I'm more and more impressed by Micheal Marks.
If you haven't read his letter yet, I suggest you do so. He is a "wheeler dealer", no question about it; he knows how to wheel and deal very well. No CEO in this sector has had a better record at growing their company than Marks; this we knew from the revenue growth since he became CEO in January 1994 (from about $100M then to $1000M expected this fiscal year). I just didn't know how good he was at covering his bases.
Micheal Marks letter to shareholders, June 3, 1997
flextronics.com
For example, I didn't know that he had an independent appraisal done on the Astron purchase to determine how much to write off as in-process R&D. And that he used the lower appraised value as the write-off that Flextronics actually took. This was good enough for the outside accounting firm, Ernst and Young, who audited the 1996 10K that is now being questioned by the SEC.
The whole thing came up, I believe now, because Marks recruited Stephen Rees, the Chairman and principal owner of Astron, to remain with Flextronics after his employment contract runs out in June of 1998. Apparently Marks and Rees have hit it off well, and Rees has elected to stay with the company as Sr. VP of Worldwide Sales and Marketing. How's that for a surprise? When's the last time you saw the CEO of an acquired company (that he played a major role in building), remain on, working under the lead of the new CEO, when he had the option to leave? It happens, but not often.
The final payment was scheduled to be paid as "compensation" in June 98. This was contracted that way for obvious reasons, not the least of which is taxation. Now that Rees is remaining on board, apparently the SEC wants the $14M (reduced from $15M) to be added to the original purchase price, and capitalized instead of expensing it next year as compensation (salary or bonus). If they do this, it should cost Rees money for taxes, so this could be the hold-up in agreeing to the SEC demands.
There is a big move on at the SEC to clamp down on companies writing off excessive "in-process R&D", so I think when they looked at Rees' payments, they also looked at this issue. But if Marks had an independent appraisal on this, the SEC can't very well force Flextronics to not write off the "in-process R&D". The best they can do is ask Flextronics to get another appraisal, which they have done. Seems to me, Flextronics' actions were justified, even though I tend to think the write-off excessive.
Too bad the appraisal process will delay the 10K. I assume that Flextronics will file, and the SEC, will approve, an extension to the 90 day 10K filing period in order to finish the appraisal and resolve this issue. OW the 10K is due before the end of June.
Seems to me that the company is on solid ground here, although I think the Rees payment is still an issue.
I was pleased to hear the news about the faster completion of the Guadalajara facility, in order to acommodate a "new business opportunity" (new contract ??). The completion of the new plants in Mexico, SJ and China, should provide strong revenue growth in the SepQ and DecQ.
Paul |
