a factor of .625% to 1.00% depending on the Company's funded debt to total capitalization ratios. The Company pays a commitment fee on the unused portion of the Revolver at .20% to .25% depending on the Company's funded debt to total capitalization ratios. The renegotiated Revolver expires on August 3, 2001 and outstanding borrowings are then due and payable. As of August 31, 1998, there were $40 million in borrowings outstanding under the Revolver and $185 million of the facility was available. As of August 31, 1997, there were no borrowings under the previous $100 million revolving credit facility.
The agreements related to the obligations described above contain a number of restrictive financial and/or other covenants. In all cases, the Company was in compliance with the respective covenants as of August 31, 1998.
Aggregate annual maturities for notes payable and long-term debt are as follows (in thousands):
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Income tax expense amounted to $13,724,000, $27,745,000, and $25,047,000 for the years ended August 31, 1996, 1997 and 1998, respectively (an effective rate of 36%, 35%, and 31%, respectively). The actual expense differs from the "expected" tax expense (computed by applying the U.S. federal corporate tax rate of 35% to earnings before income taxes) as follows (in thousands):
The Company's Malaysian subsidiary has been granted "pioneer" tax status for the five-year period commencing November 1, 1995. This status allows tax-free treatment by the Malaysian government for the subsidiary's income through October 30, 2000. Malaysia's statutory income tax rate is 30%. The Malaysian subsidiary generated income during the years ended August 31, 1997 and 1998, resulting in a tax holiday of approximately $2,320,000 ($0.06 per share) and $5,106,000 ($0.13 per share), respectively. The Company intends to indefinitely re-invest income from all of its foreign subsidiaries. The aggregate undistributed earnings of the Company's foreign subsidiaries for which no deferred income taxes have been recorded was approximately $7,426,000 as of August 31, 1998.
The components of income tax expense are (in thousands):
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
Based on the Company's historical operating income, management believes that it is more likely than not that the Company will realize the benefit of its net deferred tax assets.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
A. PUBLIC OFFERING
The Company completed a public offering of 8,050,000 common shares on November 3, 1995 in which the Company sold 5,750,000 shares (including an over-allotment of 750,000 shares) and certain selling stockholders sold 2,300,000 shares. Net proceeds to the Company (net of underwriters' discounts and commissions and other offering costs of approximately $350,000) were approximately $39,152,000.
B. STOCK OPTION PLANS
As of August 31, 1998, options to purchase a total of 1,394,400 shares were outstanding under the 1983 and 1989 stock option plans. The Board of Directors terminated these plans in November 1992, and no additional options may be issued thereunder. The exercise price of the outstanding options under these plans is equal to fair market value, as determined by the Company, on the date of grant.
The Company's 1992 Stock Option Plan (the "1992 Plan") provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and for the granting of non-statutory stock options to employees and consultants of the Company. The 1992 Plan was adopted by the Board of Directors in November 1992 and approved by the stockholders in December 1992. A total of 2,610,000 shares of common stock have been reserved for issuance under the 1992 Plan, of which 800,000 were authorized during the year ended August 31, 1998. As of August 31, 1998, options to purchase 926,060 shares are outstanding under the 1992 Plan.
The exercise price of all incentive stock options granted under the 1992 Plan is to be at least equal to the fair market value of shares of common stock on the date of grant. With respect to any participant who owns stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any stock option granted is to equal at least 110% of the fair market value on the grant date and the maximum term of the option may not exceed five years. The term of all other options under the 1992 Plan may not exceed ten years.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
B. STOCK OPTION PLANS (CONTINUED)
The following table summarizes option activity from September 1, 1995 through August 31, 1998:
At August 31, 1998, options for 1,826,860 shares were exercisable.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
B. STOCK OPTION PLANS (CONTINUED)
The range of exercise prices, shares, weighted average contractual life and exercise price for the options outstanding as of August 31, 1998 are presented below:
The range of exercise prices, shares and weighted average exercise price of the options exercisable at August 31, 1998 are presented below:
The per-share weighted-average fair value of stock options granted during 1997 and 1998 was $29.63 and $22.45, respectively, on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield of 0%, risk-free interest rate of 6.2%, expected volatility of 76%, and an expected life of 5 years; 1998 - Expected dividend yield of 0%, risk-free interest rate of 5.6%, expected volatility of 78% and an expected life of 5 years.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
C. PRO FORMA RESULTS
The Company applies APB Opinion No. 25 in accounting for its stock options and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Additionally, no compensation costs are reflected for the discount related to shares granted to employees under the 1992 Employee Stock Purchase Plan. Had the Company determined compensation cost based on Statement 123, the Company's net income would have been as follows:
As discussed in note 1 (l) the disclosure presented above represents the estimated fair value of stock options granted in fiscal 1996 and subsequent years for which attribution is attributable to fiscal 1997 and 1998. Such disclosure is not necessarily indicative of the fair value of stock options that could be granted by the Company in future fiscal years or of all options currently outstanding.
D. STOCK PURCHASE PLAN
The Company's 1992 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in November 1992 and approved by the stockholders in December 1992. A total of 1,205,000 shares of common stock have been reserved for issuance under the Purchase Plan. The Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code.
Employees are eligible to participate after one year of employment with the Company. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee's compensation, as defined, at a price equal to 85% of the fair market value of the Common Stock at the beginning or end of the offering period, whichever is lower. Unless terminated sooner, the Purchase Plan will terminate ten years from its effective date. As of August 31, 1998, a total of 851,533 shares had been issued under the Purchase Plan.
The per-share weighted-average fair value of stock issued to employees in 1998 under the Company's 1992 Employee Stock Purchase Plan was $13.76 using the Black-Scholes option-pricing model with the identical assumptions as those listed for stock options granted during 1998.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONCENTRATION OF RISK AND GEOGRAPHIC DATA
A. CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses.
Sales of the Company's products are concentrated among specific customers. Sales to the following customers, expressed as a percentage of consolidated net revenue, and the percentage of accounts receivable for each customer, were as follows:
* Amount was less than 10% of total
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONCENTRATION OF RISK AND GEOGRAPHIC DATA (CONTINUED)
B. GEOGRAPHIC DATA
The Company has defined the three geographic regions for the segment in which it operates: North America (including Mexico), Europe and Asia. Sales to unaffiliated customers are based on the location of the Company's operating entity. Corporate assets include cash and cash equivalents, intangibles, and deferred income taxes. Transfers between regions are not considered material. The following data does not consider fully the extent of interrelated activities between the regions including product development, manufacturing, engineering, marketing and corporate management. Accordingly, the following amounts are not necessarily indicative of the operating contribution of the geographic regions. The following table sets forth information concerning these geographic segments (in thousands):
Foreign source revenue for the years ended August 31, 1996, 1997, and 1998 was approximately 31%, 30%, and 31%, respectively.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FOREIGN CURRENCY EXCHANGE CONTRACTS
The purpose of the Company's foreign currency hedging activity is to protect the Company from the risk that the eventual dollar net cash flows resulting from the sale and purchase of products in foreign currencies will be adversely affected by changes in the exchange rates. It is the Company's policy to utilize derivative financial instruments to reduce foreign exchange risks where internal netting strategies cannot be effectively employed. The Company does not hold or issue financial instruments for trading purposes. Fluctuations in the value of hedging instruments are offset by fluctuations in the underlying exposures being hedged, and deferred gains and losses on these contracts are recognized when the future purchases and sales being hedged are realized.
The Company had approximately $5 million of net foreign currency exchange contracts outstanding at August 31, 1998 related to the United Kingdom, with $26 million outstanding at August 31, 1997 related to the United Kingdom and Malaysia. Unrealized gains and losses on these contracts were not material.
9. COMMITMENTS AND CONTINGENCIES
A. LEASE AGREEMENTS
The Company leases certain facilities and computer services under non-cancelable operating leases. The future minimum lease payments under noncancelable operating leases outstanding August 31, 1998 are as follows (in thousands):
Total rent expense for operating leases was approximately $3,354,000, $3,868,000, and $5,311,424 for the years ended August 31, 1996, 1997, and 1998, respectively.
B. LITIGATION
The Company is party to certain lawsuits in the ordinary course of business. Management does not believe that these proceedings individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACQUISITION
On August 3, 1998 the Company acquired certain assets (primarily raw material inventory and property, plant and equipment) relating to the LaserJet Formatter Manufacturing Organization business unit of Hewlett-Packard Company located in Boise, Idaho, and Bergamo, Italy. The acquisition price was approximately $80 million and was accounted for under the purchase method of accounting. The acquisition resulted in goodwill and other intangible assets of approximately $11.2 million, which is being amortized on a straight-line basis over ten years.
Simultaneously, the Company entered into a manufacturing arrangement to continue to produce the Laserjet circuit board assemblies being produced by the Hewlett-Packard operations in Boise and Bergamo.
In conjunction with the acquisition, the Company recorded an acquisition-related charge of $20.8 million consisting of an in-process technology write-off of $6.5 million, work force related expenses of $10.0 million, and $4.3 million of other expenses.
11. NEW ACCOUNTING PRONOUNCEMENTS
During 1997 and 1998, the Financial Accounting Standards Board ("FASB") issued several Statements of Financial Accounting Standards (Statements) which are pending implementation by the Company. They are as follows:
Statement 130 - Reporting Comprehensive Income. Statement 130 establishes standards for reporting comprehensive income. The Statement defines comprehensive income as the change in equity of an enterprise except those resulting from shareholder transactions. All components of comprehensive income are required to be reported in a new financial statement that is displayed with equal prominence as existing financial statements. The Company will be required to adopt this Statement September 1, 1998. As the Statement addresses reporting and presentation issues only, there will be no impact on earnings from its adoption.
Statement 131 - Disclosures about Segments of an Enterprise and Related Information. Statement 131 establishes standards for related disclosures about the products and services, geographic areas, and major customers of an enterprise The Company will be required to adopt this Statement for financial statements for the fiscal year beginning September 1, 1998. As this Statement addresses reporting and disclosure issues only, there will be no impact on earnings from its adoption. The Company is currently evaluating this Statement and has yet to form an opinion on whether segment disclosure presented herein will change significantly upon the adoption of Statement 131.
Statement 133 - Accounting for Derivative Instruments and Hedging Activities. Statement 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company is currently evaluating this Statement and has yet to form an opinion on whether its adoption will have any significant impact on the Company's consolidated financial statements. The Company will be required to implement Statement 133 for its fiscal year ending August 31, 2000.
Statement of Position 98-5 Reporting on the Costs of Start Up Activities. SOP 98-5 establishes standards on the financial reporting of start-up costs and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. As the Company has historically made a practice of expensing costs related to both the establishment of greenfield manufacturing facilities and the set-up of production lines as such costs are incurred, it does not anticipate that the adoption of SOP 98-5 will have any material impact on its consolidated financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on this 7th day of December, 1998.
JABIL CIRCUIT, INC. By: /s/ THOMAS A. SANSONE ------------------------------------ Date: December 7, 1998
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas A. Sansone and Ronald J. Rapp and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
EXHIBIT INDEX
- ---------- (1) Incorporated by reference to the Registration Statement on Form S-1 filed by the Registrant on March 3, 1993 (File No. 33-58974).
(2) Incorporated by reference to exhibit Amendment No. 1 to the Registration Statement on Form S-1 filed by the Registrant on March 17, 1993 (File No. 33-58974).
(3) Incorporated by reference to exhibit the Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1994.
(4) Incorporated by reference to exhibit the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1997.
(5) Indicates management compensatory plan, contract or arrangement.
SCHEDULE VIII
JABIL CIRCUIT, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
S-5